<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998
REGISTRATION NO. 333-63993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JAVELIN SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3571 52-1945748
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
17891 CARTWRIGHT ROAD
IRVINE, CA 92614
(949) 440-8000
(Address and Telephone Number of Principal Executive Offices)
------------------------
RICHARD P. STACK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JAVELIN SYSTEMS, INC.
17891 CARTWRIGHT ROAD
IRVINE, CA 92614
(949) 440-8000
(Name, Address, Telephone Number of Agent for Service)
------------------------
COPIES TO:
JEREMY D. GLASER, ESQ. CAMERON JAY RAINS, ESQ.
MICHAEL A. NEWMAN, ESQ. SCOTT M. STANTON, ESQ.
ADAM C. LENAIN, ESQ. CHRISTIAN WAAGE, ESQ.
COOLEY GODWARD LLP GRAY CARY WARE & FREIDENRICH LLP
4365 EXECUTIVE DRIVE, SUITE 1100 4365 EXECUTIVE DRIVE, SUITE 1600
SAN DIEGO, CA 92121 SAN DIEGO, CA 92121
(619) 550-6000 (619) 677-1400
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 7, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,250,000 SHARES
[LOGO]
COMMON STOCK
All 1,250,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), offered hereby are being sold by Javelin Systems, Inc. ("Javelin" or
the "Company"). The Company's Common Stock is quoted on the Nasdaq SmallCap
Market under the symbol "JVLN." On October 5, 1998, the last reported sale price
of the Common Stock was $8.625 per share. See "Price Range of Common Stock." The
Company has applied to have the Common Stock approved for quotation, subject to
official notice of issuance, on the Nasdaq National Market under the symbol
"JVLN."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------------
Per Share......................................... $ $ $
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Total(3).......................................... $ $ $
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act").
(2) Before deducting expenses payable by the Company estimated at $425,000.
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted to the Underwriters a 45-day option to purchase up to 187,500
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public and
Underwriting Discounts and Commissions will be $ and $ ,
respectively, and the Selling Stockholders will receive proceeds of
$ . The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders if the Underwriters' over-allotment option
is exercised. See "Selling Stockholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to reject any orders in whole or in
part. It is expected that delivery of share certificates will be made against
payment therefor at the offices of Van Kasper & Company in San Francisco,
California, or through the facilities of Depository Trust Company, on or about
, 1998.
VAN KASPER & COMPANY
L. H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
MERIDIAN CAPITAL GROUP, INC.
, 1998
<PAGE>
[LOGO]
[PHOTOGRAPHS OF PRODUCTS IN USE IN RETAIL AND RESTAURANT SETTINGS.]
Javelin Systems designs, manufactures and markets open systems touchscreen
point-of-sale ("POS") computers and provides system integration services
primarily for the food service and retail industries.
Javelin's POS computers assist restaurants, arenas and pubs to better serve
their customers and capture and analyze information to manage their businesses.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Javelin, Javelin-Wedge 5, Javelin-Wedge P, Javelin-LC, Javelin-LCP,
Javelin-LP, Javelin-HHT 40, CCI and Posnet are trademarks of the Company. All
other trademarks or service marks used in this Prospectus are the property of
their respective holders.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF (I) THE UNDERWRITERS' OVER-ALLOTMENT OPTION,
(II) WARRANTS OUTSTANDING AS OF THE DATE OF THIS PROSPECTUS, OR (III) OPTIONS
GRANTED OR RESERVED UNDER THE COMPANY'S STOCK OPTION PLANS.
THE COMPANY
Javelin Systems, Inc. ("Javelin" or the "Company") designs, manufactures and
markets open system touchscreen point-of-sale ("POS") computers and provides POS
systems integration services primarily for the food service and retail
industries. POS systems incorporating the Company's products enable restaurants
and retailers to capture, analyze, disseminate and use information throughout an
enterprise from the point of sale to the in-store "back office" to the
enterprise's headquarters. These POS systems provide transaction processing,
in-store operating controls, and timely information used to manage inventory and
costs, analyze sales data and customize products and services. The Company's
product family of network-ready computers integrates substantially all of the
functionality of standard desktop personal computers into durable, small
footprint touchscreen workstations that run on industry standard open operating
systems.
Javelin also has a global POS systems integration business that assists
large multi-site corporate customers in identifying the optimal multi-vendor
open systems solution for a customer's particular business. The Company manages
the full deployment and ongoing support of the POS solution. The Company has
extensive experience resolving the integration, implementation and management
issues faced by food service providers and retailers and substantial knowledge
of advanced information technologies, POS systems and the numerous software
applications developed by information system and software vendors for these
markets. The ability to provide its customers with systems integration and POS
system support service allows Javelin to capture a greater percentage of a
customer's expenditures on any given POS system installation, provides Javelin
with a direct marketing channel to end user customers for the sale of its POS
hardware products and allows it to build a base of recurring help desk,
maintenance and field service revenues. In addition, by providing these
post-installation services, Javelin has the opportunity to keep its customers
abreast of applications software, business enterprise integration application,
networking and hardware developments and make recommended changes and upgrades
to systems when appropriate.
The Company estimates there are more than 450,000 restaurants and more than
1.6 million retail stores in the United States alone. These restaurants and
retail stores are increasingly part of multi-location chains that need to
capture, analyze and disseminate information throughout their entire enterprise.
Food service providers and retailers require robust, integrated POS systems and
services that can reliably manage large numbers of individual transactions.
Additionally, through sales and service offices recently opened in England,
Australia and Singapore, along with the pending acquisitions of European systems
integration companies, Javelin is serving international markets. Javelin
believes that Western Europe presents a particularly attractive market for its
products and services.
The Company utilizes its management team's and product development staff's
experience and in-depth knowledge of computer technology to engineer products
that are relatively low priced without sacrificing features and standards which
are required by customers. Because of this experience, the Company believes it
is able to introduce products with less lead time than that required by its
competitors while competitively pricing its products. Key product requirements
of the Company's customers include touchscreens, a small footprint, durability,
networking capability, reliability and service.
Javelin distributes its products through OEMs, VARs, and through direct
sales. The Company's OEM and VAR relationships can play a critical role in
getting the Company's products to market through their
3
<PAGE>
direct knowledge of new business opportunities and changing customer
requirements. End users of the Company's hardware products include Blimpies
International, Greyhound Lines Inc., Madison Square Garden, Universal Studios,
Chevron Corporation and others. Service customers include ARAMARK Corp.,
Popeye's Inc., Church's Fried Chicken Inc., Seattle's Best Coffee,
Baskin-Robbins USA Co. and Dunkin' Donuts Incorporated.
The Company's objective is to become a leading developer of POS hardware
systems and to be the premier POS systems integrator for multi-site chain
operators in the food service and retail industries. Principal elements of the
Company's strategy include pursuing large customers directly and through the
Company's OEM relationships, introducing new products on a timely basis,
focusing on international business opportunities, minimizing production costs
and growing the base of recurring service revenues.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................................ 1,250,000 shares
Common Stock to be outstanding after the Offering............... 5,365,025 shares(1)
Use of proceeds................................................. Repayment of debt, potential
acquisitions, including RGB/Trinet
Limited and Jade Communications
Limited, product development,
working capital and other general
corporate purposes.
Nasdaq symbol................................................... JVLN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR ENDED
JUNE 30, JUNE 30,
------------ -------------------------
1996 1997 1998
------------ ---------- -----------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product sales....................... $ 1,463,600 $7,014,600 $27,132,400
Service............................. -- -- 2,513,700
------------ ---------- -----------
Total revenues.................... 1,463,600 7,014,600 29,646,100
Gross profit.......................... 359,400 1,515,100 7,910,100
Research and development expenses..... 46,700 396,400 874,000
Selling and marketing expenses........ 83,500 390,800 1,179,900
General and administrative expenses... 244,700 859,900 4,195,500
Income (loss) from operations......... (15,500) (132,000) 1,660,700
Net income (loss)..................... $ (54,300) $ (826,900)(3) $ 1,014,100
Net income (loss) per share(2):
Basic............................... $ (0.03) $ (0.30)(3) $ 0.28
Diluted............................. $ (0.03) $ (0.30)(3) $ 0.27
Shares used in computing earnings
(loss) per share(2):
Basic............................... 2,086,260 2,782,535 3,622,604
Diluted............................. 2,086,260 2,782,535 3,750,611
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
ACTUAL AS ADJUSTED(4)
------------ --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ -- $ 6,431,600
Working capital................................................................... 4,080,700 11,855,300
Total assets...................................................................... 22,531,300 28,962,900
Short-term debt................................................................... 1,643,000 300,000
Long-term debt, net of current portion............................................ 1,200,000 1,200,000
Total stockholders' equity........................................................ 11,398,900 20,973,500
</TABLE>
4
<PAGE>
(1) Excludes: (i) 833,700 shares of Common Stock reserved for issuance upon
exercise of options outstanding at a weighted average exercise price of
$5.16 per share as of August 15, 1998; (ii) 154,330 shares of Common Stock
issuable upon exercise of warrants outstanding at a weighted average
exercise price of $9.27 per share as of August 15, 1998; and (iii) an
aggregate of 519,000 shares of Common Stock reserved for future issuance
under the Company's 1997 Equity Incentive Plan (the "1997 Plan"). See
"Management--Stock Option Plans," and "Description of Capital Stock."
(2) See Note 2 of Notes to Javelin Systems, Inc. Consolidated Financial
Statements (the "Javelin Consolidated Financial Statements") for a
description of the computation of the net income (loss) per share and the
number of shares used in the per share calculations.
(3) Net loss for the year ended June 30, 1997 includes interest expense of
approximately $636,100 related to warrants issued in connection with certain
promissory notes. This non-recurring interest expense is attributable to the
imputation of interest based upon the fair value of the warrants and did not
represent a cash expense to the Company.
(4) As adjusted to give effect to the sale of 1,250,000 shares of Common Stock
to be sold in the Offering by the Company hereby at an assumed public
offering price of $8.625 per share after deducting estimated underwriting
discounts and commissions and offering expenses and the application of the
net proceeds from the sale of such shares. Other than a reduction in cash
and cash equivalents and working capital of $1.8 million, as adjusted
information does not give effect to the pending acquisitions of RGB/ Trinet
Limited or Jade Communications Limited. See "Use of Proceeds" and
"Capitalization."
------------------------------
The following table presents certain operating and other data for each of
the four quarters in the fiscal year ended June 30, 1998. The information for
each of the quarterly periods is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that management considers
necessary to fairly present such information. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results of
Operations."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product sales........................................ $ 2,950,100 $ 4,452,200 $ 9,357,400 $ 10,372,700
Service.............................................. -- -- 1,286,000 1,227,700
------------- ------------ ------------- -------------
Total revenues..................................... 2,950,100 4,452,200 10,643,400 11,600,400
Gross profit........................................... 681,300 1,024,700 2,887,600 3,316,500
Research and development expenses...................... 137,200 169,500 250,100 317,200
Selling and marketing expenses......................... 147,500 261,300 438,100 333,000
General and administrative expenses.................... 374,700 448,200 1,581,700 1,791,000
Income from operations................................. 21,900 145,700 617,700 875,300
Net income............................................. $ 21,100 $ 92,600 $ 353,400 $ 547,000
Units shipped.......................................... 1,638 2,351 2,535 4,083
</TABLE>
------------------------
The Company was incorporated in the State of Delaware on September 19, 1995.
The Company's executive offices are located at 17891 Cartwright Road, Irvine,
California, 92614, and its telephone number is (949) 440-8000. The Company's
World Wide Web address is http://www.jvln.com. Information contained in such
World Wide Web site shall not be deemed to be part of this Prospectus.
5
<PAGE>
RECENT ACQUISITIONS
Since its inception, Javelin has designed, manufactured and marketed open
system touchscreen POS computers. Through acquisitions of POS systems service
providers, Javelin intends to also become a global provider of POS systems
integration and support services. The ability to provide its customers with
systems integration and POS system support service allows Javelin to capture a
greater percentage of a customer's expenditures on any given POS system
installation, provides Javelin with a direct marketing channel to its end user
customers for the sale of its POS hardware products and allows it to build a
base of recurring help desk, maintenance and field service revenues. In
addition, by providing these post-installation services, Javelin has the
opportunity to keep its customers abreast of applications software, business
enterprise integration application, networking and hardware developments and
make recommended changes and upgrades to systems when appropriate.
In December 1997, Javelin acquired CCI Group, Inc. ("CCI") and POSNET
Computers, Inc. ("Posnet"), two POS systems integrators. CCI and Posnet have
been combined and now collectively operate as CCI. CCI enables the Company to
offer turn-key systems integration services, including system design, staging,
training, deployment and after-market product support and maintenance throughout
the United States. CCI has also provided Javelin with a direct marketing channel
to reach end users.
With its recent and planned acquisitions, Javelin intends to replicate this
marketing, distribution and service revenue strategy globally. In June 1998,
Javelin acquired Aspact IT Services ("Aspact"), a consulting and systems
integration business based in Singapore. In October 1998, Javelin entered into
definitive agreements to acquire each of RGB/Trinet Limited ("RGB/Trinet") and
Jade Communications Limited ("Jade"), both based in the United Kingdom.
RGB/Trinet provides networking systems integration services while Jade provides
POS systems integration services similar to CCI. Through these acquisitions,
Javelin will have the ability to provide POS systems hardware, systems
integration and support services throughout what it believes to be a
fundamentally untapped POS systems market in Western Europe.
Pursuant to the terms of the definitive acquisition agreements, in
consideration for all of the outstanding equity interests of RGB/Trinet and
Jade, Javelin will pay an aggregate of approximately $1.8 million in cash and
issue an aggregate of 25,000 shares of Javelin Common Stock, plus shares of
Javelin Common Stock valued at approximately $1.5 million based on the average
closing price of Javelin Common Stock over the ten (10) days immediately
preceding to the business day immediately prior to the closing date of the
acquisitions of RGB/Trinet and Jade. Javelin may issue additional shares valued
at an aggregate of approximately $6.6 million pursuant to earnout provisions
contained in the definitive agreements. Each of the acquisitions is conditioned
upon Javelin having secured sufficient funds to finance the cash portion as
previously described and, at Javelin's option, on the price per share of Javelin
Common Stock being not less than $7.50 on the business day preceding the closing
date. The agreements are each terminable if the acquisitions are not completed
by November 15, 1998.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; RECENT OPERATING PROFITABILITY
The Company was incorporated in September 1995 and has a limited operating
history upon which to base an evaluation of its business and prospects. Although
the Company had net income of approximately $1.0 million for its fiscal year
ended June 30, 1998, the Company has experienced operating losses in the past.
The Company's operating results for future periods are subject to all of the
risks and uncertainties inherent in the development and maturation of the
business. The Company anticipates that in the future it will make significant
investments in its operations, particularly to support new product development
and increased sales activities. The Company intends to make investments on an
ongoing basis, primarily from cash generated from operations, and to the extent
necessary, funds available from the Company's line of credit and from this
Offering, as the Company develops and introduces new products and services and
expands into new markets. There can be no assurance that recent revenue growth
is indicative of future sales growth, if any. The Company has only recently
achieved profitability on both a quarterly and annual basis, and there can be no
assurance that the Company will be able to sustain profitability in any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANAGEMENT OF GROWTH
The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a strain on its administrative, engineering
and operating resources and increased demands on its systems and controls. The
Company anticipates that continued growth will require it to recruit and hire a
number of additional management personnel, particularly in operational
management. There can be no assurance that the Company will be successful at
hiring or retaining these personnel. The Company's ability to manage its growth
successfully will also require the Company to continue to expand and improve its
operational, management and financial systems and controls. If the Company's
management is unable to manage growth effectively, the Company's business,
financial condition and results of operations may be materially and adversely
affected.
In addition, the Company plans to increase its operating expenses in order
to expand its product line, increase its sales and marketing operations,
increase the volume of products manufactured, develop new distribution channels,
broaden its customer support capabilities, grow its international sales force,
and develop and fully integrate its international operations. There can be no
assurance that this internal expansion will be successfully implemented, that
the cost of this expansion will not exceed the revenues generated, or that the
Company's sales and marketing organization will be able to successfully compete
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors, both
domestically and internationally. Moreover, the foregoing expenses may be
incurred prior to any potential positive impact on revenues. If these expenses
are not subsequently followed by sufficient increased revenues, the Company's
operating results and financial condition would be materially adversely
affected. If the Company is unable to effectively execute its expansion, the
Company's results of operations and financial condition could be materially
adversely affected.
7
<PAGE>
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced in the past and may in the future experience
significant fluctuations in its operating results. Such fluctuations may be
caused by many factors, including, but not limited to: the size and timing of
individual orders, some of which may be of significant size; seasonality of
revenues; employee hiring and retention, particularly with respect to sales and
consulting personnel; lengthy sales and implementation cycles; reduction in
demand for existing products and services and shortening of product life cycles;
the timing of the introduction of products, product enhancements or services by
the Company or its competitors; competition and pricing in the POS systems
industry; market acceptance of new products; service personnel utilization
rates; the ability of the Company to expand its international and domestic
sales, as well as the mix of such sales; foreign currency exchange rates;
changes in the mix of products and services sold; general health of the
restaurant industry, particularly the quick service restaurant ("QSR") segment;
the ability of the Company to generate service agreements; product quality
problems; the ability of the Company to control costs; the Company's success in
establishing and expanding its direct and indirect distribution channels; the
mix of distribution channels through which the Company's products are sold; and
general economic conditions. The Company's products are typically shipped
shortly after orders are received and, consequently, order backlog at the
beginning of any quarter typically represents only a small portion of that
quarter's expected revenues. As a result, product revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter, and
revenues for any future quarter are not predictable with any significant degree
of accuracy. Product revenues are also difficult to forecast because the market
for the Company's products is rapidly evolving and the Company's sales and
implementation cycles, from initial evaluation to multiple product purchases and
the provision of support services, vary substantially from customer to customer.
The Company has in the past experienced and expects to continue to experience
quarters or periods with individual product or service orders which are
significantly larger than its typical product or service orders, adding to the
unpredictability of the Company's revenues. The Company's expense levels,
however, are based in significant part on the Company's expectations of future
revenues and therefore are relatively fixed in the near term. In addition, the
Company expects expense levels to increase in the near term as the Company
attempts to expand its operations. Net income may be disproportionately affected
by an unanticipated decline in revenue for a particular quarter because a
relatively small amount of the Company's expenses varies with its revenue in the
near term. Moreover, the POS systems industry is generally dependent on system
roll-outs with fixed time horizons. The Company's operating results,
particularly with respect to its systems integration business, may vary
significantly because of the Company's failure to obtain major projects, the
cancellation or delays in the progress of major projects for any reason and the
Company's failure to timely replace projects that have been completed or are
nearing completion. Any of these factors could cause the Company's results of
operations to fluctuate significantly from period to period, including on a
quarterly basis. The Company may also experience relatively weaker demand for
its products in August, particularly in international markets, and December as a
result of reduced sales activities during those months.
As a result of the above factors, revenues and earnings for any quarter are
subject to significant variation and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Fluctuations in
operating results may also result in volatility in the price of the Company's
Common Stock. Accordingly, it is likely that in some future quarter the
Company's total revenues or operating results will be below the expectations of
public market analysts or investors. In such event, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Common Stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has recently acquired CCI Group, Inc. ("CCI"), POSNET Computers,
Inc. ("Posnet") and Aspact IT Services Ltd. ("Aspact"). Acquisitions involve
numerous risks, including difficulties in the
8
<PAGE>
assimilation of the operations and personnel of the acquired business, the
integration of management information and accounting systems of the acquired
business, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no direct prior experience,
and the potential loss of key employees of the acquired business. In particular,
CCI, Posnet and Aspact have self-contained management information and accounting
systems, and the Company has not yet implemented a management information and
accounting system that fully integrates each acquired entity's system into the
overall enterprise. Further, CCI, Posnet and Aspact are POS systems integrators
and service providers and therefore operate in a market in which the Company has
no direct prior experience. The Company currently intends as part of its
business strategy to continue to pursue additional acquisitions of complementary
businesses. The Company's management will be required to devote substantial time
and attention to the integration of the recently acquired, or any future
acquired, businesses and to any material operational or financial problems
arising as a result of the acquisitions. There can be no assurance that
operational or financial problems will not occur as a result of any acquisition.
Failure to effectively integrate acquired businesses could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company intends to continue to evaluate potential acquisitions of, or
investments in, companies which the Company believes will complement or enhance
its existing business. In October 1998, the Company entered into definitive
agreements to acquire each of RGB/Trinet Limited ("RGB/Trinet") and Jade
Communications Limited ("Jade") both of which are located in England. The
consummation of these acquisitions is subject to a number of conditions,
including Javelin having secured funds necessary to finance the cash portion of
such acquisitions. There can be no assurance that the Company will consummate
such acquisitions, or if consummated, that such acquisitions will ultimately be
beneficial to the Company. The Company may face additional challenges in
integrating such acquisitions if consummated due to RGB/Trinet's and Jade's
potentially large size and overseas location and may need to divert significant
management resources in order to accomplish such integration. The issuance of
shares of the Company's Common Stock to the equity holders of RGB/Trinet and
Jade pursuant to earnout and price protection provisions of the respective
acquisition agreements may result in dilution to holders of the Company's Common
Stock. Future acquisitions by the Company may also result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
amortization expenses related to goodwill and other tangible assets which could
adversely affect the Company's business, results of operations and financial
condition. Except for the letter of intent to acquire RGB/Trinet and Jade, the
Company currently does not have any arrangements or understandings with respect
to any specific future acquisitions. There can be no assurance that the Company
will be able to identify or consummate any acquisition in the future or, if
consummated, that any acquisition will ultimately be beneficial to the Company.
RISKS OF INTERNATIONAL SALES AND INTERNATIONAL OPERATIONS
The Company derived approximately 10% of its total revenues from sales
outside North America, principally in Europe, in the year ended June 30, 1998.
If the Company completes its acquisitions of RGB/ Trinet and Jade, the Company
anticipates that the percentage of revenues attributable to sales in
international markets will increase. The Company believes that its growth and
profitability will require additional expansion of its sales in foreign markets.
The Company has sales or support staff located in Singapore, Australia and
England. The Company's expansion into foreign countries has required and will
continue to require significant management attention and financial resources,
particularly with respect to the expansion of the Company's sales force, the
transferring of a significant portion of the Company's manufacturing operations
to a third-party manufacturer in Singapore, and the Company's operation and
management of its recently acquired service-based subsidiary in Singapore. To
increase international sales in subsequent periods, the Company must establish
additional foreign operations, hire additional personnel and recruit additional
international resellers. To the extent the Company is unable to expand
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international sales in a timely and cost-effective manner, the Company's
business, financial condition and results of operations would be materially
adversely affected.
In addition, there can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products or
services. Although the Company's product sales are currently denominated in U.S.
dollars, the Company's international service contracts are currently denominated
in local currency and, accordingly, gains and losses on the conversion to U.S.
dollars of accounts receivable and accounts payable arising from international
service revenues may contribute to fluctuations in the Company's operating
results. The Company does not currently utilize foreign currency hedging
instruments. There can be no assurance that fluctuations in currency rates will
not materially adversely impact the Company's business, financial condition and
results of operations in the future. Additional risks inherent in the Company's
international business activities, including its relationship with the expected
third-party manufacturer of the Company's products in Singapore, include various
and changing regulatory requirements, costs and risks of relying upon local
subcontractors, increased sales and marketing and research and development
expenses, export restrictions and availability of export licenses, tariffs and
other trade barriers, political and economic instability, difficulties in
staffing and managing foreign operations, longer payment cycles, seasonal
reduction in business activities, potentially adverse tax laws, complex foreign
laws and treaties and the potential for difficulty in accounts receivable
collection. Any of these factors could have a material adverse effect on the
Company's business, financial condition or results of operations. Certain of the
Company's customer purchase agreements are governed by foreign laws, which may
differ significantly from U.S. laws. Therefore, the Company may be limited in
its ability to enforce its rights under such agreements and to collect amounts
owing to the Company should any customer refuse to pay such amounts. In
addition, the Company is subject to the Foreign Corrupt Practices Act (the
"FCPA") which may place the Company at a competitive disadvantage to foreign
companies that are not subject to the FCPA.
To date, the Company has not been negatively affected by the recent turmoil
in Asian markets; however, certain of the Company's customers, suppliers and
third-party manufacturers located in Asian markets may encounter financial
difficulties resulting from foreign currency fluctuations or other economic,
social or political instabilities which could restrict their ability to fulfill
their contractual obligations to the Company. In particular, the Company
operates a consulting and systems integration subsidiary in Singapore and plans
to transfer a significant portion of its manufacturing operations to a
third-party manufacturer in Singapore. There can be no assurance that a decline
in the value of any relevant foreign currency relative to the U.S. dollar or an
economic, social or political change in any relevant country, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
The Company has derived, and believes that it may continue to derive, a
significant portion of its revenues from a limited number of large customers.
For the fiscal year ended June 30, 1998, AFC Enterprises, Inc. accounted for 11%
of the Company's revenues. For the fiscal year ended June 30, 1997, ScanSource,
Inc. and CompUSA Inc. each accounted for 16% of the Company's revenues,
respectively. Most customer product orders are placed within the quarter that
delivery is expected; therefore, projections of future orders may be unreliable.
In addition, the amount of the Company's products or services required by any of
its customers can be adversely affected by a number of factors, including
technological developments and the internal budget cycles of its customers.
Moreover, the volume of work performed for specific customers is likely to vary
from year to year, and a major customer in one year may not purchase the
Company's products or services in a subsequent year. The completion,
cancellation or significant reduction in the scope of a large customer product
or service order, or the failure by the Company to obtain future orders from a
significant customer, could have a material adverse effect on the Company's
business, financial condition and results of operations. As a result of the
Company's focus in specific vertical markets, economic and other conditions that
affect these industries could lead to a reduction in
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capital spending by its target customers, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent, in part, upon the continued services of
certain key executive officers, including Richard P. Stack, the Company's
President and Chief Executive Officer, Robert D. Nichols, the Company's
Executive Vice President and President of CCI Group, Inc., C. Norman Campbell,
the Company's Vice President Engineering, and Horace M. Hertz, the Company's
Chief Financial Officer and Secretary. The Company believes that its future
success depends to a significant degree upon the continued contributions of its
existing key management, sales, marketing, research and development and
manufacturing personnel, many of whom would be difficult to replace. The Company
has entered into employment agreements with Messrs. Stack, Nichols and Campbell,
and the Company carries key-man life insurance on Messrs. Stack and Campbell.
The Company also believes its future success will also depend largely upon its
ability to attract and retain highly-skilled hardware engineers, managerial, and
sales and marketing personnel. Competition for such personnel is intense, and
the Company competes in the market for personnel against numerous companies,
including larger, more established companies with significantly greater
financial resources than the Company. There can be no assurance that the Company
will be successful in attracting and retaining skilled personnel. The loss of
certain key employees or the Company's inability to attract and retain other
qualified employees could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The market for the Company's products and services is highly competitive,
subject to rapid change and sensitive to new product introductions or
enhancements and marketing efforts by industry participants. The Company expects
to continue to experience significant and increasing levels of competition in
the future, in part as open systems architecture in its targeted industries
becomes more common. The principal elements of competition related to the
Company's products include price, product features and performance,
compatibility with open systems, quality and reliability, brand awareness, level
of customer service and quality of display. The POS systems integration industry
is also highly competitive and undergoing continual change. The principal
elements of competition related to the Company's systems integration services
include reputation, scope of services provided, availability of resources and
price. In many of the Company's markets, traditional computer hardware
manufacturing, communications and consulting companies provide the most
significant competition. The Company must also compete with smaller service
providers that have been able to develop strong local or regional customer
bases. Most of the Company's competitors for its products and services, as well
as certain potential competitors, are more established, benefit from greater
name recognition, have significantly greater financial, technological,
production and marketing resources, and have more extensive distribution
networks than the Company.
The Company believes the use of open systems architecture in its targeted
industries is an important competitive element. Several of the Company's
competitors currently also offer open systems and the Company believes that the
number of competitors offering open systems solutions will grow over the next
several years. The Company anticipates that a significant source of future
competition may be from existing competitors in the POS products and services
market that the Company believes are currently attempting to develop POS systems
and support services utilizing open systems architecture. Due to the greater
sales, marketing, product development and financial resources of the Company's
competitors, the Company anticipates that competition from these competitors
will intensify in the future. In order to effectively compete against these
competitors, the Company will need to continue its growth trend and attain
sufficient revenues to have the resources to timely develop new products and
services in response to evolving technology and customer demands and to sell
products and services through a broad distribution channel in competition with
these other existing and potential competitors. No assurance can be given that
the Company will be able to grow sufficiently to enable it to compete
effectively in this marketplace.
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The Company's competitors include a substantial number of large
well-established companies including International Business Machines (IBM),
MICROS Systems, Inc., Par Technology Corporation, Radiant Systems, Inc., NCR
Corp., Panasonic Communications and Systems Co., Fujitsu, Ltd. and ICL Retail
Systems, each of which also offers open systems architecture products and
services related thereto. There can be no assurance that the Company will be
able to compete effectively or that these existing substantial competitors, or
new competitors, will not develop competitive products and services with
favorable pricing. Moreover, the Company has little or no proprietary barriers
to entry that could keep its competitors from developing similar products or
services and technology or selling competing products or services in the
Company's markets.
Increased competition from manufacturers or distributors of products similar
to or competitive with the Company's products, or from service providers that
provide services similar to the Company's services, could result in price
reductions, reduced margins and loss of market share or could render the
Company's technology obsolete, all of which could have a material adverse effect
on the Company's results of operations and financial condition. There can be no
assurance that the Company will be able to successfully compete in this
marketplace or develop sufficient new products and services to remain
competitive, and any failure to do so could have a material adverse effect on
its results of operations and financial condition.
DISTRIBUTION RISKS
The Company presently markets its products primarily through OEMs, VARs and
direct sales to end-users, and intends to continue to utilize these distribution
channels in the future. Moreover, as part of the Company's strategy to increase
international sales, the Company will need to more fully develop similar
distribution channels in international markets. The Company also anticipates
that its services business will increase in the future, resulting in a greater
emphasis on marketing and distributing directly to end users. As the Company
increasingly relies on direct sales to end users, the Company anticipates
competing to a certain extent with its OEMs and VARs. This competition may harm
the Company's relationship with certain of its OEMs and VARs, potentially
resulting in the termination of some relationships with the Company. Failure by
the Company to expand its distribution channels, develop its international
distribution channels or manage any potential channel conflicts could have a
material adverse effect on the Company's growth. Moreover, any factors, such as
general adverse economic conditions, high inventory levels, financial condition,
marketing considerations or governmental regulations and restrictions, that
affect the ability of the Company's resellers to sell the Company's products
will adversely affect the Company's sales and could have a material adverse
impact on the Company's financial condition and results of operations.
There can be no assurance that the Company will be able to attract resellers
or OEMs that will be able to market the Company's products effectively and will
be qualified to provide timely and cost-effective customer support and service
or that the Company will be able to manage conflicts among its resellers and/ or
OEMs. In addition, the Company's agreements with resellers typically do not
restrict resellers from distributing competing products, and in most cases may
be terminated by either party without cause. The inability to recruit, manage or
retain important resellers or OEMs, or their inability to penetrate their
respective market segments, could materially adversely affect the Company's
financial condition and results of operations.
The Company's future success will also depend in part upon the ability of
the Company to attract, integrate, train, motivate and retain sales and
technical support personnel. The Company intends to rely more heavily in the
future on direct sales to end users, and there can be no assurance that the
Company's efforts to expand its direct sales force will be successful or that
the cost of these efforts will not exceed the revenue generated. In addition,
the Company expects to experience a significant time lag between the date sales
personnel are hired and the date sales personnel become fully productive. The
Company's inability to manage its sales force expansion effectively could have a
material adverse effect on the Company's
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business, financial condition and results of operations. Competition for sales
and support personnel is intense, and the Company competes in the market for
sales personnel against numerous companies, including larger, more established
companies with significantly greater financial resources than the Company. There
also can be no assurance that the Company will be successful in attracting and
retaining sales personnel, and the loss of certain sales personnel or the
Company's inability to attract and retain other qualified sales personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK OF PRODUCT DEFECTS; PRODUCT AND OTHER LIABILITY.
Computer products and systems as complex as those sold by the Company often
contain undetected errors or performance problems, particularly during new and
enhanced product launches. Despite product testing prior to introduction, the
Company's products have in the past, on occasion, contained errors that were
discovered after commercial introduction. Errors or performance problems may
also be discovered in the future. In addition, the Company's computer products
have a warranty that covers defective material and workmanship during the
twelve-month warranty period commencing on the date of delivery of the products.
Any future defects discovered after shipment of the Company's products could
result in loss of sales, delays in or elimination of market acceptance, damage
to its brand or to the Company's reputation, or product returns and warranty
costs, particularly in the QSR market where certain product defects could cause
a restaurant's POS systems and cash registers to be inoperable for periods of
time. Any loss of sales, delays in market acceptance or product returns and
warranty costs that result from defects discovered after shipment could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company attempts to make adequate allowance in its
new product release schedule for testing of product performance. Because of the
complexity of the Company's products, however, the release of new products by
the Company may be postponed should test results indicate the need for redesign
and retesting, or should the Company elect to add product enhancements in
response to customer feedback. In addition, third-party products, upon which the
Company's products are dependent, may contain defects which could reduce or
undermine entirely the performance of the Company's products.
