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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1998
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Commission file number 0-22325
ALYDAAR SOFTWARE CORPORATION
Incorporated In 87-0399301
North Carolina (I.R.S. Employer Identification No.)
2101 Rexford Road, Suite 250 W, Charlotte, North Carolina 28211
(704) 365-2324
Securities registered pursuant to Section 12 (g) of the
Securities Exchange Act\ of 1934:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
----
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of common equity as of a specified date
within 60 days prior to the date of filing. $64,106,511 as of March 26, 1999.
As of February 24, 1999, 17,610,085 shares of the registrants common
stock were outstanding.
Documents Incorporated by Reference: See Footnotes to Exhibits
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PART I
ITEM 1. BUSINESS
BACKGROUND
We are presently engaged in the business of providing
software-reengineering services. These services include (i) the correction and
validation of existing mainframe computer software systems' ability to manage
the Year 2000 problem and (ii) software conversion services, such as language
translations and migrations. In October 1998, we also announced a new strategic
direction, establishing an Internet services business providing management
consulting, design, development and deployment for enterprise information
portals. Through this new strategic direction, we plan to assist organizations
in transforming their existing information systems architecture to support
scalable and flexible architecture for Internet, Intranet and Extranet
applications. (See "Business -- Recent Developments")
We were founded in 1982 as a Utah corporation under the name of
Enertronix Corporation ("Enertronix"). In 1992 we changed our name to Alydaar
Software Corporation ("Alydaar"). Alydaar later changed its corporate domicile
to North Carolina through a merger with and into a North Carolina corporation
established by Alydaar, Daar Corporation. Alydaar is the surviving corporation.
We commenced business in 1992. Initially, we focused on research and
development of proprietary software known as SmartCode(R) ("SmartCode") to
provide automated software re-engineering services specializing in computer
language translation, upgrades and migration. SmartCode understands most
computer language dialects on any platform, including multi-dialect languages
such as PL/1, COBOL, Fortran and Natural. Between 1994 and 1995, we performed
software language translation services for such companies as The First Boston
Corporation and Stratacom, Inc. In 1995 management concluded that SmartCode
could be used for more complex tasks and devoted its efforts, utilizing the
basic framework of SmartCode, to developing a proprietary detection and solution
process to address the Year 2000 ("Y2K") problem (the "Y2K Problem").
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The Y2K Problem arises from the fact that most software programs
automatically assume the first two digits of any year reference are "19," and
thus the Year 2000 and thereafter will be read as "1900," "1901," etc. If the
software is not converted to correct the Y2K Problem, the two digit field "00"
could result in improper calculations and, in many cases, cause programs not to
work properly or cease to function. Because most businesses and government
entities rely on "mission-critical" software to operate their core business
functions, failure to correct latent Y2K Problems may result in malfunction of
these essential processes. The result of these malfunctions can range from
incorrect customer billings to complete shutdown of the companies' operations.
Therefore, there is no alternative to correcting the latent Y2K Problems. Y2K
Problems are addressed with a three-phase approach: (1) assessment of the risk,
(2) correction or remediation of the Y2K Problem ("Remediation") and (3) testing
or validation of the results of the second phase ("Validation"). We have mainly
devoted our efforts to the Remediation and Validation phases of the Y2K Problem
process.
Between 1995 and the first quarter of 1997, we devoted all of our
efforts to developing SmartCode as a cost effective and fully automated,
artificial intelligence-based solution to the Y2K Problem. The goal was to
develop SmartCode and a scalable and repeatable methodology that would not
disrupt a customer's normal business operations. As a result of the research and
development, we created a solution to the Y2K Problem utilizing SmartCode to
automatically identify and remediate Y2K Problems. Because many companies and
governmental agencies perform in-house Remediation, we also offer Validation
services to determine the accuracy of in-house Remediation. Most importantly,
SmartCode is able to validate and remediate a number of different computer
languages and dialects on multiple platforms. It is this latter capability which
presently distinguishes us from our competitors, who mainly have automated
solutions to only remediate the computer language COBOL. We believe that our
automated Remediation and Validation capability for computer languages other
than COBOL gives us a competitive advantage.
The standard method employed in estimating the cost for Remediation and
Validation is to determine the number of lines of code ("LOC") that are
contained within each program and multiply it times a fixed cost per LOC.
Industry wide, the costs per LOC generally range from $.20 to $1.00 per LOC for
Remediation and from $.10 to $.50 per LOC for Validation.
Our approach to Y2K services, both Remediation and Validation, consists
of a step-by-step process starting with a methodology for extraction of the
customers' software from its existing systems. Once we receive the software,
SmartCode identifies any possible Y2K Problems. In connection with Validation
services, we return a report to our customers identifying the Y2K failure
points. At this point, the customer has the option to make its own in-house
corrections or allow us to perform the Remediation. With respect to Remediation
services, after the failure points are identified, we Remediate the Y2K Problems
and redeliver the software to the customer for testing. Since all Remediation
and Validation is performed at our facilities, we believe that the customer
saves time and money by not using its valuable computer resources and
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personnel. Each step of our factory process is controlled by procedures and
checks to insure the most accurate results possible. In addition, extensive use
of our proprietary SmartCode software reduces manual corrections to the minimum
extent practicable resulting in a low defect rate. Because of our approach, a
minimum amount of customer software must be changed. Our low error rate serves
to attract customers because they believe our process reduces testing time and
costs.
During 1998, we refined our software conversion services. Today,
greater emphasis is placed on maintaining computer systems at the peak of
technology. As with any resource that must be maintained, computer software must
be changed or upgraded periodically as requirements change. As earlier
discussed, since our founding, we have been in the business of software
conversions and have continued to invest our resources in conversion service
research and development. Using our core SmartCode technology, we provide two
types of conversion services ("Conversions") as follows:
1. LANGUAGE TRANSLATIONS--In language translations we convert an application's
source code from one software language to a completely different software
language, such as PL/I to C.
2. LANGUAGE (SYSTEMS) MIGRATIONS--In language migrations we convert an
application from one platform or environment, to a different platform or
environment such as OS/VS COBOL (MVS) to MICROFOCUS COBOL (UNIX) and OS/VS
COBOL (MVS) to ACUCOBOL (Windows NT).
PRESENT OPERATIONS
Since the second quarter of 1997, we have performed Remediation,
Validation and Conversion services pursuant to contracts with various
corporations and governmental entities. Prior to actually providing our
services, either (i) the customer is required to package its software in
accordance with Alydaar's Guide to Packaging or (ii) we provide an on-site
packaging expert to package the software. Once we receive the customer's
software and properly compile it, we are prepared to perform the services.
Upon receiving the customer's software, there are five phases involved
in the Remediation process. In Phase One SmartCode scans a customer's software
and automatically identifies the possible Y2K Problems. Phase Two involves the
manual verification of Phase One results. In Phase Three SmartCode automatically
inserts code that corrects the Y2K Problem into customer's software. Phase Four
involves a manual verification of the output of Phase Three. In Phase Five we
conduct an automated quality check to insure that the customer's modified
software is syntactically correct. The entire process, depending upon the size
of the customer's applications and the computer language(s) present, can take
from three to eight weeks for
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completion. Once we have completed Remediation, the remediated software is
returned to the customer. The customer generally has sixty (60) days to test the
Remediated software to identify any Y2K issues, which we will then correct free
of charge.
With respect to Validation services, we perform phases Phase One, Phase
Two, and Phase Five as described above. Following the completion of the
Validation services, a final report identifying any possible Y2K failure points
is returned to the customer. It is the customer's responsibility to determine
how to correct any identified Y2K failure points.
Upon receipt of customer's software, we follow a four phase approach to
conversion services. Phase One automatically identifies or flags the language
elements and syntax differences between the current version or language and the
target version or language. Smartcode then converts the identified language
elements and syntax differences from the current version/language to the
targeted version/language. Phase Two is a manual verification of the results of
Phase One. In Phase Three, the items flagged by the automated process are
analyzed and manually converted. In Phase Four, we investigate the special-case
changes to verify that they meet the customer's specifications. Following the
completion of Phase Four, the software is returned to customer.
We perform services under contracts with many major corporations and
government entities. Our standard contract generally requires payment of an
initial percentage of the contract price after receipt of the customer's code
and a further percentage upon delivery of the code back to the customer. With
Remediation there is usually a small percentage held until the end of the
testing period. Some of our customers include E.I. Dupont DeNemours & Co., 3M
Corporation, British Airways PLC, AER Lingus, Ltd., R. J. Reynolds Tobacco
Company, Kelly Services, Inc., The Boeing Company, Northern States Power, Total
Raffinage Distribution, OAG Worldwide and Whirlpool Corporation. In addition, we
performed services for the States of New Jersey, Texas, Georgia and Florida.
MARKETING
We currently conduct direct sales for the Y2K and conversion services
through sales offices located throughout the United States and Europe with a
sales staff of 39 as of December 31, 1998. In addition, we have hired 6 new
salespeople and are hiring additional salespeople in the U.S. for our new
strategic direction (See "Recent Developments"). Salespeople receive both a base
salary and a commission. In the last quarter of 1998, we recognized a shift in
the Y2K market as companies and governmental entities completed Remediation and
began seeking Validation services. We see this trend increasing as the Year 2000
approaches and are adjusting our marketing direction accordingly.
The scalability of our Remediation and Validation services enables us
to service
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customers with as little as 1,000,000 LOC or customers with 100 million or more
LOC within the same time period. We target companies with more than $100 million
or more in revenues. We also target companies and governmental entities that
have a Y2K budget of $1,000,000 or more. Names of potential corporate customers
are obtained through a variety of sources, including master databases that we
have purchased from various sources. We market our services through advertising
in major trade magazines, attendance at various trade shows and telemarketing.
We also perform free pilot projects for most of our customers as a way to prove
the value of our services. These pilot projects typically involve us performing
Remediation or Validation on only a small amount of customers' software. While
we have been successful in obtaining contracts following this marketing
strategy, we may not be successful in the future.
In addition to direct marketing, we entered into business arrangements
with several other computer software service providers. Under these arrangements
the providers recommend customers to us for Remediation and Validation services.
In particular, during 1998, we performed Remediation services for a number of
customers introduced by Compuware Corporation. In return the providers receive
either a discount to our list prices or a commission.
We also directly market our services internationally through a wholly
owned subsidiary, Alydaar International Ltd. ("Alydaar International"), which we
acquired in July 1997. Alydaar International employed 5 salespeople as of
December 31, 1999 who covered the United Kingdom, France, Italy and Germany. To
further expand our international business, we also entered into marketing
alliances with computer services organizations to market our services in
countries or regions not covered by our direct sales. These countries and
regions include Australia, New Zealand, Switzerland, South America and the
Pacific Region. These alliances generally provide for the companies to market
our Y2K services to their customers and receive a commission or discount to list
our prices.
COMPETITION
In our Y2K and conversion businesses, we are confronted with two
distinct types of competition. The first type is competition with other
companies that offer Remediation, Validation, and Conversion services. These
competitors are often much better established, more widely known, have offered
computer software services for a much longer period, have established
relationships with customers, and have far greater resources than us. Some of
these companies are International Business Machine, Inc. and Keane, Inc.
The second type of competition arises from the fact that many
businesses and government entities perform their own Remediation and Conversion
services using in-house personnel and licensing software "tools". These tools
are marketed by certain vendors such as Viasoft, Inc. and Peritus Software
Services, Inc. As the Y2K market shifts from Remediation to Validation we
believe our reputation in the industry will allow us to continue to compete for
Remediation services and positions us well to be a major
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player in the Validation market. We also anticipate that competition for Y2K
Validation and Remediation services will be highly competitive and may affect
our revenues. (See "Risk Factors Generally Applicable to Our Business - We Face
Intense Competition for Year 2000 Services")
RECENT DEVELOPMENTS
In October 1998, we announced a new business strategy to expand our business
beyond the Year 2000. The new strategy positions us to become a complete
business solution provider for innovative Internet, Intranet and Extranet
applications. In order to implement this strategy, we entered into a series of
agreements to acquire various companies and technologies. The transactions are
discussed below:
- - On January 31, 1999, we signed a definitive merger agreement to acquire
Data Systems Network Corporation ("Data Systems"), a network integration
company based in Farmington Hills, Michigan. Pursuant to the terms of the
merger agreement and subject to certain adjustments, approximately 1.6
million shares of our common stock will be exchanged for all of the issued
and outstanding shares of Data Systems. The acquisition was approved by our
board of directors and by the board of directors of Data Systems. The
acquisition is subject to various closing conditions, including approval by
the shareholders of Data Systems. The closing of the acquisition is
anticipated to occur either in June or July of 1999.
- - On February 16, 1999, we acquired a next generation web server technology,
called Metaphoria, from Pencom Systems Incorporated, a private company
based in New York, New York ("Pencom"). In exchange for $750,000 of our
common stock and the assumption of certain Pencom obligations, we acquired
all of Pencom's right to its Metaphoria software. Metaphoria is a virtual
web server ("VWS"). A VWS can gather information from multiple data sources
simultaneously and present the information through a Web browser as a
single point of access. This presentation can be tailored to each specific
end user's requirements.
- - On February 18, 1999, we signed a letter of intent to acquire the stock of
Tumble Interactive Media, Inc. and its affiliated companies ("Tumble"), all
of which are private companies based in New York, New York. Tumble is
engaged in providing various Internet related services, including
multimedia design, website development and a full suite of Internet access
and hosting solutions. We are currently in the process of negotiating the
terms and conditions of the definitive merger agreement.
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Once these acquisitions are completed, coupled with our experience with legacy
systems, we will offer complete Internet solutions that integrate strategic
consulting, design, engineering, electronic relationship marketing, online
media, Web hosting, and maintenance. The principal vehicle for such services
will be through Enterprise Information Portals (EIP) (See "Risk Factors -- New
Strategic Direction").
EIP's are a way for organizations to view their disparate data through a single
Web browser interface. Such information comes to the Web browser from a variety
of sources. The EIP permits an organization to view unstructured data, such as
internal and external documents, structured data, such as information contained
in databases, and conduct business electronically all in real time through a
single point of access. In order to build an EIP, experience in a company's
legacy systems, network, web design, a VWS and internet hosting is required. We
believe our recent acquisitions and proven experience in legacy systems fill
these requirements and position us to become a leading provider of such
services.
As we reported on April 1, 1999, our Chief Financial Officer, V. Hollis Scott,
resigned from all his positions with us.
On February 22, 1999, we announced our intention to change our name to
Information Architects Corporation to better describe our new strategic
direction. We reserved the name in North Carolina and are currently doing
business as Information Architects Corporation. We plan to submit the name
change to the shareholders for approval at our next annual shareholder meeting.
If approved, we will amend our Certificate of Incorporation to reflect our new
name and begin trading under the symbol "IARC", which we have reserved on the
National Association of Securities Dealers National Market System.
PERSONNEL
As of December 31, 1998, we had 298 employees and 31 contract
programmers working at our site. The contract programmers were supplied by
independent agencies. Beginning in the first quarter of 1999, we began to
transition most contract programmers to full-time employees. As of March 30,
1999 only 3 contract programmers remain. Of the workforce, 169 individuals are
engaged in production, 45 in research and development, 39 in sales, and the
balance of 45 in administration and systems support.
We recognize that we will need to expand our workforce in light of
recent acquisitions and our future plans (See "Recent Developments"). To date,
we have been successful in recruiting qualified personnel, and, as such, believe
we will be able to satisfy our personnel requirements. (See "Risk Factors - New
Strategic Direction - We May Be Adversely Affected If We Are Not Able to Attract
and Retain Qualified Professionals")
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
We hold numerous registered trademarks in the United States, including
Alydaar(R), SmartCode(R), and Information Architects(R). We have filed for
protection of these trademarks in Europe. We also hold registered copyrights for
the SmartCode software. In addition, there is a patent application filed with
the U.S. Patent and Trademark office for our newly acquired software known under
the trademark "Metaphoria". We also filed for patent protection of Metaphoria
under the Patent Cooperation Treaty in the European Patent Region, Japan and
Israel.
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We rely on a combination of copyright, trade secret trademark laws, and
contractual provisions to establish and protect our rights to our proprietary
technology. We protect the source code version of our products as a trade secret
and as a copyrighted work. In addition, we have adopted stringent internal
security measures. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse engineer our software or obtain and use
information that the we regard as proprietary. (See "Risk Factors - Generally
Applicable to Our Business -- If We Are Unable to Adequately Protect Our
Intellectual Property Rights Or If Our Intellectual Property Rights Are
Challenged, Our Business Could Suffer".)
RISK FACTORS - GENERALLY APPLICABLE TO OUR BUSINESS
We Are Dependent On Our New Strategic Direction To Replace Revenues From Our
Year 2000 Business. Until the completion of our announced acquisitions (see
"Business -- Recent Developments"), we will derive substantially all of our
revenues from our Year 2000 business. We anticipate that the Year 2000 business
will begin to decline, perhaps dramatically, after December 31, 1999. In order
for us to sustain our growth and viability after December 31, 1999, we entered
into agreements to acquire Data Systems, Tumble and the Metaphoria software (see
"Recent Developments"). The successful implementation of the acquisitions of
Data Systems, Tumble, Metaphoria software and other possible acquisitions are
dependent on a number of factors, including our ability to assimilate the
operations, personnel, and technology of the acquired companies and
technologies, and our ability to provide sufficient capital either from
internally generated revenues or external sources to properly fund the
integration and future growth of the combined entities. We may not be successful
in the integration of these entities. Also, if we do not complete any of these
acquisitions, we will need to seek other acquisitions or business combinations
to replace the revenues generated by our Year 2000 business. If we are unable to
complete the announced acquisitions or find other sources of revenues, it could
have a materially adverse affect on our stock trading price, prospects and
financial condition.
Our Future Results Will Depend On Our Ability To Manage Change. We have
experienced substantial growth and expansion in our business and operations
since our inception. We expect to continue to experience periods of rapid change
as we implement our new strategic direction and integrate acquisitions.
Continued expansion places significant demands on our administrative,
operational, financial, and other resources. The failure of our management team
to successfully manage the changing business could have a material adverse
impact on our business, results of operations and financial condition.
Our Quarterly Results Are Subject To Significant Fluctuations. We have
experienced significant quarterly fluctuations in revenues and operating
results, including the fourth quarter of 1998, and expect these fluctuations to
continue in the future. These fluctuations may occur and have occurred due to a
number of factors including:
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- - the length of customer's evaluation process for our services;
- - sales pipeline disruption caused by a major restructuring of the sales
and marketing departments during the third and early fourth quarters of
1998;
- - changes in the mix of Y2K services from higher price remediation
services to lower price validation services;
- - the timing and cost of new product and service introductions;
- - the timing of any acquisitions and associated costs; and
- - general economic conditions.
Furthermore, these fluctuations could materially and adversely affect the price
of our Common Stock in future quarters if our revenues or operating results are
below expectations. (See "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations.").
Our Recent And Planned Acquisitions And Financing Are Dilutive To Existing
Stockholders. We will issue common stock to complete each of our recent and
planned acquisitions and in connection with the debentures issued in the
"Marshall Financing" (See "Business - Recent Developments"). Our debentures are
convertible into shares of our common stock based on the trading prices of the
common stock in the future. The conversion price of the debentures is adjusted
monthly based on the trade price of our common stock. If the trading price of
the common stock is low when the conversion price of the debentures is
determined, we would be required to issue a higher number of shares of common
stock, which could cause substantial dilution to our stockholders. In addition,
if the debenture holders convert their debentures and sell the common stock,
this could result in an imbalance of supply and demand for our common stock and
reduce its price. The further our stock price declines, the further the monthly
adjustment of the conversion price will fall and the greater the number of
shares we will have to issue upon conversion. The Data Systems acquisition is
structured with a minimum price per share of $6.00. If the average price per
share for the ten trading days immediately prior to closing of this acquisition
is less than $6.00 per share, then we are required to issue the number of shares
equivalent to $9,666,282. These transactions and any future acquisitions or
financing requiring additional issuances of our common stock could be dilutive.
Our Debenture Financing Limits Our Ability To Enter Future Transactions And The
Debenture Holders Can Require Us To Redeem The Debentures At A Premium If
Certain Events Happen. In March 1999, we raised $3 million by issuing
debentures, which are convertible into shares of our common stock. The
debentures and related agreements contain significant covenants. These covenants
may limit our ability to enter into future transactions, including financing
transactions and transactions involving a change in control or acquisition of
us. The debenture holders can require us to redeem the debentures at a premium
if certain events happen, including:
- - If we breach the representations, warranties and covenants contained in
the debentures and related agreements;
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- - If the SEC does not declare the registration statement covering the
common stock issuable upon conversion of the debentures effective by
the 120th day after the registration statement is filed; or
- - If we are acquired by a third party.
The redemption price will be 125% of the outstanding principal amount if certain
events within our control occur and also after certain change of control
transactions. The redemption price will be 110% if certain events not within our
control occur and following certain other change of control transactions. If the
debentures become redeemable, we may not be able to pay the redemption price.
Even if we are able to redeem the Debentures, the redemption payments could be
substantial and this could have a material adverse effect on our business and
financial condition.
We May Need To Raise Additional Capital. If we decide to expand more rapidly
than currently anticipated or we do not materially meet our revenue projections,
we may need to raise additional capital. Any additional equity financing will be
dilutive to stockholders, and debt financing will involve restrictive covenants,
which may limit our operating flexibility. If financing is not available on
acceptable terms, we may be unable to develop or enhance our products, take
advantage of future opportunities, or respond to competitive pressures, or
unanticipated requirements. The occurrence of any of these factors could have a
material adverse effect on our business, financial condition, and operating
results. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.")
If We Are Unable To Adequately Protect Our Intellectual Property Rights Or If
Our Intellectual Property Rights Are Challenged, Our Business Could Suffer. Our
success depends significantly upon our proprietary technology. We currently
protect our proprietary rights through a combination of patent, copyright,
trademark, trade secret law, confidentiality agreements and contractual
provisions. Certain provisions of our client agreements, including provisions
protecting against unauthorized use, copying, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions. We are also required to
negotiate limits on these provisions from time to time. We may not be able to
adequately deter misappropriation of proprietary information or to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights.
In recent years, litigation involving patents and other intellectual property
rights has increased. Certain patents may cover solutions to the Y2K Problem. We
believe that we are either not using these patented solutions or have utilized
such solutions prior to the patent filing date. Regardless, we may be a party to
litigation in the future to protect our intellectual property or for allegedly
infringing other intellectual property rights. Such litigation may force us to
do one or more of the following:
- - Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- - Obtain from the holder of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms;
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and
- - Redesign our affected products or services.
The occurrence of any of these factors could materially and adversely impact
our operations and results.
We Face Potential Liability To Clients From Our Year 2000 Business. There is
increasing litigation arising out of failures or potential failures in computer
systems arising out of the Y2K Problem. To date, we are not a party to any
litigation arising out of a Y2K failure. We have attempted to limit our
liability for Y2K claims through provisions in our contracts with customers,
limiting our damages, generally providing no warranties on our services through
the Year 2000, and disclaiming all other warranties. These contractual
protections may not be enforceable in all instances, and may not otherwise
protect us from the substantial costs involved in defending a Y2K claim. We
currently self-insure against the possibility of these costs. In the event we
become a party to any such litigation, the cost of defending such litigation or
adverse outcome could materially adversely affect our business, results of
operations and financial condition.
We May Not Be Able To Respond To Rapid Technological Change. Rapid technological
change characterizes the markets for Internet professional services and Y2K
services. Our future success will depend significantly on our ability to improve
our existing services and products, offer new services, enhance our recently
acquired products and develop, acquire and market new products and services. Our
failure to adequately and timely respond to changing technology could result in
material adverse effects to our business and operations.
Our Stock Price Has Been Volatile And We Have Not Paid, And Do Not Plan To Pay,
Cash Dividends. Since our inception we have not paid, and do not intend to pay,
any cash dividends on our common stock in the foreseeable future. Historically,
our common stock's price and trading volume has fluctuated widely. We expect
this fluctuation to continue in the future for a number of reasons, including
the following:
- Our success or failure in meeting market expectations of our
quarterly or annual revenues, net income or earnings per
share;
- Our or competitor's announcements regarding new services and
products or technological innovations;
- Stock prices for many technology companies fluctuate widely
for reasons that may be unrelated to operating results;
- Changing market conditions in the industry; and
- Announcements of unusual events such as acquisitions.
Fluctuations in the market price of our stock may, in turn, adversely affect our
ability to complete any planned acquisitions, our access to capital and
financing and our ability to attract and retain qualified personnel, all of
which could have a material adverse effect on our business.
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We May Be Adversely Affected If We Lose Key Personnel. Our success depends
largely on the skills, experience and performance of some key members of our
senior management and technical personnel. The loss of one or more of these key
personnel could have a materially adverse effect on the business.
Our Results May Be Adversely Affected By Our International Operations. Our
international sales, primarily in France, England and the rest of Europe
attributed approximately 18% of our total consolidated revenues for the year
ended December 31, 1998. We anticipate that international business will account
for a significant portion of our revenues in 1999. The risks inherent in
international markets, include:
- - unexpected changes in regulatory requirements;
- - difficulties in staffing and managing foreign operations;
- - political instability;
- - potentially adverse tax consequences;
- - potentially adverse differences in business customs, practices and
norms;
- - differences in accounting practices;
- - longer payment cycles;
- - problems in collecting accounts receivable;
- - fluctuations in currency exchange rates; and
- - seasonal reductions in business activity during the summer months in
Europe.
Any of these could adversely impact the success of our international operations.
The factors described above may have an adverse effect on our future
international revenues and, consequently, on our business, results of operations
and financial condition.
Mr. Gruder Exercises Significant Control Over Us. Mr. Gruder, our Chief
Executive Officer and Chairman of the Board, is presently the beneficial owner
of approximately 40% of our outstanding common stock. Although Mr. Gruder's
ownership will be diluted as a result of planned acquisitions and financing (See
"Recent Developments"), Mr. Gruder will continue to be in a position to
influence the election of directors and generally to direct our affairs
including certain significant corporate actions such as acquisitions, the sale
or purchase of assets and the issuance and sale of our securities.
We Face Intense Competition For Year 2000 Services. Our Y2K services have
intense competition from two different sources: Remediation performed in-house
and Remediation and Validation software and services offered by direct
competitors. Many of our competitors are better established, have existing
relationships with customers and have far greater resources than us. As a result
of this competition, our revenues for Y2K services could decrease which would
have a materially adverse effect on our business, financial conditions, results
of operations and prospects. (See "Business - Competition.")
13
<PAGE> 14
RISK FACTORS - NEW STRATEGIC DIRECTION
We May Be Adversely Affected If We Are Not Able To Attract And Retain Qualified
Professionals. The future success of our new strategic direction will depend on
our ability to attract, train, motivate and retain personnel who provide the
Internet strategy, technology, marketing, and creative skills required by
clients. We believe that there is a shortage of, and significant competition
for, professionals with the advanced technological skills necessary to perform
the services offered by our new Internet services. We also intend to transfer
current employees from our Y2K business to our new Internet business. The
transition will require training in new technology and new skills sets
applicable to Internet technology. Once trained, such individuals will be in
higher demand because of their new skill set. Additionally, not all of our
current personnel will be able to acquire the skills necessary to transition to
our new business. We cannot be certain that we will be successful in attracting,
assimilating, transitioning or retaining qualified technological personnel in
the future. Our failure to do so could have a materially adverse affect on our
ability to deliver and enhance our services.
We May Not Be Able to Develop Successful Products. We recently acquired and plan
to develop new software products designed to facilitate communication and
commerce over the Internet. This software is in a development stage and will
require significant expenditures of resources to complete the development
effort. These products will involve a new approach to the conduct of online
business and as a result, intensive marketing and sales efforts may be necessary
to educate prospective customers regarding the uses and benefits of our
products. We cannot be certain that we will successfully develop and market new
products, new product enhancements or new products compliant with present or
emerging Internet technology standards. Any delays in developing and releasing
enhanced or new products could have a materially adverse effect on our business,
operating results and financial condition.
We Will Face Intense Competition In The Internet Market. The market for Internet
professional services and products is relatively new, intensely competitive and
subject to rapid technological change. There is competition on two distinct
levels: (i) from in-house development efforts by potential customers and (ii)
third party competitors. Our third party competitors include service vendors,
advertising and media agencies, large information technology consulting service
providers, telecommunications companies, Internet and online service providers
and software vendors. Many of our current and potential competitors have longer
operating histories, established name recognition, longer relationships with
clients and significantly greater financial, technical, marketing and public
relations resources. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products or services. Also, businesses may not
elect to outsource the design, development and maintenance of their Websites or
utilize Internet professional services firms. All of these factors could have a
material adverse effect on our business, financial condition, results of
operations and prospects. (See "Business--
14
<PAGE> 15
Competition".)
Future Regulations Could Be Enacted That Either Directly Restrict Our
Business Or Indirectly Impact Our Business By Limiting The Growth of Internet
Commerce. We are not aware of any legislation or regulatory requirements
currently in effect in the United States that regulate Internet commerce.
Certain other countries and political entities, however, such as the European
Economic Community, have adopted legislation and regulatory requirements that
regulate Internet commerce. As Internet commerce evolves, we expect that
federal, state, local or foreign agencies will adopt regulations covering
issues such as user privacy, pricing, content and quality of products and
services, freedom of expression, taxation, advertising, intellectual property
rights, information security or the convergence of traditional communications
services with Internet communications. If enacted, such laws, rules or
regulations could restrict the market or increase the costs for our products
and services, which could materially adversely affect our business, financial
condition and operating results.
ITEM 2. PROPERTIES
We presently lease office space for our executive offices and
operations in two office complexes located at 2101 Rexford Road, Suite 250W,
Charlotte, North Carolina and 4201 Congress Street, Charlotte, North Carolina.
These leases are month-to-month leases terminating on August 13, 1999. We are
planning to terminate these leases, without penalty, in May 1999 in order to
consolidate our operations in a new office located at Two Morrocroft Center,
4064 Colony Road, Charlotte, North Carolina. We have already entered into a ten
year lease for the new headquarters building. The lease is between us and a
partnership in which Mr. Gruder, our Chairman and CEO, is a limited partner.
(See "Certain Relationships and Related Party Transactions")
In addition, we lease space for 8 sales offices located throughout the
United States and the United Kingdom as follows:
<TABLE>
<CAPTION>
Location Expires
-------- -------
<S> <C>
1. Cherry Hill, NJ Month-to-Month
2. Chicago, IL 01-31-00
3. Columbus, OH Month-to-Month
4. Melville, NY 12-31-99
5. Newport Beach, CA Month-to-Month
6. San Francisco, CA 09-06-99
7. Laguna Niguel, CA 06-01-99
8. Esher, UK 7-6-2000
Total
</TABLE>
15
<PAGE> 16
ITEM 3. LITIGATION
There is a lawsuit pending against us and our Chief Executive Officer,
Robert F. Gruder ("Gruder"): Andrew Kaplan et al. v. Robert F. Gruder et al.,
Index No. CV 96 03343085, Superior Court (Conn.), Judicial District of Fairfield
at Bridgeport (the "Kaplan Lawsuit"). Thomas J. Dudchik, our Senior Vice
President and Director, is also named as a defendant in the Kaplan Lawsuit.
The Kaplan Lawsuit involves allegations by a group of former creditors
of GEM Technology, Inc. ("GEM") of breach of contract and misrepresentations.
The plaintiffs claim they were fraudulently induced to invest in GEM; that GEM
wrongfully transferred assets to Alydaar Software Corporation ("Alydaar") and
Alydaar promoted products based on technology misappropriated from GEM. The
plaintiffs are seeking unspecified damages, but claim they are entitled to
damages equal to a nine percent interest in GEM, and as such, some interest in
GEM's alleged successor Alydaar. This matter is only before a judge and not a
jury. It originally went to trial in April of 1998 but was adjourned until
October 1998 after only two days. In October 1999 the trial continued and was
completed. The parties submitted trial briefs and on February 22, 1999, gave
oral arguments before the judge on the merits of the case. The judge must send a
written decision to the parties within six months of February 22, 1999. Mr.
Gruder has agreed to indemnify and hold us harmless in the event of a judgement
against us. In exchange, we have agreed to bear all costs of the litigation for
Mr. Gruder and ourselves. (See "Certain Relationships and Related
Transactions.")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
the year ended December 31, 1998.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS
Our Common Stock trades on the NASDAQ National Market System ("National
Market") under the symbol "ALYD." The Common Stock was admitted to trading on
the National Market on December 3, 1997. Prior to that and from 1982 through
December 2, 1997, the Common Stock traded on the Bulletin Board, first as
Enertronix and later as Alydaar.
The following tables set forth the high and low bid prices for the
Common Stock on the Bulletin Board and the high and low bid prices on the
National Market for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
For Year Ended December 31, 1997
--------------------------------
High Bid Low Bid
-------- ---------
<S> <C> <C>
1st Quarter Ended March 31, 1997 $12.187 $ 9.25
2nd Quarter Ended June 30, 1997 $22.125 $ 8.00
3rd Quarter Ended September 30, 1997 $32.125 $19.00
Period Ended November 30, 1997 $22.50 $11.437
Period Ended December 31, 1997(1) $19.25 $14.125
For Year Ended December 31, 1998
--------------------------------
High Bid Low Bid
-------- ---------
1st Quarter Ended March 31, 1998 $19.25 $14.25
2nd Quarter Ended June 30, 1998 $17.9375 $11.75
3rd Quarter Ended September 30, 1998 $17 $6.4375
4th Quarter Ended December 31, 1998 $9.25 $5.625
</TABLE>
- ---------------------
(1) Our Common Stock was admitted to trading on the National Market on
December 3, 1997, and as such, the price reflects the high and low sales for the
month of December, 1997.
The tables set forth above were for periods as reported by the National
Association of Securities Dealers Corporate composite feed and NASDAQ. The
figures represent inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
17
<PAGE> 18
As of March 15, 1999, the number of beneficial holders of our Common
Stock was approximately 7,000, based on information received from our transfer
agent and those brokerage firms who hold securities for customers in "street
name."
We have not paid any cash dividends since our inception. By reason of
our present financial status and contemplated future financial requirements, we
do not anticipate paying any cash dividends in the foreseeable future. (See
"Risk Factors - Generally Applicable to Our Business -- Our Stock Price Has Been
Volatile And We Have Not Paid, and Do Not Plan to Pay, Cash Dividends.")
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ending December 31st
(000, except per share data)
1998 1997 1996 1995 1994
------- -------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net Revenues $27,790 $ 10,736 $ 38 $ 229 $ 160
Payroll and Related Costs $19,239 $ 13,801 $ 3,598 $ 444 $ 236
Net Profit (Loss) 1,398 (7,797) (5,133) (580) (304)
Net Income (Loss) 0.08 (0.51) (0.41) (0.05) (0.03)
Per Common Share
Total Assets 23,471 18,866 2,869 133 160
Long Term Obligations 121 101 0 0 0
Cash Dividends 0 0 0 0 0
</TABLE>
Prior to 1994, our operations were primarily related to research and development
of software (SmartCode(R)) to offer automated computer language translation
services: converting one computer language to another. Revenue for 1994 and 1995
resulted from sales of computer language translation services. Between 1994 and
1996, we directed our efforts to adapting SmartCode(R) as an automated solution
to the Y2K Problem. We only began to generate revenues from our Y2K Problem
solution commencing with the second quarter of 1997. As such, the selected
financial data is not indicative of future operation results.
18
<PAGE> 19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis contains a number of "forward-looking
statements" within the meaning of Section 27.A. of the Securities Act of 1933
and Section 21.E. of the Securities Exchange Act of 1934, both as amended, and
are subject to a number of risks and uncertainties, including those set forth
elsewhere in this Report (See "Risk Factors"). The following discussion should
be read in conjunction with the "Selected Financial Data" and the other
financial data appearing elsewhere in this Form 10-K.
RESULTS OF OPERATIONS FOR 1996, 1997, AND 1998
During 1996, we were a research and development company engaged in software
development to offer an automated solution for the Y2K Problem. From August 31,
1996, through December 31, 1996, we added management and staff and grew from 35
people to approximately 190 employees and contract programmers. As we positioned
ourselves to successfully compete for large Y2K contract awards, we incurred a
loss of $5.1 million for 1996, while recording only $38,000 in revenues for the
year. We continued to incur substantial research, development, and
organizational cost through the first quarter 1997, as the loss amounted to $3.3
million and revenues totaled only $187,000. Finally, we successfully obtained
several contract awards during the second quarter 1997, producing revenues of
$2.2 million and narrowing our quarterly loss to $2.3 million. The third quarter
1997 results were similar to the second quarter. Finally, for the fourth quarter
1997, we reached a break even operating result, producing $6.2 million in
revenues. Therefore, the timing of the evolution of the business, both as to
operating expenses and revenues, causes the trends reflected in the following
comparisons of operating results not to be indicative of future periods'
operating results.
For the periods indicated, the following table sets forth selected items from
our Consolidated Statement of Operations, included in this Form 10-K, expressed
as a percentage of total revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
REVENUES 100.0% 100.0% 100%
EXPENSES
Payroll and related costs 69.2% 128.5 NM
Rent and occupancy 5.2 10.3 NM
Advertising and promotion 2.2 7.8 NM
Depreciation and amortization 6.6 7.8 NM
Bad debt expense 1.5 2.9 --
Litigation and legal costs 2.5 3.5 NM
Other operating expenses 11.4 18.2 NM
-------------- --------------
Total Expenses 98.6 179.0
-------------- --------------
OPERATING INCOME (LOSS) 1.4 (79.0)
OTHER INCOME (EXPENSES) (0.7) 0.8 NM
-------------- --------------
EARNINGS (LOSS) BEFORE TAX BENEFIT .07 (78.1) NM
INCOME TAX BENEFIT 4.3 5.5 --
-------------- --------------
NET EARNINGS (LOSS) 5.0% (72.6)% NM
============== ==============
NET EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.08 $ (0.51) $ (0.41)
============== ============== ==========
Diluted $ 0.08 $ (0.51) $ (0.41)
============== ============== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 17,446,467 15,387,125 12,394,056
============== ============== ==========
Diluted 17,584,510 15,387,125 12,394,056
============== ============== ==========
</TABLE>
19
<PAGE> 20
REVENUES
Net revenues for the years ended December 31, 1998 ("1998"), December 31, 1997
("1997"), and December 31, 1996 ("1996") were $27.8 million, $10.7 million and
$38,000, respectively. We were a research and development company during
1996 and through the first quarter of 1997. We began to generate revenues in the
second quarter 1997 from our proprietary, internally developed software solution
for the Y2K Problem. As we developed a reputation for very high quality Y2K
Remediation, we experienced a significant increase in contract awards. We
recorded revenues of $27.8 million for 1998, compared with $10.7 million for
1997, or a 160% increase. For the three-year period, virtually all revenues were
generated from Y2K services. During 1998, we developed software to provide
Validation services. Since Validation services are priced at 50% or less of the
Remediation services price, we do not expect an increase in Y2K business
revenues for 1999.
OPERATING EXPENSES
1998 COMPARED TO 1997
- - Total operating expenses for 1998 increased $8.176 million, or 43%, to $27.394
million from $19.218 million in 1998. Payroll and related benefit costs
increased from $13.801 million in 1997 to 19.239 million in 1998, a 39%
increase. The increase resulted from the amount of a full year's salary for 90
additional people, plus the cost of an additional 35 people added during 1998.
The additional personnel were added as the workflow increased during 1997 and
1998. Depreciation and amortization increased to $1.836 million from $838,000,
a 119% increase. This increase is due to a full year of depreciation on $1.664
million of 1997 fixed asset and software acquisitions, a full year of
amortization of goodwill, both versus half-year in 1997, and a half year
depreciation on 1998 fixed asset and software additions of $3.204 million.
Occupancy costs increased by $339,000 as we absorbed a full year's rent on
facilities which were expanded during 1997, payment of one month's rent for an
early lease termination penalty, approximately $150,000 in moving costs
associated with the move from the terminated lease facility, and higher rent
costs in a new facility for the last five months of the year. The lease
termination and relocation to other facilities was a strategic move to prepare
for consolidation of our operations in May 1999 in a newly constructed leased
facility. Advertising and promotion expenses declined to $612,000 from $832,000,
or 26%, mainly due to a reduction of $208,000 in the costs of sales
demonstrations. Bad debt expense increased by $92,000 to $403,000 from $311,000,
an increase of 30%. We increased our allowance for doubtful accounts and
wrote-off some accounts that were deemed uncollectable. Litigation expenses
amounted to $692,000 in 1998, an increase of $313,000 over the amount recorded
for 1997. We incurred the litigation costs in defending us and our officers in
connection with the lawsuits described in this Report at "ITEM 3-LEGAL
PROCEEDINGS." Other operating expenses increased 62% to $3.172 million from
$1.956 million, due to the significant increase in personnel, marketing and
selling activities and expanded square footage occupied in 1998 for a full year,
as compared with 1997 levels. Categories of expenses which increased
significantly included the following:
- - TELEPHONE EXPENSE--Telephone expense increased from $177,000 in 1997 to
$456,000 in 1998, an increase of 158%. During the last half of 1997, we
expanded our sales and sales support staff from two people to approximately
35. Therefore, we absorbed a full year of telephone expense from the
expanded sales force in 1998, as compared with approximately four months of
activity in 1997. A major increase in telephone expense resulted from a
three-month telemarketing campaign that involved approximately 25
telemarketers, and continuing telemarketing activities with 10 people for
the balance of the year.
