SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|_| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
|X| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 0-27106
RSI SYSTEMS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1767211
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7400 METRO BOULEVARD, SUITE 475
MINNEAPOLIS, MN 55439
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 896-3020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01
PAR VALUE
Check 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB for any
amendment to this Form 10-KSB. |X|
The Company's revenues for its most recent fiscal year were $2,570,851.
On September 26, 1997, the Company had 4,769,765 shares of common stock, $.01
par value, outstanding, and the aggregate market value of the common stock as of
that date (based on the average of the closing bid and asked prices as of that
date as reported by the NASDAQ SmallCap Market), excluding outstanding shares
beneficially owned by directors and officers, was approximately $10,145,577.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ___; No _X_
<PAGE>
PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE
COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING
STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subjects of fact and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
RSI Systems, Inc. (the "Company" or "RSI") designs, develops,
manufactures and markets telecommunications products for video conferencing. The
Company's first product, the ERIS(TM) Visual Communications System (the "ERIS
System"), was a self-contained peripheral firmware and software device that
attached directly to personal computers, Macintosh computers and laptop
computers. It provided quality desktop video conferencing over ISDN lines
between any ITU H.320 standards-based system.
The Company was incorporated under the laws of Minnesota on December
21, 1993. Following the establishment of a business infrastructure, which
included the further development of the ERIS System and implementation of
marketing strategies, the first beta unit of the Company's ERIS System was
produced in October 1994 and the first production unit was shipped in February
1995.
On July 25, 1995, the Company conducted a public offering of its
common stock, par value $0.01 per share (the "Common Stock"). With the net
proceeds from the public offering, including proceeds from the exercise of the
underwriter's overallotment option (approximately $7,400,000), the Company has
funded further research and development related to the enhancement of the ERIS
System.
In July 1996, the Company brought in a new management team which
redesigned the ERIS System into a small television-based workgroup system. In
addition, the management team accelerated the Company's development of a second
generation, high performance mobile workgroup video conferencing system
product--the Video Flyer(TM). In September 1996, the Company completed a private
placement of 1,500,000 shares of Common Stock, resulting in proceeds to the
Company of approximately $3,942,892, net of offering costs.
The first beta units of the Video Flyer came to the market in January
1997. Limited production and customer shipments began in March 1997. The system
went into full production for worldwide distribution in July 1997. The Video
Flyer is a self-contained, high performance video conferencing peripheral
component engine. The system is available in two models: the Video Flyer 384
("384") and the Video Flyer Rocket ("Rocket"). The Video Flyer 384 can
communicate simultaneously over three ISDN lines to provide a high quality
signal of up to 30 frames per second. The Rocket incorporates the same chassis,
software, external shell and electronic components as the 384 except that it
connects to only a single ISDN line and provides business quality video
conferencing of up to 15 frames per second. Both systems are designed to connect
to any size TV, projection system, PC, MAC or laptop (properly configured) and
can support most of the popular industry cameras and recording, playback and
communication devices.
(b) BUSINESS OF THE COMPANY
PRODUCTS
The Company's first product, the ERIS System, consists of a
self-contained peripheral firmware-based product and application software. The
ERIS System was designed to be an external "plug and play" device easily
connected to properly configured personal computers, Macintosh computers and
laptops. The system's architecture did not require an invasive strategy on the
part of the user with their existing computer. Initially, the ERIS System
provided higher frame rate performance, image and audio quality than readily
available traditional software and interface kits.
<PAGE>
By mid-year 1996, a number of personal computer software developers
began entering the desktop video conferencing marketplace. Though varying
degrees of transmission quality and user operability existed, the majority of
these new desktop/PC-based video conferencing products were less expensive than
the ERIS System. The Company found itself unable to reduce its manufacturing
costs accordingly so that the product could compete effectively in a PC
commodity marketplace. The initial list price of the ERIS System was $3,995.
In October 1996, the ERIS System was redesigned to attach directly to
small televisions and LCD projection devices. This system eliminated the
previous requirement on the part of the user to understand PC or MAC software
operations in order to create a video conference. The ERIS Computer-Free
software dramatically simplified the dialing and connection activities of the
user by incorporating simple operator logic.
During mid-summer of 1996, the Company redirected all of its primary
engineering resources into the development of a second generation video
conferencing component engine--the Video Flyer. This system was designed to
enable exceptional high quality video conferencing to occur on any commonly
available display system; i.e., television, flat screen, LCD projection, PC,
MAC, laptop, etc. The primary focus of the Video Flyer was to continue the
Company's computer-free theme by eliminating the need for computer knowledge,
keyboards, mice or additional peripheral devices other than the Video Flyer, a
camera and a display device to conduct the call.
Four development criteria were used for the Video Flyer.
(1) Provide high quality video image and audio output.
(2) Enable the system to have the broadest range of connectivity.
(3) Be as easy to use as a television set, thus eliminating the need
for any previous video conferencing system knowledge or
experienced supervision.
(4) Provide performance and value at an exceptional price.
PRODUCT DEVELOPMENT
To guarantee the highest quality video image and audio signal in the
mobile workgroup market segment where the Video Flyer has been targeted, the
product incorporates two commonly recognized industry components: a video
conferencing chip set and an echo-cancellation audio package, licensed from
DSPSE, Inc., based on technology from PictureTel, Inc.
To achieve connectivity, the company built the Video Flyer on a
single motherboard that incorporated all of the primary and secondary electronic
components to conduct high quality video conferencing through a variety of
devices and connections. By connecting an interchangeable single daughter card
to the motherboard, the system can be made to connect to a single ISDN line
using the Video Flyer Rocket, or up to three ISDN lines to conduct 384 calls
using the Video Flyer 384. The Company is currently developing additional
daughter cards that will provide connectivity to V.35/RS449 and H.323 LAN
devices.
Both Video Flyer Rocket and Video Flyer 384 guarantee ease of
operation and utilize universal TV-like infrared remote controllers. The Company
wrote all of the Video Flyer software to dramatically simplify the calling,
in-call and hang-up process. Recent published evaluations of the system
indicated that it may be the easiest to use, professional quality video
conferencing system currently available.
The system's software architecture has already allowed a number of
significant new features to be added on to products in the field without any
inconvenience to the user. The software resides entirely in flash memory
eliminating the need for a hard drive and computer diskettes to perform software
updates or new add-on features. Such capabilities as near and far-end remote
camera control, extended alpha/numeric phone book, multiple language screen
faces, PowerPoint(R) connectivity and BONDING have already been added to systems
installed worldwide merely by offering unattended downloading of these new
capabilities via the ISDN connection. Customers have said this dramatically
eliminates the inconvenience and hassle associated with updating a computer-type
product.
<PAGE>
Valuable economies have been achieved in the manufacturing and
assembly of the product because of the thoughtful and forward-thinking design
and engineering of the product. The Video Flyer Rocket (128Kbps) was introduced
with a list price in North America of $4,995. For comparison purposes, with the
addition of a high performance Sony pan/tilt/zoom camera (Model EVI-G20), the
system lists for $5,995. A recognized comparable product from the industry's
largest manufacturer of video conferencing products carries a suggested list
price of $8,995. At list price, the Video Flyer Rocket carries a lower price of
over 33%.
The Video Flyer 384 carries a North American list price of $8,995.
Again, the largest video conferencing manufacturer markets a comparable system
in feature and video/audio quality (incorporating a similar chip set and
echo-cancellation as the Video Flyer 384 and Rocket) with a suggested list price
of $22,000 to $27,000, a price differential of at least 55%. Over time, the
Company expects the prices of many of the systems in the roll-about market
segment to decline. The Company believes that the Video Flyers are outstanding
values that will be difficult for both existing and new video conferencing
buyers to ignore.
The Video Flyer is manufactured in Minnesota by Altron, Inc., an ISO
9002 facility that has been regionally recognized as a provider of high quality,
component-type assembly products. Currently all product development for the
Video Flyer continues to be performed in-house. A long list of no-charge and
for-fee new features are in development. The Company's management believes these
will keep the Video Flyer current in the evolving technological marketplace and
continue to enhance its price performance and value as a hedge against price
point erosion.
SALES AND DISTRIBUTION
In 1995, the Company began to distribute its ERIS product primarily
through selected personal computer, Macintosh, network integrators, resellers
and small telecommunication service providers. In July 1996, the Company
restructured all of its distribution. Today the Company distributes its products
through a variety of channels, as follows:
* Authorized Distributors and Resellers. The Company now targets,
where possible, large regionally recognized video conferencing,
audio visual, telecommunications and selected computer-type product
resellers. In North America, the Company has now established
resellers to cover all states and cities where ISDN service is
available. In Europe, distributors and resellers have been signed up
and trained in all countries where ISDN service is generally
available. In Asia, the Middle East, South Africa and Australia, the
Company now has both distributor and reseller coverage for the Video
Flyer. The Company intends to continue to add proven, results-driven
distributors and resellers into areas where either sales opportunity
or needs dictate.
* OEM and Private Label Relationships. The Video Flyer was designed to
be distributed as an OEM (original equipment manufacturer) and/or
private label product. The Company intends to pursue this strategy
by establishing selected product and vertical market OEM/private
label relationships. Certain regional and international brand name
product manufacturers are now entering the roll-about video
conferencing marketplace. A number of them have entered into
discussions with the Company about reselling the Video Flyer or
certain system key components under their label. The Company
believes the marketplace is broad enough and selected vertical
markets deep enough to allow for these types of additional sales
relationships.
* Major Accounts. The Company has established a major and preferred
account (MAP) program to accommodate selected direct sales
opportunities. It is not uncommon that larger multisite,
multinational and/or market specific organizations will not do
business with a product reseller. Rather, they expect the
manufacturer to offer the product directly and to guarantee regional
or worldwide service and support. To accommodate this need, the
Company has hired experienced, direct sale industry specialists.
Their efforts directly benefit the distributor/reseller strategy by
creating recognizable industry references that further support brand
name product awareness.
In an effort to attract and sustain its reseller interest and
on-going productivity, the Company will continue its policy of offering some of
the highest margins in the industry.
Currently, the Company is very limited in its ability to advertise
its products and, therefore, target markets through participating in vertical
market and market specific conferences and conventions. The Company
offers to its resellers both planning materials and courseware to conduct
regular application-based user seminars. The Company
<PAGE>
regularly conducts lead-generating mailing campaigns and offers its printed
materials as well as its expanding base of quality literature to its resellers
to support their sales efforts.
COMPETITION
When first founded, the Company's initial product focus was on the
evolving desktop video conferencing marketplace. Its first product, the ERIS
System, was designed to connect to desktop personal computers, MACs and laptops.
By July 1996, declining price points and margins in this market segment led the
Company to reposition itself in the broader, less competitive roll-about
workgroup niche. Market experts have estimated that, by 1998, the roll-about
marketplace will account for 64% of the total market revenues, 58% by 1999 and
52% by 2000. (The roll-about system marketplace is commonly understood to mean
any system that incorporates a television or projector-type system to
accommodate group viewing of two to ten plus individuals.) In contrast, the
desktop marketplace is estimated to be only 25% of the marketplace in 1998, 32%
in 1999 and 37% in 2000.
In the roll-about market segment, PictureTel is considered the
recognized industry leader. They offer two primary systems: the SwiftSite(TM)
128 Kbps set-top system and the Venue Model 30 and 50 (128 to 384) systems.
Though it is difficult to estimate the number of these systems that are
currently installed worldwide, the Company believes that they have created an
interest level that is triggering a broad market expansion. The Video Flyer
Rocket is a worthy opponent to the SwiftSite and at a much lower price, and the
Video Flyer 384 is a direct competitor in both video, audio and feature quality
to the Venue systems.
In the past year, VTEL, Inc. acquired Compression Labs, Inc. Both
companies are also recognized as providers of products in the roll-about market
segment. Sony, Panasonic, Tandberg and a handful of other international systems
manufacturers also compete in this market.
Though a majority of the manufacturers with which the Company
competes are significantly larger in their posted annual revenues and available
resources, the Company believes that the Video Flyer's design and capability
will allow it to compete effectively during the foreseeable future. Currently
the Company is unaware of any new or existing system that offers any capability
or price performance that is measurably better than the Video Flyer. The Company
expects price points to decline over time and is well positioned to absorb this
through intended cost saving manufacturing economies and bolstering of the
product's capabilities with user desired add-on software features.
Finally, the Company has designed the Video Flyer to fully comply
with all industry video communications primary standards. This allows the Video
Flyer to communicate easily, successfully and reliably with any of its
standards-based competitors. Just like the evolution of the personal computer to
industry standards in the late 1980s, organizations are now able to purchase a
multitude of video conferencing brands based on personal or regional preference
without any concern for compatibility. This standards-based strategy and market
evolution plays well into RSI's hand. Though the Company's products may not be
thought of during an initial video conferencing product search and review, if
introduced during the selection process, the Video Flyer competes favorably on
both the feature and cost effective level.
The Company services and supports its Video Flyer products with a
one-year manufacturer's guarantee. While under warranty, products are exchanged
in 24 to 48 hours via UPS. This consumer product-like service approach
dramatically reduces the Company's overall support structure and labor expense
and has found significant favor with both existing and potential users who
currently must choose from other products that provide traditional and often
expensive on-site service and repair personnel.
MANUFACTURING
The Company's original product, the ERIS System, was manufactured
under contract by Lucent Technologies (formerly AT&T Custom Manufacturing
Services) ("Lucent") during fiscal year 1996 and half of fiscal year 1997.
Lucent provided substantially all purchasing and related materials inventory,
manufacturing, testing and product warranty coverage for the Company. The
Manufacturing Agreement with Lucent was terminated by the Company on August 9,
1996.
As part of the termination of the Manufacturing Agreement with
Lucent, the Company assumed the warranty responsibilities for the ERIS units
that Lucent had built in exchange for reductions in excess inventory and other
financial obligations of the Company to Lucent. These warranty responsibilities
are considered by the Company to be
<PAGE>
insignificant since any defective units could be replaced by excess inventory
which the Company has written down to lower of cost or market as of June 30,
1997.
On September 10, 1996, a new Manufacturing Agreement was finalized
with a new third party manufacturer, Altron, Inc. ( Altron ) for the manufacture
of the Company's video conferencing units. Altron provides substantially the
same services to the Company as Lucent has provided in the past. Pursuant to its
agreement with the Company, Altron warrants that all products will be free from
defects in material and workmanship for fifteen ( 15 ) months from the date
Altron ships to the Company, or for twelve ( 12 ) months from the date the
Company ships to the customer, whichever comes first.
Although raw materials purchasing services are provided by Altron,
alternate suppliers have been identified by the Company for most components in
the Video Flyer product.
A major component in the Video Flyer product family for which the
Company depends on a single source is the compression chip. If this component
becomes unavailable to the Company, the Company would redesign the Video Flyer
products to accommodate similar components from other vendors. Currently the
Company has no information which would indicate the component may become
unavailable during the product life cycle of Video Flyer.
Alternate suppliers for ERIS components are not deemed necessary by
the Company, since the Company plans no additional manufacturing of the product.
The Company regularly upgrades and enhances its software. To date,
the Company has supplied upgrades to its customers free of charge. The Company
expects to charge customers for substantive upgrades in the future.
The Company believes Altron has the capacity and capability to
satisfy manufacturing requirements for the Video Flyer in the foreseeable
future. If a disruption in manufacturing were to occur, the Company believes it
could locate alternative manufacturers to satisfy production requirements.
APPROVALS AND CERTIFICATIONS
Government and telecommunications carrier approvals, safety
certifications and Electromagnetic Compliance ( EMC ) certifications are a key
requirement for electronic systems that use the telephone network. In the United
States the ERIS and Video Flyer systems have been certified by the FCC as a
class A ( business ) device. The Company has received certification from
Underwriters Laboratories Inc. ( "UL" ) that the ERIS and Video Flyer systems
comply with the applicable requirements for U.S. and Canadian Listing. The
Company has received telephone, safety and EMC certifications for its ERIS
System in the following countries: Australia, New Zealand, the European Union,
Japan, Taiwan, Hong Kong, Singapore, Malaysia and Korea. The Company has also
received the same certifications for its Video Flyer systems in Australia, the
European Union, Switzerland and Singapore. The Company also has telephone,
safety and EMC certifications in process for its Video Flyer systems in
Malaysia, Korea and Indonesia.
Although the Company has obtained telephone, safety and EMC
certifications for its ERIS and Video Flyer systems in these countries, the
Company cannot predict whether it will obtain necessary approvals and
certifications for Video Flyer systems or for future products in additional
countries. Also, the Company cannot predict whether applicable law or
regulations might change in a way adverse to the Company's ability to sell its
products in a particular country.
INTELLECTUAL PROPERTY AND ROYALTY AGREEMENTS
The Company's success is dependent in part on its proprietary
information, technology and expertise. The Company relies on a combination of
patents, trade secrets, copyrights and confidentiality agreements to establish
and protect its proprietary rights. The Company's U.S. design patent application
for the ERIS System, originally filed in October 1994, was granted in May 1996.
The Company amended its U.S. utility patent application for the ERIS System,
originally filed in September 1994, to narrow and refocus the Company's claims.
The Company also applied for various foreign patents relating to both the Video
Flyer and ERIS System, none of which have been granted to date.
The Company filed a trademark application for its intent to use the
mark "ERIS" in August 1994, and the certificate of registration was issued on
August 27, 1996. The Company was also issued certificates of registration for
the "ERIS" trademark as follows: in Australia on July 1, 1996; Germany on
January 2, 1996; and Great Britain on January 26, 1996.
<PAGE>
With respect to its technical employees and consultants, the Company
requires these employees to sign an agreement which obligates them to keep
confidential certain trade secrets and information of the Company and to assign
to the Company any inventions arising from their work for the Company, as
permitted by law. Depending on the responsibilities of a particular employee,
the Company may also consider having such an employee sign a non-compete
agreement.
The software embedded in the Company's Video Conferencing Systems
carries a standard license agreement for the end-user. The software license
agreement is included in the System manuals and grants the purchaser a
non-exclusive and non-transferable license to use the software program.
The Company entered into a license agreement with DSP Software
Engineering, Inc. ("DSPSE") on February 2, 1996. Pursuant to the agreement,
DSPSE granted to the Company a non-exclusive, non-transferable license to use
and modify specific DSPSE components in the creation of the Company's Video
Flyer video conferencing systems, subject to certain limitations. License fees
payable by the Company include an initial licensing fee of $60,000 for the right
to develop a stand alone video conferencing system and an additional $30,000
upon production. In addition to these licensing and production fees, the Company
is required to pay a royalty of $40.00 on each of the first 1,000 video
conferencing systems (VC Systems) sold, $4.75 for the following 9,000 VC Systems
sold, $6.25 for the following 90,000 VC Systems sold and $5.10 for each VC
System sold in excess of 100,000. Sales of the related VC Systems ( Video Flyer
384 and Video Flyer Rocket ) began in fiscal year 1997.
Pursuant to a license agreement with Link Technology Inc., which
provides certain ISDN software used in the Company's Video Conferencing
Systems, the Company pays a royalty of $25 on each of the first 10,000 systems
sold, $15 on each system over 10,000 up to 50,000 and $8 on each system sold in
excess of 50,000. The agreement with Link Technology Inc. was modified on August
30, 1996, to allow the use of the ISDN software in the Video Flyer products. The
Company paid a one time license fee of $9,000 for this amendment, all other
terms of the agreement regarding royalty payments remain the same.
The Company entered into an agreement with a software development
company on January 17, 1997. This agreement provided the Company with the
required development tools to integrate a T.120 computer software program with
the Video Flyer Windows computer software application. This agreement included a
one time fee for the Software Development Kit, annual maintenance fees and
minimum bundle quantity fees for the first 100 copies. The agreement also
includes a royalty fee of up to $40 per unit for copies of the software sold by
the Company in the future.
<PAGE>
EMPLOYEES
On September 26, 1997, the Company had 24 full-time employees; eight
in sales; four in marketing and customer support; six in product development;
and six in administration and finance.
None of the Company's employees is represented by a labor union. The
Company believes its employee relations are good.
CERTAIN IMPORTANT FACTORS
In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to materially
differ from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals, as
well as those listed in the "Risk Factors" section of the Company's Registration
Statement on Form SB-2 (File No. 33-93240C), include the following:
(1) The history of operating losses experienced by the Company
since its inception and the ability of the Company to avoid
additional operating losses and net losses over the next year.
(2) The ability of the Company to achieve market acceptance of its
new Video Flyer products.
(3) The impact of competition within the mobile workgroup, private
office and other segments of the overall market for video
conferencing equipment.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 4,190 square feet of space at its
headquarters in Edina, Minnesota under a lease agreement which expires on May
31, 1998. Rent payments under the lease for fiscal year ending June 30, 1997,
were approximately $89,000. The Company believes its current space is sufficient
for its current and anticipated needs. The Company also leases space for a sales
office in Florida and paid approximately $1,470 in fiscal year 1997 to rent this
space. The Company also spent $24,271 in fiscal year 1997 to lease office space
in Australia. Finally, the Company leases a sales office in the Netherlands. No
payments were made in fiscal year 1997 in connection with this lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal or administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 25, 1995 (the date of the Company's initial public
offering of Common Stock), the Company's Common Stock has been traded in the
over-the-counter market and is quoted on the NASDAQ SmallCap Market System. The
following table sets forth the high and low bid prices for the Company's Common
Stock as reported by NASDAQ. Such quotations represent interdealer prices,
without retail markup, markdown or commission, and do not necessarily represent
actual transactions for the fiscal quarters indicated.
HIGH LOW
---- ---
1996
First Quarter (FROM JULY 25, 1995) $ 9.250 $ 7.750
<PAGE>
Second Quarter $ 9.250 $ 9.000
Third Quarter 9.250 8.875
Fourth Quarter 9.250 7.750
1997
First Quarter 8.000 3.500
Second Quarter 4.750 1.500
Third Quarter 1.750 1.000
Fourth Quarter 3.625 1.000
As of September 26, 1997, there were (a) 4,769,765 shares of Common
Stock outstanding, held of record by approximately 960 persons, (b) outstanding
options to purchase an aggregate of 670,750 shares of Common Stock, and (c)
outstanding warrants to purchase an aggregate of 712,500 shares of Common Stock.
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and does not intend to pay any dividends for the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company was organized on December 21, 1993, and it designs,
develops manufacturers and markets telecommunications products for video
conferencing. During the fiscal year ended June 30, 1997, the Company's
activities were primarily directed at building world wide distribution channels
and developing its new Video Flyer product.
During the first half of the fiscal year ended June 30, 1996, the
Company's activities were primarily directed towards completion of the
development of the ERIS System. During the second half of fiscal year 1996, the
Company's activities included sales and sales support of the ERIS System and new
product development. The following discussion covers the fiscal years ended June
30, 1997 and 1996.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales. In fiscal year 1997, net sales increased to $2,570,851, up
58.1% from $1,625,720 in fiscal year 1996. Sales are derived primarily from
video conferencing units, but also include sales of cameras, software and other
supplies used with the systems. The increase in sales in fiscal year 1997
compared to fiscal year 1996 was a result of higher unit volume and higher
pricing associated with enhanced product configurations, new products, and
increased distribution channels. The first sales of Video Flyer occurred in the
fourth quarter of fiscal year 1997. In fiscal year 1997, the company focused on
building a network of dealers and resellers for its products in Europe,
Australia, the Pacific Rim and the United States. The Company expects volume to
increase in fiscal year 1998 over historical levels as a result its continuing
efforts to build distribution.
The Video Flyer 384 is currently priced higher than the Company's
previous ERIS product. Although the ultimate effects of competition on future
market price points is uncertain, the Company expects its fiscal year 1998
average pricing levels to be higher than historical levels because the fiscal
year 1998 sales mix is expected to be comprised of Video Flyer and related
components. Average pricing in fiscal year 1997 was influenced by sales of lower
priced ERIS. As a result of higher expected volume, higher pricing over
historical levels and changes in product mix, the Company expects fiscal year
1998 revenues to increase compared to fiscal year 1997.
Gross Profit (Loss). Gross loss was $(763,793) or (29.7%) of net
sales for fiscal year 1997 compared to $(396,980) or (24.4%) of net sales for
fiscal year 1996. The 1997 gross loss resulted from an inventory writedown to
lower of cost or market of $1,430,428 related to the ERIS product. The writedown
was a result of the Company's transition to its next generation product, Video
Flyer. Cost of goods sold in fiscal year 1997 amounted to $1,904,216 or 74.1% of
net sales, compared to $1,640,508 or 101.0% of net sales in fiscal year 1996.
The lower cost of goods sold relative to net sales in fiscal year 1997 resulted
from sales of the company's higher priced, lower cost Video Flyer in the fourth
quarter of fiscal year 1997, as well as changes in product configurations and
lower price discounting through the third quarter of fiscal year 1997 compared
to the prior year.
<PAGE>
As discussed above, the Company's expects higher overall fiscal year
1998 average pricing levels and a shift in product mix to Video Flyer and
related components compared to fiscal year 1997. When combined with an overall
lower manufacturing cost for Video Flyer compared to ERIS, these trends are
expected to result in increased gross profit percentages in fiscal year 1998
compared to fiscal year 1997.
Research and Development Expenses. Research and development expenses
were $1,528,493 or 59.5% of net sales for fiscal year 1997 compared to
$1,540,416 or 94.8% of net sales for fiscal year 1996. The decrease as
percentage of sales was due to the higher sales volume in fiscal year 1997 as
discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3,445,301 or 134.0% of net sales for fiscal year
1997 compared to $3,121,796 or 192.0% of net sales for fiscal year 1996. The
percentage decrease was primarily due to the higher sales volume in fiscal year
1997 as discussed above. Actual dollar spending during fiscal year 1997 was
higher than fiscal year 1996 primarily due to increased marketing, and an
increased sales force to correspond with expanded distribution and new product
introductions in fiscal year 1997. General and administrative salaries and
related costs also increased to correspond with the expanding business during
fiscal year 1997. In fiscal year 1998, the dollar amount of selling general and
administrative expenses is expected to increase over historical levels as the
Company focuses on marketing, sales and distribution of Video Flyer and
continues to grow.
Other Income and Expense. Interest income was $90,324 for fiscal year
1997 compared to $180,521 for fiscal year 1996. The decrease in fiscal year 1997
was due to higher cash and cash equivalents available to the Company throughout
fiscal year 1996 due to the Company's public offering in July 1995. Interest
expense was $40,340 for fiscal year 1997 compared to $154 for the same period
last year. The increase in fiscal year 1997 was primarily due to the interest
charges on inventory procured by the Company's third party manufacturer on
behalf of the Company to support required lead times.
As a result of the above, the net loss for fiscal year 1997 was
$(5,684,690), or $(1.30) per share, compared to the net loss of $(4,878,825), or
$(1.56) per share for fiscal year 1996.
Net Operating Loss Carryforwards. The Company has net operating loss
carryforwards for financial and federal income tax reporting purposes of
approximately $12,500,000, which can be used to offset taxable income in future
years. Sales of the Company's equity during fiscal year 1997 and 1996 have
caused changes in ownership under Section 382 of the Internal Revenue Code of
1996, which limits the use of the Company's net operating loss carryforwards
existing as of the date of the ownership change. It is not anticipated that any
limitation would have a material adverse effect on the Company.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales. The Company realized total net sales of $1,625,720 during
the year ended June 30, 1996, compared to $229,998 in fiscal year 1995. The
first video conferencing production units were shipped by the Company in
February 1995. Fiscal year 1996 represents the first full year of unit sales
while fiscal year 1995 had only five months of sales.
Gross Profit (Loss). Gross loss was $(396,980) for fiscal year 1996
compared to a gross profit of $51,336 for fiscal year 1995. The gross loss in
fiscal year 1996 resulted from the termination of a third party manufacturing
agreement with Lucent. As part of the termination agreement, the Company agreed
to purchase from Lucent remaining inventory after Lucent completed its
manufacturing obligations to the Company. As a result, the Company recognized an
impairment charge to value the related inventory at the lower of cost or market
of $382,192.
Research and Development Expenses. The Company incurred research and
development expenses of $1,540,416 or 94.8% of sales during fiscal year 1996
compared to $1,383,365 or 601.5% of sales in the prior year. The decrease in
expenses relative to sales in fiscal year 1996 resulted from increased sales
volume as discussed above. Actual dollar spending during fiscal year 1996 was
higher than the previous year due to costs associated with the Company
continuing to modify the ERIS System for market acceptability in the United
States and internationally, and development expenditures related to new products
to be released by the Company in fiscal year 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3,121,796 or 192.0% of net sales for fiscal year
1996 compared to $1,180,365 or 513.2% of net sales for fiscal year 1995. The
percentage decrease was primarily due to the higher sales volume in fiscal year
1996 as discussed above. Actual dollar spending during fiscal year 1996 was
higher than the same period last year primarily due to an increased sales force,
and thus increased salaries and commissions, to correspond with the introduction
of product sales beginning in late 1995 and extending through 1996. General and
administrative salaries and related costs also increased to correspond with the
expanding business during fiscal year 1996.
<PAGE>
Other Income and Expense. Interest income was $180,521 for fiscal
year 1996 compared to $14 for the previous year. The increase in fiscal year
1996 was due to increased cash and cash equivalents available to the Company
throughout fiscal year 1996 from the Company's public offering in July 1995.
Interest expense was $154 for fiscal year 1996 compared to $5,705 for the same
period last year. The decrease in fiscal year 1996 was primarily due to the
conversion to equity of a convertible note payable which was outstanding for
most of 1995 and for none of 1996.
As a result of the above, the net loss for fiscal year 1996 was
$(4,878,825), or $(1.56) per share compared to the net loss of $(2,518,085), or
$(1.31) per share for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Cash and Cash Equivalents. Cash and cash equivalents totaled
$1,152,671 on June 30, 1997, compared to $1,032,921 on June 30, 1996. The
primary reasons for the $119,750 increase in cash and cash equivalents during
fiscal year 1997 was the completion in September 1996 of a private offering of
the Company's Common Stock, netting the Company proceeds of $3,942,892, which
was largely offset by cash used in operating activities, as discussed below.
Net Cash Used in Operating Activities. The amount of cash used in
operating activities was ($3,728,376) during fiscal year 1997 compared to
($6,037,203) during fiscal year 1996. The cash used in operating activities
resulted mainly from a net loss of $(5,684,690) which was offset by a non-cash
inventory writedown to lower of cost or market of $1,430,428, depreciation and
amortization of $239,867 and non-cash compensation of $100,000.
Order activity and revenue increased during the fourth quarter of
fiscal year 1997 compared to fiscal year 1996. This growth in the business
resulted in increases in accounts receivable and inventory on June 30, 1997,
compared to fiscal year 1996 (after excluding inventory reserves and writedowns
to lower of cost or market valuation).
In connection with the Company's overall business growth, increased
order activity and introduction of Video Flyer, accounts payable increased
$887,687 from June 30, 1996, to June 30, 1997.
Accrued liabilities decreased $364,067 from June 30, 1996, to June
30, 1997, primarily as a result of payment of a $225,590 severance accrual
during fiscal year 1997. Accrued inventory commitments also declined $134,355
from June 30, 1996, to June 30, 1997.
Net Cash Used in Investing Activities. Cash used in investing
activities decreased $359,413 in fiscal year 1997 due to a reduction in
additions to property and equipment compared to 1996.
Net Cash Provided by Financing Activities. Cash provided by financing
activities was $3,947,317 in fiscal year 1997, compared to $7,469,229 in fiscal
year 1996. The higher amount of cash generated in fiscal year 1996 was a result
of the Company's initial public offering.
In July 1997, the Company signed a commercial loan agreement with a
bank for a $1,000,000 discretionary revolving credit facility, and on September
5, 1997, the Company borrowed $300,000 on the line of credit. Under the terms of
the agreement, working capital funds are drawn based on a borrowing base
comprised of a percentage of eligible accounts receivable and inventory.
The Company believes the remaining funds from the private placement
and funds from the line of credit will be sufficient to cover cash needs.
Management plans to continue to increase sales and improve operating results by
<PAGE>
expanding distribution of its products through an expanded dealer network,
enhanced dealer support services and additional emphasis on larger, national and
OEM accounts. In addition, the Company plans to initiate expanded marketing
efforts in fiscal year 1998. In the event sales do not materialize at the
expected rates, management would conserve cash by reducing administrative
expenses as well as sales, marketing efforts, and research and development
expenses. To the extent that the Company requires cash in excess of the funds
generated by the private placement, its line of credit or future operations,
management would seek additional financing, however no formal arrangements have
been made in this regard and no assurance can be made that any such financing
would be available on favorable terms or at all.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following Consolidated Financial Statement and Independent
Auditors' Report thereon are included herein.
Page
----
Independent Auditors' Report.....................................
Consolidated Balance Sheets as of June 30, 1997 and 1996.........
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995...................................
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1997, 1996 and 1995...................
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995.....................................
Notes to Consolidated Financial Statements.......................
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
RSI Systems, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of RSI Systems,
Inc. and Subsidiary (the Company) as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RSI Systems, Inc.
and Subsidiary as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
Minneapolis, Minnesota
September 12, 1997
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,152,671 1,032,921
Accounts receivable, net of allowance for doubtful
accounts of $210,000 in 1997 and $49,000 in 1996 747,427 524,433
Inventories (note 4) 544,613 1,744,222
Prepaid expenses 41,556 184,658
- -------------------------------------------------------------------------------------------------------------
Total current assets 2,486,267 3,486,234
- -------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and equipment 718,998 619,807
Leasehold improvements 4,818 4,818
Less accumulated depreciation (332,589) (168,282)
- -------------------------------------------------------------------------------------------------------------
Net property and equipment 391,227 456,343
- -------------------------------------------------------------------------------------------------------------
Other assets 2,500 316,000
Less accumulated amortization (1,979) (239,919)
- -------------------------------------------------------------------------------------------------------------
Net other assets 521 76,081
- -------------------------------------------------------------------------------------------------------------
$ 2,878,015 4,018,658
=============================================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable 1,166,507 278,820
Accrued expenses (note 8) 363,165 861,586
Deferred revenue 123,989 0
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 1,653,661 1,140,406
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity (note 11):
Common stock, par value $.01 per share, authorized 10,000,000
shares; 4,757,265 and 3,251,015 issued and outstanding at
June 30, 1997 and 1996, respectively 47,573 32,510
Additional paid-in capital 14,358,381 10,214,252
Foreign currency translation adjustment 0 28,400
Accumulated deficit (13,081,600) (7,396,910)
Unearned compensation--restricted stock (100,000) 0
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,224,354 2,878,252
- -------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 6 and 9)
- -------------------------------------------------------------------------------------------------------------
$ 2,878,015 4,018,658
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,570,851 1,625,720 229,998
Cost of goods sold 1,904,216 1,640,508 178,662
Inventory writedown to lower of cost or market (note 4) 1,430,428 382,192 0
- -------------------------------------------------------------------------------------------------------------
Gross profit (loss) (763,793) (396,980) 51,336
Research and development 1,528,493 1,540,416 1,383,365
Selling, general, and administrative 3,445,301 3,121,796 1,180,365
- -------------------------------------------------------------------------------------------------------------
Operating loss (5,737,587) (5,059,192) (2,512,394)
Other income (expense):
Other income 2,913 0 0
Interest income 90,324 180,521 14
Interest expense (40,340) (154) (5,705)
- -------------------------------------------------------------------------------------------------------------
Other income (expense), net 52,897 180,367 (5,691)
- -------------------------------------------------------------------------------------------------------------
Net loss $ (5,684,690) (4,878,825) (2,518,085)
=============================================================================================================
Net loss per common share $ (1.30) (1.56) (1.31)
=============================================================================================================
Weighted average shares outstanding 4,378,326 3,127,189 1,928,098
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Foreign Unearned
Common stock Additional currency compensation--
----------------- paid-in translation Accumulated restricted
Shares Amount capital adjustment deficit stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 700,000 $ 7,000 442,600 0 (470,829) 0 (21,229)
Common stock sold to employee/director
[note 11(a)] 260,000 2,600 107,900 0 0 0 110,500
Common stock sold to a director
[note 11(a)] 50,000 500 49,500 0 0 0 50,000
Common stock sold to a separate
corporation [note 11(a)] 21,112 211 20,901 0 0 0 21,112
Common stock issued to directors 0 0 151,000 0 0 0 151,000
Common stock issued in private placements
[note 11(a)] 721,015 7,210 2,126,340 0 0 0 2,133,550
Common stock warrants issued to
employees/directors [note 11(b)] 0 0 165,000 0 0 0 165,000
Common stock warrant sold to
employee/director 0 0 100 0 0 0 100
Conversion of note payable to common stock
(note 5) 88,888 889 99,111 0 0 0 100,000
Reclassification of S-corporation
accumulated deficit to additional
paid-in capital 0 0 (470,829) 0 470,829 0 0
Foreign currency translation adjustment 0 0 0 2,160 0 0 2,160
Net loss for the year ended June 30, 1995 0 0 0 0 (2,518,085) 0 (2,518,085)
====================================================================================================================================
Balances at June 30, 1995 1,841,015 18,410 2,691,623 2,160 (2,518,085) 0 194,108
Common stock sold in public offering
[note 11(a)] 1,383,750 13,838 7,394,342 0 0 0 7,408,180
Exercises of stock options 26,250 262 60,737 0 0 0 60,999
Common stock warrants issued to directors 0 0 67,500 0 0 0 67,500
Common stock warrants issued to underwriter 0 0 50 0 0 0 50
Foreign currency translation adjustment 0 0 0 26,240 0 0 26,240
Net loss for the year ended June 30, 1996 0 0 0 0 (4,878,825) 0 (4,878,825)
====================================================================================================================================
Balances at June 30, 1996 3,251,015 32,510 10,214,252 28,400 (7,396,910) 0 2,878,252
Common stock sold in private placement
[note 11(a)] 1,500,000 15,000 3,927,892 0 0 0 3,942,892
Exercise of stock options 1,250 13 4,362 0 0 0 4,375
Common stock warrant issued to underwriter 0 0 50 0 0 0 50
Shutdown of foreign subsidiary 0 0 0 (28,400) 0 0 (28,400)
Restricted stock award [note 9(c)] 0 0 200,000 0 0 (100,000) 100,000
Common stock issued in settlement of claim 5,000 50 11,825 0 0 0 11,875
Net loss for the year ended June 30, 1997 0 0 0 0 (5,684,690) 0 (5,684,690)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 4,757,265 $47,573 14,358,381 0 (13,081,600) (100,000) 1,224,354
====================================================================================================================================
</TABLE>
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,684,690) (4,878,825) (2,518,085)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 239,867 194,316 191,056
Inventory writedown to lower of cost or market (note 4) 1,430,428 382,192 0
Common stock warrant issued to employees 0 0 165,000
Compensation from restricted stock 100,000 0 0
Common stock issued in settlement of claim 11,875 0 0
Foreign currency translation adjustment (28,400) 26,240 2,160
Changes in operating assets and liabilities:
Accounts receivable (222,994) (453,075) (71,358)
Inventories (365,173) (567,918) (1,222,104)
Prepaid expenses 143,102 (144,741) (39,367)
Accounts payable 887,687 (917,298) 1,147,490
Accrued liabilities (364,067) 321,906 199,708
Deferred revenue 123,989 0 0
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,728,376) (6,037,203) (2,145,500)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to furniture and equipment (99,191) (458,604) (133,953)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (99,191) (458,604) (133,953)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,947,267 7,469,179 2,315,162
Proceeds from issuance of warrants 50 50 100
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 3,947,317 7,469,229 2,315,262
- --------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 119,750 973,422 35,809
Cash and cash equivalents at beginning of year 1,032,921 59,499 23,690
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,152,671 1,032,921 59,499
==========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 39,970 154 5,716
==========================================================================================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During fiscal year 1996, warrants to purchase shares of common stock were
issued in connection with letters of credit obtained by the Company
which were guaranteed by two stockholders/directors. The estimated value
of the warrants $(67,500) was capitalized related to this transaction
[note 9(d)].
