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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended March 31, 1998.
Commission file number: 33-89384-LA
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 East Speedway Boulevard, Tucson, Arizona 85719
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 320-1000
Securities registered under Section 12(g) of the Exchange Act:
Common Stock and Warrants to Purchase Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 disclosure of delinquent filers pursuant to Item 405 of
Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenue for its most recent fiscal year: $21,623,000.
As of March 31, 1998, the aggregate market value of
voting stock held by non-affiliates of the issuer: $3,071,980 based on Common
Stock of 3,071,980. This calculation does not reflect a determination that
certain persons are affiliates of the registrant for any other purposes.
Number of shares of common stock outstanding on March 31, 1998 was 4,478,724.
Transitional Small Business Disclosure Format: Yes [ ]; No [X].
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
RECENT DEVELOPMENTS
Liquidity
Prologic Management Systems, Inc. ("Prologic") together with its
subsidiaries (the "Company") is a commercial systems integration and software
development firm. Historically the Company has not been able to generate
sufficient cash flows from operations to support its operations and has had to
depend on working capital reserves and outside capital sources to supplement its
cash flow. New equity investments, advances on lines of credit, other short and
long term borrowings and credit granted by its suppliers and vendors have been
able to sustain the Company operations over the past several years. During the
fiscal year ended March 31, 1998 ("fiscal 1998"), the Company received in excess
of $750,000 of new equity from cash investments and debt conversion. Subsequent
to March 31, 1998, an additional $740,000 of debt has been converted to equity.
The Company's ability to raise additional capital and its relationships with
these suppliers, vendors and financial sources are critical to the continued
viability of the Company.
The Company's primary supplier, whose products accounted for
approximately 65% of the Company's fiscal 1998 revenues, currently allows the
Company to purchase goods on open credit and under a program that allows
customers to assign proceeds from sales of products directly to the supplier. At
March 31, 1998, the Company had balances of $1,217,000 under the assignment of
proceeds program and $444,000 on open credit with this supplier. The current
stated credit limit with this supplier is $600,000. Historically, the supplier
has allowed the Company to exceed its credit limits. However, there is no
assurance that this supplier will continue to do so. Although this supplier is
not the sole source of the Company's products, the Company has a long
relationship with this supplier and would like to continue the relationship.
Management is currently pursuing options available to the Company for increasing
the credit limit and financing purchases with other sources. Although this
relationship and the stated credit limit have not caused delays in meeting
customer shipments, management believes that because of the trends in the
Company's operating results and the current low credit limit that the Company's
ability to meet customer demands could be effected.
During fiscal 1998, the Company signed a $5,000,000 financing agreement
with Coast Business Credit for a line of credit to finance accounts receivable
for its Great River Systems, Inc. ("GRSI") and BASIS, Inc. ("BASIS")
subsidiaries. This credit facility replaced a $2.2 million credit facility that
was in place at its BASIS subsidiary. This new facility is designed to provide
working capital to support the Company's sales growth for both subsidiaries.
Among other things the agreement required that the Company maintain a combined
net worth at its BASIS and GRSI subsidiaries of at least $1,000,000. The Company
received a waiver for non-compliance with this requirement at March 31, 1998
and modified the agreement in July 1998 to a combined net worth requirement of
$750,000 for both subsidiaries. The total amount of the line of credit
outstanding at March 31, 1998 was $1,238,000 with additional availability of
approximately $117,000. At August 14, 1998 the Company had $1,055,000
outstanding on the line with additional availability of $65,000.
Delisting of Securities From Nasdaq SmallCap Market and the Boston Stock
Exchange, Inc.
As of March 31, 1998, the Company's common stock and the Company's
warrants to purchase shares of common stock were listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange. In order remain listed on the Nasdaq
SmallCap Market, an issuer must meet the "continued listing criteria"
established by The Nasdaq Stock Market, Inc. ("Nasdaq"). As previously reported
in the Company's
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Report on Form 10-QSB for the quarter ended December 31, 1998, the Nasdaq Stock
Market (in February 1998) changed the continued listing criteria, including the
minimum equity requirement of $1,000,000 to a net tangible assets (assets minus
liabilities minus goodwill) requirement of at least $2,000,000. To be in
compliance with this specific requirement, the Company would have needed over
$3,000,000 of additional capital investment at March 31, 1998. In addition,
Nasdaq requires that a Nasdaq SmallCap Market issuer maintain a minimum bid
price of at least $1 per share. At March 31, 1998, the Company failed to meet
the net tangible assets and the minimum bid price criteria for continued listing
on the Nasdaq SmallCap Market, and on June 8, 1998, the Company was informed by
Nasdaq that its securities would be delisted from the Nasdaq SmallCap Market.
The Company filed to appeal that determination, and Nasdaq set an August 7, 1998
hearing date for the appeal. Although the capital needed to maintain continued
listing on the Nasdaq Small Cap Market was available to the Company, the terms
and conditions of such capital were unacceptable to the Company and the Company
notified Nasdaq that it would not pursue its right to appeal the decision by
Nasdaq to delist the Company's securities from the Nasdaq SmallCap Market.
Accordingly, pursuant to the terms of the Nasdaq Listings Qualifications Panel
decision dated June 8, 1998, the Company's Securities were delisted from the
Nasdaq Stock Market effective with the close of business on August 7, 1998.
The Boston Stock Exchange, Inc. also maintains certain quantitative and
qualitative continued listing criteria, certain areas of which the Company did
not meet. Accordingly, the Company elected not to maintain listing of its
securities with the Boston Stock Exchange.
With the delisting of the Company's securities from the Nasdaq SmallCap
and the Boston Stock Exchange in August 1998, trading of the Company's
securities may continue to be conducted on the OTC Electronic Bulletin Board or
in the non-Nasdaq over-the-counter market. As a result, a holder of the
Company's securities may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Company's securities. In
addition, purchases and sales of the Company's securities may be subject to Rule
15g-9 (the "Rule") promulgated by the Securities and Exchange Commission (the
"SEC"). The Rule imposes various sales practice requirements on broker-dealers
who sell securities governed by the Rule to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5 million or individuals with a net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the Rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the Rule may
have an adverse effect on the ability of broker-dealers to sell the Company's
securities and may affect the salability of the Company's securities in the
secondary market.
The SEC has also adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system. With the Company's securities delisted from the Nasdaq SmallCap Market,
they may come within the definition of penny stocks because the trading price of
the Company's common stock in currently below the $5.00 per share threshold. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not exempt from the rules, to deliver a standardized document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information must be given to the customer prior to
effecting the transaction. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules.
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Changes In Management
The President and Vice President of the Company's GRSI subsidiary
elected not to renew their employment agreements, which expired under an
extension on April 30, 1998. These officers had managed GRSI prior to the
Company's acquisition of GRSI in September 1995, and continued to manage the
subsidiary until the date of their departure. Although some disruption of
operations at GRSI can be expected as a consequence of the terminations, the
Company has consolidated the operations of GRSI with its BASIS subsidiary to
maintain continuity in operations and minimize the impact of the terminations.
During fiscal 1998, GRSI accounted for approximately $7,000,000, or 32.4% of the
Company's total revenues.
The Employment Agreement with the Chief Executive Officer of BASIS,
Patricia F. Shanks, expires under an extension on July 31, 1998 and has been
extended through August 31, 1998.
William E. Wallin, the Company's Vice President of Finance and Chief
Financial Officer has announced his intention to resign. The Company has an
agreement with Mr. Wallin to provide ongoing assistance on a contract basis. The
Company intends to announce a replacement by August 31, 1998.
Other
The Company's independent public accountants have reported to the
Company that, in the course of their audit of the Company's consolidated
financial statements for the fiscal year ended March 31, 1998, they discovered
various conditions that they believe constitute material weaknesses in the
Company's internal controls. These conditions consist of (i) weakness in
policies and procedures to ensure accurate timing, classification, and recording
of significant transactions; (ii) weaknesses in maintaining formal documentation
regarding accounting transactions; and (iii) weaknesses in operating and
accounting personnel due to significant turnover and absence of technical
competencies. The Company has been taking various steps intended to strengthen
its financial controls, including engaging more experienced personnel in both
operational and financial positions.
ITEM 1. BUSINESS
GENERAL
Prologic Management Systems, Inc. is an Arizona corporation founded in
1984. The Company is a commercial systems integration and software development
firm. The Company's subsidiaries, BASIS, based in Emeryville, California, and
GRSI, based in St. Paul, Minnesota, offer national and regional systems
integration expertise. The Company's system integration services include
enterprise and workgroup client/server design and optimization, relational
database development, LAN/WAN and workgroup solutions, Internet/intranet design
and connectivity, and graphic design services for the World Wide Web. The
Company's Prologic Tucson office has software development expertise in
manufacturing, distribution and resource tracking for commercial clients.
Prologic provides a full range of hardware and commercial software solutions,
with a focus on UNIX-based products, as well as Microsoft NT and legacy
interoperability. The Company's principal executive offices are located at 2030
East Speedway Boulevard, Tucson, Arizona 85719 and its telephone number is (520)
320-1000. The Company's World Wide Web Site can be accessed at www.prologic.com.
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In September 1995, Prologic acquired GRSI, a commercial systems
integration firm based in St. Paul, Minnesota. In August 1996, Prologic acquired
BASIS, a regional systems integration company based in the San Francisco Bay
Area with additional offices in Portland, Oregon, and Sacramento and San Jose,
California. The Company is currently planning to centralize its financial
reporting and some administrative and marketing functions at its corporate
office in Tucson, Arizona. In addition, the Company has expanded its BASIS
subsidiary's presence in Northern California with the opening of sales offices
in San Jose and Sacramento.
PRODUCTS AND SERVICES
The Company provides systems integration services, software
development, proprietary software products and related services, however, the
majority of the Company's revenues are generated from systems integration and
related product sales. The Company's services include systems integration, and
national and regional support in Internet and intranet application and framework
design, enterprise and workgroup client/server design and optimization,
relational database development, LAN/WAN and workgroup solutions,
Internet/intranet design and connectivity, and graphic design services for the
World Wide Web. The Company's software development expertise provides an
internal resource for development needs in integration and custom projects. The
Company's proprietary products include manufacturing, distribution, and resource
tracking software for commercial clients, as well as its intranet-based sales
tracking and reporting system and intranet-based document management,
warehousing and retrieval system.
The Company's revenues arise principally from the sale of systems
integration-related products and services, the sale and re-engineering of
third-party software, and the sale of its proprietary software. Since 1996, the
Company has continued to increase sales of its systems integration services,
which have a higher margin than sales of computer hardware and related services.
Over the long term, the Company believes that the sale of professional services
and proprietary software offers the greatest opportunity to increase the
Company's overall margins, and the Company focuses its development expenditures
principally on software and service development activities. To date, sales of
the Company's professional services and proprietary software have represented an
increasingly important percentage of gross margin. During the Company's fiscal
year ended March 31, 1998 approximately 35% of the Company's total gross margin
was generated by professional services. During the same fiscal year,
approximately 65% of the Company's gross margin was generated by hardware sales
and related third-party software, which have materially lower margins than sales
of professional services, systems integration services or proprietary software.
The Company provides national and regional product support, as well as
Internet and Intranet application and framework and design, workgroup solutions
and relational database development. The Company provides full-service planning,
design, management, custom programming, systems integration, technical and
consulting services. This includes consulting, maintenance and support, training
and the installation and sale of third-party computer hardware and software
products.
The Company provides consulting services to its clients, particularly
in the areas of hardware and software selection, logical and physical system
design, programming implementation, education and training. As a systems
integrator, the Company assumes overall project management responsibility. The
Company generally bills for project work on a time and materials basis. The
Company's ability to undertake and successfully implement major systems
integration and other projects requires a wide range of technical skills, such
as logical and physical design, implementation and training support and
technical expertise in computer hardware and peripheral equipment, databases,
programming, productivity tools, communications, and system design and
maintenance. The Company's experience has been that a highly
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trained and skilled workforce possessing the necessary technical expertise is
available in each of the markets in which the Company currently has offices.
In an effort to increase its software sales, the Company has focused a
limited amount of development resources to address Year 2000 compliance and
enhance and improve its application software products, which use an open
architecture with the capability of accessing data from multiple
industry-standard database architectures. The Company's principal software
products are described below.
Prologic Manufacturing. Prologic Manufacturing is a comprehensive
20-module software application suite that includes management tools which help
manage the day-to-day operations of a manufacturing environment. The
Manufacturing modules range from general accounting to the tracking and movement
of products through the plant, to increased visibility of labor efficiencies.
Prologic Manufacturing integrates all aspects of the manufacturing process.
Prologic Manufacturing can be used in conjunction with Prologic Electronic Data
Interchange software as well as Prologic Data Collection software.
Prologic Distribution. The Prologic Distribution application software
suite includes software tools to help management of product distribution,
businesses forecast and plan for product fulfillment and distribution. Prologic
Distribution was designed to help customers reduce inventory carrying costs and
improve customer service. Inventory forecasts provide management with complete
reporting tools including seasonality and multi-warehouse considerations for
reducing warehousing and distribution costs. In addition, a full history by
location is maintained on-line to enable management to track product demand by
location and to further facilitate customer service. Prologic Distribution can
be used in conjunction with Prologic Electronic Data Interchange software and
Prologic Data Collection software.
Prologic Electronic Data Interchange. The Prologic Electronic Data
Interchange is a management tool that automatically creates and electronically
sends outgoing invoices and incoming orders for inter-company communications.
Prologic Data Collection. The Prologic Data Collection software
provides a comprehensive and sophisticated data collection applications suite
designed to meet extensive information management needs. Prologic Data
Collection is a chart-server, open file system which offers full compatibility
with other applications as well as operating systems and hardware platforms. The
Data Collection applications include Bar Code Warehouse Management, Time and
Attendance, Shop Flow and Material Reporting and Custom Applications.
MARKETING AND DISTRIBUTION
The Company's overall marketing and distribution effort is directed by
its corporate office in Tucson. However, each subsidiary provides local sales
and marketing management with additional support, when required, from the Tucson
office. The Company's primary goal is to lead with its commercial systems
integration expertise, leveraging its reputation and client base, and in the
long term promote the sale of professional services and proprietary software
products to increase the Company's overall margins and competitive advantage. To
achieve this goal, the Company will address its existing customer base, develop
new corporate accounts in targeted geographical areas and expand and develop
strategic relationships with various companies that sell products within this
market. The Company has joint marketing relationships with leading hardware
vendors and will continue to offer its systems integration expertise. The
Company currently has marketing agreements with Adobe, Access Graphics, Banyan,
Cisco, IBM, Informix, Netscape Communications Corporation, Oracle,
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Progressive Networks, Sun Microsystems, SunSoft, Sybase and Symbol Technologies
to resell their products.
The Company has established sales offices in Portland, Maine, San Jose
and Sacramento, California (BASIS), as well as regional sales and integration
centers in St. Paul, Minnesota (GRSI), Emeryville, California (BASIS), and
Portland, Oregon (BASIS), to offer proximity to its customer and vendor base.
The Company believes that there are sufficient numbers of qualified potential
employees in the Tucson area, as well as in the Company's targeted expansion
areas, to support the geographic expansion of the Company in accordance with the
Company's long-range business plan.
GROWTH STRATEGY
Notwithstanding the Company's temporary suspension of its acquisition
activity, the Company's strategy is to grow its revenue both by increasing its
systems integration services within its customer base at existing Company
locations, and by acquiring existing systems integration companies and
businesses. The Company has identified and qualified a number of potential
acquisition candidates in targeted geographical locations. These candidates have
technical personnel and sales resources that would be complementary to the
Company's business plan. Once acquired, the Company's Corporate office will act
as the administrative arm for new subsidiary companies, providing management,
accounting, finance and marketing support. Once fully integrated, senior
management, accounting functions, finance and marketing activity for the
acquisitions will be consolidated and centralized at the Company's Corporate
office.
As acquisitions are integrated into the overall operations, the
Company's focus will turn to securing higher gross margins. This will be
accomplished primarily through the sale of systems integration services, and in
the long term, the sale of proprietary software products and related services.
