<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Spacetec IMC Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Labtec Common Stock
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(2) Aggregate number of securities to which transaction applies:
28,824,310 shares(a)
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
96,081.03(b)
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
96,081.03(b)
-------------------------------------------------------------------------
(5) Total fee paid: $20.00(c)
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(a) Based on 25,011,310 shares of Labtec common stock and options to
purchase 3,813,000 shares of Labtec common stock outstanding on
November 12, 1998.
(b) Calculated pursuant to Exchange Act Rules 0-11(c)(i) and
0-11(a)(4), based upon one-third of the par value of the shares
of Labtec common stock to be acquired.
(c) Pursuant to Exchange Act Rules 14a-6(i)(4) and 0-11, the filing
fee represents 1/50th of one percent of the value of the
securities to be acquired by Spacetec IMC Corporation in the
proposed transaction.
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
SPACETEC IMC CORPORATION
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 17, 1999
TO THE STOCKHOLDERS OF SPACETEC IMC CORPORATION:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Spacetec
IMC Corporation, a Massachusetts corporation ("Spacetec"), will be held at 9:00
a.m., Boston time, on February 17, 1999, at the offices of Testa, Hurwitz &
Thibeault, LLP, High Street Tower, 125 High Street, 20th Floor, Boston,
Massachusetts, 02110, to consider and vote upon the following proposals:
1. The issuance of approximately 14,363,954 shares of Spacetec common
stock and such additional shares as may be required to be issued in
connection with the potential valuation or sale of the Spacetec industrial
business, in each case as pursuant to the Agreement and Plan of Merger
dated as of October 21, 1998, as amended and restated on November 13, 1998,
among Labtec Inc., a Delaware corporation, Spacetec and SIMC Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of
Spacetec. The Merger Agreement provides for, among other things, the
assumption of all outstanding options to purchase Labtec common stock and
the merger of Labtec with and into SIMC Acquisition Corporation, with
Labtec being the surviving corporation and a wholly-owned subsidiary of
Spacetec.
2. An amendment to the Amended and Restated Articles of Organization
of Spacetec (i) to increase the number of authorized shares of Spacetec
common stock from 20,000,000 to 25,000,000, $.01 par value per share and
(ii) to change the corporate name of Spacetec to "Labtec Inc." ("New
Labtec"), both subject to and upon completion of the merger.
3. To elect twelve directors, four to each of Class I, II and III to
serve terms of one, two and three years, respectively, subject to and upon
completion of the merger.
4. An amendment to the Amended and Restated Articles of Organization
of Spacetec to authorize a reverse stock split whereby one share of New
Labtec common stock will be issued in exchange for each three shares of
outstanding common stock of New Labtec, subject to and immediately
following the completion of the merger.
5. To authorize Spacetec to adjourn the special meeting to solicit
additional proxies in the event that the number of proxies sufficient to
approve any of the proposals has not been received by the date of the
special meeting.
6. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on January 8, 1999 are
entitled to notice of and to vote at the meeting and any adjournment thereof.
All stockholders are cordially invited to attend the special meeting in
person. To ensure your representation at the special meeting, however, you are
urged to sign and return the enclosed proxy card as promptly as possible in the
enclosed postage-prepaid envelope. You may revoke your proxy in the manner
described in the accompanying Proxy Statement at any time before it has been
voted at the Spacetec special meeting. Any stockholder attending the special
meeting may vote in person even if he or she has returned a proxy.
By Order of the Board of Directors,
GEORGE REA
Acting Chief Executive Officer
Lowell, Massachusetts
January 22, 1999
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[SPACETEC LOGO]
SPACETEC IMC
CORPORATION
January 22, 1999
As most of you are aware, Spacetec IMC Corporation has entered into an
agreement to merge with Labtec Inc. At a special meeting, you will be asked to
vote on a number of matters, including the issuance of shares of Spacetec common
stock to the Labtec stockholders in the merger, changing the corporate name of
Spacetec to "Labtec Inc." ("New Labtec") and a reverse stock split.
If you approve the issuance of shares of Spacetec common stock to the
Labtec stockholders and the merger is completed, the ownership of current
Spacetec stockholders will change from ownership of 100% of Spacetec to
ownership of approximately 33% of New Labtec. Also, if the merger is completed,
the directors of New Labtec nominated by Labtec may decide at any time at or
prior to December 31, 1999 to proceed with a valuation or sale of the Spacetec
industrial business. If such valuation or sale results in a valuation or
proceeds of less than $6,000,000, additional shares of New Labtec will be issued
to the current Labtec stockholders and the percentage ownership of current
Spacetec stockholders in New Labtec will be reduced to as low as 21%. If the
merger is completed and you approve the reverse stock split, you will receive
one share of New Labtec common stock for each three shares of Spacetec common
stock you hold. Spacetec and Labtec anticipate that, as a result of the
one-for-three reverse stock split, the market value of a share of New Labtec
common stock will increase approximately 200%, however there can be no assurance
that the market value will increase by this amount, if at all. If the merger is
completed and you do not approve the reverse stock split, you will receive one
share of New Labtec common stock for each share of Spacetec common stock you
hold. SPACETEC IS CURRENTLY TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "SIMC".
We have enclosed a Proxy Statement discussing the merger. We encourage you
to read this document carefully. Your participation at the special meeting is
especially important because the items to be voted on are very important to
Spacetec and you. Whether or not you plan to attend the special meeting in
person, please complete, sign and date the enclosed proxy card and return it to
us as soon as possible in the envelope we have provided. If you decide to attend
the special meeting, you may vote your shares in person whether or not you have
mailed us a proxy.
THE SPACETEC BOARD OF DIRECTORS BELIEVES THE MERGER IS IN THE BEST
INTERESTS OF SPACETEC AND YOU AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR EACH
OF THE PROPOSALS.
GEORGE REA
Acting Chief Executive Officer
------------------------
PROXY STATEMENT DATED JANUARY 22, 1999 AND FIRST MAILED TO STOCKHOLDERS ON
JANUARY 22, 1999.
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<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 4
RISK FACTORS................................................ 13
INTRODUCTION................................................ 21
SPACETEC IMC CORPORATION SPECIAL MEETING.................... 21
Date, Time and Place of Spacetec Special Meeting.......... 21
Purpose................................................... 21
Recommendations of Spacetec Board of Directors............ 21
Record Date and Outstanding Shares........................ 21
Vote Required............................................. 22
Proxies................................................... 22
Solicitation of Proxies; Expenses......................... 23
Appraisal Rights.......................................... 23
Labtec Board and Stockholder Approvals.................... 23
PROPOSAL 1 APPROVAL OF THE ISSUANCE OF SPACETEC COMMON
STOCK..................................................... 24
Joint Reasons for the Merger.............................. 24
Spacetec's Reasons for the Merger......................... 24
Labtec's Reasons for the Merger........................... 25
Background of the Merger.................................. 25
Opinion of Advest, Financial Advisor to Spacetec.......... 28
Certain Federal Income Tax Considerations of the Merger... 31
Accounting Treatment...................................... 37
TERMS OF THE MERGER......................................... 38
Completion of the Merger.................................. 38
Exchange of Stock Certificates............................ 38
The Note.................................................. 38
Contingent Shares......................................... 39
Stock Ownership Following the Merger...................... 40
Corporate Structure Following the Merger.................. 40
Conduct of Spacetec's and Labtec's Business Prior to the
Merger................................................. 40
No Solicitation........................................... 42
Termination Fees.......................................... 42
Conditions to the Merger.................................. 43
Voting Agreement and Irrevocable Proxy.................... 44
Interest of Certain Persons in the Merger................. 45
Contribution of Assets.................................... 46
Corporate Structure After the Transactions are
Completed.............................................. 46
Government and Regulatory Approvals....................... 46
Federal Securities Law Consequences....................... 47
Accountants............................................... 47
</TABLE>
i
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<TABLE>
<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 48
UNAUDITED PRO FORMA COMBINED BALANCE SHEET.................. 49
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS........ 51
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 53
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF SPACETEC
STOCKHOLDERS.............................................. 55
Proposal 2 Amendment to Articles to increase number of
authorized shares of Spacetec common stock and to
change the corporate name.............................. 55
Proposal 3 Election of Directors.......................... 55
Proposal 4 Amendment to Articles to provide for the
1-for-3 reserve stock split............................ 57
Proposal 5 Authorization to adjourn special meeting....... 58
SPACETEC.................................................... 59
SPACETEC BUSINESS......................................... 59
SPACETEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 69
SPACETEC CERTAIN TRANSACTIONS............................. 78
SPACETEC MANAGEMENT AND EXECUTIVE COMPENSATION PRIOR TO
THE MERGER............................................. 80
OPTION GRANTS IN LAST FISCAL YEAR......................... 83
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES...................... 84
TEN YEAR OPTION REPRICING................................... 85
SPACETEC STOCK INFORMATION.................................. 86
LABTEC...................................................... 90
LABTEC BUSINESS........................................... 90
LABTEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 95
LABTEC CERTAIN TRANSACTIONS............................... 99
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF LABTEC................................... 101
COMPENSATION AND OTHER INFORMATION........................ 103
OPTION GRANTS IN LAST FISCAL YEAR......................... 104
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES...................... 105
DESCRIPTION OF CAPITAL STOCK................................ 106
COMPARISON OF CAPITAL STOCK................................. 110
EXPERTS..................................................... 115
STOCKHOLDER PROPOSALS....................................... 115
INDEX TO FINANCIAL STATEMENTS............................... F-1
REPORT OF ERNST & YOUNG LLP................................. F-2
REPORT OF PRICEWATERHOUSECOOPERS LLP........................ F-20
</TABLE>
ii
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<TABLE>
<S> <C> <C> <C>
ANNEX A -- Agreement and Plan of Merger dated as of October 21, 1998,
as amended and restated on November 13, 1998, among Labtec
Inc., SIMC Acquisition Corporation and Spacetec IMC
Corporation................................................. A-1
ANNEX B -- Opinion of Advest, Inc. .................................... B-1
ANNEX C -- Form of Unsecured Subordinated Promissory Note.............. C-1
ANNEX D -- Form of Voting Agreement and Irrevocable Proxy.............. D-1
ANNEX E -- Text of Amendments to Restated Articles of Organization, as
amended, of Spacetec IMC Corporation........................ E-1
</TABLE>
iii
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QUESTIONS AND ANSWERS ABOUT
THE SPACETEC/LABTEC MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: Spacetec and Labtec believe that the combined customer relationships,
management, personnel and technical and manufacturing expertise of Spacetec
and Labtec will be better able to capitalize on growth opportunities in the
personal computer industry.
The merger means that you will have a stake in a leading developer and
marketer of high-technology, multimedia input/output peripheral products to
the PC industry.
Q: PLEASE EXPLAIN THE EXCHANGE RATIO.
A: Holders of shares of Labtec common stock that are outstanding at the time of
the merger will receive for each share of Labtec stock (1) .55430739 shares
of Spacetec common stock; (2) a pro-rata share of all principal and interest
payments made under a six-year, 10% interest promissory note to be issued by
Spacetec in the principal amount of $1,065,000; and (3) a pro-rata share of
additional shares, if any, of New Labtec common stock issuable in connection
with a potential valuation or sale of the Spacetec industrial business. An
example of the effect of any adjustment in the number of shares issuable to
Labtec stockholders in connection with the potential valuation or sale of the
industrial business appears on page 3.
In addition, each outstanding option to purchase a share of Labtec common
stock will be assumed by Spacetec and adjusted so that an option to purchase
a share of Labtec common stock will be converted into a right to purchase
.55430739 shares of Spacetec common stock. The exercise price of each option
will also be adjusted to reflect the exchange ratio of the option.
We will not issue fractional shares. Labtec stockholders who would otherwise
be entitled to receive a fractional share will instead receive cash based on
the market value of the fractional share at the closing of the merger.
The shares of Spacetec common stock will then be reissued in the name of New
Labtec in connection with the reverse stock split.
Q: WHY DID THE SPACETEC BOARD AGREE TO THE LABTEC STOCKHOLDERS CONTROLLING AS
MUCH AS 79% OF NEW LABTEC WITH SPACETEC STOCKHOLDERS HOLDING AS LITTLE AS 21%
OF NEW LABTEC?
A: Spacetec and Labtec engaged in extensive negotiations regarding the shares to
be issued to Labtec stockholders in connection with the merger. Labtec's
initial interest in Spacetec was related to the consumer side of the Spacetec
business, a market that Labtec understands very well. Based on the relative
size of revenues, operating income and growth prospects and after completion
of due diligence, Spacetec and Labtec agreed on a post-merger ownership of
approximately 67% by Labtec stockholders and 33% by Spacetec stockholders.
With respect to the industrial side of the business, Labtec has less
experience than Spacetec. In addition, the recent financial results of the
industrial business made a valuation more difficult to agree upon. Spacetec
agreed to the potential issuance of additional shares to the Labtec
stockholders and, as a result, Labtec stockholders' ownership of New Labtec
may increase to as much as 79% while Spacetec stockholders ownership of New
Labtec may decrease to as low as 21%. The issuance of any shares will depend
on the valuation or sale of the industrial business over the next year. This
arrangement is intended to provide time for Labtec to gain a better
understanding of the industrial business and measures to be implemented to
strengthen the industrial business prior to any potential valuation or sale.
1
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Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER AND STOCK SPLIT TO ME?
A: In connection with the merger, holders of Spacetec common stock should not
recognize any gain or loss for United States federal income tax purposes.
In connection with the 1-for-3 reverse stock split, holders of New Labtec
will receive cash in lieu of fractional shares and may recognize gain or loss
as a result of such payment.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: If the merger is approved by Spacetec stockholders, we anticipate that the
completion of the merger will occur on or about February 17, 1999, following
satisfaction of all closing conditions.
Q: WHEN WILL I RECEIVE MY NEW STOCK CERTIFICATE REPRESENTING MY SHARES OF NEW
LABTEC COMMON STOCK ASSUMING THE MERGER IS COMPLETED?
A: If the merger is completed, American Stock Transfer, transfer agent for New
Labtec, will forward a letter to New Labtec stockholders with instructions to
be used in surrendering stock certificates in exchange for new stock
certificates on or about February 24, 1999. If the reverse stock split is
approved, the instructions will indicate that one share of New Labtec will be
received for every three shares of Spacetec common stock.
In each case, the new stock certificates issued to stockholders of both
Spacetec and Labtec will be issued in the name of "Labtec Inc."
Q: WILL THE SHARES OF SPACETEC REMAIN PUBLICLY TRADED AFTER THE MERGER WITH
LABTEC AND THE REVERSE STOCK SPLIT?
A: Yes. New Labtec may not meet the listing requirements of Nasdaq. In such
event, management will take the necessary steps to ensure that New Labtec
common stock trades on a public market.
Q: WHAT WILL THE STRUCTURE BE AFTER THE MERGER AND THE CONTRIBUTION OF THE
SPACETEC LIABILITIES AND ASSETS TO THE NEWLY-FORMED WHOLLY-OWNED SUBSIDIARY?
A: Spacetec will be renamed Labtec Inc. and will be a publicly traded company
organized under the laws of the Commonwealth of Massachusetts. New Labtec
will remain the parent corporation to the existing Spacetec subsidiaries and,
in addition, it will have two wholly-owned subsidiaries organized under the
laws of the State of Delaware. Labtec Corporation will be the current Labtec
business and Spacetec Corporation will be the current Spacetec business.
Q: IF I AM NOT GOING TO ATTEND THE SPACETEC SPECIAL MEETING IN PERSON, SHOULD I
RETURN MY PROXY CARD?
A: Yes. After carefully reading and considering the information contained in
this Proxy Statement, please fill out and sign your proxy card. Then, return
it to Spacetec in the enclosed return envelope as soon as possible, so that
your shares may be voted at the Spacetec special meeting.
Q: WHAT WILL HAPPEN IF THERE IS AN ADJUSTMENT IN THE NUMBER OF SHARES ISSUABLE
TO LABTEC STOCKHOLDERS BECAUSE OF THE VALUE OF THE SPACETEC INDUSTRIAL
BUSINESS?
A: If the Spacetec industrial business is valued at less than $6.0 million, the
Labtec stockholders will own a greater percentage of New Labtec. For every
$1.0 million that the Spacetec industrial business is valued at less than
$6.0 million, additional shares of New Labtec common stock will be issued
such that, the percentage ownership of holders of Labtec common stock at the
time of the merger will be increased in the aggregate by 2.7555% for each
$1.0 million shortfall. Any adjustment will be prorated for all amounts less
than $1.0 million. The aggregate percentage ownership of the current Spacetec
stockholders will decrease by the same percentage because of the issuance of
additional shares. Under no
2
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circumstance, however, will the percentage ownership of Spacetec stockholders
at the time of the merger be less than 21%. Set forth below is an example of
an equity adjustment as a result of a valuation of the Spacetec industrial
business at less than $6.0 million.
For example, if the Spacetec industrial business was valued at $5,500,000,
the equity adjustment would result in an aggregate of 300,161 additional
shares of New Labtec common stock being issued to holders of Labtec stock
outstanding at the time of the merger, as indicated in the table below:
<TABLE>
<CAPTION>
LABTEC STOCKHOLDERS SPACETEC STOCKHOLDERS
---------------------- ----------------------
% OF % OF TOTAL
SHARES(1) OWNERSHIP SHARES(1) OWNERSHIP SHARES(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Pre-Adjustment................... 4,621,318 66.94% 2,282,331 33.06% 6,903,649
Adjustment....................... 300,161(3) 1.38(2) -- (1.38)(2) 300,161(3)
--------- ----- --------- ----- ---------
Post-Adjustment.................. 4,921,479 68.32% 2,282,331 31.68% 7,203,810
========= ===== ========= ===== =========
</TABLE>
- ---------------
(1) Shares reflect the issuance of one share of New Labtec common stock for
three shares of Spacetec common stock pursuant to the reverse stock split.
(2) (Dollar shortfall) x (.000002755) = % Equity Adjustment.
(3) Labtec Adjustment Shares = (((Total Pre-Adjustment Shares X Post-Adjustment
Labtec % ownership) -- Pre-Adjustment Labtec Shares)/Post-Adjustment
Spacetec % ownership).
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of the Proxy Statement
or if you have more questions about the merger you should contact:
MEG QUINLAN
Spacetec IMC Corporation
The Boott Mills
100 Foot of John Street
Lowell, MA 01852-1126
Phone Number: (978) 275-6100
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (Call Collect)
or
Call Toll-Free (800) 322-2885
3
<PAGE> 13
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you.
THE COMPANIES
Spacetec IMC Corporation (see pages 59-89)
The Boott Mills
100 Foot of John Street
Lowell, Massachusetts 01852-1126
(978) 275-6100
Spacetec IMC Corporation is a leading developer and marketer of controllers
and the related software that enable a user to manipulate three-dimensional
graphical images in real-time as if the user were moving actual objects or
moving through actual scenes in the real world. Spacetec products are used by
electronic design engineers, architectural engineers, industrial designers,
film, video and broadcast television animators, graphic artists, and game
developers.
Labtec Inc. (see pages 90-105)
1499 SE Tech Center Drive
Suite 350
Vancouver, WA 98683
(360) 896-2000
Labtec Inc. is a leading developer and marketer of high-technology,
multimedia input/output peripheral products for the personal computer industry.
Labtec offers a broad array of proprietary products, including computer
speakers, subwoofers, PC voice access microphones, headphones and accessories.
OUR REASONS FOR THE MERGER (SEE PAGES 24-25)
The Spacetec Board believes the merger will enhance long-term stockholder
value as a result of the following:
- Enhanced sales of Spacetec's products through Labtec's established
worldwide retail, master distributor and OEM relationships.
- Permit more effective management of Spacetec's business due to Labtec's
more established infrastructure.
- Create greater interest among research analysts and investors due to the
larger size of the combined company.
- Reduce overall business risk through product diversity and greater
critical mass.
RECOMMENDATION OF THE SPACETEC BOARD (SEE PAGE 21)
The Spacetec Board believes that the merger is fair and each of the
Proposals is in your best interest and unanimously recommends that you vote FOR
each of Proposals 1, 2, 3, 4 and 5.
FAIRNESS OPINION OF ADVEST (SEE PAGES 28-31)
In deciding to approve the merger, your Board considered the opinion of
Advest, financial advisor to your Board, that the issuance of the merger
consideration was fair to the Spacetec stockholders from a financial point of
view even if additional shares of Spacetec common stock were issued in
connection with a potential valuation or sale of the industrial business as
contemplated by the Merger Agreement. This opinion is subject to the
qualifications and limitations referred to in the opinion. The opinion of Advest
is attached as Annex B to this Proxy Statement.
APPRAISAL RIGHTS (SEE PAGE 23)
No Spacetec stockholder is entitled to an appraisal of the value of his
shares in connection with the merger of Spacetec and Labtec.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 31-36)
Holders of Spacetec common stock should not recognize any gain or loss for
United States federal income tax purposes in connection with the merger.
THE NOTE (SEE PAGES 38, 106-107)
At the closing of the merger, Spacetec will issue a six-year promissory
note in the principal amount of $1,065,000. The Note will:
- be payable to a collection agent for the benefit of each holder of Labtec
common stock outstanding at the time of the merger;
- be unsecured;
- be subordinated to all institutional indebtedness of Spacetec;
- accrue interest at a rate of 10% per year, to be paid quarterly in cash
or, under certain circumstances, through the issuance of additional
promissory notes;
- be paid in full at the end of the six-year term of the Note; and
- be prepayable, in whole or in part, without penalty, at any time at
Spacetec's option.
The Note contains certain events of default, including but not limited to a
change of control of New Labtec, the disposition of any assets of New Labtec not
in the ordinary course of business or the sale of securities of New Labtec, in
each case pursuant to which New Labtec would receive at least $10.0 million, any
default in payment of any amount due under the Note which continues for 10 days
and the commencement of any proceeding under bankruptcy or insolvency laws. If
an event of default occurs, all amounts due under the Note may be accelerated.
CONTINGENT SHARES (SEE PAGES 39-40)
At the time of the execution of the Merger Agreement, the directors of
Spacetec believed that if sold to a third party, the value of the Spacetec
industrial business approximated $6,000,000. This valuation assumed the
existence of a ten-year license agreement which provides for the payment of an
8% royalty based on net sales. In the Merger Agreement, Spacetec and Labtec
agreed to value the Spacetec industrial business no later than December 31, 1999
and, if required, the number of shares of New Labtec common stock issued upon
the completion of the merger in exchange for each share of Labtec stock will be
adjusted through the issuance of additional shares of New Labtec common stock
for any valuation of the industrial business below $6,000,000. This adjustment
will result in the aggregate outstanding percentage ownership of outstanding New
Labtec common stock of holders of Labtec common stock outstanding at the time of
the Merger being increased. The increase will be 2.7555% for every $1.0 million
that the value of the Spacetec industrial business, plus the consolidated net
income or minus the consolidated net loss of Spacetec, excluding Labtec and its
subsidiaries, for the period October 1, 1998 through the date of completion of
the sale of the industrial business or the final determination of the value of
the industrial business, is less than $6,000,000. Under no circumstances will
the percentage ownership of holders of Labtec common stock outstanding, as
adjusted, be greater than 79% of the total outstanding New Labtec common stock.
ACCOUNTING TREATMENT (SEE PAGES 37, 48-54)
Since Labtec shareholders will own approximately 67% of Spacetec and will
control the Spacetec Board upon completion of the merger, the transaction will
be accounted for as a purchase of Spacetec by Labtec in a "reverse acquisition,"
which requires the excess of the purchase price over the historical book value
of the assets and liabilities of Spacetec be recorded as goodwill, which must
subsequently be written off against earnings. As a result of the merger,
approximately $5.8 million will be booked as goodwill, resulting in an
approximate $1.9 million charge against earnings over each of the next three
years.
5
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TERMINATION OF THE MERGER AGREEMENT AND TERMINATION FEES (SEE PAGES 42-43)
Under certain circumstances, including your failure to approve the merger,
we must pay to Labtec $300,000 plus all out-of-pocket fees and expenses incurred
by Labtec in connection with the merger plus, if a third-party acquires all or
part of Spacetec or if Spacetec agrees to such an acquisition within 12 months
following the termination of the Merger Agreement, we must pay Labtec an amount
equal to 5% of the amount by which the consideration in connection with such
acquisition exceeds the value of all outstanding shares of Spacetec common stock
on October 20, 1998, which was $1.375 per share.
In addition, the Merger Agreement may be terminated by any one of Spacetec,
SIMC Acquisition or Labtec, without any termination fee, under various
circumstances, including (a) a court or other governmental authority prohibits
or adversely affects the merger; (b) the merger is not completed by March 31,
1999; or (c) any other party materially breaches or materially fails to comply
with any of its covenants, representations or warranties, but only if the breach
is not curable through the reasonable efforts of the breaching party.
CONDITIONS OF THE MERGER (SEE PAGES 43-44)
The completion of the merger depends upon meeting a number of conditions,
including, among others, (a): that no litigation, inquiry or other request for
information by any governmental authority or third-party has been instituted
which (i) questions the validity or legality of the merger or (ii) could
reasonably be expected to have a material adverse effect on Spacetec or Labtec;
(b) the execution and delivery of the Note; (c) there being no material adverse
change in the business, assets, financial condition or results of operations of
either Spacetec or Labtec; and (d) the representations and warranties of each
party in the Merger Agreement being true and correct in all material aspects;
INTERESTS OF CERTAIN PERSONS IN THE MERGER
(SEE PAGE 45)
In considering our recommendation to approve the issuance of shares to the
Labtec stockholders, you should be aware that members of your Board and the
executive officers of Spacetec hold options to purchase 89,100 shares of
Spacetec common stock that automatically accelerated upon the mailing of this
Proxy Statement and options to purchase 81,000 shares of Spacetec common stock
that accelerate upon completion of the merger. In addition, J. Grant Jagelman,
Dennis Gain, George Rea and Pat Sullivan have been designated by Spacetec for
election as directors of New Labtec.
STOCK OWNERSHIP FOLLOWING THE MERGER (SEE PAGE 40)
Upon the closing of the merger, approximately 13,863,954 shares of Spacetec
common stock will be issued to Labtec stockholders. In addition, Spacetec will
assume options exercisable for up to approximately 2,113,574 additional shares
of Spacetec common stock. Upon the closing of the merger, we anticipate that the
former holders of Labtec common stock will hold approximately 67% of New
Labtec's total issued and outstanding shares. Of these shares, Sun Multimedia
Partners, L.P. will own approximately 10,727,478 shares, or approximately 51.8%
of the outstanding shares of Spacetec.
RECORD DATE AND VOTE REQUIRED (SEE PAGES 21-22, 44-45)
Under Massachusetts law and the Spacetec Articles:
- a majority of the votes cast at the special meeting must approve
Proposals 1 and 5;
- a majority of the outstanding shares of Spacetec must approve Proposals 2
and 4; and
- the four nominees for directors in each class of directors receiving the
highest number of votes cast at the special meeting
6
<PAGE> 16
for nominees of each class shall be elected in connection with Proposal
3.
Dennis Gain, J. Grant Jagelman and certain of their affiliates who own
approximately 20% of the outstanding shares of Spacetec, have each executed a
Voting Agreement and Irrevocable Proxy in the form of Annex D whereby each has
agreed to vote such shares in favor of each of the Proposals.
BOARD OF DIRECTORS AND MANAGEMENT OF SPACETEC FOLLOWING THE MERGER (SEE PAGE 46)
Upon the closing of the merger, the Board of Directors of New Labtec will
consist of twelve directors, each of whom will be elected at the special
meeting. Four of the directors you are being asked to vote for at the special
meeting, George Rea, Pat Sullivan, Dennis Gain and J. Grant Jagelman, have been
designated by Spacetec and eight of the directors you are being asked to vote
for at the special meeting, Marc J. Leder, Rodger R. Krouse, Bradley A. Krouse,
Marc Wolpow, Geoffrey Rehnert, Joseph Pretlow, Robert G. Wick and Caroline
Merison have been designated by Labtec.
Following the completion of the merger, the principal executive officers of
New Labtec will be as follows: Robert G. Wick will serve as President, Marc J.
Leder will serve as Co-Chairman, Senior Vice President and Chief Financial
Officer and Rodger R. Krouse will serve as Co-Chairman.
7
<PAGE> 17
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
We are providing the following summary financial information to aid you in
your analysis of the financial aspects of the merger. The financial information
relating to Spacetec was derived from our historical financial statements (and
related notes) contained in the annual reports and other information that we
have filed with the SEC and should be read in conjunction with that information.
The financial information relating to Labtec was derived from their historical
financial statements (and related notes) and should be read in conjunction with
such financial statements. See the historical financial statements of Labtec
starting on page F-20. The historical financial statements for the full years
were audited; those for interim periods were not audited. The unaudited
financial information reflects all adjustments (consisting only of normal
recurring accruals) which are considered necessary to fairly state the financial
information for such periods. The results of operations for any interim period
are not necessarily indicative of results for a full year, and historical
results are not necessarily indicative of future results.
SPACETEC SELECTED HISTORICAL FINANCIAL INFORMATION
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------ -----------------
1994 1995 1996 1997 1998 1997 1998
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................................... $3,198 $5,536 $8,132 $9,075 $8,884 $3,899 $3,324
Income (loss) from operations.................... 467 686 705 (4,948) (3,838) (1,868) (2,467)
Net income (loss)................................ 327 526 628 (3,722) (3,270) (1,587) (2,252)
Basic:
Net income (loss) per share...................... $ 0.27 $ 0.42 $ 0.19 $(0.51) $(0.45) $(0.22) $(0.33)
Weighted average shares outstanding.............. 1,200 1,262 3,232 7,283 7,195 7,214 6,880
Diluted:
Net income (loss) per share...................... $ 0.08 $ 0.10 $ 0.10 $(0.51) $(0.45) $(0.22) $(0.33)
Weighted average shares outstanding.............. 3,984 5,526 6,412 7,283 7,195 7,214 6,880
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
--------------------------------------------- ----------------
1994 1995 1996 1997 1998 1997 1998
------ ------ ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $2,357 $2,142 $17,503 $13,622 $10,480 $11,834 $7,706
Total assets................................. 3,342 4,507 21,108 16,602 12,999 14,230 9,792
Long term liabilities, less current
portion.................................... 99 220 320 -- -- -- --
Total shareholders' equity................... $2,667 $3,339 $19,301 $15,260 $11,489 13,330 $8,516
</TABLE>
8
<PAGE> 18
LABTEC SELECTED HISTORICAL FINANCIAL INFORMATION
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR LABTEC
-------------------------- -------------------------------------------------------
FISCAL
YEAR ENDED APRIL 1, 1994 JUNE 24, 1994 FISCAL YEAR ENDED MARCH 31,
MARCH 31, TO JUNE 24, TO MARCH 31, ---------------------------------------
1994 (1) 1994 (1) 1995 1996 1997 1998
---------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 38,454 $ 11,297 $ 38,711 $ 43,664 $ 59,779 $ 57,820
Net income (loss).......... $ 3,876 $ 1,274 $ (1,612) $ (2,578) $ 601 $ (2,277)
Net income (loss) per
share.................... $79,590.51 $26,154.39 $ (0.12) $ (0.19) $ 0.03 $ (0.12)
Shares used in per share
computation.............. 48.7 48.7 13,486,819 13,510,209 20,144,940 19,156,928
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------
1994(1) 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET
DATA:
Working capital........................ $ 6,775 $ 3,380 $ 2,997 $ 3,407 $19,544
Total assets........................... 14,224 27,309 30,034 34,528 36,202
Long-term obligations and redeemable
warrants, less current portion of
long-term debt....................... -- 8,175 6,598 2,216 31,361(2)
Total stockholders' equity (deficit)... $ 6,958 $ 6,066 $ 6,027 $ 6,666 $(3,798)(2)
</TABLE>
- ---------------
(1) Labtec underwent a 100% change in ownership effective June 24, 1994 and the
financial statements for all periods after this date reflect a new basis of
accounting.
(2) Reflects the recapitalization of Labtec effective October 7, 1997. Refer to
historical financial statements of Labtec included elsewhere in this Proxy
Statement.
9
<PAGE> 19
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF SPACETEC AND LABTEC
Presented below is unaudited pro forma consolidated financial information
that is intended to give you a better picture of what our businesses might have
looked like had they always been combined. The companies would have performed
differently had they been combined, and you should not rely on the pro forma
information as being indicative of the historical results that would have been
achieved or the future results that we will experience after the merger. The
shares used as well as the per share amounts shown below give effect to the
1-for-3 reverse stock split immediately following the completion of the merger.
The information below does not reflect cost savings that are expected as a
result of the merger or the charges that may be incurred as a result of the
merger.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1998 1998
----------------- -------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS DATA:
Revenues.................................................... $ 66,704 $ 31,512
Loss from operations........................................ $ (4,264) $ (4,539)
Net loss before extraordinary items......................... $ (7,000) $ (5,343)
Net loss per share before extraordinary items (1)........... $ (1.18) $ (0.80)
Shares used in per share computation (1).................... 5,937,895 6,720,111
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
------------------
<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Working capital............................................. $19,309
Total assets................................................ $44,235
Long-term liabilities....................................... $26,569
Stockholders' equity........................................ $ 6,128
</TABLE>
- ---------------
(1) Reflects the contemplated 1-for-3 reverse stock split to be voted on
pursuant to this Proxy Statement.
10
<PAGE> 20
COMPARATIVE PER SHARE DATA
The table below summarizes the net loss per share information of Spacetec
and Labtec. In addition, we have summarized the net loss per share of the
combined company on an unaudited pro forma basis assuming that the merger and
the migratory merger had been completed. This information should be read along
with the selected historical financial information summarized above, the annual
audited financial statements of Spacetec and Labtec, the unaudited pro forma
combined condensed financial information and the separate historical financial
statements of Spacetec and Labtec and notes thereto, included elsewhere in this
Proxy Statement. The pro forma information is presented for illustrative
purposes only and does not necessarily indicate what the operating results or
financial position of the combined company would have been if the merger had
been completed at the beginning of the indicated periods.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1998 1998
----------------- -------------
<S> <C> <C>
HISTORICAL -- SPACETEC:
Net loss per share.......................................... $(0.45) $(0.33)
Book value per share(1)..................................... $ 1.61 $ 1.24
HISTORICAL -- LABTEC:
Net loss per share before extraordinary loss................ $(0.09) $(0.09)
Book value per share(1)..................................... $(0.15) $(0.20)
PRO FORMA COMBINED NET LOSS PER SHARE(2):
Per Spacetec share.......................................... $(1.18) $(0.80)
Equivalent per Labtec share(3).............................. $(0.65) $(0.44)
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(2)(4):
Per Spacetec share.......................................... $ 0.91
Equivalent per Labtec share(3).............................. $ 0.50
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity (deficit) by the number of shares of common stock, on an as if
converted basis, outstanding at the end of each period.
(2) New Labtec estimates that it will incur direct transaction costs of
approximately $2 million associated with the merger, a portion of which will
be capitalized as costs of the purchase and amortized over three-years and a
portion of which will be charged to operations upon completion of the
merger. In addition, it is expected that after the merger, New Labtec will
incur additional significant charges to operations of up to $1 million in
the six months ended March 31, 1999, to reflect costs associated with
integrating the two companies. The pro forma combined net loss per Spacetec
share is calculated after considering a 1-for-3 reverse stock split
immediately following the completion of the merger. The pro forma combined
book value per share data gives effect to the estimated capitalized direct
transaction costs, but does not include the estimated transaction costs
which will be charged to operations or any additional charges relating to
integrating the two companies, as if such costs had been incurred as of the
respective balance sheet date. The costs and charges which will be charged
to operations are not included in the pro forma combined net loss per share
data. See "Unaudited Pro Forma Combined Condensed Financial Information" and
accompanying notes thereto.
11
<PAGE> 21
(3) The Labtec equivalent pro forma combined per share amounts are determined by
multiplying the Spacetec combined pro forma per share amounts by the
exchange ratio of .55430739.
(4) The pro forma combined book value per Spacetec share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period, after considering a 1-for-3
reverse stock split immediately following the completion of the merger.
12
<PAGE> 22
RISK FACTORS
This Proxy Statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain factors, including those set forth in the risk
factors set forth below. Reference is made to the particular discussions set
forth under "Spacetec's Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Labtec's Management's Discussion and
Analysis of Financial Condition and Results of Operations". In connection with
forward-looking statements which appear in these disclosures, stockholders
should carefully review the factors set forth below.
RISKS RELATING TO INABILITY TO LIST NEW LABTEC STOCK ON NASDAQ. As a
result of the merger, it is likely that New Labtec will not meet either the
initial listing requirements or the maintenance requirements of the Nasdaq
National Market or the Nasdaq SmallCap Market. In that event, unless the
National Market agrees to waive these requirements for a period of time, it is
likely that the New Labtec common stock will not be listed on the Nasdaq
National Market or the Nasdaq SmallCap Market following the merger. In the event
that New Labtec is not traded on either the National Market or the SmallCap
Market, management will take the steps necessary so that New Labtec may trade on
a regional exchange or on the OTC Bulletin Board. In either case, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of the Company's Common Stock. This lack of liquidity may
cause New Labtec to have difficulty raising capital.
IMMEDIATE DILUTION. The issuance of the shares of Spacetec common stock to
Labtec stockholders will result in immediate and substantial dilution to the
Spacetec stockholders because, as a result of the merger, the ownership of
Spacetec stockholders will initially decrease from 100% of Spacetec to
approximately 33% of New Labtec. Dilution refers to a decrease in the percentage
ownership interest of a company that a share of stock represents.
EFFECT OF THE POTENTIAL VALUATION OR SALE OF THE INDUSTRIAL BUSINESS. In
connection with the potential valuation or sale of Spacetec's industrial
business, additional shares of New Labtec common stock may be issued to holders
of Labtec stock at the time of the merger, resulting in dilution to the Spacetec
stockholders, such that ownership by the Spacetec stockholders could be reduced
to as low as 21% of New Labtec. Additional shares will be issued if the sale
price or valuation of the industrial business is less than $6,000,000. The
$6,000,000 valuation assumes the existence of a ten-year license agreement with
an 8% royalty. Spacetec may be unable to procure a license agreement on such
terms as part of a sale. If Spacetec fails to obtain such a license agreement in
connection with a sale, the value of its industrial business would be less than
the actual purchase price obtained and, as a result, Labtec's stockholders would
receive a greater ownership percentage of New Labtec. Likewise, absent a sale, a
valuation would assume the existence of the license agreement on the terms
discussed above and therefore have the effect of decreasing the valuation of the
industrial business. See "Terms of the Merger -- Contingent Shares."
DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS WILL OWN 64% OF NEW
LABTEC. Following the completion of the merger, the directors, executive
officers and principal stockholders of New Labtec will beneficially own
approximately 64.27% of its outstanding common stock. These stockholders could
determine the outcome of actions by New Labtec that require stockholder
approval. For example, these stockholders could elect all the directors, delay
or prevent a transaction in which stockholders might receive a premium over the
prevailing market price for their shares and prevent changes in control or
management. The interests of these stockholders could, at times, conflict with
the interests of other stockholders of New Labtec. See "Stock Ownership
Following the Merger."
13
<PAGE> 23
SUN MULTIMEDIA PARTNERS WILL OWN 52% OF NEW LABTEC. Sun Multimedia
Partners, L.P. will own approximately 51.8% of the outstanding stock of New
Labtec and could, on its own, determine the outcome of actions by New Labtec
that require stockholder approval, including the election of directors. The
interests of Sun Multimedia Partners, L.P. could, at times, conflict with the
interests of other stockholders of New Labtec. See "Stock Ownership Following
the Merger."
ACCELERATION OF THE NOTE. The Note contains provisions which provide that
if certain events happen, at the option of the collection agent, all outstanding
principal and accrued interest accelerates and becomes immediately due and
payable. These events include a change of control of New Labtec and the sale or
disposition of any assets of New Labtec not in the ordinary course of business
or the sale of securities of New Labtec, in each case pursuant to which New
Labtec would receive net cash proceeds of at least $10,000,000. A change of
control occurs if any person or group other than Sun Multimedia Partners, L.P.
(an affiliate of Sun Capital Partners, Inc.), Bain Capital, Inc. and their
respective affiliates and their affiliates become a beneficial owner of more
than 25% of New Labtec, the members of New Labtec's Board of Directors who are
nominated by Sun Multimedia Partners, L.P. or Bain Capital, Inc. represent less
than a majority of all members of the New Labtec Board of Directors or the
stockholders of New Labtec approve a merger or consolidation of New Labtec after
which the stockholders of New Labtec immediately prior to such merger represent
less than 75% of New Labtec or the surviving entity immediately after such
merger. Sun Multimedia Partners, L.P. will own 52% of New Labtec immediately
following the merger and therefore will be able to sell 25% or more of the
shares of New Labtec or approve a merger or consolidation as described above
without the approval of other stockholders. These actions will cause the
acceleration of all amounts due under the Note. In addition, immediately
following the merger, Sun Multimedia Partners, L.P. will own sufficient shares
of New Labtec to elect the entire Board of Directors. There can be no assurance
that Sun Multimedia Partners, L.P. will retain ownership of the New Labtec
shares and therefore continue to control the election of the Board of Directors
of New Labtec.
NONCOMPLETION OF THE MERGER. The completion of the merger depends upon the
approval of the proposals being voted on at the Spacetec special meeting.
Failure to obtain such approval could result in termination by Labtec of the
Merger Agreement. If the Merger Agreement is terminated, Spacetec will have to
make changes in operations and seek financing.
INTENSE COMPETITION IN THE MARKETS FOR NEW LABTEC'S PRODUCTS. The computer
products industry is intensely competitive and rapidly changing. To compete
effectively, we must:
- develop new products that our customers want to buy;
- introduce new enhancements to our existing products;
- price our products at appropriate and competitive levels;
- provide strong marketing support to promote our products; and
- maintain or increase the shelf space retailers allocate to our products.
The competitors of New Labtec vary by product. In the PC speaker business,
New Labtec competitors include Altec Lansing Corporation, Creative Technology,
Ltd. and Microsoft Corporation, which has recently entered this market. In the
PC voice access market, New Labtec's competitors include Andrea Electronics
Corporation and Telex Communications, Inc. In the 3D graphical applications
market, New Labtec's competitor is Logitech International SA. Within each
market, many of these competitors offer similar products to New Labtec and
target the same customers as New Labtec. Further, many of these competitors are
substantially larger and have significantly greater financial, technical and
marketing
14
<PAGE> 24
resources. If we are unable to compete effectively, New Labtec could lose its
share of the market, see an increase in our expenses or be forced to reduce the
price of our products. Any of these developments could have a material adverse
effect on our future financial condition.
POTENTIAL LOSS OF CUSTOMERS BY NEW LABTEC. The customers of Spacetec and
Labtec may not continue their current and historical buying patterns without
regard to the merger. Certain customers may defer purchasing decisions as they
evaluate the proposed merger, New Labtec's future product strategy and current
and anticipated product offerings of competitors. In addition, as commonly
occurs with mergers of technology companies, during the pre-merger and
integration phases, aggressive competitors may undertake initiatives to attract
customers through various incentives. Customers may ultimately decide to
purchase competitors' products in lieu of New Labtec's products. Spacetec and
Labtec have each historically depended upon a limited number of customers for a
significant portion of its business and Ingram Micro, a master distributor of
computer and other products, would have represented 12% of New Labtec's pro
forma revenues in the year ended March 31, 1998 if the merger had occurred prior
to that time. While no one customer is crucial to New Labtec, decisions by a
relatively small number of customers to defer their purchasing decisions or to
purchase products elsewhere could have a material adverse effect on the
business, results of operations and financial condition of New Labtec.
RAPID TECHNOLOGICAL CHANGE IN PERSONAL COMPUTER PRODUCTS. Rapid product
development and technological advances are characteristic of the personal
computer products industry. New Labtec will be subject to a number of technology
risks, including the following:
- obsolescence of existing products;
- identification of new product opportunities; and
- timely completion of the development process and product introductions.
The success of New Labtec will depend on its ability to identify new trends
in customer preferences, develop the new technology required to satisfy those
preferences and incorporate the new technology into its products in a timely and
cost-effective manner. There can be no assurance that New Labtec will succeed in
developing products which incorporate technological advances or address customer
preferences on a timely basis, if at all. Furthermore, even if New Labtec is
able to develop and market products that incorporate technological advances,
there can be no assurance that such products will gain customer acceptance.
RELIANCE ON THIRD-PARTY DISTRIBUTION CHANNELS. New Labtec expects to
increase its product sales through third-party distribution channels, including
original equipment manufacturers, value added resellers, system integrators and
distributors. These third-party distributors incorporate the products of
Spacetec and Labtec into their product offerings which are then sold to the end
user. These third-party distributors are not controlled by either Spacetec or
Labtec and may choose not to include the Spacetec and Labtec components in their
products. Further, the end users may not purchase the products of the
third-party distributors. Any reduction in the use of the products of Spacetec
and Labtec in the products of third-party distributors or in the use of the
products of the third-party distributors would impede the ability of New Labtec
to meet its business objectives.
DEPENDENCE ON PC SPEAKER BUSINESS. The success of New Labtec is to a large
extent dependent on the success of its PC speaker business, which comprised 74%
and 61% of Labtec's revenues in the years ended March 31, 1997 and March 31,
1998, respectively. Labtec sold 2,013,000 units of PC Speakers in the year ended
March 31, 1997, up from 1,800,000 units in the year ended March 31, 1996. In the
year ended March 31, 1998, Labtec sold 1,646,000 units, as compared to 2,013,000
units in the year ended
15
<PAGE> 25
March 31, 1997. To a large extent, the decrease in sales during the year ended
March 31, 1998 was attributable to Labtec's loss of AST Research, its then
largest OEM customer, which represented 22% of its sales during the year ended
March 31, 1997. Labtec's loss of this customer resulted from AST's acquisition
by Samsung, one of Labtec's competitors, who required that AST purchase speakers
from them and resulted from AST's change in the focus of its business from the
consumer to the commercial personal computer market (in which speakers generally
are not purchased).
DEPENDENCE ON RELATIONSHIPS WITH INDEPENDENT SOFTWARE VENDORS FOR 3D
APPLICATIONS. Sales of Spacetec's products are dependent upon independent
software vendors, which incorporate Spacetec's enabling software into their 3D
products/applications. These 3D product/applications are then sold to end users.
The incorporation of Spacetec's products can be time-consuming and expensive.
These vendors are not required to incorporate Spacetec's enabling software into
their products/applications. Sales of Spacetec's hardware products can lag from
6 to 18 months behind the actual incorporation of Spacetec's enabling software
into the vendor's product/application. Any delay in the product development of a
vendor or a decision by the vendor to incorporate the enabling software of a
competitor of Spacetec into its products/applications would impede New Labtec's
ability to meet its business objectives.
DEPENDENCE ON CONTRACT MANUFACTURERS, INCLUDING OVERSEAS
MANUFACTURERS. Spacetec and Labtec rely on, and New Labtec will continue to
rely on, outside vendors, including vendors located in Hong Kong, Taiwan and the
People's Republic of China, to manufacture our products. Some of the risks
associated with third-party manufacturers include:
- potential inability to obtain an adequate supply of required products;
- reduced control over the price and time of delivery;
- reduced control over the reliability and quality of finished products;
- limited financial and other resources of such manufacturers; and
- fluctuations in currency exchange rates.
In addition, the use of a foreign manufacturer, in a country with an
emerging commercial base, will subject New Labtec to additional risks,
including:
- unexpected changes in regulatory requirements and tariffs;
- difficulties in communications; and
- more limited protection of products and intellectual property rights than
in the United States.
Any inability to obtain timely deliveries of products in acceptable
quantities and quality or any other disruption which would cause New Labtec to
seek alternative sources of manufacturing or to manufacture its products itself
could delay New Labtec's ability to ship its products. Any delay in shipment of
products could adversely affect the relationship of New Labtec with its
customers and distributors and could have a material adverse effect on results
of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. New Labtec will have operations
outside the United States and its international sales are subject to a variety
of risks, including:
- difficulties in establishing and managing international distribution
channels;
- difficulties in servicing and supporting products sold outside the United
States;
- difficulties in translating products and related material into foreign
languages;
16
<PAGE> 26
- difficulties in collecting accounts receivables, staffing and managing
personnel and enforcing intellectual property rights;
- fluctuations in the value of foreign currencies and currency exchange
rates, changes in import/export duties and quotas;
- introduction of tariff or non-tariff barriers;
- economic or political changes in international markets; and
- rising tax rates and taxes imposed on international operations that
cannot be credited against New Labtec's United States tax liability.
Any inability to obtain foreign regulatory approvals on a timely basis
could have a material adverse effect on New Labtec's business, financial
condition and results of operations. Any of these factors could have a material
adverse effect on New Labtec's future international sales and, consequently, on
New Labtec's business, financial condition and results of operations.
NEED TO INTEGRATE KEY AND RETAIN EMPLOYEES. The success of New Labtec is
dependent on the retention and integration of the key management, sales,
marketing, engineering and other technical employees of Spacetec and Labtec.
Competition for qualified personnel in the industries in which Spacetec and
Labtec compete is very intense, and competitors may use aggressive tactics to
recruit key employees of Spacetec and Labtec during the period leading up to the
merger and during the integration phase following the merger which could result
in the loss of key employees.
UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS. Labtec and Spacetec
believe that the merger will result in long-term strategic benefits. However,
the realization of these benefits will depend on whether management can
integrate the operations of Spacetec and Labtec in an efficient and effective
manner. Among other things, New Labtec must integrate the respective companies'
products, technologies, management information systems, distribution channels
and key personnel. Furthermore, New Labtec must coordinate the sales, marketing
and research and development efforts of Spacetec and Labtec. The difficulties of
integrating Spacetec and Labtec may be increased by the need to coordinate
organizations with distinct cultures and widely dispersed operations. Spacetec
and a majority of its employees are located in Massachusetts while Labtec and a
majority of its employees are located in Washington State. The effective
integration of the various operations will depend on the ability of New Labtec
to attract and retain key management, sales, marketing and research and
development personnel. The integration of operations following the merger will
require significant attention of management and thus may distract attention from
the day-to-day operations of New Labtec.
FAILURE TO ACHIEVE BENEFICIAL SYNERGIES. Spacetec and Labtec management
have entered into the Merger Agreement with the expectation that the merger will
result in beneficial synergies. See "Proposal 1 Approval of the Issuance of
Spacetec Common Stock." Achieving these anticipated synergies will depend on a
number of factors including, without limitation, the successful integration of
Spacetec's and Labtec's operations and general and industry-specific economic
factors. In particular, since Spacetec's retail marketing efforts have been less
successful than expected, New Labtec intends to utilize Labtec's established
distribution channels to bolster sales of Spacetec's products. Even if Spacetec
and Labtec are able to integrate their distribution channels and other
operations, and economic conditions remain stable, the anticipated synergies
still may not be achieved.
FLUCTUATIONS IN RESULTS OF OPERATIONS. Spacetec's and Labtec's operating
results have varied significantly and New Labtec's operating results may vary
significantly in the future, on a quarterly and
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annual basis, as a result of a variety of factors, many of which are not in the
control of either Spacetec, Labtec or New Labtec. Factors that may affect
quarterly and annual results include:
- market acceptance of Spacetec and Labtec products,
- timing and cancellation of customer orders;
- delays or problems in the introduction or performance of either
Spacetec's or Labtec's technology;
- cost of product upgrades;
- the introduction of new products by us or competitors;
- increases in reserves or inadequate reserves for product obsolescence,
excess inventory, warranty, and seasonal fluctuations of retail sales;
and
- general economic factors.
SUBSTANTIAL TRANSACTION AND INTEGRATION EXPENSES. Spacetec and Labtec
estimate that New Labtec will incur approximately $2 million of costs associated
with the merger, a portion of which will be capitalized as costs of the purchase
and amortized over three years and a portion of which will be charged to
operations upon the completion of the merger. In addition, New Labtec expects to
incur additional significant charges to operations of up to $1.0 million in the
six months ended March 31, 1999, to reflect costs associated with integrating
the two companies.
FUTURE CAPITAL NEEDS. New Labtec may need additional financing in the
future for a number of uses, including:
- expanding research and development programs;
- expanding the marketing and sales organization;
- continued investment in tools, dies and molds for new products; and
- servicing and repaying its existing debt.
New Labtec may not be able to find additional financing on acceptable
terms.
LEVERAGE OF NEW LABTEC. New Labtec will have approximately $38.1 million
in liabilities, with approximately $26.6 million of such liabilities
representing long-term debt. This indebtedness may limit New Labtec's ability to
obtain additional financing. Its ability to make scheduled payments on or to
refinance its obligations will be dependent on its financial and operating
performance, which is in turn subject to prevailing industry and economic
conditions and to financial, business and other factors beyond its control. In
the event New Labtec is unable to meet its obligations with respect to its
existing debt, it may be required to refinance all or a portion of its existing
debt or to obtain additional financing. There can be no assurance, however, that
New Labtec would be able to effect any such refinancing or obtain any such
additional financing.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The success of New
Labtec will depend in part, on defending its patents, obtaining patent
protection in the future, preserving its trade secrets and trademarks and
operating without infringing upon patents and proprietary rights held by others,
both in the
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United States and internationally. New Labtec will be subject to a number of
risks related to intellectual property rights, including the following:
- patents may not be issued from any of the applications that Spacetec or
Labtec have filed or that New Labtec may file in the future;
- claims allowed in any patent application may not be sufficient to protect
New Labtec's technology or technology that New Labtec licenses;
- New Labtec's licenses, patents, trademarks and tradenames may be
challenged, invalidated, canceled, infringed or circumvented and may not
provide any competitive advantage to New Labtec;
- The laws of various foreign countries may not protect New Labtec's
intellectual property rights to the same extent as the laws of the United
States;
- Spacetec's and Labtec's methods for preserving trade secrets, such as
confidentiality agreements with employees, consultants and others, may
not effectively prevent disclosure of such information, and third parties
could independently develop substantially equivalent technology;
- Spacetec and Labtec have been involved in patent litigation in the past
and New Labtec could be involved, as both plaintiff and defendant, in
expensive and time-consuming patent and other intellectual property
litigation in the future; and
- An adverse determination in such litigation could subject New Labtec to
substantial liability, require it to seek licenses from third parties on
unfavorable terms or prevent it from manufacturing or selling certain of
its products.
ANTI-TAKEOVER PROVISIONS. Certain provisions of New Labtec's Articles of
Organization and By-laws may have the effect of delaying, deterring or
preventing a future takeover or change in control of New Labtec. Such provisions
also may render the removal of directors and management more difficult. These
provisions of New Labtec's Restated Articles of Organization and By-laws also
have the effect of discouraging or preventing certain types of transactions
involving an actual or threatened change of control of New Labtec (including
unsolicited takeover attempts), even though such a transaction may offer New
Labtec's stockholders the opportunity to sell their stock at a price above the
prevailing market price. New Labtec's By-laws places certain restrictions on who
may call a special meeting of stockholders. In addition, New Labtec's board of
directors has the authority to issue shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders
of New Labtec. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and serving other corporate purposes, may have the effect of making
it more difficult for a third party to acquire, or may discourage a third party
from attempting to acquire, a majority of the outstanding voting stock of New
Labtec. In addition, New Labtec's Restated Articles of Organization provide that
the board of directors will be divided into three classes of directors serving
staggered three-year terms and all stockholder actions must be effected at a
duly called meeting and not by a consent in writing. The classification
provision and the prohibition on stockholder action by written consent could
have the effect of discouraging a third party from making a tender offer or
otherwise attempting to gain control of New Labtec.
RISKS ASSOCIATED WITH YEAR 2000. The Year 2000 issue is the result of
date-sensitive devices, systems and computer programs that were deployed using
two digits rather than four to define the applicable year.
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Any such technologies may recognize a year containing "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in similar normal
business activities.
Spacetec and Labtec have completed their assessment of their information
systems which support business applications and have completed or are in the
process of modifying or replacing the applicable systems or applications which
are date sensitive. Labtec is in the process of assessing the research and
development, administration and facility management systems which is expected to
be substantially completed by December 31, 1998. Both Spacetec and Labtec are in
the process of assessing the readiness of their key suppliers and business
partners to be Year 2000 compliant. We expect that the completion of these
efforts will be substantially completed during the first quarter of calendar
1999.
Neither Spacetec nor Labtec has a formal contingency plan in place at this
time. A formal contingency plan, if necessary, will be developed during the
first six months of calendar year 1999, after completion of our assessment of
the Year 2000 issue.
All costs associated with modifying software for Year 2000 compliance will
be expensed as incurred. Such costs do not include normal system upgrades and
replacements, as the systems being replaced will be close to their scheduled
replacement dates. To date, costs have not been material and are not expected to
be in the future. However, if the required modifications are not made or are not
completed in a timely manner, there may be a material adverse effect on the
results of operations of New Labtec. In addition, the failure of a significant
supplier to become Year 2000 compliant may have a material adverse effect on the
results of operations of New Labtec.
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INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies to be used at the Spacetec special meeting. This Proxy Statement is also
furnished by Spacetec to Labtec stockholders in connection with the issuance of:
(i) shares of Spacetec common stock; (ii) a note in the principal amount of
$1,065,000, and (iii) the right to receive additional shares of common stock of
New Labtec in connection with the merger.
The information concerning Spacetec has been furnished by Spacetec and the
information set forth herein concerning Labtec has been furnished by Labtec.
SPACETEC IMC CORPORATION SPECIAL MEETING
DATE, TIME AND PLACE OF SPACETEC SPECIAL MEETING
The Spacetec Special meeting will be held at the offices of Testa, Hurwitz
& Thibeault, LLP, High Street Tower, 125 High Street, 20th Floor, Boston,
Massachusetts, 02110, on February 17, 1999 at 9:00 a.m.
PURPOSE
The purpose of the Spacetec special meeting is to vote on the following
Proposals to:
Proposal 1 approve the issuance of shares of Spacetec common stock and New
Labtec common stock to the stockholders of Labtec pursuant to
the merger;
Proposal 2 approve an amendment to the Spacetec Articles to increase the
authorized shares of Spacetec common stock from 20,000,000 to
25,000,000 shares and to change the corporate name of Spacetec
to "Labtec Inc.", both subject to and upon completion of the
merger;
Proposal 3 elect twelve directors, four to each of Class I, II and III, to
serve for one, two and three years, respectively, subject to
and upon completion of the merger;
Proposal 4 approve an amendment to the Articles to provide for a reverse
stock split whereby one share of New Labtec common stock will
be issued in exchange for each three shares of outstanding
common stock of Spacetec, subject to and immediately following
the completion of the merger; and
Proposal 5 authorize Spacetec to adjourn the special meeting to solicit
additional proxies in the event that the number of proxies
sufficient to approve any of the proposals has not been
received by the date of the special meeting.
RECOMMENDATIONS OF SPACETEC BOARD OF DIRECTORS
The Spacetec Board has unanimously approved the Merger Agreement and the
merger and has determined that the merger is fair and in the best interests of
Spacetec and you. After careful consideration, your Board unanimously recommends
a vote in favor of Proposals 1, 2, 3, 4 and 5.
RECORD DATE AND OUTSTANDING SHARES
Only Spacetec stockholders of record at the close of business on January 8,
1999 are entitled to notice of and to vote at the Spacetec special meeting. As
of the record date, there were 376 stockholders of
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record holding an aggregate of 6,846,993 shares of Spacetec common stock. On or
about January 22, 1999, a notice of the special meeting of Spacetec was mailed
to all stockholders of record as of the record date.
VOTE REQUIRED
Under Massachusetts law and the Spacetec Articles, the following vote is
required to approve each proposal:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
PROPOSAL VOTE REQUIRED TO APPROVE
- ----------------------------------------------------------------------------
<S> <C>
1 and 5 affirmative vote of a majority of
the votes cast (in person or by
proxy) at the special meeting
- ----------------------------------------------------------------------------
2 and 4 affirmative vote of the holders of a
majority of the Spacetec common
stock outstanding as of the Spacetec
record date
- ----------------------------------------------------------------------------
3 the four nominees in each class of
directors receiving the highest
number of affirmative votes cast
will be elected
- ----------------------------------------------------------------------------
</TABLE>
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Spacetec common stock entitled to vote at
the Spacetec special meeting shall constitute a quorum. Each stockholder of
record of Spacetec on the record date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders of Spacetec at the Spacetec Special
meeting. The effect of an abstention or broker non-vote in connection with
Proposals 1 and 5 is to lower the number of votes required to approve each such
proposal. The effect of an abstention or broker non-vote in connection with
Proposals 2 and 4 is the same as that of a vote against each proposal.
Dennis Gain, J. Grant Jagelman and certain of their affiliates have each
executed a Voting Agreement and Irrevocable Proxy, in the form attached hereto
as Annex D, with Labtec whereby they have agreed to vote an aggregate of
1,370,331 shares of Spacetec common stock, representing approximately 20% of the
votes entitled to vote at the Spacetec special meeting, in favor of the issuance
of shares of Spacetec common stock and the other Proposals indicated above and
against approval of any proposal made in opposition or competition with the
completion of the merger. In addition, Dennis Gain and J. Grant Jagelman hold
options exercisable as of the record date to purchase an aggregate of 109,000
shares of Spacetec common stock which, if exercised prior to the Spacetec record
date, would approximate 21.4% (including the 1,370,331 shares indicated above)
of the votes entitled to vote at the Spacetec meeting and will be voted as
described above.
PROXIES
Dennis Gain and George Rea, each named as proxies in the proxy are
directors of Spacetec. All shares of Spacetec common stock that are entitled to
vote and are represented at the Spacetec special meeting either in person or
properly executed proxies received prior to or at the Spacetec special meeting
and not duly and timely revoked will be voted at the Spacetec special meeting in
accordance with the instructions indicated on such proxies. If no such
instructions are indicated, these proxies will be voted for the applicable
proposal.
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To the knowledge of your Board, there are no other matters to be presented
at the special meeting. If any other matters are properly presented for
consideration at the Spacetec special meeting (or any adjournments or
postponements thereof) including, among other things, consideration of a motion
to adjourn or postpone the Spacetec special meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies), Dennis Gain and George Rea will have the discretion to vote on such
matters in accordance with their best judgment.
Any proxy may be revoked by the person giving it at any time before it is
voted. Proxies may be revoked by: (1) filing with the Assistant Clerk of
Spacetec at or before the taking of the vote at the special meeting, a written
notice of revocation bearing a later date than the proxy; (2) duly executing a
later-dated proxy relating to the same shares and delivering it to the Assistant
Clerk of Spacetec before the taking of the vote at the special meeting; or (3)
attending the special meeting and voting in person (although attendance at the
special meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent to Spacetec
IMC Corporation at The Boott Mills, 100 Foot of John Street, Lowell,
Massachusetts 01852-1126, Attention: Assistant Clerk, or hand-delivered to the
Assistant Clerk of Spacetec, in each case at or before the taking of the vote at
the Spacetec special meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of Spacetec stockholders will be borne by
Spacetec. In addition, Spacetec may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies may also be solicited
by certain Spacetec directors, officers and regular employees personally or by
telephone, telegram, letter or facsimile. No person will receive additional
compensation in connection with any solicitation other than for reasonable
out-of-pocket expenses. Spacetec has retained MacKenzie Partners, Inc., an
independent proxy solicitation firm, to assist in soliciting proxies at an
estimated fee of $7,500, plus reimbursement of reasonable expenses.
APPRAISAL RIGHTS
Holders of Spacetec common stock are not entitled to appraisal rights under
Massachusetts law in connection with the merger and issuance of shares to Labtec
stockholders.
LABTEC BOARD AND STOCKHOLDER APPROVALS
The Labtec Board unanimously approved the Merger Agreement on October 19,
1998 and recommended it to the Labtec stockholders for approval and adoption.
The Labtec stockholders approved and adopted the Merger Agreement by unanimous
written consent on October 19, 1998.
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PROPOSAL 1 APPROVAL OF THE ISSUANCE OF SPACETEC COMMON STOCK
THE FOLLOWING DISCUSSION SUMMARIZES THE TERMS OF THE PROPOSED MERGER.
DETAILED TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE MERGER
AGREEMENT, ATTACHED TO THIS PROXY STATEMENT AS ANNEX A AND INCORPORATED HEREIN
BY REFERENCE. STATEMENTS MADE IN THIS PROXY STATEMENT WITH RESPECT TO THE TERMS
OF THE MERGER ARE QUALIFIED IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE TO THE
MORE DETAILED INFORMATION SET FORTH IN THE MERGER AGREEMENT AND THE OTHER
ANNEXES HERETO, EACH OF WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS PROXY
STATEMENT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE RISK FACTORS SET
FORTH BELOW. REFERENCE IS MADE TO THE PARTICULAR DISCUSSIONS SET FORTH UNDER
SPACETEC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND LABTEC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IN CONNECTION WITH FORWARD
LOOKING STATEMENTS WHICH APPEAR IN THESE DISCLOSURES, STOCKHOLDERS SHOULD
CAREFULLY REVIEW THE FACTORS SET FORTH IN THIS PROXY STATEMENT UNDER "RISK
FACTORS."
JOINT REASONS FOR THE MERGER
Each of the Spacetec and Labtec Boards has identified potential mutual
benefits of the merger that they believe will contribute to the success of New
Labtec. These potential benefits include principally the following:
- The combination of the technology, research and development and
proprietary products of Spacetec and the sales and marketing,
distribution and research and development expertise of Labtec will result
in a company with a broad array of high-technology, multimedia
input/output peripheral products for the personal computer industry.
Overall business risk will be reduced through product diversity and
greater critical mass.
- The management expertise of New Labtec will be able to capitalize on the
research and development strengths and marketing expertise of the
combined company.
- A public company the size of New Labtec with an estimated $70 million in
revenue may be a more attractive investment than Spacetec and may more
likely be followed by analysts and investors.
- New Labtec's ability to raise capital in the private and public markets
will be enhanced.
SPACETEC'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, we believe
that the following are additional reasons the merger will be beneficial to
Spacetec and you:
- The merger will enhance the potential realization of Spacetec's strategic
objective to market its 3D "6 degrees of freedom" technology and products
to the PC market, including PC games and desktop applications, market
opportunities which Spacetec believes promise future growth.
- Merging with Labtec will enable Spacetec to capitalize on the sales and
marketing and distribution expertise of Labtec and thereby increase the
visibility and accessibility of Spacetec's products.
- Spacetec products will be able to take advantage of the access to
retailers' shelf space that Labtec has enjoyed through its PC speakers
and PC voice access products.
- Spacetec will be able to take advantage of the management expertise at
Labtec and their record of developing and marketing high-technology,
input/output peripheral products to the PC industry.
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<PAGE> 34
- The merger will immediately provide Spacetec with increased research and
development, sales and marketing, manufacturing and distribution
capabilities without the cost of investing in these areas on its own,
resulting in a continual drag on our earnings.
- The revenue of New Labtec will be approximately nine times the revenue of
Spacetec alone, thus decreasing Spacetec's dependence and vulnerability
to the product purchase decision of any one customer.
LABTEC'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, the Labtec
Board believes the merger with Spacetec should be beneficial to Labtec and the
stockholders of Labtec for the following reasons:
- It will enable Labtec to leverage its infrastructure and worldwide
customer relationships by offering additional proprietary
high-technology, multimedia, input/output peripheral products for the
personal computer.
- Spacetec's research and development staff will enable Labtec to
accelerate its product development activities.
- The merger will provide Labtec with immediate access to additional
financial resources to accelerate its growth, as well as access to the
public markets for further capital if needed.
- The merger will also result in a public stock that can be used as
currency to facilitate additional acquisitions as Labtec continues to
pursue its strategic plan of offering a growing assortment of
high-technology, multimedia, input/output peripheral products based on
proprietary technology through multiple channels of distribution.
BACKGROUND OF THE MERGER
In an unsolicited letter dated January 29, 1998 to Mr. Gain, then Chairman,
President and Chief Executive Officer of Spacetec, Paul L. Schaye, Vice
President of ValuFinder Group, Inc., a New York firm that identifies and
facilitates the introduction of potential acquisition and/or merger parties,
raised the possibility of an acquisition or other similar arrangement of
Spacetec. After discussing the contents of the letter with other Spacetec Board
members, Mr. Gain spoke with Mr. Schaye in the beginning of March, during which
Mr. Schaye indicated that he was representing Sun Capital Partners, Inc., an
affiliate of Sun Multimedia Partners, L.P., the majority stockholder of Labtec,
and briefly described Sun Capital and Labtec. Mr. Gain and Mr. Schaye agreed
that Spacetec and Labtec would exchange confidential basic financial information
and product literature and would explore the possibilities of a strategic
relationship.
In March, 1998, Mr. Gain and Marc Leder, a managing director of Sun
Capital, discussed the materials that had been exchanged, the business of
Spacetec and Labtec, and possible synergies and benefits of a merger of Spacetec
and Labtec.
On April 3, 1998, Mr. Gain advised Mr. Jagelman, Mr. Rea and Mr. Sullivan,
all directors of Spacetec, of his discussion with Mr. Leder. At a regularly
scheduled Spacetec Board meeting on April 6, 1998, Mr. Gain related his
discussions with Mr. Schaye and Mr. Leder to the Spacetec Board. After much
discussion, the Board requested that Mr. Gain and Mr. Rea meet with Mr. Leder
and other business advisors, to discuss a potential combination of Spacetec and
Labtec.