During fiscal year 1995, the Company's note payable was converted into
88,888 shares of common stock (note 5).
During fiscal year 1995, warrants to purchase shares of common stock were
issued in connection with letters of credit obtained by the Company
which were guaranteed by two stockholders/directors. The estimated value
of the warrants $(151,000) was capitalized related to this transaction
[note 9(d)].
During fiscal year 1995, the Company issued warrants to two
employees/directors of the Company for the purchase of 33,000 shares
each of Company common stock. On the date of issuance, the Company
recorded $165,000 as compensation expense related to these warrants
[note 11(b)].
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
(1) DESCRIPTION OF BUSINESS
RSI Systems, Inc. and Subsidiary (the Company) designs, develops and
markets telecommunications products for videoconferencing. The
Company was incorporated in Minnesota in 1993. Shipments of the
Company's first product began in February 1995. Prior to that
time, the Company was considered a development stage enterprise.
In April 1997, the Company began selling its next generation
product, Video Flyer.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and a wholly owned subsidiary located in the United
Kingdom, RSI Systems, Limited, which was dissolved on April 11,
1997. All intercompany accounts and transactions are eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly-liquid debt securities
having an initial maturity of three months or less to be cash
equivalents. Cash equivalents amounted to $1,015,627 and
$1,005,692 at June 30, 1997 and 1996, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over their estimated useful lives
which range from two to seven years.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under Accounting
Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR
STOCKS ISSUED TO EMPLOYEES. Accordingly, no compensation expense
had been recognized for its stock-based compensation plans. The
Company has adopted the disclosure requirements under Statement
of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING AND
DISCLOSURE OF STOCK-BASED COMPENSATION.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
WARRANTY ACCRUAL
The Company's product carries a warranty from a third party custom
manufacturer of twelve (12) months from the date the Company ships
to the customer or fifteen (15) months from the date the third
party manufacturer ships to the Company, whichever comes first.
[see note 9(d)]. The cost to the Company for this warranty is
included in the total manufacturing costs charged by the third
party custom manufacturer to the Company for each unit produced.
As a result, the third party manufacturer covers warranty costs
for defective units.
REVENUE RECOGNITION
The Company recognizes revenue from system sales upon shipment. Post
sale customer support costs are insignificant and are expensed as
incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when
incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES (FASB No. 109). Under the asset and liability method of FASB
No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FASB
No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are subject to a
valuation allowance based on the estimated realization of these
assets.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of RSI Systems, Limited were translated at the
rate of exchange in effect on the balance sheet date; income and
expenses were translated at the average rates of exchange
prevailing during the period of reporting. The related translation
adjustments were reflected in the foreign currency translation
adjustment section of the consolidated balance sheet. Foreign
currency transaction gains or losses are included in net loss.
LOSS PER COMMON SHARE
Loss per common share is determined by dividing the net loss by the
weighted average number of shares of common stock outstanding.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(3) LIQUIDITY
In 1997, the Company took steps to increase sales including completion
of its new computer free Video Flyer product, increasing
distribution through an expanded dealer network and sales force,
and increasing pre-sale dealer support and training services.
On September 30, 1996, the Company completed a private offering of its
common stock. The Company received $3,942,892, net of offering
costs, in exchange for 1,500,000 shares of common stock ($3.00
per share) (note 11).
In July 1997, the Company completed a commercial loan agreement with a
Bank for a $1,000,000 discretionary revolving credit facility
(note 14). The facility is secured by all corporate assets and
provides for working capital based on a borrowing base comprised
of accounts receivable and inventory. The facility contains
certain covenants and conditions, including minimum net worth and
debt to tangible net worth levels, and minimum annual interest
payments.
Management plans to continue to increase sales and improve operating
results through expanded distribution of products through an
expanded dealer network, enhanced dealer support services, and
increased emphasis on larger national and OEM accounts. In
addition, the Company plans to initiate expanded marketing efforts
in fiscal year 1998. The Company believes that funds remaining
from the private placement, funds generated from operations, and
funds available under the line of credit will be sufficient to
cover cash needs. In the event sales do not materialize at the
expected rates, management would seek additional financing or
would conserve cash by reducing administrative, product
development, and sales and marketing expenses.
(4) INVENTORIES
Inventories consisted of the following at June 30:
1997 1996
-------------------------------------------------------------------
Components $ 374,234 303,615
Work in process 0 952,456
Finished goods 170,379 488,151
-------------------------------------------------------------------
$ 544,613 1,744,222
===================================================================
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Inventory at June 30, 1997, and 1996 reflects a reduction to lower of
cost or market valuation. The charges to operations associated
with these inventory write downs amounted to $1,430,428 and
$382,192 for fiscal 1997 and 1996, respectively. The 1997 write
down was associated with excess inventory resulting from the
Company's decision to transition to its new product, Video Flyer.
The 1996 inventory write down charges related to the termination
of a manufacturing agreement with the Company's third party
manufacturer, and the Company's obligation to purchase remaining
component inventory. [See note 9(d)].
(5) CONVERTIBLE NOTE PAYABLE
In December 1993, the Company purchased equipment and teleconferencing
codec (a data compression and decompression hardware and software
product) from VideoLabs, Inc. (VideoLabs) in exchange for a
convertible note payable. The 7% convertible note was secured by
all of the assets purchased. In May 1995, VideoLabs exercised its
right of conversion under the terms and conditions of the
convertible note payable. The conversion resulted in VideoLabs
receiving 88,888 shares of the Company's common stock in exchange
for the $100,000 note payable.
(6) LEASES
The Company leases office space and various equipment under
noncancelable operating leases. Future minimum rental payments due
under noncancelable operating leases are as follows:
Fiscal year ending June 30:
-----------------------------------------------------------------
1998 $ 108,094
1999 23,321
2000 5,196
2001 5,196
Thereafter 3,897
Total rental expense was $135,901, $136,680 and $30,561 for the years
ended June 30, 1997, 1996 and 1995, respectively.
(7) RELATED PARTIES
As discussed in note 5, the Company purchased certain assets from
VideoLabs. One of the Company's directors is also a director of
VideoLabs. This same director holds ownership interests in both
VideoLabs and the Company. The Company has purchased cameras from
VideoLabs and sold them as optional equipment with the Company's
Eris System. During the years ended June 30, 1997, 1996 and 1995,
the Company's purchases from VideoLabs totaled approximately
$8,972, $57,140 and $25,000, respectively.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
(8) ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30:
1997 1996
-------------------------------------------------------------------
Severance [note 9(c)] $ 0 225,590
Inventory [note 9(d)] 247,837 382,192
Miscellaneous, other 115,328 253,804
-------------------------------------------------------------------
$ 363,165 861,586
===================================================================
(9) COMMITMENTS AND CONTINGENCIES
(a) ROYALTY AGREEMENTS
During 1996, the Company entered into a royalty agreement with
a software development company. The agreement obligated the
Company to pay a royalty fee ranging from 25% (1 to 2,000
systems sold) to 5% (over 20,000 systems sold) of unit list
price depending on the volume of systems sold. The agreement
provided for a first year minimum royalty commitment of
$100,000. Sales of Eris Systems containing the software per
this royalty agreement were anticipated to begin in fiscal
year 1997. In fiscal year 1997, the Company terminated the
agreement.
During 1994, the Company entered into royalty agreements with
two vendors who contributed to the design and development of
the Company's Eris System. Under one agreement, the Company
paid a royalty of approximately $46,000. Under the agreement
with the second vendor, the Company is obligated to pay a
l-1/2% royalty to the vendor on net sales for up to 5,000
Video Conferencing systems, 1% royalty for the next 5,000
systems and 1/2% royalty for the following 5,000 systems.
(b) SOFTWARE LICENSE AGREEMENT
During 1997, the Company entered into a software license
agreement with a software development company. Pursuant to
the agreement, in addition to licensing, production,
maintenance, and training fees, the Company is to pay a
royalty fee of up to $40 per unit for Video Conferencing
systems containing the software. Sales of the related
systems began in fiscal year 1997.
During 1996, The Company entered into a software license
agreement with a separate software development company.
Pursuant to the agreement, in addition to licensing and
production fees of $90,000, the Company is to pay a royalty
fee of $40 on each of the first 1,000 Video Conferencing
Systems sold, $4.75 for the following 9,000 systems, $6.25
for the following 90,000 systems and $5.10 for each system
sold in excess of 100,000. Sales of the related systems
began in fiscal year 1997.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
During 1994, the Company entered into a software license
agreement with a software development company. Pursuant to
the agreement, the Company is to pay a royalty fee of $25 on
each of the first 10,000 systems sold, $15 on each system
over 10,000 up to 50,000, and $8 on each system sold in
excess of 50,000.
(c) EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into a two-year employment
agreement with its President and Chief Executive Officer.
Pursuant to the agreement, the officer receives an annual
salary of $150,000. The agreement provides for payment to
the officer of up to twelve month's salary and benefits in
the event of termination without cause or the Company's
breach of a material term of the agreement.
Also, in connection with the employment agreement, on July 1,
1996, the Company granted 25,000 shares of the Company's
common stock to its President and Chief Executive Officer.
The stock is subject to certain restrictions which lapse at
a rate of 6,250 shares every six months from the date of
grant. As of June 30, 1997, the stock had not been issued.
Total compensation expense recognized in fiscal year 1997
related to this stock grant was $100,000.
During fiscal year 1995, the Company entered into employment
agreements with four officers. During fiscal year 1996,
three of these officers either resigned from the Company or
their employment was terminated by the Company. Based on
either the termination clause of the original employment
agreements or a separate termination letter between the
officer and the Company, the Company provided for severance
payments to these three officers at June 30, 1996. One of
the three officers formed a new company in which the Company
obtained a 20% ownership position as part of the separation
settlement. On September 13, 1996, the fourth officer also
resigned from the Company.
(d) MANUFACTURING AGREEMENT
On August 28, 1996, the Company entered into a new
manufacturing agreement with a third party custom
manufacturer (New Manufacturer). Pursuant to this agreement,
the New Manufacturer agreed to produce the Company's video
conferencing products, and warrant that all products will be
free from defects in material and workmanship for twelve
(12) months from the date the Company ships to the customer
or fifteen (15) months from the date the third party
manufacturer ships to the Company, whichever comes first.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
The agreement may be terminated by either party upon failure of
the other party to comply with any material term of the
agreement after a 30 day written notice and cure period. In
the event of such termination, the Company would be
obligated to pay for any goods accepted under the terms of
the agreement. The Company may also terminate the agreement
upon 30 days written notice. In such case, the Company would
be obligated to pay for material and work in progress for
products ordered. As of June 30, 1997, the Company had
ordered equipment from the New Manufacturer totaling
$1,620,000 which had not yet been received and accepted as
of June 30, 1997.
During 1996 and 1995, the Company's video conferencing systems
were manufactured by a separate third party custom
manufacturer (the Previous Manufacturer). The Previous
Manufacturer provided substantially all parts and
manufacturing supplies for the Company's product. On August
9, 1996, the Company and the Previous Manufacturer
terminated the manufacturing agreement. Pursuant to this
termination agreement, the Previous Manufacturer agreed to
produce, and the Company agreed to purchase, 690 completed
Eris System units. In addition, upon the completion of the
690 units, the Company agreed to purchase from the Previous
Manufacturer any remaining component inventory. During the
year ended June 30, 1996, the Company recognized an
impairment charge of $382,192 to value the related inventory
at the lower of cost or market (see note 4). On February 7,
1997, the Company concluded all business with the Previous
Manufacturer.
At June 30, 1995, the Company had outstanding, irrevocable bank
letters of credit totaling $1,250,000. The letters of credit
could be drawn upon through September 1995 by the previous
Manufacturer. The letters of credit were guaranteed by two
stockholders/directors and collateralized by all corporate
assets, as defined in the underlying promissory notes.
Warrants to purchase a total of 225,000 shares of common
stock at $1.00 to $2.00 per share were issued as
consideration for these guarantees. The estimated value of
the warrants was capitalized and amortized over the terms of
the letters of credit.
In May 1996, the Company also obtained irrevocable bank letters
of credit totaling $600,000. The letters of credit could be
drawn upon through May 1997 by the Previous Manufacturer.
The letters of credit were also guaranteed by the same two
stockholders/directors and collateralized by assets pledged
by the two stockholders/directors. Warrants to purchase a
total of 15,000 shares of common stock at $3.00 per share
were issued as consideration for these guarantees. The
estimated value of the warrants was capitalized and was
amortized over the terms of the letters of credit.
(e) DISTRIBUTOR, DEALER, AND MANUFACTURER REPRESENTATIVE AGREEMENTS
The Company is a party to distributor or dealer agreement with
several companies. Each distributor or dealer has minimum
purchase obligations. The term of each agreement is one
year, renewable for additional one-year periods.
Distributors and dealers receive discounts depending upon
the number of systems ordered from the Company.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
(10) INCOME TAXES
The Company is a Subchapter C corporation for income tax reporting
purposes beginning July 1, 1994.
At June 30, 1997, the Company has approximately $12,500,000 of net
operating loss carryforwards and $60,000 of tax credit
carryforwards for federal income tax purposes, which begin to
expire in 2010. Section 382 of the Internal Revenue Code of 1986
limits the use of the Company's net operating loss carryforwards
as of the date of a more than 50% change in ownership. As a result
the public offering discussed at note 11(a), a Section 382
ownership change occurred. As a result of prior ownership changes,
a portion of net operating losses are limited in use in any one
year. Future ownership changes may further limit the use of the
net operating losses in any one year.
The provision for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate for the two
year period ended June 30, 1997, 1996 and 1995 is as follows:
1997 1996 1995
---------------------------------------------------------------
Expected federal benefit 34% 34 34
State taxes, net 6 6 6
Change in valuation allowance (40) (40) (40)
---------------------------------------------------------------
Actual tax benefit 0% 0 0
===============================================================
The tax effect of items which comprise a significant portion of
deferred tax assets as of June 30, 1997, 1996 and 1995 is as
follows:
1997 1996
---------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,060,000 2,640,000
Other 160,000 352,000
Valuation allowance (5,220,000) (2,992,000)
---------------------------------------------------------------
Net deferred tax asset $ 0 0
===============================================================
A valuation allowance is provided when there is some likelihood that
all or a portion of a deferred tax asset may not be recognized.
The net deferred assets at June 30, 1997 and 1996 are fully
offset by a valuation allowance. The valuation allowance is
reviewed annually.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
(11) CAPITAL STOCK
(a) COMMON STOCK
On September 30, 1996, the Company completed a private offering
of its common stock. The Company received $3,942,892 net of
offering costs, in exchange for 1,500,000 shares of common
stock ($3.00 per share). A registration statement for these
shares has been declared effective by the Securities and
Exchange Commission and the shares are registered and freely
tradable as of June 30, 1997.
Effective July 25, 1995, the Company offered 1,200,000 shares
of common stock for sale to the public through an
underwriter at a price of $6.25 per share. Net proceeds to
the Company from the public offering, including the
underwriters over-allotment option of 183,750 shares, was
$7,408,180.
During the year ended June 30, 1995, the Company had two
private offerings of its common stock. The Company received
$520,000 in exchange for 260,000 shares of common stock
($2.00 per share) from the first private offering and
$1,613,550 in exchange for 461,015 shares of common stock
($3.50 per share) from the second private offering. The
above amounts include shares sold to directors of the
Company of 117,500 shares and 80,000 shares, respectively.
During the year ended June 30, 1995, the Company received $500
from an employee/director of the Company for 100,000 shares
of Company common stock. The Company also sold common stock
at fair market value to employees and directors and received
$160,000 for 210,000 shares of Company common stock ($.50 to
$3.50 per share).
In August 1994, the Company also sold common stock at fair
market value and received $21,112 from a separate
corporation for 21,112 shares of Company common stock ($1.00
per share).
(b) STOCK WARRANTS
On September 30, 1996, in connection with the Company's private
offering of 1,500,000 shares of its common stock, the
Company issued warrants to the placement agent for the
purchase of 150,000 shares of common stock. Such warrants
have a ten year term and are exercisable at $3.00 per share.
In July 1995, in connection with the Company's initial public
offering, the Company issued warrants to the underwriter for
the purchase of 122,500 shares of Company common stock. Such
warrants have a five-year term and are exercisable at $7.50
per share.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
In May 1995, a director surrendered to the Company, the right
to purchase 66,000 shares at $1.00 per share of Company
common stock. At the same time, the Company issued warrants
to two employees/directors of the Company for the purchase
of 33,000 shares each of Company common stock. Such warrants
have a five-year term and are exercisable at $1.00 per
share. On the date of issuance, the Company recorded
$165,000 as compensation expense, representing the
difference between the exercise price and the estimated fair
market value of the warrants.
Additional warrants were issued in conjunction with guarantees
on standby letters of credit [see note 9(d)].
(c) STOCK OPTIONS
The Company has a stock plan which permits the granting of
stock options, including incentive stock options as defined
under Section 422 of the Internal Revenue Code of 1986,
nonqualified stock options and restricted stock. The
exercise price for options granted under the stock plan
shall be at a price determined at the sole discretion of the
compensation committee of the Company's board of directors
provided, however, that incentive stock options granted
under the plan shall be granted at exercise prices equal to
the fair market value on the date of grant (110% for a
stockholder holding 10% or more of the outstanding shares of
common stock).
The Company has reserved 600,000 shares of common stock for
issuance under the plan. At June 30, 1997, 39,250 shares
remained available for grant. Options issued become
exercisable over varying periods as provided in the
individual plan agreements and certain options are subject
to accelerated vesting based upon individual employment
agreements or changes in control of the Company. The
exercisable shares at June 30, 1997, and 1996 were 254,666
and 49,375 respectively.
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
A summary of changes in common stock options during the years
ended June 30, 1996 and 1997 is as follows:
Weighted
average
exercise
price per
Shares share
---------------------------------------------------------------
Outstanding at June 30, 1995 242,500 $ 3.34
Granted 71,000 8.66
Exercised (26,250) 2.32
Canceled (33,750) 2.34
---------------------------------------------------------------
Outstanding at June 30, 1996 253,500 5.06
Granted 570,000 2.49
Exercised (1,250) 3.50
Canceled (151,500) 4.02
---------------------------------------------------------------
Outstanding at June 30, 1997 670,750 $ 3.12
===============================================================
Exercisable at June 30, 1997 254,666 $ 3.03
===============================================================
Options outstanding at June 30, 1997, have an exercisable price
per share ranging between $1.125 and $9.25 and have a
weighted average exercisable price of $3.03 and a weighted
average remaining contractual life of 7.0 years.
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no
compensation cost has been recognized in the accompanying
statements of operations. Had compensation cost been
recognized based on the fair values of options at the grant
dates consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per common share would have
been increased to the following pro forma amounts:
Fiscal year ended June 30,
--------------------------------
1997 1996
------------------------------------------------------------
Net loss:
As reported $ (5,684,690) (4,878,825)
Pro forma (5,907,444) (4,919,115)
Net loss per common share:
As reported (1.30) (1.56)
Pro forma (1.35) (1.57)
(Continued)
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
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 used for grants
in 1996 and 1997, respectively; risk-free interest rates of
6.70% and 6.88%, expected option lives of 10.0 years and 5.8
years, expected volatility of 8.4% and 65.3%, and expected
dividend yield of $0.
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to July 1, 1995, the
resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The weighted average fair values of options granted in 1997 and
1996 were as follows:
Fiscal 1997 grants $ .71
Fiscal 1996 grants 3.47
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair
value because of the short maturity of those instruments.
(13) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to three unaffiliated customers aggregated approximately 32% of
net sales in fiscal 1996. In addition, accounts receivable from
these three unaffiliated customers aggregated approximately 45% of
total accounts receivable as of June 30, 1996. Historically, the
Company has not experienced write-offs related to these major
customers.
(14) SUBSEQUENT EVENTS
LOAN AGREEMENT
In July 1997, the Company entered into a commercial loan agreement
with a bank for a $1,000,000 discretionary revolving credit
facility. The facility is secured by all corporate assets and
provides for working capital based on a borrowing base comprised
of accounts receivable and inventory. Interest on outstanding
borrowings is payable monthly at 4% above the bank's publically
announced base rate, and the facility requires a minimum annual
interest payment of $56,000. The facility contains certain
covenants and conditions, including minimum net worth and debt to
tangible net worth levels. On September 5, 1997, the Company
borrowed $300,000 on the line of credit.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position with Company
---- --- ---------------------
Richard J. Braun 52 Chairman of the Board
Donald C. Lies 49 Chief Executive Officer, President,
and Director
Dennis A. Leese 52 Director
William J. Brummond 46 Director
Richard F. Craven 54 Director
Byron G. Shaffer 64 Director
David W. Stassen 45 Director
RICHARD J. BRAUN was elected as a director of the Company in June
1995. He is the Chief Executive Officer and a director of MEDTOX Scientific,
Inc., a business specializing in clinical and forensic diagnostic devices and
testing. He has served as a Managing Director of Headwaters Capital Management
LLC, a management investment company, and President of Headwaters Capital
Corporation. From 1992 to 1994, Mr. Braun was Chief Operating Officer and a
director of Employee Benefit Plans, Inc., (an NYSE Company) a provider of
managed care, benefit plans and insurance services, and Chief Executive Officer
of EBP Life Insurance Company. From 1989 to 1991, Mr. Braun was Chief Operating
Officer and a director of Reich and Tang LP. (an NYSE Company). He is also a
director of Enstar, Inc.
DONALD C. LIES became President, Chief Executive Officer and a
director of the Company on July 1, 1996. Before joining the Company, Mr. Lies
founded CHORUS Marketing Group in May of 1989 and served as its President until
June of 1996. CHORUS specialized in both reengineering of management and
marketing and sales processes for a variety of office and factory automation
systems manufacturers and service providers. From 1987 to 1989, Mr. Lies served
as the Vice President of Marketing and Sales for Com Squared Systems, a computer
software design, manufacturing and reselling company. From 1985 to 1987, Mr.
Lies was director of Scanning Products Marketing for commercial products at
National Computer Systems. Prior to that, Mr. Lies served as General Manager and
Vice President for Norstan, Inc. in its information systems division for five
years. Before joining Norstan, Mr. Lies was in sales for the office systems
group of IBM. Mr. Lies is the brother-in-law of David W. Stassen who is also a
director of the Company.
DENNIS A. LEESE has served as a director of the Company since
February 1995. Mr. Leese is the Chief Executive Officer and President of DBNS,
Inc., a telecommunication and software company. Mr. Leese served as President of
the Company from February 1994 to June 1996, and he served as Chief Executive
Officer of the Company from August 1994 to June 1996. From October 1991 until
December 1993 Mr. Leese was Senior Vice President of Sales and Marketing at
Augat Communications in Seattle, Washington, a subsidiary of Augat, Inc. and an
equipment supplier to telecommunication and cable television companies. From
April 1990 until October 1991, Mr. Leese was Chief Operating Officer at ALS, a
supplier of software-based training programs on telecommunications technology.
<PAGE>
WILLIAM J. BRUMMOND has served as a director of the Company since
June 1995. Mr. Brummond served as Chief Financial Officer and Treasurer of the
Company from May 1995 until August 1996. Prior to joining the Company, Mr.
Brummond helped found Medisys, Inc., a public company which sells infusion
therapy products and services, and served as its Chief Executive Officer from
1990 until 1994 and as its Chief Operating Officer from 1987 until 1990. From
October 1994 until May 1995, Mr. Brummond served as President and a consultant
for BDC, Inc., a management consulting company.
RICHARD F. CRAVEN, a founder of the Company, has served as a director
since its inception in December 1993. Mr. Craven is a private investor and has
been involved as a manager, owner and developer in several real estate ventures.
He has been a licensed real estate broker and a licensed insurance agent since
1965. Mr. Craven is also a director of VideoLabs, Inc.
BYRON G. SHAFFER has served as a director of the Company since
February 1995. Mr. Shaffer has been a private investor for the last 20 years and
has also served as a director of Mentor Corporation, a medical products
manufacturer, since 1976.
DAVID W. STASSEN was elected as a director of the Company in June
1995. He has served as President and Chief Executive Officer of Spine-Tech,
Inc., a manufacturer of spinal implants, since June 1992 and as a director since
June 1991. From January 1990 until June 1992, Mr. Stassen served as Executive
Vice President of St. Paul Venture Capital, Inc. He is also a director of Avecor
Cardiovascular, Inc., a medical products company. Mr. Stassen is the
brother-in-law of Donald C. Lies who is the Chief Executive Officer, President
and a director of the Company.
Pursuant to the terms of the Company's Restated Articles of
Incorporation, the directors are divided into three classes with the term of one
class expiring each year. As the term of each class expires, the successors to
the directors in that class will be elected for a term of three years. The terms
of Messrs. Brummond and Braun expire at the 1997 Annual Meeting of Shareholders,
the term of Messrs. Leese and Craven expire at the 1998 Annual Meeting of
Shareholders and the terms of Messrs. Lies, Shaffer and Stassen expire at the
1999 Annual Meeting of Shareholders. Executive officers are elected by the Board
of Directors and serve until their successors are elected and appointed.
BOARD OF DIRECTORS' COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Messrs. Braun,
Shaffer and Leese, supervises the financial affairs of the Company and
generally reviews the results and scope of the audit and other services provided
by the Company's independent accountants and reports the results of their review
to the full Board and to the Company's management. The Compensation Committee,
which consists of Messrs. Braun, Shaffer and Craven, has general responsibility
for management of compensation matters, including recommendations to the Board
of Directors on compensation arrangements for officers and incentive
compensation for employees of the Company.
(b) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and all persons who
beneficially own more than 10% of the outstanding shares of the Company's Common
Stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of the Company's Common Stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended June 30, 1997, none of the
Company's directors or officers or beneficial owners of greater than 10% of the
Company's Common Stock failed to file on a timely basis the forms required by
Section 16 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by
the Company for services rendered for the years ended June 30, 1995, 1996 and
1997 to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal year 1997 and (ii) the other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 in fiscal year
1997 (the "Named Executive Officers"). Other than those individuals listed
below, no executive officer of the Company received cash compensation of more
than $100,000 in fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
AWARDS
------
RESTRICTED ALL OTHER
---------- ---------
NAME AND PRINCIPAL FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
- ------------------ ------ ------------------- ----- ---------- ------------
POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) ($)
- -------- ------ --------- -------- --------- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 1997 $150,000 $0 $200,000 215,000 $7,800
CHIEF EXECUTIVE OFFICER (1)
AND PRESIDENT
</TABLE>
- -----------------------
(1) On July 1, 1996, the Company granted Donald C. Lies 25,000 shares of
restricted common stock vesting in equal increments of 25% of such
shares at each interval of six months from July 1, 1996, so long as Mr.
Lies remains employed by the Company. On June 30, 1997, Mr. Lies owned
18,750 shares of the restricted stock and 6,250 shares of unrestricted
stock pursuant to the agreement, with an aggregate value of $40,625.
Based on the June 30, 1997, closing bid price of the Company's Common
Stock of $1.625 per share.
OPTION GRANTS AND EXERCISES
The tables below set forth information about the stock options held by the
Named Executive Officer and the potential realizable value of the options held
by such person on June 30, 1997. No stock options were exercised by the named
executive officer of the Company during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF
---------
SECURITIES % OF TOTAL
---------- ----------
UNDERLYING OPTIONS GRANTED
---------- ---------------
OPTIONS GRANTED(#) TO EMPLOYEES EXERCISE EXPIRATION
------------------ ------------ -------- ----------
NAME (1) IN FISCAL YEAR 1997 PRICE($/sh) DATE
---- --- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Donald C. Lies 110,000(2) 22.0% $8.00 June 30, 2006
CHIEF EXECUTIVE 5,000(3) 1.0% $1.38 February 5, 2007
OFFICER AND 100,000(4) 20.0% $1.13 April 13, 2002
PRESIDENT
</TABLE>
- ----------------------------
(1) During fiscal year 1997, options to acquire an aggregate of 500,000
shares of Common Stock were granted to all employees and options to
acquire 70,000 shares of Common Stock were granted to non-employee
directors.
(2) 110,000 options were granted to Mr. Lies on July 1, 1996. The options
become vested and exercisable in installments of 27,500 every six
months commencing six months after the date of the grant.
(3) 5,000 options were granted to Mr. Lies on February 6, 1997. The options
become vested and exercisable in quarterly installments of 1,250
commencing three months after the date of the grant.
(4) 100,000 options were granted to Mr. Lies on April 14, 1997, and 75,000
were vested and exercisable on the date of the grant. The remaining
25,000 options become vested and exercisable in annual installments of
8,333 commencing one year after the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
------ --------------------
ACQUIRED ON VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
----------- ----- --------------------- --------------------
NAME EXERCISE (#) REALIZED ($) OPTIONS AT JUNE 30, 1997 (#) AT JUNE 30, 1997 ($)(1)
---- ------------ ------------ ----------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 0 $0 103,750 111,250 $37,812 $13,438
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
</TABLE>
- ----------------------------
(1) Based on the June 30, 1997, closing bid price of the Company's Common
Stock of $1.625 per share.
EMPLOYMENT AGREEMENTS
The Company and Donald C. Lies have entered into an employment
agreement, dated as of July 1, 1996, which provides that Mr. Lies will receive
the following: (i) an annual salary of $150,000; (ii) a grant of 25,000 shares
of restricted Common Stock vesting in equal increments of 25% of such shares at
each interval of six months from the effective date of Mr. Lies employment, so
long as Mr. Lies remains employed by the Company; (iii) a grant of options to
purchase 110,000 shares of Common Stock at $8.00 per share, vesting in equal
increments of 25% of such options at each interval of six months from July 1,
1996, so long as Mr. Lies remains employed by the Company; and (iv) an
automobile allowance of $650 per month. In fiscal year 1997, an arrangement in
which Donald C. Lies was to purchase 110,000 shares of the Company's Common
Stock at $3.00 per share was terminated prior to it's consummation. In addition
to the foregoing,
Mr. Lies is entitled to all other benefits available generally to employees of
the Company, including vacation and health benefits.
COMPENSATION OF DIRECTORS
The Board of Directors of the Company has established the following
compensation policies for non-employee directors of the Company. Non-employee
directors receive $100 for each meeting attended. Also, under the Company's 1994
Stock Plan, each non-employee director is granted, upon election to the Board,
an option to purchase 10,000 shares of Common Stock, exercisable at fair market
value and vesting in equal increments of 25% every three months and expiring ten
years from the date of grant. After the year of election, each non-employee
director will also receive annually an option to purchase 5,000 shares of Common
Stock. Directors who are employees of the Company receive no additional
compensation for serving as directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 26, 1997, the number
of shares of the Company's Common Stock beneficially owned by (i) each director
of the Company; (ii) each of the Named Executive Officers; (iii) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; and (iv) all executive officers and directors as a group.
Unless otherwise indicated, each person has sole voting and dispositive power
over such shares. Shares not outstanding but deemed beneficially owned by virtue
of the right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned by
such group or person. The address for all directors and officers of the Company
is 7400 Metro Boulevard, Suite 475, Minneapolis, MN, 55439.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
- ---- ------------------ ----------------
Richard J. Braun..................... 66,250 (1) 1.4%
Donald C. Lies....................... 147,850 (2) 3.0
Dennis A. Leese...................... 299,450 (3) 6.2
William J. Brummond.................. 66,750 (4) 1.4
Richard F. Craven.................... 841,750 (5) 17.1
Byron G. Shaffer..................... 241,750 (6) 5.0
David W. Stassen..................... 28,750 (7) *
All Current Executive Officers and 1,692,550 (8) 32.3
Directors as a Group (7 persons).....
- ----------------------------------------------------------
* Indicates ownership of less than 1%.
(1) Includes 53,750 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes 133,750 shares which may be acquired within 60 days upon the
exercise of stock options.
(3) Includes 36,750 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(4) Includes 36,750 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(5) Includes (i) 155,250 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 15,000 shares owned
by Mr. Craven's three children.
(6) Includes (i) 46,250 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 28,000 shares owned
by Mr. Shaffer's four children.
(7) Includes 13,750 shares which may be acquired within 60 days upon the
exercise of stock options.
(8) Includes 476,250 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Richard Craven, a director of the Company, is a director of
VideoLabs, Inc. ("VideoLabs"), a Minneapolis, Minnesota based manufacturer of
video cameras. Both Mr. Craven and Douglas Clapp, a former officer of the
Company, are beneficial owners of more than 5% of the outstanding shares of
VideoLabs. In December 1993, the Company purchased certain videoconferencing
technology from VideoLabs and issued to VideoLabs a convertible promissory note
in the amount of $100,000. In May 1995, VideoLabs converted its note into 88,888
shares, 25,000 shares of which were sold in July 1995. In addition, the Company
has purchased FlexCam cameras from VideoLabs and sold them as optional equipment
in connection with the sales of video conferencing systems. From inception until
June 30, 1995, the Company's purchases from VideoLabs totaled $22,740. Net
purchases by the Company from VideoLabs were approximately $8,972, and $57,140
during fiscal year 1997 and 1996 respectively. The Company believes its
transactions with VideoLabs have been on terms no less favorable than could have
been obtained from unaffiliated third parties on an arm's length basis.
Mr. Richard Craven, a director of the Company, is the father-in-law
of the owner/partner of Pointe Design, which is a Minneapolis, Minnesota based
company that designs and prints advertising and other marketing tools. The
Company has used Pointe Design's services to print marketing brochures and other
advertising media. Net purchases by the Company from Pointe Design totaled
$97,500 and $28,661 during fiscal year 1997 and 1996 respectively.
The Company was required to obtain a letter of credit in the amount
of $1,000,000 in favor of AT&T Corporation in September 1994. Richard F. Craven,
the Company's Chairman of the Board of Directors, pledged certain of his
personal assets to secure his personal guarantee in order to obtain such letter
of credit. In consideration of the personal guarantee, the Company issued Mr.
Craven warrants to purchase 200,000 shares of the Company's Common Stock at
$1.00 per share. The Company believes its transactions with Mr. Craven are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.
The Company was also required to obtain a letter of credit in the
amount of $250,000 in favor of AT&T Corporation in December 1994. Byron G.
Shaffer, a director of the Company, and his spouse pledged certain of their
personal assets to secure a personal guarantee in order to obtain such letter of
credit. In consideration of the personal guarantee, the Company issued Mr.
Shaffer a warrant to purchase 25,000 shares of the Company's Common Stock at
$2.00 per share. The Company believes its transactions with Mr. Shaffer are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.
In May 1996, the Company obtained a letter of credit in the amount of
$600,000 in favor of Lucent. Messrs. Craven and Shaffer, directors of the
Company, pledged certain personal assets to secure their personal guarantees of
this letter of credit. In consideration of these directors' guarantees, the
Company issued each of Messrs. Craven and Shaffer a warrant to purchase 7,500
shares of Common Stock with an exercise price equal to the market price of the
Common Stock on the date of the warrant, which was $8.00 per share on May 22,
1996. The warrants expire on May 22, 2000. The terms of the warrants provide
that if, during the one year term of the letter of credit, the Company secures
additional financing pursuant to a private placement or registered secondary
offering of securities, the warrant exercise price would be reduced to the price
at which such securities are offered to investors. In connection with the recent
private placement completed by the Company, on September 30, 1996, the exercise
price of the warrants was reduced to $3.00 per share. The Company believes the
foregoing transactions with Messrs. Craven and Shaffer are on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's length basis.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. See Exhibit Index which is incorporated herein
by reference. Exhibits that cover management contracts or
compensatory plans or arrangements are marked with an
asterisk(*) in the Exhibit Index.
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K
during the fourth quarter of fiscal year 1997.
<PAGE>
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.
Dated: September 26, 1997 RSI SYSTEMS, INC.
By: /s/ Donald C. Lies
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 26, 1997.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Donald C. Lies as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
SIGNATURE TITLE
--------- -----
/s/ Richard J. Braun Chairman of the Board
- ---------------------------------
Richard J. Braun
/s/ Donald C. Lies Director, President, Chief
- --------------------------------- Executive Officer
Donald C. Lies
/s/ James D. Hanzlik
- --------------------------------- Chief Financial Officer
James D. Hanzlik
/s/ Richard F. Craven Director
- ---------------------------------
Richard F. Craven
/s/ Byron G. Shaffer Director
- ---------------------------------
Byron G. Shaffer
/s/ David W. Stassen Director
- ---------------------------------
David W. Stassen
/s/ William J. Brummond Director
- ---------------------------------
William J. Brummond
/s/ Dennis A. Leese Director
- ---------------------------------
Dennis A. Leese
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Exhibit No. Title of Document Method of Filing
- ----------- ----------------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended Filed as Exhibit 3.1 to the Form SB-2 Registration
Statement of the Company, File No. 33-93240C, (the
"SB-2 Registration Statement") and incorporated
herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the SB-2 Registration
Statement and incorporated herein by reference.
10.1 1994 Stock Plan * Filed as Exhibit 10.5 to the SB-2 Registration
Statement and incorporated herein by reference.
10.2 Form of Inventions, Confidential Filed as Exhibit 10.2 to the SB-2 Registration
Information and Non-Competition Statement and incorporated herein by reference.
Agreement
10.3 Letter of Credit Agreement, dated Filed as Exhibit 10.13 to the SB-2 Registration
September 19, 1994 Statement and incorporated herein by reference.
10.4 Letter of Credit Agreement, dated Filed as Exhibit 10.14 to the SB-2 Registration
December 13, 1994, as amended Statement and incorporated herein by reference.
10.5 Link Technology Inc. Source Code Software Filed as Exhibit 10.15 to the SB-2 Registration
License Agreement Statement and incorporated herein by reference.
10.6 Design Royalty Agreement between the Filed as Exhibit 10.16 to the SB-2 Registration
Company and Worrell Design Inc. Statement and incorporated herein by reference.
10.7 License Agreement with DSP Software Filed as Exhibit 10.15 to the Company's 1996 10-KSB
Engineering, Inc. dated February 1, 1996 and incorporated herein by reference.
10.8 Addendum to License Agreement with Link Filed as Exhibit 10.17 to the Company's 1996 10-KSB
Technology, Inc. dated April 29, 1996 and incorporated herein by reference.
10.9 Employment Agreement between the Filed as Exhibit 10.20 to the Company's 1996 10-KSB
Company and Donald Lies* and incorporated herein by reference.
10.10 Manufacturing Agreement with Altron, Inc. Filed as Exhibit 10.21 to the Company's 1996 10-KSB
dated August 28, 1996 and incorporated herein by reference.
10.11 Selling Agency Agreement with Miller Filed as Exhibit 10.23 to the Company's 1996 10-KSB
Johnson & Kuehn Incorporated dated and incorporated herein by reference.
August 22, 1996
10.12 Shareholder Agreement dated April 30, Filed as Exhibit 10.24 to the Company's 1996 10-KSB
1996 and incorporated herein by reference.