In addition, although the Company's sales agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims, there can be no assurance that these
limitations of liability would be enforceable or would otherwise protect the
Company from liability for damages to a customer resulting from a defect in one
of the Company's products. Although the Company maintains product liability
insurance covering certain damages arising from implementation and use of the
Company's products, there can be no assurance that this insurance would cover or
be sufficient to cover any claims sought against the Company. Any product
liability or other claims against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON THIRD-PARTY MANUFACTURERS AND SUPPLIERS
Although the Company has capacity to manufacture limited volumes of its
products, the Company currently relies upon, and intends in the future to rely
more heavily upon, third-party manufacturers for the manufacture, assembly and
subassembly of its products. In particular, the Company intends to transfer a
significant portion of its manufacturing operations to a third-party
manufacturer in Singapore. Any termination of, or significant disruption in, the
Company's relationship with third-party manufacturers of its products may
prevent the Company from filling customer orders in a timely manner, as the
Company generally does not maintain large inventories of its products or
components. The Company has occasionally experienced and may in the future
experience delays in delivery of products and delivery of products of inferior
quality from some of its third-party manufacturers. Although alternate
manufacturers are available to produce the Company's products, the number of
manufacturers of some products is limited, and qualifying a replacement
manufacturer could take several months. In addition, the Company's use of third-
party manufacturers reduces direct control over product quality, manufacturing
timing, yields and costs
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since the Company must rely on the third-party manufacturers' ability to
identify the Company's requirements for products and components, the
manufacturers' general competence and ability to progress along the learning
curve relating to the manufacture of the Company's products, and the
manufacturers' schedules and capacity. Disruption of the manufacture of the
Company's products or failure of a third-party manufacturer to remain
competitive in functionality or price could delay or interrupt the Company's
ability to manufacture or deliver its products to customers on a timely basis
and would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, although arrangements with the
Company's manufacturers may contain provisions for warranty obligations on the
part of the third-party manufacturers, the Company remains primarily responsible
to its customers for warranty obligations.
The Company also depends upon third-party suppliers to deliver components
that are free from defects, competitive in functionality and cost and in
compliance with the Company's specifications and delivery schedules. Disruption
in supply, a significant increase in the cost of one or more components or
failure of a third-party supplier to comply with any of the Company's
procurement needs could delay or interrupt the Company's ability to manufacture
or deliver its products to customers on a timely basis and would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, any factors, such as general adverse economic conditions,
financial condition or government regulations and restrictions, that affect the
Company's third-party manufacturers or suppliers could have a material adverse
impact on the Company's business, financial condition and results of operations.
RISKS OF EXPANSION IN CERTAIN MARKET SECTORS
Although the Company has historically sold most of its products and services
to the food service industry, the Company is increasingly focusing on selling
its products and services to retailers and the industrial market. To date, the
Company has only recognized a limited amount of revenue in these markets. There
can be no assurance that the Company's products and services will gain
acceptance in or meet these sectors' expectations and needs. In addition, the
Company may attempt to penetrate other markets. The inability of the Company,
for any reason, to successfully sell its products and services into these
markets could materially adversely affect the Company's growth.
EVOLVING TECHNOLOGY AND MARKET
The POS computer industry is characterized by evolving technology and
industry standards. The Company's touchscreen computers presently consist of the
Javelin-Wedge 5, the Javelin-Wedge P, the Javelin-LC and the Javelin-LCP, which
are sold in various configurations to meet the needs of the Company's customers.
The Company is in the process of developing additional touchscreen computers and
intends to introduce new products during the fiscal year ending June 30, 1999,
although no assurance can be given that the Company will be successful in
developing or introducing any new products. The Company's success will depend,
in part, on its ability to maintain and enhance its existing products and
broaden its product offerings by developing and introducing new products that
keep pace with technological developments in a cost effective manner, respond to
evolving customer preferences and requirements and achieve market acceptance.
Lack of market acceptance for the Company's existing or new products, the
Company's failure to introduce new products in a timely or cost-effective manner
or the Company's failure to achieve a technological advantage over its
competition while also remaining price competitive, could materially adversely
affect the Company's results of operations and financial condition. There can be
no assurance that the Company will be successful in its product development
efforts. In addition, there can be no assurance that the Company's products,
even if successfully developed, will achieve timely market acceptance. Moreover,
the introduction of products embodying new technology and the emergence of new
industry standards could render the Company's existing products obsolete and
unmarketable.
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The Company's future success will depend on its ability to continue to
develop and manufacture new competitive products and to enhance its existing
products, both of which will require continued investment in engineering and
product development. The success of product enhancements and new products
depends on a variety of factors, including product selection and specification,
timely and efficient completion of product design, cost-effective implementation
of the manufacturing and assembly processes and effective sales and marketing
efforts. There can be no assurance that the Company will be able to successfully
manage all of the diverse aspects of successful new product development in order
to develop and maintain competitive products.
LACK OF PATENT PROTECTION
The Company holds no patents and believes that its competitive position is
not materially dependent upon patent protection. The Company believes that most
of the technology used in the design and manufacture of most of the Company's
products is generally known and available to others. Consequently, there can be
no assurances that others will not develop, market and sell products
substantially equivalent to the Company's products, or utilize technologies
similar to those used by the Company. The Company is aware of at least one
competitor that has attempted to copy the Company's products in the past, and
there can be no assurance that similar attempts will not be made in the future.
Although the Company believes that its products do not infringe on any third
party's patents, there can be no assurance that the Company will not become
involved in litigation involving patents or proprietary rights. Patent and
proprietary rights litigation entails substantial legal and other costs, and
there can be no assurance that the Company will have the necessary financial
resources to defend or prosecute its rights in connection with any litigation.
Responding to, defending or bringing claims related to the Company's rights to
its intellectual property may require the Company's management to redirect its
resources to address these claims, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this Offering, the Company's principal stockholders,
executive officers, directors and affiliated individuals and entities together
will beneficially own approximately 41.4% of the outstanding shares of Common
Stock (38.3% if the Underwriters' over-allotment option is exercised in full).
As a result, these stockholders, acting together, will be able to influence
significantly and possibly control most matters requiring approval by the
stockholders of the Company, including approvals of amendments to the Company's
Certificate of Incorporation, mergers, sales of all or substantially all of the
assets of the Company, going private transactions and other fundamental
transactions. In addition, the Company's Certificate of Incorporation does not
provide for cumulative voting with respect to the election of directors.
Consequently, the present directors and executive officers of the Company,
together with the Company's principal stockholders, may be able to control the
election of the members of the Board of Directors of the Company. Such a
concentration of ownership could have an adverse effect on the price of the
Common Stock, and may have the effect of delaying or preventing a change in
control of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
FUTURE CAPITAL REQUIREMENTS
The Company has expended and will continue to expend substantial funds on
expansion of its sales and marketing efforts, expansion of its services
business, potential acquisitions and product development. The Company expects
that the net proceeds of this Offering, together with current sources of
financing available to the Company, will be sufficient to fund the Company's
operations for the next eighteen months. Thereafter, the Company may require
additional funds to finance its operations. The precise amount and timing of the
Company's funding needs cannot be determined at this time, and will depend upon
a number of factors, including the market demand for the Company's products and
services, the progress of the Company's product development efforts, and the
Company's management of its cash,
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accounts payable, inventory and other working capital items. There can be no
assurance that, if required by the Company in the future, funds will be
available on terms satisfactory to the Company, if at all. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of the existing stockholders of the Company will be
reduced, the existing stockholders may experience additional dilution and such
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. Additionally, any debt financing that may
be available to the Company may include restrictive covenants on the Company.
Any inability to obtain needed funding on satisfactory terms may require the
Company to reduce planned capital expenditures, to scale back its manufacturing
or other operations or to enter into financing arrangements on terms which it
would not otherwise accept, and could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON INDEPENDENT SOFTWARE PROVIDERS
The Company produces PC-based open system hardware for the food service and
retail industries; however, the Company does not develop software. Consequently,
the Company is dependent upon third party software providers to develop the POS
application software that operates on the Company's hardware platform. As in
other sectors of the computer industry, hardware sales can often be driven by
advances in software technology. Accordingly, if software providers do not, or
are unable to, continue to provide state-of-the-art POS application software
that runs on the Company's hardware, the Company's financial condition and
results of operations could be materially adversely affected.
IMPACT OF YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
is reviewing both its information technology and its non-information technology
systems to determine whether they are year 2000 compliant, and to date the
Company has not identified any material systems which are not year 2000
compliant. The Company has not made any material expenditure to address the year
2000 problem and at present does not anticipate that it will be required to make
any such material expenditure in the future.
The Company has initiated formal communications with all significant
suppliers and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate the year 2000 problem.
Although the Company has received verbal assurances of year 2000 compliance from
certain of such third parties, the Company has not yet received written
assurances of year 2000 compliance from the third parties with whom it has
relationships. The Company believes its operations will not be significantly
disrupted even if third parties with whom the Company has relationships are not
year 2000 compliant. In the event that the Company's suppliers are unable to
provide sufficient quantities of materials or goods to the Company as a result
of their failure to be year 2000 compliant, the Company believes that it can
obtain adequate supplies of materials and goods at comparable prices from other
sources. In the event that the Company's OEMs and VARs are adversely affected by
any failure to become year 2000 compliant and are therefore unable to purchase
anticipated quantities of the Company's products on a timely basis, the Company
may seek to replace such OEMs and VARs. Nevertheless, the Company believes that
any year 2000 compliance problems of its suppliers, OEMs or VARs could cause the
Company's results of operations to fluctuate on a period to period basis.
Uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance, and the Company intends to continue to make efforts to
ensure that third parties with whom it has relationships are year 2000
compliant. Any year 2000 compliance problem of either the Company or third
parties with whom the
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Company has relationships could materially adversely affect the Company's
business, financial condition or results of operations.
The year 2000 problem could also have an effect on the Company's revenues.
Demand for the Company's products and services may decline after January 1, 2000
as the Company may not be able to incorporate its products and services into a
customer's year 2000 driven POS retrofit. Similarly, many companies may spend
substantial resources to prevent or minimize problems associated with the year
2000 problem and therefore may choose not to, or not have the budget capacity
to, upgrade their current POS systems for some period of time. Any lessening of
demand for the Company's products and services could have a material adverse
effect on the Company's business, financial condition and results of operations.
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS
The Company intends to use approximately $3.2 million of the net proceeds
from this Offering for the retirement of existing indebtedness and $1.8 million
of the net proceeds from this Offering for the pending acquisitions of
RGB/Trinet and Jade, with the remainder being used principally for working
capital and general corporate purposes, including product development and
potential acquisitions. The Company's management and Board of Directors have
broad discretion with respect to the application of the proceeds other than the
repayment of indebtedness, and the amounts actually expended by the Company for
working capital purposes may vary significantly depending on a number of
factors, including the amount of cash, if any, generated by the Company's
operations. See "Use of Proceeds."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue to
be, volatile. Factors such as announcements of new customer orders or services
by the Company or its competitors, changes in pricing policies by the Company or
its competitors, quarterly fluctuations in the Company's operating results,
announcements relating to strategic relationships or acquisitions, changes in
earnings estimates by analysts, government regulatory actions, general
conditions in the market for POS systems, overall stock market conditions and
other factors may have a significant impact on the market price of Common Stock.
In addition, in recent periods the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. In addition, in the past the Company has not
experienced significant trading volume in its Common Stock, has not been
actively followed by stock market analysts and has had limited market-making
support from broker-dealers. If greater market-making support is not generated,
supported by broader analyst coverage, resulting in greater average trading
volume in the Company's Common Stock, there can be no assurance that an adequate
trading market will exist to sell large positions in the Company's Common Stock.
See "Price Range of Common Stock" and "Dividend Policy."
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND
CERTAIN CHARTER PROVISIONS
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue shares of Preferred Stock, the issuance of any additional
shares of Preferred Stock in the future could affect the rights of the holders
of Common Stock and thereby reduce the value of the Common Stock. In particular,
specific rights granted to future holders of Preferred Stock could be used to
restrict the Company's ability to merge with or sell its assets to a third
party, thereby preserving control of the Company by its present owners. The
issuance of Preferred Stock, rights to purchase Preferred Stock or additional
shares of Common Stock may have the effect of delaying or
17
<PAGE>
preventing a change in control of the Company. In addition, the possible
issuance of Preferred Stock or additional shares of Common Stock could
discourage a proxy contest, make more difficult the acquisition of a substantial
block of the Company's Common Stock or limit the price that investors might be
willing to pay for shares of the Company's Common Stock. Further, the Company's
Restated Certificate of Incorporation (the "Restated Certificate") provides that
any action required or permitted to be taken by stockholders of the Company must
be effected at a duly called annual or special meeting of stockholders and may
not be effected by written consent. Special meetings of the stockholders of the
Company may be called only by the Chairman of the Board of Directors, the Chief
Executive Officer of the Company, by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors or
by the holders of 10% of the outstanding voting stock of the Company. The
Restated Certificate and the Company's Bylaws also provide for staggered terms
for the members of the Board of Directors. These and other provisions contained
in the Restated Certificate and the Company's Bylaws, as well as certain
provisions of Delaware law, could delay or make more difficult certain types of
transactions involving an actual or potential change in control of the Company
or its management (including transactions in which stockholders might otherwise
receive a premium for their shares over then current market prices) and may
limit the ability of stockholders to remove current management of the Company or
approve transactions that stockholders may deem to be in their best interests
and, therefore, could adversely affect the price of the Company's Common Stock.
See "Description of Capital Stock--Preferred Stock" and "--Delaware
Anti-Takeover Law and Certain Charter Provisions."
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
Upon completion of this Offering, the Company will have outstanding
5,365,025 shares of Common Stock. Of these shares, the 1,250,000 shares sold in
the Offering and 873,900 shares previously registered by the Company for sale to
the public will generally be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 3,241,125 shares of Common Stock may be sold in the public
market as follows: (i) 855,817 shares will be eligible for immediate sale on the
date of this Prospectus; and (ii) upon expiration of lock-up agreements 180 days
after the date this Prospectus is declared effective (the "Effective Date"),
2,385,308 additional shares will be eligible for sale subject to the volume and
other restrictions of Rule 144. The foregoing does not include any shares that
may be issued in connection with the acquisitions of RGB/Trinet and Jade which
may first become eligible for resale one year after the date of issuance. In
addition, holders of vested options to purchase 125,300 shares of Common Stock
as of the date of this Prospectus will be able to sell such shares without
restriction pursuant to a Form S-8 registration statement filed with respect to
such shares. Holders of additional vested options to purchase an aggregate of
92,583 shares of Common Stock as of the date of this Prospectus will be entitled
to sell all of such shares upon expiration of lock-up agreements 180 days after
the Effective Date. Future sales of shares by existing stockholders could have
an adverse effect on the market price of the Common Stock or otherwise impair
the Company's ability to raise additional capital. In addition, the holders of
36,362 shares of Common Stock and the holders of warrants to purchase an
aggregate of 154,330 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning at the end of the 180-day
lock-up period. If such holders, by exercising their demand registration rights,
cause a large number of shares to be registered and sold in the public market,
such sales could have an adverse effect on the market price for the Company's
Common Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital. See. "Management," "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $8.625 per share, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, are estimated to be
approximately $9.6 million. The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholders if the over-allotment option is
exercised.
The Company intends to use the net proceeds from this Offering to repay
certain indebtedness incurred to fund operations under the Company's loan and
security agreement with FINOVA Capital Corporation. Specifically, the Company
has outstanding a revolving loan bearing interest at the prime rate publicly
announced by Citibank, N.A., plus 1.75% annually, that matures in June 2001 (the
"Loan"). As of June 30, 1998 and August 31, 1998, borrowings under the Loan were
approximately $1.3 million and approximately $4.1 million, respectively. After
the consummation of this Offering, the Company intends to repay approximately
$3.2 million under the Loan.
In addition, the Company intends to use $1.8 million of the net proceeds
from the Offering to acquire RGB/Trinet and Jade, if such acquisitions are
completed. The balance of the net proceeds will be used primarily for working
capital needs and general corporate purposes, including product and market
development, and selected acquisitions or investments in complementary
businesses or products. While from time to time the Company evaluates potential
acquisitions of businesses and products and anticipates continuing to make these
evaluations, there are no present understandings, commitments or agreements with
respect to any acquisition of businesses or products other than the definitive
agreements entered into in connection with the pending acquisitions of
RGB/Trinet and Jade. Pending such uses, the net proceeds of this Offering will
be invested in short-term, interest-bearing securities, including money market
funds.
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on October 25, 1996, at a
price to the public of $5.00 per share. Since that date, the Common Stock has
traded on the Nasdaq SmallCap Market under the symbol "JVLN." Concurrent with
the effectiveness of this Offering, the Common Stock will trade on the Nasdaq
National Market under the symbol "JVLN." The following table sets forth the high
and low sales prices for the Common Stock for the quarters indicated as reported
on the Nasdaq SmallCap Market. Prices reflect inter-dealer prices without retail
mark-up, mark-down or commissions, and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------------ ----------
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
Second Quarter (from October 25, 1996)...................................... 51/2 41/2
Third Quarter............................................................... 51/2 41/2
Fourth Quarter.............................................................. 63/8 45/8
YEAR ENDED JUNE 30, 1998
First Quarter............................................................... 111/4 41/2
Second Quarter.............................................................. 1013/16 81/2
Third Quarter............................................................... 103/4 71/2
Fourth Quarter.............................................................. 15 93/8
YEAR ENDED JUNE 30, 1999
First Quarter (to October 5, 1998).......................................... 131/8 73/8
</TABLE>
On October 5, 1998, the last reported sale price of the Common Stock on the
Nasdaq SmallCap Market was $8.625 per share. As of September 29, 1998, there
were 62 holders of record of the Company's Common Stock. This number does not
reflect the number of beneficial holders of the Company's Common Stock, which
the Company believes to be in excess of 600 holders.
DIVIDEND POLICY
To date, the Company has not declared nor paid any cash dividends on its
Common Stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. In addition, a
loan agreement of the Company prohibits the payment of cash dividends on the
Company's capital stock without the consent of the lender.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale of 1,250,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $8.625 per share
(after deducting the estimated underwriting discounts and commissions and
offering expenses) and the application of the net proceeds therefrom. This table
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Short-term debt, including current portion of long-term debt... $ 1,643,000 $ 300,000
------------- -------------
------------- -------------
Long-term debt, net of current portion......................... $ 1,200,000 $ 1,200,000
------------- -------------
Stockholders' equity:
Preferred Stock, $0.01 par value: 1,000,000 shares authorized
and no shares issued and outstanding, actual and as
adjusted................................................... $ -- $ --
Common Stock, $0.01 par value: 10,000,000 shares authorized,
actual and as adjusted; 4,111,962 shares issued and
outstanding, actual; 5,361,962 shares issued and
outstanding, as adjusted(1)(2)............................. 41,100 53,600
Additional paid-in capital..................................... 11,270,900 20,833,000
Deferred compensation.......................................... (39,200) (39,200)
Retained earnings.............................................. 132,900 132,900
Cumulative translation adjustment.............................. (6,800) (6,800)
------------- -------------
Total stockholders' equity................................... 11,398,900 20,973,500
------------- -------------
Total capitalization....................................... $ 12,598,900 $ 22,173,500
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Excludes: (i) 833,700 shares of Common Stock reserved for issuance upon
exercise of options outstanding at a weighted average exercise price of
$5.16 per share as of August 15, 1998; (ii) 154,330 shares of Common Stock
issuable upon exercise of warrants outstanding at a weighted average
exercise price of $9.27 per share as of August 15, 1998; and (iii) an
aggregate of 519,000 shares of Common Stock reserved for future issuance
under the 1997 Plan. See "Management-- Stock Option Plans," and "Description
of Capital Stock."
(2) As adjusted data excludes 3,063 shares issued after June 30, 1998 and shares
issuable upon consummation of the acquisitions of RGB/Trinet and Jade.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Javelin Consolidated Financial Statements and
the Notes thereto included elsewhere in this Prospectus. The Consolidated
Statements of Operations Data for the period from inception to June 30, 1996 and
for the years ended June 30, 1996, 1997 and 1998 and the Consolidated Balance
Sheet Data as of June 30, 1997 and 1998 are derived from the Javelin
Consolidated Financial Statements, which financial statements have been audited
by Ernst & Young LLP, independent auditors for the period from inception to June
30, 1996 and the year ended June 30, 1997 and by PricewaterhouseCoopers LLP,
independent accountants, for the year ended June 30, 1998.
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR ENDED
JUNE 30, JUNE 30,
------------ ---------------------------------
1996 1997 1998
------------ -------------- ------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales............................................................ $1,463,600 $ 7,014,600 $ 27,132,400
Service.................................................................. -- -- 2,513,700
------------ -------------- ------------
Total revenues......................................................... 1,463,600 7,014,600 29,646,100
------------ -------------- ------------
Cost of revenues:
Cost of product sales.................................................... 1,104,200 5,499,500 19,831,300
Cost of service.......................................................... -- -- 1,904,700
------------ -------------- ------------
Total cost of revenues................................................. 1,104,200 5,499,500 21,736,000
------------ -------------- ------------
Gross profit............................................................... 359,400 1,515,100 7,910,100
------------ -------------- ------------
Operating expenses:
Research and development................................................. 46,700 396,400 874,000
Selling and marketing.................................................... 83,500 390,800 1,179,900
General and administrative............................................... 244,700 859,900 4,195,500
------------ -------------- ------------
Total operating expenses............................................... 374,900 1,647,100 6,249,400
------------ -------------- ------------
Income (loss) from operations.............................................. (15,500) (132,000) 1,660,700
Interest expense........................................................... (38,800) (709,500) (115,000)
Other income (expense)..................................................... -- -- 41,100
Interest income............................................................ -- 14,600 12,200
------------ -------------- ------------
Income before income taxes................................................. (54,300) (826,900) 1,599,000
Provision for income taxes................................................. -- -- (584,900)
------------ -------------- ------------
Net income (loss).......................................................... $ (54,300) $ (826,900)(2) $ 1,014,100
------------ -------------- ------------
------------ -------------- ------------
Earnings per common share:
Basic.................................................................... $ (0.03) $ (0.30)(2) $ 0.28
Diluted.................................................................. $ (0.03) $ (0.30)(2) $ 0.27
Shares used in computing earnings (loss) per share:
Basic.................................................................... 2,086,260 2,782,535 3,622,604
Diluted.................................................................. 2,086,260 2,782,535 3,750,611
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1998 (AS
1996 1997 1998 ADJUSTED)(3)
---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 6,400 $ 686,200 $ -- $ 6,431,600
Working capital.......................................... 232,200 3,028,900 4,080,700 11,855,300
Total assets............................................. 951,300 5,203,000 22,531,300 28,962,900
Short-term debt.......................................... 291,600 200,000 1,643,000 300,000
Long-term debt, net of current portion................... 75,000 -- 1,200,000 1,200,000
Total stockholders' equity............................... 195,000 3,354,500 11,398,900 20,973,500
</TABLE>
- ------------------------------
(1) See Note 2 of Notes to Javelin Consolidated Financial Statements for a
description of the computation of the net income (loss) per share and the
number of shares used in the per share calculation.
(2) Net loss for the year ended June 30, 1997 includes interest expense of
approximately $636,100 related to warrants issued in connection with certain
promissory notes. This non-recurring interest expense is attributable to the
imputation of interest based upon the fair value of the warrants and did not
represent a cash expense to the Company.
(3) As adjusted to give effect to the sale of 1,250,000 shares of Common Stock
to be sold in the Offering by the Company hereby at an assumed public
offering price of $8.625 per share after deducting estimated underwriting
discounts and commissions and offering expenses and the application of the
net proceeds from the sale of such shares. Other than a reduction in cash
and cash equivalents and working capital of $1.8 million, as adjusted
information does not give effect to the pending acquisitions of RGB/Trinet
Limited or Jade Communications Limited. See "Use of Proceeds" and
"Capitalization."
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
On December 19, 1997, the Company acquired all of the outstanding capital
stock of POSNET Computers, Inc. ("Posnet") pursuant to the terms of a Stock
Purchase Agreement by and among the Company, Posnet and the selling shareholders
of Posnet. Posnet sold, installed and maintained POS systems and turnkey retail
automation systems. The purchase price for the Posnet stock consisted of 300,000
shares of the Common Stock of the Company. See Notes 3 and 9 to Javelin
Consolidated Financial Statements. The acquisition has been accounted for using
the purchase method, and accordingly, the results of operations of Posnet have
been included with those of the Company beginning at the date of acquisition.
The purchase price of $1,594,200 (including acquisition costs of $75,500) was
based on the quoted market price of the Company's Common Stock at the date of
acquisition discounted by 25% due to restrictions and liquidity. The purchase
price resulted in an excess of the cost of acquisition over the net assets
acquired of $2,036,000. Such excess (which will increase based on the portion of
the stock issued after June 30, 1998 as payment for the acquisition) is being
amortized on a straight-line basis over 25 years. The final allocation of the
purchase price may vary as additional information is obtained, and accordingly,
the ultimate allocation may differ from that used in the Unaudited Pro Forma
Condensed Financial Information. See Note 9 to Javelin Consolidated Financial
Statements.
On December 22, 1997, the Company acquired all of the outstanding capital
stock of CCI Group, Inc. ("CCI") pursuant to the terms of a Plan of
Reorganization and Stock Purchase Agreement by and among the Company, CCI and
the selling shareholders of CCI. CCI sold, installed and maintained POS systems
and turnkey retail automation systems. The purchase price for the CCI stock
consisted of 670,000 shares of the Common Stock of the Company. The acquisition
has been accounted for using the purchase method, and accordingly, the results
of operations of CCI have been included with those of the Company beginning at
the date of acquisition. The purchase price of $4,476,800 (including acquisition
costs of $111,300) was based on the quoted market price of the Company's Common
Stock at the date of acquisition discounted by 25% due to restrictions and
liquidity. The purchase price resulted in an excess of the cost of acquisition
over the net assets acquired of $4,097,500. The final allocation of the purchase
price may vary as additional information is obtained, and accordingly, the
ultimate allocation may differ from that used in the Unaudited Pro Forma
Condensed Financial Information. Such excess is being amortized on a
straight-line basis over 25 years.
The Unaudited Pro Forma Condensed Financial Information for the year ended
June 30, 1998 presents the combined results of operations of Javelin for the
year ended June 30, 1998 and the historical results of operations of CCI and
Posnet from July 1, 1997 through the date of acquisition as if the acquisitions
had occurred on July 1, 1997, after giving effect to certain adjustments
described in the attached Notes to Unaudited Pro Forma Condensed Financial
Information.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The unaudited pro forma earnings, which do not reflect
any direct costs or potential savings, are not indicative of the results of
future operations. No assurances can be given with respect to the ultimate level
of expense savings.
22
<PAGE>
JAVELIN SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
JAVELIN CCI POSNET TOTAL ADJUSTMENTS PRO FORMA
----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales......................... $27,132,400 $3,718,300 $1,949,800 $32,800,500 $(869,200)(1) $31,931,300
Service............................... 2,513,700 925,100 711,700 4,150,500 -- 4,150,500
----------- ---------- ---------- ----------- ---------- -----------
Total revenues...................... 29,646,100 4,643,400 2,661,500 36,951,000 (869,200) 36,081,800
----------- ---------- ---------- ----------- ---------- -----------
Cost of revenues:
Cost of product sales................. 19,831,300 3,049,000 1,179,600 24,059,900 (869,200)(1) 23,190,700
Cost of service....................... 1,904,700 652,500 370,300 2,927,500 -- 2,927,500
----------- ---------- ---------- ----------- ---------- -----------
Total cost of revenues.............. 21,736,000 3,701,500 1,549,900 26,987,400 (869,200) 26,118,200
----------- ---------- ---------- ----------- ---------- -----------
Gross profit............................ 7,910,100 941,900 1,111,600 9,963,600 -- 9,963,600
----------- ---------- ---------- ----------- ---------- -----------
Operating expenses:
Research and development.............. 874,000 -- -- 874,000 -- 874,000
Selling, general and administrative... 5,375,400 862,500 1,058,400 7,296,300 122,700(2) 7,419,000
----------- ---------- ---------- ----------- ---------- -----------
Total............................... 6,249,400 862,500 1,058,400 8,170,300 122,700 8,293,000
----------- ---------- ---------- ----------- ---------- -----------
Income (loss) from operations........... 1,660,700 79,400 53,200 1,793,300 (122,700) 1,670,600
Other income (expense).................. (61,700) (6,200) 3,000 (64,900) -- (64,900)
----------- ---------- ---------- ----------- ---------- -----------
Income before income taxes.............. 1,599,000 73,200 56,200 1,728,400 (122,700) 1,605,700
Provision for income taxes.............. (584,900) (29,700) (800) (615,400) -- (615,400)
----------- ---------- ---------- ----------- ---------- -----------
Net income (loss)....................... $ 1,014,100 $ 43,500 $ 55,400 $ 1,113,000 $(122,700) $ 990,300
----------- ---------- ---------- ----------- ---------- -----------
----------- ---------- ---------- ----------- ---------- -----------
Weighted average shares outstanding:
Basic................................. 4,517,600
-----------
-----------
Diluted............................... 4,645,600
-----------
-----------
Earnings per share:
Basic................................. $ 0.22
-----------
-----------
Diluted............................... $ 0.21
-----------
-----------
</TABLE>
NOTE 1
The Unaudited Pro Forma Condensed Financial Information should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this Prospectus.
NOTE 2
The Unaudited Pro Forma Condensed Financial Information reflects the
acquisition of Posnet and CCI using the purchase method of accounting.
Purchase accounting adjustments related to the foregoing acquisitions
reflected in the Unaudited Pro Forma Condensed Financial Information for the
year ended June 30, 1998 are summarized as follows:
<TABLE>
<S> <C> <C>
(1) Elimination of intercompany sales and cost of sales.......... $ 869,200
No adjustments were necessary to eliminate intercompany
profits from inventory as such amount was not significant.
(2) Amortization of goodwill..................................... $ 122,700
No adjustments to the provision for income taxes were
required since the amortization of goodwill is not deductible
for income tax purposes.
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE JAVELIN
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company was incorporated in September 1995 and commenced shipping its
initial products in December 1995. From its inception through the quarter ended
March 31, 1997, the Company experienced operating losses primarily as a result
of costs incurred in connection with product development and the establishment
of distribution channels, partially offset by revenues from product sales.
Javelin sells its hardware products through its direct sales force and
indirectly through OEMs and VARs.
In December 1997, the Company acquired all of the outstanding capital stock
of CCI Group, Inc. ("CCI") and POSNET Computers, Inc. ("Posnet"). CCI and Posnet
have been combined and now operate as CCI. CCI sells the Javelin product line as
well as hardware from other manufacturers and provides POS systems integration
and support services directly to end-users. These acquisitions were consummated
to enable the Company, among other things, to sell products and services
directly to large end-users and to capture a greater proportion of each
customer's POS system expenditures, including system design, installation,
maintenance and help desk. These acquisitions and increased product sales have
resulted in substantial growth in revenues, operating profits and net income.
Through March 31, 1998, substantially all of the Company's sales had been
made to domestic customers. To implement its marketing strategy internationally,
the Company established foreign subsidiaries in March and April 1998 in England,
Singapore and Australia and in October 1998 entered into definitive agreements
to acquire all of the outstanding capital stock of two companies based in
England, RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited
("Jade"). In addition to the ongoing service revenues that Jade's existing
operations may generate, the Company anticipates that these acquisitions will
increase international sales of Javelin's product line through indirect
distribution channels. Although the Company is not presently contemplating the
acquisition of companies other than RGB/Trinet and Jade, the Company may pursue
opportunities, if they arise, for strategic acquisitions both domestically and
internationally.
The acquisitions of CCI and Posnet were accounted for using the purchase
method, and accordingly, the results of operations of these subsidiaries have
been consolidated with those of the Company commencing on the respective dates
of acquisition. The acquisitions of RGB/Trinet and Jade, if completed, will also
be accounted for using the purchase method, and accordingly, their results of
operations will be included with those of the Company from the date of any such
acquisition. The Company amortizes goodwill resulting from its acquisitions over
25 years.
The replacement cycle for hardware in the POS food service industry is
generally long, and consequently, revenues for hardware products to a specific
end-user tend to be non-recurring. Certain services, such as system design and
installation, also tend to be non-recurring. Other services, such as maintenance
and help desk, are of an ongoing nature, and the related revenues tend to be
recurring. Through December 31, 1997, the Company's revenues consisted solely of
product sales. Due to the acquisition of CCI, service revenues represented 11.3%
of total revenues in the six months ended June 30, 1998 and 8.5% in fiscal 1998.
The Company anticipates that service revenues in the future will increase and
become a more significant percentage of total revenues.
24
<PAGE>
If the Company's strategy to increase sales to large end-users who have
volume purchasing power is successful, the Company believes its gross margins
may decline over time. Notwithstanding such potential decline in gross margins,
the Company believes that increased sales to large end-users may improve
operating margins because (i) related sales and marketing costs as a percentage
of revenues may be lower than the costs incurred to generate sales to indirect
distribution channels, and (ii) increased related general and administrative
costs necessary to support the additional revenues should not be significant. In
addition, sales to large end-users may result in significant variations in
revenues or profits from period to period due to, among other things, the timing
and size of large orders, delays in system installations or the Company's
inability to generate new sales on a timely basis to large end-users.
Revenues from product sales are generated from the sale of hardware
manufactured by Javelin and other independent manufacturers and are recorded as
the products are shipped. Service revenues are generated by the installation of
products and the provision of consulting and other services. Service revenues
are recognized upon the completion of installation or ratably over the term of
related contracts.