On April 9, 1998, Messrs. Gain and Rea met with Mr. Leder and Rodger R.
Krouse, also a managing director of Sun Capital, to discuss the business of
Spacetec and Labtec and the synergies and benefits of a combination of or
strategic relationship between Spacetec and Labtec. The parties agreed that a
merger of
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<PAGE> 35
the two companies appeared to have benefits for both companies and the
stockholders of each. The parties also agreed that, subject to the approval of
the Spacetec Board, meetings between the two companies would be arranged to
pursue discussions regarding a strategic relationship.
On May 4, 1998, at a regularly scheduled meeting, the Spacetec Board
authorized Messrs. Gain, Jagelman, Rea and Sullivan to proceed with further
discussions. Shortly thereafter, Mr. Gain discussed the possibility of a merger
of Spacetec and Labtec with Rex Green of Advest, Inc., a market-maker in the
Spacetec common stock and other business advisors.
Over the next several weeks, Spacetec and Labtec began to explore the
possibility of a merger of the two companies. On May 6 and 7, 1998, Messrs.
Gain, Jagelman, Rea, Sullivan, Green and Raymond Boelig, Spacetec's then
president and Chief Operating Officer, visited the corporate offices of Labtec
in Vancouver, Washington at which the management of Labtec made a series of
presentations regarding Labtec and Mr. Boelig made a presentation regarding
Spacetec. Representatives of NationsBank Montgomery Securities and Furman Selz
were also present.
On June 9, 1998 Messrs. Gain and Sullivan met with Messrs. Leder and Krouse
to discuss the financial structure of a merger of Spacetec and Labtec. At a
telephonic meeting of the Spacetec Board on June 19, 1998, Messrs. Gain,
Jagelman, Rea and Sullivan reviewed the status of the discussions with Labtec,
including the structure, with the Spacetec Board. The Spacetec Board authorized
Messrs. Gain, Jagelman, Rea, and Sullivan to proceed with further discussions
and an in-depth analysis of the Labtec business. At a special meeting of the
Spacetec Board via teleconference on June 25, 1998, the Spacetec Board
reaffirmed its decision to proceed with discussions with Labtec.
Discussions between Spacetec and Labtec continued through July 10, 1998, at
which time Spacetec reported to Sun Capital that its industrial business would
record a loss of approximately $1.0 million in the quarter ended June 30, 1998.
Sun Capital expressed its concern with the continuing losses of the industrial
business and decided to delay consideration of a merger of Spacetec and Labtec.
All discussions between Spacetec and Labtec were suspended.
At or near the time that discussions between Spacetec and Labtec
terminated, a third-party contacted Mr. Gain regarding its interest in expanding
its business. At a regularly scheduled meeting of the Spacetec Board on July 16,
1998, Mr. Gain related his conversation to the Spacetec Board. The Spacetec
Board directed Messrs. Gain, Jagelman, Rea, and Sullivan to pursue discussions
with the third party regarding the sale of the industrial business only and to
initiate contact with Mr. Leder regarding the possibility of a merger of
Spacetec (excluding the industrial business) and Labtec. Mr. Leder expressed an
interest in pursuing a merger of Spacetec and Labtec in connection with a prior
sale by Spacetec of its industrial business. Over the next several weeks,
Spacetec continued discussions with the third party regarding the sale of its
industrial business.
On or about August 28, 1998, Mr. Rea, a director of Spacetec and then
recently-named Acting Chief Executive Officer of Spacetec, retained the services
of Advest to act as Spacetec's financial advisor in connection with a potential
merger with Labtec and other business advisors to assist Spacetec in its due
diligence review of Labtec.
On September 2, 1998, at a regularly scheduled meeting of the Spacetec
Board, Messrs. Jagelman and Sullivan reviewed the status of the negotiations
with the third party and Labtec. In addition, the Spacetec Board discussed the
status of the due diligence review of Labtec.
Over the next several weeks, Spacetec, its financial advisor and Labtec
continued to have more extended discussions regarding their businesses. In
September 1998, Labtec provided Spacetec with a draft of the Merger Agreement
and over the next several weeks discussions between counsel to Spacetec and
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<PAGE> 36
counsel to Labtec regarding the proposed structure and other principal terms of
the Merger Agreement occurred.
On September 18, 1998, Spacetec reviewed the preliminary results of their
due diligence review with their business advisors. In addition, Mr. Rea informed
Mr. Leder that the projected cash and receivables of Spacetec for the quarter
ending September 30, 1998 would be approximately $1.0 million less than
originally projected. As a result, further discussions occurred between Spacetec
and Labtec.
At a regularly scheduled meeting of the Spacetec Board on September 25,
1998, the Spacetec Board discussed the status of negotiations and due diligence
review. In addition, the Spacetec Board discussed the terms of the Merger
Agreement and Plan of Merger, including the structure of the merger, the
termination rights relating to the Merger Agreement, and the conditions upon
which any termination fee would be payable.
On October 9, 1998, all discussions with the third party regarding the sale
of the industrial business were terminated. On October 12 and 13, Spacetec had
preliminary discussions with the broker who represented the third-party about
possible interest of another third-party, but no further discussions occurred
and, as discussed below, discussions with Labtec resumed on October 15, 1998.
Other than the discussions with the third-party or the preliminary discussions
with the broker previously discussed, since discussion with Labtec began,
Spacetec did not contact or receive any expressions of interest from other
potential purchasers or receive any alternative transactions to review.
Over the course of discussions beginning in July 1998, each of Spacetec,
with the advice of Advest and legal counsel, and Labtec had conducted financial
and due diligence of the other and of similar companies in an effort to agree on
valuation. Prior to the termination of discussions on October 9, 1998, the
parties were in the range of a 1/3 Spacetec, 2/3 Labtec ownership ratio, but had
not yet agreed on a final exchange ratio. In an effort to bridge the difference
in valuation, the parties discussed the possibility of a note to Labtec
stockholders for the difference in valuation, providing a fixed return to the
Labtec stockholders, but keeping long-term capital appreciation potential for
Spacetec stockholders.
On October 15, 1998, Mr. Leder spoke with Mr. Sullivan and expressed an
interest in proceeding with a merger of Spacetec, including the industrial
business, and Labtec. On October 17, 1998, Mr. Leder faxed Mr. Sullivan proposed
financial terms of the merger, including the issuance of the contingent shares
in connection with the potential valuation or sale of Spacetec's industrial
business with no minimum floor for ownership by Spacetec stockholders. Mr.
Sullivan delivered this proposal to Messrs. Gain, Jagelman, Rea, Green and
Lloyd, a director of Spacetec. Mr. Sullivan also delivered the proposal to John
Hession, a partner at Testa, Hurwitz & Thibeault, LLP, counsel to Spacetec. On
October 17 and October 18, Mr. Sullivan discussed the terms of the proposal with
various Spacetec Board members, Mr. Green and Mr. Hession. On October 18, 1998,
at a special meeting of the Spacetec Board via teleconference which included Mr.
Hession, the Spacetec Board discussed the valuation of the industrial business,
the proposed issuance of the contingent shares, the conditions under which the
Merger Agreement could be terminated, and conditions upon which any termination
fee would be payable and the amount of the fee. The Spacetec Board authorized
Mr. Sullivan to continue discussions with Mr. Leder regarding these issues.
Negotiations regarding the valuation of the industrial business, the
issuance of contingent shares, a minimum floor for ownership by Spacetec
stockholders following the issuance of such shares and the conditions of
termination of the Merger Agreement continued on October 19, 1998. During a
special telephonic meeting of the Spacetec Board on that date which included
Messrs. Hession and Green, Mr. Sullivan related the status of his discussions
with Mr. Leder.
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Negotiations regarding the valuation of the industrial business, the
issuance of the contingent shares and the valuation of the industrial business
continued through the evening of October 20, 1998.
On the morning of October 21, 1998, at a special telephonic meeting of the
Spacetec Board which included Mr. Hession and Mr. Green, Mr. Sullivan reported
the status of his discussions with Mr. Leder. Mr. Hession reviewed the fiduciary
duties of the Spacetec Board in considering the merger and the proposed
definitive terms of the Merger Agreement, which had been delivered to all
Spacetec Board members. In addition, Advest made a presentation to the Spacetec
Board regarding its detailed financial analysis and pro forma and other
information with respect to the companies and delivered its written and oral
opinion to the effect that, as of October 20, 1998, the merger and the Merger
Agreement were fair to Spacetec stockholders. The Spacetec Board authorized Mr.
Rea to clarify certain points regarding the valuation of the industrial business
with Mr. Leder. The Spacetec Board approved the Merger Agreement, subject to Mr.
Rea's satisfaction regarding the valuation of the industrial business. Mr. Rea
spoke with Mr. Leder and received satisfactory clarification regarding the
valuation of the industrial business, after which, Spacetec and Labtec executed
the Merger Agreement. In addition, Mr. Gain, Mr. Jagelman and certain of their
affiliates each executed a Voting Agreement and Irrevocable Proxy.
In the weeks following the execution of the Agreement, Labtec discussed the
proposed merger and the terms of the Merger Agreement with Bankers Trust
Company, its secured creditor. Under a credit agreement among Labtec, various
lending institutions, and Bankers Trust Company, as agent, the merger required
the consent of Bankers Trust. Following these discussions with Bankers Trust and
discussions with financial advisors, Spacetec and Labtec agreed to amend and
restate the Agreement and Plan of Merger to provide that, among other things,
the assets of Spacetec would be contributed to a newly-formed, wholly organized
subsidiary immediately after the completion of the merger and that all holders
of Labtec common stock on the date of the completion of the merger would receive
a pro-rata portion of the Note and shares of Spacetec common stock, if any,
issued pursuant to a valuation or sale of the industrial business. The Amended
and Restated Agreement and Plan of Merger was executed by both parties on
November 13, 1998.
OPINION OF ADVEST, FINANCIAL ADVISOR TO SPACETEC
Spacetec retained Advest to deliver a financial opinion letter in
connection with the merger. Advest was selected by Spacetec's board to provide
an opinion based on Advest's qualifications, expertise and reputation, as well
as Advest's investment banking relationship and familiarity with Spacetec.
At the meeting of Spacetec's Board on October 21, 1998, Advest rendered its
opinion both in written form and orally, that, as of October 20, 1998, based
upon and subject to the various considerations set forth in the Advest opinion,
should the stockholders of Spacetec receive at least the minimum percentage
(21%) of the outstanding shares of New Labtec, such consideration would be fair,
from a financial point of view, to the Spacetec stockholders.
The full text of the written Advest opinion dated October 20, 1998, which
sets forth, among other things, assumptions made, procedures followed, matters
considered, and limitations on the scope of the review undertaken by Advest in
rendering the Advest opinion, is attached as Annex B to this Proxy Statement.
Spacetec stockholders are urged to read the Advest opinion carefully and in its
entirety. Advest was not asked to consider, and its opinion does not address,
the relative merits of the merger as compared to any alternative business
strategy that might exist for Spacetec or the effect of any other business
combination in which Spacetec might engage. The Advest opinion addresses only
the fairness of the financial terms from a financial point of view to the
Spacetec stockholders as of the date of the Advest opinion, and does not
constitute a recommendation to any stockholder of Spacetec as to how such
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stockholder should vote at the Spacetec stockholder meeting. The summary of the
Advest opinion set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
In connection with this opinion, Advest, among other matters, reviewed and
analyzed publicly available information as of the date of this letter,
including, but not limited to: (1) annual and quarterly reports on SEC Form 10-K
and 10-Q of Spacetec for the three years ended March 31, 1998 and interim period
ended June 30, 1998, as well as audited annual and unaudited interim financial
statements of Labtec for the same time periods; (2) business and financial
information regarding companies similar to New Labtec, including the pricing of
these comparable companies' publicly traded securities; (3) the pricing and
financial terms of business combinations recently effected involving companies
similar to New Labtec; and (4) such other publicly available information,
financial studies, analyses, investigations and market data as deemed relevant.
In addition, Advest also reviewed, analyzed and discussed other information
furnished by Spacetec and Labtec and their advisors, including: (1) the draft
Agreement and Plan of Merger dated October 20, 1998; (2) certain internal and
pro-forma financial statements, projections and other unaudited financial and
operating data concerning Spacetec and Labtec; and (3) presentation and
marketing materials from Spacetec and Labtec.
Advest's opinion states that it is subject to the following contingent and
limiting conditions: (1) information, estimates, and opinions supporting
Advest's opinion were obtained from sources which Advest did not verify; (2)
Spacetec and Labtec and their respective representatives have warranted to
Advest that the information supplied to Advest was complete, accurate and not
misleading to the best of their knowledge and that this opinion will be used
only in compliance with all applicable laws and regulations; (3) Advest's
opinion applies to this situation only, and may not be used out of the context
presented therein; (4) Advest did not prepare or obtain any independent
valuation or appraisal of any of the assets of Spacetec or Labtec, nor did
Advest conduct a complete physical inspection of properties and facilities of
Spacetec or Labtec; and (5) Advest's opinion is necessarily based upon
conditions as they existed and could be evaluated as of the date of the opinion
letter.
The following is a summary of the analysis performed by Advest in
preparation of the Advest opinion dated October 20, 1998, and reviewed with the
Spacetec Board at a meeting held on October 21, 1998.
Certain Key Assumptions
In arriving at the opinion that the financial terms of the merger were
fair, from a financial point of view, Advest considered both quantitative and
qualitative factors. As part of this consideration, Advest compared the
estimated per share value of New Labtec's common stock, under several scenarios
based on specific terms of the merger, to the price per share of Spacetec common
stock as of the close of the stock markets on October 19, 1998, or $1.50 per
share. Since the merger clearly contemplates the valuation and potential sale of
the industrial business, it was necessary for Advest to assess the value of New
Labtec without the industrial business. Advest therefore analyzed the value of
New Labtec based on a sale of the industrial business for $6 million cash plus a
future royalty stream, as well as a worst case scenario of divesting the
industrial business for no proceeds, no future royalty stream and the resulting
increases in combined company stock issued to Labtec shareholders as set forth
in the Merger Agreement.
Comparison to Similar Public Companies
Advest compared certain financial information of Spacetec and Labtec to
financial information of certain companies involved in developing and
manufacturing PC peripheral devices, specifically audio input and output, as
well as gaming devices. Advest identified nine companies that are sufficiently
similar to New Labtec to serve as a base for determining a reasonable value. The
companies considered were:
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Andrea Electronics Corporation, Cybex Computer Products Corporation, Creative
Technology, Ltd., Koss Corporation, Logitech International SA, Recoton
Corporation, Voice Control Systems, Inc., Aureal Semiconductor, Inc. and
Thrustmaster, Inc. A comparison of such financial information included, but was
not limited to, market capitalization, stock price as a multiple of earnings per
share, total enterprise value ("TEV," calculated as market value of equity plus
total debt less cash and cash equivalents) as a multiple of latest twelve month
revenues and earnings before interest, taxes, depreciation and amortization
("EBITDA"), latest twelve month operating margin, and estimated earnings per
share growth rates. Based on these analyses, Advest determined that the
appropriate multiples of TEV/Sales and TEV/EBITDA to apply to the pro-forma last
twelve month results of New Labtec were 1.5 and 13.0, respectively. After
applying these multiples, adjustments were applied to the results in order to
derive an estimated price per share of the common stock of New Labtec. This
analysis was provided to the Spacetec Board and was one of the many factors
considered by Advest in rendering its opinion. No conclusions can be
independently drawn from such analysis.
Recent Transactions Involving Similar Companies
Advest examined the pricing and financial terms of recent mergers and
acquisitions of PC peripheral product companies. The purchase price of these
transactions was used to determine the targets' TEV as a multiple of their
latest twelve month revenues and EBITDA, which in turn were applied to New
Labtec's pro-forma latest twelve month revenues and EBITDA in order to determine
an assessment of value per share of New Labtec. After analyzing the comparable
target companies' business descriptions, relative latest twelve month revenues
and operating margins, among other things, selected transaction multiples were
1.5x latest twelve month sales, 24.0x latest twelve month EBITDA. Since these
are multiples derived from transactions where the acquirer acquired control of
the target companies, Advest adjusted these multiples downward to account for
inherent control premiums included in the purchase prices of these selected
transactions. Resultant selected multiples applied to New Labtec pro-forma
latest twelve month revenues and EBITDA were 1.25 and 18.5, respectively. After
applying these multiples, adjustments were applied to the results in order to
derive an estimated price per share of the common stock of New Labtec. This
analysis was provided to the Spacetec Board and was one of the many factors
considered by Advest in rendering its opinion. No conclusions can be
independently drawn from such analysis.
Discounting Expected Future Cash Flows
Advest analyzed projected net operating profit after taxes ("NOPAT") for
New Labtec based on projected future sales and earnings provided by Spacetec's
and Labtec's respective managements. From NOPAT, Advest constructed future free
cash flows by adding back depreciation and amortization, while subtracting
necessary capital expenditures and investments in non-cash working capital.
Estimated free cash flows were discounted using a discount rate that reflects
the weighted average cost of capital for New Labtec. Finally, Advest estimated a
residual value of cash flows that are projected to occur after the discrete
projection period by assuming free cash flow growth into perpetuity at a normal
rate just above inflation. Adding the net present value of the discrete period
cash flows to the net present value of the projected residual cash flows results
in an estimate of TEV. Adjustments are made to TEV in order to derive an
estimate of New Labtec common stock value per share. This analysis was provided
to the Spacetec Board and was one of the many factors considered by Advest in
rendering its opinion. No conclusions can be independently drawn from such
analysis.
In connection with the review of the merger by the Spacetec Board, Advest
performed a variety of financial and comparative analyses for purposes of its
opinion. While the foregoing summary describes all material analyses and factors
reviewed by Advest with the Spacetec Board, it does not present a complete
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description of the presentations by Advest to the Spacetec Board or the analyses
performed by Advest in arriving at its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Advest believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create a misleading view of the process underlying the Advest opinion. In
addition, Advest may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the range of valuation resulting from any particular
analysis described above should not be taken to be Advest's view of the actual
value of Spacetec, Labtec, or New Labtec. In performing its analyses, Advest
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Spacetec or Labtec. The analyses performed by Advest are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. In addition, analyses
relating to the value of businesses or assets do not purport to be appraisals or
to necessarily reflect the price at which businesses or assets may actually be
sold. The analyses performed were prepared solely as part of Advest's analysis
of the fairness of the financial terms of the merger, taken as a whole from a
financial point of view, to Spacetec and were provided to the Spacetec Board in
connection with the delivery of the Advest opinion.
Advest is a nationally recognized regional investment banking and advisory
firm. Advest, as part of its investment banking business, is continuously
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of Advest's
trading and brokerage activities, Advest or its affiliates may at any time hold
long or short positions, may trade or otherwise effect transactions, for its own
account or for the account of customers, in debt or equity of Spacetec.
Pursuant to a letter of agreement between Spacetec and Advest dated August
28, 1998, Spacetec has agreed to pay Advest a customary fee in connection with
the rendering of the Advest opinion, payable upon delivery of the Advest
opinion. Spacetec has agreed to indemnify Advest against certain liabilities,
including certain liabilities under federal securities laws.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER
THE FOLLOWING SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO
BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OF
SPACETEC COMMON STOCK AND LABTEC COMMON STOCK. ACCORDINGLY, HOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The following discussion summarizes certain United States federal income
tax considerations relevant to the merger that are applicable to Spacetec,
Labtec and to holders of Labtec common stock holding Labtec common stock as a
capital asset. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "IRS Code"), existing Treasury
Regulations issued under the IRS Code and current administrative rulings and
court decisions, all of which are subject to change. Any such changes, which may
or may not be retroactive, could alter the tax consequences as described herein.
In addition, the federal income tax laws relating to the treatment and reporting
of transactions involving contingent future consideration are complex and
uncertain. Accordingly, there can be no assurance that the Internal Revenue
Service or the courts will not attempt to apply the tax law in a manner
different from that discussed below.
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Holders of Spacetec common stock should not recognize any gain or loss for
United States federal income tax purposes as a result of the merger.
Holders of Labtec common stock should be aware that this discussion does
not deal with all United States federal income tax considerations that may be
relevant to a particular stockholder in light of their specific circumstances,
such as stockholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the IRS Code, who are foreign persons or
entities or who are financial institutions or insurance companies. Furthermore,
this discussion does not address the tax consequences to stockholders who do not
hold their shares of Labtec common stock as capital assets, who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions, who hold shares of Labtec common stock as part of an
integrated investment (including a "straddle") comprised of shares of Labtec
common stock and one or more other positions, or who may hold shares of Labtec
common stock subject to the constructive sale provisions of Section 1259 of the
IRS Code. In addition, the following discussion does not address the tax
consequences of the merger under foreign, state or local tax laws, the tax
consequences of transactions effectuated prior or subsequent to, or concurrently
with, the merger (whether or not any such transactions are undertaken in
connection with the merger), including without limitation any transaction in
which shares of Labtec common stock are acquired or shares of Spacetec common
stock are disposed of, or the tax consequences to holders of options, warrants
or similar rights to acquire Labtec common stock, including the assumption by
Spacetec of outstanding options, warrants and subscriptions to acquire Labtec
common stock. The discussion assumes that Labtec is not (i) a "collapsible
corporation" within the meaning of Section 341 of the IRS Code or (ii) a
"qualified small business" within the meaning of Section 1202 of the IRS Code.
Taxation Generally
The parties to the merger intend that the merger will be treated as a
reorganization under Section 368(a) of the IRS Code and have agreed to use their
best efforts to insure that the merger is in fact treated as a reorganization.
However, it is not a condition to Labtec's or Spacetec's obligations to close
the merger that the merger be treated as a reorganization. If the merger is
treated as a reorganization, the merger should generally result in the following
federal income tax consequences:
Amount of Gain
Pursuant to the merger, each holder of Labtec common stock at the time of
the merger will receive, in exchange for shares of Labtec common stock, shares
of Spacetec common stock, a portion of the Note and a right to receive a portion
of the contingent shares. In addition, each holder of Labtec common stock will
receive cash in lieu of fractional shares. Each holder of Labtec common stock
will recognize gain, if any, pursuant to the merger (not including for this
purpose cash received in lieu of fractional shares of Spacetec common stock)
limited to an amount equal to the lesser of the fair market value of the portion
of the Note received or the gain realized (as calculated below) by such
stockholder as a result of the merger. As discussed more fully below, interest
paid and original issue discount, if any, accrued on the Note and a portion of
the contingent shares received, if any, will be taxed as interest at ordinary
income tax rates.
The amount of gain realized by a holder of Labtec common stock as a result
of the merger will be equal to the sum of the fair market value (in United
States dollars) of shares of Spacetec common stock (including contingent shares)
and the amount of the Note received (excluding any cash received in lieu of a
fractional share of Spacetec common stock) received by such stockholder less
such stockholder's adjusted tax basis in the Labtec common stock exchanged
therefor. No stockholder will be entitled to recognize any loss as a result of
the merger. Any recognized gain will be treated as capital gain unless the
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receipt of the portion of the Note has the effect of the distribution of a
dividend, in which case the gain would be treated as a dividend to the extent of
the stockholder's ratable share of current and accumulated earnings and profits
after giving effect to the merger.
Character of Gain
Under current law, net capital gain (the excess of net long-term capital
gain over short-term capital loss) recognized by individuals, estates and trusts
is taxed at a maximum federal tax rate of 20%. Capital gain will be long-term
capital gain if such gain is attributable to dispositions of capital assets held
for more than one year as of the date of the disposition. Short-term capital
gains (i.e., gains on dispositions of capital assets held for not more than one
year) of individuals, estates and trusts are taxed at ordinary income tax rates,
currently at a maximum tax rate of 39.6%. Capital gains of corporations are
taxed at the federal income tax rates applicable to corporate ordinary income,
currently a maximum of 35%. Ordinary dividend income, by contrast, is generally
taxable to individuals at a maximum tax rate of 39.6% and to corporations at a
maximum federal tax rate of 35%. Each of the foregoing tax rates is subject to
change, and any such change could be applied retroactively to include the
transactions consummated pursuant to the merger. Holders of Labtec common stock
that are corporations should be aware that dividends may be eligible for a
dividends received deduction and may be subject to the rules for extraordinary
dividends set forth in the IRS Code. These rules are not addressed in this
summary.
Characterization of the gain recognized in the merger as capital gain or as
ordinary dividend income depends upon whether and to what extent that exchange
reduces a stockholder's deemed percentage stock ownership of Spacetec. For
purposes of that determination, a holder of Labtec common stock will be treated
as if he or she first exchanged all of his or her shares of Labtec common stock
solely for Spacetec common stock and then Spacetec immediately redeemed (the
"deemed redemption") a portion of such Spacetec common stock in exchange for the
portion of the Note the stockholder actually received. The gain recognized in
that exchange will be treated as capital gain if the deemed redemption is (a)
"not essentially equivalent to a dividend" or (b) "substantially
disproportionate" with respect to the stockholder.
Whether the deemed redemption is "not essentially equivalent to a dividend"
with respect to a holder of Labtec common stock will depend upon the
stockholder's particular circumstances. At a minimum, however, in order for the
deemed redemption to be "not essentially equivalent to a dividend," the deemed
redemption must result in a "meaningful reduction" in the stockholder's deemed
percentage stock ownership of Spacetec. In general, that determination requires
a comparison of (a) the percentage of the outstanding common stock of Spacetec
the stockholder is deemed actually and constructively to have owned immediately
before the deemed redemption and (b) the percentage of the outstanding common
stock of Spacetec actually and constructively owned by the stockholder
immediately after the deemed redemption. The deemed redemption will be
"substantially disproportionate" with respect to a stockholder if the percentage
described in (b) above is less than 80 percent of the percentage described in
(a) above and certain other conditions are satisfied.
In applying the foregoing tests, under certain attribution rules, a
stockholder is deemed to own stock owned (and, in some cases, constructively
owned) by certain family members, by certain estates and trusts of which the
stockholder is a beneficiary, and by certain affiliated entities, as well as
stock subject to an option actually or constructively owned by the stockholder
or such other persons.
If neither the "substantially disproportionate" test nor the "not
essentially equivalent to a dividend" test is satisfied with respect to a holder
of Labtec common stock, some or all of the gain recognized by such stockholder
would likely be treated as ordinary dividend income. Each holder of Labtec
common stock should consult his or her tax advisor concerning the application of
the tests described above and the
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character of any gain realized by the holder of Labtec common stock as a result
of the merger. Each holder of Labtec common stock should be aware that changes
in the fair market value of shares of Spacetec common stock before the
completion of the merger may affect the application of these tests. Until any
such adjustments and fair market values are determined, the outcome of the
application of these rules to a holder of Labtec common stock may be unknown.
Tax Basis
A holder of Labtec common stock will have an aggregate tax basis in the
shares of Spacetec common stock received (including the maximum number of
contingent shares that may be received by such holder of Labtec common stock and
including any fractional shares of Spacetec common stock treated as received)
pursuant to the merger equal to the tax basis immediately prior to the
completion of the merger of such holder in the Labtec common stock exchanged
therefor, increased by the amount of any gain recognized (including any
recognized gain treated as ordinary dividend income, but excluding gain with
respect to any fractional share of Spacetec common stock) pursuant to the merger
and decreased by the portion of the Note received.
Holding Period
The holding period of shares of Spacetec common stock received (or treated
as received with respect to fractional shares) by a holder of Labtec common
stock will include the holding period of such holder in the Labtec common stock
exchanged therefor except with respect to contingent shares received that are
treated as interest as described below.
Cash Received in Lieu of Fractional Shares
No fractional shares of Spacetec common stock will be issued pursuant to
the merger. A holder of Labtec common stock who, pursuant to the merger,
receives cash in lieu of a fractional share of Spacetec common stock will be
treated as having actually received such fractional share of Spacetec common
stock pursuant to the merger and as then having received such cash in a
redemption of such fractional share. Under Section 302 of the IRS Code, provided
that such deemed redemption is "substantially disproportionate" or is "not
essentially equivalent to a dividend" with respect to such stockholder, after
giving effect to the applicable constructive ownership rules, the holder of
Labtec common stock will recognize capital gain or loss on such deemed
redemption equal to the difference between the amount of cash received and the
holder's adjusted tax basis in the fractional share of Spacetec common stock
(determined as described above) rather than ordinary dividend income. Such
capital gain or loss would be long-term capital gain or loss if the holding
period (determined as described above) for the fractional share of Spacetec
common stock deemed received and then redeemed is more than one year.
Receipt of Contingent Shares
Any contingent shares received by a holder of Labtec common stock will be
bifurcated into an interest component and a principal component under the
imputed interest rules. The fair market value of contingent shares that are
treated as payments of principal under these rules will be determined by
discounting the payment back from the payment date to the completion of the
merger using a rate prescribed by the IRS Code. The remainder of the fair market
value of the contingent shares should be treated as interest. No gain or loss
should generally be recognized by holders of Labtec common stock upon receipt of
contingent shares that are treated as principal payments. The fair market value
of contingent shares treated as interest should be includable in the taxable
income of the holders of Labtec
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common stock as ordinary income in accordance with their respective methods of
accounting upon receipt of the contingent shares.
When, if at all, a holder of Labtec common stock receives contingent
shares, such holder will redetermine the adjusted tax basis of the shares of
Spacetec common stock received in the merger. It is not clear how the holder's
adjusted tax basis will be apportioned between shares of Spacetec common stock
originally issued in the merger and the contingent shares. Further, the
aggregate amount of any contingent shares treated as ordinary interest income as
described above will also be added to, and apportioned among, the contingent
shares received. Holders of Labtec common stock should be aware that if they
choose to dispose of contingent shares in order to obtain proceeds to satisfy
tax payment obligations arising on the receipt of interest income, they will
recognize additional gain or loss on that disposition.
The holding period for any contingent shares will generally consist of two
periods for each contingent share. That portion of each contingent share
representing interest will generally have a holding period that begins on the
date that the contingent shares are received. The non-interest component of the
contingent shares should have a holding period that includes the holding period
of the holder's shares of Labtec common stock surrendered in the merger.
Note
If the portion of the Note treated as principal received by a holder
pursuant to the merger is not treated as the receipt of a dividend under the
rules described above, the holder may be eligible to report his or her
recognized gain under the installment method if the stockholder can demonstrate
that the Note will not be readily tradeable in an established securities market.
If a holder is eligible to report his or her recognized gain under the
installation method and does not elect out, then, a portion of the principal of
each Note payment should generally be taxable as gain in the year of receipt.
The amount of gain will be calculated by multiplying the principal amount of any
Note payment received in the year by a "gross profit ratio" which is the ratio
that the gross profit realized on the merger bears to the merger consideration.
Holders are urged to contact their tax advisors as to the application of the
installment method and the dividend equivalence of the Note payment. In
particular, holders should note that the installment method is subject to
several limitations including, in certain cases, an interest charge on tax
liability deferred under the installment method. Holders should also note that,
under the original issue discount provisions of the IRS Code, certain payments
made with respect to the Note, including amounts designated as interest, should
be taxable as ordinary income at the time and in the manner provided by the
original discount provisions.
Under certain circumstances, interest will not be paid currently on the
Note but will be paid in the form of promissory notes. Under the "original issue
discount" rules, a holder, upon receipt of a promissory note, will generally be
required (subject to a de minimis exception) to recognize ordinary interest
income in the form of original issue discount, even though the holder will not
receive a corresponding cash payment. Any accrued original issue discount will
increase the holder's basis in the Note. A holder will not recognize additional
income upon receiving an actual cash payment corresponding to any previously
accrued original issue discount.
Tax Attributes
Spacetec and Labtec have substantial accumulated net operating loss
("NOL"), tax credit and capital loss carryovers ("Tax Carryovers") which are
available to reduce federal income tax liabilities in future taxable years.
These carryovers were accumulated in years which have not yet been reviewed by
the Internal Revenue Service, and there is no assurance that the Internal
Revenue Service will not successfully
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contend upon audit that these carryovers should be reduced. In addition,
Sections 382 and 383 of the IRS Code impose limitations on the use of Tax
Carryovers following an "ownership change" as defined in Section 382 of the IRS
Code.
Where there has been an ownership change, an annual limitation is imposed
on the amount of taxable income in subsequent years which can be offset by Tax
Carryovers accumulated prior to the ownership change. Any portion of the annual
limitation not offset in one year is added to the annual limitation for the next
year. The annual limitation is generally an amount equal to the value of the
corporation immediately prior to the ownership change multiplied by an interest
rate factor in effect for the month in which the ownership change occurred. For
this purpose, the value of the corporation generally means the value of the
stock of the corporation reduced by certain capital contributions and
nonbusiness assets. The reduction for capital contributions is limited to those
contributions made as part of a plan a principal purpose of which is to increase
the annual limitation under IRS Code Section 382 following a change of
ownership. However, the IRS Code creates a presumption that, except to the
extent provided in regulations, any capital contribution received within two
years prior to the ownership change was received pursuant to such a plan. The
value of the corporation must also be reduced by the fair market value of any
nonbusiness assets if the loss corporation has substantial nonbusiness assets
immediately after the ownership change. Regulations have not been issued with
respect to the reduction for capital contributions, the definition of
nonbusiness assets or other aspects of this rule.
Spacetec will likely undergo an ownership change at the time of the merger
and Labtec may also undergo an ownership change. Because the impact of an
ownership change on the ability of a corporation to utilize Tax Carryovers
involves inherently factual questions, some of which cannot be currently known
(including the future profitability of Spacetec and/or Labtec), the extent to
which the ownership change occurring as a result of the merger will materially
affect the ability of Spacetec and/or Labtec to utilize their NOLs cannot be
predicted with any certainty.
Moreover, the merger will likely be treated as a "reverse acquisition"
within the meaning of the "consolidated return" rules. As a result, the ability
of Spacetec and Labtec as a consolidated group to utilize the Tax Carryovers may
further be limited by the "separate return limitation year" rules.
No Ruling
The parties will not request a ruling from the Internal Revenue Service in
connection with the merger. A successful Internal Revenue Service challenge to
the reorganization status of the merger as a result of a failure to meet any of
the requirements of a reorganization would result in Holders recognizing taxable
gain or loss with respect to each share of Labtec common stock surrendered equal
to the difference between the Holder's basis in such share and the fair market
value as of the completion of the merger of the Spacetec common stock, Note,
cash in lieu of fractional shares and any contingent shares received in exchange
therefor. Original issue discount on the Note and interest imputed in connection
with the receipt of the contingent shares will be taxable as ordinary income. In
such event, a Holder's aggregate tax basis and holding period for the Spacetec
common stock and contingent shares would be determined under rules that differ
materially from the rules discussed above.
Backup Withholding
Certain of the payments due to the holders of Labtec common stock under the
Merger Agreement may be subject to "backup withholding" at the rate of 31% for
federal income tax purposes unless certain requirements are satisfied. In order
to avoid backup withholding, a holder of Labtec common stock must
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complete Form W-8 (if the holder is a nonresident alien individual or foreign
entity) or Form W-9 (if the holder is a United States resident or domestic
entity).
Statements Affixed to Tax Returns
Holders will be required to attach a statement to their tax returns for the
year the merger is completed that contains the information listed in Treasury
Regulation Section 1.368-3(b). Such statement must include the holder's tax
basis in the Labtec common stock and a description of the Spacetec common stock,
the Note, cash in lieu of fractional shares of Spacetec common stock and
contingent shares, if any, received.
ACCOUNTING TREATMENT
Upon completion of the merger, Labtec stockholders will own approximately
67% of Spacetec and will control the Spacetec Board. Consequently, the
transaction will be accounted for as a purchase of Spacetec by Labtec in a
"reverse acquisition". See "Unaudited Pro Forma Combined Balance Sheet" as of
September 30, 1998 and "Unaudited Pro Forma Combined Statements of Operations"
for the year ended March 31, 1998 and six month period ended September 30, 1998
for the impact of purchase accounting applied to the transaction.
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TERMS OF THE MERGER
COMPLETION OF THE MERGER
The merger will be completed upon the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware. It is anticipated that the
merger will become effective on or about February 17, 1999.
EXCHANGE OF STOCK CERTIFICATES
Upon the completion of the merger, SIMC Acquisition will merge with and
into Labtec (with Labtec as the surviving corporation) and Spacetec will own all
of the capital stock of Labtec. As a result of the merger, the holder of each
share of Labtec common stock outstanding at the time of the merger will receive
(1) .55430739 shares of Spacetec common stock; (2) a pro-rata portion of
principal and interest payments made under the Note; and (3) a pro-rata portion
of any additional shares, if any, of Spacetec common stock issuable in
connection with a potential valuation or sale of the Spacetec industrial
business. In addition, each outstanding option to purchase a share of Labtec
common stock will be assumed by Spacetec and adjusted so that an option to
purchase a share of Labtec common stock will be converted into a right to
purchase .55430739 shares of Spacetec common stock. The exercise price of each
option will also be adjusted to reflect the exchange ratio of the option.
No fractional shares of Spacetec common stock will be issued. In lieu of
fractional shares, each holder of Labtec common stock will receive cash (rounded
to the nearest whole cent) equal to the average market value of Spacetec common
stock for the five most recent days that Spacetec has traded ending on the
trading day immediately prior to the completion of the merger.
After the completion of the merger and the reverse stock split, American
Stock Transfer will deliver to each Labtec stockholder a letter of transmittal
including instructions to be used in surrendering Labtec common stock
certificates. Certificates should not be surrendered by the holders of Labtec
common stock until such holders receive the letter of transmittal from American
Stock Transfer.
As soon as practicable following the merger, Spacetec will file a
registration statement on Form S-8 under the Securities Act covering the shares
of common stock issuable upon exercise of the Labtec options.
THE NOTE
At the closing of the merger, Spacetec will issue to a collection agent,
for the benefit of each holder of Labtec common stock outstanding at the time of
the merger, a six-year promissory note in the principal amount of $1,065,000.
Spacetec stockholders are encouraged to read the form of Note in its entirety.
The Note will:
- be unsecured;
- be subordinated to all institutional indebtedness of Spacetec;
- accrue interest at a rate of 10% per year, to be paid quarterly in cash
or, under certain circumstances, through the issuance of additional
promissory notes;
- be paid in full at the end of the six-year term of the Note;
- be prepayable, in whole or in part, without premium or penalty at any
time at Spacetec's option; and
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- be payable to the collection agent who shall be responsible for
distributing to each holder of Labtec stock outstanding at the time of
the merger his or her pro-rata share of the payments.
The Note contains certain events of default, including but not limited to a
change of control of New Labtec, the disposition of any assets of New Labtec not
in the ordinary course of business or the sale of securities of New Labtec, in
each case pursuant to which New Labtec would receive at least $10.0 million, any
default in payment of any amount due under the Note which continues for 10 days
and the commencement of any proceeding under bankruptcy or insolvency laws. If
an event of default occurs, all amounts due under the Note may be accelerated.
CONTINGENT SHARES
At the time of the execution of the Merger Agreement, the directors of
Spacetec believed that if sold to a third-party, the value of the Spacetec
industrial business approximated $6,000,000. This valuation assumes the
existence of a ten-year license agreement which provided for the payment of an
8% royalty to Spacetec based on net sales. Under the Merger Agreement, Spacetec
and Labtec agreed to value the industrial business no later than December 31,
1999. Based on this valuation, if required, the number of shares of Spacetec
common stock issued upon the completion of the merger in exchange for each share
of Labtec stock then outstanding will be adjusted through the issuance of
additional shares of New Labtec common stock. Depending on the valuation of the
industrial business, the percentage ownership of outstanding New Labtec common
stock of holders of Labtec common stock at the time of the merger will be
increased by 2.7555% for every $1.0 million that the value of the Spacetec
industrial business, plus the consolidated net income or minus the consolidated
net loss of Spacetec, excluding Labtec and its subsidiaries, for the period
October 1, 1998 through the date of consummation of the sale of the industrial
business or the final determination of the value of the industrial business, is
less than $6,000,000. Under no circumstances will the percentage ownership of
holders of Labtec stock at the time of the merger be greater than 79% of the
total outstanding Spacetec common stock.
In the event that the eight directors nominated by Labtec to become
directors of New Labtec determine not to proceed with a valuation on or prior to
February 28, 1999, no additional shares of Spacetec common stock will be issued.
However, if the directors nominated by Labtec decide to proceed to value the
industrial business, the four directors nominated by Spacetec to become
directors of New Labtec will hire an investment bank to value the industrial
business. The investment bank will have 30 days to value the industrial
business. If the directors nominated by Labtec accept the valuation determined
by the investment bank, the value will be the basis of the equity adjustment set
forth above. If the directors nominated by Labtec do not accept the valuation
determined by the investment bank, the directors nominated by Labtec and the
directors nominated by Spacetec will negotiate in good faith to determine the
value of the industrial business. In the event that the parties are able to
agree as to the approximate value of the industrial business within 10 days,
then such value will be the basis of the equity adjustment, if any. In the event
that the directors are unable to agree on the value within ten days of the
valuation by the investment bank, the directors nominated by Labtec will decide
whether to sell the industrial business. If the directors nominated by Labtec
decide not to sell the industrial business at this time, no additional shares of
Spacetec common stock will be issued.
If the directors nominated by Labtec decide to sell the industrial
business, the investment bank that performed the valuation shall be engaged to
sell the industrial business. If the industrial business is sold, the value of
the industrial business as determined by the sale shall be the basis of the
equity adjustment as set forth above. If the investment bank is unable to sell
the industrial business by December 31, 1999, the directors nominated by Labtec
will engage a second investment bank to value the industrial business and the
valuation determined by this investment bank will be the basis of the equity
adjustment, if any.
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Any valuation of the industrial business, other than as determined under
the Merger Agreement through a sale, shall consist of the expected net sale
proceeds to be received in connection with an arms'-length sale of the
industrial business, after deduction of all anticipated reasonable transaction
expenses. The value of any actual sale of the industrial business will consist
of the net sale proceeds received in connection with such sale, after deduction
of all transaction expenses incurred. In addition, the value shall be adjusted
by an amount equal to the consolidated net income or net loss of New Labtec from
October 1, 1998 through the date of consummation of the sale of the industrial
business or the final valuation determination after taxes at an estimated 38%
combined rate, but excluding any interest expense.
Any valuation shall also assume the existence of, a 10-year license
agreement that provides for the payment to New Labtec of an 8% royalty, based
upon net sales generated by the industrial business, whether or not such a
license is included as part of the sale of the industrial business and
regardless of whether the terms of any actual license differ from these terms.
As a result, in the event that the sale of the industrial business either does
not include any license or includes a license upon terms, taken as a whole,
having less value to New Labtec than the assumed terms, the valuation shall be
reduced by the amount by which the value of the actual license, if any, is less
than the value of the assumed terms. In the event that the sale of the
industrial business includes a license upon terms, taken as a whole, having
greater value to New Labtec than the assumed terms, the valuation shall be
increased by the amount by which the value of the actual license is greater than
the value of the assumed terms. Similarly, any valuation of the industrial
business shall represent the amount that a third-party purchaser would be
willing to pay for the industrial business, assuming that such purchaser had
also entered into a license with New Labtec upon the assumed terms.
STOCK OWNERSHIP FOLLOWING THE MERGER
Upon the completion of the merger, approximately 13,863,954 shares of
Spacetec common stock, representing approximately 67% of the total issued and
outstanding shares of Spacetec, will be issued to Labtec stockholders.
Approximately 13,630,442 or 64.27% of the outstanding shares of Spacetec common
stock following the merger, will be owned by directors, executive officers and
5% stockholders, with Sun Multimedia Partners, L.P. owning approximately
10,727,475 shares, or approximately 51.8% of the outstanding shares of Spacetec.
In addition, Spacetec will reserve approximately 2,113,574 shares of Spacetec
common stock in connection with the assumption of options granted by Labtec.
Of the approximately 1,126,125 shares of Spacetec common stock subject to
outstanding options, 446,800 shares accelerate upon the mailing of this proxy
and, assuming the merger is completed, an additional 392,115 shares would become
exercisable as a result of completion of the merger.
CORPORATE STRUCTURE FOLLOWING THE MERGER
Once the merger is completed, SIMC Acquisition will cease to exist as a
corporation, and Labtec will become a wholly-owned subsidiary of Spacetec and
will be renamed Labtec Corporation. Its headquarters will be at 1499 SE Tech
Center Drive, Suite 350, Vancouver, Washington 98683. Spacetec will continue as
a public company.
CONDUCT OF SPACETEC'S AND LABTEC'S BUSINESS PRIOR TO THE MERGER
Under the Merger Agreement, each of Spacetec and Labtec have agreed, on
behalf of itself and its subsidiaries, that during the period from October 21,
1998 and continuing until the earlier of the termination of the Merger Agreement
or the completion of the merger, except as consented to in writing or
specifically agreed to in the Merger Agreement, to conduct its business only in
the ordinary course and
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substantially in the same manner as it has operated its business. Until
completion of the merger, each party has also agreed to preserve its business
organization, to continue its operations at the present levels, to keep
available the services of the present employees and agents, to preserve the
goodwill of customers, suppliers and others with which it has business
relations, to promptly pay all taxes when due, to maintain all insurance
policies in full force and effect, to make all filings with the appropriate
governmental agencies and to comply with all applicable laws, each consistent
with past practice and good business standards. In addition, except as consented
to in writing or specifically agreed to in the Merger Agreement, each of
Spacetec and Labtec has agreed that it shall not do any of the following nor
permit its subsidiaries to do any of the following:
- anything which is represented and warranted in the Merger Agreement not
to be true;
- change its corporate charter, bylaws or other constituent documents;
- change its authorized, issued or outstanding capital stock or enter into,
issue, grant or create any subscriptions, options, rights, warrants,
calls, commitments or agreements relating to its authorized, issued or
outstanding capital stock, other than the issuances of shares of stock
pursuant to the exercise of outstanding stock options and warrants;
- declare, set aside, pay or make any dividend or other distribution or
payment on or in respect of shares of its capital stock or, directly or
indirectly, redeem, retire, purchase or otherwise acquire any of its
capital stock;
- dissolve, liquidate, adopt a plan of liquidation or merge, or consolidate
with any other corporation or acquire all or substantially all of the
business or assets of, or acquire ownership of any capital stock, bonds
or other securities of, or any proprietary interest in, any person, or
acquire control of the management or policies of any person, or initiate
or engage in any negotiations relating to any foregoing;
- change the accounting methods and practices followed or change the
depreciation, amortization or inventory valuation policies, rates or
methods used or adopted prior to the Merger Agreement;
- sell, lease, abandon, assign, transfer, license or otherwise dispose of
(i) any real property or intellectual property right (or pending
application for any patent, trademark, service mark or copyright),
invention, process, know-how, formula, pattern, design, trade secret or
interest thereunder or other intangible asset or (ii) any machinery,
equipment or other operating property, or initiate or engage in any
negotiations relating to any of the foregoing or solicit any offers in
connection therewith;
- incur or become subject to, or agree to incur or become subject to, any
liability or obligations, except current liabilities incurred in the
ordinary course of business and obligations under contracts entered into
in the ordinary course of business (none of which, individually or in the
aggregate, will be material to it, taken as a whole);
- default under, or breach any term or provision of, or suffer or permit to
exist any condition or event which, after notice or lapse of time or
both, would constitute a default under, any contract, agreement, lease,
license, commitment, instrument or obligation to which it or its
properties or businesses are bound, which default or breach (i) either
individually or in the aggregate with all such other defaults and
breaches, results in, or is reasonably likely to result in, any material
adverse change in its condition (financial or otherwise), properties,
assets, liabilities, earnings, business or prospects, taken as a whole,
and (ii) shall not have been cured within 30 days after it has given
notice to the other of such breach or default, and the event giving rise
thereto; or
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- do any act or thing, or suffer any act or thing to be done or to exist,
which would result in (i) an inaccuracy in any representation or breach
of any warranty of it under the Merger Agreement if such representation
or warranty were deemed to be restated and made again at the time of
doing or suffering such act or thing or at the completion of the Merger,
or (ii) any failure by it to duly perform or observe any term, provision,
covenant, agreement or condition set forth or provided for in the Merger
Agreement.
NO SOLICITATION
Under the terms of the Merger Agreement, until the earlier of the
completion of the merger or termination of the Merger Agreement, Spacetec has
agreed, on behalf of itself and its subsidiaries, that, it will not, and will
use its best efforts to cause its directors, officers, employees, financial
advisors, legal counsel, accountants and other agents and representatives not
to, initiate, solicit or encourage, directly or indirectly, or take any other
action to facilitate any inquiries or the making of any proposal with respect
to, engage or participate in negotiations concerning, provide any nonpublic
information or data to or have any discussions with any person other than a
party thereto or its affiliates relating to, any acquisition, tender offer
(including a self-tender offer), exchange offer, merger, consolidation,
acquisition of beneficial ownership of or the right to vote securities
representing 10% or more of the total voting power of such entity or any of its
subsidiaries, dissolution, business combination, purchase of all or any
significant portion of the assets (other than sales of assets and inventory in
the ordinary course of business) or any division of, or any equity interest in,
such entity or any subsidiary, or similar transaction other than the merger.
Exception to No Solicitation.
The Spacetec Board may furnish information to, or engage in discussions or
negotiations with, any person in response to an unsolicited bona fide written
acquisition proposal or recommend an unsolicited bona fide written acquisition
proposal to you, if and only to the extent that:
- the Board concludes in good faith (after consultation with its financial
advisors) that the acquisition proposal is superior to you from a
financial point of view, and is more favorable generally to you (taking
into account all financial and strategic considerations, including
relevant legal, financial, regulatory and other aspects of such proposal,
and the conditions to and prospects for completion of such proposal) than
the merger of Spacetec and Labtec;
- the Board determines in good faith (after consultation with outside legal
counsel) that the failure to take such action would result in a breach of
its fiduciary duties to you under applicable law;
- prior to furnishing information to, or entering into discussions or
negotiations with, any third-party, Spacetec provides prompt written
notice to Labtec indicating that it is furnishing information to, or
entering into discussions or negotiations with, the third-party and
identifying the nature and material terms of the proposal; and
- prior to providing any information or data to any third-party in
connection with an acquisition proposal, the Spacetec Board receives an
executed confidentiality agreement with provisions no less favorable than
those contained in the confidentiality agreement with Labtec.
TERMINATION FEES
The Merger Agreement may be terminated by Spacetec, SIMC Acquisition or
Labtec if the Spacetec Board recommends a proposal of a third-party that it has
determined to be more favorable to its
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stockholders from a financial point of view, than the merger of Spacetec and
Labtec. In addition, the Merger Agreement may be terminated by Labtec upon:
- a material breach or failure to materially comply with any
representation, warranty or covenant by any stockholder who executed a
Voting Agreement;
- the withdrawal or modification (or an announcement to so do) in any
adverse manner by the Spacetec Board of its recommendation to approve the
Merger Agreement and the merger;
- the recommendation of an alternative acquisition proposal by the Spacetec
Board;
- the commencement or filing of a registration statement relating to a
tender offer or exchange offer for 20% or more of the outstanding shares
of Spacetec common stock or a subsidiary of Spacetec and the Spacetec
Board either takes no position or fails to recommend against the
acceptance of such tender or exchange offer by a Spacetec stockholder; or
- the continuation for a period in excess of 60 days of discussions or
negotiations with any third-party regarding an acquisition proposal.
In the event that the Merger Agreement is terminated for any of the above
reasons, Spacetec must pay to Labtec $300,000 plus all out-of-pocket fees and
expenses incurred by Labtec in connection with the merger. Additionally, in the
event that Spacetec completes or enters into an agreement regarding an
acquisition proposal with a third-party within 12 months following the
termination of the Merger Agreement or the payment of the $300,000 termination
fee, Spacetec must pay Labtec an amount equal to 5% of the amount by which the
total value of all consideration to be received by Spacetec, its subsidiaries or
any Spacetec stockholders in connection with the third-party acquisition
proposal exceeds the total value of all outstanding shares of Spacetec Common
Stock (including the value of any other classes of Spacetec stock then
outstanding) on the date immediately prior to the date of the Merger Agreement
(based upon $1.375 per share).
Finally, the Merger Agreement may be terminated by Spacetec, SIMC
Acquisition and Labtec, without any termination fee upon:
- the mutual consent of the parties;
- the issuance of an order or other action of a court or other governmental
body that could prohibit or adversely affect the merger;
- the failure to complete the merger on or prior to March 31, 1999; or
- any material breach of any covenant, representation or warranty, but only
by the non-breaching party and only if the breach is not curable through
the reasonable efforts of the breaching party.
CONDITIONS TO THE MERGER
The obligations of each of Spacetec and Labtec to complete the merger are
subject the satisfaction of several conditions including:
- all corporate and other proceedings required to carry out the
transactions contemplated by the Merger Agreement and all instruments and
other documents relating to such transactions shall be reasonably
satisfactory in form and substance to counsel to the other and such other
instruments and documents as counsel to the other parties shall have
reasonably requested;
- all representations and warranties of the other party under the Merger
Agreement shall have been true and correct in all material respects at
and as of the completion of the merger, and the other
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party shall have performed and complied in all material respects with every
agreement and condition required by the Merger Agreement to be performed or
complied with by it prior to or at the completion of the merger;
- all statutory and other legal requirements for the valid completion of
the merger have been fulfilled;
- all consents, approvals and agreements of other parties or governmental
authorities which are necessary to the effective completion of the merger
or to avoid a default under an instrument or document to which any party
to the agreement is a party or by which it may be bound shall have been
obtained;
- no litigation, action, investigation, inquiry or request for information
by any administrative agency or governmental body and no legal or
administrative proceeding shall have been instituted which (1) questions
the validity or legality of the Merger Agreement or the merger or seeks
to restrict, limit, prohibit or enjoin or to obtain substantial damages
as a result of the merger, or (2) may have a material adverse affect on
the financial condition, business or prospects of the other parties and
its subsidiaries, taken as a whole; and
- there shall have been no material adverse change in the condition
(financial or otherwise), assets, liabilities, earnings, business or
prospects of Spacetec and Labtec and their respective subsidiaries, taken
as a whole, since October 21, 1998. None of the following shall be deemed
by itself or by themselves, either alone or in combination, to constitute
a material adverse change: (1) a change in the market price or trading
volume of Spacetec common stock; (2) conditions affecting the industrial,
corporate or consumer desktop computer workstation industries as a whole
or the U.S. economy as a whole; and (3) any effect arising primarily out
of or resulting primarily from actions contemplated by the parties in
connection with, or which is primarily attributable to, the announcement
of the Merger Agreement and merger, to the extent so attributable.
In addition, the obligation of Labtec is subject to the following
additional conditions:
- the registration statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order suspending the
effectiveness of the registration statement shall have been issued by the
SEC, and no proceeding shall have been initiated or threatened in writing
by the SEC for the purpose of seeking or obtaining such a stop order; and
- the approval of Proposals 1-4 as set forth in this Proxy Statement.
VOTING AGREEMENT AND IRREVOCABLE PROXY
Dennis Gain, J. Grant Jagelman and certain of their affiliates have each
executed a Voting Agreement and Irrevocable Proxy, in the form attached hereto
as Annex D, with Labtec whereby they have agreed to vote an aggregate of
1,370,331 shares of Spacetec common stock, representing approximately 20% of the
votes entitled to vote at the Spacetec special meeting, in favor of:
- the approval of the Merger Agreement and the merger and any action in
furtherance thereof;
- against any action or agreement that would result in any breach of any
representation, warranty, covenant or agreement of Spacetec of any of its
subsidiaries that would or could reasonably be expected to materially
reduce the benefits to Labtec of the merger, except as approved by
Labtec;
- against any third-party acquisition proposal, except as approved by
Labtec; and
- against any amendment to the charter or by-laws of Spacetec, except as
approved by Labtec.
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In addition, each of the above Spacetec stockholders has granted an
irrevocable proxy to Labtec to vote the shares of Spacetec common stock owned by
him or her in the manner indicated above. Each Voting Agreement will terminate
upon the earlier of the completion of the merger or, at the election of either
Labtec or such stockholder, upon termination of the Merger Agreement. Spacetec
has also agreed to use its best efforts to have certain other affiliates holding
an aggregate of 381,664 shares to execute a Voting Agreement.
In the event the Merger Agreement is terminated and any stockholder
executing a Voting Agreement sells or otherwise disposes of shares of Spacetec
common stock pursuant to an acquisition proposal and Spacetec is obligated to
pay Labtec an additional termination fee (1) within 90 days following the
termination of the Merger Agreement or (2) thereafter to any third-party with
which Spacetec had any discussions concerning a possible acquisition proposal
prior to the termination of the Merger Agreement, such stockholder must also pay
Labtec a fee. If the consideration to be received by such stockholder from an
alternative acquisition proposal is in excess of $8.00 per share, the
stockholder must pay Labtec 50% of the per share consideration it receives in
excess of $8.00. If the consideration to be received by such stockholder is less
than $8.00 per share, the stockholder must pay Labtec an amount equal to the
third-party purchase price and/or other consideration per share received by the
stockholder in excess of $1.375, not to exceed $2.00 per share. No amount shall
be paid by the stockholder to Labtec in connection with any transaction in which
Spacetec is merged with another corporation and the stockholder is forced to
sell or otherwise dispose of such shares. Spacetec did not pay any additional
consideration to any stockholder in connection with the execution and delivery
of the Voting Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Options
Options to purchase 89,100 shares of Spacetec common stock granted to
directors and executive officers accelerated upon the mailing of this proxy and
notice of the Spacetec special meeting and options to purchase an additional
81,000 shares of Spacetec common stock will accelerate upon the completion of
the merger. In addition, J. Grant Jagelman, Dennis Gain, George Rea and Pat
Sullivan have each been designated by Spacetec for election as directors of New
Labtec.
Consulting Agreement
Effective October 20, 1998, Spacetec entered into a consulting agreement
with a management consulting firm affiliated with Sun Capital, to assist in
reviewing and reorganizing the Spacetec operations. The agreement provides for
payment of $30,000 per month and may be terminated upon ten days notice by
either party. In addition, the agreement contains non-disclosure clause
provisions, assignment of inventions, a twelve-month non-compete with certain
competitors and a twelve-month non-solicitation of employees.
Indemnification
The Certificate of Incorporation of New Labtec contains certain provisions
permitted under Delaware General Corporation Law relating to the liability of
directors. These provisions eliminate a director's liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as the breach of a director's duty of
loyalty or acts or omissions which involve intentional misconduct or a knowing
violation of law. The Certificate of Incorporation of New Labtec also contains
provisions indemnifying its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law.
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In addition, Spacetec has executed an Indemnification Agreement with each
of Dennis Gain, J. Grant Jagelman and certain of their affiliates pursuant to
which Spacetec would indemnify such person in connection with claims arising
from or related to such person's obligations under the Voting Agreement and
Irrevocable Proxy, except where indemnification is unlawful or prohibited.
CONTRIBUTION OF ASSETS
Immediately following the completion of the merger, all of the assets,
except cash and cash equivalents, all shares of capital stock of subsidiaries
and all rights under the Merger Agreement, the Note and all other instruments
executed in connection with the merger and all of the liabilities of the current
Spacetec business prior to the completion of the merger will be contributed to
Spacetec Corporation, a wholly-owned subsidiary of New Labtec.
CORPORATE STRUCTURE AFTER THE TRANSACTIONS ARE COMPLETED
After the amendments to Spacetec's Articles to increase the number of
shares authorized and to change the corporate name and the completion of the
merger, Spacetec IMC Corporation will be renamed "Labtec Inc." and will be
incorporated under the laws of the Commonwealth of Massachusetts. Immediately
after the completion of the merger, the non-cash assets and liabilities of the
current Spacetec business will be contributed to Spacetec Corporation, and the
reverse stock split shall be effected. New Labtec will have two wholly-owned
subsidiaries that are also incorporated under the laws of Delaware. One
subsidiary will be Labtec Corporation, the successor to Labtec in the merger,
and the other will be Spacetec Corporation, the subsidiary that received assets
and liabilities from Spacetec IMC Corporation immediately after the merger.
The directors of New Labtec, assuming the individuals designated by Labtec
and Spacetec are elected, will be:
- J. Grant Jagelman, Caroline Merison, Joseph Pretlow and Robert G. Wick as
Class I directors;
- Dennis T. Gain, Geoffrey Rehnert, Patrick J. Sullivan and Marc Wolpow as
Class II directors; and
- Rodger R. Krouse, Marc J. Leder, George R. Rea and Bradley A. Krouse as
Class III directors.
The executive officers of New Labtec upon completion of the merger will be:
<TABLE>
<S> <C>
Robert G. Wick President
Marc J. Leder Co-Chairman, Senior Vice President,
Finance and Chief Financial Officer
Rodger R. Krouse Co-Chairman
</TABLE>
GOVERNMENTAL AND REGULATORY APPROVALS
Spacetec and Labtec are not required to file any information with the
Federal Trade Commission or the Antitrust Division of the Department of Justice
under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, in connection with the merger and the transactions
contemplated by the Merger Agreement. Spacetec and Labtec are not aware of any
governmental or regulatory approvals required for consummation of the merger,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.
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<PAGE> 56
FEDERAL SECURITIES LAW CONSEQUENCES
Shares of New Labtec common stock received by Labtec stockholders in the
merger will not be registered under the Securities Act and may not be sold
unless the are registered or unless an exemption from registration, such as the
exemption provided by Rule 144 promulgated under the Securities Act, is
available. In general, under Rule 144 as currently in effect, a Labtec
stockholder (or Labtec stockholders whose shares are aggregated) who receives
shares of New Labtec common stock in the merger and who, thereafter,
beneficially owns such shares for at least one year, will then be entitled to
sell within any three-month period a number of such shares that does not exceed
the greater of one percent of the outstanding shares of New Labtec common stock
or the average weekly trading volume in the New Labtec common stock during the
four calendar weeks preceding the date on which notice of such sale is filed
pursuant to Rule 144. Sales under Rule 144 are also subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about New Labtec. A Labtec
stockholder (or Labtec stockholders whose shares are aggregated) who receives
shares of New Labtec common stock in the merger and who, thereafter, is not an
affiliate of New Labtec for at least 90 days prior to a proposed transaction and
who beneficially owns such shares for at least two years will then be entitled
to sell such shares under Rule 144 without regard to the limitations described
above. Persons who may be deemed to be affiliates generally include individuals
or entities that control, are controlled by, or are under common control with, a
party and may include certain officers and directors of Labtec and New Labtec,
as well as principal stockholders of Labtec and New Labtec.
ACCOUNTANTS
The firm of Ernst & Young LLP, independent auditors and accountants of
Spacetec, have been invited to attend the Spacetec special meeting and will have
an opportunity to make a statement and respond to appropriate questions.
The firm of PricewaterhouseCoopers LLP, independent accountants and
auditors of Labtec, have been invited to attend the Spacetec special meeting and
will have an opportunity to make a statement and respond to appropriate
questions.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ISSUANCE
OF SHARES OF SPACETEC COMMON STOCK TO HOLDERS OF LABTEC COMMON STOCK.
47
<PAGE> 57
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
SEPTEMBER 30, 1998
The following Unaudited Pro Forma Combined Condensed Financial Information
gives pro forma effect to the merger by application of the pro forma adjustments
described in the accompanying notes. The merger will be accounted for by Labtec
as a "reverse acquisition" of Spacetec under the "purchase" method of
accounting. APB 16 requires the purchase price to be allocated to the acquired
assets and liabilities of Spacetec on the basis of their fair values as of the
date of acquisition. The Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1998 gives effect to the merger as if it occurred on September 30,
1998. The Unaudited Pro Forma Combined Statements of Operations for the six
months ended September 30, 1998 and for the fiscal year ended March 31, 1998
give effect to the merger as if it occurred at the beginning of the periods
presented, and include adjustments directly attributable to the merger and
expected to have a continuing impact on New Labtec. The pro forma adjustments do
not reflect an extraordinary charge of approximately $500,000 that Labtec will
take associated with a pro-rata write-down of capitalized loan fees upon a
partial paydown of its term loan with excess Labtec and Spacetec cash upon
consummation of the merger, nor direct transaction costs to be incurred and
expensed by Spacetec of approximately $500,000.
The Unaudited Pro Forma Combined Condensed Financial Information and
related notes are provided for informational purposes only. The Unaudited Pro
Forma Combined Condensed Financial Information presented is not necessarily
indicative of the consolidated financial position or results of operations of
New Labtec as they may be in the future or as they might have been had the
merger been effected on the assumed dates. The Unaudited Pro Forma Combined
Condensed Financial Information should be read in conjunction with the
historical financial statements of Labtec and Spacetec, and the related notes
thereto, which are included elsewhere in this Proxy Statement.
48
<PAGE> 58
NEW LABTEC
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HISTORICAL HISTORICAL ------------------------------ PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................... $ 666,164 $ 2,560,866 $ 1,443,043(6) $ 1,783,987
Securities available
for sale............. 5,556,957 5,556,957(6) --
Accounts receivable.... 2,037,151 15,448,246 17,485,397
Interest and other
receivables.......... 3,547 9,093 12,640
Inventory.............. 535,446 9,903,074 10,438,520
Prepaids and other
assets............... 182,769 182,769
Current deferred income
taxes................ -- 944,091 944,091
----------- ------------ ------------
Current assets.... 8,982,034 28,865,370 30,847,404
Furniture and
equipment, net....... 638,410 2,007,178 2,645,588
Noncurrent deferred
income taxes......... 1,666,345 1,666,345
Goodwill and other
intangible assets.... 142,434 883,760 $ 1,500,000(3) 6,813,672
4,287,478(2)
Noncompete agreement... 180,900 180,900
Capitalized loan
fees................. 2,435,115 499,527(7) 1,935,588
Investment in
subsidiary........... 12,803,877(1) 12,803,877(2)
Other assets (net)..... 29,192 115,952 145,144
----------- ------------ ------------
Total assets........... $ 9,792,070 $ 36,154,620 $ 44,234,641
=========== ============ ============
</TABLE>
49
<PAGE> 59
NEW LABTEC
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HISTORICAL HISTORICAL ------------------------------ PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDER'S EQUITY
(DEFICIT)
Current portion of LT
debt.................... $ $ 1,000,000 1,000,000(6) $ --
Accounts payable.......... 332,802 6,711,952 1,500,000(3) 8,544,754
Income taxes payable...... 28,445 28,445
Accrued payroll, bonuses,
& benefits.............. 658,805 418,905 1,077,710
Accrued interest.......... 157,152 157,152
Other accrued expenses.... 284,064 1,446,016 1,730,080
----------- ------------ ------------
Current liabilities... 1,275,671 9,762,470 11,538,141
Long-term debt............ 31,503,586 6,000,000(6) 25,503,586
Merger notes payable...... 1,065,000(5) 1,065,000
----------- ------------ ------------
Total liabilities..... 1,275,671 41,266,056 38,106,727
----------- ------------ ------------
Common stock.............. 68,409 262,285 68,409(2) 22,823(1) 69,036
216,072(4)
Additional paid-in-
capital................. 16,006,225 7,052,279 16,006,225(2) 216,072(4) 19,854,304
195,101(8) 12,781,054(1)
Treasury stock............ (195,101) 195,101(8) --
Stock subscription
receivable.............. (188,617) (188,617)
Deferred compensation..... (50,221) (16,608) 50,221(2) (16,608)
Unrealized gain on
available for sale
securities.............. 3,496 3,496(2) --
Cumulative translation of
adjustment.............. 44,419 44,419(2) --
Accumulated deficit....... (7,555,929) (12,025,674) 499,527(7) 7,555,929(2) (13,590,201)
1,065,000(5)
----------- ------------ ------------
Total equity
(deficit).......... 8,516,399 (5,111,436) 6,127,914
----------- ------------ ----------- ----------- ------------
Total Liabilities and
Equity.................. $ 9,792,070 $ 36,154,620 $43,689,604 $43,689,604 $ 44,234,641
=========== ============ =========== =========== ============
</TABLE>
50
<PAGE> 60
NEW LABTEC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL HISTORICAL ----------------------- PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.................. $ 3,323,582 $28,188,763 $31,512,345
Cost of sales.............. 952,780 18,389,274 19,342,054
----------- ----------- ---------- -------- -----------
Gross profit............... 2,370,802 9,799,489 12,170,291
----------- ----------- ---------- -------- -----------
Operating Expenses:
Selling and marketing.... 2,037,976 5,407,676 7,445,652
General, administrative
and R&D............... 2,525,378 3,750,986 6,276,364
Depreciation and
amortization.......... 274,412 683,538 957,950
Amortization of
goodwill.............. -- 883,762 964,580(9) 1,848,342
Amortization of
noncompete
agreement............. -- 180,900 180,900
----------- ----------- ---------- -------- -----------
4,837,766 10,906,862 964,580 16,709,208
----------- ----------- ---------- -------- -----------
Income (loss) from
operations............... (2,466,964) (1,107,373) 964,580 (4,538,917)
Other expenses (income):
Net interest expense
(income).............. (214,556) 1,799,807 53,250(10) 287,700(11) 1,528,394
214,556(6) 36,963(7)
Other expense (income)... -- (15,631) (15,631)
----------- ----------- ---------- -------- -----------
Income (loss) before income
taxes and extraordinary
loss..................... (2,252,408) (2,891,549) 1,232,386 324,663 (6,051,680)
Provision for (benefit
from) income taxes....... (722,887) 14,214(12) (708,673)
----------- ----------- ---------- -------- -----------
Income (loss) before
extraordinary loss....... $(2,252,408) $(2,168,662) $1,246,600 $324,663 $(5,343,007)
=========== =========== ========== ======== ===========
Net loss per share......... $ (0.33) $ (0.09) $ (0.80)(13)
=========== =========== ===========
Weighted average number of
shares outstanding....... 6,841,467 23,953,293 6,720,111(13)
=========== =========== ===========
</TABLE>
51
<PAGE> 61
NEW LABTEC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HISTORICAL HISTORICAL ----------------------- PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 8,883,669 $57,820,303 $66,703,972
Cost of sales...................... 2,855,047 38,163,280 41,018,327
----------- ----------- -----------
Gross profit....................... 6,028,622 19,657,023 25,685,645
----------- ----------- -----------
Operating expenses:
Selling and marketing............ 4,359,099 9,903,762 14,262,861
General, administrative and
R&D........................... 5,029,964 5,176,876 10,206,840
Depreciation and amortization.... 477,687 943,449 1,421,136
Amortization of goodwill......... -- 1,767,524 1,929,159(9) 3,696,683
Amortization of noncompete
agreement..................... -- 361,800 361,800
----------- ----------- ---------- -----------
9,866,750 18,153,411 1,929,159 29,949,320
----------- ----------- ---------- -----------
Income (loss) from operations...... (3,838,128) 1,503,612 1,929,159 (4,263,675)
Other expense (income):
Interest expense (income), net... (568,127) 3,253,795 106,500(10) 575,400(11) 2,739,231
568,127(6) 45,664(7)
Other expense -- 1,956 1,956
----------- ----------- ---------- -------- -----------
Income (loss) before income taxes
and extraordinary loss........... (3,270,001) (1,752,139) 2,603,786 621,064 (7,004,862)
Provision for (benefit from) income
taxes............................ -- 13,555 18,211(12) (4,656)
----------- ----------- ---------- -------- -----------
(Loss) income before extraordinary
loss............................. $(3,270,001) $(1,765,694) $2,603,786 $639,275 $(7,000,206)
=========== =========== ========== ======== ===========
Net loss per share before
extraordinary items (basic and
diluted)......................... $ (0.45) $ (0.09) $ (1.18)(13)
=========== =========== ===========
Weighted average number of shares
outstanding...................... 7,195,000 19,156,928 5,937,895(13)
=========== =========== ===========
</TABLE>
52
<PAGE> 62
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. Represents the investment of Labtec in Spacetec equal to the fair value of
Spacetec calculated as 6,846,993 shares of Spacetec common stock
outstanding at October 21, 1998 at an average price of $1.87 per share.