10.13 New Employee Inventions, Confidentiality Filed herewith electronically.
and Noncompete Agreement
10.14 Non-Qualified Stock Option Agreement with Filed herewith electronically.
Donald C. Lies
10.15 Restricted Stock Agreement with Donald C. Filed herewith electronically.
Lies
- ---------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or
arrangements.
<PAGE>
Exhibit No. Title of Document Method of Filing
- ----------- ----------------- ----------------
10.16 Qualified Stock Option Agreement with Filed herewith electronically.
Donald C. Lies
10.17 Termination of Stock Purchase and Filed herewith electronically.
Subscription Agreement
10.18 Norwest Loan Agreement Filed herewith electronically.
21.1 Subsidiary of the Registrant Filed as Exhibit 21.1 to the Company's 1996 10-KSB
and incorporated herein by reference.
23.1 Consent of KPMG Peat Marwick LLP Filed herewith electronically.
24.1 Power of Attorney Included in signature page of this Registration
Statement and incorporated herein by reference
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
The exhibits referred to in this Exhibit Index will be supplied to a
shareholder at a charge of $.25 per page upon written request directed to
Secretary, RSl Systems, Inc. at the executive offices of the Company.
- ---------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or
arrangements.
EXHIBIT 10.13
EMPLOYEE INVENTIONS, CONFIDENTIALITY AND
NONCOMPETE AGREEMENT
This Agreement ("Agreement") is entered into effective as of the 14th day
of April, 1997, between RSI Systems, Inc., a Minnesota corporation (the
"Company") and ___________ ("Employee").
WHEREAS, the Company desires to obtain reasonable protection against
unfair competition and reasonable protection of it's proprietary and
confidential trade secrets, inventions and other business information that have
been or will be developed and acquired at substantial expense; and
WHEREAS, as a condition to the employment of the Employee by the Company,
and for other good and valuable consideration, including the grant of options to
purchase shares of capital stock of the Company, the Employee has agreed to be
bound by the terms and conditions of this Agreement in connection with the
Employee's employment relationship with the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. Inventions.
(a) "Inventions," as used in this Section 1, means any discoveries,
improvements and ideas (whether or not they are in writing or reduced to
practice) or works of authorship (whether or not they can be patented or
copyrighted) that the Employee makes, authors, or conceives (either alone
or with others) and that:
(i) concern directly the Company's business or the Company's
present or demonstrably anticipated future research or development;
(ii) result from any work the Employee performs for the
Company;
(iii) use the Company's equipment, supplies, facilities or
trade secret information; or
(iv) the Employee develops during the time the Employee is
performing employment duties for the Company.
(b) The Employee agrees that all Inventions made, authored or
conceived by the Employee during the term of the Employee's employment
with the Company will be the Company's sole and exclusive property. The
Employee will, with respect to any Invention:
<PAGE>
(i) keep current, accurate, and complete records, which will
belong to the Company and will be kept and stored on the Company's
premises while the Employee is employed by the Company;
(ii) promptly and fully disclose the existence and describe
the nature of the Invention to the Company in writing (and without
request);
(iii) assign (and the Employee does hereby assign) to the
Company all of the Employee's rights to the Invention, any
applications the Employee makes for patents or copyrights in any
country, and any patents or copyrights granted to the Employee in
any country; and
(iv) acknowledge and deliver promptly to the Company any
written instruments, and perform any other acts necessary in the
Company's opinion to preserve property rights in the Invention
against forfeiture, abandonment or loss and to obtain and maintain
letters patent and/or copyrights on the Invention and to vest the
entire right and title to the Invention in the Company.
The requirements of this subsection 1(b) do not apply to an Invention for
which no equipment, supplies, facility or trade secret information of the
Company was used and which was developed entirely on the Employee's own
time, and (1) which does not relate directly to the Company's business or
to the Company's actual or demonstrably anticipated research or
development, or (2) which does not result from any work the Employee
performed for the Company. With respect to any obligations performed by
the Employee under this subsection 1(b) following termination of
employment, the Company will pay the Employee reasonable hourly
compensation (consistent with the last base salary) and will pay or
reimburse all reasonable out-of-pocket expenses.
2. Confidential Information.
(a) "Confidential Information," as used in this Section 2, means
information that is not generally known and that is proprietary to the
Company or that the Company is obligated to treat as proprietary.
Confidential Information includes trade secrets, confidential or secret
designs, processes, formulas, plans, devices or material (whether or not
patented or patentable) directly or indirectly useful in any aspect of the
business of the Company, any customer, client, prospective customer,
prospective client or supplier lists, any confidential or secret
development or research work of the Company, or any other Confidential
Information or secret aspects of the business of the Company. Confidential
Information includes any information that the Employee reasonably
considers Confidential Information, or that the Company treats as
Confidential Information (whether the Employee or others originated it and
regardless of how the Employee obtained it).
(b) Except as specifically authorized by an authorized officer of
the Company or by written Company policies, the Employee will never,
either during or after the Employee's employment by the Company, use or
disclose Confidential
<PAGE>
Information to any person not authorized by the Company to receive it.
When the Employee's employment with the Company ends, the Employee will
promptly deliver to the Company all records and any compositions,
articles, devices, apparatus and other items that disclose, describe or
embody Confidential Information, including all copies, reproductions and
specimens of the Confidential Information in the Employee's possession,
regardless of who prepared them, and will promptly deliver any other
property of the Company in the Employee's possession, whether or not
Confidential Information.
3. Competitive Activities. The Employee agrees that during the term of the
Employee's employment with the Company and for a period of one year after the
Employee's employment with the Company ends:
(a) The Employee will not alone, or in any capacity with another
firm:
(i) directly or indirectly own, manage, operate, control, be
employed by, participate in or be connected in any manner with the
ownership, management, operation or control of any business that
competes with the Company's business as the Company has conducted it
during the five years before the Employee's employment with the
Company ends, within any state in the United States or within any
country in which the Company directly or indirectly markets or
services products or provides services;
(ii) in any way interfere or attempt to interfere with the
Company's relationships with any of its current or potential
customers; or
(iii) employ or attempt to employ any of the Company's then
employees on behalf of any other person or entity competing with the
Company.
(b) The provisions of this Section 3 shall not prevent the Employee
from seeking employment which would be competitive during such one-year
period so long as such employment commences after the expiration of such
period. The Employee agrees to provide a copy of this Agreement to any
employer with which the Employee accepts employment during the term of the
covenant not to compete set forth above, whether or not the Employee
believes that any such other employment may be in violation of this
Agreement.
4. Specific Enforcement. The Employee understands that if the Employee
fails to fulfill the Employee's obligations under this Agreement, the damages to
the Company would be very difficult to determine. Therefore, in addition to any
other rights or remedies available to the Company at law, in equity, or by
statute, the Employee hereby consents to the specific enforcement of this
Agreement by the Company through an injunction or restraining order issued by an
appropriate court.
<PAGE>
5. Miscellaneous.
(a) Modification. This Agreement may be modified or amended only by
a writing signed by both the Company and the Employee.
(b) Governing Law. The laws of Minnesota will govern the validity,
construction and performance of this Agreement. Any legal proceedings
related to this Agreement will be brought in an appropriate Minnesota
court, and both the Company and the Employee hereby consent to the
exclusive jurisdiction of that court for this purpose.
(c) Construction. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under the applicable
law. If any provision of this Agreement is to any extent invalid under the
applicable law, that provision will still be effective to the extent it
remains valid. The remainder of this Agreement also will continue to be
valid, and the entire Agreement will continue to be valid in other
jurisdictions.
(d) Waivers. No failure or delay by either the Company or the
Employee in exercising any right or remedy under this Agreement will waive
any provision of the Agreement. Nor will any single or partial exercise by
either the Company or the Employee of any right or remedy under this
Agreement preclude either of them from otherwise or further exercising
these rights or remedies, or any other rights or remedies granted by any
law or any related document.
(e) Captions. The headings in this Agreement are for convenience
only and do not affect this Agreement's interpretation.
(f) Notices. All notices and other communications required or
permitted under this Agreement shall be in writing and sent by registered
first-class mail, postage prepaid, and shall be effective five days after
mailing to the addresses stated at the beginning of this Agreement. These
addresses may be changed at any time by like notice.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the date first above written.
RSI SYSTEMS, INC. EMPLOYEE
By________________________________ ___________________________________
(Signature)
Its_______________________________ ___________________________________
(Print Name)
<PAGE>
I have received a copy of this Agreement
________________________________________
Employee
Date____________________________________
EXHIBIT 10.14
RSI SYSTEMS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT is made as of the 1st day of July, 1996, between RSI
SYSTEMS, INC., a Minnesota corporation (the "Company"), and DONALD LIES, the
President and Chief Executive Officer of the Company (the "Optionee").
The Company desires to afford the Optionee an opportunity to purchase
shares of its common stock, no par value per share (the "Common Stock"), as
hereinafter provided. The Company and the Optionee acknowledge that this Option
is not granted under the Company's 1994 Stock Plan and is not intended to
qualify as an "incentive stock option" under Section 422 of the Internal Revenue
Code, as amended (the "Code").
THEREFORE, the parties hereby agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the right
and option (hereinafter called the "Option") to purchase from the Company all or
any part of an aggregate amount of 110,000 shares of the Common Stock of the
Company (the "Option Shares") on the terms and conditions herein set forth.
2. Purchase Price. The purchase price of the Option Shares shall be $8.00
per share.
3. Term of Option. The term of the Option shall be for a period of ten
(10) years from July 1, 1996 (the "Option Date"), subject to earlier termination
as hereinafter provided.
4. Exercise of Option. During the first six months the Option is
outstanding it may not be exercised with respect to any of the shares covered
thereby. Thereafter, subject to the terms and conditions hereof, the Option may
be exercised as follows:
(a) From and after January 1, 1997, the Option may be exercised as
to 27,500 Option Shares.
(b) From and after July 1, 1997, the Option may be exercised as to
an additional 27,500 Option Shares.
(c) From and after January 1, 1998, the Option may be exercised as
to an additional 27,500 Option Shares.
(d) From and after July 1, 1998, the Option may be exercised as to
the remaining 27,500 Option Shares.
5. Non-Transferability. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of the Optionee, only by the Optionee.
6. Death, Disability or Retirement of Optionee. If the Optionee's
employment with the Company shall terminate by reason of death, Disability or
Retirement (as such terms are defined in the Plan), the Option may be exercised
(to the extent that the Optionee shall have been entitled to do so at the date
of his termination of employment by reason of death, Disability or Retirement)
by the Optionee, his or her legal representative, or, in the case of death, by
the person to whom the Option is transferred by will or the applicable laws of
descent and
<PAGE>
distribution at any time within five (5) years after the Optionee's termination
of employment, but in no event later than the expiration of the term specified
in paragraph 3 hereof.
7. Termination of Employment. In the event the employment of the Optionee
shall be terminated for any reason other than death, Disability or Retirement,
any unexercised Option may be exercised by the Optionee at any time within five
(5) years of such termination but only to the extent the Option was exercisable
by the Optionee on the date of termination. In no event shall any Option be
exercisable after the expiration of the term specified in Section 3 hereof. So
long as the Optionee shall continue to be an employee of the Company or one or
more of its subsidiaries, the Option shall not be affected by any change of
duties or position. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the employ of the Company or of any of its
subsidiaries or interfere in any way with the right of the Company or any such
subsidiary to terminate the employment of the Optionee at any time.
8. Method of Exercising Option. Subject to the terms and conditions of
this Option Agreement, the Option may be exercised by written notice to the
Board of Directors of the Company at the principal office of the Company. Such
notice shall state the election to exercise the Option and the number of shares
in respect of which it is being exercised, and shall be signed by the person so
exercising the Option. Such notice shall be accompanied by payment of the full
purchase price of such shares, which payment shall be made in cash or by check
or bank draft payable to the Company, or, provided such form of payment does not
result in a charge to earnings of the Company for financial accounting purposes,
by delivery of shares of Common Stock of the Company with a fair market value
equal to the purchase price or by a combination of cash and such shares, whose
fair market value shall equal the purchase price. For purposes of this
Agreement, the "fair market value" of the Common Stock of the Company shall be
the value of the Common Stock on a given date as determined by the Board of
Directors in accordance with applicable Treasury Department regulations under
Section 422 of the Code. In the event the Option shall be exercised by any
person other than the Optionee, such notice shall be accompanied by appropriate
proof of such right of such person to exercise the Option.
9. Disputes. As a condition of the granting of the Option herein granted,
the Optionee agrees, for the Optionee and the Optionee's personal
representatives, that any dispute or disagreement which may arise under or as a
result of or pursuant to this Agreement shall be determined by the Company, in
its sole discretion, and that any interpretation by the Company of the terms of
this Agreement shall be final, binding and conclusive.
10. Binding Effect. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement as of the date and year first above written.
RSI SYSTEMS, INC.
By:
- ----------------------------------- ----------------------------------
Donald Lies
Its:
---------------------------------
EXHIBIT 10.15
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement ("Agreement") is made as of the 1st day of
July, 1996, beween RSI Systems, Inc., a Minnesota corporation, (the "Company")
and Donald Lies, ("Employee") an employee of the Company or subsidiary thereof.
The Company desires to provide the Employee with an added incentive to
continue his services to the Company, and through his proprietary interest, to
increase his participation in the success of the Company and its subsidiaries.
THEREFORE, IT IS AGREED:
1. Issuance of Restricted Stock. Subject to the terms and conditions set
forth below in this Agreement, the Company grants and issues to the Employee, as
additional compensation for services, and the Employee accepts from the Company,
a total of 25,000 shares of the Company's no par value Common Stock (the
"Shares"). The Shares will be subject to certain restrictions enumerated in
Section 2 during the period (the "Restriction Period") commencing on the date
hereof and terminating as set forth below:
Number of Shares for Which
Date Restriction Period Lapses
---- --------------------------
January 1, 1997 6,250 shares
July 1, 1997 6,250 shares
January 1, 1998 6,250 shares
July 1, 1998 6,250 shares
2. Nature of Restrictions. The restrictions to which the Shares shall be
subject during the Restriction Period shall be as follows:
(a) During the Restriction Period applicable to any portion of the
Shares, none of such Shares shall be sold, transferred, pledged, or
otherwise encumbered, whether voluntarily, involuntarily, or by operation
of law.
(b) All Shares for which the Restriction Period has not lapsed shall
be forfeited to the Company, without payment therefore, if during the
Restriction Period employment of the Employee shall be terminated for any
reason, including death.
3. Deposit of Certificates. The Employee agrees that he will, at any time
upon the request of the Company, deposit with the Company the certificate or
certificates representing the Shares together with stock powers or other
instruments of transfer appropriately endorsed in blank by him. This deposit, if
requested, shall remain in effect with respect to the Shares until the
Restriction Period shall have lapsed with respect to such Shares pursuant to
Section 1 of this Agreement.
4. Employment of Employee. Nothing in this Agreement shall be construed as
constituting a commitment, guaranty, agreement, or understanding of any kind or
nature that the Company or its subsidiaries shall continue to employ the
Employee, and this Agreement shall
<PAGE>
not affect in any way the right of the Company or its subsidiaries to terminate
the employment of the Employee at any time for any reason.
5. Changes in Capital Structure of the Company. The number of Shares held
by the Employee for which the Restriction Period has not lapsed shall be
adjusted equitably by the Company, as if the Restriction Period had lapsed with
respect to such Shares, in the event of (i) a subdivision or combination of the
shares of capital stock of the Company, (ii) a dividend payable in shares of
capital stock of the Company, (iii) a reclassification of any shares of capital
stock of the Company, or (iv) any other change in the capital structure of the
Company. Any additional Shares issued to the Employee as a result of any of the
foregoing events shall continue to be subject to the terms of this Agreement to
the same extent as the Shares giving rise to the right to receive such
additional Shares.
6. Withholding. The Employee agrees to pay to the Company, when due, any
amount necessary to satisfy applicable federal, state and local withholding tax
requirements with respect to the Shares.
7. Rights of Stockholder. Subject to the terms and provisions of this
Agreement, the Employee shall have all the rights of a stockholder of the
Company with respect to the Shares, including the right to vote the Shares and
to receive all dividends or other distributions paid or made with respect to the
Shares.
8. Burden and Benefit. The terms and provisions of this Agreement shall be
binding upon and inure to the benefit of the Employee and the Employee's
executors or administrators, personal representatives and heirs.
9. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota, without regard to the
principles of rules of any jurisdiction with respect to conflict of laws.
10. Modifications. Any change in, or modification of, this Agreement shall
be valid only if in writing and signed by the parties to this Agreement.
11. Entire Agreement. This Agreement sets forth all of the promises,
agreements, conditions, understandings, warranties and representations between
the parties of this Agreement with respect to the Shares, and there are no
promises, agreements, conditions, understandings, warranties, or
representations, oral or written, express or implied, between the parties with
respect to the Shares other than as set forth in this Agreement. This Agreement
is, and is intended by the parties to be, an integration of any and all prior
agreements or understandings, oral or written, with respect to the Shares.
12. Notices. Any and all notices provided for in this Agreement shall be
addressed: (i) if to the Company, to the principal executive office of the
Company to the attention of the Secretary, and (ii) if to the Employee, to the
address of the Employee as reflected in the stock records of the Company.
13. Invalid or Unenforceable Provisions. The invalidity or
unenforceability of any particular provisions of this Agreement shall not affect
the other provisions, and this Agreement shall be construed in all respects as
if that invalid or unenforceable provision were omitted.
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
RSI SYSTEMS, INC.
By:
-----------------------------------
Its:
----------------------------------
--------------------------------------
Donald Lies
EXHIBIT 10.16
QUALIFIED STOCK OPTION AGREEMENT
UNDER THE
RSI SYSTEMS, INC.
1994 STOCK OPTION PLAN
THIS AGREEMENT is dated effective as of the grant date set forth on
Exhibit A attached hereto, between RSI Systems, Inc., a Minnesota corporation
(the "Company"), and the employee listed on Exhibit A ("Optionee").
WHEREAS, the Company has adopted the RSI Systems, Inc. 1994 Stock Option
Plan (the "Plan") to permit stock options to be granted to certain key employees
and other persons providing valuable services to the Company; and
WHEREAS, the Company desires to grant and the Optionee desires to accept
the options to purchase shares of common stock of the Company (as defined
below);
NOW THEREFORE, in consideration of the premises and of the covenants and
agreements set forth below, it is mutually agreed as follows:
1. Grant of Options. The Company hereby grants to Optionee an option to
purchase from the Company all or any part of an aggregate amount of the shares
of the common stock of the Company, par value $0.01 per share (the "Common
Stock"), at the option price and on other terms, as set forth in Exhibit A
attached hereto and made a part hereof. The date of this Agreement is the
effective date of the grant. This option is intended to qualify as an incentive
stock option as described in Section 422 of the Internal Revenue Code of 1986.
2. Incorporation of Plan by Reference. This option and any shares
purchased upon the exercise of this option shall be subject to each and every
provision of the Plan. A copy of the Plan and all amendments is available from
the Company upon request of the Optionee. All terms contained in this Agreement
which are not defined in this Agreement shall have the same meaning given to
such terms in the Plan.
3. Exercise Period. This option shall vest and become exercisable in
accordance with the schedule attached hereto as Exhibit A and made a part
hereof. If Optionee terminates employment prior to an applicable vesting date,
all non-vested options shall be immediately forfeited. All options must be
exercised on or before a date five (5) years from the date of the grant.
4. Exercise of Option. This option may be exercised only by written notice
of intent to the Company at its office at 7400 Metro Boulevard, Minneapolis,
Minnesota 55439. Such notice shall state the number of shares in respect of
which the option is being exercised and shall be accompanied by payment for such
shares in cash, certified or cashier's check or by personal check, if acceptable
to the Committee, or in such other manner as specified in the Plan. A form of
Notice of Exercise is attached hereto.
<PAGE>
5. Withholding. In the event that the Optionee elects to exercise this
Option or any part thereof, and if the Company shall be required to withhold any
amounts by reasons of any federal, state or local tax laws, rules or regulations
in respect of the issuance of shares to the Optionee pursuant to the Option, the
Company shall be entitled to deduct and withhold such amounts from any payments
to be made to the Optionee. In any event, the Optionee shall make available to
the Company, promptly when requested by the Company, sufficient funds to meet
the requirements of such withholding; and the Company shall be entitled to take
and authorize such steps as it may deem advisable in order to have such funds
available to the Company out of any funds or property due or to become to the
Optionee.
6. Exercise Upon Death or Termination of Employment. If the Optionee's
employment with the Company or any subsidiary terminates for any reason other
than gross misconduct, the option shall remain in force for a period of ninety
(90) days and remain subject to the terms of the Plan and this Agreement. If
Optionee shall die while an employee of the Company or any subsidiary or within
ninety (90) days after termination of employment, this option may be exercised
(subject to the previous sentence), to the extent that the Optionee was entitled
to do so at the date of death, by the person or persons to whom Optionee's
rights under this option pass by will or applicable law, or if no such person
has such right, by his or her executors or administrators, subject to the terms
of this Agreement. If Optionee is terminated by reason of gross misconduct as
described in the Plan, this option shall terminate as of the date of such
termination.
7. No Right of Employment. Nothing contained in this Agreement shall
obligate the Company or any subsidiary of the Company to continue the employment
of Optionee for any particular period or interfere with the right of the Company
or any such subsidiary to terminate Optionee's employment at any time.
8. No Shareholder Rights. Optionee shall have no rights as a stockholder
with respect to any shares of Common Stock subject to this option prior to the
date of issuance of a certificate or certificates for such shares.
9. Investment Representation. Notice of the exercise of this option shall
include a representation that any of the option shares purchased shall be
acquired as an investment and not with a view to, or for sale in connection
with, any public distribution.
10. Compliance with Law and Regulations. The Optionee acknowledges that
this option may not be exercised until the Company has taken all actions then
required to comply with all applicable federal and state laws, rules and
regulations and any exchange on which the stock may then be listed. The
certificates representing the shares purchased upon the exercise of this option
shall bear a legend in substantially the following form:
THESE SHARES HAVE NOT BEEN REGISTERED EITHER UNDER ANY APPLICABLE FEDERAL
LAW AND RULES AND RESALE WILL NOT BE PERMITTED UNDER STATE LAW UNLESS THE
SHARES ARE FIRST REGISTERED UNDER THE MINNESOTA SECURITIES LAW. FURTHER,
NO SALE, OFFER TO SELL, OR TRANSFER OF THESE SHARES SHALL BE MADE UNLESS A
REGISTRATION STATEMENT UNDER THE FEDERAL SECURITIES ACT OF 1933, AS
AMENDED, WITH RESPECT TO SUCH SHARES IS THEN IN
<PAGE>
EFFECT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS
THEN IN FACT APPLICABLE TO SUCH SHARES.
11. Non-Transferability. This option shall not be transferable other than
by will or by laws of descent and distribution. During the lifetime of the
Optionee, this option shall be exercisable only by such Optionee.
12. Dispute or Disagreement. As a condition of the granting of this
option, the Optionee agrees that any dispute or disagreement which may arise
under or as a result of or pursuant to this Agreement or the Plan shall be
determined by the Committee in its sole discretion, and that any interpretation
by the Committee of the terms of this Agreement or the Plan shall be final,
binding and conclusive.
13. Other Assistance. Upon the exercise of this option the Optionee or
other person exercising the option must execute a shareholder's agreement and
make any representation or give any commitment which the Committee, in its
discretion, deems necessary or advisable by reason of the securities laws of the
United States or any state, and execute any document or pay any sum of money in
respect of taxes or undertake to pay or have paid any such sum which the
Committee, in its discretion, deems necessary be reason of the Code or any rule
or regulation thereunder, or by reason of the tax laws of any state.
14. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the legal representatives, executors, administrators, successors
and assigns of each parties to this Agreement.
15. Complete Agreement. This Agreement sets forth the entire understanding
of the parties hereto and shall not be amended, changed or terminated except by
an instrument in writing signed by the parties to this Agreement.
16. Counterparts and Governing Law. This Agreement may be executed in
counterparts, and its validity, construction and performance, shall be governed
by the laws of the state of Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective the
date first above written.
RSI SYSTEMS, INC.
By /s/ Richard J. Braun
-----------------------------------
Print Name R. J. Braun
---------------------------
Title Chairman
--------------------------------
OPTIONEE
[Optionee's signature is set forth on
Exhibit A attached hereto and made a
part hereof.]
<PAGE>
NOTICE OF EXERCISE OF STOCK OPTION
RSI Systems, Inc.
7400 Metro Boulevard
Minneapolis, MN 55439
The undersigned is the holder of a qualified stock option (the "Option")
to purchase shares of common stock ("Stock") of RSI Systems, Inc. (the
"Company"), pursuant to the terms of the Company's 1994 Stock Option Plan (the
"Plan") and the Stock Option Agreement between the Company and the undersigned
(the "Agreement"). The undersigned hereby irrevocably elects to exercise the
Option to purchase _____ shares of common stock (the "Option Shares"). Enclosed
herewith are (1) the original signed Agreement, and (2) payment for the Option
Shares as required under the Plan and the Agreement. The undersigned requests
that the certificate representing the Option Shares be issued in the name of the
undersigned and delivered to the address set forth below.
In connection with the issuance of the Option Shares to the undersigned,
the undersigned hereby certifies and represents to the Company that the
undersigned is acquiring such shares for the purpose of investment and not with
a view toward distribution. The undersigned understands that these securities
have not been registered either under any applicable federal law and rules or
applicable state law and rules and that resale will not be permitted under state
law unless the securities are first registered or the sale is a transaction
exempt from registration under the applicable state securities law.
The undersigned further understands that no sale, offer to sell, or
transfer of the Option Shares shall be made unless a registration statement
under the federal Securities Act of 1933, as amended (the "Act"), with respect
to the Option Shares is then in effect or an exemption from the registration
requirements of the Act is then in fact applicable to the Option Shares. The
undersigned understands that a legend reciting this investment restriction shall
be placed on any stock certificate that may be issued to the undersigned.
Dated:
-----------------------------
- -----------------------------------
(Optionee Signature)
- -----------------------------------
(Address)
S.S. No.
---------------------------
<PAGE>
EXHIBIT A
TO STOCK OPTION AGREEMENT
RSI SYSTEMS, INC.
Name of Optionee: Donald Lies
Date of Grant: April 14, 1997
Number of Shares Granted: 100,000
Exercise Price: $1.125
Type of Option
(Qualified or Non-Qualified): Qualified
Vesting Schedule No. of Shares Vesting Date
---------------- ------------- --------------
Year 1 75,000 April 14, 1997
Year 2 8,333 April 14, 1998
Year 3 8,333 April 14, 1999
Year 4 8,333 April 14, 2000
-------
100,000
RSI Systems, Inc. Accepted and agreed to by the
undersigned Optionee
By /s/ R. J. Braun /s/ Donald Lies
--------------------------------- ----------------------------------
Signature Donald Lies
- -----------------------------------
Chairman
- -----------------------------------
Title
[Please execute two copies of this Exhibit A
and return one copy to the Company.]
EXHIBIT 10.17
TERMINATION OF STOCK PURCHASE
AND
SUBSCRIPTION AGREEMENT
Reference is made to the Stock Purchase and Subscription Agreement dated
September 3, 1996, between the undersigned (the "Agreement") and the Promissory
Note dated September 3, 1996 of Donald Lies (the "Note") attached to the
Agreement as Exhibit A. The undersigned hereby acknowledge that the transactions
contemplated in the Agreement were not consummated and that the Agreement and
the Note are each terminated and cancelled effective as of October 31, 1996.
RSI SYSTEMS, INC.
By:
--------------------------------- ----------------------------------
Richard Braun Donald Lies
Chairman
EXHIBIT 10.18
REVOLVING NOTE
$1,000,000
Minneapolis, Minnesota
June 26, 1997
For value received, the undersigned, RSI SYSTEMS, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND to the
order of NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"),
at its main office in Minneapolis, Minnesota, or at any other place designated
at any time by the holder hereof, in lawful money of the United States of
America and in immediately available funds, the principal sum of One Million
Dollars ($1,000,000) or, if less, the aggregate unpaid principal amount of all
Advances made by the Lender to the Borrower under the Credit and Security
Agreement of even date herewith by and between the Lender and the Borrower (as
the same may hereafter be amended, supplemented or restated from time to time,
the "Credit Agreement") together with interest on the principal amount hereunder
remaining unpaid from time to time (computed on the basis of actual days elapsed
in a 360-day year) from the date of the initial Advance until this Note is fully
paid at the rate from time to time in effect under the Credit Agreement.
This Note is the Revolving Note as defined in the Credit
Agreement and is subject to the Credit Agreement.
RSI SYSTEMS, INC.
By
--------------------------------
Donald C. Lies
Its President and Chief Executive
Officer
<PAGE>
CREDIT AND SECURITY AGREEMENT
Dated as of June 26, 1997
RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"), and NORWEST
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as
follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
"Accounts" means the aggregate unpaid obligations of customers and
other account debtors to the Borrower arising out of the sale or lease of
goods or rendition of services by the Borrower on an open account or
deferred payment basis, whether now existing or hereafter arising.
"Advance" means a Revolving Advance.
"Agreement" means this Credit and Security Agreement, as amended,
supplemented and restated from time to time.
"Base Rate" means the rate of interest publicly announced from time
to time by Norwest Bank Minnesota, National Association as its "base rate"
or, if such bank ceases to announce a rate so designated, any similar
successor rate designated by the Lender.
"Book Net Worth" means the aggregate of the common stockholders'
equity of the Borrower, determined in accordance with GAAP, but excluding
any capital stock (including the conversion of debt to equity) for which
the Borrower has not received readily available funds on approximately the
same day such capital stock was issued.
"Borrowing Base" means, at any time and subject to change from time
to time in the Lender's sole discretion, the lesser of:
(a) the Maximum Line less the Norwest Minnesota Revolving
Advances; or
(b) the sum of:
(i) the lesser of (A) 75% of Eligible Accounts, plus
<PAGE>
(ii) 100% of Eligible Certificates of Deposits.
"Collateral" has the meaning given in Section 3.1.
"Credit Facility" means the discretionary credit facility being made
available to the Borrower by the Lender pursuant to Article II.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes
of determining a Person's aggregate Debt at any time, "Debt" shall also
include the aggregate payments required to be made by such Person at any
time under any lease that is considered a capitalized lease under GAAP.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which a Default or Event of Default has occurred and
ending on the date the Lender notifies the Borrower in writing that such
Default or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to three percent (3%) over
the Floating Rate, which rate shall change when and as the Floating Rate
changes.
"Eligible Accounts" means all unpaid Accounts, net of any credits,
except the following shall not in any event be deemed Eligible Accounts:
(i) That portion of Accounts over 90 days past invoice date
[or, if the Lender in its discretion has determined that a
particular dated Account of 120 days or less from invoice date may
be eligible, that portion of such Account which is more than 30 days
past the stated due date];
(ii) That portion of Accounts that are disputed or subject to
a claim of offset or a contra account;
(iii) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer;
(iv) Accounts owed by any unit of government, whether foreign
or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of
government for which the Borrower has provided evidence satisfactory
to the Lender that (A) the Lender has a first priority perfected
security interest and (B) such Accounts may be enforced by the
Lender directly against such unit of government under all applicable
laws);
<PAGE>
(v) Accounts owed by an account debtor located outside the
United States;
(vi) Accounts owed by an account debtor that is the subject
of bankruptcy proceedings or has gone out of business;
(vii) Accounts owed by a shareholder, subsidiary, affiliate,
officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected security
interest in favor of the Lender or which are subject to any lien,
security interest or claim in favor of any Person other than the
Lender or Norwest Minnesota;
(ix) That portion of Accounts that have been restructured,
extended, amended or modified;
(x) That portion of Accounts that constitutes finance charges,
service charges or sales or excise taxes;
(xi) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(ix) above; and
(xii) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.
"Eligible Certificates of Deposit" means those certificates of
deposit (i) issued by a bank acceptable to the Lender in its sole
discretion, and (ii) in which the Lender has a first perfected and senior
security interest, provided, however, that the Lender may deem any or all
of such certificates of deposits ineligible at any time, in its sole
discretion.
"Event of Default" has the meaning specified in Section 7.1.
"Floating Rate" means an annual rate equal to the sum of the Base
Rate plus four percent (4%), which annual rate shall change when and as
the Base Rate changes.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 5.2.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired.
"Loan Documents" means this Agreement, the Note, the Security
Documents and the Disclosure by the Borrower in favor of the Lender of
even date herewith.
"Maturity Date" has the meaning given in Section 2.3.
<PAGE>
"Maximum Line" means $1,000,000.
"Norwest Bank Credit Agreement" means that certain Credit Agreement
by and between Norwest Minnesota and the Borrower of even date herewith.
"Norwest Bank Credit Facility" means the credit facility extended to
the Borrower pursuant to the Norwest Bank Credit Agreement.
"Norwest Minnesota" means Norwest Bank Minnesota, National
Association, a national banking association.
"Norwest Minnesota Revolving Advances" means the outstanding
principal balance of the revolving advances as of a given date made by
Norwest Minnesota to the Borrower pursuant to the Norwest Bank Credit
Agreement.
"Note" means the Revolving Note.
"Obligations" means each and every debt, liability and obligation of
every type and description which the Borrower may now or at any time
hereafter owe to the Lender, including all indebtedness arising under this
Agreement, the Note or any other loan or credit agreement or guaranty
between the Borrower and the Lender, whether now in effect or hereafter
entered into.
"Original Maturity Date" means the one year anniversary of the date
of this Agreement.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender of
even date herewith.
"Permitted Liens" "Permitted Liens" means security interests, liens
and encumbrances acceptable to the Lender in its sole discretion including
without limitation those liens described on Exhibit C.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto.
<PAGE>
"Security Documents" means this Agreement and the Patent and
Trademark Security Agreement, and the Collateral Account Agreement and the
Lockbox Agreement, each of even date herewith and by and among the
Borrower, the Lender and Norwest Bank Minnesota, National Association.
"Security Interest" has the meaning given in Section 3.1.
"Support Agreement" means the Management Support Agreement by Donald
Lies, of even date herewith.
"Termination Date" means the Maturity Date or the date the Lender
demands payment pursuant to Section 2.3 or Section 7.2, or the Borrower
terminates the Credit Facility pursuant to Section 2.4, as the case may
be.
"UCC" means the Uniform Commercial Code as in effect from time to
time in the State of Minnesota.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Revolving Advances. The Lender may, in its sole discretion,
make advances to the Borrower from time to time from the date this Agreement is
signed and delivered to the Termination Date, on the terms and subject to the
conditions herein set forth (each a "Revolving Advance"). The Lender shall not
consider any request for a Revolving Advance if, after giving effect to such
requested Revolving Advance, the sum of the outstanding and unpaid Revolving
Advances would exceed the Borrowing Base. The Borrower's obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be secured
by the Collateral. Within the limits set forth in this Section 2.1, the Borrower
may request Revolving Advances, prepay, and request additional Revolving
Advances. The Borrower shall make each request for a Revolving Advance to the
Lender before 11:00 a.m. (Minneapolis time) of the day of the requested
Revolving Advance. Requests may be made in writing or by telephone.
Section 2.2 Interest; Default Interest. All interest shall be payable
monthly in arrears on the first day of the month and on demand.
(a) REVOLVING NOTE. Except as set forth in subsection (c) and (d),
the outstanding principal balance of the Advances shall bear interest at
the Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
pursuant to subsections (a) and (c), the Borrower shall pay to the Lender
interest of not less than $56,000 per calendar year during the term of
this Agreement (prorated for less than full year), and the Borrower shall
pay any deficiency between (i) such minimum interest charge and (ii) the
sum of the amount of interest otherwise
<PAGE>
calculated under Sections (a) and (c) hereof plus the amount of interest
paid during the same period under the Norwest Bank Credit Agreement. Such
minimum interest charge deficiency shall be payable in arrears on the
first day of the following calendar year.
(c) DEFAULT INTEREST RATE. At any time during any Default Period,
in the Lender's sole discretion and without waiving any of its other
rights and remedies, the principal of the Advances outstanding from time
to time shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) USURY. In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by
law.
Section 2.3 Discretionary Nature of Credit Facility; Automatic Renewal.
THE LENDER MAY AT ANY TIME AND FOR ANY REASON REFUSE TO MAKE AN ADVANCE AND/OR
DEMAND PAYMENT OF THE ADVANCES AND TERMINATE THIS AGREEMENT WHETHER BORROWER IS
OR IS NOT IN COMPLIANCE WITH THIS AGREEMENT. The Lender need not show that an
adverse change has occurred in the Borrower's condition, financial or otherwise,
in order to refuse to make any requested Advance or to demand payment of the
Advances. Unless terminated by the Lender at any time or by the Borrower
pursuant to Section 2.4, this Agreement shall remain in effect until the
Original Maturity Date and, thereafter, shall automatically renew for successive
one year periods. Each such anniversary date is herein referred to as a
"Maturity Date".
Section 2.4 Termination by Borrower.
(a) TERMINATION BY BORROWER. The Borrower may terminate this
Agreement at any time and, subject to payment and performance of all
Obligations, may obtain any release or termination of the Security
Interest to which the Borrower is otherwise entitled by law by (i) giving
at least 30 days' prior written notice to the Lender of the Borrower's
intention to terminate this Agreement, (ii) terminating the Norwest Bank
Credit Agreement pursuant to the terms thereof, and (iii) paying the
Lender a prepayment fee in accordance with subsection (b) if the Borrower
terminates this Agreement effective as of any date other than a Maturity
Date.
(b) PREPAYMENT FEE. If the Borrower desires to terminate this
Agreement as of any date other than a Maturity Date, or as of a Maturity
Date but without giving at least 90 days' prior written notice thereof, it
shall (i) give at least 30 days' prior written notice to the Lender of the
Borrower's intention to do so, and (ii) pay to the Lender a prepayment fee
equal to the greater of (A) 2.00% of the Maximum Line, or (B) $56,000 less
all interest paid since the date hereof, or, if this Agreement is renewed
pursuant to Section 2.3 hereof, since the last Maturity Date; provided,
however, that such prepayment fee shall be waived if such prepayment is
made
<PAGE>
because of increased cash flow generated from the Borrower's operations in
the normal course of business or refinancing by an affiliate of the
Lender.
Section 2.5 Mandatory Prepayment. Without notice or demand, if the
outstanding principal balance of the Revolving Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances
to the extent necessary to eliminate such excess.
Section 2.6 Advances Without Request. The Borrower hereby authorizes the
Lender, in its discretion, at any time or from time to time without the
Borrower's request, to make Revolving Advances to pay accrued interest, fees,
uncollected items that have been applied to the Obligations, and other
Obligations due and payable from time to time.
Section 2.7 Origination Fee. The Borrower hereby agrees to pay the Lender
a fully earned and non-refundable origination fee of $10,000, due and payable
upon the execution of this Agreement. The Lender acknowledges receipt of $7,500
toward payment of this fee and the fees, costs and expenses described in Section
8.2.