Cost of revenues from product sales consists of the acquisition costs of
non-Javelin product line hardware that is resold by the Company and the costs of
components and payroll and related costs for assembly, manufacturing,
purchasing, quality control and repairs of Javelin products. The cost of the
components incorporated in the Javelin product line represents in excess of 85%
of the total cost of such products. The cost of five components represents in
excess of 75% of the cost of all components included in the Javelin product
line. While the Company has in the past experienced reductions in the cost of
components due to increased volume of purchases, it believes that these costs
have now stabilized and that further material reductions may be difficult to
achieve. The Company is in the process of qualifying two independent outside
contract manufacturers to assist the Company in the manufacturing of new
products and with increased capacity needs for existing products. The Company
anticipates that the cost of manufacturing its products will not be materially
affected by the shifting of production to outside contract manufacturers. Cost
of service revenues consists primarily of payroll and related costs for the
technical and support staff providing the services.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Product sales................................................ 100.0% 100.0% 91.5%
Service...................................................... -- -- 8.5
--------- --------- ---------
Total revenues................................................. 100.0 100.0 100.0
--------- --------- ---------
Cost of revenues:
Cost of product sales(1)..................................... 75.4 78.4 73.1
Cost of services(1).......................................... -- -- 75.8
--------- --------- ---------
Total cost of revenues......................................... 75.4 78.4 73.3
--------- --------- ---------
Gross profit................................................... 24.6 21.6 26.7
--------- --------- ---------
Operating expenses:
Research and development..................................... 3.2 5.7 2.9
Selling and marketing........................................ 5.7 5.6 4.0
General and administrative................................... 16.7 12.2 14.2
--------- --------- ---------
Total operating expenses....................................... 25.6 23.5 21.1
--------- --------- ---------
Income (loss) from operations.................................. (1.0) (1.9) 5.6
Interest expense............................................... (2.7) (10.1) (0.4)
Other income................................................... -- -- 0.2
Interest income................................................ -- 0.2 --
Provision for income taxes..................................... -- -- (2.0)
--------- --------- ---------
Net income (loss).............................................. (3.7)% (11.8)% 3.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Expressed as a percentage of related revenues, not of total revenues.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUES. Revenues increased by 322.9% to $29.6 million in fiscal 1998
compared to revenues of $7.0 million in fiscal 1997. The change is due to a
154.2% increase in revenues relating to Javelin product sales of $10.8 million,
product sales from CCI of $8.4 million, service revenues from CCI of $2.5
million and revenues derived primarily from the sale of products by the
Company's newly established foreign subsidiaries of $900,000. The increase
relating to Javelin is attributable primarily to increases in the number of
units sold as the average sales price of Javelin products remained relatively
constant in fiscal 1997 and 1998.
GROSS PROFIT. Gross profit increased by 422.1% to $7.9 million in fiscal
1998 compared to a gross profit of $1.5 million in fiscal 1997. The change is
due to a 224.0% increase in gross profit relating to Javelin of $3.4 million,
gross profit relating to hardware sales by CCI of $2.2 million, gross profit
relating to services provided by CCI of $500,000 and gross profit from the newly
established foreign subsidiaries of $300,000. Gross margins on revenues from
product sales increased to 26.9% in fiscal 1998 from 21.6% in fiscal 1997
primarily due to a reduction in the cost of its products and the realization of
manufacturing efficiencies. The reduction in the cost of the Company's products
was attributable to decreases in prices from the Company's suppliers resulting
from increased volume of purchases by the Company. The increased gross margins
on revenues from product sales were partially offset by lower gross margins on
sales of non-Javelin products by CCI. Gross margin on service revenues were
24.2% in fiscal 1998. The Company anticipates that annual gross margins will not
increase in fiscal 1999.
26
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. All research and development is
performed by Javelin at its corporate headquarters. Research and development
expenses consist primarily of payroll and related costs and the cost of tooling
and prototypes. The Company expenses research and development costs as incurred.
Research and development expenses increased by 120.5% to $900,000 in fiscal 1998
compared to research and development expenses of $400,000 in fiscal 1997. The
increase is primarily attributable to increased payroll costs due to the hiring
of additional engineers. The Company anticipates a continued increase in
research and development expenses primarily due to the anticipated introduction
of several new products and enhancements to existing products.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of payroll and related costs, including commissions, of salespersons
and of the customer service department, and of travel, entertainment and
advertising costs. Selling and marketing expenses increased by 201.9% to $1.2
million in fiscal 1998 compared to selling and marketing expenses of $400,000 in
fiscal 1997. The increase is primarily attributable to additional personnel and
advertising costs associated with the growth of the business. The Company
anticipates that selling and marketing costs will increase as the Company
increases its sales force, both domestically and internationally, and attempts
to enhance the recognition of its brand name; however, to the extent that
revenues increase in future periods, the Company anticipates that such costs may
decrease as a percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of payroll and related costs, facility costs, depreciation and
amortization and costs associated with being a public company. General and
administrative expenses increased by 387.9% to $4.2 million in fiscal 1998
compared to general and administrative of $900,000 in fiscal 1997. The change is
due to an increase in general and administrative expenses relating to Javelin of
$1.2 million (138.9%), general and administrative expenses from the acquired
domestic subsidiaries of $1.9 million and general and administrative expenses
from the newly established foreign subsidiaries of $300,000. As a percentage of
revenues, general and administrative expenses increased from 12.2% to 14.2%. The
increase at Javelin consisted primarily of increased payroll costs due primarily
to an increase in the number of employees, increased facility costs due to
relocations and costs associated with being a public company. The Company
believes that general and administrative expenses will continue to increase as
the Company invests additional resources to improve its operating systems, to
expand its international presence and to sustain its anticipated continued
growth; however, to the extent that revenues increase in future periods, the
Company anticipates that general and administrative expenses may remain
relatively constant as a percentage of revenues.
INTEREST EXPENSE. Interest expense decreased by $600,000 to $100,000 in
fiscal 1998 compared to interest expense of $700,000 in fiscal 1997. The
decrease is due to the inclusion of $600,000 in interest expense in fiscal 1997
related to warrants issued in connection with certain promissory notes. This
non-recurring interest expense incurred in fiscal 1997 is attributable to the
imputation of interest based upon the fair value of the warrants and did not
represent a cash expense to the Company.
INCOME TAXES. A provision for federal, state and foreign income taxes of
$600,000 was required in fiscal 1998 since the Company generated taxable income
while no provision was required for fiscal 1997 as the Company incurred a net
taxable loss for that period. The tax benefits of the Company's historical
operating losses were realized during the year ended June 30, 1998 resulting in
an effective tax rate lower than the U.S. statutory tax rate. The Company
anticipates that in the future its tax rate on U.S. income will increase due to
the lack of additional tax benefits and the non-deductibility of certain
expenses, including the amortization of goodwill. This anticipated increase may
be mitigated to the extent that increases from revenues result from the
Company's foreign subsidiaries operating in jurisdictions with lower income tax
rates than those in the United States.
27
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
REVENUES. Revenues increased by 379.3% to $7.0 million in fiscal 1997
compared to revenues of $1.5 million in fiscal 1996. The increase was
attributable primarily to increases in the number of units sold.
GROSS PROFIT. Gross profit increased by 321.6% to $1.5 million in fiscal
1997 compared to a gross profit of $359,000 in fiscal 1996. Gross margins
decreased to 21.6% in fiscal 1997 from 24.6% in fiscal 1996 primarily due to
component cost increases.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 747.5% to $396,000 in fiscal 1997 compared to research and
development expenses of $47,000 in fiscal 1996, primarily due to increased
payroll costs and the introduction of two new products.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased by
368.1% to $391,000 in fiscal 1997 compared to selling and marketing expenses of
$84,000 in fiscal 1996, primarily due to additional personnel necessary to
manage the activities of an increased number of VAR and OEM customers and the
introduction of new products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 251.3% to $860,000 in fiscal 1997 compared to general and
administrative expenses of $245,000 in fiscal 1996, primarily due to an
increased in payroll costs and consulting fees.
INTEREST EXPENSE. Interest expense increased by $671,000 to $709,000 in
fiscal 1997 compared to interest expense of $38,000 in fiscal 1996. The increase
is due to the inclusion of $636,000 in interest expense in fiscal 1997 related
to warrants issued in connection with certain promissory notes. This non-
recurring interest expense in fiscal 1997 is attributable to the imputation of
interest based upon the fair market value of the warrants and did not represent
a cash expense to the Company.
INCOME TAXES. A provision for income taxes was not required for fiscal 1997
as the Company incurred a net taxable loss for that period.
QUARTERLY RESULTS OF OPERATIONS
The following tables present quarterly operating results for fiscal 1998.
This information has been derived from unaudited consolidated financial
statements and has been prepared on the same basis as the Javelin Consolidated
Financial Statements which appear elsewhere in this Prospectus. In the opinion
of the Company's management, this information reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The operating results for any quarter are not necessarily
indicative of the results for any future period.
28
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998
--------------------- -------------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product sales................... $ 2,950,100 $ 4,452,200 $ 9,357,400 $ 10,372,700
Service......................... -- -- 1,286,000 1,227,700
----------- ----------- ---------------- --------------
Total revenues................ 2,950,100 4,452,200 10,643,400 11,600,400
----------- ----------- ---------------- --------------
Cost of revenues:
Cost of product sales........... 2,268,800 3,427,500 6,864,100 7,270,900
Cost of service................. -- -- 891,700 1,013,000
----------- ----------- ---------------- --------------
Total cost of revenues........ 2,268,800 3,427,500 7,755,800 8,283,900
----------- ----------- ---------------- --------------
Gross profit...................... 681,300 1,024,700 2,887,600 3,316,500
----------- ----------- ---------------- --------------
Operating expenses:
Research and development........ 137,200 169,500 250,100 317,200
Selling and marketing........... 147,500 261,300 438,100 333,000
General and administrative...... 374,700 448,200 1,581,700 1,791,000
----------- ----------- ---------------- --------------
Total operating expenses...... 659,400 879,000 2,269,900 2,441,200
----------- ----------- ---------------- --------------
Income from operations............ 21,900 145,700 617,700 875,300
Interest expense.................. (1,900) (6,900) (26,800) (79,400)
Other income (expense)............ (2,800) 8,900 23,200 11,900
Interest income................... 3,900 4,100 2,200 2,000
----------- ----------- ---------------- --------------
Income before income taxes........ 21,100 151,800 616,300 809,800
Provision for income taxes........ -- (59,200) (262,900) (262,800)
----------- ----------- ---------------- --------------
Net income........................ $ 21,100 $ 92,600 $ 353,400 $ 547,000
----------- ----------- ---------------- --------------
----------- ----------- ---------------- --------------
Units shipped..................... 1,638 2,351 2,535 4,083
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998
----------------------- --------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product sales................... 100.0% 100.0% 87.9% 89.4%
Service......................... -- -- 12.1 10.6
----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Cost of product sales(1)........ 76.9 77.0 73.4 70.1
Cost of service(1).............. -- -- 69.3 82.5
----- ----- ----- -----
Total cost of revenues........ 76.9 77.0 72.9 71.4
----- ----- ----- -----
Gross profit...................... 23.1 23.0 27.1 28.6
----- ----- ----- -----
Operating expenses:
Research and development........ 4.7 3.8 2.3 2.7
Selling and marketing........... 5.0 5.9 4.1 2.9
General and administrative...... 12.7 10.0 14.9 15.4
----- ----- ----- -----
Total operating expenses...... 22.4 19.7 21.3 21.0
----- ----- ----- -----
Income from operations............ 0.7 3.3 5.8 7.6
Interest expense.................. -- (0.2) (0.2) (0.7)
Other income (expense)............ (0.1) 0.2 0.2 0.1
Interest income................... 0.1 0.1 -- --
----- ----- ----- -----
Income before income taxes........ 0.7 3.4 5.8 7.0
Provision for income taxes........ -- (1.3) (2.5) (2.3)
Net income........................ 0.7% 2.1% 3.3% 4.7%
</TABLE>
- ------------------------
(1) Expressed as a percentage of related revenues, not of total revenues.
Gross margins on revenues from product sales increased from 23.1% in the
first quarter of 1998 to 29.9% in the fourth quarter of 1998 primarily due to
decreases in prices from the Company's suppliers resulting from increased volume
of purchases by the Company. The increase in the number of Javelin products sold
has enabled the Company to obtain volume discounts from its suppliers and to
procure certain products directly from the manufacturers rather than from
distributors.
Cost of service consists primarily of payroll and related costs for
technical and support staff providing the services and are of a relatively fixed
nature in the short term. Gross margins on service revenues decreased from 30.7%
in the third quarter of 1998 to 17.5% in the fourth quarter of 1998 due
primarily to the completion in the third quarter of a significant retrofit by
CCI of 66 stores of one customer and increased costs in the fourth quarter
incurred to support anticipated future projects.
General and administrative expenses increased from $448,000 in the second
quarter of 1998 to $1.8 million in the fourth quarter of 1998 primarily due to
the acquisitions of CCI and Posnet in the third quarter and the establishment of
three foreign subsidiaries in the fourth quarter.
The Company has experienced in the past and may in the future experience
significant fluctuations in its operating results. Such fluctuations may be
caused by many factors, including, but not limited to: the size and timing of
individual orders, some of which may be of significant size; seasonality of
revenues; employee hiring and retention, particularly with respect to sales and
consulting personnel; lengthy sales and implementation cycles; reduction in
demand for existing products and services and shortening of product life cycles;
the timing of the introduction of products, product enhancements or services by
the Company or its competitors; competition and pricing in the POS systems
industry; market acceptance of new products; service personnel utilization
rates; the ability of the Company to expand its international
30
<PAGE>
and domestic sales, as well as the mix of such sales; foreign currency exchange
rates; changes in the mix of products and services sold; general health of the
restaurant industry, particularly the QSR segment; the ability of the Company to
generate service agreements; product quality problems; the ability of the
Company to control costs; the Company's success in establishing and expanding
its direct and indirect distribution channels; the mix of distribution channels
through which the Company's products are sold; and general economic conditions.
The Company's operating results, particularly with respect to its systems
integration business, may vary significantly because of the Company's failure to
obtain major projects, the cancellation or delays in the progress of major
projects for any reason and the Company's failure to timely replace projects
that have been completed or are nearing completion. Any of these factors could
cause the Company's results of operations to fluctuate significantly from period
to period, including on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit
facility of $7.5 million from a financial institution. The credit facility
expires on June 8, 2001 and consists of a line of credit of up to $6.0 million
and a term loan of $1.5 million. Under the line of credit, the Company may
borrow up to 80% of eligible receivables (as defined) and 50% of eligible
inventory (as defined) with monthly interest based upon the prime rate of a
national financial institution plus 1.75% (10.25% as of June 30, 1998). As of
June 30, 1998 borrowing outstanding under the line amounted to $1.3 million with
approximately $2.8 million available for future borrowings. Borrowings under the
term loan are collateralized by substantially all of the assets of the Company
and bear interest at 13.65% per annum. The Company is required to repay $25,000
per month under the term loan with all unpaid principal and interest due on June
8, 2001. As of June 30, 1998, the Company had working capital of $4.1 million.
Cash used in operating activities in fiscal 1998 totaled $1.8 million and
consisted primarily of increases in trade receivables and inventories. Cash used
in net investing activities in fiscal 1998 totaled $400,000 and resulted
primarily from the acquisition of capital equipment offset by cash received from
acquired businesses. The Company anticipates that expenditures for capital
equipment will decrease in fiscal 1999. Cash provided by financing activities in
fiscal 1998 totaled $1.6 million and consisted primarily of net borrowings under
the line of credit and a term loan obtained in June 1998.
The Company anticipates that its working capital needs will increase with
the growth of the Company. The Company believes that the net proceeds from the
Offering, together with the availability of its line of credit, will be
sufficient to meet its capital requirements for the next eighteen months.
Depending on the rate of growth and profitability, the Company may require
additional equity or debt financing to meet its future working capital and
capital expenditures needs. There can be no assurance that such additional
financing will be available or, if available, that such financing can be
obtained on terms satisfactory to the Company.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
is reviewing both its information technology and its non-information technology
systems to determine whether they are year 2000 compliant, and to date the
Company has not identified any material systems which are not year 2000
compliant. The Company has not made any material expenditure to address the year
2000 problem and at present does not anticipate that it will be required to make
any such material expenditures in the future.
31
<PAGE>
The Company has initiated formal communications with all significant
suppliers and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate the year 2000 problem.
Although the Company has received verbal assurances of year 2000 compliance from
certain of such third parties, the Company has not yet received written
assurances of year 2000 compliance from the third parties with whom it has
relationships. The Company believes its operations will not be significantly
disrupted even if third parties with whom the Company has relationships are not
year 2000 compliant. In the event that the Company's suppliers are unable to
provide sufficient quantities of materials or goods to the Company as a result
of their failure to be year 2000 compliant, the Company believes that it can
obtain adequate supplies of materials and goods at comparable prices from other
sources. In the event that the Company's OEMs and VARs are adversely affected by
any failure to become year 2000 compliant and are therefore unable to purchase
anticipated quantities of the Company's products on a timely basis, the Company
may seek to replace such OEMs and VARs. Nevertheless, the Company believes that
any year 2000 compliance problems of its suppliers, OEMs or VARs could cause the
Company's results of operations to fluctuate on a period to period basis.
Uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance, and the Company intends to continue to make efforts to
ensure that third parties with whom it has relationships are year 2000
compliant. Any year 2000 compliance problem of either the Company or third
parties with whom the Company has relationships could materially adversely
affect the Company's business, financial condition or results of operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. This standard will require that an enterprise display an amount
representing total comprehensive income for the period. SFAS 130 will be
effective for the Company's year ending June 30, 1999. Adoption of SFAS 130 is
for presentation only and will not affect the Company's financial position or
results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which supersedes Statement of Financial Accounting Standards No.
14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about products and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 will be effective for
the Company's year ending June 30, 1999 and will not affect the Company's
financial position or results of operations.
32
<PAGE>
BUSINESS
GENERAL
Javelin Systems, Inc. ("Javelin" or the "Company") designs, manufactures and
markets open system touch screen point-of-sale ("POS") computers and provides
POS systems integration services primarily for the food service and retail
industries. POS systems incorporating the Company's products enable restaurants
and retailers to capture, analyze, disseminate and use information throughout an
enterprise on a real-time basis, from the point of sale to the in-store "back
office" to the enterprise's headquarters. These POS systems provide transaction
processing, in-store operating controls, and timely information used to manage
inventory and costs, analyze sales data and customize products and services. The
Company's product family of network-ready computers integrates substantially all
of the functionality of standard desktop personal computers into durable, small
footprint touchscreen workstations that run on industry standard open operating
systems. The Company's products utilize off-the-shelf, industry-specific
application software developed by third parties. The Company's products are
currently being marketed by value added resellers ("VARs"), original equipment
manufacturers ("OEMs") and directly to end users through the Company's sales
force. The Company's systems integration services are generally sold directly to
multi-site operators.
In December 1997, Javelin made two strategic acquisitions, CCI Group, Inc.
("CCI") and POSNET Computers, Inc. ("Posnet") that have enabled the Company to
offer full turn-key systems integration services, including system design,
staging, training, deployment and after-market product support and maintenance.
In addition to providing the Company with a significant new end user customer
base, the Company believes these acquisitions provide it with the ability to
become a national POS systems integrator in the food service and retail markets.
In early 1998, Javelin established international sales and support
subsidiaries in England, Australia and Singapore. The Company intends to
replicate its domestic distribution and acquisition strategies in the growing
international marketplace. In June 1998, the Company acquired Aspact IT Services
("Aspact"), a consulting and systems integration business based in Singapore. In
October 1998, the Company entered into definitive agreements to acquire each of
RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited ("Jade"), both
POS service provider companies based in England. The consummation of the
acquisitions is subject to a number of conditions, including Javelin having
secured funds to finance the cash portion of such acquisitions. In consideration
for all of the outstanding equity interests of each of RGB/ Trinet and Jade,
Javelin will pay to the shareholders of RGB/Trinet and Jade an aggregate of
approximately $1.8 million in cash and issue to such shareholders an aggregate
of 25,000 shares of Javelin Common Stock, plus shares of Javelin Common Stock
having a value of approximately $1.5 million based on the average of the closing
price of Javelin Common Stock over the ten (10) days immediately preceding the
business day immediately prior to the closing of the acquisitions. Javelin also
may be required to issue additional shares valued at approximately $6.6 million
pursuant to the earnout provisions of the respective definitive agreements.
Following the consummation of the acquisitions, RGB/Trinet and Jade will be
consolidated into a single wholly-owned subsidiary of Javelin.
INDUSTRY OVERVIEW
The Company estimates that there are more than 450,000 restaurants and more
than 1.6 million retail stores in the United States. These restaurants and
retail stores are increasingly part of multi-location chains that have the need
to capture, analyze and disseminate information throughout the entire enterprise
in order to better manage inventory and costs, make pricing decisions, analyze
sales data and provide customized products and services. Moreover, businesses
that encounter local demographic changes or seek to expand globally face
additional challenges, such as multilingual customer and employee bases,
multiple currency transactions and local regulatory requirements. Consequently,
food service providers and retailers now require robust, integrated POS systems
and services that are able to reliably and efficiently capture and manage large
numbers of individual transactions generated by diversified points of sale.
33
<PAGE>
The critical front and back office roles of integrated POS systems are now
being recognized by distinct market segments within the food service and retail
industries. Quick service restaurants ("QSRs") and full service restaurants, the
largest market segments within the food service industry, both are investing in
advanced POS systems, with QSRs generally being the first to adopt the latest
POS technology and full service restaurants being more price sensitive and
therefore more likely to adopt POS technology later in the product life cycle. A
typical QSR requires four to seven POS workstations to operate efficiently,
while a full service restaurant generally requires at least seven POS
workstations. The food service industry also encompasses hotel restaurants and
restaurants located in other hospitality locations, such as stadiums and arenas,
casinos, theme parks and cruise lines. Retail establishments, such as
convenience stores, gas stations, record stores and clothing stores, are
increasingly utilizing POS systems to expedite in-store transactions and more
effectively monitor inventory on a current basis.
Initial POS systems targeted for the food service and retail industries were
generally designed to satisfy the individual operating requirements of a
particular large chain of restaurants or stores. These initial POS systems were
custom designed to meet the individual enterprise's needs and, as such, were
generally proprietary with all hardware, software and service developed or
provided by a single vendor. Because this focus on single company solutions
resulted in no generic POS standard operating system or computer architecture,
many large food service providers and retailers became captive to the relatively
small companies that had designed their proprietary POS systems. In addition,
the POS companies found it difficult to achieve significant economies of scale
due to the highly customized nature of their products. Instead, early POS
companies were forced to focus on establishing and maintaining long product life
cycles in order to recoup their high costs from developing custom products for a
limited customer base. There was little opportunity for these POS companies to
leverage their niche success into market-wide success.
The POS industry has begun evolving from proprietary, customized single
platform systems to open-architecture systems in which a variety of hardware and
software products from different manufacturers can be combined to obtain the mix
of features desired by the customer. With the advent of hardware and software
systems that use industry standard open-architecture, food service providers and
retailers are no longer captive to single solution vendors that had initially
created their POS systems. As in other markets for computer products and systems
where open systems are replacing proprietary platforms, new entrants have been
drawn to the growing POS market, increasing competition for POS software and
hardware and enhancing competitive pressure through faster design cycles.
In addition to relying on single solution vendors, large multi-unit food
service and retail chains frequently implemented and maintained their
proprietary POS systems utilizing internal resources. However, as a result of
the competitive environment in which these businesses operate and the growing
complexity and multiplicity of available POS systems, food service providers and
retailers have found it increasingly difficult to design, implement and manage
these systems on their own. For example, a typical multi-chain enterprise
requires a POS system that is capable of supporting multiple applications and
processing high volumes of data across geographically remote locations. In
addition, the increasing variety of hardware and software applications utilized
in the food service and retail industries has resulted in connectivity and
compatibility problems for many POS systems. Multi-unit chains now generally
require a total systems integration solution including design, consulting,
system creation, acquisition of software applications and required hardware,
system installation and configuration, product support services and ongoing
system service and maintenance. The high demand for qualified network engineers
and other technical personnel has also made it increasingly difficult for these
types of businesses to recruit and train qualified POS technology professionals.
Consequently, many food service providers and retailers now rely upon third
parties for the technological expertise and personnel to meet their POS systems
needs. Javelin believes that the increasing complexity and rapid evolution of
POS system technologies have created a significant opportunity for companies
specializing in providing POS system solutions to the food service and retail
industries.
34
<PAGE>
THE JAVELIN SOLUTION
Javelin designs, manufactures and markets open system touch screen POS
computers and provides POS systems integration services primarily for the food
service and retail industries. The Company's product family of network-ready
computers integrates substantially all of the functionality of standard desktop
personal computers into durable, small footprint touchscreen workstations that
run on industry standard open operating systems. The Company's products utilize
off-the-shelf, industry specific application software developed by third
parties. POS systems incorporating the Company's products enable restaurants and
retailers to capture, analyze, disseminate and use information throughout an
enterprise on a real-time basis, from the point of sale to the in-store "back
office" to the enterprise's headquarters. These POS systems provide transaction
processing, in-store operating controls, and timely information used to manage
inventory and costs, analyze sales data and customize products and services.
Javelin also has a global POS systems integration business that assists
large multi-site corporate customers in identifying the best multi-vendor open
systems solution for the customer's particular business, and then manages the
full deployment and ongoing support of the POS solution. The Company has
extensive experience resolving the integration, implementation and management
issues faced by food service providers and retailers and substantial knowledge
of advanced information technologies, POS systems and the numerous software
applications developed by information system and software vendors for these
markets. The Company serves as a single point of contact to objectively assess
its customers' POS technology requirements, taking into account the products and
applications of various hardware and software vendors. The Company then selects
the optimal mix of applications and products of various hardware and software
vendors to create tailored advanced POS systems. By acting as the project
manager during the installation and implementation of the POS system, the
Company frees its customers from much of the time and difficulties associated
with large-scale systems installations, including managing the variety of other
vendors involved in the systems' installation. The Company believes that its
cumulative experience, food service and retail focus and technology expertise
enable it to understand its customers' core business dynamics and deliver
customized advanced POS systems and services to satisfy its customers'
specialized needs.
BUSINESS STRATEGY
The Company's objective is to become a leading developer of POS hardware
systems and to be the premier POS systems integrator for multi-site chain
operators in the food service and retail industries. The Company plans to
achieve these objectives through internal growth and development and, to the
extent suitable acquisition candidates are identified, through the acquisition
of complementary businesses. Key elements of Javelin's strategy include the
following:
- PURSUE LARGE CUSTOMERS. The Company intends to increase its sales of
products to large chains with over 100 stores through direct sales efforts
and by utilizing the Company's relationships with its OEMs. The evolution
to open systems has also created an opportunity for full service systems
integrators which have an in-depth knowledge of the industry standard POS
software and hardware packages and the ability to integrate them into a
successful POS solution for clients. The Company's acquisitions of CCI and
Posnet have given Javelin an immediate entrance and client base in the POS
systems integration business on a domestic basis.
- INTRODUCE TIMELY NEW PRODUCTS. The Company intends to continue to develop
new POS hardware systems incorporating advanced PC technology utilizing
its engineering team composed of PC industry veterans. As part of its
sales strategy, the Company consults with its OEMs and VARs in order to
identify new product platforms and product refinements. The Company also
obtains direct customer feedback through its systems integration business.
Because a significant portion of the Company's management is experienced
in the PC industry, the Company has been able to quickly launch new
products in the POS system industry and respond quickly to its customers'
specific needs. This experience has enabled Javelin to rapidly establish
itself in the POS market by developing and introducing new products with
advanced features in an average of six months
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compared to the industry standard of twelve to eighteen months. The
Company intends to leverage its history of timely new product
introductions and successful customer engagements and expand its marketing
programs to enhance its market presence and visibility with the goal of
making Javelin a recognized leader in providing POS solutions.
- FOCUS ON INTERNATIONAL BUSINESS OPPORTUNITIES. The Company has
established sales and support branches in England, Australia and Singapore
to capture identified sales opportunities. The Company also continues to
pursue its acquisition strategy internationally, including its recent
acquisition of Aspact and the pending acquisitions of RGB/Trinet and Jade,
which provide the Company with additional systems integration services and
complementary networking products and services. The Company believes that
the international markets continue to be fundamentally under-served with
respect to technologically advanced POS systems, and, in particular, the
Company believes that Western Europe presents a particularly attractive
market for its products and services.
- MINIMIZE PRODUCTION COSTS. The Company plans to continue to outsource the
manufacturing and assembly of its products in order to maintain low
overhead and production costs. The Company also controls its costs by
utilizing components that are generally available in the PC industry and
anticipates streamlining its product line in order to further develop
economies of scale. The
Company believes that it will be able to maintain its cost advantage in the
future through economies of scale and because the Company utilizes
in-house design capabilities and integrates the design and manufacturing
engineering of its products, which reduces engineering costs and costly
design changes. In addition, the Company intends to utilize contract
manufacturers based in Singapore commencing later in fiscal 1999, which
the Company believes will provide many benefits, including high quality,
components' cost reduction, and lower corporate income tax.
- GROW RECURRING SERVICE REVENUE. The Company currently receives recurring
revenue from its help desk, depot repair, managed network services and
field services. The Company intends to expand certain of these services in
the future because the Company believes that an increase in these revenues
can lessen the Company's reliance on product sales, which tend to
fluctuate over time, and provide the Company with stable, recurring
billings and cash flow. The Company also plans to leverage CCI's name
recognition in the field of systems integration to expand the service
component of the Company's business.
PRODUCTS AND SERVICES
THE JAVELIN PRODUCT LINE
Javelin's product line offers customers a fully functioning PC inside a
small footprint touchscreen POS workstation. All of Javelin's systems are
network ready and support industry standard operating systems, enabling the easy
installation and setup of leading industry standard POS software programs. The
Javelin system also virtually eliminates configuration conflicts due to the
Javelin system's proprietary embedded firmware. In addition, its single
motherboard design reduces costly trouble shooting and service calls, and
Javelin's systems are sealed to protect against liquid and other foreign matter
entering the interior electronic chamber. Javelin believes that its POS computer
systems offer its clients more features and better reliability than its
competitors' products at lower price points. The retail price of the Company's
products to end users generally ranges from $2,500 to $3,700. The Javelin
product line is currently comprised of the Javelin-Wedge 5, Javelin-Wedge P,
Javelin-LC and Javelin-LCP series.
JAVELIN-WEDGE 5. The Javelin-Wedge 5 is a small footprint, high performance
color LCD touchscreen computer which is approximately 12.75"(W), 10.25"(D) and
6.0"(H). The Javelin-Wedge 5 features a 133mHz processor, system memory from 4
MB of RAM up to 64 MB of RAM, 1 MB of video memory, a 10.4 or 12.1 inch TFT
active matrix screen, 4 serial ports, 1 enhanced parallel port, 2 electronic
cash drawer ports, a 10 Base-T Ethernet port and an integrated customer display.
As a result of the product's inherent flexibility and rugged design, it is being
marketed and sold as a POS workstation and as an industrial operator interface.
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JAVELIN-WEDGE P. The Javelin-Wedge P is a product line extension of the
Javelin-Wedge 5 series and is believed by the Company to be the first fully
integrated, Pentium-based touch screen computer designed specifically for the
POS marketplace. The Wedge P features a 200 mHz Intel Pentium processor with
additional features such as a 512K Pipeline Burst cache and up to 128 MB of RAM.
The Wedge P approximately doubles the speed and performance of the Wedge 5 which
provides end users the ability to dramatically increase speed and performance
when using graphically intensive POS applications that operate in Windows 95 and
Windows NT environments.
JAVELIN-LC. The Javelin-LC product line offers customers what the Company
believes is the smallest footprint of any POS computer in the industry with a
footprint of less than eight inches square and has been designed to be more
compact and elegant in appearance, making it suitable for both the food service
market and the retail market. In addition, the system's reduced size and flat
panel display allow it to be mounted in a variety of ways, including
wall-mounted, fixed to an adjustable base or attached to an articulated arm. The
Javelin-LC features a 133mHz processor, system memory from 4 MB of RAM up to 64
MB of RAM, 1 MB of video memory, a 10.4 or 12.1 inch TFT active matrix screen, 2
serial ports, 1 enhanced parallel port and a 10 Base-T Ethernet port.
JAVELIN-LCP. The Javelin LCP is a product line extension of the Javelin-LC.
This is a Pentium based LC product which, like the LC, is believed by the
Company to have the smallest footprint of any POS computer in the industry. The
speed of the Pentium-based CPU offers clients the ability to dramatically
increase speed and performance when using graphically intensive POS
applications. The LCP features a 200 mHz Intel Pentium processor with additional
features such as an integrated sound card and full screen video, 3 serial ports
and up to 128 MB of RAM. The food service industry, especially the QSR segment,
is demanding the latest generation hardware to be based around the Pentium
processor. The Javelin LCP is specifically designed to meet the industry's
unique hardware requirements for speed, space, flexibility and multimedia
features.
NEW PRODUCTS
JAVELIN-LP. The Company intends to release the Javelin LP in fiscal 1999.
The Javelin LP is designed to be a compact, low profile PC for the high-traffic,
POS environment. The LP is planned to be network-ready with an integrated
100/10BaseT Ethernet controller. With 4 serial ports, two of which can supply
+5Volt power, the LP should accommodate a variety of peripheral equipment such
as cash drawers, card readers, scanners and printers. The Javelin LP's rugged,
aluminum die-cast, convection cooled case should provide the Javelin LP with a
significant advantage over other POS systems. The LP is designed to be spill-
resistant with a solid cover, and, because it has no fans, is expected to be
noiseless and have no vents into which airborne debris can enter and collect
inside the system. The LP's low profile design should require minimal counter
space, and I/O connectors planned to be located at the bottom of the unit should
allow easy routing of cables through a small opening in a counter or desk top.
The Javelin LP is expected to come with an integrated touchscreen controller
supporting both Elographics and Microtouch Bus Monitors, eliminating the need
for an external controller.
JAVELIN-HHT 40. The Javelin HHT-40 is being developed for the Company by a
third party, and the Company anticipates that the HHT-40 will become available
in fiscal 1999. The HHT-40 is designed to be a compact, lightweight, wireless
handheld system that provides service people the ability to enter orders quickly
and efficiently and offers the benefit of sending information remotely to the
kitchen, bar, etc. With its built-in customer display and paging system, the
HHT-40 would expedite customer transactions, reduce operator errors, and most
significantly, increase table turns. The HHT-40 is planned to be based on a main
module where a battery, magnetic card reader or end-piece can be connected to
any side of the main module.