Management believes that higher margins, if achieved, will enable the Company to
internally fund the growth of the operations to take advantage of the
significant acquisition and other growth opportunities that exist in the market.
The Company believes that its acquisition strategy is the most
cost-effective avenue of growth for the Company. However, delisting of the
Company's securities from the Nasdaq Stock Market and the Boston Stock Exchange
(see "Part I -- Recent Developments - Delisting of Securities From Nasdaq
SmallCap Market and the Boston Stock Exchange, Inc.," above), the low market
price of the Company's stock, liquidity, and the need to raise additional
capital has caused the Company to temporarily suspend its acquisition activity
and focus on internal growth until these conditions and operating results have
improved.
COMPETITION
The systems integration and computer software industries are highly
competitive, include participants from a variety of market segments, are subject
to rapid change and have low barriers to entry. The competition in systems
integration services includes mid-level and regional systems integrators,
international, national and regional accounting firms, the service groups of
computer equipment companies, contract programming companies, facilities
management companies and general management consulting firms. Among the more
recognizable participants in the market are Andersen Consulting, Cambridge
Technology Partners, Computer Sciences Corporation, Coopers & Lybrand LLP,
Electronic Data Systems Corporation, IBM-Innovative Information Systems, and
Technology Solutions Corporation. The Company believes it competes favorably
with these systems integrators in the areas and level of responsiveness,
regional and national vendor contacts, and its dedication to achieving
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certification standards to provide its clients with a higher standard of
customer service.
The Company's software products are intended for sale to clients with
annual revenues of approximately $10,000,000 to $100,000,000. Although the
Company is not a significant competitor in the manufacturing and distribution
markets, it competes generally on the basis of product features and functions,
product architecture, the ability to run on a variety of industry standard
platforms, technical support and other related services. Ease of product
integration with third-party applications software and price/performance are
also factors. Products in this market are principally sold through value-added
resellers and systems integrators. The Company distributes its software products
through a national network of dealers and a field salesperson on the East Coast.
With the emerging browser technology, the impact of which changed industry
standards and expectations, several competitors have announced that they are in
the process of developing versions of their existing products which will operate
in a browser-based environment, but the Company believes that most of their
production is currently host or windows-based. The Company is currently working
towards incorporating browsers into its proprietary software and plans to
complete this development prior to introducing sales of its proprietary software
into its subsidiaries' sales mix.
Many participants in the software development and systems integration
businesses have significantly greater financial, technical, and marketing
resources than does the Company. The Company expects that competition in the
services industry could increase in the future, partly due to low barriers of
entry. Increased competition could result in price reductions, reduced margins,
or loss of market share for the Company and greater competition for qualified
technical personnel. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. If the Company is
unable to compete effectively, or if competition among information technology
services companies results in a deterioration of market conditions for
information technology services companies, there could be a material adverse
effect on the Company.
DEPENDENCE UPON LIMITED SUPPLY OF SALES, MANAGEMENT AND TECHNICAL PERSONNEL
The Company believes that its ability to compete depends in part on a
number of factors outside of its control, including the ability of its
competitors to hire, retain and motivate a large number of sales personnel,
technicians, managers, and the development by others of competitive services and
software. The Company's Management believes that its principal challenge, in the
long-term, is to identify and hire effective sales, and project managers and
skilled technical personnel to focus efforts on the marketing and sales of
professional services and proprietary software products, both through the
Company's systems integration subsidiaries and through direct sales. Many
participants in the professional services, systems integration and software
development businesses have significantly greater financial, technical, and
marketing resources than does the Company.
SOURCES OF PRODUCTS AND UNDERLYING TECHNOLOGY
The principal products used in the Company's systems integration
projects include third-party computer hardware and software. As of July 1998,
the Company has not experienced any material difficulties or delays in meeting
customer shipments. While alternate independent suppliers for such products are
available, the Company is reliant upon licensing and marketing agreements with
the product manufacturers.
The Company's primary supplier, whose products accounted for
approximately 65% of the Company's fiscal 1998 revenues, currently allows the
Company to purchase goods on open credit and
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under a program that allows customers to assign proceeds from sales of products
directly to the supplier. At March 31, 1998, the Company had balances of
$1,217,000 under the assignment of proceeds program and $444,000 on open credit
with this supplier. The current stated credit limit with this supplier is
$600,000. Historically, the supplier has allowed the Company to exceed its
credit limits. However, there is no assurance that this supplier will continue
to do so. Although this supplier is not the sole source of these products, the
Company has a long relationship with this supplier and would like to continue
the relationship. Management is currently pursuing options available to the
Company for increasing the credit limit and financing purchases with other
sources. Although this relationship and the stated credit limit have not caused
delays in meeting customer shipments, management believes that because of the
trends in the Company's operating results and the current low credit limit that
the Company's ability to meet customer demands could be effected.
The Company has numerous underlying agreements with third-party
hardware and software companies concerning the distribution and support of their
products. There are a limited number of companies that have comparable products.
Furthermore, the loss of any license agreement with a significant supplier or
manufacturer could interrupt the sales of the Company's products and services
and have a material adverse impact on the Company.
DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS
The Company's five largest clients in fiscal year ended March 31, 1998
accounted in the aggregate for 38.25% of total revenues at 14.94%, 8.60%, 5.47%,
4.84% and 4.40% of total revenues, respectively; and in fiscal 1997, the five
largest clients accounted in the aggregate for 32.2% at 8.12%, 7.60%, 7.03%,
4.83% and 4.63% of total revenues, respectively.
From time to time, the Company, in the ordinary course of business,
enters into agreements to provide professional services to customers in
connection with the development of certain product features and enhancements.
Such agreements provide for payment of specified fees as services are provided,
and payments as development milestones are attained. Other than with respect to
such agreements, none of the Company's customers are contractually obligated to
license or purchase additional products or services from the Company. Based upon
the significant capital expenditure usually associated with the initial purchase
of the Company's products and services, it is unlikely that the revenue from any
individual customer that has accounted for significant revenues in past periods
will continue to represent a significant portion of future period revenues. As a
result of this customer concentration, the Company's business, operating results
and financial condition could be materially adversely affected by the failure of
anticipated orders to materialize and by deferrals or cancellations of orders.
Furthermore, such customers are concentrated in specific geographic
areas. Accordingly, the Company's future success depends upon the capital
spending patterns of such customers and the continued demand by such customers
for the Company's products and services. The Company's operating results may in
the future be subject to substantial period-to-period fluctuations as a
consequence of such customer concentration and factors affecting capital
spending in these areas.
PRODUCT DEVELOPMENT
The market for application and development software, as well as
computer software in general, is characterized by rapid technological
developments and changes in customer requirements. As a result, the Company's
success will depend in part on its ability to continue to enhance products and
to develop and introduce in a timely manner new products that keep pace with
technological advances and respond to
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rapidly changing customer requirements. The life cycle of a product is dependent
in part on timely updates to keep pace with technological advances and the needs
of its customers. The Company seeks to enhance its products, typically on an
annual basis, but there can be no assurance that the Company will be successful
in developing and marketing enhancements of the Company's existing products or
new products on a timely basis, or at all. In addition, there can be no
assurance that any enhancements or new products will adequately address the
changing needs or gain the acceptance of the marketplace. The Company employed 8
full-time programmers in product support and development at March 31, 1998.
Product development employees' time is expensed to research and development. Due
to current restraints in working capital, the Company has significantly reduced
corporate-funded development. In the future the Company may be required to
expend substantial funds for continuing product development, including expenses
associated with research and development activities and additional engineering
and other technical personnel. There can be no assurance that such funds will be
available to the Company given its current financial condition and results of
operations. Any failure by the Company to anticipate or respond adequately to
technological developments, customer requirements, or new design and production
techniques, or any significant delays in product development or introduction,
could have a material adverse effect on the operating results of the Company.
EMPLOYEES
As of March 31, 1998, the Company had approximately 62 full-time
employees, including 29 in technical services, 13 in sales and marketing and 20
in finance and administration. The Tucson office employed 16 full-time
employees, GRSI had 10 full-time employees, and BASIS had 36 full-time
employees. The Company's employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage.
The Company believes that its relations with its employees are satisfactory.
Subsequent to March 31, 1998, the following changes in management have
occurred: the President and Vice President of the Company's GRSI subsidiary
elected not to renew their employment agreements which expired under an
extension on April 30, 1998; the Employment Agreement with the Chief Executive
Officer of BASIS, Patricia F. Shanks, expired on July 31, 1998 and has been
extended through August 31, 1998 (at September 1, 1998, the position will be
assumed by BASIS President, Daniel Udoutch); William E. Wallin, the Company's
Vice President of Finance and Chief Financial Officer has announced his
intention to resign. The Company has an agreement with Mr. Wallin to provide
ongoing assistance on a contract basis. The Company intends to announce a
replacement by August 31, 1998. See "Part I - Recent Developments -- Changes In
Management".
ITEM 2. PROPERTIES
The Company's headquarters are located in Tucson, Arizona in a leased
office consisting of approximately 10,000 square feet. The facility is owned by
a partnership which is controlled by the family of Mr. James M. Heim, the
Company's President, Chief Executive Officer and Chairman of the Board. The
lease term which expires in June 2001, with rentals based on a rate not to
exceed 95% of the market rate as determined by an independent market analysis of
other office space located in the general area. The rent shall be increased
annually in a percentage amount equal to one-half of the percentage increase in
the Consumer Price Index for the previous year.
GRSI leases 3,400 square feet of office space in St. Paul, Minnesota.
The GRSI lease expires in November 1998. BASIS leases 10,700 square feet of
office space in Emeryville, California, under a month-to-month lease, pending
renewal. BASIS' Portland, Oregon site leases 2672 square feet of office space
under a lease that expires in December 1999. BASIS leases 1781 square feet of
office space at its
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<PAGE> 11
San Jose location under a lease expiring in February 1999, and 264 square feet
of office space at its Sacramento site under a lease expiring in March 1999.
If the Company were to require additional or alternate space within the
next twelve months, the Company believes that the space sufficient to meet its
requirements will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries
are a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SHAREHOLDERS
No matters were submitted to a vote of security holders during the
quarter ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on March 15, 1996 at
a price of $5.00 per share of Common Stock and $0.125 per Warrant (each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $6.00). As of March 31, 1998, the common stock and common stock warrants of
the Company were traded on the Nasdaq Stock Market SmallCap Market under the
symbols PRLO and PRLOW, respectively, as well as on the Boston Stock Exchange
under the symbols PRC and PRCW, respectively. With the delisting of the
Company's securities from the Nasdaq SmallCap and the Boston Stock Exchange in
August 1998, trading of the Company's securities may continue to be conducted on
the OTC Electronic Bulletin Board or in the non-Nasdaq over-the-counter market.
See "Part I -- Recent Developments - Delisting of Securities From Nasdaq
SmallCap Market and the Boston Stock Exchange, Inc.," above.
The table below represents the high and low bid prices for the
Company's common stock and warrants, as reported on the Nasdaq Stock Market from
the initial trading on March 31, 1996 through March 31, 1998. The quotations
shown represent inter-dealer prices without adjustment for retail mark-ups, mark
downs or commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Quarter Ended High Low High Low
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1996 $6.00 $3.63 $1.630 $0.570
June 30, 1996 $4.63 $3.25 $1.250 $0.625
September 30, 1996 $4.25 $3.00 $0.937 $0.625
December 31, 1996 $4.13 $1.88 $0.937 $0.500
March 31, 1997 $3.25 $1.00 $0.750 $0.250
June 30, 1997 $1.50 $0.62 $0.391 $0.031
September 30, 1997 $1.62 $0.50 $0.125 $0.063
December 31, 1997 $1.62 $0.62 $0.125 $0.063
March 31, 1998 $1.50 $0.68 $0.094 $0.031
</TABLE>
11
<PAGE> 12
As of June 15, 1998 there were 433 shareholders of record of the
Company's common stock. The Company has neither declared or paid cash dividends
on its common stock in the past, and currently intends to retain any earnings
for use in the business and does not anticipate paying any cash dividends on its
common stock in the foreseeable future. During fiscal 1998, the Company had sold
subscriptions for $250,000 of the private placement offering of the Company's 8%
Cumulative Convertible Preferred Stock. In accordance with this offering, the
Company's Board of Directors elected to pay the preferred stockholders cash
dividends totaling $12,657 in lieu of stock dividends. Subsequent to March 31,
1998, $150,000 of the 8% Cumulative Convertible Preferred Stock holders
converted to common stock at $2.00 per share. Pursuant to the terms of the
offering's conversion feature, the holder received 75,000 shares of common stock
and warrants to purchase an additional 75,000 shares of common stock at $2.00
per share. These warrants expire December 31, 2000.
PART III
ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain important factors and risks, including the
rapid change in hardware and software technology, market conditions, the
anticipation of growth of certain market segments and the positioning of the
Company's products and services in those segments, seasonality in the buying
cycles of certain of the Company's customers, the timing of product
announcements by the Company and by companies whose products are sold by the
Company under reseller agreements, the release of new or enhanced products, the
introduction of competitive products and services by existing or new competitors
and the significant risks associated with the acquisition of new products,
product rights, technologies, businesses, the management of growth, the
Company's ability to attract and retain highly skilled technical, managerial and
sales and marketing personnel, and the other risks detailed from time to time in
the Company's SEC reports, including reports on Form 10-KSB and Form 10-QSB,
that could cause results to differ materially from those anticipated by the
statements made herein. Therefore, historical results and percentage
relationships will not necessarily be indicative of the operating results of any
future period.
INTRODUCTION
The Company provides systems integration services, networking services,
software development and applications software for the commercial market. The
Company's professional services include consulting, systems integration,
software development, maintenance, training and the installation of hardware on
which to implement the Company's as well as third-party software products. The
Company's proprietary applications software is primarily licensed for use to
manufacturers and for use in the wholesale distribution industry. The financial
information for the fiscal year ended March 31, 1998 includes a full year of
operating activity from both GRSI and BASIS, wholly-owned subsidiaries of the
Company. The results for the fiscal year ending March 31, 1997 include BASIS
operating activity from the date of its acquisition in August 1996. For
additional information on the operating results of the
12
<PAGE> 13
Company and its subsidiaries, see the Consolidated Financial Statements of the
Company and Notes thereto. The discussion should be read in conjunction with and
is qualified in its entirety by the Consolidated Financial Statements of the
Company and Notes thereto.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Revenues. Revenues increased by 56% to approximately $21,623,000 in
fiscal 1998 from $13,864,000 in fiscal 1997. The increase was due primarily to
the inclusion in fiscal 1998 of a full year of BASIS' results. In fiscal 1997,
BASIS provided revenue of approximately $8,610,000 for the eight month period
following the August 1996 acquisition, versus approximately $14,395,000 for the
twelve months ended March 31, 1998. Revenue attributable to sales of computer
hardware for fiscal years 1998 and 1997 were approximately $15,595,000 and
$9,513,000, respectively, or approximately 72.1% and 68.6%, respectively, of
total revenues for the periods. Revenue from professional services in fiscal
1998 increased approximately 40.8% to $3,194,000 from $2,269,000 in fiscal 1997.
Third-party software license, maintenance and upgrade revenue increased 36.1% to
approximately $2,835,000 in fiscal 1998, from approximately $2,083,000 in fiscal
1997. The acquisition of GRSI and BASIS has significantly changed the Company's
historic product mix from principally proprietary software and related support
sales to that of third-party hardware, software and related services. No
proprietary product accounted for more than 10% of total revenues during fiscal
year 1998 or 1997.
Historically, the Company's revenues in any particular period have been
concentrated among a relatively small number of customers. This is due to the
revenues associated with the initial stages of a typical system implementation
in contrast to the relatively lower revenues associated with services and
products which may be furnished by the Company to the customer after completion
of the initial installation. Accordingly, the Company's revenues may vary
significantly from period to period for a variety of reasons, including but not
limited to the timing of customer orders for products and services, deferrals
and cancellations of orders, and capital spending patterns of customers and
prospective customers in the specific industries and areas in which the
Company's customers have historically been concentrated.