After giving effect to the 1-for-3 reverse stock split, pro forma Spacetec
shares amount to 2,282,331. New Labtec's common stock has a par value of
$0.01, accordingly, the investment is recorded as common stock of $22,823
and $12,781,054 of additional paid in capital.
2. Represents the excess of the purchase price of $12,803,877 over the
$8,516,399 historical book value of Spacetec's net assets as of September
30, 1998, and represents the elimination of Labtec's initial investment in
Spacetec against Spacetec's historical net book value.
3. Represents an estimate of the capitalizable transaction costs to be
incurred in connection with the merger.
4. Represents the recapitalization of Labtec common stock to reflect "reverse
acquisition" accounting. The recapitalized number of shares is calculated
by multiplying the exchange ratio of 0.55430739 by the 25,011,310 shares of
Labtec common stock outstanding on the effective date of the merger, adding
the existing Spacetec shares outstanding of 6,846,993, and dividing the
total number of post-merger Spacetec shares of 20,710,947 by 3 (to reflect
the 1-for-3 reverse stock split), and then multiplying the result of
6,903,649 shares by $0.01 par value. This new par value of $69,036 results
in an adjustment to the historical common stock balance of $216,072.
5. Represents merger note payable to the Labtec shareholders by New Labtec.
Interest accrues and is payable quarterly at an annual interest rate of 10%
and principal is due in full six years from date of issuance.
6. Represents the cash estimated to be used to pay off existing long-term debt
of Labtec. This results in a pro forma reduction of Spacetec's interest
income of $568,127 and $214,556, respectively, for the fiscal year ended
March 31, 1998 and for the six months ended September 30, 1998.
7. Represents the pro-rata write-down of capitalized debt issuance costs by
Labtec (to be classified as an extraordinary loss) related to the portion
of Labtec's existing long-term debt paid off early as discussed in 6.
above. The lower balance results in pro forma adjustments to interest
expense of $45,664 and $36,963, respectively, for the fiscal year ended
March 31, 1998 and for the six months ended September 30, 1998.
8. Represents the cancellation of Labtec's treasury stock. All shares of
Labtec common stock held in treasury immediately prior to the merger will
be cancelled and cease to exist pursuant to the terms of the Merger
Agreement.
9. Represents the amortization of the preliminary allocation of excess
purchase price to goodwill and other intangible assets created by the
purchase of Spacetec as if the purchase occurred at the beginning of the
period presented. The goodwill and other intangible assets are being
amortized over an estimated average life of three years.
10. Represents interest expense at 10% incurred on the merger note payable as
if the purchase occurred at the beginning of the period presented.
11. Represents decrease in Labtec's interest expense related to the debt
estimated to be paid off upon completion of the merger. The debt to be paid
off accrues interest at the Libor rate (currently 5.22%) plus 3.00%.
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<PAGE> 63
12. Represents the tax effect of the increase and decrease in interest expense
as described in 6, 7, 10, and 11 above. The federal statutory rate of 34%
is used for the fiscal year ended March 31, 1998. Labtec's anticipated
effective tax rate of 25% for the fiscal year ended March 31, 1999 is used
for the six month period ended September 30, 1998. Note that the goodwill
and intangibles amortization generated by the merger is not deductible,
thus no tax effect is considered.
13. Gives effect to the 1-for-3 reverse stock split to be voted on pursuant to
this Proxy Statement.
54
<PAGE> 64
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE
OF SPACETEC STOCKHOLDERS
PROPOSAL 2 AMENDMENT TO ARTICLES TO INCREASE NUMBER OF AUTHORIZED SHARES OF
SPACETEC COMMON STOCK AND TO CHANGE THE CORPORATE NAME
Spacetec's Articles provide that the number of authorized shares of common
stock, par value $.01 per share, is 20,000,000 shares. To fulfill its
obligations to Labtec stockholders and option holders under the Merger Agreement
and to provide a sufficient number of authorized shares for corporate purposes
in the future, the Spacetec Board would like to increase the number of
authorized shares to 25,000,000. On November 12, 1998, the Spacetec Board
resolved to recommend to the Spacetec stockholders that the Spacetec Articles be
amended to increase the number of authorized shares of Spacetec common stock
from 20,000,000 to 25,000,000 shares and to change the corporate name to "Labtec
Inc.", both subject to and upon completion of the merger. The full text of the
proposed amendments to the Articles is included in Annex E attached to this
Proxy Statement.
As of January 8, 1999, there were approximately 6,846,993 shares of
Spacetec common stock issued and outstanding. In addition, approximately 817,221
shares have been reserved for issuance under the Spacetec stock option plans and
stock purchase plan. Upon completion of the merger, we will issue or reserve for
issuance approximately 13,863,954 shares of Spacetec common stock to holders of
Labtec common stock. We have also agreed to assume all outstanding options to
purchase Labtec common stock, which will require Spacetec to reserve
approximately 2,113,574 shares. Assuming you approve Proposal 4 regarding the
1-for-3 reverse stock split, approximately 7.8 million shares of Spacetec common
stock will be outstanding or reserved for issuance. An increase in the
authorized but unissued shares of Spacetec common stock to 25,000,000 shares
will provide a sufficient number of authorized but unissued shares of common
stock to satisfy our obligations under the Merger Agreement and shares for other
corporate purposes. These other purposes may include, without limitation:
entering into acquisitions, joint venture and collaborative research and
development arrangements with other companies in which Spacetec common stock or
the right to acquire Spacetec common stock is a part of the consideration;
raising capital through the sale of Spacetec common stock; attracting and
retaining valuable employees by the issuance of additional stock options; and
other transactions involving the use of Spacetec common stock. Spacetec has no
present commitments, agreements or undertakings to issue any additional shares
for any such other purpose.
The affirmative vote of the holders of a majority of the Spacetec common
stock issued and outstanding on the record date will be required to approve the
amendment to the Articles.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT OF THE ARTICLES TO INCREASE THE AUTHORIZED SHARES OF SPACETEC COMMON
STOCK FROM 20,000,000 SHARES TO 25,000,000 SHARES, SUBJECT TO AND UPON
COMPLETION OF THE MERGER.
PROPOSAL 3 ELECTION OF DIRECTORS
On October 21, 1998, the Spacetec Board was increased to twelve members,
subject to the completion of the merger. The Spacetec Articles provide that the
Spacetec Board is divided into three classes, consisting of four directors in
each class. At the special meeting, an aggregate of twelve directors will be
elected to hold office with four such directors being elected as (i) Class I
directors for a one year-term, (ii) Class II directors for a two-year term and
(iii) Class III directors for a three-year term, each until their successors are
duly elected and qualified. The following table indicates each individual
55
<PAGE> 65
designated by Spacetec and Labtec to serve as directors of Spacetec following
the merger and of the New Labtec following the migratory merger in the Class
indicated:
<TABLE>
<CAPTION>
NAME AGE DESIGNATED BY
---- --- -------------
<S> <C> <C> <C>
CLASS I DIRECTORS J. Grant Jagelman.............. 56 Spacetec
Caroline Merison............... 43 Labtec
Joseph Pretlow................. 31 Labtec
Robert G. Wick................. 36 Labtec
CLASS II DIRECTORS Dennis Gain.................... 55 Spacetec
Geoffrey Rehnert............... 41 Labtec
Patrick J. Sullivan............ 43 Spacetec
Marc Wolpow.................... 40 Labtec
CLASS III DIRECTORS Rodger R. Krouse............... 37 Labtec
Marc J. Leder.................. 37 Labtec
George R. Rea.................. 60 Spacetec
Bradley A. Krouse.............. 33 Labtec
</TABLE>
- ---------------
J. Grant Jagelman has been a director of Spacetec since its incorporation
in April 1991. Mr. Jagelman was the Chairman of Spatial Systems Ltd. ("SSL"), an
Australian public company, from 1986 to July 1997 when SSL was merged into
Spacetec.
Caroline Merison has been a director and founding member of Equinox
Investment Partners ("EIP") since 1996. Prior to forming EIP, Ms. Merison spent
15 years in London and New York with Kleinwort Benson Limited, a British
Merchant Bank. Ms. Merison is a director of Rapid Design Service, Inc. and
Gateway HomeCare, Inc.
Joseph Pretlow joined Bain Capital in 1992 and has been a principal since
1996. Prior to joining Bain Capital, Mr. Pretlow spent two years at Lehman
Brothers in investment banking where he specialized in mergers and acquisitions
and corporate finance transactions for retail companies. Previously, he worked
as a consultant at Sibson & Company. Mr. Pretlow is a director of Artisan
Entertainment and Bentley's luggage.
Robert G. Wick joined Labtec on January 5, 1999 as its President. Mr. Wick
will become President of New Labtec after the merger. Prior to joining Labtec,
Mr. Wick spent four years as Vice President of Finance and Logistics at Weiser
Lock, a division of Masco Corporation. From 1991 to 1994, Mr. Wick served as
Controller of Weiser Lock.
Dennis T. Gain was the founder of Spacetec and has been a director of
Spacetec since its incorporation in April 1991. In addition, Mr. Gain was
Chairman of the Board and served as President and Chief Executive Officer of
Spacetec from its incorporation in April 1991 until February 1998. Mr. Gain has
served as Chairman and Chief Executive Officer of 3D Open Motion, L.L.C. since
June 1995.
Geoffrey Rehnert helped to found Bain Capital at its inception in 1984, and
has been a General Partner and a Managing Director since 1986. Mr. Rehnert is a
director of Artisan Entertainment, Inc., ICON Health & Fitness, Inc., FTD
Holdings, Inc., First Communications, Inc., Midwest of Cannon Falls,
Nutraceutical Corp., Miltex, Inc., General Sportcraft, Ltd., and Kollmorgen
Corporation.
Patrick J. Sullivan has been a director of Spacetec since February 1997.
Mr. Sullivan has extensive consumer electronics and computer industry
experience. Mr. Sullivan has served as Vice President of the Merchandising Group
of Digital Equipment Corporation, a computer manufacturer, since 1993.
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<PAGE> 66
Marc Wolpow has been a Managing Director at Bain Capital, Inc. since 1993
and of Sankaty Advisors, Inc. (an affiliate of Bain Capital, Inc. since 1997).
He is a director of American Pad & Paper Corp., Miltex Holdings, Inc., PSI,
Inc., Physicians Quality Care, Inc., and PiRod Holdings, Inc.
Rodger R. Krouse has been a Managing Director of Sun Capital Partners, Inc.
since May 1995, prior to which he was employed by Lehman Brothers, Inc. since
1984, most recently as a Senior Vice President. Mr. Krouse is a director of
Labtec Inc., Nailite International, Inc. and The Atlas Companies, Inc. Following
the completion of the merger, Mr. Krouse will serve as Co-Chairman of New
Labtec.
Marc J. Leder has been a Managing Director of Sun Capital Partners, Inc.
since May 1995, prior to which he was employed by Lehman Brothers, Inc. since
1989, most recently as a Senior Vice President. Mr. Leder is a director of
Labtec Inc., Nailite International, Inc. and The Atlas Companies, Inc. Following
the completion of the merger, Mr. Leder will serve as Co-Chairman, Senior Vice
President, Finance and Chief Financial Officer of New Labtec.
George R. Rea has been the Acting Chief Executive Officer of Spacetec since
July 1998 and a director of Spacetec since September 1997. Mr. Rea has been a
consultant and investor since 1994. Prior to this, Mr. Rea was Executive Vice
President of Conner Peripherals Inc. from 1992 until his retirement in 1994. In
addition, Mr. Rea is a director of Imaging Technologies International LLC.
Bradley A. Krouse has been an attorney at Klehr, Harrison, Harvey,
Branzburg & Ellers LLP since 1995, and a partner since 1997. Mr. Krouse is the
brother of Rodger Krouse.
The members of the Audit Committee and Compensation Committee will be
determined at the first meeting of the New Labtec Board.
The four nominees in each class of directors receiving the highest number
of affirmative votes cast will be elected.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH PERSON
NAMED ABOVE TO THE DESIGNATED CLASS OF DIRECTOR, SUBJECT TO AND UPON COMPLETION
OF THE MERGER.
PROPOSAL 4 AMENDMENT TO ARTICLES TO PROVIDE FOR THE 1-FOR-3 REVERSE STOCK SPLIT
General
The Spacetec Board believes that it is in the best interests of Spacetec
and you to effect a reverse stock split whereby one share of New Labtec common
stock will be issued for each three shares of New Labtec common stock. This
reverse stock split will occur after the merger and after the filing of the
amendment with the Secretary of State in the Commonwealth of Massachusetts. The
Spacetec Board believes that a decrease in the number of outstanding shares of
common stock may cause the price to increase. An increase in the price may
increase the interest of analysts and investors in New Labtec common stock. For
these reasons the Spacetec Board believes that a decrease in the number of
outstanding shares of stock will improve the liquidity of the New Labtec common
stock.
Assuming you approve the 1-for-3 reverse stock split, one share of New
Labtec common stock will be issued for each three shares of New Labtec common
stock outstanding after the merger. No fractional shares of New Labtec common
stock will be issued. In lieu of fractional shares, each holder of New Labtec
common stock will receive cash (rounded to the nearest whole cent) equal to the
average market value of Spacetec common stock for the five most recent days that
Spacetec, or New Labtec, as the case may be, has traded ending on the trading
day immediately prior to the date on which the amendment to the Articles
effecting the reverse stock split is filed with the Secretary of State in the
Commonwealth of Massachusetts.
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While the Spacetec Board believes that the 1-for-3 reverse stock split may
result in a higher price for New Labtec common stock, the market price cannot be
accurately predicted. In addition, there can be no assurance that the desired
results as stated above will be achieved. Finally, the 1-for-3 reverse stock
split may have the effect of creating odd lots of stock (i.e., lots of fewer
than 100 shares) for some stockholders and such odd lots may be more difficult
to sell or have higher brokerage commissions associated with their sale.
As soon as practicable after the amendment to the Articles effecting the
reverse stock split is filed, American Stock Transfer will deliver to each New
Labtec stockholder a letter of transmittal including instructions to be used in
surrendering Spacetec and Labtec common stock certificates.
Federal Income Tax Consequences of the Reverse Split
No gain or loss should be recognized by a stockholder of New Labtec upon
such stockholder's exchange of shares pursuant to the reverse stock split
(except to the extent of any cash received in lieu of a fractional share). Cash
payments in lieu of a fractional share of New Labtec should be treated as if the
fractional share were issued to the stockholder and then redeemed by New Labtec
for cash. A New Labtec stockholder receiving such payment should recognize gain
or loss equal to the difference, if any, between the amount of cash received and
the stockholder's basis in the fractional share (determined as provided below).
Such gain or loss will be capital gain or loss if the payment of cash in lieu of
the fractional share is a mere mechanical rounding off of fractions and not
separately bargained for consideration, and the payment is "not essentially
equivalent to a dividend" with respect to the stockholder under the federal
income tax law. For this purpose, a payment is not essentially equivalent to a
dividend if it results in a "meaningful reduction" in the stockholder's
percentage interest in New Labtec, taking into account the constructive
ownership rules and redemptions of fractional shares from all the stockholders.
The Internal Revenue Service has ruled publicly that any reduction in the
percentage interest of a small minority stockholder in a publicly-held
corporation who exercises no control over corporate affairs should constitute a
meaningful reduction.
The aggregate tax basis of the New Labtec shares received in the reverse
stock split (including any fractional shares deemed to have been received) will
be the same as the stockholder's aggregate tax basis in the shares exchanged
therefor. The stockholder's holding period for the new shares received in the
reverse stock split will include the period during which the stockholder held
the old shares surrendered in the reverse stock split.
The affirmative vote of the holders of a majority of Spacetec common stock
issued and outstanding on the record date will be required to approve the
amendment to the Articles to provide for the 1-for-3 reverse stock split.
YOUR BOARD UNANIMOUSLY APPROVED THE ONE-FOR-THREE REVERSE STOCK SPLIT AND
RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ONE-FOR-THREE REVERSE STOCK SPLIT.
PROPOSAL 5 AUTHORIZATION TO ADJOURN SPECIAL MEETING.
The Spacetec Board believes it is in the best interest of the Spacetec
stockholders that the special meeting be adjourned in the event that the number
of proxies sufficient to approve any of the proposal has not been received by
the date of the special meeting. Postponing the meeting would provide the
Spacetec Board with additional time to solicit and receive proxies.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AUTHORIZATION OF
SPACETEC TO ADJOURN THE SPECIAL MEETING.
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SPACETEC
SPACETEC BUSINESS
Spacetec IMC Corporation is a leading developer and marketer of controllers
and the related software that enable a user to manipulate three dimensional
graphical images in real-time. Unlike traditional hardware controllers such as
keyboards, gamepads, mice, trackballs and joysticks, Spacetec's products enable
the user to manipulate images as if the user were moving actual objects or
moving through actual scenes in the real world. Spacetec's products are used in
the mechanical CAD market, the consumer market and the emerging desktop market
as typified by the Internet.
3D graphical capability, once found only in UNIX workstations and gaming
consoles, is now widely available and used by electronic design engineers,
architectural engineers, industrial designers, film, video and broadcast
television animators, graphic artists, and game developers. With both Microsoft
and Intel promoting 3D graphical interfaces, the use of 3D graphical capability
will become increasingly available.
EFFECTS OF THE TRANSACTIONS
After the completion of the merger, Spacetec IMC Corporation will be
renamed "Labtec Inc." (New Labtec). New Labtec will contribute all of the
assets, except cash and cash equivalents, and all of the liabilities of the
current Spacetec business to a wholly-owned subsidiary. New Labtec will then
have two wholly-owned subsidiaries that are incorporated under the laws of
Delaware. One subsidiary will be Labtec Corporation, the successor to Labtec in
the merger, and the other will be Spacetec Corporation, the subsidiary that
received assets and liabilities from Spacetec IMC Corporation.
SPACETEC STRATEGY
Spacetec views itself as a leading provider of 3D enabling products and
software technology to the market. With 3D increasingly prevalent in personal
computing and other consumer electronics systems, Spacetec is positioned to
become an important player in the emerging 3D environment. To achieve this,
Spacetec's strategies are:
GROW ITS PREMIER POSITION IN THE NT/UNIX MARKET:
Workstations -- To build on its market position by leveraging relationships
with a growing list of high-end system applications, Spacetec now offers an
"open" software development kit (SDK) to the development community for
integration into their applications, thus enabling the 3D input controller. With
access to the source code, the developer takes control of the implementation and
adds value wherever possible by going "native."
In addition to enabling the applications with sophisticated SDK offerings,
Spacetec has initiated a new direction in input controller development,
beginning with ergonomics. Using an input device is a physical and repetitive
event. Major end users are cognizant of the health and well being of their
employees, and are requesting quantitative and qualitative data on the impact of
usage as it relates to "Repetitive Stress Injury". Spacetec has responded by
engaging a leading specialist in this field, has actively measured employees at
key customer sites, and has remitted the data to a leading design house. The
outcome of this advanced work is expected to be the Spaceball 4000, slated for
release in the latter half of fiscal year 1999. By working with industry
specialists, key OEMs and large end users, Spacetec has further strengthened its
position in the workstation market.
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PENETRATE MASS MARKETS:
Consumer -- Spacetec intends to maintain its position of supplying 3D input
controller technology to this market segment by building additional
relationships with key market players. In fiscal year 1998, to heighten
awareness of 3D input controllers, strategic relationships were pursued and most
recently a marketing relationship with Acclaim Entertainment for a software
bundle was initiated. In a related area, Spacetec began shipment of components
to ASCII Entertainment for use in its "Sphere 360", a controller for the Sony
PlayStation. Spacetec hopes to leverage its success with ASCII Entertainment to
deliver other products for the game console market. Spacetec looks to further
enhance its award-winning SpaceOrb 360 and offer a Universal Serial Bus ("USB")
and Human Interface Device ("HID") in the second half of the fiscal year.
Concurrently, Spacetec is working closely with Microsoft in the area of
DirectInput to simplify the support of 3D devices by application developers, and
to define a separate class of 3D controllers within Windows. The goal is to make
input controllers truly plug-and-play.
Desktop -- Desktop PC's remain the traditional domain of the mouse (2D)
today and into the foreseeable future as there has been little progress at the
OS level to standardize on a graphics modeling or rendering engine. Nonetheless,
the desktop represents the single largest business opportunity for 3D
interactive computing, and is ripe for application development that brings real
3D to the desktop. The competing forces of OpenGL (Silicon Graphics Inc.) and
Direct3D (Microsoft) are anticipated to create a standard that targets the
development community. Microsoft is committed to evolving the 3D-user interface
into a standard GUI in future releases of Windows. As the PC is 3D ready, it is
anticipated that a standard will emerge. As both Intel and Microsoft are
concentrating on this segment, the expectation of ensuing applications is high.
Until that time, the Internet and gaming are the most viable 3D environments on
the desktop.
In anticipation of this evolution, Spacetec has committed itself to
furthering the use and deployment of 3D input controllers on the desktop.
Spacetec will take a similar approach to defining the product offering in
desktop as in the workstation segment, commencing with ergonomics, and on to
customer input, and industrial design. Product functionality takes into
consideration that the desktop is mostly 2D, and that evolution to 3D cannot
preclude either form. Spacetec anticipates increased demand from the mass market
on the desktop as it evolves its 3D input controllers and related software.
PRODUCTS
HARDWARE PRODUCTS
Spacetec's hardware products include two classes of motion controllers:
Consumer Products -- Spacetec entered the consumer electronics market at
Christmas 1996 with the introduction of the SpaceOrb 360, a serial 3D game
controller. The SpaceOrb 360 is compatible with many of today's popular 3D
games, including Forsaken, Quake, Descent, DOOM, MDK, Redneck Rampage, Duke
Nukem 3D, and all Windows 95 games. The SpaceOrb 360 is expected to be
redesigned and relaunched to support USB, HID and DirectInput and be separately
recognized as a separate device class within Windows. This will result in
"plug-and-play" status, and broader acceptance in this market segment.
Industrial Products -- Spacetec has two product lines for the Industrial
Market. The Spaceball 2003 is aimed at the higher-performance applications and
the Spaceball 3003 at the lower end. The Spaceball 3003 "FLX" mid-range 3D
controller is primarily targeted at the emerging 3D animation and multimedia
markets, and for the rapidly growing NT Mechanical-CAD market. The Spaceball
3003 "FLX" series provides an improved PowerSensor ball that moves with a
displacement for easier use and improved
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motion control, delivering three powerful advantages: less force for model
movement, improved ergonomics, and a reduced learning curve for new users. The
Spaceball 3003 "FLX" is sold by a number of OEM's including, Hewlett Packard,
Compaq, and IBM Corporation, together with a number of value-added resellers and
distributors. The Spaceball 2003 "FLX" featuring fully programmable capability
with tactile buttons, is targeted at a more rigorous environment using
UNIX-based workstations and high-end NT-based PCs. The Spaceball 2003 "FLX" has
become a standard input controller for industrial as well as digital content
creation applications. Using these products, designers and engineers can pan,
zoom and rotate 3D models as smoothly and easily as if they were holding them in
their hands. Spacetec believes that the ability to manipulate 3D models faster
with more accuracy can result in significant increases in productivity. With end
use customers that include many of the large Fortune 1000 manufacturing
companies, such as General Motors, General Electric, General Dynamics, Chrysler,
Eastman Kodak, Daimler Benz, Honda Motors, McDonnell Douglas, and Motorola, the
Spaceball 2003 "FLX" is the largest selling and most widely used product in this
market. The Spaceball 2003 "FLX" is sold by a number of OEMs, including
Hewlett-Packard and IBM Corporation, and a number of value-added resellers and
distributors.
SOFTWARE PRODUCTS
As part of its hardware sales, Spacetec offers (without charge to its
hardware customers) software products which enable and enhance the performance
of its 3D controllers. These software products include:
SpaceWare 7.4 -- This recently released version of the driver for the
Spaceball 2003 "FLX" and Spaceball 3003 "FLX" features a robust programmable
user interface that allows the user to customize settings to the particular
environment and thus increase productivity. SpaceWare 7.4 provides for custom
selection of user defined operands including: creation of groups of functions,
modifying sensitivity of settings, programmable button selections and on-line
assistance.
SpaceWare AniMotion -- Software developers that create applications for
games, motion pictures or videos, animators, and other creative applications
have a growing need to create more sophisticated, life-like 3D animation in a
timely manner. To put an advanced, intuitive 3D interactive motion control
capability in the hands of animators, Spacetec has created SpaceWare AniMotion,
an advanced 3D interactive motion control solution for use with 3D Studio MAX,
the industry leader in animation software. By incorporating SpaceWare AniMotion
with the Spaceball 3003 "FLX", animators can dynamically move objects, cameras
or lights, to create sophisticated 3D animations faster and more effectively.
SpaceWare 8.1 -- SpaceWare 8.1 driver source code is targeted for delivery
to application developers like AutoCAD for their integration, and is designed to
be the primary interface to high-end graphic technologies such as Accel View
which is embedded within Autodesk's 3D Mechanical Desktop. The SpaceWare 8.1
release is designed and developed to interface with any graphic technology
deployed by application developers, and to provide added value to those
developers. SpaceWare 8.1, which is anticipated to be released in the latter
half of fiscal 1999, will provide support for Spacetec's 3D input controllers in
a seamless fashion.
Spacetec's plans to develop and commence shipments of new hardware and
software products are forward-looking statements. The timing and completion of
such plans depends on numerous factors, including the continued technical
development of such products; the successful transition of the prototype
products to volume production; and the successful development of sufficient
market demand for such products. There can be no assurance that any new product
introduction will occur as planned, or that such introduction will prove to be
of financial benefit to Spacetec. Delays and difficulties associated with new
product introductions have had material adverse effects on Spacetec's business,
operating results and
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financial condition. Spacetec's products represent new technology to the
marketplace, and there continues to be substantial risks that the marketplace
may not accept Spacetec's products.
Market acceptance of Spacetec's products depends to a certain extent upon
the ability of Spacetec to demonstrate the advantages of its products over other
types of products. There can be no assurance that either existing or new
competitors will not develop products that are superior to Spacetec's products
or may achieve greater market acceptance or that Spacetec will be able to
identify, develop, manufacture, market or support new products and services that
will respond to evolving customer requirements and maintain market acceptance.
Failure by Spacetec to anticipate or respond adequately to technological
developments and customer requirements or any significant delays in product
development or introductions could result in a material loss of market share or
revenues. In addition, new products, when released by Spacetec, may contain
unexpected errors or "bugs" that, despite testing by Spacetec, are discovered
only after a product has been installed and used by customers. Although Spacetec
has not experienced material adverse effects from any such errors to date, there
can be no assurance that errors will not be discovered in the future, causing
delays in product introduction and shipments or requiring design modifications
that could materially adversely affect Spacetec's competitive position and
operating results. There can be no assurance that announcements of competing new
product offerings by others will not cause customers to defer purchasing
Spacetec's products or to not purchase them at all.
MARKETS
Spacetec's marketing focus is divided into two broad business sectors, the
Industrial Sector Business and the Consumer Sector Business. The Industrial
Sector Business is comprised of the industrial and Professional Digital Media
(multimedia) market, together with other emerging market areas supported on UNIX
and Windows NT workstation and Windows 95 PC platforms. The Consumer Sector
Business includes both 3D games and entertainment applications.
THE INDUSTRIAL SECTOR BUSINESS
The Industrial Market
Although this market segment generally consists of all CAD applications
including electronic design and architectural engineering and construction
("A/E/C"), Spacetec focuses on the mechanical design, manufacturing, and
analysis segments where 3D technology is well accepted and has shown continued
growth.
In this market segment, the combination of increased hardware performance
and advancements in 3D technologies is accelerating the use and adoption of
solids modeling and 3D design tools. The release of several new Windows NT based
applications in this field is also contributing to opening the market potential.
The aerospace, automotive and major manufacturing industries have adopted
real-time interactive 3D graphics as a standard technology approach providing an
expanding on-going core business for Spacetec.
Spacetec serves this market with its Spaceball 2003 and 3003 and
SpaceWareinterface software customized to the leading industrial applications,
including Parametric Technology Corporation's Pro/Engineer, IBM/Dassault
Systems' CATIA, EDS's Unigraphics, SDRC's I-DEAS Master Series, SolidWorks'
SolidWorks 97, Computervision's CADDS5, Matra Datavision's Euclid3 and Strim100,
Hewlett-Packard's CoCreate, and Baystate Technologies CADKEY 97.
Major industrial end users of Spacetec's products include BMW, Chrysler,
Eastman Kodak, Ford, General Dynamics, General Electric, General Motors, Jaguar,
John Deere, Lockheed-Martin, McDonnell
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Douglas, Motorola, Pratt & Whitney Aircraft, Rockwell, Saab, Siemens, 3M,
Toyota, TRW, and Whirlpool.
The Professional Digital Media (Multimedia) Market
The Professional Digital Media market spans a broad spectrum of market
segments where end users create 3D digital content. This market includes game
developers, film, video and broadcast television animators, industrial
designers, architectural designers, and 3D graphic and promotional artists.
SpaceWare AniMotion for 3D Studio MAX was Spacetec's initial entry into
this market. An enhanced SDK is expected to be developed to offer similar but
more powerful capability to other popular 3D modeling and rendering applications
to further encourage advanced levels of 3D interactive motion control.
Workstations supporting NT and UNIX dominate the mechanical CAD and digital
content creation markets with NT now outstripping UNIX by a greater than 2:1
ratio and expected to increase. The anticipated growth rate of over 18% over the
next few years provides for a significant market opportunity. The combination of
new seats and a large installed base together with its expanding list of OEM
partners make this an attractive market for Spacetec.
THE CONSUMER SECTOR BUSINESS
PC-Based Games
Spacetec believes that the introduction of several very successful 3D game
titles such as Quake and Descent and more recently, Acclaim's Forsaken, will
increase the demand for enhanced 3D interactive motion control in the PC game
marketplace. Spacetec began shipping its serial version of the SpaceOrb 360 game
controller into the retail channel in September 1996 with some initial success.
It marked the first entry into this dynamic and highly competitive market
segment. In fiscal 1998, Spacetec decided to reposition the SpaceOrb 360 as an
OEM technology and to develop some strategic bundling opportunities to build
awareness for the product/technology. It succeeded in doing so with both Packard
Bell/ NEC and Acclaim Entertainment. Spacetec also decided to focus internally
on enhancing the software support for the future, as there would be significant
changes slated for the PC game controller market. New controllers need to be USB
based and HID compliant, and have 3D class support within DirectInput. At that
time PC game controllers such as the planned re-release of the SpaceOrb 360
would have true "plug & play" capability.
Console Games and Entertainment
Spacetec entered into an exclusive licensing strategic development,
manufacturing and marketing agreement with ASCII Entertainment in 1996 to bring
its Real-Life 3D controller technology to the Sony PlayStation. Together with
ASCII Entertainment, Spacetec has been previewing the product known as the
"Sphere 360", and anticipates game support when released later this year. This
controller is designed to address consumer demand for enhanced 3D interactive
motion control for the latest 3D games released for the console marketplace.
Mirroring the PC market, target titles for console systems include the Action,
Adventure/Role Play Games and Simulation segment, which are becoming the
majority of titles on this platform.
Discussions are also continuing with other leading vendors serving the
console game market to bring the 3D-controller technology to other console
system platforms such as Nintendo and SEGA. There can
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be no assurance that such discussions will result in Spacetec entering into a
definitive agreement with any such companies or that any such agreement entered
into will prove to be of financial benefit to Spacetec.
Desktop
Windows 95/98 and NT proliferate the corporate and consumer desktop
markets. Microsoft is making a decided push into the 3D market with support from
chip manufacturers, including Intel. In March, Microsoft announced that beyond
NT 5.0, both Windows and NT would have a 3D User Interface. Practical
applications will follow, requiring devices to navigate these new horizons.
SALES AND MARKETING
Spacetec focuses on four primary channels: OEM, Independent Software
Vendors ("IEV's"), Value-Added Resellers ("VARS"), and Corporate Accounts in the
"Fortune 1,000" category with a heavy emphasis on the automotive and aerospace
industries.
OEM -- Spacetec sells to leading manufacturers of Unix and Windows NT-based
workstations and PC's, which incorporate our 3D controllers into systems offered
to end users. In some cases, these 3D controllers are sold as a bundle with the
system; in others as an add-on option. Current OEM customers include IBM,
Hewlett-Packard, Compaq and Intergraph. Spacetec directs its sales efforts to
increasing the number of OEM customers and increasing the usage of 3D
controllers in each OEM system.
ISV -- Spacetec works with ISVs to incorporate its software to enable and
enhance the 3D motion control capabilities of its controllers. Spacetec believes
ISV support is important to ongoing sales and marketing efforts.
Value Added Resellers -- VARs supply a total solution to end-use customers.
Spacetec develops this channel both domestically in North America and in Europe
where Spacetec has made a determined effort to expand its scope of operations.
The combined opportunity of Europe rivals that of North America.
Corporate Accounts -- Spacetec markets to corporate accounts to build
awareness and demand for 3D controllers, allowing the OEMs and VARs to fulfill
the demand.
Distribution -- Spacetec has recently renewed a two-year distribution and
market development arrangement with Sumisho Electronic Devices Corporation, a
wholly owned subsidiary of Sumitomo Corporation, for the development of all its
business in Japan. The Japanese market showed growth and resilience during a
difficult period and represented approximately 9% of Spacetec's business in
fiscal year 1998. Recently, Spacetec has signed a distribution agreement with
Avnet Computer, Inc., a large international distributor, to market and sell
Spacetec industrial products to VARs in North America.
Spacetec also offers turnkey product for private labeling or core
components to the OEM for their own manufacturing processes. Spacetec will also
license technology and component manufacturing rights to primary manufacturers
of system hardware platforms and peripheral accessories. These include PC and
console game systems manufacturers or third-party providers.
RESEARCH AND DEVELOPMENT
Spacetec's research and development efforts consist of enhancing the
features and performance of its core 3D control technologies and applying these
enhancements to existing products and the development of new products.
Spacetec's research and development functions are divided into hardware
development and software development groups.
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Spacetec's software developments efforts are designed to enhance the value
of the hardware offerings by improving functionality within the input
controller, at the driver level and within the ISV application. Each is a key
area that requires dedicated software efforts.
Spacetec's hardware development efforts are designed to enhance the
performance, functionality, build-in features and ease-of-use characteristics of
Spacetec's 3D technologies, while reducing the cost of manufacturing of key
components. These enhancements are designed to allow the production of such
components that allow scale-ability, especially reduction in size, enhanced
reliability and broadening the use, all at progressively lower costs of
manufacturing.
Spacetec has directed its engineering efforts on developing a new
controller which is intended to enhance the ergonomic features on its 3D
controllers. Management anticipates that these product features will be
completed during 1999. This group is also involved in the design and development
of a range of new controller products, including the introduction of a USB
solution, for various market segments and strategic partners and it is
anticipated that requirements in this area will increase.
During the years ended March 31, 1998, 1997, and 1996, Spacetec expended
$3,483,000, $2,916,000 and $1,684,000, respectively, on its research and
development efforts.
PATENTS AND PROPRIETARY RIGHTS
Spacetec relies on a combination of patents, copyrights, trade secrets,
trademark laws, confidentiality procedures and license arrangements to establish
and protect its proprietary technology.
Spacetec has received eleven patents in the United States, Canada,
Australia, Japan, and certain European countries covering its core technology
relating to the PowerSensor. Spacetec further has one issued United States
patent and three pending United States patent applications, as well as five
pending international patent applications, covering input sensing technology not
yet incorporated into Spacetec's products.
No assurances can be given that patents issued to Spacetec will not be
infringed upon or designed around by others or that others will not obtain
patents that Spacetec would need to license or design around. Although Spacetec
believes that its products and other proprietary rights do not infringe the
proprietary rights of third parties, there can be no assurance that other third
parties will not assert infringement claims against Spacetec or that such claims
will not be successful. If Spacetec is found to be infringing third-party
patents, there can be no assurance that licenses that might be required for
Spacetec's products would be available on reasonable terms, if at all.
Spacetec's SpaceWare software is protected by copyright laws, which offer
only limited protection for Spacetec's software. However, because the software
development industry is characterized by rapid technological change, Spacetec
believes that factors such as the technical know-how in the interactive 3D
motion control field, and the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position than the various legal protections available for its software.
In addition to the protection afforded by patent registrations and
copyright laws, generally employees of Spacetec and consultants to Spacetec have
executed a proprietary information agreement designed to protect the trade
secrets of Spacetec, inventions created in the course of employment with
Spacetec and other proprietary information of Spacetec. Additionally, certain
senior officers and technical personnel are required to sign non-competition
agreements prohibiting such persons from competing with Spacetec for a period of
1 year following their departure from Spacetec.
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MANUFACTURING
Spacetec contracts its hardware manufacturing requirements to outside
sources and expects to continue to do so in the future. Spacetec's production
engineering and manufacturing staff are responsible for establishing and
managing all manufacturing procedures and processes, and for procurement,
production planning, quality assurance and quality control of all of Spacetec's
products.
Spacetec currently uses several United States contractors and an overseas
contractor in China, for its primary manufacturing requirements. Final
functional testing, calibration and quality control, as well as final packing
and shipping for its industrial products, are performed by Spacetec but will
shift to the source of manufacturing in fiscal year 1999. Generally, standard
parts and components are used in the manufacturing of Spacetec's products with
supplies sourced from multiple vendors. To date, Spacetec has been able to
obtain adequate supplies of all components in a timely manner from existing
sources
COMPETITION
The markets for computer hardware and software are highly competitive and
are characterized by continual change and technological improvement. In the
input hardware field, Spacetec's products currently compete with traditional 1D
and 2D input devices, such as the dial box, keyboard, gamepad, mouse, trackball
and joysticks and some pure 3D input devices. On the software side there is a
broad range of 3D enabling technologies, but few are closely aligned with
six-degrees-of-freedom ("6DOF") input hardware devices. This provides a
desirable area of focus for Spacetec.
There are currently several alternative input device technologies available
that provide various degrees of interactive 3D control capabilities. These
devices range from the traditional 1D dial box, the keyboard, a gamepad or a 2D
mouse. Other products like a trackball and joystick may provide some interactive
3D-motion control with 1, 2 or at most 3 degrees of freedom at a time. Some
specialized 3D devices are available, including head positioning trackers but
are minimally deployed. Motion control with the 1D and 2D devices tends to
require a great deal of finger or hand dexterity and is somewhat robotic in
nature. The specialized 3D devices are either difficult to use or have a
difficult software interface. In comparison, Spacetec believes its 6DOF input
device technology, once learned, allows life-like intuitive 3D-motion control.
LogiCad 3D, a subsidiary of Logitech, Inc., represents the principal
competition in the development and marketing of 3D input controllers with 6DOF.
Space Control successfully markets a product known as the Space Mouse/Space
Mouse Plus. In addition, Space Control has a relationship with Logitech for
private labeling under the Logitech logo and sells as the Magellan. The Logitech
relationship poses a significant challenge as they are a presence at OEMs, and
within the consumer arena. Spacetec believes that it has a number of inherent
advantages over Space Control, including full ownership of Spacetec's technology
and therefore the absence of license fees, a direct worldwide presence and
strong OEM relations with key partners, as well as a dedicated software
development organization that works to supply the best technology while
supporting key ISVs.
Spacetec currently competes principally on the basis of product
performance, the breadth of product compatibility with existing 3D applications,
the speed with which software is developed for new 3D applications, Spacetec's
reputation, relationships with distributors and quality of professional
services. To the extent that Spacetec aims to broaden its penetration of
consumer sector business, Spacetec anticipates that it will compete on the basis
of price in addition to these other factors.
While Spacetec believes it compares favorably with any competition from a
performance and functionality basis, and also through the value that it provides
through its superior technology, there can be
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no assurance that Spacetec will be able to compete successfully against current
and future competitors or that competitive pressures faced by Spacetec will not
materially adversely affect its business and results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Spacetec's total sales to Electronic Data Systems and subsidiaries
represented 21% and 17% of Spacetec's revenues for the years ended March 31,
1998 and 1997, respectively. Sales to IBM Corporation totaled 13% and 8% for the
1998 and 1997 fiscal years, respectively and sales to Hewlett Packard totaled 6%
and 15% for the 1998 and 1997 fiscal years, respectively. The loss of these
customers could have a material adverse effect on Spacetec's business, financial
position and results of operations.
EMPLOYEES
Following a significant reduction effected on November 6, 1998, Spacetec
had 22 full-time employees, of whom 9 were engaged in research and development,
5 in sales and marketing, 5 in administration and finance and 3 in manufacturing
control. Spacetec's employees are not covered by a collective bargaining
agreement. Spacetec has never experienced employment-related work stoppages and
believes that it has satisfactory employee relations.
PROPERTIES
Spacetec's corporate offices are located in an approximately 33,300 square
foot facility in Lowell, Massachusetts. Spacetec occupies the Lowell facility
under a sublease which terminates on July 3, 2000, subject to two successive one
year renewal terms at the option of Spacetec. Spacetec believes that its
existing facilities, together with additional office space available to it
pursuant to an option under its Lowell lease, are sufficient to meet its
requirements for the near term.
LEGAL PROCEEDINGS
As of September 30, 1998, Spacetec is not party to any legal proceedings
and is not aware of any material threatened litigation.
WHERE TO FIND ADDITIONAL INFORMATION
Spacetec files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information Spacetec files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Spacetec filings with the SEC are also available to public from commercial
document retrieval services and at the website maintained by the SEC at
"http://www.sec.gov." Since Spacetec's common stock trades on the Nasdaq
National Market, you may also read its Registration Statement and any report,
statements or other information at the Nasdaq offices at 1735 K Street N.W.,
Washington, D.C. 20006.
You should rely only on the information provided in this Proxy Statement.
Spacetec has authorized no one to provide you with different information.
Spacetec is not making an offer to sell stock in any state or country where the
offer is not permitted. You should not assume that the information in this Proxy
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Statement is accurate as of any date other than the date on the front of the
document.
SPACETEC TRADEMARKS
Spacetec's registered trademarks include the following: 3D-I, a registered
trademark in Brazil and France; DLD, a registered trademark of the United
States; PANCEA, a registered trademark of the United States; POWERSENSOR, a
registered trademark in Benelux, Canada, France, Japan and the United Kingdom;
REALLIFE 3D, a registered trademark of Japan, South Korea and the United States;
SEIZE THE POWER, a registered trademark of the United States; SPACEBALL, a
registered trademark in Australia, Benelux, Brazil, Canada, China, France,
Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Singapore, South Korea,
Taiwan, the United Kingdom and the United States; SPACECONTROLLER, a registered
trademark of Benelux, France, Germany, Italy, and the United Kingdom and the
United States; SPACEMATES, a registered trademark of Benelux, France, Germany
and Italy; SPACENAVIGATOR, a registered trademark of Benelux, France, Germany,
Italy and the United Kingdom; SPACEORB, a registered trademark of Hong Kong,
Japan and Mexico; SPACEPLAYER, a registered trademark of Benelux, Brazil,
France, Germany, Hong Kong, Italy, Malaysia, Mexico, Singapore, South Korea,
Taiwan and the United Kingdom; SPACEWARE, a registered trademark of Australia,
Benelux, Brazil, Canada, France, Germany, Hong Kong, Italy, Japan, Mexico, South
Korea, Taiwan and the United States; SPACEWARE 3D-I, a registered trademark of
Japan; THE BIG PICTURE, a registered trademark of the United States; and
WINSPEED, a registered trademark of Benelux, Canada, France, Germany, Italy and
the United Kingdom. This Proxy Statement also includes trademarks and tradenames
of companies other than Spacetec and Labtec. All other trademarks and tradenames
referred to in this Proxy Statement are the property of their respective owners.
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SPACETEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT, AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE
FACTORS SET FORTH ELSEWHERE HEREIN, INCLUDING "RISK FACTORS."
Overview
Spacetec was incorporated in April 1991 to develop and market advanced 3D
graphical hardware and the related enabling software to the industrial
workstation market. Historically, Spacetec generated revenues from sales of
bundled hardware and software. These sales depended on ISV's incorporating
Spacetec's enabling software into a specific application and lagged six to
eighteen months behind the completion of the incorporation. In fiscal 1995,
Spacetec launched its first product aimed at the industrial personal computer
market. In early fiscal 1996, Spacetec began marketing its first stand-alone
software product for the personal computer CAD market and commenced limited
test-marketing of its first PC game product. Late in fiscal 1996, Spacetec began
marketing the ergonomically improved version of the consumer product to the OEM
market. In the third quarter of fiscal 1997, Spacetec commenced shipment to the
consumer market.
For reasons of manufacturing and volume efficiencies, Spacetec contracts
all of its hardware manufacturing to outside sources. Primary manufacturing of
its products had previously been through multiple domestic contract
manufacturers, with final functional testing and quality control performed by
Spacetec. Late in fiscal 1996, Spacetec began directing its manufacturing to an
offshore contract manufacturer to further reduce the cost of goods. Currently,
the majority of Spacetec products are produced by the offshore contract
manufacturer.
Research and development comprises both hardware and software activities.
Hardware development has focused on creating products utilizing Spacetec's core
hardware technology, but designed for specific end-use markets, and engineering
these components to reduce manufacturing costs. This has resulted in products
for the workstation, PC and consumer markets, and significant cost reductions in
the core technology. In fiscal 1996, Spacetec began sampling its proprietary
low-cost Eclipse-1 ASIC chip for use in its own proprietary controllers. The
Eclipse-1 ASIC chip has successfully been incorporated into both consumer and
industrial products.
The primary activity in software development has been to create specialized
3D motion control software and software tools to enable Spacetec's products to
be integrated into specific application software. Spacetec offers an "open"
software development kit (SDK) to the development community for integration into
their applications. Integration of the SDK enables Spacetec's 3D input
controllers to work with specific software. With access to the source code, the
developer can take control of the implementation and add value wherever possible
by going "native." Software development activities have increased as the number
of 3D applications into which Spacetec's software has been integrated has
increased, and upon entering the professional PC multimedia animation market and
consumer multimedia "entertainment" market with 3D interactive software
programs.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
For the six-month period ended September 30, 1998, revenues decreased 14.8%
to $3,323,000 from $3,899,000 for the six months ended September 30, 1997
("prior six-month period"). The decrease in revenues is mainly attributable to a
decrease in orders from the automotive sector as a result of a General Motors
strike and a short-term delay in the start of the ASCII release of the Sphere
360 controller for the Sony Play Station.
Mechanical CAD ("M-CAD") and multimedia sales for the current six-month
period decreased 23.5% to $2.6 million from $3.4 million in the prior six-month
period.
During the current six-month period ended September 30, 1998, more emphasis
was placed on the industrial business as evidenced by orders received from
accounts such as Carrier, Chrysler, Ingersol Rand and Sony. Spacetec seeks to
achieve a balance between various business units consisting of OEMs, corporate
accounts and resellers. In the coming quarters, Spacetec expects to continue
discussions with potential partners to assist in capitalizing on its technology.
However, there is no assurance that such relationships, if established, will be
able to generate substantial revenue.
Gross Profit:
Spacetec's gross profit is arrived at after the costs of materials,
manufacturing overhead, royalties, and amortization of capitalized software are
subtracted from revenues. Gross profit decreased 13.8% to $2,370,000 in the
current six-month period from $2,750,000 in the prior six-month period, and
represented 71.3% of current period revenues versus 70.5% of revenues for the
prior six-month period.
As Spacetec continues to shift its sales mix from direct to OEM and general
distribution channels for its industrial and consumer products, it is expected
that the gross profit percentage experienced by Spacetec may decline. Spacetec's
expectations regarding the decline in gross profit percentage is a forward-
looking statement. There can be no assurance that such decreases in gross profit
will not be greater than anticipated.
Selling and Marketing Expenses:
Selling and marketing expenses, which include personnel costs, advertising
and marketing costs, sales commissions and trade show expenses, decreased 1.7%
to $2,038,000 in the current six-month period ended September 30, 1998 from
$2,073,000 in the comparable period of the prior year, and represented 61.3% of
current six-month period revenues, up from 53.2% of revenues in the comparable
period of the prior year. Spacetec has taken action to further reduce these
selling and marketing expenses to restore profitability. These actions included
a reduction in both direct and indirect selling and marketing staff as well as a
decline in general selling and marketing expenses. Spacetec anticipates that
efficiencies may ensue in this area as a result of a proposed merger with
Labtec.
Research and Development Expenses:
Research and development expenses, which consist primarily of personnel and
equipment costs required to conduct Spacetec's software and hardware development
and engineering efforts, decreased 18.9% to $1,407,000 in the current six-month
period, versus $1,735,000 in the comparable period of the prior year. These
expenses represent 42.3% of current six-month period revenues and 44.5% of
revenues in the comparable period of the prior year. The decrease in those
expenses reflect the spin-off of the Open Motion technology, and the related
staff reduction and decreased expenditures in hardware design. Further
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reductions in expenses in this area are anticipated in November as further
reductions in the workforce are undertaken.
General and Administrative Expenses:
General and administrative expenses, which include the costs of Spacetec's
finance, human resources and administrative functions, increased 71.9% to
$1,392,000 in the current six-month period versus $810,000 in the comparable
period of the prior year. These expenses represented 41.9% of current period
revenues compared with 20.8% of prior period revenues.
The increase in expenses in the current six-month period is mainly the
result of the following one-time expenses totalling approximately $470,000
related to: accounting, legal, and administration fees related to the Open
Motion spin-off and the Labtec merger as well as other legal and administrative
expenses incurred in pursuing various strategic relationships during the period;
consulting fees related to the installation and implementation of a new
enterprise accounting system; and severance costs associated with the former
Chief Executive Officer, Ray Boelig, and other employees terminated during the
six-month period ended September 30, 1998.
In addition, Spacetec incurred consulting fees for George Rea, Acting Chief
Executive Officer, and consulting fees for the Acting Controller.
The proposed merger with Labtec is expected to result in the discontinuance
of some of these significant, non-recurring expenses. In addition, Spacetec
anticipates a reduction of up to 25% of general and administrative expenses
associated with the planned reduction in facilities costs, consolidation of
several remote sales offices, and the lowered administrative costs associated
with a reduced workforce.
Provision for Income Taxes:
As Spacetec has recognized losses in the current fiscal year, it has not
recorded a provision for income taxes. The benefit attributable to carryback of
losses to prior years was fully utilized during the fiscal year ended March 31,
1997. Spacetec has unutilized federal net operating loss carryforwards of
approximately $4,300,000.
Year 2000 Compliance:
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000 or Y2K" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with the Year 2000 issue.
Spacetec in its ordinary course of business tests and evaluates its own
products. Since Spacetec's products do not use any date-related processing in
the hardware or driver software, the products are Y2K compliant, meaning that
the use or occurrence of dates on or after January 1, 2000 and the occurrence of
leap years will not materially affect the performance of Spacetec's products. As
Spacetec's products are intended to be used in conjunction with other hardware
and applications through third-party suppliers, there can be no assurances that
users of Spacetec's products will not experience Y2K problems as a result of the
integration of Spacetec's products with non-compliant Y2K products of such
third-party suppliers. In addition, in certain circumstances, Spacetec has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of Spacetec's products with respect to its
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lack of any date-related processing the hardware or driver software. If any of
these customers experience Y2K problems, such customers could assert claims for
damages against Spacetec.
Spacetec is in the process for forming a Y2K committee that will review the
Y2K status of Spacetec's software and systems used in its internal business
processes. It also will include obtaining appropriate assurances of compliance
from the manufacturers of these products or, in the event that such assurances
cannot be obtained, will provide for modification or replacement of all
non-compliant products. Management has verified that its accounting software is
Year 2000 compliant.
Spacetec is in the process of contacting its critical suppliers and major
customers to determine whether the products obtained by it from such vendors or
sold by the customer to third parties are Y2K compliant. Its suppliers and
customers are under no contractual obligation to provide such information to it.
Spacetec intends to continue its efforts to monitor the Y2K compliance of
Spacetec suppliers and major customers.
Based on the information available to date, Spacetec believes it will be
able to complete it Y2K compliance review and make necessary modifications prior
to the end of 1999. Spacetec is prioritizing its efforts to focus on any Y2K
discrepancies found that would impact its operations. Nevertheless, particularly
to the extent that Spacetec is relying on the products of other vendors to
resolve Y2K issues, there can be no assurances that Spacetec will not experience
delays in implementing such changes. If key systems, or a significant number of
systems were to fail as a result of Y2K problems, or Spacetec were to experience
delay implementing Y2K compliant software products, Spacetec could incur
substantial costs and disruption of its business, which could potentially have a
material effect on Spacetec's business and results of operations. In addition,
as Spacetec purchases many critical components from single or sole source
suppliers, failure of any such vendor to adequately address issues related to
the Y2K problem may have a material adverse effect on Spacetec's business,
financial conditions and results of operations.
To date Spacetec has not required a complete and separate budget for
investigating and remedying issues related to Y2K compliance, whether involving
its own products or the software or systems used in its internal operations. The
costs of the Y2K initiatives is not expected to be material to Spacetec's
results of operations or financial position. Additionally, Spacetec has
currently not developed a contingency plan related to Y2K. There can be no
assurances that Spacetec's resources spent on investigating and remedying Y2K
compliance issues, or the lack of a contingency plan related to Y2K, will not
have a material adverse effect on Spacetec's business, financial condition and
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 Spacetec had cash and cash equivalents and
securities available for sale of $6,223,000 and working capital of $7,707,000
versus $9,026,000 and $10,480,000, respectively, at March 31, 1998.
Operating activities of Spacetec absorbed $1,924,000 of cash in the current
year as compared to $501,000 in the prior year. The use of funds in the current
year was primarily due to the net loss of $2,252,000. A decrease in accounts
payable and accrued expenses from $1,498,000 at March 31, 1998, to $1,276,000 on
September 30, 1998, used $223,000 in cash. Inventory levels decreased in the
current year from $687,000 at March 31, 1998 to $536,000 at September 30, 1998.
Net cash provided to Spacetec in the current year from investing activities
totaled $2,819,000 versus $959,000 in the prior year. The primary reason for the
increase was the sale of securities to fund stock repurchases and operating
expenses. Additionally, expenditures for furniture and equipment were reduced
($158,000 in the current year versus $263,000 in the prior year.)
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Financing activities used $777,000 of net cash in the current year,
primarily as a result of Spacetec repurchasing $700,000 worth of its stock as
part of the Open Motion spin-off, and an additional $150,000 worth of common
stock in a periodic, open market purchase program. The amount paid for the
repurchase of stock was partially offset by the proceeds from the exercise of
employee stock options.
Spacetec believes that its existing cash and investment securities together
with future anticipated funds from operations, will satisfy its projected
working capital and other cash requirements through the end of its fiscal year
ending March 31, 1999. Spacetec anticipates that additional funds will be
required to continue software and hardware development, as well as to develop
the sales and marketing infrastructure, distribution channels and market
awareness of Spacetec's products. Spacetec believes the level of financial
resources available to it is an important competitive factor in its industry and
may seek additional capital prior to the end of that period.
Spacetec's capital requirements will depend on many factors, including the
rate at which Spacetec can develop its products, the market acceptance of such
products, and the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace. Changes in
technology or growth in revenues beyond currently established capabilities will
also require further investment. To the extent that Spacetec's current financial
resources are insufficient to fund Spacetec's operating requirements, it may be
necessary for Spacetec to seek additional funding through public or private
financing. There can be no assurance that additional financing will be available
on acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders will result. If
adequate funds are not available, Spacetec's business would be materially
adversely affected, and, as a result, Spacetec may be required to curtail its
operations significantly. There can be no assurance that Spacetec's cash flow
from operations will be adequate to fund its long-term working capital
requirements, or that it will be able if necessary, to obtain equity financing
on favorable terms (if at all).
FISCAL YEAR ENDED MARCH 31, 1998 AND 1997
Revenues. Spacetec's revenues consist of sales of industrial and consumer
products, and license fees. Revenues decreased 2.1% to $8,884,000 for the fiscal
year ended March 31, 1998 ("1998 Fiscal Year") from $9,075,000 for the fiscal
year ended March 31, 1997 ("1997 Fiscal Year"). The decrease in revenues is
attributable to a reduction in the sales of Spacetec's SpaceOrb 360 RealLife 3D
("SpaceOrb 360") game controller into the consumer retail channel.
During the 1998 Fiscal Year, management refocused the sales force on the
industrial business and increased sales in this market by 24.2% to $8,056,000
for the 1998 Fiscal Year from $6,485,000 in the 1997 Fiscal Year. Sales to the
industrial market for the 1997 Fiscal Year were negatively impacted by the
launch of the Spaceball 3003 ("3003"), a new lower priced input device for
workstation based 3D CAD applications, which essentially replaced the higher
priced Spaceball 2003 ("2003"). Spacetec had anticipated that unit sales would
increase sufficiently to offset the decrease in price. However, these
expectations were not realized as Spacetec was unable to encourage additional
bundling of the 3003 by its OEMs as rapidly as anticipated.
Other revenues, which include consumer sales and licensing arrangements
decreased 68.0% in the 1998 Fiscal Year to $828,000 from $2,590,000 in the 1997
Fiscal Year. Licensing arrangements decreased in the 1998 Fiscal Year primarily
from Spacetec discontinuing its 2D graphics acceleration software business.
Consumer retail sales of the SpaceOrb 360 also declined in the 1998 Fiscal Year.
While the SpaceOrb 360 has enjoyed widespread acceptance in the early-adopter,
hard core gamer market, sales to the mass market have lagged due to delays in
customer acceptance of the product and inadequate channel
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sales. Spacetec has been unable to clearly differentiate its product from other
lower priced computer control devices. As a result, management has shifted its
sales focus from direct retail channels to establishing Original Equipment
Manufacturer ("OEM") and strategic alliance partnerships in the consumer
business.
As part of its corporate strategy, management expects to continue to
emphasize the industrial business and pursue additional strategic alliance
partnerships and OEM relationships. However, there is no assurance that forging
additional relationships will be able to generate substantial revenue, if at
all.
Two customers represented 21.3% and 13.4% of Spacetec's revenues for the
1998 Fiscal Year as compared with two customers representing 17.0% and 14.8% of
sales for the 1997 Fiscal Year.
Revenue generated through Spacetec's foreign subsidiaries totaled $631,000
and represented 7.1% of total revenues for the 1998 Fiscal Year. These sales are
denominated in the local currency of the country in which the subsidiary is
located. Although denominated in foreign currency, exchange rate fluctuations
have not been material.
Gross Profit. Spacetec's gross profit is arrived at after the costs of
materials, manufacturing overhead, royalties and amortization of capitalized
software are subtracted from revenues. Gross profit increased 30.0% to
$6,029,000 for the 1998 Fiscal Year from $4,639,000 for the 1997 Fiscal Year and
represented 67.9% and 51.1% of revenues, respectively. The increase in gross
profit as a percentage of revenues reflects the proportionately higher margins
available from the industrial market, which has been the area of principal focus
by Spacetec during the 1998 Fiscal Year. Gross profit in both the 1998 Fiscal
Year and 1997 Fiscal Year was negatively impacted by write-downs of inventory
and capitalized software of $470,000 and $929,000, respectively, related to the
consumer market. During the 1998 Fiscal Year, Spacetec recognized charges of
$340,000 for the write-down of inventory and $130,000 for the write-down of
capitalized software and in the 1997 Fiscal Year, charges of $600,000 for the
write-down of inventory and $329,000 for the write-down of capitalized software
associated with the SpaceOrb 360 were incurred. The charges in the 1998 Fiscal
Year resulted from the cessation of a retail marketing program. In the 1997
Fiscal Year, Spacetec had reviewed the projected revenue stream associated with
the sales of the SpaceOrb 360 product and had determined that the recoverability
of the costs of the inventory and capitalized software was uncertain. As of
March 31, 1998, Spacetec has attached no value to inventory and capitalized
software related to the SpaceOrb 360, and does not anticipate further
write-downs related to this product. However, in the future, there can be no
assurance that Spacetec will avoid write-downs related to other current products
or products in development.
As Spacetec shifts its sales mix from direct to OEM channels for industrial
and consumer products, it is expected that the gross profit percentage currently
experienced by Spacetec, will not be sustainable. Generally, Spacetec realizes a
lower profit on its sales through OEMs and therefore expects that increases in
the volume of its products through OEM channels will negatively impact its gross
profit. Spacetec's expectations regarding the decline in gross profit percentage
is a forward looking statement. There can be no assurance that such decreases in
profit will not be greater than anticipated.
Selling and Marketing Expenses. Selling and marketing expenses, which
include principally personnel costs and sales commissions, and to a lesser
extent, tradeshow expenses and expenses related to advertising and marketing,
decreased 11.9% to $4,359,000 for the 1998 Fiscal Year from $4,945,000 for the
1997 Fiscal Year and represented 49.1% and 54.5% of revenues, respectively.
During the 1998 Fiscal Year, significant marketing expenses associated with a
direct presence in the retail channel were eliminated. In addition, Spacetec
realized savings from cost containment programs implemented at the end of the
1997 Fiscal Year and eliminated broad based advertising and public relations
activities in favor of focused marketing events. Going forward, Spacetec
anticipates that selling and marketing expenses will be reduced
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as a percentage of revenues as it is anticipated that revenues will increase and
expenses will remain stable. Spacetec has recently invested in additional
salespeople and new sales offices, both domestically and internationally, which
were not established long enough in the 1998 Fiscal Year to impact revenues
significantly. Spacetec's expectations regarding the decline of selling and
marketing expenses as a percentage of revenues and the increase in revenues are
forward looking statements. There can be no assurance that expenses will not be
greater than anticipated or that revenues will not be less than expected.
Research and Development Expenses. Research and development expenses,
which consist primarily of personnel and equipment costs required to conduct
Spacetec's software and hardware development and engineering efforts, increased
19.4% to $3,483,000 for the 1998 Fiscal Year from $2,916,000 for the 1997 Fiscal
Year and represented 39.2% and 32.1% of revenues, respectively. The increase in
research and development expenditure in the 1998 Fiscal Year resulted from
hiring additional engineering research personnel at higher skill levels and
therefore at higher average salaries. This investment was necessary to expand
Spacetec's software product development efforts, particularly in developing
software for stand-alone revenue generation unrelated to current hardware
offerings.
In the 1997 Fiscal Year, $224,000 of research and development expenses were
recorded as capitalized software related to the SpaceOrb 360. In comparison,
Spacetec did not capitalize any research and development expenses in the 1998
Fiscal Year, as technological feasibility was not reached.
Spacetec has focused its research and development efforts on the
development of several new products, slated for release during the 1999 Fiscal
Year. The Spaceball 4000 and the Enhanced SDK will require additional research
and development funding during the upcoming year. Although Spacetec anticipates
that research and development expenses in the 1999 Fiscal Year will stabilize at
dollar levels similar to the 1998 Fiscal Year results, the continued development
of both the Spaceball 4000 and the Enhanced SDK as well as development of
additional products under consideration could cost more than expected, and there
can be no assurance that these expenses will not be greater than anticipated.
General and Administrative Expenses. General and administrative expenses,
which include the costs of Spacetec's corporate finance, human resources and
administrative functions, increased 17.3% to $2,025,000 for the 1998 Fiscal Year
from $1,726,000 for the 1997 Fiscal Year, and represented 22.8% and 19.0% of
sales, respectively. The increase is associated with increases in accounting,
legal, and administration fees related to the establishment of three
wholly-owned subsidiaries in each of Germany, France and the United Kingdom, and
to the acquisition of Spatial Systems Limited ("SSL"). Additionally, Spacetec
incurred severance costs of approximately $300,000 in connection with the
termination of an executive officer, as well as a loss of $104,000 related to
the write-off of intangible assets associated with its Panacea graphics
acceleration software business. Management anticipates that general and
administrative expenses will decrease in absolute dollars for the year ended
March 31, 1999. However, there can be no assurance that these expenses will not
be greater than anticipated.
Provision for Income Taxes. As Spacetec has recognized losses in the 1998
Fiscal Year, it has not recorded a provision for income taxes. The benefit
attributable to the carryback of losses to prior fiscal years was fully utilized
during the fiscal year ended March 31, 1997. Spacetec has unbenefited federal
net operating loss carryforwards of approximately $4,300,000.
Fiscal Year Ended March 31, 1997 and 1996
Revenues. Revenues increased 11.6% to $9,075,000 in the 1997 Fiscal Year
from $8,132,000 for the fiscal year ended March 31, 1996 ("1996 Fiscal Year").
The increase in revenues is attributable to Spacetec's launch of the SpaceOrb
360 into the consumer market. This was the first year that Spacetec sold a
consumer product.
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Two customers represented 17.0% and 14.8% of Spacetec's revenues for the
1997 Fiscal Year as compared with two customers representing 24.3% and 9.8% of
sales for the 1996 Fiscal Year.
Gross Profit. Gross profit, decreased 21.4% to $4,639,000 for the 1997
Fiscal Year from $5,903,000 for the 1996 Fiscal Year and represented 51.1% and
72.6% of revenues, respectively. Gross profit declined mainly due to write-offs
of capitalized software and a write down of inventory to net realizable value.
Spacetec completed an evaluation of the projected revenue stream associated with
inventory components related to the SpaceOrb 360 and capitalized software, which
indicated that the recoverability of the costs of these assets was uncertain.
Spacetec recognized a $329,000 charge for the write down of its capitalized
software and a $600,000 charge for the write down of its inventory.
Selling and Marketing Expenses. Selling and marketing expenses, increased
82.4% to $4,945,000 for the 1997 Fiscal Year from $2,711,000 for the 1996 Fiscal
Year and represented 54.5% and 33.3% of revenues, respectively. The increase is
primarily due to costs incurred in connection with the initial marketing program
for the SpaceOrb 360, including extensive non-recurring television advertising
and promotion expenses in excess of $1,000,000. Additional personnel and
recruiting costs associated with an expansion of the sales and marketing
infrastructure were also incurred during the year.
Research and Development Expenses. Research and development expenses,
increased 73.2% to $2,916,000 for the 1997 Fiscal Year from $1,684,000 for the
1996 Fiscal Year and represented 32.1% and 20.7% of revenues, respectively. The
increase reflects significant investments in personnel and consultants necessary
to expand software product development efforts, particularly in the consumer,
multimedia and PC CAD markets, and engineering efforts designed to lower the
cost of manufacturing of Spacetec's hardware components. Research and
development expenses that were recorded as capitalized software costs decreased
to $224,000 for the 1997 Fiscal Year in comparison with $425,000 for the 1996
Fiscal Year.
General and Administrative Expenses. General and administrative expenses,
which include the costs of Spacetec's corporate finance, human resources and
administrative functions, increased 114.9% to $1,726,000 for the 1997 Fiscal
Year from $803,000 for the 1996 Fiscal Year, and represented 19.0% and 9.9% of
sales respectively. The increase is associated with increased personnel costs to
expand the administrative infrastructure as well as increases in professional
fees and filing fees due to additional reporting requirements consequent upon
becoming a public company.
Provision for Income Taxes. The current federal tax benefit represents
taxes receivable arising primarily from the carryback of the fiscal 1997 loss to
the three previous years and other refunds.
Basic and diluted loss per common share are presented to conform with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." See
Note 2 to the Consolidated Financial Statements.