ARTICLE III
Security Interest
Section 3.1 Grant of Security Interest. The Borrower hereby grants to the
Lender a security interest (the "Security Interest") in the following collateral
(the "Collateral"), as security for the payment and performance of the
Obligations:
INVENTORY: All inventory of Borrower, as such term is defined in the UCC,
whether now owned or hereafter acquired, whether consisting of whole
goods, spare parts or components, supplies or materials, whether acquired,
held or furnished for sale, for lease or under service contracts or for
manufacture or processing, and wherever located;
ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Borrower to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a rendering
of services, out of a loan, out of the overpayment of taxes or other
liabilities, or otherwise arises under any contract or agreement, whether
such right to payment is created, generated or earned by Borrower or by
some other Person who subsequently transfers such Person's interest to
Borrower, whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be evidenced,
together with all other rights and interests (including all liens and
security interests) which Borrower may at any time have by law or
agreement against any account debtor or other obligor obligated to make
any such payment or against any property of such account debtor or other
<PAGE>
obligor; all including all of Borrower's rights to payment in the form of
all present and future accounts, contract rights, loans and obligations
receivable, chattel papers, bonds, notes and other debt instruments, tax
refunds and rights to payment in the nature of general intangibles;
EQUIPMENT: All of the Borrower's equipment, as such term is defined in the
UCC whether now or hereafter owned, including all present and future
machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools, supplies, and
including specifically the goods described in any equipment schedule or
list herewith or hereafter furnished to the Lender by Borrower;
GENERAL INTANGIBLES: All of Borrower's general intangibles, as such term
is defined in the UCC, whether now owned or hereafter acquired, including
all present and future contract rights, patents, patent applications,
copyrights, trademarks, trade names, trade secrets, customer or supplier
lists and contracts, manuals, operating instructions, permits, franchises,
the right to use Borrower's name, and the goodwill of Borrower's business;
and
INVESTMENT PROPERTY: All of Borrower's investment property, as such term
is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all securities, security entitlements, securities
accounts, commodity contracts, commodity accounts, stocks, bonds, mutual
fund shares, money market shares and U.S. Government securities;
together with all substitutions and replacements for and products of any
of the foregoing property and together with proceeds of any and all of the
foregoing property and, in the case of all tangible property, together
with all accessions and together with (i) all accessories, attachments,
parts, equipment and repairs now or hereafter attached or affixed to or
used in connection with any such goods, and (ii) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering
such goods.
Section 3.2 Notification of Account Debtors and Other Obligors. The Lender
may at any time (either before or after the occurrence of an Event of Default)
notify any account debtor or other Person obligated to pay the amount due that
such right to payment has been assigned or transferred to the Lender for
security and shall be paid directly to the Lender. The Borrower will join in
giving such notice if the Lender so requests. At any time after the Borrower or
the Lender gives such notice to an account debtor or other obligor, the Lender
may, but need not, as the Borrower's agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept the
Borrower's mail, and receive, open and dispose of the Borrower's mail, applying
all Collateral as permitted under this Agreement and
<PAGE>
holding all other mail for the Borrower's account or forwarding such mail to the
Borrower's last known address.
Section 3.3 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the right
to take possession of each premises where Borrower conducts its business
and has any rights of possession (the "Premises") at any time during any
Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender in good faith considers related.
(c) The Lender's right to hold the Premises shall terminate upon the
earlier of payment in full of all Obligations, or final sale or
disposition of all goods constituting Collateral and delivery of all such
goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or
other compensation for the possession or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof.
Section 3.4 License. Without limiting the generality of the Patent and
Trademark Security Agreement, the Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use, sub-license or
otherwise exploit all trademarks, franchises, trade names, copyrights and
patents of the Borrower for the purpose of selling, leasing or otherwise
disposing of any or all Collateral following an Event of Default.
Section 3.5 Filing a Copy. A carbon, photographic, or other reproduction
of this Agreement or of a financing statement signed by Borrower is sufficient
as a financing statement.
ARTICLE IV
Conditions of Lending
Section 4. 1 Conditions Precedent to the Lender's Willingness to Consider
Making Advances. The Lender's willingness to consider making an initial Advance
hereunder shall be subject to the condition precedent that the Lender shall have
received all of the following, each in form and substance satisfactory to the
Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
<PAGE>
(c) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease in favor of the
Lender and Norwest Minnesota.
(d) A true and correct copy of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other
than the Borrower, together with, in the case of any goods held by such
Person for resale, (i) a consignee's acknowledgment and waiver of liens,
(ii) UCC financing statements sufficient to protect the Borrower's and the
Lender's interests in such goods, and (iii) UCC searches showing that no
other secured party has filed a financing statement against such Person
and covering property similar to the Borrower's other than the Borrower,
or if there exists any such secured party, evidence that each such secured
party has received notice from the Borrower and the Lender sufficient to
protect the Borrower's and the Lender's interests in the Borrower's goods
from any claim by such secured party.
(e) An acknowledgment and waiver of liens from each warehouse in
which the Borrower is storing Inventory.
(f) A true and correct copy of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other
than the Borrower, together with, (i) an acknowledgment and waiver of
liens from each subcontractor who has possession of the Borrower's goods
from time to time, (ii) UCC financing statements sufficient to protect the
Borrower's and the Lender's interests in such goods, and (iii) UCC
searches showing that no other secured party has filed a financing
statement covering such Person's property other than the Borrower, or if
there exists any such secured party, evidence that each such secured party
has received notice from the Borrower and the Lender sufficient to protect
the Borrower's and the Lender's interests in the Borrower's goods from any
claim by such secured party.
(g) An acknowledgment and agreement from each licensor in favor of
the Lender, together with a true, correct and complete copy of all license
agreements in favor of the Lender and Norwest Minnesota.
(h) The Collateral Account Agreement, properly executed by the
Borrower and Norwest Minnesota.
(i) The Lockbox Agreement, properly executed by the Borrower and
Norwest Minnesota.
(j) The Patent and Trademark Security Agreement, properly executed
by the Borrower.
(k) Current searches of appropriate filing offices showing that (i)
no state or federal tax liens have been filed and remain in effect against
the Borrower, (ii) no
<PAGE>
financing statements or assignments of patents, trademarks or copyrights
have been filed and remain in effect against the Borrower except Permitted
Liens or liens held by Persons who have agreed in writing that upon
receipt of proceeds of the Advances, they will deliver UCC releases and/or
terminations and releases of such assignments of patents, trademarks or
copyrights satisfactory to the Lender, and (iii) the Lender has duly filed
all financing statements necessary to perfect the Security Interest, to
the extent the Security Interest is capable of being perfected by filing.
(l) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Borrower's directors and, if
required, shareholders, authorizing the execution, delivery and
performance of the Loan Documents, (ii) the Borrower's articles of
incorporation and bylaws, and (iii) the signatures of the Borrower's
agents authorized to execute and deliver the Loan Documents and other
instruments, agreements and certificates, including Advance requests, on
the Borrower's behalf.
(m) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(n) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(o) A certificate of Good Standing of the Borrower confirming, in
his personal capacity, the representations and warranties set forth in
Article V and the Disclosure.
(p) A support agreement in favor of the Lender and Norwest
Minnesota, properly executed by Donald C. Lies, the Borrower's President
and Chief Executive Officer, in his personal capacity.
(q) An opinion of counsel to the Borrower, addressed to the Lender.
(r) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(s) Delivery to the Lender of all certificates of deposit which the
Borrower requests the Lender designate as Eligible Certificates of
Deposit, together with a Collateral Pledge Agreement for each such
certificate of deposit, and any other security document or agreement which
the Lender may request.
(t) A copy of the Norwest Bank Credit Agreement, executed by Norwest
Minnesota and the Borrower, and evidence that of all documents required
pursuant to
<PAGE>
the terms of the Norwest Bank Credit Agreement have been duly executed and
delivered.
(u) Payment of the fees and commissions due through the date of the
initial Advance and expenses incurred by the Lender through such date and
required to be paid by the Borrower under Section 8.2, including all legal
expenses incurred through the date of this Agreement.
(v) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances. The Lender will not
consider any request for an Advance unless on such date:
(a) the representations and warranties contained in Article V and
the Disclosure are correct on and as of the date of such Advance as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Name; Locations; Tax ID No.; Subsidiaries. During its
existence, the Borrower has done business solely under its corporate name as set
forth herein and under such trade names and such other corporate names as
disclosed to Lender in writing before this Agreement is signed and delivered.
The address of Borrower's chief executive office and principal place of business
and its federal tax identification number are set forth below its signature to
this Agreement. All Inventory is located at that location or at one of the other
locations disclosed to Lender in writing before this Agreement is signed and
delivered. The Borrower has no subsidiaries except as disclosed to Lender in
writing before this Agreement is signed and delivered.
Section 5.2 Financial Condition; No Adverse Change. Before this Agreement
was signed and delivered, the Borrower furnished the Lender its audited
financial statements for its fiscal year ended June 30, 1996 and its unaudited
financial statements for the fiscal year to day ending March 31, 1997, each
certified by the Borrower. Those statements fairly present the Borrower's
financial condition as of the dates indicated therein and the results of its
operations for the periods then ended and were prepared in accordance with GAAP.
Since the date of the most recent financial statements, there has been no
material adverse change in the business, properties or condition (financial or
otherwise) of the Borrower.
<PAGE>
ARTICLE VI
Covenants of the Borrower
So long as the Advances or any amount owing to Lender hereunder shall
remain unpaid, the Borrower will comply with the requirements in this Article,
unless the Lender shall otherwise consent in writing.
Section 6.1 Reporting Requirements. The Borrower will deliver to the
Lender each of the following in form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements prepared in accordance with GAAP; together with (i) copies of
all management letters prepared by such accountants; (ii) a report signed
by such accountants stating that in making the investigations necessary
for said opinion they obtained no knowledge, except as specifically
stated, of any Default or Event of Default hereunder and all relevant
facts in reasonable detail to evidence, and the computations as to,
whether or not the Borrower is in compliance with the requirements set
forth in Sections 6.7 and 6.8 and (iii) a certificate of the Borrower's
chief financial officer stating that such financial statements have been
prepared in accordance with GAAP, that they fairly present the Borrower's
financial condition and the results of its operations, and whether or not
such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) as soon as available and in any event within 20 days after the
end of each month, an unaudited/internal balance sheet and statement of
income and retained earnings of the Borrower as at the end of and for such
month and for the year to date period then ended, prepared in accordance
with GAAP, subject to year-end audit adjustments; and accompanied by a
certificate of the Borrower's chief financial officer, substantially in
the form of Exhibit B hereto stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end audit
adjustments and fairly represent the Borrower's financial condition and
the results of its operations, (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder
not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in Sections
6.7 and 6.8;
(c) within 15 days after the end of each month, agings of the
Borrower's accounts receivable and accounts payable and an accounts
receivable certification as of the end of such month;
<PAGE>
(d) as soon as available and in any event within 15 days of receipt
thereof, a copy of the checking account statement of the Borrower as of
the last day of each month from each bank with which Borrower maintains a
checking account, such statements to be provided to the Lender directly by
each such bank or by the Borrower with respect to a bank that is unwilling
to send them to the Lender;
(e) at least 30 days before the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each
month of such year, each in reasonable detail, representing the Borrower's
good faith projections and certified by the Borrower's chief financial
officer as being the most accurate projections available and identical to
the projections used by the Borrower for internal planning purposes,
together with such supporting schedules and information as the Lender may
in its discretion require;
(f) as soon as available and in any event within three (3) days
after they are due, copies of tax payments due and paid and written notice
of any and all taxes due but not paid;
(g) as soon as possible and in any event within three (3) days after
it is due, a copy of the Borrower's rent payment to Rice Real Estate
Company and written notice of any rent due to Rice Real Estate Company but
not paid;
(h) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
Section 6.2 Inspection. Upon the Lender's request, the Borrower will
permit any officer, employee, attorney, agent or accountant for the Lender to
audit, review, make extracts from or copy any and all records of the Borrower
and to inspect the Collateral at all times during ordinary business hours.
Section 6.3 Account Verification. The Lender may at any time and from time
to time send, or request the Borrower to send, requests for verification of
Accounts or notices of assignment to account debtors and other obligors. The
Borrower authorizes the Lender to verify Accounts as frequently as daily and the
Borrower understands the Lender intends to do so by telephone and/or in writing.
Section 6.4 No Other Liens. The Borrower will keep all Collateral free and
clear of all security interests, liens and encumbrances except the Security
Interest, the Permitted Liens, purchase money security interests in equipment,
and other security interests approved by the Lender in writing.
Section 6.5 Insurance. The Borrower will at all times keep all tangible
Collateral insured against risks of fire (including so-called extended
coverage), theft, collision
<PAGE>
(for Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with a lender's loss payable
clause in favor of Lender to the extent of its interest.
Section 6.6 Lockbox; Collateral Account. The Borrower has provided the
Lender with agreements regarding a lockbox and a collateral account in
connection with the collection of Accounts.
Section 6.7 Minimum Tangible Net Worth. The Borrower will maintain its
Tangible Net Worth, determined as at the end of each month, at an amount not
less than $350,000.
Section 6.8 Minimum Book Net Worth. The Borrower will maintain, during
each period described below, its Book Net Worth determined as at the end of each
month, at an amount not less than the amount set forth opposite such period:
PERIOD MINIMUM BOOK NET WORTH
------ ----------------------
May, 1997 through
September, 1997 $850,000
October, 1997 $950,000
November, 1997 through
December, 1997 $1,100,000
Section 6.9 Renewal of Financial Covenants. On or before December 31 of
each year, the Lender shall establish acceptable covenant levels for Sections
6.7 and 6.8 based upon the Borrower's projections for such periods. The Lender
shall negotiate in good faith with the Borrower to establish such covenant
levels, provided that (a) in no event shall such covenant levels be less
stringent than the present levels and (b) if for any reason the Borrower and the
Lender do not enter into legally binding documentation establishing such
covenants at levels acceptable to the Lender in its reasonable discretion on or
prior to December 31 of such year, such failure shall constitute an Event of
Default hereunder.
Section 6.10 No Sale or Transfer of Collateral and Other Assets. The
Borrower will not sell, lease, assign, transfer or otherwise dispose of (a) the
stock of any subsidiary, (b) all or a substantial part of its assets, or (c) any
Collateral or any interest therein (whether in one transaction or in a series of
transactions) to anyone other than the sale of Inventory in the ordinary course
of business.
Section 6.11 Place of Business; Name. The Borrower will not change the
location of its chief executive office or principal place of business from that
disclosed pursuant to Section 5.1 unless the Borrower has delivered written
notice to the Lender at least thirty (30) days prior to such change. The
Borrower will not permit any tangible Collateral to
<PAGE>
be located in any state or area in which, in the event of such location, a
financing statement covering such Collateral would be required to be, but has
not in fact been, filed in order to perfect the Security Interest. The Borrower
will not change its name unless the Borrower has delivered written notice to the
Lender at least thirty (30) days prior to such name change.
ARTICLE VII
Events of Default, Rights and Remedies
Section 7.1 Events of Default. An "Event of Default" as used herein shall
mean any of the following:
(a) Failure to pay the Note when demanded, and in this connection
Borrower hereby waives presentment, notice of dishonor and protest;
(b) A petition shall be filed by or against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor;
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in any Loan Document.
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in the Norwest Bank Credit Agreement.
Section 7.2 Rights and Remedies. As provided in Section 2.3, the Lender
may, at any time and for any reason, refuse to make any requested Advance or
demand payment of the Obligations. In addition, upon the occurrence of an Event
of Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) The Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which the Borrower hereby
expressly waives) and the right to sell, lease or otherwise dispose of any
or all of the Collateral, and in connection therewith, the Borrower will
on demand assemble the Collateral and make it available to the Lender at a
place to be designated by the Lender which is reasonably convenient to
both parties;
(b) The Lender may exercise any other rights and remedies available
to it by law or agreement.
The remedies provided hereunder are cumulative.
<PAGE>
Section 7.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.1) at least 10 calendar days before
the date of intended disposition or other action.
ARTICLE VIII
Miscellaneous
Section 8.1 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for hereunder shall be in writing and shall be (i) personally
delivered, (ii) sent by first class United States mail, (iii) sent by overnight
courier of national reputation, or (iv) transmitted by telecopy, in each case
addressed or telecopied to the party to whom notice is being given at its
address or telecopy number as set forth below its signature to this Agreement.
Section 8.2 Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses (including legal fees) incurred by the Lender in connection
with the Loan Documents and any other document or agreement related thereto, and
the transactions contemplated hereby, including wire transfer and ACH charges,
the cost of credit reports, overadvance fees, the expense of any auditors (at
the rate established from time to time by the Lender as its audit fees, which
fees are currently $62.50 per hour per auditor, plus out of pocket expenses),
and fees and expenses in enforcing this Agreement.
Section 8.3 Indemnity. In addition to the payment of expenses pursuant to
Section 8.2, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the making of
the Advances;
(ii) any and all liabilities, losses, damages, penalties, judgments,
suits, claims, costs and expenses of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of
counsel) in connection with any investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a party
thereto, which may be imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in connection
with the making of the
<PAGE>
Advances, this Agreement and the other Loan Documents or the use or
intended use of the proceeds of the Advances; and
(iii) any claim, loss or damage to which any Indemnitee may be
subjected as a result of any violation of any federal, state, local or
other governmental statute, regulation, law, or ordinance dealing with the
protection of human health and the environment.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, then the Borrower or counsel
designated by the Borrower and satisfactory to the Indemnitee, will resist and
defend such action, suit or proceeding to the extent and in the manner directed
by the Indemnitee. Each Indemnitee will use its best efforts to cooperate in the
defense of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 8.3 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 8.4 Binding Effect; Assignment; Counterparts; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Without limiting the Lender's right to share
information regarding the Borrower and its Affiliates with the Lender's
participants, accountants, lawyers and other advisors, the Lender, Norwest
Corporation, and all direct and indirect subsidiaries of Norwest Corporation,
may exchange any and all information they may have in their possession regarding
the Borrower and its Affiliates, and the Borrower waives any right of
confidentiality it may have with respect to such exchange of such information.
Section 8.5 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. This
Agreement and the Note shall be governed by and construed in accordance with the
laws (other than conflict laws) of the State of Minnesota. Each party consents
to the personal jurisdiction of the state and federal courts located in the
State of Minnesota in connection with any controversy related to this Agreement,
waives any argument that venue in any such forum is not convenient and agrees
that any litigation initiated by any of them in connection with this Agreement
shall be venued in either the District Court of Hennepin County, Minnesota
located in Minneapolis, Minnesota, or the United States District Court, District
of Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY
<PAGE>
ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first above written.
NORWEST BUSINESS CREDIT, INC. RSI SYSTEMS, INC.
By /s/ Roger A. Pfiffner By /s/ Donald C. Lies
-------------------------------- --------------------------------
Roger A. Pfiffner Donald C. Lies
Its Vice President Its President and
Chief Executive Officer
Address: Address:
Norwest Center 7400 Metro Blvd.
Sixth Street and Marquette Avenue Suite 475
Minneapolis, Minnesota 55479-0152 Edina, Minnesota 55439
Telecopy No. 612/341-2472 Telecopy No. (612) 896-3030
Federal Tax ID No. 41-1712687 Federal Tax I.D. No. 41-1767211
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$1,000,000
Minneapolis, Minnesota June 26, 1997
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay ON DEMAND to the order of
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of One Million Dollars
($1,000,000) or, if less, the aggregate unpaid principal amount of all Advances
made by the Lender to the Borrower under the Credit and Security Agreement of
even date herewith by and between the Lender and the Borrower (as the same may
hereafter be amended, supplemented or restated from time to time, the "Credit
Agreement") together with interest on the principal amount hereunder remaining
unpaid from time to time (computed on the basis of actual days elapsed in a
360-day year) from the date of the initial Advance until this Note is fully paid
at the rate from time to time in effect under the Credit Agreement.
This Note is the Revolving Note as defined in the Credit Agreement and is
subject to the Credit Agreement.
RSI SYSTEMS, INC.
By
--------------------------------
Donald C. Lies
Its President and
Chief Executive Officer
<PAGE>
Exhibit B to Credit and Security Agreement
COMPLIANCE CERTIFICATE
To: Roger A. Pfiffner
Norwest Business Credit, Inc.
Date: __________________, 199___
Subject: RSI Systems, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as of June 26,
1997 (the "Credit Agreement"), attached are the financial statements of RSI
Systems, Inc. (the "Borrower") as of and for ________________, 19___ (the
"Reporting Date") and the year-to-date period then ended (the "Current
Financials"). All terms used in this certificate have the meanings given in the
Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition as of the date thereof.
Events of Default. (Check one):
|_| The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
|_| The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
Financial Covenants. I further hereby certify as follows:
1. Minimum Tangible Net Worth. Pursuant to Section 6.7 of the Credit
Agreement, as of the Reporting Date the Borrower's Tangible Net Worth was
$____________ which |_| satisfies |_| does not satisfy the requirement
that such amount be not less than $350,000.
2. Minimum Book Net Worth. Pursuant to Section 6.8 of the Credit
Agreement, as of the Reporting Date, the Borrower's Book Net Worth was
$____________ which |_| satisfies |_| does not satisfy the requirement
that such amount be not less than $_____________ on the Reporting Date [as
set forth in table below:
<PAGE>
Period Minimum Book Net Worth
------ ----------------------
May, 1997 through
September, 1997 $850,000
October, 1997 $950,000
November, 1997 through
December, 1997 $1,100,000
Attached hereto are all relevant facts in reasonable detail to evidence,
and the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.
RSI SYSTEMS, INC.
By ________________________________
Its Chief Financial Officer
<PAGE>
Exhibit C to Credit and Security Agreement
PERMITTED LIENS
---------------
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
NONE
<PAGE>
DISCLOSURE
RSI Systems, Inc.
The Borrower signing below hereby makes the following disclosures to
Norwest Business Credit, Inc. in connection with a Credit and Security Agreement
between them dated on or about the date hereof:
1. Legal Names. During its existence, the legal name of the Borrower has
been its legal name as disclosed in the Credit Agreement and the following
predecessor legal names (insert "None" if none"):
Rocket Science, Inc.
2. Assumed Names. During its existence, the Borrower has done business
under the following trade names other than the legal names disclosed in
paragraph 1 above (insert "None" if none):
None.
3. Inventory Locations. All of the Borrower's inventory is located at the
address of the chief executive office of the Borrower as disclosed in the Credit
Agreement and at the following additional locations (insert "None" if none):
Eden Prairie Metro RV and Mini-Storage
6852 Flying Cloud Drive, Suite B
Eden Prairie, Minnesota 55344
Altron, Inc.
6700 Industry Avenue
Anoka, Minnesota 55303-4595
4. Subsidiaries. The Borrower has no subsidiaries other than as follows
(insert "None" if none):
RSI Systems Export Corporation
5. Payment of Taxes. The Borrower has paid to the proper authorities when
due all federal, state, and local income taxes and taxes required to be withheld
by Borrower, and no claim is being made against Borrower for any such taxes by
any taxing authority except as follows (insert "None" if none):
None.
6. Environmental. To the best of Borrower's knowledge, the Borrower has
conducted and is conducting its business in compliance with all federal, state,
and local
<PAGE>
statutes, regulations, laws, and ordinances dealing with the protection of human
health and the environment ("Environmental Laws"), and there are no claims,
investigations, lawsuits, or administrative proceedings against Borrower or
relating to any real estate owned or operated by Borrower alleging a violation
of any Environmental Law except as follows (insert "None" if none):
None.
7. Litigation. Other than as disclosed above with respect to Environmental
Laws, there are no lawsuits or proceedings pending, or to the best knowledge of
the Borrower threatened, against or affecting the Borrower or its properties
except as follows (insert "None" if none):
None.
Dated: June 26, 1997 RSI SYSTEMS, INC.
By /s/ Donald C. Lies
--------------------------------
Donald C. Lies
Its President and
Chief Executive Officer
<PAGE>
CERTIFICATE OF AUTHORITY
I, James D. Hanzlik, do hereby certify that I am secretary or assistant
secretary of RSI Systems, Inc., a Minnesota corporation; that the following is a
true, complete and correct copy of the resolution duly adopted (check one):
|X| at a meeting of the directors of said corporation duly and properly
called and held on the 4th day of June 1997, at which
a quorum was present and acting throughout;
|_| by unanimous written action duly and lawfully taken, subscribed by
all the directors of said corporation;
and I further certify that said resolution is now in full force and effect:
Resolution
RESOLVED, that the Chief Executive Officer, President and Chief Financial
Officer of the Company be and hereby are authorized and directed to
negotiate the final documents with respect to the proposed credit
facilities with Norwest Business Credit and Norwest Bank Minnesota in
order to secure for the Company a $1,000,000 and a $500,000, respectively,
of credit and such officers are hereby authorized and directed on behalf
of the Company to execute and deliver the credit agreements so negotiated
together with such security and pledge agreements and other agreements,
instruments, certificates and documents as may be necessary or desirable
to achieve the purposes of this resolution.
I further certify that the directors of said Corporation have, and at the
time of adoption of the foregoing resolution had, full power and lawful
authority to adopt the foregoing resolution and to confer the powers therein
granted to the persons named and that such persons have full power and authority
to exercise same. I further certify that the signatures appearing below are the
authentic and official signatures of the officers and agents referred to in the
foregoing resolution, that the persons named below as officers have been duly
elected to and now hold the offices in said Corporation set forth opposite their
respective names, and that the persons named as agents below have been duly
authorized to sign and to act on behalf of said Corporation pursuant to the
foregoing resolution:
<PAGE>
Name Title Sample Signature
---- ----- ----------------
Donald C. Lies President and Chief /s/ Donald C. Lies
Executive Officer --------------------
James D. Hanzlik Secretary and Chief /s/ James D. Hanzlik
Financial Officer --------------------
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
I further certify (check one):
|X| that the foregoing resolution was duly approved by the shareholders
of said Corporation at a meeting duly and properly called and held
on the 4th day of June 1997, at which a quorum was
present and acting throughout, or otherwise as permitted by law;
|_| that the foregoing resolution is effective and binding on said
Corporation without approval by its shareholders.
I further certify that the forms of Credit and Security Agreement and the
other Loan Documents, and any other writings relating to the credit facility
with Norwest Business Credit, Inc., executed on behalf of said Corporation by
its President and Chief Executive Officer and delivered to the Lender are the
agreements and writings referred to in and approved by the Resolution set forth
above.
I further certify that attached hereto as Exhibit A, are true, correct and
complete copies of the articles of incorporation and bylaws of said Corporation,
which articles of incorporation and bylaws are in full force and effect and have
not been altered, amended or revised. I further certify that attached hereto as
Exhibit B is a Certificate of Good Standing of the Corporation not more than ten
days old.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 26th day of
June, 1997.
/s/ James D. Hanzlik
-----------------------------------
James D. Hanzlik, Secretary
RSI Systems, Inc.
Attest by One Other Officer
/s/ Donald C. Lies
- -----------------------------------
<PAGE>
PATENT AND TRADEMARK SECURITY AGREEMENT
This Agreement, dated as of June 26, 1997, is made by and between RSI
SYSTEMS, INC., a Minnesota corporation whose address and principal place of
business is 7400 Metro Blvd., Suite 475, Edina, Minnesota 55439 (the "Debtor"),
and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation whose address and
principal place of business is Norwest Center, Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479-0152 (the "Secured Party").
Recitals
The Debtor and the Secured Party have entered into a Credit and Security
Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") setting
forth the terms on which the Secured Party may now or hereafter make certain
loans or other financial accommodations to or for the account of the Debtor.
As a further condition to making any loan or other financial accommodation
under the Credit Agreement or otherwise, the Secured Party has required the
execution and delivery of this Agreement by the Debtor.
ACCORDINGLY, in consideration of the mutual covenants contained in the
Credit Agreement and herein, the parties hereby agree as follows:
1. Definitions. All terms defined in the Recitals hereto or in the Credit
Agreement that are not otherwise defined herein shall have the meanings given to
them therein. In addition, the following terms have the meanings set forth
below:
"Obligations" means each and every debt, liability and obligation of
every type and description arising under or in connection with any Loan
Document (as defined in the Credit Agreement) which the Debtor may now or
at any time hereafter owe to the Secured Party, whether such debt,
liability or obligation now exists or is hereafter created or incurred and
whether it is or may be direct or indirect, due or to become due, absolute
or contingent, primary or secondary, liquidated or unliquidated,
independent, joint, several or joint and several, and including
specifically, but not limited to, the Obligations (as defined in the
Credit Agreement).
"Patents" means all of the Debtor's right, title and interest in and
to patents or applications for patents, fees or royalties with respect to
each, and including without limitation the right to sue for past
infringement and damages therefor, and licenses thereunder, all as
presently existing or hereafter arising or acquired, including without
limitation the patents listed on Exhibit A.
<PAGE>
"Trademarks" means all of the Debtor's right, title and interest in
and to trademarks, service marks, collective membership marks, the
respective goodwill associated with each, and licenses thereunder, all as
presently existing or hereafter arising or acquired, including, without
limitation, the marks listed on Exhibit B.
2. Security Interest. The Debtor hereby irrevocably assigns to and grants
to the Secured Party a security interest with power of sale to the extent
permitted by law (the "Security Interest") in the Patents and in the Trademarks
to secure payment of the Obligations.
3. Representations, Warranties and Agreements. The Debtor hereby
represents, warrants and agrees as follows:
(a) EXISTENCE; AUTHORITY. The Debtor is a corporation, having full
power to and authority to make and deliver this Agreement. The execution,
delivery and performance of this Agreement by the Debtor have been duly
authorized by all necessary action of the Debtor's directors and
shareholders and do not and will not violate the provisions of, or
constitute a default under, any presently applicable law or its articles
of incorporation and bylaws or any agreement presently binding on it. This
Agreement has been duly executed and delivered by the Debtor and
constitutes the Debtor's lawful, binding and legally enforceable
obligation. The correct name of the Debtor is RSI Systems, Inc.. The
authorization, execution, delivery and performance of this Agreement do
not require notification to, registration with, or consent or approval by,
any federal, state or local regulatory body or administrative agency.
(b) PATENTS. Exhibit A accurately lists all Patents owned or
controlled by the Debtor as of the date hereof and accurately reflects the
existence and status of registrations pertaining to the Patents as of the
date hereof.
(c) TRADEMARKS. Exhibit B accurately lists all Trademarks owned or
controlled by the Debtor as of the date hereof and accurately reflects the
existence and status of Trademarks and all registrations pertaining
thereto as of the date hereof.
(d) TITLE. The Debtor has absolute title to each Patent and each
Trademark listed on Exhibits A and B, free and clear of all security
interests, liens and encumbrances, except the Security Interest. The
Debtor (i) will have, at the time the Debtor acquires any rights in
Patents or Trademarks hereafter arising, absolute title to each such
Patent or Trademark free and clear of all security interests, liens and
encumbrances, except the Security Interest, and ( ii) will keep all
Patents and Trademarks free and clear of all security interests, liens and
encumbrances except the Security Interest.
(e) NO SALE. The Debtor will not sell or otherwise dispose of the
Patents or Trademarks, or any interest therein, without the Secured
Party's prior written consent.
<PAGE>
(f) DEFENSE. The Debtor will at its own expense, and using its best
efforts, protect and defend the Patents and Trademarks against all claims
or demands of all persons other than the Secured Party.
(g) MAINTENANCE. The Debtor will at its own expense maintain the
Patents and the Trademarks to the extent reasonably advisable in its
business including, but not limited to, filing all applications to
register and all affidavits and renewals possible with respect to issued
registrations. The Debtor covenants that it will not abandon nor fail to
pay any maintenance fee or annuity due and payable on any Patent or
Trademark, nor fail to file any required affidavit in support thereof,
without first providing the Secured Party: (i) sufficient written notice,
as provided in the Credit Agreement, to allow the Secured Party to timely
pay any such maintenance fees or annuity which may become due on any of
said Patents or Trademarks, or to file any affidavit with respect thereto,
and (ii) a separate written power of attorney or other authorization to
pay such maintenance fees or annuities, or to file such affidavit, should
such be necessary or desirable.
(h) SECURED PARTY'S RIGHT TO TAKE ACTION. If the Debtor fails to
perform or observe any of its covenants or agreements set forth in this
Section 3, and if such failure continues for a period of ten (10) calendar
days after the Secured Party gives the Debtor written notice thereof (or,
in the case of the agreements contained in subsection (g), immediately
upon the occurrence of such failure, without notice or lapse of time), or
if the Debtor notifies the Secured Party that it intends to abandon a
Patent or Trademark, the Secured Party may (but need not) perform or
observe such covenant or agreement on behalf and in the name, place and
stead of the Debtor (or, at the Secured Party's option, in the Secured
Party's own name) and may (but need not) take any and all other actions
which the Secured Party may reasonably deem necessary to cure or correct
such failure.
(i) COSTS AND EXPENSES. Except to the extent that the effect of such
payment would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, the Debtor shall pay the
Secured Party on demand the amount of all moneys expended and all costs
and expenses (including reasonable attorneys' fees) incurred by the
Secured Party in connection with or as a result of the Secured Party's
taking action under subsection (h) or exercising its rights under Section
6, together with interest thereon from the date expended or incurred by
the Secured Party at the highest rate then applicable to any of the
Obligations.
(j) POWER OF ATTORNEY. To facilitate the Secured Party's taking
action under subsection (h) and exercising its rights under Section 6, the
Debtor hereby irrevocably appoints (which appointment is coupled with an
interest) the Secured Party, or its delegate, as the attorney-in-fact of
the Debtor with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file, in the name and on
behalf of the Debtor, any and all instruments, documents, applications,
<PAGE>
financing statements, and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Debtor under this Section
3, or, necessary for the Secured Party, after an Event of Default, to
enforce or use the Patents or Trademarks or to grant or issue any
exclusive or non-exclusive license under the Patents or Trademarks to any
third party, or to sell, assign, transfer, pledge, encumber or otherwise
transfer title in or dispose of the Patents or Trademarks to any third
party. The Debtor hereby ratifies all that such attorney shall lawfully do
or cause to be done by virtue hereof. The power of attorney granted herein
shall terminate upon the termination of the Credit Agreement as provided
therein and the payment and performance of all Obligations (as defined
therein).
4. Debtor's Use of the Patents and Trademarks. The Debtor shall be
permitted to control and manage the Patents and Trademarks, including the right
to exclude others from making, using or selling items covered by the Patents and
Trademarks and any licenses thereunder, in the same manner and with the same
effect as if this Agreement had not been entered into, so long as no Event of
Default occurs and remains uncured.
5. Events of Default. Each of the following occurrences shall constitute
an event of default under this Agreement (herein called "Event of Default"): (a)
an Event of Default, as defined in the Credit Agreement, shall occur; or (b) the
Debtor shall fail promptly to observe or perform any covenant or agreement
herein binding on it; or (c) any of the representations or warranties contained
in Section 3 shall prove to have been incorrect in any material respect when
made.
6. Remedies. Upon the occurrence of an Event of Default and at any time
thereafter, the Secured Party may, at its option, take any or all of the
following actions:
(a) The Secured Party may exercise any or all remedies available
under the Credit Agreement.
(b) The Secured Party may sell, assign, transfer, pledge, encumber
or otherwise dispose of the Patents and Trademarks.
(c) The Secured Party may enforce the Patents and Trademarks and any
licenses thereunder, and if Secured Party shall commence any suit for such
enforcement, the Debtor shall, at the request of Secured Party, do any and
all lawful acts and execute any and all proper documents required by
Secured Party in aid of such enforcement.
Notwithstanding the foregoing, the Secured Party will not take any of the
foregoing actions if a third person pledges, assigns and transfers within one
(1) day after the occurrence of an Event of Default, as additional collateral to
secure the Obligations, negotiable certificates of deposit, equity securities
that are traded on any national securities exchange or on the NASDAQ National
Market System and/or cash or the equivalent, which in the aggregate have
<PAGE>
and will continue to have a fair market value equal to or greater than the
outstanding Obligations under the Credit Agreement at the time such Event of
Default arises. Such person must execute and deliver all security agreements and
related documents and transfer possession and control of such additional
collateral as the Secured Party may request in its sole discretion, and such
additional collateral shall be in form and substance acceptable to the Secured
Party in its sole discretion.
7. Miscellaneous. This Agreement has been duly and validly authorized by
all necessary action, corporate or otherwise. This Agreement can be waived,
modified, amended, terminated or discharged, and the Security Interest can be
released, only explicitly in a writing signed by the Secured Party. A waiver
signed by the Secured Party shall be effective only in the specific instance and
for the specific purpose given. Mere delay or failure to act shall not preclude
the exercise or enforcement of any of the Secured Party's rights or remedies.
All rights and remedies of the Secured Party shall be cumulative and may be
exercised singularly or concurrently, at the Secured Party's option, and the
exercise or enforcement of any one such right or remedy shall neither be a
condition to nor bar the exercise or enforcement of any other. The Secured Party
shall not be obligated to preserve any rights the Debtor may have against prior
parties, to realize on the Patents and Trademarks at all or in any particular
manner or order, or to apply any cash proceeds of Patents and Trademarks in any
particular order of application. This Agreement shall be binding upon and inure
to the benefit of the Debtor and the Secured Party and their respective
participants, successors and assigns and shall take effect when signed by the
Debtor and delivered to the Secured Party, and the Debtor waives notice of the
Secured Party's acceptance hereof. The Secured Party may execute this Agreement
if appropriate for the purpose of filing, but the failure of the Secured Party
to execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by the Debtor shall have the
same force and effect as the original for all purposes of a financing statement.
This Agreement shall be governed by the internal law of Minnesota without regard
to conflicts of law provisions. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not affect other provisions or applications which can be
given effect and this Agreement shall be construed as if the unlawful or
unenforceable provision or application had never been contained herein or
prescribed hereby. All representations and warranties contained in this
Agreement shall survive the execution, delivery and performance of this
Agreement and the creation and payment of the Obligations.
<PAGE>
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Patent and Trademark
Security Agreement as of the date written above.
NORWEST BUSINESS CREDIT, INC. RSI SYSTEMS, INC.
By /s/ Roger A. Pfiffner By /s/ Donald C. Lies
------------------------------- --------------------------------
Roger A. Pfiffner Donald C. Lies
Its Vice President Its President and
Chief Executive Officer
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 26th day of June,
1997, by Donald C. Lies, the President and Chief Executive Officer of RSI
Systems, Inc., a Minnesota corporation, on behalf of the corporation.
[SEAL] /s/ Robert J. Weierman, Jr.
ROBERT J. WEIERMAN JR. -----------------------------------
NOTARY PUBLIC-MINNESOTA Notary Public
My Commission Expires Jan. 31, 2000
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 26th day of June,
1997, by Roger A. Pfiffner, a Vice President of Norwest Business Credit, Inc., a
Minnesota corporation, on behalf of the corporation.
[SEAL] /s/ Robert J. Weierman, Jr.
