SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
|_| 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.)
5555 WEST 78TH STREET, SUITE F
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 $4,662,558.
On September 14, 1998, the Company had 6,663,531 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 $11,247,901.
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 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, manufactures
and sells high performance, business quality video conferencing systems
throughout a worldwide network of resellers and OEM or private label partners.
The Company's third-generation product family, the Video Flyer(TM) PLUS system,
is now in manufacture and available for sale. This system provides computer-free
television quality video and audio via a miniaturized, self-contained
free-standing device which is fully industry standards based.
The Company was incorporated under the laws of Minnesota on
December 21, 1993. Its founders proceeded to develop a self-contained desktop
video conferencing device for connection to personal computers and Apple
Macintosh systems. 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 overall allotment option (approximately $7,400,000), the Company
funded further research and development related to the enhancement of the
original product. By June 1996 it was determined that the target market for this
product had not developed nor did the product achieve its price performance
objectives as envisioned.
In July 1996, the Company brought in a new President and Chief
Executive Officer who in turn developed a new management team. Immediately, the
Company's efforts were redirected away from the computer-based desktop video
conferencing systems marketplace and towards the emerging small workgroup and
set-top television-based market. Subsequently, the Company designed a
second-generation system, the Video Flyer, that created a new level of video,
audio and price performance without need for interfacing to any type of computer
system. Deemed a COMPUTER-FREE SYSTEM, the original Video Flyer has evolved into
the Video Flyer PLUS computer product line of video conferencing engines.
In September 1996, to fund the development and marketing of the
Video Flyer product, the Company completed a private placement of 1,500,000
shares of its Common Stock resulting in net proceeds to the Company of
approximately $3,943,000. In January 1998, to provide additonal funds for
expanded marketing, distribution, product development and general corporate
purposes, the Company completed the private placement of 1,671,255 shares of its
Common Stock resulting in net proceeds of approximately $2,523,000.
<PAGE>
OVERVIEW OF THE MARKETPLACE
Various forms of video conferencing equipment have been introduced
to the global marketplace during the past 20 years. Initial system offerings
were very expensive and sold primarily as a method to reduce travel expense or
conduct distance meetings between large groups of individuals.
With the establishment of industry standards by the International
Telecommunications Union (ITU) in the early 1990s and the availability of lower
cost electronic componentry, marketplace sales began to rapidly accelerate.
Though estimates vary widely, Frost & Sullivan(1) believe that the total
worldwide marketplace for video conferencing equipment and services will achieve
revenues of approximately $9 billion in 1998, $13 billion in 1999 and $18
billion in 2000. Additionally, better products and lower prices throughout the
marketplace have increased the application uses for video conferencing systems
thus creating distinct product segments.
Today, the video conferencing systems market, estimated at
approximately $2 billion in revenues, is generally recognized as having the
following segmentation:
(1) Baseline Consumer Systems. These systems are generally very
inexpensive, operate on standard telephone lines and provide
minimal levels of quality picture and audio performance.
(2) Desktop Computerized Systems. These systems consist of
electronic components or internal devices being added to
existing desktop personal computers. Available from a variety
of different manufacturers, product performance varies widely
from minimal to very good. Pricing of these systems based upon
system requirements, functionality, upgradability, etc., also
varies widely.
(3) Set-top/Mobile Workgroup Video Conferencing Systems. This
segment has been identified by Frost & Sullivan as the fastest
growing marketplace for business-based video conferencing
equipment. RSI's Video Flyer product was the first system to
enter this marketplace as a fully self-contained, high
performance television quality non-computer based product.
Deemed COMPUTER-FREE, the Video Flyer contained no disk drive,
hard drive or internalized moving parts nor did it require a
keyboard for operation. The systems in this market segment
generally attach to high quality brand name televisions or
other non-computerized displays to provide medium to
exceptional video and audio performance. All systems provided
by manufacturers in this market segment are interoperable
between each other, thus allowing for rapid expansion of use
and cross-platform compatibility. This is similar to facsimile
machines standardization in the late 1980s to allow for rapid
expansion of the marketplace regardless of the product brand.
(4) Large Permanent Room Systems. With the improvement in quality
of set-top/mobile workgroup systems, this market segment is
under decline. Large permanent room systems are intended to
provide a high level of consistent operation for both audio
and video signals.
Again, referring to the Frost & Sullivan report, they believe that
the largest segment in this marketplace will continue to be the set-top/mobile
workgroup systems at approximately 52.7 percent of overall revenue in year 2000,
with an estimated growth rate of over 50% annually. It is believed that the
market will generally remain stratified over the next few years within these
identified segments. New products will be introduced that may further subdivide
the primary segments. However, user applications will become the primary driver
of product development and market expansion.
(a) BUSINESS OF THE COMPANY
PRODUCTS
In 1993 the initial management team at RSI Systems attempted to
enter the desktop video conferencing marketplace with a standards-based H.320
(ISDN) digital phone line system. Due to a variety of issues involving product
development, compatibility, higher than anticipated build costs and lack of
distribution, the product proved to be unsuccessful.
In July 1996, the new management team retargeted the Company to go
after the expanding set-top/mobile workgroup marketplace. It is believed that
this marketplace offers both greater revenue and margin opportunities, access to
broader distribution channels, longer manufacturing and sales life cycles for
its products, higher product name recognition and future repurchase
opportunities.
___________________
(1) Frost & Sullivan, Inc., is a market research firm which closely follows the
video conferencing marketplace.
<PAGE>
The Company restructured itself to follow a fast track for the
purpose of developing a high performance, TV quality, self-contained,
non-computerized video conferencing engine. The design criteria for the system
was
* Lifelike television video imagery
* True lifelike audio quality with full lip synchronization
* Consumer level product ease of operation through eliminating
computer keyboards, coding, etc., and substituting a
television type universal remote controller
* Excellent hardware reliability
In the spring of 1997, the Company's next generation product was
introduced to the marketplace as the Video Flyer. It was available in both a 128
Kbps (single ISDN line) business quality version or the Video Flyer 384 Kbps
(three ISDN lines) full television quality version. Both systems use the same
hardware and software, thus dramatically reducing the development,
manufacturing, distribution and overall service costs related to the product.
Product price points at the 384 (full television quality) version were initially
priced at $8995 USD. At the time this was approximately $10,000 to $20,000 below
competitors providing similar levels of products. Since that time, other
manufacturers have reduced their price points. Currently RSI's price points have
remained consistant with initial levels.
The Video Flyer system contains a number of unique design
specifications and software capabilities including:
(1) Architecture. All Video Flyers operate on a single high
performance motherboard developed by the Company. This
architecture dramatically reduces the chances for system
failure, cost of manufacture and opportunity for increasing
overall operational performance. This motherboard is secured
inside of a full metal chassis approximately the size of a
small notebook computer, thus protecting the self-contained
electronics from abuse or damage. With the addition of a
connectivity daughter card which is also internalized, the
Video Flyer system can be altered from a 128 to 384 Kbps
system. Known as the Video Flyer engine, this metal container
is mounted inside of a decorative plastic shell when delivered
to the customer.
(2) Internalization of Multiple Devices. The Video Flyer was the
first high performance video conferencing system to
internalize many of the cumbersome external devices necessary
to deliver high performance video conferencing signals. The
Video Flyer engine contains all of the electronics for video,
audio, memory for retention of code, inverse multiplexer and
network terminal adapters. A single Video Flyer weighs
approximately 10 pounds and can be placed inside of a
briefcase or carry-on bag, brought to a location, plugged into
a digital phone line and a television or large screen display
and provide high performance video in less than 10 minutes
from initiating the installation process. No other system had
ever been brought to the marketplace that offered this kind of
capability and design miniaturization.
(3) Software Architecture. To deliver high performance television
like video and audio conferencing signals, customized software
must be developed by a manufacturer that operates within the
ITU's published standards (H.320). RSI's team of talented
engineers created software code that could reside on flash
memory and provide unparalleled video and audio signal
performance with a level of operational simplicity at time of
manufacture unavailable from any other system.
RSI delivers its software to its product users via telephone
line. No diskettes or hard drives are required. When a new
version of software is made available to the marketplace,
existing product users merely place a phone call to a Video
Flyer master server and require an unattended download of the
new software. In a matter of minutes the new software is
loaded onto the user's system and they are now able to take
advantage of all of the new features or enhancements that have
been developed. The Video Flyer again was the first system in
this market segment to offer this type of delivery mechanism
for full system software.
(4) Signal Quality. The Video Flyer's unique software design
maximizes both the frame rate and resolution quality for the
video signal. This has provided many customers with the
ability to use video conferencing for more sophisticated large
meeting applications such as training, classrooms, sales
meetings, remote deposition, arraignment, group discussions,
problem solving, sales, marketing and executive staff
sessions.
Delivering a clear, lifelike fully synchronized audio signal
has been a major stumbling block for products in the high
performance video conferencing arena. The Company developed
its own advanced version of audio software called AUDIO++ and
introduced it in the spring of 1998. It delivers full lip
synchronization and a more lifelike experience for the video
conferencing system users.
All Video Flyers can accept additional software features and
upgrades as the Company continues to develop software to meet
the demands of the expansive application-based marketplace.
<PAGE>
(5) Standards-Based Compatibility. The Company was determined to
develop the industry's first 100-percent standards-based
system. By doing so, it was guaranteed that the Video Flyer
would interoperate with any other standards-based video
conferencing system regardless of manufacturer. The Video
Flyer contains no proprietary standards that will not
interoperate with other standards-based systems. Note:
Standards are established and then published by the ITU and
are available to all manufacturers for voluntary compliance.
(6) Expansive Connectivity. The Video Flyer has the greatest range
of external component connectivity of any system in its market
segment. All Video Flyers can connect to any size or brand
television set, LCD projector, flat screen display or power
screen device. This flexible connectivity allows the Video
Flyer to fit into a variety of applications ranging from
classrooms to boardrooms, factory floors, lunchrooms,
conference centers, hotel meeting halls, outdoor facilities,
living rooms or offices.
The Video Flyer's unique self-contained component design also
gives it the flexibility to connect to an unlimited variety of
audio devices such as mixers, microphones, speaker systems,
etc. This means that the system can be installed in virtually
any type of environment regardless of the customer's existing
electronic design.
Connectivity exists also to VCRs and digital video disk
systems (DVDs) for input and playback or recording of video
conferences. This has proved to be very useful in both
educational, legal and various business applications where
training or negotiation sessions need to be captured or played
back for group review.
(7) Warranty Program. The Video Flyer was engineered to eliminate
the need for field maintenance and repair. Often costly and
inconsistent, this form of field support can, over time,
degrade the functionality and reputation of the manufacturer's
installed base of systems. The Company developed and
introduced in 1998 its 24-hour full system exchange warranty
program named Service Angel. In conjunction with Federal
Express, RSI will guarantee full exchange of a defective
system within 24 hours of notification anywhere in North
America. This program is available on a 48-hour exchange basis
throughout Europe. Customers have readily endorsed this
alternative program to time consuming and often frustrating
in-office system repair provided by many of the Company's
competitors. The Service Angel program also allows the Company
to dramatically reduce its requirement for parts, spares,
technicians, bench test beds and telephone-based customer
service representatives.
NEW SYSTEM PRODUCT ENHANCEMENTS
The Video Flyer PLUS had become the Company's standard product of
manufacture by the end of fiscal year 1998. With selected improvements in
hardware design and the addition of two internalized components, the system
dramatically increased the overall functionality and price performance of the
standard Video Flyer product. The system's enhancements include
* Internalization of Two High Speed RS232 Data Communication
Ports. One port has been designated for interoperative
software use. Currently the system operates with NetMeeting
from Microsoft, thus allowing individuals to collaborate on
budgets, files, whiteboarding applications, etc. The Company
believes this will be an area of growth within the video
conferencing market-the providing of interactive data sharing
while in simultaneous video conferencing sessions.
* Internalization of the Network Terminal Adapters (NT1s). In
North America most telecommunication services require an
external device known as an NT1 to be attached to each ISDN
line connected to a video conferencing system. In the case of
a 384 Kbps (three ISDN lines) based system, this means that up
to three NT1s may have to be purchased by the customer.
Assuming normal wear and tear, compatibility issues, available
power outlets, etc., this can be a source of frustration and
repair. The Video Flyer PLUS internalizes these devices and
thus eliminates any requirements for external componentry. At
this time, the Company believes it is the only computer-free
product in its market segment that does not require external
NT1s.
In addition to being available in the 128 and 384 versions, the
product is also now available in the following configurations:
* Video Flyer PLUS V.35 System. Connects to T1/E1 and PRI based
telecommunication systems. With this connectivity, the
standard Video Flyer PLUS system can now enter into new
marketplaces where ISDN-based telecommunication service is
unavailable. Many larger corporations, portions of Asia, much
of eastern Europe and South America do not have ISDN service
but can use the V.35 system to deliver the same level of video
and audio performance as the standard Video Flyer PLUS
products.
<PAGE>
* Video Flyer PLUS Executive Bookshelf/Small Office System. By
repackaging the Video Flyer PLUS with speaker, microphones, a
smaller television and a pan/tilt/zoom camera, the Video Flyer
can now fit on bookshelves, credenzas and small office work
surfaces to provide full television quality video conferencing
to any individual or group of business people.
* Video Flyer PLUS Executive PC. By extending the operational
performance level of the Video Flyer and creating a new
version of the software, the system can now connect directly
to any PC or laptop computer. This unique capability, which
the Company carries a patent on, (the Video Flyer holds the
patent for cross-platform connectivity between
non-computerized and computerized devices from a single
platform), has met with very positive feedback from the
marketplace in Europe, North America and Asia. The Company
will continue to pursue this market segment; i.e., providing
full television based video conferencing on laptop personal
computers with a self-contained high performance engine.
* Video Flyer PLUS Roll-About System. The Company continues to
generate the major portion of its equipment revenue from the
sale of this configuration, the Video Flyer PLUS engine
residing on top of the Company's roll-about cart designed with
internalized center channel audio speaker, brand name large
screen television, pan/tilt/zoom camera and small group high
performance microphone. Priced very aggressively in the
marketplace, the system will both meet and exceed most of any
prospect's performance expectations, budget requirements and
interoperability requirements.
ON-GOING PRODUCT DEVELOPMENT
The Company will continue to refine the Video Flyer PLUS platform
to provide greater performance, capability and enhancements to the marketplace
and its existing users. Through increased sales volume, it is believed that the
overall manufacturing cost of the system may decline, thus allowing the Company
and the marketplace to share in the potential cost reductions. Additionally, as
new forms of communication connectivity are brought to the marketplace, such as
ATM, local area network, etc., the Company will continue to review their
viability and, if deemed appropriate, the Company will create the connectivity
electronics to interoperate within these networks. It is management's belief
that the Video Flyer will have an extended life cycle because of its unique
architecture, software design and cross-platform flexibility.
The Company will continue to work on next generation products that
will further enhance the customer's video conferencing experience and
capability.
SALES AND DISTRIBUTION
In 1996 under the new management team, the Company shifted its
approach away from a single level of distribution to a broader based,
multi-level approach. This approach includes Resellers, OEM partnerships and
Preferred Accounts.
RESELLERS
In fiscal year 1998, the Company introduced the Fast-Track
Reseller Program and used it to create distribution throughout North America,
Europe, Asia, Australia and portions of the Middle East and South Africa.
Through the Fast-Track program these authorized product resellers can purchase
Video Flyer equipment and related peripheral devices from the Company and resell
them in their local geographic markets. The Company provides classroom training,
literature, sales, marketing and technical support to the reseller. The Company
believes its Fast-Track program offers the highest margins to its resellers of
any comparably based product in the industry.
The Company will continue to add resellers on an on-going basis to
guarantee sales coverage. However, the Company is looking more towards
developing successful long-term reseller relationships rather than strictly
seeking quantity and turnover from its distribution network.
ORIGINAL EQUIPMENT MANUFACTURER (OEM) PARTNERSHIPS
The Company has entered into two OEM distribution agreements.
* Philips Business Electronics N.V. of Eindhoven, The
Netherlands. The Company has designed, manufactured and
delivered a version of the Video Flyer product to Philips
Business Electronics. The external skin/shell has been altered
for appearance sake; a new user software interface created;
and selected features have been added or deleted based upon
Philips' requests. The Company anticipates a long-term,
successful relationship with Philips. The Company is
responsible for manufacturing the product; Philips is
responsible for the sale, service and support of the product.
The contract calls for specific minimum quantities to be
purchased by Philips during the life of the
<PAGE>
agreement. Philips has the right to purchase an unlimited
quantity of the product if their market demands require them
to do so.
* VTEL Corporation. In the spring of 1998, the Company entered
into an OEM agreement with VTEL Corporation. VTEL asked the
Company to develop a version of the Video Flyer PLUS system
for the purpose of resale. VTEL has taken responsibility for
the design of the external shell, modifications to the user
interface, selected changes in the system's feature offerings
and/or capabilities. VTEL has required of the Company new
features and performance expectations which the Company will
develop for their marketplace requirements. The agreement
calls for VTEL to purchase a specific quantity of product for
worldwide distribution, and there is no limit to the quantity
that VTEL is allowed to purchase from the Company. The Company
anticipates a long-term and successful relationship with VTEL.
PREFERRED ACCOUNT SALES
In selected instances, RSI will continue to sell directly to
and/or support accounts in North America that are of either significant size or
their requirements dictate direct interaction with the manufacturer (the
Company). Though it is not RSI's intention to compete with its other
distribution channels, many of the organizations which make larger purchases of
video conferencing equipment have dictated that the manufacturer provide
specialized services (be they domestic or global), attention to slight product
modification or increased application flexibility. Where practical, RSI will
create an environment for these accounts that will allow them to be transitioned
to its authorized Fast-Track resellers or OEM business partners for long-term
future sales and support.
MARKETPLACE COMPETITION
As described earlier, the video conferencing marketplace has
continued to evolve into relatively well defined product segments. RSI's Video
Flyer PLUS systems are targeted at the set-top/mobile workgroup marketplace. The
competition within this marketplace is intense and constant. Many of the
Company's competitors are large multinational companies with resources
subsantially greater than those available to RSI. The primary competitor within
the marketplace is PictureTel Corporation. They offer products for sale within
all market segments and have posted combined revenues close to $500 million
dollars annually. They offer products which directly compete against RSI's Video
Flyer PLUS systems. Currently, their Concorde and Venue systems are based on
personal computer engines and list at price points significantly greater than
RSI's products. RSI is fully compatible with these systems when operated under
published industry standards.
PictureTel has previously brought to the market the SwiftSite
set-top system, a partially computer-free product, which operates at 128 Kbps
(single ISDN line). RSI's comparable product lists for $4995. RSI's best 384
(three ISDN lines) system lists for $8995. Long-term, the Company believes that
PictureTel will continue to produce competitive products into this market
segment and remain a significant marketplace participant.
VTEL Corporation currently has computer-based products available
for sale within RSI's identified market segment. They have entered into an OEM
agreement with the Company to resell a version of the RSI product under the VTEL
label into this market segment.
Tandberg of Norway offers a full range of video conferencing
systems for sale within most of the existing marketplace segments. Within the
set-top rollabout workgroup market segment, they offer a computer-based system
which delivers consistent video and audio quality. Their systems are generally
50 to 70 percent higher in price than the Video Flyer PLUS.
Polycom of Austin, Texas, is a recent entry into the set-top
workgroup marketplace with its product. Their system is computer-free. It
integrates the camera and video conferencing engine into a single device. The
system is mounted on top of standard television sets. The price point for the
system is comparable with the Company's price points for its products. The
Company believes that Polycom will continue to create market opportunities for
theirs and the Company's products by aggressively emphasizing the value of
computer-free technology versus older, computer-based video conferencing
architecture. Polycom may choose to follow a discount strategy for its product.