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SYSTEMS INTEGRATION
NETWORK DESIGN/PROJECT MANAGEMENT. The Company provides network services
ranging from network design to large-scale network implementation, which would
include a review and audit of a customer's existing POS technology
infrastructure, an assessment of the functional requirements of the customer's
POS system, the preparation of network specifications and technical design
documentation and diagrams. The Company's network implementation services
involve the purchase, delivery, testing and installation of enterprise-wide POS
systems. The Company acts as the single project manager for all parties involved
in a multi-unit installation, to effectively converge and integrate of all the
client's business processes. The Company believes that the delivery of a
combination of design, implementation and management services through a project
manager enables the Company's personnel to fully understand the customer's
computing and operating environments, install POS systems that meet the
customer's specialized requirements and train the customer's users and internal
POS system staff prior to the full migration to a new POS system. The Company's
personnel have extensive experience resolving the integration, implementation
and management issues faced by its customers, and the personnel involved in any
particular project are carefully selected for their technical expertise to meet
the requirements of the specific project. The Company assesses its customers'
POS system requirements and selects the optimal mix of applications and products
of various hardware and software vendors, and does not exclusively use Javelin
products. The Company's expertise extends through each area of POS system
networking to create a tailor-made infrastructure for the client, including
structured cabling, power, local area network (LAN), wide area network (WAN) and
internet technologies.
BUSINESS PROCESS INTEGRATION. The Company offers total software integration
solutions for POS clients who already have existing software platforms (e.g.
accounting, inventory, payroll, and food costing) in place. Programs are
provided and written in Visual Basic, C++ and Crystal Reports. The Company
believes that the future of software systems integration is to develop and
implement Intranet and Internet connections within multi-unit chains resulting
in the localization of all critical operational data.
SUPPORT SERVICES
MANAGED NETWORK SERVICES. As POS systems become more complex, food service
providers and retailers are experiencing difficulties in hiring, training and
retaining technology professionals who can maintain the performance and
functionality of their POS systems. Accordingly, these companies are
increasingly outsourcing certain maintenance and management functions for their
POS systems in order to minimize the potentially high costs associated with POS
system outages. The Company provides a range of enterprise network support and
management services that are designed to maintain the effective performance of a
customer's POS system. The Company uses its technical expertise and staffing
experience to package, price and deliver combinations of these services, and the
customer benefits from the Company's experience in providing network management
services in a broad range of operating environments. The Company's network
management services include combinations of the following services, which are
selected by the customer to meet its specific needs: network health checks,
baseline documentation and management maintenance, break/fix remote network
management and diagnostics help desk services network outsourcing.
HELP DESK. The Company's emergency software hotline is available for
questions customers may have with respect to specific application software and
operating systems. The Help Desk is designed to provide service and support for
issues that can be resolved without an on-site visit. If at any time during the
Help Desk call it is determined that hardware service is required, the support
personnel will expedite the call to the hardware service department.
HARDWARE SERVICE/HARDWARE MAINTENANCE/PREVENTATIVE MAINTENANCE. A variety
of hardware maintenance options are currently provided on a 24 hour, seven day a
week basis. Calls placed to a central service center are greeted with assistance
to determine the nature of the call. Once the failure is determined, the
responding field technician will answer the call in accordance with services
needed and contracted
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coverage. Depot service supplies configured equipment directly to the location
for uninterrupted operations while defective equipment is returned from the site
to the service center for repair via courier. Full service maintenance offers on
site technical maintenance from the Company's field service technician for both
front and back of house equipment.
TRAINING/INSTALLATION. Site-specific training is available through customer
support personnel beginning with pre-install configuration and database building
through installation and "live" date. Hardware preparation such as software
load, equipment burn-in, cabling and performance testing of "pre-live" system is
an essential component prior to staging and installation.
PRODUCT DEVELOPMENT
For the fiscal years ended June 30, 1998 and June 30, 1997, the Company
spent approximately $874,000 and $396,000, respectively, on research and
development. The Company maintains an engineering staff of nine people, with
expertise in electronics, mechanical and software design, who are responsible
for prototyping, tooling and testing the Company's products. The Company's
engineering and manufacturing staff then coordinate with systems engineers and
quality control personnel to progress from the final design stage to mass
production. The Company intends to hire additional engineers and project
managers to better coordinate the product development process as the Company
expands its product development efforts.
PRODUCT DISTRIBUTION
The Company's products are primarily distributed through strategic
relationships with OEMs and VARs that have a strong reputation in the food
service and retail POS markets. By distributing its products through OEMs and
VARs, the Company has been able to take advantage of the existing name
recognition and market position of its OEMs and VARs and quickly establish a
market for its products, while minimizing expenditures for direct sales,
marketing, technical support and service. The Company intends to continue to
expand these relationships to further penetrate its existing domestic and
international markets, as well as to gain access to new market segments and
international markets.
To date, the Company's sales have been predominantly to small-to-mid size
restaurant chains. Javelin believes a major opportunity exists for it to further
penetrate large accounts (100 site or more chain organizations) with its
existing systems and ability to provide a total solution to the client. Large
accounts often require a "total solution" including initial consulting, hardware
and software installation, ongoing support and maintenance, product support
services and a super-regional or national presence. Consequently, in order to
meet this need, the Company recently purchased three established and
well-regarded systems integrators: CCI, Posnet and Aspact. CCI and Posnet, both
based in the US, have been consolidated and operate as CCI Group, Inc. Aspact's
activities have been primarily focused on the Singapore and Hong Kong markets.
The Company believes that by targeting different markets through its different
distribution channels, it can more effectively penetrate multiple markets while
minimizing costs associated with channel conflicts.
VARS. The Company sells its products to VARs who integrate
industry-specific software with the Company's hardware product for resale into
various vertical markets comprised of relatively small customers (less than 50
stores). The Company works closely with these VARs as well as the various
software developers to stay abreast of the diversified needs of the Company's
targeted markets. The Company's VAR network currently totals approximately 250
VARS. The Company believes that VAR distribution channels are advantageous to
the Company as they generally have existing geographically diverse customers,
focus their businesses on providing customized solutions to their customers and
maintain their own sales and technical support staff.
OEMS. The Company also sells its products to OEMs with significant market
presence in the food service and specialty retail industries. The OEMs market
the Company's products under their own names and sell either through dealers or
directly to mid-sized customers (50 to 100 stores). Because of the high
likelihood of the Company's product being offered by more than one OEM into an
end user account, the
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Company offers the OEM an opportunity to choose its own customized design. The
OEM is charged for mechanical design, prototyping and tooling. One of the
Company's principal strategies is to expand the OEM distribution channel both
domestically and internationally.
DIRECT SALES ORGANIZATION (CCI). The Company's acquisitions of CCI and
Posnet allow it to sell directly to corporate accounts. Since the acquisitions,
the Company has focused its efforts principally on large customers (100+ stores)
because these customer opportunities are beyond the scope that can be
effectively managed by the Company's regional VAR marketing partners. In this
manner, the Company believes it can minimize any potential distribution channel
conflict with its VARs. The Company typically provides a multi-vendor POS
solution for its corporate accounts, and the hardware utilized in any particular
account may not be Javelin hardware. The standardized nature of franchised
operations enables the Company to design and rapidly deploy customized solutions
for these large-scale customers. The Company intends to focus on growing its
direct sales business in the near future to take advantage of a scarcity of POS
service providers currently in the marketplace.
CUSTOMERS
Certain end users of the Company's products are:
<TABLE>
<CAPTION>
BOTH JAVELIN
JAVELIN HARDWARE SERVICES HARDWARE AND SERVICES
- -------------------------------- ------------------------------- --------------------------
<S> <C> <C>
Blimpies International ARAMARK Corp. Universal Studios
Red Robin International
Madison Square Garden -Stadiums and Arenas Inc.
Greyhound Lines Inc. -National Parks Direct Express
Club Corporation of America AFC Enterprises, Inc. Chevron Corporation
Greennall's Pubs and Restaurants -Popeye's Inc. Claim Jumper Restaurants
Ogden Entertainment Services
Inc. -Church's Fried Chicken Inc.
Mitsubishi Silicon America -Seattle's Best Coffee
Sonic Corp.
Allied Domecq PLC
-Baskin-Robbins USA Co.
-Dunkin' Donuts Incorporated
Jamba Juice Co.
</TABLE>
CASE STUDIES
VAR. Farris Point of Sale ("Farris") is an example of a well-established
VAR focused on the food service and retail markets that was searching for an
open systems solution to integrate with the software it was selling. Farris now
integrates restaurant software with Javelin's touchscreen hardware, then deploys
the open system POS solution in small chain operations throughout Texas. Farris'
customers generally are chains with less than ten stores. Historically, Farris
has purchased 30-40 Javelin systems per month and provides 24-hour technical
support for its customers.
OEM. Wang (Global) is a leading global network and desktop and integration
services company that plans, deploys, manages and maintains worldwide network
and desktop computing environments. Wang is also a long-term supplier for one of
the world's largest QSR chains. To date, Wang has installed POS systems in a
large number of locations for the customer. Recently, the customer delineated a
new hardware specification for its POS systems requiring a Pentium-based
solution. Since Wang did not have a product that satisfied this new
specification, Wang sought Javelin's assistance to provide an integrated
solution for the customer. In this collaboration, Javelin has provided the
hardware design and manufacturing, while Wang distributes and supports the
product. The companies together refined Javelin's Wedge-P to match the
customer's requirements, and Wang guided it through the customer's extensive
approvals process.
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DIRECT SALES/CCI. ARAMARK Corp. ("ARAMARK") is an industry leader offering
a variety of managed services to private and public sector clients, and
generates $7 billion in revenues each year. ARAMARK is the largest provider of
food services to major and minor league sports venues, including many high
profile locations such as Camden Yards in Baltimore, Turner Field in Atlanta,
Coors Field in Denver, CoreStates Center in Philadelphia and Fenway Park in
Boston. ARAMARK also serves state and national park locations, including Denali
in Alaska, Pikes Peak, Lake Powell, Hearst Castle as well as many major
convention centers throughout the United States. CCI has worked closely with
ARAMARK's sports and entertainment division for the past four years and offers a
number of products and services to ARAMARK's clients. For example, CCI has
provided systems integration services to Camden Yards and CoreStates Center to
interconnect multiple providers of point of sale solutions, to Turner Field and
Coors Field to implement wireless handheld order devices, and at several
national park locations to interconnect several manufacturers' cash registers
with PC-based inventory systems.
CCI provides turn-key deployments of POS solutions for ARAMARK properties
starting with the development of a complete network and equipment design and
associated budget for the property. Once the design and budget is approved, CCI
develops a detailed project plan in conjunction with ARAMARK and the property
owners. CCI then procures all equipment and materials, builds all necessary
computer and POS systems, performs the required network wiring and installation
and deploys all systems at the property. Prior to releasing the property for
use, CCI will conduct various tests and dry run activities to ensure correct
functionality of all equipment and systems. On larger properties, such as
stadiums, CCI also provides on-going on-site support as part of the deployment
plan. All properties also receive hardware and software support via CCI's St.
Louis-based help desk and repair center. All ARAMARK properties can receive
seven-day support from CCI's help desk and repair center, including overnight
and same day counter-to-counter equipment replacement. Larger facilities also
have an on-site equipment spares pool maintained by CCI in support of major
sporting events. Throughout the process, CCI provides weekly status and
financial reports to ARAMARK for project control.
SALES AND MARKETING
The Company's sales and marketing efforts are dedicated to developing the
Company's direct and indirect distribution channels on a worldwide basis. The
Company's sales efforts in its indirect distribution channels are divided into
four regional groups, United States, Europe, Australia and Asia, with
international sales efforts directed from the Company's international
subsidiaries. In its indirect distribution channel, the Company has a sales
force of ten salespersons spread throughout the regions, all of whom are
dedicated to developing the Company's OEM and VAR distribution channels. Three
of these salespersons have also recently been dedicated to specific domestic
channels linked to the application software that is integrated with the Javelin
POS system with the intent of increasing sales from these channels. The
Company's technically sophisticated OEMs and VARs are responsible for all end
user interaction, including sales and warranty support, thereby reducing the
need for the Company to maintain large in-house sales or technical support staff
while increasing the Company's presence in the food service and retail markets.
The Company also consults with its OEMs and VARs in order to identify new
product opportunities and product refinements.
The Company's direct sales and marketing efforts are staffed by 11
salespersons located in regional offices in the Unites States, England,
Australia and Singapore. The Company's direct sales business has grown
significantly through acquisitions of its POS systems integrators: CCI and
Posnet in the United States and Aspact in Singapore. The Company expects its
systems integration business to operate under labels other than "Javelin" in
order to reinforce the independent role of the systems integrator in a multi-
vendor marketplace. The Company eventually expects to adopt a single brand
identity for all of its regional system integration subsidiaries. In the United
States, for example, the Posnet sales force has been merged into CCI's sales
force.
The Company's primary direct selling efforts for its system integration
services are through CCI. CCI is an expert in touchscreen POS technology focused
in the food service and retail markets. This expertise
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combined with a vendor independent, open systems commitment have positioned CCI
as a client partner as opposed to a vendor.
MANUFACTURING
The Company designs all of the hardware and certain of the firmware
components for all Javelin products. The Company's manufacturing operations
consist of the procurement of components and the assembly, testing and quality
assurance of finished goods for shipment to its customers. The fabrication of
major sub-assemblies, such as circuit boards and sheet metal chassis, and the
supply of other finished components, such as touchscreens, are provided by
third-party manufacturers. Javelin monitors the quality of its purchased and
manufactured components through source and incoming inspection. The Company
evaluates and monitors suppliers based on quality, reputation, responsiveness
and price. To date, the Company has undertaken substantially all of the final
assembly for its products at its facility in Irvine, California.
The principal components that make up the Company's products are standard
electronics available from a wide variety of suppliers. A single supplier
currently provides certain components utilized in the Company's products. The
Company believes that, with respect to these components, there are a number of
alternative suppliers that could supply components that could be easily
integrated into the Company's products without any significant interruption in
the Company's operations. The Company has no written long-term contracts with
the manufacturers of its products or with any suppliers of the components used
in the Company's products. The Company historically has placed orders for
products and components based on its projected sales over the next approximately
90 days, and the Company currently maintains a 60-day supply of product
components in inventory.
The Company recently has begun to outsource some final assembly of its
products to a U.S.-based contract manufacturer. The Company believes that
outsourcing will reduce the likelihood of capacity constraints as production
volumes for its products increase. In addition, the Company has contracted with
a manufacturer based in Singapore to manufacture one of Javelin's proposed new
products, the Javelin LP, on a turnkey basis. Under the turnkey program, the
Singapore manufacturer will ship finished products to Javelin, with the
manufacturer managing the day-to-day purchasing, manufacturing and quality
control requirements. The Company initially plans to have all finished products
inspected at its Irvine, California facility prior to shipment to customers. The
Company ultimately plans to have the manufacturer ship products directly to the
Company's subsidiaries and distributors for final integration of the products
and shipment to customers. The Company expects to have all of its new products
similarly manufactured and shipped by third parties in the future.
Any termination of, or significant disruption in, the Company's relationship
with the third-party manufacturers of its products may prevent the Company from
filling customer orders in a timely manner, as the Company generally does not
maintain large inventories of its products or components. The Company has
occasionally experienced and may in the future experience delays in delivery of
products and delivery of products of inferior quality from some of its
third-party manufacturers. Although alternate manufacturers are available to
produce the Company's products, the number of manufacturers of some products is
limited, and qualifying a replacement manufacturer could take several months. In
addition, the Company's use of third-party manufacturers reduces control over
product quality, manufacturing timing, yields and costs since the Company must
rely on the third-party manufacturers' ability to identify the Company's
requirements for products and components, the manufacturers' general competence
and ability to progress along the learning curve relating to the manufacture of
the Company's products, and the manufacturers' schedules and capacity.
Disruption of the manufacture of the Company's products or failure of a
third-party manufacturer to remain competitive in functionality or price could
delay or interrupt the Company's ability to manufacture or deliver its products
to customers on a timely basis and would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
although arrangements with the Company's manufacturers may contain provisions
for warranty obligations on the part of the third-party manufacturers, the
Company remains primarily responsible to its customers for warranty obligations.
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The Company also depends upon third-party suppliers to deliver components
that are free from defects, competitive in functionality and cost and in
compliance with the Company's specifications and delivery schedules. Disruption
in supply, a significant increase in the cost of one or more components or
failure of a third-party supplier to comply with any of the Company's
procurement needs could delay or interrupt the Company's ability to manufacture
or deliver its products to customers on a timely basis and would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, any factors, such as general adverse economic conditions,
financial condition or government regulations and restrictions, that affect the
Company's third-party manufacturers or suppliers could have a material adverse
impact on the Company's business, financial condition and results of operations.
PRODUCT WARRANTY
The Company's computer products have a warranty that covers defective
material and workmanship during the twelve-month warranty period commencing on
the date of delivery of the products. During the warranty period, the Company
will, at its sole option, repair or replace parts found to be defective or
refund the purchase price of products or parts. Certain of the Company's major
distributors also provide warranty service for the Company's products.
COMPETITION
The Company believes that the open system architecture of its products and
systems integration services makes it well positioned to take advantage of the
current POS marketplace. The migration to open systems architecture in the POS
industry has been disruptive to many POS companies that built their businesses
on the proprietary operating model. While the Company focuses on large-scale
solutions to multi-site customer POS problems, companies promoting proprietary
systems have faced significant pressure on their operating margins due to high
product costs and substantial overheads. Many of these proprietary vendors have
now left the POS marketplace through acquisitions or financial failure, and the
remaining proprietary vendors generally have undergone reorganizations that have
resulted in rapid exits from significant market segments and/or distribution
channels. With the largest multinational open systems computer companies not yet
fully appreciating the potential of the open systems POS market, the Company is
focused on providing food service providers and retailers with cost-effective
POS solutions that satisfy their POS needs, including system design, hardware
and software installation and implementation and ongoing support and
maintenance.
The market for the Company's products and services is highly competitive,
subject to rapid change and sensitive to new product introductions or
enhancements and marketing efforts by industry participants. The Company expects
to continue to experience significant and increasing levels of competition in
the future, in part as open systems architecture in its targeted industries
becomes more common. The principal elements of competition related to the
Company's products include price, product features and performance,
compatibility with open systems, quality and reliability, brand awareness, level
of customer service and quality of display. The POS systems integration industry
is also highly competitive and undergoing continual change. The principal
elements of competition related to the Company's systems integration services
include reputation, scope of services provided, availability of resources and
price. In many of the Company's markets, traditional computer hardware
manufacturing, communications and consulting companies provide the most
significant competition. The Company must also compete with smaller service
providers that have been able to develop strong local or regional customer
bases. Most of the Company's competitors for its products and services, as well
as certain potential competitors, are more established, benefit from greater
name recognition, have significantly greater financial, technological,
production and marketing resources, and have more extensive distribution
networks than the Company.
The Company believes the use of open systems architecture in its targeted
industries is an important competitive element. Several of the Company's
competitors currently also offer open systems and the Company believes that the
number of competitors offering open systems solutions will grow over the next
several years. The Company anticipates that a significant source of future
competition may be from
43
<PAGE>
existing competitors in the POS products and services market that the Company
believes are currently attempting to develop POS systems and support services
utilizing open systems architecture. Due to the greater sales, marketing,
product development and financial resources of the Company's competitors, the
Company anticipates that competition from these competitors will intensify in
the future. In order to effectively compete against these competitors, the
Company will need to continue its growth trend and attain sufficient revenues to
have the resources to timely develop new products and services in response to
evolving technology and customer demands and to sell products and services
through a broad distribution channel in competition with these other existing
and potential competitors. No assurance can be given that the Company will be
able to grow sufficiently to enable it to compete effectively in this
marketplace.
The Company's competitors include a substantial number of large
well-established companies including International Business Machines (IBM),
MICROS Systems, Inc., Par Technology Corporation, Radiant Systems, Inc., NCR
Corp., Panasonic Communications and Systems Co., Fujitsu, Ltd. and ICL Retail
Systems, each of which also offers open systems architecture products and
services related thereto. There can be no assurance that the Company will be
able to compete effectively or that these existing substantial competitors, or
new competitors, will not develop competitive products and services with
favorable pricing. Moreover, the Company has little or no proprietary barriers
to entry that could keep its competitors from developing similar products or
services and technology or selling competing products or services in the
Company's markets.
Increased competition from manufacturers or distributors of products similar
to or competitive with the Company's products, or from service providers that
provide services similar to the Company's services, could result in price
reductions, reduced margins and loss of market share or could render the
Company's technology obsolete, all of which could have a material adverse effect
on the Company's results of operations and financial condition. There can be no
assurance that the Company will be able to successfully compete in this
marketplace or develop sufficient new products and services to remain
competitive, and any failure to do so could have a material adverse effect on
its results of operations and financial condition.
EMPLOYEES
As of August 31, 1998 the Company had approximately 165 full-time employees,
including 16 employed in sales and marketing, 118 employed in research and
development, engineering, technical support and production, and 31 employed as
administrative and support staff. None of the Company's employees are
represented by unions, and the Company considers its employee relations to be
good.
FACILITIES
The Company's executive offices, research and product development,
warehousing and distribution facilities are currently housed in a single leased
industrial unit comprised of approximately 29,000 square feet located in Irvine,
California. Under the terms of the lease, the Company presently pays rent of
approximately $23,500 per month with predetermined monthly rent increases at
annual intervals. The lease expires in July 2003. CCI leases a warehousing and
distribution facility of approximately 11,700 square feet in Earth City,
Missouri under a lease that expires on October 31, 1998 and provides for monthly
rental of approximately $8,700. CCI is in the process of seeking larger
facilities; however, no lease has been consummated.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Richard P. Stack................. 33 President, Chief Executive Officer and Director
Robert D. Nichols................ 45 Vice President, Sales and Marketing, President, CCI Group, Inc.
and Director
C. Norman Campbell............... 44 Vice President, Engineering
Horace M. Hertz.................. 49 Chief Financial Officer and Secretary
Andrew F. Puzder(2).............. 48 Director
Steven J. Goodman(1)............. 58 Director
Jay L. Kear(1)(2)................ 61 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
RICHARD P. STACK has been President, Chief Executive Officer and a director
of the Company since the Company's inception in September 1995. Prior to that
time, from 1991 through September 1995, Mr. Stack was Managing Director of
Hi-Technology Supply, a manufacturer and distributor of personal computers and
components located in South Africa. From 1988 through 1991, Mr. Stack was
employed by Pan-American Airlines in technical management positions. Mr. Stack
holds a B.A. degree from the University of California at Berkeley.
ROBERT D. NICHOLS has been Vice President, Sales and Marketing, and a
director of the Company since August 1998, and has been President of CCI Group,
Inc. since its inception in 1992. Prior to that time, from 1991 to 1992, Mr.
Nichols served as Director of Sales and Marketing for DP-Tek, Inc., an
electronic components manufacturer and systems integrator. From 1985 through
1991, Mr. Nichols served in various sales and marketing positions, most recently
as Sales Manager, Quick Service Restaurants, for Unisys Corporation, a
publicly-traded computer and information systems provider. Mr. Nichols holds an
Associates Degree from the State University of New York and B.S. and M.B.A.
degrees from the University of Missouri.
C. NORMAN CAMPBELL has been Vice President, Engineering, of the Company
since its inception in September 1995. Mr. Campbell also served as a director of
the Company from its inception through May 1998. Prior to that time, from 1991
through September 1995, Mr. Campbell served in various engineering management
positions, including Director of Research and Development, Singapore, for
Advanced Logic Research, a publicly-traded high-end file server manufacturing
company. From 1984 to 1991, Mr. Campbell also acted as a consultant to the
computer industry with such companies as Intel, ITT, Orange Micro Inc. and IBC
(UK).
HORACE M. HERTZ has been Chief Financial Officer of the Company since
November 1997. Prior to that time, from 1996 to 1997, Mr. Hertz acted as a
financial consultant for various companies. From October 1995 to December 1995,
Mr. Hertz was the Chief Financial Officer of Access Healthnet, Inc., an entity
that declared bankruptcy in December 1995. From 1991 to 1995, Mr. Hertz was a
partner of Corbin & Wertz, a CPA firm specializing in publicly-held companies.
From 1974 to 1991, Mr. Hertz was a partner of Deloitte & Touche LLP. Mr. Hertz
holds a masters degree in mathematics from the University of California at
Irvine.
45
<PAGE>
ANDREW F. PUZDER was elected as a director of the Company in November 1996.
Mr. Puzder is currently Executive Vice President of Irvine-based Fidelity
National Financial, Inc., Executive Vice President and General Counsel of CKE
Restaurants, Inc., Chief Executive Officer and a director of Green Burrito Foods
Corporation, and a director of Rally's Hamburgers, Inc. He is also a partner on
leave at the law firm of Stradling, Yocca, Carlson & Rauth. Mr. Puzder received
his J. D. from the Washington University School of Law.
STEVEN J. GOODMAN was elected as a director of the Company in January 1996.
Mr. Goodman is currently a consultant for Tessa Financial Group, Inc., a
regional investment banking firm. From November 1991 through March 1995, Mr.
Goodman was West Coast Managing Director of Creative Business Strategies, Inc.,
a financial corporate consulting firm.
JAY L. KEAR was elected as a director of the Company in August 1996. Since
1988, Mr. Kear has represented Kear Enterprises in working with and investing in
high technology companies. From 1988 through 1993, Mr. Kear also engaged in
similar work for the Noorda Family Trust. Prior to 1988, Mr. Kear held various
sales, marketing, engineering, and general management positions with private and
public companies in the high technology sector. Mr. Kear received a B.S. degree
from the University of Southern California.
BOARD COMPOSITION
The Board of Directors is divided into three classes, with each class
holding office for staggered three-year terms. The terms of Jay L. Kear and
Andrew F. Puzder expire in 1998, the terms of Richard P. Stack and Robert
Nichols expire in 1999 and the term of Steven J. Goodman expires in 2000.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Puzder and Kear. The Audit Committee
makes recommendations to the Board of Directors regarding the selection of
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's audit and control functions.
The Compensation Committee consists of Messrs. Goodman and Kear. The
Compensation Committee makes recommendations regarding the Company's stock
option plans as well as decisions concerning salaries and incentive compensation
for employees and consultants of the Company.
DIRECTOR COMPENSATION
The members of the Board do not receive any cash compensation for their
service as directors, but are eligible for reimbursement of their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy. Each non-employee director of the Company is also automatically
granted options to purchase 30,000 shares of the Company's Common Stock pursuant
to the terms of the Company's stock option plan for services rendered as a
director of the Company. During the last fiscal year, the Company granted
options covering an aggregate of 30,000 shares to Mr. Goodman at an exercise
price of $9.00 per share, representing the fair market value of the Company's
Common Stock on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and the other executive officer
of the Company who earned in excess of $100,000
46
<PAGE>
in salary and bonus (collectively, the "Named Executive Officers") for services
rendered to the Company during the year ended June 30, 1998:
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
Richard P. Stack................. 1998 $ 105,508 -- 50,000
President, Chief Executive 1997 $ 87,958 -- --
Officer and Director 1996 $ 15,000 -- --
C. Norman Campbell............... 1998 $ 107,593 -- 30,000
Vice President, Engineering
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"SEC"), the compensation described in this table does not include medical,
group life insurance or other benefits received by the Named Executive
Officers which are available generally to all salaried employees of the
Company and certain perquisites and other personal benefits received by the
Named Executive Officers which do not exceed the lesser of $50,000 or 10% of
any such officer's salary and bonus disclosed in this table.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1998 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------- REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE OR MARKET PRICE FOR OPTION TERM(3)
OPTIONS FISCAL BASE PRICE ON DATE OF EXPIRATION ------------------
NAME GRANTED(1) YEAR(2) ($/SH) GRANT DATE 5% 10%
- ----------------------- ----------- ------------ ----------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard Stack.......... 50,000 8.0% $ 8.625 $ 8.625 12/11/07 $271,200 $685,700
C. Norman Campbell..... 30,000 4.4% $ 8.625 $ 8.625 12/11/07 $162,700 $412,400
</TABLE>
- ------------------------
(1) The options referenced above become exercisable over a 5-year period with
20% vesting one year from the date of grant and 20% of the remaining shares
vesting yearly thereafter. The term of the options is ten years.
(2) Based on options to purchase 650,300 shares granted to employees in fiscal
1998, including the Named Executive Officers.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the SEC, and do not reflect the Company's
estimate or projection of future stock price performance. Actual gains, if
any, are dependent on the actual future performance of the Company's Common
Stock and no gain to the
47
<PAGE>
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the Named
Executive Officers at June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT JUNE 30, 1998(1) AT JUNE 30, 1998(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard Stack.............. -- 50,000 -- $150,000
C. Norman Campbell......... -- 30,000 -- $ 90,000
</TABLE>
- ------------------------
(1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money"
options are options with exercise prices below the market price of the
Company's Common Stock.
(2) Based on the fair market value of the Common Stock as of June 30, 1998.
Amounts reflected are based on the fair market value minus the exercise
price and do not indicate that the optionee sold such stock.
STOCK OPTION PLANS
1996 INCENTIVE STOCK AWARD PLAN
In August 1996, the Company adopted, and the stockholders subsequently
approved, the Company's 1996 Stock Incentive Award Plan (the "1996 Plan"). Under
the 1996 Plan, 300,000 shares of the Company's Common Stock are reserved for
issuance pursuant to the exercise of stock awards granted to employees,
directors and consultants. As of August 15, 1998, options to purchase a total of
279,600 shares were outstanding under the 1996 Plan, 20,400 shares of Common
Stock had been issued upon the exercise of options granted under the 1996 Plan,
and no shares remained available for grant thereunder. The 1996 Plan will
terminate in August 2006, unless sooner terminated by the Company's Board of
Directors.
The 1996 Plan provides for the grant of both incentive and nonstatutory
stock options, restricted stock, stock appreciation rights, dividend
equivalents, stock payments and/or performance awards. Incentive stock options
granted under the 1996 Plan are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Nonstatutory stock options granted under the 1996 Plan are
intended not to qualify as incentive stock options under the Code. Options
granted under the 1996 Plan generally have a term of ten years and vest over
three years, with 40% vesting after one year and 30% vesting yearly thereafter.
No incentive stock option may be granted under the 1996 Plan to any person
who, at the time of the grant, owns (or is deemed to own) stock possessing more
than 10% of the total combined voting power of the Company or any affiliate of
the Company, unless the option exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and the
term of the option does not exceed five years from the date of grant. For
incentive stock option grants, the aggregate fair market value, determined at
the time of grant, of the shares of Common Stock with respect to which such
options are exercisable for the first time by an optionee during any calendar
year (under all such plans of the Company and its affiliates) may not exceed
$100,000.
The Company did not grant any options to its executive officers under the
1996 Plan during the fiscal year ended June 30, 1998.
48
<PAGE>
1997 EQUITY INCENTIVE PLAN
In September 1997, the Company adopted, and the stockholders subsequently
approved, the Company's 1997 Equity Incentive Plan (the "1997 Plan"). Under the
1997 Plan, 1,100,000 shares of the Company's Common Stock are reserved for
issuance pursuant to the exercise of stock awards granted to employees,
directors and consultants. As of August 15, 1998, options to purchase a total of
561,000 shares were outstanding under the 1997 Plan and options to purchase
539,000 shares remained available for grant thereunder. The 1997 Plan will
terminate in September 2007, unless sooner terminated by the Company's Board of
Directors.
The 1997 Plan provides for the grant of both incentive and nonstatutory
stock options and stock appreciation rights. Incentive stock options granted
under the 1997 Plan are intended to qualify as "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Nonstatutory stock options granted under the 1997 Plan are intended not
to qualify as incentive stock options under the Code. Options granted under the
1997 Plan generally have a term of ten years and vest over a period of four to
five years, with 25% to 20% vesting after one year and 25% to 20% vesting yearly
thereafter.
No incentive stock option may be granted under the 1997 Plan to any person
who, at the time of the grant, owns (or is deemed to own) stock possessing more
than 10% of the total combined voting power of the Company or any affiliate of
the Company, unless the option exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and the
term of the option does not exceed five years from the date of grant. For
incentive stock option grants, the aggregate fair market value, determined at
the time of grant, of the shares of Common Stock with respect to which such
options are exercisable for the first time by an optionee during any calendar
year (under all such plans of the Company and its affiliates) may not exceed
$100,000.
EMPLOYMENT AGREEMENTS
The Company and Richard P. Stack entered into an Employment Agreement dated
August 19, 1996 (the "Stack Employment Agreement"). The Stack Employment
Agreement expires on August 19, 1999 (subject to annual renewals thereafter) and
provides for payment to Mr. Stack of an annual salary of $95,000 from January 1,
1997 through December 31, 1997 and $105,000 from and after January 1, 1998. As
of April 1, 1998, Mr. Stack's annual salary was increased to $150,000. In
addition to his salary, Mr. Stack is reimbursed for all reasonable and necessary
travel and other business expenses incurred in connection with the performance
of his duties. The Company is also obligated to pay the premium for a life
insurance policy insuring Mr. Stack's life providing for death benefits of up to
$750,000 to the named beneficiary of the policy. If Mr. Stack's employment with
the Company is terminated for cause (as defined in the Stack Employment
Agreement), Mr. Stack will be entitled to receive his base salary through the
date of termination. If Mr. Stack's employment with the Company is terminated
without cause, he will be entitled to receive payment of his base salary for the
greater of (i) the remaining term of the Stack Employment Agreement, or (ii) one
(1) year from the date of termination.