ROBERT J. WEIERMAN JR. -----------------------------------
NOTARY PUBLIC-MINNESOTA Notary Public
My Commission Expires Jan. 31, 2000
<PAGE>
EXHIBIT A
---------
UNITED STATES ISSUED PATENTS
----------------------------
Title Patent Number Issue Date
----- ------------- ----------
Peripheral Video Conferencing Unit Des. 370,010 May 21, 1996
UNITED STATES PATENT APPLICATIONS
---------------------------------
Patent Application
Title Number Issue Date
----- ------------------ ----------
Peripheral Video Conferencing System Application No. September 7, 1994
PCT/US95/11390
FOREIGN ISSUED PATENTS
----------------------
Title Country Patent Number Issue Date
----- ------- ------------- ----------
Stand alone peripheral video WO 9608110 March 14, 1996
conferencing system - allows
communication with analogue or
digital communications channel
and separate host computer
system
Same AU 9535484 March 27,
1996
Same AU 127747 September 6,
1996
Same CA 78379 May 9, 1996
Same DE M9503539.7 July 19, 1995
Same FR 952365 April 21, 1995
Same GB 2046903
Same JP Pending April 21, 1995
<PAGE>
EXHIBIT B
---------
UNITED STATES ISSUED TRADEMARKS, SERVICE MARKS
AND COLLECTIVE MEMBERSHIP MARKS
REGISTRATIONS
-------------
Mark Registration Number Registration Date
---- ------------------- -----------------
Eris 1,997,487 August 27, 1996
APPLICATIONS
------------
Mark Application Number Registration Date
---- ------------------ -----------------
Computer Free 75-183,232 October 17, 1996
Video Airline 75-183,056 October 17, 1996
Eris Video Flyer 75-178,355 October 8, 1996
COLLECTIVE MEMBERSHIP MARKS
---------------------------
None
UNREGISTERED MARKS
------------------
None
<PAGE>
COLLATERAL ACCOUNT AGREEMENT
June 26, 1997
TO: Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Re: Account No. 3974360702 maintained by Norwest Bank Minnesota,
National Association (the "Bank")
Ladies and Gentlemen:
RSI Systems, Inc., a Minnesota corporation (the "Client"), and the Bank
are writing to confirm that they have agreed as follows:
1. The Client will cause all of its account debtors located outside the
United States of America to wire transfer to the referenced account (the
"Collateral Account") all payments for goods and services sold to them.
2. The Collateral Account will be operated and maintained exclusively for
the benefit of Norwest Bank Minnesota, National Association, a national banking
association (the "Lender"). Amounts deposited in the Collateral Account shall
not bear interest and shall not be subject to withdrawal by the Client, except
after full payment and discharge of all obligations to the Lender and
termination of all related credit facilities. The Client shall have no right to
make or countermand withdrawals from the Collateral Account.
3. The Client hereby pledges to and grants the Lender a security interest
in all funds on deposit in the Collateral Account from time to time and all
proceeds thereof, to secure payment of all of the Client's obligations to the
Lender whether now existing or hereafter arising.
4. After allowing two (2) days for collection of items deposited in the
Collateral Account, the Bank is authorized and agrees to transmit deposited
funds in the amount of the deposit to Norwest Bank Minnesota, National
Association for the Lender's account, account No. 6355010053. Following deposit
in the Lender's account, the Lender shall apply the amount deposited to payment
of the Borrower's obligations to the Lender.
5. The Client may not terminate this Agreement without obtaining the
Lender's prior written consent. The Bank may not terminate this Agreement
without 60 days' prior written notice to the Lender. The Lender may terminate
this Agreement at any time, with or without cause.
<PAGE>
6. This Agreement shall be enforceable against the Client and the Bank by
the Lender and the Lender's participants, successors and assigns. The Client and
the Bank waive notice of the Lender's acceptance hereof.
7. This Agreement may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument. This Agreement shall be governed by and construed in accordance with
the substantive laws (other than conflict laws) of the State of Minnesota. Each
party consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement waives any argument that venue in any such forum is not
convenient, and agrees that any litigation initiated by any of them in
connection with this Agreement shall be venued in either the District Court of
Hennepin County, Minnesota, or the United States District Court, District of
Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By /s/ Signature Illegible By /s/ Donald C. Lies
--------------------------------- --------------------------------
Its Vice President Donald C. Lies
Its President and
Chief Executive Officer
Accepted:
NORWEST BUSINESS CREDIT, INC.
By /s/ Roger A. Pfiffner
---------------------------------
Roger A. Pfiffner
Its Vice President
<PAGE>
AGREEMENT AS TO LOCKBOX SERVICE
This Agreement, dated as of June 26, 1997, is made by and among RSI
SYSTEMS, INC., a Minnesota corporation (the "Customer"), NORWEST BUSINESS
CREDIT, INC., a Minnesota corporation (the "Secured Party"), and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Agent").
The Secured Party has required the execution of this Agreement as a
condition to the Secured Party's consideration of making any advances to the
Customer under the terms of the Credit and Security Agreement of even date
herewith, by and between the Customer and the Secured Party.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter contained, the parties agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the meanings given to them in this paragraph:
"Collateral" means all of the Customer's equipment, inventory,
accounts, instruments, chattel paper, other rights to payment, money and
general intangibles, now or hereafter acquired, together with all products
and proceeds thereof.
"Collateral Account" means account No. 3974360702 maintained by the
Agent for the benefit of the Secured Party pursuant to the terms of the
Collateral Account Agreement of even date herewith, given to the Secured
Party by the Customer and the Agent.
"Lockbox" means the lockbox to be administered by the Agent for the
benefit of the Secured Party, to which the Customer shall direct account
debtors and other persons obligated to make payments constituting
Collateral to make such payments.
2. Notification to Account Debtors. The address of the Lockbox shall be as
follows:
RSI Systems, Inc.
NW-__________
P.O. Box 1450
Minneapolis, Minnesota 55485-______
Immediately upon the execution of this Agreement, and as the Collateral is
generated in the future, the Customer shall give written notification to all
persons obligated to make payments constituting Collateral, directing them to
make such payments to the address of the Lockbox. The Customer shall not revoke
or rescind any such notification and shall not take any action inconsistent with
this Agreement. The Customer agrees to deposit any and all collections of
<PAGE>
accounts receivable and any and all other proceeds of Collateral received
directly by it in the Collateral Account.
3. Control of Lockbox. The Lockbox shall be under the sole and exclusive
control of the Secured Party. All items in the Lockbox shall constitute proceeds
of Collateral upon their deposit therein.
4. Delivery of Contents of Lockbox to Operations Center. Each business
day, the Agent or its authorized designees shall remove the contents of the
Lockbox and deliver them to the Agent's Operations Center in Minneapolis,
Minnesota ("Operations Center"). Every day is a business day except Saturdays,
Sundays and holidays observed by the Agent. The Agent may, at its option,
perform the services set forth in this Agreement on a day other than a business
day.
5. Processing Contents of Lockbox. The Agent will process the mail removed
from the Lockbox ("items") and delivered to its Operations Center. Standard
processing of the items will generally include the following:
(a) All items will be opened and inspected.
(b) Each check will be examined for date, payee, signature,
consistency of written and numerical amounts on the face of the check, and
legends.
(i) Any check that is undated will be dated by the Agent with
the date shown on the envelope in which it was received, and will be
processed as if correctly dated.
(ii) The Agent will estimate the collection time associated
with presenting postdated checks to the paying or payable-through
bank (the "payor"). A postdated check will be processed if, in the
Agent's judgment, the check will reach the payor on or after the
date on the check; otherwise, the check will be delivered to the
Customer with a written notice thereof sent to the Secured Party.
Notwithstanding the foregoing, the Agent shall have no liability for
incorrectly estimating the time it takes to present the check to the
payor.
(iii) Any check whose written and numerical amounts disagree
will be compared with the invoice or other materials with which it
is received. If the correct amounts can be determined from the
invoice or other material, such check will be deposited and the
Collateral Account will be credited for what appears to be the
correct amount; otherwise, the check will be delivered to the
Customer with a written notice thereof sent to the Secured Party.
<PAGE>
(iv) A request to obtain proper signature or authority to pay
will be stamped on any unsigned check, and such check will be
deposited to the Collateral Account.
(v) If a check contains the legend "paid in full" or any other
language that is intended to modify the Customer's contractual
rights, or is payable to a payee other than the Customer, the check
will be delivered to the Customer with a written notice thereof sent
to the Secured Party. Notwithstanding the foregoing, the Agent shall
have no liability for processing a check that contains the legend
"paid in full" or any other language that is intended to modify the
Customer's contractual rights.
(vi) Mail that does not contain any checks will be delivered
to the Customer.
(vii) If the amount of any check differs from the amount of
the invoice received in the same envelope, the amount on the invoice
will be crossed out and the amount of the check will be inserted.
(viii) If a check is received without an accompanying invoice,
any related correspondence and other material received with such
check will be stapled to the envelope in which it is received.
(ix) Each business day, copies of all deposit tickets, all
tape listings, all rejected checks, and all other instruments and
papers referred to in this paragraph will be delivered to the
Customer at a time and place to be separately agreed upon by the
Agent and the Customer.
6. Depositing Checks to the Collateral Account. For all processed checks,
other than those with respect to which Paragraph 5 provides a different
procedure, the Customer authorizes the Agent to endorse the checks and to
deposit them to the Collateral Account on the business day of receipt; provided,
however, that for this purpose checks received by the Agent at its Operations
Center after 9:00 a.m. on a business day will be deemed to have been received on
the following business day.
7. Limitation of Liability. The Agent's and the Secured Party's liability
in connection with the performance of the transactions covered by this Agreement
shall be strictly limited as follows:
(a) The Agent shall exercise ordinary care in selecting agents and
independent contractors to pick up and deliver the contents of the Lockbox
(the "Agent's Designees") but shall not be liable for loss caused by the
Agent's Designees' negligence or misconduct. In the event of such loss,
the Agent will exercise its best
<PAGE>
efforts, at the Customer's cost and expense, to assist the Customer in
obtaining redress from the responsible party.
(b) The Agent shall exercise its best efforts in determining the
optimum time to pick up mail at the Lockbox and the best carrier to
deliver that mail to its Operations Center. However, the Agent shall not
be liable if the chosen pickup time and carrier prove not to result in the
earliest possible availability of funds.
(c) In performing its duties hereunder, the Agent will exercise
ordinary care and will act in good faith. The Agent will not be
accountable for its failure to perform any of its obligations hereunder,
except for its gross negligence or willful misconduct, or that of its
employees, officers, or agents. If, as a result of such gross negligence
or willful misconduct, the Agent is liable for mishandling any item, such
liability shall be limited to the lesser of the face amount of any check
involved or the amount of the Customer's direct loss as a result of such
mishandling, and in no event shall the Agent be responsible for any
incidental or consequential damages. IN NO EVENT SHALL THE AGENT BE LIABLE
FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSS OF PROFIT,
NOTWITHSTANDING NOTICE TO THE AGENT OF THE POSSIBILITY OF SUCH DAMAGES OR
LOSSES.
(d) Neither the Secured Party nor its present, former or future
shareholders, directors, officers, employees, agents, attorneys,
predecessors, successors, divisions, parent, subsidiaries, affiliates,
participants and assigns (together with the Secured Party, collectively
the "Indemnitees") shall be liable for, and the Customer hereby assumes
full responsibility for and agrees to indemnify and hold harmless the
Indemnitees from and against, any and all of the Customer's or any other
person's losses, liabilities, damages, claims, demands, causes of action,
lawsuits, judgments, costs and expenses (including without limitation
attorneys' fees) relating in any way to this Agreement. The foregoing
indemnification agreement shall survive the termination of this Agreement,
the closing of the Lockbox and the payment of the Customer's indebtedness
to the Secured Party. IN NO EVENT SHALL THE SECURED PARTY BE LIABLE FOR
ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSS OF PROFIT, NOTWITHSTANDING
NOTICE TO THE SECURED PARTY OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.
8. Fees. For the services to be provided by the Agent, the Customer will
pay the Agent in accordance with the Agent's standard rates for the services
contemplated hereby as set forth on such fee schedules as the Agent may from
time to time deliver to the Customer.
9. Term and Termination. This Agreement shall be effective when a copy of
the Agreement executed by all parties has been delivered to the Agent. The
Customer may
<PAGE>
not terminate this Agreement without the written consent of the Secured Party
and 30 days' written notice to the Agent. The Secured Party may terminate this
Agreement at any time, with or without cause, upon 30 days' written notice to
the other parties. The Agent may terminate this Agreement at any time, with or
without cause, upon 30 days' written notice to the Customer and the Secured
Party. The Agent may terminate this Agreement immediately upon written notice to
the Customer and the Secured Party if it in good faith believes that it is at
significant risk of loss by continuing its obligations under this Agreement.
10. Notice. Any notice required or permitted by this Agreement shall be
deemed to have been given when mailed, postage prepaid, or when delivered to the
following address:
If to the Agent:
Norwest Bank Minnesota, National Association
Sixth and Marquette
Minneapolis, Minnesota 55479
Attention: /s/ Signature Illegible
-----------------------
If to the Customer:
RSI Systems, Inc.
7400 Metro Blvd.
Suite 475
Edina, Minnesota 55439
Attention: Donald C. Lies
If to the Secured Party:
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Attention: Roger A. Pfiffner
11. Governing Law; Waiver of Jury Trial. This Agreement shall be governed
by and construed in accordance with the substantive laws (other than conflict
laws) of the State of Minnesota. Each party consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Agreement, waives any
argument that venue in any such forum is not convenient, and agrees that any
litigation initiated by any of them in connection with this Agreement shall be
venued in either the District Court of Hennepin County, Minnesota, or the United
States
<PAGE>
District Court, District of Minnesota, Fourth Division. THE PARTIES WAIVE ANY
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO
THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By /s/ Signature Illegible By /s/ Donald C. Lies
--------------------------------- --------------------------------
Its Vice President Donald C. Lies
Its President and
Chief Executive Officer
NORWEST BUSINESS CREDIT, INC.
By /s/ Roger A. Pfiffner
---------------------------------
Roger A. Pfiffner
Its Vice President
<PAGE>
OFFICER'S CERTIFICATE
TO: Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
To induce you, at your sole discretion, to make one or more loans from
time to time to RSI Systems, Inc., a Minnesota corporation (the "Borrower"), in
accordance with the Credit and Security Agreement dated June 26, 1997 between it
and you (the "Credit Agreement") and all other Loan Documents (as defined in the
Credit Agreement), I hereby represent and warrant to you, in my individual
capacity, that each and every representation and warranty set forth in Article V
of the Credit Agreement is true and correct as of the date hereof.
Dated: June 26, 1997
Very truly yours,
/s/ Donald C. Lies
-----------------------------------
Donald C. Lies
<PAGE>
SUPPORT AGREEMENT
This Agreement, dated as of June 26, 1997, is made by Donald C. Lies (the
"Officer"), and RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"), for
the benefit of NORWEST BUSINESS CREDIT, INC., a Minnesota corporation ("NBCI")
and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
("Norwest" and together with NBCI, the "Lenders").
Recitals
NBCI and the Borrower have entered into a Credit and Security Agreement
(together with all amendments, supplements and restatements, the "NBCI Credit
Agreement") of even date herewith, pursuant to which NBCI may make revolving
advances and extend other financial accommodations to or for the benefit of the
Borrower.
Norwest and the Borrower have entered into a Credit and Security Agreement
(together with all amendments, supplements and restatements, the "Norwest Credit
Agreement" and together with the NBCI Credit Agreement, the "Credit Agreements")
of even date herewith, pursuant to which Norwest may make revolving advances and
extend other financial accommodations to or for the benefit of the Borrower.
The Officer is the duly elected, qualified and acting President and Chief
Executive Officer of the Borrower and is fully familiar with all of the
Borrower's business and financial affairs.
To induce the Lenders to make advances and extend other financial
accommodations to or for the account of the Borrower under the Credit Agreements
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Officer, the Borrower and the Lenders agree
as follows:
1. Definitions. Capitalized terms used in this Agreement which are not
defined in this Agreement have the meanings given to them in the NBCI Credit
Agreement.
2. Officer to Dispose of Collateral. The Officer and the Borrower agree
that if (i) the Lenders come into possession of any or all of the tangible
Collateral or are collecting the Borrower's Accounts or otherwise disposing of
Collateral because an Event of Default has occurred; and (ii) the Lenders have
given notice of an acceleration of all of the obligations owed to either Lender;
(a) if the Officer is still employed by the Borrower, the Borrower
will, upon the Lenders' request, cause the Officer so long as he is
employed by the Borrower, to exert his best efforts and devote reasonable
working hours, and in any event not less than 20 hours per week, to obtain
sales of the Collateral at the best commercially
<PAGE>
obtainable prices and terms and to collect the Accounts at their full face
value to the extent commercially reasonable; and
(b) if the Officer ceases to be employed by the Borrower or has
ceased to be employed by the Borrower, at the Lenders' option and upon the
Lenders' request, the Officer shall assist the Lenders as the Lenders'
independent contractor, for a period not to exceed six months, for the
sole purpose of disposing of the Collateral and collecting the Accounts,
or assisting the Lenders in disposing of the Collateral and collecting the
Accounts. During the period of such employment the Officer shall exert his
best efforts and devote reasonable working hours, and in any event not
less than 20 hours per week, to obtain sales of the Collateral at the best
commercially obtainable prices and terms and to collect the Accounts at
their full face value.
3. Lenders' Right to Terminate Officer's Employment. The Lenders shall
have the right to terminate the Officer's employment or other assistance
described in Paragraph 2 hereof at any time on 90 days' notice, for any cause or
without cause.
4. Officer's Compensation. The Officer's sole compensation for any
employment or assistance rendered pursuant to Paragraph 2 hereof shall be a
weekly salary paid at the same rate as the average total cash compensation (on a
weekly basis) paid to such person by the Borrower in the twelve (12) months
immediately preceding the commencement of such employment or activities. Such
compensation shall be prorated for partial weeks of service.
5. Officer Shall Not Bind Lenders. In connection with such employment, the
Officer shall not have any authority to bind the Lenders, except such specific
authority as the Lenders may grant in writing.
6. Lenders' Remedies Against Officer; Liquidated Damages. Until
termination pursuant to Paragraph 9, if the Officer fails to comply with the
provisions of Paragraph 2 hereof, unless such failure occurs as a result of
death or mental or physical incapacity, the Officer shall pay the Lenders an
amount equal to the lesser of (a) $50,000 or (b) the Officer's total cash
compensation for the most recently completed calendar year, as liquidated
damages, but not as a penalty, because of the difficulty of proving actual
damages for the breach of promises of the type contained herein. Such liquidated
damages shall be immediately due and payable upon the Officer's failure to
comply with the provisions of Paragraph 2 above. In addition, the Officer shall
be liable for the Lenders' costs and expenses (including reasonable attorneys'
fees and legal expenses) incurred in enforcing the liquidated damages provision.
In any event, however, the Officer shall not be liable for more than the
Lenders' actual damages (excluding consequential and punitive damages), plus the
Lenders' costs of enforcement of this Agreement.
<PAGE>
7. Officer Remains Liable for Fraud and Misrepresentation. Notwithstanding
paragraph 9 hereof, the Officer shall hold the Lenders harmless for any actual
loss, cost, expense, claim and damage (including any reasonable attorney fees
but excluding consequential and punitive damages) arising out of fraud or
misrepresentation made by the Borrower or its agents with respect to the
Collateral or the Borrower's financial statements while the Officer is employed
by the Borrower or the Lenders. This paragraph 7 shall remain in full force and
effect so long as any obligations owed to either Lender remain outstanding or
until otherwise agreed by an amendment to this Agreement signed by the Lenders,
the Borrower and the Officer.
8. Borrower to Find Replacement for Officer. If the Officer dies, becomes
mentally or physically incapacitated, or ceases to be employed by either Lender,
the Borrower shall obtain a replacement for the Officer and the Borrower shall
use its best efforts to cause such replacement to execute a support agreement
substantially in the form of this Agreement.
9. Termination of Officer's Obligations. This Agreement shall remain in
full force and effect until
(a) the Credit Agreement is no longer outstanding and all
obligations owed to either Lender have been paid in full; or
(b) the Officer shall have ceased to be employed by the Borrower for
more than thirty (30) business days before the occurrence of the events
described in clauses (i) and (ii) of Paragraph 2 hereof, and shall have
given notice of such cessation of employment to the Lenders at least
thirty (30) business days before the occurrence of such events.
10. Miscellaneous. The provisions of this Agreement are declared to
be severable. If any provision of this Agreement shall be held to be
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement.
The Officer and the Borrower waive notice of the Lenders' acceptance
hereof.
<PAGE>
11. Governing Law; Waiver of Jury Trial. This Agreement shall be
governed by and construed in accordance with the substantive laws (other
than conflict laws) of the State of Minnesota. THE PARTIES WAIVE ANY RIGHT
TO TRIAL BY JURY IN ANY CLAIM, COUNTERCLAIM, ACTION OR PROCEEDING BASED ON
OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the Officer and the Borrower have executed this
Agreement as of the date first written above.
RSI SYSTEMS, INC.
/s/ Donald C. Lies
- ------------------------------------
Donald C. Lies
By /s/ Donald C. Lies
--------------------------------
Donald C. Lies
Its President and
Chief Executive Officer
Accepted:
NORWEST BUSINESS CREDIT, INC.
By /s/ Roger A. Pfiffner
---------------------------------
Roger A. Pfiffner
Its Vice President
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Christopher A. Cudak
---------------------------------
Christopher A. Cudak
Its Vice President
<PAGE>
ACKNOWLEDGMENT OF OWNERSHIP
AND
WAIVER OF LIENS
(SUBCONTRACTOR)
June 25, 1997
TO: Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0085
Attention: Christopher A. Cudak
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Attention: Roger A. Pfiffner
Re: Goods Located At:
Altron Inc.
6700 Industry Avenue
Anoka, MN 55303-4595
To induce you, Norwest Bank Minnesota, National Association and Norwest
Business Credit, Inc., at any time or from time to time to make loans or extend
financial accommodations to RSI Systems, Inc., a Minnesota corporation (the
"Owner"), and in consideration thereof, the undersigned, Altron, Inc. (the
"Subcontractor") hereby confirms and agrees that:
1. Receipt of Goods; Notice of Security Interest. The Subcontractor has
received, and may from time to time hereafter receive, possession of goods and
inventory (the "Goods") including (without limitation):
Parts and Components for production of ERIS and Video flyer,
fixture to test the same.
The Goods are owned by the Owner. The Subcontractor acknowledges receipt of
notice that each of you have a security interest in the Goods.
2. Waiver of Subcontractor's Liens. The Owner has delivered and may in the
future deliver the Goods to the Subcontractor solely to facilitate the
Subcontractor's manufacture of certain products that the Owner may order from
the Subcontractor from time
<PAGE>
to time. The Goods are not for sale by the Subcontractor and will continue to be
owned solely and exclusively by the Owner, subject to your security interest,
and the Subcontractor does not and shall not have any interest therein or lien
or claim thereon. Without limiting the generality of the foregoing, the
Subcontractor specifically waives and releases all present and future liens,
claims and charges arising out of any improvement, repair, carriage, storage or
service to the Goods provided by the Subcontractor and each and all other
security interests, liens, claims and charges now or at any time hereafter
available to the Subcontractor with respect to the Goods.
3. Limited Use of Goods; Covenant Not to Transfer Interest. The
Subcontractor will use the Goods solely to manufacture products to be delivered
to the Owner from time to time pursuant to purchase orders submitted to the
Subcontractor by the Owner. The Subcontractor will not use the Goods to
manufacture any other product or for any other purpose. The Subcontractor has no
right to, and will not sell, lease, create security interests in or otherwise
transfer or encumber any of the Goods. If in the course of manufacturing such
products the Subcontractor improves or makes accessions to the Goods, or
incorporates the Goods in any other goods, the Owner shall continue to own the
Goods so improved or to which accessions are made and the goods or products in
which the Goods may be incorporated, as the case may be, subject only to your
security interest therein.
4. Identification of Goods; Financing Statements. The Subcontractor will
assure that the Goods are at all times readily identifiable and will not mix or
commingle any Goods with any property of the Subcontractor or any other person.
The Subcontractor will assure that the Goods are marked as property of the Owner
in any manner reasonably requested by the Owner or by you at any time or from
time to time. If requested by the Owner or by you, the Subcontractor will sign
financing statements under the Uniform Commercial Code describing the Goods, but
such financing statements shall not be construed as evidence of an intention
that the Subcontractor owns any interest in the Goods and, if filed, will be
filed merely to make the Owner's ownership a matter of public record.
5. Safekeeping; Inspection. The Goods will be kept only at the address set
forth above. The Subcontractor will exercise reasonable care in storing,
processing or using the Goods and will maintain the Goods in good condition,
reasonable wear and tear excepted. Either or both of you may inspect the Goods
at any time and from time to time during business hours.
6. Return Goods Upon Direction. The Subcontractor acknowledges that it may
keep and use the Goods solely at the sufferance of the Owner and you. Either the
Owner or either of you may at any time require the Subcontractor to return the
Goods by written notice given, mailed or telecopied to the Subcontractor at its
mailing address or telecopier number stated below, and the Subcontractor will
deliver the Goods as directed in such notice immediately upon receipt of such
notice; provided, however, that the Owner's right to the return or delivery of
the Goods shall terminate upon notice from Norwest Business Credit, Inc. to the
Subcontractor pursuant to paragraph 7 hereof. Such delivery shall not affect
<PAGE>
whatever right the Subcontractor may otherwise have to make and enforce an
unsecured claim against the Owner (but not against you) for any work performed
with respect to the Goods prior to receipt of such notice.
7. Notice Not to Deliver Goods to Owner. At all times after your written
or oral notice given, mailed or telecopied to the Subcontractor at the mailing
address, telecopier number or telephone number stated below, the Subcontractor
shall refuse to release the Goods to or upon the instructions of the Owner or
any other person except you.
8. No Responsibility for Owner's Debts. Both of you are interested in the
Goods solely as secured parties holding security interests therein, and neither
of you shall be responsible for any debts, liabilities or obligations of the
Owner or for any improvements, repairs, carriage, storage, or services which the
Subcontractor may provide to the Goods.
9. Miscellaneous. This Acknowledgment is binding upon the Subcontractor
and the heirs, representatives, successors and assigns of the Subcontractor, and
may be enforced, without further act or notice of acceptance, by either of you
and your participants, successors and assigns. The agreements herein shall be
governed by and construed in accordance with the substantive laws (other than
conflict laws) of the State of Minnesota. Each party consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Acknowledgment waives any
argument that venue in any such forum is not convenient, and agrees that any
litigation initiated by any of them in connection with this Acknowledgment shall
be venued in either the District Court of Hennepin County, Minnesota, or the
United States District Court, District of Minnesota, Fourth Division. THE
PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR
PERTAINING TO THIS ACKNOWLEDGMENT.
ALTRON INC.
By /s/ Alan C. Phillips
--------------------------------
Its President
Mailing Address: Altron Inc.
6700 Industry Ave. NW
Anoka, Minnesota 55303
Telecopier No.: (612) 427-3980
Telephone No.: (612) 427-7735
OWNER'S CONSENT
RSI Systems, Inc., a Minnesota corporation, the Owner identified in the
foregoing Acknowledgment, hereby consents to all of the terms and provisions
therein and agrees that the Subcontractor shall have no liability to the Owner
if it complies with the instructions of Norwest Bank Minnesota, National
Association and/or Norwest Business
<PAGE>
Credit, Inc. described therein. The Owner further agrees that it will continue
to pay all fees and other expenses related to the improvement, repair, storage,
carriage or service of the Goods and will reimburse the Subcontractor for all
reasonable costs and expenses incurred as a direct result of its compliance with
the terms and provisions of the foregoing Acknowledgment. In addition, the Owner
agrees that any payments the Lenders may make to the Subcontractor pursuant to
this Acknowledgment shall constitute additional Obligations under the Credit and
Security Agreements.
RSI SYSTEMS, INC.
By /s/ Donald C. Lies
--------------------------------
Donald C. Lies
Its President and
Chief Executive Officer
Accepted on June 26, 1997
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Christopher A. Cudak
--------------------------------
Christopher A. Cudak
Its Vice President
NORWEST BUSINESS CREDIT, INC.
By /s/ Roger A. Pfiffner
--------------------------------
Roger A. Pfiffner
Its Vice President
<PAGE>
REVOLVING NOTE
$500,000
Minneapolis, Minnesota
June 26, 1997
For value received, the undersigned, RSI SYSTEMS, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND, and if
demand is not sooner made, then as provided in the Credit Agreement (defined
below) to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national
banking association (the "Lender"), at its main office in Minneapolis,
Minnesota, or at any other place designated at any time by the holder hereof, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Five Hundred Thousand Dollars ($500,000) or, if less, the
aggregate unpaid principal amount of all Advances made by the Lender to the
Borrower under the Credit and Security Agreement of even date herewith by and
between the Lender and the Borrower (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") together
with interest on the principal amount hereunder remaining unpaid from time to
time (computed on the basis of actual days elapsed in a 360-day year) from the
date of the initial Advance until this Note is fully paid at the rate from time
to time in effect under the Credit Agreement.
This Note is the Revolving Note as defined in the Credit
Agreement and is subject to the Credit Agreement.
RSI SYSTEMS, INC.
By
---------------------------------
Donald C. Lies
Its President and Chief Executive
Officer
<PAGE>
CREDIT AND SECURITY AGREEMENT
(Eximbank Guaranteed Loan No. AP072433XX)
Dated as of June 26, 1997
RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"),
and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender"), hereby agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
"Accounts" means the aggregate unpaid obligations of customers
and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open
account or deferred payment basis, whether now existing or hereafter
arising.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any subsidiary of the Borrower. For purposes of
this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as
amended, supplemented and restated from time to time.
"Availability" means the Borrowing Base less the outstanding
principal balance of the Revolving Advances.
"Base Rate" means the rate of interest publicly announced from
time to time by the Lender as its "base rate" or, if such bank ceases
to announce a rate so designated, any similar successor rate designated
by the Lender.
"Book Net Worth" means the aggregate of the common and
preferred stockholders' equity of the Borrower, determined in
accordance with GAAP.
<PAGE>
"Borrower Agreement" means the Borrower Agreement of even date
herewith by and between the Borrower and the Lender in the form
attached hereto as Exhibit B.
"Borrowing Base" means, at any time and subject to change from
time to time in the Lender's sole discretion, the least of
(a) the Maximum Line; or
(b) the difference of $1,000,000 and the NBCI Revolving
Advances; or
(c) the sum of:
(i) 80% of Eligible Foreign Accounts; and
(ii) 60% of Eligible Export Inventory;
provided, however, that the Lender and/or the Servicer may, in their
sole discretion, establish reserves for fees which have become or may
become due pursuant to any or all of the Borrower's license agreements
with licensor's with whom the Lender has not entered into a License
Acknowledgment and Agreement, in form and substance acceptable to the
Lender.
"Borrowing Base Certificate" means a certificate,
substantially in the form attached hereto as Exhibit D, executed by the
Borrower and accepted by the Lender.
"Business Day" means any day on which the Federal Reserve Bank
of New York is open for business.
"Closing Date" means the date of this Agreement.
"Collateral" has the meaning given in Section 3.1.
"Collateral Account" has the meaning given in the Collateral
Account Agreement.
"Collateral Account Agreement" means the Collateral Account
Agreement by and among the Borrower, Norwest Bank International New
York Branch and the Lender of even date herewith, as the same may
hereafter be amended, supplemented or restated from time to time.
"Country Limitation Schedule" shall mean the most recent
schedule published by Eximbank and provided to the Borrower by the
Lender which sets forth on a country by country basis whether and under
what conditions Eximbank will provide coverage for the financing of
export transactions to countries listed therein.
"Credit Facility" means the discretionary credit facility made
available to the Borrower pursuant to Article II.
<PAGE>
"Debt" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet of that Person as at the date as of which Debt is to be
determined. For purposes of determining a Person's aggregate Debt at
any time, "Debt" shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the
first day of any month during which a Default or Event of Default has
occurred and ending on the date the Lender notifies the Borrower in
writing that such Default or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to three percent
(3%) over the Floating Rate, which rate shall change when and as the
Floating Rate changes.
"Eligible Export Inventory" means all Inventory consisting of
Items, raw materials and components to be used to manufacture or
assemble Items, and work-in-process relating to Items, and raw
materials and components the Borrower must purchase to manufacture or
assemble Items, at the lower of cost or market value as determined in
accordance with GAAP; provided, however, that the following shall not
in any event be deemed Eligible Export Inventory:
(i) Inventory that is: in-transit; located at any
warehouse or other premises not approved by the Lender in
writing; located outside of the states, or localities, as
applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such
Inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title;
on consignment from any Person; on consignment to any Person
or subject to any bailment;
(ii) Inventory consisting of proprietary software;
(iii) Inventory that is damaged, slow moving,
obsolete, returned, defective, recalled or unfit for further
processing or not currently saleable in the normal course of
the Borrower's operations;
(iv) Inventory that is perishable or live;
(v) Inventory that the Borrower has returned, has
attempted to return, is in the process of returning or intends
to return to the vendor thereof;
(vi) Inventory that is subject to a security interest
in favor of any Person other than the Lender or NBCI;
(vii) Sample or demonstration Inventory;
<PAGE>
(viii) Inventory which has been previously exported
from the US;
(ix) Inventory which constitutes defense articles or
defense services;
(x) Inventory consisting of or to be incorporated
into Items destined for shipment to a Prohibited Country;
(xi) The Foreign Content portion of Items containing
less than fifty percent (50%) US Content;
(xii) For Items containing at least fifty percent
(50%) US Content, any Foreign Content not incorporated into
such Items in the US;
(xiii) That portion of Inventory consisting of or to
be incorporated into Items whose sale would result in an
Account deemed ineligible under clauses (ii), (viii), (x), or
(xi) of the definition of "Eligible Foreign Accounts"; and
(xiv) Inventory otherwise deemed ineligible by the
Lender in its discretion.
"Eligible Foreign Accounts" means all Accounts owed by Account
debtors located outside the US for the sale or provision of Items,
except the following shall not in any event be deemed Eligible Foreign
Accounts:
(i) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer;
(ii) That portion of Accounts not providing for
payment in full within 180 days of shipment date;
(iii) That portion of Accounts (A) over 60 days past
the original due date, (B) over 90 days past the original due
date if insured through Eximbank export credit insurance for
comprehensive commercial and political risk or through an
Eximbank approved private insurer for comparable coverage, or
(C) or over 180 days past shipping date;
(iv) Accounts owed by a shareholder, Affiliate,
officer or employee of the Borrower;
(v) Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone
out of business;
(vi) Accounts not subject to a duly perfected
security interest in favor of the Lender or which are subject
to any lien, security interest or claim in favor of any Person
other than the Lender or NBCI;
(vii) That portion of Accounts that constitutes
finance charges, service charges or sales or excise taxes;
(viii) That portion of Accounts that is payable in a
currency other than US Dollars unless prior written approval
has been received from Eximbank;
<PAGE>
(ix) That portion of Accounts owed by military buyers
or for defense articles or services, except as may be approved
in writing by the Lender and Eximbank;
(x) That portion of Accounts due and collectible
outside the US;
(xi) That portion of Accounts owed by Account debtors
located in, or arising from sales of Items delivered to a
Prohibited Country;
(xii) That portion of Accounts, or portions thereof,
otherwise deemed uncollectible for any reason by the Lender or
Eximbank in its discretion.
"Event of Default" has the meaning specified in Section 7.1.
"Eximbank" means the Export-Import Bank of the United States.
"Export Order" means a bona fide written export order or
contract to purchase Items from the Borrower from a customer outside
the US.
"Floating Rate" means an annual rate equal to the sum of the
Base Rate plus four percent (4%), which annual rate shall change when
and as the Base Rate changes.
"Foreign Content" means that portion of the cost of an Item
arising from materials which are not of US origin or from labor and
services not performed in the US.
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied
on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.2.
"Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired.
"Items" means the goods and services to be sold by the
Borrower to customers located outside the US pursuant to Export Orders.
"Loan Documents" means this Agreement, the Note, the Borrower
Agreement, the Security Documents and the Disclosure by the Borrower in
favor of the Lender of even date herewith.
"Master Guaranty" means that certain Master Guaranty Agreement
No. MN-MGA-96-001, dated as of November 13, 1996, by and between the
Lender and Eximbank.
"Maturity Date" means June 25, 1998.
<PAGE>
"Maximum Line" means $500,000.
"Minimum Interest Charge" has the meaning given in Section
2.3(b).
"NBCI" means Norwest Business Credit, Inc., a Minnesota
corporation.
"NBCI Credit Agreement" means that certain Credit and Security
Agreement of even date herewith by and between the Borrower and NBCI,
as the same may hereafter be amended, supplemented or restated from
time to time.
"NBCI Credit Facility" means the credit facility extended to
the Borrower pursuant to the NBCI Credit Agreement.
"NBCI Revolving Advances" means the Revolving Advances as
defined in the NBCI Credit Agreement, or as the context requires, the
outstanding principal balance thereof.
"Note" means the Revolving Note.
"Obligations" means each and every debt, liability and
obligation of every type and description which the Borrower may now or
at any time hereafter owe to the Lender, including all indebtedness
arising under this Agreement, the Note or any other loan or credit
agreement or guaranty between the Borrower and the Lender, whether now
in effect or hereafter entered into.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender and
NBCI of even date herewith, as the same may hereafter be amended,
supplemented or restated from time to time.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Permitted Liens" means security interests, liens and
encumbrances acceptable to the Lender in its sole discretion including
without limitation those liens described on Exhibit E.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession.
"Prohibited Country" means any country in which Eximbank
coverage is not available for commercial reasons or in which Eximbank
is legally prohibited from doing business, as designated in the Country
Limitation Schedule.
"Revolving Advance" has the meaning given in Section 2.1.
<PAGE>
"Revolving Note" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form of
Exhibit A hereto.
"Security Documents" means this Agreement and the Patent and
Trademark Security Agreement, and the Collateral Account Agreement,
each of even date herewith and by and among the Borrower, the Lender
and Norwest Bank Minnesota, National Association.
"Security Interest" has the meaning given in Section 3.1.
"Servicer" means NBCI.
"Tangible Net Worth" means the difference between (i) the
tangible assets of the Borrower, which, in accordance with GAAP are
tangible assets, after deducting adequate reserves in each case where,
in accordance with GAAP, a reserve is proper and (ii) all Debt of the
Borrower; provided, however, that notwithstanding the foregoing in no
event shall there be included as such tangible assets patents,
trademarks, trade names, copyrights, licenses, goodwill, receivables
from Affiliates, directors, officers or employees, prepaid expenses,
deposits, deferred charges or treasury stock or any securities or Debt
of the Borrower or any other securities unless the same are readily
marketable in the US or entitled to be used as a credit against federal
income tax liabilities, non-compete agreements and any other assets
designated from time to time by the Lender, in its sole discretion.
"Termination Date" means the earliest of (i) the Maturity
Date, (ii) the date the Borrower terminates the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the State of Minnesota.
"US" means the United States of America.
"US Content" means that portion of the cost of an Item arising
from materials which are of US origin or from labor and services
performed in the US.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Revolving Advances. The Lender may, in its sole
discretion, make advances (each a "Revolving Advance") to the Borrower from time
to time from the date all of the conditions set forth in Section 4.1 are
satisfied (the "Funding Date") to the Termination Date, on the terms and subject
to the conditions herein set forth, to provide the Borrower with working capital
to fulfill Export Orders. The Lender shall not consider any request for a
<PAGE>
Revolving Advance to the extent that the amount of the requested Revolving
Advance exceeds Availability. The Borrower's obligation to pay the Revolving
Advances shall be evidenced by the Revolving Note and shall be secured by the
Collateral. Within the limits set forth in this Section 2.1, the Borrower may
request Revolving Advances, prepay, and request additional Revolving Advances.
Section 2.2 Requests for Advances. The Borrower shall make
each request for a Revolving Advance to the Lender before 11:00 a.m.