Spacetec's results of operations have varied significantly in the past and
may vary significantly in the future, on a quarterly and annual basis as a
result of a variety of factors, many of which are outside Spacetec's control.
These factors include, without limitation: (i) the timing and size of orders
which are received and can be shipped in any particular period; (ii) the
commercial success of Spacetec's products; (iii) delays in the introduction of
products or product enhancements by Spacetec and Spacetec's ability to introduce
new products and technologies on a timely basis; (iv) the financial stability of
Spacetec's major customers; (v) the timing of new product introductions or
announcements by Spacetec or its competitors; (vi) the seasonality of the
placement of customer orders; (vii) the timing and nature of selling and
marketing expenses such as tradeshows and advertising campaigns; (viii) the
timing of development expenditures and personnel changes; (ix) customer order
deferrals in anticipation of product enhancements
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<PAGE> 86
or new product offerings by Spacetec or its competitors; (x) customer
cancellation of orders and the gain or loss of significant customers; (xi) the
mix of products sold; and (xii) the mix of OEM and direct sales to end users.
Spacetec has historically operated with little backlog because its products are
generally shipped immediately upon receipt of an order by Spacetec. As a result,
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter and on sales by Spacetec's customers to end users.
Spacetec has historically recognized a large portion of its revenues from
sales booked and shipped in the last month of a quarter such that the magnitude
of quarterly fluctuations may not become evident until late in, or at the end
of, a particular quarter. Because a number of Spacetec's individual orders are
for significant amounts, the failure to ship a significant order in a particular
quarter could materially adversely affect revenues and results of operations for
such quarter. To the extent that significant sales occur earlier than expected,
results of operations for subsequent quarters may be materially adversely
affected. Due to these and other factors, Spacetec's quarterly revenues,
expenses and results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance. There can be no assurance that Spacetec will be able to increase
its revenues in future periods or be able to sustain its level of revenues or
its rate of growth on a quarterly or annual basis.
LIQUIDITY AND CAPITAL RESOURCES
To date, Spacetec has funded its operations and capital expenditures
primarily through cash generated from operations and the proceeds from the
initial public offering of its common stock in December 1995. As of March 31,
1998, Spacetec had cash and cash equivalents and available-for-sale securities
of $9,026,000 and working capital of $10,480,000 versus $10,229,000 and
$13,622,000, respectively at March 31, 1997. Spacetec has no outstanding line of
credit or other indebtedness for borrowed money.
Spacetec used $265,000 to fund operating activities in the current year as
compared with $4,408,000 used in operations in the prior year. The use of funds
in the 1998 Fiscal Year is primarily attributable to the net loss of $3,270,000,
which was offset by a reduction in inventories, income taxes receivable and
accounts receivable and increases in accounts payable and accrued expenses. The
change in accounts receivable from using cash of $173,000 in the 1997 Fiscal
Year, to providing cash of $216,000 in the 1998 Fiscal Year is the result of
enhanced collection efforts over the course of the year. The change in inventory
to providing cash of $1,031,000 in the 1998 Fiscal Year from using cash of
$1,309,000 in the 1997 Fiscal Year resulted from the overall reduction of
on-hand quantities of inventory coupled with write-downs of SpaceOrb 360
inventory in the 1998 Fiscal Year. Inventory levels were high in the 1997 Fiscal
Year as Spacetec had made significant investments in inventory related to the
SpaceOrb 360 in order to have the necessary anticipated quantities on hand for
sale during the peak retail Christmas season. In the 1998 Fiscal Year, Spacetec
made an effort to reduce its overall inventories, especially those related to
the SpaceOrb 360. However, as Spacetec was unable to sell the on-hand quantities
of this product, and as systems configurations had changed, management
determined that the inventory value was impaired. Therefore, a write-down of
$340,000 related to the SpaceOrb 360 was taken in the 1998 Fiscal Year. Also
during the 1998 Fiscal Year, Spacetec received income tax refunds of $438,000
resulting from the carryback of the 1997 Fiscal Year net operating loss to the
three previous years. The change in accounts payable and accrued expenses from
providing cash of $231,000 in the 1998 Fiscal Year from using cash of $208,000
in the 1997 Fiscal Year is primarily due to the timing of payments to vendors.
The overall improvement in cash from operating activities from a use of
$4,408,000 in the 1997 Fiscal Year to a use of $265,000 in the 1998 Fiscal Year
was due to considerable efforts by management to improve the overall balance
sheet.
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<PAGE> 87
Net cash provided to Spacetec through investing activities totaled
$1,056,000 during the 1998 Fiscal Year. The increase is attributable to net
proceeds in the amount of $1,482,000, generated from net sales of Spacetec's
available-for-sale securities. The increase was offset by $339,000 for purchases
of furniture and equipment, (primarily computer equipment), and $87,000 for
purchases of intangible assets. Spacetec anticipates that capital expenditures
for the 1999 Fiscal Year will mirror capital expenditures for the 1998 Fiscal
Year, but it has no commitments or specific plans for any significant purchases.
Financing activities used $457,000 of net cash in the current year.
Spacetec spent $534,000 to repurchase 150,000 shares of its common stock. The
cost was offset by $77,000 which was received upon the exercise of employee
stock options.
Spacetec believes existing cash and investment securities together with
future anticipated funds from operations, will satisfy its projected working
capital and other cash requirements through the end of its fiscal year ending
March 31, 1999. Substantial, additional funds will be required to continue
software and hardware development, as well as to develop the sales and marketing
infrastructure, distribution channels and market awareness of Spacetec's
products. Spacetec believes the level of financial resources available to it is
an important competitive factor in its industry and may seek additional capital
prior to the end of that period.
Spacetec's capital requirements will depend on many factors, including the
rate at which Spacetec can develop its products, the market acceptance of such
products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace. Changes in
technology or growth in revenues beyond currently established capabilities will
also require further investment. To the extent that Spacetec's current financial
resources are insufficient to fund Spacetec's operating requirements, it may be
necessary for Spacetec to seek additional funding through public or private
financing. There can be no assurance that additional financing will be available
on acceptable terms if at all. If additional funds are raised by issuing equity
securities, further dilution to the existing shareholders will result. If
adequate funds are not available, Spacetec's business would be materially
adversely affected, and, as a result, Spacetec may be required to curtail its
operations significantly. There can be no assurance that Spacetec's cash flow
from operations will be adequate to fund its long-term working capital
requirements, or that it will be able if necessary, to obtain equity financing
on favorable terms, if at all.
SPACETEC CERTAIN TRANSACTIONS
Effective October 20, 1998, Spacetec entered into a consulting agreement
with a management consulting firm affiliated with Sun Capital, to assist in
reviewing and reorganizing the Spacetec operations. The agreement provides for
payment of $30,000 per month and may be terminated upon ten days notice by
either party. In addition, the agreement contains non-disclosure clause
provisions, assignment of inventions, a twelve-month non-compete with certain
competitors and a twelve-month non-solicitation of employees.
On June 30, 1998, Spacetec entered into a consulting agreement with George
Rea pursuant to which Mr. Rea agreed to serve as Acting Chief Executive Officer
of Spacetec until September 30, 1998 or until the completion of the merger. Mr.
Rea will be paid $1,500 per day.
Dennis T. Gain, a director of Spacetec and former President and Chief
Executive Officer of Spacetec, entered into a Separation Agreement with Spacetec
on March 18, 1998. The Separation Agreement provides that Spacetec shall pay to
or on behalf of Mr. Gain: (i) severance payments in an aggregate of $12,000 per
month for the next twenty months, (ii) health insurance premium for his
then-existing health coverage for the next twenty-four months, and (iii) a
$1,000 automobile allowance for the next twenty
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<PAGE> 88
months. In addition, all incentive stock options previously granted to Mr. Gain,
other than 12,000 options of an option grant on April 29, 1994, converted into
non-qualified stock options and Mr. Gain exercised and sold the 12,000 Incentive
Stock Options on May 22, 1998. Further, Spacetec sold an automobile purchased by
it in March 1997 to Mr. Gain for $28,471, $11,929 below the fair market value of
the automobile. The Spacetec Board agreed, subject to its fiduciary and other
legal duties, to nominate Mr. Gain for election to the Spacetec Board at the
1998 annual meeting. In connection therewith, Mr. Gain agreed to return all
proprietary information of Spacetec, release all claims and causes of action
relating to his employment with Spacetec, and to execute a Non-competition,
Non-disclosure and Non-solicitation Agreement with Spacetec.
On June 5, 1998, Spacetec contributed its Open Motion technology and
certain assets related thereto having a net book value of approximately $50,000
to 3D Open Motion, LLC, a Delaware limited liability corporation (the "LLC"),
established by Mr. Gain, a director of Spacetec, former President and Chief
Executive Officer of Spacetec and majority owner of the LLC, in exchange for an
initial 20% non-voting interest in the LLC. In connection with the transaction,
Spacetec received an option, exercisable January 1, 1999 through May 31, 1999,
upon payment of $250,000 to the LLC, to obtain a 50% discount from the most
favorable terms offered to any other customer on all commercial products
developed by the LLC. Simultaneously with Spacetec's contribution, Mr. Gain
contributed 291,667 shares of Spacetec's common stock to the LLC. Spacetec
repurchased the 291,667 shares on June 17, 1998 from the LLC pursuant to its
stock buyback plan at $2.40 per share, a 20% discount from the closing price of
Spacetec common stock on the Nasdaq National Market on June 3, 1998, the date on
which Spacetec and the LLC agreed to the terms of the joint venture.
Mr. Boelig and Spacetec entered into an Employment Agreement dated April 1,
1998 whereby Mr. Boelig agreed to serve as President and Chief Operating Officer
of Spacetec for a two year period ending March 31, 2000, at an annual salary of
$160,000 for the first year and a bonus plan pursuant to which Mr. Boelig would
be eligible for a bonus up to $100,000 per year upon the attainment of certain
goals. In addition, the Spacetec Board granted Mr. Boelig a non-qualified stock
option to purchase 50,000 shares of Spacetec common stock at an exercise price
of $3.25, the fair market value of Spacetec common stock on April 1, 1998, such
option to vest twenty percent (20%) per year over six years. In the event Mr.
Boelig is terminated for reasons other than Just Cause (as defined in the
Employment Agreement), Mr. Boelig shall receive salary and benefits for twelve
months and all options which may become vested within the twelve-month period
following such termination (the "Exercise Period") shall become vested and all
vested options held by Mr. Boelig pursuant to any option agreement may be
exercised at any time within such Exercise Period. Mr. Boelig had previously
executed a Non-competition, Non-disclosure and Inventions Agreement with
Spacetec which continues in full force and effect.
On July 30, 1998, Mr. Boelig resigned as a director of Spacetec. On August
18, 1998, Mr. Boelig and Spacetec entered into a Resignation Agreement and
Release whereby Mr. Boelig resigned as President and Chief Operating Officer
effective August 29, 1998. Under the terms of the Resignation Agreement, Mr.
Boelig will receive salary and benefits for twelve months following his
termination and all options which would have vested by August 29, 1999 vested.
On July 18, 1997, Spacetec completed a tender offer for the outstanding
shares of SSL, a then-shareholder of Spacetec. At the time of the tender offer,
(i) Mr. Jagelman, Chairman of the Board of SSL, was a director and shareholder
of Spacetec. Pursuant to the tender offer, Spacetec exchanged (i) two shares of
Spacetec common stock for fifteen shares of SSL and (ii) one share of Spacetec
common stock for every option to purchase twelve shares of SSL. Concurrent with
the tender offer, all shares of Spacetec common stock owned by SSL at the time
of the tender offer were canceled. As a result of this transaction, the number
of outstanding shares of Spacetec did not change.
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Spacetec has agreed to indemnify and reimburse Dennis Gain and J. Grant
Jagelman and certain of their affiliates for any liabilities and expenses
incurred by them in connection with litigation arising out of the Voting
Agreements or any actions taken in connection therewith.
On April 11, 1997, the Compensation Committee of the Board of Directors
repriced certain outstanding stock options granted to then-current employees,
including options held by Messrs. Gain, Rossen, Hilton, Wick and Ms. Ouellette
under the 1993 Plan which had an exercise price ranging from $4.50 to $11.00 to
an exercise price equal to $3.25. See "Option Repricing".
SPACETEC MANAGEMENT AND EXECUTIVE COMPENSATION PRIOR TO THE MERGER
The following table sets forth each executive officer of Spacetec prior to
the completion of the merger and their ages and present positions with Spacetec:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George R. Rea.......................... 60 Acting Chief Executive Officer and Class I Director
John A. Hilton......................... 38 Vice President and Chief Technology Scientist
A. Lorne Grant*........................ 53 Vice President, Engineering
Joyce A. Ouellette..................... 40 Vice President, OEM Sales, Business Development & ISV
Relations
</TABLE>
- ---------------
* No longer employed by Spacetec.
George R. Rea has been the Acting Chief Executive Officer of Spacetec since
July 1998 and a director since September 1997. Mr. Rea has been a consultant and
investor since 1994. Prior to this, Mr. Rea was Executive Vice President of
Conner Peripherals Inc. from 1992 until his retirement in 1994. In addition, Mr.
Rea is a director of Imaging Technologies International LLC.
John A. Hilton has served as Vice President since its incorporation in
April 1991 and Chief Technology Scientist since 1997. Mr. Hilton holds a B.S.
degree in Computer Science, and B.E. and M.E. degrees in mechanical engineering
from the University of Sydney, Australia.
A. Lorne Grant served as Vice President of Engineering from March 1997
until November 1998. From 1995 until 1997, Mr. Grant served as a consultant to
area high-technology firms, including Spacetec IMC Corporation. Mr. Grant served
as Chief Executive Officer of Nexus Integrated Services Corporation from 1990
through 1995.
Joyce A. Ouellette has served as Vice President since 1992 and is currently
the Vice President of Business Development, OEM Sales and ISV Relations since
August 1997. Ms. Ouellette holds a B.S. degree in business from North Adams
State College.
COMMITTEES OF THE BOARD
The Audit Committee, of which Mr. Goulder, Mr. Loyd and Mr. Gain are
currently members, is responsible for providing the Board of Directors with an
independent review of the financial health of Spacetec and its financial
controls and reporting. Its primary functions are to recommend independent
auditors to the Board of Directors, review the results of the annual audit and
the auditors' reports, and
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ensure the adequacy of Spacetec's financial controls and procedures. The Audit
Committee met once in Fiscal Year 1998.
The Compensation Committee, of which Messrs. Jagelman, Sullivan and Rea are
currently members, acts for the Board of Directors with respect to Spacetec's
compensation practices and implementation thereof. The Compensation Committee
sets and implements the compensation of Spacetec's officers and administers
Spacetec's stock plans. The Compensation Committee held two meetings in Fiscal
Year 1998.
The Board of Directors does not have a standing nominating committee.
The Board of Directors held eleven meetings during Fiscal Year 1998. No
directors attended less than 75% of the aggregate meetings of the Board of
Directors and all committees of the Board of Directors on which such director
served during Fiscal Year 1998.
COMPENSATION AND OTHER INFORMATION CONCERNING DIRECTORS AND OFFICERS
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for their services. All directors
who are not employees of Spacetec (the "Eligible Directors"), however, are
currently eligible to participate in the Director Plan. Under the Director Plan,
each Eligible Director receives, on the date such person is first elected to the
Board, an option to purchase 10,000 shares (the "Initial Option") of the
Spacetec common stock, such shares vesting over two years. Subsequent to the
grant of the Initial Option, each Eligible Director who is a director on each
December 31st thereafter receives an option to purchase an additional 10,000
shares of Spacetec common stock, such shares vesting over two years. All options
granted under the Director Plan have an exercise price equal to the fair market
value of the Spacetec common stock on the date of grant. Each option granted
under the Director Plan expires ten years from the date of grant.
During Fiscal Year 1998, Messrs. Goulder, Jagelman, Loyd, Rea and Sullivan
each received an option to purchase 10,000 shares of Spacetec common stock which
was immediately exercisable with respect to 30% of such shares and will become
exercisable with respect to 30% and 40% on December 31, 1998 and December 31,
1999 respectively. In addition, Mr. Rea, upon his election to the Board of
Directors, also received an initial option of 10,000 shares of Spacetec common
stock which was immediately exercisable with respect to 30% of such shares and
will become exercisable with respect to 30% and 40% of such shares on September
11, 1998 and September 11, 1999, respectively.
In addition to the options granted pursuant to the Director Plan on
November 20, 1997 each of Messrs. Rea and Sullivan were granted options from the
1993 Stock Plan to purchase 9,000 and 10,000 shares of Spacetec common stock,
respectively, in connection with their participation on a technology advisory
committee of Spacetec. The options were immediately exercisable with respect to
30% of such shares and which will become exercisable with respect to 30% and 40%
of such shares on November 20, 1998 and November 20, 1999 respectively.
On December 14, 1998, the Spacetec Board suspended the grant of options to
Eligible Directors, such that no director shall receive a grant of options on
December 31, 1998. Absent action by the Board of Directors of New Labtec, the
suspension shall terminate on December 30, 1999.
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EXECUTIVE COMPENSATION
The following table provides summary information concerning the cash
compensation and certain other compensation paid, awarded, or accrued by
Spacetec to (i) Spacetec's Former Chief Executive Officer (through August 29,
1998), (ii) Spacetec's former Chief Executive Officer (through February 1998),
(iii) each of Spacetec's four most highly compensated executive officers who
were serving as of March 31, 1998, and (iv) a former executive officer who would
have been among Spacetec's four most highly compensated executive officers, but
for the fact that he was not serving in that capacity as of March 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------------
------------------------------------------- AWARDS
OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS # $
- --------------------------- ---- -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
C. RAYMOND BOELIG*...... 1998 $122,995(1) -- -- 100,000 --
President, Chief Operating 1997 -- -- -- --
Officer and Director 1996 -- -- -- -- --
--
DENNIS T. GAIN.......... 1998 $148,205 -- -- 58,000(2)(3) $37,575(3)(4)
Former President, CEO, and 1997 $180,000 -- -- -- $ 3,507(4)
Chairman of the Board 1996 $135,000 -- -- 40,000 $ 3,237(4)
NEIL M. ROSSEN*......... 1998 $110,000 -- -- 75,000(2) --
Former Vice President and 1997 $ 37,800 -- -- 50,000 --
Chief Financial Officer 1996 -- -- -- -- --
JOHN A. HILTON.......... 1998 $110,000 -- -- 15,500(2) --
Vice President and Chief 1997 $110,000 -- -- 7,500 --
Technology Scientist 1996 $ 93,333 -- -- 42,000 --
JOYCE A. OUELLETTE...... 1998 $152,845(5) -- -- 29,500(2) --
Vice President, OEM Sales 1997 135,625(5) -- -- --
Business Development & ISV 1996 $ -- -- -- --
Relations 153,000(5) 62,000
$
A. LORNE GRANT*......... 1998 $124,925(7) $16,000 2,000(6) 100,000 $
Vice President, Engineering 1997 29,600 -- -- -- --
1996 $ -- -- -- --
JAMES J. WICK*.......... 1998 $ 93,711 -- -- 15,500(2) $17,401(8)
Former Vice President, and 1997 $110,000 -- -- 7,500 --
Chief Technology Officer 1996 $ 92,000 -- -- 32,000 --
</TABLE>
- ---------------
* No longer employed by Spacetec.
(1) Includes $37,070 of sales commissions paid to Mr. Boelig. Mr. Boelig and
Spacetec entered into an Employment Agreement dated April 1, 1998. See
"Spacetec Certain Transactions."
(2) Includes Options granted pursuant to the repricing of options described
under the caption "Option Repricing" and disclosed in the table "Ten Year
Option Repricing" set forth below.
(3) Includes certain payments and Option Re-grant made pursuant to a Separation
Agreement between Mr. Gain and Spacetec. See "Spacetec Certain
Transactions."
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(4) These amounts represent the value of life insurance policies on the life of
Mr. Gain maintained by Spacetec until February 1998, under a split dollar
insurance agreement between Spacetec and New York Life Insurance Company,
where Spacetec paid $5,992, $5,963, and $22,669, in Fiscal Years 1996,1997
and 1998, respectively, of total premiums of $6,787, $6,787, and 30,653
respectively.
(5) Includes sales commissions of $54,545, $45,625 and $64,000 paid to Ms.
Ouellette in each of fiscal year 1998, 1997 and 1996, respectively.
(6) Consists of re-location expenses paid to Mr. Grant in connection with his
becoming an officer of Spacetec.
(7) Consists of sales commissions of $4,925 received by Mr. Grant.
(8) Consists of a payment made pursuant to a severance agreement between Mr.
Wick and Spacetec.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
--------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS PRICE APPRECIATION OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------------
NAME GRANTED YEAR 1998 ($/SHARE) DATE 5%($) 10%($)
- ---- ----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
C. Raymond Boelig.............. 100,000 10.32% $4.38 7/14/07 $275,456 $698,059
Dennis T. Gain................. 10,000 1.32% $3.58 9/29/00 $13,327 $37,047
30,000 3.10% $3.12 4/27/00 $14,802 $26,332
8,000 0.83% $1.10 4/29/99 $18,735 $20,282
10,000 1.32% $3.58 9/29/00 $1,091 $5,828
Neil M. Rossen................. 50,000 5.16% $3.25 12/4/07 $110,715 $285,891
25,000 2.58% $3.25 4/11/07 $51,098 $129,492
John A. Hilton................. 8,000 0.83% $3.25 9/29/05 $13,302 $32,278
7,500 0.77% $3.25 7/26/06 $13,978 $34,713
Joyce A. Ouellette............. 28,500 3.04% $3.25 9/29/05 $49,051 $119,026
A. Lorne Grant................. 100,000 10.32% $3.25 4/11/07 $204,391 $517,966
James J. Wick.................. 8,000 0.83% $3.25 9/29/05 $13,302 $32,278
7,500 0.77% $3.25 7/26/06 $13,978 $34,713
</TABLE>
- ---------------
(1) Stock options were granted under Spacetec's 1993 Plan at an exercise price
equal to the fair market value of Spacetec's common stock on the date of
grant. The options have a term of ten years from the date of grant (with the
exception of Mr. Gain which have a term of 5 years from date of grant) and
become exercisable as to 20% of the shares covered on the anniversary of the
date of grant for each of the next six years.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%) on
Spacetec's common stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect Spacetec's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common stock
holdings are dependent on the timing of such exercise and the future
performance of Spacetec's common stock. There can be no assurance that the
rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
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<PAGE> 93
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to options to
purchase Spacetec's common stock granted under Spacetec's 1993 Stock Plan,
including (i) the number of shares of Spacetec common stock purchased upon
exercise of options in the fiscal year ended March 31, 1998; (ii) the net value
realized upon such exercise; (iii) the number of unexercised options outstanding
at March 31, 1998; and (iv) the value of such unexercised options at March 31,
1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
SHARES NUMBER OF SECURITIES UNDERLYING UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS AT IN-THE-MONEY
ON MARCH 31, 1998 (#) OPTIONS AT
EXERCISE VALUE -------------------------------- MARCH 31,
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE 1998 ($)(1)
- ---- --------- -------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Raymond Boelig........ 0 0 0 100,000 0 0
Dennis T. Gain(2)........ 0 0 36,000 34,000 49,360 25,040
Neil M. Rossen........... 0 0 10,000 81,000 0 0
John A. Hilton........... 0 0 27,900 37,600 27,176 22,764
Joyce A. Ouellette....... 0 0 41,900 36,100 30,005 19,320
A. Lorne Grant........... 0 0 20,000 80,000 0 0
James J. Wick(3)......... 0 0 23,900 0 25,536 0
</TABLE>
- ---------------
(1) Value is based on the difference between the option exercise price and the
fair market value at March 31, 1998, the fiscal year-end ($3.25 per share as
quoted on the Nasdaq National Market), multiplied by the number of shares
underlying the option.
(2) All incentive stock options previously granted to Mr. Gain except for 12,000
options of an option grant on April 29, 1994 converted into non-qualified
stock options upon termination of employment. Mr. Gain exercised and sold
the 12,000 Incentive Stock Options on May 22, 1998.
(3) Mr. Wick's employment with Spacetec terminated on February 5, 1998. Unvested
options terminated as of May 5, 1998 and may no longer be exercised. Mr.
Wick exercised and sold 19,200 options in April 1998.
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<PAGE> 94
TEN YEAR OPTION REPRICING
The following table sets forth information concerning the repricing of
stock options held by certain executive officers of Spacetec since December 6,
1995, the date of Spacetec's initial public offering, including (i) the date of
the repricing; (ii) the number of shares subject to the repricing; (iii) the
market price at the time of the repricing; (iv) the exercise price prior to the
repricing; (v) the new exercise price; and (vi) the original option term
remaining at the date of the repricing.
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE EXERCISE TERM
UNDERLYING OF STOCK AT PRICE AT REMAINING
OPTIONS TIME OF TIME OF NEW AT DATE OF
DATE OF REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME REPRICING AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE AMENDMENT
- ---- --------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
C. RAYMOND BOELIG....... -- -- -- -- -- --
Former President and
Chief Operating
Officer
DENNIS T. GAIN.......... 4/11/97 10,000 $3.25 $7.70 3.58 8.5 years
Former President,
Chief Executive
Officer and Chairman
of the Board
JOHN A. HILTON.......... 4/11/97 8,000 $3.25 $7.00 3.25 8.5 years
Vice President and 4/11/97 7,500 $3.25 $8.75 3.25 9.33 years
Chief Technology
Scientist
JOYCE A. OUELLETTE...... 4/11/97 29,500 $3.25 $7.00 3.25 8.5 years
Vice President, OEM
Sales, Business
Development & ISV
Relations
JAMES J. WICK........... 4/11/97 8,000 $3.25 $7.00 3.25 8.5 years
Former Vice President 4/11/97 7,500 $3.25 $8.75 3.25 9.33 years
and Chief Technology
Officer
</TABLE>
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SPACETEC STOCK INFORMATION
SPACETEC PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Spacetec's common stock as of October 31, 1998 by (i) persons known by
Spacetec to be beneficial owners of more than 5% of its common stock, (ii) the
executive officers named in the Summary Table, (iii) the directors and nominees
for election as directors of Spacetec, and (iv) all current executive officers
and directors of Spacetec as a group and the percentage of shares represented
thereby.
<TABLE>
<CAPTION>
PRIOR TO THE MERGER AFTER THE MERGER
---------------------------- ----------------------------
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED OWNED OWNED
- ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Labtec Inc.(2)............................... 1,370,331 19.80% -- --
1499 SE Tech Center Drive
Suite 350
Vancouver, WA 98683
Dennis T. Gain(3)............................ 1,319,274 19.11% 1,319,274 6.35%
30 Boren Lane
Boxford, MA 01921
J. Grant Jagelman(4)......................... 591,972 8.55% 591,972 2.85%
Level 8 139 Macquarie St.
Sydney, NSW 2000 Australia
Gain Family Trust(5)......................... 1,047,590 15.30% 1,047,590 5.06%
Sun Multimedia Partners, L.P.(6) ............ -- -- 10,727,478 51.8%
5355 Town Center Rd.
Suite 802
Boca Raton, FL 33486
OTHER DIRECTORS AND NOMINEES FOR DIRECTOR
Morton E. Goulder(7)......................... 170,809 2.48% 170,809 *
Jerry H. Loyd(8)............................. 58,809 * 58,809 *
George R. Rea(9)............................. 30,000 * 59,000 *
Patrick J. Sullivan(10)...................... 28,000 * 50,000 *
Caroline Merison............................. -- -- 554,307 2.68%
Joseph Pretlow............................... -- -- -- --
Robert G. Wick............................... -- -- -- --
Geoffrey Rehnert............................. -- -- -- --
Marc Wolpow.................................. -- -- -- --
Rodger R. Krouse(11)......................... 1,370,331 19.8% 10,727,478 51.8%
Marc J. Leder(11)............................ 1,370,331 19.8% 10,727,478 51.8%
Bradley A. Krouse............................ -- -- -- --
</TABLE>
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<PAGE> 96
<TABLE>
<CAPTION>
PRIOR TO THE MERGER AFTER THE MERGER
---------------------------- ----------------------------
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED OWNED OWNED
- ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OTHER NAMED EXECUTIVE OFFICERS
John A. Hilton(12)........................... 200,411 2.90% 210,411 1.01%
Joyce A. Ouellette(13)....................... 98,000 1.42% 118,000 *
A. Lorne Grant(14)........................... 115,000 1.65% 115,000 *
All directors, nominees for director and
executive officers as a group(15), (16).... 3,970,422 53.81% 13,630,442 64.27%
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise indicated in these footnotes, the persons and entities
named in the table have sole voting and investment power with respect to
all shares beneficially owned by them. Includes shares of Spacetec common
stock issuable pursuant to outstanding options which may be exercised
within 60 days after October 31, 1998. The option information included in
the above table includes options that became exercisable upon the mailing
of this proxy and notice of special meeting but does not include any
options that will become exercisable at the completion of the merger. The
inclusion herein of any shares of Spacetec common stock deemed beneficially
owned does not constitute an admission of beneficial ownership of those
shares.
(2) Includes 1,370,331 shares held of record by those principal stockholders
who are parties to the Voting Agreement pursuant to which Labtec shares
voting power.
(3) Includes (i) 1,047,590 shares held by the Gain Family Trust, a trust for
the benefit of certain members of the family of Dennis T. Gain and of which
Mr. Gain is the sole trustee, (ii) 36,000 shares of Spacetec common stock
subject to options held by Mr. Gain exercisable as of October 31, 1998 or
within 60 days thereafter (iii) 74,000 shares held by Mr. Gain's wife and
children, (iv) 37,600 shares held by the Gain New Zealand Trust of which
Mr. Gain is a Trustee and (v) 22,000 shares which accelerate upon mailing
of this notice.
(4) Includes (i) 446,420 shares held by Rhetford Pty. Ltd., an Australian
corporation of which Mr. Jagelman is Chief Executive Officer and of which
his family members own 100% of the stock, (ii) 27,396 shares held by the
Group Superannuation Fund, an Australian retirement trust of which Mr.
Jagelman holds a 100% interest, (iii) 40,623 shares of Spacetec common
stock held by Mr. Jagelman's wife and children and mother in-law, (iv)
73,000 shares of Spacetec common stock subject to options held by Mr.
Jagelman exercisable as of October 31, 1998 or within 60 days thereafter
and (v) 4,000 shares which accelerate upon mailing of this notice.
(5) The Gain Family Trust is a trust for the benefit of certain family members
of Dennis T. Gain, director of Spacetec and the former President and Chief
Executive Officer. Mr. Gain is the sole trustee of the Gain Family Trust
and has sole voting control and investment power over the shares held by
the trust.
(6) The beneficial ownership of such stockholder may be increased to a maximum
of 13,864,954 shares issued to holders of Labtec common stock.
(7) Includes 36,000 shares of Spacetec common stock subject to options held by
Mr. Goulder exercisable as of October 31, 1998 or within 60 days thereafter
and 4,000 shares which accelerate upon mailing of this notice. Mr. Goulder
will no longer be a director following the merger.
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<PAGE> 97
(8) Includes 36,000 shares of Spacetec common stock subject to options held by
Mr. Loyd exercisable as of October 31, 1998 or within 60 days thereafter
and 4,000 shares which accelerate upon mailing of this notice. Mr. Loyd
will no longer be a director following the merger.
(9) Includes 26,400 shares of Spacetec common stock subject to options held by
Mr. Rea exercisable as of October 31, 1998 or within 60 days thereafter and
3,600 shares which accelerate upon mailing of this notice but does not
include options to purchase 29,000 shares of Spacetec common stock that
will become exercisable at the completion of the merger due to acceleration
provisions discussed in footnote (1) above.
(10) Includes 24,000 shares of Spacetec common stock subject to options held by
Mr. Sullivan exercisable as of October 31, 1998 or within 60 days
thereafter and 4,000 shares which accelerate upon mailing of this notice
but does not include options to purchase 22,000 shares of Spacetec common
stock that will become exercisable at the completion of the merger due to
acceleration provisions discussed in footnote (1) above.
(11) Messrs. Leder and Krouse each own 50% of Sun Multimedia Advisors, Inc., the
general partner of Sun Multimedia Partners, L.P. Following the merger, Sun
Multimedia Partners, L.P. will be the majority stockholder of New Labtec.
Pursuant to a Stockholders Agreement dated October 7, 1997 by and among
Labtec and all the stockholders of Labtec, Sun Multimedia Partners, L.P.
holds voting power with respect to all acquisition proposals. This
Stockholders Agreement terminates upon the completion of the merger.
(12) Includes 41,000 shares of Spacetec common stock subject to options held by
Mr. Hilton exercisable as of October 31, 1998 or within 60 days thereafter
and 24,500 shares which accelerate upon mailing of this notice, but does
not include options to purchase 10,000 shares of Spacetec common stock that
will become exercisable at the completion of the merger due to the
acceleration provisions discussed in footnote (1) above. Includes 54,800
shares held by Mr. Hilton's wife.
(13) Includes 55,000 shares of Spacetec common stock subject to options held by
Ms. Ouellette exercisable as of October 31, 1998 or within 60 days
thereafter and 23,000 shares which accelerate upon mailing of this notice,
but does not include options to purchase 20,000 shares of Spacetec common
stock that will become exercisable at the completion of the merger due to
acceleration provisions discussed in footnote (1) above.
(14) Includes 115,000 shares of Spacetec common stock subject to options held by
Mr. Grant exercisable as of October 31, 1998 or which became exercisable
upon his termination on November 5, 1998. Any options not exercised on or
prior to February 3, 1999 shall terminate and no longer be exercisable.
(15) With respect to prior to the merger, includes 17 persons shares and options
described in footnotes (2-13) but does not include options to purchase
81,000 shares of Spacetec common stock that will become exercisable at the
completion of the merger due to acceleration provisions discussed in
footnote (1) above.
(16) With respect to after the merger, includes 14 persons and the shares and
options described in footnotes (2-6 and 9-13) and shares beneficially owned
by Rodger R. Krouse and Marc J. Leder, through Sun Multimedia Advisors,
Inc., the general partner of Sun Multimedia Partners, L.P.
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<PAGE> 98
SPACETEC STOCK PRICE AND DIVIDEND INFORMATION
Spacetec common stock has been traded on Nasdaq under the symbol "SIMC"
since Spacetec's initial public offering in December 1995. The following table
sets forth the range of high and low closing prices for Spacetec common stock as
reported on Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
YEAR ENDED MARCH 31, 1997
First Quarter............................................... $20 1/4 $14 1/4
Second Quarter.............................................. $14 5/8 $ 8
Third Quarter............................................... $12 1/8 $ 4
Fourth Quarter.............................................. $6 3/8 $3 1/4
YEAR ENDED MARCH 31, 1998
First Quarter............................................... $4 9/16 $ 2
Second Quarter.............................................. $4 5/8 $2 9/16
Third Quarter............................................... $3 7/8 $2 7/8
Fourth Quarter.............................................. $3 9/16 $3 1/16
YEAR ENDED MARCH 31, 1999
First Quarter............................................... $3 5/8 $2 9/16
Second Quarter.............................................. $3 1/8 $1 9/16
Third Quarter............................................... $3 3/16 $1 5/16
Fourth Quarter (through January 15, 1999)................... $2 1/4 $1 11/16
</TABLE>
As of October 20, 1998, the last full day of trading prior to the
announcement of the proposed merger, the closing price for Spacetec common stock
was $1.395. As of January 15, 1999, the closing price for Spacetec common stock
was $2.1875. Spacetec has not paid any dividends since its inception and does
not intend to pay any dividends in the foreseeable future. At the record date,
there were approximately 376 Spacetec stockholders of record.
Upon completion of the merger, it is likely that New Labtec will not meet
either the initial listing requirements or the maintenance requirements of the
Nasdaq National Market or the Nasdaq SmallCap Market. In that event, unless
Nasdaq agrees to waive these requirements for a period of time, it is likely
that the New Labtec common stock will not be listed on the Nasdaq National
Market or the Nasdaq SmallCap Market following the merger. In the event that New
Labtec is not traded on either the National Market or the SmallCap Market,
management will take the steps necessary so that the New Labtec common stock may
trade on a regional exchange or on the OTC Bulletin Board.
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<PAGE> 99
LABTEC
LABTEC BUSINESS
Labtec Inc. is a leading developer and marketer of high-technology,
multimedia input/output peripheral products for the personal computer industry.
Labtec offers an array of proprietary products, including computer speakers,
subwoofers, PC voice access microphones, headphones and accessories. Labtec's
strategy is to offer an assortment of technology products through multiple
channels of distribution. Labtec currently sells to numerous retailers (e.g.,
CompUSA, Circuit City, Best Buy, Wal-Mart, Office Depot, Vobis and Dixons),
master distributors (e.g., Ingram Micro, Merisel, Tech Data), and original
equipment manufacturers ("OEMs") (e.g., Hewlett Packard, Compaq, and Dell).
Labtec serves these multiple channels of distribution on a worldwide basis.
Labtec maintains a leading market position in each of its two product
categories, PC speakers and PC voice access. According to an Electronic Industry
Association ("EIA") report, Labtec has approximately 47% of the US retail market
in units for personal computer speakers. Labtec first introduced the PC speaker
in the early 1990s and continues to provide a broad product offering, a
recognized industry brand name, and consistent technological innovations such as
a proprietary Dynamic Bass Equalization circuit, the industry's first Laminar
Bass Flow Port, and the Unique Clear Desk(TM) mounting system. Labtec attempts
to provide the best performing product based on sound quality, industrial
design, and product features at each retail price point, currently ranging from
$9.99 to $199.99. Labtec management believes that the growth in audio content
from streaming audio over the Internet to DVD is driving penetration of PC
speakers. This growth is being further supported by the proliferation of low
priced PCs that typically include inexpensive speakers, which Labtec management
believes often results in upgrade PC speaker purchases.
According to PC Data, Labtec also has about 64% of the US market for PC
Voice Access microphones, headphones and accessories, a category management
believes it commercialized in 1996. Labtec management believes the advent of
robust speech recognition and voice command technology will make speech an
accepted interface for the PC, driving the demand for high performance voice
input peripherals. Labtec's Noise Canceling and Amplification Technology
("NCAT1"(TM) and "NCAT2"(TM)) provides both an input/output solution to these
applications.
Labtec competes in the worldwide market for multimedia PC peripheral
products. According to Data Quest the PC market has increased by 17% per year
over the last several years, with the number of new shipments growing from 67
million units in 1995 to approximately 91 million units in 1997. According to
Data Quest PC vendors will ship 36 million units in the U.S., up 15%, and 105
million units worldwide, up 15% in 1998.
Labtec believes the following industry trends will create growth
opportunities for each of Labtec's product categories over the next few years:
(i) increased shipments of new multimedia computer systems at retail prices
below $1,000 with inexpensive and low sound quality speakers which Labtec
management believes can lead to demand for speaker upgrades, (ii) the growth in
audio content from streaming audio over the Internet to DVD; and (iii) growth in
the PC voice access market as a result of voice recognition and voice command
software and growing use of the PC for Internet communication and tele-
conferencing.
Labtec plans to supplement its existing product line with both an
aggressive new product development program and strategic alliances or
acquisitions of other high-technology, input/output PC peripheral products,
although it has no present commitments or agreements with respect to any such
transactions.
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<PAGE> 100
Labtec intends to focus on proprietary products that have not yet achieved the
broad distribution Labtec can provide through its worldwide customer
relationships.
PRODUCTS AND MARKETS
Labtec's products are broadly grouped into two categories: PC speakers and
PC voice access.
PC SPEAKERS. In fiscal 1998, approximately $38.3 million or 61% of
Labtec's gross revenue was generated from the PC speaker category. Labtec offers
a line of twelve retail speaker models ranging in street price from $9.99 to
$199.99. Product positioning covers both entry-level and upgrade speaker
segments, encompassing most addressable industry volume.
PC speakers are differentiated from audio speakers in several ways. As
computer soundcard amplification is not sufficient to power a loudspeaker, the
audio device must incorporate an internal amplifier. In addition, due to
potential magnetic interference with the monitor, PC speakers must also contain
shielding. Size and monitor mounting considerations are also an issue when
dealing with limited desk space.
Labtec believes the following industry trends should support the continued
growth of the PC speaker segment:
- Shipments of new computer systems with multimedia capabilities installed,
often with very inexpensive speakers, particularly those systems geared
to retail at or below $1,000.
- Increasing capability and demand for Internet on-line audio.
- Introduction of new software titles with ever-improving audio
capabilities.
Labtec's line of PC speakers is oriented toward three different user
groups: Edutainment for the users of basic multimedia software such as
educational or basic music software, Audio Enthusiasts desiring crisp audio
sound for music, and Gamers desiring a strong bass component in their system.
These different groups are described below:
Edutainment. Labtec's Edutainment line of PC speakers includes five
different models ranging in price from $9.99 to $39.99. All of these two-piece
models are designed to be used with a wide variety of multimedia software.
Audio Enthusiasts. The Audio Enthusiast line consists of two separate
models priced at the $49.99 and $79.99 price points. These speakers are designed
to give crisp, clear sound for the discriminating listener. To further enhance
performance, both models come with an output jack to add a stand-alone
subwoofer.
Gamers. Labtec's Game Series consists of five three-piece models priced
from $49.99 to $199.99 that are designed to add a strong bass component and a
feeling of immersion in the sound. In addition, Labtec introduced the industry's
first universally compatible subwoofer at $49.99 that can be added to any brand
of speakers and significantly upgrade their performance.
Peripherals. Labtec also has a line of peripheral products designed to
enhance the performance of stand-alone PC speaker systems. For example, Labtec
offers the Imager, a product that can add three-dimensional sound to any pair of
PC speakers, and Quicksound, a key pad that gives a user one-touch command over
the entire PC sound system.
PC VOICE ACCESS. Labtec offers a complete line of PC voice access products
to meet all consumer needs. These models are sold under the PC VoiceAccess by
Labtec brand name. This line is designed to
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complement several emerging applications, including basic PC telephony (voice
mail, call forwarding, etc.), Internet communications (long distance), voice
command software (activation and response), and gaming (multi-player
interaction).
The PC VoiceAccess product line is composed of four product classes and
come in the retail price range of $9.99 to $49.99:
- Headset/boom microphones that allow comfortable hands-free use of basic
telephony and Internet communications applications.
- Headsets for use with PC systems for private listening.
- PC microphones that allow for effective voice input for voice command and
voice recognition software.
- A special reference-level headset/boom microphone designed to deliver
high performance sound for the serious gaming enthusiast. This model
features aviation-style ear pads for total comfort and a sturdy design
for active use.
An important element of this emerging industry is the need for the computer
to clearly recognize voice input, in addition to delivering quality sound.
Omnidirectional Electret microphones commonly used in many multimedia systems
pick up ambient noise which can interfere with voice recognition software and
clear communications, while conventional Dynamic microphones are unable to
provide sufficient output level required by many of today's soundcards. To
overcome these issues, Labtec developed and utilizes Noise Canceling and
Amplification Technology ("N-CAT"(TM)). N-CAT(TM) improves performance in two
ways: focusing on direct voice input, it dramatically reduces ambient background
noise, and a high output internal amplification stage insures output
compatibility with virtually all Soundblaster(TM) standard soundcards.
Over the last 18 months, according to PC Data, the demand for products that
facilitate voice interaction with PCs has increased. Labtec management expects
this category to continue to expand with the recent advances made in the
integration of telephone products with computers. Common uses include voice
command and control applications, video conferencing, basic telephone/PC
integration, educational software, voicemail systems, interactive head-to-head
gaming and Internet applications. In fact, many current PC systems now include
telephony functionality as part of their multimedia package. Computer oriented
telephony can be differentiated from ordinary headsets for stereos or telephones
by the need to reduce ambient noise pickup for speech recognition software and
to meet the output level required by most of today's soundboards.
SALES AND DISTRIBUTION
Labtec's sales and distribution strategy is to offer a broad line of
high-technology, multimedia input/output peripheral products through multiple
channels of distribution. Labtec currently sells through numerous retailers,
master distributors and OEM accounts. In addition, Labtec sells through each of
these three channels both domestically and worldwide.
RETAILERS. Labtec maintains an extensive North American retail
distribution network, selling high-technology PC input/output peripheral
products to computer superstores, consumer electronic chains, mass
merchandisers, software retailers, office superstores, and wholesale clubs.
MASTER DISTRIBUTORS. Labtec serves many small to mid-sized accounts
through master distributors, including Ingram Micro, Tech Data and Merisel.
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OEM ACCOUNTS. Retail and master distributor sales are complemented by
Labtec's support of the OEM marketplace. Customers include: primary computer
manufacturers, component manufacturers, Internet product suppliers, and
"bundlers," or firms who package Labtec PC speakers or PC Voice Access products
with other hardware components or complete multimedia systems.
Although Labtec profitably serves such OEM customers as Hewlett Packard and
Compaq, it also focuses its efforts on serving the mid/small OEM market due to
its growth potential. Labtec has grown its base of OEM customers from less than
15 in 1995 to over 50 today.
INTERNATIONAL SALES. Labtec's international distribution includes more
than 40 distributors serving 24 countries. Key customers include Dixon's (U.K.),
Byte (U.K.), Vobis (Germany), Virgin Megastores (U.K.), Fnac (France), Media
Markt (Germany) and Staples (U.K.). The establishment of sales offices in London
and Germany has enhanced Labtec's performance in Europe. International gross
sales were $10.9 million in fiscal 1998, or approximately 17% of Labtec's total
gross sales for the year.
To further penetrate the international market, Labtec has developed a
strategic plan consisting of the following four key elements:
- - Create brand awareness through a multi-country advertising and public
relations campaign. Attending relevant trade shows such as CeBIT and
Funkaustellung and participate in distributor sponsored programs.
- - Improvement of retail and master distributor support through multi-lingual
collateral materials, selective use of interactive displays, merchandising
programs, promotions, and focused sales and product training.
- - Development of competitive products utilizing in-house regulatory and safety
expertise and competitive knowledge and analysis.
- - Utilization of local marketing support specialists as needed.
PRODUCT DEVELOPMENT AND TECHNOLOGY
Product development at Labtec begins with understanding customers' needs
and requirements. This process is typically accomplished through a combination
of primary market research, solicitation of suggestions from retail, master
distributor and OEM partners, and internal brainstorming sessions to anticipate
future needs. In addition, technology developments and the competitive
environment are key inputs to this effort.
Labtec begins the product development process by choosing a given price
point and then targeting certain features and performance specifications.
Throughout the development process, Labtec involves internal engineers, outside
consultants and its contract manufacturers to minimize the time to market and
maximize the probability of a successful product. The product development
process can last up to 12 months for a brand new product whereas a derivative
can take as little as three months.
The industrial, mechanical, electrical and acoustical design is managed by
Labtec's in-house engineering team in Vancouver, WA. The team utilizes Labtec's
Hong Kong subsidiary to search for new components that meet desired
specifications. Labtec believes that this interaction between design engineers
and component manufacturers enables Labtec to develop innovative, high
performance, low cost products. Final specification of all components and
designs is the responsibility of the U.S. based engineering team.
In addition to its internal development efforts, Labtec has also initiated
several strategic partnerships to include new technologies in its products. An
example is a program with Desper Audio Corp. to help
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differentiate Labtec's high-end speakers. Labtec has licensed Desper's
Spatializer 3D sound technology, which has been incorporated in a number of its
newer speakers.
MANUFACTURING
Labtec contracts its production requirements with four primary and several
secondary manufacturers in Hong Kong, Taiwan and China. From Labtec's Hong Kong
office, Labtec personnel supervise daily product development activities,
initiate placement of orders, expedite shipments, arrange and track
transportation and oversee the quality assurance function. This twenty person
team plays an important role in assuring a steady and timely supply of product
to the US, European and Canadian distribution centers.
EMPLOYEES
Labtec currently employs approximately 83 individuals, including 30 who
staff Labtec's U.K., Germany and Hong Kong subsidiaries.
PROPERTIES
Labtec's corporate offices are located in 14,335 square feet of office
space in Vancouver, Washington. This facility is leased to Labtec through April
2006. In addition, Labtec currently leases a 46,271 square foot warehouse
located in Vancouver, Washington, which terminates in April 1999. Labtec has
signed a lease for a new 60,000 square foot warehouse facility in Vancouver,
Washington which commences in May 1999 and terminates in April 2006. Finally,
Labtec also leases office space in the UK, Germany and Hong Kong. Labtec
management believes its current facilities are adequate to meet its requirements
for the near term.
LEGAL PROCEEDINGS
Labtec is not a party to any material legal proceedings.
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LABTEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six Months Ended September 30, 1998 and 1997
SALES AND GROSS PROFIT
Sales for the six month period ended September 30, 1998 were $28,188,763
compared to $27,622,150 for the same period the prior year, which was an
increase of 2%. The sales increase was primarily due to strong North American
retail and International markets, but was partially offset by a weak North
American OEM market. While the PC speaker segment of Labtec's business was flat,
the PC voice access segment continued strong.
Labtec's two largest customers represented 16.6% and 7.1% of sales for the
six months ended September 30, 1998 compared with 15.3% and 5.1% of sales for
the same period the prior year.
Gross profit, increased 1% to $9,799,489 for the six months ended September
30, 1998 from $9,700,893 for the six months ended September 30, 1997 and
represented 35% of sales for both periods.
OPERATING EXPENSES
Selling and marketing expenses, increased 6% to $5,407,676 for the six
months ended September 30, 1998 from $5,112,287 for the same period the prior
year and represented 19% of sales for both periods. The increase was primarily
due to costs incurred related to the introduction of new PC voice access
products and product promotions in the U.S. and Europe.
General and Administrative Expenses, which include Labtec's corporate
finance, research and development, human resources and administrative functions,
increased 54% to $3,750,986 for the six months ended September 30, 1998 from
$2,433,202 for the same period the prior year, and represented 13% and 9% of
sales, respectively. The increased costs are primarily related to the growth in
Labtec's research and development activities, the leasing of new corporate
headquarters in Vancouver, Washington in August 1997, communications expenses
related to implementing a frame relay system between the Vancouver office and
offices in the UK and Hong Kong, compensation expense of $802,660 on common
stock sold to management and Labtec incurring severance costs of approximately
$400,000 in connection with the termination of an executive officer.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such technologies may recognize a year containing "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
Labtec has completed its assessment of its information systems which
support business applications and is in the process of modifying or replacing
those portions of the software that are required. The assessment of products
sold to customers has also been completed. No date-sensitive devices or
applications are included in Labtec's products, and no risk relating to Year
2000 are considered to exist regarding the functionality of Labtec's products.
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The assessment of research and development, administration and facility
management systems is underway and is expected to be substantially complete by
December 1998. Labtec is also assessing the readiness of its key suppliers and
business partners to be Year 2000 compliant. Information requests will be
distributed to all key vendors before December 31, 1998, and replies will be
evaluated. If the risk is deemed material, Labtec is prepared to perform on-site
visits to those businesses to verify the adequacy of the information received.
All of these efforts should be substantially complete during the first half of
calendar 1999, which is prior to any anticipated significant impact on
operations.
Based upon the accomplishments to date, no contingency plans are expected
to be needed and therefore none have been developed. Because of substantial
progress to date and plans that contemplate being substantially complete in the
early part of calendar 1999, Labtec believes adequate time will be available to
insure alternatives can be developed, assessed and implemented prior to a Year
2000 issue having a material negative impact on its operations. However, if such
modifications and conversions are not made or not completed timely, the Year
2000 issue could have a material impact on Labtec's operations.
Both internal and external resources are being used to reprogram or replace
non-compliant technologies, and to appropriately test Year 2000 modifications.
Such modifications are being funded through operating cash flows. The project to
address Year 2000 has been underway since December 1997. The pretax costs
incurred to date for this effort were approximately $30,000 and $10,000 in the
six months ended September 30, 1998 and fiscal year 1998, respectively. Labtec
anticipates expenses of approximately $20,000 will be incurred in fiscal years
1999 and 2000 to substantially complete the effort.
The cost of the project and the date on which Labtec believes it will
substantially complete Year 2000 modifications are based on its management's
best estimates. Such estimates were derived using software surveys and programs
to evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources and other factors.
Because none of these estimates can be guaranteed, actual results could differ
materially from those anticipated. Specific factors that might cause such
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
FISCAL YEAR ENDED MARCH 31, 1998 AND 1997
SALES AND GROSS PROFIT
Sales for Fiscal Year 1998 were $57,820,303 compared to $59,779,334 for
Fiscal Year 1997, a decrease of 3%. The sales decrease was primarily due to the
loss of one large OEM customer which was partially offset by the continued
growth in North American and International retail business. While the PC speaker
product line of Labtec's business decreased, the PC voice access product line
increased substantially.
Labtec's two largest customers represented 14.0% and 5.6% of sales in
Fiscal Year 1998 as compared with 14.1% and 11.5% of sales for Fiscal Year 1997.
Gross profit, decreased 2% to $19,657,023 for Fiscal Year 1998 from
$20,098,576 for Fiscal Year 1997 and represented 34% of sales for both periods.
OPERATING EXPENSES
Selling and marketing expenses, increased 15% to $9,903,762 for Fiscal Year
1998 from $8,582,171 in Fiscal Year 1997 and represented 17% and 14% of sales,
respectively. The increase is primarily due to costs incurred related to the
introduction of new PC voice access products, efforts to replace the lost sales
96
<PAGE> 106
of its large OEM customer and expenses incurred to maintain market share in the
PC speaker market which has become more competitive.
General and administrative expenses, which include Labtec's corporate
finance, research and development, human resources and administrative functions,
increased 28% to $5,176,876 for Fiscal Year 1998 from $4,040,278 for Fiscal Year
1997, and represented 9% and 7% of sales, respectively. The increased costs are
primarily related to greater investment in research and development, the leasing
of new corporate headquarters in Vancouver, Washington in August 1997,
communications expenses related to implementing a frame relay system between the
Vancouver office and offices in the UK and Hong Kong and legal expenses.
Fiscal Year Ended March 31, 1997 and 1996
SALES AND GROSS PROFIT
Sales for Fiscal Year 1997 were $59,779,334 compared to $43,664,333 for
Fiscal Year 1996, an increase of 37%. Sales increased due to the continued
growth in all channels of the business, OEM, Retail and International. Also all
product lines saw an increase over the prior year, especially the PC voice
access products.
Labtec's two largest customers represented 14.1% and 11.5% of sales in
Fiscal Year 1997 as compared with 9.5% and 7.3% of sales for Fiscal Year 1996.
Gross profit, increased 46% to $20,098,576 for Fiscal Year 1997 from
$13,785,900 for the Fiscal Year 1996 and represented 34% and 32% of sales,
respectively. This increase is attributable to the introduction of PC voice
access products in Fiscal Year 1997 which generally generate a higher gross
profit margin than PC speakers.
OPERATING EXPENSES
Selling and marketing expenses, increased 21% to $8,582,171 for Fiscal Year
1997 from $7,099,657 in Fiscal Year 1996 and represented 14% and 16% of sales,
respectively. The increase is primarily due to the growth in sales, costs
incurred related to the introduction of new products and additional staffing in
Fiscal Year 1997.
General and administrative expenses, which includes Labtec's corporate
finance, research and development, human resources and administrative functions,
increased 4% to $4,040,278 for Fiscal Year 1997 from $3,876,942 for Fiscal Year
1996, and represented 7% and 9% of sales, respectively. The increase was
primarily caused by bonuses paid to management based on profitability.
LIQUIDITY AND CAPITAL RESOURCES
Since March 1996 Labtec has financed its operations and capital
expenditures primarily through a revolving credit facility. Labtec's cash
balances were $2,560,866, $998,417, $71,871 and $343,124 at September 30, 1998,
March 31, 1998, March 31, 1997, and March 31, 1996, respectively. Labtec's
working capital was $19,102,900, $19,544,428, $3,407,404 and $3,054,334 at
September 30, 1998, March 31, 1998, March 31, 1997, and March 31, 1996,
respectively. Labtec had no outstanding borrowings on its Revolving Credit
facility at September 30, 1998.
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<PAGE> 107
Labtec used $2,574,004 and $752,180 to fund operating activities in Fiscal
1997 and Fiscal 1996, respectively. The use of funds in Fiscal Year 1997 was
primarily attributed to the increase in inventories of $7,080,728, which was
offset by net income, depreciation and amortization and change in deferred
taxes. The change in accounts receivable from using cash of $2,535,015 in Fiscal
Year 1996, to providing cash of $456,467 in Fiscal Year 1997 is due to the
increased collection efforts during the year and extending shorter terms to new
customers. The change in inventory to using cash of $7,080,728 in Fiscal Year
1997 from using cash of $1,482,542 in Fiscal Year 1996 is due to building
inventories to support the larger increase in sales and the introduction of new
products.
Labtec's operating activities provided $4,665,173 and $1,189,892 in the six
months ended September 30, 1998 and Fiscal Year 1998, respectively. The funds
provided in Fiscal Year 1998 were primarily attributed to the decrease in
inventories of $3,432,747, depreciation and amortization, which was offset by
the loss and increase in accounts receivable. The change in accounts receivable
from providing cash of $456,467 in Fiscal Year 1997, to using cash of $3,143,437
in Fiscal Year 1998 is due to the slowness of payments in the International
markets and employee turnover in the accounts receivable department. The change
in inventory from using cash of $7,080,728 in Fiscal Year 1997 to providing cash
of $3,432,747 in Fiscal Year 1998 is due to the concerted effort by management
to reduce quantities of excess inventories.
The funds provided in the current period are primarily attributed to the
decrease in inventories of $2,761,347, increase in accounts payable of
$3,067,839, increase in accrued payroll and other expenses, depreciation and
amortization, which was offset by the net loss of $2,168,662 and increase in
accounts receivable of $1,899,926. The increase in accounts receivable is due to
the slowness of International collections and timing of payments by customers.
The change in inventory is due to the concerted effort by management to reduce
quantities of excess inventories. The increase in accounts payable is due to the
timing of payments to vendors for seasonal inventory purchases.
Net cash used by Labtec for investing activities totaled $498,643,
$1,536,872, $743,116 and $1,714,795 in the six months ended September 30, 1998
and Fiscal Years 1998, 1997 and 1996, respectively. The reductions in Fiscal
Year 1997 were primarily due to the reduction in investment for tooling and
molds for new products and the reduction in the retail display program.
Financing activities used $2,594,081 of net cash in the six months ended
September 30, 1998. This was primarily attributed to the reduction of short-term
debt with cash generated from operations. Financing activities provided
$1,263,526 and $3,045,867 of net cash in Fiscal Years 1998 and 1997.
Labtec believes existing cash and the Revolving Credit facility together
with future funds from operations will satisfy its need for working capital,
debt service and other cash requirements.
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<PAGE> 108
LABTEC CERTAIN TRANSACTIONS
On October 7, 1997, Labtec entered into a ten year management agreement
with Sun Multimedia Advisors, Inc. which is the general partner of Sun
Multimedia Partners, L.P., the majority stockholder of Labtec. Marc J. Leder and
Rodger R. Krouse each own 50% of the outstanding capital stock of Sun Multimedia
Advisors, Inc. Pursuant to the terms of the management agreement, Sun Multimedia
Advisors, Inc. receives a management fee of $500,000 per annum and will receive
a transaction fee with respect to its participation in the structuring and
negotiation of the merger based upon the aggregate value of Spacetec's
outstanding common stock immediately prior to the merger. If the price per share
of Spacetec common stock immediately prior to the merger is $2.1875 (the closing
price on January 15, 1999), the aggregate value of Spacetec's outstanding common
stock at that time would be equal to approximately $15.0 million and, as a
result, the fee to Sun Multimedia Advisors, Inc. would be equal to approximately
$350,000. If the aggregate value of Spacetec's outstanding common stock
immediately prior to the merger exceeds its value on January 15, 1999, the fee
will increase by 1% of such excess.
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<PAGE> 109
OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF LABTEC
The following table sets forth for each director and the executive officers
of Labtec, their ages and present positions with Labtec:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Marc J. Leder......................... 37 Director
Rodger R. Krouse...................... 37 Director
Geoffrey Rehnert...................... 41 Director
Joseph Pretlow........................ 31 Director
Robert G. Wick........................ 36 President
Mark Zadeh............................ 40 Senior Vice President, OEM and
International Sales
Gregory Jones......................... 40 Senior Vice President, North American
Retail Sales
</TABLE>
See Proposal 3 -- Election of Directors for a biography of Messrs. Rehnert,
Leder, Krouse, Wick and Pretlow.
Mark Zadeh joined Labtec as Senior Vice President in March, 1995. From 1991
to 1995, Mr. Zadeh served as Director of International Sales at Future Domain, a
producer of SCSI host adapters for PCs. From 1988 to 1991, Mr. Zadeh was Major
International Accounts Manager at Archive Corporation, a tape drive
manufacturer, and before that, served as International Marketing Manager, Europe
with CalComp, Inc.
Gregory Jones joined Labtec as Senior Vice President in February 1998.
Prior to joining Labtec, Mr. Jones spent three years at Hewlett Packard, where
he was the Marketing Manager responsible for Hewlett Packard's entree into the
consumer PC area, with the Pavilion line. Prior to joining Hewlett Packard, Mr.
Jones was employed for two years by Sigma Designs as a Senior Vice President for
Marketing. Prior to that time, Mr. Jones held a variety of increasingly
responsible sales and marketing positions with Acer Corporation, Compaq Computer
and Adaptec, Inc.
COMPENSATION OF DIRECTORS
Labtec Directors receive no compensation in connection with their services
to Labtec.
100
<PAGE> 110
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF LABTEC
The following table sets forth certain information regarding beneficial
ownership of Labtec's common stock as of October 31, 1998 by: (i) each person
who, to the knowledge of Labtec, owned beneficially more than 5% of the shares
of Labtec common stock outstanding at such date; (ii) each executive officer
identified in the Summary Compensation Table set forth below under "Compensation
and Other Information Concerning Directors and Officers;" (iii) the directors
and nominees for election as directors of Labtec; and (iv) all directors,
nominees for director, and executive officers as a group. Unless otherwise
indicated, the address of each person listed below is c/o Labtec, 1499 SE Tech
Center Drive, Suite 350, Vancouver, WA 98683.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
SHARES BENEFICIALLY OWNED PRIOR TO
BENEFICIAL OWNER OWNED (1) THE MERGER (2)
- ---------------- ------------------- --------------------
<S> <C> <C>
5% STOCKHOLDERS
Sun Multimedia Partners, L.P.(3)........................... 19,352,940 77.4%
5355 Town Center
Suite 802
Boca Raton, FL 33486
Northern Investment Limited Partnership II................. 1,715,340 6.9%
c/o The Northern Group
Suite 3140
900 Fourth Avenue
Seattle, WA 98164
EXECUTIVE OFFICERS
Gary Savadove(4)........................................... 662,763 2.6%
Mark Zadeh(5).............................................. 187,868 0.7%
Jim Hillman(6)............................................. 374,583 1.5%
Gregory Jones(7)........................................... 74,248 0.3%
DIRECTORS OR NOMINEES FOR DIRECTOR
Marc J. Leder(8)........................................... 19,352,940 77.4%
Rodger R. Krouse(8)........................................ 19,352,940 77.4%
Caroline Merison(9)........................................ 1,000,000 4.0%
All directors and executive officers (7 persons) as a group 21,652,402 86.6%
(10).....................................................
</TABLE>
- ------------------------
(1) Except as otherwise indicated in these footnotes, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned by them. Includes shares of Labtec common stock
issuable pursuant to outstanding options which may be exercised within 60
days after October 31, 1998. The inclusion herein of any Labtec common stock
deemed beneficially owned does not constitute an admission of beneficial
ownership of those shares.
(2) Includes 25,011,310 shares outstanding at September 30, 1998, plus the
options held individually by each of the executive officers that became
exercisable on October 7, 1998 for purposes of calculating the individual
ownership percentages of each of the executive officers.
(3) Pursuant to a Stockholders Agreement dated as of October 7, 1997 by and
among Labtec and all the stockholders of Labtec, Sun Multimedia Partners,
L.P. shares voting rights with respect to all acquisition proposals,
including the merger, with respect to 100.0% of the outstanding shares of
Labtec common stock. This Stockholders Agreement terminates upon the
completion of the merger.
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<PAGE> 111
(4) Includes 161,667 shares of Labtec common stock subject to options which
became exercisable on October 7, 1998 upon completion of the first year of
vesting of stock options granted upon the recapitalization of Labtec. Does
not include shares subject to options that were not exercisable as of
October 31, 1998. As of January 5, 1999, Mr. Savadove's employment with
Labtec terminated.
(5) Includes 87,500 shares of Labtec common stock subject to options which
became exercisable on October 7, 1998 upon completion of the first year of
vesting of stock options granted upon the recapitalization of Labtec. Does
not include shares subject to options that were not exercisable as of
October 31, 1998.
(6) Includes 116,667 shares of Labtec common stock subject to options which
became exercisable on October 7, 1998 upon completion of the first year of
vesting of stock options granted upon the recapitalization of Labtec. Does
not include shares subject to options that were not exercisable as of
October 31, 1998. As of January 5, 1999, Mr. Hillman's employment with
Labtec terminated.
(7) Does not include shares subject to options that were not exercisable as of
October 31, 1998.
(8) Mr. Leder and Mr. Krouse are directors and officers of Sun Multimedia
Advisors, Inc., the General Partner of Sun Multimedia Partners, L.P.
Messrs. Leder and Krouse each own 50% of Sun Multimedia Advisors, Inc., the
general partner of Sun Multimedia Partners, L.P. Following the merger, Sun
Multimedia Partners, L.P. will be the majority stockholder of New Labtec.
Pursuant to a Stockholders Agreement dated October 7, 1997 by and among
Labtec and all the stockholders of Labtec, Sun Multimedia Partners, L.P.
holds voting power with respect to all acquisition proposals. Mr. Leder and
Mr. Krouse share control of the Labtec shares and disclaim beneficial
ownership of the shares held by Sun Multimedia Partners, L.P. except to the
extent of their pecuniary interests.
(9) Consists of shares held by Equinox Investment Partners, L.L.C. ("Equinox")
through its KB Mezzanine Fund II, L.P. Ms. Merison is a director and
founding member of Equinox and thereby shares control of Equinox and
disclaims beneficial ownership of the shares held by KB Mezzanine Fund II,
L.P., except to the extent of her pecuniary interest.
(10) Includes shares and options described in footnotes 2 through 8 but does not
include shares subject to options that were not exercisable as of October
31, 1998.
MARKET PRICE OF LABTEC COMMON STOCK
Labtec's common stock is not publicly traded.
Labtec has not paid any cash dividends since its inception.
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<PAGE> 112
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS OF LABTEC
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth summary information concerning the cash
compensation and certain other compensation paid, awarded, or accrued by Labtec
for the years ended March 31, 1997 and 1998 for (i) Labtec's former Chief
Executive Officers, (ii) each of Labtec's four most highly compensated executive
officers and former Chief Financial Officer for the fiscal year ended March 31,
1998 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
---------------------------------------
ANNUAL COMPENSATION(1) SECURITIES
NAME AND -------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS (# OF SHARES) COMPENSATION(1)
- ------------------ ---- -------- -------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. James (3)....... 1998 $258,173 $ -- $9,153 440,000 --
Former Chief Executive 1997 270,874 320,000 -- -- --
Officer 1996 254,612 45,000 -- 5,136 --
Gary Savadove (3).......... 1998 185,394 -- 5,534 260,000 --
Former Chief Executive 1997 202,120 117,000 -- -- --
Officer and President 1996 183,715 25,462 -- 2,254 --
Mark Zadeh................. 1998 140,146 -- 1,780 525,000 --
Senior Vice President, 1997 153,181 77,000 -- 1,217 --
OEM and International 1996 141,481 20,000 -- -- --
Sales
Jim Hillman (4)............ 1998 119,000 -- 1,386 700,000 --
Former Senior Vice 1997 121,090 42,000 -- 877 --
President, Finance and 1996 88,842 10,000 -- -- --
Chief Financial Officer
Gregory Jones.............. 1998 7,500 -- -- 525,000 --
Senior Vice President, 1997 -- -- -- -- --
North American Retail 1996 -- -- -- -- --
Sales
</TABLE>
- ---------------
(1) The annual amount of perquisites and other personal benefits provided to
such named executive officer is less than 10% of the total annual salary and
bonus of such officer. Other annual compensation includes amounts reimbursed
during the fiscal year for payment of taxes related to the October, 1997
recapitalization of Labtec.
(2) Options granted to the named executive officers during fiscal year 1998 were
issued under the 1997 Employee Stock Option Plan at exercise prices ranging
from $0.2816 to $0.8448. See "Option Grants in Last Fiscal Year." Options
granted in fiscal years 1997 and 1996 were issued under the 1994 Employee
Stock Option Plan at an exercise price of $100 per share. See "Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR
Values."
(3) On April 1, 1998, Richard E. James terminated employment with Labtec and
Gary Savadove was named Chief Executive Officer and President. On January 5,
1999, Mr. Savadove's employment with Labtec terminated and Robert G. Wick
was named President. Severance compensation in the amount of twelve (12)
months annual salary will be paid to Mr. Savadove.
(4) On January 5, 1999, Jim Hillman's employment with Labtec terminated.
Severance compensation in the amount of nine (9) months annual salary will
be paid to Mr. Hillman.