- - LEGAL EXPENSE--Legal expense increased 198% from $124,000 to $370,000. The
majority of the increased legal expenses were incurred in connection with
potential acquisitions. Also, during 1998, we engaged a number of foreign
law firms for assistance in contract reviews and other matters related to
foreign customers.
- - COMPUTER MAINTENANCE--Beginning in January 1998, we covered all computers
and computer-related equipment under a third party maintenance agreement.
The total cost was $245,000, as compared with no cost in 1997.
20
<PAGE> 21
- - SALES OFFICE EXPENSE--Sales office expenses increased from $57,000 in 1997
to $228,000 in 1998, a 300% increase. Field sales offices were increased
from 1 to approximately 15 for effectively the last 3-month period of time
during 1997. Thus, the expense for 1998 was approximately 4 times more than
the expense recorded for 1997.
- - TRAVEL EXPENSE--Travel, meals and entertainment expenses increased $119,000
or 16% over the expense incurred for 1997 of $747,000. Although the sales
force expanded significantly during the last half of 1997, the regional
field sales office structure allowed customers to be serviced without
incurring a significant increase in travel and related expenses.
- - INSURANCE EXPENSE--Insurance expense increased 110% to $147,000 in 1998
from $70,000 in 1997. The insurance expense for 1998 includes retrospective
adjustments for 1997. The adjustments were for premiums that were based
upon actual revenues and number of employees for 1997, as compared with
April 1997 estimates used to project 1997 premiums.
- - SHAREHOLDER RELATIONS EXPENSE--For 1998, we incurred $62,000 in shareholder
relations expense compared with no expense for 1997. We became subject to
the reporting requirements of the 1934 Securities Exchange Act and were
listed on NASDAQ during 1997. Shareholder Relations Expenses for 1998
reflect the Annual Meeting and Annual Report expenses, as well as expenses
paid to a shareholders' relations firm during the last quarter.
- - CONFERENCES EXPENSE--For 1998, we incurred the expense of producing a new
conference display booth, new conference materials, and participated in
more conferences in 1998 than in 1997.
OPERATING EXPENSES
1997 COMPARED TO 1996
Operating expenses also experienced major increases from $5.199 million
in 1996 to over $19.218 million in 1997, a 270% increase. The change from a
research and development company in 1996 to an operating company in 1997 caused
this dramatic increase in operating expenses. Also, Alydaar International, Ltd.
("Alydaar International") added $1.161 million to operating expenses during 1997
for its cost of operations during the last half of 1997. Payroll and related
benefit costs increased from $3.598 million in 1996 to $13.801 million in 1997,
a 284% increase, as we added new personnel (from 194 people at December 31, 1996
to over 300 people at December 31, 1997) to meet the increase in sales volume.
Also, we absorbed a full-year cost of the 1996 increase in personnel from 30
people at June 30, 1996 to 194 at
21
<PAGE> 22
December 31, 1996. Occupancy costs also increased by approximately $781,000 from
1996 to 1997, as we expanded our operating facilities (or "factory") capacity
and opened over a dozen regional sales offices in the USA and UK during 1997.
Advertising and promotion expenditures increased from approximately $215,000 in
1996 to $832,000 in 1997. This increase was due to increased marketing efforts
by our sales force via print, direct mail and telemarketing efforts and over
$208,000 worth of demonstrations in 1997. Depreciation and amortization expense
increased by $488,000, due in large part to the amortization of $6.719 million
of goodwill, which was recorded at the time of acquisition of Alydaar
International, and depreciation on the increase in the amount of property and
equipment of $1.664 million. Bad debt expense was $311,000 in 1997, compared to
no bad debt write-off or provision for losses in 1996. Other operating expenses
increased $1.619 million in 1997, due to the significant increase in personnel,
marketing and selling activities and expanded square footage occupied in 1997
versus 1996. Categories included travel, meals and entertainment expenses, which
increased from $219,000 in 1996 to $747,000 in 1997; telephone expenses
increased by $138,000 in 1997 from 1996 due to a significant increase in sales
and marketing efforts during 1997 and an increase in the sales force from one
person in 1996 to 25 people from August 1997 through the end of the year; office
supplies and related expenses increased to $122,000 from $31,000 in 1996 due to
increased personnel; professional fees, which increased $348,000, primarily due
to legal fees incurred by us to defend against two civil actions filed against
us in late 1996; computer supplies and related expenses increased $79,000; sales
office expenses, including telephone, copying and similar expenses increased
$57,000; and other administrative and operating expenses, including postage and
employee training costs, increased by $378,000.
NET INCOME (LOSS)
In 1998 we produce net income of $1.398 million as compared with a loss
of $(7.797) million for 1997, an improvement in operating results of $9.195
million. As previously noted, 1997 was a year of ramping up the business,
beginning in the second quarter and reaching breakeven revenues in the fourth
quarter. We reached maturity by first quarter 1998, and successfully increased
business to net income of 5.0% of revenues. The loss for 1997 of $7.797 million
was 52% higher than the loss of $5.132 million for 1996. The 1996 loss was due
primarily to our decision to add approximately 150 people during the last half
of 1996 and to increase space occupied from 3100 square feet to approximately
30,000 square feet during the first half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had working capital of $7.250 million as
compared to working capital of $6.466 million at December 31, 1997. We had cash
and cash equivalents of $2.963 million at December 31, 1998, compared to cash
and cash equivalents of $1.527 million at December 31, 1997.
In addition to funding operating activities during 1998 cash flow was
used to purchase
22
<PAGE> 23
approximately $676,000 of equipment and to pay for $2.529 million of
additions to computer software. We expect to spend approximately $1.6 million
for furniture, fixtures, and equipment for new location which we expect to
occupy in May 1999. We expect that other equipment purchases will be less
than $500,000 during 1999. We also expect that additions to computer software
will not exceed $750,000 for 1999.
The primary sources of cash, other than from operating activities, were from
loans from stockholders, net of repayments, of approximately $2.1 million and
proceeds from issuances of stock under employee benefit programs of $608,000.
On March 5, 1999, we entered into an agreement with an affiliate of Credit
Suisse First Boston to sell up to $10 million of subordinated, convertible
Debentures (See footnote 14 "Subsequent Events" in Footnotes to Consolidated
Financial Statements). We sold $3 million of Debentures on March 5, 1999 and may
sell an additional $2 million of Debentures by June 30 upon the meeting of
certain conditions. We then have the option, upon satisfaction of certain
conditions, to sell an additional $5 million, during the period beginning
September 2, 1999, and continuing for a period of six months thereafter. We are
in the process of arranging a revolving line of credit facility from a major
financial institution, which would be secured by accounts receivable, during the
second quarter 1999.
Subsequent to December 1998, we announced agreements to acquire two companies.
Both transactions will use our Common Stock to acquire 100% of the Common Stock
of the two companies. (See "Business - Recent Developments")
We believe that the combination of present cash balances, future operating cash
flows, and cash provided from sales of debentures under the Debentures or
alternate working capital financing secured by us will be adequate to fund our
growth and provide adequate liquidity for the recently foreseeable future.
IMPACT OF INFLATION
We believe that inflation will not have a material impact on our future
operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting standards applicable to us consist of Statement of
Position 98-4, "Deferral of the Effective Date of the Provision of SOP 97-2,
Software Revenue Recognition" and Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with respect to certain transactions",
each of which relates to software revenue recognition requirements. It is not
expected that the adoption of these accounting pronouncements will have a
material effect on our operating results or financial condition.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs that were written using
two
23
<PAGE> 24
digits rather than four to identify the applicable year. Any of our computer
equipment, software and devices with embedded technology that are time-sensitive
may mistakenly identify a date field using "00" as the year 1900, rather than
the year 2000.
State of Readiness. We provide Y2K Remediation and Validation services to
Fortune 500 companies and government agencies and intend to employ the same
methods and processes to complete our own internal Y2K project. We established a
Y2K task force, comprised of members representing our various areas of business
operation, to assess, remediate and test the impact of Y2K on our IT and non-IT
systems, material third party relationships, and services. As identified by the
task force, our Y2K issues that may have a material impact on our ability to
continue our normal business practices include: internal business systems;
internet and intranet service; telecommunications; power; and the compliance and
readiness of our third party suppliers, vendors, and customers. The task force
has divided our Y2K project into three major phases: (1) identification,
assessment and planning; (2) remediation; and (3) verification and contingency
planning. We have completed the identification and planning portion of the first
phase and are in the middle of the assessment portion of the project. To date,
our progress has not revealed any information which indicates that the magnitude
of our Y2K problem is material. During the remediation phase of the project, we
will replace obsolete systems and update (or repair) the hardware, embedded
systems or applications both internally developed and those purchased from third
party vendors so they are Y2K compliant. During the verification and contingency
planning phase of the project, we will perform acceptance testing and review the
results to determine that the updated applications or internally remediated
systems are ready to return to production as well as remove any unused and
outdated hardware and software, and migrate the various systems to production
status. Based on information compiled to date, we expect to substantially
complete our compliance project, as outlined above, by the end of the third
quarter 1999. In addition to our own compliance efforts, we are conducting an
assessment of the third parties with which we have material relationships to
determine if they are Y2K compliant. We have contacted our key vendors and
suppliers and to date, we have not received sufficient responses to make a
definitive statement; however, the responses received indicate that these key
vendors and suppliers are addressing their Y2K issues. In May of 1999 we will be
moving into a newly constructed headquarters building. We have received
responses from most of the vendors and suppliers that are supplying either IT or
non-IT systems for the new headquarters and they have indicated that they are
addressing the Y2K issue. Finally, we have replaced our voice mail systems with
new, Y2K-compliant systems to better provide for the expanding communication
needs of the organization.
Costs to Address Y2K Issues. At this stage of the project, we project the total
estimated cost to be no more than $250,000. These costs consist primarily of the
cost of labor needed to complete our compliance project. The approximate labor
cost during the first quarter 1999 was $30,000, with the remainder to be
incurred in 1999 as the more labor intensive portions of the project are
completed. The move to the new headquarters building, replacement of IT and
non-IT systems and the timing thereof, arose in the
24
<PAGE> 25
ordinary course of our growth, and is not considered a cost associated with the
Y2K issue.
Risks of Year 2000 Issues. The failure to correct a material Y2K problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. If such failures occur, our results of operations,
liquidity, and financial condition could be materially and adversely affected
and we may be required to incur unanticipated expenses to remedy any problems
not addressed by our compliance efforts. Additionally, if any of our material
suppliers or vendors is not fully Y2K compliant, it is possible that a system
failure or miscalculations causing disruptions in our operations or potential
problems with our product and service offerings could result.
Contingency Plans. Part of our Y2K project includes the preparation of
contingency plans. We anticipate completion of our contingency plans by
mid-1999.
The statements made in this Form 10-K that are not historical facts contain
"forward-looking information" within the meaning of the Private Securities
Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, both as amended, which can
be identified by the use of forward-looking terminology such as "may", "will",
anticipates", "expects", "projects", "estimates", "believes" or "continue", the
negative thereof, other variations or comparable terminology. Important factors,
including certain risks and uncertainties with respect to such forward-looking
statements that could cause actual results to differ materially from those
reflected in such forward looking statements include, but are not limited to,
the impact of competitive products and services, the ability of customers to
package code in a timely manner, our ability to manage growth and acquisitions
of technology or people, diversification of our business, the effect of economic
and business conditions, including risks inherent in international operations,
the ability to attract and retain technical personnel and other risks detailed
from time to time in our SEC reports. We assume no obligation to update the
information in this release.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had no market risk sensitive instruments, positions or transactions at
December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Consolidated Financial Statements" on pages F-2 through F-16 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH
SECTION 16(A)
<TABLE>
<CAPTION>
Directors and Executive Officers Age Position
- -------------------------------- --- --------
<S> <C> <C>
Robert F. Gruder 40 Chief Executive Officer and Chairman of the
Board
Frank G. Milligan 58 President and Director
Thomas J. Dudchik 39 Senior Vice President and Director
James F. Helm 57 Chief Information Officer
Richard J. Blumberg 1 63 Director
</TABLE>
- --------------------------------
(1) Mr. Blumberg was appointed to fill the Director position vacated by
Mr. McMillan, who resigned for personal reasons. Mr. Milligan was appointed to
fill the Director position vacated upon Mr. Scott's resignation (See "Business
- -- Recent Developments"). Messrs. Blumberg and Milligan will be placed on the
ballot for election by our shareholders at our next annual meeting to serve a
one year term.
Directors are elected to serve until the next annual meeting of
shareholders or until their successors are elected and qualified. The Board of
Directors held three meetings during the calendar year 1998 and also met
informally and acted by written consent during the year. Officers serve at the
discretion of the Board of Directors subject to any contracts of employment. At
the present time there are no contracts.
ROBERT F. GRUDER has served as Chief Executive Officer and Chairman of
the Board of Directors since 1989. Prior to his association with the Company and
for three years, Mr. Gruder served as president of GEM Technologies, Inc.
("GEM"), a company which was engaged in developing a computer language compiler.
GEM filed for bankruptcy in 1992 pursuant to Chapter 7 of the Bankruptcy Code.
Mr. Gruder was the principal stockholder of GEM. Prior to Mr. Gruder's
association with GEM, he was employed at three different banks. Mr. Gruder is a
graduate of American University and holds a BS degree in finance.
FRANK G. MILLIGAN joined us as Chief Operating Officer in December 1996
and on May 19, 1998 was appointed President. In March 1999, Mr. Milligan was
appointed as a Director. Between 1963 and December 1996, Mr. Milligan was
employed by IBM. He served as a senior manager with various management
responsibilities in development and systems integration and general business
management. Mr. Milligan attended the University of Tennessee, where he received
BS and MS degrees in electrical engineering.
26
<PAGE> 27
THOMAS J. DUDCHIK joined the Company as Senior Vice President in
February 1996. He is responsible for all national and international marketing
and investor relations. Prior to joining the Company, Mr. Dudchik served as
Deputy Chief of Staff for Connecticut Governor Lowell P. Weicker, Jr. from
January 1993 through January 1995. As part of his responsibilities, Mr. Dudchik
administered the State of Connecticut's $10 billion annual budget for the 26
major state agencies, covering 50,000 state employees. From February 1991
through December 1992, Mr. Dudchik served as Deputy Commissioner of the
Connecticut Department of Environmental Protection. From February 1995 through
January 1996 he operated an advertising and sales promotion business. Mr.
Dudchik received a BA degree from Trinity College.
JAMES F. HELM joined the Company in April 1996. Mr. Helm serves as
Chief Information Officer for Information Technology. Prior to joining the
Company, Mr. Helm acted as an independent consultant to various companies
between 1994 and 1996. Prior to that, he was employed by Formula Consultants,
Inc. from June 1992 to May 1994 in various management positions and acted as
consultant to that company from February through May of 1992. From 1969 to
October 1991, Mr. Helm held various management positions with Unisys Corporation
("Unisys"). His last position with Unisys was Vice President of Customer
Services.
RICHARD J. BLUMBERG was appointed to serve as an interim director in
place of John McCarthy, who resigned as a director because of other personal
commitments. Mr. Blumberg is a practicing attorney in New York and for the last
five years has been a member of the firm of McLaughlin & Stern, LLP. The
McLaughlin & Stern law firm has acted as corporate counsel to Alydaar for the
last two years. Mr. Blumberg received a bachelor of laws degree from New York
University School of Law.
Messrs. Blumberg and Milligan currently serve on our Compensation
Committee. Messrs. Blumberg and Gruder currently serve on our Audit Committee.
Our outside directors, upon their appointment to the Board, were given
the option to receive an award of 15,000 warrants each. The warrants vest after
one year from the date of the grant at the fair market price of our Common Stock
on the date of grant and expire after 10 years. The outside directors do not
receive any compensation for their attendance at meetings, but are reimbursed
for travel expenses.
Based solely on review of the copies of such forms furnished to us or
written representations that no forms 5 were required, we believe that during
the year ended December 31, 1998 all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with.
27
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information with respect to compensation
paid by us for the services during the three years ended December 31, 1998 of
our Chief Executive Officer and President. No other officer receives
compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Re-
Other stricted Securities
Annual Stock Underlying LTIP All Other
Compen- Awarded Options/ Payouts Compen-
Name and Principal Position Year Salary($) Bonus($) sation($) ($) SARs(#) ($) sation($)
- --------------------------- ---- --------- -------- --------- ---- ------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ROBERT F. GRUDER 1998 68,730 -0- -0- -0- 2,000(1) -0- -0-
Chief Executive Officer
1997 60,000 -0- -0- -0- 2,000 -0- -0-
1996 60,000 -0- -0- -0- -0- -0- -0-
FRANK G. MILLIGAN 1998 103,519 -0- -0- -0- 102,000(2) -0- -0-
President
1997 94,231 -0- -0- -0- 73,000 -0- -0-
1996 5,846 -0- -0- -0- -0- -0- -0-
</TABLE>
- -----------------------
(1) Mr. Gruder was granted 2,000 incentive stock options under the 1994
Plan on April 24, 1997. These options were cancelled and replaced by 2000
options granted on October 8, 1998 and vest on October 8, 1999. The options
expire on October 8, 2003.
(2) Mr. Milligan was granted incentive and non-qualified stock
options over 1996, 1997 and 1998. These options were cancelled and replaced by
84,609 incentive and non-qualified stock options granted on October 8, 1998 and
vest on October 8, 1999. The options expire on October 8, 2008.
The senior executive officers do not currently receive any other
personal benefits except those made available to all employees, including health
insurance. We also have a 401(k) program, but during the year 1998, we made no
contributions.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
- ----------------- -----------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/ SARs
Underlying Granted to
Options/ SARs Employees in Exercise
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5% ($) 10% ($)
- ---- ----------- ----------- ------------ --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Gruder 2,000(1) * 6.33 10/08/03 8,800 18,700
Frank G. Milligan 102,000 8.8 5.75 10/08/08 346,800 371,280
</TABLE>
- -------------------
(1) The exercise price for the options granted to Mr. Gruder was
established at 110% of fair market value on date of grant. These options were
cancelled and replaced by 2000 options granted on October 8, 1998 and vest on
October 8, 1999.
* Less than one percent
28
<PAGE> 29
STOCK OPTION PLANS
In 1994, we adopted the Omnibus Stock Plan (the "1994 Plan") for the
benefit of our employees. The 1994 Plan covered the issuance of 375,000 options
to purchase shares of our Common Stock. The 1994 Plan was subsequently amended
in 1996 to increase the number of shares from 375,000 to 1,000,000. During 1997,
the 1994 Plan was further amended to increase the number of shares available
under the plan to 2,000,000. As of December 31, 1998 1,159,450 shares were
outstanding. The 1994 Plan provides for the issuance of options and/or stock
appreciation rights. The 1994 Plan permits the issuance of either incentive
stock options or non-qualified stock options. In case of incentive stock options
(as defined under Section 422 of the Internal Revenue Code), the exercise price
can be no less than fair market value on the date of grant. In the case of
non-qualified stock options, the exercise price may be less than then fair
market value. To date no options have been granted at less than fair market
value at date of grant. The 1994 Plan is administered by the Compensation
Committee. All employees are entitled to participate in the 1994 Plan, except
that no outside directors may participate. We have adopted a policy of offering
options to all full-time employees, which enables us to attract and retain
skilled and dedicated personnel. On October 8, 1998 we offered all employees the
option to trade in their existing options in exchange for an equal number of new
options at the option price of $5.75 to vest 100% on October 14, 1999. All but
one of the officers and directors took advantage of this option. All of the
outstanding options expire at various times between October 2003 and 2008 with
exercise prices ranging from $1.18 per share to $19.00 per share.
During 1997 the Board of Directors at the May 22, 1998 Annual Meeting
approved and the shareholders ratified the adoption of the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan permits employees to
purchase shares of our Common Stock through payroll deductions at six-month
29
<PAGE> 30
intervals as specified in the Purchase Plan at a 15% discount from market. The
Purchase Plan is to be administered by members of the Board who are ineligible
to participate in the Purchase Plan. An employee electing to participate can
have up to 10% of his weekly salary withheld for the purchase of stock. After
purchasing the shares, a participant, who is not subject to Section 16(b) of the
Exchange Act, may withdraw shares at any time. The Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"). If participants wish to avoid a tax on the purchase of Common Stock
under the Purchase Plan, the participant must meet certain holding period
requirements as required by the Code. The aggregate amount of purchases by any
employee may not exceed $25,000 per year. A total of 200,000 shares have been
reserved by us under the Purchase Plan. As of January 31, 1998 18,686 shares
were purchased under the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our Common Stock as of March 30, 1999 by (i) each person who is
known by us to own beneficially more than 5% of our outstanding Common Stock;
(ii) each of our officers and directors and (iii) all of our officers and
directors as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature* Percent of Class
- ---------------- ------------------ ----------------
<S> <C> <C>
Robert F. Gruder 7,035,815 40.3%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
Thomas J. Dudchik 118,666 *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
Frank G. Milligan 1,545 *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
James F. Helm 250 *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
Richard J. Blumberg (Director) 0 *
260 Madison Avenue
New York, NY 10016
All officers and directors 7,156,276 41.0%
as a group (9 persons)
</TABLE>
* Less than 1% of our outstanding shares of common stock.
30
<PAGE> 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the litigation referred to in Item 3, "Legal
Proceedings," Mr. Robert Gruder, our Chairman and Chief Executive Officer,
entered into an agreement with us to indemnify us against any liability
resulting from a final unappealable judgment in connection with the Kaplan
Lawsuit (See "Litigation"). In consideration of the agreement to indemnify us,
we agreed to pay Mr. Gruder's legal fees and expenses in defending the Kaplan
Lawsuit. As of December 31, 1998, we paid equal defense of $317,848.
Mr. Robert F. Gruder, Chairman and Chief Executive Officer, has made
advances to the Company from time to time to assist us in our working capital
requirements with annual interest at 10.5% per year. The loan is evidenced by a
promissory note payable on demand. As of December 31, 1998, the balance of the
loan due to Mr. Gruder was $3,005,534 and accrued interest of $236,494.
During, 1997 and 1998, V. Hollis Scott, our Chief Financial Officer,
advanced us $366,700 with interest at 10.5% per annum. The loan was evidenced by
a promissory note payable on demand. During 1998 we repayed Mr. Scott the
balance and interest of the loan. On December 31, 1998, Mr. Scott owed us
$320,750, representing the unpaid exercise price of certain stock options
exercised by Mr. Scott during 1998.
Mr. Gruder is a limited partner in the partnership group Two Morrocroft
Centre, LLC, which owns our new headquarter's building located at Two
Morrocroft Centre, 4064 Colony Road, Charlotte, North Carolina. In June 1998, we
entered into a lease with the partnership and expect to begin paying annual fees
of $2,000,000 in May 1999. The lease was negotiated as an arms length
transaction, approved by the Board of Directors and the rent is comparable to
similar rents in the area.
31
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 1. Financial Statements and Schedules
The financial statements and schedules appearing after the
Index to Exhibits are filed as part of this Annual Report.
3. Exhibits
The following exhibits are incorporated herein by reference or
are filed with this report as indicated below.
2.1 Agreement and Plan of Merger Between Data Systems Network
Corporation, Alydaar Acquisition Corporation and Alydaar
Software Corporation*
3.1(a) Articles of Incorporation of Daar, Inc.(1)
3.1(b) Articles of Merger of Alydaar Software Corporation into Daar,
Inc.(1)
3.1(c) Plan of Merger(1)
3.2 Amended and Restated By-Laws of Alydaar Software
Corporation(1)
3.2(a) Amendment to our Articles of Incorporation(3)
4.2 Debenture and Agreements relating to Convertible Debenture
Financing we received from Marshall Capital Management, Inc.(4)
10.2 Omnibus Stock Option Plan(1)
10.3 Amendments to Omnibus Stock Plan(2)
10.4 Standard Continuing Service Agreement(2)
10.5 Indemnification Agreement by Robert F. Gruder(2)
10.6 1997 Employee Stock Purchase Plan(2)
10.7 Purchase Contract of Alydaar International, Ltd.(2)
10.8 Subcontractor Agreement between Alydaar Software Corporation
and Compuware Corporation(2)
10.9 Lease, dated June 16, 1998, between Alydaar Software
Corporation and Two Morrocroft Centre, LLC*
16.1 Letter re: change in accountant(1)
23.1 Consent of Holtz Rubenstein & Co., LLP*
27 Financial Data Schedule *
</TABLE>
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALYDAAR SOFTWARE CORPORATION
By:/s/ ROBERT F. GRUDER
-----------------------------------------
Robert F. Gruder, Chief Executive Officer
and Chairman of the Board
Dated: April 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on April 5, 1999, by the following persons on
behalf of Registrant and in the capacities indicated.
/s/ ROBERT F. GRUDER
--------------------------------------------
Robert F. Gruder, Chief Executive Officer
and Chairman of the Board
/s/ FRANK G. MILLIGAN
--------------------------------------------
Frank G. Milligan, President and Director
/s/ THOMAS J. DUDCHIK
--------------------------------------------
Thomas J. Dudchik, Senior Vice President and
Director
/s/ MICHAEL RACANIELLO
--------------------------------------------
Michael Racaniello, Principal Financial and
Accounting Officer
/s/ RICHARD J. BLUMBERG
--------------------------------------------
Richard J. Blumberg, Director
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger Between Data Systems Network
Corporation, Alydaar Acquisition Corporation and Alydaar
Software Corporation*
3.1(a) Articles of Incorporation of Daar, Inc.(1)
3.1(b) Articles of Merger of Alydaar Software Corporation into Daar,
Inc.(1)
3.1(c) Plan of Merger(1)
3.2 Amended and Restated By-Laws of Alydaar Software
Corporation(1)
3.2(a) Amendment to our Articles of Incorporation(3)
4.2 Debenture and Agreements relating to Convertible Debenture
Financing we received from Marshall Capital Management, Inc.(4)
10.2 Omnibus Stock Option Plan(1)
10.3 Amendments to Omnibus Stock Plan(2)
10.4 Standard Continuing Service Agreement(2)
10.5 Indemnification Agreement by Robert F. Gruder(2)
10.6 1997 Employee Stock Purchase Plan(2)
10.7 Purchase Contract of Alydaar International, Ltd.(2)
10.8 Subcontractor Agreement between Alydaar Software Corporation
and Compuware Corporation(2)
10.9 Lease, dated June 16, 1998 between Alydaar Software
Corporation and Two Morrocroft Centre, LLC*
16.1 Letter re: change in accountant(1)
23.1 Consent of Holtz Rubenstein & Co., LLP*
27 Financial Data Schedule *
</TABLE>
- ------------------
* Filed herewith
(1) Incorporated by reference from our Registration of Securities on
Form 10, pursuant to Section 12(b) or (g) of the Securities Exchange Act of
1934, filed with the Commission.
(2) Incorporated by reference from our 1997 Form 10K Annual Report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, filed
with the Commission.
(3) Incorporated by reference from our Form 8K Current Report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934, filed May 28,
1998.
(4) Incorporated by reference from our Form 8K Current Report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934, filed March 12,
1999.
34
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statement of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-16
</TABLE>
F-1
<PAGE> 36
Independent Auditors' Report
Board of Directors and Stockholders
Alydaar Software Corporation and Subsidiary
Charlotte, North Carolina
We have audited the consolidated balance sheets of Alydaar Software Corporation
and Subsidiary (d/b/a Information Architects Corporation) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alydaar Software
Corporation and Subsidiary as of December 31, 1998 and 1997 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 23, 1999 (except for Note 15b,
as to which the date is March 5, 1999)
F-2
<PAGE> 37
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,962,570 $ 1,526,924
Accounts receivable, net allowance for doubtful
accounts of $100,000 and $115,000, respectively 5,231,116 5,150,617
Costs and estimated earnings in
excess of billings 2,213,036 1,297,986
Prepaid expenses and other current assets 304,621 249,801
Other receivable (Note 3) -- 435,000
Deferred tax asset (Note 12) 1,800,000 600,000
Loan to stockholder -- 51,256
----------- -----------
Total current assets 12,511,343 9,311,584
PROPERTY AND EQUIPMENT, net (Note 4) 2,561,253 2,697,051
COMPUTER SOFTWARE, net (Note 5) 2,254,429 222,026
GOODWILL, net of accumulated amortization of
$671,400 and $223,800, respectively (Note 2) 6,047,183 6,494,783
OTHER ASSETS 97,186 141,030
----------- -----------
$23,471,394 $18,866,474
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,341,651 $ 1,005,923
Accrued payroll and commissions 282,515 350,000
Other current liabilities 543,986 420,220
Billings in excess of costs and estimated
earnings on contracts in progress -- 49,497
Current portion of capital lease obligations 51,063 21,869
Loans payable, stockholders (Note 6) 3,042,029 998,118
----------- -----------
Total current liabilities 5,261,244 2,845,627
----------- -----------
CAPITAL LEASE OBLIGATIONS 121,327 101,230
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY: (Notes 2, 6 and 7)
Common stock, $0.001 par value, 50,000,000 shares
authorized; 17,505,686 and 17,808,728 shares issued 17,506 17,809
Additional paid-in capital 31,111,734 30,113,284
Deficit (12,696,567) (14,094,107)
Accumulated other comprehensive income (23,100) (26,924)
----------- -----------
18,409,573 16,010,062
Less: treasury stock, at cost -- (445)
receivable from warrant exercise (320,750) (90,000)
----------- -----------
Total stockholders' equity 18,088,823 15,919,617
----------- -----------
$23,471,394 $18,866,474
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 38
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES (Note 9) $27,790,621 $10,736,237 $ 37,500
----------- ----------- -----------
EXPENSES: (Notes 7 and 10)
Payroll and related costs 19,239,268 13,800,797 3,598,307
Rent and occupancy 1,440,608 1,102,050 320,707
Advertising and promotion 611,986 832,270 215,453
Depreciation and amortization 1,835,718 837,897 349,655
Bad debt expense 402,804 310,833 --
Litigation and legal costs 691,669 378,302 145,149
Other operating expenses 3,172,050 1,955,519 569,499
----------- ----------- -----------
27,394,103 19,217,668 5,198,770
----------- ----------- -----------
Earnings (loss) from operations 396,518 (8,481,431) (5,161,270)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (255,219) (54,171) (3,550)
Interest income 37,509 14,454 6,812
Other income 18,732 123,981 25,163
----------- ----------- -----------
(198,978) 84,264 28,425
----------- ----------- -----------
EARNINGS (LOSS) BEFORE
TAX BENEFIT 197,540 (8,397,167) (5,132,845)
INCOME TAX BENEFIT (Note 12) (1,200,000) (600,000) --
----------- ----------- -----------
NET EARNINGS (LOSS) $ 1,397,540 $(7,797,167) $(5,132,845)
=========== =========== ===========
NET EARNINGS (LOSS) PER
COMMON SHARE: (Note 7)
Basic $ .08 $ (.51) $ (.41)
=========== =========== ===========
Diluted $ .08 $ (.51) $ (.41)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: (Note 7)
Basic 17,446,467 15,387,125 12,394,056
=========== =========== ===========
Diluted 17,584,510 15,387,125 12,394,056
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 39
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Notes 2, 6 and 7)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Other
Additional Comprehe-
Shares Paid-in sive
Outstanding Amount Capital Deficit Income
----------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 11,187,373 $ 11,187 $ 1,282,770 $ 1,164,095 $ --
----------- -------- ------------ ------------ --------
Comprehensive (loss):
Net loss -- -- -- (5,132,845) --
Comprehensive loss -- -- -- -- --
Issuance of common shares 2,385,909 2,386 5,076,014 -- --
Issuance of common shares
as treasury stock 900,000 900 (900) -- --
Shares issued to employees from
exercise of stock options 10,000 10 202,695 -- --
Retirement of treasury stock (500,000) (500) (249,500) -- --
----------- -------- ------------ ------------ --------
Balance, December 31, 1996 13,983,282 13,983 6,311,079 (6,296,940) --
----------- -------- ------------ ------------ --------
Comprehensive (loss):
Net loss -- -- -- (7,797,167) --
Translation adjustments -- -- -- -- (26,924)
--------
Comprehensive loss
Issuance of common shares
for cash, net 1,703,500 1,704 12,986,118 -- --
Issuance of securities for services 45,000 45 367,455 -- --
Issuance of securities in connection
with business acquisition 791,652 792 6,358,208 -- --
Shares issued from exercise
of stock options/warrants 1,235,294 1,235 4,086,494 -- --
Conversion of debt for equity 50,000 50 3,930 -- --
----------- -------- ------------ ------------ --------
Balance, December 31, 1997 17,808,728 17,809 30,113,284 (14,094,107) (26,924)
----------- -------- ------------ ------------ --------
Comprehensive income:
Net earnings -- -- -- 1,397,540 --
Translation adjustments -- -- -- -- 3,824
Comprehensive income 1,401,364
Issuance of securities for services 1,900 2 13,798 -- --
Issuance of securities under
employee stock purchase plan 18,583 19 223,323 -- --
Shares issued from exercise
of stock options/warrants 113,475 113 705,550 -- --
Conversion of debt for equity 8,000 8 55,779 -- --
Retirement of treasury stock (445,000) (445) -- -- --
----------- --------- ------------ ------------ --------
Balance, December 31, 1998 17,505,686 $ 17,506 $ 31,111,734 $(12,696,567) $(23,100)
=========== ======== ============ ============ ========
<CAPTION>
Treasury Stock
------------------------
Receivable Total
from Stockholders
Warrant (Deficiency)
Shares Amount Exercise Equity
-------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 (500,000) $(250,000) $ -- $ (120,138)
-------- --------- --------- ------------
Comprehensive (loss):
Net loss -- -- -- (5,132,845)
------------
Comprehensive loss -- -- -- (5,132,845)
------------
Issuance of common shares -- -- -- 5,078,400
Issuance of common shares
as treasury stock (900,000) (900) -- (900)
Shares issued to employees from
Exercise of stock options 105,000 105 -- 202,810
Retirement of treasury stock 500,000 250,000 -- --
-------- --------- --------- ------------
Balance, December 31, 1996 (795,000) (795) -- 27,327
-------- --------- --------- ------------
Comprehensive (loss):
Net loss -- -- -- (7,797,167)
Translation adjustments -- -- -- (26,924)
------------
Comprehensive loss (7,824,091)
------------
Issuance of common shares
for cash, net -- -- -- 12,987,822
Issuance of securities for services -- -- -- 367,500
Issuance of securities in connection
with business acquisition -- -- -- 6,359,000
Shares issued from exercise
Of stock options/warrants 350,000 350 (90,000) 3,998,079
Conversion of debt for equity -- -- -- 3,980
-------- --------- --------- ------------
Balance, December 31, 1997 (445,000) (445) (90,000) 15,919,617
-------- --------- --------- ------------
Comprehensive income:
Net earnings -- -- -- 1,397,540
Translation adjustments -- -- -- 3,824
------------
Comprehensive income 1,401,364
------------
Issuance of securities for services -- -- 90,000 103,800
Issuance of securities under
employee stock purchase plan -- -- -- 223,342
Shares issued from exercise
of stock options/warrants -- -- (320,750) 384,913
Conversion of debt for equity -- -- -- 55,787
Retirement of treasury stock 445,000 445 -- --
-------- --------- --------- ------------
Balance, December 31, 1998 -- $-- $(320,750) $ 18,088,823
======== ========= ========= ============
</TABLE>
F-5
<PAGE> 40
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,397,540 $ (7,797,167) $(5,132,845)
----------- ------------ -----------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Stock based compensation 103,800 330,500 252,810
Allowance for doubtful accounts (15,000) 115,000 --
Depreciation and amortization 1,835,718 837,897 349,655
Loss on disposal of equipment 1,127 -- --
Deferred tax benefit (1,200,000) (600,000) --
(Increase) decrease in assets:
Accounts receivable (60,495) (4,963,962) (37,500)
Costs and estimated earnings
in excess of billings (915,050) (1,297,986) --
Prepaid expenses and other current assets (54,821) (66,719) (2,760)
(Decrease) increase in liabilities:
Accounts payable 335,728 (1,202,354) 1,986,654
Accrued payroll and commissions (67,485) 332,600 7,702
Other current liabilities 179,555 160,076 (59,274)
Billings in excess of costs
and estimated earnings (49,497) (170,495) --
----------- ------------ -----------
Total adjustments 93,580 (6,525,443) 2,497,287
----------- ------------ -----------
Net cash provided by (used in)
operating activities 1,491,120 (14,322,610) (2,635,558)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (675,511) (1,556,109) (1,737,561)
Proceeds from disposal of equipment 37,237 -- --
Additions to computer software (2,528,756) (107,971) (251,105)
Decrease (increase) in other assets 43,844 (80,808) (52,516)
Net cash received from acquisition of subsidiary -- 1,450 --
Decrease in other receivables 435,000 55,000 --
Loans receivable -- (300,000) --
----------- ------------ -----------
Net cash used in investing activities (2,688,186) (1,988,438) (2,041,182)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of stock 608,255 16,985,201 4,537,500
Advances to stockholders -- -- (10,183)
Loans from stockholders 2,628,147 1,394,568 503,370
Repayments of stockholders' loans (532,981) (900,000) --
Repayments of capital lease obligations (70,709) (21,179) --
----------- ------------ -----------
Net cash provided by financing activities 2,632,712 17,458,590 5,030,687
----------- ------------ -----------
NET INCREASE IN CASH 1,435,646 1,147,542 353,947
CASH AND CASH EQUIVALENTS,
beginning of year 1,526,924 379,382 25,435
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,962,570 $ 1,526,924 $ 379,382
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 41
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Description of business
Through 1998, the Company was engaged primarily in the business of
providing software reengineering services, specializing in the correction of
existing mainframe computer software systems to manage the year 2000 and
thereafter. By the end of 1998, the Company began transformation to become an
enterprise information portal business which will include document imaging,
networking, web design and hosting, legacy data acquisition, content
dissemination and presentation, in addition to continuing to provide year 2000
services.
b. Principles of consolidation
On July 1, 1997, the Company acquired a 100% interest in Alydaar
International, Limited ("International"). Accordingly, the Company's
consolidated financial statements include the accounts of International from the
date of acquisition. All significant intercompany transactions and accounts have
been eliminated as part of the consolidation of the financial information.
c. Cash and cash equivalents
For purposes of the cash flow statement, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash and/or cash equivalents.
d. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.
Intangible assets are amortized using the straight-line method over the
following periods:
Computer software 3 years
Goodwill 15 years
e. Revenue recognition
Commencing January 1, 1997, the Company reported revenues from
contracts on the percentage-of-completion method for financial reporting
purposes, in accordance with Statement of Position No. 97-2, "Software Revenue
Recognition", issued by the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee (AcSEC). Revenues under these contracts
are recognized based on the proportion of contract costs incurred to total
estimated contract costs. Contract costs include all direct labor related to
contract performance. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
F-7
<PAGE> 42
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
e. Revenue recognition (Cont'd)
Prior to January 1, 1997, the Company used the accrual method of
accounting, wherein revenue was recognized when the contract tasks were
completed and accepted by the customers.
This change had no effect on prior years, and accordingly, pro forma
results for prior years are not applicable.
f. Income taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
g. 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.
h. Foreign currencies
Assets and liabilities recorded in foreign currencies on the books of
the foreign subsidiary are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to equity. Revenues, costs and expenses are translated at average rates
of exchange prevailing during the year.
i. Research and development
Research and development costs are expensed as incurred.
j. Software development costs
The Company's policy is to capitalize certain costs attributable to
modifying and improving its software product or developing additional features
of its code subsequent to the establishment of technological feasibility to the
extent that costs are realizable from future revenues. Costs subject to
capitalization include labor, overhead, and purchased software. Costs
capitalized in 1998, 1997 and 1996 approximated $2,529,000, $108,000 and
$251,000, respectively.
k. Comprehensive income
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. The Company's other
comprehensive income is comprised of foreign currency translation adjustments.
The tax benefit or expense, as well as any reclassifications related to the
components of other comprehensive income were not significant.
l. Advertising costs
Advertising costs are expensed as incurred. Advertising expense
approximated $612,000, $624,000 and $215,000 in 1998, 1997 and 1996,
respectively.
F-8
<PAGE> 43
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
m. Reclassifications
Certain items in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 classifications.
n. New accounting standards
In March 1998, AcSEC issued Statement of Position No. 98-1, "Accounting
for Costs of Computer Software Developed for Internal Use" ("SOP-98-1"). SOP No.
98-1, effective for years beginning after December 15, 1998, requires certain
costs incurred in connection with developing or obtaining internal-use software
to be capitalized and other costs to be expensed. Under SOP No. 98-1,
non-payroll related overhead costs must be charged to operations as incurred.
Had the Company implemented SOP No. 98-1 as of January 1, 1998, earnings before
income taxes for 1998 would have been reduced by $456,000.
In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires
that all start-up (or pre-opening) activities and organization costs be expensed
as incurred. This SOP is effective for years beginning after December 15, 1998.
The Company believes it has complied with the provisions of this pronouncement
for all periods presented.
2. BUSINESS COMBINATION:
On July 1, 1997, the Company acquired 100% of the capital stock of
International. The purchase price approximated $6,720,000, which consisted of
791,652 shares of common stock (valued at $6,115,000), options to acquire
207,152 shares of the Company's common stock for $15 per share (valued at
$244,000) and the forgiveness of debt. The Company had no equity interest in
International prior to the acquisition. The transaction was accounted for as a
purchase. The Company recorded approximately $6,720,000 of goodwill in
connection with the acquisition.
50,000 of the shares of common stock issued in connection with this
transaction were granted to an officer of the Company, who was also a
stockholder of International.
3. OTHER RECEIVABLES:
Other receivables at December 31, 1997 consist of amounts owed the
Company for shares of common stock issued in connection with warrant exercises
which were collected in 1998.
4. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Equipment and furniture $3,653,207 $3,221,535
Transportation equipment 226,354 144,278
Leasehold improvements 430,054 190,108
---------- ----------
4,309,615 3,555,921
Less accumulated depreciation 1,748,362 858,870
---------- ----------
$2,561,253 $2,697,051
========== ==========
</TABLE>
F-9
<PAGE> 44
5. COMPUTER SOFTWARE:
COMPUTER SOFTWARE CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Capitalized internal costs $2,035,906 $ 47,147
Purchased software 851,926 311,929
---------- --------
2,887,832 359,076
Less accumulated amortization 633,403 137,050
---------- --------
$2,254,429 $222,026
========== ========
</TABLE>
6. LOANS PAYABLE, STOCKHOLDERS:
Loans payable, stockholders represent loans from certain corporate
officers/stockholders. The loans are due on demand and bear interest at 10 1/2%.
One of the loans, which originated in 1992, provided for the conversion
of the loan to common stock at a conversion rate approximating the fair market
value of the common stock ($.08 per share) at the time the loan was made. In
1997, this loan was converted into 50,000 shares of common stock.
7. STOCKHOLDERS' EQUITY:
a. Capital stock
During 1998, the Company issued approximately 113,500 shares of common
stock for net proceeds approximating $717,000 in connection with the exercise of
warrants and options. An additional 18,600 shares of common stock were issued
under the Employee Stock Purchase Plan (the "Purchase Plan") for proceeds of
$223,000. Further, the Company issued 9,900 common shares for services and to
satisfy an outstanding liability.
During 1997, the Company issued 1,703,500 shares of common stock under
Regulation S offerings for net proceeds of $12,988,000. The Company also issued
1,585,294 shares of common stock (including 350,000 shares distributed from
treasury) for net proceeds of $4,088,000 in connection with the exercise of
warrants and options.
In 1997, the Company issued an aggregate of 45,000 shares of common
stock to an officer and a third party as compensation for services provided. The
value of the shares ($222,500, based upon the stock's trading value on the date
of grant) has been charged to operations.
In December 1996, the Company issued 109,909 shares of common stock in
exchange for 65,000 Class A Warrants and 65,000 Class B Warrants.
In December 1996, the Company issued 370,000 shares of common stock for
net proceeds of $65,000 and a receivable of $490,000 in connection with the
exercise of 370,000 Class A Warrants.
In December 1996 the Company placed 500,000 shares for anticipated net
proceeds of $3,500,000, but the transaction was not completed by December 31,
1996. In December 1996, the Company issued 155,000 of the 500,000 shares of
common stock for net proceeds of $1,041,445. The net proceeds reflect a fee of
4% and other fees charged by the underwriter.
F-10
<PAGE> 45
7. STOCKHOLDERS' EQUITY (DEFICIENCY): (Cont'd)
a. Capital stock (Cont'd)
In October 1996, the Company issued 1,000,000 shares in exchange for
$850,000, 565,000 of Class A Warrants and 935,000 of Class B Warrants and the
forgiveness of certain demand registration rights previously granted to this
warrantholder.
In July 1996, the Company issued 150,000 shares of common stock for net
proceeds of $1,048,800. In August 1996, the Company issued 25,000 shares to the
purchaser of the 150,000 shares, thereby reducing the proceeds to the Company by
$1 per share as a penalty for failing to comply with a condition of the stock
placement agreement.
In February 1996, the Company granted an employee 20,000 shares of
common stock and recorded compensation of $40,000.
In January 1996, the Company retired all of the outstanding treasury
shares, that were obtained when a stock subscriber defaulted on his obligation.
Subsequently the Company issued 900,000 shares into treasury at par value to
fulfill obligations under employee stock grants and stock options. Distributions
of 350,000 and 105,000 shares were made from treasury to employees in connection
with the exercise of stock options in 1998 and 1997, respectively. The remaining
445,000 treasury shares were retired in 1998.
During 1994, the Company accepted non-recourse notes totaling $450,000
for 900,000 shares of subscribed stock. In 1995, the notes expired without
repayment. The Company reclaimed the shares from escrow, retired 400,000 of
those shares in 1995 and retired the balance during 1996.
b. Stock option plan
During 1994, the Company's Board of Directors approved an omnibus stock
option plan (the "1994 Plan") to benefit certain key employees. Under this plan
(as amended), the Company may issue stock and/or stock options to a maximum of
10% of the authorized shares of the authorized shares of the Company, through
the year 2004. The options become exercisable at various periods of time from
thirty days to two years from the date of grant.
The Company has granted employees options at various exercise prices
that reflected the fair value of stock on the date of grant. The Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
employee stock options. Therefore, no compensation cost has been recognized. If
the Company accounted for its stock options under the fair value method of SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's basic net
earnings (loss) and earnings (loss) per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 1,397,540 $(7,797,167) $(5,132,845)
Proforma (1,276,460) (9,155,167) (5,482,845)
Earnings (loss) per share:
As reported $ .08 $ (.51) $ (.41)
Proforma $ (.07) $ (.59) $ (.44)
</TABLE>
F-11
<PAGE> 46
7. STOCKHOLDERS' EQUITY (DEFICIENCY): (Cont'd)
b. Stock option plan (Cont'd)
The fair value of each option is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend yield -0- -0- -0-
Expected volatility 86.49% 86.51% 71.00%
Risk free interest rate 5.5% 5.5% 6.875%
Expected lives 3 years 3 years 3 years
</TABLE>
The following table summarizes the status of stock options outstanding
under the Company's option plan:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Exercise Fair
Shares Price Value
------ ----- -----
<S> <C> <C> <C>
Granted 295,000 $ 2.23 $ 1.16
Exercised (115,000) 1.75
Cancelled and expired -- --
---------
Outstanding, December 31, 1996 570,000 1.82
Granted 907,900 11.06 6.42
Exercised (440,000) 1.83
Cancelled and expired (60,500) 12.38
---------
Outstanding, December 31, 1997 977,400 9.78
Granted 1,091,000 7.72 4.99
Exercised (113,475) 6.32
Cancelled and expired (795,000) 10.96
---------
Outstanding, December 31, 1998 1,159,925 7.37
=========
</TABLE>
The weighted average remaining contractual life of options outstanding
as of December 31, 1998 is 9.2 years.
The Company contributed the capital in 1996 for the exercise of the
115,000 options and recorded approximately $212,800 as compensation expense.
c. Warrants
In June 1997, the Company issued 207,152 warrants in connection with
its acquisition of International. The warrants had an exercise price of $15 per
share and were exercisable for a six-month period. During 1997, 113,152 of the
warrants were exercised and the remaining 94,000 were cancelled. The fair value
of the warrants using the Black-Scholes option pricing model ($244,000) was
included as a component of the purchase price.
The Company issued 10,000 warrants to an underwriter in each of the
years ended December 31, 1997 and 1996. The warrants have exercise prices
ranging from $11.25 per share to $14.55 per share. These warrants are
outstanding as of December 31, 1998.
F-12
<PAGE> 47
7. STOCKHOLDERS' EQUITY (DEFICIENCY): (Cont'd)
c. Warrants (Cont'd)
During 1997, the Company issued an aggregate of 30,000 warrants, with
exercise prices ranging from $9.75-$11.75 per share, to two directors. The fair
value of the warrants is being charged to operations over the vesting period of
the options. During 1998, 15,000 warrants were cancelled, and the remaining
15,000 warrants, with an exercise price of $9.75 per share, are outstanding as
of December 31, 1998.
During 1994 and 1995, the Company issued an aggregate of 1,425,000
Class A and 300,000 Class B warrants in connection with the sale of securities.
The exercise prices of the Class A and Class B Warrants were $1.50 and $2.00,
respectively. During 1997, 425,000 Class A and 300,000 Class B Warrants were
exercised. During 1996, 435,000 Class A and 65,000 Class B Warrants were
exercised, and 565,000 Class A and 935,000 Class B Warrants were retired. As of
December 31, 1998, there were no Class A or Class B Warrants outstanding.
In 1995, the Company issued an aggregate of 307,142 warrants to third
parties in consideration for services provided in connection with various equity
offerings. The warrants had exercise prices ranging from $1 to $1.75, and were
exercised in 1997.
d. Employee stock purchase plan
In August 1997, the Company adopted an Employee Stock Purchase Plan to
provide eligible employees an opportunity to purchase shares of its common stock
through payroll deductions. Semi-annually, participant account balances are used
to purchase shares of stock at 85% of the lesser of the fair market value at (i)
the beginning or (ii) the end of the semi-annual offering period.
The fair market value of shares that may be purchased by any
participant during any calendar year may not exceed $25,000. A total of 200,000
shares are available for purchase under the Purchase Plan. Approximately 18,600
shares had been issued under the Purchase Plan as of December 31, 1998.
e. Net income (loss) per common and common equivalent share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") simplifies the standards for computing earnings per share
and replaces the presentation of primary earnings per share ("EPS") with basic
earnings per share. It also requires dual presentation of basic and diluted EPS
on the face of the consolidated statement of operations for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic and diluted EPS were equivalent for 1997 and
1996. The reconciliation of EPS for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Income Shares Per Share
---------- ---------- ---------
<S> <C> <C> <C>
Basic EPS $1,397,540 17,446,467 $.08
Effect of diluted securities -- 138,043 --
---------- ---------- ----
Diluted EPS $1,397,540 17,584,510 $.08
========== ========== ====
</TABLE>
Options and warrants to acquire 1,457,000, 1,027,000 and 1,305,000
shares of common stock were not included in the computation of diluted EPS for
1998, 1997 and 1996, respectively, because their exercise prices were greater
than the average market price of the common shares.
F-13
<PAGE> 48
8. SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest expense for the years ended December 31, 1998,
1997 and 1996 was $78,000, $22,200 and $-0-, respectively.
During 1998 and 1997, the Company incurred capital lease obligations
approximating $120,000 and $144,000, respectively, for the acquisition of
various property and equipment. Further, the Company issued stock and/or options
to various parties in consideration for services provided.
9. CONCENTRATION OF CREDIT RISK:
The Company maintained bank balances which at times exceeded the
federally insured limit of $100,000.
One customer accounted for 20% of net revenues for 1998. Sales to two
customers approximated 14% and 12% of net revenues for 1997. One customer
accounted for 100% of net revenues for 1996.
Sales to foreign customers, located principally in Europe, approximated
18% and 32% of net sales for 1998 and 1997, respectively.
10. COMMITMENTS AND CONTINGENCY:
a. Leases
The Company leases operations and sales office space under various
operating leases. Rent expense under these leases approximated $1,319,000,
$916,000 and $257,000 in 1998, 1997 and 1996, respectively. Future minimum lease
payments under these operating leases are:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -------
<S> <C>
1999 $93,300
2000 44,100
</TABLE>
In June 1998, the Company entered into a lease agreement for a building
currently under construction. The Company intends to consolidate its operations
into this one facility. The ten year lease agreement, which commences upon the
completion of the facility (estimated to be May 1999), provides for an annual
rent of $2,000,000. The Company's Chairman is affiliated with the lessor.
b. Litigation
The Company is a defendant in a lawsuit which relates to Gem
Technologies, Inc. (GEM) a former affiliated company of Information Architects
Corporation. Twenty purported noteholders or shareholders of GEM filed a
complaint against certain officers, GEM and the Company alleging that the
defendants fraudulently induced the plaintiffs into entering a note purchase
agreement with GEM and fraudulently transferred the property of GEM to the
Company. The plaintiffs have sought actual damages, punitive damages, attorney
fees and injunctive relief relative to the property allegedly transferred to the
Company.
Although no estimate of loss or range of loss, if any, can be
determined at this time, the Company intends to vigorously defend the
allegations made in this complaint. In addition, the Company's Chairman has
agreed to indemnify the Company against any liability resulting from a final and
unappealable judgment or settlement in this action.
F-14
<PAGE> 49
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.
The following methods and assumptions used to estimate the fair value
of the following classes of financial instruments:
Current Assets and Current Liabilities: The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable and payable, costs and estimated earnings in excess
of billings, certain accrued liabilities, and certain other short-term
financial instruments, approximates their carrying amount in the
financial statements due to the short maturity of such instruments.
Capital Lease Obligations: The fair value of the capital lease
obligations approximate their carrying amount since the currently
effective rates reflect market rates.
12. INCOME TAXES:
The income tax benefit for 1998 and 1997 represents the estimated
benefit of net operating losses, net of a valuation allowance. No benefit was
recognized in 1996 as the Company had a 100% valuation allowance
The components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforward $ 6,011,000 $ 5,720,000 $ 2,280,000
Costs and estimated earnings
in excess of billings (885,000) (519,000) --
Investment in subsidiary (211,000) 382,000 --
Depreciation method of
property and equipment (171,000) (120,000) (128,000)
Other 84,000 127,000 --
Allowance for realization of assets (3,028,000) (4,990,000) (2,152,000)
----------- ----------- -----------
$ 1,800,000 $ 600,000 $ --
=========== =========== ===========
</TABLE>
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income before
taxes is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed income tax provision
(benefit) at 34% $ 67,000 $(2,855,000) $(1,745,167)
Adjustment to allowance for realization
of deferred tax asset net operating
loss carryforward (1,267,000) 2,255,000 1,745,167
----------- ----------- -----------
$(1,200,000) $ (600,000) $ --
=========== =========== ===========
</TABLE>
As of December 31, 1998, the Company had net operating loss
carryforwards ("NOLs") of approximately $15,029,000 available through December
31, 2013 to offset future taxable income. However, under Section 382 of the
Internal Revenue Code, a greater than 50% change in ownership, as defined,
restricts the annual utilization of available NOLs to a prescribed amount.
Accordingly, future utilization of the NOLs may be limited.
F-15
<PAGE> 50
13. RETIREMENT PLAN:
In August 1997, the Company adopted a salary reduction plan under
Section 401(k) of the Internal Revenue Code. Participation in the Plan is
voluntary, and any qualified employees may elect to contribute up to 10% of
earnings. The Company may, at its discretion, match a percentage of an
employee's elected deferrals. The Company did not make a contribution to the
Plan in 1998 and 1997.
14. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1998, the Company recorded certain
adjustments, related to revenue recognition and the classification of
demonstration expenses, which reduced revenues by $1,659,000. Of this amount,
approximately $1,150,000, $228,000 and $281,000 are allocable to the first,
second and third quarters, respectively. The adjustments also reduced net
earnings by $1,000,000, which is allocable to the first quarter.
15. SUBSEQUENT EVENTS:
a. Acquisitions
On January 31, 1999, the Company entered into a merger agreement with
Data Systems Network Corporation ("DSNC"), a provider of computer network
services and products that enable the control of complex distributed computing
environments. Under the terms of the agreement, the Company would exchange
approximately 1.6 million shares of its common stock of all outstanding shares
of DSNC.
In addition, in February 1999, the Company entered into agreements to
acquire technology and the on-going business of certain entities engaged in
various internet businesses.
b. Private placement
On March 5, 1999, the Company completed a private placement of up to
$10,000,000 of convertible exchangeable debentures ("Debentures"). The placement
will be made in three tranches. Tranche A ($3,000,000) was completed on March 5,
1999. Tranche B ($2,000,000) will automatically fund upon certain conditions
being met. Tranche C ($5,000,000) may be completed, at the Company's option,
upon the meeting of certain conditions as of September 2, 1999 or up to six
months thereafter. In addition to the issuance of the Debentures, the Company
has issued warrants to the investor(s) to purchase 30,000 shares of Common Stock
for an exercise price equal to the initial conversion price for Tranche A. The
Company will also be required to issue additional warrants to purchase shares,
if the conditions are met and Company elects to sell securities for Tranches B
and C.
The Tranche A and Tranche B Debentures are convertible into shares of
Common Stock, beginning ninety days after issuance. The initial conversion price
for Tranche A and Tranche B will be equal to the lower of (i) 140% of the
average closing bid price for the Common Stock for the ten trading days prior to
the Tranche A closing date ($12.73) or (ii) 104% of the average closing bid
price for the Common Stock for the ten trading days prior to the 90th day
following the closing date. The conversion price of the Debenture is subject to
adjustment due to certain fluctuations in the closing bid price of the Common
Stock during certain periods of time and upon the occurrence of certain events.
The Debentures accrue interest at the rate of 6% per annum.
The Company has the option, subject to the satisfaction of certain
conditions (including shareholder approval authorizing issuance of preferred
stock), to require the holders of the Debentures to exchange the entire
principal amount of the Debentures for shares of a newly- created Series A
Convertible Preferred Stock. The terms of the Preferred Stock will be
substantially the same as those of the Debentures.
F-16
<PAGE> 1
EXHIBIT 2.1
EXECUTION
COPY
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 31, 1999
BY AND AMONG
ALYDAAR SOFTWARE CORPORATION,
ALYDAAR ACQUISITION CORP.
AND
DATA SYSTEMS NETWORK CORPORATION
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
<S> <C>
ARTICLE I THE MERGER.......................................................... 1
1.1 The Merger................................................... 1
1.2 Effective Time; Closing...................................... 1
1.3 Effect of the Merger......................................... 2
1.4 Certificate of Incorporation; Bylaws......................... 2
1.5 Directors and Officers....................................... 2
1.6 Effect on Capital Stock...................................... 2
1.7 Stock Options................................................ 5
1.8 Surrender of Certificates.................................... 5
1.9 No Further Ownership Rights in DSNC Common Stock............. 7
1.10 Lost, Stolen or Destroyed Certificates....................... 7
1.11 Tax and Accounting Consequences.............................. 7
1.12 Taking of Necessary Action; Further Action................... 8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF DSNC............................. 8
2.1 Organization of DSNC......................................... 8
2.2 DSNC Capital Structure....................................... 8
2.3 Obligations With Respect to Capital Stock.................... 9
2.4 Authority.................................................... 9
2.5 Intentionally reserved....................................... 11
2.6 SEC Filings; DSNC Financial Statements....................... 11
2.7 Absence of Certain Changes or Events......................... 12
2.8 Taxes........................................................ 12
2.9 Intellectual Property........................................ 13
2.10 Compliance; Permits; Restrictions; Insurance................. 14
2.11 Litigation................................................... 15
2.12 Brokers' and Finders' Fees................................... 15
2.13 Employee Benefit Plans....................................... 15
2.14 Title to Properties; Absence of Liens and Encumbrances....... 16
2.15 Environmental Matters........................................ 17
2.16 Employees; Labor Matters..................................... 17
2.17 Agreements, Contracts and Commitments........................ 18
2.18 Purchase Commitments and Outstanding Bids.................... 19
2.19 Customers, Distributors and Suppliers........................ 20
2.20 DSNC Contracts............................................... 20
2.21 Pooling of Interests......................................... 20
2.22 Intentionally reserved....................................... 20
2.23 DSNC Proxy Statement/Prospectus.............................. 20
2.24 Board and Shareholder Approval............................... 21
2.25 Fairness Opinion............................................. 21
2.26 Products and Distribution.................................... 21
2.27 Intentionally reserved....................................... 21
2.28 Year 2000 Compliance......................................... 21
2.29 Inventories.................................................. 22
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C>
2.30 Interested Party Transactions................................ 22
2.31 Disclosure................................................... 22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ALYDAAR AND
MERGER SUB..................................... 23
3.1 Organization of Alydaar and Merger Sub....................... 23
3.2 Alydaar and Merger Sub Capital Structure..................... 23
3.3 Authority.................................................... 23
3.4 SEC Filings; Alydaar Financial Statements.................... 25
3.5 Absence of Certain Changes or Events......................... 26
3.6 Pooling of Interests......................................... 26
3.7 DSNC Proxy Statement/Prospectus.............................. 26
3.8 Board Approval............................................... 26
3.9 Merger Sub. ................................................ 26
3.10 Broker's Fees................................................ 26
3.11 Disclosure................................................... 27
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME................................ 27
4.1 Conduct of Business.......................................... 27
ARTICLE V ADDITIONAL AGREEMENTS............................................... 30
5.1 DSNC Proxy Statement/Prospectus; Registration
Statement; Other Filings;
Board Recommendations.......................... 30
5.2 Meeting of Shareholders...................................... 31
5.3 Confidentiality.............................................. 31
5.4 No Solicitation.............................................. 31
5.5 Public Disclosure............................................ 34
5.6 Legal Requirements........................................... 34
5.7 Third Party Consents......................................... 34
5.8 Notification of Certain Matters; Financial Statements........ 34
5.9 Reasonable Best Efforts and Further Assurances............... 35
5.10 Intentionally reserved....................................... 35
5.11 Schedules.................................................... 35
5.12 NMS Listing.................................................. 35
5.13 DSNC Affiliate Agreement..................................... 35
5.14 Tax-Free Merger.............................................. 36
5.15 Pooling Covenant............................................. 36
5.16 Employee Matters............................................. 36
5.17 Director and Officer Liability............................... 36
ARTICLE VI CONDITIONS OF THE MERGER........................................... 37
6.1 Conditions to Obligations of Each Party to................... 37
Effect the Merger
6.2 Additional Conditions to Obligations of DSNC................. 38
6.3 Additional Conditions to the Obligations of.................. 39
Alydaar and Merger Sub
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER................................. 40
7.1 Termination.................................................. 40
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C>
7.2 Notice of Termination; Effect of Termination................. 42
7.3 Fees and Expenses............................................ 43
ARTICLE VIII GENERAL PROVISIONS............................................... 44
8.1 Non-Survival of Representations and Warranties............... 44
8.2 Notices...................................................... 44
8.3 Interpretation; Knowledge.................................... 45
8.4 Counterparts................................................. 45
8.5 Entire Agreement; Third Party Beneficiaries.................. 45
8.6 Severability................................................. 45
8.7 Other Remedies; Specific Performance......................... 46
8.8 Governing Law................................................ 46
8.9 Rules of Construction........................................ 46
8.10 Assignment................................................... 46
8.11 Waiver of Jury Trial......................................... 46
</TABLE>
INDEX OF EXHIBITS
Exhibit A Form of DSNC Voting Agreement
Exhibit B Form of Confidentiality Agreement
Exhibit C Form of DSNC Affiliate Agreement
Exhibit D Form of McGuire, Woods, Battle & Boothe LLP Legal Opinion
Exhibit E Form of Legal Opinion from Counsel to DSNC
INDEX OF SCHEDULES
Schedule 2.1 Organization of DSNC
Schedule 2.2 Outstanding Options
Schedule 2.4 Required Consents
Schedule 2.7 Absence of Certain Changes or Events
Schedule 2.8 Taxes
Schedule 2.9(b) Intellectual Property
Schedule 2.9(c) Form of Confidentiality Agreement
Schedule 2.10(a) Governmental Review
Schedule 2.10(c) Insurance Policies
Schedule 2.11 Litigation
Schedule 2.13(c) Employee Benefit Plans
iv
<PAGE> 5
Schedule 2.14(a) Property
Schedule 2.14(b) Liens
Schedule 2.16 Employee Matters
Schedule 2.17 Agreements
Schedule 2.18 Merchandise Claims
Schedule 2.19 Customers and Distributors
Schedule 2.20 Material Contracts
Schedule 2.26 Software Products
Schedule 2.26(a) Products
Schedule 2.28(a) Contingency Plans
Schedule 2.29 Inventory
Schedule 3.1(a) Qualification or License to Do Business
Schedule 3.3(a) Required Consents
Schedule 4.1(r) Waiver of Release Claims
Schedule 5.13 DSNC Affiliates
[The exhibits and the schedules have been omitted]
v
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and
entered into as of January 31, 1999, by and among Alydaar Software Corporation,
a North Carolina corporation ("Alydaar"), Alydaar Acquisition Corp., a North
Carolina corporation and a wholly owned subsidiary of Alydaar ("Merger Sub"),
and Data Systems Network Corporation, a Michigan corporation ("DSNC").
STATEMENT OF PURPOSE
A. Upon the terms and subject to the conditions of this Agreement and
in accordance with the North Carolina General Corporation Law ("North Carolina
Law") and the Michigan Business Corporation Act ("Michigan Law"), Alydaar,
Merger Sub and DSNC intend to enter into a business combination transaction.
B. Concurrently with the execution of this Agreement, and as a
condition and inducement to Alydaar's willingness to enter into this Agreement,
certain shareholders of DSNC are entering into a Voting Agreement (the "Voting
Agreement") in substantially the form attached hereto as Exhibit A.
C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
D. It is also intended by the parties hereto that the Merger (as
defined below) shall qualify for accounting treatment as a pooling of interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of North Carolina Law and Michigan Law, Merger Sub shall
be merged with and into DSNC (the "Merger"), the separate corporate existence of
Merger Sub shall cease and DSNC shall continue as the surviving corporation.
DSNC as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by filing
a Certificate of Merger with the Secretary of State of the State of North
Carolina in accordance with the relevant provisions of
<PAGE> 7
North Carolina Law (the "Certificate of Merger") and the filing of a Certificate
of Merger with the Michigan Department of Consumer and Industry Services -
Corporation; Securities and Land Development Bureau (the "Michigan Department")
in accordance with the relevant provisions of Michigan Law (the time of such
filing (or such later time as may be agreed in writing by the parties and
specified in the Certificate of Merger) being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The closing of the
Merger (the "Closing") shall take place at the offices of McGuire, Woods, Battle
& Boothe LLP, 100 North Tryon Street, Suite 2900, Charlotte, North Carolina
28202, at a time and date to be specified by the parties, which shall be no
later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI, or at such other time, date and location as
the parties hereto agree in writing (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions of
North Carolina Law and Michigan Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of DSNC and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of DSNC and Merger
Sub shall become the debts, liabilities and duties of the Surviving Corporation.
At the Effective Time, the separate existence of Merger Sub will cease and
Merger Sub will be merged with and into DSNC.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, shall
be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of
Incorporation of the Surviving Corporation; provided, however, that at
the Effective Time, the Certificate of Incorporation of the Surviving
Corporation shall be amended so that the name of the Surviving
Corporation shall be Data Systems Network Corporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be, at the Effective Time, the Bylaws of
the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of DSNC immediately prior to the Effective Time, until their respective
successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, DSNC or the holders of
any of the following securities:
(a) Conversion of DSNC Common Stock. Subject to Section
1.6(b), each share of Common Stock, $.01 par value per share, of DSNC
(the "DSNC Common
2
<PAGE> 8
Stock") issued and outstanding immediately prior to the Effective Time,
will be canceled and extinguished and automatically converted (subject
to Sections 1.6(b), (e) and (f)) into the number of shares (the
"Exchange Ratio") of Common Stock of Alydaar (the "Alydaar Common
Stock") equal to the quotient obtained by dividing 1,611,047 by the
total number of shares of DSNC Common Stock outstanding at Closing
(taking into account shares issued pursuant to the exercise of stock
options as included in the formula set forth below) (the "DSNC
Outstanding Shares"), which shall be deemed to include, without
limitation:
(A) the portion of each share of DSNC Common Stock, whether
issued or issuable pursuant to the exercise of either stock
options under the Option Plan or warrants to purchase DSNC
Common Stock held as of the date hereof, which is equal to the
product obtained by multiplying each such share by the
quotient obtained by dividing:
(x) the result of subtracting the exercise price of
such option or warrant from the quotient obtained by
dividing (1) the actual number of shares of DSNC
Common Stock issued and outstanding immediately prior
to Closing into (2) the product obtained by
multiplying the aggregate number of shares of Alydaar
Common Stock into which the DSNC Outstanding Shares
are to be converted pursuant to the terms and
provisions hereof, by 10.8625 (such quotient being
referred to as the "DSNC Stock Price"), by
(y) the DSNC Stock Price;
provided that if the amount obtained from the
subtraction specified in the preceding clause (x) is
not a positive number, no portion of such share shall
be included in the DSNC Outstanding Shares; and
(B) any shares of DSNC Common Stock issued or issuable
pursuant to the resolution or settlement of In Re: DSNC
Systems Network Corporation Securities Litigation (including
pursuant to any indemnity obligations of DSNC with respect
thereto).
As an example of the calculation contained in the foregoing
clause (A) relating to the portion of each share of DSNC
Common Stock underlying stock options or warrants to be
included in the number of DSNC Outstanding Shares, the
following calculation would be performed with respect to such
a stock option or warrant to purchase one share of DSNC Common
Stock having an exercise price of $1.50, assuming a DSNC Stock
Price of $3.50:
1 x (3.50 - 1.50) = .57
3.50
3
<PAGE> 9
As a result, .57 of the share of DSNC Common Stock underlying
such stock option or warrant would be included in the DSNC
Outstanding Shares.
(b) Adjustment to Exchange Ratio. The Exchange Ratio shall be
subject to adjustment as follows:
(i) if the average closing price per share of Alydaar
Common Stock on the Nasdaq National Market for the 10 trading
day period ending on the trading day immediately preceding the
Effective Time (the "Alydaar Stock Price") is less than $6.00
per share, Alydaar will issue a maximum aggregate number of
shares of Alydaar Common Stock into which the DSNC Outstanding
Shares are to be converted pursuant to the terms and
provisions hereof (the "Maximum Aggregate Number") that is the
quotient obtained by dividing 9,666,282 by the Alydaar Stock
Price; and
(ii) if the Alydaar Stock Price is in excess of
$16.00 per share, Alydaar will issue a Maximum Aggregate
Number of shares of Alydaar Common Stock that is the quotient
obtained by dividing 25,776,752 by the Alydaar Stock Price.
(c) Cancellation of Alydaar-Owned Stock. Each share of DSNC
Common Stock held by DSNC or owned by Merger Sub, Alydaar or any direct
or indirect wholly owned subsidiary of DSNC or of Alydaar immediately
prior to the Effective Time shall be canceled and extinguished without
any conversion thereof.
(d) Capital Stock of Merger Sub. Each share of Common Stock,
$.01 par value per share, of Merger Sub (the "Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into one validly issued, fully paid and nonassessable share
of Common Stock, $.01 par value per share, of the Surviving Corporation
and shall constitute the only outstanding shares of capital stock of
the Surviving Corporation. Each certificate evidencing ownership of
shares of Merger Sub Common Stock shall evidence ownership of such
shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect appropriately the effect of any stock split,
reverse stock split, stock dividend (including any dividend or similar
distribution of securities convertible into Alydaar Common Stock or
DSNC Common Stock), reorganization, recapitalization, reclassification
or other like change with respect to Alydaar Common Stock or DSNC
Common Stock occurring or having a record date on or after the date
hereof and prior to the Effective Time, which shall not include any
issuance of securities in connection with sales of stock, acquisitions,
financings, etc.
(f) Fractional Shares. No fraction of a share of Alydaar
Common Stock will be issued by virtue of the Merger, but in lieu
thereof each holder of shares of DSNC Common Stock who would otherwise
be entitled to a fraction of a share of Alydaar
4
<PAGE> 10
Common Stock (after aggregating all fractional shares of Alydaar Common
Stock that otherwise would be received by such holder) shall receive
from Alydaar an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) such fraction, multiplied by (ii) the
average closing price of one share of Alydaar Common Stock for the five
most recent days that Alydaar Common Stock has traded ending on the
trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market.
1.7 Stock Options.
(a) Unexercised Options. At the Effective Time, each
outstanding stock option under the Option Plan (an "Outstanding DSNC
Option") shall be assumed by Alydaar. Each Outstanding DSNC Option
shall thereafter be converted into an option, which option shall be
deemed to be vested as of the Effective Time, to purchase the same
number of shares of Alydaar Common Stock as such Outstanding DSNC
Option would have been exchangeable for pursuant to Section 1.6 had
such Outstanding DSNC Option been exercised prior to Closing. The
exercise price for each such converted Outstanding DSNC Option shall be
the quotient obtained by dividing the exercise price of such
Outstanding DSNC Option by the Exchange Ratio.
(b) Exercised Options. Shares issued pursuant to options to
purchase DSNC Common Stock under the Option Plan that are exercised
prior to the date that is three business days prior to the Closing Date
shall be converted into shares of Alydaar Common Stock in accordance
with and subject to the provisions of Section 1.6. In connection with
the exercise of options to purchase DSNC Common Stock under the Option
Plan as contemplated hereby, such options shall be deemed to have
vested not later than the fifth business day prior to the Closing Date.
1.8 Surrender of Certificates.
(a) Exchange Agent. First Union National Bank shall act as the
exchange agent (the "Exchange Agent") in the Merger.
(b) Alydaar to Provide Common Stock. Promptly after the
Effective Time, Alydaar shall make available to the Exchange Agent for
exchange in accordance with this Article I, the shares of Alydaar
Common Stock issuable pursuant to Section 1.6 in exchange for
outstanding shares of DSNC Common Stock, and cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section
1.6(f) and any dividends or distributions to which holders of shares of
DSNC Common Stock may be entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time,
Alydaar shall cause the Exchange Agent to mail to each holder of record
(as of the Effective Time) of a certificate or certificates (the
"Certificates") that immediately prior to the Effective Time
represented outstanding shares of DSNC Common Stock whose shares were
converted into shares of Alydaar Common Stock pursuant to Section 1.6,
cash in lieu of any fractional shares pursuant to Section 1.6(f) and
any dividends or other distributions pursuant to Section 1.8(d), (i) a
letter of transmittal in customary form (which shall
5
<PAGE> 11
specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to
the Exchange Agent and shall contain such other provisions as Alydaar
may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing
shares of Alydaar Common Stock, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.8(d). Upon surrender of Certificates for
cancellation to the Exchange Agent or to such other agent or agents as
may be appointed by Alydaar, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions
thereto, the holders of such Certificates shall be entitled to receive
in exchange therefor certificates representing the number of whole
shares of Alydaar Common Stock into which their shares of DSNC Common
Stock were converted at the Effective Time, payment in lieu of
fractional shares which such holders have the right to receive pursuant
to Section 1.6(f) and any dividends or distributions payable pursuant
to Section 1.8(d), and the Certificates so surrendered shall forthwith
be canceled. Until so surrendered, outstanding Certificates will be
deemed from and after the Effective Time, for all corporate purposes,
subject to Section 1.8(d) as to the payment of dividends, to evidence
the ownership of the number of full shares of Alydaar Common Stock into
which such shares of DSNC Common Stock shall have been so converted and
the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with Section 1.6(f) and any dividends
or distributions payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the date of
this Agreement with respect to Alydaar Common Stock with a record date
after the Effective Time will be paid to the holders of any
unsurrendered Certificates with respect to the shares of Alydaar Common
Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates, and no cash payment in
lieu of fractional shares shall be paid to such holder until the holder
of record of such Certificates shall surrender such Certificates.
Subject to applicable law, following surrender of any such
Certificates, the Exchange Agent shall deliver to the record holders
thereof, without interest, certificates representing whole shares of
Alydaar Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(f) hereof and the
amount of any such dividends or other distributions with a record date
after the Effective Time payable with respect to such whole shares of
Alydaar Common Stock.
(e) Transfers of Ownership. If certificates representing
shares of Alydaar Common Stock are to be issued in a name other than
that in which the Certificates surrendered in exchange therefor are
registered, it will be a condition of the issuance thereof that the
Certificates so surrendered will be properly endorsed and otherwise in
proper form for transfer and that the persons requesting such exchange
will have paid to Alydaar or any agent designated by it any transfer or
other taxes required by reason of the issuance of certificates
representing shares of Alydaar Common Stock in any name other than that
of the registered holder of the Certificates surrendered, or
established to the satisfaction of Alydaar or any agent designated by
it that such tax has been paid or is not payable.
6
<PAGE> 12
(f) No Liability. Notwithstanding anything to the contrary in
this Section 1.8, none of the Exchange Agent, Alydaar, the Surviving
Corporation or any party hereto shall be liable to a holder of shares
of Alydaar Common Stock or DSNC Common Stock for any amount properly
paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(g) Termination of Exchange Agent Provisions. On the demand of
Alydaar, any Alydaar Common Stock issuable or cash payable in
accordance with this Agreement that is made available to the Exchange
Agent, if not distributed to the shareholders of DSNC for one year
after the Effective Time, shall no longer be made available to the
Exchange Agent, and any former shareholders of DSNC who have not
theretofore complied with this Section 1.8 shall thereafter look only
to Alydaar for payment of their claim for Alydaar Common Stock, any
cash in lieu of fractional shares of Alydaar Common Stock and any
dividends or distributions with respect to Alydaar Common Stock.
1.9 No Further Ownership Rights in DSNC Common Stock. All shares of
Alydaar Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Section 1.6(f) and 1.8(d)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of DSNC Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of DSNC Common
Stock which were outstanding immediately prior to the Effective Time. If after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
Certificates 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, certificates
representing the shares of Alydaar Common Stock into which the shares of DSNC
Common Stock represented by such Certificates were converted pursuant to Section
1.6, cash for fractional shares, if any, as may be required pursuant to Section
1.6(f) and any dividends or distributions payable pursuant to Section 1.8(d);
provided, however, that Alydaar may, in its discretion and as a condition
precedent to the issuance of such certificates representing shares of Alydaar
Common Stock, 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 Alydaar, the Surviving Corporation or the
Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall
constitute a reorganization within the meaning of Section 368 of the
Code. The parties hereto adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Income Tax Regulations.
(b) It is intended by the parties hereto that the Merger shall
qualify for accounting treatment as a pooling of interests.
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1.12 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of DSNC and Merger Sub, the officers and directors of DSNC and
Merger Sub will take all such lawful and necessary action. Alydaar shall cause
Merger Sub to perform all of its obligations relating to this Agreement and the
transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DSNC
DSNC represents and warrants to Alydaar and Merger Sub as follows:
2.1 Organization of DSNC.
(a) DSNC (i) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the corporate power and authority to own, lease
and operate its assets and property and to carry on its business as now
being conducted and as proposed to be conducted, and (iii) except as
set forth on Schedule 2.1, is duly qualified or licensed to do business
and is in good standing in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary.
(b) Except as set forth on Schedule 2.1, DSNC has no direct or
indirect subsidiaries (either wholly or partially owned by DSNC) and
other than in the ordinary course of business, DSNC has not made any
advances to or investments in, and does not own any securities of or
other interests in, any person.
(c) DSNC has delivered or made available to Alydaar a true and
correct copy of the Articles of Incorporation and Bylaws of DSNC and
other governing instruments, each as amended to date, and each such
instrument is in full force and effect. DSNC is not in violation of any
of the provisions of its Articles of Incorporation or Bylaws or other
governing instruments.
(d) When used in connection with an entity, the term "Material
Adverse Effect" means, for purposes of this Agreement, any change,
event or effect that is materially adverse to the business, assets
(including intangible assets), liabilities, prospects, conditions
(financial or otherwise), results of operations, properties, or
ownership of proprietary software of DSNC (including without limitation
with respect to any such change, event or effect relating to any SEC
investigation or proceeding concerning DSNC and any failure by DSNC to
hold annual shareholder meetings), or of Alydaar, as the case may be.
2.2 DSNC Capital Structure. The authorized capital stock of DSNC
consists of 10,000,000 shares of Common Stock, $.01 par value per share, of
which there were 4,859,224
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shares issued and outstanding as of December 31, 1998 and 1,000,000 shares of
Preferred Stock, $.01 par value per share, of which no shares are issued or
outstanding. All outstanding shares of DSNC Common Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of DSNC or
any agreement or document to which DSNC is a party or by which it is bound. As
of the date hereof, DSNC had reserved an aggregate of 600,000 shares of DSNC
Common Stock, net of exercises, for issuance to employees, consultants and
nonemployee directors pursuant to the 1994 Option Plan, as amended (the "Option
Plan") under which options are outstanding for an aggregate of 375,823 shares.
All shares of DSNC Common Stock subject to issuance as aforesaid, upon issuance
on the terms and conditions specified in the instruments pursuant to which they
are issuable, will be duly authorized, validly issued, fully paid and
nonassessable. Schedule 2.2 lists for each person who held options to acquire
shares of DSNC Common Stock at December 31, 1998, the name of the holder of such
option, the exercise price of such option, the number of shares as to which such
option will have vested at such date, and the vesting schedule for such option.
The maximum number of shares of DSNC Common Stock issued or to be issuable
pursuant to the Option Plan at or prior to Closing shall not exceed 412,500
shares, which amount is within the number of shares reserved under the Option
Plan.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of DSNC, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.2, there are no options, warrants,
equity securities, partnership interests or similar ownership interests, calls,
rights (including preemptive rights), commitments or agreements of any character
to which DSNC is a party or by which it is bound obligating DSNC to issue,
deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem
or otherwise acquire, or cause the repurchase, redemption or acquisition, of any
shares of capital stock, partnership interests or similar ownership interests of
DSNC or obligating DSNC to grant, extend, accelerate the vesting of or enter
into any such option, warrant, equity security, call, right, commitment or
agreement. Except as set forth in Section 2.2 and the Voting Agreement, there
are no registration rights and, to the knowledge of DSNC, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of DSNC.
2.4 Authority.
(a) DSNC has all requisite corporate power and authority to
enter into this Agreement and each other agreement entered into by it
in connection with the transactions contemplated hereby (the "DSNC
Ancillary Agreements") and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and
the DSNC Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of DSNC, subject only to the
approval and adoption of this Agreement and the approval of the Merger
by DSNC's shareholders and the filing and recordation of the
Certificate of Merger pursuant to North Carolina Law and Michigan Law.