The Company is well aware of this and has programs in place to compete
effectively at new price points if discounting becomes necessary. The Company
feels that its product can be clearly differentiated from the Polycom system in
architecture, software capability and selected performance levels in both video,
audio and connectivity.
Sony Corporation offers a product in the Company's identified
market segment. This computer-based roll-about system is priced approximately 30
to 35 percent higher than the Company's Video Flyer PLUS systems. Most
manufacturers, including the Company, use Sony cameras and televisions/displays
for optimum performance for their similar roll-about system configurations. The
Company believes that the Sony Corporation will probably avoid heavy discounting
of its primary video conferencing product to avoid creating aggressive direct
competition which may disrupt their on-going business relationship for the sale
of cameras and display systems to the rest of the industry.
<PAGE>
VCON of Israel is a recent addition to the Company's identified
market segment. They also provide a small computer-based video conferencing
system. Currently the Company's product is significantly different in
architecture and performance level from that of VCON. VCON has so far
established only spotty distribution in North America, Europe and portions of
Asia. The Company believes that VCON will continue to expand its distribution
presence.
Other organizations that have either entered or left this video
conferencing market segment over the past year are INTEL, Panasonic and NEC. To
the Company's knowledge, none of these participants is currently a direct threat
to the computer-free marketplace that the Company is pursuing.
Though the Company has a very unique product with clear,
identifiable features and levels of performance, it is no guarantee that another
manufacturer or organization could not enter the marketplace with similar or
improved levels of capability without any prenotice to the Company. The Company
will continue to refine its product, remain at the lower end of the price curve
for high performance systems, offer aggressive margins to its resellers and keep
the product at the high end of the performance curve for comparable systems.
MANUFACTURING
The Company's main product, Video Flyer, is manufactured by a third
party manufacturer, Altron, Inc. (Altron) under a manufacturing agreement signed
on September 10, 1996. In addition to manufacturing, Altron provides all
purchasing, material control, testing services and product warranty coverage for
the Company's Video Flyer and similar products. 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.
A major component in the Video Flyer product family for which the
Company depends on a single source is the compression chip. In the past, the
Company has maintained an inventory of the compression chips sufficient to allow
for time to redesign the Video Flyer product to accommodate similar components
from other vendors, in the event the compression chip currently used was to
become unavailable to the Company. Based on the Company's current forecasted
sales volume, it believes current inventory levels of the compression chip must
be increased in order to maintain its required levels of safety stock, and is
currently in the process of ordering more compression chips. Although materials
purchasing services are provided by Altron, alternate suppliers have been
identified by the Company for most other components in the Video Flyer and
similar products. The Company has no information which would indicate that the
compression chip or other components currently used may become unavailable
during the product life cycle of Video Flyer and similar products.
The Company believes Altron has the capacity and capability to satisfy
manufacturing requirements for the Video Flyer and similar products 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 Video Flyer system and similar products have been certified by the
FCC as a class A (business) device. The Company has received certification from
Underwriters Laboratories Inc. ("UL") that the Video Flyer and similar systems
comply with the applicable requirements for U.S. and Canada Listing. The Company
has also received telephone, safety and EMC certifications for its Video Flyer
system in Australia, the European Union, Singapore, Malaysia, Korea, Indonesia
and South Africa.
Although the Company has obtained telephone, safety and EMC
certifications for its Video Flyer systems in the countries, noted above, the
Company cannot predict whether it will obtain necessary approvals and
certifications for Video Flyer systems and similar products 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. In fiscal year 1998 the Company amended its
U.S. utility patent application for its peripheral videoconferencing system,
originally filed in September 1994, to narrow and refocus the Company's claims.
The Company received a Notice of Allowance on the patent on August 11, 1997. The
Company has also applied for various foreign patents relating to the Video Flyer
System, none of which have been granted to date.
With respect to its technical employees and consultants, the Company
requires these employees to sign an agreement which
<PAGE>
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 videoconferencing 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 software license agreement with a software
development company on April 8, 1998. Pursuant to the agreement, the Company
pays a royalty fee of up to $5.00 per unit of videoconferencing systems sold.
Sales of the related videoconferencing systems began in fiscal year 1998.
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 videoconferencing systems, subject to certain limitations. License fees
payable by the Company included an initial licensing fee of $60,000 for the
right to develop a stand alone videoconferencing 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
videoconferencing systems sold, $4.75 for the following 9,000 videoconferencing
systems sold, $6.25 for the following 90,000 videoconferencing systems sold and
$5.10 for each videoconferencing systems sold in excess of 100,000. Sales of the
related videoconferencing 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 videoconferencing 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.
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses in fiscal
year 1998 and 1997 of $993,525 and $1,528,493 respectively.
EMPLOYEES
On September 18, 1998, the Company had 29 full-time employees; ten in
sales; three in marketing and customer support; eight in product development and
engineering; two in operations 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
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 S-3 (File No.
333-46721), 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 identify and develop new
products and gain their acceptance by the marketplace.
(3) The impact of competition within the mobile workgroup,
private office and other segments of the overall market for
video conferencing equipment.
(4) The impact of Year 2000 issues on the Company.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 7,651 square feet of space at its headquarters in
Edina, Minnesota under a lease agreement which expires on September 30, 1999.
Rent payments under the lease for fiscal year ending June 30, 1998, were $26,243
encompassing only four months, because the Company moved its headquarters on
March 1, 1998. The Company believes its current space is sufficient for its
current and anticipated needs. The following schedule summarizes payments made
in fiscal year 1998 for other sales office space leased by the Company:
Location Amount
- -------- ------
Previous Edina, MN Headquarters $ 81,678
Florida Sales Office 2,568
Amsterdam Sales Office 39,070
Singapore Sales Office 23,908
Sydney Sales Office 3,424
--------
Total $150,648
--------
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal or administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
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 trade 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
---- ---
1997
First Quarter 8.500 4.000
Second Quarter 5.250 1.500
Third Quarter 2.375 1.000
Fourth Quarter 4.000 1.000
1998
First Quarter 3.875 1.250
Second Quarter 4.000 2.375
Third Quarter 3.000 1.750
Fourth Quarter 3.000 1.500
As of September 18, 1998, there were (a) 6,663,531 shares of Common
Stock outstanding, held of record by 148 persons, (although the Company has been
informed that there are approximately 1,000 beneficial owners). (b) outstanding
options to purchase an aggregate of 1,144,250 shares of Common Stock, and (c)
outstanding warrants to purchase an aggregate of 879,626 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.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Net Sales. In fiscal year 1998, net sales increased to $4,662,558, up
81.4% from $2,570,851 in fiscal year 1997. The increase in sales in fiscal year
1998 compared to fiscal year 1997 was the result of higher unit volume
associated with increased marketing and broader distribution channels as well as
higher average pricing.
Although sales to resellers in the Pacific Rim declined in fiscal year
1998 due to the economic uncertainty in that region, the Company experienced
increased unit sales volume to resellers in both Europe and the United States in
fiscal year 1998. Also in fiscal year 1998, units sold directly to end users
increased over end user sales volume in fiscal year 1997, due to the Company's
increased focus on large national accounts.
In fiscal year 1998, the Company began selling units under a private
label relationship with Philips Business Electronics N.V. (Philips) of
Eindhoven, The Netherlands. Under the agreement, the Company and Philips
co-developed a videoconferencing system for sale to Philips and ultimate
distribution through Philips' worldwide network of resellers. Sales to Philips
accounted for approximately 37% of the $2,091,707 increase in sales in fiscal
year 1998 over fiscal year 1997.
In July, 1998, the Company entered into another co-development
agreement with VTEL Corporation of Austin, Texas (VTEL). Under the terms of this
agreement the Company expects to co-develop videoconferencing systems for
distribution through VTEL's worldwide network of resellers. The Company expects
to ship and recognize sales on the first production units under this agreement
in the fall of 1998.
The Company also expects increased unit volume in fiscal year 1999
compared to 1998, as a result of continued focus on broader distribution through
resellers, direct sales to national accounts and private label relationships.
The average pricing levels increased in fiscal year 1998 because the
Company's product mix shifted to its new Video Flyer
<PAGE>
product in fiscal year 1998. Video Flyer was first shipped in March, 1997.
Therefore, product mix in fiscal year 1997 included a significant portion of the
Company's previous generation product, which carried a lower overall sales
price. Since the Company may experience increased competition in the future, the
Company plans to continue its strategy of providing additional value added
enhancements to the product in fiscal year 1999 to counteract any downward
pressure on price points.
As a result of higher expected volume and the Company's plan to
mitigate downward pressure on price points, the Company expects fiscal year 1999
revenues to increase compared to fiscal year 1998.
Gross Profit (Loss). The Company generated a gross profit of $2,539,005
or 54.5% of net sales for fiscal year 1998 compared to a gross loss of
$(763,793) or (29.7%) of net sales for fiscal year 1997. The 1997 gross loss
resulted from an inventory writedown to lower of cost or market of $1,430,428
related to the Company's previous generation product. Cost of goods sold in
fiscal year 1998 amounted to $2,123,553, or 45.5% of net sales compared to
$1,904,216 or 74.1% of net sales in fiscal year 1997. The lower cost of goods
sold relative to net sales in fiscal year 1998 resulted from a full year of
production of the Company's Video Flyer product in fiscal year 1998, compared to
only four months in fiscal year 1997. A significant portion of the Company's
sales in fiscal year 1997 were generated from its previous generation product,
which was lower priced and more costly to manufacture than the Video Flyer.
The Company plans to add low cost product enhancements to support price
points and pursue products cost reductions in fiscal year 1999 in order to
minimize any gross profit erosion. The ultimate effects of these factors on
future gross profit is unknown.
Research and Development Expenses. Research and development expenses
were $993,525 or 21.3% of net sales for fiscal year 1998 compared to $1,528,493
of 59.5% of net sales for fiscal year 1997. The decrease as a percentage of net
sales was due to higher sales volume in fiscal year 1998 as discussed above. The
higher amount of dollar spending on research and development in fiscal year 1997
compared to fiscal year 1998 was caused by the Company's full scale development
of its new Video Flyer product in fiscal year 1997. In fiscal year 1998 the
Company's research and development activities were concentrated on enhancements
to the Video Flyer, requiring lower overall expenditures.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $3,478,665 or 74.6% of net sales for fiscal year
1998 compared to $3,445,301 or 134.0% of net sales for fiscal year 1997. The
percentage decrease was due to the higher sales volume in fiscal year 1998. In
fiscal year 1998, the Company increased its marketing and sales expenses in
North America and Europe to help generate higher sales. Offsetting these expense
increases were reductions in the Company's Pacific Rim sales office and in
intangible assets amortization expenses. As a result, the actual dollar amount
of expenses in fiscal year 1998 were comparable with the expenses in fiscal year
1997.
Other Income and Expense. Interest income was $53,249 for fiscal year
1998 compared to $90,324 for fiscal year 1997. The higher interest income in
fiscal year 1997 was due to higher cash and cash equivalents available to the
Company during fiscal year 1997 due to the Company's private offering in
September, 1996 which raised approximately $3,943,000. In fiscal year 1998,
interest expense was $86,649 compared to $40,340 for fiscal year 1997. The
increase in fiscal year 1998 was due to outstanding borrowings on the Company's
line of credit throughout fiscal year 1998. There was no line of credit during
fiscal year 1997.
As a result of the above, the net loss for fiscal year 1998 was
$(1,959,956) or $(0.34) per share, compared to a net loss of $(5,684,690), or
$(1.30) per share for fiscal year 1997.
Net Operating Loss Carryforwards. The Company has net operating loss
carryforwards for financial and federal income tax reporting purposes of
approximately $14,448,000 which can be used to offset taxable income in future
years. Sales of the Company's equity during fiscal year 1998, 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 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. 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 at a significantly higher price than the
Company's previous generation product. In fiscal year 1997, the Company also
focused on building a network of dealers and resellers for its products in
Europe, Australia, the Pacific Rim and the United States to increase unit volume
over fiscal year 1996 levels.
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 previous generation product. The
writedown was a result of the Company's transition to its new generation
<PAGE>
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 less price discounting through the third quarter of
fiscal year 1997 compared to the prior year.
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. 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.
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 fiscal year 1996.
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.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Cash, Cash Equivalents and Marketable Securities. Cash and cash
equivalents, combined with marketable securities, totaled $1,361,648 on June 30,
1998 compared to $1,152,671 on June 30, 1997. The primary reason for the
$208,977 increase during fiscal year 1998 was the completion in January 1998 of
a private offering of the Company's Common Stock, netting proceeds of
$2,522,945, and net proceeds from the Company's line of credit of $497,715,
which were 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 $(2,582,643) during fiscal year 1998 compared to
$(3,728,376) during fiscal year 1997. The cash used in operating activities
resulted mainly from a net loss of $(1,959,956) which was partially offset by
non-cash depreciation and compensation expenses of $255,230 and $100,000
respectively.
In fiscal year 1998, an increase in fourth quarter order activity and
net sales over comparable amounts in the fourth quarter of fiscal year 1997
resulted in increased levels of accounts receivable and inventory at June 30,
1998 compared to June 30, 1997. The Company expects to increase inventory levels
in fiscal year 1999, to support expected growth in sales volume.
In connection with this business growth, accounts payable increased
$246,720 from June 30, 1997 to June 30, 1998, excluding a non-cash reduction in
accounts payable of $375,896 in exchange for the issuance of 210,011 shares of
common stock. Accrued expenses decreased $238,911 from June 30, 1997 to June 30,
1998 as a result of final payment by the Company in fiscal year 1998 to its
third party manufacturer for obligations associated with the manufacture of
previous generation products.
Deferred revenue represents billings to customers in excess of revenue
recognized. Deferred revenue at June 30, 1998 decreased $83,325 primarily as a
result of shipment of units in the first quarter of fiscal year 1998 which had
been pre-billed to customers as of June 30, 1997.
Net Cash Used in Investing Activities. In fiscal year 1998 the Company
invested a portion of the proceeds of a January, 1998 private placement of its
common stock in marketable securities. As of June 30, 1998, $197,995 of these
securities had matured and a total of $1,169,603 had been invested.
During fiscal year 1998, the Company also invested cash in new
equipment and leasehold improvements totaling $227,218. The increased investment
in fiscal year 1998 was made to support of the overall growth in the Company.
Net Cash Provided by Financing Activities. Cash provided by financing
activities was $3,010,891, which was comprised primarily of $2,522,945 from a
private offering of the Company's Common stock in January 1998, and net amounts
borrowed on the
<PAGE>
Company's line of credit of $497,715.
In April, 1998 the Company amended its commercial loan agreement with a
bank. The new agreement provided the Company with a $1,000,000 committed line of
credit which is secured by all corporate assets. The facility provides working
capital based on a borrowing base comprised of accounts receivable, inventory
and marketable securities.
Management plans to continue to increase sales and improve operating results
through increased marketing and broader distribution of its products through on
expanded dealer network as well increased emphasis on larger national and
private label accounts. 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 these
sources of cash are not sufficient, management would seek additional financing
or would conserve cash by reducing administrative, product development, and
sales and marketing expenses.
YEAR 2000 ISSUES
The Company is currently in the process of assessing Year 2000 issues
relative to its business. The following information outlines the current status
of the Company's understanding and plans regarding the Year 2000 problem.
COMPANY STATE OF READINESS.
Description of the Company's information technology and non-information
technology systems. The Company uses a widely used PC based information system
to process financial transactions and generate financial information. The
Company also uses various other PC based software packages to support its
business. These systems are linked by a network at the Company's headquarters in
Edina, Minnesota. No significant information systems are located outside the
Company's headquarters, other than individual stand alone PC software packages
used by sales personnel. The Company's main product, Video Flyer and similar
products, utilize imbedded technology supported by microcontrollers to operate.
While the Company is in the process of assessing Year 2000 issues relative to
its vendors, products and related components used in the product, the Company
knows that its Video Flyer and similar products do not utilize time or dates to
operate.
Status of Company Timetable for Year 2000 Readiness. The Company has
established the following phases and timetable for becoming ready for the Year
2000:
Awareness Phase - The Company has researched the Year 2000 issue and
has had communication both internally and with outside parties including its
independent auditors, its bank, key suppliers and certain customers. The Company
is aware of the potential issues surrounding the Year 2000 problem and this
phase is complete.
Assessment Phase - This phase includes establishing a Year 2000 team
and investigating how Year 2000 issues may impact the Company, both in terms of
the specific aspects of the business which could be affected, and the
consequences to the Company if it is not prepared. The Company is currently
conducting its assessment phase and expects to complete it by December 31, 1998.
Renovation Phase - This process will begin as soon as the assessment
phase is completed and reported to the Board of Directors. The renovation phase
covers all Company actions to correct systems which are not Year 2000 compliant,
or develop alternate systems in all areas which are determined to have a
significant impact on the Company if not corrected. The Company expects to
initiate this phase in January 1999, and complete it by March 31, 1999.
Validation Phase - This phase will include all Company activities
performed to test any new or alternate systems for conducting its business, and
taking corrective actions in situations where new systems do not properly handle
year 2000 problems.
This phase is expected to begin in April, 1999 with completion scheduled for
June 30, 1999.
Implementation Phase - In this phase, the Company will begin utilizing
all newly developed systems which are installed to correct Year 2000 problems as
they relate to the Company. This phase is expected to begin with the start of
the Company's fiscal year 2000, which begins July 1, 1999.
Description of Company relationships with third parties relative to
Year 2000 issues. The Company has relationships with key suppliers to support
its business. These suppliers include its third party manufacturer, (Altron,
Inc.), suppliers for critical components including 8x8, Inc., suppliers for
third party software utilized in the Company's product and other key vendors.
While the Company believes alternate vendors could be utilized to provide
comparable products and services currently provided by its key vendors, the
Company currently relies on its relationships with its key vendors to conduct
its business, and changes in sources of key products and services could have a
material impact on the Company. The Company is currently in the process of
assessing the impact of these third party risks, and is expecting to complete
this process by December 31, 1998.
The Company also has established relationships with two key customers
to co-develop and provide products on a private
<PAGE>
label basis. These customers are Philips Business Electronics, N.A. and V-TEL,
Inc. The Company expects to sell a significant amount of product to these
customers in the future. The Company expects that both customers will demand
Year 2000 compliance, and non-compliance could disrupt the Company's
relationship with these customers and significantly impact future sales volume.
The Company expects to gain a detailed understanding of the expectations of
these two key customers and other large customers as well during its assessment
phase, which is expected to be complete by December 31, 1998. Corrective actions
relative to these key customer relationships as well as key suppliers are
expected to be included in the Company's renovation, validation and
implementation phases.
COSTS TO ADDRESS COMPANY'S YEAR 2000 ISSUES.
Since the Company has not completed its assessment of the year 2000
issues relative to its business, the costs of remediation cannot yet be
reasonably estimated. To date, the costs of assessing the year 2000 problem have
been insignificant, and based on its assessment so far, the Company does not
believe remediation costs will be material to the Company's financial condition
or operating results.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES.
A worst case scenario relative to the Year 2000 issue would be that the
Company needs to replace both its information technology and non-information
technology systems, and develop alternate sources of supply for its critical
components, third party software, and third party manufacturing. Because of its
current size, the Company believes replacement of its current information
systems would not result in costs material to the Company's financial condition
or results of operations. In the event the Company were forced to develop
alternate sources of supply in any key areas, significant costs could result,
but amounts have not yet been estimated. The Company expects to analyze these
uncertainties as part of its Year 2000 assessment phase, and develop a plan of
action to minimize the uncertainties and mitigate the potential costs involved,
should the worst case scenario occur.
CONTINGENCY PLANS.
The Company does not currently have a contingency plan to handle the
worst case scenario above, but expects to develop one as part of its assessment
phase to be completed by December 31, 1998.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statement and Independent Auditors' Report
thereon are included herein.
Page
----
Independent Auditors' Report...........................
Balance Sheets as of June 30, 1998 and 1997............
Statements of Operations for the years ended
June 30, 1998, 1997 and 1996.........................