(Minneapolis time) of the day of the requested Revolving Advance. Requests may
be made in writing or by telephone. The Lender will not consider any request for
a Revolving Advance unless the Lender has received from the Borrower, among
other things, a Borrowing Base Certificate as of a date not more than five (5)
Business Days before the date of the requested Advance and copies of the Export
Orders (or a summary thereof) against which the Borrower is requesting such
Advance. Whenever the Borrower makes a request for an Advance based on Eligible
Export Inventory, it shall also indicate in its books and records that such
Inventory has been designated to fulfill an Export Order and shall no longer be
considered Eligible Inventory under the NBCI Credit Facility. Any request for an
Advance shall be deemed to be a representation by the Borrower that the
conditions set forth in Section 4.2 have been satisfied as of the date of the
request.
Section 2.3 Interest; Minimum Interest Charge; Default
Interest. All interest shall be payable monthly in arrears on the first day of
the month and on demand.
(a) REVOLVING NOTE. Except as set forth in subsection (c) and
(d), the outstanding principal balance of the Advances shall bear
interest at the Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest
payable pursuant to subsections (a) and (c), the Borrower shall pay to
the Lender interest of not less than $56,000 per calendar year during
the term of this Agreement (prorated for less than a full year), and
the Borrower shall pay any deficiency between such minimum interest
charge and the amount of interest otherwise calculated under Sections
(a) and (c) in arrears on the first day of the following calendar year,
provided that the sum of the Minimum Interest Charge and the Minimum
Interest Charge under the NBCI Credit Facility shall not exceed $56,000
per calendar year.
(c) DEFAULT INTEREST RATE. At any time during any Default
Period, in the Lender's sole discretion and without waiving any of its
other rights and remedies, the principal of the Advances outstanding
from time to time shall bear interest at the Default Rate, effective
for any periods designated by the Lender from time to time during that
Default Period.
(d) USURY. In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law.
<PAGE>
Section 2.4 Fees.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable origination fee of $5,000, due
and payable upon the execution of this Agreement, provided that the sum
of this fee and the origination fee under the NBCI Credit Facility
shall not exceed $10,000.
(b) FACILITY FEES. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable facility fee equal to one
percent (1.00%) of the Maximum Line, due and payable upon the execution
of this Agreement. In addition, if the Credit Facility is renewed the
Borrower shall pay the Lender a fee equal to one percent (1.00%) of the
Maximum Line, due and payable 60 days in advance of the Maturity Date.
(c) AUDIT FEES. The Borrower hereby agrees to pay the Lender,
on demand, audit fees in connection with any audits or inspections
conducted by the Lender of any Collateral or the Borrower's operations
or business at the rates established from time to time by the Lender as
its audit fees (which fees are currently $62.50 per hour per auditor),
together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection; provided that so long as NBCI
is the Servicer the Borrower shall not have to reimburse such costs and
expenses to the extent it has already done so pursuant to the NBCI
Credit Facility.
Section 2.5 Discretionary Nature of Credit Facility. THE
LENDER MAY AT ANY TIME AND FOR ANY REASON REFUSE TO MAKE AN ADVANCE AND/OR
DEMAND PAYMENT OF THE ADVANCES AND TERMINATE THIS AGREEMENT WHETHER BORROWER IS
OR IS NOT IN COMPLIANCE WITH THIS AGREEMENT. The Lender need not show that an
adverse change has occurred in the Borrower's condition, financial or otherwise,
in order to refuse to make any requested Advance or to demand payment of the
Advances. Unless terminated by the Lender at any time or by the Borrower
pursuant to Section 2.6, this Agreement shall remain in effect until the
Maturity Date.
Section 2.6 Termination by Borrower. The Borrower may
terminate this Agreement at any time and, subject to payment and performance of
all Obligations, may obtain any release or termination of the Security Interest
to which the Borrower is otherwise entitled by law by: (i) giving at least 30
days' prior written notice to the Lender of the Borrower's intention to
terminate this Agreement, and (ii) terminating the NBCI Credit Agreement
pursuant to the terms thereof.
Section 2.7 Mandatory Prepayment. Without notice or demand, if
the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving
Advances to the extent necessary to eliminate such excess.
<PAGE>
Section 2.8 Advances Without Request. The Borrower hereby
authorizes the Lender, in its discretion, at any time or from time to time
without the Borrower's request, to make Revolving Advances to pay accrued
interest, fees, uncollected items that have been applied to the Obligations, and
other Obligations due and payable from time to time.
Section 2.9 Use of Proceeds. The Borrower shall use the
proceeds of Advances for working capital to finance the manufacture, assembly,
production or purchase and subsequent sale of Items only. Without limiting the
generality of the foregoing, the Borrower shall not use any proceeds of Advances
for any purpose prohibited by the Borrower Agreement or (i) to acquire fixed
assets or capital goods for use in the Borrower's business; (ii) to acquire,
equip or rent commercial space overseas; (iii) to employ non-US residents in
offices outside the US; (iv) to serve as a retainage or warranty bond; or (v) to
repay pre-existing Debt or future indebtedness of the Borrower unrelated to the
Advances.
Section 2.10 Facility Subject to Eximbank Rules. The Borrower
acknowledges that the Lender is willing to make the Credit Facility available to
the Borrower because the Eximbank is willing to guaranty payment of a
significant portion of the Obligations pursuant to the Master Guaranty.
Accordingly, in the event of any inconsistency among the Loan Documents and the
Master Guaranty or related documents, the provision that is the more stringent
on the Borrower shall control.
ARTICLE III
Security Interest
Section 3.1 Grant of Security Interest. The Borrower hereby
grants to the Lender a security interest (the "Security Interest") in the
following collateral (the "Collateral"), as security for the payment and
performance of the Obligations:
INVENTORY: All inventory of the Borrower, as such term is defined in
the UCC, whether now owned or hereafter acquired, whether consisting of
whole goods, spare parts or components, supplies or materials, whether
acquired, held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located;
ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of the
Borrower to the payment of money, whether such right to payment now
exists or hereafter arises, whether such right to payment arises out of
a sale, lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other Person who subsequently
transfers such Person's interest to the Borrower, whether such right to
payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with
<PAGE>
all other rights and interests (including all liens and security
interests) which the Borrower may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such
payment or against any property of such account debtor or other
obligor; all including all of the Borrower's rights to payment in the
form of all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles;
EQUIPMENT: All of the Borrower's equipment, as such term is defined in
the UCC whether now or hereafter owned, including all present and
future machinery, vehicles, furniture, fixtures, manufacturing
equipment, shop equipment, office and recordkeeping equipment, parts,
tools, supplies, and including specifically the goods described in any
equipment schedule or list herewith or hereafter furnished to the
Lender by the Borrower;
GENERAL INTANGIBLES: All of the Borrower's general intangibles, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including all present and future contract rights, patents, patent
applications, copyrights, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Borrower's
name, and the goodwill of the Borrower's business; and
INVESTMENT PROPERTY: All of the Borrower's investment property, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all securities, security entitlements,
securities accounts, commodity contracts, commodity accounts, stocks,
bonds, mutual fund shares, money market shares and U.S. Government
securities;
together with all substitutions and replacements for and products of
any of the foregoing property and together with proceeds of any and all
of the foregoing property and, in the case of all tangible property,
together with all accessions and together with (i) all accessories,
attachments, parts, equipment and repairs now or hereafter attached or
affixed to or used in connection with any such goods, and (ii) all
warehouse receipts, bills of lading and other documents of title now or
hereafter covering such goods.
Section 3.2 Notification of Account Debtors and Other
Obligors. The Lender may at any time (either before or after the occurrence of
an Event of Default) notify any account debtor or other Person obligated to pay
the amount due that such right to payment has been assigned or transferred to
the Lender for security and shall be paid directly to the Lender. The Borrower
will join in giving such notice if the Lender so requests. At any time after the
Borrower or the Lender gives such notice to an account debtor or other obligor,
the Lender may, but need not, as the Borrower's agent and attorney-in-fact,
notify the US Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the
<PAGE>
Lender, otherwise intercept the Borrower's mail, and receive, open and dispose
of the Borrower's mail, applying all Collateral as permitted under this
Agreement and holding all other mail for the Borrower's account or forwarding
such mail to the Borrower's last known address.
Section 3.3 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of each premises where Borrower conducts its
business and has any rights of possession (the "Premises") at any time
during any Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender in good faith considers related.
(c) The Lender's right to hold the Premises shall terminate
upon the earlier of payment in full of all Obligations and termination
of the Commitment, or final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession or use of any of the
Premises; provided, however, that if the Lender does pay or account for
any rent or other compensation for the possession or use of any of the
Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof.
Section 3.4 License. Without limiting the generality of the
Patent and Trademark Security Agreement, the Borrower hereby grants to the
Lender a non-exclusive, worldwide and royalty-free license to use, sub-license
or otherwise exploit all trademarks, franchises, trade names, copyrights and
patents of the Borrower for the purpose of selling, leasing or otherwise
disposing of any or all Collateral following an Event of Default.
Section 3.5 Filing a Copy. A carbon, photographic, or other
reproduction of this Agreement or of a financing statement signed by Borrower is
sufficient as a financing statement.
ARTICLE IV
Conditions of Lending
Section 4.1 Conditions Precedent to Lender's Willingness to
Consider Making the Initial Revolving Advance. The Lender's willingness to
consider making the initial Revolving Advance hereunder shall be subject to the
condition precedent that the Lender shall have received all of the following,
each in form and substance satisfactory to the Lender:
<PAGE>
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) The SBA/Eximbank Joint Application, properly completed and
executed by the Borrower.
(d) The Borrower Agreement, properly executed by the Borrower.
(e) A properly completed and executed Borrowing Base
Certificate as of a date not more than five (5) Business Days before
the date of this Agreement.
(f) An Exceptions Approval Letter, properly signed by
Eximbank.
(g) A participation and servicing agreement, properly signed
by the Servicer.
(h) Copies of the Borrower's audited financial statements with
full disclosure for the last three (3) fiscal years.
(i) Copies of the Borrower's federal tax returns for the last
year together with all schedules thereto.
(j) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease in favor of the
Lender and NBCI.
(k) A true and correct copy of any and all agreements pursuant
to which the Borrower's property is in the possession of any Person
other than the Borrower, together with, in the case of any goods held
by such Person for resale, (i) a consignee's acknowledgment and waiver
of liens, (ii) UCC financing statements sufficient to protect the
Borrower's and the Lender's interests in such goods, and (iii) UCC
searches showing that no other secured party has filed a financing
statement against such Person and covering property similar to the
Borrower's other than the Borrower, or if there exists any such secured
party, evidence that each such secured party has received notice from
the Borrower and the Lender sufficient to protect the Borrower's and
the Lender's interests in the Borrower's goods from any claim by such
secured party.
(l) An acknowledgment and waiver of liens from each warehouse
in which the Borrower is storing Inventory in favor of the Lender and
NBCI.
(m) A true and correct copy of any and all agreements pursuant
to which the Borrower's property is in the possession of any Person
other than the Borrower, together with, (i) an acknowledgment and
waiver of liens from each subcontractor
<PAGE>
who has possession of the Borrower's goods from time to time, (ii) UCC
financing statements sufficient to protect the Borrower's and the
Lender's interests in such goods, and (iii) UCC searches showing that
no other secured party has filed a financing statement covering such
Person's property other than the Borrower, or if there exists any such
secured party, evidence that each such secured party has received
notice from the Borrower and the Lender sufficient to protect the
Borrower's and the Lender's interests in the Borrower's goods from any
claim by such secured party.
(n) An acknowledgment and agreement from each licensor in
favor of the Lender, together with a true, correct and complete copy of
all license agreements in favor of the Lender and NBCI.
(o) The Collateral Account Agreement, properly executed by the
Borrower.
(p) The Patent and Trademark Security Agreement, properly
executed by the Borrower.
(q) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in
effect against the Borrower, (ii) no financing statements or
assignments of patents, trademarks or copyrights have been filed and
remain in effect against the Borrower except those financing statements
and assignments of patents, trademarks or copyrights relating to
Permitted Liens or to liens held by Persons who have agreed in writing
that upon receipt of proceeds of the Advances, they will deliver UCC
releases and/or terminations and releases of such assignments of
patents, trademarks or copyrights satisfactory to the Lender, and (iii)
the Lender has duly filed all financing statements necessary to perfect
the Security Interest, to the extent the Security Interest is capable
of being perfected by filing.
(r) A certificate of the Borrower's secretary or assistant
secretary certifying as to (i) the resolutions of the Borrower's
directors and, if required, shareholders, authorizing the execution,
delivery and performance of the Loan Documents, (ii) the Borrower's
articles of incorporation and bylaws, and (iii) the signatures of the
Borrower's officers or agents authorized to execute and deliver the
Loan Documents and other instruments, agreements and certificates,
including Advance requests, on the Borrower's behalf.
(s) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(t) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary.
<PAGE>
(u) A certificate of an officer of the Borrower confirming, in
his personal capacity, the representations and warranties set forth in
the Disclosure by the Borrower of even date herewith.
(v) A support agreement in favor of the Lender and NBCI,
properly executed by Donald C. Lies, the Borrower's President and Chief
Executive Officer, in his personal capacity.
(w) An opinion of counsel to the Borrower, addressed to the
Lender.
(x) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(y) Payment of the fees and commissions due through the date
of the initial Advance and expenses incurred by the Lender through such
date and required to be paid by the Borrower under Section 8.3,
including all legal expenses incurred through the Closing Date.
(z) Such other documents as the Lender in its sole discretion
may require.
Section 4.2 Conditions Precedent to All Advances. The Lender
will not consider any request for an Advance unless on such date:
(a) the representations and warranties contained in Article V
are correct on and as of the date of such Advance as though made on and
as of such date, except to the extent that such representations and
warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result
from such Advance which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Name; Locations; Tax ID No.; Subsidiaries. During
its existence, the Borrower has done business solely under its corporate name as
set forth herein and under such trade names and such other corporate names as
disclosed to Lender in writing before this Agreement is signed and delivered.
The address of Borrower's chief executive office and principal place of business
and its federal tax identification number are set forth below its signature to
this Agreement. All Inventory is located at that location or at one of the other
locations disclosed to Lender in writing before this Agreement is signed and
delivered. The
<PAGE>
Borrower has no subsidiaries except as disclosed to Lender in writing before
this Agreement is signed and delivered.
Section 5.2 Financial Condition; No Adverse Change. Before
this Agreement was signed and delivered, the Borrower furnished the Lender its
audited financial statements for its fiscal year ended June 30, 1996 and its
unaudited financial statements for the fiscal year to day ending March 31, 1997,
each certified by the Borrower. Those statements fairly present the Borrower's
financial condition as of the dates indicated therein and the results of its
operations for the periods then ended and were prepared in accordance with GAAP.
Since the date of the most recent financial statements, there has been no
material adverse change in the business, properties or condition (financial or
otherwise) of the Borrower.
Section 5.3. Suspension and Debarment, etc. On the date of
this Agreement neither the Borrower nor any of its Principals (as defined below)
are (A) debarred, suspended, proposed for debarment with a final determination
skill pending, declared ineligible or voluntarily excluded (as such terms are
defined under any of the Debarment Regulations referred to below) from
participating in procurement or nonprocurement transactions with any US federal
government department or agency pursuant to any of the Debarment Regulations (as
defined below) or (B) indicted, convicted or had a civil judgment rendered
against the Borrower or any of its Principals for any of the offenses listed in
any of the Debarment Regulations. Unless authorized by Eximbank, the Borrower
will not knowingly enter into any transactions in connection with the Items with
any person who is debarred, suspended, declared ineligible or voluntarily
excluded from participation in procurement or nonprocurement transactions with
any US federal government department or agency pursuant to any of the Debarment
Regulations. The Borrower will provide immediate written notice to the Lender if
at any time it learns that the certification set forth in this Section 5.3 was
erroneous when made or has become erroneous by reason of changed circumstances.
For the purposes hereof, (1) "Principals" shall mean any officer, director,
owner, partner, key employee, or other person with primary management or
supervisory responsibilities with respect to the Borrower; or any other person
(whether or not an employee) who has critical influence on or substantive
control over the transaction covered by this Agreement and (2) the Debarment
Regulations shall mean (x) the Government wide Debarment and Suspension
(Nonprocurement) regulations (Common Rule), 53 Fed. Reg. 19204 (May 26, 1988),
(y) Subpart 9.4 (Debarment, Suspension and Ineligibility) of the Federal
Acquisition Regulations, 48 C.F.R. 9.400-9.409 and (z) the revised Government
wide Debarment and Suspension (Nonprocurement) regulations (Common Rule), 60
Fed. Reg. 33037 (June 26, 1995). The Borrower acknowledges that any statement,
certification or representation made by it in connection with the Credit
Facility is subject to the penalties provided in Article 18 U.S.C. Section 1001.
<PAGE>
ARTICLE VI
Covenants of the Borrower
So long as the Advances or any amount owing to Lender
hereunder shall remain unpaid, the Borrower will comply with the requirements in
this Article, unless the Lender shall otherwise consent in writing.
Section 6.1 Reporting Requirements. The Borrower will deliver
to the Lender each of the following in form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, the Borrower's
audited financial statements prepared in accordance with GAAP; together
with (i) copies of all management letters prepared by such
accountants; (ii) a report signed by such accountants stating that in
making the investigations necessary for said opinion they obtained no
knowledge, except as specifically stated, of any Default or Event of
Default hereunder and all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Section 6.8 and (iii) a
certificate of the Borrower's chief financial officer stating that such
financial statements have been prepared in accordance with GAAP, that
they fairly present the Borrower's financial condition and the results
of its operations, and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so,
stating in reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within 20 days
after the end of each month, an unaudited/internal balance sheet and
statement of income and retained earnings of the Borrower as at the end
of and for such month and for the year to date period then ended,
prepared in accordance with GAAP, subject to year-end audit
adjustments; and accompanied by a certificate of the Borrower's chief
financial officer, substantially in the form of Exhibit C hereto
stating (i) that such financial statements have been prepared in
accordance with GAAP subject to year-end audit adjustments, and fairly
represent the Borrower's financial condition and the results of its
operations, (ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto, and (iii) all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the
Borrower is in compliance with the requirements set forth in Section
6.8;
(c) as soon as available and in any event within five (5)
Business Days after the end of each month, a properly completed
Borrowing Base Certificate as at the end of such month, signed by the
Borrower's chief financial officer;
<PAGE>
(d) as soon as available and in any event within five (5)
Business Days after the end of each month inventory certifications as
at the end of such month;
(e) within five (5) Business Days after the end of each month,
agings of the Borrower's accounts receivable and accounts payable and
an accounts receivable certification as of the end of such month;
(f) at least 30 days before the beginning of each fiscal year
of the Borrower, the projected balance sheets and income statements for
each month of such year, each in reasonable detail, representing the
Borrower's good faith projections and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as
the Lender may in its discretion require;
(g) as soon as available and in any event within 15 days of
receipt thereof, a copy of the checking account statement of the
Borrower as of the last day of each month from each bank with which
Borrower maintains a checking account, such statements to be provided
to the Lender directly by each such bank or by the Borrower with
respect to a bank that is unwilling to send them to the Lender;
(h) as soon as available and in any event within three (3)
days after they are due, copies of tax payments due and paid and
written notice of any and all taxes due but not paid;
(i) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
(j) promptly upon knowledge thereof, notice of any Items (and
the corresponding invoice amount) which are articles, services, or
related technical data that are listed on the United States Munitions
List (part 121 of title 22 of the Code of Federal Regulations);
(k) immediately after a proceeding in bankruptcy or an action
for debtor's relief is filed by, against, or on behalf of the Borrower;
(l) immediately after the Borrower fails to obtain the
dismissal or termination within thirty (30) calendar days of the
commencement of any proceeding or action referred to in (k) above; and
(m) immediately after the Borrower begins any procedure for
its dissolution or liquidation, or a procedure therefor has been
commenced against it.
<PAGE>
So long as the Servicer is actively servicing the Loan Documents on behalf of
the Lender as described in Section 8.2, the Borrower shall provide to the
Servicer all reports required under this Section 6.1.
Section 6.2 Inspection. Upon the Lender's request, the
Borrower will permit any officer, employee, attorney, agent or accountant for
the Lender to audit, review, make extracts from or copy any and all records of
the Borrower and to inspect the Collateral at all times during ordinary business
hours.
Section 6.3 Account Verification. The Lender may at any time
and from time to time send, or request the Borrower to send, requests for
verification of Accounts or notices of assignment to account debtors and other
obligors. The Borrower authorizes the Lender to verify Accounts as frequently as
daily and the Borrower understands the Lender intends to do so by telephone
and/or in writing.
Section 6.4 Account Debtors to Pay to Designated Account;
Pledge of Account. The Borrower shall instruct all of its Account debtors
located outside the US to make all payments for Items directly to the Collateral
Account.
Section 6.5 No Other Liens. The Borrower will keep all
Collateral free and clear of all security interests, liens and encumbrances
except the Security Interest, the Permitted Liens, purchase money security
interests in equipment, and other security interests approved by the Lender in
writing.
Section 6.6 Insurance. The Borrower will at all times keep all
tangible Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the Lender may reasonably request, with
a lender's loss payable clause in favor of Lender to the extent of its interest.
Section 6.7 Collateral Account. The Borrower has provided the
Lender with agreements regarding a collateral account in connection with the
collection of Accounts.
Section 6.8 Minimum Tangible Net Worth. The Borrower will
maintain its Tangible Net Worth, determined as at the end of each month, at an
amount not less than $350,000.
Section 6.9 No Sale or Transfer of Collateral and Other
Assets. The Borrower will not sell, lease, assign, transfer or otherwise dispose
of (i) the stock of any subsidiary, (ii) all or a substantial part of its
assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to anyone other than the sale of
Inventory in the ordinary course of business.
Section 6.10 Consolidation and Merger; Asset Acquisitions. The
Borrower will not consolidate with or merge into any Person, or permit any other
Person to merge into it, or
<PAGE>
acquire (in a transaction analogous in purpose or effect to a consolidation or
merger) all or substantially all the assets of any other Person.
Section 6.11 Place of Business; Name. The Borrower will not
change the location of its chief executive office or principal place of business
from that disclosed pursuant to Section 5.1. The Borrower will not permit any
tangible Collateral to be located in any state or area in which, in the event of
such location, a financing statement covering such Collateral would be required
to be, but has not in fact been, filed in order to perfect the Security
Interest. The Borrower will not change its name.
ARTICLE VII
Events of Default, Rights and Remedies
Section 7.1 Events of Default. Notwithstanding that the Lender
may demand immediate payment of the Obligations at any time, whether or not a
Default Period then exists, and without waiving or limiting in any respect the
Lender's right to so demand payment of the Obligations at any time, this
Agreement sets forth a non-exclusive list of certain critical events after the
occurrence of which the Lender expects that it would demand immediate payment of
the Obligations and exercise its remedies. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of the Obligations on demand or on
any portion of the Obligations that otherwise becomes due and payable;
(b) Any payment default shall occur under any agreement (other
than this Agreement) between the Borrower and the Lender, or the Lender
shall accelerate or demand payment of any obligations (other than
arising under this Agreement) owed to it by the Borrower, or the Lender
shall begin exercising its remedies against the Borrower;
(c) Any payment default shall occur under any agreement
between the Borrower and the Servicer, or the Servicer shall accelerate
or demand payment of any obligations owed to it by the Borrower, or the
Servicer shall begin exercising its remedies against the Borrower;
(d) Eximbank shall repudiate, purport to revoke or fail to
perform its obligations under the Master Guaranty;
(e) Any material litigation is commenced against the Borrower
and is not withdrawn within thirty (30) calendar days of filing;
(f) A petition shall be filed by or against the Borrower under
the United States Bankruptcy Code naming the Borrower as debtor;
<PAGE>
(g) The Borrower begins any procedure for its liquidation or
dissolution or any such procedure is commenced against it; or
(h) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in any Loan Document not
specifically addressed in this Section 7.1, which shall remain uncured
for 30 days after notice from the Lender.
Section 7.2 Rights and Remedies. As provided in Section 2.5,
the Lender may, at any time, refuse to make any requested Advance, demand
payment of the Advances or terminate the Credit Facility, whether or not a
Default Period then exists. In addition, during any Default Period, the Lender
may exercise any or all of the following rights and remedies:
(a) The Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which the Borrower hereby
expressly waives) and the right to sell, lease or otherwise dispose of
any or all of the Collateral, and in connection therewith, the Borrower
will on demand assemble the Collateral and make it available to the
Lender at a place to be designated by the Lender which is reasonably
convenient to both parties;
(b) The Lender may exercise any other rights and remedies
available to it by law or agreement.
The remedies provided hereunder are cumulative.
Section 7.3 Certain Notices. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 8.1) at least 10
calendar days before the date of intended disposition or other action.
ARTICLE VIII
Miscellaneous
Section 8.1 Addresses for Notices, Etc. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be (i)
personally delivered, (ii) sent by first class US mail, (iii) sent by overnight
courier of national reputation, or (iv) transmitted by telecopy, in each case
addressed or telecopied to the party to whom notice is being given at its
address or telecopy number as set forth below its signature to this Agreement.
<PAGE>
Section 8.2 Servicing of Credit Facility.
(a) The Lender has requested that the Servicer service and
enforce the Loan Documents, make all Advances and collect all
Obligations on the Lender's behalf and the Servicer has agreed to do
so. The Borrower acknowledges and accepts the Servicer's appointment as
such.
(b) The Servicer shall have no duties or responsibilities to
the Borrower hereunder, but only to the Lender. Neither the Servicer
nor any of its officers, directors, employees or agents shall be liable
for any action taken or omitted by them hereunder or in connection
herewith, unless caused by its or their willful misconduct. The
Servicer's duties shall be mechanical and administrative in nature;
nothing in this Agreement, express or implied, is intended to or shall
be so construed as to impose upon the Servicer any obligations with
respect to the Loan Documents except as expressly set forth herein. The
Borrower shall not in any way be construed to be a third party
beneficiary of any relationship between the Servicer and the Lender.
(c) The Servicer shall be entitled to rely, and shall be fully
protected in relying, upon any communication whether written or oral
believed by it to be genuine and correct and to have been signed, sent
or made by the proper Person, and, with respect to all legal matters
pertaining to this Agreement and its duties hereunder, upon advice of
counsel selected by it.
(d) The Borrower shall be entitled to rely upon any
communication whether written or oral sent or made by the Servicer for
and on behalf of the Lender with respect to all matters pertaining to
the Loan Documents and the Borrower's duties and obligations hereunder,
unless and until the Borrower receives written notice from the Lender
that the Servicer is no longer servicing this credit facility.
(e) The Servicer shall hold and be the custodian of the Loan
Documents on the Lender's behalf for so long as the Servicer is
servicing the Credit Facility.
Section 8.3 Costs and Expenses. The Borrower agrees to pay on
demand all costs and expenses (including legal fees) incurred by the Lender in
connection with the Loan Documents and any other document or agreement related
thereto, and the transactions contemplated hereby, including wire transfer and
ACH charges, the cost of credit reports, overadvance fees, the expense of any
auditors and fees and expenses in enforcing this Agreement.
Section 8.4 Indemnity. In addition to the payment of expenses
pursuant to Section 8.3, the Borrower agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and
<PAGE>
agents of the foregoing (the "Indemnitees") from and against any of the
following (collectively, "Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by
reason of the execution and delivery of this Agreement and the
other Loan Documents or the making of the Advances;
(ii) any and all liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any
kind or nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection
with any investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred
by or asserted against any such Indemnitee, in any manner
related to or arising out of or in connection with the making
of the Advances, this Agreement and the other Loan Documents
or the use or intended use of the proceeds of the Advances;
and
(iii) any claim, loss or damage to which any
Indemnitee may be subjected as a result of any violation of
any federal, state, local or other governmental statute,
regulation, law, or ordinance dealing with the protection of
human health and the environment.
If any investigative, judicial or administrative proceeding arising
from any of the foregoing is brought against any Indemnitee, then the Borrower
or counsel designated by the Borrower and satisfactory to the Indemnitee, will
resist and defend such action, suit or proceeding to the extent and in the
manner directed by the Indemnitee. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
foregoing undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The Borrower's obligation under this Section 8.4 shall survive the termination
of this Agreement and the discharge of the Borrower's other obligations
hereunder. If Eximbank makes payment of a claim to the Lender under the Master
Guaranty in connection with the Credit Facility, Eximbank shall be assigned all
the Lender's rights and remedies under the Loan Documents and may enforce any
such rights or remedies against the Borrower and the Collateral. Additionally,
the Borrower shall hold Eximbank harmless from agrees to indemnify it against
any and all liabilities, damages, claims, costs and losses incurred or suffered
by it resulting from (a) any materially incorrect certification or statement
knowingly made by or on behalf of the Borrower to Eximbank or the Lender in
connection with an Advance , this Agreement or any of the other Loan Documents
or (b) any breach by the Borrower of the terms and conditions of this Agreement
or any of the other Loan Documents.
<PAGE>
Section 8.5 Binding Effect; Assignment; Counterparts;
Exchanging Information. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Without limiting the Lender's right to share
information regarding the Borrower and its Affiliates with the Lender's
participants, accountants, lawyers and other advisors, the Lender, Norwest
Corporation, and all direct and indirect subsidiaries of Norwest Corporation,
may exchange any and all information they may have in their possession regarding
the Borrower and its Affiliates, and the Borrower waives any right of
confidentiality it may have with respect to such exchange of such information.
<PAGE>
Section 8.6 Governing Law; Jurisdiction, Venue; Waiver of
Jury Trial. This Agreement and the Note shall be governed by and construed in
accordance with the laws (other than conflict laws) of the State of Minnesota.
Each party consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement, waives any argument that venue in any such forum is not
convenient and agrees that any litigation initiated by any of them in connection
with this Agreement shall be venued in either the District Court of Hennepin
County, Minnesota located in Minneapolis, Minnesota, or the United States
District Court, District of Minnesota, Fourth Division. THE PARTIES WAIVE ANY
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO
THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first above written.
NORWEST BANK MINNESOTA, NATIONAL RSI SYSTEMS, INC.
ASSOCIATION
By /s/ Christopher A. Cudak By /s/ Donald C. Lies
----------------------------------- -----------------------------------
Christopher A. Cudak Donald C. Lies
Its Vice President Its President and Chief Executive
Officer
Address: Address:
Norwest Center 7400 Metro Blvd.
Sixth Street and Marquette Avenue Suite 475
Minneapolis, Minnesota 55479-0085 Edina, Minnesota 55439
Telecopy No. 612/667-2269 Telecopy No. (612) 896-3030
Federal Tax ID No. 41-1592157 Federal Tax I.D. No. 41-1767211
<PAGE>
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$500,000 Minneapolis, Minnesota
June 26, 1997
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay ON DEMAND, and if demand is
not sooner made, then as provided in the Credit Agreement (defined below) to the
order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of Five Hundred Thousand Dollars ($500,000) or, if less, the aggregate
unpaid principal amount of all Advances made by the Lender to the Borrower under
the Credit and Security Agreement of even date herewith by and between the
Lender and the Borrower (as the same may hereafter be amended, supplemented or
restated from time to time, the "Credit Agreement") together with interest on
the principal amount hereunder remaining unpaid from time to time (computed on
the basis of actual days elapsed in a 360-day year) from the date of the initial
Advance until this Note is fully paid at the rate from time to time in effect
under the Credit Agreement.
This Note is the Revolving Note as defined in the Credit Agreement and
is subject to the Credit Agreement.
RSI SYSTEMS, INC.
By _________________________________________
Donald C. Lies
Its President and Chief Executive Officer
<PAGE>
Exhibit B to Credit and
Security Agreement
EXPORT-IMPORT BANK OF THE UNITED STATES
WORKING CAPITAL GUARANTEE PROGRAM
BORROWER AGREEMENT
THIS BORROWER AGREEMENT (this "Agreement") is made and entered into by
RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"), and is acknowledged
by NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender").
RECITALS
A. The Lender shall make a loan (the "Loan") to the Borrower for the
purpose of providing the Borrower with pre-export working capital to finance the
manufacture, production or purchase and subsequent export sale of the Items (as
hereinafter defined).
B. The Loan shall be in a principal amount (the "Loan Amount") not to
exceed at any time outstanding the amount specified in Section (5)(A) of the
Loan Authorization Agreement between the Lender and the Export-Import Bank of
the United States ("Eximbank") which is attached hereto as Exhibit A and
incorporated herein as a part of this Agreement. If the Loan is being made
pursuant to the Lender's Delegated Authority from Eximbank, all references
herein to the Loan Authorization Agreement shall be deemed to be to the Loan
Authorization Notice provided to Eximbank and the Borrower by the Lender.
C. The Loan shall be evidenced by a valid and enforceable promissory
note payable by the Borrower to the order of the Lender (the "Note") and shall
be made pursuant to a written agreement related solely thereto between the
Borrower and the Lender (the "Loan Agreement").
D. A condition precedent to the making of the Loan by the Lender is
that Eximbank guarantee the payment of ninety percent (90%) of the Loan Amount
and all interest accrued thereon, subject to the terms and conditions of a
master guarantee agreement (the "Master Guarantee Agreement") between Eximbank
and the Lender.
E. In consideration for and as a condition precedent to the Lender's
making the Loan and Eximbank's entering into the Master Guarantee Agreement, the
Borrower shall execute this Agreement for the benefit of the Lender and
Eximbank.
<PAGE>
NOW, THEREFORE, the Borrower hereby agrees as follows:
ARTICLE I
DEFINITIONS
"Accounts Receivable" shall mean those trade accounts from the sale of
the Items due and payable to the Borrower in the United States and any notes,
drafts, letters of credit or insurance proceeds supporting payment thereof.
"Availability Date" shall mean the last date on which the Lender may
make a Disbursement as set forth in Section (10) of the Loan Authorization
Agreement or, if such date is not a Business Day, the next Business Day
thereafter.
"Borrowing Base" shall mean the Collateral Value as discounted by the
applicable Disbursement Rate(s).
"Borrowing Base Certificate" shall mean the certificate in form
provided by the Lender and executed by the Borrower setting forth the Borrowing
Base supporting one or more Disbursements.
"Business Day" shall mean any day on which the Federal Reserve Bank of
New York is open for business.
"Buyer" shall mean an entity which has entered into one or more Export
Orders with the Borrower.
"Closing Date" shall mean the date on which the Loan Documents are
executed by the Borrower.
"Collateral" shall mean the property of the Borrower in which the
Borrower has granted to the Lender a valid and enforceable security interest as
security for the payment of all principal and interest due under the Loan, and
which is identified in Section (6) of the Loan Authorization Agreement,
including all proceeds (cash and non-cash) thereof.
"Collateral Value" shall mean at any given time the value of all
Collateral against which Disbursements may be made as set forth in Section
(5)(C) of the Loan Authorization Agreement, valued according to GAAP.
"Country Limitation Schedule" shall mean the most recent schedule
published by Eximbank and provided to the Borrower by the Lender which sets
forth on a country by country basis whether and under what conditions Eximbank
will provide coverage for the financing of export transactions to countries
listed therein.
"Debarment Regulations" shall have the meaning set forth in Section
2.16.
<PAGE>
"Disbursed Amount" shall mean the aggregate outstanding amount of the
Disbursements.
"Disbursement" shall mean an advance of the Loan from the Lender to
the Borrower under the Loan Agreement.
"Disbursement Rate" shall mean the rate specified in Section (5)(C) of
the Loan Authorization Agreement for each category of Collateral.
"Dollars" or "$" shall mean the lawful money of the United States of
America.
"Export Order" shall mean a written export order or contract for the
purchase by the Buyer from the Borrower of any of the Items.
"GAAP" shall mean the generally accepted accounting principles issued
by the American Institute of Certified Public Accountants.
"Guarantor" shall mean each person or entity, if any, identified in
Section (3) of the Loan Authorization Agreement who shall guarantee (jointly and
severally if more than one) the Borrower's obligation to repay all amounts
outstanding under the Note.
"Inventory" shall mean the raw materials, work-in-process and finished
goods purchased or manufactured by the Borrower for resale and located in the
United States.
"Items" shall mean the finished goods or services which are intended
for export, as specified in Section (4)(A) of the Loan Authorization Agreement.
"Letter of Credit" shall mean an irrevocable letter of credit subject
to UCP 500, payable in the United States or at the issuing bank and issued
either: (i) for the benefit of the Borrower on behalf of a Buyer in connection
with the purchase of the Items; or (ii) for the benefit of United States
supplier(s) on behalf of the Borrower in connection with the purchase of goods
or services from the supplier by the Borrower, which purchase is in support of
the export sales financed under the Loan.
"Loan Documents" shall mean the Note, the Loan Agreement, this
Agreement and any other instrument, agreement or document previously,
simultaneously or hereafter executed by the Borrower or any Guarantors
evidencing, securing, guaranteeing or in connection with the Loan.
"Principals" shall have the meaning set forth in Section 2.16.
"Revolving Loan" shall mean a Loan under which amounts disbursed and
repaid may be disbursed on a continuous basis during the term of the Loan.
"Transaction Specific Loan" shall mean a Loan under which amounts
disbursed and repaid may not be disbursed again.
<PAGE>
"U.S." or "United States" shall mean the United States of America and
its territorial possessions.
"U.S. Content" shall mean with respect to any Item all the labor,
materials and services which are of U.S. origin or manufacture, and which are
incorporated into an Item in the United States
ARTICLE II
OBLIGATIONS OF THE BORROWER
Until payment in full of the Loan, the Borrower agrees to the
following:
Section 2.1 Use of Disbursements. The Borrower shall use Disbursements
only for the purpose of enabling the Borrower to finance the cost of
manufacturing, producing, purchasing or selling the Items. The Borrower may not
use Disbursements for the purpose of: (a) servicing any of the Borrower's
pre-existing or future indebtedness unrelated to the Loan; (b) acquiring fixed
assets or capital goods for use in the Borrower's business; (c) acquiring,
equipping or renting commercial space outside of the United States; (d) paying
the salaries of non-U.S. citizens or non-U.S. permanent residents who are
located in offices outside the United States; or (e) serving as a retainage or
warranty bond.
In addition, Disbursements may not be used to finance the manufacture,
purchase or sale of any of the following:
(a) Items to be sold to a Buyer located in a country in which Eximbank
is legally prohibited from doing business as designated in the Country
Limitation Schedule;
(b) that part of the cost of the Items which is not U.S. Content
unless such part is not greater than fifty percent (50%) of the cost of the
Items and is incorporated into the Items in the United States;
(c) defense articles or defense services; or
(d) without Eximbank's prior written consent, any Items to be used in
the construction, alteration, operation or maintenance of nuclear power,
enrichment, reprocessing, research or heavy water Production facilities.
Section 2.2 Borrowing Base Certificates and Export Orders. In order to
receive a Disbursement under the Loan, the Borrower shall deliver to the Lender
a Borrowing Base Certificate current within the past five (5) Business Days and
a copy of the Export Order(s) (or, for Revolving Loans, if permitted by the
Lender, a written summary of the Export Orders) against which the Borrower is
requesting a Disbursement. If the Lender permits summaries of Export Orders, the
Borrower shall also deliver promptly to the Lender copies of any Export Orders
requested by the Lender. Additionally, the Borrower shall deliver to the Lender
at least
<PAGE>
once every thirty (30) calendar days a Borrowing Base Certificate current within
the past five (5) Business Days, which requirement may be satisfied by
submission of a Borrowing Base Certificate when requesting a Disbursement.