A vote of the holders of at least a majority of the outstanding shares
of the DSNC Common Stock is required for DSNC's shareholders to approve
and adopt
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this Agreement and approve the Merger. Each of this Agreement and the
DSNC Ancillary Agreements has been duly executed and delivered by DSNC
and, assuming the due authorization, execution and delivery by Alydaar
and, if applicable, Merger Sub, constitutes a legal, valid and binding
obligation of DSNC, enforceable in accordance with its terms. The
execution and delivery of this Agreement and the DSNC Ancillary
Agreements by DSNC does not, and the performance of this Agreement and
the DSNC Ancillary Agreements by DSNC and the consummation by DSNC of
the transactions contemplated hereby and thereby will not, (i) conflict
with or violate the Articles of Incorporation or Bylaws of DSNC, (ii)
subject to obtaining the approval and adoption of this Agreement and
the approval of the Merger by DSNC's shareholders as contemplated in
Section 5.2 and compliance with the requirements set forth in Section
2.4(b) below, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to DSNC or by which its properties
is bound or affected, or (iii) subject to obtaining such consents and
approvals as are required pursuant to the Foothill Capital Corp. Loan
Security Agreement, conflict with, result in any breach of or
constitute a default (or an event that with notice or lapse of time or
both would become a default) under, or impair DSNC's rights or alter
the rights or obligations of any third party under, or give rise to any
rights of in, or result in the creation of a lien or encumbrance on,
any of such properties or result in termination, amendment,
acceleration or cancellation of any obligation contained in, or result
in the creation of a lien or encumbrance on, any of the properties or
assets of DSNC pursuant to any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which DSNC is a party or by which DSNC or
any of its properties or assets are bound or affected, except with
respect to clause (iii) for any such conflicts, violations, defaults,
rights, liens, encumbrances or other occurrences that would not,
individually or in the aggregate, have a Material Adverse Effect on
DSNC; provided that certain of the DSNC Contracts (as defined herein)
provide for termination upon a change of control of DSNC.
Other than consents relating to such change of control provisions
under such DSNC Contracts, Schedule 2.4 lists all consents,
authorizations, filings, approvals, waivers and registrations required
to be obtained in connection with the consummation of the transactions
contemplated hereby.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with any court, administrative
agency or commission or other governmental authority or
instrumentality, foreign or domestic ("Governmental Entity"), is
required to be obtained by DSNC in connection with the execution and
delivery of this Agreement, the DSNC Ancillary Agreements or the
Certificate of Merger or the consummation of the transactions
contemplated hereby or thereby, except for (i) the filing of the
Certificate of Merger with the Michigan Department, (ii) the filing of
the DSNC Proxy Statement (as defined in Section 2.23) with the
Securities and Exchange Commission ("SEC") in accordance with the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii)
such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal
and state securities laws (including a Form S-4 registration statement
to register the shares of Alydaar Common Stock issued in the Merger),
and the securities or antitrust laws of any foreign country and (iv)
such other consents, authorizations, filings, approvals,
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waivers and registrations set forth on Schedule 2.4, which are required
for the parties to consummate the Merger.
2.5 Intentionally reserved.
2.6 SEC Filings; DSNC Financial Statements.
(a) Except as disclosed in the DSNC SEC Reports (as defined
below), DSNC has filed all forms, reports and documents, together with
all exhibits, required to be filed with the SEC relating to periods
subsequent to January 1, 1994, and has made available to Alydaar all
such forms, reports and documents in the form filed with the SEC. All
such forms, reports and documents (including those that DSNC may file
subsequent to the date hereof) are referred to herein as the "DSNC SEC
Reports." Except as disclosed in the DSNC SEC Reports, the DSNC SEC
Reports (i) as of their respective dates were prepared and filed in
accordance in all material respects with the requirements of the
Securities Act of 1993 (the "Securities Act") or the Exchange Act, as
the case may be, and the rules and regulations of the SEC thereunder
applicable to such DSNC SEC Reports, and (ii) did not at the time they
were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) or, in the case of
DSNC SEC Reports filed under the Securities Act, when such filing
became effective, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) Each of the financial statements (including, in each case,
any related notes thereto) contained in DSNC SEC Reports (the "DSNC
Financials"), including any DSNC SEC Reports filed after the date
hereof until the Closing, (x) complied as to form in all material
respects with the published rules and regulations of the SEC with
respect thereto, (y) was prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes thereto
or, in the case of unaudited interim financial statements, as may be
permitted by the SEC on Form 10-Q under the Exchange Act) and (z)
fairly presented the financial position of DSNC as at the respective
dates thereof and the results of DSNC's operations and cash flows for
the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end
adjustments. The balance sheet of DSNC as of December 31, 1997 is
hereinafter referred to as the "DSNC Balance Sheet." Except as
disclosed in the DSNC Financials, since the date of the DSNC Balance
Sheet through the date of this Agreement, DSNC has no liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the financial
statements prepared in accordance with GAAP which are, individually or
in the aggregate, material to the business, results of operations or
financial condition of DSNC, except (i) liabilities provided for in the
DSNC Balance Sheet or (ii) net liabilities incurred since the date of
the DSNC Balance Sheet in the ordinary course of business consistent
with past practices,
(c) DSNC has heretofore furnished to Alydaar a complete and
correct copy of any amendments or modifications, which have been
generated and not yet been filed
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with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by DSNC
with the SEC pursuant to the Securities Act or the Exchange Act.
2.7 Absence of Certain Changes or Events. Since the date of the DSNC
Balance Sheet, except as set forth on Schedule 2.7, there has not been: (i) any
Material Adverse Effect on DSNC or any event that could reasonably be expected
to have a Material Adverse Effect on DSNC; (ii) any change by DSNC in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP; (iii) any revaluation by DSNC of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off or assignment or pledge of notes or accounts receivable; (iv) any
declaration, setting aside, payment of a dividend or other distribution with
respect to the shares of DSNC, or any direct or indirect purchase or other
acquisition or any redemption by DSNC of any of its shares of capital stock; (v)
any increase in or modification of the compensation or benefits payable or to
become payable by DSNC to any of its directors, officers or, other than in the
ordinary course of business consistent with past practice, to employees; (vi)
any acquisition or sale of an amount of property or assets of DSNC, other than
in the ordinary course of business consistent with past practice; (vii) any
alteration in the term of any outstanding security of DSNC; (viii) any (A)
incurrence, assumption or guarantee by DSNC of any debt for borrowed money, (B)
issuance or sale of any securities convertible into or exchangeable for debt
securities of DSNC or (C) issuance or sale of options or other rights to acquire
from DSNC, directly or indirectly, debt securities of DSNC or any securities
convertible into or exchangeable for such debt securities; (ix) other than in
the ordinary course of business, any creation or assumption by DSNC of any
mortgage, pledge, security interest or lien or other encumbrance on any asset;
(x) any making of any loan, advance or capital contribution to or investment in
any person other than (A) travel loans or advances made in the ordinary course
of business of DSNC and (B) purchases on the open market of liquid, publicly
traded securities; (xi) any entering into, amendment of, relinquishment,
termination or non-renewal of, or any breach under, any contract, lease
transaction, commitment or other right or obligation other than in the ordinary
course of business which individually or in the aggregate would result in a
Material Adverse Effect on DSNC; or (xii) any transfer or grant of a right under
the DSNC IP Rights (as defined in Section 2.9 below). Except as set forth on
Schedule 2.7, DSNC has not taken any steps, and does not currently intend to
take any steps, to seek protection pursuant to any bankruptcy law nor to DSNC's
knowledge, does any of its creditors intend to initiate involuntary proceedings.
2.8 Taxes. Except as set forth on Schedule 2.8, DSNC, and any
consolidated, combined, unitary or aggregate group for Tax (as defined below)
purposes of which DSNC is or has been a member, has timely filed all Returns (as
defined below) required to be filed by it and all such Returns properly reflect
the liabilities of DSNC for Taxes for periods, property or events covered
thereby, has paid all Taxes shown thereon to be due and has provided adequate
accruals in accordance with GAAP in its financial statements for any Taxes that
have not been paid, whether or not shown as being due on any returns. In
addition, except as set forth on Schedule 2.8 (i) no claim for unpaid Taxes has
become a lien (other than statutory liens with respect to payments not yet
delinquent) against the property of DSNC or is being asserted against DSNC, (ii)
no audit of any Tax Return of DSNC is being conducted by a Tax authority as of
the date of this Agreement, (iii) DSNC has not received any notice of assessment
or proposed assessment in connection with any Tax Returns, and there are no
pending tax
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examinations of or tax claims asserted against DSNC or any of its assets or
properties or, to the best knowledge of DSNC, threatened against DSNC, (iv) no
extension of the statute of limitations on the assessment of any Taxes has been
granted by DSNC and is currently in effect as of the date of this Agreement and
(v) there is no agreement, contract or arrangement to which DSNC is a party that
may result in the payment of any amount that would not be deductible pursuant to
Sections 280G, 162 or 404 of the Code. As used herein, "Taxes" shall mean all
taxes of any kind, including, without limitation, those on or measured by or
referred to as income, gross receipts, sales, use, ad valorem, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any governmental authority, domestic or foreign. As used herein,
"Return" shall mean any return, report or statement required to be filed with
any governmental authority with respect to taxes.
2.9 Intellectual Property.
(a) Except as individually or in aggregate would not have a
Material Adverse Effect, DSNC owns, or has a valid license under, all
patents, trademarks, trade names, service marks, copyrights, any
applications for all of the foregoing, trade secrets and know-how that
are required for the conduct of business of DSNC (including, without
limitation, the development, production and marketing of DSNC's
products) as currently conducted (the "DSNC IP Rights"), with
sufficient rights for the conduct of DSNC's business as currently
conducted.
(b) Schedule 2.9(b) sets forth a complete list of all patents
and patent rights, trademarks and trademark rights, trade names and
trade name rights, service marks and service mark rights, service names
and service name rights, copyrights and copyright rights and any
applications for all of the foregoing, included in DSNC IP Rights, and
specifies, where applicable, the jurisdictions in which each such DSNC
IP Right has been issued or registered or in which an application for
such issuance and registration has been filed, including the respective
registration or application numbers and the names of all registered
owners. Schedule 2.9(b) sets forth the list of all material licenses,
sublicenses and other agreements to which DSNC is a party and pursuant
to which DSNC or any other person is licensed or otherwise has rights
under any DSNC IP Right (excluding licenses granted by DSNC in the
ordinary course of business that permit use of software products
without a right to modify, distribute or sublicense the same and
excluding standard licenses granted to DSNC by software vendors
covering software which is broadly distributed by such licensors). The
execution and delivery of this Agreement and the DSNC Ancillary
Agreements by DSNC, and the consummation of the transactions
contemplated hereby, will neither cause DSNC to be in violation or
default under any such license, sublicense or other agreement, nor
entitle any other party to any such license, sublicense or agreement to
terminate or modify such license, sublicense or agreement.
(c) Neither the manufacture, marketing, license, sale or
intended use of any product or technology currently licensed or sold or
under development by DSNC violates
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any license or agreement between DSNC and any third party or, to the
knowledge of DSNC, infringes any intellectual property right of any
other party; and there is no pending or, to the knowledge of DSNC,
threatened claim or litigation contesting the validity, ownership or
right to use, sell, license or dispose of any DSNC IP Rights, nor has
DSNC received any notice asserting that any DSNC IP Rights or the
proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party. To DSNC's knowledge, there
is no unauthorized use, infringement or misappropriation under any DSNC
IP Rights by any third party, including any employee or former employee
of DSNC. No DSNC IP Right or product of DSNC is subject to any
outstanding decree, order, judgment, or stipulation restricting in any
manner the licensing thereof by or to DSNC. It is DSNC's policy to have
each employee of DSNC execute a proprietary information and
confidentiality agreement substantially in the form of the agreement
attached hereto as Exhibit B, and, except as set forth on Schedule
2.9(c), all of DSNC's employees, have executed such an agreement.
(d) DSNC has taken all necessary action to maintain the
secrecy and confidentiality of, and its proprietary rights in, all DSNC
IP Rights and the intellectual property rights of third parties
entrusted to it.
2.10 Compliance; Permits; Restrictions; Insurance.
(a) DSNC is not in conflict with, or in default or violation
of any law, rule, regulation, ordinance, order, judgment or decree
applicable to DSNC or by which DSNC or any of its properties is bound
or affected. Except as set forth on Schedule 2.10(a), to the knowledge
of DSNC, no investigation or review by any Governmental Entity is
pending, threatened or contemplated against DSNC. Except as would not,
individually or in the aggregate, have a Material Adverse Effect, there
is no agreement, judgment, injunction, order or decree binding upon
DSNC which has or, to the knowledge of DSNC, is reasonably likely to
have, the effect of prohibiting or impairing any business practice of
DSNC, any acquisition of property by DSNC or the conduct of business by
DSNC as currently conducted.
(b) DSNC holds all permits, licenses, variances, exemptions,
orders and approvals from governmental authorities which are necessary
for the operation of the business of DSNC (collectively, the "DSNC
Permits"). DSNC is in compliance in all material respects with the
terms of the DSNC Permits.
(c) DSNC maintains and at all times since January 1, 1994 has
maintained fire and casualty, directors and officers, errors and
omissions, workers' compensation and general liability insurance with
respect to its business. Set forth on Schedule 2.10(c) is a complete
and correct list of all policies of insurance relating to the business
of DSNC, or covering the assets of DSNC, indicating for each policy the
risks insured against, coverage limits, premium rate, expiration date,
all outstanding claims in excess of $200,000 individually thereunder
and whether the terms of such policy provide for retrospective premium
adjustments. All such policies are outstanding and in full force and
effect. Copies of all such policies have been provided or made
available to Alydaar or its counsel. The coverages provided by such
policies are comparable to the coverages
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customarily maintained by companies in similar lines of businesses. All
premiums to date with respect to such policies have been paid. Except
as would not, individually or in the aggregate, have a Material Adverse
Effect, there is no default with respect to any provision contained in
any such policy, nor to the knowledge of DSNC has there been any
failure to give any notice or present any claim known to DSNC under any
such policy in a timely fashion or in the manner or detail required by
the policy.
2.11 Litigation. Except as disclosed in the DSNC SEC Reports or as set
forth on Schedule 2.11, there is no action, suit, proceeding, claim, demand,
arbitration or investigation pending, or as to which DSNC has received any
notice of assertion nor, to DSNC's knowledge, is there a threatened action,
suit, proceeding, claim, arbitration or investigation against DSNC. DSNC has no
knowledge of any unasserted claim, the assertion of which is likely, and which,
if asserted, will seek damages, an injunction or other legal, equitable,
monetary or nonmonetary relief, which claim individually or collectively with
other such unasserted claims if granted could have a Material Adverse Effect on
DSNC. DSNC has delivered or made available to Alydaar or its counsel complete
and correct copies of all correspondence prepared by its counsel for DSNC's
auditors in connection with the last two completed audits of DSNC's financial
statements and any such correspondence since the date of the last such audit.
2.12 Brokers' and Finders' Fees. Except for fees payable to Jefferies
and Company, Inc., whose fees will be paid by DSNC, pursuant to an engagement
letter dated April 23, 1998, as amended, a copy of which has been provided to
Alydaar, DSNC has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
2.13 Employee Benefit Plans.
(a) With respect to each employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), maintained or
contributed to by DSNC or any trade or business (a "DSNC Affiliate")
which is under common control with DSNC within the meaning of Section
414 of the Code (the "DSNC Employee Plans"), DSNC has made available to
Alydaar a true and complete copy of, to the extent applicable, (i) such
DSNC Employee Plan, (ii) the most recent annual report (Form 5500),
(iii) each trust agreement related to such DSNC Employee Plan, (iv) the
most recent summary plan description for each DSNC Employee Plan for
which such a description is required, (v) the most recent actuarial
report relating to any DSNC Employee Plan subject to Title IV of ERISA
and (vi) the most recent United States Internal Revenue Service ("IRS")
determination letter issued with respect to any DSNC Employee Plan.
(b) Each DSNC 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 Tax Reform Act of 1986
stating that such DSNC Employee Plan is so qualified and to the
knowledge of DSNC nothing has occurred since the date of such letter
that could reasonably be expected to affect the qualified status of
such plan.
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Each DSNC Employee Plan has been operated in accordance with its terms
and the requirements of applicable law. Neither DSNC nor any DSNC
Affiliate has incurred, and no facts exist which would be likely to
cause, any liability under Title IV of ERISA in connection with any
DSNC Employee Plan. All contributions due from DSNC or any DSNC
Affiliate with respect to any DSNC Employee Plan have been made or
accrued on DSNC's financial statements, and no further contributions
will be due or will have accrued thereunder as of the Effective Date,
except contributions that are consistent with the Employee Plans and
past practices of DSNC. The group health plans, as defined in Section
4980B(g) of the Code, that benefit employees of DSNC and DSNC
Affiliates are in compliance with the continuation coverage
requirements of subsection 4980B of the Code. There are no outstanding
violations of Section 4980B of the Code with respect to any DSNC
Employee Plan, covered employees or qualified beneficiaries.
(c) Except as set forth on Schedule 2.13(c), neither the
execution and delivery of this Agreement or the DSNC Ancillary
Agreements nor the consummation of the transactions contemplated hereby
or thereby will (i) result in any payment (including, without
limitation, severance, unemployment compensation, golden parachute,
bonus or otherwise) becoming due to any director or employee of DSNC
from DSNC, under any DSNC Employee Plan or otherwise, (ii) increase any
benefits otherwise payable under any DSNC Employee Plan or otherwise or
(iii) result in the acceleration of the time of payment or vesting of
any such benefits.
(d) DSNC has made available to Alydaar a list of all employees
of DSNC and their salaries as of the date of this Agreement.
2.14 Title to Properties; Absence of Liens and Encumbrances.
(a) DSNC owns no real property. Schedule 2.14(a) lists each
real or personal property lease (excluding software leases) to which
DSNC is a party, including without limitation as lessor or lessee, and
each amendment thereto. All such current leases are in full force and
effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default
or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) DSNC has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its
tangible properties and assets, real, personal and mixed, used or held
for use in its business, free and clear of any liens, pledges, charges,
claims, security interests or other encumbrances of any sort, except as
reflected in the DSNC Financials, the DSNC SEC Reports or in Schedule
2.14(b) and except for liens for taxes not yet delinquent or liens
imposed by law and incurred in the ordinary course of business for
obligations not yet due to carriers, warehousemen, laborers, materials
men and the like and such imperfections of title and encumbrances, if
any, which are not material in character, amount or extent, and which
do not materially detract from the value, or materially interfere with
the present use, of the property subject thereto or affected thereby.
DSNC is not in violation of any zoning, building or safety ordinance,
regulation or requirement or other law or regulation applicable to the
operation of owned or leased properties, nor has it received any notice
of violation with
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which it has not complied, except where such violation individually or
in the aggregate would not reasonably be expected to have a Material
Adverse Effect on DSNC.
2.15 Environmental Matters.
(a) Hazardous Material. No underground storage tanks and no
amount of any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment,
including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste
pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said
laws, (a "Hazardous Material"), but excluding office and janitorial
supplies, are present, as a result of the actions of DSNC or any
affiliate of DSNC, or, to DSNC's knowledge, as a result of any actions
of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water
thereof, that DSNC has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. DSNC has not transported,
stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law in
effect on or before the Closing Date, nor has DSNC disposed of,
transported, sold, used, released, exposed its employees or others to
or manufactured any product containing a Hazardous Material
(collectively "Hazardous Materials Activities") in violation of any
rule, regulation, treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. DSNC currently holds all environmental approvals,
permits, licenses, clearances and consents which are necessary for the
conduct of DSNC's Hazardous Material Activities and other businesses of
DSNC as such activities and businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding,
revocation proceeding, amendment procedure, writ, injunction or claim
is pending or, to DSNC's knowledge, threatened concerning any DSNC
Environmental Permit, Hazardous Material or any Hazardous Materials
Activity of DSNC. DSNC is not aware of any fact or circumstance which
could involve DSNC in any environmental litigation or impose upon DSNC
any environmental liability.
2.16 Employees; Labor Matters. Except as disclosed on Schedule 2.16,
between January 1, 1996 and the date of this Agreement, to DSNC's knowledge, no
employee of DSNC has violated, in any material respect, any employment contract,
patent disclosure agreement, confidentiality agreement or noncompetition
agreement between such employee and any former employer of such employee due to
such employee being employed by DSNC or disclosing to DSNC trade secrets or
proprietary information of such employer. Except as set forth on Schedule 2.16,
between January 1, 1998 and the date of this Agreement, no employee of DSNC
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has given notice to DSNC that such employee intends to terminate his or her
employment with DSNC except for terminations of a nature and number that are
consistent with DSNC's prior experience. To DSNC's knowledge, there are no
activities or proceedings of any labor union to organize any employees of DSNC
and there are no strikes, or slowdowns, work stoppages or lockouts, or threats
thereof by or with respect to any employees of DSNC. DSNC is not, and has never
been, a party to any collective bargaining agreement. Except for failures to be
in compliance which would not individually or in aggregate have a Material
Adverse Effect, DSNC is, and since January 1, 1996, DSNC has been in compliance
with all applicable laws regarding employment practices, terms and conditions of
employment, and wages and hours (including, without limitation, ERISA, WARN or
any similar state or local law).
2.17 Agreements, Contracts and Commitments. Except as set forth in
Schedule 2.17, as of the date hereof, DSNC is not a party to, is not bound by,
and none of its properties are subject to:
(a) any employment or consulting agreement, contract or
commitment with any officer, employee, consultant or member of DSNC's
Board of Directors, other than those that are terminable by DSNC on no
more than thirty days notice without liability or financial obligation,
except to the extent general principles of wrongful termination law may
limit DSNC's ability to terminate employees at will;
(b) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation right plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, or pursuant to which any amounts
may become payable (whether currently or in the future) to current or
former employees, consultants, officers and directors of DSNC by the
occurrence of any of the transactions contemplated by this Agreement,
or the value of any of the benefits of which will be calculated on the
basis of or in connection with any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered
into in the ordinary course of business other than indemnification
agreements between DSNC and any of its officers or directors;
(d) any agreement, contract or commitment containing any
covenant limiting the freedom of DSNC to engage in any line of business
or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force
relating to the disposition or acquisition of assets not in the
ordinary course of business or any ownership interest in any
corporation, partnership, joint venture or other business enterprise;
(f) any joint marketing or development agreement currently in
force;
(g) any agreement, contract or commitment currently in force
to provide source code to any third party for any product or
technology, except for (i) any
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agreement, contract or commitment pursuant to which source code is
provided for maintenance of the source code or for development of
modifications thereto only, and not for distribution of source or
object code to third parties and (ii) any source code escrow agreement
entered into in the ordinary course of business that contains
provisions relating to the release of source code if DSNC ceases to do
business or fails to provide appropriate maintenance;
(h) any agreement, contract or commitment currently in force
to license any third party to manufacture or reproduce any DSNC
product;
(i) any continuing contract for the future purchase, sale or
manufacture of products, material, supplies, equipment or services
requiring payment to or from DSNC in an amount in excess of $25,000 per
annum which is not terminable on 30 days' or less notice without cost
or other liability at or at any time after the Effective Time or in
which DSNC has granted or received manufacturing rights, most favored
nation pricing provisions relating to any product, group of products or
territory;
(j) any contract providing for the development of software
(other than contracts with consultants) for, or license of software to,
DSNC, which software is used or incorporated in any DSNC Product (as
defined in Section 2.26);
(k) any indenture, mortgage, promissory note, loan agreement,
guarantee or other agreement or commitment for the borrowing of money,
for a line of credit or for a leasing transaction of a type required to
be capitalized in accordance with Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards Board; or
(l) any written agreement regarding intercompany loans,
revenue or cost sharing, ownership or license of DSNC IP Rights,
intercompany royalties or dividends or similar matters.
Any agreement, contract or commitment described in clauses (a) through
(1) above shall be referred to as a "DSNC Contract." Neither DSNC, nor to DSNC's
knowledge any other party to a DSNC Contract (as defined below), is in material
breach, violation or default under, and DSNC has not since January 1, 1997
received notice that it has materially breached, violated or defaulted under,
and there exists no event, condition or occurrence which, after notice or lapse
of time, or both, would constitute such a material default by DSNC under, any of
the DSNC Contracts.
2.18 Purchase Commitments and Outstanding Bids. All accepted and
unfulfilled orders for the sale of merchandise received by DSNC, and all DSNC
Contracts or commitments for the purchase of supplies by it, were made in the
ordinary course of business consistent with past practice. Except as set forth
on Schedule 2.18, there are no claims in excess of $50,000 against DSNC to
return merchandise by reason of alleged overshipments, defective merchandise or
otherwise. To the knowledge of DSNC, there is no outstanding bid, proposal or
unfilled order which relates to the business of DSNC which is or would, if
accepted, reasonably be expected to result in a net loss to DSNC. Except as
reflected on Schedule 2.18, DSNC has no
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prepayments or deposits from customers for products to be shipped, or services
to be performed, by DSNC after the Closing Date.
2.19 Customers, Distributors and Suppliers. Schedule 2.19 sets forth a
complete and accurate list of the names and addresses and nature of the
relationship between DSNC and (i) customers, distributors and other agents and
representatives of the business of DSNC with annual sales greater than $100,000
during DSNC's last fiscal year, showing the approximate total sales in dollar
amount by DSNC to each such customer during such fiscal year, and (ii) suppliers
of DSNC with purchases by DSNC greater than $100,000 during DSNC's last fiscal
year, showing the approximate total purchases in dollars by DSNC from each
supplier during such fiscal year. Except as set forth on Schedule 2.19 (i) since
December 31, 1997, there has been no material adverse change in the business
relationship of DSNC with any customer, distributor or supplier named in
Schedule 2.19, and (ii) DSNC has not received any communication from any
customer, distributor or supplier named in Schedule 2.19 which has a contract
with DSNC or which represented 5% or more of DSNC's revenues for 1998 of any
intention to terminate or materially reduce purchases from or supplies to DSNC.
As a result of the transactions contemplated hereby, and to the knowledge of
DSNC, no payment, penalty, other obligation or remuneration may be required by
any such customer, distributor, agent or other representative. Except as set
forth on Schedule 2.19, DSNC (A) has no obligation with respect to
representations or warranties relating to the products and services it provides;
and (B) provides no warranties with respect to work performed relating to year
2000 compliance and remediation.
2.20 DSNC Contracts. Except as described on Schedule 2.20, DSNC has no
material customer contracts relating to its business.
2.21 Pooling of Interests. Neither DSNC nor any of its directors,
officers, affiliates or shareholders has taken, agreed to take or to DSNC's
knowledge, failed to take any action which would preclude Alydaar's ability to
account for the Merger as a pooling of interests in accordance with Accounting
Principles Board Opinion No. 16, the interpretive releases issued pursuant
thereto and the pronouncements of the Commission (including Staff Accounting
Bulletin 76) (collectively, "APB Opinion No. 16").
2.22 Intentionally reserved.
2.23 DSNC Proxy Statement/Prospectus. The information supplied by DSNC
for inclusion in the Form S-4 registration statement filed by Alydaar relating
to the issuance of Alydaar Common Stock in the Merger (together with all
amendments thereto and any information incorporated therein by reference, the
"Registration Statement") shall not at the time the Registration Statement is
filed with the SEC, at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. The information supplied by DSNC for inclusion in the
proxy statement/prospectus to be sent to the shareholders of DSNC in connection
with the meeting of DSNC's shareholders to consider the approval and adoption of
this Agreement and the approval of the Merger (the "DSNC Shareholders' Meeting")
(such proxy statement/prospectus as amended or supplemented is referred to
herein as the "DSNC Proxy Statement") shall not, on the date the DSNC Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed to
DSNC's
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shareholders, at the time of the DSNC Shareholders' Meeting and at 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 in order to make the
statements therein, in light of the circumstances under which they are made, not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the DSNC Shareholders' Meeting which has become false or misleading.
The DSNC Proxy Statement will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations thereunder. If
at any time prior to the Effective Time, any event relating to DSNC or any of
its affiliates, officers or directors should be discovered by DSNC which should
be set forth in an amendment to the Registration Statement or a supplement to
the DSNC Proxy Statement, DSNC shall promptly inform Alydaar and shall assist
Alydaar in appropriately amending or supplementing the Registration Statement.
Notwithstanding the foregoing, DSNC makes no representation or warranty with
respect to any information supplied by Alydaar or Merger Sub which is contained
in any of the foregoing documents.
2.24 Board and Shareholder Approval. The Board of Directors of DSNC
has, as of the date of this Agreement, unanimously (i) approved this Agreement
and the Merger, (ii) determined that the Merger is fair to, and in the best
interests of, DSNC and its shareholders and (iii) determined to recommend that
the shareholders of DSNC approve and adopt this Agreement and approve the
Merger. The affirmative vote of the holders of a majority of the outstanding
shares of DSNC Common Stock is the only vote of the holders of any class or
series of capital stock of DSNC necessary to approve the Merger.
2.25 Fairness Opinion. DSNC has received a written opinion from
Jefferies & Company, Inc., dated as of the date hereof, to the effect that as of
the date hereof, the Exchange Ratio is fair to DSNC's shareholders from a
financial point of view and has delivered to Alydaar a copy of such opinion.
2.26 Products and Distribution. Schedule 2.26 contain a complete list
of the proprietary software products distributed or installed by DSNC (the "DSNC
Published Products"). Schedule 2.26(a) sets forth, for each DSNC Product, the
following (to the extent not already listed on another Schedule to this
Agreement): (i) a list of all contracts and agreements (including without
limitation all development, trademark license, technology license, distribution
or other agreements) relating to the DSNC Products; (ii) the identity of the
significant independent contractors and a list of the agreements with such
independent contractors; (iii) the advances paid or payable, and the royalties
payable, to any third parties with respect to such DSNC Product; and (iv) a list
of the third parties with significant distribution rights to such DSNC Product.
2.27 Intentionally reserved.
2.28 Year 2000 Compliance. DSNC has performed a systems inventory and
assessment of potential year 2000 remediation and testing costs for all
hardware, software, and embedded microprocessors in non-computer equipment used
in connection with DSNC's business to ensure, other than such as would not have
a Material Adverse Effect, that such items shall be century compliant for the
year 2000 and beyond. In order to be century compliant, DSNC agrees that such
items must be capable of accounting for all calculations using a century and
date
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sensitive algorithm for the year 2000 and beyond. DSNC agrees that Alydaar may
request one or more test scripts from DSNC to validate that such items are
century compliant and to determine the latest future date such items are able to
process. Set forth on Schedule 2.28(a) are DSNC's contingency plans for year
2000 compliance and remediation of current equipment. DSNC expects to incur no
material liability in connection with the year 2000 issue, provided that
additional expenditures will need to be made with respect to Year 2000
remediation as described in DSNC's quarterly report on Form 10Q for the period
ended September 30, 1998.
2.29 Inventories. Any and all inventory relating to the business of
DSNC (the "Inventory") is properly valued at the lower of cost (first-in,
first-out) or market in accordance with generally accepted accounting principles
consistently applied, and except for items sold in the ordinary course of
business, consists of and will, at the Effective Time, consist of items of a
quality and quantity currently usable and saleable in the ordinary course of
business without markdown or discount. With respect to Inventory in the hands of
suppliers for which DSNC is committed as of the date hereof or as of the
Effective Time, such Inventory is described in Schedule 2.29 and is reasonably
expected to be usable in the ordinary course of business as the business of DSNC
is presently being conducted. All items included in the Inventory are the
property of DSNC, except for those items sold in the ordinary course of the
business of DSNC; for each of these sales either the purchaser has made full
payment therefore or the purchaser's liability to make payment is reflected in
the books of DSNC. Except as set forth on Schedule 2.29, no items included in
the Inventory have been pledged as collateral or are held by DSNC on consignment
from others. The Inventory is free of defects to the knowledge of DSNC and, to
the extent that it consists of finished or semi-finished goods, complies with
any specifications submitted by the purchasers thereof.
2.30 Interested Party Transactions. Except as disclosed in the DSNC SEC
Reports filed prior to the date of this Agreement, since the date of DSNC's last
proxy statement to its shareholders, no event has occurred that would be
required to be reported by DSNC as a Certain Relationship or Related
Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC.
2.31 Disclosure. No representation or warranty by DSNC contained in
this Agreement (including the Schedules referred to herein), or in any
certificate furnished or to be furnished by DSNC to Alydaar in connection with
the transactions contemplated hereby contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to make the statements herein or therein not misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ALYDAAR AND MERGER SUB
Alydaar and Merger Sub represent and warrant to DSNC as follows:
3.1 Organization of Alydaar and Merger Sub.
(a) Each of Alydaar and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized; has the corporate power and
authority to own, lease and operate its assets and property and to
carry on its business as now being conducted; and, except as set forth
on Schedule 3.1(a), is duly qualified or licensed to do business and is
in good standing in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except
where the failure to be so qualified would not have a Material Adverse
Effect on Alydaar.
(b) Alydaar has delivered or made available to DSNC a true and
correct copy of the charter and bylaws of Alydaar and Merger Sub, each
as amended to date, and each such instrument is in full force and
effect. Neither Alydaar nor Merger Sub is in violation of any of the
provisions of its respective articles of incorporation or bylaws.
3.2 Alydaar and Merger Sub Capital Structure. The authorized capital
stock of Alydaar consists of 50 million shares of Common Stock, par value $.001
per share, of which there were 17,516,230 shares issued and outstanding as of
the date hereof. The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, par value $0.01 per share, all of which, as of the date
hereof, are issued and outstanding and are held by Alydaar. Merger Sub was
formed in January, 1999 for the purpose of consummating the Merger and has no
material assets or liabilities except as necessary for such purpose. All
outstanding shares of Alydaar Common Stock are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights created by
statute, the Articles of Incorporation or Bylaws of Alydaar or any agreement or
document to which Alydaar is a party or by which it is bound. Alydaar has
reserved a sufficient number of shares of Common Stock for the issuance of
shares to the shareholders of DSNC in the Merger. The shares of Alydaar Common
Stock to be issued pursuant to the Merger will be duly authorized and validly
issued and at the Effective Time will be fully paid, nonassessable and free of
pre-emptive rights.
3.3 Authority.
(a) Each of Alydaar and Merger Sub (as applicable) has all
requisite corporate power and authority to enter into this Agreement
and each other agreement entered into by it in connection with the
transactions contemplated hereby (the "Alydaar Ancillary Agreements")
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Alydaar Ancillary
Agreements and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action
on the part of Alydaar and, in the case of
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this Agreement, Merger Sub, subject only to the filing and recordation
of the Certificate of Merger pursuant to North Carolina Law. Each of
this Agreement and the Alydaar Ancillary Agreements has been duly
executed and delivered by each of Alydaar and Merger Sub (as
applicable) and, assuming the due authorization, execution and delivery
by DSNC, constitutes the legal, valid and binding obligation of Alydaar
and Merger Sub enforceable in accordance with its terms. The execution
and delivery of this Agreement and the Alydaar Ancillary Agreements by
each of Alydaar and Merger Sub (as applicable) does not, and the
performance of this Agreement and the Alydaar Ancillary Agreements by
each of Alydaar and Merger Sub (as applicable) and consummation by
Alydaar and Merger Sub of the transactions contemplated hereby and
thereby will not (i) conflict with or violate the Articles of
Incorporation or Bylaws of Alydaar or the Certificate of Incorporation
or Bylaws of Merger Sub or the equivalent organizational documents of
any of Alydaar's other subsidiaries, (ii) subject to compliance with
the requirements set forth in Section 3.3(b) below, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable
to Alydaar or any of its subsidiaries (including Merger Sub) or by
which its or any of their respective properties is bound or affected,
or (iii) conflict with, result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a
default) under, or impair Alydaar's rights or alter the rights or
obligations of any third party under, or give rise to any rights of
termination, amendment, acceleration or cancellation of any obligation
contained in, or result in the creation of a lien or encumbrance on any
of the properties or assets of Alydaar or any of its subsidiaries
(including Merger Sub) pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Alydaar or any of its
subsidiaries (including Merger Sub) is a party or by which Alydaar or
any of its subsidiaries or its or any of their respective properties or
assets is bound or affected, except with respect to clause (iii) for
any such conflicts, violations, defaults, rights, liens, encumbrances
or other occurrences that would not, individually or in the aggregate,
have a Material Adverse Effect on Alydaar. Schedule 3.3(a) lists all
consents, waivers and approvals under any of Alydaar's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions
contemplated hereby.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with any Governmental Entity is
required to be obtained by Alydaar or Merger Sub in connection with the
execution and delivery of this Agreement, the Alydaar Ancillary
Agreements or the consummation of the Merger, except for (i) the filing
of the Registration Statement relating to the issuance of Alydaar
Common Stock in the Merger with the SEC in accordance with the
Securities Act, (ii) the filing of the Certificate of Merger with the
Secretary of State of the State of North Carolina, (iii) such consents,
approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal and state
securities laws and the securities or antitrust laws of any foreign
country, and (iv) such other consents, authorizations, filings,
approvals and registrations which if not obtained or made would not
have a Material Adverse Effect on Alydaar or a material adverse effect
on the ability of the parties to consummate the Merger.
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3.4 SEC Filings; Alydaar Financial Statements.
(a) Alydaar has filed all forms, reports and documents,
together with all exhibits, required to be filed with the SEC since
December 31, 1997, and has made available to DSNC all forms, reports
and documents in the form filed with the SEC. All such forms, reports
and documents (including those that Alydaar may file subsequent to the
date hereof) are referred to herein as the "Alydaar SEC Reports." The
Alydaar SEC Reports (i) as of their respective dates were prepared and
filed in accordance in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Alydaar
SEC Reports and (ii) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) or, in the case of Alydaar SEC Reports filed
under the Securities Act, when such filing became effective, contain
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(b) Each of the consolidated financial statements (including,
in each case, any related notes thereto) contained in Alydaar SEC
Reports (the "Alydaar Financials"), including any Alydaar SEC Reports
filed after the date hereof until the Closing, (x) complied as to form
in all material respects with the published rules and regulations of
the SEC with respect thereto, (y) was prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes thereto or, in the case of unaudited
interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (z) fairly presented the consolidated
financial position of Alydaar and its subsidiaries as at the respective
dates thereof and the consolidated results of Alydaar's operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring
year-end adjustments. The balance sheet of Alydaar contained in Alydaar
SEC Reports as of September 30, 1998 is hereinafter referred to as the
"Alydaar Balance Sheet." Except as disclosed in the Alydaar Financials,
since the date of the Alydaar Balance Sheet through the date of this
Agreement neither Alydaar nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a balance sheet or in the related notes to
the consolidated financial statements prepared in accordance with GAAP
which are, individually or in the aggregate, material to the business,
results of operations or financial condition of Alydaar and its
subsidiaries taken as a whole, except liabilities (i) provided for in
the Alydaar Balance Sheet, or (ii) incurred since the date of the
Alydaar Balance Sheet in the ordinary course of business consistent
with past practices that would not have a Material Adverse Effect on
Alydaar.
(c) Alydaar has heretofore furnished to DSNC a complete and
correct copy of any amendments or modifications, which have not yet
been filed with the SEC but which are required to be filed, to
agreements, documents or other instruments which previously had been
filed by Alydaar with the SEC pursuant to the Securities Act or the
Exchange Act.
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3.5 Absence of Certain Changes or Events. Since the date of the Alydaar
Balance Sheet through the date of this Agreement, there has not been any
Material Adverse Effect on Alydaar or any event that would reasonably be likely
to have a Material Adverse Effect on Alydaar.
3.6 Pooling of Interests. Neither Alydaar nor any of its directors,
officers, affiliates or shareholders has taken, agreed to take or to Alydaar's
knowledge, failed to take any action which would preclude Alydaar's ability to
account for the Merger as a pooling of interests in accordance with the APB
Opinion No. 16.
3.7 DSNC Proxy Statement/Prospectus. The information supplied by
Alydaar for inclusion in the Registration Statement filed by Alydaar shall not
at the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by Alydaar for inclusion in the DSNC Proxy Statement shall
not, on the date the DSNC Proxy Statement (or any amendment or supplement
thereto) is first mailed to DSNC's shareholders, at the time of the DSNC
Shareholders' Meeting and at 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 in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the DSNC
Shareholders' Meeting which has become false or misleading. The DSNC Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder. If at any time prior
to the Effective Time, any event relating to Alydaar or any of its affiliates,
officers or directors should be discovered by Alydaar which should be set forth
in an amendment to the Registration Statement or a supplement to the DSNC Proxy
Statement, Alydaar shall promptly inform DSNC. Notwithstanding the foregoing,
Alydaar makes no representation or warranty with respect to any information
supplied by DSNC which is contained in any of the foregoing documents.
3.8 Board Approval. The Board of Directors of Alydaar has (i)
determined that the Merger is fair to, and in the best interests of, Alydaar and
its shareholders and (ii) approved the Merger.
3.9 Merger Sub. As of the date hereof and the Effective Time of the
Merger, except for obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated by this
Agreement, Merger Sub has not and will not have incurred, directly or
indirectly, through any affiliate, any material obligations or liabilities or
engaged in any material business activities of any type or kind whatsoever or
entered into any material agreement or arrangements with any person.
3.10 Broker's Fees. Except for First Albany Corporation, neither
Alydaar nor, to the knowledge of Alydaar, any of its directors, officers or
employees has employed any person or entity as a broker, finder or agent or
incurred any liability for any broker's fees, finder's fees
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or other commission in connection with the Merger or the related transactions
contemplated by this Agreement.
3.11 Disclosure. No representation or warranty by Alydaar contained in
this Agreement (including the Schedules referred to herein), or in any
certificate furnished or to be furnished by Alydaar to DSNC in connection with
the transactions contemplated hereby contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to make the statements herein or therein not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, DSNC shall, except as permitted by
the terms of this Agreement, carry on and use reasonable best efforts to
preserve its business, in all material respects, in the usual, regular and
ordinary course, and in compliance with all applicable laws and regulations, pay
its debts and taxes when due subject to good faith disputes over such debts or
taxes, pay or perform other obligations when due, and use its reasonable best
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and employees and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings.