Statements of Stockholders' Equity for
the years ended June 30, 1998, 1997 and 1996.........
Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996...........................
Notes to Financial Statements..........................
<PAGE>
RSI SYSTEMS, INC.
Financial Statements
June 30, 1998 and 1997
<PAGE>
RSI SYSTEMS, INC.
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page(s)
Independent Auditors' Report............................................. 1
Financial Statements:
Balance Sheets...................................................... 2
Statements of Operations............................................ 3
Statements of Stockholders' Equity.................................. 4
Statements of Cash Flows............................................ 5
Notes to Financial Statements............................................ 6-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
RSI Systems, Inc.:
We have audited the accompanying balance sheets of RSI Systems, Inc. (the
Company) as of June 30, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RSI Systems, Inc. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended June 30, 1998, in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota
August 14, 1998
1
<PAGE>
RSI SYSTEMS, INC.
Balance Sheets
June 30, 1998 and 1997
<TABLE>
<CAPTION>
============================================================================================================
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 382,093 1,152,671
Marketable securities 979,555 --
Accounts receivable, net of allowance for doubtful
accounts of $254,000 in 1998 and $210,000 in 1997 1,541,626 747,427
Inventories (note 4) 637,422 544,613
Prepaid expenses 56,949 42,077
- ------------------------------------------------------------------------------------------------------------
Total current assets 3,597,645 2,486,788
- ------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and equipment 1,038,463 718,998
Leasehold improvements 50,625 4,818
Less accumulated depreciation and amortization (560,403) (332,589)
- ------------------------------------------------------------------------------------------------------------
Net property and equipment 528,685 391,227
- ------------------------------------------------------------------------------------------------------------
$ 4,126,330 2,878,015
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Current liabilities:
Revolving credit facility (note 5) 497,715 --
Current portion of capital lease obligations (note 6) 55,388 --
Accounts payable 1,037,331 1,166,507
Accrued expenses (note 7) 124,254 363,165
Deferred revenue 40,664 123,989
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 1,755,352 1,653,661
- ------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Capital lease obligations, net of current portion (note 6) 107,639 --
- ------------------------------------------------------------------------------------------------------------
Total long-term liabilities 107,639 --
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity (note 10):
Common stock, par value $.01 per share, authorized 10,000,000
shares; 6,657,281 and 4,757,265 issued and outstanding at
June 30, 1998 and 1997, respectively 66,573 47,573
Additional paid-in capital 17,238,322 14,358,381
Accumulated deficit (15,041,556) (13,081,600)
Unearned compensation--restricted stock -- (100,000)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,263,339 1,224,354
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 6 and 8)
- ------------------------------------------------------------------------------------------------------------
$ 4,126,330 2,878,015
============================================================================================================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
RSI SYSTEMS, INC.
Statements of Operations
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
==========================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 4,662,558 2,570,851 1,625,720
Cost of goods sold 2,123,553 1,904,216 1,640,508
Inventory writedown to lower of cost or market (note 4) -- 1,430,428 382,192
- ----------------------------------------------------------------------------------------------------------
Gross profit (loss) 2,539,005 (763,793) (396,980)
Research and development 993,525 1,528,493 1,540,416
Selling, general, and administrative 3,478,665 3,445,301 3,121,796
- ----------------------------------------------------------------------------------------------------------
Operating loss (1,933,185) (5,737,587) (5,059,192)
Other income (expense):
Other income 6,629 2,913 --
Interest income 53,249 90,324 180,521
Interest expense (86,649) (40,340) (154)
- ----------------------------------------------------------------------------------------------------------
Other income (expense), net (26,771) 52,897 180,367
- ----------------------------------------------------------------------------------------------------------
Net loss $(1,959,956) (5,684,690) (4,878,825)
==========================================================================================================
Basic loss per share $ (0.34) (1.30) (1.56)
Diluted loss per share $ (0.34) (1.30) (1.56)
==========================================================================================================
Weighted average common shares outstanding:
Basic 5,706,145 4,378,326 3,127,189
Diluted 5,706,145 4,378,326 3,127,189
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
RSI SYSTEMS, INC.
Statements of Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996
<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, 1995 1,841,015 $ 18,410 2,691,623 2,160 (2,518,085) -- 194,108
Common stock sold in public offering
[note 10(a)] 1,383,750 13,838 7,394,342 -- -- -- 7,408,180
Exercises of stock options 26,250 262 60,737 -- -- -- 60,999
Common stock warrants issued to directors -- -- 67,500 -- -- -- 67,500
Common stock warrants issued to underwriter -- -- 50 -- -- -- 50
Foreign currency translation adjustment -- -- -- 26,240 -- -- 26,240
Net loss for the year ended June 30, 1996 -- -- -- -- (4,878,825) -- (4,878,825)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1996 3,251,015 32,510 10,214,252 28,400 (7,396,910) -- 2,878,252
Common stock sold in private placement
[note 10(a)] 1,500,000 15,000 3,927,892 -- -- -- 3,942,892
Exercise of stock options 1,250 13 4,362 -- -- -- 4,375
Common stock warrant issued to underwriter -- -- 50 -- -- -- 50
Shutdown of foreign subsidiary -- -- -- (28,400) -- -- (28,400)
Restricted stock award [note 8(b)] -- -- 200,000 -- -- (100,000) 100,000
Common stock issued in settlement of claim 5,000 50 11,825 -- -- -- 11,875
Net loss for the year ended June 30, 1997 -- -- -- -- (5,684,690) -- (5,684,690)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 4,757,265 47,573 14,358,381 -- (13,081,600) (100,000) 1,224,354
Common stock sold in private placement
[note 10(a)] 1,671,255 16,712 2,506,233 -- -- -- 2,522,945
Common stock warrant issued to underwriter -- -- 100 -- -- -- 100
Restricted stock award [note 8(b)] 18,750 188 (188) -- -- 100,000 100,000
Common stock issued in settlement of trade
payables [note 10(a)] 210,011 2,100 373,796 -- -- -- 375,896
Net loss for the year ended June 30, 1998 -- -- -- -- (1,959,956) -- (1,959,956)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 6,657,281 $ 66,573 17,238,322 -- (15,041,556) -- 2,263,339
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
RSI SYSTEMS, INC.
Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
==================================================================================================================
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,959,956) (5,684,690) (4,878,825)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 255,230 239,867 194,316
Inventory writedown to lower of cost or market (note 4) -- 1,430,428 382,192
Compensation from restricted stock 100,000 100,000 --
Common stock issued in settlement of claim -- 11,875 --
Foreign currency translation adjustment -- (28,400) 26,240
Changes in operating assets and liabilities:
Accounts receivable (794,199) (222,994) (453,075)
Inventories (92,809) (365,173) (567,918)
Prepaid expenses (15,393) 143,102 (144,741)
Accounts payable 246,720 887,687 (917,298)
Accrued expenses (238,911) (364,067) 321,906
Deferred revenue (83,325) 123,989 --
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,582,643) (3,728,376) (6,037,203)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 197,995 -- --
Purchase of marketable securities (1,169,603) -- --
Additions to property and equipment (227,218) (99,191) (458,604)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,198,826) (99,191) (458,604)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,522,945 3,947,267 7,469,179
Proceeds from issuance of warrants 100 50 50
Repayments of obligations under capital leases (9,869) -- --
Net proceeds from revolving line of credit 497,715 -- --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,010,891 3,947,317 7,469,229
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (770,578) 119,750 973,422
Cash and cash equivalents at beginning of year 1,152,671 1,032,921 59,499
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 382,093 1,152,671 1,032,921
==================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 83,600 39,970 154
==================================================================================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During fiscal year 1998, the Company entered into capital lease obligations
for the purchase of $173,204 of equipment.
During fiscal year 1998, the Company issued 210,011 shares of its common
stock in exchange for the settlement of $375,896 of trade payables.
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.
See accompanying notes to financial statements.
5
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS
Founded in 1993, RSI Systems, Inc. (the Company) designs, manufactures,
and resells business level videoconferencing systems for domestic and
international markets. These systems are available in a variety of
configurations and price points.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME (SFAS No. 130), is effective for the Company for
interim and annual periods beginning after December 15, 1997. This
standard prescribes a new way of reporting and displaying the balances
of changes in certain equity accounts. SFAS No. 130 does not affect the
measurement or accounting for these accounts. Effective for the year
ending June 30, 1999, and quarterly reporting thereafter, SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(SFAS No. 131), replaces existing disclosure requirements for industry
and geographic segments with requirements for annual and quarterly
disclosure information about reportable operating segments and certain
geographic data. By their nature, SFAS Nos. 130 and 131 will, when
implemented, have no effect on the Company's reported operations or
financial position.
(b) 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 $359,891 and $1,015,627 at
June 30, 1998 and 1997, respectively.
(c) MARKETABLE SECURITIES
The Company has adopted the provisions of SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS No. 115).
Marketable securities have an original maturity of more than three
months and a remaining maturity of less than 1 year. These investments
are classified as held-to-maturity and are carried at cost in accordance
with SFAS No. 115. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. This
amortization and accretion, as well as interest income and realized
gains and losses, are included in interest income. Marketable securities
at June 30, 1998, represent investments in government bonds.
(d) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in
first-out (FIFO) method.
(e) 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.
(Continued)
6
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(f) CAPITALIZED SOFTWARE COSTS
Software development costs are accounted for in accordance with SFAS No.
86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED. Costs associated with the planning and designing
phase of software development, including coding and testing activities
necessary to establish technological feasibility, are classified as
research and development and expensed as incurred. Once technological
feasibility has been determined, additional costs incurred in
development, including coding, testing, and product quality assurance
are capitalized, when material. During 1998, 1997 and 1996, software
development costs subject to capitalization were not material and,
accordingly, were not capitalized.
(g) 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 has been
recognized for its stock-based compensation plans. The Company has
adopted the disclosure requirements under SFAS No. 123, ACCOUNTING AND
DISCLOSURE OF STOCK-BASED COMPENSATION.
(h) 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 [note 8(c)].
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.
(i) REVENUE RECOGNITION
The Company recognizes revenue from system sales upon shipment. Post
sale customer support costs are insignificant and are expensed as
incurred.
(j) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
(k) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES (SFAS No. 109). Under the asset and
liability method of SFAS 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 SFAS 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.
(l) ADVERTISING COSTS
All costs related to advertising the Company's products are expensed in
the period incurred.
(Continued)
7
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(m) NET LOSS PER SHARE
During fiscal 1998, the Company adopted SFAS No. 128, EARNINGS PER SHARE
(SFAS No. 128). SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All net loss per share
amounts for all periods have been presented and, where appropriate,
restated to conform to SFAS No. 128 requirements.
(n) 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.
(o) CHANGES IN PRESENTATION
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
(3) LIQUIDITY
In January 1998, the Company completed a private offering of its common
stock. The Company received $2,522,945, net of offering costs, in
exchange for 1,671,255 shares of common stock ($1.65 per share) [note
10(a)]. In April 1998, the Company amended a previous commercial loan
agreement with a Bank for a $1,000,000 revolving credit facility (note
5).
Management plans to continue to increase sales and improve operating
results through increased marketing and broader distribution of products
through an expanded dealer network as well as increased emphasis on
larger national and private label accounts. The Company believes that
funds remaining from the private placement, funds generated from
operations, and funds available under the revolving credit facility 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:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Components $ 476,261 374,234
Finished goods 161,161 170,379
- --------------------------------------------------------------------------------
$ 637,422 544,613
================================================================================
(Continued)
8
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Inventory at June 30, 1997 and 1996 reflected 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 [note 8(c)].
(5) REVOLVING CREDIT FACILITY
In April 1998, the Company completed a commercial loan agreement with a
bank for a $1,000,000 committed line of credit facility. This agreement
amends and restates the previous commercial loan agreement dated July
1997. The facility is secured by all corporate assets and provides
working capital based on a borrowing base comprised of accounts
receivable, inventory, and marketable securities. The facility contains
certain covenants and conditions, including minimum net worth and
tangible net worth levels. Interest on outstanding borrowings currently
accrues at the bank's base rate, which was 8.5 % at June 30, 1998. On
June 30, 1998, borrowings on the facility were $497,715, leaving
$502,285 unused and available. The facility has a maturity date of June
26, 1999.
(6) LEASES
(a) OPERATING 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:
- --------------------------------------------------------------------------------
1999 $ 80,000
2000 24,000
2001 10,000
2002 4,000
================================================================================
Total rental expense was $204,223, $135,901, and $136,680 for the years
ended June 30, 1998, 1997, and 1996, respectively.
(b) CAPITAL LEASES
During the year ended June 30, 1998, the Company entered into capital
lease agreements for equipment. The following is a summary of the leased
equipment as of June 30, 1998:
================================================================================
Equipment $ 173,204
Less accumulated amortization (6,411)
- --------------------------------------------------------------------------------
$ 166,793
================================================================================
(Continued)
9
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The following is a schedule of future minimum lease payments under
capital leases with the present value of the minimum lease payments as
of June 30, 1998:
================================================================================
Years ending June 30
- --------------------------------------------------------------------------------
1999 $ 64,857
2000 64,857
2001 54,988
- --------------------------------------------------------------------------------
Total minimum lease payments 184,702
Less amount representing interest from 9% to 14% (21,675)
- --------------------------------------------------------------------------------
Present value of minimum lease payments 163,027
Less current portion (55,388)
- --------------------------------------------------------------------------------
$ 107,639
================================================================================
(7) ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Inventory [note 8(c)] $ - 247,837
Other 124,254 115,328
- --------------------------------------------------------------------------------
$ 124,254 363,165
================================================================================
(8) COMMITMENTS AND CONTINGENCIES
(a) SOFTWARE LICENSE AGREEMENT
During 1998, 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 up to $5.00 per unit of videoconferencing
systems containing the software. Sales of the related systems began in
fiscal year 1998.
(Continued)
10
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
During 1996, the Company entered into a software license agreement with
a separate software development company. Pursuant to the agreement, in
addition to upfront licensing and production fees of $90,000, the
Company is to pay a royalty fee of $40 on each of the first 1,000
videoconferencing 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.
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.
(b) 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, 1998, 18,750 shares of the stock had
been issued. Total compensation expense recognized in fiscal years 1998
and 1997 related to this stock grant was $100,000 each year.
(c) 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 videoconferencing 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.
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.
During 1996 and 1995, the Company's videoconferencing 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 videoconferencing 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.
(Continued)
11
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In May 1996, the Company 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 guaranteed
by 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.
(d) DISTRIBUTOR, DEALER, AND MANUFACTURER REPRESENTATIVE AGREEMENTS
The Company is a party to distributor or dealer agreements 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.
(9) INCOME TAXES
The Company is a Subchapter C corporation for income tax reporting
purposes beginning July 1, 1994.
At June 30, 1998, the Company has approximately $14,448,000 of net
operating loss carryforwards and $118,000 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 of the public offering discussed at
note 10(a), a Section 382 ownership change occurred. As a result of
prior ownership changes, a portion of the net operating losses are
limited in use in any one year. Subsequent ownership changes may further
limit the use of the net operating losses in any one year.
The provisions for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate for the three years
ended June 30, 1998, 1997, and 1996, are as follows:
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
Expected federal benefit 34% 34 34
State taxes, net 6 6 6
Research credits 6 - -
Change in valuation allowance (46) (40) (40)
- --------------------------------------------------------------------------------
Actual tax benefit -% - -
================================================================================
The tax effects of items which comprise a significant portion of
deferred tax assets as of June 30, 1998 and 1997, are as follows:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,847,000 5,060,000
Other 279,000 160,000
Valuation allowance (6,126,000) (5,220,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ - -
================================================================================
(Continued)
12
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1998 and 1997 are fully offset by a valuation allowance.
The valuation allowance is reviewed periodically.
(10) CAPITAL STOCK
(a) COMMON STOCK
In January 1998, the Company completed a private offering of its common
stock. The Company received $2,522,945, net of offering costs, in
exchange for 1,671,255 shares of common stock ($1.65 per share). A
registration statement for these shares was declared effective by the
Securities and Exchange Commission and the shares are registered and
freely tradable as of June 30, 1998.
On October 14, 1997, the Company issued 210,011 shares of its common
stock as payment on $375,896 in trade debt to two of the Company's key
vendors. A registration statement for these shares was declared
effective by the Securities and Exchange Commission and the shares are
registered and freely tradable as of June 30, 1998.
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 was 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.
(b) STOCK WARRANTS
In January 1998, in connection with the Company's private offering of
1,671,255 shares of its common stock, the Company issued warrants to the
placement agent for the purchase of 167,126 shares of its common stock.
Such warrants have a ten year term and are exercisable at $1.65 per
share.
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.
In addition, as of June 30, 1998, there were outstanding warrants held
by two Directors of the Company, for the purchase of 174,000 shares of
common stock at exercise prices ranging from $1.00 to $3.00 per share.
There were also outstanding warrants held by other third parties for the
purchase of 266,000 shares of the Company's common stock at exercise
prices ranging from $.50 to $1.00 per share.
(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).
(Continued)
13
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Company has reserved 900,000 shares of common stock for issuance
under the plan. At June 30, 1998, 183,750 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.
A summary of changes in common stock options during the years ended June
30, 1998 and 1997, is as follows:
================================================================================
Weighted
average
exercise
price per
Shares share
- --------------------------------------------------------------------------------
Outstanding at June 30, 1996 253,500 $ 5.06
Granted 460,000 1.18
Exercised (1,250) 3.50
Canceled (151,500) 4.02
- --------------------------------------------------------------------------------
Outstanding at June 30, 1997 560,750 2.16
Granted 292,500 2.24
Exercised - -
Canceled (137,000) 2.28
- --------------------------------------------------------------------------------
Outstanding at June 30, 1998 716,250 2.17
================================================================================
Exercisable at June 30, 1998 362,083 $ 2.24
================================================================================
Options outstanding at June 30, 1998 have an exercisable price per share
ranging between $1.125 and $9.25 and have a weighted average exercisable
price of $2.24 and a weighted average remaining contractual life of 7.6
years.
The Company also has issued stock options outside the stock option plan.
In July 1996, the Company issued stock options for the purchase of
110,000 shares of the Company's common stock to an employee of the
Company. The stock options have an exercise price of $8.00 per share and
vest at a rate of 25% every six months beginning January 1997.
In September 1997, the Company also granted stock options for the
purchase of 71,000 shares of the Company's common stock to three
employees of the Company. The stock options have an exercise price of
$2.81 per share and vest at a rate of one-third per year beginning
September 1998.
In September 1997, the Company also granted stock options for the
purchase of 200,000 shares of the Company's common stock to an employee
of the Company. The stock options have an exercise price of $2.81 per
share and vest at a rate of 100,000 in September 1997, 50,000 in June
1998, and 50,000 in June 1999.
(Continued)
14
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
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
-------------------------------
1998 1997
- --------------------------------------------------------------------------------
Net loss:
As reported $ (1,959,956) (5,684,690)
Pro forma (2,452,932) (5,907,444)
Net loss per common share:
As reported (0.34) (1.30)
Pro forma (0.43) (1.35)
================================================================================
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 1997 and 1998,
respectively; risk-free interest rates of 6.88% and 6.16%, expected
option lives of 5.8 years and 6.77 years, expected volatility of 65.3%
and 55.5%, 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 1998 and 1997
were as follows:
================================================================================
Fiscal 1998 grants $ 1.49
Fiscal 1997 grants .71
================================================================================
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, marketable securities, and
revolving credit facility approximates fair value because of the short
maturity of those instruments.