Cost of Sales. Cost of sales was approximately $17,317,000 and
$11,418,000 in fiscal years 1998 and 1997, respectively, and decreased as a
percentage of total revenues to approximately 80.1% from 82.4% in the comparable
period. The decrease in cost of sales as a percentage of total revenues was
directly related to the increased revenue from professional services,
third-party software and modifications, which carry a lower ratio of cost to
revenue than the revenue mix in fiscal 1997. The Company's strategic plan is to
continue to increase sales of higher margin systems integration services and to
utilize the distribution channels provided by GRSI, BASIS, and any future
acquisitions to increase sales of its software, software development, and
related services which, when integrated into the subsidiaries product mix, is
expected to generate a more favorable ratio of cost of sales to revenue.
Gross Profits. Gross profit increased to approximately $4,306,000, or
19.9% of total revenue, in fiscal year 1998 from approximately $2,447,000, or
17.6% of total revenue, in fiscal 1997. The improvement in gross profit as a
percent of total revenue is the result of the increased service, software and
modification sales. The margin on the sale of third-party hardware decreased to
approximately 14.5% in fiscal 1998 from 15.6% in fiscal 1997 as a result of the
continued competitive pressure in the hardware market. In 1998 the gross profit
on software sales was approximately 18.4% as compared to 10.1% in fiscal 1997.
Margins on services increased from 33.3% in fiscal 1997 to 47.5% in fiscal 1998,
the result of the increased service sales at BASIS. The increased margin in
services, software and modification sales was in part due to the Company's
complete write-off over the last several fiscal years of all of its
13
<PAGE> 14
unamortized software development cost, resulting in no development cost being
amortized during fiscal 1998.
Selling and Marketing. Selling and marketing expenses were
approximately $1,939,000, or 9.0% of revenue, in fiscal 1998 and $1,516,000, or
10.9% of revenue, in fiscal 1997. The decrease as a percentage of revenue is the
net effect of the additional four months of BASIS' selling and marketing
expenses included in fiscal 1998 less a reduction of corporate marketing and
software selling expenses. Fiscal 1998 included selling and marketing
expenditures of $1,357,000 at BASIS, $391,000 at GRSI and $191,000 at Prologic.
The reduction of corporate expenditures was the result of reduction in
personnel, advertising expenditures and participation in trade shows.
General and Administrative. General and administrative expenses were
approximately $3,404,000 and $2,597,000 in fiscal 1998 and 1997, respectively,
and decreased as a percentage of revenue to approximately 15.7% in fiscal 1998
from 18.7% in fiscal 1997. The increase of approximately $911,000 in fiscal 1998
was attributable in part to the inclusion of BASIS for the entire fiscal year
1998 as opposed to eight months of fiscal 1997. Administrative expenses at
Prologic's Tucson office decreased by $190,000. An effort was made during the
year to reduce administrative expense wherever possible by reducing expenses and
personnel to match the Company's current needs. The Company believes that during
the next several years the administrative expenses of the Company will be
reduced as a percentage of revenue, as administrative functions are consolidated
at the Company's corporate office.
Research and Development. Research and development expenses increased
to approximately $523,000 in fiscal 1998 versus $327,000 in fiscal 1997. As a
percentage of revenue, research and development expenses approximated 2.4% of
net revenues in each period. Research and development is primarily involved in
upgrading current proprietary software modules, including efforts to meet Year
2000 compliance. Revenue from the Year 2000 compliant versions is expected over
the next two fiscal years.
Expenses Associated with Raising Capital. During the year the Company
incurred approximately $245,000 in expenses that were associated with the
Company's attempts to raise additional capital. These expenses included fees
paid to consultants in both Europe and the United States for efforts taken on
the Company's behalf to sell preferred stock in Europe. The Company ceased to
offer the securities upon the effectiveness of amendments to Regulation S
adopted by the Securities and Exchange Commission. Other charges included the
value of warrants given as compensation to consultants and financial advisors.
Write-off of Capitalized Software. The Company wrote off approximately
$426,000 in capitalized software costs in fiscal 1997, and as a result, no
capitalized software costs remained on the consolidated balance sheet in fiscal
1998.
Loss from Operations. The Company's loss from operations decreased to
approximately $2,050,000, or 9.5% of revenue, in fiscal 1998 compared to a loss
of approximately $2,601,000, or 18.8% of revenue, in fiscal 1997. Although the
total revenue increased by over 50% during fiscal 1998 as compared to fiscal
1997, the overall revenue growth without additional acquisitions was not at the
level the Company needed to generate an operating profit. During fiscal 1998,
the Company had planned to secure additional acquisitions and change the revenue
mix to increase the percentage of higher margin service revenue. Lack of
additional capital for acquisitions and operating results during the year
indicated that the Company would fall below its goal for the year. Therefore,
the Company reduced expenses and focused on growing sales internally to reduce
operating losses and work towards achieving an overall level of revenue which
would produce operating profits. The decrease in the loss as a percent of
revenue, from 18.8% to 9.5%, is the result of efficiencies gained as the Company
implemented its internal
14
<PAGE> 15
growth strategy and reduced operating expense during the year.
The Company expects that operating results will fluctuate as a result
of a number of factors, including but not limited to: the availability of
adequate capital; the timing of new product and service introductions by the
Company, by vendors whose products the Company resells to its customers, as well
as by its competitors; changes in the Company's level of operating expenses,
including the Company's expenditures for its Product Development Group and
promotional programs; the size and timing of customer orders for its products or
services, development, production or quality problems on the part of the Company
or its licensees; the payment of support and maintenance fees; competition in
the computer software market; and the general state of the global and national
economies. The market demand for the Company's products and services can be
significantly affected by uncertain economic cycles. Many of the factors that
may affect the Company's operating results and demand for products and services
based on its technologies cannot be predicted, may not exhibit a consistent
trend, or are substantially beyond the Company's control. Fluctuations in
operating results can also be expected to result in volatility in the price of
the Company's common stock.
Interest Expense. The Company incurred approximately $477,000 in
interest during fiscal 1998 and $563,000 in fiscal 1997. Fiscal 1998 included
interest on both long term and short term financing.
Income Taxes. The Company had no income tax expense for the years ended
March 31, 1998 and 1997. As of March 31, 1998, the Company had federal net
operating loss carryforwards of approximately $8,700,000 (see Note 8 of the
Consolidated Financial Statements for a further discussion of the loss
carryforwards). The utilization of net operating loss carryforwards will be
significantly limited as determined pursuant to applicable provisions of the
Internal Revenue Code and U.S. Treasury regulations thereunder.
Net Loss. The Company had a net loss of approximately $2,624,000 or
$0.67 per share in fiscal 1998 and a net loss of approximately $3,128,000 or
$0.88 per share in fiscal 1997. The net loss in fiscal 1998 was attributable to
the lower than expected total revenues due to the inability of the Company to
continue with its acquisition strategy, and to the lower than expected gross
profit which is a result of less than planned revenue from professional
services.
Liquidity and Capital Resources. At March 31, 1998, the working capital
was approximately $268,000 compared to working capital of approximately $230,000
at March 31, 1997. The cash balance at March 31, 1998 was approximately
$475,000, $300,000 of which was restricted as security for the Company's line of
credit.
Cash used in operations during the year totaled approximately
$2,068,000 in 1998 and $1,235,000 in 1997. Cash used in investing activities in
1997 was approximately $1,736,000 and included the purchase of BASIS, compared
to approximately $115,000 in 1998. Cash provided by financing activities in 1997
totaled $360,000 and included the issuance of new debt, compared to
approximately $1,543,000 in 1998 which is net of the payoff of the $1,000,000
line of credit with the Company's bank and the issuance of warrants and
preferred stock.
During fiscal 1998, the Company did not generate sufficient cash flows
from operations to fund its current operations and has had to supplement its
cash outflow with new equity investments, advances on lines of credit, other
short and long term borrowings and credit granted by its suppliers and vendors.
During fiscal 1998, the Company received in excess of $750,000 of new equity
from cash investments and debt conversion. Subsequent to March 31, 1998, an
additional $740,000 of debt has been converted to equity. The Company's ability
to raise additional capital and the relationships with these suppliers and
vendors are critical to the viability of the Company.
15
<PAGE> 16
The Company has not integrated the sale of its proprietary software
into its subsidiaries and has not generated the increase in professional service
revenue it had anticipated and has therefore not generated the higher margins
that it had expected. Management believes that it must rely on outside sources
of funds and reductions in operating costs until revenues from hardware,
services and software generate margins which will offset cash outflows.
In the future, the Company will require additional equity, working
capital and/or debt financing to maintain current operations as well as achieve
future plans for expansion. No assurance can be given of the Company's ability
to obtain such financing on favorable terms, if at all. If the Company is unable
to obtain additional financing, its ability to meet current and future plans for
expansion could be materially adversely affected. As the Company's securities
have been delisted by Nasdaq and the Boston Stock Exchange, the Company's
ability to raise capital, particularly by sales of its equity securities, could
be materially and adversely affected. See "Part I - Recent Developments -
Pending Delisting of Securities From Nasdaq SmallCap Market and the Possible
Delisting of Securities From the Boston Stock Exchange, Inc.," above.
During fiscal 1998, the Company signed a financing agreement with Coast
Business Credit for a line of credit in an amount of the lower of $5,000,000 or
the sum of 85% of eligible accounts receivable, restricted cash (see Note 5 of
the Consolidated Financial Statements) and equipment loans (maximum of
$250,000). This credit facility replaced a $2.2 million facility that was in
place at its BASIS subsidiary. This new facility is designed to provide working
capital to support the Company's sales growth for both subsidiaries. Among other
things the agreement required that the Company maintain a combined net worth at
its BASIS and GRSI subsidiaries of at least $1,000,000. The Company received a
waiver for non-compliance with this requirement at March 31, 1998 and modified
the agreement in July 1998 to a combined net worth requirement of $750,000 for
both subsidiaries. The total amount of the line of credit outstanding at March
31, 1998 was $1,238,000 with additional availability of approximately $117,000.
At August 14, 1998 the Company had $1,055,000 outstanding on the line with
additional availability of $65,000. The line matures on March 31, 2001.
During fiscal 1997, the Company borrowed approximately $100,000 at a
rate of 8%, which was scheduled to become due on June 30, 1997. During July
1997, the note holder agreed to extend maturity on a month-to-month basis. As a
result of the extension, the Company issues 10,000 restricted common shares per
month to the note holder in consideration for the term of the extension.
In addition, during fiscal 1997 the Company borrowed $820,000 in a
private offering of 10% Subordinated Convertible Notes due December 31, 1999.
Prior to September 30, 1997, with the exception of one $100,000 note holder, the
Company renegotiated the conversion terms with the note holders of the remaining
$720,000. The revised terms assign a fixed conversion price of $3.75 per share.
In addition, the note holders have been granted warrants to purchase a total of
252,000 shares of the Company's common stock at a price of $2.00 per share. The
warrants will expire on December 31, 2001. During December 1997, one $100,000
note holder exchanged the debt for unregistered common stock of the Company. The
common stock was exchanged at a price of $.625 per share for a total of 160,000
shares. Subsequent to March 31, 1998, the remainder of the note holders
representing $720,000 converted to 72,000 shares of unregistered convertible
preferred stock at a conversion rate of $3.75 per share and received warrants to
purchase an additional 72,000 shares of unregistered common stock at a price of
$1.00 per share. These warrants expire March 31, 2001.
During the previous fiscal year, the Company borrowed $240,000 in short
term notes collateralized by its computer equipment and office furnishings.
Interest on these notes is paid monthly at a rate of 2%. During the first half
of this fiscal year, an additional $125,000 was borrowed against this equipment.
At October 31, 1997, total borrowings on the short term equipment notes totaled
$365,000. Of the $365,000, holders of notes totaling $205,000 agreed to extend
through December 31, 1997; the
16
<PAGE> 17
remaining $160,000 exchanged their debt for unregistered common stock of the
Company at a price of $.625 per share, for a total of 256,000 shares. During the
quarter ended March 31, 1998, the remaining note holders were paid interest on
a month to month basis.
Subsequent to March 31, 1998, holders of notes totaling $35,000 were
paid off; holders of notes totaling $130,000 extended through July 31, 1998; a
$20,000 note holder agreed to extend on a month-to-month basis with 30 days
notice of payment on demand; and a $20,000 note holder exchanged the debt for
common stock at a rate of $0.625 per share. As of June 30, 1998, $150,000 of
principal remained outstanding on these notes.
During fiscal 1998, the Company issued 241,330 shares of common stock
at $1.00 per share to three affiliates of the Company for cash and the
assumption of debt. The $1.00 per share price was in excess of the market price
of the Company's common stock on the respective dates of purchase.
During the year, the Company purchased approximately $173,000 in
capital equipment and software.
Also in fiscal 1998, the Company sold $250,000 of its 8% Cumulative
Convertible Preferred Stock pursuant to Regulation S of the Securities Act of
1933. The shares were sold at a price of $6.00 per share, and may be converted
to common stock after June 30, 1998 at $2.00 per share of common stock. The
Company has the right to pay the dividends in cash or in shares of common stock,
and in fiscal 1998, the Company elected to pay cash dividends totaling
$12,657 in lieu of stock dividends. Subsequent to March 31, 1998, $150,000 of
the 8% Cumulative Convertible Preferred Stock holders converted to common stock
at $2.00 per share. Pursuant to the terms of the offering's conversion feature,
the holder received 75,000 shares of common stock and warrants to purchase an
additional 75,000 shares of common stock at $2.00 per share. These warrants
expire December 31, 2000.
Year 2000 Issue. The Company's proprietary manufacturing software
product line was Year 2000 compliant in July 1998 and will be released during
the quarter ending September 30, 1998. The Company's internal development tools
are Year 2000 compliant. The proprietary wholesale distribution software product
line will be Year 2000 compliant by August 1998. Internally, the Company uses
its distribution software accounting package and does not foresee any problems
in converting to the Year 2000 compliant version of its software. The Company
does not foresee any problems in working with third-party companies or clients
because of the Year 2000 issue. Furthermore, the Company does not believe that
clients utilizing its software products will have any problems with their
vendors because of the Year 2000 issue due to the use of the Company's software
products. Costs relating to the development of the Year 2000 issue have been
included in the research and development expenses over the past year; we expect
additional expenses associated with Year 2000 compliance to be less than
$50,000, incurred over the next 6 months, and will be included in research and
development expenses, as incurred.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10KSB contains forward-looking statements which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve risks and
uncertainties, including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, and the results of financing efforts. Further information
regarding these and other risks is described from time
17
<PAGE> 18
to time in the Company's filings with the Securities and Exchange Commission.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". This Statement establishes standards
for computing and presenting earnings per share ("EPS"), and supersedes APB
Opinion No. 15. This statement replaces primary EPS with basic EPS and requires
dual presentation of basic and diluted EPS. This statement is effective for
periods ending after December 15, 1997 and has been adopted by the company for
the year ended March 31, 1998.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Examples are stock purchase
plans, stock options, restricted stock, and stock appreciation rights. This
Statement also applies to transactions in which an equity issues its equity
instruments to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable.
PART IV.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as
pages F-1 to F-24 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Current Report on Form 8K dated March 31, 1998 and amended in its
entirety April 10, 1998, reporting under Item 4. Changes in
Registrant's Certifying Accountant, the March 26, 1998 resignation of
the Company's auditors, KPMG Peat Marwick LLP; Item 5, Other Events,
the Company reported that it did not have any disagreements with KPMG
Peat Marwick LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject
matter of the disagreement.
Current Report on Form 8K dated May 13, 1998 reporting under Item 4.
Changes in Registrant's Certifying Accountant, on April 29, 1998, the
Company engaged Arthur Andersen LLP as its principal accountant to
audit the Registrant's financial statements, commencing with its fiscal
year ended March 31, 1998.