103
<PAGE> 113
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OPTIONS ASSUMED ANNUAL
OF GRANTED PRICE APPRECIATION STOCK ALTERNATIVE
SECURITIES TO OF STOCK PRICE GRANT
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(2) DATE
OPTIONS IN FISCAL BASE PRICE EXPIRATION --------------------------- VALUE
NAME GRANTED YEAR 1998 ($/SHARE) DATE 5%($) 10%($) 0%($)
- ---- ---------- ---------- ----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. James.......... 146,667 3.8% $0.2816 10/7/07 $25,975 $ 65,824 $--
146,667 3.8% $0.8448 10/7/07 $ -- $ -- $ 0
146,667 3.8% $0.2816 6/1/08 $25,975 $ 65,824 $--
Gary Savadove............. 86,667 2.2% $0.2816 10/7/07 $15,348 $ 38,896 $--
86,667 2.2% $0.8448 10/7/07 $ -- $ -- $ 0
86,667 2.2% $0.2816 6/1/08 $15,348 $ 38,896 $--
Mark Zadeh................ 175,000 4.5% $0.2816 10/7/07 $30,990 $ 78,540 $--
175,000 4.5% $0.8448 10/7/07 $ -- $ -- $ 0
175,000 4.5% $0.2816 6/1/08 $30,990 $ 78,540 $--
Jim Hillman............... 233,333 6.0% $0.2816 10/7/07 $41,322 $104,719 $--
233,333 6.0% $0.8448 10/7/07 $ -- $ -- $ 0
233,333 6.0% $0.2816 6/1/08 $41,322 $104,719 $--
Gregory Jones............. 175,000 4.5% $0.2816 2/11/08 $30,990 $ 78,540 $--
175,000 4.5% $0.8448 2/11/08 $ -- $ -- $ 0
175,000 4.5% $0.2816 6/1/08 $30,990 $ 78,540 $--
</TABLE>
- ---------------
(1) Options were granted under Labtec's 1997 Employee Stock Option Plan in
conjunction with the recapitalization of Labtec that occurred on October 7,
1997. The options with exercise prices of $0.2816 were granted at the fair
market value of Labtec's common stock on the date of grant, which was
determined by reference to the price per share of $0.2816 paid by the new
investor group on October 7, 1997. Other options were granted with exercise
prices higher than fair market value. The options have a term of ten years
from the date vesting begins, and become exercisable 25% per year on the
anniversary of the date on which vesting begins for each of the next four
years.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to their expiration assuming
the specified rates of appreciation (5% and 10%) on Labtec's common stock
over the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
Labtec's estimated future stock price growth. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the timing of
such exercise and the future performance of Labtec's common stock. There can
be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
On April 1, 1998, Richard E. James terminated employment with Labtec, and
all options held by Mr. James were terminated. Also on April 1, 1998, an
additional 710,000 options were granted to Gary Savadove (473,333 options
were at an exercise price of $0.2816 and 236,667 options were at an exercise
price of $0.8448). On January 5, 1999, Gary Savadove's and Jim Hillman's
employment with Labtec terminated and all unvested options held by Mr.
Savadove and Mr. Hillman terminated.
Based on the $1.87 average trading price of Spacetec common stock on October
21, 1998 and for the two days prior to and subsequent to October 21, 1998
(the date the Merger agreement was signed and terms of the merger were
announced), and based on the exchange ratio of 0.55430739, the fair value of
Labtec's common stock on October 21, 1998 was $1.0365 per share. The
potential realizable values of the options held at March 31, 1998, utilizing
this average trading price, amount to $147,464, $297,763, $397,017 and
$297,763 respectively, for Gary Savadove, Mark Zadeh, Jim Hillman and
Gregory Jones.
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<PAGE> 114
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to options to
purchase Labtec's common stock granted under Labtec's 1994 and 1997 Employee
Stock Option Plans, including (i) the number of shares of Labtec common stock
issued upon exercise of options in the fiscal year ended March 31, 1998; (ii)
the net value realized upon such exercise; (iii) the number of unexercised
options outstanding at March 31, 1998; and (iv) the value of such unexercised
options at March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 1998(2) MARCH 31, 1998($)(3)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(1) REALIZED(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---- -------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard E. James(4)....... 5,136 $34,601 440,000 0 0 --
Gary Savadove(4).......... 2,254 $15,181 260,000 0 0 --
Mark Zadeh................ 1,127 $ 7,590 525,000 0 0 --
Jim Hillman(4)............ 877 $ 5,909 700,000 0 0 --
Gregory Jones............. 0 $ 0 525,000 0 0 --
</TABLE>
- ---------------
(1) Options exercised during the fiscal year ended March 31, 1998 were issued
under the 1994 Employee Stock Option Plan and were accelerated upon
consummation of the recapitalization of Labtec on October 7, 1997. The
options were originally granted with an exercise price of $100 per share and
the value realized is calculated as the number of shares received multiplied
by the difference between the redemption price per share and $100.
(2) All unexercised options at March 31, 1998 vest 25% per year on the
anniversary of the date vesting begins. Because all of the above options
were granted on October 7, 1997 (except for Gregory Jones options, which
were granted on February 11, 1998), no options were exercisable on March 31,
1998.
(3) On March 31, 1998, Labtec's board of directors estimated Labtec's common
stock to have a fair value of no greater than $0.2816 per share, based upon
no increase in fair value from the new investor group's purchase price per
share of $0.2816 on October 7, 1997 and the repurchase price of $0.1965 for
Richard E. James' previously-owned 1,217,240 shares negotiated as part of
the buyback of such shares in connection with his termination on April 1,
1998.
(4) On April 1, 1998, Richard E. James terminated employment with Labtec, and
all options held by Mr. James were terminated. On January 5, 1999, Gary
Savadove's and Jim Hillman's employment with Labtec terminated and all
unvested options held by Mr. Savadove and Mr. Hillman were terminated.
105
<PAGE> 115
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SPACETEC CAPITAL STOCK
Assuming the stockholders of Spacetec approve the filing of the Amendment
to the Articles to increase the number of authorized shares of Spacetec common
stock, the authorized capital stock of Spacetec will consist of 25,000,000
shares of common stock, $0.1 par value per share, and 1,000,000 shares of
preferred stock, $0.01 par value per share.
Spacetec common stock
As of the record date, there were approximately 6,846,993 shares of
Spacetec common stock outstanding held of record by approximately 376
stockholders. Spacetec common stock is listed on Nasdaq under the symbol "SIMC."
Holders of Spacetec common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The stockholders do not have a
right to take action by written consent. The holders of Spacetec common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Spacetec, the
holders of Spacetec common stock are entitled to share ratably in all assets
remaining after payment of liabilities. The Spacetec common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Spacetec common stock.
All outstanding shares of Spacetec common stock are fully paid and
non-assessable, and the shares of Spacetec common stock to be outstanding upon
completion of the merger will be fully paid and non-assessable.
Spacetec preferred stock
Spacetec has 1,000,000 shares of preferred stock authorized, of which, no
shares are outstanding. The Board of Directors has the authority to issue these
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any unissued
and undesignated shares of preferred stock and to fix the number of shares
constituting any series and the designations of such series, without any further
vote or action by the stockholders. Although it presently has no intention to do
so, the Board of Directors, without stockholder approval, can issue preferred
stock with voting and conversion rights which could adversely affect the voting
power or other rights of the holders of Spacetec common stock and the issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Spacetec.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Spacetec common stock is American
Stock Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, NY 10005
and its telephone number is (718) 921-8200.
DESCRIPTION OF NOTE
Subject to and upon completion of the merger with Labtec, Spacetec will
issue a six-year, unsecured promissory note in the principal amount of
$1,065,000 in the form attached hereto as Annex C. The Note will be subordinated
to all institutional indebtedness of Spacetec. "Institutional Indebtedness" is
defined to include money borrowed from banks or other institutional lenders. In
addition, the Note will accrue interest at the rate of ten percent (10%) per
year to be paid quarterly in cash, or under certain circumstances, through the
issuance of additional promissory notes. The principal amount of the Note will
be paid in full at the end of the six-year term. All or any part of principal
amount of the Note will be prepayable at any time, without penalty, at any time,
at the sole option of Spacetec. The Note will be payable to a collection agent
for the benefit of each holder of Labtec common stock at the time of the
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merger. The collection agent will be responsible for distributing to each such
holder his or her pro-rata share of the principal and interest payment made
under the Note. The Note will not be listed on any public market and interests
in the Note will be transferable only in limited circumstances.
The Note provides that all outstanding principal and accrued interest will,
at the option of the collection agent, accelerate and become due and payable
without notice or demand, upon the happening of any of the following specified
events:
- any default (whether in whole or in part) occurs in the payment of any
amount payable under the Note which continues for a period of ten (10)
days.
- the making by New Labtec of a general assignment for the benefit of
creditors;
- the filing of any petition or the commencement of any proceeding New
Labtec for any relief under any bankruptcy or insolvency laws, or any
laws relating to the relief of debtors, readjustment of indebtedness,
reorganizations, compositions, or extensions;
- the filing of any petition or the commencement of any proceeding against
New Labtec for any relief under any bankruptcy or insolvency laws, or any
laws relating to the relief of debtors, readjustment of indebtedness,
reorganizations, compositions, or extensions, which proceeding is not
dismissed within sixty (60) days;
- a receiver, liquidator, assignee, trustee or custodian is appointed to
administer the affairs of New Labtec;
- except for the contribution of assets to Spacetec Corporation as
contemplated by the Merger Agreement, New Labtec dissolves, liquidates,
winds-up, or sells or otherwise disposes of all or substantially all of
its business or assets;
- a Change in Control (as defined below) of New Labtec;
- New Labtec sells or otherwise disposes of any of its assets not in the
ordinary course of business, pursuant to which sale New Labtec receives
net cash proceeds of at least $10,000,000, but only if the holders of New
Labtec's institutional indebtedness consent to the acceleration; or
- New Labtec issues and sells any securities of New Labtec, pursuant to
which sale New Labtec receives net cash proceeds of at least $10,000,000,
but only if the holders of New Labtec's institutional indebtedness
consent to the acceleration.
For purposes of the Note, a "Change in Control" will be deemed to have
occurred if: (i) any "person" or "group" (as such terms are used in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Act")), except for Sun Capital Partners, Inc., Bain Capital, Inc. and their
respective affiliates (the "Sun/Bain Group"), becomes a "beneficial owner" (as
such term is used in Rule 13d-3 promulgated under the Act), after the date
hereof, directly or indirectly, of securities of New Labtec representing more
than 25% of the combined voting power of New Labtec's then outstanding
securities; (ii) the members of New Labtec's Board of Directors who are
nominated by the Sun/Bain Group constitute fewer than a majority of all members
of New Labtec's Board of Directors; or (iii) the stockholders of New Labtec
approve a merger or consolidation of New Labtec with any other company, other
than a merger or consolidation which would result in the combined voting power
of New Labtec's voting securities outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) 75% or more of the combined
voting power of the voting securities of New Labtec or such surviving entity
outstanding immediately after such merger or consolidation.
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DESCRIPTION OF RIGHT TO RECEIVE CONTINGENT SHARES
Each holder of Labtec common stock at the time of the merger will receive
the right to receive a pro-rata portion of any additional shares of New Labtec
common stock issued in connection with a potential valuation or sale of the
industrial business. These shares may be issued in accordance with the procedure
set forth below.
At the time of the execution of the Merger Agreement, the directors of
Spacetec believed that if sold to a third-party, the value of the Spacetec
industrial business approximated $6,000,000. This valuation assumes the
existence of a ten-year license agreement which provided for the payment of an
8% royalty based on net sales. Under the Merger Agreement, Spacetec and Labtec
agreed to value the industrial business no later than December 31, 1999. Based
on this valuation, if required, the number of shares of Spacetec common stock
issued upon the completion of the merger in exchange for each share of Labtec
stock then outstanding will be adjusted through the issuance of additional
shares of New Labtec common stock. Depending on the valuation of the industrial
business, the percentage ownership of outstanding New Labtec common stock of
holders of Labtec common stock at the time of the merger will be increased by
2.7555% for every $1.0 million that the value of the Spacetec industrial
business, plus the consolidated net income or minus the consolidated net loss of
Spacetec, excluding Labtec and its subsidiaries, for the period October 1, 1998
through the date of consummation of the sale of the industrial business or the
final determination of the value of the industrial business, is less than
$6,000,000. Under no circumstances will the percentage ownership of holders of
Labtec stock at the time of the merger be greater than 79% of the total
outstanding Spacetec common stock.
In the event that the eight directors nominated by Labtec to become
directors of New Labtec determine not to proceed with a valuation on or prior to
February 28, 1999, no additional shares of Spacetec common stock will be issued.
However, if the directors nominated by Labtec decide to proceed to value the
industrial business, the four directors nominated by Spacetec to become
directors of New Labtec will hire an investment bank to value the industrial
business. The investment bank will have 30 days to value the industrial
business. If the directors nominated by Labtec accept the valuation determined
by the investment bank, the value will be the basis of the equity adjustment set
forth above. If the directors nominated by Labtec do not accept the valuation
determined by the investment bank, the directors nominated by Labtec and the
directors nominated by Spacetec will negotiate in good faith to determine the
value of the industrial business. In the event that the parties are able to
agree as to the appropriate value of the industrial business within 10 days,
then such value will be the basis of the equity adjustment, if any. In the event
that the directors are unable to agree on the value within ten days of the
valuation by the investment bank, the directors nominated by Labtec will decide
whether to sell the industrial business. If the directors nominated by Labtec
decide not to sell the industrial business at this time, no additional shares of
Spacetec common stock will be issued.
If the directors nominated by Labtec decide to sell the industrial
business, the investment bank that performed the valuation shall be engaged to
sell the industrial business. If the industrial business is sold, the value of
the industrial business as determined by the sale shall be the basis of the
equity adjustment as set forth above. If the investment bank is unable to sell
the industrial business by December 31, 1999, the directors nominated by Labtec
will engage a second investment bank to value the industrial business and the
valuation determined by this investment bank will be the basis of the equity
adjustment, if any.
Any valuation of the industrial business, other than as determined under
the Merger Agreement through a sale, shall consist of the expected net sale
proceeds to be received in connection with an arms'-length sale of the
industrial business, after deduction of all anticipated reasonable transaction
expenses. The value of any actual sale of the industrial business will consist
of the net sale proceeds received in
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connection with such sale, after deduction of all transaction expenses incurred.
In addition, the value shall be adjusted by an amount equal to the consolidated
net income or net loss of New Labtec from October 1, 1998 through the date of
consummation of the sale of the industrial business or the final valuation
determination after taxes at an estimated 38% combined rate, but excluding any
interest expense.
Any valuation shall also assume the existence of, a 10-year license
agreement that provides for the payment to New Labtec of an 8% royalty, based
upon net sales generated by the industrial business, whether or not such a
license is included as part of the sale of the industrial business and
regardless of whether the terms of any actual license differ from these terms.
As a result, in the event that the sale of the industrial business either does
not include any license or includes a license upon terms, taken as a whole,
having less value to New Labtec than the assumed terms, the valuation shall be
reduced by the amount by which the value of the actual license, if any, is less
than the value of the assumed terms. In the event that the sale of the
industrial business includes a license upon terms, taken as a whole, having
greater value to New Labtec than the assumed terms, the valuation shall be
increased by the amount by which the value of the actual license is greater than
the value of the assumed terms. Similarly, any valuation of the industrial
business shall represent the amount that a third-party purchaser would be
willing to pay for the industrial business, assuming that such purchaser had
also entered into a license with New Labtec upon the assumed terms.
DESCRIPTION OF LABTEC CAPITAL STOCK
The authorized capital stock of Labtec consists of 35,000,000 shares of
Labtec Common stock, $0.01 par value per share, and 34,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock").
Labtec common stock
As of October 31, 1998, there were 25,011,310 shares of Labtec common stock
outstanding held of record by 41 stockholders. Labtec common stock is not listed
on any public market. Holders of Labtec common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders and to receive
such lawful dividends as may be declared by Labtec's Board of Directors. In the
event of the liquidation, dissolution or winding up of Labtec, the holders of
shares of Labtec common stock will be entitled to share ratably in Labtec's
assets. All outstanding shares of Labtec common stock are fully paid and
nonassessable.
Labtec preferred stock
The Labtec Board has the authority, without any further vote or action by
the stockholders, to provide for the issuance of these shares of preferred stock
in one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, preferences, limitations
and relative, participating, optional or other special rights and qualifications
or restrictions on the shares of each series, and to determine the voting
powers, if any, of such shares. The issuance of preferred stock could adversely
affect, among other things, the rights of existing stockholders or could delay
or prevent a change in control of Labtec without further action by the
stockholders. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of Labtec common
stock. In addition, any such issuance could have the effect of delaying,
deferring or preventing a change in control of Labtec and could make the removal
of the present management of Labtec more difficult. Labtec has no current plans
to issue any preferred stock.
Labtec acts as transfer agent and Registrar for Labtec common stock.
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COMPARISON OF CAPITAL STOCK
After completion of the merger between Spacetec and Labtec, the holders of
Labtec common stock who receive Spacetec common stock will become stockholders
of New Labtec. The rights of holders of New Labtec stock will be governed by
Massachusetts law, the Amended and Restated Articles of Organization of New
Labtec (the "New Labtec Charter") and the By-laws (the "New Labtec By-laws").
The rights of holders of Labtec stock are presently governed by Delaware law and
by the Labtec Amended and Restated Articles of Incorporation, (the "Labtec
Charter"), and By-laws (the "Labtec By-laws"). The following discussion
summarizes the material differences between the rights of holders of Labtec
common stock and holders of New Labtec common stock. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Labtec Charter and By-laws, the New Labtec Charter and By-laws and the relevant
provisions of Delaware and Massachusetts law.
Special Meeting of Stockholders
Massachusetts law provides that special meetings of stockholders of a
corporation with a class of voting stock registered under the Exchange Act (a
"public company"), may be called by a corporation's president or directors, and,
unless otherwise provided in the articles of organization or by-laws, must be
called by its clerk or any other officer upon written application of the owners
of at least 40% of the corporation's stock entitled to vote at such meeting. New
Labtec will be a public company, and the New Labtec By-laws provide that, upon
written application of one or more stockholders who hold at least 90% in
interest of the capital stock entitled to vote at a meeting, a special meeting
shall be called by the clerk. Delaware law provides that special meetings of
stockholders may be called by the directors or by any other person as may be
authorized by the corporation's certificate of incorporation or by-laws. The
Labtec By-laws provide that special meetings may be called by the president and
shall be called by the president or secretary upon written request of (i) a
majority of the board of directors or (ii) stockholders owning not less than ten
percent of the entire capital stock issued and outstanding and entitled to vote.
Inspection Rights
Under Massachusetts law, a corporation's stockholders have the right for a
proper purpose to inspect the corporation's articles of organization, by-laws,
records of all meetings of incorporators and stockholders, and stock and
transfer records, including the stockholder list. The New Labtec By-laws do not
alter these statutory rights. In addition, stockholders of a Massachusetts
business corporation have a qualified common law right under certain
circumstances to inspect other books and records of the corporation. Inspection
rights under Delaware law are more extensive than under Massachusetts law. Under
Delaware law, stockholders, upon the demonstration of a proper purpose, have the
right to inspect and make copies or extracts of a corporation's stock ledger,
stockholder list, and other books and records. The Labtec By-laws provide that a
stockholder list prepared for a stockholder meeting shall be open to the
examination of any stockholder or stockholder's agent for a period of at least
ten days prior to and at the meeting.
Action by Consent of Stockholders
Under Massachusetts law, any action to be taken by stockholders may be
taken without a meeting if all stockholders entitled to vote on the matter
consent to the action in writing, and such consents must be filed with the
records of meetings of stockholders. The New Labtec By-laws do not alter these
statutory rights. Under Delaware law, unless the certificate of incorporation
provides otherwise, any action to be taken by stockholders may be taken without
a meeting, without prior notice, and without a vote, if the stockholders having
the number of votes that would be necessary to take such action at a meeting at
which all stockholders were present and voted consent to the action in writing.
The Labtec Charter
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provides that any action which could be taken at a meeting of the shareholders
is permitted to be taken by its stockholders by written consent, provided all
the shareholders entitled to vote on the action sign a written consent that is
then delivered to Labtec.
Cumulative Voting
Massachusetts has no cumulative voting provision. The New Labtec Charter
does not provide for cumulative voting. Under Delaware law, a corporation may
provide in its certificate of incorporation for cumulative voting by
stockholders in elections of directors (i.e., each stockholder casts as many
votes for directors as he has shares of stock multiplied by the number of
directors to be elected). The Labtec Charter provides for cumulative voting for
the election of directors.
Dividends and Repurchases of Stock
Under Massachusetts law, the payment of dividends and the repurchase of the
corporation's stock are generally permissible if such actions are not taken when
the corporation is insolvent, do not render the corporation insolvent or
bankrupt, and do not violate the corporation's articles of organization. Under
Delaware law, a corporation generally is permitted to declare and pay dividends
out of surplus or out of net profits for the current and/or preceding fiscal
year, provided that such dividends will not reduce capital below the amount of
capital represented by all classes of stock having a preference upon the
distribution of assets. Also under Delaware law, a corporation may generally
redeem or repurchase shares of its stock if such redemption or repurchase will
not impair the capital of the corporation.
Classification of the Board of Directors
Massachusetts law permits classification of a corporation's board of
directors, but in the case of a public company, Massachusetts law requires
classification into three classes and imposes certain requirements unless the
corporation makes an election not to be governed by the statutory provisions.
Spacetec has not made such an election and, therefor, the New Labtec board of
directors is classified into three classes. Delaware law permits (but does not
require) classification of a corporation's board of directors into one, two or
three classes. The Labtec Charter does not provide for classes of directors.
Removal of Directors
Under Massachusetts law, stockholders may remove directors with or without
cause by a majority of shares entitled to vote. However, the New Labtec By-laws,
in conformity with statutory provisions, provide that if the directors are
classified with respect to the time for which they severally hold office
pursuant to Section 50A(a) of the Massachusetts Business Corporation Law, the
stockholders may, by the affirmative vote of a majority of the shares
outstanding and entitled to vote, remove any director, directors or the entire
board of directors only for cause. Under Massachusetts law, directors may remove
other directors for cause by a majority vote.
Under Delaware law, although stockholders may generally remove directors
with or without cause by a majority vote, stockholders may remove members of
classified boards only for cause unless the certificate of incorporation
provides otherwise. Under Delaware law, directors are not permitted to remove
other directors. The Labtec By-laws provide that the shareholders may, at a
meeting called expressly for that purpose, remove a director with or without
cause by a majority of the cumulative votes entitled to be cast through the
cumulative voting procedure described above.
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Vacancies on the Board of Directors
Under both Massachusetts and Delaware law, unless otherwise provided in the
charter or by-laws, vacancies on the board of directors and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by the remaining directors.
Exculpation of Directors
Massachusetts law and Delaware law have substantially similar provisions
relating to exculpation of directors. Each state's law permits, and the New
Labtec Charter provides, that no director shall be personally liable to Spacetec
and New Labtec, respectively, or their respective stockholders for monetary
damages for breaches of fiduciary duty except where such exculpation is
expressly prohibited by law. The circumstances under which exculpation is
prohibited are substantially similar in Massachusetts and Delaware.
New Labtec may not eliminate the liability of directors to the extent that
such liability is provided by applicable law, (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for any transaction from which the director
derived an improper personal benefit or (iv) for authorizing illegal
distributions and/or loans to insiders.
Indemnification of Directors, Officers and Others
Both Massachusetts and Delaware law generally permit indemnification of
directors and officers for expenses incurred by them by reason of their position
with the corporation, if the director or officer has acted in good faith and
with the reasonable belief that his conduct was in the best interests of the
corporation. New Labtec's By-laws provide for indemnification to its directors
and officers to the maximum extent legally permissible. Delaware law, unlike
Massachusetts law, does not permit a corporation to indemnify persons against
judgments in actions brought by or in the right of the corporation (although it
does permit indemnification in such situations if approved by the Delaware Court
of Chancery and for expenses of such actions). The Labtec Charter authorizes
Labtec to provide indemnification to its agents to the maximum extent legally
permissible. Labtec's By-laws provide indemnification to its officers,
directors, or employees serving at the request of an agent of the corporation to
the maximum extent permissible provided such act was not adjudged to be
intentional or a knowing violation of the law. In addition, Labtec's By-laws
provide that the Board of Directors has the power to indemnify and advance
expenses to any employee or agent or class of employees or class of agents in
the same manner as directors may be indemnified or as consistent with applicable
law.
Interested Director Transactions
Delaware law provides that no transaction between a corporation and one or
more of its directors or officers or any entity in which one or more of its
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for that reason. In addition, no such
transaction shall be void or voidable solely because the director or officer is
present at, participates in, or votes at the meeting of the board of directors
or committee which authorizes the transaction. In order that such a transaction
not be found void or voidable, it must, after disclosure of material facts, be
approved by a vote of a majority of the disinterested directors, or a committee
of disinterested directors, or the stockholders, or the transaction must be fair
as to the corporation. Massachusetts law has no comparable provisions. The New
Labtec Charter and By-laws and the Labtec Charter and By-laws do not address
this issue.
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Sales, Lease or Exchange of Assets and Mergers
Massachusetts law provides that a vote of two-thirds of the shares of each
class of stock outstanding and entitled to vote thereon is required to authorize
the sale, lease, or exchange of all or substantially all of a corporation's
property and assets or a merger or consolidation of the corporation into any
other corporation, except that the articles of organization may provide that the
vote of a greater or lesser proportion, but not less than a majority of the
outstanding shares of each class, is required. Under Massachusetts law, the
articles of organization or by-laws may provide that all outstanding classes of
stock shall vote as a single class, but, in the case of a merger or
consolidation, the separate vote of all classes of stock, the rights of which
would be adversely affected by the transaction, is also required. The New Labtec
Charter reduces the stockholder vote required to approve such transactions from
two-thirds to a majority of each class outstanding and entitled to vote thereon
if such transaction has been approved by the board of directors.
Delaware law requires the approval of the directors and the vote of the
holders of a majority of the outstanding stock entitled to vote thereon for the
sale, lease, or exchange of all or substantially all of a corporation's property
and assets or a merger or consolidation of the corporation into any other
corporation, although the certificate of incorporation may require a higher
stockholder vote. The New Labtec Charter does not require a higher vote.
Amendments to Charter
Under Massachusetts law, amendments to a corporation's articles of
organization relating to certain changes in capital or in the corporate name
require the vote of at least a majority of each class of stock outstanding and
entitled to vote thereon. Amendments relating to other matters require a vote of
at least two-thirds of each class outstanding and entitled to vote thereon or,
if the articles of organization so provide, a greater or lesser proportion but
not less than a majority of the outstanding shares of each class. Under
Massachusetts law, the articles of organization or by-laws may provide that all
outstanding classes of stock shall vote as a single class, but the separate vote
of any class of stock the rights of which would be adversely affected by the
amendment is also required. The New Labtec Charter reduces the stockholder vote
required to approve such amendments from two-thirds to a majority of each class
of stock outstanding and entitled to vote thereon. Under Delaware law,
amendments to the certificate of incorporation require the approval of the
directors and the vote of the holders of a majority of the outstanding stock and
a majority of each class of stock outstanding and entitled to vote thereon as a
class, unless the certificate of incorporation requires a greater proportion.
The Labtec Charter does not require a greater proportion to amend the Labtec
Charter. Delaware law requires a class vote when, among other things, an
amendment will adversely affect the powers, preferences or special rights of a
class of stock.
Amendments to By-laws
Both Massachusetts and Delaware law provide that stockholders may amend the
by-laws and, if provided in its charter, the board of directors also has this
power. Under Massachusetts law, the power to make, amend or repeal by-laws also
lies in the stockholders; provided that if authorized by the articles of
organization, the by-laws may provide that the directors may also make, amend or
repeal the by-laws, except with respect to any provision which by law, the
articles of organization or the by-laws requires action by the stockholders. The
New Labtec By-laws may be amended by an affirmative vote of at least a majority
of stockholders entitled to vote, provided that notice of the proposed amendment
was given in the notice for the meeting and may be amended by the directors,
except with respect to any provision thereof which, by law, the articles of
organization or the by-laws require action by the stockholders. The Labtec
Charter provides that the directors may amend or repeal the By-laws in whole or
in part, except with
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respect to any provision thereof which by law or the By-laws requires action by
the stockholders. Under Delaware law, the power to adopt, amend or repeal
by-laws lies in stockholders entitled to vote; provided, however, that any
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal by-laws upon the directors. The Labtec Charter and By-laws give
the board of directors and shareholders the power to make, alter, amend or
repeal by-laws except those expressly outside their power to amend, and except
those that would conflict with an inconsistent agreement.
Appraisal Rights
Dissenting stockholders have the right to obtain the fair value of their
shares (so-called "appraisal rights") in more circumstances under Massachusetts
law than under Delaware law. Under Massachusetts law, a properly dissenting
stockholder is entitled to receive the appraised value of his shares when the
corporation votes (i) to sell, lease, or exchange all or substantially all of
its property and assets, (ii) to adopt an amendment to its articles of
incorporation which adversely affects the rights of the stockholders, or (iii)
to merge or consolidate with another corporation. Under Delaware law, appraisal
rights are available in connection with a statutory merger or consolidation in
certain specified situations. Appraisal rights are not available when a
corporation is to be the surviving corporation and no vote of its stockholders
is required to approve the merger. In addition, unless otherwise provided in the
charter, no appraisal rights are available to holders of shares of any class of
stock which is either: (a) listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or (b) held of
record by more than 2,000 stockholders, unless such stockholders are required by
the terms of the merger to accept anything other than: (i) shares of stock of
the surviving corporation; (ii) shares of stock of another corporation which are
or will be so listed on a national securities exchange or designated as a
national market system security on an inter-dealer quotation system by Nasdaq or
held of record by more than 2,000 stockholders; (iii) cash in lieu of fractional
shares of such stock or (iv) any combination thereof. Appraisal rights are not
available under Delaware law in the event of the sale, lease, or exchange of all
or substantially all of a corporation's assets or the adoption of an amendment
to its certificate of incorporation, unless such rights are granted in the
corporation's certificate or incorporation.
"Anti-Takeover" Statutes
Business Combination Statute
Massachusetts' "business combination" statute is substantially similar to
Delaware's business combination statute. However, while the Massachusetts
statute has a 5% threshold with certain persons excluded, the Delaware statute
provides that, if a person acquires 15% or more of the stock of a Delaware
corporation without the approval of the board of directors of that corporation
(an "interested stockholder"), he may not engage in certain transactions with
the corporation for a period of three years. Both the Massachusetts and Delaware
statutes include certain exceptions to this prohibition; for example, if the
board of directors approves the acquisition of stock or the transaction prior to
the time that the person became an interested stockholder, or if the interested
stockholders acquires 90% (in the Massachusetts statute) or 85% (in the Delaware
statute) of the voting stock of the corporation (excluding voting stock owned by
directors who are also officers and certain employee stock plans) in one
transaction, or if the transaction is approved by the board of directors and by
the affirmative vote of two-thirds of the outstanding voting stock which is not
owned by the interested stockholder.
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Control Share Acquisition Statute
Under the Massachusetts Control Share Acquisition statute for Massachusetts
corporations, a person (hereinafter, the "acquirer") who makes a bona fide offer
to acquire, or acquires, shares of stock of a corporation that when combined
with shares already owned, would increase the acquirer's ownership to at least
20%, 33 1/3%, or a majority of the voting stock of the corporation, must obtain
the approval of a majority of shares held by all stockholders except the
acquirer and the officers and inside directors of the corporation, in order to
vote the shares acquired. The statute does not require the acquirer to
consummate the purchase before the stockholder vote is taken. The Control Share
Acquisition statute permits a Massachusetts corporation to elect not to be
governed by these provisions by including such an election in its articles of
organization or by-laws. The New Labtec By-laws state that the Control Share
Acquisition statute shall not apply to New Labtec. Delaware does not have a
Control Share Acquisition statute.
Consideration of Societal Factors
Massachusetts law expressly provides that in determining what a director
reasonably believes to be in the best interests of the corporation, he may
consider the interests of the corporation's employees, suppliers, creditors and
customers; the economy of the state, region and nation; community and societal
considerations; and the long-term as well as short-term interests of the
corporation and its stockholders, including the possibility that these interests
may be best served by the continued independence of the corporation. Thus, these
interests could be considered even in connection with a decision to sell a
company. The New Labtec Charter and New Labtec By-laws do not discuss the
consideration of societal factors.
Unlike Massachusetts, Delaware does not explicitly provide for the
consideration of societal interests by a corporation's board of directors in
making decisions. The Delaware Supreme Court has, however, held that, in
discharging their responsibilities, directors may consider constituencies other
than stockholders, such as creditors, customers, employees and perhaps even the
community in general, as long as there are rationally related benefits accruing
to stockholders as well. The Delaware Supreme Court has held, however, the
concern for non-stockholder interests is inappropriate when a sale of the
company is inevitable and an auction among active bidders is in progress. The
New Labtec Charter and New Labtec By-laws do not directly discuss consideration
of societal factors.
EXPERTS
The consolidated financial statements of Spacetec as of March 31, 1997 and
1998, and for each of the three years in the period ended March 31, 1998,
included in this Proxy Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Labtec Inc. as of March 31, 1997
and 1998, and for each of the three years in the period ended March 31, 1998
appearing in this Proxy Statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
STOCKHOLDER PROPOSALS
New Labtec's By-laws require a stockholder who wishes to bring business
before or propose director nominations at an annual meeting to give written
notice to the Chairman of the Board of Directors, the
115
<PAGE> 125
President or the Clerk of New Labtec not less than 50 days nor more than 75 days
before the meeting, unless less than 65 days' notice or public disclosure of the
date of the meeting is given, in which case the stockholder's notice must be
received within 15 days following the day on which such notice or disclosure of
the date of the annual meeting was marked or public disclosure was made. The
notice must contain specified information about the proposed business or nominee
and the stockholder making the proposal or nomination. If any stockholder
intends to present a proposal at the Fiscal Year 1999 annual meeting of
stockholders and desires that it be considered for inclusion in New Labtec's
proxy statement and form of proxy, it must be received by the Company at The
Boott Mills, 100 Foot of John Street, Lowell, Massachusetts 01852-1126,
Attention: Robert G. Wick, no later than February 22, 1999.
116
<PAGE> 126
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Spacetec IMC Corporation and Subsidiaries
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-5
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
Labtec Inc.
Report of Independent Accountants......................... F-20
Consolidated Balance Sheet................................ F-21
Consolidated Statement of Operations...................... F-22
Consolidated Statement of Changes in Shareholders' Equity
(Deficit).............................................. F-23
Consolidated Statement of Cash Flows...................... F-24
Notes to Consolidated Financial Statements................ F-26
</TABLE>
F-1
<PAGE> 127
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Spacetec IMC Corporation
We have audited the accompanying consolidated balance sheets of Spacetec
IMC Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the index Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Spacetec IMC Corporation at March 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Boston, Massachusetts
May 7, 1998, except as to Note 15
as to which the date is June 5, 1998
Ernst & Young LLP
F-2
<PAGE> 128
SPACETEC IMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH-31
------------------ SEPTEMBER-30
1998 1997 1998
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 490 $ 170 $ 666
Securities available-for-sale............................ 8,536 10,059 5,557
Accounts receivable, less allowance for doubtful accounts
of $126 and $75 at March 31, 1998 and 1997,
respectively.......................................... 2,069 2,285 2,037
Inventories.............................................. 687 1,718 536
Prepaid expenses......................................... 176 275 183
Receivable from employees and officer.................... 32 19 4
Income taxes receivable.................................. -- 438 --
------- ------- ------
Total current assets............................. 11,990 14,964 8,983
Furniture and equipment, net............................... 765 964 638
Intangible assets, net..................................... 216 382 142
Software development costs, net............................ -- 265 --
Other assets............................................... 28 27 29
------- ------- ------
1,009 1,638 809
------- ------- ------
Total assets..................................... $12,999 $16,602 $9,792
======= ======= ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 1,498 $ 1,267 $1,276
Deferred revenue......................................... 12 75 --
------- ------- ------
Total current liabilities........................ 1,510 1,342 1,276
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized............................................ -- -- --
Common stock, voting, $.01 par value; 20,000,000
authorized shares; 6,841,534, 7,142,742 and 7,366,508
shares issued at September 30, 1998, March 31, 1998
and 1997, respectively................................ 71 74 68
Additional paid-in capital............................... 16,780 17,969 16,007
Deferred compensation.................................... (50) (40) (50)
Unrealized gain on available-for-sale securities......... 5 46 3
Accumulated deficit...................................... (5,303) (2,033) (7,556)
Cumulative translation adjustment........................ (14) -- 44
Treasury stock, at cost; 100,000 shares at March 31,
1997.................................................. -- (756) --
------- ------- ------
Total shareholders' equity....................... 11,489 15,260 8,516
------- ------- ------
Total liabilities and shareholders' equity....... $12,999 $16,602 $9,792
======= ======= ======
</TABLE>
See accompanying notes.
F-3
<PAGE> 129
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31 --------------------------
---------------------------- SEPT. 30, SEPT. 30,
1998 1997 1996 1998 1997
------- ------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 8,884 $ 9,075 $8,132 $ 3,323 $ 3,899
Cost of revenues....................... 2,855 4,436 2,229 953 1,149
------- ------- ------ ------- -------
Gross profit......................... 6,029 4,639 5,903 2,370 2,750
Operating expenses:
Selling and marketing................ 4,359 4,945 2,711 2,038 2,073
Research and development............. 3,483 2,916 1,684 1,407 1,735
General and administrative........... 2,025 1,726 803 1,392 810
------- ------- ------ ------- -------
Total operating expenses..... 9,867 9,587 5,198 4,837 4,618
------- ------- ------ ------- -------
Income (loss) from operations........ (3,838) (4,948) 705 (2,467) (1,868)
Interest income...................... (568) (632) (278) 215 281
------- ------- ------ ------- -------
Income (loss) before income taxes...... (3,270) (4,316) 983 (2,252) (1,587)
Income tax provision (benefit)......... -- (594) 355 -- --
------- ------- ------ ------- -------
Net income (loss)...................... $(3,270) $(3,722) $ 628 $(2,252) $(1,587)
======= ======= ====== ======= =======
Net income (loss) per share:
Basic................................ $ (0.45) $ (0.51) $ 0.19 $ (0.33) $ (0.22)
======= ======= ====== ======= =======
Diluted.............................. $ (0.45) $ (0.51) $ 0.10 $ (0.33) $ (0.22)
======= ======= ====== ======= =======
Weighted average shares outstanding:
Basic................................ 7,195 7,283 3,232 6,841 7,214
======= ======= ====== ======= =======
Diluted.............................. 7,195 7,283 6,412 6,841 7,214
======= ======= ====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 130
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
SERIES A SERIES B GAIN ON RETAINED
PREFERRED STOCK PREFERRED STOCK ADDITIONAL AVAILABLE EARNINGS
------------------- ----------------- PAID-IN DEFERRED FOR-SALE (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SECURITIES DEFICIT)
---------- ------ -------- ------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995....... 1,262,001 126 813,953 81 1,951 -- -- 1,061
Issuance of common stock upon
public offering, net of
underwriters' discount and
issuance costs of $1,207 and
$709, respectively.......... -- -- -- -- 15,317 -- -- --
Conversion of preferred stock
and Class B common stock
upon public offering........ (1,262,001) (126) (813,953) (81) 272 -- -- --
Net income.................... -- -- -- -- -- -- -- 628
---------- ---- -------- ---- ------- ---- ---- -------
Balance at March 31, 1996....... -- -- -- -- 17,540 -- -- 1,689
Common stock issued upon
exercise of options......... -- -- -- -- 384 -- -- --
Payments to repurchase common
stock....................... -- -- -- -- -- -- -- --
Additional offering costs..... -- -- -- -- (5) -- -- --
Deferred compensation recorded
upon issuance of stock
options..................... -- -- -- -- 50 (50) -- --
Amortization of deferred
compensation................ -- -- -- -- -- 10 -- --
Unrealized gain on
available-for-sale
securities.................. -- -- -- -- -- -- 46 --
Net loss...................... -- -- -- -- -- -- -- (3,722)
---------- ---- -------- ---- ------- ---- ---- -------
Balance at March 31, 1997....... -- -- -- -- 17,969 (40) 46 (2,033)
Common stock issued upon
exercise of options......... -- -- -- -- 51 -- -- --
Common stock issued under
Employee Stock Purchase
Plan........................ -- -- -- -- 26 -- -- --
Common stock issued to former
shareholders of Spatial
System, Ltd. upon
acquisition................. -- -- -- -- -- -- -- --
Cancellation of common stock
received upon acquisition of
Spatial System, Ltd......... -- -- -- -- -- -- -- --
Payments to repurchase common
stock....................... -- -- -- -- -- -- -- --
Deferred compensation recorded
upon issuance of stock
options..................... -- -- -- -- 21 (21) -- --
Cancellation of treasury
stock....................... -- -- -- -- (1,287) -- -- --
Amortization of deferred
compensation................ -- -- -- -- -- 11 -- --
Unrealized gain on
available-for-sale
securities.................. -- -- -- -- -- -- (41) --
Net loss...................... -- -- -- -- -- -- -- (3,270)
Cumulative translation
adjustment.................. -- -- -- -- -- -- -- --
---------- ---- -------- ---- ------- ---- ---- -------
Balance at March 31, 1998....... -- $ -- -- $ -- $16,780 $(50) $ 5 $(5,303)
========== ==== ======== ==== ======= ==== ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 131
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE DATA)
See accompanying notes.
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK CUMULATIVE TREASURY STOCK TOTAL
-------------------- ------------------ TRANSLATION ----------------- SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT ADJUSTMENT SHARES AMOUNT EQUITY
---------- ------- -------- ------- ----------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995........... 574,000 6 395,000 114 -- -- -- 3,339
Issuance of common stock upon
public offering, net of
underwriters' discount and
issuance costs of $1,207 and
$709, respectively.............. 1,725,000 17 -- -- -- -- -- 15,334
Conversion of preferred stock and
Class B common stock upon public
offering........................ 4,961,908 49 (395,000) (114) -- -- -- --
Net income........................ -- -- -- -- -- -- -- 628
---------- ------- -------- ------- --------- -------- ---- --------
Balance at March 31, 1996........... 7,240,908 72 -- -- -- -- -- 19,301
Common stock issued upon exercise
of options...................... 125,600 2 -- -- -- -- -- 386
Payments to repurchase common
stock........................... -- -- -- -- -- (100,000) (756) (756)
Additional offering costs......... -- -- -- -- -- -- -- (5)
Deferred compensation recorded
upon issuance of stock
options......................... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 10
Unrealized gain on
available-for-sale securities... -- -- -- -- -- -- -- 46
Net loss.......................... -- -- -- -- -- -- -- (3,722)
---------- ------- -------- ------- --------- -------- ---- --------
Balance at March 31, 1997........... 7,366,508 74 -- -- -- (100,000) (756) 15,260
Common stock issued upon exercise
of options...................... 16,700 -- -- -- -- -- -- 51
Common stock issued under Employee
Stock Purchase Plan............. 9,536 -- -- -- -- -- -- 26
Common stock issued to former
shareholders of Spatial System,
Ltd. upon acquisition........... 1,133,332 -- -- -- -- -- -- --
Cancellation of common stock
received upon acquisition of
Spatial System, Ltd............. (1,133,334) -- -- -- -- -- -- --
Payments to repurchase common
stock........................... -- -- -- -- -- (150,000) (534) (534)
Deferred compensation recorded
upon issuance of stock
options......................... -- -- -- -- -- -- -- --
Cancellation of treasury stock.... (250,000) (3) -- -- -- 250,000 1,290 --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 11
Unrealized gain on
available-for-sale securities... -- -- -- -- -- -- -- (41)
Net loss.......................... -- -- -- -- -- -- -- (3,270)
Cumulative translation
adjustment...................... -- -- -- -- (14) -- -- (14)
---------- ------- -------- ------- --------- -------- ---- --------
Balance at March 31, 1998........... $7,142,742 71 $ -- -- (14) -- -- $ 11,489
========== ======= ======== ======= ========= ======== ==== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 132
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31 SEPTEMBER 30
---------------------------- -------------------------
1998 1997 1996 1998 1997
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................ $(3,270) $(3,722) $ 628 $(2,252) $(1,587)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 772 1,063 557 273 412
Deferred income taxes.................................. -- (220) 50 84 --
Loss on disposal of assets............................. 266 488 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................... 216 (173) (840) 32 472
Inventories............................................ 1,031 (1,309) (215) 152 413
Prepaid expenses and other assets...................... 98 (5) (221) (8) 95
Due from employees and officer......................... 16 53 (67) 30 15
Income taxes receivable................................ 438 (438) -- -- 121
Accounts payable and accrued expenses.................. 231 (208) 598 (223) (432)
Deferred revenue....................................... (63) 63 (39) (12) (10)
------- ------- -------- ------- -------
Net cash provided by (used in) operating activities...... (265) (4,408) 451 (1,924) (501)
INVESTING ACTIVITIES
Net sales (purchases) of securities available-for-sale... 1,482 5,607 (14,120) 2,977 1,225
Purchase of furniture and equipment...................... (339) (676) (633) (158) (263)
Purchase of intangible assets............................ (87) (171) (129) -- (3)
Software development costs............................... -- (224) (425) -- --
------- ------- -------- ------- -------
Net cash provided by (used in) investing activities...... 1,056 4,536 (15,307) 2,819 959
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of costs..... -- -- 15,334 -- --
Proceeds from exercise of stock options.................. 77 386 -- 73 10
Stock repurchase......................................... (534) (756) -- (850) (323)
Additional offering costs................................ -- (5) -- -- --
Repayment of line of credit.............................. -- -- (65) -- --
Repayment of capital lease obligation.................... -- -- (3) -- --
------- ------- -------- ------- -------
Net cash provided by (used in) financing activities...... (457) (375) 15,266 (777) (313)
------- ------- -------- ------- -------
Currency translation effect on cash...................... (14) -- -- 58 --
Net increase in cash and cash equivalents................ 320 (247) 410 176 145
Cash and cash equivalents at beginning of period......... 170 417 7 490 170
------- ------- -------- ------- -------
Cash and cash equivalents at end of period............... $ 490 $ 170 $ 417 $ 666 $ 315
======= ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid...................................... $ -- $ 336 $ 220 $ $ 5
======= ======= ======== ======= =======
Interest paid.......................................... $ -- $ -- $ 15 $ -- $ --
======= ======= ======== ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Adjustment of Panacea Inc. purchase price................ -- -- 48 -- --
Unrealized gain on available-for-sale securities......... $ 5 $ 46 $ -- $ 3 $ 12
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 133
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Spacetec IMC Corporation (the "Company") is a Massachusetts corporation,
organized in April 1991. The Company manufactures and markets real time three
dimensional ("3D") interactive motion control ("IMC") input hardware controllers
and integration software for the industrial CAD/CAM/CAE and consumer markets in
the domestic and international arenas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions by
management affect the Company's allowance for doubtful accounts, reserve for
inventory obsolescence and certain accrued expenses. Actual results could differ
from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND SECURITIES AVAILABLE-FOR-SALE
The Company considers all highly liquid financial instruments with a
maturity at the date of acquisition of three months or less to be cash
equivalents.
At March 31, 1998 and 1997, securities available-for-sale consist
principally of commercial paper and debt securities maturing within one year or
less. Available-for-sale securities are carried at fair market value and
unrealized gains and losses are reported as a separate component of
shareholders' equity.
Unrealized gains included in shareholders' equity totaled $5,000 and
$46,000 at March 31, 1998 and 1997, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
securities available-for-sale and trade receivables. Cash equivalents and
securities available-for-sale consist of temporary investments in money market
funds with maturity dates of three months or less when purchased, commercial
paper and debt securities with maturity dates of one year or less when
purchased, respectively, and have limited credit exposure.
Concentrations of credit risk with respect to trade receivables arise as a
significant portion of the Company's customer base is comprised of
high-technology manufacturers. The Company had two customers representing
approximately 21% and 13% of 1998 sales, two customers representing
approximately 17% and 15% of 1997 sales and two customers representing
approximately 24% and 10% of 1996 sales. Although the Company's exposure to
credit risk associated with nonpayment by high
F-8
<PAGE> 134
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
CONCENTRATIONS OF CREDIT RISK -- CONTINUED
technology manufacturers is affected by conditions or occurrences within the
high-technology industry, trade receivables from the high-technology
manufacturers were current at March 31, 1998. The Company's write-offs related
to the collection of trade accounts receivable amounted to $31,000, $76,000 and
$27,000 in 1998, 1997 and 1996, respectively.
INVENTORIES
Inventory, which is comprised of component parts, subassemblies and
finished goods, is stated at the lower of cost or market. Cost is determined
using the first in, first out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets. The useful lives of furniture and equipment range from three
to seven years. Leasehold improvements are stated at cost and amortized over the
shorter of the remaining life of the building lease or the estimated useful life
of the asset.
INTANGIBLE ASSETS
Intangible assets consist primarily of acquired technology, patents,
licenses and a non-compete agreement and are amortized on a straight-line basis
over three to five years.
The realizability of intangible assets is evaluated periodically as events
or circumstances indicate a possible inability to recover the carrying amounts.
REVENUE RECOGNITION
Sales are recorded as products are shipped. A provision for estimated sales
returns is recorded in the period in which related sales are recognized.
The Company provides customers with a warranty, principally for one to
three years from the date of sale. Estimated warranty obligations are provided
at the time of sale of the Company's products based on historical and
anticipated warranty costs. Warranty costs during 1998, 1997 and 1996 were
immaterial.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Software
development costs incurred after the establishment of technological feasibility
and until the product is available for general release are capitalized, provided
recoverability is reasonably assured.
Technological feasibility is defined as the establishment of a working
prototype or a detail program design. Amortization of software development costs
is the greater of the amount computed using (i) the ratio of current gross
revenues to the total of current and anticipated future gross revenues of each
product or (ii) the straight-line method over the expected useful life of the
product, which generally does not exceed three years. Amortization of software
development costs in 1998, 1997 and 1996 was approximately
F-9
<PAGE> 135
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
RESEARCH AND DEVELOPMENT COSTS -- CONTINUED
$265,000, $654,000 and $136,000, respectively, and is included in cost of sales.
In 1998 and 1997, management determined that the recoverability of certain costs
associated with capitalized software was uncertain and recorded a charge of
$130,000 and $329,000, respectively, for the write down of the software; these
amounts are included in amortization expense for the year ended March 31, 1998
and 1997.
INCOME TAXES
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income taxes are recognized for the future
tax consequences of differences between the tax and financial accounting of
assets and liabilities at each year end. Deferred income taxes are based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to effect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
NET INCOME/LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options, warrants and
convertible securities. Earnings per share amounts for all periods presented
have been restated to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)...................................... $(3,270) $(3,722) $ 628
======= ======= ======
Weighted average shares for basic earnings (loss) per
share................................................ 7,195 7,283 3,232
Effect of dilutive securities:
Employee stock options............................... -- -- 348
Convertible preferred stock.......................... -- -- 2,832
------- ------- ------
Weighted average shares for diluted earnings (loss) per
share................................................ 7,195 7,283 6,412
======= ======= ======
Basic earnings (loss) per share........................ $ (0.45) $ (0.51) $ 0.19
======= ======= ======
Diluted earnings (loss) per share...................... $ (0.45) $ (0.51) $ 0.10
======= ======= ======
</TABLE>
F-10
<PAGE> 136
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date. Statements of operations amounts have been translated using average
exchange rates. The gains and losses resulting from the changes in exchange
rates from the dates of inception of Spacetec IMC GmbH, Spacetec IMC SARL, and
Spacetec IMC Limited through March 31, 1998, have been reported separately as a
component of stockholders' equity. The operations of Spatial Systems Limited
have been translated and consolidated with the accounts of the Company from the
date of acquisition. (See Note 13)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements for periods beginning after December 15, 1997.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. Examples of items to be included in comprehensive income
which are excluded form net income include cumulative translation adjustments
resulting from consolidation of foreign subsidiaries' financial statements and
unrealized gains and losses on available-for-sale securities. Reclassification
of financial statements for earlier periods for comparative purposes is
required. The Company will adopt SFAS 130 beginning in its fiscal year 1999 and
does not expect such adoption to have a material effect on its consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements for periods
beginning after December 15, 1997. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company will adopt SFAS 131 beginning in fiscal 1999 and does not expect
such adoption to have a material effect on its consolidated financial
statements.
RECLASSIFICATIONS
Certain amounts in fiscal year 1996 financial statements have been
reclassified to conform with current classifications.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on the results of
operations or financial position of the Company.
F-11
<PAGE> 137
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Office equipment............................................ $ 564 $ 517
Computer equipment.......................................... 504 325
Tools and dies.............................................. 474 510
Furniture and fixtures...................................... 72 64
Leasehold improvements...................................... 64 45
Vehicles.................................................... -- 72
------ ------
1,678 1,533
Accumulated depreciation.................................... (913) (569)
------ ------
$ 765 $ 964
====== ======
</TABLE>
Depreciation expense for the years ended March 31, 1998, 1997, and 1996 was
$477,000, $479,000, and $266,000, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Patents..................................................... $ 256 $ 355
Software licenses........................................... 132 53
Acquired technology......................................... 54 151
Non-compete agreements...................................... -- 325
Organization costs.......................................... -- 33
----- -----
442 917
Accumulated depreciation.................................... (226) (535)
----- -----
$ 216 $ 382
===== =====
</TABLE>
The non-compete agreement of $325,000 arose from payments made to a certain
former employee of Panacea. During the year, the Company ceased selling the 2D
software product acquired from the purchase of Panacea. As a result, management
determined that the carrying value of the non-compete agreement was impaired and
recorded a loss equal to the unamortized balance of the non-compete in the
amount of $104,000 for the year ended March 31, 1998.
Amortization expense totaled $149,000, $248,000, and $155,000 for the years
ended March 31, 1998, 1997, and 1996, respectively.
F-12
<PAGE> 138
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------
1998 1997
---- ------
(IN THOUSANDS)
<S> <C> <C>
Materials................................................... $425 $1,133
Work-in-process............................................. 77 31
Finished goods.............................................. 185 554
---- ------
$687 $1,718
==== ======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Trade payables............................................. $ 938 $1,055
Commission and royalties................................... 132 130
Accrued compensation....................................... 364 27
Other...................................................... 64 55
------ ------
$1,498 $1,267
====== ======
</TABLE>
7. COMMITMENTS
OPERATING LEASES
The Company leases office equipment and certain office space under various
agreements which expire through the fiscal year 2001. The agreement pertaining
to office space is subject to rent escalation clauses. Future minimum lease
payments under these noncancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999.............................................. $283,000
2000.............................................. 282,000
2001.............................................. 71,000
--------
$636,000
========
</TABLE>
Total rent expense for the years ended March 31, 1998, 1997 and 1996
amounted to approximately $284,000, $272,000, and $136,000, respectively.
ROYALTY AGREEMENTS
In May 1991, the Company entered into a royalty agreement (the "Agreement")
with a shareholder of the Company. Pursuant to the Agreement, the Company is
obliged to pay one-half of one percent
F-13
<PAGE> 139
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS -- CONTINUED
ROYALTY AGREEMENTS -- CONTINUED
(0.5%) of all net revenues received by the Company with respect to technology
covered by certain existing patents which relate to the Company's hardware
products. The Agreement will remain in effect until the last of such patents
expire.
Pursuant to the acquisition of Panacea, the Company was obligated to pay
royalties on net revenues received from the sales of certain of the Company's
products which contained purchased technology. Royalties were paid at fifteen
dollars per five hundred seats sold on one product and at eight percent (8%) of
net revenues for another product. As the Company no longer sells the products
that were acquired with Panacea, these royalties are no longer applicable.
The Company incurred royalty expenses of approximately $39,000, $74,000 and
$67,000 under these agreements in fiscal years 1998, 1997 and 1996,
respectively.
8. SEGMENT INFORMATION AND FOREIGN SALES
The Company operates in one industry segment: the manufacturing and
marketing of real time 3D IMC hardware input controllers and integration
software for the industrial and consumer electronics market. Commencing in
fiscal year 1998, the Company generated revenue through foreign subsidiaries.
Foreign sales are denominated in the local currency of the country in which the
subsidiary is located. Amounts are translated into US dollars upon
consolidation. Foreign sales totaled $631,000 for the year ended March 31, 1998.
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
---------------------
1998 1997 1996
---- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal............................................ $-- $(318) $265
State.............................................. -- (56) 40
--- ----- ----
-- (374) 305
Deferred:
Federal............................................ -- (187) 42
State.............................................. -- (33) 8
--- ----- ----
-- (220) 50
-- ----- ----
$-- $(594) $355
=== ===== ====
</TABLE>
F-14
<PAGE> 140
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES -- CONTINUED
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Tax at federal statutory rate........................ (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit.................. (6.3) (6.0) 6.3
Research and development credits..................... -- (4.1) (4.7)
Other, net........................................... -- (0.1) .5
Increase in valuation allowance...................... 40.3 30.4 --
----- ----- ----
--% (13.8)% 36.1%
===== ===== ====
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
MARCH 31
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 1,714 $ 568
R&D credit carryforward................................... 144 367
Inventory obsolescence reserve............................ 374 290
Allowance for doubtful accounts........................... 77 59
Accrued vacation.......................................... 18 19
Deferred revenue.......................................... 5 30
Uniform capitalization.................................... 8 5
Covenant not to compete................................... (6) 48
Other..................................................... 11 (3)
Valuation allowance....................................... (2,320) (1,156)
------- -------
25 227
Deferred tax liabilities:
Software development costs................................ -- (132)
Patents................................................... (25) (50)
Tax over book depreciation................................ -- (45)
------- -------
Total deferred tax liabilities.................... (25) (227)
------- -------
$ -- $ --
======= =======
</TABLE>
10. CAPITAL STOCK
In July 1996, the Board of Directors authorized the repurchase, from time
to time, of up to 100,000 shares of the Company's Common Stock. Repurchases
under this program were completed in December 1996 at a cost of $756,000.
F-15
<PAGE> 141
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITAL STOCK -- CONTINUED
On May 15,1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's Common Stock. As of March 31, 1998, the
Company has repurchased 150,000 shares at a total cost of $534,000.
11. STOCK OPTION PLANS
1995 DIRECTOR STOCK OPTION PLAN
On December 4, 1996, the Board of Directors of the Company adopted, the
Amended and Restated 1995 Director Stock Option Plan (the "Director Plan") in
which all directors who are not employees of the Company (the "Eligible
Directors") participate. The Company has reserved 225,000 shares of Common Stock
for issuance under the Director Plan. Upon initial election to the Board of
Directors, each new Eligible Director is to be granted an option to purchase
10,000 shares of Common Stock. On each December 31st thereafter, any eligible
director serving as such on that date will be granted options ("Annual Options")
to purchase 10,000 shares. Options become exercisable with respect to 3,000
shares on the date of grant, 3,000 shares on the second anniversary of the date
of grant and 4,000 shares on the third anniversary of the date of grant, if the
optionholder is a member of the Board at the opening of business on that date.
The options have a term of ten years and an exercise price equal to the fair
market value of the Common Stock on the date of grant. In addition to the Annual
Options, the Director Plan allowed for the grant of 20,000 options to each of
two directors and 14,000 options to a third director ("Initial Options"). The
Initial Options become exercisable with respect to 30% on the date of grant, 30%
on the second anniversary of the date of grant, and 40% on the third anniversary
of the date of grant.
1993 STOCK OPTION PLAN
The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan")
was readopted by the Board of Directors on September 29, 1995. The 1993 Plan
authorized the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended ("ISOs") and non-qualified
stock options. The 1993 Plan allows for the purchase of an aggregate of
1,600,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock to employees of the Company and, in the case of
non-qualified stock options, to consultants of the Company or any Affiliate (as
defined in the 1993 Plan) capable of contributing to the Company's performance.
The Board of Directors has appointed the Compensation Committee to administer
the Plan.
The purchase price per share of stock deliverable upon the exercise of a
stock option is determined by the Compensation Committee provided that the
exercise price for ISOs shall not be less than the fair market value of the
stock on the date of grant. Each option granted under the Plan is exercisable
either in full or in installments as set forth in each recipient's option
agreement. Incentive stock options generally vest over a five-year period. All
options expire ten years after the date of grant.
OPTION REPRICING
On April 11, 1997, the Board of Directors approved a repricing of all
options granted to current employees of the Company. Options meeting
qualification were repriced at $3.25 per share which equaled
F-16
<PAGE> 142
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS -- CONTINUED
OPTION REPRICING -- CONTINUED
the fair market value of the Company's Common Stock on that date. A total of
393,200 options were repriced.
EMPLOYEE STOCK PURCHASE PLAN
In September 1995, the Company approved an Employee Stock Purchase Plan
(the "ESPP") under which employees may purchase shares of Common Stock at a
discount from fair market value. There are 100,000 shares of Common Stock
reserved for issuance under the ESPP. The ESPP is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Rights to purchase Common Stock under the ESPP are granted at the discretion of
the Compensation Committee, which determines the frequency and duration of
individual offerings under the Plan and the dates when stock may purchased.
Eligible employees participate voluntarily and may withdraw from any offering at
any time before stock is purchased. Participation terminates automatically upon
termination of employment. The purchase price per share of Common Stock in an
offering is 85% of the lesser of its fair market value at the beginning of the
offering period or on the applicable exercise date and may be paid through
payroll deductions, periodic lump sum payments or a combination of both. The
ESPP terminates on September 29, 2005. As of March 31, 1998, the Company has
issued 9,536 shares at a price of $2.76 per share under the ESPP.
FAS 123 DISCLOSURES
Pursuant to the requirements of FAS 123, the following are the pro forma
net loss and net loss per share for the years ended March 31, 1998 and 1997, as
if the compensation expense for the options plans had been determined based on
the fair value at the grant date for grants during fiscal years 1998 and 1997,
consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss (in 000's)................. $ (3,270) $(4,293) $ (3,722) $(4,335)
Net loss per share.................. $ (0.45) $ (0.60) $ (0.51) $ (0.60)
</TABLE>
The fair value of options granted under the Company's stock option plans
was estimated using the Black-Scholes multiple option model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Expected term in years (from vest date)....... 1.0 1.0
Volatility.................................... 98.0% 70.0%
Interest rate................................. 5.51% - 5.69% 5.92% - 6.30%
</TABLE>
For the purposes of the calculation, the Company assumed no dividends.
The effects on 1998 and 1997 pro forma net income or loss per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting the results of operations
F-17
<PAGE> 143
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS -- CONTINUED
FAS 123 DISCLOSURES -- CONTINUED
for future years as the periods presented include only two and three years of
option grants under the Company's plans.
The following table presents the combined activity of the 1993 Plan and the
Director Plan for the years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning
of period.......... 886,370 $4.87 873,050 $4.05 183,000 $0.61
Granted.............. 969,200 3.35 280,650 7.08 708,550 4.97
Canceled............. (608,860) 5.88 (141,730) 5.83 (18,500) 6.10
Exercised............ (16,700) 3.02 (125,600) 3.07 -- --
--------- ----- -------- ----- ------- -----
Outstanding at end of
year............... 1,230,010 $3.19 886,370 $4.87 873,050 $4.05
========= ===== ======== ===== ======= =====
Options exercisable
at year end........ 442,787 $2.92 227,904 $3.56 162,000 $2.58
========= ===== ======== ===== ======= =====
Available for grant
at end of year..... 452,690 813,050 951,950
========= ======== =======
Weighted average fair
value per share of
options granted
during the year.... $1.60 $3.44 $2.61
===== ===== =====
</TABLE>
The following table presents weighted average price and life information
for significant option groups outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05 - $1.00 134,200 5.72 $0.53 99,800 $0.52
$1.01 - $3.00 170,100 6.37 $2.64 100,500 $2.63
$3.01 - $4.00 736,310 8.43 $3.25 183,420 $3.26
$4.01 - $5.00 154,000 9.10 $4.51 32,400 $4.75
$5.01 - $13.00 35,400 8.12 $8.98 24,667 $8.90
--------- -------
1,230,010 440,787
========= =======
</TABLE>
F-18
<PAGE> 144
SPACETEC IMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEVERANCE PAYMENTS
In the fiscal quarter ended March 31, 1998, the Company incurred charges of
approximately $370,000 as a result of changes in its senior management. This
amount consisted principally of salary and benefit payments, outplacement
expenses and compensation expense related to the remeasurement of stock options.
Included in severance charges was a loss of $30,000 on the sale of a Company
vehicle to a former employee. At March 31, 1998, the Company's severance
liability was $313,000. This amount represents severance payments that will
continue to be paid through October 1999.
13. ACQUISITION
On April 19, 1997, the Company initiated a tender offer to purchase all of
the outstanding shares of Spatial Systems Ltd. ("SSL") from SSL's stockholders
in exchange for 1,133,332 shares of Common Stock of the Company. The tender
offer ended on July 18, 1997. In connection with the tender offer, the Company
paid approximately $75,000 to SSL for the cancellation of a license agreement
that was entered into in May 1991. Additionally, 1,133,334 shares of Common
Stock of the Company owned by SSL prior to the offer, were canceled. The tender
offer, together with the cancellation of the shares of the Company's Common
Stock owned by SSL, did not affect the number of shares of Common Stock
outstanding of the Company.
14. RELATED PARTY TRANSACTIONS
During the fiscal years 1997 and 1996, the Company sold its products to
SSL, a former shareholder of the Company whose Chairman was also a Director of
the Company. Sales to SSL for the years ended March 31, 1998, 1997 and 1996,
amounted to approximately $0, $278,000, and $140,000, respectively. Accounts
receivable at March 31, 1998, 1997 and 1996 from SSL were approximately $0,
$149,000, and $79,000, respectively. The Company did not sell products to SSL
during the year ended March 31, 1998. On July 18, 1997, the Company acquired
SSL. (See Note 13)
15. SUBSEQUENT EVENTS
As the Company decided to focus its efforts on developing and growing its
core 3D controller and related software business, management has determined that
it does not wish to pursue certain other technology that the Company has
developed. Consequently, on June 5, 1998 the Company transferred certain 3D
software technology and computer equipment having a net book value of
approximately $50,000 to 3D OpenMotion, LLC (the "LLC"). The LLC was established
by the former CEO and current director of the Company, who is majority owner of
the LLC. The Company received a 20% non-voting interest in the LLC.
Additionally, the LLC agreed to provide the Company with an option to obtain
favorable pricing for commercial products developed by the LLC at a 50% discount
on the most favorable terms offered to any other customer. This option becomes
exercisable on January 1, 1999 and expires on May 31, 1999 if not exercised. To
exercise the option, the Company must pay $250,000 to the LLC.
If the option is exercised, the Company's favorable pricing terms would
extend through June 2003.
In conjunction with this agreement, the former CEO contributed 291,667
shares of stock of Spacetec IMC Corporation to the LLC as his initial investment
in the LLC. The Company has agreed to repurchase these shares from the LLC at a
price of $2.40 per share, which represents a discount of approximately 20% from
the fair market value of the shares on June 3, 1998, the date on which the
parties agreed to the terms of the joint venture.