(Continued)
15
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(12) NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
================================================================================================
Years ended June 30
--------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (1,959,956) (5,684,690) (4,878,825)
- ------------------------------------------------------------------------------------------------
Net loss available to common stockholders $ (1,959,956) (5,684,690) (4,878,825)
================================================================================================
Denominator:
Weighted average shares outstanding 5,706,145 4,378,326 3,127,189
================================================================================================
Basic loss per share $ (0.34) (1.30) (1.56)
================================================================================================
Diluted loss per share $ (0.34) (1.30) (1.56)
================================================================================================
</TABLE>
(13) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to one customer represented approximately 17% of net sales in
fiscal 1998. In addition, accounts receivable from this customer
represented approximately 33% of total accounts receivable as of June
30, 1998. In fiscal 1996, sales to three unaffiliated customers
aggregated approximately 32% of net sales. 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.
16
<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
- ---- --- ---------------------
Donald C. Lies 50 Chairman of the Board, Chief
Executive Officer and President
Richard F. Craven 55 Director
Byron G. Shaffer 65 Director
David W. Stassen 46 Director
Manfred D. Haiderer 58 Director
James D. Hanzlik 42 Chief Financial Officer
Marti D. Miller 41 Vice President Engineering
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, 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.
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.
MANFRED D. HAIDERER was elected as a director of the Company in
February 1998. Mr. Haiderer has served as President and V.P., U.S.A. Operations
for Richards-Wilcox Inc., a manufacturer of office and material handling
products since 1990. Prior to that, Mr. Haiderer was President and CEO of Baker
Material Handling Corporation.
JAMES D. HANZLIK became Chief Financial Officer on January 9, 1997.
Before joining the Company, Mr. Hanzlik was Vice President, Controller for
Sterner Lighting Group, a manufacturer of commercial lighting. Prior to that,
Mr. Hanzlik served as Controller and Product Group Manager for Despatch
Industries Ltd. a manufacturer of industrial heat processing equipment.
MARTI D. MILLER became Vice President of Engineering in August, 1995.
Before joining the Company, Mr. Miller was
<PAGE>
Director of Engineering for Transition Networks, Inc.
The members of the Board of Directors are elected annually at the 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. Shaffer,
Craven, Stassen, and Haiderer, 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. Shaffer, Craven Stassen and Haiderer, 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, 1998, 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
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
for services rendered for the years ended June 30, 1996, 1997 and 1998 to (i)
all persons who served as the Chief Executive Officer of the Company during
fiscal year 1998 and (ii) the other most highly compensated executive officers
of the Company whose salary and bonus exceeded $100,000 in fiscal year 1998 (the
"Named Executive Officers"). Other than those individuals listed below, no
executive officer of the Company received cash compensation of more than
$100,000 in fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
RESTRICTED ALL OTHER
NAME AND PRINCIPAL FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) OPTIONS(#) ($)
- -------- ---- ---------- --------- ---------- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 1997 150,000 0 200,000(1) 215,000 7,800
CHIEF EXECUTIVE
OFFICER, AND PRESIDENT
1998 171,693 0 0 200,000 7,800
Marti D. Miller 1996 85,538 0 0 20,000 0
VICE PRESIDENT, 1997 96,000 0 0 40,000 0
ENGINEERING 1998 107,723 0 0 20,000 0
- --------------------
</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, 1998, Mr. Lies owned
18,750 shares of the restricted stock and had unvested interest in
6,250 shares of the restricted stock pursuant to the agreement, with an
aggregate value of $68,750 based on the June 30, 1998, closing bid
price of the Company's Common Stock of $2.750 per share.
OPTION GRANTS AND EXERCISES
<PAGE>
The tables below set forth information about the stock options held by
the Named Executive Officers and the potential realizable value of the options
held by such person on June 30, 1998. No stock options were exercised by the
Named Executive Officers of the Company during fiscal year 1998.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES
NAME OPTIONS GRANTED (#)(1) IN FISCAL YEAR 1998 EXERCISE PRICE ($/SH) EXPIRATION DATE
---- ---------------------- ------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Donald C. Lies 200,000(2) 45.1% 2.81 September 1, 2007
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
MARTI D. MILLER
VICE PRESIDENT, 20,000(3) 4.5% 2.81 September 1, 2007
ENGINEERING
</TABLE>
- --------------------
(1) During fiscal year 1998, options to acquire an aggregate of 443,500
shares of Common Stock were granted to all employees and options to
acquire 120,000 shares of Common Stock were granted to non-employee
directors and other non-employees.
(2) 200,000 options were granted to Mr. Lies on September 2, 1997 and
100,000 were vested and exercisable on the date of the grant. 50,000
options became vested and exercisable on June 30, 1998 and the
remaining 50,000 options become vested and exercisable on June 30,
1999.
(3) 20,000 options were granted to Mr. Miller on September 2, 1997. The
options become vested and exercisable in three equal installments
commencing one year after the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT JUNE 30, 1998 (#) AT JUNE 30, 1998 ($)(1)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 0 0 320,833 94,167 142,291 27,084
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
MARTI D. MILLER
VICE PRESIDENT, 0 0 30,000 50,000 32,500 32,500
ENGINEERING
- --------------------
</TABLE>
(1) Based on the June 30, 1998, closing bid price of the Company's Common
Stock of $2.750 per share.
EMPLOYEE AGREEMENTS
The Company and Donald C. Lies 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 October, 1997, Mr. Lies's annual
salary was increased to $180,000. 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.
<PAGE>
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 market value
on the date of grant, 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 exercisable at market value on the date of grant, vesting
in equal increments of 25% every three months and expiring ten years from the
date of grant. On February 6, 1998 options to acquire 20,000 shares of the
Company's Common Stock were granted to non-employee directors, exercisable at
market value on the date of grant, vesting in equal increments of 25% every
three months and expiring ten years from the date of grant. 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 18, 1998, 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 5555 West 78th Street, Suite F, Minneapolis, MN, 55439.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
- ---- ------------------ ----------------
<S> <C> <C>
Donald C. Lies................................ 396,658 (1) 5.7
Richard F. Craven............................. 993,000 (2) 14.5
Byron G. Shaffer.............................. 374,000 (3) 5.6
David W. Stassen.............................. 75,000 (4) 1.1
Manfred D. Haiderer........................... 20,000 (5) *
Marti D. Miller 41,667 (6) *
All Current Executive Officers and
Directors as a Group (6 persons). 1,900,325 (7) 25.8
Aaron Boxer Revocable Trust 495,888 7.5
Perkins Capital Management 499,550 7.5
</TABLE>
- --------------------
* Indicates ownership of less than 1%.
(1) Includes 348,333 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes (i) 176,500 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 45,000 shares owned
by Mr. Craven's three children.
(3) Includes (i) 67,500 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 8000 shares owned
by Mr. Shaffer's four children.
(4) Includes 35,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(5) Includes 20,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(6) Includes 41,667 shares which may be acquired within 60 days upon the
exercise of stock options.
(7) Includes 695,250 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
<PAGE>
Mr. Richard F. 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
$108,405, $97,500 and $28,661 during fiscal year 1998, 1997 and 1996
respectively. The Company believes its transactions with Pointe Design have been
on terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis.
In connection with the private offering of the Company's Common Stock
in January 1998, certain members of the Board of Directors of the Company
purchased a total of 297,725 shares of the Company's Common Stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
See Exhibit Index on page 37 which is incorporated herein by
reference. Exhibits that cover management contract or compensatory
plans or arrangements are marked with an asterisk (*) in the Exhibit
Index.
(b) REPORTS ON FORM 8-K
None.
<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 18, 1998 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 18, 1998.
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/ Donald C. Lies Chairman of the Board, Chief
- --------------------------------- Executive Officer and President
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/ Manfred D. Haiderer Director
- ---------------------------------
Manfred D. Haiderer
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1998
<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 as exhibit 10.13 to the Company's
and noncompete Agreement 1997 10-KSB and incorporated herein by reference
10.14 Non-Qualified Stock Option Agreement Filed as exhibit 10.14 to the Company's
with Donald C. Lies* 1997 10-KSB and incorporated herein by reference
</TABLE>
* Denotes an exhibit that covers management contracts or compensatory plans
or arrangements
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title of Document Method of Filing
- ----------- ----------------- ----------------
<S> <C> <C>
10.15 Restricted Stock Agreement with Filed as exhibit 10.15 to the Company's
Donald C. Lies* 1997 10-KSB and incorporated herein by reference
10.16 Qualified Stock Option Agreement with Filed as exhibit 10.16 to the Company's
Donald C. Lies* 1997 10-KSB and incorporated herein by reference
10.17 Termination of Stock Purchase and Filed as exhibit 10.17 to the Company's
Subscription Agreement* 1997 10-KSB and incorporated herein by reference
10.18 Norwest Loan Agreement Filed as exhibit 10.18 to the Company's
1997 10-KSB and incorporated herein by reference
10.19 Selling Agency Agreement with Miller Filed herewith electronically.
Johnson & Kuehn Incorporated dated
December 29, 1997.
10.20 Amended and Restated Credit and Security Filed herewith electronically
Agreement (Norwest Bank Minnesota, N. A.)
10.21 Amended and Restated Credit and Security Filed herewith electronically
Agreement ( Norwest Business Credit, Inc.)
10.22 First Amendment to the Eximbank guar- Filed herewith electronically
anteed Amended and Restated Credit and
Security Agreement
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 10.19
RSI SYSTEMS, INC.
SELLING AGENCY AGREEMENT
MINIMUM OFFERING: $1,500,000 OF COMMON STOCK
MAXIMUM OFFERING: $3,250,000 OF COMMON STOCK
Miller Johnson & Kuehn Incorporated Minneapolis, Minnesota
5500 Wayzata Boulevard December 29, 1997
Suite 800 - 8th Floor
Minneapolis, MN 55416
Gentlemen:
The undersigned, RSI Systems, Inc., (the "Company") hereby confirms its
agreement with you (the "Selling Agent") as follows:
1. DESCRIPTION OF OFFERING. The Company proposes to offer and sell to
private investors through you, as its exclusive agent (the "Offering"), a
minimum of $1,500,000 of Common Stock (the "Minimum Offering") and a maximum of
$3,250,000 of Common Stock (the "Maximum Offering"). The shares of Common Stock
(the "Shares") will be sold at a per share price of $1.65. Purchases will be
made pursuant to a Subscription Agreement between the Company and each investor.
The terms of the Subscription Agreement shall be reasonably acceptable to the
Company and the Selling Agent.
2. APPOINTMENT OF AGENT. On the basis of the warranties,
representations and agreements of the parties hereto, the Company hereby
appoints the Selling Agent, and the Selling Agent hereby accepts such
appointment, to act as the Company's exclusive agent in connection with the
offer and sale of the Shares to private investors, on a best efforts basis. The
Selling Agent will use its best efforts to sell the Shares, but there is no
commitment by the Selling Agent to purchase or sell all or any of the Shares.
The Selling Agent may utilize the services of sub-agents, but the use of
sub-agents shall not increase the compensation payable by the Company hereunder.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Selling Agent as follows:
(a) The Company will prepare a disclosure document or package
consisting of a description of the Offering, intended use of the
proceeds from the Offering, recent developments and risk factors
regarding the Company, and other information including the Company's
most recent annual report on Form 10-KSB, the Company's most recent
<PAGE>
quarterly report on Form 10-QSB, the Company's most recent definitive
Proxy Statement and the Company's press releases released since January
1, 1997 (which, together with any supplements or amendments thereto
including any documents incorporated by reference therein is herein
defined as the "Disclosure Package"). The Company will also prepare and
file a Form D, if applicable, with the Securities and Exchange
Commission (the "Commission"). The Disclosure Package and Form D will
be subject to your approval, which will not be unreasonably withheld.
The Company has not taken, or omitted to take, any action and will not
take, or omit to take, any action which would have the result of making
the exemptions from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") or Regulation
D thereunder unavailable for the offer and sale of the Shares. The
Company and the Selling Agent shall mutually determine whether to issue
a press release under Rule 135c of the Securities Act and the contents
of such release.
(b) As of the commencement date of the Offering and until and
as of the date of any Closing (as hereinafter defined), the Disclosure
Package will (i) fairly present all material information regarding the
Company; and (ii) not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made; provided, that the
representations and warranties in this paragraph shall not apply to
statements or omissions made in reliance upon written information
furnished to the Company by the Selling Agent expressly for use in
preparation of the Disclosure Package.
(c) The financial statements (including all related schedules
and notes) set forth in the Disclosure Package will fairly present the
financial condition and results of operations of the Company as of the
dates and for the periods indicated; such statements will have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods indicated; and, in the
event the Disclosure Package shall include a report of a public
accountant, such report shall be by an independent public accountant
within the meaning of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations promulgated
thereunder.
(d) The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Minnesota,
with power and authority to own its properties and conduct its
business, as will be described in the Disclosure Package. The Company
has no subsidiaries.
(e) The Company is duly qualified to do business as a foreign
corporation and is in good standing in all states or jurisdictions in
which the ownership or leasing of its property or the conduct of its
business requires such qualification and the failure to be so qualified
would have a material, adverse effect on the Company's business.
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(f) The Company has full legal power, right and authority to
enter into this Agreement and the Agent's Warrant (as defined herein).
This Agreement and such Agent's Warrant have been duly authorized, and
this Agreement has been and as of the date of Closing such Agent's
Warrant will be executed and delivered on behalf of the Company and
this Agreement is, and such Agent's Warrant when delivered will be, the
valid and binding obligation of the Company, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally,
to the exercise of judicial discretion as to the availability of
equitable remedies such as specific performance and injunction and
subject, as to enforcement of the indemnification provisions, to
limitations under applicable securities laws.
(g) The Shares, when issued and delivered to the purchasers
against payment therefor in accordance with the Purchase Agreement,
will conform in all material respects to all statements made in
relation thereto contained in the Disclosure Package, and will be
validly issued, fully paid and non-assessable.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will promptly deliver to the Selling Agent and
its counsel a number of copies of the Disclosure Package and each
amendment or supplement thereto as may reasonably be requested by the
Selling Agent. The Selling Agent is authorized on behalf of the Company
to use and distribute copies of the Disclosure Package in connection
with the sale of the Shares as, and to the extent, permitted by this
Agreement and Federal and applicable state securities laws.
(b) The Company will promptly notify the Selling Agent, by
telephone and in writing of (i) the issuance of any stop order
suspending the sale of securities of the Company, or of the institution
or notice of intended institution of any action or proceeding for that
purpose and (ii) any other communication directed to and received by
the Company by any public authority relating to the possible suspension
of the qualification of the offer and sale of the securities of the
Company in any state.
(c) Until the Closing (as hereinafter defined) of the Maximum
Offering or the earlier termination of this Agreement, if any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by the Selling Agent, shall occur as a result of
which it is necessary, in the opinion of counsel for the Company or the
Selling Agent, to supplement or amend the Disclosure Package in order
to make the Disclosure Package not misleading in light of the
circumstances existing at the time it is delivered to a purchaser of
the Shares, the Company will forthwith prepare an amended or
supplemented Disclosure Package (in form satisfactory to counsel for
the Selling Agent) so that the amended or supplemented Disclosure
Package will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the
time the Disclosure Package is delivered to such purchaser, not
misleading.
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(d) The Company shall pay, or cause to be paid, all expenses
incident to the performance of its obligations under this Agreement,
including all expenses incident to the delivery of the Shares; the fees
and expenses of counsel and accountants for the Company; the cost of
filing the Form D and amendments thereto; and the cost of all blue sky
filings, including legal expenses related thereto. The payment of all
such fees and expenses shall not be conditioned upon the sale of any
Shares. The Company shall also pay to the Selling Agent a
nonaccountable expense allowance equal to 1% of the gross proceeds from
the sale of the Shares (including Shares for which no commission is
paid or a reduced commission is paid) and, at each Closing hereunder,
the fees and expenses of counsel to the Selling Agent. If no Closing is
held prior to the termination of this Agreement, then promptly after
any such termination the Company shall pay the actual expenses of the
Selling Agent and the fees and expenses of its counsel.
(e) The Company will apply the net proceeds from the sale of
the Shares substantially in the manner set forth in the Disclosure
Package.
(f) Within thirty (30) days of the final Closing, the Company
shall file a registration statement covering the resale of the Shares
in accordance with the provisions of Exhibit A attached hereto. In the
event that (i) the Company shall fail to file with the Commission the
Registration Statement described in Exhibit A (the "Registration
Statement") by the thirtieth day after the final Closing hereunder;
(ii) the Company shall fail to use its diligent, good faith efforts to
have the Registration Statement declared effective by the Commission;
or (iii) the Registration Statement is not declared effective by the
ninetieth day after the final Closing hereunder, then, on the date of
the first to occur of (i), (ii) or (iii) above (the "Extra Warrant
Date") and on each monthly anniversary of the Extra Warrant Date
thereafter until the earlier of the effective date of the Registration
Statement ("Effective Date") or the twentieth monthly anniversary of
the Extra Warrant Date, the Company shall issue to each investor in the
offering warrants ("Extra Warrants") to purchase a number of shares of
common stock equal to 5% of the number of Shares purchased by such
investor in the offering. Each Extra Warrant shall be substantially in
the form of the Agent's Warrant attached hereto as Exhibit F. Each
Extra Warrant shall entitle the holder thereof to purchase one share of
common stock during the five-year period commencing on the date of
issuance. The exercise price of the Extra Warrants shall be equal to
the price per share paid by such investor hereunder. The exercise price
and number of Extra Warrants shall be subject to adjustment in the
event of a merger, acquisition, recapitalization or stock split or
reverse stock split of shares of the Company, the issuance by the
Company of a stock dividend or any similar event. Upon issuance of the
Extra Warrants, the Company shall include the shares underlying the
Extra Warrants in the registration pursuant to the Registration
Statement.
5. OFFERING PERIOD. Subject to applicable law, the Selling Agent shall
commence the offer and sale of the Shares to investors on or as soon as is
reasonably practicable following the date hereof and, unless otherwise
terminated hereunder shall continue to offer and sell the Shares to investors
until the earlier of (i) the date on which all of the Shares are sold, (ii)
February 27, 1998 (unless extended up to 60 days by the Company and the Selling
Agent at their discretion and without notice to investors); (iii) such earlier
date as the Selling Agent and the Company mutually
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agree to terminate the offering; or (iv) on such date as the Selling Agent
terminates its obligations under this Agreement as provided in Section 11
hereof. "Termination Date," as used herein, shall refer to the date on which the
offering is terminated in accordance with the preceding sentence. In the event
of any such termination, the parties shall have no further obligations to each
other except (i) as set forth in Section 4(d) hereof and (ii) with respect to
provisions which survive termination of this Agreement.
6. DELIVERY; PAYMENT AND CLOSING.
(a) A closing of the sale of Shares shall be held as soon as
practicable after the Minimum Offering has been sold at a mutually
agreeable time at the offices of Leonard, Street and Deinard
Professional Association, Minneapolis, Minnesota, unless some other
time and place is mutually agreed upon by the Company and the Selling
Agent. It is anticipated that such closing will be held no later than
January 6, 1998. Additional closings may be held from time to time
until the maximum number of Shares are sold (in any such case, a
"Closing.")
(b) All checks and other funds received by the Selling Agent
in subscription for the Shares shall be held by Selling Agent in
accordance with Rule 15c2-4 under the Exchange Act until the Closing of
the sale of such Shares. If the Minimum Offering has not been
subscribed for on or before February 27, 1998 (unless extended up to 60
days by the Company and the Selling Agent), then all sums so held shall
be returned to the subscribers thereof, without interest or deduction.
All subscriptions are subject to the reasonable approval of the
Company.
7. CONDITIONS TO CLOSING. The obligation of the Selling Agent to close
the Offering shall be conditioned upon the satisfaction of the following at each
Closing:
(a) The receipt by the Selling Agent of an opinion of counsel
to the Company, in the form of Exhibit B hereto.
(b) The receipt by the Selling Agent of a certificate of the
President and Chief Financial Officer of the Company, stating that the
representations and warranties contained in Section 3 hereof are true
and correct in all respects as of the date of the Closing, that the
Company has performed all of its agreements and obligations to be
performed under this Agreement and that the Disclosure Package, as of
the date of Closing, contains all material statements which are
required to be made therein, does not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, substantially in
the form attached hereto as Exhibit C, and acceptable to the Selling
Agent.