The Company and C. Norman Campbell entered into an Employment Agreement
dated August 19, 1996 (the "Campbell Employment Agreement"). The Campbell
Employment Agreement expires on August 19, 1999 (subject to annual renewals
thereafter) and provides for payment to Mr. Campbell of an annual salary of
$95,000 from January 1, 1997 through December 31, 1997 and $105,000 from and
after January 1, 1998. As of April 1, 1998, Mr. Campbell's annual salary was
increased to $130,000. In addition to his salary, Mr. Campbell is reimbursed for
all reasonable and necessary travel and other business expenses incurred in
connection with the performance of his duties. The Company is also obligated to
pay the premium for a life insurance policy insuring Mr. Campbell's life
providing for death benefits of up to $750,000 to the named beneficiary of the
policy. If Mr. Campbell's employment with the Company is terminated for cause
(as defined in the Campbell Employment Agreement), Mr. Campbell will be entitled
49
<PAGE>
to receive his base salary through the date of termination. If Mr. Campbell's
employment with the Company is terminated without cause, he will be entitled to
receive payment of his base salary for the greater of (i) the remaining term of
the Campbell Employment Agreement, or (ii) one year from the date of
termination.
CCI and Robert Nichols entered into an Employment Agreement dated January 1,
1998 (the "Nichols Employment Agreement"). The Nichols Employment Agreement
expires on December 31, 2002 and provides for payment to Mr. Nichols of an
annual base salary of $100,000. Mr. Nichols is also entitled to a quarterly
bonus of $6,250 and a year-end bonus of approximately $31,750, subject to
adjustment based on CCI's profitability for the applicable fiscal year. In
addition to his base salary and bonuses, Mr. Nichols is also reimbursed for all
reasonable and necessary travel and other business expenses incurred in
connection with the performance of his duties. If Mr. Nichols' employment with
CCI is terminated for cause (as defined in the Nichols Employment Agreement),
Mr. Nichols will be entitled to his base salary through the date of termination.
If Mr. Nichols is terminated without cause (as defined in the Nichols Employment
Agreement), then Mr. Nichols will be entitled to a lump sum equal to Mr.
Nichol's annual base salary.
50
<PAGE>
CERTAIN TRANSACTIONS
On December 22, 1997, the Company issued 557,500 shares of the Company's
Common Stock to Robert Nichols, Executive Vice President, Sales and Marketing,
and a Director of the Company, for his entire interest in CCI in connection with
the purchase by the Company of all the outstanding capital stock of CCI. In
connection with the acquisition of CCI, the Company also assumed a note payable
to Mr. Nichols with a balance of approximately $185,000 (the "Nichols Note"). In
February 1998, the Company repaid to Mr. Nichols the principal amount and all
accrued interest outstanding under the Nichols Note.
The Company has entered into employment agreements with Richard P. Stack and
C. Norman Campbell. In addition, CCI entered into an employment agreement with
Robert Nichols. See "Management--Employment Agreements."
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 15, 1998, and as
adjusted to reflect the sale of shares in this Offering, by (i) each person who
is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each Named Executive Officer, (iii) each of the
Company's directors, and (iv) all current directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY
SHARES OWNED(2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
Richard P. Stack(3)................................................... 857,008 20.8% 16.0%
Robert D. Nichols(4).................................................. 557,500 13.6 10.4
C. Norman Campbell(5)................................................. 483,550 11.7 9.0
Steven S. Goodman(6).................................................. 287,200 7.0 5.3
Jay L. Kear(7)........................................................ 20,000 * *
Andrew F. Puzder(8)................................................... 12,000 * *
All Executive Officers and Directors as a group (7 persons)(9)........ 2,239,758 53.9% 41.4%
</TABLE>
- ------------------------
* Less than one percent
(1) All persons listed above have an address c/o the Company's principal
executive offices at 17891 Cartwright Road, Irvine, CA 92614.
(2) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 4,111,962 shares of Common Stock outstanding as of August 15, 1998
and assuming 5,365,025 shares of Common Stock outstanding after completion
of this Offering.
(3) Includes 5,000 shares owned by Mr. Stack's children and 62,000 shares owned
by Mr. Stack's mother.
(4) Includes 5,850 shares owned by Mr. Nichols' children.
(5) Includes 9,450 shares subject to options exercisable within 60 days of
August 15, 1998, held by Mr. Campbell's spouse.
(6) Includes 203,200 shares owned by The Steven J. Goodman Revocable Living
Trust of which Steven J. Goodman, a director of the Company, is the sole
trustee and the sole beneficiary, and with respect to which Mr. Goodman has
sole voting and investment power. Also includes 10,000 shares subject to
options exercisable within 60 days of August 15, 1998.
(7) Includes 5,000 shares held by the Jay Louis Kear Family Trust of which Mr.
Kear is the trustee. Also includes 15,000 shares subject to options
exercisable within 60 days of August 15, 1998.
(8) Includes 12,000 shares subject to options exercisable within 60 days of
August 15, 1998.
(9) Includes 46,450 shares subject to options exercisable within 60 days of
August 15, 1998.
52
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information as of August 15, 1998
with respect to each Selling Stockholder that will sell shares of the Company's
Common Stock to the Underwriters if the Underwriters exercise the over-allotment
option granted by the Selling Stockholders to the Underwriters. If the over-
allotment option is exercised in full, the Underwriters will purchase an
aggregate of 187,500 shares of Common Stock from the Selling Stockholders as set
forth in the following table. If the over-allotment option is exercised only in
part, the Underwriters have agreed that they will purchase from each Selling
Stockholder a pro rata portion of the number of shares to be purchased in
connection with the exercise of the over-allotment option, which pro rata
portion shall be determined based upon the number of shares which each Selling
Stockholder has requested to be sold in the Offering and which shall not exceed
the number of shares specified in the following table as being offered by each
such Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(2) NUMBER OF AFTER OFFERING(2)
---------------------- SHARES BEING ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------------------------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Richard P. Stack(3)........................................ 857,008 20.8 57,500 799,508 14.9%
Robert D. Nichols.......................................... 557,500 13.6 50,000 507,500 9.5
C. Norman Campbell(4)...................................... 483,550 11.7 50,000 433,550 8.1
Steven S. Goodman(5)....................................... 298,200 7.0 30,000 268,200 5.0
</TABLE>
- ------------------------
(1) All persons listed above have an address c/o the Company's principal
executive offices at 17891 Cartwright Road, Irvine, CA 92614.
(2) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 4,111,962 shares of Common Stock outstanding as of August 15, 1998
and assuming 5,365,025 shares of Common Stock outstanding after completion
of this Offering.
(3) Includes 5,000 shares owned by Mr. Stack's children and 62,000 shares owned
by Mr. Stack's mother.
(4) Includes 9,450 shares subject to options exercisable within 60 days of
August 15, 1998, held by Mr. Campbell's spouse.
(5) Includes 203,200 shares owned by The Steven J. Goodman Revocable Living
Trust of which Steven J. Goodman, a director of the Company, is the sole
trustee and the sole beneficiary, and with respect to which Mr. Goodman has
sole voting and investment power. Also includes 10,000 shares subject to
options exercisable within 60 days of August 15, 1998.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $0.01 par value, and 1,000,000 shares of Preferred Stock, $0.01
par value. The following description of the Company's capital stock is qualified
in all respects by reference to the Company's Amended and Restated Certificate
of Incorporation ("Certificate of Incorporation"), which has been filed as an
exhibit to the Registration Statement incorporating this Prospectus.
COMMON STOCK
At August 15, 1998, there were 4,111,962 shares of Common Stock outstanding,
which were held of record by 73 stockholders. The holders of outstanding shares
of Common Stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the Board of Directors
may, from time to time, determine, subject to any preferences which may be
granted to the holders of Preferred Stock. Holders of Common Stock are entitled
to one vote per share on all matters on which the holders of Common Stock are
entitled to vote. The Common Stock is not entitled to preemptive rights and is
not subject to redemption or conversion. Upon liquidation, dissolution or
winding-up of the Company, the assets (if any) legally available for
distribution to stockholders are distributable ratably among the holders of the
Common Stock after payment of all debt and liabilities of the Company and the
liquidation preference of any outstanding class or series of Preferred Stock.
All outstanding shares of Common Stock are, and the shares of Common Stock to be
issued pursuant to this Offering will be, when issued and delivered, validly
issued, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to any series of Preferred Stock that the
Company may issue in the future. Certain holders of Common Stock or securities
convertible into Common Stock are entitled to the registration rights discussed
below.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors, without action by the holders of the Common Stock, may
fix or alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of Preferred Stock. The Board of Directors,
without stockholder approval, can issue shares of Preferred Stock with rights
that could adversely affect the rights of holders of Common Stock. No shares of
Preferred Stock presently are outstanding, and the Company has no present plans
to issue any such shares. The issuance of shares of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company
or other corporate action.
WARRANTS
The Company issued warrants to Meridian Capital Group, Inc. ("Meridian"),
one of the Underwriters in this Offering, and certain of Meridian's officers in
connection with the Company's initial public offering in October 1996 (the
"Meridian Warrants"). To date, warrants to purchase 65,670 shares of Common
Stock have been exercised pursuant to the net-exercise provisions of the
Meridian Warrants, and warrants to purchase 19,330 shares of Common Stock remain
outstanding under the Meridian Warrants at an exercise price of $6.25 per share.
In addition, the Company issued warrants to purchase 35,000 shares of Common
Stock to L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend"), one of
the Underwriters in this Offering, and certain of L.H. Friend's officers in
connection with certain financial services provided to the Company at a weighted
average exercise price per share of $11.61 (the "L.H. Friend Warrants"), and a
warrant to
54
<PAGE>
purchase 100,000 shares of Common Stock to FINOVA Capital Corporation ("Finova")
at an exercise price per share of $9.00 (the "Finova Warrants," and together
with the Meridian Warrants and the L.H. Friend Warrants, the "Warrants").
REGISTRATION RIGHTS
The holders of the Warrants have certain rights of registration with respect
to the 154,330 shares of Common Stock now issuable upon exercise thereof. The
holders of the shares issuable upon exercise of the Meridian Warrants may
require the Company to file one registration statement under the Securities Act
with respect to such shares. In addition, if the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of the shares issuable upon exercise of the Warrants are
entitled to include their shares of Common Stock in the registration, subject to
certain limitations.
The Company is required to bear substantially all costs incurred in
connection with any such registrations, other than underwriting discounts and
commissions. The foregoing registration rights could result in substantial
future expense to the Company and adversely affect any future equity or debt
offerings of the Company. The demand and piggy-back registration rights related
to the Meridian Warrants expire November 1, 2001 and November 1, 2003,
respectively. The registration rights related to the Finova Warrants and the
L.H. Friend Warrants terminate on June 8, 2003 and June 9, 2003, respectively.
CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER DOCUMENTS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation law (the "Delaware GCL"), an anti-takeover law. In
general, Section 203 of the Delaware GCL prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the board of directors and of the holders of at least two-thirds of the
outstanding shares of voting stock not owned by the interested stockholder. The
existence of this provision would be expected to have an anti-takeover effect,
including attempts that might result in a premium over the market price of the
shares of Common Stock held by stockholders.
As permitted by the Delaware GCL, the Company has included in its
Certificate of Incorporation a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors to the extent permitted by the Delaware GCL. In
addition, the Amended and Restated Bylaws ("Bylaws") of the Company provide that
the Company is required to indemnify its officers and directors under certain
circumstances, including the circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. The Company has entered into
indemnification agreements with its officers and directors containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the Delaware GCL. The indemnification agreements require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers to the fullest extent permitted by Delaware law and to
advance their expenses incurred as a result of any proceedings against them as
to which they could be indemnified. The Company also carries directors' and
officers' liability insurance. The foregoing provisions of the Company's Bylaws
and indemnification agreements would be available for indemnification of, and
advancing of expenses to, officers and directors of the Company in connection
with liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the Company's Bylaws
and/or indemnification agreement, or otherwise, the Company has been advised
that in the opinion of the SEC,
55
<PAGE>
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. At present, the Company is not aware of any
pending or threatened litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification would be required or
permitted. The Company believes that its charter provisions and indemnification
agreement are necessary to attract and retain qualified persons as directors and
officers.
The Company's Certificate of Incorporation and Bylaws provide for the Board
of Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The provisions of the Certificate of Incorporation
and Bylaws of the Company with respect to the foregoing may be amended, modified
or rescinded by the holders of at least 66 2/3% of the Company's outstanding
voting stock. These provisions could have the effect of delaying, deferring or
preventing a change in control or other corporation action.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation, Glendale, California.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this Offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this Offering, the Company will have outstanding
5,365,025 shares of Common Stock. Of these shares, the 1,250,000 shares sold in
the Offering and 873,900 shares previously registered by the Company for sale to
the public will generally be freely tradable without restriction or further
registration under the Securities Act. The remaining 3,241,125 shares of Common
Stock may be sold in the public market as follows: (i) 855,817 shares will be
eligible for immediate sale on the date of this Prospectus; and (ii) upon
expiration of lock-up agreements 180 days after the date this Prospectus is
declared effective (the "Effective Date"), approximately 2,385,308 additional
shares will be eligible for sale subject to the volume and other restrictions of
Rule 144. The foregoing does not include any shares that may be issued in
connection with the acquisitions of RGB/Trinet and Jade which may first become
eligible for resale one year after the date of issuance. In addition, holders of
vested options to purchase 125,300 shares of Common Stock as of the date of this
Prospectus will be able to sell without restriction pursuant to a Form S-8
registration statement filed with respect to such shares. Holders of additional
vested options to purchase an aggregate of 92,583 shares of Common Stock as of
the date of this Prospectus will be entitled to sell all of such shares upon
expiration of lock-up agreements 180 days after the Effective Date. Future sales
of shares by existing stockholders could have an adverse effect on the market
price of the Common Stock or otherwise impair the Company's ability to raise
additional capital. See "Description of Capital Stock."
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year will be entitled to sell in any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of the Company's Common Stock or (ii)
the average weekly trading volume of the Company's Common Stock in the Nasdaq
National Market during the four calendar weeks immediately preceding the date on
which notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice, and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned restricted shares for at least two years is entitled
to sell such shares under Rule 144(k) without regard to the limitations
described above.
The Company has filed registration statements under the Securities Act
covering shares of Common Stock reserved for issuance under the Company's stock
option plans. Such registration statements cover approximately 1,400,000 shares.
Shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market, unless such shares are subject to the lock up agreements described
above. See "Management."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Van Kasper & Company, L.H. Friend, Weinress, Frankson & Presson, Inc. and
Meridian Capital Group, Inc. (the "Representatives"), have severally agreed to
purchase from the Company the number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.............................................................
L.H. Friend, Weinress, Frankson & Presson, Inc...................................
Meridian Capital Group, Inc......................................................
Total........................................................................ 1,250,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby (other than those
subject to the Underwriters' Over-Allotment Option described below) if any are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the price to public set forth on the cover page of this Prospectus and
to certain dealers at this price less a concession not in excess of $ per
share. The Underwriters may allot and these dealers may reallot a concession not
in excess of $ per share to certain other dealers. After the initial
offering, the offering price and other selling terms may be changed by the
Representatives.
The Selling Stockholders have granted to the Underwriters an option (the
"Over-Allotment Option"), exercisable no later than 45 days after the date of
this Prospectus, to purchase up to 187,500 additional shares of Common Stock at
the per share public offering price less the Underwriting Discounts and
Commissions set forth on the cover page of this Prospectus, solely to cover
over-allotments. To the extent that the Representatives act to exercise the
Over-Allotment Option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof as the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
offering, and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares of Common Stock to the Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
In connection with the Offering, the Representatives may engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, the Representatives may reduce that short position
by purchasing Common Stock in the open market. The Representatives may also
elect to reduce any short position by exercising all or part of the
Over-Allotment Option. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
58
<PAGE>
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transaction or that such transactions, once
commenced, will not be discontinued without notice.
The Company, the Selling Stockholders, all of the Company's executive
officers and directors, and certain beneficial owners of the Company's Common
Stock have agreed not to, directly or indirectly, offer to sell, contract to
sell, sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable for shares of Common Stock or any rights to
purchase or acquire Common Stock for the 180-day period from the date of this
Prospectus without the prior written consent of Van Kasper & Company. Van Kasper
& Company may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to these lock-up agreements. See
"Shares Eligible for Future Sale."
As discussed above, Van Kasper & Company may, under certain circumstances,
decide to release the Company, the Selling Stockholders and the Company's
officers, directors, employees and certain other stockholders from the 180-day
lock-up period on sales of Common Stock as set forth in the lock-up agreements.
In making such a determination, Van Kasper & Company would consider prevailing
market factors and conditions at the time of receipt of a request for release
from the 180-day restriction period. The granting of any such release would be
conditioned, in the judgment of the Van Kasper & Company on such sale not
materially adversely impacting the prevailing trading market for the Common
Stock on the Nasdaq National Market. Specifically, factors such as average
trading volume, recent price trends, and the need for additional public float in
the market for the Common Stock would be considered in evaluating such a
request.
In October 1996, the Company issued to Meridian Capital Group, Inc.
("Meridian") and certain of Meridian's officers warrants to purchase 85,000
shares of the Company's Common Stock at $6.25 per share in connection with the
Company's initial public offering (the "Meridian Warrants"). To date, warrants
to purchase 65,670 shares of the Company's Common Stock have been exercised for
a total of 36,362 shares of Common Stock pursuant to the net exercise provisions
contained in the Meridian Warrants, and warrants to purchase 19,330 shares of
Common Stock at an exercise price of $6.25 per share remain outstanding under
the Meridian Warrants. In December 1997, L.H. Friend, Weinress, Frankson &
Presson, Inc. ("L.H. Friend") and certain of L.H. Friend's officers received
warrants to purchase an aggregate of 10,000 shares of the Company's Common Stock
with an exercise price of $9.36 per share. In June 1998 L.H. Friend and these
same officers received additional warrants to purchase 25,000 shares of the
Company's Common Stock at an exercise price of $12.65 per share (together with
the warrants issued in December 1997, the "L.H. Friend Warrants"). The L.H.
Friend Warrants were issued as partial consideration for financial advisory
services rendered in connection with the establishment of the Company's credit
facility with FINOVA Capital Corporation. Additional cash consideration of
$165,000 was paid in connection with such financial advisory services. In
addition, the terms of the Company's engagement of L.H. Friend provide that L.H.
Friend has a right of first refusal with respect to placing or underwriting any
financing, merger, stock or asset sale, business combination, reorganization or
recapitalization of $3 million or more undertaken by the Company until December
1998.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP, San Diego, California.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Gray Cary Ware & Freidenrich LLP, San Diego, California.
59
<PAGE>
EXPERTS
The Consolidated Financial Statements of Javelin Systems, Inc. at June 30,
1997, and for the period from inception to June 30, 1996 and the year ended June
30, 1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The Consolidated Financial Statements of Javelin Systems, Inc. as of June
30, 1998 and for the year then ended included in this Prospectus and
Registration Statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The Financial Statements of POSNET Computers, Inc. as of October 31, 1997
and for the year then ended included in this Prospectus and Registration
Statement have been so included in reliance on the report of Corbin & Wertz,
independent auditors, given on the authority of said firm as experts in
accounting and auditing.
The Consolidated Financial Statements of CCI Group, Inc. as of December 31,
1997 and for the year then ended included in this Prospectus and Registration
Statement have been so included in reliance on the report of Rubin, Brown,
Gornstein & Co. LLP, independent auditors, given on the authority of said firm
as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
On May 28, 1998, the Company elected to replace Ernst & Young LLP ("Ernst &
Young") as its independent accountants. The reports of Ernst & Young on the
Company's financial statements as of June 30, 1996 and 1997 and for the period
from inception to June 30, 1996 and for the year ended June 30, 1997 contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. The Company's audit
committee approved the Company's dismissal of Ernst & Young and the engagement
of PricewaterhouseCoopers LLP as the Company's independent accountants.
During the Company's two most recent fiscal years and through May 28, 1998,
there were no disagreements with Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Ernst &
Young would have caused them to make reference thereto in their report. During
the two most recent fiscal years and through May 28, 1998, there have been no
reportable events (as defined in Regulation S-K Item 304(a)(1) (v)). Ernst &
Young has furnished the Company with a letter addressed to the SEC stating that
it agrees with the above statements.
The Company engaged PricewaterhouseCoopers LLP as its new independent
accountants as of May 28, 1998. During the two most recent fiscal years and
through May 28, 1998, the Company has not consulted with PricewaterhouseCoopers
LLP on items which (i) are described in Regulation S-K Item 304(a)(2)(i) or (ii)
concerned the subject matter of a disagreement or reportable event with the
former accountants (as described in Regulation S-K Item 304(a)(2)(ii)).
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form SB-2 under the Act, with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof.
60
<PAGE>
Statements contained in this Prospectus as to the contents of any contract or
document filed as an exhibit to the Registration Statement are qualified by
reference to such exhibit as filed.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the SEC. A copy of the Registration Statement, and the
exhibits and schedules thereto, as well as reports and other information filed
by the Company with the SEC may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's World Wide Web site is
http://www.sec.gov.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
JAVELIN SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants:
PricewaterhouseCoopers LLP............................................................................. F-2
Ernst & Young LLP...................................................................................... F-3
Consolidated Balance Sheets as of June 30, 1997 and 1998................................................. F-4
Consolidated Statements of Operations for the Years Ended June 30, 1997 and 1998......................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997 and 1998......................... F-6
Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1997 and 1998................ F-7
Notes to Consolidated Financial Statements............................................................... F-8
POSNET COMPUTERS, INC. FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-21
Balance Sheet as of October 31, 1997..................................................................... F-22
Statement of Operations for the Twelve-Month Period Ended October 31, 1997............................... F-23
Statement of Stockholders' Deficit for the Twelve-Month Period Ended October 31, 1997.................... F-24
Statement of Cash Flows for the Twelve-Month Period Ended October 31, 1997............................... F-25
Notes to Financial Statements............................................................................ F-26
CCI GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report......................................................................................... F-32
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-33
Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996......................... F-34
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997 and
1996................................................................................................... F-35
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996..................... F-36
Notes to Consolidated Financial Statements............................................................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Javelin Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Javelin
Systems, Inc. and its subsidiaries at June 30, 1998, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Costa Mesa, California
August 25, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Javelin Systems, Inc.
We have audited the accompanying balance sheet of Javelin Systems, Inc. as of
June 30, 1997, and the related statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Javelin Systems, Inc. at June
30, 1997, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
August 1, 1997
F-3
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 686,200 $
Accounts receivable--net of allowance for doubtful accounts of $41,000 as of June
30, 1997 and of $248,800 as of June 30, 1998................................... 2,470,600 7,449,700
Inventories...................................................................... 1,674,100 5,925,300
Deferred income taxes............................................................ 204,900
Other current assets............................................................. 46,500 426,900
------------ -------------
Total current assets........................................................... 4,877,400 14,006,800
Property and equipment, net...................................................... 295,600 1,036,400
Excess of cost over net assets of purchased businesses........................... 6,457,500
Deferred financing costs......................................................... 889,000
Other assets, net................................................................ 30,000 141,600
------------ -------------
Total assets................................................................... $ 5,203,000 $ 22,531,300
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 200,000 $ 1,343,000
Accounts payable................................................................. 1,503,800 5,636,900
Accrued expenses................................................................. 144,700 625,000
Current maturities of long-term debt............................................. 300,000
Customer deposits................................................................ 1,197,200
Deferred maintenance revenues.................................................... 385,300
Income taxes payable............................................................. 438,700
------------ -------------
Total current liabilities...................................................... 1,848,500 9,926,100
------------ -------------
Long-term debt, net of current portion............................................. 1,200,000
Deferred rent expense.............................................................. 6,300
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value: authorized shares--1,000,000; issued and
outstanding shares--none
Common stock, $.01 par value: authorized shares--10,000,000; issued and
outstanding shares--3,119,250 as of June 30, 1997 and 4,111,962 as of June 30,
1998........................................................................... 31,200 41,100
Additional paid in capital....................................................... 4,295,300 11,270,900
Deferred compensation............................................................ (90,800) (39,200)
Retained earnings (accumulated deficit).......................................... (881,200) 132,900
Cumulative translation adjustment................................................ (6,800)
------------ -------------
Total stockholders' equity..................................................... 3,354,500 11,398,900
------------ -------------
Total liabilities and stockholders' equity..................................... $ 5,203,000 $ 22,531,300
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales........................................................... $ 7,014,600 $ 27,132,400
Service................................................................. 2,513,700
------------------ ------------------
Total revenues.......................................................... 7,014,600 29,646,100
------------------ ------------------
Cost of revenues:
Cost of product sales................................................... 5,499,500 19,831,300
Cost of service......................................................... 1,904,700
------------------ ------------------
Total cost of revenues.................................................. 5,499,500 21,736,000
------------------ ------------------
Gross profit............................................................ 1,515,100 7,910,100
------------------ ------------------
Operating expenses:
Research and development................................................ 396,400 874,000
Selling and marketing................................................... 390,800 1,179,900
General and administrative.............................................. 859,900 4,195,500
------------------ ------------------
Total operating expenses.................................................. 1,647,100 6,249,400
------------------ ------------------
Income (loss) from operations............................................. (132,000) 1,660,700
Interest expense.......................................................... (709,500) (115,000)
Other income.............................................................. 41,100
Interest income........................................................... 14,600 12,200
------------------ ------------------
Income (loss) before income taxes......................................... (826,900) 1,599,000
Provision for income taxes................................................ (584,900)
------------------ ------------------
Net income (loss)......................................................... $ (826,900) $ 1,014,100
------------------ ------------------
------------------ ------------------
Earnings (loss) per common share:
Basic................................................................... $ (0.30) $ 0.28
------------------ ------------------
------------------ ------------------
Diluted................................................................. $ (0.30) $ 0.27
------------------ ------------------
------------------ ------------------
Shares used in computing
Earnings (loss) per share:
Basic................................................................... 2,782,535 3,622,604
------------------ ------------------
------------------ ------------------
Diluted................................................................. 2,782,535 3,750,611
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................................... $ (826,900) $ 1,014,100
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization........................................... 37,800 354,900
Amortization of deferred charge related to warrants..................... 636,100
Amortization of deferred compensation................................... 108,200 51,600
Loss on disposal of assets.............................................. 55,100
Deferred income taxes................................................... (204,900)
Deferred rent expense................................................... 6,300
Income tax benefit from exercise of stock options....................... 59,200
Non-cash allowances:
Inventories........................................................... 312,800
Accounts receivable................................................... 243,800
Other................................................................. 130,000
Changes in operating assets and liabilities, net of acquisitions:.......
Accounts receivable................................................... (1,776,900) (3,403,500)
Inventories........................................................... (1,464,800) (2,985,800)
Other current assets.................................................. (42,500) (313,900)
Accounts payable...................................................... 1,147,100 2,838,100
Accrued expenses...................................................... 111,800 35,100
Deferred maintenance revenues......................................... 129,200
Customer deposits..................................................... (408,500)
Income taxes payable.................................................. 239,000
------------------ ------------------
Net cash used in operating activities................................... (2,070,100) (1,847,400)
------------------ ------------------
INVESTING ACTIVITIES
Purchase of equipment................................................... (305,300) (724,600)
Cash received from purchased businesses................................. 392,400
Other assets............................................................ (20,300) (75,200)
------------------ ------------------
Net cash used in investing activities................................... (325,600) (407,400)
------------------ ------------------
FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit........................ (6,600) 774,200
Proceeds from issuance of long-term debt................................ 1,500,000
Payments of notes payable to related parties............................ (90,000) (515,500)
Repayment of notes payable.............................................. (70,000)
Deferred financing costs................................................ (278,900)
Net proceeds from initial public offering............................... 3,238,700
Exercise of stock options and warrants.................................. 3,400 95,600
------------------ ------------------
Net cash provided by financing activities............................. 3,075,500 1,575,400
------------------ ------------------
CUMULATIVE TRANSLATION ADJUSTMENT......................................... (6,800)
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 679,800 (686,200)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 6,400 686,200
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 686,200 $ --
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax paid......................................................... $ 800 $ 298,000
------------------ ------------------
------------------ ------------------
Interest paid........................................................... $ 71,400 $ 113,200
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES:
See Note 3 for the acquisition of businesses in exchange for 910,300
shares of the Company's common stock
See Note 5 for the warrants issued in connection with credit facility.
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
DEFERRED CHARGE
RELATED TO RETAINED
COMMON STOCK ADDITIONAL WARRANTS ISSUED EARNINGS CUMULATIVE
------------------ PAID-IN DEFERRED IN CONNECTION (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL COMPENSATION WITH DEBT DEFICIT) ADJUSTMENT TOTAL
--------- ------- ----------- ------------ --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of July 1,
1996.................. 2,104,250 $21,100 $ 348,100 $ -- $(119,800) $ (54,300) $ -- $ 195,100
Value assigned to
warrants issued in
connection with
debt.................. 516,300 (516,300) --
Amortization of deferred
charge................ 636,100 636,100
Exercise of warrants.... 165,000 1,600 1,700 3,300
Proceeds from initial
public offering,
net................... 850,000 8,500 3,230,200 3,238,700
Deferred stock
compensation.......... 199,000 (199,000) --
Amortization of deferred
stock compensation.... 108,200 108,200
Net loss................ (826,900) (826,900)
--------- ------- ----------- ------------ --------------- ------------ ---------- -----------
Balance, June 30,
1997.................. 3,119,250 31,200 4,295,300 (90,800) -- (881,200) -- 3,354,500
Value assigned to
warrants issued in
connection with credit
facility.............. 621,900 621,900
Issuances of shares for
acquisitions.......... 929,050 9,300 6,199,500 6,208,800
Amortization of deferred
stock compensation.... 51,600 51,600
Exercise of stock
options and exchange
of warrants for common
stock................. 63,662 600 95,000 95,600
Income tax benefit from
exercise of stock
options............... 59,200 59,200
Cumulative translation
adjustment............ (6,800) (6,800)
Net income.............. 1,014,100 1,014,100
--------- ------- ----------- ------------ --------------- ------------ ---------- -----------
Balance, June 30,
1998.................. 4,111,962 $41,100 $11,270,900 $ (39,200) $ -- $ 132,900 $(6,800) $11,398,900
--------- ------- ----------- ------------ --------------- ------------ ---------- -----------
--------- ------- ----------- ------------ --------------- ------------ ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Javelin Systems, Inc. ("Javelin") was incorporated in the State of Delaware
on September 19, 1995 under the name of Sunwood Research, Inc. Javelin designs,
develops, markets and sells open systems touch screen point-of-sale ("POS")
computers.
On November 1, 1996, Javelin completed an initial public offering (the
"IPO") of 850,000 shares of its common stock at $5.00 per share, netting
proceeds of approximately $3.2 million. Proceeds were used to repay debt with an
outstanding balance of approximately $745,000 and for working capital.
In December 1997, Javelin acquired all of the outstanding common stock of
POSNET Computers, Inc.("Posnet") and CCI Group, Inc. ("CCI") as described in
Note 3. Posnet and CCI provide full turn-key systems integration services,
including system consulting, staging, training, deployment, product support and
maintenance.
In March and April 1998, Javelin established three international
subsidiaries to expand its sales and distribution channels in the international
marketplace. The international subsidiaries are: Javelin Systems (Europe)
Limited ("Javelin Europe") headquartered in England; Javelin Systems
International Pte Ltd ("Javelin Asia") headquartered in Singapore; and Javelin
Systems Australia Pty Limited ("Javelin Australia") headquartered in Australia.
In May 1998, Javelin Asia acquired all of the outstanding common stock of
Aspact IT Services (Singapore) Pte Ltd ("Aspact") as described in Note 3. Aspact
is headquartered in Singapore and provides consulting and system integration
services.
In July 1998, Javelin entered into a letter of intent to acquire all of the
outstanding capital stock of RGB/Trinet Ltd. ("RGB/Trinet") and Jade
Communications Ltd ("Jade"). RGB/Trinet and Jade are headquartered in England
and provided complementary Wide Area Networking (WAN) products and services
primarily to large retail, hospitality, and telecommunications companies. See
Note 9 for description of these planned acquisitions.
Hereinafter, Javelin and its subsidiaries are referred to as the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Javelin and of
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could materially differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of the financial instruments could be different than
that recorded on a historical basis in the accompanying consolidated financial
statements. The financial instruments consist of cash and
F-8
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash equivalents, accounts receivable, accounts payable, accrued expenses and
debt. The carrying amounts of the Company's financial instruments as of June 30,
1997 and 1998 approximate their respective fair values.
CONCENTRATION OF BUSINESS AND CREDIT RISK
Javelin operates within an industry that is subject to rapid technological
advancement, intense competition and uncertain market acceptance. The
introduction of new technologies, competitors' alternative products and ultimate
market acceptance of the products sold by Javelin, could have a substantial
impact on the future operations of the Company.
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers
and collateral is generally not required. Accordingly, the Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential losses which, when realized, have been within the range of
management's expectations.
During the year ended June 30, 1997 two customers aggregated approximately
16% each of net sales. During the year ended June 30, 1998 one customer
aggregated approximately 11% of net sales. Sales were not to the same major
customers in 1997 and 1998. Export sales, principally to Europe, during the year
ended June 30, 1998 aggregated approximately 10% of net sales. Export sales
during the year ended June 30, 1997 were not significant.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories consist primarily of computer hardware and components and are
stated at the lower of cost (first-in, first-out) or market as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 1,525,700 $ 3,572,500
Finished goods.................................................... 148,400 2,352,800
------------ ------------
$ 1,674,100 $ 5,925,300
------------ ------------
------------ ------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred, and the costs of additions and betterments are
capitalized. Depreciation is provided in amounts, which amortize costs over the
useful lives of the related assets, generally three to five years, utilizing the
straight-line method. Leasehold improvements are amortized over the terms of the
respective leases or useful lives of the improvements, whichever is shorter.