F-19
<PAGE> 145
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Labtec Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Labtec Inc. and its subsidiaries (the "Company") at March
31, 1997 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Labtec's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
August 3, 1998, except for Notes 8 and 10
which are as of January 5, 1999
F-20
<PAGE> 146
LABTEC INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
------------------------- SEPTEMBER 30,
1997 1998 1998
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 71,871 $ 988,417 $ 2,560,866
Accounts receivable, net.................................. 10,404,883 13,548,320 15,448,246
Interest and other receivables............................ 24,375 19,790 9,093
Inventories............................................... 16,097,168 12,664,421 9,903,074
Current deferred income taxes............................. 264,839 337,477 944,091
----------- ----------- ------------
Total current assets............................... 26,863,136 27,558,425 28,865,370
Furniture and equipment, net................................ 1,662,417 2,190,910 2,007,178
Noncurrent deferred income taxes............................ 1,314,258 1,591,552 1,666,345
Noncompete agreement........................................ 723,600 361,800 180,900
Debt issuance costs......................................... 376,626 2,614,880 2,435,115
Other noncurrent assets..................................... 53,386 117,116 115,952
Goodwill.................................................... 3,535,046 1,767,522 883,760
----------- ----------- ------------
$34,528,469 $36,202,205 $ 36,154,620
----------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings..................................... $15,672,671 $ 2,500,000 $ --
Current portion of long-term debt......................... 2,191,038 625,000 1,000,000
Accounts payable.......................................... 3,916,686 3,644,113 6,711,952
Income taxes payable...................................... 243,808 270,925 28,445
Accrued payroll and benefits.............................. 744,451 125,645 418,905
Accrued interest.......................................... 126,494 202,260 157,152
Other accrued expenses.................................... 560,584 646,054 1,446,016
----------- ----------- ------------
Total current liabilities.......................... 23,455,732 8,013,997 9,762,470
Long-term debt.............................................. 2,955,213 31,985,988 31,503,586
----------- ----------- ------------
26,410,945 39,999,985 41,266,056
----------- ----------- ------------
Redeemable warrants......................................... 1,451,937 -- --
----------- ----------- ------------
Commitments and contingencies (Notes 4 and 9)
Shareholders' equity (deficit):
Common stock, par value $.01, 400,000 and 35,000,000
shares authorized, 78,986, 25,164,720 and 26,228,550
shares issued and outstanding at March 31, 1997, 1998
and September 30, 1998.................................. 790 251,647 262,285
Preferred stock, par value $.01 and $0.00, 34,000 and
34,000 shares authorized, 34,000 and 0 shares
outstanding at March 31, 1997 and 1998.................. 2,500,000 -- --
Treasury stock (1,217,240 shares held at September 30,
1998)................................................... -- -- (195,101)
Additional paid-in capital................................ 7,923,810 5,942,139 7,052,279
Stock subscription receivable............................. (170,902) (134,554) (188,617)
Deferred compensation..................................... -- -- (16,608)
Accumulated deficit....................................... (3,588,111) (9,857,012) (12,025,674)
----------- ----------- ------------
6,665,587 (3,797,780) (5,111,436)
----------- ----------- ------------
$34,528,469 $36,202,205 $ 36,154,620
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-21
<PAGE> 147
LABTEC INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $43,664,333 $59,779,334 $57,820,303 $27,622,150 $28,188,763
Cost of sales.............................. 29,878,433 39,680,758 38,163,280 17,921,257 18,389,274
----------- ----------- ----------- ----------- -----------
Gross profit............................... 13,785,900 20,098,576 19,657,023 9,700,893 9,799,489
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing.................... 7,099,657 8,582,171 9,903,762 5,112,287 5,407,676
General and administrative............... 3,876,942 4,040,278 5,176,876 2,433,202 3,750,986
Depreciation............................. 561,999 722,906 943,449 448,750 683,538
Amortization of goodwill................. 1,767,524 1,767,524 1,767,524 883,762 883,762
Amortization of noncompete agreement..... 804,000 482,400 361,800 180,900 180,900
----------- ----------- ----------- ----------- -----------
14,110,122 15,595,279 18,153,411 9,058,901 10,906,862
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.............. (324,222) 4,503,297 1,503,612 641,992 (1,107,373)
Interest expense, net...................... 2,565,516 2,610,571 3,253,795 1,301,143 1,799,807
Other nonoperating expense (income)........ -- (31,124) 1,956 1,155 (15,631)
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary loss and
income taxes............................. (2,889,738) 1,923,850 (1,752,139) (660,306) (2,891,549)
Provision (benefit) for income taxes....... (312,069) 1,322,560 13,555 5,085 (722,887)
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary loss.... (2,577,669) 601,290 (1,765,694) (665,391) (2,168,662)
Extraordinary loss on extinguishment of
debt, less applicable income tax benefit
of $263,156.............................. -- -- (510,834) -- --
----------- ----------- ----------- ----------- -----------
Net (loss) income.......................... $(2,577,669) $ 601,290 $(2,276,528) $ (665,391) $(2,168,662)
----------- ----------- ----------- ----------- -----------
Net (loss) income per share before
extraordinary loss:
Basic.................................... $ (0.19) $ 0.04 $ (0.09) $ (0.05) $ (0.09)
----------- ----------- ----------- ----------- -----------
Diluted.................................. $ (0.19) $ 0.03 $ (0.09) $ (0.05) $ (0.09)
----------- ----------- ----------- ----------- -----------
Net (loss) income per share
Basic.................................... $ (0.19) $ 0.04 $ (0.12) $ (0.05) $ (0.09)
----------- ----------- ----------- ----------- -----------
Diluted.................................. $ (0.19) $ 0.03 $ (0.12) $ (0.05) $ (0.09)
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-22
<PAGE> 148
LABTEC INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON PREFERRED STOCK
--------------------- TREASURY PAID-IN STOCK ----------------------
SHARES AMOUNT STOCK CAPITAL SUBSCRIPTION SHARES AMOUNT
---------- -------- --------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995......... 78,546 $ 786 $ -- $ 7,842,814 $(177,300) -- $ --
Payments on common stock
subscription..................... 6,398
Issuance of Series A preferred
stock............................ 34,000 2,500,000
Issuance of Class A common
stock............................ 440 4 43,996
Net loss..........................
---------- -------- --------- ------------ --------- -------- -----------
Balance at March 31, 1996......... 78,986 790 -- 7,886,810 (170,902) 34,000 2,500,000
Compensation expense on stock
options granted.................. 37,000
Net income........................
---------- -------- --------- ------------ --------- -------- -----------
Balance at March 31, 1997......... 78,986 790 -- 7,923,810 (170,902) 34,000 2,500,000
Payments on common stock
subscription..................... 36,348
Preferred stock dividend..........
Preferred stock converted to
common stock..................... 34,000 340 2,499,660 (34,000) (2,500,000)
Compensation expense on stock
options granted.................. 73,000
Exercise of warrants (including
cancellation of "put" rights).... 5,319 53 1,901,884
Exercise of stock options......... 18,728 187 1,872,613
8.5853 to 1 stock split........... 1,039,436 10,394 (10,394)
Repurchase and retirement of
existing common stock............ (1,017,659) (10,176) (14,260,573)
Issuance of new common stock...... 1,049,426 10,494 5,900,094
Issuance of shares to subordinated
debtholder....................... 50,000 500 281,110
20 to 1 stock split............... 23,906,484 239,065 (239,065)
Net loss..........................
---------- -------- --------- ------------ --------- -------- -----------
Balance at March 31, 1998......... 25,164,720 251,647 -- 5,942,139 (134,554) -- --
Repurchase of common stock for
treasury (1,217,240 shares)...... (195,101) 134,554
Stock options granted............. 18,118
Issuance of common stock to
management....................... 1,063,830 10,638 1,092,022 (188,617)
Net loss..........................
---------- -------- --------- ------------ --------- -------- -----------
Balance at September 30, 1998
(unaudited)...................... 26,228,550 $262,285 $(195,101) $ 7,052,279 $(188,617) $ -- $ --
------- ------ ------- --------- --------- ------ --------
<CAPTION>
DEFERRED
COMPEN- ACCUMULATED
SATION DEFICIT TOTAL
-------- ------------ ------------
<S> <C> <C> <C>
Balance at March 31, 1995......... $ -- $ (1,611,732) $ 6,054,568
Payments on common stock
subscription..................... 6,398
Issuance of Series A preferred
stock............................ 2,500,000
Issuance of Class A common
stock............................ 44,000
Net loss.......................... (2,577,669) (2,577,669)
-------- ------------ ------------
Balance at March 31, 1996......... -- (4,189,401) 6,027,297
Compensation expense on stock
options granted.................. 37,000
Net income........................ 601,290 601,290
-------- ------------ ------------
Balance at March 31, 1997......... -- (3,588,111) 6,665,587
Payments on common stock
subscription..................... 36,348
Preferred stock dividend.......... (435,314) (435,314)
Preferred stock converted to
common stock..................... --
Compensation expense on stock
options granted.................. 73,000
Exercise of warrants (including
cancellation of "put" rights).... 1,901,937
Exercise of stock options......... 1,872,800
8.5853 to 1 stock split........... --
Repurchase and retirement of
existing common stock............ (3,557,059) (17,827,808)
Issuance of new common stock...... 5,910,588
Issuance of shares to subordinated
debtholder....................... 281,610
20 to 1 stock split............... --
Net loss.......................... (2,276,528) (2,276,528)
-------- ------------ ------------
Balance at March 31, 1998......... -- (9,857,012) (3,797,780)
Repurchase of common stock for
treasury (1,217,240 shares)...... (60,547)
Stock options granted............. (16,608) 1,510
Issuance of common stock to
management....................... 914,043
Net loss.......................... (2,168,662) (2,168,662)
-------- ------------ ------------
Balance at September 30, 1998
(unaudited)...................... $(16,608) $(12,025,674) $ (5,111,436)
------ --------- ---------
</TABLE>
This accompanying notes are an integral part of this statement.
F-23
<PAGE> 149
LABTEC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................... $(2,577,669) $ 601,290 $(2,276,528) $ (665,391) $(2,168,662)
Depreciation............................ 561,999 722,906 943,449 448,750 683,538
Amortization of goodwill................ 1,767,524 1,767,524 1,767,524 883,762 883,762
Amortization of noncompete agreement.... 804,000 482,400 361,800 180,900 180,900
Amortization of debt issuance costs and
original issue discount............... 746,249 619,854 474,857 251,754 217,281
Change in deferred income taxes......... (624,295) (304,640) (349,932) (681,407)
Loss on disposal of assets.............. 1,200
Compensation expense on common stock
sold to management.................... 802,660
Compensation expense on stock options
granted............................... 37,000 73,000 1,510
Write-off of debt issuance costs........ 296,468
Write-off of unamortized discount on
refinanced subordinated debt.......... 307,185
Changes in current assets and
liabilities:
Accounts receivable................... (2,535,015) 456,467 (3,143,437) (2,730,400) (1,899,926)
Interest and other receivables........ (9,108) (13,604) 4,585 9,925 10,697
Inventories........................... (1,482,542) (7,080,728) 3,432,747 2,179,109 2,761,347
Accounts payable...................... 2,035,475 (232,847) (272,573) 1,433,678 3,067,839
Accrued interest...................... 126,494 75,766 (14,448) (45,108)
Accrued payroll and other expenses.... 136,458 388,744 (533,336) (11,822) 1,093,222
Income taxes payable.................. 424,744 (144,864) 27,117 (69,915) (242,480)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating
activities.............................. (752,180) (2,574,004) 1,189,892 1,895,902 4,665,173
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.................... (1,692,371) (743,116) (1,473,142) (433,233) (499,807)
Other assets............................ (22,424) (63,730) (54,270) 1,164
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities..... (1,714,795) (743,116) (1,536,872) (487,503) (498,643)
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-24
<PAGE> 150
LABTEC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in new
short-term credit facility............ 2,500,000 (2,500,000)
Net (decrease) increase in old
short-term borrowing facility......... 1,966,900 5,672,671 (15,672,671) 433,845
Proceeds from issuance of long-term
debt.................................. 33,000,000
Repayments of long-term debt............ (2,000,000) (2,375,000) (5,750,000) (1,250,000) (125,000)
Debt issuance costs..................... 51,468 (251,804) (2,820,417) (19,917)
Proceeds from exercise of stock options
and warrants.......................... 2,322,800
Repurchase and cancellation of common
stock................................. (17,827,808) (60,547)
Proceeds from issuance of common
stock................................. 44,000 5,910,588 111,383
Proceeds from issuance of preferred
stock................................. 2,500,000
Preferred stock dividend................ (435,314)
Payments on common stock subscription... 6,398 36,348 36,348
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 2,568,766 3,045,867 1,263,526 (779,807) (2,594,081)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........... 101,791 (271,253) 916,546 628,592 1,572,449
Cash at beginning of period............... 241,333 343,124 71,871 71,871 988,417
----------- ----------- ----------- ----------- -----------
Cash at end of period..................... $ 343,124 $ 71,871 $ 988,417 $ 700,463 $ 2,560,866
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE> 151
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
LEI Holdings, Inc. was formed June 24, 1994 to acquire, own and operate
Labtec Enterprises, Inc. ("Labtec") and its wholly owned subsidiary, Labtec
Electronics (HK) Limited, located in Hong Kong. In 1996, LEI Holdings, Inc.
incorporated a new subsidiary under Labtec Enterprises, Inc. in Windsor, Great
Britain (Labtec Enterprises UK Limited) to facilitate sales on the European
continent. On October 6, 1997 Labtec merged with LEI Holdings, Inc., with LEI
Holdings being the survivor, in conjunction with a recapitalization transaction
through which it refinanced its debt and obtained new equity capital and
repurchased a significant portion of its previously outstanding equity interests
(approximately 86.5%) (the "Recapitalization") (see Notes 4 and 7). Labtec was
dissolved and LEI Holdings, Inc. changed its name to Labtec Enterprises, Inc. On
October 7, 1997 Labtec Enterprises, Inc. consummated the Recapitalization and
changed its name to Labtec Inc. (the "Company"). The accompanying consolidated
financial statements reflect the financial position and results of operations of
Labtec Inc. and its subsidiaries.
The Company designs, manufactures and distributes multimedia computer
peripheral products. Its world-wide customers include original computer
equipment manufacturers, distributors and retailers. The Company's products are
manufactured by various factory suppliers located in Asia and are imported to
the Company's headquarters in Vancouver, Washington and to warehouses in Great
Britain, the Netherlands and Canada for distribution.
The principal accounting policies followed by Labtec Inc. and its
subsidiaries in maintaining their financial records and preparing these
consolidated financial statements are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company,
as well as the accounts of its wholly owned subsidiaries, Labtec Electronics
(HK) Limited and Labtec Enterprises UK, Limited. The HK subsidiary provides
research, product design and engineering, component sourcing and quality control
over the products produced for the Company from various foreign factories. The
UK subsidiary provides international marketing services for the Company's
products. All significant intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
Revenues are recognized upon shipment of the Company's products, net of an
estimated allowance for sales returns. Gross revenues from one customer were
$4.4 million, $9.1 million and $8.8 million for the years ended March 31, 1996,
1997 and 1998, respectively, while revenues from another customer were $7.4
million for the year ended March 31, 1997. Each of these revenue amounts
accounted for more than 10% of consolidated sales for the respective period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, accounts payable, notes
payable, and accrued liabilities as presented in the financial statements
approximate fair value because of the short-term maturity of these instruments.
The recorded amount of long-term debt approximates fair value because actual
interest rates approximate current competitive rates.
F-26
<PAGE> 152
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable are net of allowances for doubtful accounts and for
sales returns. The allowance for doubtful accounts was $120,000 and $89,736 at
March 31, 1997 and 1998, respectively. The allowance for returns of merchandise
was $599,162 and $578,067 at March 31, 1997 and 1998, respectively. At March 31,
1997 and 1998, 11%, and 10%, respectively, of receivables were from one
customer.
INVENTORIES
Inventories are stated at the lower of landed cost (first-in, first-out
method) or market. Landed cost includes the cost of merchandise, freight, duty
and handling fees.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided on the
straight-line method for financial reporting purposes and on an accelerated
method for tax purposes over estimated useful lives ranging from three to seven
years. Depreciation expense for the years ended March 31, 1996, 1997 and 1998
was $561,999, $722,907 and $943,449, respectively.
Repair and maintenance costs are expensed as incurred.
DEBT ISSUANCE COSTS
Debt issuance costs, including bank fees of $1,608,545 and other
transaction fees relating to the debt of $1,211,872, included in debt issuance
costs at March 31, 1998 represent all costs and fees incurred to obtain bank
financing for the refinancing of debt in October 1997 (see Notes 4 and 7). These
costs are being amortized over the term of the related debt. Remaining debt
issuance costs of $296,468 related to earlier financing arrangements were
written off in October 1997 and are included in the extraordinary loss on
extinguishment of debt. Amortization for fiscal years 1996, 1997 and 1998 were
$369,088, $198,864 and $285,695, respectively. Expenses related to amortization
of debt issuance costs are recorded in interest expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Costs in excess of the fair value of the net tangible assets of Labtec
acquired in fiscal 1995 consist primarily of goodwill associated with product
trade names originally recorded at $8,837,618 and a $3,350,000 noncompete
agreement with the former owner. Goodwill is being amortized using the straight-
line method over 5 years, which represents the estimated lives of the underlying
product trade names. The noncompete agreement is being amortized using the
double-declining balance method over the agreement's life of 5 years to reflect
management's belief that the noncompete provision has more value in the earliest
years of the noncompete period. Periodically, the Company reviews the
recoverability of its intangible assets based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of the
intangible assets. If the aggregate future cash flows are less than the carrying
value, a write-down would be required, measured by the difference between the
fair value and the carrying value of the intangible assets. The Company has not
recorded any provision related to impairment of intangible assets. Amortization
expense recognized related to goodwill was $1,767,524 for each of the years
ended March 31, 1996, 1997 and 1998. Amortization expense recognized related to
the noncompete agreement was $804,000, $482,400 and $361,800 for the years ended
March 31, 1996, 1997 and 1998, respectively.
F-27
<PAGE> 153
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DISCOUNT ON SUBORDINATED DEBT
In connection with the Recapitalization, the Company issued 50,000 shares
of common stock (prior to the 20 to 1 stock split effected March 31, 1998) (see
Note 8) to a subordinated lender and recorded the $281,610 of fair value of the
shares as a discount on the face amount of the debt. This non-cash transaction
is excluded from the accompanying statement of cash flows. The discount is being
amortized using the effective interest method over eight years, which is the
life of the subordinated note. Amortization during fiscal 1998 aggregated
$17,598.
STOCK SUBSCRIPTION RECEIVABLE
In fiscal year 1995 the Company issued 1,773 shares of common stock to the
Company's president in exchange for a note aggregating $177,300. This note
receivable has been recorded as a reduction to shareholders equity. Subsequent
to March 31, 1998, the note was forgiven. (See Note 10).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in
selling, general and administrative expenses in the accompanying consolidated
statement of operations.
ADVERTISING EXPENSES
The Company expenses advertising costs when incurred. Total advertising
expenses for the years ended March 31, 1996, 1997 and 1998 were $817,364,
$615,102 and $818,984, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes.
FAS 109 requires the recognition of deferred tax assets and liabilities for the
expected tax effects from differences between the financial reporting and tax
bases of assets and liabilities. In estimating future tax effects, FAS 109
generally considers all expected future events other than enactments of changes
in tax law or statutorily imposed rates.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods,
computed using the treasury stock method for stock options. In fiscal year 1998
the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The following table sets forth the reconciliation of the
denominator
F-28
<PAGE> 154
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
utilized in computation of basic and diluted (loss) earnings per share. All
amounts below are calculated after considering the stock splits that occurred
during fiscal year 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTH PERIOD ENDED
MARCH 31, SEPTEMBER 30,
1996 1997 1998 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of common
shares outstanding................. 13,510,209 13,562,370 19,156,928 13,562,370 23,953,293
Assumed conversion of preferred
stock.............................. 5,838,004
Assumed exercise of stock options and
warrants (net of shares assumed
acquired under the treasury stock
method)............................ 744,576
---------- ---------- ---------- ---------- ----------
Diluted shares outstanding........... 13,510,209 20,144,950 19,156,928 13,562,370 23,953,293
========== ========== ========== ========== ==========
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998 the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The Statement is effective beginning with
the Company's fiscal year ended March 31, 2001, and will require the Company to
record all derivative instruments at fair value on its balance sheet. The
Company has not elected to adopt the statement early, and does not expect the
standard to have a material effect on the Company's financial position or
results of operations upon adoption.
RELATED PARTIES
The former controlling shareholders of the Company provided certain
management services for which they charged a monthly fee of approximately
$14,500 for April 1998 through September 1998 (prior to the
Recapitalization -- Note 7) and for the years ended March 31, 1996 and 1997. The
new majority shareholders charge an annual management services fee of $500,000,
of which $250,000 was charged during fiscal 1998 and remained payable at March
31, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of September 30, 1998 and for the six month
periods ended September 30, 1997 and 1998 has not been audited. In the opinion
of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of September 30, 1998 and
the results of their
F-29
<PAGE> 155
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
operations and of cash flows for the six month periods ended September 30, 1997
and 1998. The interim results are not necessarily indicative of results that may
occur for the full fiscal year.
2. INVENTORIES
Inventories represent merchandise produced for the Company by foreign
factories subcontracted by the Company. Of the total inventory, $4,010,674 and
$716,715 was in transit at March 31, 1997 and 1998, respectively. The Company
takes title upon shipment.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
----------- -----------
<S> <C> <C>
Leasehold improvements.................................... $ 147,200 $ 238,948
Tooling and molds......................................... 1,283,850 1,676,727
Furniture and equipment................................... 795,119 1,381,983
Retail displays........................................... 796,211 1,093,227
----------- -----------
3,022,380 4,390,885
Less accumulated depreciation and amortization............ (1,359,963) (2,199,975)
----------- -----------
$ 1,662,417 $ 2,190,910
=========== ===========
</TABLE>
4. BORROWINGS
In connection with the Recapitalization in October of 1997, the Company
repaid its $16.5 million revolving line of credit and subordinated notes with
funds obtained from a $27 million term note, a $6 million subordinated note, and
a $13 million revolving line of credit with other lenders. A termination fee of
$170,337 related to the old credit line is included in the extraordinary loss on
extinguishment of debt. At March 31, 1997 and 1998, $15.7 million and $2.5
million, respectively, was outstanding on the Company's lines of credit. At
March 31, 1997, interest was at the EURODOLLAR rate plus 3.5%. At March 31,
1998, $2,000,000 and $500,000 of the outstanding amount was accruing interest at
the EURODOLLAR rate plus 2.5% and at the prime rate plus 1.5%, respectively. The
current line of credit is secured by substantially all of the Company's assets.
Loan fees paid to the banks and transaction fees relating to the new term note,
subordinated note, and line of credit were $2,820,417 and have been recorded in
debt issuance costs (see Note 1). The current line of credit agreement expires
in October of 2002.
F-30
<PAGE> 156
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWINGS -- (CONTINUED)
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
----------- -----------
<S> <C> <C>
Bank note payable with varying quarterly payments,
interest at the bank's Eurodollar rate plus 3% (8.625%
at March 31, 1998), with the final payment due September
30, 2004 secured by the Company's assets................ $ -- $26,875,000
Bank subordinated notes payable (net of $478,749 discount
at March 31, 1997) with quarterly payments of $625,000,
plus interest at 12% (20% effective interest rate after
consideration of warrants), with the final payment due
June 30, 1999........................................... 5,146,251
Bank subordinated note payable (net of $264,012 discount
at March 31, 1998) 12%, with principal due October 1,
2005.................................................... 5,735,988
----------- -----------
5,146,251 32,610,988
Less amounts payable in one year.......................... (2,191,038) (625,000)
----------- -----------
Total long-term debt...................................... $ 2,955,213 $31,985,988
=========== ===========
</TABLE>
In fiscal year 1995, under the terms and conditions of the subordinated
note payable agreement, the Company issued warrants to purchase 5,319 shares of
Class A common stock to the lender at an exercise price of $84.60 per share for
a nominal consideration of $200. The aggregate exercise price of the warrants
was $450,000. The estimated fair value of the warrants of $1,451,937 was
recorded as redeemable warrants and as a discount to long-term debt. The warrant
holder had certain "put" rights that would require the Company to repurchase the
warrants at a price to be determined on the date the warrants are put to the
Company. These warrants were exercised and converted into common stock in
conjunction with the Recapitalization discussed in Note 7, and the $1,451,937
was reclassified as additional paid-in capital. The reclassification of the fair
value of the warrants has been excluded from the accompanying consolidated
statement of cash flows.
Debt discount amortization expense for the years ended March 31, 1996, 1997
and 1998 was $377,161, $420,990 and $189,162, respectively. The discount on the
new subordinated note payable is being amortized over the life of the note.
These amounts were recorded as part of interest expense in the consolidated
statement of operations. The unamortized balance of $307,185 on the old debt was
written off during fiscal 1998 concurrent with the Recapitalization and is
included in the extraordinary loss on extinguishment of debt.
The bank line of credit agreement and long-term debt agreements are subject
to certain restrictive covenants. The Company was in compliance with these
covenants for all periods presented in the accompanying financial statements.
F-31
<PAGE> 157
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWINGS -- (CONTINUED)
Interest payments for the years ended March 31, 1996, 1997 and 1998 were
$1,850,750, $1,886,319 and $2,758,083, respectively. Principal repayments of the
long-term debt are required as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999............................................ $ 625,000
2000............................................ 1,375,000
2001............................................ 1,875,000
2002............................................ 2,250,000
2003............................................ 3,500,000
Thereafter...................................... 22,985,988
-----------
$32,610,988
===========
</TABLE>
5. EMPLOYEE BENEFITS
The Company has a defined contribution profit sharing plan for its
employees who meet certain requirements of age and length of service. Employees
may voluntarily contribute up to a maximum of 20% of their annual compensation
to the plan. The Company will also contribute up to an additional 3% of each
employee's base salary to the Plan if the Company achieves at least 80% of the
operating income target in that year's business plan. In fiscal year 1997, the
Company matched 50% of the employee contributions up to a maximum of 5%. For the
years ended March 31, 1996, 1997 and 1998, matching contributions for eligible
employees amounted to $106,860, $91,583 and $56,212, respectively.
Discretionary bonuses of $196,545, $700,700 and $175,485 were awarded to
employees for the years ended March 31, 1996, 1997 and 1998, respectively.
6. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998
--------- ---------- ---------
<S> <C> <C> <C>
Current tax expense............................. $ 312,226 $1,627,200 $ 363,487
Deferred tax benefit............................ (624,295) (304,640) (349,932)
--------- ---------- ---------
$(312,069) $1,322,560 $ 13,555
========= ========== =========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
---------- ----------
<S> <C> <C>
Nondeductible accruals and allowances....................... $ 213,636 $ 273,004
Capitalized inventory costs................................. 51,204 64,473
Fixed assets depreciation................................... 180,971 283,193
Intangibles................................................. 1,133,286 1,308,359
---------- ----------
Deferred tax assets......................................... $1,579,097 $1,929,029
========== ==========
</TABLE>
F-32
<PAGE> 158
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
The income tax provision is reconciled to the tax computed at the statutory
federal rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
Tax expense at federal statutory rate..................... (34.00)% 34.00% (34.00)%
Foreign taxes............................................. .21 .04 .39
Permanent differences..................................... 20.80 31.24 35.38
Other..................................................... 2.19 3.47 (1.00)
------ ----- ------
(10.80)% 68.75% .77%
====== ===== ======
</TABLE>
Permanent differences primarily include nondeductible goodwill and
nondeductible meals and entertainment expense.
Income taxes paid for the years ended March 31, 1996, 1997 and 1998 were
$169,262, $1,791,287, and $75,960, respectively.
7. SHAREHOLDERS' EQUITY (DEFICIT)
On October 7, 1997 the Company undertook the Recapitalization whereby the
Company: a) refinanced its existing debt by obtaining a $13 million line of
credit, a $27 million term note and a $6 million subordinated term note, and by
issuing 1,099,426 shares of common stock (pre 20 to 1 stock split) for aggregate
net proceeds of $6,192,198 representing approximately 87.4% of the stock
ownership of the Company; and b) repurchased 1,017,659 shares of its previously
existing outstanding stock for aggregate cash consideration of $17,827,808,
including direct expenses of approximately $690,000. The repurchase of existing
stock resulted in the old shareholder group maintaining an approximate 12.6%
interest in the Company. (See Note 10).
All holders of common stock are entitled to one vote per share and are
entitled to dividends, provided that equivalent dividends are declared and paid
on all outstanding shares of common stock. The Company has granted stock options
and warrants to purchase shares of Class A common stock of the Company. (See
Note 8).
At March 31, 1996 and 1997, 78,986 shares of Class A common stock were
issued and outstanding.
In fiscal year 1996, the Company authorized and issued 34,000 shares of
preferred stock. At March 31, 1996 and 1997, 34,000 shares were issued and
outstanding.
8. STOCK OPTIONS
The Company provided an employee incentive stock option plan (the "Plan")
which commenced on January 27, 1995. Options under the Plan were granted at the
discretion of the Board of Directors. The exercise price of these options
generally was the fair market value of shares at the date of grant as determined
by the Board of Directors. Such options were exercisable generally over ten
years from the time the options were granted, and vested over a period of three
years. Compensation cost recognized on the Company's stock option grants which
provided an exercise price below the fair value on the date of the grant was
$37,000 and $73,000 for the years ended March 31, 1997 and 1998, respectively.
F-33
<PAGE> 159
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS -- (CONTINUED)
The Plan allowed the granting of options to purchase up to an aggregate of
15,645 shares (before considering stock splits) of the Company's Class A common
stock. Options granted under the Plan were nonqualified stock options as defined
by the Internal Revenue Code. All options were exercised and the Plan was
terminated pursuant to the completion of the Recapitalization in October of
1997.
In connection with the Recapitalization, the Company established a new
employee incentive stock option plan which commenced on October 7, 1997 (the
"New Plan"). The Company reserved 4,789,496 shares of common stock (post 20 to 1
stock split as described below) for issuance to certain employees under the
plan. The exercise price of these options range from $0.2816 (estimated fair
value based upon the price paid for new shares) to $0.8448 per share. Such
options may be exercised generally over 10 years from the time the options are
granted, and vest over a period of four years.
The Company adopted Statement of Financial Accounting Standards No. 123
("FAS 123"), Accounting for Stock-Based Compensation, in fiscal 1997. This
statement allows companies to choose whether to account for stock-based
compensation under the current method as prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25") or use a fair value method described in FAS 123.
The Company continues to follow the provisions of APB 25. Management has
determined that the pro forma effects of applying FAS 123 would have an
immaterial effect on the results of operations for fiscal years 1998 and 1997
based on the following assumptions: dividend yield of zero, risk-free interest
rate of 5.61% for fiscal 1998 and 6.57% for fiscal 1997, and an expected life of
five years.
During fiscal year 1998 the Company granted 2,587,667 options at an
exercise price of $0.2816 per share, which approximated fair value on the date
of grant. Of these options, 246,667 were subsequently cancelled. In addition,
the Company granted 1,293,833 options at $0.8448 per share. Of these options,
123,333 were subsequently cancelled.
The stock options granted in fiscal 1998 are presented after considering a
8.5853 to 1 stock split that occurred on October 6, 1997 and a 20 to 1 stock
split that occurred on March 31, 1998. The following table summarizes the stock
option transactions under the Plan and the New Plan described above.
<TABLE>
<CAPTION>
SHARES UNDER AVERAGE EXERCISE
OPTION PRICE
------------ ----------------
<S> <C> <C>
Balance, March 31, 1995................................... --
Options granted......................................... 17,982 $100.00
Options cancelled....................................... (1,754) 100.00
---------
Balance, March 31, 1996................................... 16,228 100.00
Options granted......................................... 2,500 100.00
---------
Balance, March 31, 1997................................... 18,728 100.00
Options exercised....................................... (18,728) 100.00
---------
Balance, October 7, 1997 (Recapitalization date).......... -- --
Options granted......................................... 3,881,500 0.47
Options cancelled....................................... (370,000) 0.47
---------
Balance, March 31, 1998................................... 3,511,500 0.47
==========
</TABLE>
F-34
<PAGE> 160
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS -- (CONTINUED)
Subsequent to March 31, 1998, 1,240,000 of the options granted in fiscal
1998 were cancelled and an additional 771,500 were granted to certain members of
management at exercise prices ranging from $0.2816 (the estimated fair value of
the Company's stock) to $0.8448 per share. Of the 771,500 options granted after
March 31, 1998, 236,667 were subsequently cancelled.
Of the 3,511,500 options outstanding at March 31, 1998, 2,341,000 were
issued at $0.2816 per share and 1,170,000 were issued at $0.8448 per share. All
of these options have lives of 10 years. None of these options were exercisable
at March 31, 1998.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is contractually obligated under various operating lease
agreements for warehouse and office space until April of 2006. The total rent
expense related to warehouse and office space under leases amounted to $356,822,
$352,464 and $620,657 for the fiscal years ended March 31, 1996, 1997 and 1998,
respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999............................................. $ 605,500
2000............................................. 628,336
2001............................................. 579,084
2002............................................. 579,084
2003............................................. 611,902
Thereafter....................................... 1,935,844
----------
Total minimum lease payments........... $4,939,750
==========
</TABLE>
Payments for fiscal year 1999 are net of sublease revenue of $18,000 on the
Company's old facilities. The sublease expires in September of 1998.
CONTINGENCIES
Pursuant to the Recapitalization agreement, the shareholder group that
received redemption proceeds are contingently entitled to receive from the
Company up to $1,500,000 upon a "Change in Control" (as defined in the
Stockholders Agreement), or up to $3,000,000 in the event of an "Initial Public
Offering" (as defined in the Stockholders Agreement).
10. SUBSEQUENT EVENTS
On April 1, 1998 the Company's president terminated employment. As part of
the severance agreement, the Company repurchased 1,217,240 shares of common
stock (post 20 to 1 stock split) for cash consideration of $104,688 and
forgiveness of the remaining balance of the stock subscription receivable of
$134,554. As discussed in Note 8, stock options issued to the Company's
president were also cancelled subsequent to March 31, 1998. In addition, the
Company agreed to pay $358,690 in cash severance payments during fiscal year
1999, which were provided for in the six-month period ended September 30, 1998.
F-35
<PAGE> 161
LABTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS -- (CONTINUED)
On September 30, 1998 the Company sold 1,063,830 shares of common stock to
certain members of management for $0.282 per share. $111,383 was received in
cash and the remaining $188,617 in proceeds was recorded as a stock subscription
receivable. The difference between the fair market value of the Company's common
stock ($1.0365 per share determined by reference to the proposed merger with
Spacetec IMC Corporation discussed below) and the proceeds received was recorded
as compensation expense aggregating $802,660 during the six-month period ended
September 30, 1998.
On October 21, 1998, the Company announced the signing of a merger
agreement with Spacetec IMC Corporation ("Spacetec"), a publicly-traded company,
with annual sales of approximately $8.9 million. Spacetec is involved with the
development, manufacture and distribution of three-dimensional ("3D") input
controller devices for the PC and workstation marketplace used in both
industrial applications and in consumer electronic games. The merger calls for
issuance of 0.55430739 of Spacetec common shares for each Labtec common share
outstanding, and is subject to Spacetec shareholder approval. As a result of the
merger, Labtec shareholders will ultimately own approximately 67% of Spacetec
and therefore, the transaction will be accounted for as a purchase of Spacetec
by Labtec in a "reverse acquisition." Based on the average trading price of
Spacetec's stock of $1.87 per share and the exchange ratio, Labtec shareholders
will receive value per share of approximately $1.0365. Assuming Spacetec
shareholder approval, the transaction is expected to close in the first quarter
of 1999.
On January 5, 1999, the Company's president and the Company's chief
financial officer terminated employment. As part of the severance agreements,
the Company agreed to pay a total of $497,500 in cash severance payments during
fiscal 1999. As discussed in Note 8, all stock options granted to the president
and to the chief financial officer that had not vested as of January 5, 1999
were cancelled.
F-36
<PAGE> 162
ANNEX A
------------------------
AMENDED AND RESTATED
AGREEMENT
AND
PLAN OF MERGER
------------------------
AMONG
SPACETEC IMC CORPORATION,
SIMC ACQUISITION CORPORATION
AND
LABTEC INC.
------------------------
DATED AS OF OCTOBER 21, 1998,
AS AMENDED AND RESTATED AS OF NOVEMBER 13, 1998
------------------------
<PAGE> 163
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 164
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I TERMS AND EFFECT OF MERGER....................................... A-1
Section 1.1 The Merger; Name of Surviving Corporation................... A-1
Section 1.2 Certificate of Incorporation of Surviving Corporation....... A-1
Section 1.3 By-laws of Surviving Corporation............................ A-1
Section 1.4 Directors and Officers of Surviving Corporation and
Parent...................................................... A-2
Section 1.5 Effect of Merger on Capital Stock of Constituent
Corporations................................................ A-2
Section 1.6 Effect of the Merger........................................ A-5
Section 1.7 Certain Merger Consideration................................ A-5
Section 1.8 Initial Expense Reimbursement............................... A-7
Section 1.9 Withholding Rights.......................................... A-7
ARTICLE II CLOSING; FILING OF ARTICLES OF MERGER........................... A-7
Section 2.1 Closing; Filing of Articles of Merger; Effective Time....... A-7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF LABTEC....................... A-8
Section 3.1 Organization, Good Standing, Corporate Power and Authority
and Foreign Qualification of Labtec......................... A-8
Section 3.2 Capitalization of Labtec.................................... A-8
Section 3.3 Issuance of Capital Stock of Labtec; Calls Upon Shares...... A-8
Section 3.4 Effective Agreement of Labtec............................... A-9
Section 3.5 Subsidiaries and Affiliates................................. A-9
Section 3.6 Corporate Charters and By-Laws.............................. A-10
Section 3.7 Financial Statements........................................ A-10
Section 3.8 Undisclosed Liabilities..................................... A-10
Section 3.9 Absence of Changes.......................................... A-10
Section 3.10 Accuracy of Information..................................... A-10
Section 3.11 Brokers and Finders......................................... A-11
Section 3.12 Adoption of this Agreement by the Shareholders of Labtec.... A-11
Section 3.13 Intellectual Property....................................... A-11
Section 3.14 Employee Benefit Plans...................................... A-11
Section 3.15 Labor Matters............................................... A-12
Section 3.16 Litigation.................................................. A-12
Section 3.17 Taxes....................................................... A-12
Section 3.18 Ownership of Parent Common Stock............................ A-13
Section 3.19 Certain Arrangements........................................ A-13
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO.............. A-13
Section 4.1 Organization, Good Standing, Corporate Power and Authority
and Foreign Qualification of Parent and Newco............... A-13
Section 4.2 Capitalization of Parent.................................... A-14
Section 4.3 Issuance of Capital Stock of the Spacetec Corporations...... A-14
Section 4.4 Effective Agreement of Parent and Newco..................... A-14
Section 4.5 Subsidiaries and Affiliates................................. A-15
Section 4.6 Corporate Charters and By-laws.............................. A-15
Section 4.7 Financial Statements........................................ A-15
</TABLE>
i
<PAGE> 165
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.8 Undisclosed Liabilities..................................... A-16
Section 4.9 Absence of Changes.......................................... A-16
Section 4.10 Accuracy of Information..................................... A-16
Section 4.11 Brokers and Finders......................................... A-16
Section 4.12 Reports and Financial Statements............................ A-16
Section 4.13 Adoption of this Agreement by the Shareholders of Newco..... A-17
Section 4.14 Certain Arrangements Certain Arrangements................... A-17
Section 4.15 Fairness Opinion............................................ A-17
Section 4.16 Intellectual Property....................................... A-17
Section 4.17 Employee Benefit Plans...................................... A-18
Section 4.18 Labor Matters............................................... A-18
Section 4.19 Litigation.................................................. A-18
Section 4.20 Taxes....................................................... A-18
ARTICLE V COVENANTS OF LABTEC.............................................. A-19
Section 5.1 Action Not Permitted........................................ A-19
Section 5.2 Conduct of Business in Ordinary Course...................... A-19
Section 5.3 No Change in Corporate Charters or By-laws.................. A-19
Section 5.4 No Change in Capital Stock.................................. A-19
Section 5.5 No Dividend or Redemption................................... A-19
Section 5.6 No Liquidation, Merger or Acquisition....................... A-19
Section 5.7 No Change in Accounting Methods; Tax Items.................. A-19
Section 5.8 No Sales or Other Dispositions.............................. A-20
Section 5.9 Prohibition on Certain Commitments.......................... A-20
Section 5.10 No Defaults................................................. A-20
Section 5.11 Preservation of Business.................................... A-20
Section 5.12 Maintenance of Properties................................... A-20
Section 5.13 Access to Labtec and the Subsidiaries....................... A-20
Section 5.14 Actions Affecting Representations, Warranties and
Covenants................................................... A-21
Section 5.15 Obtaining of Consents; Satisfaction of Other Conditions..... A-21
Section 5.16 Books and Records; Notification of Changes.................. A-21
Section 5.17 Tax Free Reorganization..................................... A-21
ARTICLE VI COVENANTS OF PARENT AND NEWCO................................... A-21
Section 6.1 Action Not Permitted........................................ A-21
Section 6.2 Conduct of Business in Ordinary Course...................... A-21
Section 6.3 No Change in Corporate Charters or By-laws.................. A-21
Section 6.4 No Change in Capital Stock.................................. A-22
Section 6.5 No Dividend or Redemption................................... A-22
Section 6.6 No Liquidation, Merger or Acquisition....................... A-22
Section 6.7 No Change in Accounting Methods; Tax Items.................. A-22
Section 6.8 No Sales or Other Dispositions.............................. A-22
Section 6.9 Prohibition on Certain Commitments.......................... A-22
Section 6.10 No Defaults................................................. A-22
Section 6.11 Preservation of Business.................................... A-23
</TABLE>
ii
<PAGE> 166
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 6.12 Maintenance of Properties................................... A-23
Section 6.13 Access to Spacetec and the Spacetec Subsidiaries............ A-23
Section 6.14 Actions Affecting Representations, Warranties and
Covenants................................................... A-23
Section 6.15 Obtaining of Consents; Satisfaction of Other Conditions..... A-23
Section 6.16 Books and Records; Notification of Changes.................. A-23
Section 6.17 Compliance with the Securities and Exchange Act............. A-24
Section 6.18 Tax Free Reorganization..................................... A-24
Section 6.19 Bank Consent and Other Voting Agreements.................... A-24
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND NEWCO.... A-24
Section 7.1 Proceedings and Documentation............................... A-24
Section 7.2 Accuracy of Representations and Warranties; Compliance with
Covenants and Conditions.................................... A-24
Section 7.3 Legal Opinion of Counsel to Labtec.......................... A-25
Section 7.4 Fulfillment of Legal Requirements........................... A-25
Section 7.5 Obtaining of Consents....................................... A-25
Section 7.6 Absence of Pending Proceedings.............................. A-25
Section 7.7 Tax Certificates............................................ A-25
Section 7.8 No Material Adverse Change.................................. A-25
Section 7.9 Effectiveness of Registration Statement..................... A-25
Section 7.10 Shareholder Approval........................................ A-25
Section 7.11 Due Diligence............................................... A-26
Section 7.12 Charter Amendments.......................................... A-26
Section 7.13 Parent Restructuring........................................ A-26
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF LABTEC............. A-26
Section 8.1 Proceedings and Documentation............................... A-26
Section 8.2 Accuracy of Representations and Warranties; Compliance with
Covenants and Conditions.................................... A-26
Section 8.3 Completion of Required Corporate Action..................... A-26
Section 8.4 Legal Opinion of Counsel to Spacetec and Newco.............. A-27
Section 8.5 Fulfillment of Legal Requirements........................... A-27
Section 8.6 Obtaining of Consents....................................... A-27
Section 8.7 Absence of Pending Proceedings.............................. A-27
Section 8.8 Promissory Note............................................. A-27
Section 8.9 No Material Adverse Change.................................. A-27
Section 8.10 Effectiveness of Registration Statement..................... A-27
Section 8.11 Listing..................................................... A-27
Section 8.12 Due Diligence............................................... A-27
Section 8.13 Charter Amendments.......................................... A-27
Section 8.14 Parent Restructuring........................................ A-27
ARTICLE IX ADDITIONAL COVENANTS............................................ A-28
Section 9.1 Acquisition Proposals....................................... A-28
Section 9.2 Proxy Statement/Prospectus; Registration Statement.......... A-29
Section 9.3 Shareholder Approvals....................................... A-30
</TABLE>
iii
<PAGE> 167
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 9.4 Agreement of Parent Shareholders............................ A-30
Section 9.5 Listing..................................................... A-30
ARTICLE X TERMINATION OF AGREEMENT......................................... A-31
Section 10.1 Termination................................................. A-31
Section 10.2 Liability of the Parties.................................... A-32
Section 10.3 Effect of Termination....................................... A-33
ARTICLE XI SURVIVAL OF REPRESENTATIONS AND WARRANTIES...................... A-33
Section 11.1 Survival of Representatives and Warranties.................. A-33
ARTICLE XII MISCELLANEOUS.................................................. A-34
Section 12.1 Notices..................................................... A-34
Section 12.2 Assignability and Parties in Interest....................... A-34
Section 12.3 Governing Law............................................... A-35
Section 12.4 Counterparts................................................ A-35
Section 12.5 Best Efforts................................................ A-35
Section 12.6 Publicity................................................... A-35
Section 12.7 Complete Agreement.......................................... A-35
Section 12.8 Modifications, Amendments and Waivers....................... A-35
Section 12.9 Headings.................................................... A-35
Section 12.10 Interpretation.............................................. A-35
Section 12.11 Knowledge................................................... A-35
</TABLE>
EXHIBITS
Exhibit A -- Example of Valuation Adjustment and Determination of Contingent
Shares Amount
Exhibit B -- Form of Certificate of Merger
iv
<PAGE> 168
DEFINITIONS
The following terms when used herein have the respective meanings ascribed
thereto in the following Sections:
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Acquisition Proposals....................................... 9.1
Affiliates.................................................. 9.1
Agreement................................................... Preamble
Applicable Fraction......................................... 1.5(b)
Assumed License Terms....................................... 1.7(b)
Balance Sheet Date.......................................... 3.7
Bank........................................................ 8.12
Bank Consent................................................ 8.12
Business.................................................... 1.7(b)
Certificate of Merger....................................... 2.1
Charter Amendments.......................................... 9.3(b)
Closing..................................................... 2.1
Code........................................................ Preamble
Collection Agent............................................ 1.7(a)
Confidentiality Agreement................................... 5.13
Contingent Shares........................................... 1.7(b)
Contingent Valuation Adjustment............................. 1.7(b)
Disclosure Statement........................................ 3.1
DGCL........................................................ 1.1
Effective Time.............................................. 2.1
Equity Adjustment........................................... 1.7(b)
ERISA....................................................... 3.14
ERISA Affiliate............................................. 3.14
Exchange Agent.............................................. 1.5(f)
Expenses.................................................... 10.2(a)
GAAP........................................................ 3.7
Incentive Stock Options..................................... 1.5(h)
Initial Expense Reimbursement............................... 1.8
IRS......................................................... 3.14
Knowledge................................................... 12.11
Labtec...................................................... Preamble
Labtec Corporation.......................................... 3.5
Labtec Directors............................................ 1.7(b)
Labtec Disclosure........................................... 3.8
Labtec Employee Plans....................................... 3.14
Labtec Financial Statements................................. 3.7
Labtec Investment Bank...................................... 1.7(b)
Labtec IP Rights............................................ 3.13
Labtec Option Plan.......................................... 1.5(h)
</TABLE>
v
<PAGE> 169
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Labtec Stock................................................ 1.5(b)
Labtec Stock Option......................................... 1.5(h)
Labtec Subsidiary........................................... 3.5
Limitation Amount........................................... 1.7(b)
Material Adverse Change..................................... 3.9
Material Adverse Effect..................................... 3.1
Merger...................................................... Preamble
Merger Consideration........................................ 1.5(b)
Newco....................................................... Preamble
New Spacetec Option......................................... 1.5(i)
Note Payments 1.7(a) Other Parent Shareholders.............. 6.19
Outside Date................................................ 1.7(b)
Outstanding Options......................................... 1.5(i)
Parent...................................................... Preamble
Parent Additional Termination Fee........................... 10.2(b)
Parent Initial Termination Fee.............................. 10.2(b)
Parent Proposals............................................ 9.2(a)
Parent Restructuring........................................ 7.13
% Factor Per Dollar......................................... 1.7(b)
Person...................................................... 5.6
Principal Parent Shareholders............................... 9.4
Prior Day Market Price...................................... 1.5(i)
Promissory Note............................................. 1.7(a)
Proxy Statement............................................. 9.2(a)
Registration Statement...................................... 9.2(a)
Reverse Stock Split......................................... 9.3(b)
Rhetford.................................................... 8.12
Sale........................................................ 1.7(b)
SEC......................................................... 9.3(a)
SEC Reports................................................. 4.12
Securities Act.............................................. 3.3
Shareholder Meeting......................................... 9.3(b)
Spacetec Corporation........................................ 4.5
Spacetec Directors.......................................... 1.7(b)
Spacetec Disclosure......................................... 4.8
Spacetec Employee Plans..................................... 4.16
Spacetec Investment Bank.................................... 1.7(b)
Spacetec IP Rights.......................................... 4.16
Spacetec Financial Statements............................... 4.7
Spacetec Plans.............................................. 9.3(b)
Spacetec Stock.............................................. 1.5(a)
Spacetec Subsidiary......................................... 4.5
Superior Proposal........................................... 9.1(b)
</TABLE>
vi
<PAGE> 170
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Surviving Corporation....................................... 1.1
Tax......................................................... 3.17
Terminating Labtec Breach................................... 10.1(d)
Terminating Parent Breach................................... 10.1(e)
Valuation................................................... 1.7(b)
Valuation Date.............................................. 1.7(b)
Valuation Guarantee......................................... 1.7(b)
Voting Agreement............................................ 9.4
WARN Act.................................................... 3.15
</TABLE>
vii
<PAGE> 171
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 172
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of October 21,
1998, as amended and restated by the parties as of November 13, 1998 (this
"Agreement"), among LABTEC INC., a Delaware corporation ("Labtec"), and SIMC
ACQUISITION CORPORATION, a Delaware corporation ("Newco"), as the "constituent
corporations" to the merger contemplated by this Agreement (the "Merger"), and
SPACETEC IMC CORPORATION, a Massachusetts corporation ("Parent"), as a party
hereto but not as a constituent corporation.
W I T N E S S E T H:
WHEREAS, the laws of State of Delaware permit the merger of Newco with and
into Labtec; and
WHEREAS, the respective Boards of Directors of Labtec, Newco (all of the
outstanding capital stock of which is owned by Parent) and Parent deem it
desirable and in the best interests of their respective corporations and
shareholders for Newco to merge with and into Labtec, and have approved this
Agreement for that purpose; and
WHEREAS, this Agreement and the Merger have been approved by the
shareholders of Labtec and by Parent, as the sole shareholder of Newco, and will
be submitted to the shareholders of Parent for approval; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the covenants, agreements,
representations and warranties contained in this Agreement, and in order to
prescribe the terms and conditions of the Merger and the procedures to
effectuate the Merger, the parties hereto agree as follows:
ARTICLE I
TERMS AND EFFECT OF MERGER
Section 1.1 The Merger; Name of Surviving Corporation. Labtec and Newco
are the constituent corporations as contemplated by the Delaware General
Corporation Law (the "DGCL"). At the Effective Time and pursuant to the DGCL,
(a) Newco shall be merged with and into Labtec and the separate existence of
Newco, except to the extent continued by law, shall cease, and (b) Labtec shall
be the "surviving corporation" and shall continue its corporate existence under
the DGCL under the name "Labtec Corporation" (the "Surviving Corporation").
Section 1.2 Certificate of Incorporation of Surviving Corporation. The
certificate of incorporation of the Surviving Corporation shall be the
certificate of incorporation of Labtec in effect at the Effective Time, except
that Paragraph 1 of the certificate of incorporation of Labtec shall, at the
Effective Time, be amended to read as follows: "The name of the corporation (the
"Corporation") is "Labtec Corporation"." Except for such amendment, the
certificate of incorporation of Labtec in effect at the Effective Time shall
remain unchanged and unaffected by the Merger until further amended as provided
by law.
Section 1.3 By-laws of Surviving Corporation. The by-laws of the
Surviving Corporation shall be the by-laws of Labtec in effect at the Effective
Time, which shall remain unchanged and unaffected by the Merger until amended as
provided by law.
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Section 1.4 Directors and Officers of Surviving Corporation and Parent.
(a) Directors and Officers of Surviving Corporation. From and after the
Effective Time, the Board of Directors of the Surviving Corporation shall
consist of those individuals designated by Labtec prior to the date that the
definitive Proxy Statement is mailed to Parent's shareholders, each of whom
shall serve as directors of the Surviving Corporation until the first annual
meeting of shareholders of the Surviving Corporation and until their respective
successors shall be duly elected and qualify or until their tenure shall be
otherwise terminated in accordance with the by-laws of the Surviving
Corporation. From and after the Effective Time, the persons designated by Labtec
prior to the date that the definitive Proxy Statements is mailed to Parent's
shareholders shall serve, at the pleasure of the Board of Directors of the
Surviving Corporation, in the respective offices of the Surviving Corporation
designated by the Board of Directors of Labtec at that time.
(b) Directors and Officers of Parent. From and after the Effective Time,
the Board of Directors of Parent shall consist of twelve (12) directors, (a)
four (4) of whom shall be designated by the Board of Directors of Parent, one
(1) of whom shall be so designated to each of Classes I and III, and two (2) of
whom shall be so designated to Class II, pursuant to Parent's Articles of
Organization, prior to the date that the definitive Proxy Statement is mailed to
Parent's shareholders and (b) eight (8) of whom shall be designated by the Board
of Directors of Labtec, three (3) of whom shall be so designated to each of
Classes I and III, and two (2) of whom shall be so designated to Class II,
pursuant to Parent's Articles of Organization, prior to the date that the
definitive Proxy Statement is mailed to Parent's shareholders, and each of whom
shall serve as directors of the Surviving Corporation until the first annual
meeting of shareholders of Parent and until their respective successors shall be
duly elected and qualify or until their tenure shall be otherwise terminated in
accordance with the by-laws of Parent. From and after the Effective Time, the
persons designated by the Board of Directors of Labtec prior to the date that
the definitive Proxy Statement is mailed to Parent's shareholders shall serve,
at the pleasure of the Board of Directors of Parent, in the respective offices
of Parent designated by the Board of Directors of Labtec at that time. The Class
I directors shall serve a one-year term or until their successors are duly
elected and qualified, the Class II directors shall serve a two-year term or
until their successors are duly elected and qualified, and the Class III
directors shall serve a three-year term or until their successors are duly
elected and qualified.
Section 1.5 Effect of Merger on Capital Stock of Constituent Corporations.
(a) All shares of common stock, par value $.01 per share, of Parent
("Spacetec Stock"), which are issued and outstanding immediately prior to the
Effective Time shall be unchanged and unaffected by the Merger and shall
represent approximately 33.06% of the outstanding Spacetec Stock, as measured
immediately following the Effective Time.
(b) Each share of common stock, par value $.01 per share, of Labtec
("Labtec Stock"), which is issued and outstanding immediately prior to the
Effective Time (other than shares to be canceled in accordance with Section
1.5(d) hereof) shall, by virtue of the Merger, be converted into and represent
solely the right to receive (i) .55430739 shares of Spacetec Stock, which in the
aggregate shall represent approximately 66.94% of the outstanding Spacetec Stock
(before giving effect to the Reverse Stock Split), as measured immediately
following the Effective Time, (ii) the Applicable Fraction of the Note Payments
(as defined in, and determined in accordance with, Section 1.7 hereof), and
(iii) the Applicable Fraction of the Contingent Shares (as defined in, and
determined in accordance with, Section 1.7 hereof; the consideration described
in clauses (i), (ii) and (iii) of this Section 1.5(b) are hereinafter
collectively referred to as the "Merger Consideration"). Each holder of record
of Labtec Stock shall, subject to the provisions hereof, have the right to
receive the Merger Consideration for each of his or her shares of
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Labtec Stock. For purposes of this Agreement, "Applicable Fraction" means a
fraction, (A) the numerator of which is 1 and (B) the denominator of which is
the number of shares of Labtec Stock outstanding immediately prior to the
Effective Time.
(c) At the Effective Time, all Labtec Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist, and
each certificate previously representing any such Labtec Stock shall thereafter,
subject to the provisions hereof, represent solely the right to receive the
Merger Consideration. Certificates representing Labtec Stock shall be exchanged
for certificates representing whole shares of Spacetec Stock issued in
consideration therefor upon the surrender of such certificate in accordance with
the provisions hereof.
(d) Each share of Labtec Stock held in its treasury immediately prior to
the Effective Time shall be canceled and cease to exist, and no Spacetec Stock
shall be issued in exchange therefor.
(e) Each share of common stock, par value $.01 per share, of Newco issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into one (1) share of common stock of the Surviving Corporation.
(f) Prior to the Effective Time, Parent shall appoint American Stock
Transfer & Trust Company to act as exchange agent hereunder (the "Exchange
Agent"). No later than the Effective Time, Parent shall make available, and each
holder of Labtec Stock shall be entitled to receive (whether from the Exchange
Agent or the Collection Agent, as the case may be), upon surrender to the
Exchange Agent of one or more certificates representing Labtec Stock for
cancellation, (i) certificates representing the number of shares of Spacetec
Stock into which such shares of Labtec Stock are converted in the Merger, (ii)
the Applicable Fraction of the Note Payments, when paid, and (iii) the
Applicable Fraction of the Contingent Shares, if any, when issued. The shares of
Spacetec Stock into which the shares of Labtec Stock shall be converted in the
Merger shall be deemed to have been issued at the Effective Time. After the
Effective Time, there shall be no further registration, on the records of
Labtec, of transfers of shares of Labtec Stock.
(g) If any delivery of shares of Spacetec Stock on account of any shares of
Labtec Stock is to be made in a name other than that in which the certificate
surrendered by the shareholder entitled thereto is registered on the stock
transfer books of Labtec at the Effective Time, it shall be a condition to such
delivery that the certificate so surrendered shall be properly endorsed in
blank, or otherwise in proper form for transfer, and that the holder thereof pay
to the Exchange Agent any transfer or other tax required by reason of the
delivery to a person other than the registered holder of the certificate
surrendered, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable. No party hereto shall be liable to any
holder of shares of Labtec Stock for any amount paid to a public official
pursuant to any abandoned property, escheat or similar law.
Notwithstanding any purported sale, transfer or other disposition by any
Labtec shareholder of any shares of Labtec Stock after the Effective Time, any
delivery of shares of Spacetec Stock to be made to such shareholder pursuant to
this Agreement shall be made with respect to such shares of Labtec Stock as if
such sale, transfer or other disposition had not occurred and none of the
parties hereto nor the Exchange Agent shall recognize such sale, transfer or
other disposition.
(h) At the Effective Time of the Merger, each outstanding option to
purchase Labtec Stock (a "Labtec Stock Option") issued pursuant to the Labtec's
1997 Employee Stock Option Plan (the "Labtec Option Plan"), whether vested or
unvested, shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Labtec Stock Option (including,
without limitation, any vesting schedules), the same number of shares of Parent
Stock as the holder of such
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Labtec Stock Option would have been entitled to receive pursuant to the Merger
had such holder exercised such option in full immediately prior to the Effective
Time (not taking into account whether or not such option was in fact
exercisable), at a price per share equal to (i) the aggregate exercise price for
the shares of Labtec Stock otherwise purchasable pursuant to such Labtec Stock
Option divided by (ii) the number of full shares of Parent Stock deemed
purchasable pursuant to such Labtec Stock Option; provided, however, that in (y)
the case of any option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code ("incentive stock options"), the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in order to
comply with Section 424(a) of the Code, and (z) the number of shares of Spacetec
Stock that may be purchased upon exercise of any such Labtec Stock Option shall
not include any fractional share and, upon exercise of each Labtec Stock Option
a cash payment shall be made for any fractional share based upon the average
closing price of a share of Spacetec Stock during the ten (10) trading days
immediately preceding the date of exercise. From and after the Effective Time,
Parent shall assume the Labtec Option Plan and comply with the terms thereof
with respect to each outstanding Labtec Stock Option.
(i) No certificates or script representing fractional shares of Spacetec
Stock shall be issued upon surrender for exchange of certificates representing
shares of Labtec Stock pursuant to this Section 1.5. In lieu of such fractional
securities, each holder of Labtec Stock who would otherwise have been entitled
to a fraction of a share of Spacetec Stock upon surrender of certificates
representing Labtec Stock shall be paid cash upon such surrender in an amount
equal to the product of such fraction multiplied by the average closing price
for Spacetec Stock on the Nasdaq Stock Market's National Market for the five (5)
trading days immediately prior to the Effective Time.
(j) Notwithstanding anything to the contrary contained in this Section 1.5,
neither Spacetec nor Labtec shall be liable to any holder of Labtec Stock or
Spacetec Stock for any Merger Consideration delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(k) In the event any certificates representing shares of Labtec Stock shall
have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange
for such lost, stolen or destroyed certificates, upon the making of an affidavit
of that fact by the holder thereof, such shares of Spacetec Stock as may be
required pursuant to this Section 1.5; provided, however, that Spacetec may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Spacetec or the Exchange Agent with respect to the certificates alleged
to have been lost, stolen or destroyed.
(l) After the Effective Time of the Merger, the agreements evidencing the
grants of then outstanding Labtec Stock Options shall continue in effect on the
same terms and conditions (subject to adjustments required by this Section
1.5(l) after giving effect to the Merger and the provisions set forth above). If
necessary, Parent shall comply with the terms of the Labtec Option Plan and
ensure, to the extent required by, and subject to the provisions of, the Labtec
Option Plan, that Labtec Stock Options that qualified as incentive stock options
prior to the Effective Time of the Merger continue to qualify as incentive stock
options after the Effective Time of the Merger.
Parent shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of Parent Stock for delivery upon exercise of Labtec
Stock Options. As soon as practicable after the Effective Time of the Merger,
Parent shall file a registration statement on Form S-8 (or any successor or
other appropriate forms) with respect to the shares of Parent Stock subject to
such options and shall use its reasonable best efforts to maintain the
effectiveness of such registration statement or registration
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statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding. With respect
to those individuals who subsequent to the Merger will be subject to the
reporting requirements under Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), where applicable, Parent shall administer
the Labtec Option Plan in a manner that complies with Rule 16b-3 promulgated
under the Exchange Act to the extent the Labtec Option Plan complied with such
rule prior to the Merger.
(m) At the Effective Time, each outstanding option to purchase Spacetec
Stock, whether vested or unvested, then outstanding shall be unchanged and
unaffected by the Merger, except as provided in the Spacetec stock option plan
pursuant to which such option was granted.
Section 1.6 Effect of the Merger. At the Effective Time, the constituent
corporations shall become a single corporation and Labtec shall continue to
exist as the Surviving Corporation and shall thereupon and thereafter, pursuant
to the DGCL, have all the rights, privileges, immunities, powers and franchises,
and be subject to all the duties, liabilities, obligations and penalties, of
each of the constituent corporations, and all property, real, personal and
mixed, and all debts due on whatever account and all other chooses in action,
and all and every other interest of, or belonging to or due to each of the
constituent corporations shall be vested in the Surviving Corporation without
further act or deed, and the Surviving Corporation shall be subject to all the
liabilities, obligations and penalties of the respective constituent
corporations, not pursuant to contract but by operation of law, all in the
manner and to the full extent provided by the DGCL. Whenever a conveyance,
assignment, transfer, deed or other instrument or act is necessary to vest any
property or right in the Surviving Corporation, the directors and officers of
the respective constituent corporations shall execute, acknowledge and deliver
such instruments and do such acts, for which purpose the separate existence of
the constituent corporations and the authority of their respective directors and
officers shall continue, notwithstanding the Merger.
Section 1.7 Certain Merger Consideration.
(a) Promissory Note and Note Payments. At the Closing, Parent shall issue
and deliver to a person designated by Labtec prior to the Effective Time, as
collection agent (the "Collection Agent"), Parent's promissory note in the
principal amount of $1,065,000 (the "Promissory Note"). The Promissory Note
shall (i) be payable to the Collection Agent, as collection agent, for the
benefit of each holder of shares of Labtec Stock that are outstanding
immediately prior to the Effective Time, (ii) be unsecured, (iii) be
subordinated to all institutional indebtedness of Parent, (iv) bear interest at
a rate of 10% per annum, (v) mature on the sixth anniversary of the date of the
Closing, (vi) provide for the payment of the principal amount thereof in a
lump-sum on the maturity date, (vii) provide for the payment of interest on a
quarterly basis, (viii) be prepayable at any time, at Parent's option, in whole
or in part, without premium or penalty, and (ix) provide that the Collection
Agent shall be responsible for distributing to each holder of shares of Labtec
Stock that are outstanding immediately prior to the Effective Time, such
holder's Applicable Fraction of any payments received from Parent pursuant to
the Promissory Note (the "Note Payments").
(b) Valuation and Contingent Shares. Following the Effective Time, the
Board of Directors of Parent shall consider the value of Parent's industrial
business (the "Business"). Notwithstanding the procedures set forth below, the
Board of Directors of Parent shall have the right to, at any time, establish a
value of the Business (the "Valuation"), for purposes of the matters set forth
below or determine not to sell the Business. In the event that, on or prior to
February 28, 1999, the eight (8) members of Parent's Board of Directors
originally designated by Labtec (the "Labtec Directors") determine not to
proceed with such a Valuation or sale of the Business, no adjustment shall be
made to the equity of Parent originally issued at the Effective Time to the
holders of Labtec Stock as provided below in this Section 1.7(b) (the
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"Equity Adjustment"). In the event that, on or prior to February 28, 1999, the
Labtec Directors determine to proceed with a Valuation and are unable to agree
with the Spacetec Directors as to the amount of the Valuation by that date, the
four (4) members of Parent's Board of Directors originally designated by Parent
(the "Spacetec Directors") shall, within ten (10) business days, select and
retain on behalf of Parent an investment banking firm (the "Spacetec Investment
Bank") to conduct a Valuation.
The Spacetec Investment Bank shall then conduct and complete such Valuation
within 30 days of their retention. In the event that the Labtec Directors accept
the Valuation determined by the Spacetec Investment Bank, such Valuation shall
be the basis of the Equity Adjustment, if any. In the event that the Labtec
Directors do not accept such Valuation, the Labtec Directors and the Spacetec
Directors shall negotiate in good faith as to the appropriate amount of such
Valuation. In the event that the parties are able to agree as to the appropriate
amount of such Valuation within ten (10) business days, then such agreed
Valuation shall be the basis of the Equity Adjustment, if any. In the event that
the parties are unable to agree as to such Valuation within such ten (10)
business days, the Labtec Directors shall, within such ten (10) business days,
determine whether Parent shall proceed to sell the Business. In the event that
the Labtec Directors elect, within such 10-day period, not to sell the Business,
then no Equity Adjustment shall be made.
In the event that the Labtec Directors elect to sell the Business (a
"Sale"), the Spacetec Investment Bank shall be engaged, by no later than June
30, 1999, to conduct the Sale. In the event that Parent consummates a Sale on or
before December 31, 1999 (the "Outside Date"), such Sale shall be the basis of
the Equity Adjustment, if any.
In the event that the Business is not sold by the Outside Date, the Labtec
Directors shall, within ten (10) business days following the Outside Date,
select and retain on behalf of Parent an investment banking firm ("Labtec
Investment Bank") to conduct a Valuation. The Labtec Investment Bank shall
determine such Valuation within 30 days of their retention, which Valuation
shall be the basis of the Equity Adjustment, if any.
The retention of the Spacetec Investment Bank and the Labtec Investment
Bank shall be by Parent on behalf of all of its stockholders and all Valuations
conducted by such investment banks shall be performed on a basis that is fair
and unbiased to all of the stockholders of Parent.
Any Valuation of the Business, other than as determined hereunder through
the actual sale of the Business, shall consist of the expected net sale proceeds
to be received in connection with an arms'-length sale of the Business, after
deduction of all anticipated reasonable transaction expenses. The value of any
actual sale of the Business shall consist of the net sale proceeds received in
connection with such sale, after deduction of all transaction expenses incurred.
In addition, any consolidated net income or net loss of Parent, excluding the
Labtec Corporations (determined in accordance with GAAP), after taxes at an
estimated 38% combined rate, but excluding any interest expense, from October 1,
1998 through the date of consummation of the sale of the Business or the final
Valuation determination (the "Valuation Date"), shall be added to or subtracted
from the value (as more fully described below). The Valuation or value of any
actual sale shall also be based upon, and shall assume the existence of, a
10-year license agreement that provides for the payment to Parent of an 8%
royalty based upon net sales generated by the Business (the "Assumed License
Terms"). Accordingly, in the event that a Sale either does not include any
license or includes a license upon terms, taken as a whole, having less value to
Parent than the Assumed License Terms, the value of the actual sale shall be
reduced by the amount by which the value of the actual license, if any, is less
than the value of the Assumed License Terms. In the event that a Sale includes a
license upon terms, taken as a whole, having greater value to Parent than the
Assumed License Terms, the value of the actual sale shall be increased by the
amount by which the value of the actual license is
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greater than the value of the Assumed License Terms. Similarly, any Valuation
shall represent the amount that a third party purchaser would be willing to pay
for the Business, assuming that such purchaser had also entered into a license
with Parent upon the Assumed License Terms.
If the Valuation or the value of the actual sale, plus the consolidated net
income or minus the consolidated net loss of Parent, excluding the Labtec
Corporations (determined in accordance with GAAP), for the period October 1,
1998 through the Valuation Date, is less than $6,000,000 (the "Valuation
Guarantee"), then Parent shall issue additional shares (the "Contingent Shares")
to each holder of shares of Labtec Stock that are outstanding immediately prior
to the Effective Time (in addition to the shares of Spacetec Stock to be issued
at the Effective Time) sufficient to compensate such holders for such shortfall
(the "Contingent Valuation Adjustment"). For every dollar that the Contingent
Valuation Adjustment is less than $6,000,000, a "% Factor Per Dollar" of
.000002755% (16.53% / $6,000,000) shall be applied to determine the incremental
percentage of ownership of Spacetec Stock that such holders shall be entitled to
receive; provided, however, that the maximum number of contingent shares that
may be issued shall be an amount (the "Limitation Amount") which, when added to
the number of shares of Spacetec Stock held by all holders of shares of Labtec
Stock immediately prior to the Effective Time, would equal 79% of the total
outstanding shares of Spacetec Stock immediately following the Effective Time
(excluding any shares of Spacetec Stock or Labtec Stock issued between October
21, 1998 and the Effective Time pursuant to the exercise of stock options).
Exhibit A hereto sets forth an example of the determination of the number of
Contingent Shares to be issued in the event of a $500,000 Contingent Valuation
Adjustment. For purposes of this Agreement, all references to the "Contingent
Shares" shall refer to shares of the Delaware corporation referred to in Section
7.12 hereof.
Section 1.8 Initial Expense Reimbursement. In order to reimburse Labtec
for certain expenses incurred by Labtec prior to October 21, 1998 in connection
with the Merger and the transactions contemplated hereunder, Parent has
contemporaneously herewith paid to Labtec, in cash, the sum of $250,000 (the
"Initial Expense Reimbursement").