PART V.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning the names, ages, terms and positions with the
Company's Board of Directors, and business experience of the directors is set
forth below. Each director has served continuously with the Company since his
election as indicated below.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
James M. Heim (3) 47 President, Chief Executive Officer 1984
and Director
Richard E. Metz 52 Executive Vice President and 1984
Director
Herbert F. Day (1) (2) (3) 54 Director 1995
Craig W. Rauchle (1) (2) (3) 43 Director 1996
Mark S. Biestman (1) (2) 41 Director 1997
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
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<PAGE> 19
JAMES M. HEIM, President, Chief Executive Officer, Chairman of the
Board and Director. Mr. Heim is a co-founder of the Company and has served as
President and as a Director of the Company since its inception in 1984. In
addition, Mr. Heim served as the Chief Financial Officer of the Company from
1984 through 1994. Mr. Heim holds both a Juris Doctorate from the College of Law
and a Bachelor of Science in Business Administration from the University of
Arizona.
RICHARD E. METZ, Executive Vice President, Chief Administrative
Officer, Secretary and Director. Mr. Metz, the Company's Chief Administrative
Officer, is a co-founder of the Company and has served as a director since its
inception in 1984. Mr. Metz has over twenty-five years of business management
and investment experience, including ten years as a computer hardware and
software VAR prior to his affiliation with the Company. Since 1982, Mr. Metz has
owned and managed The Metz Group, a business management consulting and
investment firm specializing in contract negotiations and dispute avoidance and
resolution. Mr. Metz is a member of the American Arbitration Association and is
an Associate of the American Bar Association, Dispute Resolution and
Intellectual Property Sections.
HERBERT F. DAY, Director. Mr. Day, retired Program Director of IBM
Corporation, became a Director in 1995. Mr. Day has over twenty-five years of
experience in the computer industry with IBM Corporation. He has held
professional and management positions in sales, marketing, product management
and product and business planning. Mr. Day received his Bachelors of Science
degree in Electrical Engineering from the University of Maryland. Mr. Day is
retired from the IBM Corporation where he was a Program Director.
CRAIG W. RAUCHLE, Director. Mr. Rauchle, who became Director in 1996,
serves as the Executive Vice President of Inter-Tel Incorporated of Chandler,
Arizona, and also holds the position of President of Inter-Tel Technologies,
Inc., a wholly-owned subsidiary. Founded in 1969, Inter-Tel designs, produces
and markets business telephone systems. Prior to joining Inter-Tel, Mr. Rauchle
was Director of Sales and Marketing for American Business Communications in
Denver, Colorado. He holds a B.A. in Communications from the University of
Denver and is a graduate of the Philip Crosby Quality College. Mr. Rauchle is an
active member of the Young Presidents Organization and has previously served in
various capacities of that organization. He has also served as a Board Member of
the North American Telecommunications Association.
MARK S. BIESTMAN, Director. Mr. Biestman, who became a Director in
1997, has worked in the information technology field for over 19 years in both
sales and marketing management. Mr. Biestman is currently Vice President of
Worldwide Sales at CommerceOne, a privately held company based in Walnut Creek,
California, co-founded by former CEO of Sybase, Mark Hoffman. CommerceOne Inc.
develops, licenses and markets the Commerce Chain Solution, the industry's only
real-time, electronic procurement and supplier management solution for
interbusiness transactions. Mr. Biestman has also served as Netscape
Communications' Vice President of Sales, Western Region, Vice President of
Telecommunications Sales at Oracle Corporation, and Vice President of Sales and
Industry Marketing at Metaphor. In addition, Mr. Biestman has held various sales
and management positions at Tandem Computers and IBM Corporation. Mr. Biestman
holds a B.A. in Economics from the University of California at Berkeley and has
attended the Stanford Business School Executive program.
19
<PAGE> 20
ITEM 10. EXECUTIVE COMPENSATION
Information below sets forth certain information regarding business
experience and compensation paid or awarded by the Company during the Fiscal
year ended March 31, 1998 to the following Executive Officers: Mr. Heim, the
Company's Chief Executive Officer; Mr. Udoutch, the Company's Vice President of
Sales and President of BASIS subsidiary; Ms. Patricia F. Shanks, Executive Vice
President of the Company and Chief Executive Officer of BASIS; and Mr. Legnitto,
Vice President and Chief Technology Officer of the Company, and Senior Vice
President of BASIS.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Other All Other
Principal Position Year Salary Bonus Stock Options/SARs(#) Compensation
- - ------------------ ---- ------ ----- --------------------- ------------
<S> <C> <C> <C> <C> <C>
James M. Heim 1998 $62,000(1) 0 0 0
President and Chief
Executive Officer
1997 $70,500 0 0 0
1996 $40,000 $24,333 0 0
Daniel Udoutch 1998 $112,610(2) 0 30,000(3) $10,448
Vice President of Sales
(President, BASIS)
Donald E. Legnitto 1998 $122,000 0 15,000(3) $ 7,656
Vice President, Chief
Technology Officer
(Senior Vice
President, BASIS)
Patricia F. Shanks (4) 1998 $130,000 0 30,000(2) 0
Executive Vice
President
(CEO, BASIS)
</TABLE>
(1) During the fiscal year ended March 31,1998, no stock options were granted or
exercised by Mr. Heim. During fiscal year 1998, Mr. Heim and other executive
managers agreed to reductions in salaries.
(2) Mr. Udoutch's 1998 Annual Compensation includes compensation since hire date
of July 1, 1997.
(3) Per employment contract
(4) Employment contract expires August 31, 1998
JAMES M. HEIM, President, Chief Executive Officer, Chairman of the
Board and Director. Mr. Heim is a co-founder of the Company and has served as
President and as a Director of the Company
20
<PAGE> 21
since its inception in 1984. In addition, Mr. Heim served as the Chief Financial
Officer of the Company from 1984 through 1994. Mr. Heim holds both a Juris
Doctorate from the College of Law and a Bachelor of Science in Business
Administration from the University of Arizona.
DAN UDOUTCH, Vice President of Sales of Prologic and President of
BASIS. Mr. Udoutch is responsible for revenue growth and operating profitability
at BASIS, and managing the sales force at Prologic, company-wide. Mr. Udoutch
has extensive experience in management, sales, sales management, systems
integration, marketing and finance. With over 17 years in the high technology
industry, Mr. Udoutch has held a variety of senior sales management positions
with NavTech, Tandem Computers Integration Engineering (TIES) and IBM. Mr.
Udoutch earned his bachelor's of science degree in math and computer science
from San Jose State University.
DONALD E. LEGNITTO, Vice President and Chief Technical Officer for
Prologic. Mr. Legnitto has over fifteen years of experience in systems
integration and software development. Mr. Legnitto has developed very strong
relationships with numerous strategic partners. During his first six years with
BASIS, revenues increased from $3 million to $15 million. Mr. Legnitto played an
instrumental part in the development and delivery of new revenue opportunities
for BASIS. Recently, he secured, designed and supervised the completion of the
Webbert project for Sun Microsystems. He directly manages the relationships with
Sun and Netscape regarding development contracts. Mr. Legnitto currently
oversees product development and the selection of third-party technology on a
enterprise wide basis.
PATRICIA F. SHANKS, Executive Vice President of Prologic. Ms. Shanks,
founder of BASIS, has extensive industry experience and contacts. Ms. Shanks is
presently serving as the President of the National Reseller Council for
SunMicrosystems, a member of Netscape's VAR Council, and a sought after speaker
for such industry gatherings as UNIX Expo, Uniforum, Sun Expo and the UNIX
Reseller Conference. Ms. Shanks received her Bachelor's Degree from Oberlin
College, where she is currently serving on the Alumni Council, and has her
Masters Degree from the University of Michigan. Ms. Shanks currently works on
fostering industry alliances, as well as strategic business planning and
acquisitions.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS AND SHAREHOLDINGS OF MANAGEMENT
The following table sets forth information, as of June 15, 1998,
concerning the Common Stock beneficially owned by (i) each director and nominee
of the Company (ii) the Company's Chief Executive Officer, (iii) each person
known to the Company to own beneficially more than 5% of the outstanding Common
Stock, and (iv) all of the Company's directors, nominees and executive officers
as a group.
Except as otherwise noted, the named individual beneficial owner has sole
investment and voting power.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Name(1) Owned of Class
- - ------- --------- --------
<S> <C> <C>
James M. Heim & Marlene Heim (2) 1,089,060 24.3%
Richard Metz 169,200 3.8%
Herbert F. Day 0 0.0%
Craig W. Rauchle 0 0.0%
Donald E. Legnitto 14,812 0.3%
Patricia F. Shanks 133,672 3.1%
All directors, nominees and executive
officers as a group (6 persons) 1,406,744 31.4%
</TABLE>
21
<PAGE> 22
(1) Except as otherwise noted below, the persons named in the table have sole
voting and investment power with respect to all shares of the Common Stock shown
as beneficially owned by the person named, subject to applicable community
property law. The shareholdings include, pursuant to rules of the Securities and
Exchange Commission, shares of Common Stock which a person has a right to
acquire as of June 15, 1998 or within 60 days thereafter. Except as otherwise
noted, the addresses for the persons named in the table is 2030 East Speedway
Boulevard, Tucson, Arizona 85719.
(2) Includes 697,320 shares owned by HFG Ltd. Properties, an Arizona limited
partnership of which Mr. Heim is the sole general partner. James M. Heim and
Marlene Heim directly own an aggregate of 391,740 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company executed an agreement with HFG
Properties, LTD, a Limited Partnership partly owned by the Company's President
Mr. Heim. The terms of the lease are from July 1996 through June 2001, with
monthly rent based on an independent appraised market rate reduced by 5%. The
rent is to be increased annually in a percentage amount equal to one-half of the
percentage increase in the Consumer Price Index for the previous year. During
fiscal 1998, the Company's obligations under this lease were in the amount of
$138,232.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. Financial Statements. The following financial statements filed as
part of this report are listed on pages F-1 to F-24 and
incorporated herein by reference:
Financial Statement Page
------------------- ----
Report of Independent Public Accountants F-2
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
<TABLE>
<CAPTION>
2. Exhibit:
Exhibit Number Document
-------------- --------
<S> <C>
3.1 Articles of Incorporation by the Company*
3.2 Bylaws of the Company*
3.3 Articles of Incorporation of Great River Systems, Inc.*
3.4 Bylaws of GRSI*
4.1 Form of Warrant Agency Agreement by and between
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C>
Prologic Management Systems, Inc. and American Stock
Transfer & Trust Company, with form of redeemable
warrant*
4.2 Specimen of Common Stock Certificate*
4.3 Specimen Redeemable Common Stock Purchase Warrant
Certificate*
4.4 [Form of] Representative's Warrant*
10.15 1994 Stock Option Plan, Form of Incentive
Agreement*
10.17 Employment Agreement of James M. Heim*
10.19 Form of Lock-Up Agreement of Shareholders*
10.20 Form of Stock Purchase Agreement, Promissory Note and
Escrow Agreement for July 31, 1994 issuance of Common
Stock*
10.21 Employment Agreement with Patricia Shanks*
10.22 Employment Agreement with Donald Legnitto*
10.28 Office Lease with HFG Properties***
10.29 Coast Business Credit Loan and Security Agreement
10.30 SYMRP Purchase Agreement*
10.31 Agreement and Plan of Reorganization dated as of
June 1, 1996 among Prologic Management Systems,
Inc., BASIS, Inc., BASIS Acquisition Corp. and
certain Principal Shareholders of BASIS, Inc.**
11.1 Earnings Per Share Calculation
23.1 Consent of Independent Public Accountants, KPMG Peat
Marwick LLP
23.2 Consent of Independent Public Accountants, Arthur
Andersen LLP
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the corresponding exhibit number in the Company's
Registration Statement on Form SB-2 (Commission file no. 33-89384-LA).
** Incorporated by reference to the corresponding exhibit number in the
Company's Form 8-K filed on August 23, 1996.
*** Incorporated by reference to the corresponding exhibit number in the
Company's Form 10-KSB filed on July 1, 1996.
B. Report on Form 8-K.
During the fourth quarter of fiscal 1998, the Company filed the following:
Current Report on Form 8K dated and amended January 16, 1998 reporting
under Item 5, Other Events, the Company reported total shareholders'
equity in excess of $1,000,000 at November 30, 1997, giving effect to
such transactions on a pro forma basis as though they had occurred on
November 30, 1997.
Current Report on Form 8K dated March 31, 1998 and amended in its
entirety April 10, 1998, reporting under Item 4. Changes in
Registrant's Certifying Accountant, the March 26, 1998 resignation of
the Company's auditors, KPMG Peat Marwick LLP; Item 5, Other Events,
the Company reported that it did not have any disagreements with KPMG
Peat Marwick LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject
matter of the disagreement.
23
<PAGE> 24
Current Report on Form 8K dated May 13, 1998 reporting under Item 4.
Changes in Registrant's Certifying Accountant, on April 29, 1998, the
Company engaged Arthur Andersen LLP as its principal accountant to
audit the Registrant's financing statements, commencing with its fiscal
year ended March 31, 1998.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James M. Heim and William E. Wallin, or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this annual
report on Form 10-KSB and any documents related to this report and filed
pursuant to the Securities and Exchange Act of 1934, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
In Accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLOGIC MANAGEMENT SYSTEMS, INC.
DATED: August 18, 1998 By: /s/ James M. Heim
------------------------------
James M. Heim
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- - --------- -------- ----
<S> <C> <C>
/s/ James M. Heim James M. Heim,
- - ------------------ President and Chief Executive Officer
(Principal Executive Officer), and Director August 18, 1998
Richard E. Metz,Executive Vice President, Chief
Administrative Officer, Secretary and
/s/ Richard E. Metz Director August 18, 1998
- - --------------------
William E. Wallin,
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
Vice President, Chief Financial Officer,
Treasurer (Principal Financial and
/s/ William E. Wallin Accounting Officer), August 18, 1998
- - ----------------------
Craig Rauchle,
/s/ Craig Rauchle Director August 18, 1998
- - ------------------
Herbert F. Day,
/s/ Herbert F. Day Director August 18, 1998
- - -------------------
Mark S. Biestman,
/s/ Mark S. Biestman Director August 18, 1998
- - ----------------------
</TABLE>
<PAGE> 26
PROLOGIC MANAGEMENT SYSTEMS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF MARCH 31, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prologic Management Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of PROLOGIC
MANAGEMENT SYSTEMS, INC., an Arizona corporation, and subsidiaries (the Company)
as of March 31, 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prologic Management
Systems, Inc. and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring operating
losses and negative cash flow from operations, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
August 14, 1998
F-2
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Prologic Management Systems, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity, and cash flows of Prologic Management Systems, Inc.