(c) The receipt by the Selling Agent of a certificate of the
Secretary of the Company substantially in the form attached hereto as
Exhibit D, and acceptable to the Selling Agent.
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(d) The receipt by the Selling Agent of a certificate of the
Company substantially in the form attached hereto as Exhibit E, and
acceptable to the Selling Agent.
(e) The receipt by Selling Agent of the commissions and
warrants referred to in Section 8 hereof.
(f) Such other documents, opinions and certificates as the
Selling Agent may reasonably request.
The obligation of the Company to close the Offering shall be
conditioned upon the satisfaction of the following at each closing:
(a) At each Closing, the receipt by the Company of payment in
full of the proceeds from the sale of the Shares.
(b) The receipt by the Company of executed copies of all
Subscription Agreements received by the Selling Agent from subscribers
acceptable to the Selling Agent (it being understood that the Selling
Agent and the Company have the right to reject any subscriptions in
whole or in part), for review and acceptance by the Company.
(c) The receipt by the Company of a certificate of the Selling
Agent substantially in the form attached hereto as Exhibit H, and
acceptable to the Company.
8. SALES COMMISSIONS.
(a) At each Closing, and conditioned thereon, the Selling
Agent shall receive from the Company as a commission 10% of the gross
proceeds received from the sale of the Shares at such Closing. The
commissions shall be payable to or upon the order of the Selling Agent
in immediately available Minneapolis funds and may together with any
expense allowance or payment due hereunder, at the option of the
Selling Agent, be netted against the gross proceeds to be delivered by
the Selling Agent to the Company. Notwithstanding the foregoing, (i)
the Selling Agent shall receive a 5% commission with respect to sales
to persons listed on Schedule 1 hereto and (ii) shall receive no
commission with respect to sales to the current members of the
Company's Board of Directors.
(b) If, during the period commencing on the Termination Date,
as defined herein, and ending on the first anniversary thereof, the
Company shall sell any securities (including, but not limited to,
shares of common stock, debentures or warrants) to any purchaser who
was contacted by the Selling Agent in connection with the offer and
sale of the Shares, the Selling Agent shall be entitled to receive upon
the sale of such securities a commission consisting of a cash amount
equal to 10% of the purchase price paid for such securities by such
purchaser (5% if such person is listed on Schedule 1 hereto and no
commission if such person is a director on the date hereof). Upon any
termination of this Agreement, the Selling Agent will provide the
Company with a list of persons and entities whom the Selling Agent
contacted.
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(c) At each Closing, for the sum of $50.00 the Selling Agent
shall receive a warrant (the "Agent's Warrant") to purchase a number of
shares of the Company's common stock equal to 10% of the total number
of Shares which have been sold in the Offering (including Shares for
which no commission has been paid), in the form of Exhibit F hereto
with an exercise price per share equal to the per share price paid by
investors at such Closing. The Agent's Warrant shall be exercisable for
a period of ten years from the date of the Closing subject to the
exceptions contained therein.
9. INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless the Selling
Agent, and each person who controls (as such term is defined by Rule
405 under the Securities Act) the Selling Agent within the meaning of
the Securities Act, against any losses, claims, damages or liabilities,
joint and several, to which the Selling Agent or such controlling
persons may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
Disclosure Package, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Selling Agent and each such
controlling person for any legal or other expenses reasonably incurred
by such Selling Agent or such controlling person (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company) in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the
extent that such loss, claim, damage or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the
Selling Agent specifically for use in the preparation of the Disclosure
Package or any additions or supplements thereto. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) The Selling Agent will indemnify and hold harmless the
Company, each person who controls (as such term is defined under Rule
405 under the Securities Act) the Company within the meaning of the
Securities Act, each of its directors, and each of its officers,
against any losses, claims, damages or liabilities, joint and several,
to which the Company, any such controlling person, director or officer
may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Disclosure
Package, or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission is made in the Disclosure Package or
any additions or supplements thereto, or such amendment or such
supplement, in reliance upon and in conformity with written information
furnished to the Company by the Selling Agent specifically for use in
the preparation thereof; and will
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reimburse the Company, any such controlling person, director or officer
for any legal or other expenses reasonably incurred by them (including
in settlement of any litigation, if such settlement is effected with
the written consent of the Selling Agent) in connection with
investigating or defending any such loss, claim, damage, liability or
action. This indemnity agreement will be in addition to any liability
which the Selling Agent may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action by a third party,
such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section, notify each
indemnifying party in writing of the commencement thereof. The
indemnification provided for in this Section 9 shall not be available
to any party who fails to so notify each indemnifying party to the
extent that the indemnifying party to whom notification was not given
was unaware of the action to which the notification would have related
and was prejudiced by the failure to notify; provided, however, that
the omission to so notify each indemnifying party will not relieve any
indemnifying party from any liability which it may have to any
indemnified party otherwise than under this section. In case any such
action is brought against any indemnified party, and it seeks or
intends to seek indemnity from an indemnifying party and notifies an
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel chosen by the indemnifying
party and reasonably satisfactory to the indemnified party; provided,
however, if the defendants in any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there
may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel (but the indemnifying
party shall not be liable for the expenses of more than one such
separate counsel), to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under
this section for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless
(i) the indemnified party shall have employed separate counsel in
connection with the assumption of legal defenses in accordance with the
above proviso or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
In no event shall any indemnifying party be liable in respect of any
amounts paid in settlement of any action unless the indemnifying party
shall have approved the terms of such settlement.
(d) As an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding as to which
indemnification hereunder is sought,
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commencing on the one hundred eightieth day after the service of a
summons and complaint on the Selling Agent with respect to an action
for which indemnification is sought, the Company will reimburse the
Selling Agent on a monthly basis for all reasonable legal fees or other
reasonable expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to
reimburse the Selling Agent for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is ultimately held to have been improper, the
Selling Agent shall promptly return it to the party or parties that
made such payment, together with interest, determined on the basis of
the base rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Norwest Bank
Minnesota, N.A., ("Prime Rate"). Any such required interim
reimbursement payments which are not made to the Selling Agent within
30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Sections
9(a) or 9(b) is for any reason held, by a court of competent
jurisdiction, to be unenforceable as to any party entitled to
indemnity, the Company and the Selling Agent, or any controlling person
of the foregoing, shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claims asserted) to which the
Company and the Selling Agent, or any controlling person of the
foregoing, may be subject (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, on the one hand,
and the Selling Agent on the other from the offering contemplated
hereby or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company, on the one hand, and of the
Selling Agent on the other in connection with the statements or
omissions which resulted in such loss, claim, damage, liability or
expense, as well as any other relevant equitable considerations. The
relative benefits received by the Company, on the one hand, and the
Selling Agent on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total sales commissions received by
the Selling Agent. The relative fault of the Company, on the one hand,
and of the Selling Agent on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the
Selling Agent and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. No person guilty of fraudulent misrepresentation or guilty of
misstating or misrepresenting a material fact or failing to state a
material fact shall be entitled to contribution, as to any liability
arising from such fraudulent misrepresentation or omission, from any
person who was not guilty of such fraudulent or other misrepresentation
or omission.
10. TERMINATION.
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Each party hereto shall have the right to terminate its
obligations under this Agreement by giving notice to the other party as
hereinafter specified at any time on or prior to the Closing if such
other party shall have failed, refused or been unable, at or prior to
the Closing, to perform any material agreement on its part to be
performed; if there shall have been a breach of any material warranty
or representation of such other party contained herein, or because any
other material conditions of the terminating party's obligations set
forth herein are not fulfilled. Any such termination shall be without
liability of any party to any other party, except for the Company's
obligations under Section 4(d) hereof.
11. REPRESENTATIONS AND AGREEMENTS TO SURVIVE. The respective
covenants, agreements, representations and warranties of the Company and the
Selling Agent hereunder, as set forth in, or made pursuant to this Agreement,
shall remain in full force and effect regardless of any investigation made by or
on behalf of any such party or any of its directors or officers or any
controlling person, and shall survive delivery of and payment for the Shares for
the statutory statute of limitations time period; and the indemnification
agreements contained in Section 10 shall also survive any termination of this
Agreement.
12. NOTICES. Except as otherwise expressly provided in this Agreement
or duly noticed hereunder, all notices and other communications hereunder shall
be in writing and, if given to the Selling Agent, shall be mailed, delivered or
telegraphed and confirmed to Miller Johnson & Kuehn Incorporated, 5500 Wayzata
Boulevard, Suite 800 - 8th Floor, Minneapolis, Minnesota 55416, Attention: David
B. Johnson, with a copy to its counsel, Leonard, Street and Deinard, 150 South
Fifth Street, Suite 2300, Minneapolis, Minnesota 55402, Attention: Mark S. Weitz
or, if given to the Company, shall be mailed, delivered or telegraphed and
confirmed to RSI Systems, Inc., 7400 Metro Boulevard, Edina, Minnesota 55439,
Attention: Donald Lies, with a copy to its counsel, Hinshaw & Culbertson, 222
South Ninth Street, Minneapolis, MN 55402, Attention: Robert Ribeiro.
13. MISCELLANEOUS. This Agreement shall inure to the benefit of and be
binding upon the successors of the Selling Agent and of the Company. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto and their
successors, and the controlling persons and directors and officers referred to
in Section 10 hereof, any legal or equitable right, remedy or claim under or in
respect to this Agreement or any provision hereof. The term "successors" shall
not include any purchaser of the Shares merely by reason of such purchase. No
subrogee of a benefited party shall be entitled to any benefits hereunder.
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If the foregoing expresses our agreement with you, kindly confirm by
signing the acceptance on the enclosed counterpart hereof and return the same to
us, whereupon this letter and your acceptance shall become and constitute a
binding agreement between the Company and the Selling Agent in accordance with
its terms.
Very truly yours,
RSI SYSTEMS, INC.
By
-------------------------------------
Donald Lies, President
The terms set forth in the foregoing Selling Agency Agreement between
RSI Systems, Inc. and Miller Johnson & Kuehn Incorporated are hereby accepted
and confirmed.
MILLER, JOHNSON & KUEHN INCORPORATED
By
----------------------------------
David B. Johnson, Vice President
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Exhibit A
REGISTRATION RIGHTS
1. Required Registration.
As soon as practicable but in no event later than the thirtieth day
after the final Closing, the Company shall file a Registration Statement under
the Securities Act covering the resale of the Shares purchased by persons in the
Offering (the "Investors"), and will diligently proceed to use its diligent,
good faith efforts to have such Registration Statement become effective with the
Securities and Exchange Commission (the "Commission") as soon as possible
thereafter and in any event no later than the ninetieth day after the final
Closing.
2. Registration - General Provisions.
(a) Whenever the Company is required to effect the registration of
Shares under the Securities Act, the Company will:
(i) Prepare and file with the Commission a registration
statement with respect to such securities, and use its diligent, good
faith efforts to cause such registration statement to become effective
and remain effective until the earlier of the date on which (i) all
Shares have been sold by the Investors or (ii) the Shares may be sold
by the Investors without restriction pursuant to Rule 144(k) under the
Securities Act;
(ii) prepare and file with the Commission such amendments to
such registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective for the period required by Section 2(a)(i) above;
(iii) provide Investors' counsel with reasonable opportunities
to review and comment on, and otherwise participate in, the preparation
of such registration statement;
(iv) furnish to the Investors participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as
the Investors and underwriters may reasonably request in order to
facilitate the public offering of such securities;
(v) use its diligent, good faith efforts to register or
qualify the securities covered by such registration statement under
such state securities or blue sky laws of such jurisdictions as any
such Investor may reasonably request, except that the Company shall not
for any purpose be required to execute a general consent to
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service of process (which shall not include a "Uniform Consent to
Service of Process" or other similar consent to service of process
which relates only to actions or proceedings arising out of or in
connection with the sale of securities, or out of a violation of the
laws of the jurisdiction requesting such consent) or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not
so qualified;
(vi) notify the Investors, promptly after it shall receive
notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(vii) notify the Investors promptly of any request by the
Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(viii) prepare and file with the Commission, promptly upon the
request of any Investor, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel
for such Investor (and concurred in by counsel for the Company), is
required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Shares by such
Investor;
(ix) prepare and promptly file with the Commission and
promptly notify the Investors of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time when a
prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the result
of which any such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
(x) advise the Investors, and the Investors' counsel, if any,
promptly after it shall receive notice or obtain knowledge thereof, of
the issuance of any stop order by the Commission suspending the
effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its
best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
(xi) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of the
Investors shall have reasonably objected on the grounds that such
amendment or supplement does not comply in all material respects with
the requirements of the Securities Act or the rules and regulations
thereunder, after having been furnished with a copy thereof at least
five business days prior to the filing thereof, unless in the opinion
of counsel for the Company the filing of such amendment or supplement
is reasonably necessary to
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protect the Company from any liabilities under any applicable federal
or state law and such filing will not violate applicable law; and
(xii) at the request of any such Investor, furnish on the
effective date of the registration statement and, if such registration
includes an underwritten public offering, at the closing provided for
in the underwriting agreement: (i) opinions, dated such respective
dates, of the counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to the
Investor or Investors making such request, covering such matters as
such underwriters may reasonably request; and (ii) letters, dated such
respective dates, from the independent certified public accountants of
the Company, addressed to the underwriters, if any, and to the Investor
or Investors making such request, covering such matters as such
underwriters or Investors making such request may reasonably request.
(b) The Company shall pay all Registration Expenses (as defined below)
in connection with the inclusion of Shares in any Registration Statement, or
application to register or qualify Shares under state securities laws, filed by
the Company hereunder, other than as set forth herein. For purposes of this
Agreement, the term "Registration Expenses" means the filing fees payable to the
Commission, any state agency and the National Association of Securities Dealers,
Inc.; the fees and expenses of the Company's legal counsel and independent
certified public accountants in connection with the preparation and filing of
the Registration Statement (and all amendments and supplements thereto) with the
Commission; and all expenses relating to the printing of the Registration
Statement, prospectuses and various agreements executed in connection with the
Registration Statement. Notwithstanding the foregoing, the Investors will pay
the fees and expenses of any legal counsel the Investors may engage, as well as
the Investors' proportionate share of any custodian fees or commission or
discounts which may be payable to any underwriter.
(c) The Investors acknowledge that there may occasionally be times when
the Company must suspend the use of the prospectus forming a part of the
Registration Statement, when there exists material non-public information
relating to the Company (including, but not limited to, an acquisition, merger,
recapitalization, consolidation, reorganization or similar transaction (or
negotiations with respect thereto)) which in the reasonable opinion of the
Company's Board of Directors should not be disclosed. Accordingly, the Company
may suspend resales pursuant to such Registration Statement for a period not to
exceed ninety (90) days in any twenty-four (24) month period if the Company has
been advised by counsel and the Board of Directors reasonably concurs that the
information the Board reasonably believes should not be disclosed is material
and therefore the prospectus forming a part of the Registration Statement is not
current. Each Investor agrees that it shall not sell any Shares pursuant to said
prospectus during the period commencing at the time at which the Company gives
the Investor notice of the suspension of the use of such prospectus and ending
at the time the Company gives the Investor notice that the Investor may
thereafter effect sales pursuant to such prospectus. The Investors shall comply
with the applicable provisions of the Securities Act and of such other
securities or blue sky laws as may be applicable in connection with the use of
such prospectus forming a part of the Registration Statement.
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(d) The Company hereby indemnifies the holder of the Shares, its
officers and directors, and any person who controls such holder within the
meaning of Section 15 of the Securities Act of 1933, against all losses, claims,
damages and liabilities caused by any untrue statement of a material fact
contained in any registration statement, prospectus, notification or offering
circular (and as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such holder expressly for
use therein, and each such holder severally agrees that it will indemnify and
hold harmless the Company and each of its officers who signs such registration
statement and each of its directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act of 1933 with
respect to losses, claims, damages or liabilities which are caused by any
material untrue statement or omission contained in information furnished in
writing to the Company by such holder expressly for use therein.
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Exhibit B
MATTERS TO BE COVERED IN OPINION
OF RSI'S COUNSEL
(1) The Company has been duly incorporated and is validly existing
in good standing under the laws of the State of Minnesota; has
the requisite corporate power to own, lease and operate its
properties and conduct its business as described in the
Disclosure Package; and is duly qualified to do business as a
foreign corporation in good standing in all jurisdictions
where the ownership or leasing of its properties or the
conduct of its business requires such qualification and in
which the failure to be qualified or in good standing would
have a material adverse effect on its business;
(2) The Company has the corporate power to enter into the Selling
Agency Agreement, and the Selling Agency Agreement has been
duly and validly authorized, executed and delivered by or on
behalf of the Company and is the valid and binding obligation
of the Company, enforceable in accordance with its terms.
(3) The number of shares authorized and the number of outstanding
shares of capital stock of the Company set forth in the
Disclosure Package under the caption "Description of Shares"
are correct as of the date of the Disclosure Package and as of
the date hereof.
(4) All outstanding capital stock of the Company has been duly
authorized and validly issued, and is fully paid, and
nonassessable.
(5) To its knowledge, no preemptive rights, contractual or
otherwise, of securities holders of the Company exist with
respect to the issuance or sale of the Shares by the Company
pursuant to this Agreement.
(6) The Shares conform as to matters of law in all material
respects to the description concerning them made in the
Disclosure Package.
(7) The Shares have been duly authorized and, upon delivery to the
investors against payment therefor, will be validly issued,
fully paid and nonassessable. The Agent's Warrants have been
duly authorized and are the valid and binding obligation of
the Company, enforceable in accordance with their terms, and a
sufficient number of shares of the Company's common stock has
been reserved for the issuance upon exercise of the Agent's
Warrants and the shares of common stock to be issued upon
exercise of the Agent's Warrants, upon delivery on exercise
and payment therefor, will be validly issued, fully paid and
nonassessable.
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(8) To its knowledge, the execution, delivery, and performance of
the Agreement will not violate or conflict with the charter or
bylaws of the Company, nor will the execution, delivery and
performance of the Agreement be in material contravention of
any of the provisions of any note, indenture, mortgage, deed
of trust, joint venture agreement, agreement or other
instrument known to such counsel to which the Company is a
party or by which it is bound and which is material to the
business of the Company as a whole, or of any material law,
rule or regulation of the United States or the State of
Minnesota or any order, writ, injunction or decree of any
government, governmental agency, or court having jurisdiction
over the Company or any of its properties.
(9) To its knowledge, (A) there are no material statutes,
agreements, contracts, leases, or other documents or material
legal or governmental proceedings of a character required by
the Act and the Rules and Regulations to be described or
referred to in the Disclosure Package which are not so
described and (B) all descriptions of legal or governmental
proceedings and of agreements, contracts and leases contained
in the Disclosure Package constitute fair and accurate
summaries of such proceedings, agreements, contracts and
leases and fairly present the information called for with
respect to the same.
(10) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with any
issuance and sale of the Shares, as contemplated under the
Agreement, except such as may be required under the Act or
under state or other securities laws in connection with any
purchase and distribution of such securities by the Selling
Agent.
(11) Assuming the accuracy of the representations and warranties of
the purchasers in the Subscription Agreements, the offer and
sale of the Shares are exempt from registration under the
Securities Act of 1933.
(12) To its knowledge, the Company is not in default of its charter
or bylaws or of any material agreements to which the Company
is a party.
(13) Although it is not opining as to, and cannot guarantee the
accuracy and completeness of the statements contained in the
Disclosure Package, in the course of its representation of the
Company nothing has come to its attention which causes it to
believe that the Disclosure Package (except as to the
financial statements and supporting financial data included or
incorporated therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
provided, however, that such statement does not require any
statement concerning statements in, or omissions from, the
Disclosure Package which are based upon and conform to written
information furnished to the Company by the Selling Agent.