In addition, except as permitted by the terms of this Agreement, during
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement pursuant to its terms and the Effective Time,
DSNC shall not do any of the following:
(a) waive any stock repurchase rights, accelerate, amend or
change the period of exercisability of options or restricted stock, or
reprice options granted under any employee, consultant or director
stock plans or authorize cash payments in exchange for any options
granted under any of such plans;
(b) grant any severance or termination pay to any officer or
employee except payments in amounts consistent with policies and past
practices or pursuant to written agreements outstanding, or policies
existing, on the date hereof and as previously disclosed in writing or
made available to Alydaar, or adopt any new severance plan;
(c) transfer or license to any person or entity or otherwise
extend the term of any agreement with respect to, amend or modify any
rights (including without limitation distribution rights) to the DSNC
IP Rights or enter into assignments of future patent rights, other than
licenses and distribution rights in the ordinary course of business;
(d) declare, set aside or pay any dividends on or make any
other distributions (whether in cash, stock, equity securities or
property) in respect of any capital stock or
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split, combine or reclassify any capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock;
(e) repurchase or otherwise acquire, directly or indirectly,
any shares of capital stock of DSNC;
(f) except for any shares of DSNC Common Stock issued pursuant
to the resolution or settlement of In Re: DSNC Systems Network
Corporation Securities Litigation (including pursuant to any indemnity
obligations of DSNC with respect thereto), issue, deliver, sell,
authorize or propose the issuance, delivery or sale of, any shares of
capital stock or any securities convertible into shares of capital
stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of
capital stock, or enter into other agreements or commitments of any
character obligating it to issue any such shares or convertible
securities, or accelerate the vesting of any outstanding option or
other security, other than the issuance, delivery and/or sale of (i)
shares of DSNC Common Stock pursuant to the exercise of outstanding
stock options or warrants, (ii) shares of DSNC Common Stock issuable to
participants in the DSNC ESPP consistent with the terms thereof and
(iii) options to purchase DSNC Common Stock granted at fair market
value, consistent with past practice and in accordance with the Option
Plan;
(g) cause, permit or propose any amendments to any charter
document or bylaw;
(h) acquire or agree to acquire by merging or consolidating
with, or by purchasing any equity interest in or a material portion of
the assets of, or by any other manner, any business or any corporation,
partnership interest, association or other business organization or
division thereof or joint venture or strategic partnerships, or, except
for transactions in the ordinary course of business consistent with
past practice (i) otherwise acquire or agree to acquire any assets
which are material, individually or in the aggregate, to the business
of DSNC or (ii) enter into any alliances;
(i) sell, lease, encumber or otherwise dispose of any
properties or assets which are material, individually or in the
aggregate, to the business of DSNC, except in the ordinary course of
business consistent with past practice;
(j) incur any indebtedness for borrowed money except pursuant
to existing funded debt agreements disclosed on Schedule 2.17, or
guarantee any indebtedness of any person for borrowed money;
(k) intentionally reserved;
(l) make any payments outside of the ordinary course of
business in excess of $25,000 individually or $100,000 in aggregate for
purposes of settling any dispute other than payments not in excess of
amounts reserved or accrued on the audited DSNC Financials for the
period ended 12-31-97;
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(m) take any action, or permit any of its affiliates to take
any action, that would be reasonably likely to interfere with Alydaar's
ability to account for the Merger as a pooling of interests whether or
not otherwise permitted by the provisions of this Section 4.1;
(n) pay (or make any oral or written commitments or
representations to pay) any bonus, increased salary or wage rate or
special remuneration to any director, officer, employee or consultant
(except (i) for normal salary increases consistent with past practices
not to exceed 10% per year, (ii) pursuant to existing arrangements
previously disclosed to Alydaar and (iii) for reasonable bonuses to
encourage retention of employees after the announcement of a Superior
Proposal (as defined below)) or enter into (except as specifically set
forth herein) or vary the terms of any employment, consulting or
severance agreement with any such person, adopt or amend any employee
benefit plan or employee stock purchase or employee stock option plan,
pay any severance or termination pay (other than payments made in
accordance with plans or agreements existing on the date hereof), grant
any stock option (except for normal grants to newly hired employees or
newly promoted employees consistent with past practices) or issue any
restricted stock, or enter into or modify any agreement or plan or
increase benefits of the type described in Section 2.13;
(o) change its accounting methods, principles or practices,
except as required by concurrent changes in GAAP;
(p) amend or terminate any contract, agreement or license to
which it is a party except those amended or terminated in the ordinary
course of its business, consistent with past practice;
(q) lend any amount to any person or entity, other than
advances for travel and expenses which are incurred in the ordinary
course of business;
(r) except as set forth on Schedule 4.1(r) and in amounts not
to exceed those set forth on such Schedule, waive or release any right
or claim except for the waiver or release of non-material claims in the
ordinary course of business, consistent with past practice;
(s) split or combine the outstanding shares of its capital
stock of any class or enter into any recapitalization or agreement
affecting the number or rights of outstanding shares of its capital
stock of any class or affecting any other of its securities;
(t) agree to any audit assessment by any Tax authority in
excess of $100,000;
(u) change any insurance coverage;
(v) enter into any contract or agreement material to the
business, results or operations or financial condition of DSNC other
than in the ordinary course of business, consistent with past
practices;
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(w) (i) take or agree or commit to take any action that would
make any representation and warranty of DSNC hereunder inaccurate at,
or as of any time prior to, the Effective Time, or (ii) omit or agree
or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate at any such time; or
(x) agree in writing or otherwise to take any of the actions
described in Section 4.1 (a) through (w) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 DSNC Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations.
(a) As promptly as practicable after the execution of this
Agreement, DSNC and Alydaar will prepare, and file with the SEC, the
DSNC Proxy Statement, and Alydaar will prepare and file with the SEC
the Registration Statement in which the DSNC Proxy Statement will be
included as a prospectus. Each of DSNC and Alydaar will respond to any
comments of the SEC, will use its respective reasonable best efforts to
have the Registration Statement declared effective under the Securities
Act and the DSNC Proxy Statement to be cleared by the SEC as promptly
as practicable after such filing and, to the extent that presenting
this Agreement and the Merger to DSNC's shareholders for their approval
and adoption would not violate applicable law, DSNC will cause the DSNC
Proxy Statement to be mailed to the DSNC shareholders at the earliest
practicable time after the Registration Statement is declared effective
by the SEC. As promptly as practicable after the date of this
Agreement, each of DSNC and Alydaar will prepare and file any other
filings required to be filed by it under the Exchange Act, the
Securities Act or any other Federal, foreign or Blue Sky or related
laws relating to the Merger and the transactions contemplated by this
Agreement (the "Other Filings"). Each of DSNC and Alydaar will notify
the other promptly upon the receipt of any comments from the SEC or its
staff or any other government officials and of any request by the SEC
or its staff or any other government officials for amendments or
supplements to the Registration Statement, the DSNC Proxy Statement or
any Other Filing or for additional information and will supply the
other with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any
other government officials, on the other hand, with respect to the
Registration Statement, the DSNC Proxy Statement, the Merger or any
Other Filing. Each of DSNC and Alydaar will cause all documents that it
is responsible for filing with the SEC or other regulatory authorities
under this Section 5.1(a) to comply in all material respects with all
applicable requirements of law and the rules and regulations
promulgated thereunder. Whenever DSNC or Alydaar obtains knowledge of
the occurrence of any event which is required to be set forth in an
amendment or supplement to the DSNC Proxy Statement, the Registration
Statement or any Other Filing, DSNC or Alydaar, as the case may be,
will promptly inform the other of such occurrence and cooperate in
filing with the SEC
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or its staff or any other government officials, and/or mailing to
shareholders of DSNC, such amendment or supplement.
(b) Subject to the provisions of Section 5.4(b), the DSNC
Proxy Statement will include the recommendation of the Board of
Directors of DSNC in favor of adoption and approval of this Agreement
and approval of the Merger (except that notwithstanding anything to the
contrary contained in this Agreement, the Board of Directors of DSNC
may withdraw, modify or refrain from making such recommendation to the
extent that the Board determines, in good faith, after consultation
with outside legal counsel, that compliance with the Board's fiduciary
duties would require it to do so).
5.2 Meeting of Shareholders. Promptly after the date hereof, DSNC will
take all action necessary in accordance with Michigan Law and its Articles of
Incorporation and Bylaws to convene the DSNC Shareholders' Meeting to be held as
promptly as practicable, and in any event (to the extent permissible under
applicable law) within 45 days after the declaration of effectiveness of the
Registration Statement, for the purpose of voting upon this Agreement. For so
long as the Board of Directors of DSNC continues to make the recommendation set
forth in Section 5.1, DSNC will use its best efforts to solicit from its
shareholders proxies in favor of the adoption and approval of this Agreement and
the approval of the Merger and will take all other action necessary or advisable
to secure the vote or consent of its shareholders required by the rules of the
National Association of Securities Dealers, Inc. or Michigan Law to obtain such
approvals.
5.3 Confidentiality.
(a) The parties acknowledge that Alydaar and DSNC have
previously executed a letter agreement regarding confidentiality, dated
November 30, 1998 (the "Confidentiality Agreement"), which
Confidentiality Agreement will continue in full force and effect in
accordance with its terms.
(b) Access to Information. Upon reasonable notice, each of
DSNC and Alydaar will afford to the other and its accountants, counsel
and other representatives reasonable access during normal business
hours to its properties, books, records and personnel during the period
prior to the Effective Time to obtain all information concerning the
business, including the status of product development efforts,
properties, results of operations and personnel of such party, as the
other may reasonably request. No information or knowledge obtained in
any investigation pursuant to this Section 5.3 will affect or be deemed
to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Subject to Section 5.4(b), from and after the date of this
Agreement until the earlier of the Effective Time or termination of
this Agreement pursuant to its terms, DSNC shall not, and will instruct
its directors, officers, employees, representatives, investment
bankers, agents and affiliates (including any subsidiaries) not to,
directly or indirectly, (i) initiate, solicit, encourage, negotiate or
accept the making, submission or
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announcement of, any Acquisition Proposal (as defined below) by any
person, entity or group (other than Alydaar and its affiliates, agents
and representatives), or (ii) participate in any discussions or
negotiations with, or disclose any non-public information concerning
DSNC to, or afford any access to the properties, books or records of
DSNC to, or otherwise assist or facilitate, or enter into any agreement
or understanding with, any person, entity or group (other than Alydaar
and its affiliates, agents and representatives), in connection with any
Acquisition Proposal with respect to DSNC. Without limiting the
generality of the foregoing, DSNC acknowledges and agrees that any
violation of any of the restrictions set forth in the preceding
sentence by any director or officer of DSNC, or by any employee,
representative, investment banker, agent or affiliate of DSNC having
direct or indirect authority from DSNC or any director or officer of
DSNC, shall be deemed to constitute a breach of this Section 5.4 by
DSNC. For the purposes of this Agreement, an "Acquisition Proposal"
with respect to an entity means any proposal, inquiry or offer relating
to or which the entity has reason to believe relates to (i) any merger,
consolidation, combination, sale, dividend or other disposition of
substantial assets or properties or similar transactions or series of
transactions involving the entity or any subsidiaries of the entity,
(ii) sale, dividend, split, or other disposition of 10% or more of
shares of capital stock or other equity interests of the entity
(including without limitation by way of a tender offer or an exchange
offer), (iii) the acquisition by any person of beneficial ownership or
a right to acquire beneficial ownership of, or the formation of any
"group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) which beneficially owns, or has the
right to acquire beneficial ownership of, 10% or more of the then
outstanding shares of capital stock of the entity; or (iv) any public
announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing. As of the
date hereof, DSNC will immediately cease and cause to be terminated any
and all existing activities, discussions or negotiations with any
parties with respect to any Acquisition Proposal. DSNC will (i) notify
Alydaar as promptly as practicable if it receives any proposal or
inquiry or request for DSNC in connection with an Acquisition Proposal
or potential Acquisition Proposal and (ii) as promptly as practicable
deliver to Alydaar a copy of such proposal, inquiry or request if it is
in written form terms and conditions of any such Acquisition Proposal,
as well as the identity of the third party submitting such Acquisition
Proposal. In addition, subject to the other provisions of this Section
5.4(a), from and after the date of this Agreement until the earlier of
the Effective Time or termination of this Agreement pursuant to its
terms, DSNC will not, and will instruct its directors, officers,
employees, representatives, investment bankers, agents and affiliates
(including any subsidiaries) not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in
support of any Acquisition Proposal made by any person, entity or group
(other than Alydaar); provided, however, that nothing herein shall
prohibit DSNC's Board of Directors from taking and disclosing to DSNC's
shareholders a position with respect to a tender offer pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
(b) Notwithstanding anything contrary contained in Section
5.4(a) or elsewhere in this Agreement, prior to the Effective Time,
DSNC may, to the extent the Board of Directors of DSNC determines, in
good faith, after consultation with outside legal counsel, that the
Board's fiduciary duties to shareholders under applicable law require
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it to do so, participate in discussions or negotiations with, and,
subject to the requirements of paragraph (c) below, furnish non-public
information, and afford access to the properties, books or records of
DSNC to any person, entity or group after such person, entity or group
has delivered to DSNC in writing, an unsolicited bona fide Acquisition
Proposal (which has not been withdrawn) which the Board of Directors of
DSNC in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would reasonably
likely to result in a transaction financially more favorable than the
Merger to the shareholders of DSNC (a "Superior Proposal"), provided
that, prior to furnishing such information to, or entering into
discussions or negotiations with, such person, entity or group, DSNC
provides written notice to Alydaar to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
person, entity or group, and keeps Alydaar informed of the status of
any such discussions or negotiations. In the event DSNC receives a
Superior Proposal, nothing contained in this Agreement (but subject to
the terms of this paragraph (b)) will prevent the Board of Directors of
DSNC from recommending such Superior Proposal to DSNC's shareholders,
if the Board determines, in good faith, after consultation with outside
legal counsel, that such action is required by its fiduciary duties; in
such case, the Board of Directors of DSNC may withdraw, modify or
refrain from making its recommendations set forth in Section 5.1(b),
and, to the extent it does so, DSNC may refrain from soliciting proxies
and taking such other action necessary to secure the affirmative vote
of its shareholders as may be required by Section 5.2; provided that
(to the extent permissible under applicable law governing the Board's
fiduciary duties) DSNC shall remain obligated under Section 5.2 to
convene the DSNC Shareholder Meeting and shall have the vote on the
Merger considered by the shareholders of DSNC prior to the vote (if
any) on the Superior Proposal; and provided, further, that (to the
extent permissible under applicable law governing the Board's fiduciary
duties) DSNC shall not recommend to its shareholders a Superior
Proposal for a period of not less than 48 hours after Alydaar's receipt
of a copy of such Superior Proposal (or a description of the
significant terms and conditions thereof, if not in writing) and the
identity of the third party. Notwithstanding anything elsewhere
contained in Section 5.4(a) or elsewhere in this Agreement, DSNC may,
if its Board of Directors determines, in good faith, after consultation
with outside legal counsel that the Board's fiduciary duties to
shareholders under applicable law require it to do so, enter into an
agreement or understanding relating to a Superior Proposal; provided,
that (i) (to the extent permissible under applicable law governing the
Board's fiduciary duties) such agreement or understanding provides that
the Merger shall be considered by the shareholders of DSNC prior to the
Superior Proposal and (ii) if the Merger is approved by the
shareholders of DSNC, neither DSNC nor Alydaar shall be required to pay
a fee or otherwise incur any liability arising out of the agreement or
understanding relating to the Superior Proposal, including, without
limitation, as a result of the Superior Proposal not being approved.
The performance of such agreement or understanding relating to the
Superior Proposal to the extent necessary to facilitate the due
consideration of such Superior Proposal at the meeting of the
shareholders of DSNC after the Merger shall not constitute a breach of
this Agreement.
(c) Notwithstanding anything to the contrary herein, DSNC will
not provide any non-public information to a third party unless: (x)
DSNC provides such non-public
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information pursuant to a nondisclosure agreement with terms regarding
the protection of oral or written confidential information at least as
restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously provided to Alydaar.
5.5 Public Disclosure. (a) DSNC and Alydaar will consult and mutually
agree with each other before issuing any press release or otherwise making any
public statement with respect to the Merger or this Agreement and will not issue
any such press release or make any such public statement prior to such
consultation and agreement, except as may be required by law or any listing
agreement with a national securities exchange or the Nasdaq Stock Market.
(b) DSNC will notify Alydaar before issuing any press release
or otherwise making any public statement with respect to an Acquisition
Proposal.
5.6 Legal Requirements. Each of DSNC, Merger Sub and Alydaar will take
all reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such filings with or investigations by any
Governmental Entity, and any other such requirements imposed upon any of them or
their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement. Alydaar will use its commercially
reasonable efforts to take such steps as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable to the
issuance of Alydaar Common Stock pursuant hereto. DSNC will use its commercially
reasonable efforts to assist Alydaar as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of Alydaar Common Stock pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date
hereof, DSNC and Alydaar will each use its commercially reasonable efforts to
obtain all consents, waivers and approvals under any of its or its subsidiaries'
agreements, contracts, licenses or leases required to be obtained in connection
with the consummation of the transactions contemplated hereby. Without limiting
the generality of the foregoing, DSNC shall, within twenty days of the date
hereof, provide a complete and accurate list of, and subsequent to such twenty
day period shall use its reasonable best efforts to obtain, all consents,
waivers and approvals relating to any change of control provisions contained in
the DSNC Contracts.
5.8 Notification of Certain Matters; Financial Statements. DSNC and
Merger Sub will give prompt notice to Alydaar, and Alydaar will give prompt
notice to DSNC, after obtaining knowledge of the occurrence, or failure to
occur, of any event, which occurrence or failure to occur would be reasonably
likely to cause (a) any representation or warranty contained in this Agreement
and made by it to be untrue or inaccurate at any time from the date of this
Agreement to the Effective Time such that the conditions set forth in Section
6.2(a) or 6.3(a), as the case may be, would not be satisfied as a result
thereof, (b) any Material Adverse Effect on DSNC or Alydaar or (c) any failure
of DSNC and Merger Sub or Alydaar, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or
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satisfied by it under this Agreement such that the condition set forth in
Section 6.2(b) or 6.3(b), as the case may be, would not be satisfied as a result
thereof. To ensure compliance with this Section 5.8, DSNC shall deliver to
Alydaar as soon as practicable but in any event within thirty days after the end
of each monthly accounting period beginning with the month ended November 30,
1998 and ending with the monthly accounting period occurring before the earlier
of the Closing Date or the termination of this Agreement in accordance with its
terms, an unaudited balance sheet, statement of operations and statement of cash
flows for DSNC, which financial statements shall be prepared in the ordinary
course of business, in accordance with DSNC's books and records and generally
accepted accounting principles and shall fairly present the financial position
of DSNC as of their respective dates and the results of DSNC's operations for
the periods then ended. DSNC also shall furnish to Alydaar, prior to the Closing
Date, audited financial statements for the year ending December 31, 1998.
Notwithstanding the above, the delivery of any notice pursuant to this Section
5.8 will not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
5.9 Reasonable Best Efforts and Further Assurances. Subject to the
respective rights and obligations of DSNC and Alydaar under this Agreement, each
of the parties to this Agreement will use its reasonable best efforts to
effectuate the Merger and other transactions contemplated hereby, to fulfill and
cause to be fulfilled the conditions to closing under this Agreement and to
effect the Closing as soon as practicable; provided that neither DSNC nor
Alydaar nor any subsidiary or affiliate thereof will be required to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or of
any business, assets or property, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and stock. Subject to the first sentence of
this Section 5.9, each party hereto, at the reasonable request of another party
hereto, will execute and deliver such other instruments and do and perform such
other acts and things as may be necessary or desirable for effecting completely
the consummation of the transactions contemplated hereby, including but not
limited to actions to be taken at and after the Effective Time.
5.10 Intentionally reserved.
5.11 Schedules. Notwithstanding anything to the contrary contained in
this Agreement, information disclosed in a Schedule to this Agreement shall be
deemed to be disclosed in all other Schedules, provided that such information
shall be disclosed with sufficient specificity such that the applicability of
such information to such other Schedules shall be apparent.
5.12 NMS Listing. Alydaar agrees to authorize for listing on the Nasdaq
National Market, prior to the Effective Time, the shares of Alydaar Common Stock
issuable, and those required to be reserved for issuance, in connection with the
Merger, upon official notice of issuance.
5.13 DSNC Affiliate Agreement. Set forth on Schedule 5.13 is a list of
those persons who may be deemed to be, in DSNC's reasonable judgment, affiliates
of DSNC within the meaning of Rule 145 promulgated under the Securities Act
(each a "DSNC Affiliate"). DSNC will provide Alydaar with such information and
documents as Alydaar reasonably requests for purposes of reviewing such list.
DSNC will use its reasonable best efforts to deliver or cause
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to be delivered to Alydaar, as promptly as practicable on or following the date
hereof (and in any event no later than the date 30 days prior to the Effective
Time), from each DSNC Affiliate an executed affiliate agreement in substantially
the form attached hereto as Exhibit C (the "DSNC Affiliate Agreement"), each of
which will be in full force and effect as of the Effective Time. Alydaar will be
entitled to place appropriate legends on the certificates evidencing any Alydaar
Common Stock to be received by a DSNC Affiliate pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the Alydaar Common Stock, consistent with the terms of the DSNC
Affiliate Agreement.
5.14 Tax-Free Merger. No party shall take any action either prior to or
after the Effective Time that could reasonably be expected to cause the Merger
to fail to qualify as a "reorganization" under Section 368(a) of the Code.
5.15 Pooling Covenant. Prior to the earlier of termination of this
Agreement and the Effective Time, Alydaar will not take any action, and Alydaar
will not permit any of its affiliates to take any action, that would be
reasonably likely to interfere with Alydaar's ability to account for the Merger
as a pooling of interests. In addition, Alydaar will use its reasonable best
efforts to deliver or cause to be delivered to DSNC, on or as promptly as
practicable following the date hereof (and in any event no later than the date
30 days prior to the Effective Time), from each person who may be deemed to be
an "affiliate" of Alydaar within the meaning of Rule 145 promulgated under the
Securities Act, an agreement (which will be in full force and effect as of the
Effective Time) requiring such person to refrain from taking any action that
would be reasonably likely to interfere with Alydaar's ability to account for
the Merger as a pooling of interests.
5.16 Employee Matters. Promptly following the Merger, as determined by
Alydaar in its sole discretion, employees of DSNC will (a) continue under the
current employee benefit plans of DSNC, or (b) become subject to Alydaar
standard employee benefit plans on an equivalent basis with other similarly
situated employees of Alydaar and will receive full credit pursuant to such
plans for years of service at DSNC.
5.17 Director and Officer Liability. For six years after the Effective
Time, Alydaar will cause the Surviving Corporation to indemnify and hold
harmless the present and former officers and directors of DSNC in respect of
acts or omissions occurring prior to the Effective Time to the extent provided
under DSNC's Articles of Incorporation and Bylaws in effect on the date hereof;
provided that such indemnification shall (i) be subject to any limitations
imposed from time to time under applicable law that pursuant to such law are
applicable to such indemnification, and (ii) continue beyond such six year
period with respect to claims filed prior to, and unresolved at, the end of such
period. For six years after the Effective Time, Alydaar will cause the Surviving
Corporation to provide officers' and directors' liability insurance in respect
of acts or omissions occurring prior to the Effective Time covering each such
person currently covered by DSNC's officers' and directors' liability insurance
policy on terms with respect to coverage no less favorable than those of such
policy in effect on the date hereof with a policy coverage amount of $1 million;
provided that Alydaar may substitute therefor policies of at least the same
coverage containing terms that are no less favorable to the extent such
liability insurance can be maintained at an aggregate cost to Alydaar not
greater than $255,000 in total premiums for such officers' and directors'
liability insurance over the course of such six
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year period; provided, further, that if such insurance cannot be so maintained
or obtained at such cost, Alydaar shall maintain or obtain as much of such
insurance for each such person as can be so maintained or obtained at an
aggregate cost of $255,000 in total premiums for such officers' and directors'
liability insurance over the course of such six year period. Any counsel
retained in connection with the provisions of this Section 5.17 shall be chosen
by Alydaar, which counsel shall be reasonably satisfactory to the indemnitees
and only one law firm shall be retained with respect to any single action unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more indemnitees. Alydaar
will cause the Surviving Corporation to pay the reasonable fees and expenses of
such counsel. Neither Alydaar nor the Surviving Corporation will be liable for
any settlement effected without its written consent (which consent will not be
unreasonable withheld).
ARTICLE VI
CONDITIONS OF THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by
the requisite vote under applicable law, by the shareholders of DSNC.
(b) Registration Statement Effective; DSNC Proxy Statement.
The SEC shall have declared the Registration Statement effective. No
stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceeding for that
purpose, and no similar proceeding in respect of the DSNC Proxy
Statement, shall have been initiated or threatened in writing by the
SEC.
(c) No Order; Approvals. No Governmental Entity shall have
enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has
the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger. All consents, approvals, orders or other
actions by or in respect of or filings with any Governmental Entity
required to permit the consummation of the Merger and the transactions
contemplated hereby shall have been obtained, provided that any of the
foregoing relating to the SEC or the State of Michigan shall have been
obtained without conditions or limitations which are unacceptable to
Alydaar in the exercise of its reasonable business judgment.
(d) Tax Opinions. DSNC and Alydaar shall each have received
written opinions from their respective counsel, Bodman, Longley &
Dahling LLP, and McGuire, Woods, Battle & Boothe LLP, in form and
substance reasonably satisfactory to them, to the effect that the
Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and such opinions shall not have been withdrawn;
provided, however, that if the counsel to either DSNC or Alydaar does
not render such opinion, this
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condition shall nonetheless be deemed to be satisfied with respect to
such party if counsel to the other party renders such opinion to such
party. The parties to this Agreement agree to make reasonable
representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of Alydaar Common Stock
issuable to shareholders of DSNC pursuant to this Agreement and such
other shares required to be reserved for issuance in connection with
the Merger shall have been authorized for listing on the Nasdaq
National Market subject to official notice of issuance.
(f) Opinion of Accountants. DSNC shall have received from
Grant Thornton LLP, independent auditors for DSNC, a letter dated
within two business days prior to the Effective Time (which may contain
customary qualifications and assumptions), to the effect that Grant
Thornton LLP concurs with DSNC's management conclusion that no
conditions exist related to DSNC that would preclude Alydaar from
accounting for the Merger as a pooling of interests; and DSNC shall
have received from Holtz, Rubenstein and Co., LLP, the independent
auditors for Alydaar, a copy of a letter addressed to Alydaar dated the
Closing Date, in substance reasonably satisfactory to DSNC (and which
may contain customary qualifications and assumptions and which may be
based in part on the letter referred to above from Grant Thornton LLP
to DSNC) to the effect that Holtz, Rubenstein and Co., LLP concurs with
Alydaar's management conclusions that as of that date, no conditions
exist that would preclude Alydaar from accounting for the Merger as a
pooling of interests.
(g) Third Party Consents. DSNC shall have obtained such
consents and approvals as are required pursuant to the Foothill Capital
Corp. Loan Security Agreement; provided that no party shall have the
right to assert any such failure to obtain such consents and approvals
as a condition to close if any act or failure to act by such party
caused the failure of such condition.
6.2 Additional Conditions to Obligations of DSNC. The obligation of
DSNC to consummate and effect the Merger shall be subject to the satisfaction at
or prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by DSNC:
(a) Representations and Warranties. The representations and
warranties of Alydaar and Merger Sub contained in this Agreement shall
be true and correct in all material respects as of the date of this
Agreement (except that representations and warranties qualified by
materiality or Material Adverse Effect shall be true and correct in all
respects). In addition, the representations and warranties of Alydaar
and Merger Sub contained in this Agreement shall be true and correct in
all material respects on and as of the Effective Time except for
changes specifically contemplated by this Agreement and except for
those representations and warranties which address matters only as of a
particular date, which shall remain true and correct in all material
respects (except that representations and warranties qualified by
materiality or Material Adverse Effect shall be true and correct in all
respects) as of such particular date, with the same force and effect as
if made on and as of the Effective Time. DSNC shall have received a
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certificate with respect to the foregoing signed on behalf of Alydaar
by the Chief Executive Officer and the Chief Financial Officer of
Alydaar;
(b) Agreements and Covenants. Alydaar and Merger Sub shall
have performed or complied in all material respects with all agreements
and covenants required by this Agreement to be performed or complied
with by them on or prior to the Effective Time, and DSNC shall have
received a certificate to such effect signed on behalf of Alydaar by
the Chief Executive Officer and the Chief Financial Officer of Alydaar;
(c) Material Adverse Effect. No Material Adverse Effect with
respect to Alydaar shall have occurred since the date of this
Agreement; and
(d) Legal Opinion. DSNC shall have received a legal opinion
from McGuire, Woods, Battle & Boothe LLP in the form attached hereto as
Exhibit D.
6.3 Additional Conditions to the Obligations of Alydaar and Merger Sub.
The obligations of Alydaar and Merger Sub to consummate and effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by Alydaar:
(a) Representations and Warranties. The representations and
warranties of DSNC contained in this Agreement shall be true and
correct in all material respects as of the date of this Agreement
(except that representations and warranties qualified by materiality or
Material Adverse Effect shall be true and correct in all respects). In
addition, the representations and warranties of DSNC contained in this
Agreement shall be true and correct in all material respects on and as
of the Effective Time except for changes specifically contemplated by
this Agreement and except for those representations and warranties
which address matters only as of a particular date, which shall remain
true and correct in all material respects (except that representations
and warranties qualified by materiality or Material Adverse Effect
shall be true and correct in all respects) as of such particular date,
with the same force and effect as if made on and as of the Effective
Time. Alydaar shall have received a certificate with respect to the
foregoing signed on behalf of DSNC by the President and the Chief
Financial Officer of DSNC;
(b) Agreements and Covenants. DSNC shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time, and Alydaar shall have received a
certificate to such effect signed on behalf of DSNC by the President
and the Chief Financial Officer of DSNC;
(c) Material Adverse Effect. No Material Adverse Effect with
respect to DSNC shall have occurred since the date of this Agreement;
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(d) Legal Opinion. Alydaar shall have received a legal opinion
from Bodman, Longley & Dahling LLP, or such other counsel to DSNC as
shall be reasonably acceptable to Alydaar and its counsel, in the form
attached hereto as Exhibit E;
(e) Injunctions or Restraints on Conduct of Business. No
temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or the legal,
contractual or regulatory restraint limiting or restricting Alydaar
conduct or operation of its business or the business or DSNC, following
the Merger, shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity,
domestic or foreign, seeking the foregoing be pending;
(f) Settlement of All Shareholder Lawsuits. All outstanding or
pending lawsuits brought by shareholders in which any of DSNC or any of
its affiliates, officers and/or directors are named as defendants,
including, without limitation, In Re: DSNC Systems Network Corporation
Securities Litigation, shall have been settled and approved and such
settlement and approval shall be final and nonappealable, substantially
in the form approved prior to the date hereof by the Board of Directors
of DSNC, by the applicable courts or authority and releases in favor of
DSNC shall have been executed and delivered by the plaintiffs in such
lawsuits; provided that in each case such settlement, approval and
release shall have been obtained on terms acceptable to Alydaar in its
reasonable discretion, including without limitation with respect to the
form and source of consideration to be paid by DSNC in any such
settlement. Any such settlement involving the issuance of additional
shares of capital stock or related rights by DSNC shall have a
corresponding offset on the Exchange Ratio as contemplated in Section
1.6(a);
(g) Financial Statements. The audited financial statements of
DSNC for the year ending December 31, 1998 shall be acceptable to
Alydaar in all material respects in its reasonable judgment; and
(h) Consents; Approvals or Waivers. DSNC shall have obtained
consents, approvals or waivers of any change of control provision in
DSNC Contracts that are material, either individually or in the
aggregate.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time of the Merger, whether before or after approval of the Merger
by the shareholders of DSNC:
(a) by mutual written consent duly authorized by the
Boards of Directors of Alydaar and DSNC;
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<PAGE> 46
(b) by either Alydaar or DSNC, if the Merger shall not have
been consummated by July 31, 1999 for any reason; provided, however,
that the right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose action or failure to act has
been a principal cause of or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act
constitutes a breach of this Agreement; provided that in any event this
Agreement shall be automatically terminated on September 30, 1999 in
the event that the Merger shall not have been consummated by such date.
(c) by either Alydaar or DSNC, if a Governmental Entity shall
have issued an order, decree or ruling or taken any other action, or
there shall be any law or regulation, in any case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger,
which order, decree or ruling is final and nonappealable;
(d) by either Alydaar or DSNC, if the required approval of the
shareholders of DSNC contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote upon a
vote taken at a meeting of shareholders duly convened therefor or at
any adjournment thereof;
(e) by Alydaar, if at any time prior to the approval of the
Merger by the shareholders of DSNC, the Board of Directors of DSNC:
(i) withdraws its recommendation of this Agreement or
the Merger,
or
(ii) accepts, publicly endorses, recommends or
executes a letter of intent or similar document with respect
to a Superior Proposal or resolves to do any of the foregoing;
(f) by Alydaar, if any of the following shall occur:
(i) DSNC shall have failed to include in the DSNC
Proxy Statement the unanimous recommendation of the Board of
Directors of DSNC in favor of approval and adoption of this
Agreement and the Merger, or the Board of Directors of DSNC
shall have amended or modified in a manner adverse to Alydaar
such Board of Directors' unanimous recommendation in favor of
the Merger or approval or adoption of this Agreement;
(ii) the Board of Directors of DSNC shall have
approved, publicly endorsed, recommended or executed a letter
of intent or similar document with respect to any Acquisition
Proposal other than the Merger;
(iii) a tender or exchange offer relating to
securities of DSNC shall have been commenced and DSNC shall
not have sent to its security holders, within 10 business days
after the commencement of such tender or exchange
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offer, a statement that DSNC recommends rejection of such
tender or exchange offer;
(iv) an Acquisition Proposal (other than a tender or
exchange offer relating to the securities of DSNC) is publicly
announced, and, upon Alydaar's request, DSNC fails to issue a
press release announcing its opposition to such Acquisition
Proposal within ten business days after such request; or
(g) by DSNC, upon a breach of any representation, warranty,
covenant or agreement on the part of Alydaar set forth in this
Agreement, or if any such representation or warranty of Alydaar shall
have become inaccurate, in either case such that the conditions set
forth in Section 6.2(a) or Section 6.2(b), as the case may be, would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become inaccurate; provided,
however, that if such inaccuracy in Alydaar's representations and
warranties or breach by Alydaar is curable by Alydaar through the
exercise of its commercially reasonable efforts, then DSNC may not
terminate this Agreement under this Section 7.1(g) for so long as
Alydaar is exercising commercially reasonable efforts to cure such
inaccuracy or breach, not to exceed 60 days from the time of written
notice to Alydaar from DSNC of its intent to terminate pursuant to this
Section 7.1(g); and, provided, further, that DSNC may not terminate
this Agreement pursuant to this Section 7.1(g) if it shall have
breached this Agreement;
(h) by Alydaar, upon a breach of any representation, warranty,
covenant or agreement on the part of DSNC set forth in this Agreement,
or if any such representation or warranty of DSNC shall have become
inaccurate, in either case such that the conditions set forth in
Section 6.3(a) or Section 6.3(b), as the case may be, would not be
satisfied as of the time of such breach or as of the time such
representation or warranty shall have become inaccurate; provided,
however, that if such inaccuracy in DSNC's representations and
warranties or breach by DSNC is curable by DSNC through the exercise of
its commercially reasonable efforts, then Alydaar may not terminate
this Agreement under this Section 7.1(h) for so long as DSNC is
exercising commercially reasonable efforts to cure such inaccuracy or
breach, not to exceed 60 days from the time of written notice to DSNC
from Alydaar of its intent to terminate pursuant to this Section
7.1(h); and, provided, further, that Alydaar may not terminate this
Agreement pursuant to this Section 7.1(h) if it shall have breached
this Agreement;
(i) by either Alydaar or DSNC, in the event of a tender or an
exchange offer relating to the securities of DSNC which is accepted by
more than fifty percent (50%) of the outstanding shares of DSNC Common
Stock;
(j) by DSNC, relying on the written opinion of outside legal
counsel that the Board is required to terminate the Agreement pursuant
to its fiduciary duties to the shareholders under applicable law.
7.2 Notice of Termination; Effect of Termination. Subject to the cure
periods set forth in Sections 7.1(g) and (h), any termination of this Agreement
under Section 7.1 above will be effective immediately upon the delivery of
written notice of the terminating party to the other
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parties hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (miscellaneous),
each of which shall survive the termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any breach of this Agreement.
No termination of this Agreement shall affect the obligations of the parties
contained in the Confidentiality Agreement, all of which obligations shall
survive termination of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees
and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such expenses whether or not the Merger is consummated; provided,
however, that Alydaar and DSNC shall share equally all fees and
expenses, other than attorneys' and accountants fees and expenses,
incurred in relation to the printing and filing of the DSNC Proxy
Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits)
and any amendments or supplements thereto.
(b) DSNC Payments. If this Agreement is terminated by Alydaar
or DSNC pursuant to Section 7.1(d) or Section 7.1(i), or by DSNC
pursuant to Section 7.1(j), or by Alydaar pursuant to Section 7.1(e) or
7.1(f), then DSNC shall pay to Alydaar, in cash, a non-refundable fee
in the amount of $2,000,000 (the "Termination Fee"); provided that no
Termination Fee shall be payable by DSNC, in the absence of a proposal
that either constitutes, or may reasonably be expected to lead to, an
Acquisition Proposal, in the event of termination pursuant to (A)
Section 7.1(d), (B) Section 7.1(e)(i) or Section 7.1(f)(i), provided in
each case that the Board of Directors of DSNC is required to do so,
acting in good faith after consultation with outside legal counsel,
pursuant to its fiduciary duties under applicable law, or (C) Section
7.1(j). In the case of termination of this Agreement by DSNC pursuant
to Section 7.1(d) where an Acquisition Proposal has been made by any
person or entity other than Alydaar prior to such termination, and
within six months of such termination a transaction is consummated or a
definitive agreement or agreement in principal is entered into which
relates to such Acquisition Proposal, DSNC shall pay the Termination
Fee concurrently with any such consummation or the entering into of any
such agreement; or 7.1(i), the Termination Fee payable pursuant to the
preceding sentence shall be paid by DSNC prior to or contemporaneous
with notice of such termination being provided to Alydaar and as a
condition to DSNC's right to terminate under such provisions, and in
the case of termination of this Agreement by Alydaar pursuant to
Section 7.1(e), Section 7.1(f) or Section 7.1(j), the Termination Fee
payable pursuant to the preceding sentence shall be paid by DSNC within
three business days after such notice of such termination.
(c) No termination of this Agreement pursuant to Section
7.1(g) or 7.1(h) shall prejudice the ability of a non-breaching party
from seeking damages from any other party for any breach of this
Agreement, including, without limitation, attorneys' fees and the right
to pursue any remedy at law or in equity.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of Alydaar, DSNC and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants and agreements that by
their terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Alydaar or Merger Sub, to:
2101 Rexford Road
Suite 250 West
Charlotte, NC 28211
Telephone: (704) 365-2324, ext. 2022
Facsimile: (704) 365-5175
Attention: Dain Dulaney, General Counsel
with a copy to:
McGuire, Woods, Battle & Boothe LLP
100 North Tryon Street
Suite 2900
Charlotte, NC 28202-4011
Attention: B. Andrew Pickens, Jr.
Telephone: (704) 338-4751
Facsimile: (704) 347-3838
(b) if to DSNC, to:
34705 W. 12 Mile Road
Suite 300
Farmington Hills, MI 48331
Attention: Michael W. Grieves
Telephone: (248) 489-7117
Facsimile: (248) 489-1007
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with a copy to:
Bodman, Longley & Dahling LLP
100 Renaissance Center
34th Floor
Detroit, MI 48243
Attention: Robert J. Diehl, Jr.
Telephone: (313) 393-7597
Facsimile: (313) 393-7579
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits,
such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The words "include," "includes" and "including"
when used herein shall be deemed in each case to be followed by the
words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
(b) For purposes of this Agreement (a) as it relates to
Alydaar, the term "knowledge" means, with respect to any matter in
question, that any of the Chief Executive Officer, Chief Financial
Officer or General Counsel of Alydaar, has actual knowledge of such
matter and (b) as it relates to DSNC, the term "knowledge" means, with
respect to any matter in question, that either of the Chief Executive
Officer or the Chief Financial Officer of DSNC has actual knowledge of,
or reasonably should have known of, such matter.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including all Schedules (a) constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, it being understood
that the Confidentiality Agreement shall continue in full force and effect until
the Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.17.
8.6 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
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reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflicts of laws.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of
its rights, interests, or obligations hereunder without the prior written
approval of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF ALYDAAR, DSNC AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF ALYDAAR, DSNC OR MERGER SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
ALYDAAR SOFTWARE CORPORATION
By: /s/ Robert F. Gruder
----------------------------
ALYDAAR ACQUISITION CORP.