and subsidiaries (the Company) for the year ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Prologic Management Systems, Inc. and subsidiaries for the year ended March 31,
1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has continued to generate cash deficits from its operating
activities that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
June 27, 1997
F-3
<PAGE> 29
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 175,110
Restricted cash 300,000
Accounts receivable, less allowance for doubtful accounts
of $273,000. Receivables include $1,217,000 of accounts
under an assignment of proceeds agreement (Note 1) 3,405,603
Inventory 220,651
Prepaid expenses 99,592
-----------
Total current assets 4,200,956
PROPERTY AND EQUIPMENT, net 513,067
GOODWILL, net 1,272,662
OTHER ASSETS 233,760
-----------
Total assets $ 6,220,445
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and notes payable 492,657
Notes payable - related parties (Note 14) 14,400
Accounts payable 2,585,792
Accrued expenses 607,061
Deferred maintenance revenue 233,041
-----------
Total current liabilities 3,932,951
-----------
LONG-TERM DEBT AND NOTES PAYABLE, excluding current portion 159,768
-----------
LONG-TERM NOTES PAYABLE - RELATED PARTIES, excluding current
portion (Note 14) 86,000
-----------
LINE OF CREDIT 1,237,863
CONVERTIBLE SUBORDINATED NOTES (Note 6) 720,000
-----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 9, 10, 12 and 14)
STOCKHOLDERS' EQUITY (Notes 3, 6, 7, 9, 10, 11 and 15):
Series A cumulative convertible preferred stock, no par value, 750,000
shares authorized, 41,667 shares issued and outstanding, liquidation
value of $6.00 per share plus accrued dividends 250,000
Common stock, no par value, 10,000,000 shares authorized, 4,478,724
shares issued and outstanding 8,493,270
Warrants 582,053
Accumulated deficit (9,241,460)
-----------
Total stockholders' equity 83,863
-----------
Total liabilities and stockholders' equity $ 6,220,445
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-4
<PAGE> 30
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUE:
Hardware $ 15,594,791 $ 9,512,835
Professional services 3,193,676 2,268,645
Software license 2,834,625 2,082,894
------------ ------------
Total revenue 21,623,092 13,864,374
------------ ------------
COST OF SALES:
Hardware 13,327,312 8,032,195
Professional services 1,676,542 1,513,911
Software license 2,312,829 1,871,689
------------ ------------
Total cost of sales 17,316,683 11,417,795
------------ ------------
GROSS PROFIT 4,306,409 2,446,579
------------ ------------
OPERATING EXPENSES:
General and administrative 3,404,225 2,597,103
Selling and marketing 1,938,907 1,515,998
Research and development 523,306 327,381
Expenses associated with raising capital 244,985 --
Write-off of capitalized software costs -- 425,807
Amortization of goodwill 244,500 181,304
------------ ------------
Total operating expenses 6,355,923 5,047,593
------------ ------------
OPERATING LOSS (2,049,514) (2,601,014)
------------ ------------
OTHER EXPENSE:
Interest expense 477,157 562,763
Other 84,267 (35,798)
------------ ------------
Total other expense 561,424 526,965
------------ ------------
NET LOSS (2,610,938) (3,127,979)
CUMULATIVE PREFERRED STOCK DIVIDENDS (12,657) --
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (2,623,595) $ (3,127,979)
============ ============
LOSS PER COMMON SHARE:
Basic $ (0.67) $ (0.88)
Diluted (0.67) (0.88)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 3,941,811 3,541,385
Diluted 3,941,811 3,541,385
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 31
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Cumulative
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount Warrants
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE at March 31, 1996 -- $ -- 3,327,570 $ 6,377,225 $ 217,938
Issuance of common stock in
connection with an acquisition -- -- 337,325 1,400,000 --
Issuance of common stock in
connection with issuance of a note -- -- 10,000 26,560 --
Issuance of stock warrants in
connection with the initial public offering -- -- -- -- 17,232
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE at March 31, 1997 -- -- 3,674,895 7,803,785 235,170
Issuance of common stock in
connection with issuance of a note -- -- 96,000 103,262 --
Issuance of common stock in
connection with conversion of notes -- -- 416,000 260,000 --
Issuance of common stock upon exercise
of warrants -- -- 50,000 20,000 (20,000)
Issuance of common stock to management
and employees -- -- 243,080 242,972 --
Reacquisition of stock issued in error -- -- (1,251) (5,004) --
Issuance of warrants in connection with
convertible subordinated notes -- -- -- -- 257,292
Issuance of warrants for professional services -- -- -- -- 109,591
Issuance of Series A cumulative convertible
preferred stock 41,667 250,000 -- -- --
Issuance of stock options -- -- -- 68,255 --
Series A Cumulative convertible preferred
stock dividends -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE at March 31, 1998 41,667 $ 250,000 4,478,724 $ 8,493,270 $ 582,053
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -----------
<S> <C> <C>
BALANCE at March 31, 1996 $(3,489,886) $ 3,105,277
Issuance of common stock in
connection with an acquisition -- 1,400,000
Issuance of common stock in
connection with issuance of a note -- 26,560
Issuance of stock warrants in
connection with the initial public offering -- 17,232
Net loss (3,127,979) (3,127,979)
----------- -----------
BALANCE at March 31, 1997 (6,617,865) 1,421,090
Issuance of common stock in
connection with issuance of a note -- 103,262
Issuance of common stock in
connection with conversion of notes -- 260,000
Issuance of common stock upon exercise
of warrants -- --
Issuance of common stock to management
and employees -- 242,972
Reacquisition of stock issued in error -- (5,004)
Issuance of warrants in connection with
convertible subordinated notes -- 257,292
Issuance of warrants for professional services -- 109,591
Issuance of Series A cumulative convertible
preferred stock -- 250,000
Issuance of stock options -- 68,255
Cumulative convertible preferred stock
dividends (12,657) (12,657)
Net loss (2,610,938) (2,610,938)
----------- -----------
BALANCE at March 31, 1998 $(9,241,460) $ 83,863
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 32
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,610,938) $(3,127,979)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 446,439 514,344
Issuance of common stock 62,968 --
Issuance of warrants 366,883 --
Issuance of stock options 68,255 --
Non-cash interest expense 103,262 26,560
Write-off of capitalized software costs -- 425,807
Changes in assets and liabilities, net of effect of business acquired:
Accounts receivable (709,159) 286,671
Inventory 72,827 (167,298)
Prepaid expenses (8,562) 4,003
Other assets (121,316) 308,484
Accounts payable (111,549) 323,441
Accrued expenses 254,402 163,295
Deferred maintenance revenue 118,408 7,272
----------- -----------
Total adjustments 542,858 1,892,579
----------- -----------
Net cash used in operating activities (2,068,080) (1,235,400)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of BASIS, Inc., net of cash acquired -- (1,212,378)
Purchase of equipment (172,893) (465,600)
Decrease (increase) in notes receivable 58,333 (58,333)
----------- -----------
Net cash used in investing activities (114,560) (1,736,311)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted cash 700,000 (1,000,000)
Net change in line of credit 135,415 1,055,081
Issuance of long-term debt and notes payable 304,311 1,454,683
Repayment of long-term debt and notes payable (95,439) (1,127,146)
Issuance of notes payable - related parties 341,000 --
Payments of notes payable - related parties (255,000) (40,000)
Issuance of Series A cumulative convertible preferred stock 250,000 --
Issuance of warrants -- 17,232
Issuance of common stock 175,000 --
Cash paid for dividends (12,657) --
----------- -----------
Net cash provided by financing activities 1,542,630 359,850
----------- -----------
NET DECREASE IN CASH (640,010) (2,611,861)
CASH, beginning of year 815,120 3,426,981
----------- -----------
CASH, end of year $ 175,110 $ 815,120
=========== ===========
SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 464,506 $ 238,254
=========== ===========
Noncash financing and investing activities-
Issuance of common stock in connection with an acquisition $ -- $ 1,400,000
Conversion of convertible subordinated notes to Series A
cumulative convertible preferred stock 100,000 --
Conversion of notes payable to common stock 160,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 33
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) THE COMPANY AND ITS OPERATIONS:
NATURE OF BUSINESS AND SUMMARY OPERATIONS
Prologic Management Systems, Inc. (Prologic), an Arizona corporation, with its
wholly-owned subsidiaries, Great River Systems, Inc. (GRSI) and BASIS, Inc.
(BASIS) (collectively, the Company) provides a full range of hardware and
commercial software solutions, with a focus on UNIX-based products, as well as
NT and legacy interoperability. The Company also provides systems integration
services, networking services and applications software for the commercial
market together with related support services. In addition, Prologic has
developed proprietary application software which is licensed to manufacturers
and companies in the wholesale distribution industry.
The Company has historically generated the majority of its revenue from the
resale of hardware and software products produced by third parties, primarily
Sun Microsystems Computer Co. (Sun). Sales of Sun products accounted for
approximately 65% and 62%, of total revenue for the years ended March 31, 1998
and 1997, respectively, and represented approximately 90% of hardware revenue
for the same periods. The BASIS and GRSI reseller agreements with Sun are
generally cancelable by either party upon 30 days notice. The Company
anticipates that the reseller agreements will continue indefinitely. The Company
is contractually required to purchase all Sun products from a designated
distributor (supplier) of Sun products. The Company's supplier offers credit
terms and financing arrangements whereby accounts receivable from the sales of
certain Sun products are assigned to the supplier, to whom customers are
directed to send payment. At March 31, 1998, the Company owed approximately
$1,700,000 to its supplier, of which $1,217,000 represented accounts receivable
assigned to its supplier. Additionally, at March 31, 1998, the supplier had
extended credit of $250,000 and $350,000 to GRSI and BASIS, respectively.
Subsequent to March 31, 1998, the Company has exceeded its credit limit with its
supplier. Management is currently pursuing options available to the Company for
increasing the credit limit and financing purchases with other sources. Although
this relationship and the stated credit limit have not caused delays in meeting
customer shipments, management believes that because of the trends in the
Company's operating results and the current low credit limit, the Company's
ability to meet customer demands could be effected.
As of March 31, 1998, the Company's common stock and warrants are listed on the
Nasdaq SmallCap Market. On June 8, 1998, the Company was informed by Nasdaq that
it failed to meet the minimum net tangible assets requirement and the minimum
bid price criteria for continued listing on the Nasdaq SmallCap Market and
therefore, its securities would be delisted. On August 7, 1998, the Company
notified Nasdaq that it will
F-8
<PAGE> 34
not pursue its right to appeal the decision by Nasdaq to delist the Company's
securities. Pursuant to the terms of the Nasdaq decision, dated June 8, 1998,
the Company's securities were delisted from the Nasdaq stock market effective
with the close of business on August 7, 1998. The delisting of the Company's
securities could significantly impair the Company's ability to obtain additional
financing.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values. However, the
Company has suffered recurring operating losses and has negative cash flow from
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company's plans with regard to these matters
are described below. In addition, the Company's ability to obtain additional
financing may be impaired due to the delisting of its securities from the Nasdaq
SmallCap Market.
MANAGEMENT PLANS
The Company intends to manage short-term liquidity concerns through extending
payments to vendors, engaging additional investors and creditors, and
negotiating an increased credit limit with its primary supplier. The Company
believes that its investment to build the necessary infrastructure to expand the
delivery of professional services and a recently implemented sales and marketing
effort directed at selling these services to its customers will significantly
improve the Company's operating results. The Company believes that a shift in
revenue mix will result in a more favorable gross profit margin for the Company,
reduced borrowing requirements, and produce a higher net margin as professional
services become a larger percentage of total revenue. There can be no assurance,
however, that the Company will be able to successfully complete a shift in
revenue mix or that the transition will result in higher gross or net margins.
In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional capital, or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
COMPETITION
The markets for systems integration services, networking services and
applications software are highly competitive and fragmented, are subject to
rapid change and have low barriers to entry. The Company competes for potential
clients with systems consulting and implementation firms, multinational
accounting firms, software application firms, service groups of computer
equipment companies, facilities management companies, general management
consulting firms, programming companies and technical personnel and data
processing outsourcing companies. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than the Company. The Company expects that
F-9
<PAGE> 35
competition in the services industry could increase in the future, partly due to
low barriers of entry. Increased competition could result in price reductions,
reduced margins or loss of market share for the Company and greater competition
for qualified technical personnel. There can be no assurance that the Company
will be able to compete successfully against current and future competitors. If
the Company is unable to compete effectively, or if competition among
information technology services companies results in a deterioration of market
conditions for information technology services companies, there could be a
material adverse effect on the Company.
INDUSTRY
The Company operates in an industry that is characterized by fast-changing
technology. As a result, the Company will be required to expend substantial
funds for continuing product development, including expenses associated with
research and development activities and additional engineering and other
technical personnel. There can be no assurance that such funds will be available
to the Company given its current financial condition and results of operations.
Any failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the operating results of the Company.
RAPID TECHNOLOGICAL CHANGE
The Company's success will depend in part on its ability to enhance its existing
products and services, to develop and introduce new services and products and
train its consultants in order to keep pace with continuing changes in
information technology, evolving industry standards and changing client
preferences. There can be no assurance that the Company will be successful in
addressing these issues or that, even if these issues are addressed, the Company
will be successful in the marketplace. In addition, there can be no assurance
that products or technologies developed by others will not render the Company's
services noncompetitive or obsolete. The Company's failure to address these
issues successfully could have a material adverse effect on the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Prologic and
its subsidiaries GRSI and BASIS. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-10
<PAGE> 36
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in 1997 were reclassified to conform with 1998 financial
statement presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgement is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange.
The carrying amount of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short maturity of these instruments.
The terms of notes payable and other long-term obligations approximate the terms
in the marketplace at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of third-party hardware and
software products upon shipment from the vendor to the end user, or when shipped
from the Company, whichever is appropriate. Revenue is recognized on sales of
third-party maintenance agreements upon receipt of the billing invoice from the
vendor at which time the Company retains no further obligation to the customer
or vendor. Revenue from professional services is recognized upon receipt of
customer acceptance of substantial completion. Revenue from software licensing
is recognized in accordance with Statement of Position 97-2, Software Revenue
Recognition. Revenue from software licensing is recognized when delivery of the
software has occurred, a signed non-cancelable license agreement has been
received from the customer and any remaining obligations under the license
agreement are insignificant. Revenue associated with agreements to provide
product support services is recognized as related services are provided. Revenue
from annual or other renewals of maintenance contracts is deferred and
recognized on a straight-line basis over the term of the contracts.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit that secures the Company's
revolving line of credit. This certificate of deposit earns interest at a rate
of 5.1%.
F-11
<PAGE> 37
INVENTORY
Inventory consists primarily of third-party computer hardware and third-party
software products, which are typically awaiting transfer to a customer, and is
stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets which is
generally five years. Depreciation expense was approximately $208,000 and
$193,000 in 1998 and 1997, respectively.
PRODUCT DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenues, estimated economic product lives and changes in software and
hardware technology. In addition, the Company has and plans to continue to
purchase software from third parties. Purchased software is also accounted for
in accordance with SFAS No. 86. Amounts that could have been capitalized during
fiscal 1998 under this statement after consideration of the above factors were
immaterial, and therefore no internal software development costs have been
capitalized by the Company in fiscal 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable.
The Company assesses the recoverability of long-lived assets by determining
whether the amortization of the balances over their remaining lives can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of long-lived assets will be impacted if
estimated future operating cash flows are not achieved. The Company wrote off
$425,807 of capitalized software costs in fiscal 1997. There was no impairment
of long-lived assets during the fiscal year ended March 31, 1998.
F-12
<PAGE> 38
GOODWILL
Cost in excess of net assets acquired (goodwill) is being amortized on a
straight-line basis over seven years. Amortization expense for the year ended
March 31, 1998 totaled $244,500. Accumulated amortization totaled $425,700 at
March 31, 1998.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, consist primarily of accounts
receivable. The Company does not require collateral upon delivery of its
products or services.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which supersedes Accounting Principles Board Opinion No. 15,
the existing authoritative guidance. SFAS No. 128 is effective for financial
statements for fiscal years ended after December 15, 1997, and as a result, all
prior year earnings per share data presented has been restated. The new
statement modifies the calculations of primary and fully diluted earnings per
share and replaces them with basic and diluted earnings per share.
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculations for the years ended March 31, 1998 and 1997, is
as follows:
<TABLE>
<CAPTION>
For the Years
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Loss per share - Basic:
Net loss available to common shareholders $(2,623,595) $(3,127,979)
Weighted average number of common shares 3,941,811 3,541,385
----------- -----------
Loss per common share - Basic $ (0.67) $ (0.88)
=========== ===========
Loss per share - Diluted:
Net loss available to common shareholders $(2,623,595) $(3,127,979)
Weighted average number of common shares 3,941,811 3,541,385
----------- -----------
Loss per common share - Diluted $ (0.67) $ (0.88)
=========== ===========
</TABLE>
(3) ACQUISITIONS:
In September 1995, the Company completed the acquisition of GRSI, a systems
integration company based in St. Paul, Minnesota. All of the outstanding common
stock of GRSI was acquired for 100,000 shares of common stock of the Company
valued at $40,000, the issuance of a promissory note in the amount of $150,000
and $100,000 of cash. The acquisition was
F-13
<PAGE> 39
accounted for as a purchase and accordingly, the aggregate purchase price of
$290,000 was allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Cost in excess of net
assets acquired of $259,746 was recorded as goodwill in connection with the
acquisition.
In August 1996, the Company completed the acquisition of BASIS, a systems
integration company located in the San Francisco Bay Area. All of the
outstanding stock of BASIS was acquired for 337,325 shares of common stock of
the Company valued at $1,400,000 and $500,000 in cash. The acquisition was
accounted for as a purchase and accordingly the aggregate purchase price of
$2,231,533 was allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of the acquisition. Cost in
excess of net assets acquired of $1,459,661 was recorded as goodwill in
connection with the acquisition. The accompanying consolidated statement of
operations for the year ended March 31, 1997 include the operations of BASIS
from August 1, 1996.