Section 1.9 Withholding Rights. Parent, Labtec and Newco shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any Labtec shareholder such amounts as Parent,
Labtec or Newco determine they are required to deduct and withhold with respect
to the making of such payment under the Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes hereof as having been paid to the
holder of the shares in respect of which such deduction and withholding was
made. To the extent that the amount so required to be deducted or withheld from
any payment to a holder exceeds the cash portion of the consideration otherwise
payable to the holder, Parent, Labtec and Newco are hereby authorized to sell or
otherwise dispose of, at fair market value, such portion of such consideration
as is necessary to provide sufficient funds to Parent, Labtec or Newco, as the
case may be, in order to enable it to comply with such deduction or withholding
requirements.
ARTICLE II
CLOSING; FILING OF ARTICLES OF MERGER
Section 2.1 Closing; Filing of Articles of Merger; Effective Time. If the
conditions to closing set forth in Articles VII and VIII shall have been
satisfied or properly waived, a closing (the "Closing") shall take place
promptly thereafter at the offices of Parker Chapin Flattau & Klimpl, LLP, 1211
Avenue of the Americas, New York, New York 10036, at a time and on a date
mutually convenient to the parties to this Agreement, which shall in no event be
later than the fifth business day following the satisfaction or waiver of the
last of such conditions to closing. At the Closing, the parties shall exchange
the certificates, opinions
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and other documents set forth in Articles VII and VIII hereof, and the
respective Presidents or Vice Presidents and Secretaries or Assistant
Secretaries of the constituent corporations to the Merger shall execute and
verify a Certificate of Merger in the form attached hereto as Exhibit B (the
"Certificate of Merger"), and the appropriate officers of such constituent
corporations shall cause the Certificate of Merger to be filed with the
Secretary of State of the State of Delaware, and the Merger shall become
effective upon acceptance of such filing by the Secretary of State. The date and
time when the Merger shall so become effective is referred to herein as the
"Effective Time."
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LABTEC
Labtec hereby represents and warrants to Parent as follows:
Section 3.1 Organization, Good Standing, Corporate Power and Authority and
Foreign Qualification of Labtec. Labtec is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power and authority to enter into this Agreement and to
perform the obligations required of it under this Agreement. Labtec has full
power and authority, and holds all licenses, franchises, permits and
authorizations, necessary for the lawful conduct of its business and to own,
lease and operate the assets, properties and business owned or leased and
operated by it. Labtec is duly qualified to transact business, and is in good
standing as a foreign corporation authorized to transact business, in the
jurisdictions set forth in Section 3.1 of the Disclosure Statement hereto among
Parent, Newco and Labtec (the "Disclosure Statement"); such jurisdictions
constitute the only jurisdictions in which the failure of Labtec to be so
qualified and in good standing would have a material adverse effect on the
business, assets, financial condition or results of operations (a "Material
Adverse Effect") of the Labtec Corporations, taken as a whole. Neither the
ownership nor the use of the properties of the Labtec Corporations, nor the
conduct of any of their respective businesses, violates, or with or without the
giving of notice or the passage of time, or both, will violate, conflict with or
result in a default, right to accelerate or loss of rights under, any terms or
provisions of any of their respective charters or by-laws as currently in
effect, or any lien, encumbrance, mortgage, deed of trust, lease, license,
agreement or understanding, to which any Labtec Corporation is a party or by
which any Labtec Corporation or any of their respective properties, assets or
businesses may be bound.
Section 3.2 Capitalization of Labtec. Set forth in Section 3.2 of the
Disclosure Statement is the authorized, issued and outstanding and, if
applicable, treasury capital stock of Labtec.
Section 3.3 Issuance of Capital Stock of Labtec; Calls Upon Shares. All
of the shares of Labtec Stock issued and outstanding as of October 21, 1998 are
now, and at the Effective Time will be, duly authorized, validly issued, fully
paid and non-assessable, and none will have been issued or sold in violation of
any applicable securities laws. The record ownership of all of the issued and
outstanding Labtec Stock as at October 21, 1998 is as set forth in Section 3.3
of the Disclosure Statement. Except as specifically set forth in Section 3.3 of
the Disclosure Statement, there are no options, calls, subscriptions, warrants,
rights, agreements or commitments of any character obligating Labtec,
contingently or otherwise, to issue, redeem or re-acquire shares of its capital
stock or to register shares of its capital stock under the Securities Act of
1933, as amended (the "Securities Act"), or any other applicable securities law,
and none of the holders of the capital stock of any of the Labtec Corporations
have any pre-emptive rights. There are no outstanding bonds, debentures, notes
or other indebtedness or debt securities of Labtec pursuant to which the holders
have the right to vote (or convertible into, or redeemable for, securities
having the right to vote) on any matters on which stockholders of Labtec may
vote. Except as set forth in Section 3.3 of the Disclosure Statement, to
Labtec's knowledge, there are no voting trusts or agreements, stockholders'
agreements,
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pledge agreements, buy-sell agreements, rights of first refusal or proxies
relating to any securities of Labtec (whether or not Labtec is a party thereto).
Section 3.4 Effective Agreement of Labtec. The execution and delivery by
Labtec of this Agreement and the consummation by Labtec of the transactions
contemplated hereby, including the Merger, have been duly authorized by all
necessary corporate action of Labtec, and this Agreement, and any other
agreements or instruments executed and delivered by Labtec pursuant to this
Agreement, when executed and delivered by Labtec, will constitute legal, valid
and binding obligations of Labtec enforceable against it in accordance with
their respective terms. Except as specifically set forth in Section 3.4 of the
Disclosure Statement, none of the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, including the Merger, and
compliance by the Labtec Corporations with any of the provisions hereof, will
(a) violate any provision of the corporate charter or by-laws of any Labtec
Corporation, (b) with or without the giving of notice and/or the passage of
time, violate, conflict with, result in the breach or termination of, constitute
a default under, or result in the creation of any lien, encumbrance or charge
upon any of the assets or property of any Labtec Corporation pursuant to, any
contract, agreement, lease or commitment to which any Labtec Corporation is a
party, or by which any Labtec Corporation or any of their respective assets or
properties may be bound, or (c) violate any judgment, decree, order, statute,
rule or governmental regulation applicable to any Labtec Corporation or any of
their respective assets, properties or businesses, except, with respect to
clauses (b) and (c) of this sentence, in each case for violations, conflicts,
breaches, terminations, defaults, liens, encumbrances or charges that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Labtec Corporations, taken as a whole.
Section 3.5 Subsidiaries and Affiliates. Except as specifically set forth
in Section 3.5 of the Disclosure Statement, Labtec does not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and
does not have any proprietary interest in, any corporation, partnership, firm,
association or business organization, entity or enterprise and does not control
(directly or indirectly) the management or policies of any corporation,
partnership, firm, association or business organization, entity or enterprise.
Section 3.5 of the Disclosure Statement sets forth the name of each of the
subsidiaries of Labtec (individually referred to herein as a "Labtec Subsidiary"
and all of which are collectively referred to herein as the "Labtec
Subsidiaries"), its jurisdiction of incorporation, the jurisdiction or
jurisdictions in which it is qualified to transact business as a foreign
corporation, the number of authorized, issued and outstanding shares of each
class of its securities, the number of its securities of each class owned by
Labtec and the number owned by any other person (identifying such other person).
Each Labtec Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, has full
power and authority, and holds all licenses, franchises, permits and
authorizations, necessary for the lawful conduct of its business and to own,
lease and operate the assets, properties and business owned or leased and
operated by it and is duly qualified to transact business and is in good
standing as a foreign corporation authorized to transact business in the
jurisdictions set forth in Section 3.5 of the Disclosure Statement, which are
the only jurisdictions in which the failure of such subsidiary to be so
qualified and in good standing would have a Material Adverse Effect on the
Labtec Corporations, taken as a whole. All of the issued shares of capital stock
of each Labtec Subsidiary are now, and at the Effective Time will be, duly
authorized, validly issued, fully paid and non-assessable and are owned, of
record and beneficially, by Labtec (except as indicated in Section 3.5 of the
Disclosure Statement) free and clear of all liens, claims, charges and
encumbrances, and there are no options, calls, subscriptions, warrants, rights,
agreements or commitments of any character obligating Labtec or any Labtec
Subsidiary, contingently or otherwise, to issue, redeem or re-acquire any shares
of capital stock of any Labtec Subsidiary. There are no outstanding bonds,
debentures, notes or other indebtedness or debt securities of any Labtec
Subsidiary pursuant to which the holders have the right to vote (or convertible
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into, or redeemable for, securities having the right to vote) on any matters on
which stockholders of any Labtec Subsidiary may vote. Except as set forth in
Section 3.5 of the Disclosure Statement, to Labtec's knowledge, there are no
voting trusts or agreements, stockholders' agreements, pledge agreements,
buy-sell agreements, rights of first refusal or proxies relating to any
securities of any Labtec Subsidiary (whether or not the Labtec Subsidiary is a
party thereto). Labtec and the Labtec Subsidiaries are sometimes referred to
herein collectively as the "Labtec Corporations" or individually as a "Labtec
Corporation".
Section 3.6 Corporate Charters and By-Laws. Labtec has delivered to Parent
and Newco true and complete copies of the respective corporate charters of each
of the Labtec Corporations, as in effect on October 21, 1998, certified in each
case as of a recent date by the appropriate governmental official of its
jurisdiction of incorporation, and a true and complete copy of the respective
by-laws of each of the Labtec Corporations, as in effect on October 21, 1998,
certified by their respective Secretaries or Assistant Secretaries.
Section 3.7 Financial Statements. Labtec has delivered to Parent and
Newco (a) audited consolidated balance sheets of Labtec and the Labtec
Subsidiaries as at March 31, 1997 and March 31, 1998, and the related audited
consolidated statements of operations, changes in shareholders equity (deficit)
and cash flows for the periods ended on each of such dates, including the
respective notes thereto, all of which are accompanied by the related opinions
of PricewaterhouseCoopers LLP, independent certified public accountants, and (b)
unaudited consolidated balance sheets of Labtec and the Labtec Subsidiaries as
at June 30, 1998 (the "Balance Sheet Date") and the related unaudited
consolidated statements of operations, changes in shareholders equity (deficit)
and cash flows for the quarterly period ended on the Balance Sheet Date,
including the respective notes thereto (the financial statements described in
clauses (a) and (b) above are hereinafter collectively called the "Labtec
Financial Statements"). Such financial statements, together with the notes
thereto, reflect the respective books and records of Labtec and the Labtec
Subsidiaries, have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods covered by such statements and fairly present, in the case of the
balance sheets, the consolidated financial condition of Labtec and the Labtec
Subsidiaries as of the respective dates indicated, and in the case of the
consolidated statements of operations, changes in shareholders equity (deficit)
and cash flows of Labtec and the Labtec Subsidiaries for the respective periods
indicated.
Section 3.8 Undisclosed Liabilities. Except as set forth on the Labtec
Financial Statements, in Section 3.8 of the Disclosure Statement or in the
sections of the Registration Statement, which specifically relate to the
businesses of the Labtec Corporations (collectively, the "Labtec Disclosure"),
none of the Labtec Corporations had, at such date, any indebtedness, obligations
or liabilities of any nature, whether accrued, absolute, contingent or other,
whether due or to become due, which, individually or in the aggregate, are
material and not shown or adequately provided for thereon, including, without
limitation, liabilities or obligations on account of taxes, other governmental
charges, duties, penalties, interest or fines.
Section 3.9 Absence of Changes. Except as specifically set forth in
Section 3.9 of the Disclosure Statement, the Labtec Corporations have, since the
Balance Sheet Date conducted their respective businesses only in the ordinary
course and, except as set forth in the Labtec Disclosure, there has not been any
material adverse change in the business, assets, financial condition or results
of operations (a "Material Adverse Change") of the Labtec Corporations, taken as
a whole.
Section 3.10 Accuracy of Information. The information included in the
Labtec Disclosure or any other information to be provided by Labtec to Parent
and Newco for use in any press release or filing to be made with any
governmental body in connection with the Merger will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the
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statements therein not false or misleading. The information concerning the
Labtec Corporations set forth in this Agreement, the Disclosure Statement, the
copies of documents prepared by Labtec and referred to herein and delivered by
Labtec to Parent and Newco pursuant hereto, in each case, are true and complete,
and such documents and any other documents furnished by Labtec to Parent and
Newco, do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated herein or therein or necessary to make the
statements contained herein or therein not false or misleading.
Section 3.11 Brokers and Finders. No Labtec Corporation nor any of their
respective officers, directors or employees has employed any broker, agent or
finder other than The Valuefinder Group, Inc., or incurred any liability for any
brokerage fees, agents' commissions or finders' fees, in connection with the
transactions contemplated hereby, except for such fees and commissions paid or
payable to The Valuefinder Group, Inc.
Section 3.12 Adoption of this Agreement by the Shareholders of
Labtec. This Agreement has been adopted by the shareholders of Labtec pursuant
to written consent, as permitted by, and in accordance with, the DGCL.
Section 3.13 Intellectual Property.
(a) The Labtec Corporations own, or have the right to use, sell or license
all intellectual property utilized in their respective businesses as presently
conducted (such intellectual property and the rights thereto are collectively
referred to herein as the "Labtec IP Rights"), except for such failures to own
or have the right to use, sell or license that, individually or in the
aggregate, would not have a Material Adverse Effect on the Labtec Corporations,
taken as a whole.
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any agreement governing any Labtec IP Rights, will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any Labtec IP Rights or impair the right of the Labtec Corporations or the
Surviving Corporation to use, sell or license any Labtec IP Rights or portions
thereof, except for the occurrence of any such breaches, forfeitures,
terminations or impairments that, individually or in the aggregate, would not
have a Material Adverse Effect on the Labtec Corporations, taken as a whole.
(c) (i) Except as set forth in Section 3.13 of the Disclosure Statement,
neither the manufacture, marketing, license, sale or intended use of any product
or technology currently licensed, sold or under development by the Labtec
Corporations violates any license or agreement between the Labtec Corporations
and any third party or, to the knowledge of Labtec, infringes or misappropriates
any intellectual property right of any other party; and (ii) there is no pending
or, to the knowledge of Labtec, threatened claim or litigation contesting the
validity, ownership or right to use, sell, license or dispose of any Labtec IP
Rights, nor has any Labtec Corporation received any written notice asserting
that any Labtec IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party, except
with respect to clauses (i) and (ii), for any violations, infringements, claims
or litigation that, individually or in the aggregate, would not have a Material
Adverse Effect on the Labtec Corporations, taken as a whole.
(d) Labtec has taken reasonable and practicable steps consistent with
industry norms designed to safeguard and maintain the secrecy and
confidentiality of, and its proprietary rights in, all Labtec IP rights.
Section 3.14 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or
contributed to by Labtec or any trade or business (an "ERISA Affiliate") which
is under common control with Labtec within the meaning of Section 414 of the
Code (the "Labtec Employee Plans"), Labtec has made available to Spacetec a true
and complete copy of, to the extent applicable, (i) such Labtec Employee Plan,
(ii) the most recent annual report (Form 5500), (iii) each trust agreement
related to such Labtec Employee Plan, (iv) the most recent summary plan
description for each Labtec Employee Plan for which such description is
required, (v) the most recent actuarial report relating to any Labtec Employee
Plan subject to Title IV of ERISA, and (vi) the most recent United States
Internal Revenue Service (the "IRS") determination letter issued with respect to
any Labtec Employee Plan.
(b) Each Labtec Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Code stating that such Labtec Employee Plan is so
qualified and nothing has occurred since the date of such letter that could
reasonably be expected to affect the qualified status of such plan. Each Labtec
Employee Plan has been operated in all material respects in accordance with its
terms and the requirements of applicable law. Neither Labtec nor any ERISA
Affiliate of Labtec has incurred or is reasonably expected to incur any material
liability under Title IV of ERISA in connection with the termination of any plan
covered or previously covered by Title IV of ERISA. No Labtec Employee Plan is a
"multiemployer plan" as defined in Section 3(37) of ERISA.
(c) With respect to the employees and former employees of Labtec, there are
no employee post-retirement medical or health plans in effect, except as
required by Section 4980B of the Code. No tax under Section 4980B or Section
4980D of the Code has been incurred in respect of any Employee Plan that is a
group health plan, as defined in Section 5000(b)(1) of the Code.
Section 3.15 Labor Matters. Except as set forth in Section 3.15 of the
Disclosure Statement, to Labtec's knowledge, there are no activities or
proceedings of any labor union to organize any employees of any of the Labtec
Corporations and there are no strikes, or material slowdowns, work stoppage or
lockouts, or threats thereof by or with respect to any employees of the Labtec
Corporations. Except as set forth in Section 3.15 of the Disclosure Statement,
the Labtec Corporations are and have been in compliance with all applicable laws
regarding employment practices, terms and conditions of employment, and wages
and hours (including, without limitation, ERISA, the Worker Adjustment and
Retraining Notification Act of 1988 (the "WARN Act") or any similar state or
local law), except for such cases of noncompliance that, individually or in the
aggregate, would not have a Material Adverse Effect on the Labtec Corporations,
taken as a whole.
Section 3.16 Litigation. Except as set forth in Section 3.16 of the
Disclosure Statement, there are no actions, suits, proceedings, claims,
arbitrations or investigations pending, or as to which the Labtec Corporations
have received any notice of assertion nor, to Labtec's knowledge, are there any
threatened actions, suits, proceedings, claims, arbitrations or investigations
against the Labtec Corporations that, individually or in the aggregate, would
have a Material Adverse Effect on the Labtec Corporations, taken as a whole, or
which in any manner challenge or seek to prevent, enjoin, alter or delay any of
the transactions contemplated by this Agreement.
Section 3.17 Taxes. Except as set forth in Section 3.17 of the Disclosure
Statement, the Labtec Corporations have filed all tax returns required to be
filed by any of them and have paid (or Labtec has paid on its behalf), or have
set up a reserve adequate in all respects for the payment of, all taxes required
to be paid (whether or not shown as due on such returns), and the most recent
financial statements delivered to Spacetec reflect a reserve adequate in all
respects for all taxes payable by the Labtec Corporations accrued through the
date of such financial statements. Except as set forth in
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Section 3.17 of the Disclosure Statement, no deficiencies for any taxes have
been proposed, asserted or assessed against the Labtec Corporations. No Labtec
Corporation has ever been a member of a group of corporations filing a
consolidated, combined or unitary tax return (except a group of which Labtec was
the common parent). For the purpose of this Agreement, the term "tax" shall
include all Federal, state, local and foreign income, profits, franchise, gross
receipts, payroll, sales, employment, use, property, withholding, excise and
other taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts.
Section 3.18 Ownership of Parent Common Stock. Neither the Labtec
Corporations nor, to Labtec's knowledge, any of their respective affiliates or
associates (as such terms are defined under the Exchange Act), (i) beneficially
own, directly or indirectly, or (ii) is party to any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of, in
each case, shares of capital stock of Parent, which in the aggregate represent
5% or more of the outstanding shares of such capital stock.
Section 3.19 Certain Arrangements. Except as set forth in Section 3.19 of
the Disclosure Statement, the execution and delivery by Labtec of this Agreement
and the consummation by Labtec of the transactions contemplated hereby,
including the Merger, (a) will not require any of the Labtec Corporations to
make a payment to, or obtained any consent or waiver from, any current or former
officer, director, employee, consultant or agent of any of the Labtec
Corporations, and (b) will not result in any change in the nature of any rights
of any current or former officer, director, employee, consultant or agent of any
of the Labtec Corporations under any agreement to which any of the Labtec
Corporations is a party, including any acceleration or change in the award,
grant, vesting or determination of stock options, stock purchase, stock
appreciation rights, phantom stock, restricted stock or other stock-based rights
(other than exercise price and number of shares adjusted in accordance with
Section 1.5 hereof), severance pay, continuation pay, termination pay or other
contingent obligations of any nature whatsoever of any of the Labtec
Corporations, or a change in the term of any such agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO
Parent and Newco hereby, jointly and severally, represent and warrant to
Labtec as follows:
Section 4.1 Organization, Good Standing, Corporate Power and Authority and
Foreign Qualification of Parent and Newco.
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts and has the
corporate power and authority to enter into this Agreement and to perform the
obligations required of it under this Agreement. Parent has full power and
authority, and holds all licenses, franchises, permits and authorizations,
necessary for the lawful conduct of its business and to own, lease and operate
the assets, properties and business owned or leased and operated by it. Parent
is duly qualified to transact business and is in good standing as a foreign
corporation authorized to transact business in the jurisdictions set forth in
Section 4.1 of the Disclosure Statement; such jurisdictions constitute the only
jurisdictions in which the failure of Parent to be so qualified and in good
standing would have a Material Adverse Effect on the Spacetec Corporations,
taken as a whole. Neither the ownership nor the use of the properties of Parent
nor the conduct of its businesses violates, or with or without the giving of
notice or the passage of time, or both, will violate, conflict with or result in
a default, right to accelerate or loss of rights under, any terms or provisions
of its charter or by-laws as currently in
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effect, or any lien, encumbrance, mortgage, deed of trust, lease, license,
agreement or understanding, to which Parent is a party or by which Parent or any
of its property, assets or businesses may be bound.
(b) Newco is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power and
authority to enter into this Agreement and to perform the obligations required
of it under this Agreement. Neither the ownership nor the use of the properties
of Newco and each other Spacetec Subsidiary nor the conduct of any of their
respective businesses violates, or with or without the giving of notice or the
passage of time, or both, will violate, conflict with or result in a default,
right to accelerate or loss of rights under, any terms or provisions of any of
their respective charters or by-laws as currently in effect, or any lien,
encumbrance, mortgage, deed of trust, lease, license, agreement or
understanding, to which Newco or any other Spacetec Subsidiary is a party or by
which Newco, any other Spacetec Subsidiary or any of their respective
properties, assets or businesses may be bound.
Section 4.2 Capitalization of Parent. Set forth in Section 4.2 of the
Disclosure Statement is the authorized, issued and outstanding and, if
applicable, treasury capital stock of Parent.
Section 4.3 Issuance of Capital Stock of the Spacetec Corporations. All
of the shares of Parent issued and outstanding as of October 21, 1998 are now,
and at the Effective Time will be, duly authorized, validly issued, fully paid
and non-assessable and none will have been issued or sold in violation of any
applicable securities laws. Except as specifically set forth in Section 4.3 of
the Disclosure Statement, there are no options, calls, subscriptions, warrants,
rights, agreements or commitments of any character obligating any Spacetec
Corporation, contingently or otherwise, to issue, redeem or re-acquire shares of
its capital stock or to register shares of its capital stock under the
Securities Act or any other applicable securities law, and none of the holders
of the capital stock of any of the Spacetec Corporations have any pre-emptive
rights. There are no outstanding bonds, debentures, notes or other indebtedness
or debt securities of the Spacetec Corporations pursuant to which the holders
have the right to vote (or convertible into, or redeemable for, securities
having the right to vote) on any matters on which stockholders of Parent may
vote. Except as set forth in Section 3.3 of the Disclosure Statement, to
Parent's knowledge, there are no voting trusts or agreements, stockholders'
agreements, pledge agreements, buy-sell agreements, rights of first refusal or
proxies relating to any securities of the Spacetec Corporations (whether or not
any Spacetec Corporation is a party thereto).
Section 4.4 Effective Agreement of Parent and Newco. The execution and
delivery by Parent and Newco of this Agreement and the consummation by Parent
and Newco of the transactions contemplated hereby, including the Merger, have
been duly authorized by all necessary corporate action of Parent and Newco
(subject to approval of the Parent Proposals at the Shareholder Meeting), and
this Agreement, and any other agreements or instruments executed and delivered
by Parent or Newco pursuant to this Agreement, when executed and delivered by
Parent or Newco, respectively, will constitute legal, valid and binding
obligations of Parent or Newco, respectively, enforceable against such person in
accordance with their respective terms. Except as specifically set forth in
Section 4.4 of the Disclosure Statement, none of the execution and delivery of
this Agreement, the consummation of the transactions contemplated hereby,
including the Merger, nor compliance by any Spacetec Corporation with any of the
provisions hereof, will (a) violate any provision of the corporate charter or
by-laws of any Spacetec Corporation, as amended to date, (b) with or without the
giving of notice and/or the passage of time, violate, conflict with, result in
the breach or termination of, constitute a default under, or result in the
creation of any lien, encumbrance or charge upon any of the assets or properties
of any Spacetec Corporation pursuant to any contract, agreement, lease or
commitment to which any Spacetec Corporation is a party, or by which or any
Spacetec Corporation or any of their respective assets or properties may be
bound, or (c) violate any judgment, decree, order, statute, rule or governmental
regulation applicable to any Spacetec Corporation or
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any of their respective assets, properties or businesses, except, with respect
to clauses (b) and (c) of this sentence, in each case for violations, conflicts,
breaches, terminations, defaults, liens, encumbrances or charges that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Spacetec Corporations, taken as a whole.
Section 4.5 Subsidiaries and Affiliates. Except as specifically set forth
in Section 4.5 of the Disclosure Statement, Parent does not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and
does not have any proprietary interest in, any corporation, partnership, firm,
association or business organization, entity or enterprise and does not control
(directly or indirectly) the management or policies of any corporation,
partnership, firm, association or business organization, entity or enterprise.
Section 4.5 of the Disclosure Statement sets forth the name of each of the
subsidiaries of Parent (individually referred to herein as a "Spacetec
Subsidiary" and all of which are collectively referred to herein as the
"Spacetec Subsidiaries"), its jurisdiction of incorporation, the jurisdiction or
jurisdictions in which it is qualified to transact business as a foreign
corporation, the number of authorized, issued and outstanding shares of each
class of its securities, the number of its securities of each class owned by
Parent and the number owned by any other person (identifying such other person).
Each Spacetec Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, has
full power and authority, and holds all licenses, franchises, permits and
authorizations, necessary for the lawful conduct of its business and to own,
lease and operate the assets, properties and businesses owned or leased and
operated by it and is duly qualified to transact business and is in good
standing as a foreign corporation authorized to transact business in the
jurisdictions set forth in Section 4.5 of the Disclosure Statement, which are
the only jurisdictions in which the failure of such subsidiary to be so
qualified and in good standing would have a Material Adverse Effect on the
Spacetec Corporations, taken as a whole. All of the issued shares of capital
stock of each Spacetec Subsidiary are now, and at the Effective Time will be,
duly authorized, validly issued, fully paid and non-assessable and are owned, of
record and beneficially, by Parent (except as indicated in Section 4.5 of the
Disclosure Statement) free and clear of all liens, claims, charges and
encumbrances, and there are no options, calls, subscriptions, warrants, rights,
agreements or commitments of any character obligating Parent or any Spacetec
Subsidiary, contingently or otherwise, to issue, redeem or re-acquire any shares
of capital stock of any Spacetec Subsidiary. There are no outstanding bonds,
debentures, notes or other indebtedness or debt securities of any Spacetec
Subsidiary pursuant to which the holders have the right to vote (or convertible
into, or redeemable for, securities having the right to vote) on any matters on
which stockholders of any Spacetec Subsidiary may vote. Except as set forth in
Section 4.5 of the Disclosure Statement, to Spacetec's knowledge, there are no
voting trusts or agreements, stockholders' agreements, pledge agreements,
buy-sell agreements, rights of first refusal or proxies relating to any
securities of any Spacetec Subsidiary (whether or not the Spacetec Subsidiary is
a party thereto). Parent and the Spacetec Subsidiaries are sometimes referred to
herein collectively as the "Spacetec Corporations" or individually as a
"Spacetec Corporation".
Section 4.6 Corporate Charters and By-laws. Parent has delivered to
Labtec true and complete copies of the respective corporate charters of each of
the Spacetec Corporations, as in effect on October 21, 1998, certified in each
case as of a recent date by the appropriate governmental official of its
jurisdiction of incorporation, and a true and complete copy of the respective
by-laws of each Spacetec Corporation, as in effect on October 21, 1998,
certified by their respective Secretaries or Assistant Secretaries.
Section 4.7 Financial Statements. Parent has delivered to Labtec (a)
audited consolidated balance sheets of Parent and the Spacetec Subsidiaries as
at March 31, 1998, March 31, 1997 and March 31, 1996 and the related audited
consolidated statements of operations, shareholders equity and cash flows for
the
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twelve-month periods ended on March 31, 1998, March 31, 1997 and March 31, 1996,
including the respective notes thereto, all of which are accompanied by the
related opinions of Ernst & Young, LLP, independent certified public
accountants, and (b) unaudited consolidated balance sheets of Parent and the
Spacetec Subsidiaries as at June 30, 1998 and the related unaudited consolidated
statements of operations, shareholders equity and cash flows for the quarterly
periods ended on June 30, 1998 and June 30, 1997, including the respective notes
thereto (the financial statements described in clauses (a) and (b) above are
hereinafter collectively called the "Spacetec Financial Statements"). Such
financial statements, together with the notes thereto, reflect the respective
books and records of Parent and the Spacetec Subsidiaries, have been prepared in
conformity with GAAP applied on a consistent basis throughout the periods
covered by such statements and fairly present, in the case of the balance
sheets, the consolidated financial condition of Parent and the Spacetec
Subsidiaries as of the respective dates indicated, and in the case of the
consolidated statements of operations, shareholders equity and cash flows of
Parent and the Spacetec Subsidiaries for the respective periods indicated.
Section 4.8 Undisclosed Liabilities. Except as set forth in any of the
disclosures made by Parent pursuant to the Exchange Act or in the sections of
the Registration Statement which specifically relate to the business of the
Spacetec Corporations, in the Spacetec Financial Statements or in Section 4.8 of
the Disclosure Statement (collectively, the "Spacetec Disclosure"), no Spacetec
Corporation had, at such date, any indebtedness, obligations or liabilities of
any nature, whether accrued, absolute, contingent or other, whether due or to
become due, which, individually or in the aggregate, are material and not shown
or adequately provided for thereon, including, without limitation, liabilities
or obligations on account of taxes, other governmental charges, duties,
penalties, interest or fines.
Section 4.9 Absence of Changes. Except as specifically set forth in
Section 4.9 of the Disclosure Statement, the Spacetec Corporations have, since
the Balance Sheet Date, conducted their respective businesses only in the
ordinary course and, except as set forth in the Spacetec Disclosure, there has
not been any Material Adverse Change in the Spacetec Corporations, taken as a
whole.
Section 4.10 Accuracy of Information. The information included in the
Spacetec Disclosure has not, and any other information to be provided by Parent
or Newco to Labtec for use in any press release or filing to be made with any
governmental body in connection with the Merger will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not false or
misleading. The information concerning the Spacetec Corporations set forth in
this Agreement and the Disclosure Statement and the copies of documents prepared
by Parent or Newco and referred to herein are true and complete, and such
documents, and any other documents furnished by Parent or Newco to Labtec, do
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated herein or therein or necessary to make the statements
contained herein or therein not false or misleading.
Section 4.11 Brokers and Finders. None of the Spacetec Corporations, nor
any of their respective officers, directors or employees has employed any
broker, agent or finder other than Advest, Inc., or incurred any liability for
any brokerage fees, agents' commissions or finders' fees, in connection with the
transactions contemplated hereby, except for such fees paid or payable to
Advest, Inc. solely for the rendering of the opinion described in Section 4.15
hereof.
Section 4.12 Reports and Financial Statements. Parent has filed all
reports required to be filed by each of them with the SEC pursuant to the
Exchange Act since April 1, 1993 (collectively, the "SEC Reports"), and has
previously furnished or made available to Labtec true and complete copies of all
such SEC Reports. None of such SEC Reports, as of their respective dates (as
amended through October 21, 1998), contained any untrue statement of a material
fact or omitted to state a material fact required to be
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stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 4.13 Adoption of this Agreement by the Shareholders of
Newco. This Agreement has been adopted by the shareholders of Newco pursuant to
written consent, as permitted by, and in accordance with, the DGCL.
Section 4.14 Certain Arrangements. Except as set forth in Section 4.14 of
the Disclosure Statement, the execution and delivery by Spacetec of this
Agreement and the consummation by Spacetec of the transactions contemplated
hereby, including the Merger, (a) will not require any of the Spacetec
Corporations to make a payment to, or obtained any consent or waiver from, any
current or former officer, director, employee, consultant or agent of any of the
Spacetec Corporations and (b) will not result in any change in the nature of any
rights of any current or former officer, director, employee, consultant or agent
of any of the Spacetec Corporations under any agreement to which any of the
Spacetec Corporations is a party, including any acceleration or change in the
award, grant, vesting or determination of stock options, stock purchase, stock
appreciation rights, phantom stock, restricted stock or other stock-based
rights, severance pay, continuation pay, termination pay or other contingent
obligations of any nature whatsoever of any of the Spacetec Corporations, or a
change in the term of any such agreement.
Section 4.15 Fairness Opinion. Parent has received the opinion of Advest,
Inc., of even date herewith, stating that the Merger and the other transactions
contemplated by this Agreement are fair to the shareholders of Parent from a
financial point of view, a copy of which opinion has been delivered to Labtec.
Section 4.16 Intellectual Property.
(a) The Spacetec Corporations own, or have the right to use, sell or
license all intellectual property utilized in their respective businesses as
presently conducted (such intellectual property and the rights thereto are
collectively referred to herein as the "Spacetec IP Rights"), except such
failures to own or have the right to use, sell or license that, individually or
in the aggregate, would not have a Material Adverse Effect on the Spacetec
Corporations, taken as a whole.
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any agreement governing any Spacetec IP Rights, will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any Spacetec IP Rights or impair the right of the Spacetec Corporations to
use, sell or license any Spacetec IP Rights or portions thereof, except for the
occurrence of any such breaches, forfeitures, terminations or impairments that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Spacetec Corporations, taken as a whole.
(c) (i) Neither the manufacture, marketing, license, sale or intended use
of any product or technology currently licensed, sold or under development by
the Spacetec Corporations violates any license or agreement between the Spacetec
Corporations and any third party or, to the knowledge of Spacetec infringes or
misappropriates any intellectual property right of any other party; and (ii)
there is no pending or, to the knowledge of Spacetec, threatened claim or
litigation contesting the validity, ownership or right to use, sell, license or
dispose of any Spacetec IP Rights, nor has any Spacetec Corporation received any
written notice asserting that any Spacetec IP Rights or the proposed use, sale,
license or disposition thereof conflicts or will conflict with the rights of any
other party, except, with respect to clauses (i) and (ii), for any violations,
infringements, claims or litigations that, individually or in the aggregate,
would not have a Material Adverse Effect on the Spacetec Corporations, taken as
a whole.
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(d) Spacetec has taken reasonable and practicable steps consistent with
industry norms designed to safeguard and maintain the secrecy and
confidentiality of, and its proprietary rights in, all Spacetec IP Rights.
Section 4.17 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of ERISA) maintained or contributed to by a
Spacetec ERISA Affiliate which is under common control with Spacetec within the
meaning of Section 414 of the Code (the "Spacetec Employee Plans"), Spacetec has
made available to Labtec a true and complete copy of, to the extent applicable,
(i) such Spacetec Employee Plan, (ii) the most recent annual report (Form 5500),
(iii), each trust agreement related to such Spacetec Employee Plan, (iv) the
most recent summary plan description for each Spacetec Employee Plan for which
such description is required, (v) the most recent actuarial report relating to
any Spacetec Employee Plan subject to Title IV of ERISA, and (vi) the most
recent IRS determination letter issued with respect to any Spacetec Employee
Plan.
(b) Each Spacetec Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Code stating that such Spacetec Employee Plan is
so qualified and nothing has occurred since the date of such letter that could
reasonably be expected to affect the qualified status of such plan. Each
Spacetec Employee Plan has been operated in all material respects in accordance
with its terms and the requirements of applicable law. Neither Spacetec nor any
ERISA Affiliate of Spacetec has incurred or is reasonably expected to incur any
material liability under Title IV of ERISA in connection with the termination of
any plan covered or previously covered by Title IV of ERISA. No Spacetec
Employee Plan is a "multiemployer plan" as defined in Section 3(37) of ERISA.
(c) With respect to the employees and former employees of Spacetec, there
are no employee post-retirement medical or health plans in effect, except as
required by Section 4980B of the Code. No tax under Section 4980B or Section
4980D of the Code has been incurred in respect of any Employee Plan that is a
group health plan, as defined in Section 5000(b)(1) of the Code.
Section 4.18 Labor Matters. To Spacetec's knowledge, there are no
activities or proceedings of any labor union to organize any employees of any of
the Spacetec Corporations and there are no strikes or material slowdowns, work
stoppages or lockouts, or threats thereof by or with respect to any employees of
any of the Spacetec Corporations. The Spacetec Corporations are and have been in
compliance with all applicable laws regarding employment practices, terms and
conditions of employment, and wages and hours (including, without limitation,
ERISA, the WARN Act or any similar state or local law), except for such cases of
noncompliance that, individually or in the aggregate, would not have a Material
Adverse Effect on the Spacetec Corporations, taken as a whole.
Section 4.19 Litigation. Except as set forth in Section 4.19 of the
Disclosure Statement, there are no actions, suits, proceedings, claims,
arbitrations or investigations pending, or as to which the Spacetec Corporations
have received any notice of assertion nor, to Spacetec's knowledge, are there
any threatened actions, suits, proceedings, claims, arbitrations or
investigations against the Spacetec Corporations that, individually or in the
aggregate, would have a Material Adverse Effect on the Spacetec Corporations,
taken as a whole, or which in any manner challenge or seek to prevent, enjoin,
alter or delay any of the transactions contemplated by this Agreement.
Section 4.20 Taxes. The Spacetec Corporations have filed all tax returns
required to be filed by any of them and has paid (or Spacetec has paid on its
behalf), or have set up a reserve adequate in all
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respects for the payment of, all taxes required to be paid (whether or not shown
as due on such returns), and the most recent financial statements delivered to
Labtec reflect a reserve adequate in all respects for all taxes payable by the
Spacetec Corporations accrued through the date of such financial statements.
Except as set forth in Section 4.20 of the Disclosure Statement, no deficiencies
for any taxes have been proposed, asserted or assessed against the Spacetec
Corporations. No Spacetec Corporation has ever been a member of a group of
corporations filing a consolidated, combined or unitary tax return (except a
group of which Spacetec was the common parent).
ARTICLE V
COVENANTS OF LABTEC
Labtec covenants and agrees with Parent and Newco that, except as otherwise
consented to in writing by Parent or provided specifically in this Agreement,
from October 21, 1998 until the Effective Time:
Section 5.1 Action Not Permitted. No Labtec Corporation will do or cause
to be done anything which is represented and warranted in Article III hereof (as
modified by the Disclosure Statement) not to be true.
Section 5.2 Conduct of Business in Ordinary Course. Each Labtec
Corporation will conduct its business only in the ordinary course and
substantially in the same manner as it has heretofore operated such business,
and will not change the character of its business or enter into any contract to
take any such action.
Section 5.3 No Change in Corporate Charters or By-laws. No change will be
made in the corporate charter, by-laws or other constituent documents of any
Labtec Corporation.
Section 5.4 No Change in Capital Stock. Except with respect to shares of
Labtec Stock issued pursuant to the exercise of outstanding Labtec Stock
Options, no change will be made in the authorized, issued or outstanding capital
stock of any Labtec Corporation and no subscriptions, options, rights, warrants,
calls, commitments or agreements relating to the authorized, issued or
outstanding capital stock of any Labtec Corporation will be entered into,
issued, granted or created.
Section 5.5 No Dividend or Redemption. No dividend or other distribution
or payment will be declared, set aside, paid or made on or in respect of shares
of the capital stock of any Labtec Corporation, nor will any Labtec Corporation
directly or indirectly redeem, retire, purchase or otherwise acquire any of such
capital stock.
Section 5.6 No Liquidation, Merger or Acquisition. No Labtec Corporation
will dissolve, liquidate, adopt a plan of liquidation or merge, amalgamate or
consolidate with any other corporation or acquire all or substantially all of
the business or assets of any other person, corporation, partnership, limited
liability company, firm, association or business organization, entity or
enterprise (each, a "Person"), or acquire ownership or control of any capital
stock, bonds or other securities of, or any proprietary interest in, any Person,
or acquire control (directly or indirectly) of the management or policies
thereof, or initiate or engage in any negotiations relating to any of the
aforesaid transactions or solicit any offers in connection therewith.
Section 5.7 No Change in Accounting Methods; Tax Items. Except as
required or permitted by GAAP, no change will be made in the accounting methods
and practices followed by any Labtec Corporation or in the depreciation,
amortization or inventory valuation policies, rates or methods heretofore used
or adopted by any Labtec Corporation. Except as otherwise required by law or in
the ordinary course
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of business, no Labtec Corporation shall make any change in any tax accounting
methods or practices, make any tax election or settle or compromise any Federal,
state, local or foreign tax liability.
Section 5.8 No Sales or Other Dispositions. Other than in the ordinary
course of business consistent with past practice, no Labtec Corporation will
sell, lease, abandon, assign, transfer, license or otherwise dispose of (a) any
real property, patent, trademark, service mark, trade name, brand name or
copyright (or pending application for any patent, trademark, service mark or
copyright), invention, process, know-how, formula, pattern, design, trade secret
or interest thereunder or other intangible asset or (b) any machinery, equipment
or other operating property, or initiate or engage in any negotiations relating
to any of the aforesaid transactions or solicit any offers in connection
therewith.
Section 5.9 Prohibition on Certain Commitments. Except as set forth in
Section 5.9 of the Disclosure Statement, no Labtec Corporation will incur or
become subject to, or agree to incur or become subject to, any liability or
obligations, absolute or contingent, except current liabilities incurred in the
ordinary course of business and obligations under contracts entered into in the
ordinary course of business (none of which, individually or in the aggregate,
will be material to the Labtec Corporations, taken as a whole).
Section 5.10 No Defaults. No Labtec Corporation will default under, or
breach any term or provision of, or suffer or permit to exist any condition or
event which, after notice or lapse of time or both, would constitute a default
under, any contract, agreement, lease, license, commitment, instrument or
obligation to which such Labtec Corporation or its properties or businesses are
bound, which default or breach (i) either individually or in the aggregate with
all such other defaults and breaches, has resulted in, or is reasonably likely
to result in, any material adverse change in the condition (financial or
otherwise), properties, assets, liabilities, earnings, business or prospects of
the Labtec Corporations, taken as a whole, and (ii) shall not have been cured
within 30 days after such Labtec Corporation has given Parent and Newco notice
of such breach or default, and the event giving rise thereto, pursuant to
Section 5.16 hereof.
Section 5.11 Preservation of Business. Labtec will use its best efforts
to preserve the business organization of each Labtec Corporation intact, to
continue their operations at their present levels, to keep available the
services of the present employees and agents of each Labtec Corporation, to
preserve the goodwill of customers, suppliers and others having business
relations with each Labtec Corporation, to promptly pay all taxes when due, to
maintain all insurance policies in full force and effect, to make all filings
with the appropriate governmental agencies and to comply with all applicable
laws, each consistent with past practice and good business standards.
Section 5.12 Maintenance of Properties. Each Labtec Corporation will keep
and maintain its buildings, offices, warehouses and other structures and its
machinery, tools, dies, fixtures, vehicles, spare parts and other properties
(whether owned or leased and whether under its control or the control of others)
in good operating condition and in states of repair consistent with their
respective ages and present usage and will take all necessary action to preserve
any intangible assets which are material to its business as conducted presently
or hereafter prior to the Effective Time.
Section 5.13 Access to Labtec and the Subsidiaries. Between October 21,
1998 and the Effective Time, each Labtec Corporation will give to authorized
representatives of Parent and Newco (including, but not limited to, their
respective officers, attorneys and accountants) full access, during normal
business hours, to such personnel, properties, customers, customer records,
contracts, commitments, books and records and other documents of such Labtec
Corporation, and will cause its officers to furnish any and all financial,
technical and operating data and other information pertaining to its business
(certified if requested), as Parent and Newco shall from time to time reasonably
require. Labtec shall hold, and shall cause its authorized representatives to
hold, in confidence all such information in accordance with the
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terms of the confidentiality agreement previously entered into among the parties
hereto or their affiliates (the "Confidentiality Agreement").
Section 5.14 Actions Affecting Representations, Warranties and Covenants.
No Labtec Corporation will do any act or thing, or suffer any act or thing to be
done or to exist, which would result in (a) an inaccuracy in any representation
or breach of any warranty of Labtec under this Agreement if such representation
or warranty were deemed to be restated and made again at the time of doing or
suffering such act or thing or at the Effective Time, or (b) any failure by
Labtec duly to perform or observe any term, provision, covenant, agreement or
condition set forth or provided for in this Agreement.
Section 5.15 Obtaining of Consents; Satisfaction of Other Conditions.
Each Labtec Corporation will use its best efforts to obtain all consents,
approvals and agreements of other Persons or governmental authorities which are
necessary to the consummation of the transactions contemplated by this Agreement
and will use its best efforts to cause the satisfaction of the conditions
precedent set forth in Article VII hereof.
Section 5.16 Books and Records; Notification of Changes. Each Labtec
Corporation will maintain its books and records in accordance with GAAP applied
on a consistent basis by each Labtec Corporation and in the usual, regular and
ordinary manner and will promptly advise Parent and Newco in writing of any
change which occurs prior to the Effective Time in any of the information
contained in the representations and warranties made in Article III hereof and
of the event which effects such a change.
Section 5.17 Tax Free Reorganization. Labtec will use, and cause each of
the Labtec Subsidiaries to use, its reasonable best efforts to cause the Merger
to qualify as a tax-free reorganization under Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code, including, without limitation, complying with the
recording and reporting requirements under Section 1.368-3 of the United States
Treasury Regulations; and Labtec will not take, and will cause each of the
Labtec Subsidiaries not to take, any action that could cause the Merger not to
qualify as a tax-free reorganization under those Sections and take the position
for all purposes that the Merger qualifies as a tax-free reorganization under
those Sections.
ARTICLE VI
COVENANTS OF PARENT AND NEWCO
Parent and Newco, jointly and severally, covenant and agree with Labtec
that, except as otherwise consented to in writing by Labtec or provided
specifically in this Agreement, from October 21, 1998 until the Effective Time:
Section 6.1 Action Not Permitted. No Spacetec Corporation will do or
cause to be done anything which is represented and warranted in Article IV
hereof (as modified by the Disclosure Statement) not to be true.
Section 6.2 Conduct of Business in Ordinary Course. Except as
contemplated by Section 9.1 hereof, each Spacetec Corporation will conduct its
business only in the ordinary course and substantially in the same manner as it
has heretofore operated such business, and will not change the character of its
business or enter into any contract to take any such action.
Section 6.3 No Change in Corporate Charters or By-laws. Except as
expressly set forth herein, no change will be made in the corporate charter,
by-laws or other constituent documents of any Spacetec Corporation.
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Section 6.4 No Change in Capital Stock. Except as contemplated by the
Charter Amendments and with respect to shares of Spacetec Stock issued pursuant
to the exercise of outstanding stock options, no change will be made in the
authorized, issued or outstanding capital stock of any Spacetec Corporation and
no subscriptions, options, rights, warrants, calls, commitments or agreements
relating to the authorized, issued or outstanding capital stock of any Spacetec
Corporation will be entered into, issued, granted or created.
Section 6.5 No Dividend or Redemption. No dividend or other distribution
or payment will be declared, set aside, paid or made on or in respect of shares
of the capital stock of any Spacetec Corporation, nor will any Spacetec
Corporation directly or indirectly redeem, retire, purchase or otherwise acquire
any of such capital stock.
Section 6.6 No Liquidation, Merger or Acquisition. Except as contemplated
by Section 9.1 hereof and except in order to effect the Delaware
Reincorporation, no Spacetec Corporation will dissolve, liquidate, adopt a plan
of liquidation or merge, amalgamate or consolidate with any other corporation or
acquire all or substantially all of the business or assets of, or acquire
ownership or control of any capital stock, bonds or other securities of, or any
proprietary interest in, any Person, or acquire control (directly or indirectly)
of the management or policies thereof, or initiate or engage in any negotiations
relating to any of the aforesaid transactions or solicit any offers in
connection therewith.
Section 6.7 No Change in Accounting Methods; Tax Items. Except as
required or permitted by GAAP, no change will be made in the accounting methods
and practices followed by any Spacetec Corporation or in the depreciation,
amortization or inventory valuation policies, rates or methods heretofore used
or adopted by any Spacetec Corporation. Except as otherwise required by law or
in the ordinary course of business, no Spacetec Corporation shall make any
change in any tax accounting methods or practices, make any tax election or
settle or compromise any Federal, state, local or foreign tax liability.
Section 6.8 No Sales or Other Dispositions. Other than in the ordinary
course of business consistent with past practice, as contemplated by Section 9.1
hereof, or in order to effect the Parent Restructuring, no Spacetec Corporation
will sell, lease, abandon, assign, transfer, license or otherwise dispose of (a)
any real property, patent, trademark, service mark, trade name, brand name or
copyright (or pending application for any patent, trademark, service mark or
copyright), invention, process, know-how, formula, pattern, design, trade secret
or interest thereunder or other intangible asset or (b) any machinery, equipment
or other operating property, or initiate or engage in any negotiations relating
to any of the aforesaid transactions or solicit any offers in connection
therewith.
Section 6.9 Prohibition on Certain Commitments. Except as set forth in
Section 6.9 of the Disclosure Statement, no Spacetec Corporation will incur or
become subject to, or agree to incur or become subject to, any liability or
obligations, absolute or contingent, except current liabilities incurred in the
ordinary course of business and obligations under contracts entered into in the
ordinary course of business (none of which, individually or in the aggregate,
will be material to the Spacetec Corporations, taken as a whole).
Section 6.10 No Defaults. No Spacetec Corporation will default under, or
breach any term or provision of, or suffer or permit to exist any condition or
event which, after notice or lapse of time or both, would constitute a default
under, any contract, agreement, lease, license, commitment, instrument or
obligation to which it or its properties or businesses are bound, which default
or breach (i) either individually or in the aggregate with all such other
defaults and breaches, has resulted in, or is reasonably likely to result in,
any material adverse change in the condition (financial or otherwise),
properties, assets, liabilities, earnings, business or prospects of the Spacetec
Corporations, taken as a whole, and (ii) shall not
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have been cured within 30 days after such Spacetec Corporation has given Labtec
notice of such breach or default, and the event giving rise thereto, pursuant to
Section 6.16 hereof.
Section 6.11 Preservation of Business. Each of Parent and Newco will use
its best efforts to preserve the business organization of each Spacetec
Corporation intact, to continue their operations at their present levels, to
keep available the services of the present employees and agents of each Spacetec
Corporation, to preserve the goodwill of customers, suppliers and others having
business relations with each Spacetec Corporation, to promptly pay all taxes
when due, to maintain all insurance policies in full force and effect, to make
all filings with the appropriate governmental agencies and to comply with all
applicable laws, each consistent with past practice and good business standards.
Section 6.12 Maintenance of Properties. Each Spacetec Corporation will
keep and maintain its buildings, offices, warehouses and other structures and
its machinery, tools, dies, fixtures, vehicles, spare parts and other properties
(whether owned or leased and whether under its control or the control of others)
in good operating condition and in states of repair consistent with their
respective ages and present usage and will take all necessary action to preserve
any intangible assets which are material to its business as conducted presently
or hereafter prior to the Effective Time.
Section 6.13 Access to Spacetec and the Spacetec Subsidiaries. Between
October 21, 1998 and the Effective Time, each Spacetec Corporation will give to
authorized representatives of Labtec (including, but not limited to, its
officers, attorneys and accountants) full access, during normal business hours,
to such personnel, properties, customers, customer records, contracts,
commitments, books and records and other documents of such Spacetec Corporation,
and will cause its officers to furnish any and all financial, technical and
operating data and other information pertaining to its business (certified if
requested), as Labtec shall from time to time reasonably require. Parent and
Newco shall hold, and shall cause their respective authorized representatives to
hold, in confidence all such information in accordance with the terms of the
Confidentiality Agreement.
Section 6.14 Actions Affecting Representations, Warranties and Covenants.
No Spacetec Corporation will do any act or thing, or suffer any act or thing to
be done or to exist, which would result in (a) an inaccuracy in any
representation or breach of any warranty of Parent or Newco under this Agreement
if such representation or warranty were deemed to be restated and made again at
the time of doing or suffering such act or thing or at the Effective Time, or
(b) any failure by Parent or Newco duly to perform or observe any term,
provision, covenant, agreement or condition set forth or provided for in this
Agreement.
Section 6.15 Obtaining of Consents; Satisfaction of Other Conditions.
Each Spacetec Corporation will use its best efforts to obtain all consents,
approvals and agreements of other Persons or governmental authorities which are
necessary to the consummation of the transactions contemplated by this Agreement
and will use its best efforts to cause the satisfaction of the conditions
precedent set forth in Article VIII hereof.
Section 6.16 Books and Records; Notification of Changes. Each Spacetec
Corporation will maintain its books and records in accordance with GAAP applied
on a consistent basis by each Spacetec Corporation and in the usual, regular and
ordinary manner and will promptly advise Labtec in writing of any change which
occurs prior to the Effective Time in any of the information contained in the
representations and warranties made in Article IV hereof and of any other event
which effects such a change.
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Section 6.17 Compliance with the Securities and Exchange Act. Parent
shall timely file with the SEC, and promptly provide Labtec with copies of, all
forms and reports required to be filed by Parent pursuant to the Exchange Act.
Section 6.18 Tax Free Reorganization. Parent will use, and cause each of
the Spacetec Subsidiaries to use, its reasonable best efforts to cause the
Merger to qualify as a tax-free reorganization under Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code, including, without limitation, complying with the
recording and reporting requirements under Section 1.368-3 of the United States
Treasury Regulations; and Parent will not take, and will cause each of the
Spacetec Subsidiaries not to take, any action that could cause the Merger not to
qualify as a tax-free reorganization under those Sections and take the position
for all purposes that the Merger qualifies as a tax-free reorganization under
those Sections.
Section 6.19 Bank Consent and Other Voting Agreements. Parent shall use
its best efforts to, as promptly as reasonably practicable, (i) obtain and
deliver to Labtec the written consent, in form and substance reasonably
satisfactory to Labtec, of Australia and New Zealand Banking Group Limited (the
"Bank"), pursuant to the Pledge Agreement dated September 30, 1997, between
Rhetford Pty Limited (ACN 001 402 339), a company organized under the laws of
New South Wales, Australia ("Rhetford"), and the Bank, in order for Rhetford to
perform its obligations under its Voting Agreement with respect to the shares of
Spacetec Stock pledged by Rhetford to the Bank under such Pledge Agreement, and
(ii) have Morton E. Goulder and John A. Hilton (collectively, the "Other Parent
Shareholders") each execute and deliver to Labtec a voting agreement
substantially in the form of the Voting Agreements.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND NEWCO
All obligations of Parent and Newco to effect the Merger are subject, at
the option of Parent and Newco, to the fulfillment of each of the following
conditions:
Section 7.1 Proceedings and Documentation. All corporate and other
proceedings required to carry out the transactions contemplated by this
Agreement and all instruments and other documents relating to such transactions
shall be reasonably satisfactory in form and substance to counsel to Parent and
Newco, and Parent and Newco shall have been furnished with (a) copies of
resolutions adopted by the Board of Directors and shareholders of Labtec,
authorizing the execution and delivery by Labtec of this Agreement and the
consummation by Labtec of the transactions contemplated hereby, certified by the
Secretary or Assistant Secretary or other appropriate officer of Labtec, (b) a
certificate of the Secretary or Assistant Secretary of Labtec with respect to
the incumbency of all officers of Labtec executing instruments and other
documents in connection with the transactions contemplated by this Agreement,
and (c) such other instruments and documents as such counsel shall have
reasonably requested.
Section 7.2 Accuracy of Representations and Warranties; Compliance with
Covenants and Conditions. The representations and warranties of Labtec
contained in this Agreement shall be true and correct in all respects on and as
of the Effective Time, with the same force and effect as though made on and as
of the Effective Time (except for those representations and warranties that
address matters only as of a particular date or only with respect to a
particular period of time, which representations or warranties shall be true and
correct as of such date or with respect to such period), except where the
failure of such representations or warranties to be so true and correct (without
giving effect to any limitation as to "material," "materiality," "Material
Adverse Effect," "Material Adverse Change" or other similar qualifiers),
individually or in the aggregate, would not have a Material Adverse Effect on
the Labtec
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Corporations, taken as a whole. Labtec shall have performed and complied in all
material respects with each and every covenant, agreement and condition required
by this Agreement to be performed or complied with by it prior to or at the
Effective Time. Labtec shall have delivered to Parent and Newco a certificate to
such effect signed by the Chief Executive Officer and the Chief Financial
Officer of Labtec.
Section 7.3 Legal Opinion of Counsel to Labtec. Labtec shall have
delivered to Parent and Newco the opinion of Parker Chapin Flattau & Klimpl,
LLP, counsel for Labtec, dated the date of the Closing, in form and substance
reasonably satisfactory to Parent and Newco.
Section 7.4 Fulfillment of Legal Requirements. All statutory and other
legal requirements for the valid consummation of the transactions contemplated
by this Agreement shall have been fulfilled.
Section 7.5 Obtaining of Consents. All consents, approvals and agreements
of other parties or governmental authorities which are necessary to the
effective consummation of the transactions contemplated by this Agreement or to
avoid a default under an instrument or document to which any party hereto is a
party or by which it may be bound shall have been obtained, except where the
failure to obtain such consents, approvals or agreements, individually or in the
aggregate, would not have a Material Adverse Effect on the Labtec Corporations,
taken as a whole, or the Spacetec Corporations, taken as a whole.
Section 7.6 Absence of Pending Proceedings. No litigation, action,
investigation, inquiry or request for information by any administrative agency
or governmental body and no legal or administrative proceeding shall have been
instituted which (a) questions the validity or legality of this Agreement or the
transactions contemplated by this Agreement or seeks to restrict, limit,
prohibit or enjoin (or to obtain substantial damages as a result of) such
transactions, or (b) could reasonably be expected to have a Material Adverse
Effect on the Labtec Corporations, taken as a whole, and shall not have been
disclosed to Parent and Newco in the Labtec Disclosure or in the Disclosure
Statement.
Section 7.7 Tax Certificates. Labtec shall have delivered to Parent a
clearance certificate or similar document or documents which may be required by
any tax authority to relieve Parent of any obligation to withhold taxes in
connection with the transactions contemplated by this Agreement to the extent
permitted by law. Labtec shall have delivered to Parent a properly executed
statement or statements satisfying the requirements of Treasury Regulation
Sections 1.897-2 and 1.1445 in form and substance reasonably satisfactory to
Parent.
Section 7.8 No Material Adverse Change. Since October 21, 1998, there
shall have been no Material Adverse Change in the Labtec Corporations, taken as
a whole; provided, however, that none of the following shall be deemed by itself
or by themselves, either alone or in combination, to constitute such a Material
Adverse Change: (a) conditions affecting the personal computing industry as a
whole or the U.S. economy as a whole; or (b) any effect arising primarily out of
or resulting primarily from actions taken by the parties as contemplated
hereunder in connection with, or which is primarily attributable to, the
announcement of this Agreement and the transactions contemplated hereby, to the
extent so attributable.
Section 7.9 Effectiveness of Registration Statement. The Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC, and no proceeding
shall have been initiated or threatened in writing by the SEC for the purpose of
seeking or obtaining such a stop order.
Section 7.10 Shareholder Approval. The shareholders of Parent shall have
duly and validly approved and adopted the Parent Proposals.
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Section 7.11 Due Diligence. Parent and Newco shall have completed and be
satisfied, in their sole discretion, with the results of their due diligence
investigation with respect to the business and operations of the Labtec
Corporations.
Section 7.12 Charter Amendments. Parent shall have effected each of the
Charter Amendments.
Section 7.13 Parent Restructuring. Immediately following the Effective
Time, Parent shall have consummated a restructuring, pursuant to which it shall
have transferred all of its non-cash assets and liabilities to a newly-formed,
wholly-owned subsidiary, incorporated in the State of Delaware solely for this
purpose and which holds no other assets or liabilities at that time (the "Parent
Restructuring").
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF LABTEC
All obligations of Labtec to effect the Merger are subject, at the option
of Labtec, to the fulfillment of each of the following conditions:
Section 8.1 Proceedings and Documentation. All corporate and other
proceedings required to carry out the transactions contemplated by this
Agreement and all instruments and other documents relating to such transactions
shall be satisfactory in form and substance to counsel to Labtec, and Labtec
shall have been furnished with (a) copies of resolutions adopted by the Board of
Directors and shareholders of Parent and Newco, authorizing the execution and
delivery by Parent and Newco of this Agreement and the consummation by Parent
and Newco of the transactions contemplated hereby, certified by the Secretary or
Assistant Secretary of Parent or Newco, as the case may be, (b) certificates of
the Secretary or Assistant Secretary of each of Parent and Newco with respect to
the incumbency of all officers of Parent and Newco, respectively, executing
instruments and other documents in connection with the transactions contemplated
by this Agreement, and (c) such other instruments and documents as such counsel
shall have reasonably requested.
Section 8.2 Accuracy of Representations and Warranties; Compliance with
Covenants and Conditions. The representations and warranties of Parent and
Newco contained in this Agreement shall be true and correct in all respects on
and as of the Effective Time, with the same force and effect as though made on
and as of the Effective Time (except for those representations and warranties
that address matters only as of a particular date or only with respect to a
particular period of time, which representations or warranties shall be true and
correct as of such date or with respect to such period), except where the
failure of such representations or warranties to be so true and correct (without
giving effect to any limitation as to "material," "materiality," "Material
Adverse Effect," "Material Adverse Change" or other similar qualifiers),
individually or in the aggregate, would not have a Material Adverse Effect on
the Spacetec Corporations, taken as a whole. Parent and Newco shall each have
performed and complied in all material respects with each and every covenant,
agreement and condition required by this Agreement to be performed or complied
with by it prior to or at the Effective Time. Parent and Newco shall each have
delivered to Labtec a certificate to such effect signed by its Chief Executive
Officer and Chief Financial Officer.
Section 8.3 Completion of Required Corporate Action. All action required
to be taken by, or on the part of, Parent and Newco to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby shall have been duly and validly taken. The
shareholders of Parent shall have duly and validly approved and adopted the
Parent Proposals.
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Section 8.4 Legal Opinion of Counsel to Spacetec and Newco. Parent and
Newco shall have delivered to Labtec the opinion of Testa, Hurwitz & Thibeault,
LLP, counsel to Parent and Newco, dated the date of the Closing, in form and
substance reasonably satisfactory to Labtec.
Section 8.5 Fulfillment of Legal Requirements. All statutory and other
legal requirements for the valid consummation of the transactions contemplated
by this Agreement shall have been fulfilled.
Section 8.6 Obtaining of Consents. All consents, approvals and agreements
of other parties or governmental authorities which are necessary to the
effective consummation of the transactions contemplated by this Agreement or to
avoid a default under an instrument or document to which any party hereto is a
party or by which it may be bound shall have been obtained, except where the
failure to obtain such consents, approvals or agreements, individually or in the
aggregate, would not have a Material Adverse Effect on the Labtec Corporations,
taken as a whole, or the Spacetec Corporations, taken as a whole.
Section 8.7 Absence of Pending Proceedings. No litigation, action,
investigation, inquiry or request for information by any administrative agency
or governmental body and no legal or administrative proceeding shall have been
instituted which (a) questions the validity or legality of this Agreement or the
transactions contemplated by this Agreement or seeks to restrict, limit,
prohibit or enjoin (or to obtain substantial damages as a result of) such
transactions, or (b) could reasonably be expected to have a Material Adverse
Effect on the Spacetec Corporations, taken as a whole, and shall not have been
disclosed to Labtec in the Spacetec Disclosure or in the Disclosure Statement.
Section 8.8 Promissory Note. Parent shall have executed and delivered the
Promissory Note to the Collection Agent.
Section 8.9 No Material Adverse Change. Since October 21, 1998, there
shall have been no Material Adverse Change in the Spacetec Corporations, taken
as a whole; provided, however, that none of the following shall be deemed by
itself or by themselves, either alone or in combination, to constitute such a
Material Adverse Change: (a) a change in the market price or trading volume of
Spacetec Stock; (b) conditions affecting the industrial, corporate or consumer
desktop computer, or computer workstation industries as a whole or the U.S.
economy as a whole; or (c) any effect arising primarily out of or resulting
primarily from actions taken by the parties as contemplated hereunder in
connection with, or which is primarily attributable to, the announcement of this
Agreement and the transactions contemplated hereby, to the extent so
attributable.
Section 8.10 Effectiveness of Registration Statement. The Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC, and no proceeding
shall have been initiated or threatened in writing by the SEC for the purpose of
seeking or obtaining such a stop order.
Section 8.11 Listing. The shares of Spacetec Stock comprising the Merger
Consideration shall have been approved for listing (subject to notice of
issuance) on the Nasdaq Stock Market's National Market.
Section 8.12 Due Diligence. Labtec shall have completed and be satisfied,
in its sole discretion, with the results of its due diligence investigation with
respect to the business and operations of the Spacetec Corporations.
Section 8.13 Charter Amendments. Parent shall have effected each of the
Charter Amendments.
Section 8.14 Parent Restructuring. Parent shall have consummated the
Parent Restructuring immediately following the Effective Time.
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ARTICLE IX
ADDITIONAL COVENANTS
Section 9.1 Acquisition Proposals.
(a) Parent and its subsidiaries will not, and will use their best efforts
to cause their respective directors, officers, employees, financial advisors,
legal counsel, accountants and other agents and representatives (for purposes of
this Section 9.1 only, being referred to as "affiliates") not to, initiate,
solicit or encourage, directly or indirectly, or take any other action to
facilitate any inquiries or the making of any proposal with respect to, engage
or participate in negotiations concerning, provide any non-public information or
data to, or have any discussions with any person other than Labtec or its
affiliates relating to, any acquisition, tender offer (including a self-tender
offer), exchange offer, merger, consolidation, acquisition of beneficial
ownership of or the right to vote securities representing 10% or more of the
total voting power of Parent or any of its subsidiaries, dissolution, business
combination, purchase of all or any significant portion of the assets (other
than sales of assets and inventory in the ordinary course of business) or any
division of, or any equity interest in, Parent or any subsidiary, or similar
transaction other than the Merger (such proposals, announcements or transactions
being referred to as "Acquisition Proposals"); provided, however, that nothing
contained in this Agreement shall prohibit the Board of Directors of Parent from
(i) furnishing information to, or engaging in discussions or negotiations with,
any person in response to an unsolicited bona fide written Acquisition Proposal;
or (ii) recommending such an unsolicited bona fide written Acquisition Proposal
to the shareholders of Parent, if and only to the extent that (w) the Board of
Directors of Parent concludes in good faith (after consultation with its
financial advisors) that such Acquisition Proposal would constitute a Superior
Proposal, and (x) the Board of Directors of Parent determines in good faith
(after consultation with outside legal counsel) that the failure to take such
action would result in a breach by the Board of Directors of Parent of its
fiduciary duties to Parent's shareholders under applicable law, and (y) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person Parent provides prompt written notice to Labtec to the effect
that it is furnishing information to, or entering into discussions or
negotiations with, such person (which notice shall identify the nature and
material terms of the proposal), and (z) prior to providing any information or
data to any person in connection with an Acquisition Proposal by any such
person, the Board of Directors of Parent receives from such person an executed
confidentiality agreement with provisions no less favorable to Parent than the
Confidentiality Agreement. Parent agrees that it will immediately cease and
cause to be terminated any existing activities, discussions, or negotiations
with any parties regarding any Acquisition Proposal existing as of October 21,
1998. Parent agrees to keep Labtec fully and timely informed of the status of
any discussions, negotiations, furnishing of information, or other activities
relating to an Acquisition Proposal.
(b) For purposes of this Agreement, a "Superior Proposal" means a bona fide
Acquisition Proposal made by a third person that the Board of Directors of
Parent determines in its good faith judgment (after consultation with the
independent financial advisor of Parent) to be superior to Parent's shareholders
from a financial point of view, and to be more favorable generally to Parent's
shareholders (taking into account all financial and strategic considerations,
including relevant legal, financial, regulatory and other aspects of such
proposal, and the conditions to and prospects for completion of such proposal)
than the Merger.
(c) Nothing contained in this Section 9.1 shall prohibit Parent from taking
and disclosing to its shareholders a position contemplated by Rule 14e-2
promulgated under the Exchange Act or from making any disclosure to Parent's
shareholders which, in the good faith judgment of the Board of Directors of
Parent after consultation with outside counsel, is required under applicable
law; provided that Parent does not withdraw or modify, or propose to withdraw or
modify, its position with respect to the Merger or
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approve or recommend, or propose to approve or recommend, an Acquisition
Proposal unless Parent and its Board of Directors have complied with all the
provisions of this Section 9.1.
Section 9.2 Proxy Statement/Prospectus; Registration Statement.
(a) Parent shall promptly prepare and file a Registration Statement under
the Securities Act for the purpose of registering the offering and issuance of
shares of Spacetec Stock comprising the Merger Consideration, including, without
limitation, the maximum number of Contingent Shares issuable pursuant to Section
1.7 hereof (the "Registration Statement"). Parent shall promptly prepare and
file a Proxy Statement (the "Proxy Statement") for the purpose of obtaining the
approval of the Parent's stockholders of the proposals described in Section
9.3(b) hereof (the "Parent Proposals"). The Proxy Statement shall be included in
the Registration Statement as the prospectus. Parent and Newco, on the one hand,
and Labtec, on the other hand shall:
(i) provide promptly to the other such information concerning its
business, financial condition and affairs as may be required or appropriate
for inclusion in the Registration Statement or the Proxy Statement;
(ii) cause its counsel and auditors to cooperate with the other's
counsel and auditors in the preparation of the Registration Statement and
the Proxy Statement; and
(iii) promptly advise the other if at any time prior to the Effective
Time it should obtain knowledge of any fact that might make it necessary or
appropriate to amend or supplement the Registration Statement or the Proxy
Statement. No amendment or supplement to the Proxy Statement will be made
by Parent without the approval of Labtec, which approval shall not be
unreasonably withheld or delayed.