By: /s/ Robert F. Gruder
----------------------------
DATA SYSTEMS NETWORK CORPORATION
By: /s/ Michael W. Grieves
----------------------------
<PAGE> 1
EXHIBIT 10.9
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG LEASE
THIS LEASE, made and entered into this the 16th day of June 1998, by
and between TWO MORROCROFT CENTRE, LLC, a North Carolina limited liability
company, hereinafter referred to as "Landlord," and ALYDAAR SOFTWARE
CORPORATION, a North Carolina corporation, hereinafter referred to as "Tenant";
W I T N E S S E T H:
THAT for and in consideration of the mutual agreements of the parties,
including the rental agreed to be paid by Tenant to Landlord, Landlord hereby
leases to Tenant, and Tenant leases and rents from Landlord the following
described premises on the terms and conditions hereinafter set forth, to wit:
ARTICLE I
BASIC LEASE TERMS AND CONDITIONS
Section 1. Commencement, Termination and Base Rent.
Building: Two Morrocroft Centre
6805 Morrison Boulevard
Charlotte, North Carolina 28211
Location of Premises: 6805 Morrison Boulevard
Charlotte, North Carolina 28211
Gross Rentable Area of Building: 100,000 square feet
Gross Rentable Area of Premises: 100,000 square feet
Initial Lease Term: Ten (10) Years
Commencement Date: The date determined as provided
in Article III, Section 1 hereof.
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<TABLE>
<S> <C>
Termination Date: The Termination Date shall be that date which is
Ten (10) years after the last day of the month in
which the Commencement Date occurs, unless the
Lease is renewed as provided in Section 2 of Article
III, in which event the Termination Date shall be the
last date of the applicable renewal period.
Base Rent:
Initial Annual Base Rent: Two Million and 00/100 Dollars ($2,000,000.00)
(based on $20.00 per square foot of Gross Rentable
Area)
Initial Monthly Base Rent: One Hundred Sixty-Six Thousand Six Hundred
Sixty Six and 67/100 Dollars ($166,666.67)
Signage Tenant may install a sign at Tenant's cost and
expense identifying Tenant on or adjacent to the
Building provided the location, dimensions and
appearance of such sign are approved in writing by
Landlord and the sign complies with all applicable
governmental requirements
Option to Extend: Tenant shall have two (2) options of five (5) years
each to extend the Lease upon the terms and
conditions hereinafter provided in this Lease
Section 2. Address of Landlord and Tenant; Notices.
Rental and Other Payments to Landlord: Two Morrocroft Centre, LLC
Rotunda Suite 175
4201 Congress Street
Charlotte, NC 28209
Correspondence to Landlord: Two Morrocroft Centre, LLC
Rotunda Suite 175
4201 Congress Street
Charlotte, NC 28209
Address of Tenant:
Prior to Commencement Date: Alydaar Software Corporation
</TABLE>
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<PAGE> 3
2101 Rexford Road
Suite 250 West
Charlotte, North Carolina 28211
Attention: Mr. Robert F. Gruder
After Commencement Date: Alydaar Software Corporation
Two Morrocroft Centre
6805 Morrison Boulevard
Charlotte, North Carolina 28211
All sums of money to be paid and all written notices to be given by
Tenant to Landlord shall be delivered to the address of Landlord as set forth
above. All sums of money to be paid and all written notices to be given by
Landlord to Tenant shall be delivered to the address of Tenant set forth above.
All notices required or permitted under this Lease shall be in writing,
signed by the party giving such notice and may be given by certified United
States Mail, postage prepaid, return receipt requested, or by a nationally-
recognized overnight courier (e.g. Federal Express, Airborne) or by hand
delivery and, if given by any of such means, shall be deemed effectively given
upon receipt by the party to whom the notice is sent. Either party may change
the address in the continental United States to which money due or notices shall
be sent by giving the other party written notice of such change of address.
Section 3. Certain Conditions. In the event that Landlord fails to obtain a
binding written commitment for a Construction Loan (as defined herein) from
NationsBank, N.A. or another lender approved by both members of Landlord in an
amount of not less than $10,500,000 prior to June 26, 1998, or in the event that
Landlord obtains such a commitment but the Construction Loan fails to close for
any reason prior to the term of the commitment, then either party to this Lease
by written notice to the other may terminate this Lease. In the event that
Providian Life and Health Insurance Company, its successors or assigns, fails
for any reason to approve the release of the Land from the existing deed of
trust encumbering the Land and certain adjacent Land owned by H-C REIT, Inc.
prior to the date designated pursuant to Landlord's operating agreement for the
contribution of the Land to Landlord or fails for any reason to release the Land
prior to the date designated pursuant to Landlord's operating agreement for the
contribution of the Land to Landlord, then either party to this Lease by written
notice to the other may terminate this Lease. In the event that the Board of
Directors of H-C REIT, Inc. fails to approve the Operating Agreement of Landlord
by July 27, 1998, and H-C REIT, Inc. terminates the Operating Agreement as a
result of such failure to approve, then this Lease shall automatically terminate
upon notice to Tenant by Landlord or by H-C REIT, Inc. of the termination of the
Operating Agreement of Landlord. Upon any termination of this Lease by either
party to this Lease pursuant to this Section, this Lease shall terminate and
shall be null and void and neither party shall have any further liability or
obligation to the other party pursuant hereto. The term "Construction Loan" as
used in this Lease means any loan obtained by Landlord from a bank, savings and
loan association, insurance company or other institutional lender, or group of
lenders, to finance the construction and development of the Project which has
both a construction phase and a term phase and in which the maturity date of the
term phase is at least three (3) years
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from the closing of the loan. The term "Project" as used in this Lease and in
Landlord's operating agreement means the Land and the office building, parking
facility and related amenities constructed on the Land. Upon satisfaction of the
conditions set forth in this Section, each party to the Lease shall at the
request of the other party execute a certification in form and substance
reasonably satisfactory to such party and its counsel acknowledging in writing
that the conditions set forth in this Section have been satisfied and waiving
any right to terminate the Lease pursuant to this Section.
ARTICLE II
LEASED PREMISES
Section 1. Description of Premises. The Premises this day leased and
demised (hereinafter called "the Premises") are to be located within the
Building identified in Article I (hereinafter called the "Building") which is to
be constructed on the land described in Exhibit A attached hereto and
incorporated herein by reference (the "Land") (the Land and the Building being
herein called the "Property"). The Premises is composed of the entire Gross
Rentable Area included in the Building and shall comprise 100,000 square feet of
Gross Rentable Area in the aggregate. Preliminary schematic floor plans for each
floor of the Building are attached hereto as Exhibit B and incorporated herein
by reference.
Landlord and Tenant agree that the Gross Rentable Area of the Premises
and Building included in the Building to be constructed substantially in
accordance with the Plans and Specifications as provided in Section 2 of this
Article will be 100,000 square feet. For purposes of this Lease the Gross
Rentable Area of the Premises and the Building is agreed to be 100,000 square
feet. Landlord and Tenant acknowledge that minor variations in such Gross
Rentable Area may occur as a result of normal and customary variation during
construction of the Building and further agree than no adjustment in the Gross
Rentable Area will be made as a result of any such variation or as a result of
any field measurement following completion of the Building. The Gross Rentable
Area of the Premises and the Initial Annual and Monthly Base Rent set forth in
Article I, Section I, shall accordingly be based on a total Gross Rentable Area
of the Premises and the Building of 100,000 square feet and upon an Initial
Annual Base Rent of $20.00 per square foot of Gross Rentable Area of the
Premises. Such agreed-upon square footage of Gross Rentable Area in the amount
of 100,000 square feet shall be included in an agreement (the form of which is
attached hereto as Rider 1) confirming the Commencement Date, the Termination
Date, the rental and the Gross Rentable Area of the Premises (the "Commencement
Agreement").
"Gross Rentable Area" for the purposes of this Lease means the actual
number of square feet of gross floor space located within the predominant
vertical plane of the exterior faces of the exterior walls of the Building on
all four (4) floors of the Building, including, without limitation, all space or
mezzanines, without deduction or exclusion of any space occupied by or used for
columns, stairs, stairwells, elevator shafts, utilities and air-conditioning
shafts and equipment, escalators, bathrooms, interior walls, or other interior
construction or equipment.
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Section 2. Construction of Shell Building.
A. Shell Building Construction Work. At Landlord's expense, Landlord
shall, as soon as practical after the later of (i) the execution of the Lease or
(ii) contribution of the Land and $2,000,000 in cash to Landlord by Landlord's
members as capital contributions as provided in Section 5.1 of Landlord's
operating agreement or (iii) closing of the Construction Loan to be obtained by
Landlord for construction of the Building, commence construction of the basic
shell building comprising the Building and included in Shell Building
Construction Work as described below. The shell building shall be a first-class
four-story office building of steel and masonry construction. The exterior
design of the building shall be consistent with the architectural rendering
included in the plans and specifications (the "Plans and Specifications")
approved by Tenant and described on attached Exhibit C . All work to be
performed by Landlord in connection with the construction of the shell building
will be performed in a good and workman-like manner in compliance with all
applicable rules, regulations, laws, codes, statutes and other governmental
requirements. Landlord agrees to complete the following in connection with the
construction of the shell building ("Shell Building Construction Work"):
1. Construction of the basic shell building (consisting of
structural frame, roofing, and exterior walls) and other
public and service areas, and parking facilities, all as shown
in the Plans and Specification. Each floor of the building
shall include restroom facilities sufficient to meet
applicable code requirements as well as compliance with the
Americans With Disabilities Act.
2. Landlord will complete all of the improvements shown in the
Plans and Specifications as part of the Shell Building
Construction Work including the following:
(i) Ceiling. Landlord will provide a suspended T-bar
system with lay-in standard acoustical tile as shown
in the Plans and Specifications.
(ii) Flooring. Landlord will provide a concrete floor,
finished, ready for application of carpet, vinyl
composition tile or other flooring as shown in the
Plans and Specifications.
(iii) Heating and Air Condition. Landlord will provide
heating, ventilation and air conditioning, including
duct work, supply and return grills served by a
central air system to provide normal air conditioning
and heating, all in accordance with the Plans and
Specifications.
(iv) Electrical. Landlord will bring the power supply to
the Premises up to and including an empty
distribution panel. Landlord shall also supply
lighting fixtures in accordance with the standards as
shown in the Plans and Specifications. Any additional
electrical requirements shall be constructed as part
of the Tenant Upfit Work.
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(v) Telephone. Landlord will bring telephone service to
the Premises. Cost for service from such location
shall be borne by Tenant. No telephone conduit or
wire shall be exposed but shall run above ceilings.
(vi) Fire Protection. Landlord shall provide a sprinkler
system with sprinkler heads in a general protective
pattern as required by building codes together with
emergency exits, stairs and extinguishers as required
by building codes. Any changes or upgrades in such
system shall be included in the Tenant Upfit Work.
(vii) Plumbing Systems. Landlord shall extend public water
lines to the Premises and shall supply building
standard plumbing as required to serve restroom
facilities sufficient to meet applicable code
requirements of the Building, all as shown in the
Plans and Specifications. Any extension of such
plumbing services shall be included in the Tenant
Upfit Work
(viii) Parking Deck. Landlord shall construct a multi-level
parking deck with parking for approximately 470
vehicles adjacent to the Building on the Land. Such
parking facility shall be available for use by Tenant
on a non-exclusive basis subject to the Parking Rules
and Regulations and to the provisions of Article VII,
Section 2 of this Lease. Use of the parking facility
by Tenant, its employees, agents and invitees shall
be non-exclusive and shall be in common with tenants
of the One Morrocroft Property adjoining the Property
and such tenants' employees, agents and invitees.
B. Landlord agrees to perform the "Shell Building Construction
Work" with diligence, subject to matters of Force Majeure. As used in
this Lease the term "Force Majeure" shall mean any accident, casualty,
act of God, war or civil commotion, strike or labor troubles, shortage
of labor or materials, unusual adverse weather conditions or any cause
whatsoever beyond the reasonable control of Landlord, including, but
not limited to, energy shortages or governmental preemption in
connection with a national emergency, or by any reason of government
laws or any rule, order or regulation of any department or subdivision
thereof or any governmental agency, or by reason of the conditions of
supply and demand which have been or are affected by war or other
emergency. In the event that any event(s) of Force Majeure result in
the Shell Building Construction Work not commencing on or before August
1, 1998, then Tenant shall have the right to terminate this Lease by
written notice to Landlord given within ten (10) days after August 1,
1998.
Section 3. Tenant Upfit Work.
A. The Tenant Upfit Work. The Tenant Upfit Work is defined as all work
(other than that specifically designated as Shell Building Construction Work)
necessary to complete the construction of the Premises in accordance with the
Tenant Upfit Plans (as defined below).
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B. Approval of Tenant Upfit Plans. Tenant shall cause to be prepared at
Tenant's expense all architectural plans and specifications and all structural,
mechanical and electrical engineering plans and specifications (the "Tenant
Upfit Plans") required for Tenant's occupancy of the Premises. Landlord shall
have the right to approve Tenant's architectural firm as well as the Tenant
Upfit Plans in its reasonable discretion. The Tenant Upfit Plans shall be
prepared in a manner which is consistent with the Plans and Specifications for
the Building and shall comply with all applicable codes and shall be subject to
approval of the Mecklenburg County Department of Building Standards. Tenant
shall submit the Tenant Upfit Plans to Landlord not later than sixty (60) days
after execution of this Lease by all parties. Landlord shall have thirty (30)
days after Tenant has submitted its Tenant Upfit Plans within which to either
approve or disapprove of said Tenant Upfit Plans. If Landlord fails to notify
Tenant of its disapproval of the Tenant Upfit Plans within the said thirty (30)
day period, then in such case, the Tenant Upfit Plans shall be deemed to be
approved. However, if Landlord does notify Tenant of its disapproval of the
Tenant Upfit Plans within said thirty (30) day period, then in such case Tenant
shall make such changes as reasonably requested by Landlord to obtain Landlord's
approval and resubmit said plans to Landlord within a fifteen (15) day period
from the date it received notification from Landlord that the plans and
specifications were disapproved. If Landlord disapproves the Tenant Upfit Plans
it shall give Tenant specific reasons for such disapproval so that Tenant may
revise the Tenant Upfit Plans in a manner which addresses Landlord's objections.
If Tenant fails to revise the Tenant Upfit Plans within said fifteen (15) day
period, then in such case, Landlord shall have the option to revise the Tenant
Upfit Plans and proceed with upfitting as provided in this Lease. Tenant shall
be responsible for the preparation of all plans and specifications for upfitting
the Premises, at Tenant's sole cost and expense. Landlord shall cooperate with
Tenant in providing Tenant's architect with the Plans and Specifications for the
Building, including any existing mechanical and electrical drawings and plans
for the Building.
C. Contract to Upfit Premises. In the event that Tenant elects by
notice to Landlord as provided herein to have Landlord contract with a general
contractor to upfit the Premises, then Landlord shall contract with a general
contractor to upfit the Premises in substantial accordance with the Tenant Upfit
Plans to be prepared by Tenant and approved by Landlord as hereinabove provided.
If Tenant elects to have Landlord contract to upfit the Premises, then the
contractor shall be a licensed general contractor reasonably acceptable to
Tenant and Landlord and the upfitting for the Premises shall be performed in
substantial accordance with the approved Tenant Upfit Plans. All such Tenant
Upfit Work performed by Landlord or Landlord's contractor or subcontractors
shall be strictly in accordance with the requirements of all governing codes and
ordinances, all Underwriters, Landlord's insurance carrier or rating
organization, any general or standard design specifications set forth by
Landlord, all public utility companies serving the Building and Landlord's
mortgage lender. With respect to any contract entered into by Landlord to upfit
the Premises, the following contractors are satisfactory to both parties:
Shelco, Inc. and F.N. Thompson Company. Any such election by Tenant to have
Landlord contract to upfit the Premises shall be made within 30 days of the
execution of this Lease. In the event that Tenant fails to give such notice or
fails to notify Landlord that Tenant has elected to upfit the Premises itself as
provided in the next succeeding paragraph, Tenant shall be deemed to have
elected to upfit the Premises itself.
In the event that Tenant elects to upfit the Premises itself by
employing a general contractor to perform such upfit work rather than requesting
that Landlord contract to upfit the Premises, then
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all work to be done by Tenant and Tenant's contractors, subcontractors and
agents shall be conducted in such a manner as to maintain harmonious labor
relations and to not interfere unreasonably with or delay the work of the
Landlord's contractors. Any such election by Tenant shall be made within 30 days
of the execution of this Lease. All of Tenant's contractors, subcontractors and
labor shall be approved in advance by Landlord. Any construction contract
entered into by Tenant with a general contractor to upfit the Premises shall
provide for payment to be made in installments in accordance with the percentage
of work completed, except that the contract shall provide for at least 10%
retainage (or such lesser amount as may be acceptable to Landlord and the lender
under the Construction Loan) to be paid upon completion of the Tenant
improvements, including all punchlist items, and issuance of a certificate of
occupancy for the Premises. Such contract shall also expressly provide that
Tenant is acting on its own account and not as the agent of Landlord in entering
the construction contract and that Tenant is not the owner of the real property.
If Tenant elects to employ a general contractor to perform the upfit work, the
following contractors are satisfactory to both parties: Shelco, Inc. and F.N.
Thompson Company. Landlord shall give access and entry to the Premises to Tenant
and its contractors and subcontractors and reasonable opportunity and time and
use of the facilities to enable Tenant to complete the Tenant Upfit Work;
provided, however, any entry prior to the Commencement Date shall be subject to
all of the terms and conditions of the Lease except the payment of rent and
shall be at Tenant's sole risk. Landlord has the right to impose additional
conditions on Tenant's early entry that Landlord, in its reasonable discretion,
deems appropriate, including without limitation, an indemnification of Landlord
and proof of insurance, and will further have the right to require that Tenant
execute an early entry agreement containing those conditions prior to Tenant's
early entry. All Tenant Upfit Work performed by Tenant or its contractor and
subcontractors shall be strictly in accordance with the requirements of all
governing codes and ordinances, all Underwriters, Landlord's insurance carrier
or rating organization, any general or standard design specifications set forth
by Landlord, all public utility companies serving the Building and Landlord's
mortgage lender. The Tenant Upfit Work shall be completed substantially in
accordance with the Tenant Upfit Plans approved by Landlord as provided in this
Lease. Tenant shall obtain permits and approvals from all authorities for its
work and shall obtain a Certificate of Occupancy at completion. Tenant shall
make arrangements for separate metering of all utilities not supplied by
Landlord and Tenant shall pay all charges, cost of meters and connection fees
for same. No approval by Landlord of the Tenant Upfit Plans, consent by Landlord
allowing Tenant to make any improvements, or any inspection of improvements made
by or for Landlord shall in any way be deemed to be an agreement by Landlord
that the Tenant Upfit Work complies with any legal requirements or insurance
requirements or the certificate of occupancy for the Building, nor shall it be
deemed to be a waiver by Landlord of the compliance by Tenant of any provision
of this Lease. Tenant shall keep the Premises free from any liens arising out of
any work performed, material furnished or obligations incurred by Tenant in
completion of the Tenant Upfit Work. In the event that Tenant shall not, within
ten days following imposition of any such lien, cause the same to be released of
record by payment or posting of a proper bond, Landlord shall have, in addition
to all other remedies provided in the Lease and by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all expenses incurred by it in connection therewith shall
be considered additional rent and shall be payable to it by Tenant on demand and
with interest at the rate payable of eighteen percent (18%) per annum or the
highest rate permitted by applicable law. In the event that Tenant elects to
upfit the
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Premises itself by employing a general contractor to perform such upfit work
rather than requesting that Landlord contract to upfit the Premises, Landlord
shall make the Premises available to Tenant for the performance of the Tenant
Upfit Work after the performance of the Shell Building Construction Work has
proceeded to the point where, in the determination of the architect for the
Shell Building employed by Landlord, Tenant Upfit Work can be commenced and
performed in conjunction with the completion of Shell Building Construction Work
(the "Delivery Date"). Landlord shall promptly notify Tenant of the Delivery
Date by written notice ("Delivery Date Notice"). The Delivery Date shall be on
or prior to the date on which a certificate of occupancy is issued for the
Building shell included in the Shell Building Construction Work. Tenant
covenants and agrees to commence Tenant Upfit Work within fifteen (15) days of
the Delivery Date and complete Tenant Upfit Work in strict accordance with the
provisions of this Lease so that the Premises are ready for occupancy by Tenant
not later than eight (8) weeks after the Delivery Date. Tenant covenants and
agrees to perform, or cause to be performed, all of the Tenant Upfit Work in a
manner so as not to unreasonably interfere with or delay the completion of Shell
Building Construction Work, in accordance with all the terms and conditions of
this Lease. Except for the upfitting allowance to be provided by Landlord as
described below, all such Tenant Upfit Work shall be performed at Tenant's sole
cost and expense.
D. Upfitting Allowance. Landlord shall provide Tenant with an upfitting
allowance of One Million Four Hundred Eighty Two Thousand Four Hundred Fifty and
00/100 Dollars ($1,482,450.00) for upfitting work actually performed in
accordance with the Tenant Upfit Plans approved by Landlord below the finished
ceiling of each floor within the Building to be paid in accordance with the
contract with the general contractor performing such upfitting work (which
contract if entered into by Tenant shall comply with the requirements set forth
in Article II, Section 3C. above), or credited against Landlord's cost of
upfitting the Premises if Landlord has paid the general contractor performing
the work. The upfitting allowance is provided so as to offset Tenant's cost of
design and construction of the improvements to the Premises in accordance with
the Tenant Upfit Plans approved by Landlord. Tenant shall be responsible for all
costs and expenses of constructing the Premises, if any, in excess of the
upfitting allowance. The upfitting allowance shall be used only for design and
construction of improvements below the ceiling grid and shall not be used for
interior furnishing and movable equipment. To the extent that the Tenant Upfit
Plans include movable furniture and partitions, such movable furniture and
partitions to the extent paid for from the upfitting allowance and installed at
Landlord's expense shall be deemed to be the property of Landlord. Any cost of
upfitting in excess of said upfitting allowance shall be paid entirely by Tenant
within ten (10) days of submission of invoice for the same from Landlord or from
the general contractor performing the upfitting.
Section 4. Tenant's Acceptance of Property. Landlord warrants and
represents that on the Commencement Date, the Premises and the Building will
comply with all applicable laws, ordinances, rules and regulations of
governmental authorities ("Applicable Laws"), except to the extent Tenant is
required to so comply due to the particular manner in which Tenant uses the
Premises or which relate to the lawful use of the Premises and with which only
the occupant can comply, such as laws governing maximum occupancy, workplace
smoking, and illegal business operations. Landlord also represents that the
Building will have a floor load capacity of at least 100 pounds per square foot
and electrical capacity of at least 5 watts per square foot (which does not
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include lights). Landlord shall upfit the Premises as provided in Section 3 of
this Article II. Except as expressly set forth herein, neither Landlord nor its
agents have made any representations with respect to the Premises, the Building
or the Property and no rights, easements or licenses are acquired by Tenant by
implication or otherwise. The taking of possession of the Premises by Tenant
shall be conclusive that the Premises and the Building were in satisfactory
condition at the time possession was taken, subject only to latent defects not
reasonably discoverable by Tenant. If Landlord is required to do any work on the
Premises, then Tenant must notify Landlord in writing within thirty (30) days of
the taking of possession of the Premises of any incomplete "punch list" items.
Any items not contained in such notice shall be deemed fulfilled. Landlord will
complete any such agreed upon "punch list" items within thirty (30) days of
preparation of and agreement on said list, unless such "punch list" items cannot
reasonably be completed within said time period, in which case Landlord shall
have such additional time as is reasonably required to complete such punch list
items. If Landlord does not complete said "punch list" items within such time
period and additional time reasonably required by Landlord, Tenant, upon ten
(10) days prior written notice to Landlord, may complete said punch list items
as its own cost, and offset the cost of the same against the Monthly Base Rent
due hereunder, if Landlord has not completed the same within said ten (10) day
notice period.
Section 5. Common Areas. Tenant and its employees, agents, invitees and
licensees are granted the right, in common with others and subject to the
exclusive control and management thereof at all times by Landlord, to the
nonexclusive use of such of the areas as are from time to time designated as
common areas by Landlord (the "Common Areas"), including any and all driveways,
entranceways, lanes of travel, walkways, sidewalks, decorative fountains and
decorative pools, surface parking lots and parking decks included as "Common
Facilities" or common areas under any Cross Easement and Maintenance Agreement
or similar agreement ("Cross Easement Agreement") heretofore or hereafter
entered into and filed of record by and between Landlord and the owner of the
One Morrocroft Centre Property with respect to the approximately 12.3401 acre
tract identified as Lot 2, Morrocroft Phase V, recorded in Map Book 24, Page
126, Mecklenburg County Public Registry. These areas shall include the
facilities of the Property which are designated for the general use, in common,
of the tenant(s) of the Building and of tenants in any building or buildings
located on the One Morrocroft Centre Property adjoining the Property. Common
Areas include, to the extent the same are provided, the parking areas, parking
facilities, sidewalks, driveways and roadways, loading platforms, and landscaped
areas. The term "One Morrocroft Centre Property" shall mean the property owned
by H-C REIT, Inc. known as "One Morrocroft Centre" which adjoins the Property.
Section 6. Quiet Enjoyment. Landlord agrees that Tenant, on paying the
stipulated rental and keeping and performing the agreements and covenants herein
contained, shall hold and enjoy the Premises for the term aforesaid, subject,
however, to the terms of this Lease.
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ARTICLE III
LEASE TERM
Section 1. Term. The term of this Lease (the "Term") shall commence and
end on the Commencement Date and Termination Date as set out below.
In the event that Tenant elects to upfit the Premises itself as
provided in Article II, Section 3.C above, then the Commencement Date shall be
on the date which is the earlier of (i) the date Tenant first occupies all or a
part of the Premises for the purposes of conducting business operations or (ii)
that date which is eight (8) weeks after the Delivery Date.
In the event that Tenant elects by notice to Landlord as provided in
Article II, Section 3.C above to have Landlord contract with a general
contractor to complete the Tenant Upfit Work, then the Commencement Date shall
be on the date which is the earlier of (i) the date Tenant first occupies all or
a part of the Premises for the purposes of conducting business operations or
(ii) the date on which Landlord substantially completes the Shell Building
Construction Work and the Tenant Upfit Work which Landlord is required to
perform and with respect to which Landlord has contracted with a general
contractor as provided in Article II, Section 3.C.
Tenant waives any right to rescind this Lease and further waives any
right to recover any damages that may result from the failure of Lessor to
deliver possession of the demised Premises by the date estimated for the
commencement of the Term.
The Termination Date shall be that date which is Ten (10) years after
the last day of the month in which the Commencement Date occurs, unless the
Lease is renewed as provided in Section 2 of Article III, in which event the
Termination Date shall be the last date of the applicable renewal period.
Within thirty (30) days following the occurrence of the Commencement
Date, Landlord and Tenant shall enter into the Commencement Agreement. If Tenant
fails to enter into such agreement, then the Commencement Date, the Termination
Date, the Gross Rentable Area of the Premises and the Initial Monthly Base Rents
shall be as designated by Landlord in such agreement in conformity with the
terms and provisions of this Lease.
Landlord shall cause The Harris Group of the Carolinas, Inc. ("The
Harris Group") to execute and deliver an indemnity agreement substantially in
the form attached hereto as Rider 2 pursuant to which The Harris Group will
agree that, (A) in the event that the Commencement Date is delayed beyond July
1, 1999 and (B) in the further event that (i) the Esplanade Rent actually paid
by Tenant during the Delay Period for the Sublet Premises under the Sublease
Extension or the Direct Lease, as applicable, exceeds (ii) the amount of base
rent which would have been paid for the Sublet Premises during the Delay Period
if such base rent was based on an annual rental rate of $20.00 per rentable
square foot, then The Harris Group will indemnify Tenant in an amount equal
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to any such excess. The term "Esplanade Rent" as used herein shall mean any base
rent (including any holdover rent) actually paid by Tenant under (i) any
extension of its existing sublease with Unisys Corporation (the "Sublease
Extension") for approximately 32,114 rentable square feet of space in the
Esplanade Building, at 2101 Rexford Road, Charlotte, North Carolina (the "Sublet
Premises") provided that The Harris Group has approved any such extension of the
existing sublease or (ii) any direct lease with BCI Property Company No. 43 as
the owner of the Esplanade Building which replaces and supercedes the existing
sublease with Unisys Corporation (the "Direct Lease") provided that The Harris
Group has approved any such Direct Lease. The term "Esplanade Rent" shall not
include any operating cost pass-throughs or other "additional" rent under such
sublease or any payments for utilities, taxes or insurance. The term "Delay
Period" as used herein shall mean the period beginning on July 1, 1999 and
ending on the Commencement Date. Notwithstanding the foregoing, in the event
that the Lease is terminated by either party thereto in accordance with its
terms prior to July 1, 1999, other than due to a default by Landlord under the
Lease, then the indemnity agreement shall be null and void ab initio and neither
party shall have any rights or obligations under the indemnity agreement . In
the event that the Lease is terminated by either party thereto in accordance
with its terms after July 1, 1999, and prior to the Commencement Date other than
due to a default by Landlord under the Lease, then the indemnity agreement shall
terminate as of the date of the termination of the Lease and The Harris Group's
obligation to indemnify Tenant shall apply only to the portion of the Delay
Period, if any, occurring prior to the termination of the Lease.
Section 2. Renewal Terms. At any time during which it is not in default
under the terms of this Lease, Tenant shall have the option to renew this Lease
for an additional term of five (5) years by giving Landlord written notice of
its election to do so at least one hundred eighty (180) days prior to the date
the original ten year Lease Term expires. Tenant shall have the further option
to renew this Lease for a second five (5) year term any time during the first
five-year renewal term during which Tenant is not in default in payment of rent
or in any other material term of this Lease by giving written notice to Landlord
of its election to do so at least one hundred eighty (180) days before the
expiration of the first five-year renewal term. In each case, the five-year
renewal term shall be subject to the same provisions and conditions that apply
to the original ten-year Lease Term except that Lessee shall have no renewal
option exercisable during the second five-year renewal term and the Base Rent
during such renewal terms shall be computed as follows:
1. The Annual Base Rent payable during the first year of the first
five-year renewal term be shall equal to the greater of (i) ninety-five percent
(95%) of the then current market rental rates for buildings in the SouthPark
area of Charlotte, North Carolina comparable to the Building determined by
agreement of the parties or by appraisal as provided below or (ii) the Annual
Base Rent payable under this Lease during the Lease Year immediately preceding
the first year of the first five-year renewal term. The Annual Base Rent shall
be adjusted each subsequent year during the first five-year renewal term as
provided in Article IV, Section 3 hereof and Tenant shall pay such Annual Base
Rent, as so adjusted, each year during the first five-year renewal term in equal
monthly installment in advance on or before the first day of each month. Tenant
shall also pay to Landlord Additional Rent during the first five-year renewal
term as provided in Article IV hereof.
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The Annual Base Rental payable during the first year of the second
five-year renewal period shall be equal to the greater of (i) ninety-five
percent (95%) of the then current market rental rates for buildings in the
SouthPark area of Charlotte, North Carolina comparable to the Building
determined by agreement of the parties or by appraisal as provided below or (ii)
the Annual Base Rent payable under this Lease during the Lease Year immediately
preceding the first year of the second five-year renewal term. The Annual Base
Rent shall be adjusted each subsequent year during the second five-year renewal
term as provided in Article IV, Section 3 hereof and Tenant shall pay such
Annual Base Rent, as so adjusted, each year during the second five-year renewal
term in equal monthly installment in advance on or before the first day of each
month. Tenant shall also pay to Landlord Additional Rent during the second
five-year renewal term as provided in Article IV hereof.
The then current market rental rates for buildings in Charlotte, North
Carolina comparable to the Building for purposes of any renewal term shall be
agreed upon by the parties hereto, or, if the parties cannot agree as to market
rental rates, the then current market rental rates for buildings in Charlotte,
North Carolina comparable to the Building shall be determined by two appraisers
who are members of the American Institute of Real Estate Appraisers, one to be
appointed by each of the parties. If such appraisers cannot agree on the market
rate, they shall select a third member of the American Institute of Real Estate
Appraisers. A written determination as to market rate agreed upon by any two of
the appraisers so chosen shall be final and binding on the parties hereto and,
if two of the appraisers so chosen are unable to agree as to market rate, then
the median of the two appraisals closest in amount shall be deemed the market
rental rate for purposes hereof.
Section 3. Holding Over. If Tenant continues to occupy the Premises
after the last day of the term hereof or after the last day of any renewal or
extension of the term hereof and if Landlord elects to accept rent, a monthly
tenancy terminable at will by either party on not less than thirty (30) days'
written notice shall be created which shall be on the same conditions as those
herein specified, except Tenant shall pay one hundred twenty percent (120%) of
the monthly rent paid for the last full month of the lease term for each month
or partial month during which Tenant retains possession of the Premises after
such expiration or termination date. Unless Tenant obtains Landlord's prior
written consent to such holdover, Tenant shall indemnify Landlord against all
claims made against, and damages sustained by, Landlord by reason of such
retention of possession. The provisions of this section shall not constitute a
waiver by Landlord of any reentry rights available under this Lease or by law.
ARTICLE IV
BASE RENT, ADDITIONAL RENT AND ADJUSTMENTS
Section 1. Base Rent. Tenant covenants and agrees to pay to Landlord as
rental for the Premises the Initial Monthly Base Rent set forth in Article I,
adjusted as hereinafter provided, on the first day of each month, in advance,
during the term of this Lease; provided, however, that if the term of this Lease
does not begin on the first day or end on the last day of a month, the Monthly
Base Rent for that partial month shall be prorated by multiplying the Monthly
Base Rent by a fraction, the numerator of which is the number of days of the
partial month included in the term and the
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denominator of which is the total number of days in the full calendar month that
is being prorated. Landlord and Tenant agree that the Initial Monthly Base Rent
will be determined on or prior to the Commencement Date based upon the Initial
Annual Base Rent set forth in Article I and such determination shall be set
forth in the Commencement Agreement.
Section 2. Annual Increase of Annual and Monthly Base Rent. For the
purposes of this Article IV, the term "Lease Year" shall mean that period of
time from the Commencement Date to the first anniversary of the Commencement
Date and from the first or any subsequent anniversary of the Commencement Date
to the next succeeding anniversary date.
Section 3. Adjustment of Annual and Monthly Base Rent. On the first day
of the month during which each anniversary of the Commencement Date occurs
during the term of this Lease or any renewal thereof, the Annual and,
correspondingly, Monthly Base Rent shall increase by a percentage equal to the
lesser of (i) one hundred percent (100%) of the percentage increase in the CPI
(as hereinafter defined) determined as herein provided or (ii) 2.96 percent.
With respect to the increase on the first anniversary of the Commencement Date,
the percentage increase in CPI shall be determined by dividing the CPI in effect
on the first day of the month immediately preceding the Commencement Date into
the CPI in effect on the first day of the month immediately preceding the first
anniversary of the Commencement Date and subtracting from the quotient the
integer one (1), and thereafter with respect to the increase on each subsequent
anniversary of the Commencement Date, the percentage increase in CPI shall be
determined by dividing the CPI in effect on the first day of the month
immediately preceding the closest prior anniversary of the Commencement Date
into the CPI in effect on the first day of the month immediately preceding the
then current anniversary of the Commencement Date for which the adjustment is
being made and subtracting from the quotient the integer one (1). In no event
shall Annual or Monthly Base Rent be less than the Base Rent stated in Article
I, Section 1. Landlord shall notify Tenant in writing of any adjusted Annual and
Monthly Base Rent at least ten (10) days prior to the date on which the next
Monthly Base Rent as adjusted is due and such notice shall include a detailed
computation of the new Annual and Monthly Base Rent. Absent manifest error, the
new Annual and Monthly Base Rent as set forth in such notice shall be deemed the
adjusted Annual and Monthly Base Rent hereunder. Tenant agrees to pay the
adjusted Monthly Base Rent on the first day of each month, thereafter, unless
and until it receives notice of any further adjusted Annual and Monthly Base
Rent amount.
Landlord shall use reasonable efforts to promptly notify Tenant of the
adjustments herein with a reasonable time after the CPI figures are made
available to Landlord. In the event Landlord does not furnish Tenant with a
statement of such rent until after one or more installments of the adjusted
Monthly Base Rent are due, then Tenant shall continue to pay Monthly Base Rent
at the rate in effect for the preceding twelve-month period until such statement
is furnished and upon receipt of such statement, Tenant shall immediately pay
the increase in amount for all such months for which Monthly Base Rent has
already been paid at the preceding rate prior to receipt of such statement.
For the purpose of this paragraph, "CPI" shall mean the Consumer Price
Index published monthly for All Urban Consumers, U.S. City Average, Base Year
1982-84 = 100, issued by the Bureau of Labor Statistics of the United States
Department of Labor, or in the event such index is
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no longer published, then such other index as shall be generally acceptable as
being comparable thereto.
In the event that the Bureau of Labor Statistics shall change the base
period (now 1982-84 = 100), the new index numbers shall be substituted for the
old index numbers in making the calculation provided for in this Section.
Section 4. Additional Rent. For the purposes of this Article IV, the
following definitions apply:
a. Operating Costs. The term "Operating Costs" shall mean and
include all costs, expenses, taxes, and disbursements of every kind and nature
which Landlord shall pay or become obligated to pay in connection with the
management, operation, maintenance, replacement and repair of all building
systems, components and appurtenances according to first class management
principles for a building located in Charlotte, North Carolina and according to
what is best for the Building in the Landlord's judgement and in connection with
management, operation, maintenance, replacement and repair of the adjacent
parking facility to be used by tenants of the Building. Such costs will include,
but will not be limited to, maintenance, operation, and repair of personal
property, fixtures, machinery, equipment, systems and apparatus used in
connection with the Building and parking facility; insurance; security;
assessments payable to any owners' association under any declaration affecting
the Property, any management fees paid for management and maintenance of the
Common Areas; management fees paid for management of the Building (provided
that, if the fees are paid under a management contract with an affiliate of
Landlord, including The Harris Group, such management fees shall be included in
Operating Costs only to the extent that such fees do not exceed 4% of gross
revenues); utilities; maintenance and repairs of parking areas, grounds and the
land upon which the Building is located; contract services; all costs or
expenses incurred by Landlord to bring the Building, parking structure, the land
upon which the Building is located, and grounds in compliance with any law or
regulation taking effect after the Commencement Date; amortization of
non-permanent equipment (example: trash containers) which otherwise might be
leased; and those items listed on Exhibit D which are not identified in this
paragraph.
Operating Costs shall not include costs for tenant
improvements, interest and principal payments on loans for the Property, real
estate leasing commissions, depreciation salaries and other compensation for
executive officers of the Landlord or manager; expenditures for which the
Landlord has been reimbursed (other than pursuant to Additional Rent provisions
in tenant leases); expenses incurred in enforcing obligations of other tenants;
the items listed on Exhibit D-1 and identified thereon as "Additional Exclusions
from Operating Costs" and capital expenditures or capital leases (except for
costs associated with the capital expenditures and capital leases by Landlord
described in paragraph J of Exhibit D).
b. Controllable Operating Costs means those Operating Costs
that are directly controllable by the Landlord as a result of such costs being
associated with work or services provided by Landlord or employees of Landlord.
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c. Uncontrollable Operating Costs means those Operating Costs
that are not directly controllable by the Landlord as a result of such costs
being associated with work or services provided by third party individuals or
entities over which Landlord has no control. Such costs include, but shall not
be limited to, ad valorem taxes, insurance premiums and utility costs.
d. Operating Cost Base means the Operating Costs for the
property during the Base Year. In the event the Building is not fully
operational and available for occupancy by tenants for the entire calendar year
constituting the Base Year, the Operating Cost Base shall be determined by
annualizing the actual Operating Costs of the Base Year as if the Building were
95% occupied for the full calendar year.
e. Base Year means the calendar year during which the
Commencement Date occurs.
f. Tenant's Proportionate Share means the proportion stated in
a percentage amount that the number of square feet of Gross Rentable Area
comprising the Premises bears to the total number of square feet included in the
Gross Rentable Area of the Building. Tenant acknowledges that the Premises
leased by Tenant comprises all of the Gross Rentable Area of the Building and
consequently that Tenant's Proportionate Share is 100%.
g. Lease Year shall have the meaning set forth in Section 2 of
this Article IV.
(i) Tenant shall pay to Landlord as additional rent (the "Additional
Rent"), for each calendar year or partial calendar year subsequent to the first
Lease Year, Tenant's Proportionate Share of the increase in Operating Costs for
such calendar year or partial calendar year over the Operating Cost Base.
(ii) For the purpose of estimating Operating Costs per square foot of
Gross Rentable Area and for the purpose of determining actual Operating Costs
per square foot of Gross Rentable Area under the provisions of this Section, all
amounts shall be adjusted so that estimated Operating Costs will be based upon
what such cost would reasonably be if ninety-five percent (95%) of the Building
were occupied, and actual Operating Costs will be calculated on the basis of 95%
assumed occupancy or actual occupancy, whichever is greater.
(iii) At Landlord's sole option, Landlord may require Tenant to pay to
Landlord as additional monthly rent (the "Additional Monthly Rent") on the first
day of each month of the term beginning on the first anniversary of the
Commencement Date, one-twelfth (1/12) of Landlord's estimate of what Tenant's
proportionate share of the increase in Operating Costs for each such calendar
year will be over the Operating Cost Base. Landlord shall use reasonable efforts
to notify Tenant of Tenant's required monthly additional rent payments at least
fifteen (1 5) days prior to such calendar year or partial calendar year. In the
case of a partial calendar year (i.e. when the Commencement Date is not January
1 or the Termination Date is not December 31, from the first anniversary of the
Commencement Date to December 31 of such calendar year or from January 1 of the
calendar year during which the Termination Date occurs to the Termination Date)
the increase in Operating Costs shall be determined by comparing the Operating
Costs for the full calendar year
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which includes such partial calendar year with the Operating Cost Base and then
prorating the amount of such increase based upon the proportion that such
partial calendar year bears to the full calendar year.