The following unaudited pro forma consolidated financial information for the
year ended March 31, 1997, was prepared assuming that the acquisition of BASIS
occurred as of April 1, 1996:
<TABLE>
<S> <C>
Revenue $ 16,434,020
Operating loss (2,670,804)
Net loss (3,197,769)
Basic loss per share (0.90)
Diluted loss per share (0.90)
</TABLE>
The above pro forma results give effect to the amortization of intangibles
resulting from the acquisition and estimated income tax effects thereon. The pro
forma information presented is for informational purposes only and is not
necessarily indicative of future earnings (loss) or of what the loss actually
would have been had the acquisition of BASIS been consummated on April 1, 1996.
(4) PROPERTY AND EQUIPMENT:
Property and equipment as of March 31, 1998, consists of the following:
<TABLE>
<S> <C>
Furniture and leasehold improvements $ 338,131
Equipment and software 1,053,079
-------------
1,391,210
Less accumulated depreciation (878,143)
-------------
Net property and equipment $ 513,067
=============
</TABLE>
(5) LINES OF CREDIT:
In March 1998, BASIS and GRSI obtained a line of credit in an amount that is the
lower of $5,000,000 or the sum of 85% of eligible accounts receivable,
restricted cash (see Note 2) and equipment loans in the first year (maximum
equipment loan is $250,000). This line of credit is secured by substantially all
of BASIS and GRSI's assets. As of March 31, 1998, borrowings under this line of
credit were $1,237,863, with additional availability of approximately $117,000.
F-14
<PAGE> 40
The line of credit bears monthly interest at the highest prime rate in effect
during each month (8.5% during March 1998) plus 1.75% per annum for the portion
of the loan related to accounts receivable and prime plus 2.25% per annum for
the portion related to equipment purchases subject to a minimum charge in any
month of not less than 9% per annum. Interest is based on a minimum daily loan
balance of $1,000,000. The line matures on March 31, 2001.
The Company is required to pay a monthly minimum fee of $1,500. Also, the
Company paid an initial loan fee of $50,000 in March 1998 with an additional
loan fee based on .25% of the maximum dollar amount ($5,000,000) due annually
thereafter. In years four and beyond, the Company must pay a renewal fee of .5%
of the maximum dollar amount.
If the Company terminates this agreement prior to the maturity date, it must pay
a penalty equal to the greater of all interest due during the prior six months
or the minimum monthly interest multiplied by the number of partial or full
months from the effective termination to the maturity date.
The line of credit agreement originally required that BASIS and GRSI maintain a
combined minimum net worth of $1,000,000. At March 31, 1998, BASIS and GRSI
were not in compliance with this covenant. BASIS and GRSI obtained a waiver for
this covenant from the bank through July 22, 1998, and subsequently obtained a
modification of the agreement for the period effective July 23, 1998 through
maturity which requires BASIS and GRSI to maintain a combined net worth of
$750,000.
The Company had a $1,000,000 revolving line of credit with a bank which was
subject to renewal in August 1997. The bank agreed to extend the line of credit
on a month-to-month basis under substantially the same terms until September
1997. The interest rate on borrowings under the agreement was the prime rate of
interest as established by the bank and was due monthly. The line of credit was
secured by the Company's $1,000,000 money market account. The line of credit was
paid off in September 1997 and was not renewed. Borrowings under this line of
credit were $-0- and $994,562 as of March 31, 1998 and 1997, respectively.
The Company also maintained a $2,200,000 line of credit facility for the
financing of accounts receivable and inventory with a financial institution for
its BASIS subsidiary. This financing facility was subject to a twelve-month
renewal in August 1997. The bank agreed to extend the line of credit through
February 1998. The interest rate was at the prime rate plus 1%. Interest was due
monthly. The credit facility was collateralized by a $300,000 irrevocable letter
of credit from the Company's bank and all accounts receivable at BASIS and GRSI.
The line of credit was paid off in March 1998 and was not renewed. Borrowings
under this agreement were $-0- and $107,886 as of March 31, 1998 and 1997,
respectively.
(6) CONVERTIBLE SUBORDINATED NOTES:
In November 1996, the Company borrowed $820,000 in a private offering of 10%
convertible subordinated notes. On September 29, 1997, the Company renegotiated
the conversion terms with the holders of $720,000 of the notes. The revised
terms assign a fixed conversion price of $3.75 per share, which was $2.63 in
excess of the market price of the Company's common stock
F-15
<PAGE> 41
on the date of the revision. In addition, the noteholders were granted warrants
to purchase a total of 252,000 shares of the Company's common stock at a price
of $2.00 per share. The warrants were valued at approximately $257,000 ($1.02
per share) and have been recorded in the accompanying financial statements as
additional debt issuance costs (other assets) and will be amortized over the
remaining term of the notes. The warrants expire on December 31, 2001.
During December 1997, $100,000 of notes were converted into 160,000 shares of
the Company's common stock based on the fair market value of the stock on the
date of the conversion. During the quarter ended June 30, 1998, the remaining
noteholders converted $720,000 of notes into 72,000 shares of Series B
convertible preferred stock and warrants to purchase a total of 72,000 shares of
the Company's common stock.
The following unaudited pro forma consolidated financial information was
prepared assuming the convertible subordinated notes had been converted into
72,000 shares of Series B convertible preferred stock and the 72,000 warrants
were issued at March 31, 1998:
<TABLE>
<S> <C>
Stockholders' Equity:
Series A cumulative convertible preferred stock, no
par value, 750,000 shares authorized, 41,667 shares
issued and outstanding, liquidation
value of $6.00 per share plus accrued
dividends $ 250,000
Series B cumulative convertible preferred stock,
no par value, 100,000 shares authorized, 72,000
shares issued and outstanding at March 31, 1998,
liquidation value of $10 per share plus accrued
and unpaid dividends 458,189
Common stock, no par value, 10,000,000 shares
authorized, 4,478,724 shares issued and outstanding
at March 31, 1998 8,493,270
Warrants 643,253
Accumulated deficit (9,241,460)
------------
Total stockholders' equity 603,252
------------
Total liabilities and stockholders' equity $ 6,019,834
============
</TABLE>
The unaudited pro forma consolidated financial data is provided for illustrative
purposes only.
F-16
<PAGE> 42
(7) LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable at March 31, 1998 are as follows:
<TABLE>
<S> <C>
Notes payable, interest at 2% per month, secured by
various equipment, originally due on March 31, 1998,
extended on a month-to-month basis or exchanged for
common stock subsequent to March 31, 1998. $ 205,000
Minimum royalty payable of $250,000, with imputed
interest at 8%, payments due in annual installments
of $25,000 through June 30, 2000 and the remaining
principal and interest due March 1, 2001; secured by
purchased software. 184,769
Note payable, interest at 8.5%, unsecured, principal
and interest due in July 1998. 126,500
Bridge note payable, interest at 2% per month, due in
October 1997, extended on a month-to-month basis,
unsecured. In return for month-to-month extensions,
the Company issues 10,000 shares of its common stock
to the lender for each month the note is extended. 100,000
Other 36,156
-----------
Total long-term debt and notes payable 652,425
Less current portion of long-term debt and notes payable 492,657
-----------
Long-term debt and notes payable, excluding
current portion $ 159,768
===========
</TABLE>
On March 31, 1998, certain of the Company's notes payable matured. In April
1998, notes totaling $20,000 were exchanged for common stock, notes with a
principal balance of $130,000 were extended to July 31, 1998, notes with a
principal balance of $35,000 were paid, and notes with a principal balance of
$20,000 were extended on a month-to-month basis. On July 31, 1998, certain of
these notes payable matured and were extended on a month-to-month basis.
In January 1996, the Company purchased SYMRP Scheduler and SYMFLO Database from
Symmetrix, Inc. (Symmetrix), a Massachusetts-based consulting firm. The
consideration included a $50,000 cash payment, a $150,000 promissory note
bearing interest at 10%, on which the final payment was made in fiscal 1998, and
a minimum royalty payment of $250,000. Each June the Company pays an annual
installment of $25,000 toward this minimum royalty. The final $25,000 is due in
June 2000 and the remaining balance on the $250,000 minimum royalty is due in
March 2001. Symmetrix holds a security interest in the above software as well as
F-17
<PAGE> 43
reversion rights in this technology. Since January 1996, the Company's plans
with respect to these products has changed and therefore, the Company is no
longer planning to market this product on a direct basis. As a result, in fiscal
1997 the cost of these products was included in the write-off of capitalized
software costs.
A summary of long-term debt and notes payable installments after March 31, 1998
is as follows:
<TABLE>
<S> <C>
1999 $ 492,657
2000 25,000
2001 134,768
-----------
$ 652,425
===========
</TABLE>
(8) INCOME TAXES:
The Company has adopted the provisions of SFAS No. 109, Accounting for Income
Taxes, which, among other things provides for the establishment of deferred
income taxes for temporary differences between the financial and income tax
basis of reporting.
A reconciliation of the difference between the provision for income taxes and
the amount that would be computed using statutory federal income tax rates is as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Benefit computed at federal rate of 34% $ (839,000) $(1,063,513)
State income tax benefit, net of federal benefit (148,000) (187,679)
Increase in valuation allowance related to net
operating loss carryforward 987,000 1,251,192
----------- -----------
Benefit for income taxes $ -- $ --
=========== ===========
</TABLE>
A detail of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,485,000 $ 2,497,835
Allowance for doubtful accounts 61,000 91,438
Deferred maintenance revenue 93,000 45,853
Amortization of goodwill 40,000 --
Employee compensation and other accruals 5,000 5,266
----------- -----------
Total deferred tax assets 3,684,000 2,640,392
Less valuation allowance (3,684,000) (2,640,392)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
F-18
<PAGE> 44
Utilization of the net operating loss carryforward may be significantly limited
or eliminated as a result of change in ownership rules. The Company has a net
operating loss carryforward approximating $8.7 million for federal income tax
purposes which expires in varying amounts from 2000 through 2012.
(9) COMMITMENTS AND CONTINGENCIES:
In February 1996, the Company executed a lease agreement with HFG Properties,
Ltd. (HFG), a limited partnership in which the Company's President and Chief
Executive Officer is a limited partner. The terms of the lease are from July
1996 through June 2001. Rent expense under this operating lease was $78,000 and
$68,879 in fiscal 1998 and 1997, respectively. Accrued rent at March 31, 1998
included $30,000 due HFG. During fiscal 1998, two employees of the Company paid
rent on behalf of the Company totaling $66,330. In return, the Company issued a
total of 66,330 shares of common stock, valued at $66,330, to the employees. At
March 31, 1998, the Company had approximately $33,000 in deposits with HFG.
The Company leases office, manufacturing and storage space, and equipment under
noncancelable operating lease agreements expiring through March 2002. These
leases contain renewal options, and the Company is responsible for certain
executory costs, including insurance and utilities. The Company's President has
also personally guaranteed amounts pertaining to certain operating leases. Total
rent expense for these operating leases was $171,500 and $223,400 for the years
ended March 31, 1998 and 1997, respectively. Future minimum lease payments under
operating leases that have remaining noncancelable lease terms in excess of one
year at March 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 259,734
2000 180,504
2001 149,980
2002 34,570
2003 -
-----------
$ 624,788
===========
</TABLE>
The Company is involved in various claims and actions arising in the ordinary
course of business. In the opinion of management, based on consultation with
legal counsel, the ultimate disposition of these matters will not have a
materially adverse effect on the Company.
(10) CAPITAL STOCK:
COMMON STOCK
In fiscal 1998, holders of notes totaling $160,000 converted these notes to
256,000 shares of common stock at $0.625 per share, as provided for in the
conversion agreement. In addition, holders of convertible subordinated notes
totaling $100,000 converted these notes to 160,000 shares of common stock at
$0.625 per share, as provided for in the conversion agreement.
In fiscal 1998, the Company issued 96,000 shares of common stock valued at the
market price on the dates of issuance, totaling $103,262, in connection with
month-to-month extensions on a $100,000 bridge note payable. The terms of the
bridge note extension require the Company to issue 10,000 additional shares of
common stock to the lender for each month the note is extended.
In fiscal 1998, the Company issued 241,330 shares of common stock at $1.00 per
share in exchange for $175,000 cash and the assumption of $66,330 of debt.
During fiscal 1997, the Company issued 337,325 shares of common stock, valued at
the market price of $4.15 per share on the date of issuance, in connection with
the acquisition of BASIS (see Note 3).
F-19
<PAGE> 45
During fiscal 1997, the Company issued 10,000 shares of common stock valued at
the market price of $2.66 per share on the date of issuance, in connection with
the issuance of a promissory note. The Company recognized $26,560 of expense
related to this issuance during the year ended March 31, 1997.
COMMON STOCK WARRANTS
During fiscal 1998, the Company issued warrants for the purchase of 134,288
shares of common stock to financial advisory companies at varying exercise
prices ranging from $.75 to $2.00 per share, expiring from February 2000 to
November 2002. The agreements provide for the issuance of warrants for the
purchase of up to an additional 50,000 shares of the Company's common stock,
dependent upon the continuation of the agreements which are cancelable by either
party without penalty. The warrants were valued at $109,591 and have been
recorded as general and administrative expense in the accompanying financial
statements.
In addition, during fiscal 1998, the Company issued warrants for the purchase of
252,000 shares of common stock as compensation to holders of convertible
subordinated notes (see Note 6) for the modification of the conversion price and
terms. These warrants have an exercise price of $2.00 per share and expire in
December 2001. The warrants were valued at $257,292 and have been recorded as
debt issuance costs and will be amortized into interest expense over the
remaining term of the notes.
During fiscal 1997, the Company issued warrants to bridge note holders for the
purchase of 157,500 shares of the Company's common stock, valued at $0.11 per
share, to purchase common stock in connection with the initial public offering.
The warrants were valued at $17,232 and have been recorded as general and
administrative expense in the accompanying financial statements.
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
From June 1997 to December 1997, the Company offered shares of 8% Series A
Cumulative Convertible Preferred Stock (Series A Preferred) to non-U.S. persons
at an offering price of $6.00 per share. During this period, 46,667 shares were
sold in exchange for $250,000. Proceeds were utilized primarily for working
capital needs.
The Series A Preferred provides for the payment of dividends at the rate of 8%,
payable quarterly beginning March 31, 1998 to be paid in cash or shares of
common stock at a stated price of $2.00 per share, at the discretion of the
Company's Board of Directors. Dividends totaling approximately $12,657 are
accrued in the accompanying consolidated financial statements and were paid in
cash in April 1998. Holders of Series A Preferred have liquidation preference
over holders of common stock and receive $6.00 per share plus accrued dividends,
in the event of liquidation.
F-20
<PAGE> 46
Holders of Series A Preferred may convert each share of Series A Preferred into
shares of common stock with a minimum stated value of $2.00 per share beginning
after June 1998, at a conversion rate of $6.00 per preferred stock share (each
share of Series A Preferred is convertible into three shares of common stock),
subject to adjustment. In addition, for each share of common stock received
through conversion, holders are entitled to receive one warrant to purchase one
share of common stock at the conversion price ($2.00 per share). Warrants issued
under this agreement expire in December 2000.
Series A Preferred is subject to conversion 12 months after the issuance at the
option of the Company, contingent upon an increase in the price of common stock
equal to at least 150% of the conversion price ($3.00 per share, subject to
adjustment).
In July 1998, holders of Series A Preferred totaling 25,000 shares elected to
convert their shares into 75,000 shares of common stock and warrants to purchase
75,000 shares of common stock as provided in the agreement.
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
In March 1998, the Company authorized 100,000 shares of 10% Series B Cumulative
Convertible Preferred Stock (Series B Preferred). The Series B Preferred
provides for the payment of dividends at the rate of 10% payable semi-annually
beginning October 31, 1998, to be paid in cash or shares of common stock,
subject to provisions in the agreement.