Management of the Company assesses the recoverability of property and
equipment when certain events are known to management which may affect the
carrying value of such assets in relation to fair value. Management assesses
fair value by determining whether the carrying value of such assets over their
F-9
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on projected undiscounted cash
flows and is charged to operations in the period in which such impairment is
determined by management. To date, management has not identified any impairment
of property and equipment.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- ------------
<S> <C> <C>
Machinery and equipment............................................. $ 112,800 $ 603,000
Furniture and fixtures.............................................. 150,800 638,000
Leasehold improvements.............................................. 72,700 35,200
---------- ------------
336,300 1,276,200
Less accumulated depreciation and amortization...................... (40,700) (239,800)
---------- ------------
Property and equipment, net......................................... $ 295,600 $ 1,036,400
---------- ------------
---------- ------------
</TABLE>
EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Excess of cost over net assets of purchased businesses (goodwill) represents
the excess of purchase price over the fair value of the net assets of acquired
businesses. Goodwill is stated at cost and is amortized on a straight-line basis
over 25 years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted cash flows. The
amount of goodwill impairment, if any, is measured based on projected
undiscounted cash flows and is charged to operations in the period in which
goodwill impairment is determined by management. To date, management has not
identified any impairment of goodwill.
DEFERRED FINANCING COSTS
Deferred financing costs represent incremental costs to unrelated parties
incurred in connection with the credit facility described in Note 5 and are
deferred and amortized over the term of the related debt.
CUSTOMER DEPOSITS
Customer deposits as of June 30, 1998 consists principally of amounts
received for contracts to be started in fiscal 1999.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company's non-U.S. operations
are translated into U.S. dollars for financial reporting purposes. The assets
and liabilities of non-U.S. operations whose functional currencies are other
than the U.S. dollar are translated at rates of exchange at fiscal year-end, and
revenues and expenses are translated at average exchange rates for the fiscal
year. The cumulative translation effects are reflected in stockholders' equity.
Foreign currency gains and losses on transactions denominated in other than the
functional currency of an operation are reflected in other income (expense).
F-10
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Revenues from sales of products are recognized upon shipment of the
products. The Company does not have any significant remaining obligations upon
shipment of the products. Product returns and sales allowances, which
historically have not been significant, are provided for at the date of sale.
Revenues from the installation of products are recognized upon the
completion of the installation of the product as acknowledged by the customer.
Service contract revenues are recognized ratably over the term of the
related contract.
WARRANTIES
The Company's products are under warranty for defects in material and
workmanship for one year. Certain components included in the Company's products
are covered by manufacturers' warranties. The Company establishes an accrual for
estimated warranty costs at the time of sale.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred.
RESEARCH AND DEVELOPMENT
The Company expenses the cost of research and development, principally
comprised of payroll and related costs and the cost of prototypes.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to use APB 25 for accounting for stock-based compensation to
employees must make pro forma disclosures of net income or loss, as if the fair
value method of accounting defined in SFAS 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB 25.
INCOME TAXES
The Company accounts for its income taxes using the asset and liability
method whereby deferred tax assets and liabilities are determined based on
temporary differences between bases used for financial reporting and income tax
reporting purposes. Income taxes are provided based on the enacted tax rates in
effect at the time such temporary differences are expected to reverse. A
valuation allowance is provided for certain deferred tax assets if it is more
likely than not that the Company will not realize those tax assets through
future operations.
EARNINGS (LOSS) PER COMMON SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS"). It replaces the presentation of primary and fully
F-11
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution and it
is based upon the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock which are dilutive were
exercised or converted into common stock. The Company has adopted SFAS 128 in
the quarter ended December 31, 1997 and has restated all previously reported per
share amounts to conform to the new presentation.
Diluted loss per common share is computed using the weighted average number
of common shares outstanding during the period. Common share equivalents were
not included in the 1997 computation of diluted loss per common share since
their effect would have been anti-dilutive.
A reconciliation of basic and diluted EPS for the years ended June 30, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1998
-------------------------- --------------------------
BASIC DILUTED BASIC DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss).................... $ (826,900) $ (826,900) $ 1,014,100 $ 1,014,100
Weighted average common shares
outstanding........................ 2,782,535 2,782,535 3,622,604 3,622,604
Additional shares due to potential
exercise of stock options.......... 128,007
Diluted weighted average common
shares outstanding................. 2,782,535 2,782,535 3,622,604 3,750,611
Earnings (loss) per share............ $ (0.30) $ (0.30) $ 0.28 0.27
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. This standard will require that an enterprise display an amount
representing total comprehensive income for the period. SFAS 130 will be
effective for the Company's year ending June 30, 1999. Adoption of SFAS 130 is
for presentation only and will not affect the Company's financial position or
results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which supersedes Statement of Financial Accounting Standards No.
14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about products and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 will be effective for
the Company's year ending June 30, 1999 and will not affect the Company's
financial position or results of operations.
F-12
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS
Cash received in connection with the Company's purchase acquisitions is as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired, including goodwill.............. $10,422,000
Less liabilities assumed....................................... 4,561,200
Less stock and cash issued to sellers.......................... 6,253,200
----------
Cash received.................................................. $ 392,400
----------
----------
</TABLE>
In December 1997, the Company acquired all of the outstanding capital stock
of Posnet. Posnet sells, installs and maintains POS systems and turnkey retail
automation systems. The original purchase price for the Posnet capital stock
consisted of 225,000 shares of the Company's common stock. The Company may be
required to issue an additional 75,000 shares (the "Contingency Shares") of its
common stock in 1998 and shares of its common stock with a market value of
$500,000 in each of 1999 and 2000 (the "Additional Contingency Shares") based
upon the cumulative net profits of Posnet during the three years ending December
31, 2000. The Contingency Shares and Additional Contingency Shares are
collectively known as the "Earnout Shares." The acquisition has been accounted
for by the purchase method, and accordingly, the results of operations of Posnet
have been included with those of the Company commencing on the date of
acquisition. The original purchase price of $1,594,200 (including acquisition
costs of approximately $75,500) was determined by discounting the value of the
common stock issued by 25% from the quoted price principally due to restrictions
and liquidity factors and resulted in excess of acquisition costs over net
assets of approximately $2,036,000. Such excess (which will increase for any
contingent payments) is being amortized on a straight-line basis over 25 years.
The final allocation of the purchase price may vary as additional information is
obtained, and accordingly, the ultimate allocation may differ from that used in
accompanying consolidated financial statements. During the year ended June 30,
1998, the Company issued 18,750 Contingency Shares as additional consideration.
See Note 9 for amendment to the additional contingent consideration.
In December 1997, the Company acquired all of the outstanding capital stock
of CCI. CCI sells, installs and maintains POS systems and turnkey retail
automation systems. The purchase price for the CCI capital stock consisted of
670,000 shares of the Company's common stock. The acquisition has been accounted
for by the purchase method, and accordingly, the results of operations of CCI
have been included with those of the Company commencing on the date of
acquisition. The purchase price of $4,476,800 (including costs of acquisition of
approximately $111,300) was determined by discounting the value of the common
stock issued by 25% from the quoted price principally due to restrictions and
liquidity factors and resulted in excess of acquisition costs over net assets of
approximately $4,097,500. Such excess is being amortized on a straight-line
basis over 25 years. The final allocation of the purchase price may vary as
additional information is obtained, and accordingly, the ultimate allocation may
differ from that used in accompanying consolidated financial statements.
F-13
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited pro forma consolidated results of operations as if the
acquisitions of Posnet and CCI had occurred as of July 1, 1996 and July 1, 1997,
respectively, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenues....................................................... $ 19,462,200 $ 36,951,000
Cost of revenues............................................... 14,750,000 26,987,300
------------- -------------
Gross profit................................................... 4,712,200 9,963,700
Operating expenses............................................. 5,081,100 8,170,300
------------- -------------
Income (loss) from operations.................................. (368,900) 1,793,400
Other income (expense)......................................... (733,600) (64,900)
------------- -------------
Income (loss) before income taxes.............................. (1,102,500) 1,728,500
Provision for income taxes..................................... (8,500) (615,400)
------------- -------------
Net income (loss).............................................. $ (1,111,000) $ 1,113,100
------------- -------------
------------- -------------
Income (loss) per share:
Basic........................................................ $ (0.30) $ 0.25
------------- -------------
------------- -------------
Fully diluted................................................ $ (0.30) $ 0.24
------------- -------------
------------- -------------
</TABLE>
The above unaudited pro forma amounts are not necessarily indicative of what
the actual results might have been if the acquisitions had occurred as of July
1, 1996.
On May 14, 1998, Javelin Asia acquired all of the outstanding common stock
of Aspact for $170,000 in cash and 15,300 shares of the Company's common stock.
The acquisition of Aspact has been accounted for as a purchase. Accordingly, the
purchase price of $567,400 has been allocated to assets and liabilities based on
their estimated fair value at the date of acquisition. Results of operations of
Aspact have been included in the consolidated financial statements from the date
of acquisition. The purchase price resulted in excess of acquisition costs over
net assets of approximately $320,000. Such excess is being amortized on a
straight-line basis over 25 years. The results of operations of Aspact prior to
May 14, 1998 were not material.
See Note 9 regarding planned future acquisitions.
F-14
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
No provision for federal or state income taxes was required for the year
ended June 30, 1997 since the Company incurred losses from inception to June 30,
1997. The components of income tax expense for the year ended June 30, 1998 are
as follows:
<TABLE>
<S> <C>
Current:
Federal........................................................ $ 686,300
State.......................................................... 70,700
Foreign........................................................ 32,800
---------
789,800
---------
Deferred:
Federal........................................................ (157,400)
State.......................................................... (47,500)
Foreign........................................................ --
---------
(204,900)
---------
Total............................................................ $ 584,900
---------
---------
</TABLE>
The Company's effective tax rate differs from the U.S. federal statutory tax
rate, as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Income tax provision at statutory tax rates.................................... 34.0% 34.0%
State taxes, net of federal tax effect......................................... 2.5
Goodwill....................................................................... 2.7
Non-deductible items........................................................... 4.1
Net operating loss benefit..................................................... (34.0) (8.7)
Other.......................................................................... -- 2.0
--------- ---
Total.......................................................................... 0% 36.6%
--------- ---
--------- ---
</TABLE>
Components of the deferred income tax balance are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................... $ 38,400 $ --
Accrued expenses.................................................... 15,700 195,000
Other................................................................. 35,600 9,900
---------- ----------
Deferred tax assets................................................... $ 89,700 $ 204,900
---------- ----------
---------- ----------
Valuation allowance................................................... $ 89,700 $ 0
---------- ----------
---------- ----------
Net deferred tax asset................................................ $ 0 $ 204,900
---------- ----------
---------- ----------
</TABLE>
Management believes it is more likely than not that the Company will realize
its deferred tax asset based upon current year and expected results.
F-15
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT
On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit
facility of $7,500,000 from an unrelated financial institution. The credit
facility expires on June 8, 2001 and consists of a line of credit of up to
$6,000,000 and a term loan of $1,500,000. The Company issued warrants to
purchase 135,000 shares of common stock in connection with the credit facility.
See Note 7 regarding warrants.
Under the terms of the line of credit, the Company may borrow up to 80% of
eligible accounts receivable (as defined) and 50% of eligible inventory (as
defined) with monthly interest payments based upon the prime rate of a national
financial institution plus 1.75% (10.25% as of June 30, 1998). Borrowings under
the line of credit are collateralized by substantially all the assets of the
Company. As of June 30, 1998, borrowings outstanding under the line amounted to
$1,343,000 with approximately $2,800,000 available for future borrowings.
Borrowings under the term loan are collateralized by substantially all of
the assets of the Company, bear interest at 13.65% per annum and are repayable
at $25,000 per month with all unpaid principal and interest due on June 8, 2001.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases subject to scheduled rent increases. The leases expire at
various dates through August 2003.
Future minimum annual lease payments as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 605,100
2000............................................................................ 670,900
2001............................................................................ 638,700
2002............................................................................ 572,200
2003............................................................................ 473,600
Thereafter...................................................................... 1,700
------------
Total........................................................................... $ 2,962,200
------------
------------
</TABLE>
Rent expense under operating lease agreements aggregated approximately
$34,300 and $230,100 for the year ended June 30, 1997 and 1998, respectively,
and is included in general and administrative expenses in the accompanying
consolidated statement of operations.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with eleven employees of the Company,
which expire at various dates through December 2002. Some of the agreements
provide for incentive bonuses which are payable if specified management goals
are attained.
F-16
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future annual minimum payments under the employment agreements as of June
30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 1,040,000
2000............................................................................ 320,000
2001............................................................................ 320,000
2002............................................................................ 320,000
2003............................................................................ 160,000
------------
Total........................................................................... $ 2,160,000
------------
------------
</TABLE>
7. STOCKHOLDERS' EQUITY
COMMON STOCK
On August 23, 1996, the Company effected a 4,300-for-1 stock split. All
references in the accompanying consolidated financial statements and notes to
shares outstanding and per share amounts have been adjusted to reflect the
impact of the stock split.
In November 1996, the Company completed its initial public offering by
issuing 850,000 shares of common stock at an offering price of $5.00 per share.
During the year ended June 30, 1998, the Company issued 929,050 shares of
its common stock in connection with the acquisitions described in Note 3, 27,300
shares of common stock upon the exercise of stock options with a weighted
average exercise price of $3.50 per share and 36,362 shares of its common stock
upon the exercise of warrants issued to the underwriter in connection with the
initial public offering.
STOCK OPTION PLANS
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, the Company recognizes
as compensation expense the difference between the exercise price and the fair
market value of the common stock on the date of grant. Stock based compensation
expense is deferred and recognized over the vesting period of the stock option.
During the years ended June 30, 1997 and 1998, the Company recognized $108,200
and $51,600, respectively, in stock based compensation expense.
In August 1996, the Company adopted a stock incentive award plan (the
"Plan") under which the Board of Directors (the "Board"), or a committee
appointed for such purpose, may from time to time grant options, restricted
stock or other stock-based compensation to the directors, officers, eligible
employees or consultants of the Company to acquire up to an aggregate of 300,000
shares of common stock, in such numbers, under such terms and at such exercise
prices as are determined by the Board or such committee. Options vest over a
3-year period based on the following schedule: 40% after year one, 30% after
year two, and 30% at the end of year three. All options expire ten years from
the date of grant. It is the Company's intention to grant options under the Plan
principally to employees.
In December 1997, the stockholders approved the Company's 1997 Equity
Incentive Plan (the "1997 Plan") under which the Board, or a committee appointed
for such purpose, may from time to time grant options, restricted stock or other
stock-based compensation to the directors, officers, eligible employees or
consultants of the Company to acquire up to an aggregate of 1,100,000 shares of
common stock, in such numbers, under such terms and at such exercise prices as
are determined by the Board or such committee.
F-17
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options generally vest 20% per year over a 5-year period. All options expire ten
years from the date of grant. It is the Company's intention to grant options
under the Plan principally to employees.
The following option activity occurred in the years ended June 30, 1997 and
1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- -----------------
<S> <C> <C>
FOR OPTIONS GRANTED AT LESS THAN FAIR
MARKET VALUE ON THE DATE OF GRANT:
Outstanding as of July 1, 1996...................................
Granted.......................................................... 191,000 $ 3.71
Exercised........................................................
Canceled......................................................... 13,500 $ 3.50
---------
Balance, June 30, 1997........................................... 177,500 $ 3.73
Granted..........................................................
Exercised........................................................ 27,300 $ 3.50
Canceled.........................................................
---------
Balance, June 30, 1998........................................... 150,200 $ 3.77
---------
---------
Exercisable at June 30, 1998..................................... 112,536 $ 3.80
--------- -----
--------- -----
Outstanding as of July 1, 1996...................................
Granted.......................................................... 68,000 $ 4.90
Exercised........................................................
Canceled......................................................... --
---------
Balance, June 30, 1997........................................... 68,000 $ 4.90
Granted.......................................................... 623,000 $ 9.42
Exercised........................................................
Canceled......................................................... 7,500 $ 9.50
---------
Balance, June 30, 1998........................................... 683,500 $ 8.96
---------
Exercisable at June 30, 1998..................................... 58,943 $ 5.47
--------- -----
--------- -----
</TABLE>
The weighted average remaining contractual life of options outstanding as of
June 30, 1998 was 9.3 years.
The range of exercise prices for options outstanding as of June 30, 1998 was
$2.50 to $12.50. The weighted-average fair value of options granted at less than
fair market value in 1997 was $1.65. The weighted-average fair value of options
granted at fair market value in 1997 and 1998 was $1.68 and $3.62, respectively.
Income tax benefits from the exercise of the stock options during the fiscal
year ended June 30, 1998 of approximately $59,000 has been credited to
additional paid-in capital in the accompanying consolidated balance sheet.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company accounted for its employee stock options granted subsequent to
June 30, 1996 under the fair value method of the statement. The fair value
F-18
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Risk free interest rate......................................... 6.0% 6.0%
Dividend yield.................................................. None None
Volatility factor of the expected market price of the Company's
common stock.................................................. 0.41 0.57
Weighted-average expected life of each option................... 3 years 3 years
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options. For purpose of pro forma
disclosures, the estimated fair value of the options is amortized to expenses
over the options vesting period. The Company's pro forma information for the
years ended June 30, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Net income (loss) as reported...................................... $ (826,900) $ 1,014,100
Net income (loss)--SFAS 123 adjusted............................... $ (886,000) $ 743,300
Earnings (loss) per share as reported:
Basic............................................................ $ (0.30) $ 0.28
Diluted.......................................................... $ (0.30) $ 0.27
Earnings (loss) per share-SFAS 123 adjusted:
Basic............................................................ $ (0.32) $ 0.21
Diluted.......................................................... $ (0.32) $ 0.20
</TABLE>
WARRANTS
In connection with the issuance of $725,000 of the Company's 10% promissory
notes at various dates through August 1996 and the initial public offering, the
Company granted warrants to purchase shares of the Company's common stock. The
warrants entitled the holders to purchase a total of 165,000 shares of the
Company's common stock at an aggregate price of approximately $3,300. The
outstanding warrants became exercisable following the effectiveness of the
public offering of the Company's common stock and had no expiration date. As of
June 30, 1997, all warrants had been exercised. The Company assigned a value of
approximately $646,300 to the warrants, which has been accounted for as
additional paid in capital in the accompanying consolidated financial
statements. The deferred charge related to the warrants was fully amortized
after the exercise of all the warrants.
In connection with its initial public offering, the Company sold the
representatives of the underwriters a warrant to purchase 85,000 shares of the
Company's common stock at $6.25 per share. During the year ended June 30, 1998,
warrants to purchase 65,670 shares of the Company's common stock were exchanged
into 36,362 shares of common stock. The fair value of the common stock issued
approximated the fair value of the warrants received.
F-19
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the credit facility described in Note 5, the Company
issued warrants to purchase 100,000 shares of its common stock at $9.00 per
share to the financial institution and warrants to purchase 35,000 shares of its
common stock at prices ranging from $9.36 to $12.65 to its independent financial
advisors. The fair value of these warrants was estimated at $621,900 at the date
of grant using a Black-Scholes pricing model with the assumptions described
above. The fair value of the warrants has been reflected as deferred financing
costs and additional paid in capital in the accompanying consolidated balance
sheet.
8. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1997, the Company purchased electronic
components from a company owned by a stockholder and founder of the Company
totaling $1,234,328. Purchases from the related company during the year ended
June 30, 1998 were not significant. Included in accounts payable at June 30,
1997 is $116,360 due to that company.
In connection with the acquisitions of Posnet and CCI described in Note 3,
the Company assumed certain debt payable to former shareholders of the acquired
entities and current shareholders of the Company. All of such debt was repaid
prior to June 30, 1998.
9. SUBSEQUENT EVENTS
In August 1998, the Company agreed to issue 56,250 shares of its common
stock to the former shareholders of Posnet in consideration for the elimination
of any future Earnout Shares (see Note 3). The value of these shares will be
recorded as additional goodwill.
In July 1998, the Company entered into a letter of intent to acquire all of
the outstanding capital stock of RGB/Trinet Limited ("RGB/Trinet") and 52.5% of
the outstanding common stock of Jade Communications Limited ("Jade"). The
remaining 47.5% of the outstanding common stock of Jade is owned by RGB/Trinet.
RGB/Trinet and Jade are located in England and provide complementary wide area
network products and services primarily to large retail, hospitality and
telecommunications customers in Europe. The aggregate purchase price for the
RGB/Trinet and Jade capital stock would consist of $1,510,100 in cash,
$1,817,700 in shares of the Company's common stock and an additional 25,000
shares of the Company's common stock. The Company may be required to issue
additional shares of its common stock with a market value of $3,290,000 in each
of 1999 and 2000 based upon the cumulative net profits of RGB/Trinet and Jade
during the twenty four months ending September 30, 2000. The acquisitions will
be accounted for by the purchase method, and accordingly, the results of
operations of RGB/Trinet and Jade will be included with those of the Company
commencing on the date of acquisition.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Posnet Computers, Inc.
We have audited the accompanying balance sheet of Posnet Computers, Inc.
(the "Company") as of October 31, 1997, and the related statements of
operations, stockholders' deficit and cash flows for the twelve-month period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Posnet Computers, Inc. as of
October 31, 1997, and the results of its operations and its cash flows for the
twelve-month period then ended in conformity with generally accepted accounting
principles.
CORBIN & WERTZ
Irvine, California
January 21, 1998
F-21
<PAGE>
POSNET COMPUTERS, INC.
BALANCE SHEET
AS OF OCTOBER 31, 1997
ASSETS (NOTE 4)
<TABLE>
<S> <C>
Current assets:
Cash.......................................................................... $ --
Accounts receivable, net of allowance for doubtful accounts of $30,000........ 729,537
Inventories................................................................... 126,905
Prepaid expenses.............................................................. 7,951
---------
Total current assets........................................................ 864,393
Property and equipment, net (Note 2)............................................ 62,644
Other assets (Note 3)........................................................... 49,000
---------
$ 976,037
---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft................................................................ $ 120,751
Accounts payable and accrued expenses......................................... 716,355
Customer deposits............................................................. 60,618
Bank line-of-credit and equipment line-of-credit (Note 4)..................... 95,134
Notes payable--stockholders (Note 6).......................................... 49,200
---------
Total current liabilities................................................... 1,042,058
---------
Commitments and contingencies (Note 7)
Stockholders' deficit (Note 8):
Common stock, no par value; 100,000 shares authorized; 4,000 shares issued and
outstanding................................................................. 121,622
Accumulated deficit........................................................... (187,643)
---------
Total stockholders' deficit................................................. (66,021)
---------
$ 976,037
---------
---------
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE>
POSNET COMPUTERS, INC.
STATEMENT OF OPERATIONS
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Net sales....................................................................... $4,813,501
Cost of sales................................................................... 2,804,806
---------
Gross profit.................................................................... 2,008,695
Salaries and related expenses................................................... 1,371,752
Selling, general and administrative expenses.................................... 648,503
---------
Loss from operations............................................................ (11,560)
Interest expense................................................................ 15,602
---------
Loss before provision for income taxes.......................................... (27,162)
Provision for income taxes (Note 5)............................................. 800
---------
Net loss........................................................................ $ (27,962)
---------
---------
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
POSNET COMPUTERS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Balances, November 1, 1996......................................... 4,000 $ 121,622 $ (159,681) $ (38,059)
Net loss........................................................... -- -- (27,962) (27,962)
----- ---------- ------------ ----------
Balances, October 31, 1997......................................... 4,000 $ 121,622 $ (187,643) $ (66,021)
----- ---------- ------------ ----------
----- ---------- ------------ ----------
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE>
POSNET COMPUTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (27,962)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense.............................................................. 50,000
Depreciation and amortization................................................. 26,425
Impairment loss on other asset................................................ 10,000
Changes in operating assets and liabilities:
Accounts receivable......................................................... (208,133)
Inventories................................................................. (65,035)
Prepaid expenses............................................................ 7,864
Accounts payable and accrued expenses....................................... 243,827
Customer deposits........................................................... (78,860)
---------
Net cash used in operating activities..................................... (41,874)
---------
Cash flows from investing activities:
Purchase of property and equipment.............................................. (11,007)
Advances to stockholders........................................................ (18,213)
---------
Net cash used in investing activities....................................... (29,220)
---------
Cash flows from financing activities:
Net payments on bank line-of-credit and equipment line-of-credit................ (56,878)
Increases in notes payable--stockholders........................................ 25,000
Bank overdraft.................................................................. 102,972
---------
Net cash provided by financing activities................................... 71,094
Net change in cash................................................................ --
Cash at beginning of year......................................................... --
---------
Cash at end of year............................................................... $ --
---------
---------
Supplemental disclosure of cash flow information--Cash paid during year for:
Interest........................................................................ $ 15,602
---------
---------
Income taxes.................................................................... $ 4,807
---------
---------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities--See
notes to the financial statements for certain non-cash transactions entered into
during the twelve-month period ended October 31, 1997.
See accompanying notes to financial statements
F-25
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION AND NATURE OF OPERATIONS
Posnet Computers, Inc. (the "Company") was incorporated in the state of
California in July 1992. The Company sells new and refurbished point-of-sales
systems within the hospitality industry, primarily to restaurants. The Company
recently expanded to include value-added services, including system integration
and specialized reporting capabilities, for its customers located in the United
States.
These financial statements are presented as of October 31, 1997 and for the
twelve-month period ended October 31, 1997 (the "Period").
RISKS, UNCERTAINTIES AND CONCENTRATIONS
CASH
Cash balances are maintained at one bank. Accounts at this institution are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
During fiscal 1997, the Company had cash balances in this bank which exceeded
the FDIC limit.
CUSTOMERS
The majority of the Company's sales are to customers throughout the Western
United States. Credit is extended based on an evaluation of each customer's
financial condition and collateral is not required. The Company establishes an
allowance for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends and other information.
During the Period, the Company received a significant portion of its
business from one customer. During the Period, sales to this customer totaled
22%. As of October 31, 1997, amounts due from this customer totaled 22% of net
accounts receivable. As of October 31, 1997, another customer accounted for 13%
of net accounts receivable. If the relationship between the Company and these
customers was altered, the future results of operations and financial condition
could be affected.
SUPPLIERS
During the Period, the Company purchased a significant portion of its goods
from three suppliers. During the Period, purchases from these suppliers totaled
24%, 21% and 11% of total purchases, respectively. As of October 31, 1997,
amounts due to these suppliers totaled 42%, 18% and 12% of accounts payable. If
the relationship between the Company and these suppliers was altered, the future
results of operations and financial condition could be affected.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying balance sheet includes financial instruments whereby the
fair market value of the financial instruments could be different than that
recorded on a historical basis. The Company's financial instruments consist of
its cash, accounts receivable, accounts payable, lines-of-credit and notes
payable--stockholders. The carrying amounts of the Company's financial
instruments generally approximate their fair values at October 31, 1997. The
fair value of the notes payable--stockholders was not readily determinable as
market comparables were not available for such an instruments.
F-26
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 the
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. Significant estimates made by management are, among others,
provisions for losses on accounts receivable and provisions for slow moving and
obsolete inventories. Actual results could materially differ from those
estimates.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is
determined on the first-in, first-out ("FIFO") method. Costs include only
materials; there are no direct labor or overhead components. The Company
operates in an industry in which its products are subject to design changes and
are manufactured based on customer specifications. Accordingly, should either
design requirements change significantly or orders cancel or decline, the
ultimate realizability of its inventories could be less than their carrying
values. As of October 31, 1997, management believes that inventories are carried
at their net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Maintenance and repairs are charged to
expense as incurred. Significant renewals and betterments are capitalized. At
the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation and amortization of property and equipment
over its remaining life can be recovered through projected undiscounted future
cash flows. The amount of property and equipment impairment, if any, is measured
based on fair value and is charged to operations in the period in which property
and equipment impairment is determined by management. As of October 31, 1997,
management believes that there is no impairment of property and equipment.
WARRANTY ACCRUAL
The Company grants warranties on certain computer products for periods
ranging from ninety days to one year, commencing from the time of sale. For most
computer products sold, the Company receives a manufacturers warranty. As such,
the repair costs or rework costs are ultimately borne by the manufacturer.
Accordingly, no provision for warranties have been included in the accompanying
financial statements.
REVENUE RECOGNITION AND DEFERRED REVENUES
Revenues are recognized upon shipment of products and as services are
rendered to customers. Nonrefundable deposits received pursuant to certain
contracts are deferred as unearned revenues until the products are shipped or
until such time that the services are rendered to customers.
F-27
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
ADVERTISING
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
NEW DISCLOSURE STANDARD
In June 1997, SFAS No. 130, "Comprehensive Income," ("SFAS 130") was issued
which becomes effective in fiscal 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS 130 requires that changes in
the amounts of certain items, including foreign currency translation adjustments
and gains and losses on certain securities, be shown in the financial
statements. SFAS 130 does not require a specific format for the financial
statement in which comprehensive income is reported, but does require that an
amount representing total comprehensive income be reported in that statement.
The Company does not expect that the implementation of SFAS 130 will have a
material effect upon the Company's financial statements.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment (see Note 4) consists of the following as of October
31, 1997:
<TABLE>
<S> <C>
Office and computer equipment..................................... $ 65,823
Trucks and automobiles............................................ 45,076
Furniture and fixtures............................................ 15,884
Tools and test equipment.......................................... 22,777
---------
149,560
Less accumulated depreciation and amortization.................... (86,916)
---------
$ 62,644
---------
---------
</TABLE>
During the Period, depreciation and amortization expense totaled $26,425 and
has been reflected in selling, general and administrative expense in the
accompanying statement of operations.
F-28
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 3--OTHER ASSETS
Other assets consist of the following as of October 31, 1997:
<TABLE>
<S> <C>
Investment in restaurant........................................... $ 10,000
Shareholder advances............................................... 39,000
---------
$ 49,000
---------
---------
</TABLE>
As of October 31, 1997, the Company has a $10,000 (or a 0.75% ownership
interest) investment in a restaurant located in Southern California. The
investment in the restaurant is carried at cost. During the Period, the Company
recorded an impairment loss on this asset totaling $10,000.
Stockholder advances are due on demand and are non-interest bearing.
NOTE 4--BANK LINE-OF-CREDIT AND EQUIPMENT LINE-OF-CREDIT
BANK LINE-OF-CREDIT
The Company has a $200,000 revolving line-of-credit (the "Line") with Wells
Fargo Bank which expires on February 10, 1998. Borrowings pursuant to the Line
($90,079 as of October 31, 1997) accrue interest at Wells Fargo Bank's prime
rate, as defined, plus 3.00% (11.50% as of October 31, 1997), and are personally
guaranteed by all of the Company's stockholders. The Line is secured by
substantially all of the assets of the Company.
The Line provides for various warranties, covenants and restrictions
requiring compliance on a continuing basis. Default on any warranty, covenant or
restriction could effect the bank's commitment to lend, and if not waived or
corrected, could accelerate the maturity of any borrowings outstanding under the
Line. Subsequent to October 31, 1997, the Company was acquired (see Note 8). The
Line has a provision which requires repayment upon such an event. The Line is
currently due and has not yet been repaid.
EQUIPMENT LINE-OF-CREDIT
The Company has a $100,000 equipment line-of-credit (the "Equipment Line")
with Wells Fargo Bank which expires on March 5, 1998. Equipment purchase
advances, pursuant to the Equipment Line ($5,055 as of October 31, 1997), accrue
interest at either of the following two options: (1) fixed on the date of a
particular disbursement at 4.25% above the Treasury Rate, as defined, in effect
at the close of business on the Thursday of the week preceding such
disbursement; or, (2) prime rate, as defined, plus 2.00%. The principal of each
equipment advance shall be amortized over a period of not less than 24 months
nor more than 96 months (depending on the type of equipment purchased), as
agreed by the Company and Wells Fargo Bank at the time of such equipment
advance.
In August 1996, the Company borrowed $10,200, pursuant to the Equipment
Line. The Company elected option #1 (see above). The equipment purchase advance
is due in equal monthly installments of $482 over a 24 month period. The
equipment purchase advance bears interest at a fixed rate of 12.35% per annum
The equipment purchase advance is secured by the related equipment purchased
(see Note 2).
F-29
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 5--INCOME TAXES
The provision for taxes consists of the following for the Period:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Current.............................................................. $ -- $ 800 $ 800
Deferred............................................................. -- -- --
----- --------- ---------
$ -- $ 800 $ 800
----- --------- ---------
----- --------- ---------
</TABLE>
During the Period, the provision for taxes totaled $800, and differs from
the amount computed by applying the U.S. Federal income tax rate of 34% to
income attributable to continuing operations as a result of the following
significant reconciling items: meals and entertainment, keyman life insurance
and an increase in the valuation account.
As of October 31, 1997, the significant components of the Company's net
deferred tax assets are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating losses............................................ $ 45,000
Allowance for bad debts......................................... 12,000
Other........................................................... 4,000
---------
61,000
Valuation allowance............................................... (61,000)
---------
Deferred tax assets............................................... $ --
---------
---------
</TABLE>
During the Period, the valuation allowance increased $5,000.
As of October 31, 1997, the Company has net operating loss carryforwards
("NOLs") for Federal and state reporting purposes of approximately $112,000 and
$111,000, respectively, which expire in various years through 2012. The Federal
and state tax codes provide for restrictive limitations on the annual
utilization of NOLs to offset taxable income when the stock ownership of a
company significantly changes, as defined. In light of the Company's sale (see
Note 8), certain NOLs may currently, or in the foreseeable future, be subject to
such annual limitations. As such, an uncertainty exists as to the ultimate NOLs
that the Company will have to offset future taxable income. The Company's
management has recorded a valuation allowance to reflect for this uncertainty.
NOTE 6--RELATED PARTY TRANSACTIONS
NOTES PAYABLE--STOCKHOLDERS
As of October 31, 1997, the Company had notes with two stockholders totaling
$49,200. The notes are due on demand and bear interest at a rate of 10% per
annum. Subsequent to year end all principal and accrued interest pursuant to
these notes was repaid.
OTHER MATTERS
See discussion in Note 3 for other related party transactions.
F-30
<PAGE>
POSNET COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 7--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities (located in Huntington Beach and the San
Francisco Bay Area) under two operating leases. The operating leases are
month-to-month. During the Period and pursuant to these operating leases, the
Company incurred rent expense totaling $49,000.