(iv) Landlord shall provide Tenant with a statement of Tenant's
Proportionate Share of the increase in Operating Costs for each calendar year or
partial calendar year (the "Landlord's Statement"), together with the credit due
Tenant for Additional Monthly Rent paid by Tenant during such calendar or
partial calendar year pursuant to Landlord's estimate, within ninety 90 days
after the end of such calendar year or partial calendar year, but Landlord's
failure to provide Tenant with such Landlord's Statement shall not affect
Tenant's obligation to pay such Additional Rent when it does receive such
Landlord's Statement. Tenant shall pay tenant's Additional Rent, less any credit
due Tenant as provided in the next following paragraph, within thirty (30) days
of receipt of such Landlord's Statement. The Landlord's Statement for any
calendar year or partial calendar year shall also include the amount of the
Operating Cost Base and the actual Operating Costs for the calendar year or
partial calendar year covered by the Landlord's Statement.
(v) After the end of each calendar year or partial calendar year
subsequent to the first Lease Year when Landlord determines Tenant's
Proportionate Share of the increase for such calendar year or partial calendar
year over the Operating Cost Base, Landlord shall credit against the amount owed
by Tenant to Landlord, any payments made by Tenant to Landlord during such
calendar year or partial calendar year pursuant to Landlord's estimate of the
increase in operating Cost for such calendar year or partial calendar year. If
the total of Tenant's payments for such calendar year or partial calendar year
based on Landlord's estimate exceed Tenant's Proportionate Share of the increase
in Operating Costs for such calendar year or partial calendar year over the
Operating Cost Base, then Landlord shall, at its sole option, either refund to
Tenant such overpayment, or credit such overpayment to the estimated payments
required of Tenant for the next succeeding calendar year or partial calendar
year. In no event shall Tenant be entitled to any credit or refund to the extent
that Operating Costs for any calendar year, or the calendar year during which a
partial calendar year occurs, decreases below the Operating Cost Base.
(vi) Upon request by Tenant, Landlord agrees to provide to Tenant
within ninety (90) days of such request, a statement distinguishing between the
increases in Controllable Operating Costs and Uncontrollable Operating Costs for
each calendar year or partial calendar year during the term of the Lease.
(vii) Tenant (or any certified public accountant engaged by Tenant for
such purposes) may review and audit, at Tenant's expense, the Landlord's books
pertaining to the determination of Operating Costs during regular business hours
in Landlord's or the property manager's office and make any objections on or
before forty-five (45) days after Landlord provides Tenant with the Landlord's
Statement showing the actual Operating Costs for the calendar year or partial
calendar year covered by the Landlord's Statement and showing Tenant's
Proportionate Share of the increase in Operating Costs as provided herein;
provided, however, that all reasonable expenses incurred by Landlord or the
property manager in connection with such review shall be paid by Tenant and such
review by Tenant shall not postpone or alter the liability and obligation of
Tenant to continue paying its share of Tenant's Proportionate Share of the
increase in Operating Costs. If, after reviewing the
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Landlord's books, Tenant objects to the Landlord's Statement, which objection
shall be made only if the discrepancy in Operating Costs as disclosed in the
Landlord's Statement and the Tenant's audit exceeds four percent (4%), Landlord
shall have the option to either (i) agree with Tenant's assessment of the actual
Operating Costs, refund the overage paid by Tenant and make appropriate
adjustments for future rental payments and reimburse Tenant for any actual
out-of-pocket third-party costs incurred by Tenant in reviewing or auditing the
Landlord's Statement or (ii) disagree with such assessment in which event
Landlord and Tenant will mutually agree on an independent accounting firm to
conduct an audit of the books of Landlord with regard to the Operating Costs and
Tenant's Proportionate Share of the increase in Operating Costs ("Independent
Audit"). If the Independent Audit reveals that the discrepancy between actual
Operating Costs and Operating Costs as disclosed on the Landlord's Statement is
less than four percent (4%), Tenant shall be solely responsible for the cost of
the Independent Audit, and no changes shall be made to the rental payments but
Landlord shall refund to Tenant any overage paid by Tenant as Tenant's
Proportionate Share of the increase in Operating Costs due to the discrepancy
between actual Operating Costs and Operating Costs as disclosed on the
Landlord's Statement . If the Independent Audit reveals a discrepancy of more
than four percent (4%), Landlord shall immediately take the actions required
under (i) above and shall be responsible for the cost of the Independent Audit.
Section 5. Late Payment. If the Monthly Base Rent, or any other payment
due hereunder from Tenant to Landlord, remains unpaid five (5) days after it is
due, the amount of such unpaid rent or other payment shall be increased by a
late charge to be paid to Landlord by Tenant in an amount equal to five percent
(5%) of the amount of the delinquent rent or other payment. The amount of the
late charge to be paid for such month shall be computed on the aggregate amount
of delinquent rent and other payment then outstanding for such month. Landlord
and Tenant agree that such late charge shall not be deemed to be a penalty, it
being understood between the parties that late payments by Tenant shall result
in additional administrative expense to Landlord which is difficult and
impractical to ascertain and that such late charge is a reasonable estimate of
the loss and expense to be suffered by Landlord as a result of such late payment
by Tenant. If rent or other payments due Landlord by Tenant hereunder are not
paid within the time limits set forth above, then in such case in addition to
the late charge provided for hereinabove, such rent or other sum shall also bear
interest after its due date at the rate of eighteen percent (18%) per annum (or,
if less, the highest rate allowed by law). If rent or any other sums due
Landlord by Tenant hereunder is collected by or through an attorney at law,
Tenant agrees to pay Landlord's actual and reasonable attorneys' fees incurred
with respect thereto not in excess of fifteen percent (15%) of the amount so
collected, or if the laws of the State of North Carolina in effect at the time
of such collection limit the amount so payable as attorneys' fees, then the
maximum percentage not in excess of fifteen percent (15%) allowed by such laws,
of the amount so collected. Nothing herein shall relieve Tenant of the
obligation to pay rent or any other payment on or before the date on which any
such payment is due, nor in any way limit Landlord's remedies under this Lease
or at law in the event said rent or other payment is unpaid after it is due.
Section 6. Application of Payments Received from Tenant. Landlord,
acting in its sole discretion, shall have the right to apply any payments made
by Tenant to the satisfaction of any debt or obligation of Tenant to Landlord
regardless of the instructions of Tenant as to application of any such payments,
whether such instructions be endorsed upon Tenant's check or otherwise, unless
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otherwise agreed upon by both parties in writing. The acceptance by Landlord of
a check or checks drawn by anyone other than Tenant shall in no way affect
Tenant's liability hereunder nor shall it be deemed an approval of any
assignment of this Lease by Tenant.
ARTICLE V
UTILITIES, SERVICES AND MAINTENANCE
Section 1. Landlord's Services and Maintenance. Landlord shall provide
the following services: (1) heating and air conditioning system in the Building
sufficient to provide heating and air conditioning to the Premises as reasonably
required for normal office use during Business Hours (as hereinafter defined);
(2) city water from the Building fixtures for drinking, lavatory and toilet
purposes; (3) customary cleaning and janitorial services in the Premises, in
substantial accordance with the janitorial specifications attached hereto as
Exhibit E, Monday through Friday, excluding Federal holidays; (4) customary
cleaning, mowing, grounds keeping, snow removal and trash removal in the Common
Areas of the Property; (5) window washing in the Premises, inside and outside,
at reasonable intervals; (6) adequate passenger elevator service; (7) customary
security services consistent with first-class office buildings in Charlotte,
North Carolina comparable to the Building; (8) replacement of lamps (both
fluorescent and incandescent) only in the Building standard lighting fixtures as
specified by Landlord for the Premises and any Common Areas of the Building (any
lamps for non Building standard lighting fixtures shall be Tenant's
responsibility); (9) sanitary sewer service as reasonably required for normal
office use and (10) except as specifically provided otherwise in this Lease,
keep the Building open to guests, invitees, employees and customers of Tenant
during the business hours of the Building (the "Business Hours"), which are
Monday through Friday from 7:00 a.m. until 7:00 p.m. and on Saturday from 8:00
a.m. to 1:00 p.m., excluding Federal holidays.
Except as otherwise provided herein, Landlord shall not be obligated to
furnish any services or utilities, other than those stated above. If Landlord
elects to furnish services or utilities requested by Tenant, in addition to
those listed above or at times other than those stated above, Tenant shall pay
to Landlord the prevailing charges for such services and utilities within thirty
(30) days after billing. If Tenant fails to make any such payment, Landlord may,
without notice to Tenant and in addition to Landlord's other remedies under this
Lease, discontinue any or all of such additional or after-hours services. No
such discontinuance of any service shall result in any liability of Landlord to
Tenant or be considered an eviction or a disturbance of Tenant's use of the
Premises. With respect to electric power, including electric power for heating
and ventilation, Tenant shall bear the cost of all electric power or current
required by Tenant in the Building as provided in Section 2 below. Consequently,
for so long as Tenant is the sole tenant of the Building, Tenant may use
electric power, including electric power after or before the Building's Business
Hours at such times as Tenant shall elect, provided that the cost of such
electric power use shall be borne solely by Tenant as provided in Section 2
below.
Landlord shall have no liability or responsibility to Tenant for loss
or damage, nor shall Tenant's lease obligations abate, should the furnishing of
any of the utilities and services as herein
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provided be interrupted, prohibited or stopped for repairs, alterations or
improvements, or by causes beyond Landlord's control, including without
limitation, accidents, strikes, storms, Acts of God, labor trouble or
disturbances, lockouts or orders or regulations of any governmental authority.
Section 2. Tenant's Services and Maintenance. Tenant shall make
arrangements directly with the public utility electric company serving the
Building at Tenant's sole cost and expense for all electric power or current
required by Tenant in the Premises, including the provision of electric power
for heat and air conditioning and directly with the telephone company or
companies for all telephone service required by Tenant. Tenant shall pay for all
electric and telephone service used or consumed in the Premises, including the
cost of installation of any separate meters. Tenant shall not place or operate
in the Premises any electrically operated equipment or other machinery, other
than typewriters, personal computers, adding machines, reproduction machines,
and other machinery and equipment normally used in business offices, which will
overload the Building's electrical system. Tenant shall also procure for its own
account, shall be solely responsible for and shall promptly pay all charges for
water, sewerage service, gas, hot and cold water furnished for heat and air
conditioning consumed or used in or at the Premises, together with any and all
other utilities used or consumed in the Premises.
Landlord shall not be responsible for the maintenance, repair or
replacement of any systems which are located within the Premises and are
supplemental or special to the Building's standard systems, whether installed
pursuant to a work letter or otherwise, for any lamps, whether fluorescent or
incandescent, for any special or non Building standard lighting fixtures, or for
any floor or wall coverings in the Premises. Tenant shall be responsible for all
services, maintenance and repairs not specifically delegated to Landlord
hereunder which are required to keep the interior of the Premises in good
condition and repair, or which are required by Tenant to conduct its business in
the Premises, provided however, Tenant shall first obtain Landlord's consent
before procuring any service not provided for in this Lease.
If heat generating machines or equipment are used in the Premises by
Tenant which affect the temperature otherwise maintained by the Building heating
and air conditioning system, Landlord shall have the right to install
supplemental air conditioning units in or about the Premises and the cost of the
units, and the cost of installation, operation and maintenance thereof, shall be
paid by Tenant to Landlord within thirty (30) days of demand by Landlord.
ARTICLE VI
ALTERATIONS, REPAIRS AND MAINTENANCE
Section 1. Alterations. Tenant agrees that it will make no material
alterations, additions or improvements to the Premises, including any initial
interior improvements and the Tenant Upfit Work, without the prior written
consent of Landlord, and that all alterations, additions or improvements made by
or for Tenant, including without limitation, any and all subdividing partitions,
walls or railings of whatever type, material or height and improvements
installed in accordance with the Lease, excepting movable office furniture
installed at the expense of Tenant, shall, when made, become the property of
Landlord and shall remain upon and be surrendered with
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the Premises as a part thereof at the end of the Lease term, unless Landlord
shall notify Tenant to remove same, in which latter event Tenant shall comply to
the end that the Premises shall be restored to the same condition in which they
were received on the Commencement Date, normal wear and tear and casualty damage
excepted. Tenant shall not core drill or in any other manner attempt to
penetrate or penetrate the floors of the Building without obtaining permission
of Landlord.
In the event that Tenant constructs any improvements to the Premises,
including the Tenant Upfit Work and any other initial improvements that Tenant
makes, then those improvements must be constructed (a) using, at least, finishes
which are standard to the Building and according to plans and specifications and
using only contractors and subcontractors approved by Landlord in advance, and
(b) in compliance with all applicable laws, ordinances, rules, building codes,
and regulations of Federal, State, municipal and county authorities, including
without limitation, the procurement of a building permit and compliance with the
Americans with Disabilities Act, and (c) in a diligent, good and workmanlike
manner. Tenant shall obtain a Builders' Risk Insurance Policy in such amount as
is reasonably requested by Landlord, naming Landlord as an additional insured
and providing that such insurance will not be canceled without giving Landlord
at least 15 days prior written notice thereof. Any mechanical or electrical work
and any penetration of floors must be performed by Landlord's contractors and
subcontractors. Upon completion of any such construction by Tenant, Tenant must
furnish Landlord with a complete set of as-built plans and specifications for
the same. Tenant will not permit and will indemnify Landlord and hold it
harmless from any mechanics or materialmen's liens against the Premises or
Property, in connection with any such improvements.
Section 2. Right of Entry. Tenant agrees that Landlord shall have the
right to enter and to grant licenses to enter the Premises at any time (a) to
examine the Premises, (b) to make alterations and repairs to the Premises or to
the Building (including the right, during the progress of such alterations or
repairs, to keep and store within the Premises all necessary materials, tools
and equipment), (c) to exhibit the Premises to prospective purchasers or tenants
during the last year of the Term or following a default hereunder, or (d) for
any other reasonable purpose, and that no such entry shall render Landlord
liable to any claim or cause of action for loss of or damage to property of
Tenant by reason thereof, nor in any manner affect the obligations and covenants
of this Lease. Except for emergencies and for routine maintenance and cleaning
conducted outside of normal business hours, Landlord shall give Tenant
reasonable notice of such entries. Any entry by Landlord to make alterations and
repairs to the Premises or to the Building of which they are a part shall be
conducted so as not to unreasonably interfere with Tenant's use of the Premises
during its normal working hours.
Section 3. Tenant's Care of Premises. Tenant shall keep the Premises
(which, as more particularly described in Section 1 of Article II, does not
include the Building Shell or surrounding land, landscaping, parking areas and
driveways), and fixtures and other property located therein, in good order and
repair, including without limitation, maintenance, repair, and replacement of
all doors (exterior and interior), all interior plate glass and window glass,
and all wall and floor coverings, effecting all such maintenance, repairs and
replacements as needed, at its own expense and employing materials and labor of
a kind and quality equal to the original installations. Tenant shall also be
responsible for and shall maintain, as needed, all special equipment and repair
and
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replace decorative treatments installed by or at Tenant's request and that serve
the Premises only, and any trade fixtures of Tenant within the Premises. If
Tenant fails to perform such maintenance, repair or replacement as above
provided, within a reasonable time, then immediately after advising Tenant in
writing as to the necessity therefor, Landlord may accomplish the required work
and add the cost thereof to the next due Monthly Base Rent, but Tenant shall not
be liable to Landlord for any failure to fulfill the obligations of this Section
until such time as Tenant shall be notified, as aforesaid, in writing of the
requirements therefor.
Section 4. Landlord's Repairs. Landlord shall make the repairs and
replacements to maintain the Building and the parking areas, driveways and
landscaping located on the Property in a condition comparable to other first
class office buildings in Charlotte, North Carolina within a reasonable time
after being notified of the need therefor. This maintenance shall include the
roof, foundation, exterior walls, interior structural walls, all structural
components, and all Building systems, such as mechanical, electrical, HVAC, and
plumbing, but shall not include any maintenance, repair or replacement which is
the responsibility of Tenant under Section 3 above.
Section 5. Surrendering the Premises. Upon the termination of this
lease, or of Tenant's right to possess the Premises, Tenant shall surrender the
Premises to Landlord in the same broom clean condition that the Premises were in
on the Commencement Date except for:
(i) ordinary wear and tear;
(ii) damage by the elements, fire, and other casualty unless Tenant
would be required to repair under Section 3;
(iii) condemnation; and
(iv) alterations as permitted by this Lease unless Landlord notifies
Tenant to remove the same.
On surrender, Tenant shall remove from the Premises its personal
property, trade fixtures, and any alterations required to be removed under
Section 1, and repair any damage to the Premises caused by such removal. Any
items not removed by Tenant as required above shall be considered abandoned.
Landlord may dispose of abandoned items as Landlord chooses and bill Tenant for
the cost of their disposal, minus any revenues received by Landlord for their
disposal.
ARTICLE VII
USE AND COVENANTS
Section 1. Use and Occupancy. Tenant agrees that the Premises will be
used only for general office purposes, that no unlawful use of the Premises will
be made, that no sign, name, legend, notice or advertisement of any kind will be
fixed, printed, painted or displayed on any part of the Building
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or Property without the prior written approval of Landlord, except that the name
and suite number of Tenant may be displayed at the entrance to the Premises in a
manner prescribed by Landlord.
Section 2. Parking. Tenant agrees for itself, its employees, agents and
invitees to comply with the parking rules contained in the Parking Rules and
Regulations attached hereto as Exhibit F together with all reasonable
modifications and additions thereto which Landlord may from time to time make.
Tenant shall use parking spaces only in a manner which is compatible with the
day-to-day general use of the Building by its employees, visitors, customers,
invitees, guests and other tenants in the Building. Tenant agrees that Landlord
shall have the right to tow vehicles of Tenant and its employees, agents, guests
and visitors that are parked in such a way as to be-in violation of the Parking
Rules and Regulations.
Landlord reserves the right from time to time without notice to Tenant
to change the location or configuration of the parking areas located on the Land
and designated by Landlord for use by the tenants of the Building (the "Parking
Areas"), or any portion thereof; change the number of parking spaces located
within the Parking Areas, or any portion thereof provided that the total number
of spaces located on the Land and available for use by Tenant in common with
tenants of on the One Morrocroft Centre Property adjoining the Property shall
not be less than the number of spaces required by applicable zoning laws;
install systems to control and monitor parking in the Parking Areas, or any
portions thereof, including without limitation, a parking gate and
identification card system; utilize parking guards or attendants to supervise
and control parking within the Parking Areas and to enforce the parking rules;
have full access to the Parking Areas (including the right to close or alter the
means of access to the Parking Areas, or portions thereof to make repairs and
alterations thereto, modify the parking rules; tow motor vehicles parked in
violation of the parking rules; and enforce the parking rules by appropriate
legal action.
Section 3. Building Rules and Regulations. Tenant has read the rules
and regulations attached hereto as Exhibit G and made a part hereof and hereby
agrees to abide by and conform to the same and to such further reasonable rules
and regulations as Landlord may from time to time make or adopt for the care,
protection and benefit of the Building or the general comfort and welfare of its
occupants. Tenant further agrees that Landlord shall have the right to modify or
waive any and all of such rules in the case of any one or more tenants without
affecting Tenant's obligations under this Lease and that Landlord shall not be
responsible to Tenant for the nonconformance by any other tenant to any such
rules or regulations.
Section 4. Hazardous Substances. Tenant shall not cause or permit any
Hazardous Substance, as hereinafter defined, (excluding, however, ordinary
office and cleaning supplies in customary amounts used in connection with the
operation or maintenance of the Premises) to be used, stored, generated or
disposed of in or about the Premises or Property by Tenant, or Tenant's agents,
employees, contractors or invitees. Tenant shall indemnify and hold harmless
Landlord from any and all claims, damages, fines, judgments, penalties, costs,
liabilities or losses, including reasonable attorneys' fees, arising during or
after the Lease Term as a result of such use, storage, generation or disposal of
Hazardous Substances by Tenant, or Tenant's agents, employees, contractors or
invitees. This indemnification includes, without limitation, any and all costs
incurred due to any investigation of the site or any cleanup, removal or
restoration mandated by a federal,
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state or local agency or political subdivision. As used herein, "Hazardous
Substance" means any substance which is toxic, ignitable, reactive, or corrosive
and which is regulated by any local government, the State of North Carolina, or
the United States government. "Hazardous Substance" includes any and all
material or substances which are defined as "hazardous waste", "extremely
hazardous waste" or a "hazardous substance" pursuant to state, federal or local
governmental law. "Hazardous Substance" includes but is not restricted to
asbestos, polychlorobiphenyls ("PCB's") and petroleum.
Section 5. Letter of Credit. Tenant covenants and agrees with Landlord
that Tenant will obtain a "stand-by" letter of credit in the amount of
$1,000,000 as additional security for any Construction Loan and any term loan
(including any "permanent" loan) obtained by Landlord and secured by a first
lien on the Property, which stand-by letter of credit shall be from an issuer
and shall be in such form and substance as shall be acceptable to the lender of
such Construction Loan and term loan (including any "permanent" loan). Landlord
shall pay the fees required to be paid to the issuer of such letter of credit up
to an amount not to exceed one and one-quarter per cent (1 1/4%) of the face
amount of the letter of credit per year. Tenant shall pay any fees for such
letter of credit in excess of such amount. Tenant or its affiliates shall also
execute any reimbursement agreement or similar agreement required by the issuer
of the letter of credit and shall provide any collateral required by the issuer
to secure such reimbursement agreement. The terms of any Construction Loan or
term loan secured by the letter of credit shall provide that the letter of
credit will be released in the event that Tenant achieves an implied investment
grade credit rating of "BBB-" by the Standard & Poors rating agency.
ARTICLE VIII
INSURANCE AND INDEMNITY
Section 1. Landlord's Insurance. Landlord shall keep the Building
insured against loss or damage by fire and any of the risks covered by insurance
of the type known as "fire and extended coverage," in the amount of at least
ninety percent (90%) of the replacement value of the Building, as the value may
exist from time to time. In addition, Landlord shall maintain a policy of
commercial general public liability insurance, or such other public liability
insurance commonly procured in the insurance industry by owners of office
buildings comparable to the Building and in such geographic area as the
Property, with respect to the Common Areas, covering bodily injury, death and
property damage, with a contractual liability endorsement, in the amount of at
least One Million Dollars ($1,000,000.00) per occurrence and with an aggregate
limit of at least One Million Dollars ($1,000,000.00). Landlord shall not be
required to insure fixtures or other property of Tenant. Tenant shall be named
as an additional insured in any such policies of liability insurance. All such
policies shall contain a provision which states that the policy of insurance
shall not be canceled, altered, changed, amended or modified, nor shall any
coverage therein be reduced, deleted, amended, modified, changed or canceled by
either the party named as the insured or the insurance company issuing the
policy without at least thirty (30) days prior written notice having been first
received by Tenant. At Tenant's request, Landlord shall provide Tenant with a
copy of such policies.
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Section 2. Tenant's Insurance. Tenant shall keep in force, during the
full term of this Lease, or any renewal or extension thereof, workmen's
compensation insurance, and commercial general public liability insurance issued
by a financially solvent insurance company, reasonably acceptable to Landlord,
with such limits as may be reasonably requested by Landlord from time to time,
but with minimum limits not less than One Million Dollars ($1,000,000.00), per
occurrence and in the aggregate, with respect to the Premises, on account of
bodily injury, including death, or property damage, or both. Said policy of
commercial general public liability insurance shall name Landlord as an
additional insured and provide that it shall not be canceled for any reason
unless and until Landlord is given fifteen (15) days' notice in writing by the
insurance company. The insurance policy or other evidence of coverage
satisfactory to Landlord shall be deposited with Landlord upon occupancy of
Premises by Tenant.
Section 3. Insurance Criteria. Insurance policies required by this
Lease shall:
(i) be issued by insurance companies licensed to do business in the
state of North Carolina with general policyholders ratings of at least A- and
the financial rating of at least XI in the most current Best's Insurance Reports
available on the Commencement Date. If the Best's ratings are changed or
discontinued, the parties shall agree to an equivalent method of rating
insurance companies. If the parties cannot agree they shall submit the dispute
to arbitration;
(ii) be primary policies - not as contributing with, or in excess of,
the coverage that the other party may carry;
(iii) be permitted to be carried through a "blanket policy" or
"umbrella" coverage;
(iv) have deductibles not greater than $1,000.00; and
(v) be maintained during the entire Term (as defined in Article III,
Section 1) and any extension Terms.
Section 4. Increase In Insurance Premium. If, because of anything done,
caused to be done, permitted or omitted by Tenant, the premium rate for any kind
of insurance affecting the Building shall be raised, Tenant agrees that the
amount of the increase in premium which Landlord shall thereby be obligated to
pay for such insurance shall be paid by Tenant to Landlord, on demand, and that
if Landlord shall demand that Tenant remedy the condition which caused the
increase in the insurance premium rate, Tenant will remedy such condition within
thirty (30) days after such demand. Tenant agrees that it shall not do or cause
to be done or permit an the Premises, anything deemed more hazardous than use as
a normal business office.
Section 5. Tenant's Indemnity. Tenant shall indemnify and hold harmless
Landlord, and the agents, employees, contractors and invitees of Landlord, from
and against any and all claims by or on behalf of any person, or entity, arising
by reason of injury to any person, including death, or property occurring in or
about the Premises or Property, and occasioned by any act or omission on the
part of Tenant or any employee (whether or not acting within the scope of
employment), agent,
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contractor (excluding Landlord), invitee, assignee or tenant of Tenant, or by
reason of nonperformance of any covenant in this Lease on the part of Tenant.
Section 6. Landlord's Indemnity. Landlord shall indemnify and hold
harmless Tenant and the agents, employees, contractors and invitees of Tenant,
from and against any and all claims by or on behalf of any person, or entity
occurring in or about the Common Areas or Property and occasioned by any act or
omission on the part of Landlord or any employee (whether or not acting within
the scope of employment), agent, contractor, or invitee of Landlord or by reason
of nonperformance of any covenant of this Lease on the part of Landlord.
Landlord shall not be liable to Tenant for any damages caused by any act or
omission of any owner or tenant of any property adjoining the Property.
Section 7. Tenant's Personal Property. Notwithstanding any other
provision of this Lease to the contrary, Tenant agrees that all personal
property or fixtures in the Premises, whether belonging to Tenant or other
persons, shall be and remain at Tenant's sole risk, and Landlord shall not be
liable for any damage to, or loss of, such property arising from any acts or
omissions of any persons, or from fire, or from the leaking of the roof, or from
the bursting, leaking, or overflowing of water, sewer or steam pipes or, from
any other cause whatsoever and Tenant expressly agrees to indemnify and save
Landlord harmless in all such cases.
Section 8. Waiver of Subrogation. Each party waives claims arising in
any manner in its (Injured Party's) favor and against the other party for loss
or damage to Injured Party's property located within or constituting a part or
all of the Building. This waiver applies only to the extent the loss or damage
is covered by:
(i) the Injured Party's insurance; or
(ii) the insurance the Injured Party is required to carry under Article
VIII, whichever is greater. The waiver also applies to each party's directors,
officers, employees, shareholders, and agents. The waiver does not apply to
claims caused by a party's willful misconduct. Each party's waiver shall only be
effective so long as the other party has in effect the foregoing insurance with
waiver of subrogation provision or endorsement.
Each party agrees to obtain a standard waiver of subrogation
endorsement to its property and casualty insurance in order to comply with this
Section. However, if despite a party's best efforts it cannot find an insurance
company meeting the criteria in Section 3 that will give the waiver of
subrogation at reasonable commercial rates, then it shall give notice to the
other party within thirty (30) days after the Lease's Commencement Date. The
other party shall then have thirty (30) days to find an insurance company
meeting the criterion of Article VIII that will issue the waiver at reasonable
commercial rates. If the other party also cannot find such an insurance company,
then both parties shall be released from their obligation to obtain the waiver,
and neither party shall be deemed to have waived any claims against the other
party for loss of or damage to the Injured Party's property.
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If an insurance company is found but it will give the waiver only at
rates greater than reasonable commercial rates, then the parties can agree to
pay for the waiver under any agreement they can negotiate. If the parties cannot
in good faith negotiate an agreement, then both parties shall be released from
their obligation to obtain the waiver.
ARTICLE IX
DAMAGES TO PREMISES
Section 1. Definition. "Relevant Space" means:
(i) the Premises as defined in Article II, excluding Tenant's
non-Building Standard fixtures;
(ii) access to the Premises; and
(iii) any part of the Building that provides essential services to the
Premises.
Section 2. Repair of Damage. If the Relevant Space is damaged in part
or whole from any cause and the Relevant Space can be substantially repaired and
restored within one hundred and eighty (180) days from the date of the damage
using standard working methods and procedures, Landlord shall at its expense
promptly and diligently repair and restore the Relevant Space to substantially
the same condition as existed before the damage. This repair and restoration
shall be made within one hundred and eighty (180) days from the date of the
damage unless the delay is due to causes beyond Landlord's reasonable control.
If the Relevant Space cannot be repaired and restored within the one
hundred and eighty (180) day period, then either party may, within ten (10) days
after determining that the repairs and restoration cannot be made within one
hundred and eighty (180) days, cancel the Lease by giving notice to the other
party. Nevertheless, if the Relevant Space is not repaired and restored within
one hundred and eighty (180) days from the date of the damage, then Tenant may
cancel the Lease at any time after the one hundred and eightieth (180th) day and
before the two hundred and tenth (210th) day following the date of damage.
Tenant shall not be able to cancel this Lease if its willful misconduct caused
the damage unless Landlord is not promptly and diligently repairing and
restoring the Relevant Space.
Section 3. Abatement. Unless the damage is caused by Tenant's willful
misconduct, the Base Rent and Additional Rent shall abate in proportion to that
part of the Premises that is unfit for use in Tenant's business. The amount of
the abatement shall take into account the nature and extent of interference to
Tenant's ability to conduct business in the Premises and the need for access and
essential services. The abatement shall continue from the date the damage
occurred until ten (10) business days after Landlord completes the repairs and
restoration to the Relevant Space or the part rendered unusable and notice to
Tenant that the repairs and restoration are completed, or until Tenant again
uses the Premises or the part rendered unusable, whichever is first. In the
event of a full
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abatement of rent as aforesaid, the term of this Lease shall be extended
automatically for a period equal to the period of such abatement.
Section 4. Tenant's Property. Notwithstanding any thing else in Section
1, Landlord is not obligated to repair or restore damage to Tenant's trade
fixtures, furniture, equipment, or other personal property, or any Tenant
improvements.
Section 5. Damage to Building. If in connection with any damage to the
Building:
(i) more than forty percent (40%) of the Building is damaged and
Landlord decides not to repair and restore the Building;
(ii) any mortgagee of the Building shall not allow adequate insurance
proceeds for repair and restoration;
(iii) the damage is not covered by Landlord's insurance required by
Article VIII, Section 1; or
(iv) the Lease is in the last twelve (12) months of its term;
then Landlord may cancel this Lease. To cancel, Landlord must give notice to
Tenant within thirty (30) days after Landlord knows of the damage. The notice
must specify the cancellation date, which shall be at least thirty (30) but not
more than sixty (60) days after the date notice is given.
Section 6. Cancellation. If either party cancels this Lease as
permitted by this Article, then this Lease shall end on the day specified in the
cancellation notice. The Base Rent, Additional Rent and any other charges due
under this Lease shall be payable up to the cancellation date and shall account
for any abatement. Landlord shall promptly refund to Tenant any prepaid,
unaccrued Base Rent and Additional Rent , accounting for any abatement, plus
security deposit, if any, less any sum then owing by Tenant to Landlord.
ARTICLE X
EMINENT DOMAIN
If (i) twenty percent (20%) or more of the floor area of the Premises,
(ii) twenty percent (20%) or more of the available parking spaces located on the
Land or (iii) land which deprives the parking areas located on the Property of
access by motor vehicles to and from a public road is taken for any public or
quasi-public use under any governmental law, ordinance or regulation or by right
of eminent domain or by private purchase in lieu thereof, then either party
hereto shall have the right to terminate this Lease effective on the date
physical possession is taken by the condemning authority or private purchaser.
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If less than twenty percent (20%) of the floor area of the Premises or
less than twenty percent (20%) of the parking spaces is taken for any public or
quasi-public use in said manner, then unless such taking deprives the parking
areas located on the Property of access by motor vehicles to and from a public
road, then neither party shall have the right to terminate this Lease as a
result of such taking. However, in the event any portion of the Premises is
taken and the Lease not terminated, the rental specified herein shall be reduced
during the unexpired term of this Lease in proportion to the area of the
Premises so taken and the reduction shall be effective on the date physical
possession is taken by the condemning authority or private purchaser.
Any election to terminate this Lease following condemnation shall be
evidenced only by written notice of termination delivered to the other party not
later than fifteen (15) days after the date on which physical possession is
taken by the condemning authority or private purchaser and shall be deemed
effective as of the date of said taking. If, however, the Lease is not
terminated following a partial condemnation, Landlord shall promptly make all
necessary repairs or alterations to the Building and Premises which are required
to make the Building usable by Tenant subsequent to such taking.
All compensation awarded for any taking (or the proceeds of private
sale in lieu thereof) whether for the whole or a part of the Premises, shall be
the property of Landlord whether such award is compensation for damages to
Landlord's or Tenant's interest, provided Landlord shall have no interest in any
award made to Tenant for loss of business or for the taking of Tenant's fixtures
and other property within the Premises if a separate award for such items is
made to Tenant.
ARTICLE XI
DEFAULT AND WAIVER
Section 1. Tenant's Default. Each of the following constitutes a
default ("Default"):
(i) Tenant's failure to pay Base Rent, Additional Rent, or any other
sum due hereunder within five (5) days after Tenant receives notice from
Landlord of Tenant's failure to pay Base Rent, Additional Rent, or such other
sum;
(ii) Tenant's failure to pay Base Rent or Additional Rent by the due
date, at any time during a Lease Year in which Tenant has already received two
notices of its failure to pay Base Rent or Additional Rent by the due date;
(iii) Tenant's failure to perform or observe any other Tenant
obligation after a period of thirty (30) days or the additional time, if any,
that is reasonably necessary to promptly and diligently cure the failure, after
it receives notice from Landlord setting forth in reasonable detail the nature
and extent of the failure and identifying the applicable Lease provision;
(iv) Tenant's abandoning or vacating the Premises (except in connection
with a permitted sublease or permitted assignment during the duration of such
sublease or assignment);
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(v) Tenant's failure to vacate or stay any of the following within
thirty (30) days after they occur:
A. a petition in bankruptcy is filed by or against Tenant;
B. Tenant is adjudicated as bankrupt or insolvent;
C. a receiver, trustee, or liquidator is appointed for all or a
substantial part of Tenant's property; or
D. Tenant makes an assignment for the benefit of creditors.
Section 2. Landlord's Remedies.
(i) Landlord, in addition to the remedies given in this Lease or under
the law, may do one or more of the following if Tenant commits a Default under
Section 1:
A. end this Lease, and Tenant shall then surrender the Premises
to Landlord;
B. enter and take possession of the Premises either with or
without process of law and remove Tenant, with or without
having ended the Lease; and
C. alter locks and other security devices at the Premises.
Tenant waives claims for damages by reason of Landlord's reentry,
repossession, or alteration of locks or other security devices following a
Default by Tenant and for damages by reason of any legal process following such
Default.
(ii) Landlord's exercise of any of its remedies or its receipt of
Tenant's keys shall not be considered an acceptance of surrender or a surrender
of the Premises by Tenant. A surrender must be agreed to in writing by Landlord.
(iii) If Landlord ends this Lease or ends Tenant's right to possess the
Premises because of a default, Landlord may hold Tenant liable for Base Rent,
Additional Rent, and other indebtedness accrued under this Lease to the date the
Lease ends. Tenant shall also be liable for the Base Rent, Additional Rent and
other indebtedness under this Lease that otherwise would have been payable by
Tenant during the remainder of the term had there been no default, reduced by
any sums Landlord receives by reletting the Premises during the Term. If
Landlord is able to relet the Premises during any part of the remainder of the
Term, at a rental in excess of that provided for under this Lease, Tenant shall
not be entitled to any such excess rental and Tenant waives any claim thereto.
(iv) Tenant shall also be liable for that part of the following sums
paid by Landlord and attributable to that part of the Term ended due to Tenant's
default:
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A. reasonable brokers fees incurred by Landlord for reletting part or
all of the Premises prorated for the part of the reletting term ending
concurrently with the then current term of this Lease;
B. the cost of removing and storing Tenant's property;
C. the cost of minor repairs, alterations, and remodeling necessary to
put the Premises in a condition reasonably acceptable to a new Tenant; and
D. other necessary and reasonable expenses incurred by Landlord in
enforcing its remedies.
(v) Landlord may sue and take any other action provided by law to
collect the amounts due hereunder at any time and from time to time without
waiving its rights to sue for and collect further amounts due from Tenant
hereunder.
Section 3. Waiver. The waiver by either party of any breach of any
covenant or agreement herein contained by the other party shall not be deemed to
be waiver of such covenant or agreement or any subsequent breach of the same or
any other covenant or agreement herein contained. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any breach by
Tenant of any covenant or agreement of this Lease, other than the failure of
Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge of such breach at the time of acceptance of such rent.
Section 4. Landlord's Default. Landlord shall not be in default of any
of its Lease obligations, until after a period of thirty (30) days or the
additional time, if any, that is reasonably necessary to promptly and diligently
cure the default after receiving notice from Tenant. The notice shall be in
writing and give in reasonable detail the nature and extent of the default and
identify the Lease provisions(s) containing the obligations(s).
Section 5. Survival. Any provision of this Lease which by its nature
would require the survival of the ending of this Lease, shall survive the ending
of this Lease.
ARTICLE XII
ASSIGNMENT AND SUBLETTING
Section 1. Consent Required. Tenant shall not transfer, mortgage,
encumber, assign, or sublease all or part of the Premises without Landlord's
advance written consent, which consent shall not be unreasonably withheld
provided, however, that Landlord shall not be deemed to have unreasonably
withheld its consent to any assignment or sublease if such assignment or
sublease is not approved by and consented to by any lender holding a first
mortgage or first deed of trust on the Property.
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Section 2. Procedure. In requesting Landlord's consent to any sublease
or assignment, Tenant must provide Landlord in writing with:
(i) the name and address of the proposed subtenant or assignee;
(ii) the nature of the proposed subtenant's or assignee's business it
will operate in the Premises;
(iii) the terms of the proposed sublease or assignment; and
(iv) reasonable financial information so that Landlord can evaluate the
proposed subtenant or assignee under this paragraph.
Landlord shall, within sixty (60) days after receiving the information
required under this Article, give notice to Tenant to permit or deny the
proposed sublease or assignment as determined by Landlord in its sole
discretion.
Section 3. Conditions. Subleases and Assignments by Tenant which are
consented to by Landlord are also subject to:
(i) The terms of this Lease;
(ii) The term shall not extend beyond the Lease term, including
extensions;
(iii) Tenant shall remain liable for all Lease obligations;
(iv) Consent to one sublease or assignment does not waive the consent
requirement for future assignments or subleases; and
(v) Fifty (50%) percent of the Net Consideration (as hereinafter
defined) received by Tenant from an assignment or sublease that exceeds the
amount Tenant must pay Landlord, which amount is to be prorated where a part of
the Premises is subleased, shall also be paid to Landlord. "Net Consideration"
as used herein shall mean the gross consideration received by Tenant from an
assignment or sublease, including all rent and other payments, but excluding
reasonable leasing commissions paid by Tenant, payments attributable to the
amortization of the cost of Tenant improvements made to the Premises at Tenant's
cost for the assignee or sublessee, and other reasonable, out-of-pocket costs
paid by Tenant, such as attorneys' fees directly related to Tenant's obtaining
an assignee or sublessee. Tenant shall pay 50% of the Net Consideration to
Landlord at the end of each calendar year during which Tenant collects any Net
Consideration. Each payment shall be sent with a detailed statement showing
A. The total consideration paid by the subtenant or assignee, and
B. Any exclusions from the consideration permitted by this
paragraph.
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Landlord shall have the right to audit Tenant's books and records to
verify the accuracy of the detailed statement.
ARTICLE XIV
SUBORDINATION
Tenant shall, upon request by Landlord, subject and subordinate all or
any of its rights under this Lease to any and all mortgages and deeds of trust
now existing or hereafter placed on any part of the Property; provided, however,
that Tenant will not be disturbed in the use or enjoyment of the Premises so
long as it is not in default hereunder. Tenant agrees that this Lease shall
remain in full force and effect notwithstanding any default or foreclosure under
any such mortgage or deed of trust and that it will attorn to the mortgagee,
trustee or beneficiary of such mortgage or deed of trust, and the successor or
assign of any of them, and to the purchaser or assignee under any foreclosure.
Tenant will, upon request by Landlord, execute and deliver to Landlord, or to
any other person designated by Landlord, any instrument or instruments,
including but not limited to such subordination, attornment and nondisturbance
agreements as may be required by any mortgagee or beneficiary in any deed of
trust on the Property required to give effect to the provisions of this
paragraph and shall execute and deliver to Landlord such amendments to this
Lease as may be required by any such mortgagee or beneficiary in a deed of trust
on the Property; provided, however, that such amendments do not materially
increase the obligations of Tenant hereunder or materially decrease the rights
of Tenant hereunder and are reasonably acceptable to Tenant and its counsel.