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Exhibit C
OFFICERS' CERTIFICATE
CERTIFICATE
OF
CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
Pursuant to Section 7(b) of the Selling Agency Agreement, dated
December ___, 1997, (the "Agency Agreement") between RSI Systems, Inc. (the
"Company") and Miller, Johnson & Kuehn, Incorporated, the undersigned, being the
duly elected Chief Executive Officer and Chief Financial Officer, respectively,
of the Company, hereby certify that:
1. Each of the representations and the warranties of the Company
set forth in Section 3 of the Agency Agreement are true and
correct on this date as if made by the Company on this date.
2. The Company has performed all of its agreements and
obligations to be performed on or prior to the Closing under
the Agency Agreement.
3. The Disclosure Package of the Company, dated ____________,
1997, does not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Dated: ____________, 1997
------------------------------------
Chief Executive Officer
------------------------------------
Chief Financial Officer
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Exhibit D
SECRETARY'S CERTIFICATE
I, ______________________, the duly elected and acting Secretary of RSI
Systems, Inc., a Minnesota corporation (the "Company"), do hereby certify as
follows:
1. Attached hereto as Exhibit A is a true, complete and correct copy of
the Articles of Incorporation of the Company, as amended. There have been no
amendments to such Articles of Incorporation of the Company and no amendments
have been authorized or contemplated as of the date hereof.
2. Attached hereto as Exhibit B is a true, correct and complete copy of
the Bylaws of the Company.
3. Attached hereto as Exhibit C is a true, correct and complete copy of
resolutions duly adopted by unanimous written action of the Board of Directors
of the Company, effective _______________, 1997, which resolutions have not been
amended or repealed and are in full force and effect on the date hereof.
4. The following persons are the duly qualified and acting officers of
the Company duly elected or appointed to the offices set forth opposite their
respective names, and the signatures set forth opposite their names are their
true and genuine signatures:
Name Office Signature
---- ------ ---------
President and Chief Executive
Officer _________________________
Treasurer and Chief Financial
Officer _________________________
Secretary _________________________
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IN WITNESS WHEREOF, I have executed this Certificate the ____ day of
_________, 1997.
___________________________________
___________________, Secretary
I, _______________________, do hereby certify that I am the duly
elected, qualified and acting President and Chief Executive Officer of the
Company, and do further certify that ____________________, is the duly elected,
qualified and acting Secretary of the Company and that the foregoing signature
is his true and genuine signature.
Dated: ____________, 1997
_________________________________
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Exhibit E
ISSUER BAD BOY CERTIFICATE
1. Neither the Issuer, any of its predecessors nor any affiliated
issuer:
(a) has filed a registration statement which is the subject of
any pending proceeding or examination under Section 8 of the Securities Act of
1933 (the "1933 Act") or is the subject of any refusal order or stop order
thereunder within the past five years;
(b) is subject to any pending proceeding under Rule 258
promulgated under the 1933 Act or any similar rule adopted under Section 3(b) of
the 1933 Act, or to an order entered thereunder within the past five years;
(c) has been convicted within the past five years of any
felony or misdemeanor in connection with the purchase or sale of any security or
involving the making of any false filing with the United States Securities and
Exchange Commission (the "SEC");
(d) is subject to any order, judgment, or decree of any court
of competent jurisdiction temporarily or preliminary restraining or enjoining,
or is subject to any order, judgment, or decree of any court of competent
jurisdiction, entered within the past five years, permanently restraining or
enjoining, such person from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or involving the making of
any false filing with the SEC; or
(e) is subject to a United States Postal Service false
representation order entered under Section 3005 of Title 39, United States Code,
within the past five years; or is subject to a temporary restraining order or
preliminary injunction entered under Section 3007 of Title 39, United States
Code, with respect to conduct alleged to have violated Section 3005 of Title 39,
United States Code.
2. None of the Issuer's directors, officers, general partners, or
beneficial owners of 10% or more of any class of its equity securities
("Beneficial Owner" means a person having the power to vote or direct the vote
and/or the power to dispose or direct the disposition of such securities), nor
any of its promoters presently connected with it in any capacity:
(a) has been convicted within the past ten years of any felony
or misdemeanor in connection with the purchase or sale of any security,
involving the making of a false filing with the SEC, or arising out of the
conduct of the business of an underwriter, broker, dealer, municipal securities
dealer, or investment advisor;
(b) is subject to any order, judgment, or decree of any court
of competent jurisdiction temporarily or preliminarily enjoining or restraining,
or is subject to any order, judgment, or decree of any court of competent
jurisdiction, entered within the past five years, permanently enjoining or
restraining such person from engaging in or continuing any conduct or
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practice in connection with the purchase or sale of any security or involving
the making of a false filing with the SEC, or arising out of the conduct of the
business of an underwriter, broker, dealer, municipal securities dealer, or
investment advisor;
(c) is subject to an order of the SEC entered pursuant to
Section 15(b), Section 15(B)(a) or 15(B)(c) of the Securities Exchange Act of
1934 (the "1934 Act"); or is subject to an order of the SEC entered pursuant to
Section 203(e) or (f) of the Investment Advisors Act of 1940;
(d) is suspended or expelled from membership in, or suspended
or barred from association with a member of, an exchange registered as a
national securities exchange pursuant to Section 6 of the 1934 Act, an
association registered as a national securities association under Section 15A of
the 1934 Act, or a Canadian securities exchange or association for any act or
omission to act constituting conduct inconsistent with just and equitable
principles of trade; or
(e) is subject to a United States Postal Service false
representation order entered under Section 3005 of Title 39, United States Code,
within the past five years; or is subject to a restraining order or preliminary
injunction entered under Section 3005 of Title 39, United States Code.
3. Neither the Issuer, any of its predecessors or any affiliated issuer
nor any of the Issuer's affiliates, directors, officers, general partners,
Beneficial Owners of 10% or more of any class of the Issuer's equity securities
or promoters presently connected with the Issuer in any capacity:
(a) has filed a registration statement which (i) is the
subject of a currently effective stop order or refusal order entered pursuant to
any state's law within the past five years, (ii) is the subject of an effective
order entered against the Issuer, its officers, directors, general partners,
controlling persons or affiliates, pursuant to any state's law within the past
five years denying effectiveness to or suspending or revoking the effectiveness
of the registration statement or (iii) is the subject of any pending proceeding
or examination under the securities laws of any jurisdiction;
(b) has been convicted within the past ten years of any felony
or misdemeanor in connection with the offer, purchase or sale of any security,
franchise or commodity or involving the making of any false filing relating to
any security or offering or any felony or misdemeanor involving fraud, deceit or
intentional wrongdoing, including but not limited to forgery, embezzlement,
obtaining money under false pretenses, larceny, conspiracy to defraud,
racketeering or a transaction in securities, or of which fraud is an essential
element;
(c) is subject to any state's administrative or enforcement
order or judgment procured or entered by the state's securities administrator
within the past five years or is subject to any state's administrative or
enforcement order or judgment in which fraud, deceit or intentional wrongdoing,
including but not limited to making untrue statements of material facts or
omitting to state material facts, was found or upon which such order or judgment
was based and the order or judgment was entered within the past five years;
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(d) is subject to (i) any state's administrative or
enforcement order or judgment which (A) prohibits, denies or revokes the use of
any exemption from registration in connection with the offer, purchase or sale
of securities or (B) prohibits the transaction of business by such party as a
securities broker-dealer or securities agent or (ii) any pending proceeding in
any jurisdiction relating to the exemption from registration of any security or
offering;
(e) is subject to any order, judgment or decree of any court
of competent jurisdiction entered within the past five years temporarily,
preliminary or permanently restraining or enjoining such party from engaging in
or continuing any conduct or practice (including making use of any exemption) in
connection with the offer, purchase or sale of any security or commodity or
involving the making of any false filing whether or not relating to any security
or offering, or arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer or investment advisor;
(f) is subject to an order, judgment or decree of a court of
competent jurisdiction entered within the past five years, enjoining or
restraining such party from engaging in or continuing any conduct or practice in
connection with the sale or purchase of securities, or involving fraud, deceit
or racketeering;
(g) has been subject to any state administrative order or
judgment in connection with the purchase or sale of securities entered within
the past five years;
(h) is subject to an order of the SEC denying or revoking
registration as a broker or dealer in securities under the 1934 Act, or is
subject to an order denying or revoking membership in a national securities
association registered under the 1934 Act, or has been suspended for a period
exceeding six months or expelled from membership in a national securities
registered under the 1934 Act.
4. If subject to the requirements of Sections 13, 14, or 15(d) of the
1934 Act, the Issuer has filed all reports required by those sections during the
past 12 calendar months (or for such shorter period that the Issuer was required
to file such reports).
RSI SYSTEMS, INC.
By: _____________________________________
Its: _____________________________________
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Exhibit F
COMMON STOCK WARRANT
To Purchase _________
Shares of Common Stock of
RSI Systems, Inc.
___________, 1997
THE SECURITIES EVIDENCED BY THIS CERTIFICATE WERE ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL (WHICH SHALL BE
IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY) THAT SUCH REGISTRATION IS NOT
REQUIRED.
THIS CERTIFIES THAT, in consideration for $50.00 and other valuable
consideration, Miller, Johnson & Kuehn, Incorporated ("MJK") or its registered
assigns is entitled to subscribe for and purchase from RSI Systems, Inc. (the
"Company"), a Minnesota corporation, at any time after the date hereof to and
including the Expiration Date (as defined in Section 1 hereof),
________________________ (_______) fully paid and nonassessable shares of the
Company's Common Stock, $.01 par value, at a price of $_______ per share:
This Warrant is subject to the following provisions, terms and
conditions:
1. Expiration; Exercise; Transferability.
(a) This Warrant may be exercised in whole or in part, at any
time after the date hereof to and including the Expiration Date. As used herein
"Expiration Date" shall mean _______, 2008.
(b) The rights represented by this Warrant may be exercised by
the holder hereof, in whole or in part (but not as to a fractional share of
stock), by written notice of exercise in the form appended hereto delivered to
the Company on or prior to the Expiration Date, ten (10) days prior to the
intended date of exercise and by the surrender of this Warrant (properly
endorsed if required) at the principal office of the Company and upon payment to
it in full by certified or bank check or wire transfer of the purchase price for
such shares.
(c) This Warrant may be transferred subject to the following
conditions: (i) during the first year after the date of this Warrant, it may not
be sold, transferred, assigned or hypothecated except to persons who are (x)
both officers and shareholders of MJK, or (y) both
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officers and employees of MJK, and (ii) after such period, the Warrant shall be
transferable without restriction, but subject to the opinion of counsel as
provided by paragraph 7 herein that such transfer is not in violation of federal
or state securities laws.
2. Issuance of Shares. The Company agrees that the shares purchased
hereby shall be and are deemed to be issued to the record holder hereof as of
the close of business on the date on which this Warrant shall have been
exercised by surrender of the Warrant and payment for the shares. Subject to the
provisions of the next succeeding paragraph, certificates for the shares of
stock so purchased shall be delivered to the holder hereof within a reasonable
time, not exceeding ten (10) days after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a new
Warrant representing the number of shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the holder
hereof within such time.
Notwithstanding the foregoing, however, the Company shall not
be required to deliver any certificate for shares of stock upon exercise of this
Warrant, except in accordance with the provisions, and subject to the
limitations, of paragraph 7 hereof.
3. Covenants of Company. The Company covenants and agrees that all
shares which may be issued upon the exercise of the rights represented by this
Warrant will upon receipt of payment therefor upon issuance, be duly authorized
and issued, fully paid, nonassessable and free from all taxes, liens and charges
with respect to the issue thereof, and, without limiting the generality of the
foregoing, the Company covenants and agrees that it will from time to time take
all such action as may be required to assure that the par value per share of the
common stock is at all times equal to or less than the then effective purchase
price per share of the common stock issuable pursuant to this Warrant. The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of its common stock to provide for the exercise of the rights
represented by this Warrant.
4. Anti-Dilution Adjustments. The above provisions are, however,
subject to the following:
(a) In case the Company shall at any time hereafter subdivide
or combine the outstanding shares of common stock or declare a dividend payable
in common stock, the exercise price of this Warrant in effect immediately prior
to the subdivision, combination or record date for such dividend payable in
common stock shall forthwith be proportionately increased, in the case of
combination, or decreased, in the case of subdivision or dividend payable in
common stock. Upon each adjustment of the exercise price, the holder of this
Warrant shall thereafter be entitled to purchase, at the exercise price
resulting from such adjustment, the number of shares obtained by multiplying the
exercise price immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the exercise price resulting from such adjustment.
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(b) No fractional shares of common stock are to be issued upon
the exercise of this Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in an
amount equal to the same fraction of the market price per share of common stock
on the day of exercise as determined in good faith by the Company.
(c) If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of common stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for common stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of common stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such common stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of the holder of this
Warrant to the end that the provisions hereof (including without limitation
provisions for adjustments of the Warrant purchase price and of the number of
shares purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. The Company shall not
effect any such consolidation, merger or sale unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger, or the corporation purchasing such assets, shall
assume by written instrument executed and mailed to the registered holder hereof
at the last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase.
Notwithstanding any language to the contrary set forth in this
paragraph 4 (c), if an occurrence or event described herein shall take place in
which the shareholders of the Company receive cash for their shares of common
stock of the Company and a successor corporation or corporation purchasing
assets shall survive the transaction then, at the election of the record holder
hereof, such corporation shall be obligated to purchase this Warrant (or the
unexercised part hereof) from the record holder without requiring the holder to
exercise all or part of the Warrant. If such corporation refuses to so purchase
this Warrant then the Company shall purchase the Warrant for cash. In either
case the purchase price shall be the amount per share that shareholders of the
outstanding common stock of the Company shall receive as a result of the
transaction multiplied by the number of shares covered by the Warrant, minus the
aggregate exercise price of the Warrant. Such purchase shall be closed within 60
days following the election of the holder to sell this Warrant.
(d) Upon any adjustment of the Warrant purchase price, then,
and in each such case, the Company shall give written notice thereof, by first
class mail, postage prepaid, addressed to the registered holder of this Warrant
at the address of such holder as shown on the books of the
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Company, which notice shall state the Warrant purchase price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(e) If any event occurs as to which in the good faith
determination of the Board of Directors of the Company the other provisions of
this paragraph 4 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Warrant or of common
stock in accordance with the essential intent and principles of such provisions,
then the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such purchase rights as aforesaid.
5. Common Stock. As used herein, the term "common stock" shall mean and
include the Company's presently authorized shares of common stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution, dissolution
or winding up of the Company; provided that the share purchasable pursuant to
this Warrant shall include shares designated as common stock of the Company on
the date of original issue of this Warrant or, in the case of any
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in Section 4 above.
6. No Voting Rights. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a stockholder of the Company.
7. Transfer of Warrant or Resale of Shares. In the event the holder of
this Warrant desires to transfer this Warrant, or any common stock issued upon
the exercise hereof, the holder shall provide the Company with a written notice
describing the manner of such transfer in the form appended hereto and an
opinion of counsel (reasonably acceptable to the Company) that the proposed
transfer may be effected without registration or qualification (under any
Federal or State law), whereupon such holder shall be entitled to transfer this
Warrant or to dispose of shares of common stock received upon the previous
exercise hereof in accordance with the notice delivered by such holder to the
Company; provided, that an appropriate legend may be endorsed on this Warrant or
the certificates for such shares respecting restrictions upon transfer thereof
necessary or advisable in the opinion of counsel satisfactory to the Company to
prevent further transfers which would be in violation of Section 5 of the
Securities Act, as amended (the "Securities Act").
If, in the opinion of either of the counsel referred to in
this paragraph 7, the proposed transfer or disposition described in the written
notice given pursuant to this paragraph 7 may not be effected without
registration or qualification of this Warrant or the shares of common stock
issued upon the exercise hereof, the Company shall promptly give written notice
thereof to the holder hereof, and such holder will limit its activities in
respect to such proposed transfer or disposition as, in the opinion of both such
counsel, are permitted by law.
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8. Registration Rights.
(a) If the Company proposes to claim an exemption under
Section 3(b) for a public offering of any of its securities or to register under
the Securities Act (except by a claim of exemption or registration statement on
Form S-8 or Form S-4 or any form that does not permit the inclusion of shares by
its security holders) any of its securities, it will give written notice to all
registered holders of Warrants, and all registered holders of shares of common
stock acquired upon the exercise of Warrants (the "Common Shares") of its
intention to do so and, on the written request of any such registered holders
given within twenty (20) days after receipt of any such notice, the Company will
use its best efforts to cause all Common Shares which such holders shall have
requested the registration or qualification thereof, to be included in such
notification or registration statement proposed to be filed by the Company;
provided, however, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any such registration initiated by it. If any such
registration shall be underwritten in whole or in part, the Company may require
that the shares requested for inclusion pursuant to this section be included in
the underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters. In the event that, in the good faith
judgment of the managing underwriter of such public offering, the inclusion of
all of the shares originally covered by a request for registration would reduce
the number of shares to be offered by the Company or interfere with the
successful marketing of the shares of stock offered by the Company, the number
of shares otherwise to be included pursuant to this Section in the underwritten
public offering may be proportionately reduced to a number deemed satisfactory
by the managing underwriter. Those shares which are thus excluded from the
underwritten public offering shall be withheld from the market for a period, not
to exceed 90 days from the effective date of the registration statement, which
the managing underwriter reasonably determines is necessary in order to effect
the underwritten public offering. All expenses of such offering, except the fees
of special counsel to such holders and brokers' commissions or underwriting
discounts payable by such holders, shall be borne by the Company.
(b) Further, on one occasion only upon request by the holders
of Warrants and/or the holders of shares issued upon the exercise of the
Warrants who collectively (i) have the right to purchase at least 50% of the
shares subject to the Warrants, (ii) hold directly at least 50% of the shares
purchased under the Warrants, or (iii) have the right to purchase or hold
directly an aggregate of at least 50% of the shares purchasable or purchased
under the Warrants, the Company will promptly take all necessary steps, at the
option of such holders, to register or qualify the sale of the Warrants or such
shares by the holders thereof, under the Securities Act (and, upon the request
of such holders, under Rule 415 thereunder) and such state laws as such holders
may reasonably request; provided that (i) such request must be made by the
Expiration Date; and (ii) the Company may delay the filing of any registration
statement requested pursuant to this section to a date not more than ninety (90)
days following the date of such request if in the opinion of the Company's
principal investment banker at the time of such request such a delay is
necessary in order not to adversely affect financing efforts then underway at
the Company or if in the opinion of the Company such a delay is necessary or
advisable to avoid disclosure of material nonpublic information. The costs and
expenses directly related to any registration requested pursuant to this
section, including but not limited to legal fees of the Company's counsel, audit
fees, printing expense, filing fees and fees and expenses relating to
qualifications under state securities or blue sky laws incurred by the Company
shall be borne entirely by the Company; provided, however, that the
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<PAGE>
persons for whose account the securities covered by such registration are sold
shall bear the expenses of underwriting commissions applicable to their shares
and fees of their legal counsel. If the holders of Warrants and the holders of
shares of common stock underlying the Warrants are the only persons whose shares
are included in the registration pursuant to this section, such holders shall
bear the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal fiscal
year or are not otherwise prepared by the Company for its own business purposes.
The Company shall keep effective and maintain any registration, qualification,
notification or approval specified in this paragraph for such period as may be
necessary for the holders of the Warrants and such common stock to dispose
thereof, and from time to time shall amend or supplement, at the holder's
expense, the prospectus or offering circular used in connection therewith to the
extent necessary in order to comply with applicable law.
If, at the time any written request for registration is
received by the Company pursuant to this Section 8(b), the Company has
determined to proceed with the actual preparation and filing of a registration
statement under the Securities Act in connection with the proposed offer and
sale for cash of any of its securities by it or any of its security holders,
such written request shall be deemed to have been given pursuant to Section 8(a)
hereof rather than this Section 8(b), and the rights of the holders of Warrants
and or shares issued upon the exercise of the Warrants covered by such written
request shall be governed by Section 8(a) hereof.