Section 2.3 Exclusions from the Borrowing Base. In determining the
amount of a requested Disbursement, the Borrower shall exclude from the
Borrowing Base the following:
(a) any Inventory which is not located in the United States;
(b) any demonstration Inventory or Inventory sold on consignment;
(c) any Inventory consisting of proprietary software;
(d) any Inventory which is damaged, obsolete, returned, defective,
recalled or unfit for further processing;
(e) any Inventory which has been previously exported from the United
States;
(f) any Inventory which constitutes defense articles or defense
services or any Accounts Receivable generated by sales of such Inventory;
(g) any Inventory which is to be incorporated into Items destined for
shipment to, and any Account Receivable in the name of a Buyer located in, a
country in which Eximbank is legally prohibited from doing business as
designated in the Country Limitation Schedule;
(h) any Inventory which is to be incorporated into Items destined for
shipment to, and any Account Receivable in the name of a Buyer located in, a
country in which Eximbank coverage is not available for commercial reasons as
designated in the Country Limitation Schedule, unless and only to the extent
that such Items are to be sold to such country on terms of a Letter of Credit
confirmed by a bank acceptable to Eximbank:
(i) any Inventory which is to be incorporated into Items whose sale
would result in an ineligible Account Receivable;
(j) any Account Receivable with a term in excess of net one hundred
eighty (180) days;
(k) any Account Receivable which is more than sixty (60) calendar days
past the original due date, unless it is insured through Eximbank export credit
insurance for comprehensive commercial and political risk, or through Eximbank
approved private insurers for comparable coverage, in which case ninety (90)
calendar days shall apply;
(l) any intra-company Account Receivable or any Account Receivable
from a subsidiary of the Borrower, from a person or entity with a controlling
interest in the Borrower or from an entity which shares common controlling
ownership with the Borrower;
<PAGE>
(m) any Account Receivable evidenced by a Letter of Credit, until the
date of shipment of the Items covered by the subject Letter of Credit;
(n) any Account Receivable which the Lender or Eximbank, in its
reasonable judgment, deems uncollectible for any reason;
(o) any Account Receivable payable in a currency other than Dollars,
except as may be approved in writing by Eximbank;
(p) any Account Receivable from a military Buyer, except as may be
approved in writing by Eximbank; and
(q) any Account Receivable due and collectible outside the United
States, except as may be approved in writing by Eximbank.
Section 2.4 Schedules, Reports and Other Statements. The Borrower
shall submit to the Lender in writing each month (a) an Inventory schedule for
the preceding month and (b) an Accounts Receivable aging report for the
preceding month detailing, the terms of the amounts due from each Buyer. The
Borrower shall also furnish to the Lender promptly upon request such
information, reports, contracts, invoices and other data concerning the
Collateral as the Lender may from time to time specify.
Section 2.5 Additional Security or Payment. The Borrower shall at all
times ensure that the Borrowing Base exceeds the Disbursed Amount. If informed
by the Lender or if the Borrower otherwise has actual knowledge that the
Borrowing Base is at any time less than the Disbursed Amount, the Borrower
shall, within five (5) Business Days, either (a) furnish additional security to
the Lender, in form and amount satisfactory to the Lender and Eximbank, or (b)
pay to the Lender an amount equal to the difference between the Disbursed Amount
and the Borrowing Base.
Section 2.6 Continued Security Interest. The Borrower shall notify the
Lender in writing within five (5) Business Days if (a) the Borrower changes its
name or identity in any manner, (b) the Borrower changes the location of its
principal place of business, (c) the nature of any of the Collateral is changed
or any of the Collateral is transferred to another location or (d) any of the
books or records related to the Collateral are transferred to another location.
The Borrower shall execute such additional financing statements or other
documents as the Lender may reasonably request in order to maintain its
perfected security interest in the Collateral.
Section 2.7 Inspection of Collateral. The Borrower shall permit the
representatives of the Lender and Eximbank to make at any time during normal
business hours reasonable inspections of the Collateral and of the Borrower's
facilities, activities, and books and records, and shall cause its officers and
employees to give full cooperation and assistance in connection therewith.
<PAGE>
Section 2.8 Notice of Debtor's Relief, Dissolution and Litigation. The
Borrower shall notify the Lender in writing within five (5) Business Days of the
occurrence of any of the following:
(a) a proceeding in bankruptcy or an action for debtor's relief is
filed by, against, or on behalf of the Borrower;
(b) the Borrower fails to obtain the dismissal or termination within
thirty (30) calendar days of the commencement of any proceeding or action
referred to in (a) above;
(c) the Borrower begins any procedure for its dissolution or
liquidation, or a procedure therefore has been commenced against it; or
(d) any material litigation is filed against the Borrower.
Section 2.9 Insurance. The Borrower shall maintain insurance coverage
in the manner and to the extent customary in businesses of similar character.
Section 2.10 Merger or Consolidation. Without the prior written
consent of Eximbank and the Lender, the Borrower shall not (a) merge or
consolidate with any other entity, (b) sell, lease, transfer or otherwise
dispose of any substantial part of its assets, or any part of its assets which
are essential to the conduct of its business or operations, (c) make any
material change in its organizational structure or identity, or (d) enter into
any agreement to do any of the foregoing.
Section 2.11 Reborrowings and Repayment Terms. (a) If the Loan is a
Revolving Loan, provided that the Borrower is not in default under any of the
Loan Documents, the Borrower may borrow, repay and reborrow amounts under the
Loan until the close of business on the Availability Date. Unless the Revolving
Loan is renewed or extended by the Lender, the Borrower shall pay in full the
outstanding Loan Amount and all accrued and unpaid interest thereon no later
than the first Business Day after the Availability Date.
(b) If the Loan is a Transaction Specific Loan, the Borrower shall,
within two (2) Business Days of the receipt thereof, pay to the Lender (for
application against the outstanding Loan Amount and accrued and unpaid interest
thereon) all checks, drafts, cash and other remittances it may receive in
payment or on account of the Accounts Receivable or any other Collateral, in
precisely the form received (except for the endorsement of the Borrower where
necessary). Pending such deposit, the Borrower shall not commingle any such
items of payment with any of its other funds or property, but will hold them
separate and apart.
Section 2.12 Cross Default. The Borrower shall be deemed in default
under the Loan if the Borrower fails to pay when due any amount payable to the
Lender under any loan to the Borrower not guaranteed by Eximbank.
<PAGE>
Section 2.13 Financial Statements. The Borrower shall provide
quarterly financial statements to the Lender no later than forty-five (45) days
after the end of each quarter. This is in addition to any other financial
statements that may be required by the Lender under the Loan Agreement.
Section 2.14 Taxes, Judgments and Liens. The Borrower shall remain
current on all of its federal, state and local tax obligations. In addition, the
Borrower shall notify the Lender in the event (i) any judgment is rendered
against the Borrower, or (ii) any lien is filed against any of the assets of the
Borrower.
Section 2.15 Munitions List. If any of the Items are articles,
services, or related technical data that are listed on the United States
Munitions List (part 121 of title 22 of the Code of Federal Regulations), the
Borrower shall send a written notice promptly to the Lender describing the
Item(s) and the corresponding invoice amount.
Section 2.16 Suspension and Debarment, etc. On the date of this
Agreement neither the Borrower nor its Principals (as defined below) are (A)
debarred, suspended, proposed for debarment with a final determination skill
pending, declared ineligible or voluntarily excluded (as such terms are defined
under any of the Debarment Regulations referred to below) from participating in
procurement or nonprocurement transactions with any United States federal
government department or agency pursuant to any of the Debarment Regulations (as
defined below) or (B) indicted, convicted or had a civil judgment rendered
against the Borrower or any of its Principals for any of the offenses listed in
any of the Debarment Regulations. Unless authorized by Eximbank, the Borrower
will not knowingly enter into any transactions in connection with the Items with
any person who is debarred, suspended, declared ineligible or voluntarily
excluded from participation in procurement or nonprocurement transactions with
any United States federal government department or agency pursuant to any of the
Debarment Regulations. The Borrower will provide immediate written notice to the
Lender if at any time it learns that the certification set forth in this Section
2.16 was erroneous when made or has become erroneous by reason of changed
circumstances. For the purposes hereof, (1) "Principals" shall mean any officer,
director, owner, partner, key employee, or other person with primary management
or supervisory responsibilities with respect to the Borrower; or any other
person (whether or not an employee) who has critical influence on or substantive
control over the transaction covered by this Agreement and (2) the Debarment
Regulations shall mean (x) the Governmentwide Debarment and Suspension
(Nonprocurement) regulations (Common Rule), 53 Fed. Reg. 19204 (May 26, 1988),
(y) Subpart 9.4 (Debarment, Suspension and Ineligibility) of the Federal
Acquisition Regulations, 48 C.F.R. 9.400-9.409 and (z) the revised
Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common
Rule), 60 Fed. Reg. 33037 (June 26, 1995).
Section 2.17 Special Conditions. The Borrower shall comply with all
Special Conditions, if any, referenced in Section (11) of the Loan Authorization
Agreement or the Loan Authorization Notice.
<PAGE>
ARTICLE III
RIGHTS AND REMEDIES
Section 3.1 Indemnification. Upon Eximbank's payment of a claim to the
Lender in connection with the Loan pursuant to the Master Guarantee Agreement,
Eximbank shall assume all rights and remedies of the Lender under the Loan
Documents and may enforce any such rights or remedies against the Borrower, the
Collateral and any Guarantors. Additionally, the Borrower shall hold Eximbank
and the Lender harmless from and indemnify them against any and all liabilities,
damages, claims, costs and losses incurred or suffered by either of them
resulting from (a) any materially incorrect certification or statement knowingly
made by the Borrower or its agent to Eximbank or the Lender in connection with
the Loan, this Agreement or any of the other Loan Documents or (b) any material
breach by the Borrower of the terms and conditions of this Agreement or any of
the other Loan Documents. The Borrower also acknowledges that any statement,
certification or representation made by the Borrower in connection with the Loan
is subject to the penalties provided in Article 18 U.S.C. Section 1001.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York, United States of
America.
Section 4.2 Notification. All notifications required by this Agreement
shall be given in the manner provided in the Loan Agreement.
Section 4.3 Partial Invalidity. If at any time any of the provisions
of this Agreement becomes illegal, invalid or unenforceable in any respect under
the law of any jurisdiction, neither the legality, the validity nor the
enforceability of the remaining provisions hereof shall in any way be affected
or impaired.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Agreement to be duly
executed as of the 26th day of June, 1997.
RSI SYSTEMS, INC.
By_____________________________________________
Donald C. Lies
Its President and Chief Executive Officer
ACKNOWLEDGED:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By___________________________________________________
Christopher A. Cudak
Its Vice President
Guaranteed Loan No. ____________________
<PAGE>
EXHIBIT B TO CREDIT AND
SECURITY AGREEMENT
Exhibit A
Loan Authorization Agreement
<PAGE>
Exhibit C to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Roger A. Pfiffner
Norwest Business Credit, Inc., as Servicer
Christopher A. Cudak
Norwest Bank Minnesota, National Association
Date: ______________________, 199___
Subject: RSI Systems, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as of June
26, 1997 (the "Credit Agreement"), attached are the financial statements of RSI
Systems, Inc. (the "Borrower") as of and for ________________, 19___ (the
"Reporting Date") and the year-to-date period then ended (the "Current
Financials"). All terms used in this certificate have the meanings given in the
Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition as of the date thereof.
Events of Default. (Check one):
|_| The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
|_| The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
Financial Covenants. I further hereby certify as follows:
<PAGE>
1. Minimum Tangible Net Worth. Pursuant to Section 6.8 of the Credit
Agreement, as of the Reporting Date the Borrower's Tangible Net Worth was
$____________ which |_| satisfies |_| does not satisfy the requirement that such
amount be not less than $350,000.
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
RSI SYSTEMS, INC.
By ____________________________
Its Chief Financial Officer
<PAGE>
Exhibit D to Credit and Security
Agreement
FORM OF BORROWING BASE CERTIFICATE
M1:0264849.06
9/22/97 3:12 PM
<PAGE>
Exhibit E to Credit and Security
Agreement
PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No.
- -------- ---------- ------------ ----------- ----------
NONE
<PAGE>
DISCLOSURE
RSI Systems, Inc.
The Borrower signing below hereby makes the following
disclosures to Norwest Bank Minnesota, National Association in connection with a
Credit and Security Agreement between them dated on or about the date hereof:
1. Legal Names. During its existence, the legal name of the
Borrower has been its legal name as disclosed in the Credit Agreement and the
following predecessor legal names (insert "None" if none"):
Rocket Science, Inc.
2. Assumed Names. During its existence, the Borrower has done
business under the following trade names other than the legal names disclosed in
paragraph 1 above (insert "None" if none):
None.
3. Inventory Locations. All of the Borrower's inventory is
located at the address of the chief executive office of the Borrower as
disclosed in the Credit Agreement and at the following additional locations
(insert "None" if none):
Eden Prairie Metro RV and Mini-Storage
6852 Flying Cloud Drive, Suite B
Eden Prairie, Minnesota 55344
Altron, Inc.
6700 Industry Avenue
Anoka, Minnesota 55303-4595
4. Subsidiaries. The Borrower has no subsidiaries other than
as follows (insert "None" if none):
RSI Systems Export Corporation
5. Payment of Taxes. The Borrower has paid to the proper
authorities when due all federal, state, and local income taxes and taxes
required to be withheld by Borrower, and no claim is being made against Borrower
for any such taxes by any taxing authority except as follows (insert "None" if
none):
None.
<PAGE>
6. Environmental. To the best of Borrower's knowledge, the
Borrower has conducted and is conducting its business in compliance with all
federal, state, and local statutes, regulations, laws, and ordinances dealing
with the protection of human health and the environment ("Environmental Laws"),
and there are no claims, investigations, lawsuits, or administrative proceedings
against Borrower or relating to any real estate owned or operated by Borrower
alleging a violation of any Environmental Law except as follows (insert "None"
if none):
None.
7. Litigation. Other than as disclosed above with respect to
Environmental Laws, there are no lawsuits or proceedings pending, or to the best
knowledge of the Borrower threatened, against or affecting the Borrower or its
properties except as follows (insert "None" if none):
None.
Dated: June 26, 1997 RSI SYSTEMS, INC.
By /s/ Donald C. Lies
----------------------------------------
Donald C. Lies
Its President and Chief Executive Officer
<PAGE>
CERTIFICATE OF AUTHORITY
I, James D. Hanzlik, do hereby certify that I am secretary or
assistant secretary of RSI Systems, Inc., a Minnesota corporation; that the
following is a true, complete and correct copy of the resolutions duly adopted
(check one):
|X| at a meeting of the directors of said corporation duly and
properly called and held on the 4th day of June, 1997, at
which a quorum was present and acting throughout;
|_| by unanimous written action duly and lawfully taken,
subscribed by all the directors of said corporation;
and I further certify that said resolutions are now in full force and effect:
Resolutions
RESOLVED, that the Chief Executive Officer, President and Chief
Financial Officer of the Company be and hereby are authorized and
directed to negotiate the final documents with respect to the proposed
credit facilities with Norwest Business Credit and Norwest Bank
Minnesota in order to secure for the Company a $1,000,000 and a
$500,000, respectively, of credit and such officers are hereby
authorized and directed on behalf of the Company to execute and deliver
the credit agreements so negotiated together with such security and
pledge agreements and other agreements, instruments, certificates and
documents as may be necessary or desirable to achieve the purposes of
this resolution.
RESOLVED, that Norwest Bank International is hereby designated as the
Company depository for foreign funds and transfers in connection with
international sales and the Company's Chief Executive Officer and Chief
Financial Officer are hereby authorized and directed to establish an
account or accounts at Norwest Bank International for such purpose and
are each authorized to execute funds, transfers and otherwise deal with
such accounts and to execute such agreements, certificates and other
documents as may be necessary or desirable to effectuate the purpose of
this resolution.
I further certify that the directors of said Corporation have,
and at the time of adoption of the foregoing resolutions had, full power and
lawful authority to adopt the foregoing resolutions and to confer the powers
therein granted to the persons named and that such persons have full power and
authority to exercise same. I further certify that the signatures appearing
below are the authentic and official signatures of the officers and agents
referred to in the foregoing resolutions, that the persons named below as
officers have been duly elected to and now hold the offices in said Corporation
set forth opposite their respective
<PAGE>
names, and that the persons named as agents below have been duly authorized to
sign and to act on behalf of said Corporation pursuant to the foregoing
resolutions:
Name Title Sample Signature
---- ----- ----------------
Donald C. Lies President and Chief /s/ Donald C. Lies
Executive Officer
James D. Hanzlik Secretary and Chief /s/ James D. Hanzlik
Financial Officer
-------------------- ------------------------- ------------------------
-------------------- ------------------------- ------------------------
I further certify (check one):
|X| that the foregoing resolutions were duly approved by the
shareholders of said Corporation at a meeting duly and
properly called and held on the 4th day of June, 1997, at
which a quorum was present and acting throughout, or otherwise
as permitted by law;
|_| that the foregoing resolutions are effective and binding on
said Corporation without approval by its shareholders.
I further certify that the forms of Credit and Security
Agreement and the other Loan Documents, and any other writings relating to the
credit facility with Norwest Bank Minnesota, National Association, executed on
behalf of said Corporation by its President and Chief Executive Officer and
delivered to the Lender are the agreements and writings referred to in and
approved by the Resolutions set forth above.
<PAGE>
I further certify that attached hereto as Exhibit A, are true,
correct and complete copies of the articles of incorporation and bylaws of said
Corporation, which articles of incorporation and bylaws are in full force and
effect and have not been altered, amended or revised. I further certify that
attached hereto as Exhibit B is a Certificate of Good Standing of the
Corporation not more than ten days old.
IN WITNESS WHEREOF, I have hereunto subscribed my name this
26th day of June, 1997.
/s/ James D. Hanzlik
-------------------------------------
James D. Hanzlik, Secretary
RSI Systems, Inc.
Attest by One Other Officer
/s/ Donald C. Lies
- -----------------------------------
<PAGE>
STATE OF MINNESOTA
SECRETARY OF STATE
CERTIFICATE OF INCORPORATION
I, Joan Anderson Growe, Secretary of State of Minnesota do certify
that: Articles of Incorporation duly signed and acknowledged under oath have
been filed on this date in the Office of the Secretary of State for the
incorporation of the following corporation under and in accordance with the
provisions of the chapter of Minnesota Statutes listed below.
This corporation is now legally organized under the laws of Minnesota.
Corporate Name: Rocket Science, Inc.
Corporate Charter Number: 8B-189
Chapter Formed Under: 302A
This certificate has been issued on 12/21/1993.
[STAMP]
THE GREAT SEAL OF THE STATE OF MINNESOTA * 1858 *
/s/ Joan Anderson Growe
-----------------------------------
Secretary of State
<PAGE>
STATE OF MINNESOTA
DEPARTMENT OF STATE
I hereby certify that this is a true and complete copy of the document as
filed for record in this office.
DATED 6-12-1997
/s/ Joan Anderson Growe
-----------------------------------
Secretary of State
/s/ {illegible}
-----------------------------------
<PAGE>
Exhibit A to Secretary's Certificate
ARTICLES OF INCORPORATION AND BYLAWS
[TO BE PROVIDED BY BORROWER]
M10264894.02
6/26/97 10:07 AM
<PAGE>
Exhibit B to Secretary's Certificate
CERTIFICATE OF GOOD STANDING
[TO BE PROVIDED BY BORROWER]
M1:0264894.02
6/26/97 10:07 AM
<PAGE>
PATENT AND TRADEMARK SECURITY AGREEMENT
This Agreement, dated as of June 26, 1997, is made by and
between RSI SYSTEMS, INC., a Minnesota corporation whose address and principal
place of business is 7400 Metro Blvd., Suite 475, Edina, Minnesota 55439 (the
"Debtor"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association whose address and principal place of business is Norwest Center,
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0085 (the
"Secured Party").
Recitals
The Debtor and the Secured Party have entered into a Credit
and Security Agreement of even date herewith (as the same may hereafter be
amended, supplemented or restated from time to time, the "Credit Agreement")
setting forth the terms on which the Secured Party may now or hereafter make
certain loans or other financial accommodations to or for the account of the
Debtor.
As a further condition to making any loan or other financial
accommodation under the Credit Agreement or otherwise, the Secured Party has
required the execution and delivery of this Agreement by the Debtor.
ACCORDINGLY, in consideration of the mutual covenants
contained in the Credit Agreement and herein, the parties hereby agree as
follows:
1. Definitions. All terms defined in the Recitals hereto or in
the Credit Agreement that are not otherwise defined herein shall have the
meanings given to them therein. In addition, the following terms have the
meanings set forth below:
"Obligations" means each and every debt, liability and
obligation of every type and description arising under or in connection
with any Loan Document (as defined in the Credit Agreement) which the
Debtor may now or at any time hereafter owe to the Secured Party,
whether such debt, liability or obligation now exists or is hereafter
created or incurred and whether it is or may be direct or indirect, due
or to become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, independent, joint, several or joint and
several, and including specifically, but not limited to, the
Obligations (as defined in the Credit Agreement).
"Patents" means all of the Debtor's right, title and interest
in and to patents or applications for patents, fees or royalties with
respect to each, and including without limitation the right to sue for
past infringement and damages therefor, and licenses thereunder, all as
presently existing or hereafter arising or acquired, including without
limitation the patents listed on Exhibit A.
<PAGE>
"Trademarks" means all of the Debtor's right, title and
interest in and to trademarks, service marks, collective membership
marks, the respective goodwill associated with each, and licenses
thereunder, all as presently existing or hereafter arising or acquired,
including, without limitation, the marks listed on Exhibit B.
2. Security Interest. The Debtor hereby irrevocably assigns to
and grants to the Secured Party a security interest with power of sale to the
extent permitted by law (the "Security Interest") in the Patents and in the
Trademarks to secure payment of the Obligations.
3. Representations, Warranties and Agreements. The Debtor
hereby represents, warrants and agrees as follows:
(a) EXISTENCE; AUTHORITY. The Debtor is a corporation, having
full power to and authority to make and deliver this Agreement. The
execution, delivery and performance of this Agreement by the Debtor
have been duly authorized by all necessary action of the Debtor's
directors and shareholders and do not and will not violate the
provisions of, or constitute a default under, any presently applicable
law or its articles of incorporation and bylaws or any agreement
presently binding on it. This Agreement has been duly executed and
delivered by the Debtor and constitutes the Debtor's lawful, binding
and legally enforceable obligation. The correct name of the Debtor is
RSI Systems, Inc.. The authorization, execution, delivery and
performance of this Agreement do not require notification to,
registration with, or consent or approval by, any federal, state or
local regulatory body or administrative agency.
(b) PATENTS. Exhibit A accurately lists all Patents owned or
controlled by the Debtor as of the date hereof and accurately reflects
the existence and status of registrations pertaining to the Patents as
of the date hereof.
(c) TRADEMARKS. Exhibit B accurately lists all Trademarks
owned or controlled by the Debtor as of the date hereof and accurately
reflects the existence and status of Trademarks and all registrations
pertaining thereto as of the date hereof.
(d) TITLE. The Debtor has absolute title to each Patent and
each Trademark listed on Exhibits A and B, free and clear of all
security interests, liens and encumbrances, except the Security
Interest. The Debtor (i) will have, at the time the Debtor acquires any
rights in Patents or Trademarks hereafter arising, absolute title to
each such Patent or Trademark free and clear of all security interests,
liens and encumbrances, except the Security Interest, and (ii) will
keep all Patents and Trademarks free and clear of all security
interests, liens and encumbrances except the Security Interest.
(e) NO SALE. The Debtor will not sell or otherwise dispose of
the Patents or Trademarks, or any interest therein, without the Secured
Party's prior written consent.
<PAGE>
(f) DEFENSE. The Debtor will at its own expense, and using its
best efforts, protect and defend the Patents and Trademarks against all
claims or demands of all persons other than the Secured Party.
(g) MAINTENANCE. The Debtor will at its own expense maintain
the Patents and the Trademarks to the extent reasonably advisable in
its business including, but not limited to, filing all applications to
register and all affidavits and renewals possible with respect to
issued registrations. The Debtor covenants that it will not abandon nor
fail to pay any maintenance fee or annuity due and payable on any
Patent or Trademark, nor fail to file any required affidavit in support
thereof, without first providing the Secured Party: (i) sufficient
written notice, as provided in the Credit Agreement, to allow the
Secured Party to timely pay any such maintenance fees or annuity which
may become due on any of said Patents or Trademarks, or to file any
affidavit with respect thereto, and (ii) a separate written power of
attorney or other authorization to pay such maintenance fees or
annuities, or to file such affidavit, should such be necessary or
desirable.
(h) SECURED PARTY'S RIGHT TO TAKE ACTION. If the Debtor fails
to perform or observe any of its covenants or agreements set forth in
this Section 3, and if such failure continues for a period of ten (10)
calendar days after the Secured Party gives the Debtor written notice
thereof (or, in the case of the agreements contained in subsection (g),
immediately upon the occurrence of such failure, without notice or
lapse of time), or if the Debtor notifies the Secured Party that it
intends to abandon a Patent or Trademark, the Secured Party may (but
need not) perform or observe such covenant or agreement on behalf and
in the name, place and stead of the Debtor (or, at the Secured Party's
option, in the Secured Party's own name) and may (but need not) take
any and all other actions which the Secured Party may reasonably deem
necessary to cure or correct such failure.
(i) COSTS AND EXPENSES. Except to the extent that the effect
of such payment would be to render any loan or forbearance of money
usurious or otherwise illegal under any applicable law, the Debtor
shall pay the Secured Party on demand the amount of all moneys expended
and all costs and expenses (including reasonable attorneys' fees)
incurred by the Secured Party in connection with or as a result of the
Secured Party's taking action under subsection (h) or exercising its
rights under Section 6, together with interest thereon from the date
expended or incurred by the Secured Party at the highest rate then
applicable to any of the Obligations.
(j) POWER OF ATTORNEY. To facilitate the Secured Party's
taking action under subsection (h) and exercising its rights under
Section 6, the Debtor hereby irrevocably appoints (which appointment is
coupled with an interest) the Secured Party, or its delegate, as the
attorney-in-fact of the Debtor with the right (but not the duty) from
time to time to create, prepare, complete, execute, deliver, endorse or
file, in the name and on behalf of the Debtor, any and all instruments,
documents, applications,
<PAGE>
financing statements, and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Debtor under this
Section 3, or, necessary for the Secured Party, after an Event of
Default, to enforce or use the Patents or Trademarks or to grant or
issue any exclusive or non-exclusive license under the Patents or
Trademarks to any third party, or to sell, assign, transfer, pledge,
encumber or otherwise transfer title in or dispose of the Patents or
Trademarks to any third party. The Debtor hereby ratifies all that such
attorney shall lawfully do or cause to be done by virtue hereof. The
power of attorney granted herein shall terminate upon the termination
of the Credit Agreement as provided therein and the payment and
performance of all Obligations (as defined therein).
4. Debtor's Use of the Patents and Trademarks. The Debtor
shall be permitted to control and manage the Patents and Trademarks, including
the right to exclude others from making, using or selling items covered by the
Patents and Trademarks and any licenses thereunder, in the same manner and with
the same effect as if this Agreement had not been entered into, so long as no
Event of Default occurs and remains uncured.
5. Events of Default. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called "Event of
Default"): (a) an Event of Default, as defined in the Credit Agreement, shall
occur; or (b) the Debtor shall fail promptly to observe or perform any covenant
or agreement herein binding on it; or (c) any of the representations or
warranties contained in Section 3 shall prove to have been incorrect in any
material respect when made.
6. Remedies. Upon the occurrence of an Event of Default and at
any time thereafter, the Secured Party may, at its option, take any or all of
the following actions:
(a) The Secured Party may exercise any or all remedies
available under the Credit Agreement.
(b) The Secured Party may sell, assign, transfer, pledge,
encumber or otherwise dispose of the Patents and Trademarks.
(c) The Secured Party may enforce the Patents and Trademarks
and any licenses thereunder, and if Secured Party shall commence any
suit for such enforcement, the Debtor shall, at the request of Secured
Party, do any and all lawful acts and execute any and all proper
documents required by Secured Party in aid of such enforcement.
Notwithstanding the foregoing, the Secured Party will not take any of the
foregoing actions if a third person pledges, assigns and transfers within one
(1) day after the occurrence of an Event of Default, as additional collateral to
secure the Obligations, negotiable certificates of deposit, equity securities
that are traded on any national securities exchange or on the NASDAQ National
Market System and/or cash or the equivalent, which in the aggregate have
<PAGE>
and will continue to have a fair market value equal to or greater than the
outstanding Obligations under the Credit Agreement at the time such Event of
Default arises. Such person must execute and deliver all security agreements and
related documents and transfer possession and control of such additional
collateral as the Secured Party may request in its sole discretion, and such
additional collateral shall be in form and substance acceptable to the Secured
Party in its sole discretion.
7. Miscellaneous. This Agreement has been duly and validly
authorized by all necessary action, corporate or otherwise. This Agreement can
be waived, modified, amended, terminated or discharged, and the Security
Interest can be released, only explicitly in a writing signed by the Secured
Party. A waiver signed by the Secured Party shall be effective only in the
specific instance and for the specific purpose given. Mere delay or failure to
act shall not preclude the exercise or enforcement of any of the Secured Party's
rights or remedies. All rights and remedies of the Secured Party shall be
cumulative and may be exercised singularly or concurrently, at the Secured
Party's option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other. The Secured Party shall not be obligated to preserve any rights the
Debtor may have against prior parties, to realize on the Patents and Trademarks
at all or in any particular manner or order, or to apply any cash proceeds of
Patents and Trademarks in any particular order of application. This Agreement
shall be binding upon and inure to the benefit of the Debtor and the Secured
Party and their respective participants, successors and assigns and shall take
effect when signed by the Debtor and delivered to the Secured Party, and the
Debtor waives notice of the Secured Party's acceptance hereof. The Secured Party
may execute this Agreement if appropriate for the purpose of filing, but the
failure of the Secured Party to execute this Agreement shall not affect or
impair the validity or effectiveness of this Agreement. A carbon, photographic
or other reproduction of this Agreement or of any financing statement signed by
the Debtor shall have the same force and effect as the original for all purposes
of a financing statement. This Agreement shall be governed by the internal law
of Minnesota without regard to conflicts of law provisions. If any provision or
application of this Agreement is held unlawful or unenforceable in any respect,
such illegality or unenforceability shall not affect other provisions or
applications which can be given effect and this Agreement shall be construed as
if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All representations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.
<PAGE>
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Patent and
Trademark Security Agreement as of the date written above.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By /s/ Christopher A. Cudak By /s/ Donald C. Lies
----------------------------------- -----------------------------------
Christopher A. Cudak Donald C. Lies
Its Vice President Its President and Chief Executive
Officer
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 26th
day of June, 1997, by Donald C. Lies, the President and Chief Executive Officer
of RSI Systems, Inc., a Minnesota corporation, on behalf of the corporation.
[STAMP]
ROBERT J. WEIERMAN JR.
NOTARY PUBLIC - MINNESOTA /s/ Robert J. Weierman Jr.
MY COMMISSION EXPIRES JAN. 31, 2000 -----------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 26th
day of June, 1997, by Christopher A. Cudak, a Vice President of Norwest Bank
Minnesota, National Association, a national banking association, on behalf of
the bank.
[STAMP]
ROBERT J. WEIERMAN JR.
NOTARY PUBLIC - MINNESOTA /s/ Robert J. Weierman Jr.
MY COMMISSION EXPIRES JAN. 31, 2000 -----------------------------------
Notary Public
<PAGE>
EXHIBIT A
UNITED STATES ISSUED PATENTS
Title Patent Number Issue Date
----- ------------- ----------
Peripheral Video Conferencing Unit Des. 370,010 May 21, 1996
UNITED STATES PATENT APPLICATIONS
Title Patent Application Issue Date
----- ------------------ ----------
Number
------
Peripheral Video Conferencing System Application No. September 7, 1994
PCT/US95/11390
FOREIGN ISSUED PATENTS
Title Country Patent Number Issue Date
----- ------- ------------- ----------
Stand alone peripheral video conferencing WO 9608110 March 14,
system - allows communication with 1996
analogue or digital communications
channel and separate host computer
system
Same AU 9535484 March 27,
1996
Same AU 127747 September 6,
1996
Same CA 78379 May 9, 1996
Same DE M9503539.7 July 19, 1995
Same FR 952365 April 21, 1995
Same GB 2046903
Same JP Pending April 21, 1995
<PAGE>
EXHIBIT B
UNITED STATES ISSUED TRADEMARKS, SERVICE MARKS
AND COLLECTIVE MEMBERSHIP MARKS
REGISTRATIONS
Mark Registration Number Registration Date
---- ------------------- -----------------
Eris 1,997,487 August 27, 1996
APPLICATIONS
Mark Application Number Registration Date
---- ------------------ -----------------
Computer Free 75-183,232 October 17, 1996
Video Airline 75-183,056 October 17, 1996
Eris Video Flyer 75-178,355 October 8, 1996
COLLECTIVE MEMBERSHIP MARKS
NONE
UNREGISTERED MARKS
NONE
<PAGE>
COLLATERAL ACCOUNT AGREEMENT
June 26, 1997
TO: Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0085
Re: Account No. 335644 maintained by Norwest Bank
International New York Branch (the "Bank")
Ladies and Gentlemen:
RSI Systems, Inc., a Minnesota corporation (the "Client"), and
the Bank are writing to confirm that they have agreed as follows:
1. The Client will cause all of its account debtors located
outside the United States of America to wire transfer to the referenced account
(the "Collateral Account") all payments for goods and services sold to them.
2. The Collateral Account will be operated and maintained
exclusively for the benefit of Norwest Bank Minnesota, National Association, a
national banking association (the "Lender"). Amounts deposited in the Collateral
Account shall not bear interest and shall not be subject to withdrawal by the
Client, except after full payment and discharge of all obligations to the Lender
and termination of all related credit facilities. The Client shall have no right
to make or countermand withdrawals from the Collateral Account.
3. The Client hereby pledges to and grants the Lender a
security interest in all funds on deposit in the Collateral Account from time to
time and all proceeds thereof, to secure payment of all of the Client's
obligations to the Lender whether now existing or hereafter arising.
4. The Bank shall transmit all funds in the Collateral Account
at the end of each business day to Norwest Business Credit, Inc., Account No.
6355010053.
5. The Client may not terminate this Agreement without
obtaining the Lender's prior written consent. The Bank may not terminate this
Agreement without 60 days' prior written notice to the Lender. The Lender may
terminate this Agreement at any time, with or without cause.
6. This Agreement shall be enforceable against the Client and
the Bank by the Lender and the Lender's participants, successors and assigns.
The Client and the Bank waive notice of the Lender's acceptance hereof.
<PAGE>
7. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. This Agreement shall be governed by and construed
in accordance with the substantive laws (other than conflict laws) of the State
of Minnesota. Each party consents to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement waives any argument that venue in any such
forum is not convenient, and agrees that any litigation initiated by any of them
in connection with this Agreement shall be venued in either the District Court
of Hennepin County, Minnesota, or the United States District Court, District of
Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
NORWEST BANK INTERNATIONAL RSI SYSTEMS, INC.
NEW YORK BRANCH
By {illegible} By /s/ Donald C. Lies
----------------------------------- -----------------------------------
Its Vice President Donald C. Lies
Its President and Chief Executive
Officer
Accepted:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By /s/ Christopher A. Cudak
----------------------------------
Christopher A. Cudak
Its Vice President
<PAGE>
OFFICER'S CERTIFICATE
TO: Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0085
To induce you, at your sole discretion, to make one or more
loans from time to time to RSI Systems, Inc., a Minnesota corporation (the
"Borrower"), in accordance with the Credit and Security Agreement dated June 26,
1997 between it and you (the "Credit Agreement") and all other Loan Documents
(as defined in the Credit Agreement), I hereby represent and warrant to you, in
my individual capacity, that each and every representation and warranty set
forth in Article V of the Credit Agreement is true and correct as of the date
hereof.
Dated: June 26, 1997
Very truly yours,
/s/ Donald C. Lies
--------------------------------------
Donald C. Lies
<PAGE>
<TABLE>
<CAPTION>
OMB NO. 3048-0003
EXPIRES AUGUST 31, 1997
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
(SBA Use Only) (EXIMBANK USE ONLY)
Date Received U.S. SMALL BUSINESS ADMINISTRATION Lender Transaction
EXPORT-IMPORT BANK OF THE UNITED STATES PLP DA Level A PLP
C.I.D. No. JOINT APPLICATION FOR WORKING CAPITAL PEFCO DA Level B DA
GUARANTEE Regular
- ------------------------------------------------------------------------------------------------------------------------------------
PART A. PRINCIPAL PARTIES
- ------------------------------------------------------------------------------------------------------------------------------------
1. BORROWER/EXPORTER
- ------------------------------------------------------------------------------------------------------------------------------------
Company Name D&B No. Telephone
RSI Systems, Inc. 87-633-0945 612-896-3026
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Title of Contact Person Federal ID No. FAX
James D. Hanzlik, President 41-1767211 612-896-3030
- ------------------------------------------------------------------------------------------------------------------------------------
Address City State Zip
7400 West Metro Boulevard, Suite 475 Edina Minnesota 55439
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Sales No. Of Full-Time Employees Primary SIC Code
$1,625,720 18 4822-06, 3577
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT (Proprietors, partners, officers, directors and all holders of outstanding stock - 100% of ownership must be shown).
Use separate sheet if necessary.
- ------------------------------------------------------------------------------------------------------------------------------------
% *Military Service
-----------------
Name and Social Security Number Complete Address Owned From To *Race *Sex
- ------------------------------------------------------------------------------------------------------------------------------------
See Exhibit A attached hereto
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
*This information is collected for statistical purposes only. It has no bearing on the credit decision to approve or decline
this application.
- ------------------------------------------------------------------------------------------------------------------------------------
2. PERSONAL GUARANTOR
- ------------------------------------------------------------------------------------------------------------------------------------
Name SSN Telephone
- ------------------------------------------------------------------------------------------------------------------------------------
Address City State Zip FAX
- ------------------------------------------------------------------------------------------------------------------------------------
3. LENDER
- ------------------------------------------------------------------------------------------------------------------------------------
Name Federal ID No. Telephone
Norwest Bank Minnesota, National Association 41-1592157 612-667-3504
- ------------------------------------------------------------------------------------------------------------------------------------
Address City State Zip FAX
Norwest Center, Sixth St & Marquette Ave Minneapolis MN 554795 612-667-2269
- ------------------------------------------------------------------------------------------------------------------------------------
PART B. INFORMATION ABOUT THE TRANSACTION
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Amount Type (check one)
$500,000 Revolving |X|
- ------------------------------------------------------------------------------------ Transaction(S) Specific |_|
Terms and Fees
|_| 6 months |X| 1 YEAR |_| Other (SPECIFY) Renewal? |_| Y |X| N
- ------------------------------------------------------------------------------------
Interest Rate to be Charged Other Fees or Charges (TYPE AND AMOUNT) Conversion of Preliminary Commitment?