ROYALTY AGREEMENT
In October 1994, the Company entered into a license agreement (the "License
Agreement") with an individual (the "Licensor") whereby the Licensor performs
repairs, maintenance and testing of RMS equipment on certain customers'
equipment (on behalf of the Company). As consideration, the Company is required
to pay the Licensor 7.5% of the total invoices billed to customers for theses
services. During the Period, the Company incurred royalty expense totaling
$9,900 pursuant to the License Agreement.
NOTE 8--SUBSEQUENT EVENTS
In December 19, 1997, all of the Company's shareholders (the "Selling
Shareholders") entered into a stock purchase agreement (the "SPA") with Javelin
Systems, Inc. (the "Purchaser"). Pursuant to the SPA and in exchange for 100% of
the Company's outstanding common stock, the Selling Shareholders received
225,000 shares of the Purchaser's common stock (the "Initial Consideration"). In
addition to the Initial Consideration and upon certain events, as defined, the
Selling Shareholders may earn additional shares of the Purchaser's common stock.
The Purchaser is a public company traded on the NASDAQ SmallCap market
(NASDAQ:JVLN).
OTHER MATTERS
See discussion of other subsequent events in Notes 4 and 6.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
CCI Group, Inc.
We have audited the accompanying consolidated balance sheets of CCI Group,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CCI Group, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Rubin, Brown, Gornstein & Co. LLP
February 6, 1998
St. Louis, Missouri
F-32
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................................ $ 793,509 $ 134,806
Accounts receivable................................................................. 1,197,299 563,899
Inventory........................................................................... 1,196,848 373,403
Prepaid expenses.................................................................... 14,179 15,526
Other assets........................................................................ 22,575 15,006
------------ ------------
TOTAL CURRENT ASSETS.............................................................. 3,224,410 1,102,640
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment.............................................................. 330,080 90,886
Accumulated depreciation............................................................ (96,733) (27,951)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT...................................................... 233,347 62,935
------------ ------------
TOTAL ASSETS.......................................................................... $ 3,457,757 $ 1,165,575
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................... $ 651,296 $ 210,898
Billings in excess of costs and estimated earnings on uncompleted contracts......... 1,479,413 537,372
Line of credit...................................................................... 365,000 --
Note payable--officer............................................................... 185,478 99,990
Accrued expenses.................................................................... 189,220 275,505
Accrued income taxes................................................................ 199,666 1,822
------------ ------------
TOTAL CURRENT LIABILITIES......................................................... 3,070,073 1,125,587
------------ ------------
LONG-TERM LIABILITIES
Deferred income taxes............................................................... 8,379 5,795
Minority interest in subsidiaries................................................... -- 35,452
------------ ------------
TOTAL LONG-TERM LIABILITIES....................................................... 8,379 41,247
------------ ------------
STOCKHOLDERS' EQUITY
Common stock:
$1 par value, 30,000 shares authorized, 1,000 shares issued and outstanding......... 1,000 1,000
Retained earnings................................................................... 378,305 126,008
Treasury stock...................................................................... -- (128,267)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................................................ 379,305 (1,259)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 3,457,757 $ 1,165,575
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
F-33
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Product sales....................................................................... $ 7,575,558 $ 4,602,186
Sales of services................................................................... 1,939,380 367,926
------------ ------------
TOTAL REVENUES........................................................................ 9,514,938 4,970,112
------------ ------------
COST OF SALES
Cost of products.................................................................... 6,335,727 3,773,499
Cost of services.................................................................... 1,487,700 64,116
------------ ------------
TOTAL COST OF SALES................................................................... 7,823,427 3,837,615
------------ ------------
GROSS PROFIT.......................................................................... 1,691,511 1,132,497
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................................... 1,177,209 1,055,116
------------ ------------
INCOME FROM OPERATIONS................................................................ 514,302 77,381
------------ ------------
OTHER INCOME (EXPENSE)
Other income........................................................................ 6,500 1,890
Interest expense.................................................................... (22,554) --
Loss on sale of assets.............................................................. (2,156) --
Interest income..................................................................... 1,387 13,052
------------ ------------
TOTAL OTHER INCOME (EXPENSE).......................................................... (16,823) 14,942
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND MINORITY
INTEREST............................................................................ 497,479 92,323
PROVISION FOR INCOME TAXES............................................................ 201,973 23,326
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST............................ 295,506 68,997
MINORITY INTEREST..................................................................... -- 6,894
------------ ------------
INCOME FROM CONTINUING OPERATIONS..................................................... 295,506 62,103
LOSS FROM DISCONTINUED AUTOMOTIVE OPERATIONS, NET OF APPLICABLE INCOME TAX CREDIT OF
$4,211 AND $2,709................................................................... (6,160) (8,012)
GAIN FROM DISPOSAL OF AUTOMOTIVE SEGMENT, NET OF APPLICABLE INCOME TAXES OF $29,643... 43,370 --
------------ ------------
NET INCOME............................................................................ $ 332,716 $ 54,091
------------ ------------
------------ ------------
INCOME PER SHARE OF COMMON STOCK:
Income from continuing operations................................................... 322 70
Discontinued operations............................................................. 41 (9)
------------ ------------
NET INCOME............................................................................ $ 363 $ 61
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
F-34
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED TREASURY STOCK STOCKHOLDERS'
---------------------- EARNINGS ----------------------- EQUITY
SHARES AMOUNT (DEFICIT) SHARES AMOUNT (DEFICIT)
----------- --------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1995..................... 1,000 $ 1,000 $ 71,917 -- $ -- $ 72,917
PURCHASE OF TREASURY STOCK..................... -- -- -- 450 128,267 (128,267)
NET INCOME..................................... -- -- 54,091 -- -- 54,091
----- --------- ---------- ----- ---------- ------------
BALANCE--DECEMBER 31, 1996..................... 1,000 1,000 126,008 450 128,267 (1,259)
TREASURY STOCK REISSUED TO EMPLOYEES........... -- -- (36,465) (168) (47,861) 11,396
TREASURY STOCK REISSUED TO STOCKHOLDER......... -- -- (43,954) (282) (80,406) 36,452
NET INCOME..................................... -- -- 332,716 -- -- 332,716
----- --------- ---------- ----- ---------- ------------
BALANCE--DECEMBER 31, 1997..................... 1,000 $ 1,000 $ 378,305 -- $ -- $ 379,305
----- --------- ---------- ----- ---------- ------------
----- --------- ---------- ----- ---------- ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
F-35
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers........................................................ $ 10,004,350 $ 6,075,501
Cash paid to suppliers and employees................................................ (9,582,820) (5,906,488)
Interest paid....................................................................... (16,839) --
Interest received................................................................... 1,417 --
Income taxes paid................................................................... (25,600) (16,500)
Other receipts...................................................................... 6,500 4,167
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 387,008 156,680
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of treasury stock.......................................................... -- (128,267)
Capital expenditures................................................................ (241,659) (62,126)
Proceeds from sale of segment....................................................... 62,866 --
Proceeds from sale of assets........................................................ -- 74,927
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES................................................. (178,793) (115,466)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (payments to) officer................................................. 85,488 (48,593)
Proceeds from line of credit........................................................ 365,000 --
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... 450,488 (48,593)
------------ ------------
NET INCREASE (DECREASE) IN CASH....................................................... 658,703 (7,379)
CASH--BEGINNING OF YEAR............................................................... 134,806 142,185
------------ ------------
CASH--END OF YEAR..................................................................... $ 793,509 $ 134,806
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income.......................................................................... $ 332,716 $ 54,091
------------ ------------
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation...................................................................... 70,091 18,056
Minority interest in subsidiaries................................................. -- 6,894
Wages paid by company stock....................................................... 11,396 --
Loss (gain) on sale of property................................................... 2,156 (66,096)
Gain on sale of segment........................................................... (73,013) --
Increase in accounts receivable................................................... (633,400) (388,816)
Increase in interest receivable................................................... -- (5,387)
Increase in inventory............................................................. (863,298) (248,003)
Decrease (increase) in prepaid expenses........................................... 1,347 (12,409)
Increase in other assets.......................................................... (7,569) (2,439)
Increase in accounts payable...................................................... 490,398 165,622
Increase in billing in excess of costs and estimated earnings on uncompleted
contracts....................................................................... 942,041 418,292
Increase (decrease) in income tax payable......................................... 197,844 (1,678)
Increase in deferred taxes........................................................ 2,584 5,795
(Increase) decrease in accrued expenses........................................... (86,285) 212,758
------------ ------------
TOTAL ADJUSTMENTS............................................................... 54,292 102,589
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. $ 387,008 $ 156,680
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Proceeds from sale of segment through reduction in accounts payable................. $ 50,000 $ --
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
F-36
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
BUSINESS DESCRIPTION
CCI GROUP, INC. (the Company) is the parent company of CCI Technology, Inc.,
CCI Payment Systems, Inc., Sourcelink, Inc., and Custom Configurations, Inc. The
parent company is a holding company.
CCI Technology, Inc. is a general contractor for the design, configuration
and deployment of retail point of sale, information management and data
collection systems, primarily for the food service industry. CCI Technology's
services include installation, training, support, and documentation. CCI Payment
Systems, Inc. is the distributor of payment processing systems assembled and
configured by CCI Technology. Custom Configurations, Inc. was the manufacturer
of certain automotive parts. Sourcelink, Inc. was the distributor of those
automotive parts. All CCI Group companies market throughout the United States.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries, which are all more than 50% owned. Intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
REVENUE RECOGNITION
The Company recognizes contract revenue principally on the percentage of
completion method. The percent complete is measured independently for each
contract based on the terms of that contract. The majority of contracts' percent
complete is based on the completion of specific phases indicated within the
contract. Other revenues are recognized on the basis of shipment of products or
performance of services.
Contract costs include all direct labor and benefits, materials unique to or
installed in the project, subcontractor cost and indirect cost allocations,
including employee benefits.
As long-term contracts extend over one or more years, revisions in cost and
earnings estimates during the course of the work are reflected in the accounting
period in which the facts which require the revision become known. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss is recognized in the financial statements.
The Company generally does not have any significant remaining obligations
upon shipment of its products. Product returns and sales allowances, which have
not been significant historically, are provided for at the date of sale.
Amounts billed to customers in excess of revenue earned is included as a
current liability, "billings in excess of costs and estimated earnings on
uncompleted contracts" on the balance sheet. At December 31, 1997 and 1996, this
account balance consists principally of amounts billed on contracts to be
started in 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid debt instruments to be cash equivalents.
F-37
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method to account for uncollectible accounts
receivable. The allowance for doubtful accounts is based on prior years'
experience and management analysis of possible bad debts. As of December 31,
1997 and 1996, management has determined no allowance is required.
INVENTORY
The Company uses the weighted average cost method of valuing inventory. At
December 31, 1997 and 1996, inventory consists principally of purchased computer
hardware and components.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using both straight line and accelerated methods. Asset lives range
from 3 to 5 years.
Repairs and maintenance are charged to expense when incurred. Expenditures
for major renewals and betterments that extend the useful life of the assets are
capitalized.
DEFERRED INCOME ON SERVICE SALES
The Company includes product service with some system contracts. Revenues
billed specifically for the service portion of the contract are deferred and
amortized on a straight-line basis over the life of the service contract.
Service contract costs are charged to operations as incurred.
INCOME TAXES
The Company's operations are included in consolidated tax returns, which
includes the operation of the four subsidiary companies, through the sale date
of the Company, December 22, 1997. The consolidated tax return excluded CCI
Payment Systems, Inc. which was an S Corporation from its inception May 5, 1997
through December 15, 1997.
The Company accounts for income taxes using the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax law or rates.
CCI Payment Systems, Inc. elected S corporate status effective on its date
of incorporation. Therefore, the income and losses through December 22, 1997 are
included in the income tax returns of the shareholders. No provision or
liability for income taxes is recorded for this subsidiary for that period.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income applicable to
common shareholders by the weighted average number of shares outstanding during
each year. The weighted average number of common shares outstanding used to
compute income (loss) per common share for 1997 and 1996 was 918 and 888,
respectively.
F-38
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
USE OF ESTIMATES
The presentation 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.
WARRANTIES
The Company's products are under warranty for defects in material and
workmanship for up to one year. Certain components included in the Company's
products are covered by manufacturer's warranties. Costs related to after-sale
service and repair have been considered insignificant.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Computer hardware..................................................... $ 119,306 $ 39,508
Computer software..................................................... 38,454 22,057
Computer hardware held for operating lease............................ 78,030 --
Office equipment...................................................... 60,167 19,469
Shop equipment........................................................ 23,009 7,102
Vehicles.............................................................. 11,114 2,750
---------- ----------
330,080 90,886
Less: Accumulated depreciation........................................ (96,733) (27,951)
---------- ----------
$ 233,347 $ 62,935
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense charged against income amounted to
$70,091 in 1997 and $18,056 in 1996.
3. LINE OF CREDIT AGREEMENT
In 1997, the Company had a $1,000,000 line of credit from Magna Bank which
matures August 5, 1998. Interest is payable monthly at a rate of one percent
over the prime rate. The Company's inventory, accounts receivable, property,
furniture and equipment are collateral for the line of credit.
4. INCOME TAXES
Deferred income taxes are provided for the temporary differences between the
tax and financial reporting basis of the Company's assets and liabilities at
December 31, 1997 and 1996, utilizing the tax rates expected to be in effect
when the temporary differences reverse. The principal temporary difference
results from the use of accelerated tax depreciation methods for income tax
reporting purposes.
F-39
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. INCOME TAXES (CONTINUED)
The income tax provision charged to continuing operations during the years
ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Current Tax Expense:
Federal.............................................................. $ 172,258 $ 13,744
State................................................................ 27,131 3,787
---------- ---------
Total Current Tax Expense............................................ 199,389 17,531
Deferred Tax Expense................................................... 2,584 5,795
---------- ---------
PROVISION FOR INCOME TAX............................................... $ 201,973 $ 23,326
---------- ---------
---------- ---------
</TABLE>
Deferred tax liabilities at December 31 were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred Tax Liabilities:
Tax over book depreciation............................................... $ 8,379 $ 5,795
--------- ---------
--------- ---------
</TABLE>
5. LEASE AGREEMENTS
The Company leases its office and warehouse facility under a noncancellable
agreement. The lease calls for monthly rental payments of $7,569 and expires
October 31, 1998. Rent expense for the years ended December 31, 1997 and 1996
totaled $89,412 and $63,273, respectively.
In 1997, CCI Technology, Inc. leased equipment to two customers under
month-to-month operating lease agreements. The leases call for monthly lease
payments of $33 to $50 per month per unit leased. Lease income for the year
ended December 31, 1997 totaled $69,831. At December 31, 1997, the assets are
carried on the books at $78,030 less $19,191 accumulated depreciation.
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash investments and trade receivables.
The Company places its cash investments with high-credit-quality financial
institutions. Deposits in excess of the FDIC insurance limit amounted to
$693,384 and $34,807 at December 31, 1997 and 1996, respectively.
In the normal course of business, the Company provides credit terms to its
customers and collateral is generally not required. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains allowances
for potential losses, if necessary.
F-40
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
6. CONCENTRATIONS OF CREDIT RISK (CONTINUED)
The Company has a significant concentration of credit risk with respect to a
receivable from a development stage customer engaged in payment processing
services (a niche market of the point of sale industry). Repayment is dependent
upon the customer's ability to continue to raise capital for operations and
expansion.
This receivable represents 57% of total accounts receivable at December 31,
1997.
7. LINES OF BUSINESS
The Company operates in two major lines of business: point of sale systems
and automotive parts. Information concerning operations in these segments at
December 31, 1997 and 1996, and for the years then ended, is presented below:
<TABLE>
<CAPTION>
AUTOMOTIVE
POINT OF PARTS
SALE (DISCONTINUED
SYSTEMS OPERATIONS) CONSOLIDATED
----------- ------------- ------------
<S> <C> <C> <C>
1997
Net operating revenues (excluding intersegment transfers).............. $ 9,514,938 $ 170,624 $9,685,562
Operating income....................................................... 514,302 2,727 517,029
Identifiable operating assets.......................................... 3,450,593 7,164 3,457,757
Capital expenditures................................................... 241,659 -- 241,659
Depreciation and amortization.......................................... 70,091 -- 70,091
1996
Net operating revenues (excluding intersegment transfers).............. $ 4,970,112 $ 1,075,913 $6,046,025
Operating income (loss)................................................ 77,381 (53,914) 23,467
Identifiable operating assets.......................................... 932,392 233,183 1,165,575
Capital expenditures................................................... 62,126 -- 62,126
Depreciation and amortization.......................................... 16,991 1,065 18,056
</TABLE>
8. MAJOR CUSTOMERS
During the year ended December 31, 1997, three customers, each accounted for
over 10% of the Company's revenues. Sales to these customers represented 20%,
39% and 11% of total Company sales. At December 31, 1997, accounts receivable
from these customers were 11%, 13% and 57% of total accounts receivable,
respectively.
During the year ended December 31, 1996, three customers, each accounted for
over 10% of the Company's revenues. Sales to these customers represented 26%,
21% and 11% of total Company sales. At December 31, 1996, accounts receivable
from these customers were 18%, 22% and 25% of total accounts receivable,
respectively.
9. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution profit sharing plan which covered
substantially all full-time employees. This Plan was amended and restated in
1997 to qualify as a salary reduction defined contribution profit sharing plan
under Section 401(k) of the Internal Revenue code. The Company's contributions
to the plan are made at the discretion of the Board of Directors. The Company's
contribution for 1996 of $50,000 was accrued at December 31, 1996 and paid in
1997. No contribution is accrued at December 31, 1997.
F-41
<PAGE>
CCI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
10. TREASURY STOCK TRANSACTIONS
In 1996, the Company and Custom Configurations purchased 450 shares and 320
shares, respectively, of treasury stock from an officer of the companies. The
treasury stock was recorded at cost.
In January 1997, 168 shares of treasury stock of the Company were reissued
to employees. Compensation expense of $11,396 was recorded based on the
estimated fair value of the Company's stock, with the difference between the
fair value and cost recorded as an adjustment to retained earnings.
In 1997, prior to the sale of the Company, the Company acquired 320 shares
of CCI Technology stock, 200 shares of Sourcelink stock, and 1,000 shares of CCI
Payment Systems stock in exchange for 282 shares of stock from its treasury
stock. The difference between the estimated fair value of stock traded and the
treasury stock cost was recorded as an adjustment to retained earnings. With
these transactions, the Company owns one hundred percent of all of its
subsidiaries.
11. SALE OF AUTOMOTIVE SEGMENT
In 1996, Custom Configurations, Inc. sold its operating assets. The sale
resulted in a gain on sale of assets of $66,096.
In 1997, Sourcelink, Inc. sold its operating assets for a price not to
exceed $200,000. $50,000 was paid immediately by a reduction in the accounts
payable to the purchaser. The remaining purchase price is being paid on a per
unit basis as units are sold and delivered by the purchaser. In 1997, Sourcelink
has recognized $73,013 of gain from the sale. The remainder of the gain will be
recognized when realized.
Custom Configurations and Sourcelink made up the Company's automotive
segment of its business. As such, the operations of these companies through the
sale of Sourcelink have been recorded as discontinued operations in the
accompanying statements. The gain on sale of Sourcelink has been recorded as
income from disposal of a segment, net of income taxes.
12. SALE OF COMPANY
On December 22, 1997, the Company's shareholders exchanged the Company's
1,000 shares of issued and outstanding stock for 380,000 shares of Javelin
Systems, Inc. common stock. 290,000 shares have been put in escrow until certain
sale provisions are met. Subsequent to this sale, the Company is owned one
hundred percent by Javelin Systems, Inc.
13. RELATED PARTY TRANSACTIONS
The Company has notes payable to a former corporate officer for $185,478 and
$99,990 at December 31, 1997 and 1996, respectively. The notes are due on demand
and carry interest at a rate of 10%. Interest expense on the notes payable for
the years ended December 31, 1997 and 1996 was $22,168 and $23,279,
respectively. Interest payable to the officer for the years ended December 31,
1997 and 1996 was $34,739 and $19,356, respectively. Subsequent to December 31,
1997, the Company paid its notes payable and interest due the officer in full.
CCI Technology purchased $166,584 of equipment and repairs from Javelin
Systems, Inc., prior to its acquisition. CCI Technology owed Javelin $15,394 at
December 31, 1997.
F-42
<PAGE>
[LOGO]
[PHOTOGRAPHS OF PRODUCT]
The Javelin LP, expected to be released during fiscal 1999, is designed to
be a compact, low profile PC for the high-traffic, POS environment. The LP is
planned to be network ready with an integrated Ethernet controller. The LP
should accommodate a variety of peripheral equipment such as cash drawers, card
readers, scanners and printers. The LP is designed to be spill resistant with a
solid cover, and, because it has no fans, is expected to be noiseless.
INNOVATIVE
The Javelin HHT-40 is being developed for the Company by a third party, and
the Company anticipates that the HHT-40 will become available in fiscal 1999.
The HHT-40 is designed to be a compact, lightweight, wireless handheld system
that provides service people the ability to enter orders quickly and efficiently
and offers the benefit of sending information remotely to the kitchen, bar, etc.
The HHT-40 targets table service restaurants as well as the arena and stadium
food service market.
VARIETY
The rugged, small-footprint Javelin Wedge, Javelin's first integrated
touchscreen computer, was introduced in January 1996. The Javelin Wedge is now
available with a Pentium processor to handle graphically-intense software
applications.
FLEXIBILITY
The Javelin LC, introduced in June 1997, presents a profile and a footprint
of less than eight inches square and has been designed to be more compact and
elegant in appearance making it suitable for both the food service market and
the retail market. In addition, the system's reduced size and flat panel display
allows it to be mounted in a variety of ways, including wall-mounted, fixed to
an adjustable base or attached to an articulated arm.
PERFORMANCE
<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Recent Acquisitions....................................................... 6
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 19
Price Range of Common Stock............................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Selected Consolidated Financial Information............................... 21
Unaudited Pro Forma Condensed Financial Information....................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 33
Management................................................................ 45
Certain Transactions...................................................... 51
Principal Stockholders.................................................... 52
Selling Stockholders...................................................... 53
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 60
Change in Accountants..................................................... 60
Additional Information.................................................... 60
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
1,250,000 Shares
[LOGO]
Common Stock
------------------
PROSPECTUS
------------------
VAN KASPER & COMPANY
L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
MERIDIAN CAPITAL GROUP, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws require that directors and officers be indemnified to
the maximum extent permitted by Delaware law.
The Delaware GCL provides that a director or officer of a corporation (i)
shall be indemnified by the corporation for all expenses of litigation or other
legal proceedings when he is successful on the merits, (ii) may be indemnified
by the corporation for the expenses, judgments, fines and amounts paid in
settlement of such litigation (other than a derivative suit) even if he is not
successful on the merits if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation (and,
in the case of a criminal proceeding, had no reason to believe his conduct was
unlawful), and (iii) may be indemnified by the corporation for expenses of a
derivative suit (a suit by a stockholder alleging a breach by a director or
officer of a duty owed to the corporation), even if he is not successful on the
merits, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, provided that no
such indemnification may be made in accordance with this clause (iii) if the
director or officer is adjudged liable to the corporation, unless a court
determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses. The
indemnification described in clauses (ii) and (iii) above shall be made upon
order by a court or a determination by (i) a majority of disinterested
directors, (ii) if there are no such directors or if such directors so direct,
by independent legal counsel in a written opinion or (iii) the stockholders that
indemnification is proper because the applicable standard of conduct is met.
Expenses incurred by a director or officer in defending an action may be
advanced by the corporation prior to the final disposition of such action upon
receipt of an undertaking by such director or officer to repay such expenses if
it is ultimately determined that he is not entitled to be indemnified in
connection with the proceeding to which the expenss relate. The Company's
Certificate of Incorporation includes a provision eliminating, to the fullest
extent permitted by Delaware law, director liability for monetary damages for
breaches of fiduciary duty.
The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each director or officer designated by the Board of Directors.
The Indemnity Agreements require that the Company indemnify directors and
officers who are parties thereto in all cases to the fullest extent permitted by
Delaware law. Under the Delaware GCL, except in the case of litigation in which
a director or officer is successful on the merits, indemnification of a director
or officer is discretionary rather than mandatory. Consistent with the Company's
Bylaw provision on the subject, the Indemnity Agreements require the Company to
make prompt payment of litigation expenses at the request of the director or
officer in advance of indemnification provided that he undertakes to repay the
amounts if it is ultimately determined that he is not entitled to
indemnification for such expenses. The advance of litigation expenses is
mandatory; under the Delaware GCL such advance would be discretionary. Under the
Indemnity Agreements, the director or officer is permitted to bring suit to seek
recovery of amounts due under the Indemnity Agreements and is entitled to
recover the expenses of seeking such recovery unless a court determines that the
action was not made in good faith or was frivolous. Without the Indemnity
Agreements, the Company would not be required to pay the director or officer for
his expenses in seeking indemnification recovery against the Company. Under the
Indemnity Agreements, directors and officers are not entitled to indemnity or
advancing of expenses (i) if such director or officer has recovered payment
under an insurance policy for the subject claim, or has otherwise been
indemnified against the subject claim, (ii) for actions initiated or brought by
the director or officer and not by way of defense (except for actions seeking
indemnity or expenses from the Company), (iii) if the director or officer
violated section 16(b) of the Exchange Act or similar provisions of law or (iv)
if a court of competent jurisdiction determines that the director or officer
failed to act in good faith and in a manner reasonably believed to be
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in or not opposed to the best interests of the Company or, with respect to any
proceeding which is of a criminal nature, had reasonable cause to believe his
conduct was unlawful. Absent the Indemnity Agreements, indemnification that
might be made available to directors and officers could be changed by amendments
to the Company's Certificate of Incorporation or Bylaws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee................................ $ 3,843
NASD filing fee................................. 1,803
Nasdaq Stock Market Listing Application fee..... 17,500
Printing and engraving expenses................. 110,000
Legal fees and expenses......................... 170,000
Accounting fees and expenses.................... 100,000
Transfer agent and registrar fees............... 5,000
Miscellaneous................................... 16,854
---------
Total......................................... $ 425,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has sold and issued within the past three years the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Act"):
1. On September 26, 1995, the Company issued 430,000 shares of Common Stock
to Richard P. Stack, 288,100 shares of Common Stock to C. Norman Campbell and
77,400 shares of Common Stock to John R. Amos at a per share price of
approximately $.006. The issuance of the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section4(2) of the Act and Rule 504
of Regulation D promulgated thereunder.
2. On October 1, 1995, the Company issued a Promissory Note in the amount
of $15,000 to Richard P. Stack. The issuance of the Promissory Note was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 504 of Regulation D promulgated thereunder because the issuance did
not involve a public offering.
3. On November 1, 1995, the Company issued 288,100 shares of Common Stock
to C. Norman Campbell and 107,500 shares of Common stock to Alex Nelson at a per
shares price of approximately $.006. The issuance of the Common Stock was deemed
to be exempt from registration under the Act by virtue of Section 4(2) the Act
and Rule 504 of Regulation D promulgated thereunder.
4. On January 9, 1996, the Company issued 180,600 shares of Common stock
the The Steven J. Goodman Revocable Living Trust ("Goodman") and 25,800 shares
of Common Stock to GAK Limited, a Delaware limited partnership ("GAK"), of which
Horace and Madeleine Hertz are the general partners, at a per shares price of
approximately $.02. The issuance of the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the act and Rule
504 of Regulation D promulgated thereunder.
5. In February 1996, the Company issued two Promissory Notes, each in the
original principal amount of $20,000, to each of Peter Aiello and Jim Cox. The
Promissory Note issued to Mr. Cox is convertible at his option into shares of
Common Stock at a per share price of $2.50 per share. Effective as of June 30,
1997, Mr. Cox converted his Promissory Note into 8,000 shares of Common Stock.
The issuance of the Promissory Notes and the Common Stock issued upon conversion
of Mr. Cox's Promissory
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<PAGE>
Note was deemed to be exempt from registration under the Act by virtue of
Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder.
6. On April 1, 1996, the Company issued 430,000 shares of Common stock to
Richard P. Stack at a price per share of approximately $.19 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of section 4(2) of the Act and Rule of
Regulation D promulgated thereunder.
7. On April 3, 1996, the Company issued 116,100 shares of Common Stock to
Goodman at a per share price of approximately $.22. The issuance of the Common
Stock was deemed to be exempt from registration under the Act by virtue of
Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder.
8. On May 1, 1996, the Company issued 86,000 shares of Common Stock to
Teresa M. McRae at a per share price of approximately $.47 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder.
9. On May 23, 1996, the Company issued 38,780 shares of Common Stock to GAK
at a per share price of approximately $.65. The issuance of the Common Stock was
deemed to be exempt from registration under the Act by virtue of Section 4(2) of
the Act and Rule 504 of Regulation D promulgated thereunder.
10. On May 31, 1996, the Company issued 17,200 shares of Common Stock to
Richard A. Stack at a per share price of approximately $.70 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder.
11. On June 3, 1996, the Company issued 10,750 shares of Common Stock to
Herbert R. and Janice N. Donica, as joint tenants by the entireties, at a per
share price of approximately $2.33. The issuance of the Common Stock was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 504 of Regulation D promulgated thereunder.
12. At various times commencing May 1996 through August 1996, the Company
issued Promissory Notes to the following accredited investors in the following
original principal amounts: (1) The Steven J. Goodman Charitable Remainder Trust
(the "Goodman CRT"), $50,000; (2) John R. Amos, $25,000; (3) Kanayo Partabrai
Gangwani, $25,000; (4) Jack S. Kompan, two Promissory Notes aggregating $50,000;
(5) Universal Partners, L.P., a partnership that specializes in providing bridge
financing of which Windy City Bridges, Inc. is a general partner, $25,000; (6)
Scott Robinson, $25,000; (7) Rebecca L. Gregarek, $12,500; (8) David M. Munch,
$25,000; (9) David J. Gregarek, $25,000; (10) Jay Louis Kear Family Trust,
$25,000; (11) Mildred J. Geiss, $37,500; (12) Westerling Family Trust, $100,000;
(13) Yu Family Revocable Trust, $25,000; (14) Kenneth and Linda Bloom, $25,000;
(15) Christopher Neil, $25,000; (16) Izzy Rabinowitz, $50,000; (17) Don R.
Thorne, $50,000; (18) Mark Ratto, $12,500; (19) B.C. Investments, $12,500; (20)
Chris Brown, $50,000; (21) Victor A. Ince and Terry A. Ince, joint tenants,
$25,000; (22) Caribou Bridge Fund, LLC, $25,000. Concurrent with the issuance of
each of the foregoing Promissory Notes, the Company issued warrants to purchase
shares of Common Stock (the "Warrants") in an amount equal to the number of
shares that results from dividing $5.00 into the original principal amount of
the Promissory Note, with the exception of the Promissory Notes issued to Mr.
Amos, Mr. Gangwani and Mr. Kompan which provided for $2.50 being divided into
the original principal amount of their respective Promissory Notes. The total
purchase price for all of the shares of Common Stock issuable upon the exercise
of such Warrants is an aggregate of $1.00 per Warrant, or $23.00 in the
aggregate. The Warrants
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<PAGE>
became exercisable October 25, 1996 and were all exercised between October and
December 1996. In connection with the sales of certain of the Promissory Notes
and Warrants, the Company paid a total of $15,000 in commissions to Spencer
Edwards in its capacity as a selling agent and $27,500 to Meridian in its
capacity as a selling agent. The issuance of the Promissory Notes and the
Warrants was deemed to be exempt from registration under the Act by virtue of
Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder.
The foregoing information has been adjusted to reflect a 4,300 for 1 stock
split of the Common Stock effected in August 1996.
13. On December 19, 1997, the company issued an aggregate of 225,000 shares
of the Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph
E. Rudzik, Jr. in consideration for all of the outstanding capital stock of
POSNET Computers, Inc., a California corporation ("Posnet"). The issuance of the
Common Stock was deemed to be exempt from registration under the Act by virtue
of Section 4(2) of the Act and Rule 506 promulgated thereunder.
14. On December 22, 1997, the Company issued a warrant to purchase up to
10,000 shares of the Company's Common Stock to L.H. Friend, Weinress, Frankson &
Presson, Inc. at an exercise price of $9.36 per share. The issuance of the
warrant and the Common Stock underlying the warrant are deemed to be exempt from
registration under the Act by virtue of Section 4(2) of the Act.
15. On December 22, 1997, the Company issued an aggregate of 670,000 shares
of the Company's Common Stock to Robert Nichols, Robert Hess, Melissa Sobo and
Renee Voirol in consideration for all of the outstanding capital stock of CCI
Group, Inc., a Missouri corporation. The issuance of the Common Stock was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 506 promulgated thereunder.
16. On March 31, 1998, the Company issued an aggregate of 18,752 shares of
the Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph E.
Rudzik, Jr. as further consideration for all of the outstanding capital stock of
Posnet pursuant to the earnout provisions of the Stock Purchase Agreement dated
December 19, 1997, among the Company, Posnet, Mark LeMay, Paul Amestoy, Greg
Kosin and Ralph E. Rudzik, Jr. The issuance of the Common Stock was deemed to be
exempt from registration under the Act pursuant to Section 4(2) of the Act and
Rule 506 promulgated thereunder.
17. On April 23, 1998, the Company issued an aggregate of 36,362 shares of
the Company's Common Stock to Meridian Capital group, Inc ("Meridian") and
certain officers of Meridian upon exercise of warrants held by such entity and
individuals pursuant to the net-exercise provision contained in such warrants.
The issuance of the Common Stock was deemed to be exempt from registration under
the Act by virtue of Section 4(2) under the Act.