Without limiting the generality of the foregoing, in the event that NationsBank,
N.A. is the beneficiary of a deed of trust on the Property in connection with a
Construction Loan, Tenant agrees upon request by Landlord to, execute and
deliver to Landlord, or to any other person designated by Landlord, any
instrument or instruments, including but not limited to subordination,
attornment and nondisturbance agreements and tenant estoppel letters in such
form as NationsBank, N.A. shall require.
ARTICLE XV
GENERAL PROVISIONS
Section 1. Transfer of Landlord's Interest. The term "Landlord" as used
in this Lease means only the owner, or the mortgagee in possession, for the time
being, of the Building or Property, or the owner of any ground lease or lease of
the Building or Property, so that in the event of any sale of said Building or
Property, or of said lease, or in the event of a lease of said Building or
Property, Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest or between the parties and the purchaser at any such sale or lease of
the Building or Property, that the purchaser, or the lessee of the Building or
Property, has assumed and agreed to carry out any and all covenants and
obligations of Landlord hereunder. Any security given by Tenant to Landlord to
secure performance of Tenant's obligations hereunder may be assigned and
transferred by Landlord to the successor in interest to Landlord; and, upon
acknowledgment by such successor of receipt of such security and its express
assumption of the
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obligation to account to Tenant for such security in accordance with the terms
of this Lease, Landlord shall thereby be discharged of any further obligation
relating thereto. Landlord's assignment, sale or transfer of the Lease or of any
or all of its rights herein shall in no manner affect Tenant's obligations
hereunder. Tenant shall thereafter attorn and look to such assignee, as
Landlord, provided Tenant first has written notice of such assignment of
Landlord's interest.
Section 2. Landlord's Limited Liability. Notwithstanding anything to
the contrary contained in this Lease, it is specifically understood and agreed
that the liability of Landlord hereunder shall be limited to the equity of
Landlord in the Property in the event of a breach or the failure of Landlord to
perform any of the terms, covenants, conditions and agreements of this Lease to
be performed by Landlord. In furtherance of the foregoing, Tenant hereby agrees
that any judgment it may obtain against Landlord as a result of the breach of
this Lease as aforesaid shall be enforceable solely against Landlord's interest
in the Property.
Section 3. Landlord Not Partner. It is expressly understood and agreed
that Landlord is not a partner, joint venturer or associate of Tenant in the
conduct of Tenant's business, that the provisions of this Lease with respect to
the payment by Tenant of rent are not sharing of profits and that the
relationship between the parties hereby is and shall remain at all times that of
landlord and tenant. No provision of this Lease shall be construed to impose
upon the parties hereto any obligation or restriction not expressly set forth
herein.
Section 4. Recording. The recording of this Lease is prohibited except
as allowed in this section. However, the parties shall promptly execute and
record, a short form memorandum in accordance with applicable law describing the
Premises and stating the term of this Lease, its Commencement and Termination
Dates, and any other information the parties agree to include or as may be
required by applicable law in order to give record notice of the Lease.
Section 5. Additional Instruments. The parties agree to execute and
deliver any instruments in writing necessary to carry out any agreement, terms,
condition or assurance in this Lease whenever occasion shall arise and
reasonable request for such instrument shall be made provided, however, that
such instruments do not materially increase the obligations of any party
hereunder or materially decrease the rights of any party hereunder.
Section 6. Lease Not An Offer. Landlord has given this Lease to Tenant
for review. It is not an offer to lease. This Lease shall not be binding unless
signed by both parties.
Section 7. Pronouns. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the person(s), firm(s), or corporation(s) may require.
Section 8. Counterparts. This Lease may be executed in counterparts,
all of which taken together, shall be deemed one original.
34
<PAGE> 35
Section 9. Amendment and Modification. This Lease embodies the full
agreement of the parties and supersedes any and all prior understandings or
commitments concerning the subject matter of this Lease. Any modification or
amendment must be in writing and signed by both parties.
Section 10. Binding Effect. This Lease shall be binding upon and inure
to the benefit of the parties hereto, their assigns, administrators, successors,
estates, heirs and legatees respectively, except as herein provided to the
contrary.
Section 11. Controlling Law. This Lease and the rights of Landlord and
Tenant hereunder shall be construed and enforced in accordance with the law of
the State of North Carolina.
Section 12. Partial Invalidity. In the event that any part or provision
of this Lease shall be determined to be invalid or unenforceable, the remaining
parts and provisions of said Lease which can be separated from the invalid,
unenforceable provision shall continue in full force and effect.
Section 13. Captions. The section titles, numbers and captions
contained in this Lease are inserted only as a matter of convenience and for
reference, and in no way define, limit, extend, modify, or describe the scope or
intent of this Lease nor any provision herein.
Section 14. Time of Essence. Time is of the essence in the performance
of the provisions of this Lease.
Section 15. Warranties. Tenant warrants that it has had no dealing with
any broker or agent in connection with the negotiation or execution of this
Lease other than The Harris Group, and Tenant agrees to indemnify and hold
Landlord harmless from and against any claims by any broker, agent or other
person claiming a commission or other form of compensation by virtue of having
dealt with Tenant with regard to this leasing transaction.
Section 16. Authority of Parties. Each party warrants that it is
authorized to enter into this Lease, that the person signing on its behalf is
duly authorized to execute the Lease, and that no other signatures are
necessary. At the request of Landlord, Tenant shall provide Landlord with a
certified resolution of Tenant's board of directors approving the Lease. At the
request of Tenant, Landlord shall provide Tenant with a copy of a resolution by
Landlord's managers approving the Lease.
35
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed the date and year first above written.
LANDLORD:
TWO MORROCROFT CENTRE, LLC,
a North Carolina limited liability company
By: /s/ JOHN W. HARRIS
-----------------------------
John W. Harris, Manager
By: /s/ ROBERT F. GRUDER
-----------------------------
Robert F. Gruder, Manager
By: /s/ SERGE FAVREAU
-----------------------------
Serge Favreau, Manager
TENANT:
: ALYDAAR SOFTWARE CORPORATION,
a North Carolina corporation
ATTEST:
/s/ V. HOLLIS SCOTT By: /s/ ROBERT F. GRUDER
- ---------------------- -----------------------------
its Secretary its CEO
[CORPORATE SEAL]
36
<PAGE> 37
EXHIBIT "A"
PROPERTY DESCRIPTION
(Description of Land)
THAT certain tract or parcel of land lying and being in Charlotte, Mecklenburg
County, North Carolina and being more particularly described as follows:
BEGINNING at a p.k. nail located in the southerly right-of-way margin of Colony
Road (110' Public Right-of-Way), said nail being the northeasterly corner of Lot
1 as shown in Map Book 24, at Page 126, and being the property of Ruddco, Inc.,
now or formerly, as described in Deed recorded in Book 6429, at Page 761 of the
Mecklenburg Public Registry; thence from said nail and along the southerly
right-of-way margin of Colony Road S 47-22-16 E 197.35 feet to a p.k. nail;
thence leaving the southerly right-of-way margin of Colony Road S 42-37-44 W
181.46 feet to a p.k, nail; thence S 47-22-16 E 237.57 feet to a new iron pin;
thence S 42-37-44 W 153.42 feet to a new iron pin; thence N 47-22-16 W 237.57
feet to a p.k. nail; thence N 42-37-44 E 11.21 feet to a p.k. nail; thence N
47-22-16 W 197.35 feet to a new iron pin located in the easterly property line
of Lot 1, Map Book 24, Page 126 of the Mecklenburg Public Registry; thence along
the easterly property line of Lot 1, N 42-37-44 E 323.67 feet to the Point and
Place of Beginning, and being a portion of Lot 2, Morrocroft - Phase V, Map Book
24, at Page 126 of the Mecklenburg Public Registry, containing 2.3031 acres,
more or less, as shown on an As Built Survey of Property of H-C Reit, Inc., by
Mitchell W. Davis, N.C.R.L.S., dated August 14, 1997, revised September 3, 1997,
and last revised on June 10, 1998.
<PAGE> 38
EXHIBIT "B"
Two/Three Morrocroft Centre Floor Plans
[DRAWINGS]
<PAGE> 39
EXHIBIT "C"
Summary of Plans and Specifications for Building
Plans and Specifications prepared by TBA2 Architects bearing a reissue
date of January 17, 1998 and consisting of Sheets CS1 through E12.
<PAGE> 40
EXHIBIT "D"
OPERATING COST ITEMS
Said "Operating Costs" shall include, but not necessarily be limited
to, the following items:
A. Cleaning
1. Wages, salaries and benefits of on-site employees (includes
social security, unemployment compensation, fringe benefits,
etc.).
2. Supplies/Materials (including ordinary repairs and replacement
of equipment).
3. Outside Service (includes window cleaning, contract cleaning,
drapery or venetian blind cleaning, etc.).
B. Heating, Ventilating, and Air Conditioning
1. Wages, salaries and benefits of any on-site employees employed
to perform general maintenance and repairs (includes social
security, unemployment compensation, fringe benefits, etc.).
2. Supplies/Materials.
3. Outside Services.
4. Repairs (includes ordinary repairs and minor replacements
required to keep the equipment in good operating condition).
C. Elevators
1. Wages, salaries and benefits of any on-site employees employed
to perform general maintenance and repairs (includes social
security, unemployment compensation, fringe benefits, etc.).
2. Supplies/Materials.
3. Outside Service.
4. Repairs (includes ordinary repairs and minor replacements
required to keep the equipment in good operating condition).
D. General Expenses - Building
1. Wages, salaries and benefits of: on-site employees to the
extent not included elsewhere (e.g. security guards), the
Building manager of the Building, whether on or off-site
(which Building manager may also manage other buildings, in
which event a pro rata portion of the wages, salaries and
benefits payable to such Building manager shall be treated as
an Operating Cost).
2. Supplies/Materials (includes toilet supplies, keys, signs, and
other miscellaneous supplies not included elsewhere).
3. Contract Services (includes rubbish handling, exterminating,
directory services, fire extinguisher services, etc.).
<PAGE> 41
4. Plumbing Repairs.
5. Sewer Charges.
6. Water Charges.
7. Landscape Expenses.
8. General Repairs (those repairs necessary to keep the Building
and walkways, etc., in good condition).
9. Security (to the extent not covered elsewhere).
11. Garbage Pickup (to the extent not covered elsewhere).
E. Administrative Expenses
1. Salaries and benefits of non-supervisory and non-executive
employees directly involved in the operation and management of
the Building (which employees may also be involved in the
management and operation of other buildings, in which event a
pro rata portion of the wages, salaries and benefits payable
to such employees shall be treated as an Operating Cost)
2. Building Office Expenses (including telephone, stationery,
supplies, stamps, equipment repairs, dues, subscriptions,
etc.)
3. Legal (except litigation, bad debts, or leasing expenses)
4. Professional Fees (including accounting and engineering
connected with Building operations; but not including leasing
costs or commissions).
5. Management Fees.
F. [Intentionally Deleted]
G. Insurance
1. Fire and extended coverage premium.
2. Earthquake and extended coverage premium.
3. Liability and extended coverage premium.
4. Other broad form coverages.
H. Taxes
1. Real estate taxes and assessments.
2. Personal property taxes (for the Building's personal property,
including license expenses).
I. Extraordinary Repairs - Large nonrecurring major repairs spread over
the normal life of the component.
J. Capital Improvements- The cost (including both capital expenditures and
capital leases) of any capital improvements to the Building or the
Common Areas which are classified as capital expenditures under
generally accepted accounting principles consistently applied) which:
(i) are made for the purpose of reducing, and which actually reduce,
operating expenses but such expense shall not exceed the operating
expenses actually saved in each year of the Term, or (ii) are mandated
by any governmental authority under any law or regulation that was not
applicable to the Building as of the date of substantial
<PAGE> 42
completion of the Building, or (iii) are mandated by any governmental
authority under any law or regulation that was applicable to the
Building as of the date of substantial completion of the Building and
Tenant consents to inclusion thereof among Operating Costs. Any
Operating Expense permitted under this paragraph J of this Exhibit D
shall be amortized over the useful life of the capital improvements as
determined in accordance with generally accepted accounting principles
consistently applied, together with interest on the unamortized balance
at the actual rate incurred by Landlord.
<PAGE> 43
EXHIBIT D-1
Additional Exclusions from Operating Costs
The following additional items shall be excluded from Operating Costs for
purposes of Article IV of the Lease:
(1) any federal, state or local income tax, and franchise, estate or
inheritance tax or any real estate transfer taxes imposed by reason of the sale
of the Project or any portion thereof or any interest therein;
(2) any penalties or interest for Landlord's failure to comply with the
obligation for the payment of any taxes;
(3) expenses incurred in leasing space or procuring new tenants (e.g.,
lease commissions, advertising expenses, marketing studies, advertising and
promotional funds and expenses of preparing, upfitting or renovating space for
new tenants);
(4) legal or accounting expenses in negotiating or enforcing the terns
of any other space lease related to the Building or to any ground lease related
to all or any portion of the Building;
(5) Landlord's state or federal income or gross receipts taxes or gift,
succession, franchise, inheritance or estate taxes;
(6) wages, salaries and benefits of executive level or supervisory
employees above the level of Building manager of the Building (which Building
manager may also manage other buildings, in which event a pro rata portion of
the wages, salaries and benefits payable to such Building manager shall be
treated as an Operating Expense);
(7) costs incurred by Landlord for repairs or other work caused by fire
or other casualty for which Landlord is required to maintain insurance pursuant
to this Lease and which would be covered by a policy of the type and in the
amount Landlord is required to carry under this Lease, but only to the extent
that such cost is incurred by Landlord as a result of a failure by Landlord to
maintain insurance of the type known as "fire and extended coverage," in the
amount of at least ninety percent (90%) of the replacement value of the Building
as required to be carried by Landlord under Article VII of this Lease. Costs
incurred by Landlord for repairs or other work caused by fire or other casualty
resulting from deductibles under the insurance carried by Landlord or resulting
from the damage exceeding the policy limits of the policies required to be
carried by Landlord under this Lease or resulting from such loss or damage not
being covered by a policy of "fire and extended coverage" of the type required
to be carried by Landlord under the Lease shall not be excluded from Operating
Costs.
(8) any rental or other payments due under any ground or underlying
lease or leases;
<PAGE> 44
(9) any syndication, financing or refinancing costs and expenses
(including interest on debt or amortization payments on debt) incurred in
connection with any mortgage or deed of trust or any other debt instrument
encumbering all or any portion of the Building or the Project;
(10) depreciation and amortization, except as otherwise expressly
provided in Paragraph J of Exhibit D;
(11) costs of initially constructing the Shell Building Construction
Work ant the Common Areas of the Project;
(12) costs of correcting any defects in (a) the Shell Building
Construction Work, (b) any Tenant Upfit Work performed by Landlord or Landlord's
contractor, (c) Common Areas and (d) other improvements installed by Landlord or
Landlord's contractor;
(13) any bad debts loss, rent loss or reserves for bad debts or rent
loss;
(14) except for the payment of the management fee described in the
definition of Operating Costs, any management fees payable to persons or
entities which constitute or are affiliated with Landlord;
(15) attorneys' fees and other costs and expenses incurred in
connection with the fees awarded to any tenant pursuant to any lease,
(16) costs of repair, abatement, removal or clean-up of any Hazardous
Substances; and
(17) any costs or expenses that are incurred directly or indirectly
with respect to Landlord's indemnity obligations under this Lease.
<PAGE> 45
EXHIBIT "E"
CLEANING SPECIFICATIONS
I. LOBBY ENTRANCE WAY AND OTHER "PUBLIC AREAS" OF BUILDING
A. Daily
1. The first floor lobby floors will be swept, mopped
and buffed to insure a high luster appearance. Damp
mop marble.
2. Vacuum weather mats and damp wipe vinyl edges to
remove all dust.
3. Vacuum all carpeted areas. Remove stains with carpet
stain remover as per manufacturer specifications and
remove any gum, staples, paper clips, tar, etc. which
has adhered to the surface.
4. Clean all baseboard ledges, moldings, directory,
depositories and window frames.
5. Clean all cigarette urns and trash receptacles.
Replace sand as required and/or wash metal urns to
remove stains and dust.
6. Clean all water fountains with a germicidal cleanser
and polish.
7. Spot clean all doors, door frames, wall and light
switches to remove fingerprints, spills and other
markings.
8. Wash glass on entrance doors and side lights to
tenant suites and building directories.
9. Sweep and dry mop all hard surface flooring. Remove
matter such as gum and tar which has adhered to the
floor.
10. Clean and polish lobby directory.
11. Clean and polish all lobby chrome or anodized metal
finishes.
12. Clean and polish all entry thresholds.
13. Wash all entry level glass.
14. Dust all mullions and sills.
15. Dust all planters, newspaper dispensers, drop boxes
and benches.
<PAGE> 46
16. Clean all elevator entrance door thresholds. This
includes entrances to tenant areas which have
thresholds.
17. Empty all waste receptacles and replace plastic
liners where required. Plastic liners to fit waste
receptacles in such a manner as to not overhang the
top. Plastic liners to be replaced on an as needed
basis, but no less than one time per week.
18. Sweep and wet mop all basement corridors and the
stairwells between lobby and basement.
B. Weekly
1. Dust with treated cloth all doors and ventilating
louvers.
2. Wet mop and buff all hard surface flooring.
3. Sweep all stairwells and dust all hand railings.
4. Sweep, scrub and wet mop all entries at building
entrances.
5. Wash glass in building directories, entrance doors
and frames, both sides. This includes all glass areas
that are adjacent to the main entrance and are a part
of the visual effect of the main entrance at the
street level.
6. Shampoo lobby entry weather mats, as applicable.
7. Vacuum and spot clean carpeted lobby floors.
8. Polish all elevator entrance door thresholds.
9. Clean thresholds to all building entrance doors.
C. Monthly
1. Vacuum all ceiling air supply and exhaust diffusers
and grills.
2. Wash vinyl and metal kick plates on doors.
3. Scrub and resurface all hard surface flooring using
buffable non-slip type floor finish.
4. Wet mop all stairwell landings, handrails and treads.
5. Wash all doors and door frames.
<PAGE> 47
6. Wash down all planters in lobby.
7. Clean all base boards with detergent and water.
D. Quarterly
1. High dust all horizontal and vertical surfaces not
reached in night cleaning, such as pipes, light
fixtures, door frames, etc.
2. Damp wash diffusers, vent grills and other such
surfaces including surrounding wall and ceiling
areas that are soiled.
E. Semi-Annually
1. Strip and refinish all resilient floor areas using a
buffable non-slip floor finish.
F. Annually.
1. Clean all vertical surfaces not attended to in
nightly, weekly, quarterly or semi-annual cleaning
specifications.
II. RESTROOMS.
A. Daily
1. Clean with non abrasive detergent/disinfectant and
polish all sinks, counters, toilets and urinals,
beginning with seats (both sides) and working down.
Use acid bowl cleaner in the interior of toilets,
making sure to clean the inner lip of closet and
urinals. Pour one ounce of bowl cleaner into urinal
after cleaning and do not flush.
2. Damp wipe all ledges, toilet stalls and doors.
3. Spot clean light switches, doors, partitions and
walls to remove fingerprints, spills and other
markings. All graffiti will be removed from all
walls, partitions and exposed surfaces.
4. Sweep and mop with a germicide all floor areas. Rinse
with clear water.
5. Clean and polish all mirrors, soap dispensers,
flushometers, shelves, chrome fixtures, piping,
toilet hinges and disposal container exteriors using
a detergent/disinfectant and water.
6. Furnish and refill all toilet tissue, paper towel and
sanitary napkin dispensers. Refill soap dispensers
and check operation.
<PAGE> 48
7. Empty and clean paper towel and sanitary napkin
disposal receptacles. Replace plastic liners.
8. Remove and clean urinal screens to remove foreign
matter.
9. Agent's philosophy is: Do Not Use Deodorants To Mask
Odors. If it is clean and disinfected, it should not
create an odor.
B Weekly
1. Clean and disinfect floor drains. Pour I quart of
water down the floor drain to prevent gases from
escaping. Polish chrome.
2. Scrub floor area with germicidal solution.
C. Monthly
1. Wash diffusers, (both supply and return) grills,
toilet stalls, doors and tile walls with
disinfectant/detergent.
III. TENANT SPACE
A. Daily
1. Empty all waste baskets. Remove trash from waste
baskets and replace plastic lining. Plastic liners to
fit waste receptacles in such a manner as to not
overhang the top by more than two (2) inches. Replace
old plastic liners no less than one time per week.
2. Dust mop all hardwood floor areas.
3. Sweep, dry mop or vacuum all floor areas with hard
surface flooring or carpet, remove matter such as
gum, staples, paper clips, tar, etc. which adhered to
the floor.
4. Damp wipe all telephones, including dials and
crevices, using disinfectant/cleaner.
5. Wash all water fountains, chalkboards, cafeteria
tables, coffee bars, and ashtrays. Sanitize and
polish water drinking fountains.
6. Dust all grill work within reach.
7. Spot clean doors, door frames, walls and switch
plates to remove fingerprints, spills and other
markings.
<PAGE> 49
8. Spot clean all interior partitions, walls, glass,
windows and glass entrance doors.
9. Spot clean all metal trim work, removing
fingerprints, smudges, water and other marks.
10. Push tenant employees' chairs up into desks.
11. Dust office furniture (desk, credenzas, shelves,
files, partitions, tables, counters).
B. Weekly
1. Damp wipe all wastebaskets.
2. Wet mop and buff and hard surface flooring. Wipe all
baseboards and furniture legs clean after mopping.
3. Spot clean all carpet stains.
4. Dust all horizontal surfaces with treated dust cloth
or dust wand including picture frames, blinds and
louvers, window ledges, including low dusting.
5. Brush all fabric covered chairs with a lint brush and
all smooth covered chairs with a damp cloth.
6. Dust all baseboards.
7. Dust with a treated cloth under all desk equipment
and telephones, replace equipment in original
position.
8. Edge vacuum.
C. Monthly
1. Scrub, strip and wax all hard surface flooring using
a buffable non-slip type floor finish. Wipe all
baseboards and furniture legs clean after refinishing
floor.
2. Vacuum all ceiling air supply and exhaust diffusers
or grills.
3. Wash all interior glass, both sides.
4. Spray buff all Perma Grain flooring with manufacturer
recommended sealer.
5. Wash all vinyl and metal kick plates on doors.
<PAGE> 50
6. Perform high level dusting.
D. Quarterly
1. High dust all horizontal and vertical surfaces not
reached in the nightly cleaning, such as pipes, light
fixtures, door jams and other wall hangings.
2. Vacuum or dust all books in place.
3. Damp wash diffusers, vents, grills and other such
items, including surrounding wall or ceiling areas
that are soiled.
E. Annually
1. Dust all storage area, including shelves and
contents, such as supply and stock closets and damp
mop floor areas.
2. Clean all vertical surfaces not attended by nightly
weekly, quarterly or semi-annual schedules.
IV. ELEVATORS
A. Daily
1. Sweep and mop-with detergent all elevator cabs.
2. Clean and polish all metal trim work and elevator
doors to remove fingerprints, smudges, water and
other marks. Care will be taken to prevent scratching
or damaging of metal finishes.
3. Elevator cab thresholds and elevator thresholds on
each floor landing will be thoroughly scrubbed and
polished with an appropriate metal polish.
4. Elevator hall call button plates will be polished and
wall surfaces around hall call plates cleaned.
B. Weekly
1. Shampoo all elevator cab carpeted flooring; scrub,
strip, and wax a hard surface flooring using a
buffable non-slip type floor finish.
2. Polish elevator cab walls.
<PAGE> 51
V. SERVICE AREAS
A. Daily
1. Sweep garage stairwells and wipe handrails with damp,
cloth.
2. Sweep and wet mop loading dock elevator lobby.
3. Clean engineer's office in accordance with tenant
space and cleaning specifications.
<PAGE> 52
EXHIBIT "F"
PARKING RULES AND REGULATIONS
Parking: The following rules. regulations and rights apply to the use
of all portions of the complex designated from time to time by Landlord as
Parking Areas in accordance with the Lease:
(a) Only Tenant and employees of Tenant may park their motor
vehicles in those portions of the Parking Areas designated by
Landlord from time to time as unreserved tenant parking areas
(the "Unreserved Parking Areas").
(b) Guests, invitees and visitors of Tenant may park their motor
vehicles only in those portions of the Parking Areas
designated by Landlord from time to time as visitor parking
areas (the "Visitor Parking Areas").
(c) Only Tenant and those employees, guests, invitees and visitors
of Tenant who are physically handicapped may park their motor
vehicles in those portions of the Parking Areas designated by
Landlord from time to time as handicapped parking areas (the
"Handicapped Parking Areas").
(d) Parking in the Unreserved Parking Areas, the Visitor Parking
Areas and the Handicapped Parking Areas shall be on a
nonexclusive, "as-available" basis.
(e) No representation or warranty is made by Landlord as to the
number or location of parking spaces comprising the Parking
Areas, or any portion thereof.
(f) Motor vehicles shall only be parked in striped parking spaces
located within the Parking Areas and no motor vehicles shall
be parked in any other location within the complex.
(g) Not more than one motor vehicle may be parked on each parking
space and no motor vehicle may be parked on more than one
parking space within the Parking Areas.
(h) Parking Areas shall not be used for any purpose other than the
parking of permitted motor vehicles thereon. No commercial
activity shall be conducted from the Parking Areas.
(i) No repairs (other than emergency repairs) or washing of motor
vehicles shall be permitted in the Parking Areas.
(j) Tenant, its employees, agents, guests, visitors and invitees
assume full responsibility and Landlord shall have no
liability for (a) loss, damage, injury or death caused to the
person or property of third parties by reason
<PAGE> 53
of their use of the Parking Areas; and (b) protecting the
motor vehicles of such third parties against theft, vandalism
and damage and for protecting their person against injury and
assault by reason of their use of the Parking Areas.
(k) A violation of these Rules shall entitle Landlord to revoke
the parking privileges of the offending party, in addition to
other rights and remedies available to Landlord.
<PAGE> 54
EXHIBIT "G"
BUILDING RULES AND REGULATIONS
The following rules and regulations have been adopted by Landlord for
the care, protection and benefit of the Building and for the general comfort and
welfare of the tenants.
1. The sidewalks, entrances, halls, passages, elevators and stairways
shall not be obstructed by Tenant or used by Tenant or its employees for any
other purpose than for ingress and egress.
2. Toilet rooms and other water apparatus shall not be used for any
purpose other than those for which they were constructed.
3. Tenant shall not do anything in the Premises, or bring or keep
anything therein, which shall in any way conflict with any law, ordinance, rule
or regulation affecting the occupancy and use of the Premises, which are or may
hereafter be enacted or promulgated by any public authority or by the Board of
Fire Underwriters.
4. In order to insure proper use and care of the Premises, neither
Tenant nor any employee of Tenant shall:
(a) Keep animals or birds on the Premises.
(b) Use Premises as sleeping apartments.
(c) Maintain or utilize bicycles or other vehicles in the
Premises.
(d) Make improper noises or disturbances of any kind, sing, play
or operate any musical instrument, radio or television set
without first securing consent of Landlord.
(e) Engage in or permit games of chance or any form of gambling or
immoral conduct in or about the Premises.
(f) Mark or defile elevators, toilet rooms, walls, windows, doors
or any part of the Building.
(g) Allow any furniture, packages or articles of any kind to
remain in corridors except for short periods incidental to
moving same in or out of Building or to clean or rearrange
occupancy of leased space.
(h) Deposit waste paper, dirt or other substances in corridors,
stairways, elevators, toilets or rest rooms, or in any other
part of the Building not leased to it.
(i) Fasten any article, drill holes, drive nails or screws into
walls, floors, doors or partitions, or otherwise mar or deface
any of them by paint, paper or otherwise,
<PAGE> 55
unless written consent is first obtained from Landlord, except
for customary interior decorations.
(j) Operate any machinery within the Building, except customary
motor driven office equipment, such as recorders and
transcribers, calculators, electric typewriters, and the like.
Special electrical or other motor driven equipment used in the
trade or profession of Tenant may be operated only with the
proper consent of Landlord.
(k) Tamper or interfere in any way with windows, doors, locks, air
conditioning controls, heating, lighting, electric plumbing
fixtures.
(l) Leave Premises unoccupied without locking all doors,
extinguishing lights and turning off all water outlets.
(m) Install or operate vending machines of any kind in the
Premises without written consent of Landlord.
5. Tenant shall have cleaned, at its expense, not less than
semiannually, the carpet that has been provided by Landlord for Tenant's use,
utilizing the cleaning company with which Landlord has contracted to do this
work.
6. Landlord shall have the right to prohibit any advertising by Tenant
which, in its opinion, tends to damage the reputation of the Building or its
desirability as a building for offices, and upon written notice from Landlord,
Tenant shall discontinue any such advertising.
7. Landlord reserves the right to designate the time when and method
whereby freight, furniture, safes, goods, merchandise and other articles may be
brought into, moved or taken from the Building and the Premises ]eased by
Tenant; and workmen employed, designated or approved by Landlord must be
employed by Tenants for repairs, painting, material moving and other similar
work that may be done on the Premises. Tenants moving in or out of the Premises
must do so between the hours of 5:30 p.m. and 7:30 a.m., Monday through Friday,
or anytime Saturday or Sunday.
8. Landlord shall furnish a reasonable number of door keys and/or
Building entrance access cards for the needs of Tenant, which shall be
surrendered on termination of the lease, and reserves the right to require a
deposit to insure their return at termination of lease. Tenant shall obtain keys
and/or cards only from Landlord, shall not obtain duplicate keys and/or cards
from any outside source, and shall not alter the locks or effect any
substitution.
9. Tenant shall not install in the Premises any metal safes or permit
any concentration of excessive weight in any portion thereof without first
having obtained the written permission of Landlord. Landlord acknowledges and
consents to the installation of a vault as set forth in the Work Letter.
10. Landlord reserves the right at all times to exclude loiterers,
vendors, solicitors and peddlers from the Building, and to require registration,
satisfactory identification
<PAGE> 56
and credentials from all persons seeking access to any part of the Building
outside of ordinary business hours. Landlord will exercise reasonable judgment
in the execution of such control but shall not be held liable for the granting
or refusal of such access.
11. Landlord reserves the right to exclude the general public from the
Building upon such days and at such hours as in Landlord's judgment will be for
the best interests of the Building and its tenants.
12. The attaching of wires to the outside of the Building is absolutely
prohibited, and no wires shall be run or installed in any part of the Building
without Landlord's permission and at Landlord's direction.
13. Requests for services of janitors or other Building employees must
be made at the office of the Building Manager.
14. Landlord shall have the right to make such other and further
reasonable rules and regulations as, in the judgment of Landlord, may from time
to time be necessary for the safety, care and cleanliness of the Premises and
for the preservation of good order therein, effective five (5) days after all
Tenants have been given written notice thereof.
15. Whenever used herein, the singular shall include the plural and the
masculine the feminine and/or neuter as the context may indicate.
16. Tenant agrees to cooperate with Landlord and other tenants of the
Building in preventing its employees from parking in spaces reserved for
visitors to the Building. Landlord does not, however, agree to be responsible
for policing the visitor parking areas.
<PAGE> 57
RIDER 1
COMMENCEMENT AGREEMENT
THIS COMMENCEMENT AGREEMENT ("Commencement Agreement") is made and
entered into this _____ day of ______________, 199__ by and between TWO
MORROCROFT CENTRE, LLC, a North Carolina limited liability company ("Landlord")
and ALY DAAR SOFTWARE CORPORATION, a North Carolina corporation ("Tenant").
STATEMENT OF PURPOSE
Landlord and Tenant have entered into a Lease Agreement dated as of
__________ 1998 and wish to confirm and memorialize certain provisions as set
forth in the Lease including the Commencement Date, the Termination Date, the
Initial Monthly Base Rent and the rentable square footage of the Premises.
NOW, THEREFORE, in consideration of the presents and the mutual
covenants herein contained and contained in the Lease, Landlord and Tenant agree
as follows:
1. Unless otherwise defined herein, all capitalized terms shall
have the same meaning ascribed to them in the Lease.
2. The Commencement Date of the Lease is ___________________.
3. The Termination Date of the Lease is ___________________.
4. The Gross Rentable Area of the Premises is 100,000 square
feet.
5. The Initial Monthly Base Rent based on an Annual Base Rent of
$20.00 per square foot of Gross Rentable Area is One Hundred
Sixty-Six Thousand Six Hundred Sixty Six and 67/100 Dollars
($166,666.67).
6. Tenant hereby confirms the following:
(a) That it has accepted possession of the Premises
pursuant to the terms of the Lease;
(b) That the Shell Building Construction Work and the
Tenant Upfit Work is substantially complete;
(c) That the Lease is in full force and effect;
(d) Except as expressly modified hereby, all terms and
provisions of the Lease are hereby ratified,
republished and revived and shall remain in full
force and effect and binding on the parties hereto;
and
<PAGE> 58
(e) The Lease and this Commencement Agreement contain all
of the terms, covenants, conditions and agreements
between Landlord and Tenant relating to the subject
matter herein. No prior agreements or understandings
pertaining to such matters are valid or of any force
and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Commencement
Agreement to be executed and sealed by their duly authorized officers as of the
date and year first above written.
LANDLORD:
TWO MORROCROFT CENTRE, LLC,
a North Carolina limited liability company
By: ________________________________________
Manager
By: ________________________________________
Manager
By: ________________________________________
Manager
By: ________________________________________
Manager
TENANT:
ALYDAAR SOFTWARE CORPORATION,
a North Carolina corporation
ATTEST:
____________________________ By: ________________________________________
____________Secretary _______ President
[CORPORATE SEAL]
<PAGE> 59
RIDER 2
Form of Indemnity Letter by The Harris Group
Alydaar Software Corporation
2101 Rexford Road
Suite 250 West
Charlotte, North Carolina 28211
Attention: Mr. Robert F. Gruder
Gentlemen:
This letter (the "Indemnity Agreement") constitutes an agreement by The
Harris Group of the Carolinas, Inc. ("The Harris Group") to indemnify Alydaar
Software Corporation, a North Carolina corporation ("Tenant"), its successors
and assigns, with respect to certain matters on the terms and conditions set
forth herein. This Indemnity Agreement is entered into pursuant to the terms of
that certain Lease (the "Lease") of even date by and between Two Morrocroft
Center, LLC, a North Carolina limited liability company ("Landlord") as Landlord
and Tenant as tenant. All capitalized terms used herein and not defined herein
shall have the respective meanings ascribed to such terms in the Lease.
The Harris Group acknowledges that Tenant has required the execution
and delivery of this Indemnity Agreement by The Harris Group as a condition to
entering the Lease and that The Harris Group is executing this Indemnity
Agreement as an inducement to Tenant to execute and deliver the Lease. The
Harris Group further acknowledges that the Lease will inure to the economic
benefit of The Harris Group and that The Harris Group will receive a leasing
commission in connection with the execution of the Lease and other
consideration, the receipt and sufficiency of which is hereby acknowledged.
The Harris Group hereby covenants and agrees that, (A) in the event
that the Commencement Date is delayed beyond July 1, 1999 and (B) in the further
event that (i) the Esplanade Rent actually paid by Tenant during the Delay
Period for the Sublet Premises under the Sublease Extension or the Direct Lease,
as applicable, exceeds (ii) the amount of base rent which would have been paid
for the Sublet Premises during the Delay Period if such base rent was based on
an annual rental rate of $20.00 per rentable square foot, then The Harris Group
will, indemnify Tenant in an amount equal to any such excess. The Harris Group
shall pay such amount with respect to any period within 10 days of receipt of
any invoice from Tenant.
If the Esplanade Rent actually paid by Tenant during the Delay Period
for the Sublet Premises under the Sublease Extension or the Direct Lease, as
applicable, does not exceed the amount of base rent which would have been paid
for the Sublet Premises during the Delay Period if such base rent was based on
an annual rental rate of $20.00 per rentable square foot, then The Harris Group
will not be required to indemnify Tenant hereunder.
The term "Esplanade Rent" as used herein shall mean any base rent
(including any holdover rent) actually paid by Tenant under (i) any extension of
its existing sublease with Unisys Corporation (the "Sublease Extension") for
approximately 32,114 rentable square feet of
<PAGE> 60
space in the Esplanade Building, at 2101 Rexford Road, Charlotte, North Carolina
(the "Sublet Premises") provided that The Harris Group has approved any such
extension of the existing sublease or (ii) any direct lease with BCI Property
Company No. 43 as the owner of the Esplanade Building which replaces and
supercedes the existing sublease with Unisys Corporation (the "Direct Lease")
provided that The Harris Group has approved any such Direct Lease. The term
"Esplanade Rent" shall not include any operating cost pass-throughs or other
"additional" rent under such sublease or any payments for utilities, taxes or
insurance. The term "Delay Period" as used herein shall mean the period
beginning on July 1, 1999 and ending on the Commencement Date.
EXAMPLE. By way of example only, if the Commencement Date is delayed
beyond July 1, 1999, the Tenant is paying Esplanade Rent during the Delay Period
under the Sublease Extension or Direct Lease, as applicable, at an annual rate
of $21.000 per rentable square foot and the Delay Period lasts for ten days
until the Commencement Date occurs, then The Harris Group would indemnify Tenant
for the amount by which the actual Esplanade Rent paid by Tenant during the 10
days of the Delay Period exceeded the amount of base rent which would have been
paid by Tenant during the Delay Period if the base rent for the Sublet Premises
had been at an annual rate of $20.00 per rentable square foot. In the foregoing
example, if the Sublet Premises consists of 32,114 rentable square feet and
Tenant was paying Esplanade Rent during the Delay Period at an annual rate of
$21.00 per rentable square foot, then the amount of Esplanade Rent actually paid
by Tenant during the 10 day Delay Period would be $18,476.50 (i.e. (i.e. $21.00
x 32,114= annual base rent of $674,394 at $21.00 per square foot. The Esplanade
Rent actually paid for the Sublet Premises during the 10 day Delay Period at an
annual rate of $21.00 per rentable square foot would therefore be calculated by
dividing the $674,3 94 annual base rent by 365 for a daily base rent of $1847.65
and then multiplying that daily base rent amount by 10 to reach a total of
$18,476.50 as the amount of Esplanade Rent actually paid by Tenant during the 10
day Delay Period). If the Sublet Premises consists of 32,114 rentable square
feet, then, the amount of base rent which would have been paid by Tenant during
the 10 day Delay Period if the base rent for the Sublet Premises had been at an
annual rate of $20.00 per rentable square foot would be $17,596.70 (i.e. $20.00
x 32,114= annual base rent of $642,280 at $20.00 per square foot. The base rent,
that would have been payable for the Sublet Premises during the 10 day Delay
Period at an annual rate of $20.00 per rentable square foot would therefore be
calculated by dividing the $642,280 annual base rent by 365 for a daily base
rent of $1759.67 and then multiplying that daily base rent amount by 10 to reach
a total of $17,596.70 as the amount of base rent that would have been paid by
Tenant during the 10 day Delay Period if the base rent was an annual rate of
$20.00 per rentable square foot). Again, using the foregoing numbers for
illustrative purposes only, since in the foregoing example the actual Esplanade
Rent of $18,476. 50 paid by Tenant during the Delay Period exceeds the base rent
of $17,596.70 that would have been paid by Tenant during the 10 day Delay Period
if the base rent was an annual rate of $20.00 per rentable square foot, then The
Harris Group would indemnify Tenant for the amount of $879.80 (i.e. $18,476.50 -
$17,596.70 = $879,80) by which the Esplanade Rent actually paid by Tenant during
the Delay Period in the foregoing example exceeded the amount which would have
been paid if the base rent had been at an annual rate of $20.00 per square foot.
Notwithstanding the foregoing, in the event that the Lease is
terminated by either party thereto in accordance with its terms prior to July 1,
1999, other than due to a default by
<PAGE> 61
Landlord under the Lease, then this Indemnity Agreement shall be null and void
ab initio and neither party shall have any rights or obligations hereunder. In
the event that the Lease is terminated by either party thereto in accordance
with its terms after July 1, 1999, and prior to the Commencement Date other than
due to a default by Landlord under the Lease, then this Indemnity Agreement
shall terminate as of the date of the termination of the Lease and The Harris
Group's obligation to indemnify Tenant shall apply only to the portion of the
Delay Period, if any, occurring prior to the termination of the Lease.
This Indemnity Agreement shall be governed by the laws of the State of
North Carolina and shall be binding upon and inure to the benefit of The Harris
Group and Tenant, their respective successors and assigns.
The Harris Group of Carolinas, Inc.
By:___________________________________
Name:_________________________________
Title:___________ President
Attest:
___________________________
__________________Secretary
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-56919 and 333-50825) of our report dated February 23, 1999
(except for Note 15b, as to which the date is March 5, 1999), with respect to
the consolidated financial statements of Alydaar Software Corporation, included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
April 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,962,570
<SECURITIES> 0
<RECEIVABLES> 5,331,116
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,511,343
<PP&E> 4,309,615
<DEPRECIATION> 1,748,362
<TOTAL-ASSETS> 23,471,394
<CURRENT-LIABILITIES> 5,261,244
<BONDS> 121,327
0
0
<COMMON> 17,506
<OTHER-SE> 18,071,317
<TOTAL-LIABILITY-AND-EQUITY> 23,471,394
<SALES> 27,790,621
<TOTAL-REVENUES> 27,790,621
<CGS> 0
<TOTAL-COSTS> 19,239,268
<OTHER-EXPENSES> 3,276,326
<LOSS-PROVISION> 402,804
<INTEREST-EXPENSE> 255,219
<INCOME-PRETAX> 197,540
<INCOME-TAX> (1,200,000)
<INCOME-CONTINUING> 1,397,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,397,540
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