Origination Fee - 1% |_| Y |X| N
Norwest MN Base Rate + 4% Facility Fee - 1% If Yes, #_____________
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IB-SBA Form 84-1
ev. 8/94
<PAGE>
PART C. CERTIFICATIONS
1. BORROWER/EXPORTER CERTIFICATION
The Borrower/Exporter certifies that the representations made and the
facts stated by it in the application for a Working Capital Guarantee by the
Export-Import Bank of the United States (EXIMBANK) or the Small Business
Administration (SBA) are true, and that it has not misrepresented or omitted any
material facts relevant to said representations. The Borrower/Exporter agrees
that the validity and completeness of such representations and facts shall be a
condition precedent to any liability of Eximbank or SBA under any guarantee
issued. The Borrower/Exporter certifies that it does not have any actual
knowledge and further certifies that is does not have any actual knowledge and
further certifies did not withhold any actual knowledge which could reasonably
be expected to cause or tend to cause a loss to Eximbank or SBA under its
guarantee. If after the date of this Application, the Borrower/Exporter comes
into possession of any such knowledge, the Borrower/Exporter agrees not to
withhold it, and the undersigned agrees to immediately communicate such
knowledge to Eximbank or SBA by facsimile or letter, as appropriate. Attach
complete information for any box marked "yes".
1. Are there any pending or threatened liens, judgments or material
litigation against the:
Borrower |_| YES |X| NO Guarantor |_| YES |X| NO
2. Has the Borrower/Exporter or its owner(S), or the Guarantor ever filed for
protection under U.S. bankruptcy laws? Has either had an involuntary
bankruptcy petition filed against it?
Borrower |_| YES |X| NO Guarantor |_| YES |X| NO
3. Has the Borrower/Exporter or its owner(S) or affiliates ever previously
requested U.S. Government financing?
Borrower |_| YES |X| NO Guarantor |_| YES |X| NO
4. Are any of the individuals listed in Part A (a) presently under
indictment, on parole or probation, or have they ever been (b) charged for
any criminal offense other than a minor vehicle violation, or (c)
convicted, placed on pretrial diversion, or placed on any form of
probation including adjudication withheld pending probation for any
criminal offense other than a minor vehicle violation?
|_| YES |X| NO If YES, SBA Form 912 must be submitted with this
application (SBA APPLICANTS ONLY).
Name of Borrower/Exporter RSI SYSTEMS, INC.
- --------------------------------------------------------------------------------
Signature /s/ Donald C. Lies Date June 26, 1997
- --------------------------------------------------------------------------------
Name and Title (PRINT OR TYPE) Donald C. Lies, President
- --------------------------------------------------------------------------------
2. LENDER CERTIFICATION
- --------------------------------------------------------------------------------
The Lender certifies that the representations made and the facts stated by
it in the application for a Working Capital Guarantee by the Export-Import Bank
of the United States (EXIMBANK) or the Small Business Administration (SBA) are
true to the best of its knowledge and belief, and that it has not misrepresented
or omitted any material facts relevant to said representations. The Lender
agrees that such representations and facts shall be a condition precedent to any
liability of Eximbank or SBA thereunder. The Lender certifies that it does not
have any actual knowledge and further certifies that it did not withhold any
knowledge which could reasonably be expected to cause or tend to cause a loss to
Eximbank or SBA under its guarantee. If after the date of this Application, the
Lender comes into possession of any such knowledge, the Lender agrees not to
withhold it, and the undersigned agrees to immediately communicate such
knowledge to Eximbank or SBA by facsimile or letter as appropriate. By signing
and submitting this application, the Lender certifies that it would not be
willing to make this loan without a guarantee of Eximbank or SBA.
The Lender further certifies to the best of his or her knowledge and
belief, that if any funds have been paid or will be paid to any person for
influencing or attempting to influence an officer or employee of any agency, a
member of Congress, an officer or employee of Congress, or an employee of a
member of Congress in connection with this commitment providing for the United
States to guarantee a loan, the undersigned shall complete and submit a Standard
Form-LLL, "Disclosure Form to Report Lobbying" in accordance with its
instructions. Submission of this statement is a prerequisite for making or
entering into this transaction imposed by Section 1352, Title 31, US Code. Any
person who fails to file the required statement shall be subject to a civil
penalty of not less than $10,000 and not more than $100,000 for each such
failure. If Standard Form-LLL is necessary, it may be obtained from Eximbank or
SBA.
Name of Lender NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Signature /s/ Christopher A. Cudak Date June 26, 1997
- --------------------------------------------------------------------------------
Name and Title (PRINT OR TYPE) Christopher A. Cudak, Vice President
- --------------------------------------------------------------------------------
<PAGE>
APPLICATION INSTRUCTIONS
PART A. PRINCIPAL PARTIES
1. BORROWER/EXPORTER. Complete this section with information on the
individual or corporate borrower. Provide the preliminary SIC cord of the
borrower, rather than the product being exported.
MANAGEMENT. Complete this section for each proprietor, partner, officer or
director owning 20% or more of the company.
2. PERSONAL GUARANTOR(S). The personal guarantee of the owner(s) is required
in most cases.
3. LENDER. Leave blank if you are applying for a Preliminary Commitment and a
prospective lender has not been identified.
PART B. INFORMATION ABOUT THE TRANSACTION
Provide the loan amount, term and type of loan requested. (See also Checklist
item 3 below.)
PART C. CERTIFICATIONS
This section must be signed by an authorized representative of the borrower and,
if a request for a final commitment, an authorized representative of the lender.
CHECKLIST OF INFORMATION TO BE ATTACHED
BACKGROUND YES N/A
1. Brief resume of principals and key employees.
2. History of business; copy of business plan, if available; identify whether
sole proprietorship, general partnership, corporation and/or subchapter-S
corporation.
3. Explanation of use of proceeds and benefits of the loan guarantee,
including details of the underlying transaction(s) for which loan is
needed, including country(s) where the buyers are located.
4. Products to be exported are on the United States Munitions Control List
(Part 121 of Title 22 of the Code of Federal Regulations), OR require a
validated export license from the Bureau of Export Administration; If Yes,
please attach explanation. If uncertain whether a validated export license
is required, written verification from the appropriate licensing agency
may be required before loan approval.
TRANSACTION
5. Description of products/services to be exported, including SIC codes and
literature. (Indicate the percentage of foreign content.)
6. Copy of letter of credit and/or copy of buyer's order/contract, if
available.
7. Export credit insurance-related material (policy, application, buyer
credit limit), if applicable. 8. Copy of export license, if required.
FINANCIAL INFORMATION
9. Business financial statements (Balance Sheet, Income Statement, statement
of Cash Flows) for the last three (3) years, if applicable.
10. Current financial statement (interim) dated within ninety (90) days of the
date of application filing. 11. Aging of accounts receivable and accounts
payable.
12. The most recent Federal income tax return for the business.
13. Schedule of all principal officer/owner's compensation for the past three
(3) years and current year to date [if none, please indicate].
14. Signed personal financial statement(s) of the major
shareholder(s)/partner(s) of the company (over 20%) and their most recent
federal income tax return; (not required for venture capital partners).
15. Estimate of monthly cash flow for the term of the loan, highlighting the
proposed export transaction.
16. Description of type and value of proposed collateral to support the loan
(company assets/export product, i.e., inventory, accounts receivable,
other).
17. Credit memorandum attached, if the Lender is the applicant.
18. Nonrefundable $100 check or money order made out to the Eximbank or the
SBA, as appropriate. Eximbank application fee for a Preliminary Commitment
is $500.
<PAGE>
MAILING/FORWARDING INSTRUCTIONS
1. IF SUBMITTED BY A BORROWER/EXPORTER
a. Is Borrower/Exporter's requested loan YES NO
amount in Part B, $833,333 or less. X
b. Is Borrower/Exporter a small business, YES NO
as defined by Title 13 CFR Part 121.601, X
IF ANSWER TO BOTH OF THE ABOVE IS YES, SEND ENTIRE
SET OF MATERIALS TO SBA DISTRICT OFFICE NEAREST YOU.
CALL (800) 827-5722 FOR THE ADDRESS.
SEND YOUR APPLICATION TO EXIMBANK IN ALL OTHER SITUATIONS:
EXPORT-IMPORT BANK OF THE U.S.
QUALITY REVIEW UNIT
811 VERMONT AVENUE, NW
WASHINGTON, DC 20571
2. IF SUBMITTED BY A LENDER.
Is Lender using its Eximbank Delegated Authority? YES NO
X
IF YES, SEND THE APPLICATION, THE LOAN AUTHORIZATION NOTICE
AND THE $100 APPLICATION FEE TO THE EXIMBANK ADDRESS ABOVE,
IRRESPECTIVE OF THE GUARANTEE AMOUNT.
If you knowingly make a false statement or over value a security in order
to obtain a guaranteed loan from SBA or Eximbank, you can be fined up to
$10,000 or imprisoned for not more than five years (or both) under 18 USC
1001.
PUBLIC BURDEN STATEMENTS
Public burden reporting for this collection of information is estimated to
average 2 hours per response, including time required for searching
existing data sources, gathering the necessary data, providing the
information required, and reviewing the final collection. Send comments on
the accuracy of this estimate of the burden and recommendations for
reducing it to: The Office of Management and Budget, Paperwork Reduction
Project (3048-0003), Washington, DC 20503.
<PAGE>
OMB NO. 3048-0003
EXPIRES AUGUST 31, 1997
<TABLE>
<CAPTION>
Exhibit A to Joint Application
Ownership and Management Structure
MILITARY SERVICE
NAME AND ----------------
SOCIAL SECURITY NUMBER COMPLETE ADDRESS % OWNED(1) FROM TO *RACE *SEX
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard F. Craven 3045 Sussex Road 16.7% N/A N/A Cauc. M
###-##-#### Orono, MN 55356
Byron Gary Shaffer 6124 Scotia Drive 4.6% (Navy) (Navy) Cauc. M
###-##-#### Edina, MN 55439 June '54 June '56
David W. Stassen 6516 Stauder Circle <1% N/A N/A Cauc. M
###-##-#### Edina, MN 55136
William J. Brummond 7665 Gibralter Terrace 1.4% N/A N/A Cauc. M
###-##-#### Apple Valley, MN 55124
Donald C. Lies 9425 Toledo Avenue 2.8% N/A N/A Cauc. M
###-##-#### Bloomington, MN 55437
Richard J. Braun 18710 24th Avenue 2.0% Army Army Cauc. M
###-##-#### Plymouth, MN 55447 1968 1970
Dennis A. Leese 5608 Brookview Avenue 8.4% N/A N/A Cauc. M
###-##-#### Edina, MN 55424
James D. Hanzlik 9650 Summit Place 0% N/A N/A Cauc. M
###-##-#### Chaska, MN 55318
</TABLE>
- ---------------------
(1) RSI 1996 Annual Report, page 16.
<PAGE>
ANNEX A2
[Two originals to be provided to Eximbank]
To: Export-Import Bank of the United States
811 Vermont Avenue, N.W.
Washington, D.C. 20571
Attention: Vice President - United States Division
LOAN AUTHORIZATION NOTICE
We hereby notify the Export-Import Bank of the United States
("Eximbank") that, pursuant to the delegated authority granted by Eximbank to
the undersigned institution (the "Lender") under the Delegated Authority Letter
Agreement referred to below between the Leader and Eximbank, we have issued an
Eximbank Guarantee under the Master Guarantee Agreement between Eximbank and the
Lender, of the loan identified below from the Lender to the Borrower (the
"Loans"). The Loan is subject to the specific terms and conditions set forth
below. Unless otherwise defined, the capitalized terms used herein shall have
the meanings set forth in the Master Guarantee Agreement.
(1) Documentation and Location of Loan Documents:
Name of Lender: Norwest Bank Minnesota, National Association
Delegated Authority Letter Agreement Number: MN____-DA- 96-A-001
Master Guarantee Agreement Number: MN___-MGA- 96-001
Borrower Agreement Date: June __, 1997
Location of Loan Documents: Norwest Business Credit, Inc., Norwest
Center, Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479-0152
If the Borrower was assisted by a city/state export agency, please
provide the name of the agency, contact person, and telephone number.
No
<PAGE>
(2) Borrower's Name and Address: The full name, address, contact person,
telephone and telefax numbers of the Borrower are as follows:
RSI Systems, Inc. Tel: (612) 896-3026
7400 West Metro Boulevard, Suite 475
Edina, Minnesota 55439 Fax: (612) 896-3030
Attention: James D. Hanzlik
IS THE BORROWER A SMALL BUSINESS AS STIPULATED BY SBA GUIDELINES ?
__X__ YES _____ NO
(3) Guarantor's Name and Address: The full name, address, telephone and
telefax numbers of each Guarantor are as follows:
None
[If there are no guarantors, the word "None" must be inserted above in
order for this Notice to be considered complete.]
(4) The Items to be financed:
A. The Items: (Complete description of goods and services to be
exported, e.g. machine tools, electronic components, logs,
etc.)
ERI's Video Conferencing Systems
Video Flyer Video Conferencing Systems
SIC Codes 4822-06, 3577, 7373
B. Are Performance Guarantees (e.g. bid bonds, performance bonds,
advance payment guarantees in the form of stand-by letters of
credit) to be issued under this Loan?
|_| Yes If yes, approximately what percentage of the
Loan will be utilized for performance
guarantees? _________
|X| No
(5) Loan Amount, Disbursement Terms and Conditions and Disbursement Rates:
A. Loan Amount: $500,000
B. Disbursement Terms and Conditions:
<PAGE>
|X| Disbursements will be made against multiple Export
Orders.
|_| Disbursements will be made against a specific
contract.
C. Disbursement Rates by Categories of Collateral:
1. Inventory: The Disbursement Rate for Collateral
categorized as Inventory shall be as follows:
__60%__ percent
2. Accounts Receivable: The Disbursement Rate for
Collateral categorized as Accounts Receivable shall
be as follows:
__80%__ percent
3. Other (specify) ___________________________________
_____ percent
D. Type of Loan:
|X| The Loan is a Revolving Loan.
For Revolving Loans identify the top three countries of
export:
Germany (5%)
Singapore (5%)
Malaysia (5%)
Estimated Total Export Sales to be supported by this Loan:
$1,000,000
|_| The Loan is a Transaction Specific Loan.
For Transaction Specific Loans identify contract or purchase
order:
Country of Export: _____________________
Contract Price: $_______________________
Contract Number: _______________________
<PAGE>
Contract Date: _________________________
Parties: _______________________________
(6) Security Interests in the Load Collateral:
Valid and enforceable, perfected security interests in the following
Collateral, and the proceeds thereof:
A. First priority in the following;
|_| All Inventory.
|X| All Export-related Inventory.
|_| Contract-related Inventory.
|_| All Accounts Receivable.
|X| All Export-related Accounts Receivable.
|_| Contract-related Accounts Receivable.
|_| Other collateral, please specify.
____________________________________________________
B. Additional Collateral:
|_| Other, please specify. Junior lien on all other
assets
To the extent applicable, "Export-related Inventory" shall
mean all of the Borrower's Inventory which is intended to be
sold pursuant to Export Orders. Unless the Export-related
Inventory can be effectively segregated, for purposes of claim
recoveries under the Master Guarantee Agreement, the
Export-related Inventory will be determined on a PRO-RATA
basis comparing as of the date of default the amount
outstanding under the Loan with the aggregate amount
outstanding under all other short term inventory financing of
the Borrower. IF THE LENDER ELECTS TO SEPARATELY COLLATERALIZE
THE TEN PERCENT (10%) PORTION OF THE LOAN NOT GUARANTEED BY
EXIMBANK, THE LENDER SHALL FULLY DESCRIBE SUCH SEPARATE
COLLATERAL IN SECTION 8 OF THIS NOTICE IN ORDER FOR THIS
NOTICE TO BE CONSIDERED COMPLETE.
<PAGE>
(7) Terms of Sale (not to exceed 180 days; check all that apply; at least
one must be checked in order for this Notice to be considered
complete):
|X| Confirmed irrevocable letters of credit.
|X| Irrevocable letters of credit.
|_| Open account insured through Eximbank export credit insurance
for comprehensive and political risk.
|_| Open account insured through non-Eximbank export credit
insurance for comprehensive commercial and political risk.
|X| Cash payment received prior to shipment.
|X| Open account uninsured.
|X| Sight drafts documents against payment (also known as
"documentary collections").
|_| Other terms. [If checked, any such terms of sale must be fully
described on an attached addendum in order for this Notice to
be considered complete.]
(8) Lender's Interest Rate: Norwest MN Base Rate + 4%
Other Fees: _Facility Fee - 1%; Origination Fee - 1%
Are you separately collateralizing the 10% portion of this Loan? No _x_
__ Yes If yes, please specify separate collateral. _______________
_______________________________________________________________________
Note: The Lender cannot collateralize its retained 10% risk with cash,
cash equivalents or marketable securities from either the Borrower, any
Guarantor, or any of the Exporter's Affiliates (as defined in Section
7(b) of the Delegated Authority Letter Agreement) or any third party
guarantors.
(9) Facility Fee:
|X| Loan Amount is less than or equal to $2,000,000: In connection
with the commitment of the Guarantee, the Lender shall charge
the Borrower a Facility Fee equal to 75 basis points of the
total Loan Amount for a term of up to six (6) months or less,
or 150 basis points of the total Loan Amount for a term of
greater than six (6) and up to twelve (12) months. In all
cases, the Lender shall
<PAGE>
remit 25 basis points of the total Loan Amount to Eximbank
within five (5) Business Days after the Closing Date.
Facility Fee remitted: $1,250
|_| Loan amount is for more than $2,000,000: In connection with
the commitment of the Guarantee, the Lender shall charge the
Borrower a Facility Fee as shown in the chart below:
- --------------------------------------------------------------------------------
EXIMBANK
TERM OF LOAN LOAN AMOUNT: FACILITY FEE = RECEIVES + LENDER RETAINS
Up to six months
First $2,000,000 75 b.p. 25 b.p. 50 b.p.
Portion over $2,000,000 75 b.p. 37.5 b.p. 37.5 b.p.
Greater than 6
months, up to 12
months
First $2,000,000 150 b.p. 25 b.p. 125 b.p.
Portion over $2,000,000 150 b.p. 75 b.p. 75 b.p.
b.p. = basis point
For a Guarantee with a term exceeding 12 months, the Facility Fee will be
pro-rated accordingly.
- --------------------------------------------------------------------------------
Facility Fee on first $2,000,000 $___________________
Facility Fee on portion over $2,000,000 +___________________
Total Facility Fee remitted: $___________________
(10) Availability Date: June 25, 1998.
(11) Country Limitation Schedule: [From time to time, Eximbank will provide
updated Country Limitation Schedules to all Lenders active in the
Working Capital Guarantee Program, and to all Delegated Authority
Lenders. It is the Lender's responsibility to provide a copy to the
Exporter within seven (7) Business Days of receipt. The updated Country
Limitation Schedule will supersede the previous Country Limitation
Schedule.]
<PAGE>
IN WITNESS WHEREOF, the Lender has caused this instrument to be sealed
this 26th day of June, 1997.
Name of Lender: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By: /s/ Christopher A. Cudak
-------------------------
(Signature)
Name: Christopher A. Cudak
-------------------------
(Print or Type)
Title: Vice President
-------------------------
(Print or Type)
Address: Telephone: (612) 667-3504
Norwest Center, Sixth St. & Marquette Ave.
Minneapolis, Minnesota 55479-0085 Telefax: (612) 667-2269
Receipt acknowledged by:
EXPORT-IMPORT BANK OF THE UNITED STATES
By: /s/ Sam Z. Zytcer
----------------------------------
(Signature)
Name: Sam Z. Zytcer
--------------------------------
(Print or Type)
Title: Vice President
-------------------------------
(Print or Type)
Date: July 9, 1997
--------------------------------
Eximbank hereby designates the Loan referred to in this Loan Authorization
Notice as Guaranteed Loan No. APO72433XX.
(Revised April 1, 1996)
<PAGE>
Reminders:
1) Did you include the completed application, signed by Exporter and
Lender?
2) Did you include the $100 Application Fee?
3) Did you include the appropriate Facility Fee?
4) Have you completed the Loan Authorization Notice and submitted TWO
originals?
If you need assistance in completing this document, please do not hesitate to
contact the U.S. Division directly at 202/565-3780.
<PAGE>
EXPORT-IMPORT BANK OF THE UNITED STATES
WORKING CAPITAL GUARANTEE PROGRAM
BORROWER AGREEMENT
THIS BORROWER AGREEMENT (this "Agreement") is made and entered into by
RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"), and is acknowledged
by NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender").
RECITALS
A. The Lender shall make a loan (the "Loan") to the Borrower for the
purpose of providing the Borrower with pre-export working capital to finance the
manufacture, production or purchase and subsequent export sale of the Items (as
hereinafter defined).
B. The Loan shall be in a principal amount (the "Loan Amount") not to
exceed at any time outstanding the amount specified in Section (5)(A) of the
Loan Authorization Agreement between the Lender and the Export-Import Bank of
the United States ("Eximbank") which is attached hereto as Exhibit A and
incorporated herein as a part of this Agreement. If the Loan is being made
pursuant to the Lender's Delegated Authority from Eximbank, all references
herein to the Loan Authorization Agreement shall be deemed to be to the Loan
Authorization Notice provided to Eximbank and the Borrower by the Lender.
C. The Loan shall be evidenced by a valid and enforceable promissory
note payable by the Borrower to the order of the Lender (the "Note") and shall
be made pursuant to a written agreement related solely thereto between the
Borrower and the Lender (the "Loan Agreement").
D. A condition precedent to the making of the Loan by the Lender is
that Eximbank guarantee the payment of ninety percent (90%) of the Loan Amount
and all interest accrued thereon, subject to the terms and conditions of a
master guarantee agreement (the "Master Guarantee Agreement") between Eximbank
and the Lender.
E. In consideration for and as a condition precedent to the Lender's
making the Loan and Eximbank's entering into the Master Guarantee Agreement, the
Borrower shall execute this Agreement for the benefit of the Lender and
Eximbank.
<PAGE>
NOW, THEREFORE, the Borrower hereby agrees as follows:
ARTICLE I
DEFINITIONS
"Accounts Receivable" shall mean those trade accounts from the sale of
the Items due and payable to the Borrower in the United States and any notes,
drafts, letters of credit or insurance proceeds supporting payment thereof.
"Availability Date" shall mean the last date on which the Lender may
make a Disbursement as set forth in Section (10) of the Loan Authorization
Agreement or, if such date is not a Business Day, the next Business Day
thereafter.
"Borrowing Base" shall mean the Collateral Value as discounted by the
applicable Disbursement Rate(s).
"Borrowing Base Certificate" shall mean the certificate in form
provided by the Lender and executed by the Borrower setting forth the Borrowing
Base supporting one or more Disbursements.
"Business Day" shall mean any day on which the Federal Reserve Bank of
New York is open for business.
"Buyer" shall mean an entity which has entered into one or more Export
Orders with the Borrower.
"Closing Date" shall mean the date on which the Loan Documents are
executed by the Borrower.
"Collateral" shall mean the property of the Borrower in which the
Borrower has granted to the Lender a valid and enforceable security interest as
security for the payment of all principal and interest due under the Loan, and
which is identified in Section (6) of the Loan Authorization Agreement,
including all proceeds (cash and non-cash) thereof.
"Collateral Value" shall mean at any given time the value of all
Collateral against which Disbursements may be made as set forth in Section
(5)(C) of the Loan Authorization Agreement, valued according to GAAP.
"Country Limitation Schedule" shall mean the most recent schedule
published by Eximbank and provided to the Borrower by the Lender which sets
forth on a country by country basis whether and under what conditions Eximbank
will provide coverage for the financing of export transactions to countries
listed therein.
"Debarment Regulations" shall have the meaning set forth in Section
2.16.
<PAGE>
"Disbursed Amount" shall mean the aggregate outstanding amount of the
Disbursements.
"Disbursement" shall mean an advance of the Loan from the Lender to
the Borrower under the Loan Agreement.
"Disbursement Rate" shall mean the rate specified in Section (5)(C) of
the Loan Authorization Agreement for each category of Collateral.
"Dollars" or "$" shall mean the lawful money of the United States of
America.
"Export Order" shall mean a written export order or contract for the
purchase by the Buyer from the Borrower of any of the Items.
"GAAP" shall mean the generally accepted accounting principles issued
by the American Institute of Certified Public Accountants.
"Guarantor" shall mean each person or entity, if any, identified in
Section (3) of the Loan Authorization Agreement who shall guarantee (jointly and
severally if more than one) the Borrower's obligation to repay all amounts
outstanding under the Note.
"Inventory" shall mean the raw materials, work-in-process and finished
goods purchased or manufactured by the Borrower for resale and located in the
United States.
"Items" shall mean the finished goods or services which are intended
for export, as specified in Section (4)(A) of the Loan Authorization Agreement.
"Letter of Credit" shall mean an irrevocable letter of credit subject
to UCP 500, payable in the United States or at the issuing bank and issued
either: (i) for the benefit of the Borrower on behalf of a Buyer in connection
with the purchase of the Items; or (ii) for the benefit of United States
supplier(s) on behalf of the Borrower in connection with the purchase of goods
or services from the supplier by the Borrower, which purchase is in support of
the export sales financed under the Loan.
"Loan Documents" shall mean the Note, the Loan Agreement, this
Agreement and any other instrument, agreement or document previously,
simultaneously or hereafter executed by the Borrower or any Guarantors
evidencing, securing, guaranteeing or in connection with the Loan.
"Principals" shall have the meaning set forth in Section 2.16.
"Revolving Loan" shall mean a Loan under which amounts disbursed and
repaid may be disbursed on a continuous basis during the term of the Loan.
"Transaction Specific Loan" shall mean a Loan under which amounts
disbursed and repaid may not be disbursed again.
<PAGE>
"U.S." or "United States" shall mean the United States of America and
its territorial possessions.
"U.S. Content" shall mean with respect to any Item all the labor,
materials and services which are of U.S. origin or manufacture, and which are
incorporated into an Item in the United States
ARTICLE II
OBLIGATIONS OF THE BORROWER
Until payment in full of the Loan, the Borrower agrees to the
following:
Section 2.1 Use of Disbursements. The Borrower shall use Disbursements
only for the purpose of enabling the Borrower to finance the cost of
manufacturing, producing, purchasing or selling the Items. The Borrower may not
use Disbursements for the purpose of: (a) servicing any of the Borrower's
pre-existing or future indebtedness unrelated to the Loan; (b) acquiring fixed
assets or capital goods for use in the Borrower's business; (c) acquiring,
equipping or renting commercial space outside of the United States; (d) paying
the salaries of non-U.S. citizens or non-U.S. permanent residents who are
located in offices outside the United States; or (e) serving as a retainage or
warranty bond.
In addition, Disbursements may not be used to finance the manufacture,
purchase or sale of any of the following:
(a) Items to be sold to a Buyer located in a country in which Eximbank
is legally prohibited from doing business as designated in the Country
Limitation Schedule;
(b) that part of the cost of the Items which is not U.S. Content
unless such part is not greater than fifty percent (50%) of the cost of the
Items and is incorporated into the Items in the United States;
(c) defense articles or defense services; or
(d) without Eximbank's prior written consent, any Items to be used in
the construction, alteration, operation or maintenance of nuclear power,
enrichment, reprocessing, research or heavy water Production facilities.
Section 2.2 Borrowing Base Certificates and Export Orders. In order to
receive a Disbursement under the Loan, the Borrower shall deliver to the Lender
a Borrowing Base Certificate current within the past five (5) Business Days and
a copy of the Export Order(s) (or, for Revolving Loans, if permitted by the
Lender, a written summary of the Export Orders) against which the Borrower is
requesting a Disbursement. If the Lender permits summaries of Export Orders, the
Borrower shall also deliver promptly to the Lender copies of any Export Orders
requested by the Lender. Additionally, the Borrower shall deliver to the Lender
at least
<PAGE>
once every thirty (30) calendar days a Borrowing Base Certificate current within
the past five (5) Business Days, which requirement may be satisfied by
submission of a Borrowing Base Certificate when requesting a Disbursement.
Section 2.3 Exclusions from the Borrowing Base. In determining the
amount of a requested Disbursement, the Borrower shall exclude from the
Borrowing Base the following:
(a) any Inventory which is not located in the United States;
(b) any demonstration Inventory or Inventory sold on consignment;
(c) any Inventory consisting of proprietary software;
(d) any Inventory which is damaged, obsolete, returned, defective,
recalled or unfit for further processing;
(e) any Inventory which has been previously exported from the United
States;
(f) any Inventory which constitutes defense articles or defense
services or any Accounts Receivable generated by sales of such Inventory;
(g) any Inventory which is to be incorporated into Items destined for
shipment to, and any Account Receivable in the name of a Buyer located in, a
country in which Eximbank is legally prohibited from doing business as
designated in the Country Limitation Schedule;
(h) any Inventory which is to be incorporated into Items destined for
shipment to, and any Account Receivable in the name of a Buyer located in, a
country in which Eximbank coverage is not available for commercial reasons as
designated in the Country Limitation Schedule, unless and only to the extent
that such Items are to be sold to such country on terms of a Letter of Credit
confirmed by a bank acceptable to Eximbank:
(i) any Inventory which is to be incorporated into Items whose sale
would result in an ineligible Account Receivable;
(j) any Account Receivable with a term in excess of net one hundred
eighty (180) days;
(k) any Account Receivable which is more than sixty (60) calendar days
past the original due date, unless it is insured through Eximbank export credit
insurance for comprehensive commercial and political risk, or through Eximbank
approved private insurers for comparable coverage, in which case ninety (90)
calendar days shall apply;
(l) any intra-company Account Receivable or any Account Receivable
from a subsidiary of the Borrower, from a person or entity with a controlling
interest in the Borrower or from an entity which shares common controlling
ownership with the Borrower;
<PAGE>
(m) any Account Receivable evidenced by a Letter of Credit, until the
date of shipment of the Items covered by the subject Letter of Credit;
(n) any Account Receivable which the Lender or Eximbank, in its
reasonable judgment, deems uncollectible for any reason;
(o) any Account Receivable payable in a currency other than Dollars,
except as may be approved in writing by Eximbank;
(p) any Account Receivable from a military Buyer, except as may be
approved in writing by Eximbank; and
(q) any Account Receivable due and collectible outside the United
States, except as may be approved in writing by Eximbank.
Section 2.4 Schedules, Reports and Other Statements. The Borrower
shall submit to the Lender in writing each month (a) an Inventory schedule for
the preceding month and (b) an Accounts Receivable aging report for the
preceding month detailing, the terms of the amounts due from each Buyer. The
Borrower shall also furnish to the Lender promptly upon request such
information, reports, contracts, invoices and other data concerning the
Collateral as the Lender may from time to time specify.
Section 2.5 Additional Security or Payment. The Borrower shall at all
times ensure that the Borrowing Base exceeds the Disbursed Amount. If informed
by the Lender or if the Borrower otherwise has actual knowledge that the
Borrowing Base is at any time less than the Disbursed Amount, the Borrower
shall, within five (5) Business Days, either (a) furnish additional security to
the Lender, in form and amount satisfactory to the Lender and Eximbank, or (b)
pay to the Lender an amount equal to the difference between the Disbursed Amount
and the Borrowing Base.
Section 2.6 Continued Security Interest. The Borrower shall notify the
Lender in writing within five (5) Business Days if (a) the Borrower changes its
name or identity in any manner, (b) the Borrower changes the location of its
principal place of business, (c) the nature of any of the Collateral is changed
or any of the Collateral is transferred to another location or (d) any of the
books or records related to the Collateral are transferred to another location.
The Borrower shall execute such additional financing statements or other
documents as the Lender may reasonably request in order to maintain its
perfected security interest in the Collateral.
Section 2.7 Inspection of Collateral. The Borrower shall permit the
representatives of the Lender and Eximbank to make at any time during normal
business hours reasonable inspections of the Collateral and of the Borrower's
facilities, activities, and books and records, and shall cause its officers and
employees to give full cooperation and assistance in connection therewith.
<PAGE>
Section 2.8 Notice of Debtor's Relief, Dissolution and Litigation. The
Borrower shall notify the Lender in writing within five (5) Business Days of the
occurrence of any of the following:
(a) a proceeding in bankruptcy or an action for debtor's relief is
filed by, against, or on behalf of the Borrower;
(b) the Borrower fails to obtain the dismissal or termination within
thirty (30) calendar days of the commencement of any proceeding or action
referred to in (a) above;
(c) the Borrower begins any procedure for its dissolution or
liquidation, or a procedure therefore has been commenced against it; or
(d) any material litigation is filed against the Borrower.
Section 2.9 Insurance. The Borrower shall maintain insurance coverage
in the manner and to the extent customary in businesses of similar character.
Section 2.10 Merger or Consolidation. Without the prior written
consent of Eximbank and the Lender, the Borrower shall not (a) merge or
consolidate with any other entity, (b) sell, lease, transfer or otherwise
dispose of any substantial part of its assets, or any part of its assets which
are essential to the conduct of its business or operations, (c) make any
material change in its organizational structure or identity, or (d) enter into
any agreement to do any of the foregoing.
Section 2.11 Reborrowings and Repayment Terms. (a) If the Loan is a
Revolving Loan, provided that the Borrower is not in default under any of the
Loan Documents, the Borrower may borrow, repay and reborrow amounts under the
Loan until the close of business on the Availability Date. Unless the Revolving
Loan is renewed or extended by the Lender, the Borrower shall pay in full the
outstanding Loan Amount and all accrued and unpaid interest thereon no later
than the first Business Day after the Availability Date.
(b) If the Loan is a Transaction Specific Loan, the Borrower shall,
within two (2) Business Days of the receipt thereof, pay to the Lender (for
application against the outstanding Loan Amount and accrued and unpaid interest
thereon) all checks, drafts, cash and other remittances it may receive in
payment or on account of the Accounts Receivable or any other Collateral, in
precisely the form received (except for the endorsement of the Borrower where
necessary). Pending such deposit, the Borrower shall not commingle any such
items of payment with any of its other funds or property, but will hold them
separate and apart.
Section 2.12 Cross Default. The Borrower shall be deemed in default
under the Loan if the Borrower fails to pay when due any amount payable to the
Lender under any loan to the Borrower not guaranteed by Eximbank.
<PAGE>
Section 2.13 Financial Statements. The Borrower shall provide
quarterly financial statements to the Lender no later than forty-five (45) days
after the end of each quarter. This is in addition to any other financial
statements that may be required by the Lender under the Loan Agreement.
Section 2.14 Taxes, Judgments and Liens. The Borrower shall remain
current on all of its federal, state and local tax obligations. In addition, the
Borrower shall notify the Lender in the event (i) any judgment is rendered
against the Borrower, or (ii) any lien is filed against any of the assets of the
Borrower.
Section 2.15 Munitions List. If any of the Items are articles,
services, or related technical data that are listed on the United States
Munitions List (part 121 of title 22 of the Code of Federal Regulations), the
Borrower shall send a written notice promptly to the Lender describing the
Item(s) and the corresponding invoice amount.
Section 2.16 Suspension and Debarment, etc. On the date of this
Agreement neither the Borrower nor its Principals (as defined below) are (A)
debarred, suspended, proposed for debarment with a final determination skill
pending, declared ineligible or voluntarily excluded (as such terms are defined
under any of the Debarment Regulations referred to below) from participating in
procurement or nonprocurement transactions with any United States federal
government department or agency pursuant to any of the Debarment Regulations (as
defined below) or (B) indicted, convicted or had a civil judgment rendered
against the Borrower or any of its Principals for any of the offenses listed in
any of the Debarment Regulations. Unless authorized by Eximbank, the Borrower
will not knowingly enter into any transactions in connection with the Items with
any person who is debarred, suspended, declared ineligible or voluntarily
excluded from participation in procurement or nonprocurement transactions with
any United States federal government department or agency pursuant to any of the
Debarment Regulations. The Borrower will provide immediate written notice to the
Lender if at any time it learns that the certification set forth in this Section
2.16 was erroneous when made or has become erroneous by reason of changed
circumstances. For the purposes hereof, (1) "Principals" shall mean any officer,
director, owner, partner, key employee, or other person with primary management
or supervisory responsibilities with respect to the Borrower; or any other
person (whether or not an employee) who has critical influence on or substantive
control over the transaction covered by this Agreement and (2) the Debarment
Regulations shall mean (x) the Governmentwide Debarment and Suspension
(Nonprocurement) regulations (Common Rule), 53 Fed. Reg. 19204 (May 26, 1988),
(y) Subpart 9.4 (Debarment, Suspension and Ineligibility) of the Federal
Acquisition Regulations, 48 C.F.R. 9.400-9.409 and (z) the revised
Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common
Rule), 60 Fed. Reg. 33037 (June 26, 1995).
Section 2.17 Special Conditions. The Borrower shall comply with all
Special Conditions, if any, referenced in Section (11) of the Loan Authorization
Agreement or the Loan Authorization Notice.
<PAGE>
ARTICLE III
RIGHTS AND REMEDIES
Section 3.1 Indemnification. Upon Eximbank's payment of a claim to the
Lender in connection with the Loan pursuant to the Master Guarantee Agreement,
Eximbank shall assume all rights and remedies of the Lender under the Loan
Documents and may enforce any such rights or remedies against the Borrower, the
Collateral and any Guarantors. Additionally, the Borrower shall hold Eximbank
and the Lender harmless from and indemnify them against any and all liabilities,
damages, claims, costs and losses incurred or suffered by either of them
resulting from (a) any materially incorrect certification or statement knowingly
made by the Borrower or its agent to Eximbank or the Lender in connection with
the Loan, this Agreement or any of the other Loan Documents or (b) any material
breach by the Borrower of the terms and conditions of this Agreement or any of
the other Loan Documents. The Borrower also acknowledges that any statement,
certification or representation made by the Borrower in connection with the Loan
is subject to the penalties provided in Article 18 U.S.C. Section 1001.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York, United States of
America.
Section 4.2 Notification. All notifications required by this Agreement
shall be given in the manner provided in the Loan Agreement.
Section 4.3 Partial Invalidity. If at any time any of the provisions
of this Agreement becomes illegal, invalid or unenforceable in any respect under
the law of any jurisdiction, neither the legality, the validity nor the
enforceability of the remaining provisions hereof shall in any way be affected
or impaired.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Agreement to be duly
executed as of the 26th day of June, 1997.
RSI SYSTEMS, INC.
By /s/ Donald C. Lies
-----------------------------------------
Donald C. Lies
Its President and Chief Executive Officer
ACKNOWLEDGED:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By /s/ Christopher A. Cudak
------------------------------------
Christopher A. Cudak
Its Vice President
Guaranteed Loan No. APO72933XX
<PAGE>
Exhibit A
Loan Authorization Agreement
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
RSI Systems, Inc.:
We consent to incorporation by reference in the registration statement
(commission File number 33-95912) on Form S-8 of RSI Systems, Inc. of our report
dated September 12, 1997, relating to the consolidated balance sheets of RSI
Systmes, Inc. and subsidiary as of June 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1997, which report
appears in the June 30, 1997 annual report on Form 10-KSB of RSI Systems, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,152,671
<SECURITIES> 0
<RECEIVABLES> 747,427
<ALLOWANCES> 0
<INVENTORY> 544,613
<CURRENT-ASSETS> 2,486,267
<PP&E> 391,227
<DEPRECIATION> 332,589
<TOTAL-ASSETS> 2,878,015
<CURRENT-LIABILITIES> 1,653,661
<BONDS> 0
0
0
<COMMON> 47,573
<OTHER-SE> 1,176,781
<TOTAL-LIABILITY-AND-EQUITY> 2,878,015
<SALES> 2,570,851
<TOTAL-REVENUES> 2,570,851
<CGS> 1,904,216
<TOTAL-COSTS> 3,334,644
<OTHER-EXPENSES> 4,973,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,340
<INCOME-PRETAX> (5,684,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,684,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,684,690)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