(b) Parent shall make all filings and take all actions that may be
necessary, proper or advisable under federal and state securities laws, rules
and regulations in connection with the offering and issuance of the Merger
Consideration.
(c) In addition, Parent shall:
(i) use its best efforts to have the Proxy Statement cleared by the
SEC under the Exchange Act and the Registration Statement declared
effective by the SEC under the Securities Act as soon after filing as may
be practicable; and
(ii) advise Labtec, promptly after it receives notice thereof, of: (A)
any requests by the SEC for additional information or amendment of the
Proxy Statement or the Registration Statement or comments thereon or
responses thereto; (B) the time when the Registration Statement has become
effective or any supplement or amendment thereto has been filed; and (C)
the issuance of any stop order or the suspension of qualification of the
shares of Spacetec Stock issuable in connection with the Merger for
offering or sale in any jurisdiction.
(d) The information supplied by Labtec for inclusion in the Registration
Statement and the Proxy Statement shall not, at (i) the time the Registration
Statement is filed, amended, supplemented or declared effective, (ii) the time
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to the shareholders of Parent, (iii) the time of the Shareholder Meeting,
and (iv) the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
(e) The information supplied by Parent for inclusion in the Registration
Statement and the Proxy Statement shall not, at (i) the time the Registration
Statement is filed, amended, supplemented or
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declared effective, (ii) the time the Proxy Statement (or any amendment thereof
or supplement thereto) is first mailed to the shareholders of Parent, (iii) the
time of the Shareholder Meeting, and (iv) the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. All
documents that Parent is responsible for filing with the SEC in connection with
the transactions contemplated herein will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(f) The Proxy Statement shall include the recommendation of the Board of
Directors of Parent that the shareholders of Parent approve the Parent Proposals
and the conclusion of the Board of Directors that the terms and conditions of
the Merger are fair and reasonable to the shareholders of Parent. Such Board of
Directors may withdraw or modify its recommendation if and only to the extent
set forth in the proviso to Section 9.1(a) hereof. No modification or withdrawal
of such recommendation shall relieve Parent of its obligation to submit this
Agreement and the transactions contemplated hereby to its stockholders in
accordance with applicable law.
Section 9.3 Shareholder Approvals. Parent, acting through its Board of
Directors, shall, in accordance with applicable law and its charter and by-laws:
(a) cause the definitive Proxy Statement to be mailed to its shareholders
as promptly as practicable after its approval by the Securities and Exchange
Commission (the "SEC"); and
(b) within five (5) business days after approval of the Proxy Statement by
the SEC, call a special meeting of its shareholders (the "Shareholder Meeting")
to be held not later than 45 days after the calling of such meeting, for the
purpose of the approval of (i) the amendment of the Articles of Organization of
Parent (A) prior to the Effective Time, to change the name of Parent to "Labtec
Inc.", (B) prior to the Effective Time, to increase, from 20,000,000 to
25,000,000, the number of shares of Spacetec Stock authorized for issuance, and
(C) immediately following the Effective Time and the issuance of the shares of
Spacetec Stock to Labtec's shareholders to effect a one-for-three reverse stock
split (the "Reverse Stock Split") of all shares of Spacetec Stock then
outstanding (collectively, the "Charter Amendments"), (ii) the issuance of the
shares of Spacetec Stock comprising the Merger Consideration to Labtec's
shareholders upon the terms and conditions set forth in this Agreement and (iii)
the election to Parent's Board of Directors of the four (4) nominees designated
by Spacetec and the eight (8) nominees designated by Labtec, in each case to
their respective Classes as so designated in accordance with Section 1.4 hereof.
Section 9.4 Agreement of Parent Shareholders. Parent shall use its best
efforts to cause (a) each of Dennis Gain, Gain NZ Trust, Gain Family Trust,
Matthew Gain, Grant Jagelman, Rhetford, Dianna Jagelman and Group Superannuation
Fund (collectively, the "Principal Parent Shareholders") to comply with the
covenants and agreements contained in the Voting Agreement and Irrevocable Proxy
of even date herewith between such Principal Parent Stockholder and Labtec, and
(b) each of the Other Parent Shareholders to comply with the covenants and
agreements contained in the Voting Agreement and Irrevocable Proxy to which they
may in the future become a party (each, a "Voting Agreement").
Section 9.5 Listing. Parent shall use its reasonable best efforts to list
on the Nasdaq Stock Market's National Market, upon official notice of issuance,
the Spacetec Stock to be issued as Merger Consideration pursuant to the Merger
and the shares of Parent Stock to be reserved for issuance upon exercise of
Labtec Stock Options.
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ARTICLE X
TERMINATION OF AGREEMENT
Section 10.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time as follows and in no other manner:
(a) by mutual consent of Parent, Newco and Labtec;
(b) by Parent and Newco or Labtec, upon the issuance by a court of
competent jurisdiction or other governmental body of an order, decree or ruling
or their taking of any other action restraining, enjoining or otherwise
prohibiting the Merger, which order, decree, ruling or any other action shall
have become final and non-appealable;
(c) by Parent and Newco or by Labtec, if the Closing shall not have
occurred on or before March 31, 1999, or such later date as may have been agreed
upon by the parties hereto; provided, however, that no termination may be made
under this provision if the failure to close shall be caused by the action or
inaction of the terminating party;
(d) by Parent and Newco, upon a breach of any covenant or agreement on the
part of Labtec set forth in this Agreement, or if any representation or warranty
of Labtec shall have become untrue, in either case such that the condition set
forth in Section 7.2 hereof would not be satisfied (a "Terminating Labtec
Breach"); provided that, if such Terminating Labtec Breach is curable by Labtec
through the exercise of reasonable efforts and for so long as Labtec continues
to exercise such reasonable efforts, Parent and Newco may not terminate this
Agreement under this Section 10.1(d);
(e) by Labtec, upon a breach of any covenant or agreement on the part of
Parent or Newco set forth in this Agreement, or if any representation or
warranty of Parent or Newco shall have become untrue, in either case such that
the condition set forth in Section 8.2 hereof would not be satisfied (a
"Terminating Parent Breach"); provided that, if such Terminating Parent Breach
is curable by Parent and Newco through the exercise of their reasonable efforts
and for so long as Parent and Newco continue to exercise such reasonable
efforts, Labtec may not terminate this Agreement under this Section 10.1(e);
(f) by Labtec, if any of the Principal Parent Shareholders or the Other
Parent Shareholders shall have breached, in any material respect, any
representation or warranty made, or defaulted, in any material respect, in any
covenant or agreement contained, in the Voting Agreement to which it is a party;
(g) by Labtec, if (i) the Board of Directors of Parent withdraws or
modifies its recommendation of this Agreement or the Merger in a manner adverse
to Labtec or shall have publicly announced its intention to do any of the
foregoing or the Board of Directors of Parent shall have recommended to the
shareholders of Parent any Acquisition Proposal or resolved to do so, or (ii) a
tender offer or exchange offer for 20% or more of the outstanding shares of
Spacetec Stock is commenced or a registration statement with respect thereto
shall have been filed and the Board of Directors of Parent, within ten (10)
business days after such tender offer or exchange offer is so commenced, either
fails to recommend against acceptance of such tender or exchange offer by its
shareholders or takes no position with respect to the acceptance of such tender
or exchange offer by its shareholders;
(h) by Parent and Newco, if the Board of Directors of Parent shall have
determined to recommend an Acquisition Proposal to its shareholders after
determining, pursuant to Section 9.1, that such Acquisition Proposal constitutes
a Superior Proposal, and Parent and Newco give Labtec at least three (3)
business days prior notice of their intention to effect such termination
pursuant to this Section 10.1(h), and Parent makes the payments required
pursuant to Section 10.2(b) hereof;
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(i) by Parent and Newco or Labtec, if the required approval of the
shareholders of Parent contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the requisite vote upon a vote taken
at a meeting of shareholders convened therefor or at any adjournment thereof;
provided that the right of Parent and Newco to terminate this Agreement pursuant
to this Section 10.1(i) shall not be available to Parent and Newco in the event
that either Parent or Newco has not complied with its obligations under Section
9.1 hereof;
(j) by Labtec, if the Board of Directors of Parent shall have engaged in
discussions or negotiations with any person in connection with an Acquisition
Proposal as permitted under the proviso contained in Section 9.1(a) hereof and
such discussions or negotiations shall not have been definitively terminated
within sixty (60) days following the date of Parent's initial receipt of such
Acquisition Proposal;
(k) by Labtec, on or before November 4, 1998, in the event that Labtec
shall not have been satisfied, in its sole discretion, with the results of its
due diligence investigation with respect to the business and operations of the
Spacetec Corporations; or
(l) by Parent and Newco, on or before November 4, 1998, in the event that
Parent and Newco shall not have been satisfied, in their sole discretion, with
the results of their due diligence investigation with respect to the business
and operations of the Labtec Corporations.
Section 10.2 Liability of the Parties.
(a) In the event that this Agreement is terminated (i) pursuant to Section
10.1(d) or 10.1(e) hereof, Parent and Newco or Labtec, whichever shall have made
such a misstatement or so defaulted, or (ii) pursuant to Section 10.1(f) hereof,
Parent and Newco, shall be liable to reimburse the terminating party for all
legal, accounting, printing and other out-of-pocket fees and expenses incurred
by the terminating party or parties (including, in the case of Parent and Newco,
the amount of the Initial Expense Reimbursement) in connection with this
Agreement and the transactions contemplated hereby ("Expenses").
(b) In the event that this Agreement is terminated (i) by Labtec pursuant
to Section 10.1(g) or 10.1(j) hereof, (ii) by Parent and Newco pursuant to
Section 10.1(h) hereof, or (iii) by either Parent and Newco or Labtec pursuant
to Section 10.1(i) hereof, Parent shall pay to Labtec a termination fee (the
"Parent Initial Termination Fee"), in cash, in the amount of $300,000, plus the
Expenses of Labtec, within one (1) business day after such termination. In the
event that (y) this Agreement is terminated in a manner which results in the
payment of the Parent Initial Termination Fee and (z) an Acquisition Proposal
involving Parent is thereafter consummated, or Parent enters into a definitive
agreement with respect to an Acquisition Proposal, within twelve (12) months
after the later of the termination of this Agreement or the payment of the
Parent Initial Termination Fee, Parent shall pay to Labtec an additional fee
(the "Parent Additional Termination Fee"), in cash, at or prior to the
consummation of such Acquisition Proposal, or within one (1) business day
following the effective date of such definitive agreement, whichever is earlier,
in an amount equal to 5% of the amount by which (I) the total value of all
consideration to be received by Parent, any Spacetec Subsidiary and Parent's
shareholders pursuant to the Acquisition Proposal exceeds (II) the total value
of all outstanding shares of Spacetec Stock (including the value of any other
classes of capital stock of Spacetec then outstanding) based on its closing
price per share on October 20, 1998 of $1.375. The value of such Parent
securities or the value of such securities or other consideration to be received
by Parent, any Spacetec Subsidiary and Parent's shareholders pursuant to the
Acquisition Proposal shall be determined as of the date of the receipt thereof.
If Parent and Labtec cannot, within fifteen (15) days of receipt of such
securities or other consideration, agree as to its value, Parent and Labtec will
submit their respective valuations of such securities to a mutually agreed upon
third-party appraiser who will either select one of the submitted valuations or
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establish a valuation within the range of the submitted valuations, which
selection or establishment of a valuation shall be binding on the parties
hereto. All costs of the third-party appraiser shall be shared equally by Parent
and Labtec.
(c) In the event that this Agreement is terminated for any reason, any
amounts that are payable by Parent and Newco to Labtec pursuant to this Section
10.2 shall be reduced by the amount of Initial Expense Reimbursement.
(d) In no event shall Parent be required to pay any termination fee to
Labtec if, immediately prior to the applicable termination of this Agreement,
Labtec was in material breach of any of its obligations under this Agreement.
(e) If one party fails to promptly pay to the other any fee or expense due
hereunder, the defaulting party shall pay the costs and expenses (including,
without limitation, reasonable legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee or
expense at the publicly announced prime rate of Citibank, N.A. from the date
such fee was required to be paid.
(f) Any payment required to be made pursuant to Section 10.2 of this
Agreement shall be made by wire transfer of immediately available funds to an
account designated by the party entitled to receive payment.
(g) The remedies provided by this Section 10.2 are non-exclusive, and each
party hereto shall not be prohibited from seeking such other equitable or legal
remedies to which it may be entitled.
Section 10.3 Effect of Termination. Notwithstanding anything to the
contrary contained herein, the last sentence of Sections 5.13 and 6.13, Sections
10.2 and 10.3 and the applicable Sections of Article XII hereof shall survive
any termination hereof.
ARTICLE XI
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Section 11.1 Survival of Representatives and Warranties. The
representations and warranties of each of the parties hereto contained in this
Agreement, or in any document delivered pursuant to the provisions of, or in
connection with, this Agreement shall survive the making of this Agreement and
any examination made by or on behalf of the parties hereto but shall terminate
upon the Closing and Merger hereunder.
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ARTICLE XII
MISCELLANEOUS
Section 12.1 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or mailed by certified or registered mail, postage prepaid,
addressed as follows:
If to Parent or Newco:
Spacetec IMC Corporation
The Boott Mill
100 Foot of John Street
Lowell, Massachusetts 01852-1126
Attention: President
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, Massachusetts 02110
Attention: John M. Hession, Esq.
If to Labtec:
Labtec Inc.
1499 Southeast Tech Center Drive
Vancouver, Washington 98683
Attention: President
with copies to:
Sun Capital Partners, Inc.
777 South Flagler Drive
West Tower, Eighth Floor
West Palm Beach, Florida 33401
Attention: Marc J. Leder and Rodger R. Krouse
and
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: Mark S. Hirsch, Esq.
Section 12.2 Assignability and Parties in Interest. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assignable by any of the parties hereto without the prior written consent of the
other party, and any purported assignment in contravention of this clause shall
be void. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors; nothing in this Agreement is
intended to confer, expressly or by implication, upon any other person any
rights or remedies under or by reason of this Agreement.
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Section 12.3 Governing Law. This Agreement and all amendments thereof
shall be governed by, and construed and enforced in accordance with, the laws of
the State of New York applicable to contracts made and to be performed therein.
Section 12.4 Counterparts. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original.
Section 12.5 Best Efforts. The parties hereto agree to use their
respective best efforts and to cooperate with each other to bring about the
transactions contemplated by this Agreement as soon as practicable, unless
theretofore terminated as herein provided.
Section 12.6 Publicity. The parties hereto agree that the timing and
content of press releases and other public announcements with respect to the
Merger shall be subject to mutual agreement.
Section 12.7 Complete Agreement. This Agreement, the Disclosure
Statement, the Exhibits hereto, the Confidentiality Agreement and the documents
delivered pursuant hereto or referred to herein contain the entire agreement
between the parties hereto with respect to the transactions contemplated herein
and therein and, except as provided herein, supersede all previous negotiations,
commitments and writings.
Section 12.8 Modifications, Amendments and Waivers. At any time prior to
the Effective Time, the parties hereto may, by written agreement:
(a) extend the time for the performance of any of the obligations or other
acts of the parties hereto;
(b) waive any inaccuracies in the representations and warranties contained
in this Agreement (including the Exhibits hereto), the Disclosure Statement or
in any document delivered pursuant hereto or in connection with the transactions
contemplated hereby; and
(c) waive compliance with any of the covenants or agreements contained in
this Agreement.
Section 12.9 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 12.10 Interpretation. The parties acknowledge and agree that each
party and its counsel have reviewed and negotiated the terms and provisions of
this Agreement and have contributed to their revision; the normal rule of
construction, to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of it; and its terms
and provisions shall be construed fairly as to all parties hereto and not in
favor of or against any party, regardless of which party was generally
responsible for the preparation of this Agreement.
Section 12.11 Knowledge. As used in this Agreement, the term "knowledge,"
"to the knowledge of," or similar phrases with respect to Parent, Newco or
Labtec means the actual knowledge of such party's directors and executive
officers.
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<PAGE> 207
IN WITNESS WHEREOF, Parent, Newco and Labtec have caused this Agreement to
be duly executed as of the date first above written.
LABTEC INC.
By: /s/ MARC LEDER
------------------------------------
Name:
Title:
SPACETEC IMC CORPORATION
By: /s/ GEORGE REA
------------------------------------
Name:
Title:
SIMC ACQUISITION CORPORATION
By: /s/ GEORGE REA
------------------------------------
Name:
Title:
A-36
<PAGE> 208
EXHIBIT A
Example of Valuation Adjustment and Determination of Contingent Shares Amount
$6,000,000 Business for 16.53% = "Agreed Valuation Base"
Contingent Valuation Adjustment mechanism based on $6,000,000 Valuation
Guarantee with respect to the Business (plus the consolidated net income or
minus the consolidated net loss of Parent, excluding the Labtec Corporations
(determined in accordance with GAAP), after taxes at an estimated 38% combined
rate, but excluding any interest expense, from October 1, 1998 through the
Valuation Date)
- In the event that the Valuation or the value of the Sale is $6,000,000 or
greater, then no Contingent Shares shall be issued by Parent.
- In the event that the Valuation Guarantee is less than $6,000,000, then,
for every dollar that the Valuation Guarantee is less than $6,000,000,
each holder of shares of Labtec Stock that are outstanding immediately
prior to the Effective Time shall be issued additional shares of Spacetec
Stock based on the Agreed Valuation Base of $6,000,000 for 16.53% of the
outstanding shares of Spacetec Stock. Note: Total shares outstanding for
the Agreed Valuation Base should be 20,710,947(1)(which is 13,863,954
shares due to Labtec shareholders and 6,846,993 shares currently held by
Spacetec shareholders).
- Therefore, since the Agreed Valuation Base is $6,000,000 for the
equivalent interest of 16.53% of pro forma October 1, 1998 shares of
Spacetec Stock issued and outstanding, or .000002755% per $1 of value
(16.53% / $6,000,000), the holders of shares of Labtec Stock that are
outstanding immediately prior to the Effective Time shall be issued
Contingent Shares for every dollar of the amount of the Contingent
Valuation Adjustment in order to increase their percentage of total
outstanding shares of Spacetec Stock pro forma as of October 1, 1998 by
.000002755/$1 ("% Factor per Dollar"), subject to the Limitation Amount.
This is illustrated by the following example, based upon a $500,000
Contingent Valuation Adjustment:
- ---------------
(1) All numerical references in this Exhibit A to actual numbers of shares of
Spacetec Stock are before giving effect to the Reverse Stock Split.
A-37
<PAGE> 209
<TABLE>
<S> <C> <C> <C> <C> <C>
STEP #1: "Dollar shortfall" X "% Factor per Dollar" = % of Additional Outstanding
Shares Due Labtec S/H
("Incremental %")
---------------------- --------------------------- ---------------------------
$500,000 X .000002755 = 1.3775%
STEP #2: Incremental % + Old % shares held by Labtec = New % of total shares to be
held by Labtec
---------------------- --------------------------- ---------------------------
1.3775% + 66.9402225% = 68.3177225%
(13,863,954 / 20,710,947)
STEP #3: 100% - "New Labtec %" = "New Spacetec %"
---------------------- --------------------------- ---------------------------
100% - 68.3177225% = 31.6822775%
STEP #4: "Incremental %" = "Gross Up %" + 1
---------------------
"New Spacetec %"
---------------------- --------------------------- ---------------------------
1.3775% = .04347856621 + 1 = 1.04347856621
-------------
31.6822775%
STEP #5: "Old Base Shares X "Gross Up %" = "New Gross Outstanding
Outstanding" Shares"
---------------------- --------------------------- ---------------------------
20,710,947 X 1.04347856621 = 21,611,429
STEP #6: "New Gross Outstanding - "Old Base Shares = "Contingent Shares due
Shares" Outstanding" Labtec"
---------------------- --------------------------- ---------------------------
21,611,429 - 20,710,947 = 900,482
PROOF: "Contingent Shares due Labtec" + "Old Labtec Shares" = "New Labtec %"
--------------------------------------------------------
"New Gross Shares Outstanding"
-------------------------------------------------------- ---------------------------
900,482 + 13,863,954 = 14,764,436 = 68.317722%
---------------------- -----------
21,611,429 21,611,429
</TABLE>
<TABLE>
<CAPTION>
New Gross Shares Labtec 68.31772%
FINAL SHARE Outstanding Spacetec 31.682278%
ALLOCATION: ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
21,611,429 X 68.317722% = 14,764,436 (LABTEC)
X 31.682278% = 6,846,993 (SPACETEC)
----------
21,611,429
==========
</TABLE>
A-38
<PAGE> 210
EXHIBIT B
CERTIFICATE OF MERGER
OF
SIMC ACQUISITION CORPORATION
INTO
LABTEC INC.
(UNDER SECTION 251 OF THE GENERAL CORPORATION LAW)
It is hereby certified that:
1. The name and state of incorporation of each of the constituent
corporations participating in the merger herein certified are as follows:
(i) SIMC Acquisition Corporation, which is incorporated under the laws
of the State of Delaware ("SIMC"); and
(ii) Labtec Inc., which is incorporated under the laws of the State of
Delaware ("Labtec").
2. An Agreement and Plan of Merger has been approved, adopted, certified,
executed, and acknowledged by each of the aforesaid constituent corporations in
accordance with the provisions of subsection (c) of Section 251 of the General
Corporation Law of the State of Delaware.
3. The name of the surviving corporation in the merger herein certified is
Labtec Inc., which will continue its existence as said surviving corporation
upon the effective time of said merger pursuant to the provisions of the General
Corporation Law of the State of Delaware.
4. The Certificate of Incorporation of Labtec, as now in force and effect,
shall continue to be the Certificate of Incorporation of said surviving
corporation until amended pursuant to the provisions of the General Corporation
Law of the State of Delaware, except that, at the effective time of the merger,
said surviving corporation's name shall be changed to "Labtec Corporation".
5. The executed Agreement and Plan of Merger between the aforesaid
constituent corporations is on file at the principal place of business of the
aforesaid surviving corporation, the address of which is as follows:
Labtec Inc.
1499 SE Tech Center Drive
Suite 350
Vancouver, WA 98683
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<PAGE> 211
6. A copy of the aforesaid Agreement and Plan of Merger will be furnished
by the aforesaid surviving corporation, on request, and without cost, to any
stockholder of each of the aforesaid constituent corporations.
Dated:
SIMC ACQUISITION CORPORATION
By:
------------------------------------
Name:
Title:
Dated:
LABTEC INC.
By:
------------------------------------
Name:
Title:
A-40
<PAGE> 212
ANNEX B
OPINION OF ADVEST, INC
The Board of Directors
Spacetec IMC Corporation
100 Foot of John Street
Lowell, MA 01854
Members of the Board:
SIMC Acquisition Corporation ("Newco"), a newly-formed subsidiary of
Spacetec Corporation ("Spacetec") and Spacetec are expected to enter into a
definitive agreement (the "Agreement") with Labtec, Inc. ("Labtec") to effect a
merger (the "Merger") pursuant to which Labtec will become a wholly-owned
subsidiary of Spacetec. Pursuant to such Merger, the capital stock of Labtec
cancelled simultaneously upon receipt of Spacetec shares (as detailed below),
and the stock of Newco converted into shares of Labtec (the "Surviving Company"
or the "Combined Company"). Pursuant to the draft of the Agreement dated October
18, 1998, Spacetec will issue sufficient shares to the shareholders of Labtec
such that following the Merger all Spacetec shares outstanding immediately prior
to the Merger will represent approximately 33.97% of the outstanding common
shares of the Combined Company or 33.15% of the shares of the Combined Company
after giving affect to the exercise or conversion of all options and warrants
that are both "in the money" and vested at the time of the Merger.
Pursuant to the Agreement, the shareholders of Labtec will have the right
to receive additional shares of the Combined Company (the "Contingent Shares")
should the value of Spacetec's line of business involved in the sale of products
used in the Industrial Business (as defined in the Agreement, including
computer-aided-design, computer-aided-manufacturing and
computer-aided-engineering ) be determined to be less than $6 million.
Specifically, Section 1.7 of the Agreement outlines a process (the "Valuation
Process") by which the Industrial Business will be appraised and, if necessary,
sold to determine its value. To the extent that the Valuation Process determines
the value of the Industrial Business to be below $6 million, additional shares
will be issued to the Labtec shareholders under a formula set out in the
Agreement so that the ownership percentage of the shareholders of Spacetec prior
to the Merger ("Existing Shareholders") could fall to a minimum of 21% of the
outstanding shares of the Combined Company (the "Minimum Percentage"). For
purposes of this opinion, Existing Shareholders is defined to include any
shareholders that may purchase shares in the aftermarket following the Merger
and whose ownership percentage would be diluted as a result of the Contingent
Shares as well as any holder, at the time of the Merger, of vested,
"in-the-money" options to purchase Spacetec shares.
You have asked us whether, in our opinion, the financial terms of the
Merger, taken as a whole, are fair from a financial point of view, to the
shareholders of Spacetec.
In connection with this opinion, Advest has, among other matters, reviewed
and analyzed publicly available information as of the date of this letter
including, but not limited to: (i) annual and quarterly reports on SEC Form 10-K
and 10-Q of Spacetec for the three years ended March 31, 1998 and interim period
ended June 30, 1998; as well as audited financial statements of Labtec for the
same time periods (ii) business and financial information regarding companies
similar to the Combined Company, including the pricing of these comparable
companies' publicly traded securities; (iii) the pricing and financial terms of
business combinations recently effected involving companies similar to the
Combined Company; and (iv) such other publicly available information, financial
studies, analyses, investigations and market data as deemed relevant. In
addition, Advest also reviewed, analyzed and discussed other information
furnished by Spacetec and Labtec and their advisors, including: (i) the draft
Agreement and Plan of Merger dated
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<PAGE> 213
October 20, 1998; (ii) certain internal and pro-forma financial statements,
projections and other unaudited financial and operating data concerning Spacetec
and Labtec; and (iii) presentation and marketing materials from Spacetec and
Labtec.
We express no opinion as to what the value of the stock of Combined Company
will be when the Merger is completed, nor do we express an opinion as to the
prices this security will trade subsequent to the Merger. Our opinion is
directed solely at the fairness from a financial point of view of the
consideration to be received in the Merger by current shareholders of Spacetec
common stock, and does not constitute a recommendation to any Spacetec
shareholder as to how such shareholder should vote at any Spacetec shareholders'
meeting. Advest was not asked to consider, and our opinion does not address, the
relative merits of the Merger as compared to any alternative business strategy
that might exist for Spacetec or the effect of any other business combination in
which Spacetec might engage. Advest was not retained to, and did not, solicit
third parties who might be interested in entering into a business combination
with Spacetec.
Spacetec has agreed to pay Advest a fee for delivery of this opinion letter
as well as other advisory services rendered in connection with the Merger.
Advest has provided certain investment banking services to Spacetec in the past
and has received fees for rendering these services. This opinion is necessarily
based on economic, market and other conditions as they exist and can be
evaluated by us as of the date of this letter.
Our opinion expressed herein is provided for the information of the Board
of Directors of Spacetec in its evaluation of the Merger. We understand and
consent that our opinion will be filed with the Securities and Exchange
Commission and may be included with proxy materials mailed to shareholders of
Spacetec. Any other use or publication of all or part of this opinion must be
granted by written consent of Advest.
Our opinion is subject to the following contingent and limiting conditions:
(i) information, estimates, and opinions supporting this opinion were obtained
from sources which we have not verified; (ii) Spacetec and Labtec and their
respective representatives have warranted to Advest that the information
supplied to Advest was complete, accurate and not misleading to the best of
their knowledge and that this opinion will be used only in compliance with all
applicable laws and regulations; (iv) this opinion applies to this situation
only, and may not be used out of the context presented herein; (v) we have not
prepared or obtained any independent valuation or appraisal of any of the assets
of the Spacetec or Labtec, nor have we conducted a complete physical inspection
of properties and facilities of Spacetec or Labtec; (vi) our opinion is
necessarily based upon conditions as they existed and could be evaluated as of
the date of this letter.
In reliance upon and subject to the foregoing, it is our opinion that, as
of the date hereof, should the Existing Shareholders receive at least the
Minimum Percentage, such consideration would be fair, from a financial point of
view to the Existing Shareholders.
Very truly yours,
Advest, Inc.
B-2
<PAGE> 214
ANNEX C
SPACETEC IMC CORPORATION
PAYMENT OF THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF SUBORDINATION SET
FORTH HEREIN.
UNSECURED SUBORDINATED PROMISSORY NOTE
$1,065,000 , 1999
FOR VALUE RECEIVED, SPACETEC IMC CORPORATION, a Massachusetts corporation
(the "Company"), hereby promises to pay to the order of (or the
then current endorsee and holder of this Note, the "Collection Agent" or
"Subordinated Lender") on , 2005, unless sooner
payable as provided herein, and thereafter on demand, the principal amount of
ONE MILLION SIXTY-FIVE THOUSAND DOLLARS ($1,065,000), plus interest on the
unpaid principal balance thereof outstanding from time to time, from and
including the date hereof until such principal balance is repaid in full, at a
rate equal to ten percent (10%) per annum. Interest hereunder shall be payable
by the Company in arrears on 1st, 1st, 1st and
1st of each year, commencing 1, 1999, at maturity (whether
by acceleration or otherwise) and upon the making of any prepayment, as
hereinafter provided. This Note may be prepaid in whole or in part, at any time
or from time to time, without premium or penalty. Any prepayment of this Note
shall be accompanied by payment in full of all accrued but unpaid interest on
the amount prepaid to the date of prepayment. Interest shall be calculated on
the basis of actual number of days elapsed over a year of 360 days.
Notwithstanding any other provision of this Note, the Subordinated Lender does
not intend to charge and the Company shall not be required to pay any interest
or other fees or charges in excess of the maximum permitted by applicable law;
any payments in excess of such maximum shall be refunded to the Company. All
payments received by the Collection Agent hereunder will be applied first to
costs of collection, if any, then to interest and the balance to principal. The
payment of principal and interest will be made by check in immediately available
United States funds sent to the Collection Agent at the address in paragraph 6
or any other address provided by the Collection Agent for such purpose.
Notwithstanding the foregoing, to the extent at any time then required pursuant
to the terms of any Institutional Indebtedness (as defined below), the payment
of interest by the Company shall be made through the issuance to the Collection
Agent of an additional promissory note containing substantially the same terms
and conditions of this Note in a principal amount equal to the amount of
interest then required to be so paid.
1. Subordination of Principal and Interest. The Subordinated Lender
agrees that the payment of principal, interest and all other charges with
respect to the Note is expressly subordinated, in the manner hereinafter set
forth, in right of payment to the prior payment and satisfaction in full of the
Institutional Indebtedness at any time outstanding.
(a) Payment of Institutional Indebtedness. In the event of any insolvency
or bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relative to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or distribution or marshaling of
its assets or any composition with creditors of the Company, whether or not
involving insolvency or bankruptcy, then and in any such event all Institutional
Indebtedness shall be paid in full in cash or cash equivalents before any
payment or distribution of any character, whether in cash, securities or other
property, shall be made on account of this Note; and any such payment or
distribution, except securities which are unsecured and subordinated and junior
in right of payment to the same extent as this Note to the payment of all
Institutional Indebtedness then outstanding, which would, but for the provisions
hereof, be payable or
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<PAGE> 215
deliverable in respect of this Note shall be paid or delivered directly to the
holders of Institutional Indebtedness (or their duly authorized
representatives), in the proportions in which they hold the same, until all
Institutional Indebtedness shall have been paid in full, and every holder of
this Note by becoming a holder thereof shall have designated and appointed the
holder or holders of Institutional Indebtedness (and their duly authorized
representatives) as his or its agents and attorney-in-fact to demand, sue for,
collect and receive such Institutional Indebtedness holder's ratable share of
all such payments and distributions and to file any necessary proof of claim
therefor and to take all such other action (including the right to vote such
Institutional Indebtedness holder's ratable share of this Note), in the name of
the holder of this Note or otherwise, as such Institutional Indebtedness holders
(or their authorized representatives) may determine to be necessary or
appropriate for the enforcement of this Section 1. The Collection Agent, and
each successor holder of this Note by its or his acceptance thereof, agrees to
execute, at the request of the Company, a separate agreement with any holder of
Institutional Indebtedness on the terms set forth in this Section 1, and to take
all such other action as such holder or such holder's representative may request
in order to enable such holder to enforce all claims upon or in respect of such
holder's ratable share of this Note.
(b) No Payment on Note Under Certain Conditions. In the event that any
default occurs in the payment of the principal of or interest on any
Institutional Indebtedness (whether as a result of acceleration thereof by the
holders of such Institutional Indebtedness or otherwise) and during the
continuance of such default until such default has been cured or waived in
writing by such holder of Institutional Indebtedness, no payment of principal or
interest on this Note shall be made by the Company or accepted by any holder of
this Note who has received notice from the Company or from a holder of
Institutional Indebtedness of such event. In the event that any other default
occurs under any Institutional Indebtedness (whether as a result of acceleration
thereof by the holders of such Institutional Indebtedness or otherwise) for a
period (a "Blockage Period") of 180 days thereafter (or for such shorter period
until such default has been cured or waived in writing by such holders of
Institutional Indebtedness), no payment of principal or interest on this Note
shall be made by the Company or accepted by any holder of this Note who has
received notice from the Company or from a holder of Institutional Indebtedness
of such default; provided, however, that a Blockage Period may only be imposed
on the Company once during any twelve-month period.
(c) Payments Held in Trust. In case any payment or distribution shall be
paid or delivered to the Collection Agent before all Institutional Indebtedness
shall have been paid in full, despite or in violation or contravention of the
terms of this subordination, such payment or distribution shall be held in trust
for and paid and delivered ratably to the holders of Institutional Indebtedness
(or their duly authorized representatives), until all Institutional Indebtedness
shall have been paid in full.
(d) Subrogation. Subject to the payment in full of all Institutional
Indebtedness and until this Note shall be paid in full, the Collection Agent
shall be subrogated to the rights of the holders of Institutional Indebtedness
(to the extent of payments or distributions previously made to such holders of
Institutional Indebtedness pursuant to the provisions of subsections (a) and (c)
of this Section 1) to receive payments or distributions of assets of the Company
applicable to the Institutional Indebtedness. No such payments or distributions
applicable to the Institutional Indebtedness shall, as between the Company and
its creditors, other than the holders of Institutional Indebtedness and the
Collection Agent, be deemed to be a payment by the Company to or on account of
this Note; and for the purposes of such subrogation, no payments or
distributions to the holders of Institutional Indebtedness to which the holder
of this Note would be entitled except for the provisions of this Section 1
shall, as between the Company and its creditors, other than the holders of
Institutional Indebtedness and the Collection Agent, be deemed to be a payment
by the Company to or on account of the Institutional Indebtedness.
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<PAGE> 216
(e) Scope of Section. The provisions of this Section 1 are intended solely
for the purpose of defining the relative rights of the Collection Agent, on the
one hand, and the holders of the Institutional Indebtedness, on the other hand.
Nothing contained in this Section 1 or elsewhere in this Note is intended to or
shall impair, as between the Company, its creditors other than the holders of
Institutional Indebtedness, and the Collection Agent, the obligation of the
Company, which is unconditional and absolute, to pay to the Collection Agent the
principal of and interest on the Note as and when the same shall become due and
payable in accordance with the terms thereof, or to affect the relative rights
of the holder of this Note and creditors of the Company other than the holders
of the Institutional Indebtedness, or to benefit any other creditors of the
Company other than the holders of the Institutional Indebtedness, nor shall
anything herein or therein prevent the Collection Agent from accepting any
payment with respect to this Note or exercising all remedies otherwise permitted
by applicable law upon default under this Note, subject to the rights, if any,
under this Section 1 of the holders of Institutional Indebtedness in respect of
cash, property or securities of the Company received by the holder of this Note.
(f) Survival of Rights. The right of any present or future holder of
Institutional Indebtedness to enforce subordination of this Note pursuant to the
provisions of this Section 1 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such holder of
Institutional Indebtedness, including, without limitation, any forbearance,
waiver, consent, compromise, amendment, extension, renewal, or taking or release
of security of or in respect of any Institutional Indebtedness or by
noncompliance by the Company with the terms of such subordination regardless of
any knowledge thereof the holder may have or otherwise be charged with.
(g) Amendment or Waiver. The provisions of this Section 1 may not be
amended or waived in any manner which is detrimental to any Institutional
Indebtedness without the consent of the holders of a majority of the then
existing Institutional Indebtedness.
(h) Institutional Indebtedness Defined. The term "Institutional
Indebtedness" shall mean all indebtedness of the Company for money borrowed
(including interest thereon after commencement of any bankruptcy, insolvency or
similar proceeding relating to the Company, whether or not such interest would
accrue in such proceeding) from banks or other institutional lenders, including
any extension or renewals thereof, whether outstanding on the date hereof or
thereafter created or incurred, which is not by its terms expressly subordinate
and junior to or on a parity with this Note.
2. Events of Default. The outstanding principal and accrued interest on
this Note shall, at the option of the Collection Agent, become due and payable
without notice or demand, upon the happening of any one of the following
specified events:
(a) any default (whether in whole or in part) shall occur in the payment of
any amount payable under this Note which shall continue for a period of ten (10)
days;
(b) the making by the Company of a general assignment for the benefit of
creditors;
(c) the filing of any petition or the commencement of any proceeding by the
Company for any relief under any bankruptcy or insolvency laws, or any laws
relating to the relief of debtors, readjustment of indebtedness,
reorganizations, compositions, or extensions;
(d) the filing of any petition or the commencement of any proceeding
against the Company for any relief under any bankruptcy or insolvency laws, or
any laws relating to the relief of debtors, readjustment of indebtedness,
reorganizations, compositions, or extensions, which proceeding is not dismissed
within sixty (60) days;
C-3
<PAGE> 217
(e) a receiver, liquidator, assignee, trustee or custodian is appointed to
administer the affairs of the Company;
(f) except for the Company's transfer of its assets to a wholly-owned
subsidiary as contemplated in the Agreement, the Company dissolves, liquidates,
winds-up, or sells or otherwise disposes of all or substantially all of its
business or assets;
(g) a Change in Control of the Company;
(h) the Company sells or otherwise disposes of any of its assets not in the
ordinary course of business, pursuant to which sale the Company receives net
cash proceeds of at least $10,000,000; or
(i) the Company issues and sells any securities of the Company, pursuant to
which sale the Company receives net cash proceeds of at least $10,000,000.
Notwithstanding the foregoing, the Collection Agent shall not have the option to
have the outstanding principal and accrued interest on this Note become due and
payable upon the happening of any of the events specified in clauses (h) or (i)
above unless the holders of the Institutional Indebtedness shall have consented
thereto in writing. For purposes hereof, a "Change in Control" shall be deemed
to have occurred if: (i) any "person" or "group" (as such terms are used in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Act")), except for Sun Capital Partners, Inc., Bain Capital, Inc. and
their respective affiliates (the "Sun/Bain Group"), becomes a "beneficial owner"
(as such term is used in Rule 13d-3 promulgated under the Act), after the date
hereof, directly or indirectly, of securities of the Company representing more
than 25% of the combined voting power of the Company's then outstanding
securities; (ii) the members of the Company's Board of Directors who are
nominated by the Sun/Bain Group shall constitute fewer than a majority of all
members of the Company's Board of Directors; or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other company,
other than a merger or consolidation which would result in the combined voting
power of the Company's voting securities outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) 75% or more of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation.
3. Collection Agent; Distribution.
This Note is issued pursuant to and is entitled to the benefits of a
certain Agreement and Plan of Merger dated as of October 21, 1998, and as
amended and restated as of November 13, 1998, among Labtec Inc., a Delaware
corporation ("Labtec"), the Company and SIMC Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company (as the same may be
amended from time to time, referred to herein as the "Agreement"). The
Collection Agent hereby acknowledges that it is holding the Note on behalf of
and for the benefit of the holders of shares of common stock of Labtec at the
time of the Merger (as defined in the Agreement) (each, a "Labtec Stockholder").
The Collection Agent hereby further acknowledges that it shall be solely
responsible for distributing any payments received from the Company in respect
of this Note to the Labtec Stockholders on a pro rata basis and hereby agrees to
make such distributions.
4. Expenses of Collection. The Company shall pay or reimburse, upon
demand, any and all reasonable costs and expenses incurred by the Collection
Agent, whether directly or indirectly, in connection with the enforcement and
collection of this Note, including (without limitation) the reasonable
disbursements, expenses and fees of counsel to the Collection Agent.
5. Waiver. No waiver of any obligation of the Company under this Note
shall be effective unless it is in a writing signed by the Collection Agent. A
waiver by the Collection Agent of any right or remedy
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<PAGE> 218
under this Note on any occasion shall not be a bar to exercise of the same right
or remedy on any subsequent occasion or of any other right or remedy at any
time.
6. Notice. Any notice required or permitted under this Note shall be in
writing and shall be deemed to have been given on the date of delivery, if
personally delivered or sent by electronic facsimile transmission to the party
to whom notice is to be given, or on the next business day, if sent by overnight
courier service, or on the third business day after mailing, if mailed to the
party to whom notice is to be given, or on the next business, if sent by
overnight courier service, by first-class mail, postage prepaid, and addressed
as follows:
if to the Company, at
The Boott Mills
100 Foot of John Street
Lowell, Massachusetts 01852-1126
if to the Collection Agent, at
or, in each case, to the most recent address, specified by written notice, given
to the sender pursuant to this paragraph.
7. Waiver by Company. The Company hereby expressly waives presentment,
demand, and protest, notice of demand, dishonor and nonpayment of this Note, and
all other notices or demands of any kind in connection with the delivery,
acceptance, performance, default or enforcement hereof, and hereby consents to
any delays, extensions of time, renewals, waivers or modifications that may be
granted or consented to by the holder hereof with respect to the time of payment
or any other provision hereof.
8. Severability. In the event any one or more of the provisions of this
Note shall for any reason be held to be invalid, illegal or unenforceable, in
whole or in part or in any respect, or in the event that any one or more of the
provisions of this Note operate or would prospectively operate to invalidate
this Note, then and in any such event, such provision(s) only shall be deemed
null and void and shall not affect any other provision of this Note and the
remaining provisions of this Note shall remain operative and in full force and
effect and in no way shall be affected, prejudiced, or disturbed thereby.
9. Governing Law. This Note shall be governed by and construed and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
10. Successors and Assignment. This Note shall not be negotiable,
transferable or assignable by the Company, whether by operation of law or
otherwise, except with the written consent of the Collection Agent. The
Collection Agent may negotiate, transfer or assign this Note, or any or all of
its rights, interests, duties or obligations hereunder, in its sole and absolute
discretion. Subject to the foregoing, whenever reference is made to any party,
such reference shall be deemed to include the successors, assigns and legal
representatives of such party.
SPACETEC IMC CORPORATION
BY:
------------------------------------
PRESIDENT
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<PAGE> 219
ATTEST:
- ------------------------------------------------------
ACKNOWLEDGED AND AGREED:
[COLLECTION AGENT]
By:
--------------------------------
Title:
-------------------------------
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<PAGE> 220
ANNEX D
VOTING AGREEMENT AND IRREVOCABLE PROXY
VOTING AGREEMENT AND IRREVOCABLE PROXY, dated as of October 21, 1998,
between LABTEC, INC., a Delaware corporation ("Labtec"), and [NAME OF
SHAREHOLDER] (the "Shareholder"), [an individual] and a shareholder of Spacetec
IMC Corporation, a Massachusetts corporation (the "Company"). Capitalized terms
used but not otherwise defined in this Agreement shall have the meanings
respectively assigned to them in the Merger Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, the Shareholder beneficially owns certain shares of common stock,
par value $.01 per share (the "Company Common Stock"), of the Company (all such
shares, together with all other shares of capital stock of the Company with
respect to which the Shareholder has beneficial ownership as of the date of this
Agreement or acquires beneficial ownership (including, without limitation,
through the exercise of stock options) on or before the termination of the
Merger Agreement are collectively referred to as the "Restricted Company
Shares");
WHEREAS, concurrently with the execution and delivery of this Agreement,
the Company, SIMC Acquisition Corporation, a Delaware corporation ("Spacetec
Subsidiary"), and Labtec are entering into an Agreement and Plan of Merger,
dated the date hereof (as amended or modified from time to time, the "Merger
Agreement"), providing for, among other things, the merger of Spacetec
Subsidiary with and into Labtec (the "Merger");
WHEREAS, Labtec may be required to incur substantial expenses in connection
with the performance of the Merger Agreement; and
WHEREAS, Labtec as a condition to its willingness to enter into the Merger
Agreement, has required the Shareholder (i) to grant Labtec an irrevocable proxy
with respect to the Restricted Company Shares on the terms and conditions
hereinafter set forth, and (ii) to provide Labtec with certain financial
protection in the event the Merger Agreement is terminated under certain
circumstances more fully described herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Voting. Until the termination of this Agreement, subject to the
receipt of proper notice and the absence of a preliminary or permanent
injunction or other final order by any United States federal court or state
court barring such action, the Shareholder shall do the following:
(a) be present, in person or represented by proxy, at each meeting
(whether annual or special, and whether or not an adjourned or postponed
meeting) of the shareholders of the Company, however called, or in connection
with any written consent of shareholders of the Company, so that all Restricted
Company Shares then entitled to vote may be counted for the purposes of
determining the presence of a quorum at such meeting; and
(b) At each such meeting held before the Effective Time and with respect
to such written consent, vote (or cause to be voted) the Restricted Company
Shares (i) to approve the Merger Agreement and the Merger, and any action in
furtherance thereof, (ii) except as otherwise approved in writing in advance by
Labtec (which approval may be granted, withheld, conditioned or delayed in its
sole discretion), against any action or agreement that would result in any
breach of any representation,
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warranty, covenant or agreement of the Company, Spacetec Subsidiary or the
Shareholder contained in the Merger Agreement or this Agreement, that would or
could reasonably be expected to materially reduce the benefits to Labtec of the
Merger, (iii) except as otherwise approved in writing in advance by Labtec
(which approval may be granted, withheld, conditioned or delayed in its sole
discretion), against any Acquisition Proposal (other than the Merger), and (iv)
except as otherwise approved in writing in advance by Labtec (which approval may
be granted, withheld, conditioned or delayed in its sole discretion) or as
contemplated by the Merger Agreement, against any amendment to the charter or
by-laws of the Company.
2. Irrevocable Proxy. The Shareholder hereby revokes any and all previous
proxies granted with respect to the Restricted Company Shares. By entering into
this Agreement, the Shareholder hereby grants a proxy (the "Proxy") appointing
Labtec (or any designee of Labtec) as the Shareholders's lawful agent,
attorney-in-fact and proxy, with full power of substitution, for and in the
Shareholder's name, (i) to attend any and all meetings of shareholders of the
Company, (ii) to vote in accordance with the provisions of Section 1 hereof the
Restricted Company Shares that the Shareholder is then entitled to vote, (iii)
to grant or withhold in accordance with the provisions of Section 1 hereof all
written consents with respect to the Restricted Company Shares that the
Shareholder is then entitled to vote, and (iv) to represent and otherwise act
for the Shareholder in the same manner and with the same effect as if the
Shareholder were personally present, with respect to all matters subject to
Section 1 hereof. The Proxy shall be deemed to be a proxy coupled with an
interest, is irrevocable and is granted in consideration of Labtec's entering
into this Agreement and the Merger Agreement; provided, however, that the Proxy
shall be revoked upon termination of this Agreement in accordance with its
terms. The Shareholder hereby authorizes such agent, attorney-in-fact and proxy
to file the Proxy with the Clerk of the Company.
3. Legending of Certificates; Nominee Shares. The Shareholder agrees to
use its reasonable best efforts to submit to Labtec promptly following the
execution of this Agreement (or promptly following receipt of any additional
certificates representing any additional Restricted Company Shares) all
certificates representing the Restricted Company Shares so that Labtec may note
thereon a legend referring to the Proxy granted to it by this Agreement. If any
of the Restricted Company Shares beneficially owned by the Shareholder are held
of record by a brokerage firm in the "street name" or in the name of any other
nominee (a "Nominee," and as to the Restricted Company Shares, "Nominee
Shares"), the Shareholder agrees that, upon written notice by Labtec requesting
it, the Shareholder will within five (5) days of the giving of such notice
execute and deliver to Labtec a limited power of attorney in such form as shall
be reasonably satisfactory to Labtec enabling Labtec to require the Nominee to
grant to Labtec an irrevocable proxy to the same effect as Section 1 hereof with
respect to the Nominee Shares held by such Nominee and to submit to Labtec the
certificates representing such Nominee Shares for notation of the foregoing
legend thereon.
4. Payment in Acquisition Proposal.
(a) If the Merger Agreement is terminated and, in connection with an
Acquisition Proposal as to which the Company is obligated to pay Labtec the
Parent Additional Termination Fee, the Shareholder, either (i) within 90 days
following the termination of the Merger Agreement or (ii) thereafter to any
Third Party with which the Company had any discussions concerning a possible
Acquisition Proposal prior to the termination of the Merger Agreement, (A) sells
or otherwise in any way disposes of, in whole or in part, the Restricted Company
Shares to a Third Party (as defined in Section 6(b) hereof) in exchange for cash
and/or securities having a value per share (the "Third Party Purchase Price") in
excess of $8.00 (as adjusted for any stock dividend, stock split, combination,
recapitalization or similar transaction with respect to the capital stock of the
Company), and/or (B) otherwise as a result of the consummation of the
Acquisition Proposal receives cash and/or securities or other consideration from
the Company having a
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value per share in excess of $8.00, the Shareholder shall, contemporaneously
with the completion of such sale or other transaction, pay or deliver to Labtec
an amount equal to (x) fifty percent (50%) of the amount by which the Third
Party Purchase Price and/or other consideration per share received by the
Shareholder exceeded $8.00 multiplied by (y) the number of Restricted Company
Shares so sold or disposed of and/or with respect to which such other
consideration was received. Any such amount shall be paid, to the extent that
the Shareholder received cash, in cash, and to the extent that the Shareholder
received securities or other consideration, in such securities or other
consideration (the value of which shall be determined as provided in Section
4(c) below), in each case in the same proportion as such cash and other
consideration was received by the Shareholder.
(b) If the Merger Agreement is terminated and, in connection with an
Acquisition Proposal as to which the Company is obligated to pay Labtec the
Parent Additional Termination Fee, the Shareholder, either (i) within 90 days
following the termination of the Merger Agreement or (ii) thereafter to any
Third Party with which the Company had any discussions concerning a possible
Acquisition Proposal prior to the termination of the Merger Agreement, (A) sells
or otherwise in any way disposes of, in whole or in part, the Restricted Company
Shares to a Third Party for a Third Party Purchase Price less than or equal to
$8.00 (as adjusted for any stock dividend, stock split, combination,
recapitalization or similar transaction with respect to the capital stock of the
Company), and/or (B) otherwise as a result of the consummation of the
Acquisition Proposal receives cash and/or securities or other consideration from
the Company having a value per share less than or equal to $8.00, the
Shareholder shall, contemporaneously with the completion of such sale or other
transaction, pay or deliver to Labtec an amount equal to (x) the amount by which
the Third Party Purchase Price and/or other consideration per share received by
the Shareholder exceeded the closing price per share of Spacetec Stock on the
last trading day immediately prior to the date hereof (provided that such amount
shall not exceed $2.00) multiplied by (y) the number of Restricted Company
Shares so sold or disposed of and/or with respect to which such other
consideration was received; provided, however, that no such amount shall be paid
by the Shareholder to Labtec in connection with any transaction in which the
Company was merged with another corporation and the Shareholder was required to
sell or otherwise dispose of Restricted Company Shares. Any such amount shall be
paid, to the extent that the Shareholder received cash, in cash, and to the
extent that the Shareholder received securities or other consideration, in such
securities or other consideration (the value of which shall be determined as
provided in Section 4(c) below), in each case in the same proportion as such
cash and other consideration was received by the Shareholder.
(c) The value of such securities or other consideration shall be
determined as of the date of the receipt thereof. If the Shareholder and Labtec
cannot, within fifteen (15) days of receipt of such securities or other
consideration, agree as to its value, the Shareholder and Labtec will submit
their respective valuations of such securities to a mutually agreed upon
third-party appraiser who will either select one of the submitted valuations or
establish a valuation within the range of the submitted valuations, which
selection or establishment of a valuation shall be binding on the parties
hereto. All costs of the third-party appraiser shall be paid by Labtec.
(d) Any payment made by the Shareholder to Labtec pursuant to Section
4(a) or 4(b) hereof shall be treated by the Shareholder as a "selling expense"
for all tax purposes which shall either (i) reduce the Shareholder's "amount
realized" in the transaction or (ii) be added to the adjusted tax basis of
disposed Restricted Company Shares and shall, therefore, reduce the gain, if
any, realized by the Shareholder in connection with such disposition. Similarly,
Labtec agrees to treat such payments as a "selling expense" for all tax
purposes, provided that such treatment does not adversely affect Labtec.
(e) Notwithstanding anything to the contrary contained in this
Agreement, in no event shall the Shareholder be liable for any payments to
Labtec pursuant to this Agreement if such sale of Restricted
D-3
<PAGE> 223
Company Shares occurs after 90 days following the termination of the Merger
Agreement, except in connection with an Acquisition Proposal (i) with a Third
Party with whom the Company had any discussions concerning a possible
Acquisition Proposal prior to termination of the Merger Agreement and (ii) in
connection with which the Company was obligated to pay Labtec the Parent
Additional Termination Fee.
5. Representations and Warranties of the Shareholder. The Shareholder
hereby represents and warrants to Labtec that:
(a) The Shareholder is the sole, true, lawful, record and beneficial
owner of the Restricted Company Shares; the Restricted Company Shares are
validly issued, fully paid and nonassessable, with no personal liability
attaching to the ownership thereof; and the Shareholder has good and valid title
to the Restricted Company Shares, free and clear of any agreements, liens,
adverse claims or encumbrances whatsoever with respect to the ownership of or
the right to vote the Restricted Company Shares.
(b) The Shareholder has the full right, power and authority to enter
into this Agreement, and this Agreement has been duly and validly executed and
delivered by the Shareholder.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not, with
or without the giving of notice or the passage of time, (i) violate any
judgment, injunction or order of any court, arbitrator or governmental agency
applicable to the Shareholder, or (ii) conflict with, result in the breach of
any provision of, constitute a default under, or give rise to a right of
termination, cancellation or acceleration of any right or obligation of the
Shareholder under, or require the consent of any third party under, any
agreement, instrument, judgment, order or decree to which the Shareholder is a
party or by which the Shareholder may be bound.
(d) This Agreement is the valid and binding Agreement of the
Shareholder, enforceable against the Shareholder in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights generally.
(e) Exhibit A attached hereto sets forth a list and description of all
Restricted Company Shares and all options to purchase or rights to subscribe for
or otherwise acquire any securities of the Company beneficially owned or owned
of record by the Shareholder and, except as set forth on Exhibit A, the
Shareholder has no other interest in or voting rights with respect to any
securities of the Company.
(f) No investment banker, broker or finder is entitled to a commission
or fee from the Shareholder or the Company in respect of this Agreement based
upon any arrangement or agreement made by or on behalf of the Shareholder.
6. Additional Covenants of the Shareholder. The Shareholder hereby
covenants and agrees that:
(a) The Shareholder will not enter into any transaction, take any
action, or by inaction permit any event to occur, that would result in any of
the representations or warranties of the Shareholder herein contained not being
true and correct at and as of the time immediately after the occurrence of such
transaction, action or event.
(b) Until the termination of this Agreement, the Shareholder shall
not, whether directly, indirectly, or through any employee, agent or otherwise
(i) solicit or initiate any inquiry or submission of a proposal or an offer from
any person, corporation, unincorporated organization, partnership, association,
joint venture, trust or any other entity (a "Third Party") relating to any
Acquisition Proposal, or (ii) participate in any discussions or negotiations
regarding, or furnish to any other person any information with respect to, or
otherwise cooperate in any way or assist or facilitate any Acquisition Proposal
by any Third Party. The Shareholder shall promptly advise Labtec of any
communication (including the identity
D-4
<PAGE> 224
of the person making such communication and the terms thereof) the Shareholder
may receive relating to any of the foregoing.
(c) Until the termination of this Agreement, the Shareholder will at
all times use his best efforts to prevent the Company from taking any action in
violation of the Merger Agreement, including, but not limited to, any such
action that would (i) amend or otherwise change the Company's charter or
by-laws, (ii) issue or sell or authorize for issuance or sale any stock
appreciation rights, stock options (other than pursuant to stock option plans in
effect on the date hereof) warrants or additional shares of any class of capital
stock, including the Company Common Stock, or any securities convertible into or
exchangeable for shares of any class of capital stock, (iii) declare, set aside,
make, pay or accelerate the time for declaration or payment, of, any dividend or
other distribution with respect to its capital stock, or (iv) redeem, purchase,
or otherwise acquire, directly or indirectly, any of its capital stock.
(d) Until the termination of this Agreement, the Shareholder shall not,
directly or indirectly, (i) grant any proxies or enter into any voting trust or
other agreement or arrangement with respect to the voting of any of the
Restricted Company Shares, or (ii) acquire, sell, assign, transfer, encumber or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the direct or indirect acquisition or sale,
assignment, transfer, encumbrance or other disposition of, any of the Restricted
Company Shares during the term of this Agreement; provided, however, that the
Shareholder shall be permitted to sell any of the Restricted Company Shares at
any time following the termination of Merger Agreement so long as such sale is
made in an open market transaction and there are no Acquisition Proposals then
outstanding. The Shareholder shall not seek or solicit any such acquisition or
sale, assignment, transfer encumbrance or other disposition or any such
contract, option or other arrangement or assignment or understanding, and the
Shareholder agrees to promptly notify Labtec and provide all details requested
by Labtec if the Shareholder shall be approached or solicited, directly or
indirectly, by any Third Party with respect to any of the foregoing.
(e) The Shareholder shall execute and deliver any additional documents
reasonably necessary or desirable, in the reasonable opinions of both Labtec's
counsel and the Shareholder's counsel, to evidence the Proxy granted in Section
2 hereof with respect to the Restricted Company Shares or otherwise implement
and effect the provisions of this Agreement.
(f) In the event that the Shareholder serves as a member of the Board
of Directors of the Company, nothing in this Agreement shall limit or restrict
the Shareholder in acting in his capacity as a director and exercising his
fiduciary duties and responsibilities, it being agreed and understood that this
Agreement shall apply to the Shareholder solely in his capacity as a shareholder
of the Company and shall not apply to the Shareholder's actions, judgements or
decisions as a director.
7. Represents and Warranties of Labtec. Labtec hereby represents and
warrants to the Shareholder that:
(a) Labtec has all requisite power and authority to enter into and
perform all of its obligations under this Agreement. The execution, delivery and
performance of this Agreement and all of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of Labtec. This
Agreement has been duly executed and delivered by Labtec.
(b) Neither the execution, delivery or performance of this Agreement by
Labtec nor the consummation of the transactions contemplated herein will violate
the organizational documents of Labtec or will conflict with or result in the
breach of any material term, condition or provision of any instrument,
indenture, contract, lease or other document or understanding, oral or written,
to which Labtec is a party
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<PAGE> 225
or is otherwise bound or affected in such manner as to materially and adversely
affect the business of Labtec.
8. Termination. This Agreement shall terminate upon consummation of the
Merger Agreement and may be terminated by any party hereto on or after the day
of the termination of the Merger Agreement in accordance with its terms;
provided, however, that Sections 4 and 8 through 14 hereof shall survive
termination of this Agreement if this Agreement is terminated at any time prior
to the Closing.
9. Binding Effect; Assignment. This Agreement shall insure to the benefit
of, and be binding upon, the parties and their respect successors and permitted
assigns. The Shareholder shall not assign its rights or obligations hereunder
without Labtec's consent which will not be unreasonably withheld. Labtec may
assign its rights and obligations hereunder to an affiliate.
10. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or mailed by certified or registered mail, postage prepaid, addressed as
follows:
If to Labtec:
1499 Southeast Tech Center Drive
Vancouver, Washington 98683
Attention: President
with copies to:
Sun Capital Partners, Inc.
777 South Flagler Drive
West Tower, Eighth Floor
West Palm Beach, Florida 33401
Attention: Marc J. Leder and Rodger R. Krouse
and
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: Mark S. Hirsch, Esq.
If to the Shareholder:
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, Massachusetts 02110
Attention: John M. Hession, Esq.
Any party may change the foregoing address from time to time by giving the other
party notice thereof.
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<PAGE> 226
11. Injunctive Relief; Remedies Cumulative.
(a). Each party hereto acknowledges that the other party will be
irreparably harmed and that there will be no adequate remedy at law for a
violation of any of the covenants or agreements of such party that are
contained in this Agreement. It is accordingly agreed that, in addition to
any other remedies that may be available to the non-breaching party upon
the breach by any other party of such covenants and agreements, the
non-breaching party shall have the right to obtain injunctive relief to
restrain any breach or threatened breach of such covenants or agreements or
otherwise to obtain specific performance of any such covenants or
agreements.
(b). No remedy conferred upon or reserved to any party herein is
intended to be exclusive of any other remedy, and every remedy shall be
cumulative and in addition to every other remedy herein or now or hereafter
existing at law, in equity or by statute.
12. Applicable Law. This Agreement and all amendments thereof shall be
governed by, and construed and enforced in accordance with, the laws of the
Commonwealth of Massachusetts applicable to contracts made and to be performed
therein.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
14. Effect of Partial Invalidity. Whenever possible each provision of
this Agreement shall be construed in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provisions shall be ineffective to the extent of such
prohibition without invalidating the remainder of such provisions or any other
provisions of this Agreement or the application of such provision to the other
party or other circumstances.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 227
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
LABTEC, INC.
By:
------------------------------------
Name:
Title:
--------------------------------------
[NAME OF SHAREHOLDER]
<PAGE> 228
EXHIBIT A
RESTRICTED COMPANY SHARES AND CERTAIN OTHER RIGHTS
<PAGE> 229
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 230
ANNEX E
TEXT OF PROPOSED AMENDMENTS
It is proposed that Articles I and III and the first paragraph of Article
IV of the Spacetec Restated Articles of Organization be deleted in their
entirety and replaced with the following:
"Article I The name of the corporation is: Labtec Inc."
"Article III The total number of shares and par value, if any, of each
class of stock which the corporation is authorized to issue:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------- -----------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------- ---------------- ---------- ---------------- --------------
<S> <C> <C> <C> <C>
Common: Common: 25,000,000 $.01 per share
Preferred: Preferred: 1,000,000 $.01 per share
</TABLE>
Upon the filing of these Articles of Amendment with the Secretary of State
of the Commonwealth of Massachusetts, each three (3) shares of Common Stock of
the Corporation, $.01 par value per share (the "Old Common Stock"), issued and
outstanding or held in the treasury of the Corporation immediately after the
filing of the Certificate of Merger on behalf of SIMC Acquisition Corporation, a
wholly-owned subsidiary of the Corporation, with respect to its merger with and
into Labtec Inc., shall be consolidated and combined into one (1) share of
Common Stock.
Each holder of record of a certificate or certificates for one or more
shares of the Old Common Stock shall be entitled to receive as soon as
practicable, upon surrender of such certificate, a certificate or certificates
representing the largest whole number of shares of Common Stock to which such
holder shall be entitled pursuant to the provisions of the immediately preceding
paragraph. Any certificate for one or more shares of the Old Common Stock not so
surrendered shall be deemed to represent one share of the Common Stock for each
three (3) shares of the Old Common Stock previously represented by such
certificate. No fractional shares of Common Stock shall be issued upon such
reverse stock split; any holder who would otherwise be entitled to receive a
fractional share will instead receive cash equal to such fraction of the average
closing price of a share of the Old Common Stock for the five most recent days
that Old Common Stock has traded ending on the trading day immediately prior to
the date on which these Articles of Amendment were filed with the Secretary of
State of the Commonwealth of Massachusetts.
"Article IV The total number of shares of all classes of capital stock
which the Corporation shall be authorized to issue is twenty-six million
(26,000,000) shares, consisting of twenty-five million (25,000,000) shares of
Common Stock, $.01 par value per share (the "Common Stock"), and one million
(1,000,000) shares of Preferred Stock, $.01 par value per share (the "Preferred
Stock")."
E-1
<PAGE> 231
SPACETEC IMC CORPORATION
Proxy for Special Meeting of Stockholders, January 22, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Dennis Gain and George Rea, and each of
them with full power of substitution to vote all shares of stock of Spacetec IMC
Corporation (the "Corporation") which the undersigned is entitled to vote at the
special meeting of stockholders of the Corporation to be held on February 17,
1999 at 9:00 a.m., local time, at the offices of Testa, Hurwitz & Thibeault,
LLP, High Street Tower, 125 High Street, Boston, Massachusetts, 02110, and at
any adjournment thereof, upon matters set forth in the Notice of Special Meeting
of stockholders and Proxy Statement dated January 22, 1999, a copy of which has
been received by the undersigned.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED. IF NO CHOICE
IS SPECIFIED, THEN THIS PROXY WILL BE VOTED IN FAVOR OF (i) APPROVING THE
ISSUANCE OF SHARES OF THE CORPORATION'S COMMON STOCK (THE "COMMON STOCK")
PURSUANT TO THE MERGER; (ii) APPROVING AN AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF ORGANIZATION OF THE CORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF THE COMMON STOCK FROM 20,000,000 TO 25,000,000 SHARES AND TO CHANGE
THE CORPORATE NAME OF THE CORPORATION TO "LABTEC INC." ("NEW LABTEC"), SUBJECT
TO AND UPON CONSUMMATION OF THE MERGER; AND (iii) ELECTING FOUR DIRECTORS TO
EACH OF CLASS I, II AND III TO SERVE A ONE, TWO AND THREE-YEAR TERM,
RESPECTIVELY; AND (iv) APPROVING AN AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF ORGANIZATION OF THE CORPORATION TO PROVIDE FOR A REVERSE STOCK SPLIT
WHEREBY ONE SHARE OF NEW LABTEC COMMON STOCK WILL BE ISSUED IN EXCHANGE FOR EACH
THREE SHARES OF OUTSTANDING COMMON STOCK OF THE CORPORATION, SUBJECT TO AND
IMMEDIATELY FOLLOWING THE COMPLETION OF THE MERGER. IN THEIR DISCRETION, THE
PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING.
************************
PLEASE MARK
VOTES AS IN
THIS EXAMPLE
The Board of Directors recommends a vote for the following proposals;
1. To approve the issuance of shares of the Corporation Common Stock to the
stockholders of Labtec Inc. pursuant to the merger.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To approve an amendment to the Corporation's Amended and Restated Articles of
Organization to increase the number of authorized shares of the Common Stock
from 20,000,000 to 25,000,000 shares and to change the corporate name of the
Corporation to "Labtec Inc.", subject to and upon consummation of the merger:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To elect four (4) directors to each of Class I, II and III to serve a one,
two and three-year term except as marked to the contrary below:
NOMINEES FOR CLASS I: J. Grant Jagelman, Caroline Merison, Joseph Pretlow
and Gary Savadove
FOR WITHHELD
ALL FROM ALL FOR ALL NOMINEES
NOMINEES [ ] NOMINEES [ ] EXCEPT AS NOTED ___________
ABOVE
NOMINEES FOR CLASS II: Dennis Gain, Geoffrey Rehnert, Patrick J. Sullivan
and Marc Wolpow
FOR WITHHELD
ALL FROM ALL FOR ALL NOMINEES
NOMINEES [ ] NOMINEES [ ] EXCEPT AS NOTED ___________
ABOVE
NOMINEES FOR CLASS III: Rodger R. Krouse, Marc J. Leder, George R. Rea and
Bradley A. Krouse
FOR WITHHELD
ALL FROM ALL FOR ALL NOMINEES
NOMINEES [ ] NOMINEES [ ] EXCEPT AS NOTED ___________
ABOVE
<PAGE> 232
4. To approve an amendment to the Corporation's Amended and Restated Articles of
Organization to provide for a reverse stock split whereby one share of New
Labtec common stock will be issued in exchange for each three shares of
outstanding common stock of the Corporation, subject to and immediately
following the completion of the merger:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. To authorize Spacetec to adjourn the special meeting to solicit additional
proxies in the event that the number of proxies sufficient to approve any of
the proposals has not been received by the date of the special meeting.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. To transact such other business as may properly come before the meeting and
any adjournment thereof.
MARK HERE
FOR ADDRESS
CHANGE AND
NOTE AT LEFT
Please sign your name exactly as it appears on your stock certificates(s),
write in the date and return this proxy as soon as possible in the enclosed
envelope. If the stock is registered in more than one name, each joint owner
should sign. If signing as attorney, executor, trustee, administrator or
guardian, please give full title as such. Only authorized officers should sign
for corporations.
Signature____________________________ Date____________________________
Signature____________________________ Date____________________________