The managing underwriter of an offering registered pursuant to
this Section 8(b), if any, shall be selected by the holders of a majority of the
Warrants and/or shares issued upon the exercise of the Warrants for which
registration has been requested and shall be reasonably acceptable to the
Company. Without the written consent of the holders of a majority of the
Warrants and/or shares issued upon the exercise of the Warrants for which
registration has been requested pursuant to this Section 8(b), neither the
Company nor any other holder of securities of the Company may include securities
in such registration if in the good faith judgment of the managing underwriter
of such public offering the inclusion of such securities would interfere with
the successful marketing of the Warrants and/or shares issued upon the exercise
of the Warrants or require the exclusion of any portion of the Warrants and/or
shares issued upon the exercise of the Warrants to be registered. Subject to the
preceding sentence, shares to be excluded from an underwritten public offering
shall be selected in the manner provided in Section 8(a) hereof.
(c) If and whenever the Company is required by the provisions
of Sections 8(a) or 8(b) hereof to effect the registration of Warrants and/or
shares issued upon the exercise of the Warrants under the Securities Act, the
Company will:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with
respect to such securities, and use its diligent, good faith
efforts to cause such registration statement to become and
remain effective until the earlier of the date on which all
the securities have been sold or the date the securities may
be sold without restriction pursuant to Rule 144(k) under the
Securities Act;
(ii) prepare and file with the Commission such
amendments to such registration statement and supplements to
the prospectus contained therein as may be
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<PAGE>
necessary to keep such registration statement effective for
the period required by Section 8(c)(i) above;
(iii) provide security holders' counsel with
reasonable opportunities to review and comment on, and
otherwise participate in, the preparation of such registration
statement;
(iv) furnish to the security holders participating in
such registration and to the underwriters of the securities
being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final
prospectus and such other documents as such security holders
and underwriters may reasonably request in order to facilitate
the public offering of such securities;
(v) use its diligent, good faith efforts to register
or qualify the securities covered by such registration
statement under such state securities or blue sky laws of such
jurisdictions as such participating holders may reasonably
request in writing within 30 days following the original
filing of such registration statement, except that the Company
shall not for any purpose be required to execute a general
consent to service of process or to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so
qualified;
(vi) notify the security holders participating in
such registration, promptly after it shall receive notice
thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a
part of such registration statement has been filed;
(vii) notify such holders promptly of any request by
the Commission for the amending or supplementing of such
registration statement or prospectus or for additional
information;
(viii) prepare and file with the Commission, promptly
upon the request of any such holders, any amendments or
supplements to such registration statement or prospectus
which, in the opinion of counsel for such holders (and
concurred in by counsel for the Company), is required under
the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Warrants or shares by
such holder;
(ix) prepare and promptly file with the Commission
and promptly notify such holders of the filing of such
amendment or supplement to such registration statement or
prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any
such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were
made, not misleading;
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<PAGE>
(x) advise such holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of
any stop order by the Commission suspending the effectiveness
of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal if such stop order should be
issued;
(xi) not file any amendment or supplement to such
registration statement or prospectus to which a majority in
interest of such holders shall have reasonably objected on the
grounds that such amendment or supplement does not comply in
all material respects with the requirements of the Securities
Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five business days
prior to the filing thereof, unless in the opinion of counsel
for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any
liabilities under any applicable federal or state law and such
filing will not violate applicable law; and
(xii) at the request of any such holder, furnish on
the effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (i)
opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to
the holder or holders making such request, covering such
matters as such underwriters and holder or holders may
reasonably request; and (ii) letters, dated such respective
dates, from the independent certified public accountants of
the Company, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters
as such underwriters and holder or holders may reasonably
request.
(d) The Company shall pay all Registration Expenses (as
defined below) in connection with the inclusion of Shares in any Registration
Statement, or application to register or qualify Shares under state securities
laws, filed by the Company hereunder, other than as set forth herein. For
purposes of this Agreement, the term "Registration Expenses" means the filing
fees payable to the Commission, any state agency and the National Association of
Securities Dealers, Inc.; the fees and expenses of the Company's legal counsel
and independent certified public accountants in connection with the preparation
and filing of the Registration Statement (and all amendments and supplements
thereto) with the Commission; and all expenses relating to the printing of the
Registration Statement, prospectuses and various agreements executed in
connection with the Registration Statement. Notwithstanding the foregoing, the
security holder will pay the fees and expenses of any legal counsel such holders
may engage, as well as the holder's proportionate share of any custodian fees or
commission or discounts which may be payable to any underwriter.
(e) The holders of Warrants and/or the holders of shares
issued upon the exercise of the Warrants acknowledge that there may occasionally
be times when the Company must suspend the use of the prospectus forming a part
of the Registration Statement, when there exists
8
<PAGE>
material non-public information relating to the Company (including, but not
limited to, an acquisition, merger, recapitalization, consolidation,
reorganization or similar transaction (or negotiations with respect thereto))
which in the reasonable opinion of the Company's Board of Directors should not
be disclosed. Accordingly, the Company may suspend resales pursuant to such
Registration Statement for a period not to exceed ninety (90) days in any
twenty-four (24) month period if the Company has been advised by counsel and the
Board of Directors reasonably concurs that the information the Board reasonably
believes should not be disclosed is material and therefore the prospectus
forming a part of the Registration Statement is not current. Each such holder
agrees that it shall not sell any Shares pursuant to said prospectus during the
period commencing at the time at which the Company gives the holder notice of
the suspension of such prospectus and ending at the time the Company gives the
holder notice that the holder may thereafter effect sales pursuant to such
prospectus.
(f) The Company hereby indemnifies the holder of this Warrant
and of any common stock issued or issuable hereunder, its officers and
directors, and any person who controls such Warrant holder or such holder of
common stock within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement, prospectus, notification
or offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading except
insofar as such losses, claims, damages or liabilities are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by such Warrant holder or such holder of common stock expressly for use
therein, and each such holder by its acceptance hereof severally agrees that it
will indemnify and hold harmless the Company and each of its officers who signs
such registration statement and each of its directors and each person, if any,
who controls the Company within the meaning of Section 15 of the Securities Act
with respect to losses, claims, damages or liabilities which are caused by any
untrue statement or omission contained in information furnished in writing to
the Company by such holder expressly for use therein.
9. Additional Right to Convert Warrant.
(a) If at any time the shares to be issued upon exercise of
this Warrant cannot be immediately sold pursuant to an effective registration
under the Securities Act, the holder of this Warrant shall have the right to
require the Company to convert this Warrant (the "Conversion Right") at any time
prior to its expiration into shares of Common Stock as provided for in this
Section 9. Upon exercise of the Conversion Right, the Company shall deliver to
the holder (without payment by the holder of any Exercise Price) that number of
shares of Common Stock equal to the quotient obtained by dividing (x) the value
of the Warrant at the time the Conversion Right is exercised (determined by
subtracting the aggregate Exercise Price for the Warrant Shares in effect
immediately prior to the exercise of the Conversion Right from the aggregate
Fair Market Value for the Warrant Shares immediately prior to the exercise of
the Conversion Right) by (y) the Fair Market Value of one share of Common Stock
immediately prior to the exercise of the Conversion Right.
9
<PAGE>
(b) The Conversion Right may be exercised by the holder, at
any time or from time to time, prior to its expiration, on any business day by
delivering a written notice in the form attached hereto (the "Conversion
Notice") to the Company at the offices of the Company exercising the Conversion
Right and specifying (i) the total number of shares of Common Stock the
Warrantholder will purchase pursuant to such conversion and (ii) a place and
date not less than one nor more than 20 business days from the date of the
Conversion Notice for the closing of such purchase.
(c) At any closing under Section 9(b) hereof, (i) the holder
will surrender the Warrant and (ii) the Company will deliver to the holder a
certificate or certificates for the number of shares of Common Stock issuable
upon such conversion, together with cash, in lieu of any fraction of a share,
and (iii) the Company will deliver to the holder a new warrant representing the
number of shares, if any, with respect to which the warrant shall not have been
exercised.
(d) "Fair Market Value" means, with respect to the Company's
Common Stock, as of any date:
(i) if the Common Stock is listed or admitted to
unlisted trading privileges on any national securities exchange or is not so
listed or admitted but transactions in the Common Stock are reported on the
NASDAQ National Market System, the reported closing price of the Common Stock on
such exchange or by the NASDAQ National Market System as of such date (or, if no
shares were traded on such day, as of the next preceding day on which there was
such a trade); or
(ii) if the Common Stock is not so listed or admitted
to unlisted trading privileges or reported on the NASDAQ National Market System,
and bid and asked prices therefor in the over-the-counter market are reported by
the NASDAQ system or National Quotation Bureau, Inc. (or any comparable
reporting service), the mean of the closing bid and asked prices as of such
date, as so reported by the NASDAQ System, or, if not so reported thereon, as
reported by National Quotation Bureau, Inc. (or such comparable reporting
service); or
(iii) if the Common Stock is not so listed or
admitted to unlisted trading privileges, or reported on the NASDAQ National
Market System, and such bid and asked prices are not so reported by the NASDAQ
system or National Quotation Bureau, Inc. (or any comparable reporting service),
such price as the Company's Board of Directors determines in good faith in the
exercise of its reasonable discretion.
IN WITNESS WHEREOF, RSI Systems, Inc. has caused this Warrant to be
executed by its duly authorized officers and this Warrant to be dated as of
1998.
RSI SYSTEMS, INC.
By
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EXERCISE FORM
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
RSI SYSTEMS, INC.
The undersigned, the holder of the within warrant, hereby irrevocably
elects to exercise the purchase right represented by such warrant for, and to
purchase thereunder ______________ shares of the Common Stock, $.01 par value,
of RSI Systems, Inc. and herewith makes payment of $________________ therefor,
and requests that the certificates for such shares be issued in the name of
_____________________________________ and be delivered to ______________________
whose address is ___________________________.
Dated: ________________ ____________________________________________
(Signature must conform in all respects to
the name of holder as specified on the face
of the warrant)
(Address)
(City - State - Zip)
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ASSIGNMENT FORM
(TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT)
For value received, the undersigned hereby sells, assigns and transfers
unto those individuals listed on Exhibit A, attached hereto, the right
represented by the within warrant to purchase the number of shares opposite
their names on the attached Exhibit A of Common Stock, $.01 par value, of RSI
Systems, Inc. to which the within warrant relates, and appoints
______________________ attorney to transfer said right on the books of RSI
Systems, Inc., with full power of substitution in the premises.
Dated: ________________ MILLER, JOHNSON & KUEHN,
INCORPORATED
5500 Wayzata Blvd.
Suite 800 - 8th Floor
Minneapolis, MN 55416
By _____________________________________
In the presence of:
_____________________________________
_____________________________________
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CONVERSION NOTICE
(TO BE SIGNED ONLY UPON EXERCISE OF CONVERSION RIGHT
SET FORTH IN SECTION 9 OF THE WARRANT)
TO RSI SYSTEMS, INC.:
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the Conversion Right set forth in Section 9 of such Warrant
and to purchase _______________ shares of the Common Stock, of RSI Systems, Inc.
The closing of this conversion shall take place at the offices of the
undersigned on ____________________. Certificates for the shares to be delivered
at the closing shall be issued in the name of ________________ whose address is
___________________________________________.
Dated: ________________ ____________________________________________
(Signature must conform in all respects to
the name of holder as specified on the face
of the Warrant)
(Address)
(City - State - Zip)
EXHIBIT 10.20
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
(Eximbank Guaranteed Loan No. AP072433XX)
Dated as of April 16, 1998
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 Amended and Restated 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 dated as of June
26, 1997, by and between the Borrower and the Lender.
"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 C, 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 dated as of June 26, 1997, 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.
"Commitment" means the Lender's commitment to make Advances pursuant
to Article II.
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"Control Agreement" means that certain Notice of Pledge and Control
Agreement by and among NISI, NBCI, the Lender and the Borrower of even
date herewith.
"Credit Facility" means the credit facility made available to the
Borrower 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 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;
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<PAGE>
(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;
(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;
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<PAGE>
(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;
(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.
"Eligible Marketable Securities" means, in the Lender's sole
discretion, government/agency securities, in the NISI Account, and for
which the Lender has received a Control Agreement executed and
acknowledged by the Borrower and NISI.
"Event of Default" has the meaning specified in Section 7.1.
"Eximbank" means the Export-Import Bank of the United States.
"Existing Revolving Advances" has the meaning specified in Section
2.1.
"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 the Spread, which Floating 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 2.2.
"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.
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"Loan Documents" means (i) this Agreement, the Note, the Pledge
Agreement and the Control Agreement, each of even date herewith, and (ii)
the Borrower Agreement, the Old Security Documents and the Disclosure by
the Borrower in favor of the Lender each dated as of June 26, 1998.
"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.
"Maximum Line" means $500,000.
"Minimum Interest Charge" has the meaning given in Section 2.4(b).
"NBCI" means Norwest Business Credit, Inc., a Minnesota corporation.
"NBCI Credit Agreement" means that certain Amended and Restated
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.
"NISI" means Norwest Investment Services, Inc., a Minnesota
corporation.
"NISI Account" means account no. 10632016 maintained with NISI.
"Note" means the Revolving Note.
"Old Credit Documents" means that certain Credit and Security
Agreement dated as of June 26, 1997 by and between the Borrower and the
Lender.
"Old Revolving Note" means the Borrower's revolving promissory note
dated as of June 26, 1997, payable to the order of the Lender in the
original principal amount of $500,000.
"Old Security Documents" means the Old Credit Documents, the Patent
and Trademark Security Agreement and the Collateral Account Agreement,
each dated as of June 26, 1997.
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"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 dated as of June 26, 1997, 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.
"Pledge Agreement" means the Collateral Pledge Agreement by the
Borrower in favor of the Lender and NBCI of even date herewith.
"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 2.2.
"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 Coverage" means the ratio of the value of the Eligible
Marketable Securities to the outstanding Revolving Advances.
"Security Interest" has the meaning given in Section 3.1.
"Servicer" means NBCI.
"Spread" means for each month a percentage based on the number of
days during the month that are a Tier One Period, Tier Two Period or Tier
Three Period as set forth below:
Period Type Spread
----------- ------
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Tier One Period 0%
Tier Two Period 1.0%
Tier Three Period 4.0%
"Tier One Period" means any Tier One Period as defined in the NBCI
Credit Agreement.
"Tier Two Period" means any Tier Two Period as defined in the NBCI
Credit Agreement.
"Tier Three Period" means any Tier Three Period as defined in the
NBCI Credit Agreement.
"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 after an Event of Default
pursuant to Section 7.1.
"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 Existing Revolving Advances. The Lender has made various
advances to the Borrower (the "Existing Revolving Advances") as evidenced by the
Old
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Credit Documents. As of April 15, 1998, the outstanding principal balance of the
Existing Revolving Advances was $0. Upon execution and delivery of this
Agreement, the Existing Revolving Advances shall be deemed to be Revolving
Advances made pursuant to Section 2.2 and repayable in accordance with the
Revolving Note. To the extent the Revolving Note evidences the Existing
Revolving Advances, the Revolving Note shall be issued in substitution for and
replacement of but not in payment of the Old Credit Documents.
Section 2.2 Revolving Advances. The Lender agrees, on the terms and
conditions set forth herein, to 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 have no
obligation to make a 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 2.2, the
Borrower may request Revolving Advances, prepay, and request additional
Revolving Advances.
Section 2.3 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 shall have no obligation to make 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 2.4 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, during any Tier Two
Period or Tier Three Period, shall pay to the Lender interest of not less
than (i) $2083.33 per month during a Tier Two Period (prorated for less
than full months), and (ii) $3750 per month during a Tier Three Period
(prorated for less than full months). The Borrower shall pay any
deficiency between (i) such minimum interest charge and (ii) the sum of
the amount of interest otherwise calculated under Sections (a) and (c)
hereof plus the amount of interest paid during the same period under the
NBCI Credit Agreement.
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Such minimum interest charge deficiency shall be payable in arrears on the
first day of the following month, provided that the sum of the Minimum
Interest Charge and the Minimum Interest Charge under the NBCI Credit
Facility shall not exceed (i) $2083.33 per month during a Tier Two Period
(prorated for less than full months), and (ii) $3750 per month during a
Tier Three Period (prorated for less than full months).
(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 2.5 Fees.
(a) FACILITY FEES. 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.
(b) 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 2.6 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.
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
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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 Capital Adequacy; Increased Costs and Reduced Return. If
any Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. The Borrower may terminate the Credit Facility
pursuant to Section 2.6 without incurring the prepayment fee set forth in
Section 2.6 if the Borrower terminates the Credit Facility within 45 days after
the date the Lender gives notice of the Rule Change. For purposes of this
Section 2.9:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy,
or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital
in amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "Return", for any period, means the return as determined by such
Related Lender on the Advances based upon its total capital requirements
and a reasonable attribution formula that takes account of the Capital
Adequacy Rules then in effect. Return may be calculated for each calendar
quarter and for the shorter period between the end of a calendar quarter
and the date of termination in whole of this Agreement.
(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the Closing Date, but the term does not include any
changes in applicable requirements that on the Closing Date are scheduled
to take place under the existing Capital Adequacy Rules or any increases
in the capital that any Related Lender is required to maintain to the
extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the Lender,
any parent corporation of the Lender and any assignee of any interest of
the Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to
time claiming compensation under this Section 2.9, stating the reason therefor
and setting forth in reasonable detail the calculation of the additional amount
or amounts to be paid to the Related Lender hereunder to restore its Return
shall be conclusive absent manifest error. In determining such amounts, the
Related Lender may use any reasonable averaging and attribution methods.
Section 2.10 Use of Proceeds. The Borrower shall use the proceeds of
Advances for working capital to finance the manufacture, assembly, production or
purchase
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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 2.11 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 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;
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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 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.
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(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 the Initial Revolving Advance.
The Lender's obligation to make 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:
(a) A Certificate of the Secretary of the Borrower certifying as to
(1) the resolutions of the board of directors of the Borrower approving
the execution and delivery of this Amended and Restated Credit and
Security Agreement and the Revolving Note, (2) the fact that the Articles
of Incorporation and Bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of the Borrower's
Secretary dated as of June 26, 1997, continue in full force and effect and
have not been amended or otherwise modified except as set forth in
Certificates previously delivered or the Certificate to be delivered, and
(3) certifying that the officers and agents of the Borrower who have been
certified to the Lender, pursuant to the Certificate of Authority of the
Borrower's Secretary dated as of June 26, 1997, as being authorized to
sign and to act on behalf of the Borrower continue to be so
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authorized or setting forth the sample signatures of each of the officers
and agents of the Borrower authorized to execute and deliver this
Agreement and all other documents, agreements and certificates on behalf
of the Borrower.
(b) Payment of the fee described in Section 2.5.
(c) The Control Agreement, properly executed by the Borrower and
NISI.
(d) The Pledge Agreement, properly executed by the Borrower.
(e) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances. The Lender's
obligation to make each Advance shall be subject to the further conditions
precedent that 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, 1997 and its
unaudited financial statements for the fiscal year to day ending December 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
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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.
Section 5.4 Legal Agreements. The Old Credit Documents constitute
the legal, valid and binding obligations of the Borrower, enforceable against
the Borrower in accordance with their respective terms. The Borrower has no
claim, defense or offset to enforcement of the Old Credit Documents.
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.
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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 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 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;
(d) during a Tier Two Period, as soon as available and in any event
within two (2) Business Days after the end of each week, a properly
completed Borrowing Base Certificate as at the end of such week, signed by
the Borrower's chief financial officer;
(e) 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;
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(f) 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;
(g) 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;
(h) 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;
(i) 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;
(j) at a minimum during any Tier Three Period and at the Lender's
Sole Discretion, 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.