Series B Preferred may be converted to fully-paid and nonassessable shares of
common stock at the option of the shareholder. The number of shares of common
stock to be received is obtained by multiplying the Applicable Conversion Rate
($2.67 at March 31, 1998) by the number of shares of Preferred Stock, subject to
adjustment.
The Company may redeem Series B Preferred at the stated value plus accrued
dividends with at least 20 days notice to the shareholders and may not reissue
any shares repurchased.
In the event of liquidation, Series B Preferred shareholders will receive $10
per share plus accrued dividends. Holders of Series B have liquidation
preference over holders of common stock.
In June 1998, holders of $720,000 of convertible notes converted their notes
into 72,000 shares of Series B Preferred and warrants to purchase 72,000 shares
of common stock.
(11) STOCK OPTION PLAN:
During 1995, the Company's Board of Directors approved a stock option plan. The
maximum number of shares that may be purchased pursuant to the plan is 500,000.
Options granted under the plan include incentive and nonqualified stock options,
with vesting determined on the grant date, not to exceed ten years, and are
exercisable over a ten-year maximum period at a price to approximate the fair
market value of the common stock at the date of grant.
F-21
<PAGE> 47
The following table summarizes the activity under the Company's stock option
plan:
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997
---------------------------- -------------------------
Weighted Weighted
Average Average
Option Option
Number Price Number Price
of Shares Per Share of Shares Per Share
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 122,750 $3.93 50,000 $4.00
Granted 356,363 1.05 72,750 3.88
Canceled/expired 18,750 1.88 - -
Exercised - - - -
---------- ---------
Options outstanding,
end of year 460,363 1.68 122,750 3.93
========== =========
Options, exercisable,
end of year 143,750 2.35 34,650 4.00
========== =========
Options available
for grant 39,637 377,250
========== =========
Weighted average
fair value of
options granted $.99 $1.37
==== =====
</TABLE>
Options outstanding and exercisable by price range as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- - ------------------------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.81 - $4.00 460,363 3.62 years $ 1.68 143,750 $ 2.35
</TABLE>
In November 1997, management repriced 51,000 stock options with exercise prices
in excess of $2.00, previously granted to employees, to $1.00 per share. The
effect of this repricing is reflected in the summary tables above.
In June 1998, the Board authorized the repricing of 100,000 stock options with
exercise prices in excess of $3.88, previously granted to management under
employment contracts, to $1.00 per share. The effect of this repricing is not
reflected in the summary tables above.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which defines a fair value based method
of accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost related to stock options issued to employees under
these plans using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees.
Entities electing to
F-22
<PAGE> 48
continue accounting for stock-based compensation under APB No. 25 must make pro
forma disclosures of net income (loss) and earnings (loss) per share, as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25 and has therefore recognized $68,255 of compensation expense in the
accompanying consolidated financial statements for stock-based employee awards
granted at an option price less than the fair value of the Company's common
stock on the date of grant. Additionally, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1998 and 1997, using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
Options Options
--------- --------
<S> <C> <C>
Risk free interest rate 5.8 - 6.8% 6.5%
Expected dividend yield - -
Expected lives 5 years 4 years
Expected volatility 127.7% 64.00%
</TABLE>
The total value of options granted was computed to be the following approximate
amounts, which would be amortized on the straight-line basis over the vesting
period:
<TABLE>
<S> <C>
Year ended March 31, 1998 $ 348,552
Year ended March 31, 1997 $ 338,680
</TABLE>
If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's net loss and loss per common and
common share equivalent would have been as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Net loss:
As reported $ (2,623,595) $ (3,127,979)
Pro forma (2,782,069) (3,212,649)
Loss per common share - Basic:
As reported $ (0.67) $ (0.88)
Pro forma (0.71) (0.91)
Loss per common share - Diluted:
As reported $ (0.67) $ (0.88)
Pro forma (0.71) (0.91)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1998 and 1997 are not likely to be representative of the effects on reported net
loss and loss per common and common share equivalent for future years, because
options vest over several years and additional awards generally are made each
year.
F-23
<PAGE> 49
(12) SIGNIFICANT CUSTOMERS:
The Company derives a significant portion of its total revenue from relatively
few customers. The Company's five largest customers accounted for 38% and 32%
of total revenue for the years ended March 31, 1998 and 1997, respectively. In
1998, sales to one customer were 15% with no other customers to whom sales
exceeded 10%. The Company had no customers to whom sales exceeded 10% in 1997.
Because of the nature of the Company's business operations, the Company
anticipates that customers that represent more than 10% of total revenue will
vary from period to period depending on the placement of orders by a particular
customer or customers in any given period.
(13) 401(k) PLAN:
The Company has a 401(k) plan for the benefit of its employees. Under the plan,
eligible employees can contribute up to 15% of their compensation or a maximum
of $10,000 and $9,500 in 1998 and 1997, respectively. The Company may also make
discretionary contributions to the plan in amounts determined by management.
Participants immediately vest in both their personal contributions and in the
Company's contributions. The Company contributed immaterial amounts to the plan
for the years ended March 31, 1998 and 1997, respectively.
(14) RELATED PARTY TRANSACTIONS:
The Company leases its Tucson facility from HFG Properties, Ltd., (HFG), a
limited partnership of which the Company's President and Chief Executive Officer
is a partner. Additionally, the Company had notes payable with related parties
of approximately $100,000 at March 31, 1998. Of these notes, approximately
$14,000 was due at March 31, 1998, with the interest rate of -0-% for $12,000
and 10% for $2,000, and $86,000 is due April 15, 1999, with the interest rate at
the prime rate.
(15) SUBSEQUENT EVENTS:
In May 1998, the Company issued warrants for the purchase of 50,000 shares of
common stock to a merger and acquisition company for services to be performed.
The warrants are exercisable over five years and have an exercise price of $1.00
per share.
F-24
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Document Page
-------------- -------- ----
<S> <C>
3.1 Articles of Incorporation by the Company*
3.2 Bylaws of the Company*
3.3 Articles of Incorporation of Great River Systems, Inc.*
3.4 Bylaws of GRSI*
4.1 Form of Warrant Agency Agreement by and between
Prologic Management Systems, Inc. and American Stock
Transfer & Trust Company, with form of redeemable
warrant*
4.2 Specimen of Common Stock Certificate*
4.3 Specimen Redeemable Common Stock Purchase Warrant
Certificate*
4.4 [Form of] Representative's Warrant*
10.15 1994 Stock Option Plan, Form of Incentive
Agreement*
10.17 Employment Agreement of James M. Heim*
10.19 Form of Lock-Up Agreement of Shareholders*
10.20 Form of Stock Purchase Agreement, Promissory Note and
Escrow Agreement for July 31, 1994 issuance of Common
Stock*
10.21 Employment Agreement with Patricia Shanks*
10.22 Employment Agreement with Donald Legnitto*
10.28 Office Lease with HFG Properties***
10.29 Coast Business Credit Loan and Security Agreement
10.30 SYMRP Purchase Agreement*
10.31 Agreement and Plan of Reorganization dated as of
June 1, 1996 among Prologic Management Systems,
Inc., BASIS, Inc., BASIS Acquisition Corp. and
certain Principal Shareholders of BASIS, Inc.**
11.1 Earnings Per Share Calculation
23.1 Consent of Independent Public Accountants, KPMG Peat
Marwick LLP
23.2 Consent of Independent Public Accountants, Arthur
Andersen LLP
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the corresponding exhibit number in the Company's
Registration Statement on Form SB-2 (Commission file no. 33-89384-LA).
** Incorporated by reference to the corresponding exhibit number in the
Company's Form 8-K filed on August 23, 1996.
*** Incorporated by reference to the corresponding exhibit number in the
Company's Form 10-KSB filed on July 1, 1996.
<PAGE> 1
COAST_________________________________________________ EXHIBIT 10.29
LOAN AND SECURITY AGREEMENT
BORROWERS: BASIS, INC.
5759 HOLLIS STREET
EMERYVILLE, CA 94608
GREAT RIVER SYSTEMS, INC.
1370 MENDOTA HEIGHTS ROAD
ST. PAUL, MN 55120
DATE: MARCH 9, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT(R), a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower(s) named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 1 below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"Borrower" has the meaning set forth in the introduction to this Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Cash Collateral" means pledged bank accounts secured by cash or cash
equivalent acceptable to Coast.
"Cash Collateral Loans" means the Loans described in Section 2.1(b) of the
Schedule.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
1
<PAGE> 2
"Closing Date" date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Debt Service Coverage Ratio" means EBITDA less cash taxes plus
non-financed capital expenditures divided by the total principal, interest and
capital lease payments to be measured on a quarterly basis.
"Dilution" means all non-cash reductions, including, but not limited to,
credit memos, discounts and journal entries, in the total amount of Receivables,
expressed as a percentage of Receivables.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBIT" means, in any fiscal period, Borrower's consolidated net income
(other than extraordinary or non-recurring items of Borrower for such period),
plus (i) the amount of all interest expense and income tax expense of Borrower
for such period, on a consolidated basis, and plus or minus (as the case may be)
(ii) any other non-cash charges which have been added or subtracted, as the
case may be, in calculating Borrower's consolidated net income for such period.
"EBITDA" means, in any fiscal period, Borrower's consolidated net income
(other than extraordinary or non-recurring items of Borrower for such period)
plus (i) the amount of all interest expense, income tax expense, depreciation
expense, and amortization expense of Borrower for such period, on a consolidated
basis and plus or minus (as the case may be (ii) any other non-cash charges
which have been added or subtracted, as the case may be, in calculating
Borrower's consolidated per income for such period.
"Eligible Foreign Receivables" means Receivables arising from Borrower's
customers located outside the United States which Coast otherwise approves for
borrowing in its sole and absolute discretion. Without limiting the foregoing,
Coast will consider the following in determining the eligibility of such
receivables: (i) whether the Borrower's goods are shipped and backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with an acceptable Dun &
Bradstreet rating, or (vi) whether Borrower's goods are shipped to an account
that has an acceptable credit insurance.
"Eligible Receivables" means Receivables and Eligible Foreign Receivables
arising in the ordinary course of Borrower's business from the sale of goods or
rendition of services, which Coast, in its sole judgment, shall deem eligible
for borrowing, based on such considerations as Coast may from time to time deem
appropriate. Eligible Receivables shall not include the following:
(a) Receivables that the Account Debtor has failed to pay within
ninety (90) days of invoice date; or
(b) Receivables owed by an Account Debtor or its Affiliates where
twenty-five (25%) percent or more of all Receivables owed by that Account Debtor
(or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which
2
<PAGE> 3
the Account Debtor is an employee, Affiliate, or agent of Borrower;
(d) Receivables with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional;
(e) Receivables, other than Eligible Foreign Receivables, that are not
payable in Dollars or with respect to which the Account Debtor: (i) does not
maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Receivable is supported by an irrevocable letter of credit satisfactory
to Coast (as to form, substance, and issuer or domestic confirming bank) that
has been delivered to Coast and is directly drawable by Coast, or (z) the
Receivable is covered by credit insurance in form and amount, and by an insurer,
satisfactory to Coast;
(f) Receivables with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31
U.S.C. Section 3727), or (ii) any State of the United States (exclusive,
however, of Receivables owed by any State that does not have a statutory
counterpart to the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a creditor
of Borrower, has or has asserted a right of setoff, has disputed its liability,
or has made any claim with respect to the Receivables;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower exceed twenty-five percent (25%) of all Eligible
Receivables, to the extent of the obligations owing by such Account Debtor in
excess of such percentage;
(i) Receivables with respect to which the Account Debtor is subject to
any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation proceeding, or becomes insolvent, or goes out of
business;
(j) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the services
giving rise to such Receivable have not been performed and accepted by the
Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Equipment Acquisition Loans" means the Loans described in Section [2.1(c)
of the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"GAAP" means generally accepted accounting
3
<PAGE> 4
principles as in effect from time to time in the United States, consistently
applied.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, investment property, inventions, designs,
drawings, blueprints, patents, patent applications, trademarks and the goodwill
of the business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"Loan Documents" means this Agreement, the agreements and documents
listed on Section 5 of the Schedule, and any other agreement, instrument or
document executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of
the Schedule.
"Net Worth" means consolidated book net worth (calculated in accordance
with GAAP).
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast, all of
which shall be secured by the Collateral.
"Permitted Liens" means the following:
4
<PAGE> 5
(a) purchase money security interests in specific items of Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes and labor related liens not yet payable, including
liens arising out of deposits in connection with Workers' Compensation
Insurance, unemployment insurance, old age pensions or other security or
retirement benefits as may be required by law;
(d) additional security interests and liens consented to in writing by
Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently with
this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or refinancing
of the indebtedness secured by liens of the type described above in clauses (a)
or (b) above, provided that any extension, renewal or replacement lien is
limited to the property encumbered by the existing lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute thereof of
the Bank of America NT & SA whether or not that rate is the lowest interest rate
charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime
Rate" shall mean the highest of the prime rates published in the Wall Street
Journal on the first business day of the applicable month, as the base rate on
corporate loans at large U.S. money center commercial banks.
"Receivable Loans" means the Loans described in Section 2.1(a) of the
Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of
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business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"Year 2000 Problem" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and
in percentages to be determined by Coast in its good faith discretion, up to the
Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables or Eligible Inventory without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Receivable Loans, Cash Secured Loans
and Equipment Acquisition Loans in the amount set forth on the Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are deemed
fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral").
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and
unpaid one hundred (120) days past its due date except for such accounts payable
being contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
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5.3 LANDLORD WAIVER. Coast shall have received duly executed
(a) landlord waivers and access agreements in form and substance
satisfactory to Coast, in Coast's sole and absolute discretion, and, when
deemed appropriate by Coast, in form for recording in the appropriate recording
office, with respect to all leased locations where Borrower maintains any
inventory or equipment.
5.4 YEAR 2000 ASSESSMENT CERTIFICATE. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as the
result of a comprehensive assessment undertaken by Borrower of Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no
facts that would cause Borrower to reasonably believe that the Year 2000
Problem will cause a Material Adverse Effect.
5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
5.7 PRIORITY TO COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute
discretion, reflecting its Uniform Commercial Code filings against Borrower
indicating that Coast has a perfected, first priority lien in and upon all of
the Collateral, subject only to Permitted Liens.
5.8 INSURANCE. Coast shall have received copies of the insurance binders
or certificates evidencing Borrower's compliance with Section 8.2 hereof,
including lender's loss payee endorsements.
5.9 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's
articles of incorporation and all amendments thereto, and a Certificate of Good
Standing, each certified by the Secretary of State of the state of Borrower's
organization, and dated a recent date prior to the Closing Date, and Coast
shall have received Certificates of Foreign Qualification for Borrower from the
Secretary of State of each state wherein the failure to be so qualified could
have a Material Adverse Effect.
5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing
the execution and delivery of this Agreement and the other documents
contemplated hereby, and authorizing the transactions contemplated hereunder
and thereunder, and authorizing specific officers of Borrower to execute the
same on behalf of Borrower, in each case certified by the Secretary or other
acceptable officer of Borrower as of the Closing Date.