(k) 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);
(l) immediately after a proceeding in bankruptcy or an action for
debtor's relief is filed by, against, or on behalf of the Borrower;
(m) 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 (l) above; and
(n) immediately after the Borrower begins any procedure for its
dissolution or liquidation, or a procedure therefor has been commenced
against it.
So long as the Servicer is actively servicing the Loan Documents on behalf of
the Lender as described in Section 8.3, the Borrower shall provide to the
Servicer all reports required under this Section 6.1.
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<PAGE>
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 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
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<PAGE>
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. An "Event of Default", as used
herein, shall mean any one of the following:
(a) Failure to pay the Note when due, and in this connection
Borrower hereby waives presentment, notice of dishonor and protest;
(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;
(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.
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<PAGE>
Section 7.2 Rights and Remedies. During any Default Period, the
Lender may exercise any or all of the following rights and remedies:
(a) The Lender, may by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
(b) 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;
(c) 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 8.2) at least 10
calendar days before the date of intended disposition or other action.
ARTICLE VIII
Miscellaneous
Section 8.1 Restatement of Old Credit Documents. This Agreement is
executed for the purpose of amending and restating the Old Credit Documents.
Section 8.2 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.
Section 8.3 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.
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<PAGE>
(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 8.4 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 8.5 Indemnity. In addition to the payment of expenses
pursuant to Section 8.4, 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,
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<PAGE>
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 8.5 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.
Section 8.6 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
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<PAGE>
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 8.7 Waiver of Default. The Borrower is in default of
Sections 6.1(b) and 6.1(f) of the Credit Agreement relating to reporting
requirements, (the "Default"). Upon the terms and subject to the conditions set
forth in this Amendment, the Lender hereby waives the default. This waiver shall
be effective only in this specific instance and for the specific purpose for
which it is given, and this waiver shall not entitle the Borrower to any other
or further waiver in any similar or other circumstances.
Section 8.8 Waiver. The Borrower hereby absolutely and
unconditionally releases and forever discharges the Bank, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Agreement, whether
such claims, demands and causes of action are matured or unmatured or known or
unknown.
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<PAGE>
Section 8.9 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 BUSINESS CREDIT, INC., as RSI SYSTEMS, INC.
Servicer for
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION By
-----------------------------------
Donald C. Lies
By Its President and Chief Executive
----------------------------------- Officer
Roger A. Pfiffner
Its Vice President Address:
5555 West 78th Street
Address: Edina, Minnesota 55439
Norwest Center Telecopy No. (612) 896-3030
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152 Federal Tax I.D. No. 41-1767211
Telecopy No. 612/341-2472
Federal Tax ID No. 41-1712687
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<PAGE>
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$500,000 Minneapolis, Minnesota
April 16, 1998
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under 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 Amended and
Restated 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. To the extent this Note evidences the
Borrower's obligation to pay Existing Revolving Advances, this Note is issued in
substitution for and replacement of but not in payment of the Borrower's
promissory note dated as of June 26, 1997 payable to the order of the Lender in
the original principal amount of $500,000.
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., as Servicer
Christopher A. Cudak
Norwest Bank Minnesota, National Association
Date: __________________, 199___
Subject: RSI Systems, Inc.
Financial Statements
In accordance with our Amended and Restated Credit and Security
Agreement dated as of April 16, 1998 (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 C to Credit and Security
Agreement
FORM OF BORROWING BASE CERTIFICATE
<PAGE>
Exhibit D to Credit and Security
Agreement
PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
NONE
EXHIBIT 10.21
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
Dated as of April 16, 1998
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 Amended and Restated 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 the lesser of:
(a) the Maximum Line less the Norwest Bank Revolving Advances;
or
(b) the sum of:
(i) the lesser of (A) 75% of Eligible Accounts,
(ii) 100% of Eligible Certificates of Deposits, plus
<PAGE>
(iii) 100% of Eligible Marketable Securities.
"Collateral" has the meaning given in Section 3.1.
"Commitment" means the Lender's commitment to make Advances pursuant
to Article II.
"Control Agreement" means that certain Notice of Pledge and Control
Agreement by and among NISI, the Lender, Norwest Bank and the Borrower of
even date herewith.
"Credit Facility" means the 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
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<PAGE>
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);
(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 Bank;
(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.
"Eligible Marketable Securities" means, in the Lender's sole
discretion, government/agency securities, in the NISI Account, and for
which the Lender has received a Control Agreement executed and
acknowledged by the Borrower and NISI.
"Event of Default" has the meaning specified in Section 7.1.
"Existing Revolving Advances" has the meaning specified in Section
2.1.
"Floating Rate" means an annual rate equal to the sum of the Base
Rate plus the Spread, which Floating Rate shall change when and as the
Base Rate changes.
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<PAGE>
"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 (i) this Agreement, the Note, the Pledge
Agreement and the Control Agreement, each of even date herewith; and (ii)
the Old Security Documents and the Disclosure by the Borrower in favor of
the Lender each dated as of June 26, 1997.
"Maturity Date" means June 26, 1999.
"Maximum Line" means $1,000,000.
"Minimum Interest Charge" has the meaning given in Section 2.3(b).
"NISI" means Norwest Investment Services, Inc., a Minnesota
corporation.
"NISI Account" means account no. 10632016 maintained with NISI.
"Norwest Bank Credit Agreement" means that certain Amended and
Restated Credit Agreement by and between Norwest Bank 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 Bank" means Norwest Bank Minnesota, National Association, a
national banking association.
"Norwest Bank Revolving Advances" means the outstanding principal
balance of the revolving advances as of a given date made by Norwest Bank
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.
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<PAGE>
"Old Credit Documents" means that certain Credit and Security
Agreement dated as of June 26, 1997 as amended by the First Amendment to
Credit and Security Agreement dated as of December 31, 1997.
"Old Revolving Note" means the Borrower's revolving promissory note
dated as of June 26, 1997, payable to the order of the Lender in the
original principal amount of $1,000,000.
"Old Security Documents" means the Old Credit Documents, the Patent
and Trademark Security Agreement, and the Collateral Account Agreement and
the Lockbox Agreement, each dated as of June 26, 1997.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender dated
as of June 26, 1997.
"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.
"Pledge Agreement" means the Collateral Pledge Agreement by the
Borrower in favor of the Lender and NBCI of even date herewith.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession.
"Revolving Advance" has the meaning given in Section 2.2.
"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 Coverage" means the ratio of the value of the Eligible
Marketable Securities to the outstanding Revolving Advances.
"Security Interest" has the meaning given in Section 3.1.
"Spread" means for each month a percentage based on the number of
days during the month that are a Tier One Period, Tier Two Period or Tier
Three Period as set forth below:
Period Type Spread
----------- ------
Tier One Period 0%
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Tier Two Period 1.0%
Tier Three Period 4.0%
"Support Agreement" means the Management Support Agreement by Donald
Lies, dated as of June 26, 1997.
"Tier One Period" means any period during which the Security
Coverage is greater than or equal to one-hundred twenty-five percent
(125%).
"Tier Two Period" means any period during which the Security
Coverage is less than one-hundred twenty-five percent (125%) but greater
than or equal to fifty (50%) and there is Excess Availability of at least
$200,000.
"Tier Three Period" means any period during which the Security
Coverage is less than fifty (50%) or there is Excess Availability of less
than $200,000.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility pursuant to Section
2.5, or (iii) the date the Lender demands payment of the Obligations after
an Event of Default pursuant to Section 7.1.
"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 Existing Revolving Advances. The Lender has made various
advances to the Borrower (the "Existing Revolving Advances") as evidenced by the
Old Credit Documents. As of April 15, 1998, the outstanding principal balance of
the Existing Revolving Advances was $0. Upon execution and delivery of this
Agreement, the Existing Revolving Advances shall be deemed to be Revolving
Advances made pursuant to Section 2.2 and repayable in accordance with the
Revolving Note. To the extent the Revolving Note evidences the Existing
Revolving Advances, the Revolving Note shall be issued in substitution for and
replacement of but not in payment of the Old Credit Documents.
Section 2.2 Revolving Advances. The Lender agrees, on the terms and
conditions set forth herein, to make advances to the Borrower from time to time
from the date this Agreement is signed and delivered to the Termination Date
(each a "Revolving 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 2.2, the Borrower may request Revolving Advances,
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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 2.3 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, during any Tier Two
Period or Tier Three Period, shall pay to the Lender interest of not less
than (i) $2083.33 per month during a Tier Two Period (prorated for less
than full months), and (ii) $3750 per month during a Tier Three Period
(prorated for less than full months). The Borrower shall pay any
deficiency between (i) such minimum interest charge and (ii) the sum of
the amount of interest otherwise 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 month.
(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 2.4 Determination of Tier Periods. Each month, upon receipt
of a report from NISI on the value of the Eligible Marketable Securities, or
sooner at the Lender's sole discretion or (i) if the value of the Eligible
Marketable Securities decreases, or (ii) if the Borrower requests that any
Investment Property be removed from the NISI Account, the Lender shall determine
whether the Borrower is in a Tier One Period, a Tier Two Period or a Tier Three
Period. Such determination shall be applied prospectively.
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Section 2.5 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) $45,000 less all interest paid since the date hereof, or, if this
Agreement is renewed hereof, since the last Maturity Date; provided,
however, that such prepayment fee shall be waived if such prepayment is
made 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 2.6 Capital Adequacy; Increased Costs and Reduced Return. If
any Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. The Borrower may terminate the Credit Facility
pursuant to Section 2.5(a) without incurring the prepayment fee set forth in
Section 2.5(b) if the Borrower terminates the Credit Facility within 45 days
after the date the Lender gives notice of the Rule Change. For purposes of this
Section 2.6:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy,
or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital
in amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "Return", for any period, means the return as determined by such
Related Lender on the Advances based upon its total capital requirements
and a reasonable attribution formula that takes account of the Capital
Adequacy Rules then in effect. Return may be calculated for each calendar
quarter and for the shorter period between the end of a calendar quarter
and the date of termination in whole of this Agreement.
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(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the Closing Date, but the term does not include any
changes in applicable requirements that on the Closing Date are scheduled
to take place under the existing Capital Adequacy Rules or any increases
in the capital that any Related Lender is required to maintain to the
extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the Lender,
any parent corporation of the Lender and any assignee of any interest of
the Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.6, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
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.
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 Amendment Fee. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable amendment fee of $10,000, due and
payable upon the execution of this Agreement.
Section 2.10 Unused Line Fee. For the purposes of this Section 2.10
"Credit Exposure" means (i) the Maximum Line, minus (ii) the outstanding
Revolving Advances. The Borrower shall pay to the Lender an unused line fee of
one quarter of one percent (0.25%) of the average daily Credit Exposure during
each calendar quarter, due and payable quarterly in arrears on the first day of
each quarter and on the Termination Date.
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:
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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
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
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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 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.
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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 Initial Advance. The
Lender's obligation to make the 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.
(c) A Certificate of the Secretary of the Borrower certifying as to
(1) the resolutions of the board of directors of the Borrower approving
the execution and delivery of this Amended and Restated Credit and
Security Agreement and the Revolving Note, (2) the fact that the Articles
of Incorporation and Bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of the Borrower's
Secretary dated as of June 26, 1997, continue in full force and effect and
have not been amended or otherwise modified except as set forth in
Certificates previously delivered or the Certificate to be delivered, and
(3) certifying that the officers and agents of the Borrower who have been
certified to the Lender, pursuant to the Certificate of Authority of the
Borrower's Secretary dated as of June 26, 1997, as being authorized to
sign and to act on behalf of the Borrower continue to be so authorized or
setting forth the sample signatures of each of the officers and agents of
the Borrower authorized to execute and deliver this Agreement and all
other documents, agreements and certificates on behalf of the Borrower.
(d) Payment of the fee described in Section 2.9.
(e) The Control Agreement, properly executed by the Borrower and
NISI.
(f) The Pledge Agreement, properly executed by the Borrower.
(g) The First Amendment to Lockbox Service Agreement, properly
executed by the Borrower and Norwest Bank.
(h) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances. The Lender's
obligation to make each Advance shall be subject to the further conditions
precedent that on such date:
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(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, 1997 and its
unaudited financial statements for the fiscal year to day ending December 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 Legal Agreements. The Old Credit Documents constitute
the legal, valid and binding obligations of the Borrower, enforceable against
the Borrower in accordance with their respective terms. The Borrower has no
claim, defense or offset to enforcement of the Old Credit Documents.
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.
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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 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; and
(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) during a Tier Two Period, as soon as available and in any event
within two (2) Business Days after the end of each week, a properly
completed Borrowing Base Certificate as at the end of such week, signed by
the Borrower's chief financial officer;
(f) 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
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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;
(g) 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;
(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) 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 Phoenix Mutual Life
Insurance Company and written notice of any rent due to Phoenix Mutual
Life Insurance Company but not paid;
(j) at a minimum during any Tier Three Period and at the Lender's
sole discretion, 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 (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the
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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 $2,000,000.
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 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:
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(a) Failure to pay the Note when due, 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. During any Default Period the
Lender may exercise any or all of the following rights and remedies:
(a) The Lender, may by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
(b) 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;
(c) 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 8.2) at least 10
calendar days before the date of intended disposition or other action.
ARTICLE VIII
Miscellaneous
Section 8.1 Restatement of Old Credit Documents. This Agreement is
executed for the purpose of amending and restating the Old Credit Documents.
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<PAGE>
Section 8.2 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 8.3 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 (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. Notwithstanding
the foregoing,
(a) during a Tier One Period, the Borrower shall not have to
reimburse the Lender for collateral fees, costs and expenses; and
(b) during a Tier Two Period, the Borrower shall not have to
reimburse the Lender for collateral fees, costs and expenses to the extent
they exceed $3,000 per year.
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 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
-18-
<PAGE>
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.
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.
Section 8.6 Waiver of Defaults. The Borrower is in default of
Sections 6.1(b) and 6.1(c) of the Credit Agreement relating to reporting
requirements, (the "Default"). Upon the terms and subject to the conditions set
forth in this Amendment, the Lender hereby waives the Default. This waiver shall
be effective only in this specific instance and for the specific purpose for
which it is given, and this waiver shall not entitle the Borrower to any other
or further waiver in any similar or other circumstances.
Section 8.7 Waiver. The Borrower hereby absolutely and
unconditionally releases and forever discharges the Bank, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Agreement,
-19-
<PAGE>
whether such claims, demands and causes of action are matured or unmatured or
known or unknown.
Section 8.8 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 BUSINESS CREDIT, INC. RSI SYSTEMS, INC.
By By
----------------------------------- -----------------------------------
Roger A. Pfiffner Donald C. Lies
Its Vice President Its President and Chief Executive
Officer
Address: Address:
Norwest Center 5555 West 78th Street
Sixth Street and Marquette Avenue Edina, Minnesota 55439
Minneapolis, Minnesota 55479-0152
Telecopy No. 612/341-2472 Telecopy No. (612) 896-3030
Federal Tax ID No. 41-1712687 Federal Tax I.D. No. 41-1767211
-20-
<PAGE>
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$1,000,000 Minneapolis, Minnesota
April 16, 1998
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below) 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 Amended and Restated 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. To the extent this Note evidences the
Borrower's obligation to pay Existing Revolving Advances, this Note is issued in
substitution for and replacement of but not in payment of the Borrower's
promissory note dated as of June 26, 1997 payable to the order of the Lender in
the original principal amount of $1,000,000.
RSI SYSTEMS, INC.
By
----------------------------------------
Donald C. Lies
Its President and Chief Executive Officer
<PAGE>
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Michael L. Guillou
Norwest Business Credit, Inc.
Date: __________________, 199___
Subject: RSI Systems, Inc.
Financial Statements
In accordance with our Amended and Restated Credit and Security
Agreement dated as of April 16, 1998 (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 $2,000,000.
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
EXHIBIT 10.22
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
(EXIMBANK GUARANTEED LOAN NO. AP072433XA)
This Amendment, dated as of June 22, 1998, is made by and between
RSI SYSTEMS, INC., a Minnesota corporation ("the Borrower") and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and
Restated Credit and Security Agreement dated as of April 16, 1998 (the "Credit
Agreement"). Capitalized terms used in these recitals have the meanings given to
them in the Credit Agreement unless otherwise specified.
The Borrower has requested that the Lender extend the Maturity Date
by one year and make other amendments to the Credit Agreement. The Lender is
willing to grant the Borrower's request pursuant to the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"'Maturity Date' means June 24, 1999."
2. No Other Changes. Except as explicitly amended by this Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit thereunder.
3. Fees.
(a) RENEWAL FEE. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable renewal fee of one percent (1%) of the
Maximum Line, due and payable due and payable upon the execution of this
Agreement.
(b) APPLICATION FEE. The Borrower shall reimburse the Lender for the
$100 application fee payable to Eximbank in connection with the renewal
application.
4. Conditions Precedent. This Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
<PAGE>
(a) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving
the execution and delivery of this Amendment, (ii) the fact that the
articles of incorporation and bylaws of the Borrower, which were certified
and delivered to the Lender pursuant to its Certificate of Authority dated
as of June 26, 1997 continue in full force and effect and have not been
amended or otherwise modified except as set forth in the Certificate to be
delivered, and (iii) certifying that the officers and agents of the
Borrower who have been certified to the Lender, pursuant to the
Certificate of Authority dated as of June 26, 1997, as being authorized to
sign and to act on behalf of the Borrower continue to be so authorized or
setting forth the sample signatures of each of the officers and agents of
the Borrower authorized to execute and deliver this Amendment and all
other documents, agreements and certificates on behalf of the Borrower.
(b) The SBA/Eximbank Joint Application, properly completed and
executed by the Borrower.
(c) An Exceptions Approval Letter, properly signed by Eximbank.
(d) Payment of the fee described in Paragraph 3.
(e) Receipt by the Lender of the executed Loan Authorization Notice.
(f) Such other matters as the Lender may require.
5. Representations and Warranties. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower, or (iii) result in a breach
of or constitute a default under any indenture or loan or credit agreement
or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as
<PAGE>
of such date, except to the extent that such representations and
warranties relate solely to an earlier date.
6. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
7. No Waiver. The execution of this Amendment and acceptance of any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Security Document or other document held by the Lender,
whether or not known to the Lender and whether or not existing on the date of
this Amendment.
8. Release. The Borrower, hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
9. Costs and Expenses. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make an Advance
under the Credit Agreement, or apply the proceeds of any Advance, for the
purpose of paying any such fees, disbursements, costs and expenses and the fee
required under paragraph 3 hereof.
<PAGE>
10. Miscellaneous. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By By
----------------------------------- -----------------------------------
Christopher A. Cudak Donald C. Lies
Its Vice President Its President and Chief Executive
Officer
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
RSI Systems, Inc.:
We consent to incorporation by reference in the registration statements
(commission File numbers 333-62573 and 33-95912) on Form S-8 of RSI Systems,
Inc. of our report dated August 14, 1998, relating to the balance sheets of RSI
Systems, Inc. as of June 30, 1998 and 1997 and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended June 30, 1998, which report appears in the June 30, 1998
annual report on Form 10-KSB of RSI Systems, Inc.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 16, 1998
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 382,093
<SECURITIES> 979,555
<RECEIVABLES> 1,541,626
<ALLOWANCES> 254,000
<INVENTORY> 637,422
<CURRENT-ASSETS> 3,597,645
<PP&E> 528,685
<DEPRECIATION> 560,403
<TOTAL-ASSETS> 4,126,330
<CURRENT-LIABILITIES> 1,755,352
<BONDS> 0
0
0
<COMMON> 66,573
<OTHER-SE> 2,196,766
<TOTAL-LIABILITY-AND-EQUITY> 4,126,330
<SALES> 4,662,558
<TOTAL-REVENUES> 4,662,558
<CGS> 2,123,553
<TOTAL-COSTS> 2,123,553
<OTHER-EXPENSES> 4,472,190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,649
<INCOME-PRETAX> (1,959,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,959,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,959,956)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
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