5.11 TAXES. Coast shall have received evidence from Borrower that
Borrower has complied with all tax withholding and Internal Revenue Service
regulations, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.13 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such
other agreements, instruments and documents as Coast may require in connection
with the transactions contemplated hereby, all in form and substance
satisfactory to Coast in Coast's sole and absolute discretion, and in form for
filing in the appropriate filing office, including, but not limited to, those
documents listed in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance
by Borrower of this Agreement, and all other documents contemplated hereby (a)
have been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by
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bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally), and (c) do not violate Borrower's articles of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (d) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture. Borrower is not and
will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Coast, use its best efforts to cause such
third party to execute and deliver to Coast, in form acceptable to Coast, such
waivers and subordinations as Coast shall specify, so as to ensure that Coast's
rights in the Collateral are, and will continue to be, superior to the rights of
any such third party. Borrower will keep in full force and effect, and will
comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial statements, for
the absence of footnotes and subject to normal year-end adjustments) and now and
in the future will fairly reflect the financial condition of Borrower, at the
times and for the periods therein stated. Between the last date covered by any
such statement provided to Coast and the date hereof, there has been no Material
Adverse Effect. Borrower is now and will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely
pay, all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a lien upon any of the Collateral. As of the
date hereof, Borrower
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is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers Borrower, to the best of its knowledge, represents and
warrants that the Year 2000 problem will not result in a Material Adverse
Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and indorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's security
interest and other rights therein. Loan requests received after 10:30 A.M. Los
Angeles, California time, will not be considered by Coast until the next
Business Day. Together with each such schedule, or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request, originals) of
all contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of
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which gave rise to such Receivables, and Borrower warrants the genuineness of
all of the foregoing. Borrower shall also furnish to Coast an aged accounts
receivable trial balance in such form and at such intervals as Coast shall
request. In addition, Borrower shall deliver to Coast the originals of all
instruments, chattel paper, security agreements, guarantees and other documents
and property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary indorsements, all of which shall
be with recourse. Borrower shall also provide Coast with copies of all credit
memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until an Event of Default has occurred. Borrower shall
hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (a) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an Event
of Default, settle or adjust disputes or claims directly with Account Debtors
for amounts and upon terms which Coast considers advisable in its reasonable
credit judgment and, in all cases, Coast shall credit Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
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8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the written
reports set forth in Section 8 of the Schedule, and such other written reports
with respect to Borrower (including budgets, sales projections, operating plans
and other financial documentation), as Coast shall from time to time reasonably
specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice, Coast, or
its agents, shall have the right to perform Audits. Coast shall take reasonable
steps to keep confidential all confidential information obtained in any Audit,
but Coast shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower's expense and the charge for the Audits
shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher
amount as shall represent Coast's then current standard charge for the same),
plus reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will, on a timely basis, adequately and
completely address the Year 2000 Problem in all material respects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a transaction
in which (i) the owners of the Borrower hold at least fifty percent (50%) of the
ownership interest in the surviving entity immediately after such merger or
consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business,
or (ii) in a transaction or a series of transactions not involving the payment
of an aggregate amount in excess of the amount set forth in Section 8 of the
Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party, unless Borrower delivers a bailee agreement acceptable to
Coast;
(f) sell any Inventory on a sale-or-return,
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guaranteed sale, consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would have
a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default is continuing or would occur as a
result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than one-hundred twenty (120) days prior to the Maturity Date or
the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date. If this Agreement is
renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the
amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and
payable on the Renewal Date and thereafter shall bear interest at a rate equal
to the rate applicable to the Receivable Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Coast's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements,
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requests for reconveyances and such other documents as may be required to fully
terminate Coast's security interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers, employees
or agents, now or in the future, shall be untrue or materially misleading and
results in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within five (5) Business Days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within sixty
(60) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer
or experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
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(p) Borrower shall generally not pay its debts as they become due,
or Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law; or
(q) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without
judicial process to enter onto any of Borrower's premises without interference
to search for, take possession of, keep, store or remove any of the Collateral,
and remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as Coast deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; provided, however, that should Coast
seek to take possession of any of the Collateral by Court process, Borrower
hereby irrevocably waives:
(i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to
such possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such
locations as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge. Coast is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in
its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on credit,
and to adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time
or times as Coast deems reasonable, or on Coast's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Coast may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item
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of the Collateral or proceeds thereof, and, in Coast's sole discretion, to
grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast (including attorneys' fees and expenses incurred in connection
with bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m. Los
Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but
is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling
the Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Upon the occurrence, and during the
continuance, of any Event of Default, without limiting Coast's other rights and
remedies provided herein and under Law, Borrower grants to Coast an irrevocable
power of attorney coupled with an interest, authorizing and permitting Coast
(acting through any of its employees, attorneys or agents) at any time, at its
option, but without obligation, with or without notice to Borrower, and at
Borrower's expense, to do any or all of the following, in Borrower's name or
otherwise, but Coast agrees to exercise the following powers in a commercially
reasonable manner:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of
Borrower or Coast, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part
of Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment
based thereon, or otherwise take any action to terminate or discharge the same;
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(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure
the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same rights
of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability that a
court of competent jurisdiction finally determines to have resulted from the
gross negligence or willful misconduct of such Indemnified Person. This
provision shall survive the termination of this Agreement and the repayment of
the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been
indefeasibly paid and performed.
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11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations four (4) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such four (4) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such four (4) Business Days of "clearance" or "float" actually occur,
and shall be deemed to be the equivalent of charging four (4) Business Days of
interest on such collections. This across-the-board four (4) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole discretion
reversed and reapplied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present of future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand,
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protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by Coast on which Borrower is or may in any way be liable, and
notice of any action taken by Coast, unless expressly required by this
Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Coast, or any
of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast, but nothing herein shall relieve Coast
from liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in
order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its costs and attorneys' fees
(including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder by the sale of assignment or participation
interests, all without the consent of Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only
used in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
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11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
BASIS, INC.
By /s/ William E. Wallin
---------------------------------
William E. Wallin
Title: Vice President
GREAT RIVER SYSTEMS, INC.
By /s/ William E. Wallin
---------------------------------
William E. Wallin
Title: Vice President
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ Robert D. Peters
---------------------------------
Robert D. Peters
Title: Vice President
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Coast
SCHEDULE TO THE
LOAN AND SECURITY AGREEMENT
Borrowers: BASIS, Inc.
5759 Hollis Street
Emeryville, CA 94608-2514
Great River Systems, Inc.
1370 Mendota Heights Road
St. Paul, MN 55120
Date: March 9, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrowers of even date.
================================================================================
SECTION 2 - CREDIT FACILITIES
Section 2.1 - Credit Limit: Loans in a total amount of any time outstanding
not to exceed the lesser of a total of Five
Million Dollars ($5,000,000) at any one time
outstanding (the "Maximum Dollar Amount"), or the
sum of (a), (b) and (c) below:
(a) Receivable Loans in an amount not to exceed
eighty percent (80%) of the amount of
Borrower's Eligible Receivables (as defined
in Section 1 of the Agreement) and an amount
up to eighty-five percent (85%) provided that
Dilution is less than five percent (5%), with
a sublimit up to $100,000 for Eligible
Foreign Receivables; and further, Eligible
Receivables to exclude unearned (deferred)
maintenance service revenues and billings
under Access Graphics, Inc. assignment of
proceeds program, plus
(b) Cash Secured Loans up to $1,300,000 or
one-hundred percent (100%) of Certificate of
Deposit to be held by Coast as Cash
Collateral with the Interest on the
Certificate of Deposit at a Reference Rate
less three (3%) percent; plus
<PAGE> 21
(c) Equipment Acquisition Loans, to be drawn
within one (1) year from the date hereof,
in minimum advances of Fifty Thousand
Dollars ($50,000) in a total amount not
to exceed the lesser of:
(1) Eighty percent (80%) of the cost of
new Equipment (after subtracting
taxes and installation charges); and
(2) Two Hundred Fifty Thousand Dollars
($250,000).
The Equipment Acquisition Loans shall
be subject to Borrower achieving a
Debt Service Coverage Ratio of not
less than 1.25:1 and amortized over
thirty-six (36) months.
================================================================================
SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 1.75% per
annum, calculated on the basis of a 360-day
year for the actual number of days elapsed for
the Receivable Loans and Prime Plus 2.25% for
the Equipment Acquisition Loans. The interest
rate applicable to all Loans shall be adjusted
monthly as of the first day of each month, and
the interest to be charged for each month
shall be based on the highest Prime Rate in
effect during said month, but in no event
shall the rate of interest charged on any
Loans in any month be less than 9.00% per
annum.
SECTION 3.1 - MINIMUM MONTHLY
INTEREST: Interest will be based on a minimum daily loan
balance of $2,000,000.
SECTION 3.2 - LOAN FEE: $50,000, payable concurrently. Thereafter .25%
of the Maximum Dollar Amount annually during
the term of this Agreement with all fees fully
earned at funding.
SECTION 3.2 - FACILITY FEES: $1,500 per month payable on the Closing Date
(prorated for any partial month at the
beginning of the term of this Agreement) and
continuing each month thereafter.
SECTION 9.1 - RENEWAL FEE: 1/2% of the Maximum Dollar Amount per year
starting year four (4).
SECTION 9.2 - EARLY An amount equal to the greater of (i) an
TERMINATION amount equal to all interest due and payable
FEE: during the six (6) months immediately
preceding the effective date of termination,
or (ii) an amount equal to the average monthly
interest due and payable based on the greater
of the six (6)
2
<PAGE> 22
month monthly interest immediately preceding
the effective date of termination or, if the
effective date of termination is less than
six (6) months from the initial funding, an
amount equal to the average monthly interest
multiplied by the number of full or partial
months from the effective date of termination
to the maturity date will be due and payable,
or (iii) an amount equal to the Minimum
Monthly Interest multiplied by the number of
full or partial months from the effective
date of termination to the Maturity Date.
================================================================================
SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM
AVAILABILITY: $1,000,000
SECTION 5.13 - OTHER DOCUMENTS
AND AGREEMENTS: 1. Joint and Several Borrower Agreement
2. Continuing Guaranties of Prologic
Management Systems, Inc.
3. Corporate Resolution of Prologic
Management Systems, Inc.
4. UCC-1 financing statements, fixture
filings and termination statements; and
5. Security Agreements (including those
covering copyrights, patents and
trademarks).
6. Borrower to notify Coast within five (5)
business days of any customer contract
termination, cancellation, delay in
delivery of goods, non-performance of
contract, or any assertion of claim,
offset or counter claim.
7. A Pledge Agreement acceptable to Coast
securing the Cash Collateral Loans.
================================================================================
SECTION 6. - REPRESENTATIONS, WARRANTS AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF
BORROWER: None.
SECTION 6.2 - PRIOR TRADE NAMES
OF BORROWER: For Great River Systems, Inc.
MicroAge Computer Centers
3
<PAGE> 23
SECTION 6.2 - EXISTING TRADE NAMES
OF BORROWER: None.
SECTION 6.3 - OTHER LOCATIONS
AND ADDRESSES: 2030 E. Speedway Blvd.
Tucson, AZ 85719
(Prologic)
40 South Market Street
Suite 510
San Jose, CA
5758 Hollis St.
Emeryville, CA 94608-2514
(Basis)
10260 SW Greenburg Rd., #400
Portland, OR 97223
(Basis)
1370 Mendota Heights Rd. #400
St. Paul, MN 55120
(Great River)
SECTION 6.10 - MATERIAL ADVERSE
LITIGATION: None.
SECTION 6.10 - FUTURE CLAIMS AND
LITIGATION: Borrower will promptly inform Coast in
writing of any claim, proceeding, litigation
or investigation in the future threatened or
instituted by or against Borrower involving
any single claim of Fifty Thousand Dollars
($50,000) or more, or involving One Hundred
Thousand Dollars ($100,000) or more in the
aggregate.
================================================================================
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS:
1. Minimum Net Worth of $1,000,000 at
funding and ongoing.
2. All applicable taxes to be paid and
current at date of funding and ongoing.
3. First position security interest in all
tangible and intangible assets of
Borrower, including patents, licenses,
copyrights and
4
<PAGE> 24
trademarks with the exception of existing liens on
equipment not financed by Coast at Closing.
4. Intercreditor Agreement with Access Graphics, Inc.
acceptable to Coast.
5. All collections to be received in Lockbox accounts
acceptable to Coast.
6. Borrower will be prohibited from upstreaming and
sidestreaming of funds other than in the normal
course of business. Borrower will not, during the
term of this Agreement, make any payments or
transfers of money, property, rights or assets of
any kind or nature (including without limitation
sales, repayment of loans, capital contributions,
purchases, compensation arrangements, consulting
fees, management fees, license, or any other
transactions of any kind or nature), except to pay
taxes, to any Affiliates of Borrower without the
prior written consent of Coast.
7. Borrower shall have thirty (30) days from Closing
to obtain Landlord Waivers acceptable to Coast.
SECTION 8.2 - INSURANCE: Subject to the limitations set forth in Section 8.2 of
the Agreement, Coast shall release to Borrower
insurance proceeds with respect to Equipment totaling
less than One Hundred Thousand Dollars ($100,000).
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the following:
1. Monthly Receivable agings, aged by invoice date,
within ten (10) days after the end of each month,
reconciled to the general ledger and to Coast Daily
Report, and rolled forward from the prior month
together with the calculated month end Ineligible
Receivables.
2. Monthly accounts payable agings, aged by invoice
date, in thirty (30) day increments and outstanding
or held check registers within ten (10) days after
the end of each month.
3. Monthly internally prepared financial statements, as
soon as available, and in any event within thirty
(30) days after the end of each month.
4. Quarterly internally prepared consolidating
financial statements, as soon as available, and in
any event within forty-five (45) days after the end
of each fiscal quarter of Borrower.
5
<PAGE> 25
5. Quarterly customer lists, including customer name,
address, and phone number.
6. Annual consolidating financial statements, as soon as
available, and in any event within ninety (90) days
following the end of Borrower's fiscal year, containing
the unqualified opinion of, and certified by, an
independent certified public accountant acceptable to
Coast.
7. Month end reconciled bank statements within ten (10) days
after the end of each month.
8. Consolidating quarterly and annual financial statements
to be included with Borrower's Form 10Q's and 10K's.
9. Monthly schedule of deferred (unearned) service revenues.
10. Maintenance service contract receivables to be identified
in Accounts Receivable agings or separately aged.
11. Monthly compliance certificate acceptable to Coast, to
include certification as to non-existence of accommodated
billings in accounts receivable collateral.
Section 8.5 - Negative Covenants
(Acquired Assets): Fifty Thousand Dollars ($50,000)
=============================================================================
Section 9 - Term (Continued on Page 7)
6
<PAGE> 26
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE: March 31, 2001 subject to automatic renewal
as provided in Section 9.1 of the Agreement,
and early termination as provided in Section
9.2 of the Agreement.
Borrower:
BASIS, INC. Coast:
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank
By: /s/ William E. Wallin By /s/ Robert D. Peters
--------------------------------- ----------------------------------
William E. Wallin Robert D. Peters
Vice President Title: Vice President
Borrower:
GREAT RIVER SYSTEMS, INC.
By: /s/ William E. Wallin
--------------------------------
William E. Wallin
Vice President
7
<PAGE> 1
EXHIBIT 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net Loss applicable to Common Stock (2,623,595) (3,127,979)
Weighted average number of common shares equivalent:
Common shares outstanding 3,941,811 3,541,385
Common equivalent shares representing shares
issuable upon exercise of stock options and warrants -- --
---------- ----------
Incremental common equivalent shares (calculated
using the higher of end of period or average fair
market value) -- --
---------- ----------
Total weighted average shares - as adjusted 3,941,811 3,541,385
Basic $ (0.67) $ (0.88)
Diluted $ (0.67) $ (0.88)
</TABLE>
Page 1
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Prologic Management Systems, Inc.:
We consent to the inclusion of our report dated June 27, 1997, relating to the
consolidated statements of operations, changes in stockholders' equity and
cash flows for the year ended March 31, 1997, which report appears in the
March 31, 1998 Form 10-KSB of Prologic Management Systems, Inc.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
August 18, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-KSB of our report dated August 14, 1998 included in
Prologic Management Systems, Inc.'s Form 10-KSB dated March 31, 1998 and to all
references to our firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 475,110
<SECURITIES> 0
<RECEIVABLES> 3,405,603
<ALLOWANCES> 273,000
<INVENTORY> 220,651
<CURRENT-ASSETS> 4,200,956
<PP&E> 513,067
<DEPRECIATION> 878,143
<TOTAL-ASSETS> 6,220,445
<CURRENT-LIABILITIES> 3,932,951
<BONDS> 0
0
250,000
<COMMON> 8,493,270
<OTHER-SE> (8,659,407)
<TOTAL-LIABILITY-AND-EQUITY> 6,220,445
<SALES> 21,623,092
<TOTAL-REVENUES> 21,623,092
<CGS> 17,316,683
<TOTAL-COSTS> 6,355,923
<OTHER-EXPENSES> 561,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477,157
<INCOME-PRETAX> (2,049,514)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,610,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,623,595)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