18. On May 10, 1998, the Company issued 15,300 shares of the Company's
Common Stock to Aspact Enterprise, Ltd. in consideration for all of the
outstanding capital stock of Aspact IT Services Pty Ltd., a corporation
organized under the laws of Singapore. The issuance of the Common Stock was
deemed to be exempt from registration under the Act by virtue of Section 4(2) of
the Act.
19. On June 9, 1998, the Company issued warrants to purchase an aggregate of
25,000 shares of the Company's Common Stock to L.H. Friend, Weinress, Frankson &
Presson, Inc. ("L.H. Friend") and certain of L.H. Friend's officers at an
exercise price of $12.65 per share. The issuance of such warrants and the Common
stock underlying such warrants was deemed to be exempt from registration under
the Act by virtue of Section 4(2) of the Act.
20. On June 12, 1998, the Company issued a warrant to purchase 100,000
shares of the Company's Common Stock to FINOVA Capital Corporation at an
exercise price per share of $9.00. The issuance of
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<PAGE>
the warrant and the Common Stock underlying the warrant was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1(1) -- Registrant's Amended and Restated Certificate of Incorporation.
3.2(1) -- Certificate of Amendment of Amended and Restated Certificate of Incorporation.
3.3(1) -- Registrant's Amended and Restated Bylaws.
4.1(1) -- Form of Common Stock Certificate of Registrant.
5.1* -- Opinion of Cooley Godward LLP.
10.1(1) -- Form of Indemnity Agreement entered into between the Company and its directors and executive
officers.
10.2(1) -- 1996 Stock Incentive Award Plan (the "1996 Plan").
10.3(1) -- Form of Director Non-Qualified Stock Option Agreement under the 1996 Plan.
10.4(1) -- Form of Employee Non-Qualified Stock Option Agreement under the 1996 Plan.
10.5(6) -- 1997 Equity Incentive Plan, as amended.
10.6(6) -- Form of Incentive Stock Option Agreement under the 1997 Plan.
10.7(6) -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan.
10.8(1) -- Employment Agreement dated August 19, 1996 by and between the Company and Richard P. Stack.
10.9(1) -- Employment Agreement dated August 19, 1996 by and between the Company and C. Norman Campbell.
10.10(6) -- Employment Agreement dated January 1, 1998 by and between CCI Group, Inc and Robert Nichols.
10.11(6) -- Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated January 27, 1998 by and
between the Company and BRS-Campo Investment Company LP.
10.12(1) -- Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between
the Company and Robert P. Peebles Trust, dated April 11, 1979.
10.13(2) -- Standard Sublease dated September 9, 1997 by and between the Company, D. Howard Lewis and William
R. Miller.
10.14(6) -- The Business Center Office/Warehouse Lease dated April 4, 1997 by and between CCI Group, Inc and
Nooney Krombech Company.
10.15(2) -- Distributor Agreement dated March 14, 1997 by and between the Company and ScanSource, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------
10.16(3) -- Stock Purchase Agreement dated December 19, 1997 by and among the Company, POSNET Computers,
Inc., Paul R. Amestoy, Greg Kolin, Mark LeMay and Ralph E. Rudzik, Jr.
<S> <C> <C>
10.17(4) -- Amendment to Stock Purchase Agreement dated January 23, 1998 by and between the Company and Mark
LeMay as agent for Paul R. Amestoy, Mark LeMay, Greg Kosin and Ralph E. Rudzik, Jr.
10.18(5) -- Plan of Reorganization and Stock Purchase Agreement dated December 22, 1997 by and among the
Company and CCI Group, Inc., Robert Nichols, Robert Hess, Melissa Sobo and Renee Voirol.
10.19(6) -- Loan and Security Agreement dated June 8, 1998 by and among the Company, CCI Group, Inc., POSNET
Computers, Inc. and FINOVA Capital Corporation and related Secured Promissory Note, Pledge
Agreement and Secured Continuing Corporate Guaranty.
10.20(6) -- Form of Warrant issued by the Company in favor of FINOVA Capital Corporation.
10.21(6) -- Letter of Intent dated July 20, 1998 by and among the Company, RGB/Trinet Limited and Jade
Communications Limited.
10.22 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Gary Green,
Roger Scarlett, Louvre Trustees Limited, and the Company.
10.23 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Anthony Sampson,
Gentech Consultants Limited, Bertram Badminton, and the Company.
16.1(6) -- Letter on change in Certifying Accountant dated May 29, 1998 from Ernst & Young LLP to the SEC.
21.1(6) -- Subsidiaries of the Registrant.
23.1 -- Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 -- Consent of Ernst & Young LLP, independent auditors.
23.3 -- Consent of Corbin & Wertz, independent auditors.
23.4 -- Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors.
23.5* -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* -- Power of Attorney.
27.1(6) -- Financial Data Schedule.
</TABLE>
- ------------------------
* Filed as an exhibit to Registration Statement on Form SB-2 (No. 333-63993),
and incorporated herein by reference.
(1) Filed as a exhibit to the Company's Registration Statement on Form SB-2, as
amended (No. 333-11217), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 30, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated
March 4, 1998 and incorporated herein by reference.
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<PAGE>
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 5, 1998 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
(b) Schedules
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated financial statements or notes
thereto.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 24 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) That, for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
in the City of Irvine, County of Orange, State of California, on the 6th day of
October, 1998.
By: /s/ RICHARD P. STACK
-----------------------------------
Richard P. Stack
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------------------- -------------------------------------------- ----------------------
<S> <C> <C>
/s/ RICHARD P. STACK
- ---------------------------------- President, Chief Executive Officer and October 6, 1998
Richard P. Stack Director (PRINCIPAL EXECUTIVE OFFICER)
/s/ HORACE HERTZ
- ---------------------------------- Chief Financial Officer and Secretary October 6, 1998
Horace Hertz (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ STEVEN J. GOODMAN*
- ---------------------------------- Director October 6, 1998
Steven J. Goodman
/s/ ROBERT NICHOLS*
- ---------------------------------- Director October 6, 1998
Robert Nichols
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RICHARD P. STACK
-------------------------
Richard P. Stack
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1(1) -- Registrant's Amended and Restated Certificate of Incorporation.
3.2(1) -- Certificate of Amendment of Amended and Restated Certificate of Incorporation.
3.3(1) -- Registrant's Amended and Restated Bylaws.
4.1(1) -- Form of Common Stock Certificate of Registrant.
5.1* -- Opinion of Cooley Godward LLP.
10.1(1) -- Form of Indemnity Agreement entered into between the Company and its directors and executive
officers.
10.2(1) -- 1996 Stock Incentive Award Plan (the "1996 Plan").
10.3(1) -- Form of Director Non-Qualified Stock Option Agreement under the 1996 Plan.
10.4(1) -- Form of Employee Non-Qualified Stock Option Agreement under the 1996 Plan.
10.5(6) -- 1997 Equity Incentive Plan, as amended.
10.6(6) -- Form of Incentive Stock Option Agreement under the 1997 Plan.
10.7(6) -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan.
10.8(1) -- Employment Agreement dated August 19, 1996 by and between the Company and Richard P. Stack.
10.9(1) -- Employment Agreement dated August 19, 1996 by and between the Company and C. Norman Campbell.
10.10(6) -- Employment Agreement dated January 1, 1998 by and between CCI Group, Inc and Robert Nichols.
10.11(6) -- Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated January 27, 1998 by and
between the Company and BRS-Campo Investment Company LP.
10.12(1) -- Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between
the Company and Robert P. Peebles Trust, dated April 11, 1979.
10.13(2) -- Standard Sublease dated September 9, 1997 by and between the Company, D. Howard Lewis and
William R. Miller.
10.14(6) -- The Business Center Office/Warehouse Lease dated April 4, 1997 by and between CCI Group, Inc and
Nooney Krombech Company.
10.15(2) -- Distributor Agreement dated March 14, 1997 by and between the Company and ScanSource, Inc.
10.16(3) -- Stock Purchase Agreement dated December 19, 1997 by and among the Company, POSNET Computers,
Inc., Paul R. Amestoy, Greg Kolin, Mark LeMay and Ralph E. Rudzik, Jr.
10.17(4) -- Amendment to Stock Purchase Agreement dated January 23, 1998 by and between the Company and Mark
LeMay as agent for Paul R. Amestoy, Mark LeMay, Greg Kosin and Ralph E. Rudzik, Jr.
10.18(5) -- Plan of Reorganization and Stock Purchase Agreement dated December 22, 1997 by and among the
Company and CCI Group, Inc., Robert Nichols, Robert Hess, Melissa Sobo and Renee Voirol.
10.19(6) -- Loan and Security Agreement dated June 8, 1998 by and among the Company, CCI Group, Inc., POSNET
Computers, Inc. and FINOVA Capital Corporation and related Secured Promissory Note, Pledge
Agreement and Secured Continuing Corporate Guaranty.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
10.20(6) -- Form of Warrant issued by the Company in favor of FINOVA Capital Corporation.
<C> <C> <S>
10.21(6) -- Letter of Intent dated July 20, 1998 by and among the Company, RGB/Trinet Limited and Jade
Communications Limited.
10.22 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Gary Green,
Roger Scarlett, Louvre Trustees Limited, and the Company.
10.23 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Anthony
Sampson, Gentech Consultants Limited, Bertram Badminton, and the Company.
16.1(6) -- Letter on change in Certifying Accountant dated May 29, 1998 from Ernst & Young LLP to the SEC.
21.1(6) -- Subsidiaries of the Registrant.
23.1 -- Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 -- Consent of Ernst & Young LLP, independent auditors.
23.3 -- Consent of Corbin & Wertz, independent auditors.
23.4 -- Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors.
23.5* -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* -- Power of Attorney.
27.1(6) -- Financial Data Schedule.
</TABLE>
- ------------------------
* Filed as an exhibit to Registration Statement on Form SB-2 (No. 333-63993),
and incorporated herein by reference
(1) Filed as a exhibit to the Company's Registration Statement on Form SB-2, as
amended (No. 333-11217), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 30, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated
March 4, 1998 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 5, 1998 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
<PAGE>
JAVELIN SYSTEMS, INC.
UNDERWRITING AGREEMENT
_________________, 1998
VAN KASPER & COMPANY
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON , INC.
MERIDIAN CAPITAL GROUP, INC.
As Representatives of the
Several Underwriters
c/o Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94108
Ladies and Gentlemen:
Javelin Systems, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
several Underwriters named in Schedule I hereto (each, an "Underwriter" and
collectively, the "Underwriters") an aggregate of 1,250,000 shares (the "Firm
Shares") of its authorized but unissued Common Stock, par value $0.01 per share
(the "Common Stock"). Certain stockholders of the Company listed on Schedule II
hereto (the "Selling Stockholders") also propose to grant to the Underwriters an
option to purchase up to 187,500 additional shares of Common Stock (the "Option
Shares") for the sole purpose of covering over-allotments, if any, in connection
with the sale of the Firm Shares. The Firm Shares and any Option Shares
purchased pursuant to this Agreement are collectively referred to below as the
"Shares." Van Kasper & Company ("Van Kasper"), L.H. Friend, Weinress, Frankson &
Presson, Inc. and Meridian Capital Group, Inc. are acting as Representatives of
the several Underwriters and in that capacity are referred to in this Agreement
as the "Representatives."
The Company hereby confirms its agreement with the several Underwriters as
follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and agrees with each Underwriter as follows:
(a) A registration statement (Registration No. 333-____________) on
Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the Shares, including such amendments to such registration statement
as may have been required to the date of this Agreement, has been prepared by
the Company under and in conformity with the provisions of the Securities Act
and the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder and has been filed with
the Commission. After the execution of this Agreement, the Company will file
with the Commission either (i) if such registration statement, as it may have
been amended, has been declared by the Commission to be effective under the
Securities Act, either (A) if the Company
1
<PAGE>
relies on Rule 434 under the Securities Act, a Term Sheet (defined below)
relating to the Shares, that identifies the Preliminary Prospectus (defined
below) that it supplements and contains such information as is required or
permitted by Rules 434, 430A and 424(b) of the Rules and Regulations or (B)
if the Company does not rely on Rule 434 under the Securities Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment has been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the
Rules and Regulations, and in the case of either (i)(A) or (i)(B) of this
sentence, as has been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement,
as it may have been amended, has not been declared by the Commission to be
effective under the Securities Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representatives prior to the execution of
this Agreement. As used in this Agreement, the term "Registration Statement"
means such registration statement, as amended at the time when it was or is
declared effective, including all financial schedules and exhibits thereto,
any information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations and included in the Prospectus (defined below) and further
including all filings or other documents incorporated therein, as well as any
additional registration statement filed in connection with the offering of
the Shares pursuant to Rule 462(b) under the Securities Act; the term
"Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective and further including all filings or documents incorporated
therein); and the term "Prospectus" means the following, including any
filings or documents incorporated therein:
(A) if the Company relies on Rule 434 under the Securities
Act, the Term Sheet relating to the Securities that is first filed pursuant to
Rule 424(b)(7) under the Securities Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the
Securities Act, the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Securities Act; or
(C) if the Company does not rely on Rule 434 under the
Securities Act and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Securities Act, the prospectus included in the
Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for use in connection with the offering of the Shares differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean
such revised prospectus (including all filings and documents incorporated
therein) from and after the time it is first provided to the Underwriters for
such use. The term "Term Sheet" as used in this Agreement means any term sheet
that satisfies the requirements of Rule 434 under the Securities
2
<PAGE>
Act. Any reference in this Agreement to the "date" of a Prospectus that
includes a Term Sheet means the date of such Term Sheet.
(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of any Preliminary Prospectus or
the Prospectus has been issued and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Shares in any jurisdiction
has been issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with.
(c) As used in this Agreement, the word "subsidiary" means any
corporation, partnership, limited liability company or other entity of which the
Company directly or indirectly owns 50% or more of the equity or that the
Company directly or indirectly controls. The subsidiaries of the Company (the
"Subsidiaries") and the jurisdiction of incorporation of each Subsidiary are
listed on Exhibit A hereto. The Company has no subsidiaries other than the
Subsidiaries listed on Exhibit A hereto; except as set forth on Exhibit A, the
Company owns 100 percent of the issued and outstanding stock of each of the
Subsidiaries free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest of any type, kind or nature. Exhibit B hereto lists
each entity in which the Company or any Subsidiary holds an equity interest,
whether as shareholder, partner, member, joint venturer or otherwise. Except as
set forth on Exhibit B, neither the Company nor any Subsidiary has any equity
interest in any person. The Company and each of its Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full power (corporate and
other) and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as is currently
being conducted by it and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned or
leased or the nature of the business transacted by it makes qualification
necessary (except where the failure to be so qualified would not have a material
adverse effect on the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and its Subsidiaries, taken as
a whole (a "Consolidated Material Adverse Effect")). The Company and each of
its Subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
federal, state, local and other governmental or regulatory authorities that are
material to the conduct of its or their business, all of which are valid and in
full force and effect. Each contractual joint venture in which the Company or
any Subsidiary is involved and, to the Company's best knowledge, each
participant therein is operating in compliance with the terms of its joint
venture agreement.
(d) When any Preliminary Prospectus was filed with the Commission
it (i) contained all statements required to be contained therein and complied in
all respects with the requirements of the Securities Act, the Rules and
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder (the "Exchange
Act Rules and Regulations") and (ii) did not include any untrue
3
<PAGE>
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective (the "Effective Date"), it (i)
contained or will contain all statements required to be contained therein and
complied or will comply in all respects with the requirements of the
Securities Act, the Rules and Regulations, the Exchange Act and the Exchange
Act Rules and Regulations and (ii) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading. When the Prospectus or any Term
Sheet that is a part thereof or any amendment or supplement to the Prospectus
is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus
or part thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective)
and on the Closing Date (defined below) and any date on which Option Shares
are to be purchased, the Prospectus, as amended or supplemented at any such
time, (i) contained or will contain all statements required to be contained
therein and complied or will comply in all respects with the requirements of
the Securities Act, the Rules and Regulations and the Exchange Act Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (d) do
not apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(e) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there has not been
any material loss or interference with the business of the Company or any of
its Subsidiaries from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any court or governmental action, order or
decree, or any changes in the capital stock or, except in the ordinary course
of its business, long-term debt of the Company or any of its Subsidiaries, or
any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company, or any material change, or a development known
to the Company that might cause or result in a Consolidated Material Adverse
Effect, whether or not arising from transactions in the ordinary course of
business, in each case other than as may be set forth in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), and since such dates, except in the
ordinary course of business, neither the Company or any of its Subsidiaries
has entered into any material transaction not described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(f) There is no agreement, contract, license, lease or other
document required to be described in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. All contracts
described in the Prospectus
4
<PAGE>
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), if any, are in full force and effect on the date hereof, and
neither the Company nor any of its direct or indirect subsidiaries nor, to
the best knowledge of the Company, any other party, is in material breach of
or default under any such contract.
(g) The authorized and outstanding capital stock of the Company
is set forth in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and the description of the capital
stock therein conforms with and accurately describes the rights set forth in
the instruments defining the same. The Shares are duly authorized and will,
when issued in accordance with the terms of this Agreement and against
payment therefor, be validly issued, fully paid and non-assessable, and the
issuance of the Shares is not subject to any preemptive or similar rights.
(h) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities.
All of the issued shares of capital stock or other equity interests of each
Subsidiary have been duly and validly authorized and issued, are fully paid
and non-assessable, have been issued in compliance with all applicable laws,
including securities laws, were not issued in violation of or subject to any
preemptive or other rights to subscribe for or purchase such securities and
are directly or indirectly owned by the Company, except as otherwise set
forth in the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus) and on Exhibit A hereto. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted or exercised
thereunder, set forth in the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus), accurately and fairly
present the information required to be shown with respect to such plans,
arrangements, options and rights. Other than this Agreement and the options
and warrants to purchase Common Stock described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there are no options, warrants or other rights outstanding to subscribe for
or purchase any shares of the Company's capital stock. There are no
preemptive rights applicable to any shares of capital stock of the Company.
There are no options, warrants or other rights outstanding to subscribe for
or purchase any shares of the capital stock or registered capital of any
Subsidiary and no Subsidiary is subject to any obligation, commitment, plan,
arrangement or court or administrative orders with respect to the same. There
are no preemptive rights applicable to any shares of capital stock or
registered capital of the Subsidiaries. There are no restrictions upon the
voting or transfer of any of the Firm Shares or Option Shares pursuant to the
Company's certificate of incorporation, as amended to date ("Certificate of
Incorporation"), bylaws or other governing documents or any agreement to
which the Company is a party or by which it may be bound. Neither the filing
of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived, for or relating to the registration of any securities
of the Company.
5
<PAGE>
(i) The Company has full right, power and authority to enter into
and perform its obligations under this Agreement and to issue, sell and
deliver the Shares. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding agreement of
the Company, and each is enforceable against the Company in accordance with
its terms except insofar as enforceability may be affected by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and except insofar as the indemnification and contribution
provisions of Section 8 of this Agreement may be affected by public policy
concerns.
(j) Neither the Company nor any of its Subsidiaries is, nor with
the giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement result in a
violation of or constitute a breach of or a default (including without
limitation with the giving of notice, the passage of time or otherwise) under
the Certificate of Incorporation, bylaws or other governing documents of the
Company or any of its Subsidiaries or any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which any of
its or their properties may be bound or affected. The Company has not
incurred any liability, direct or indirect, for any finders' or similar fees
payable on behalf of the Company or the Underwriters in connection with the
transactions contemplated by this Agreement. The performance by the Company
of its obligations under this Agreement will not violate any law, ordinance,
Rule or regulation or any order, writ, injunction, judgment or decree of any
governmental agency or body or of any court having jurisdiction over the
Company or any of its direct or indirect subsidiaries or any of its or their
properties, or result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property or asset of the Company or any of its
Subsidiaries. Except for permits and similar authorizations required under
the Securities Act, the Exchange Act or under state securities or Blue Sky
laws of certain jurisdictions and for such permits and authorizations that
have been obtained, no consent, approval, authorization or order of any
court, governmental agency or body, financial institution or any other person
is required in connection with the consummation of the transactions
contemplated by this Agreement.
(k) Each of the Company and its Subsidiaries owns, or has valid
rights to use, all items of real and personal property which are material to
the business of the Company and its Subsidiaries, taken as a whole, free and
clear, except as described in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), of all liens, encumbrances and claims that might materially
interfere with the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and its Subsidiaries, taken
as a whole, and subject to such exceptions that do not adversely affect the
present or prospective business of the Company or its Subsidiaries.
(l) Each of the Company and its Subsidiaries, taken as a whole,
owns or possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, tradenames
and copyrights described or referred to in the
6
<PAGE>
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) as owned by or used by any
of them, or which are necessary for the conduct of its or their business as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus); and
the Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, tradenames or
copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a Consolidated Material
Adverse Effect.
(m) There is no litigation or governmental proceeding to which
the Company or any of its Subsidiaries is a party or to which any property of
the Company or any of its Subsidiaries is subject which is pending or, to the
best knowledge of the Company, is threatened or contemplated against the
Company or any of its Subsidiaries that might have a Consolidated Material
Adverse Effect, that might prevent consummation of the transactions
contemplated by this Agreement or that is required to be disclosed in the
Registration Statement or Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and are that is so
disclosed.
(n) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus), neither the
Company nor any of its Subsidiaries is in violation of any law, order,
ordinance, Rule or Regulation, or any order, writ, injunction, judgment or
decree of any governmental agency or body or of any court, to which it or its
properties (whether owned or leased) may be subject, which violation might
have a Consolidated Material Adverse Effect.
(o) Neither the Company nor, to the Company's knowledge, any of
the Selling Stockholders have taken, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, the
Exchange Act Rules and Regulations or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares. No bid or purchase by the Company and, to the
best knowledge of the Company, no bid or purchase of any Selling Stockholder
or any bid or purchase that could be attributed to the Company (as a result
of bids or purchases by an "affiliated purchaser" within the meaning of
Regulation M under the Exchange Act) for or of the Common Stock, any
securities of the same class or series as the Common Stock or any securities
convertible into or exchangeable for or that represent any right to acquire
the Common Stock is now pending or in progress or will have commenced at any
time prior to the completion of the distribution of the Shares.
(p) Each of PricewaterhouseCoopers LLP, Ernst & Young LLP,
Corbin & Wertz and Rubin, Brown, Gornstein & Co. LLP, whose reports appear in
the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) are, and during the
periods covered by their reports in the Registration Statement were,
independent accountants as required by the Securities Act and the Rules and
Regulations. The historical and pro forma financial statements and schedules
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus present fairly (or, if the Prospectus has not been filed with the
Commission, as to the Prospectus, will present fairly) the
7
<PAGE>
financial condition, results of operations, cash flows and changes in
stockholders' equity of the Company and its Subsidiaries at the dates and for
the periods indicated, and the historical and pro forma financial statements
and schedules included in the Registration Statement present fairly the
information required to be stated therein in all material respects. Such
financial statements and schedules have been prepared in accordance with U.S.
generally accepted accounting principles applied on a consistent basis
throughout the periods presented, except as may be stated therein. All
accounts receivable (net of any allowance for doubtful accounts) shown on the
Company's most recent financial statements included in the Registration
Statement are good, and the Company expects to collect all such accounts
receivable in the ordinary course of business. The selected and summary
financial and statistical data included in the Registration Statement and the
Prospectus present fairly (or, if the Prospectus has not been filed with the
Commission, as to the Prospectus, will present fairly) the information shown
therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(q) The historical and any pro forma financial or other
information and related notes included in the Registration Statement, each
Preliminary Prospectus and the Prospectus comply (or, if the Prospectus has
not been filed with the Commission, as to the Prospectus, will comply) in all
material respects with the requirements of the Securities Act and the Rules
and Regulations and present fairly the historical and pro forma information
shown, as of the dates and for the periods covered by such information. Such
pro forma information, including any related notes and schedules, has been
prepared on a basis consistent with the historical financial statements and
other historical information, as applicable, included in the Registration
Statement, the Preliminary Prospectus and the Prospectus (if filed with the
Commission), except for the pro forma adjustments specified therein, and give
effect to assumptions made on a reasonable basis to give effect to historical
and, if applicable, proposed transactions described in the Registration
Statement, each Preliminary Prospectus and the Prospectus (if filed with the
Commission).
(r) The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and its
Subsidiaries. The systems of internal accounting controls maintained by the
Company and its Subsidiaries are sufficient to provide reasonable assurances
that: (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary (x) to
permit preparation of financial statements in conformity with U.S. generally
accepted accounting principles and (y) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(s) The Company has delivered to Van Kasper the written agreement
of each of its officers and directors and, to the knowledge of the Company at
the date of this Agreement, the beneficial owners of one percent or more of
the Common Stock (assuming for this purpose that all options and convertible
securities held by each beneficial owner, but not by any other person, have
been exercised or exchanged for or converted into Common Stock)
(collectively,
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the "Holders") to the effect that each of the Holders will not, for a period
of 180 days following the date of this Agreement, without the prior written
consent of Van Kasper, offer, sell, grant any option to purchase, contract to
sell, or otherwise dispose of any Common Stock or options or convertible
securities exercisable or exchangeable for, or convertible into, Common Stock
or any rights to purchase or acquire Common Stock, or announce any offer to
do so.
(t) No labor disturbance by the employees of the Company or any
of its Subsidiaries exists, or, to the knowledge of the Company, is imminent,
contemplated or threatened; and the Company is not aware of an existing,
imminent or threatened labor disturbance by the employees of any principal
suppliers, manufacturers, contractors or others which such disturbance might
be expected to result in any Consolidated Material Adverse Effect. Except as
set forth in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), no collective bargaining agreement
exists with any of the Company's employees or those of its Subsidiaries and,
to the best knowledge of the Company, no such agreement is imminent.
(u) Each of the Company and its Subsidiaries has filed all
federal, state, local and foreign tax returns which are required to be filed
or has requested extensions thereof and has paid all taxes, including
withholding taxes, penalties and interest, assessments, fees and other
charges to the extent that the same have become due and payable. No tax
assessment or deficiency has been made or proposed against the Company or any
of its Subsidiaries nor has the Company or any of its Subsidiaries received
any notice of any proposed tax assessment or deficiency. All tax liabilities
of the Company and its Subsidiaries are adequately provided for on the books
of the Company.
(v) Except as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding loans, advances or guaranties of indebtedness by the Company or
any of its Subsidiaries to or for the benefit of any of (i) its "affiliates,"
as such term is defined in the Rules and Regulations, (ii) except for
immaterial advances in the ordinary course of business, any of the officers
or directors of any of its direct or indirect subsidiaries, or (iii) any of
the members of the families of any of them, in each case, required to be set
forth in the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), under the Securities Act or Rules and
Regulations.
(w) Neither the Company nor any of its Subsidiaries has directly
or indirectly, at any time within the last five years: (i) made any
contributions to any candidate for political office, or failed to disclose
fully any such contribution, in violation of applicable law; (ii) made any
payment to any local, state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or allowed by all applicable laws; or (iii)
violated any applicable provision of the Foreign Corrupt Practices Act of
1977, as amended.
(x) Neither the Company nor any of its Subsidiaries has any
liability, absolute or contingent, relating to: (i) public health or safety;
(ii) worker health or safety; or (iii) product defect or warranty (all except
as would not reasonably be expected to have a Consolidated
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Material Adverse Effect or as are disclosed in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus)).
(y) The Company has not distributed and will not distribute prior
to the Closing Date or on or prior to any date on which the Option Shares are to
be purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Preliminary
Prospectus(es), the Prospectus, the Registration Statement and any other
material which may be permitted by the Securities Act and the Rules and
Regulations.
(z) Subject to official notice of issuance, the Shares have been
approved for inclusion for listing on the Nasdaq National Market.
(aa) The Company is not now, and intends to conduct its affairs in
the future in such a manner so that it will not become, an investment company
within the meaning of the Investment Company Act of 1940, as amended.
(bb) The Company and each of its Subsidiaries is in compliance in
all material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) for which the Company or any of its Subsidiaries would have
any liability has occurred; neither the Company nor any of its Subsidiaries has
incurred or expects to incur liability under (1) Title IV of ERISA with respect
to termination of, or withdrawal from, any "pension plan" or (2) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company or any of its Subsidiaries would have any liability that
is intended to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or by failure
to act, which would cause the loss of such qualification.
(cc) Except as set forth in the Prospectus (or if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there has, to
the best knowledge of the Company, been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic
wastes, hazardous wastes or hazardous substances by the Company or any of its
Subsidiaries (or any of their predecessors in interest) at, upon or from any
of the property now or previously owned or leased by the Company or its
Subsidiaries in violation of any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit or which would require remedial action
under any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit; there has to the best knowledge of the Company been no
material spill, discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment surrounding
such property of any toxic wastes, medical wastes, solid wastes, hazardous
wastes or hazardous substances due to or caused by the Company or any of its
Subsidiaries or with respect to which the Company or any of its direct or
indirect subsidiaries have knowledge; and the terms "hazardous wastes,"
"toxic wastes" and "hazardous substances" shall have the meanings specified
in any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.
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(dd) The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for; and neither the Company
nor any such Subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not cause a Consolidated Material Adverse
Effect.
(ee) Each certificate signed by any officer of the Company or any
of its Subsidiaries, as amended in writing from time to time, and delivered
to the Representatives or Underwriters' counsel shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(ff) Except as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), neither the
Company nor any Subsidiary has entered into any transaction with any
affiliate of the Company other than an arm's length transaction, and all such
transactions required to be described in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) have been described therein.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder, severally and not jointly, represents and warrants to
and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on any date on which
Option Shares are purchased will have valid marketable title to the Shares to
be sold by such Selling Stockholder, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than
pursuant to this Agreement; and upon delivery of such Shares hereunder and
payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability
for estate or inheritance taxes, or any liability to or claims of any
creditor, devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________ and ___________ as attorneys-in-fact (collectively,
the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal
and Custody Agreement (the "Custody Agreement") with
______________________________, as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and each of such Selling
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Stockholder's Attorneys, acting alone, is authorized to execute and deliver
this Agreement and the certificate referred to in Section 6(f) hereof on
behalf of such Selling Stockholder, to determine the purchase price to be
paid by the several Underwriters to such Selling Stockholder as provided in
Section 3 hereof, to authorize the delivery of the Option Shares to be sold
by such Selling Stockholder under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such Shares
or a stock power or powers with respect thereto, to accept payment therefor,
and otherwise to act on behalf of such Selling Stockholder in connection with
this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Stockholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling Stockholder of this Agreement and the sale and delivery of the Option
Shares to be sold by such Selling Stockholder under this Agreement (other than,
at the time of the execution hereof (if the Registration Statement has not yet
been declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Stockholder, if other than a natural person, has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to be;
and such Selling Stockholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such Power of Attorney
and Custody Agreement, and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder under this Agreement.
(d) Certificates in negotiable form for all Option Shares to be
sold by such Selling Stockholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Stockholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder.
(e) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder,
or any Option Shares to be sold by such Selling Stockholder hereunder, may be
bound or, to the best of such Selling Stockholders' knowledge, result in any
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over such Selling Stockholder or over the
properties of such Selling Stockholder, or,
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<PAGE>
if such Selling Stockholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(g) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(h) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Option Shares that is
contained in the representations and warranties of such Selling Stockholder in
such Selling Stockholder's Power of Attorney or set forth in the Registration
Statement or the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on any date on which Option Shares are to be purchased, was or
will be, true, correct and complete, and does not, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on any date on which Option Shares are to
be purchased will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make such
information not misleading.
(i) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to any date on which
Option Shares are to be purchased, and will advise one of its Attorneys and Van
Kasper & Company prior to the date on which Option Shares are to be purchased if
any statement to be made on behalf of such Selling Stockholder in the
certificate contemplated by Section 6(f) would be inaccurate if made as of such
date on which Option Shares are to be purchased.
(j) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Stockholders to the Underwriters pursuant to
this Agreement; such Selling Stockholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(k) Such Selling Stockholder is not aware (without having conducted
any investigation or inquiry) that any of the representations and warranties of
the Company set forth in Section 1 above is untrue or inaccurate in any material
respect.
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(l) To the best of such Selling Stockholder's knowledge, when any
Preliminary Prospectus was filed with the Commission it (i) contained all
statements required to be contained therein and complied in all respects with
the requirements of the Securities Act, the Rules and Regulations, the Exchange
Act and the Exchange Act Rules and Regulations and (ii) did not include any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. To the best of such Selling Stockholder's
knowledge, on the Effective Date, the Registration Statement (i) contained or
will contain all statements required to be contained therein and complied or
will comply in all respects with the requirements of the Securities Act, the
Rules and Regulations, the Exchange Act and the Exchange Act Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. To the best of such Selling Stockholder's
knowledge, when the Prospectus or any Term Sheet that is a part thereof or any
amendment or supplement to the Prospectus is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or
supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and on any date on which Option Shares are to be
purchased, the Prospectus, as amended or supplemented at any such time,
(i) contained or will contain all statements required to be contained therein
and complied or will comply in all respects with the requirements of the
Securities Act, the Rules and Regulations and the Exchange Act Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (l) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
3. PURCHASE, SALE AND DELIVERY OF SHARES
(a) On the basis of the representations, warranties, covenants and
agreements of the Company contained in this Agreement and subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
several Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $______ per share,
the respective number of Firm Shares set forth opposite the name of such
Underwriter on Schedule I to this Agreement (subject to adjustment as provided
in Section 9 of this Agreement).
(b) On the basis of the several (and not joint) covenants and
agreements of the Underwriters contained in this Agreement and subject to the
terms and conditions set forth in this Agreement, the Selling Stockholders grant
an option to the several Underwriters to purchase from the Selling Stockholders,
severally and not jointly, all or any portion of the Option Shares at the same
price per share as the Underwriters are to pay for the Firm Shares. This option
may be exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters and
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may be exercised in whole or in part at any time (but not more than once) on
or before the 45th day after the date of the Prospectus upon written or
telecopied notice by the Representatives to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option and the settlement date; notwithstanding the foregoing,
if the 45th day after the date of the Prospectus is not a business day, then
the time period for delivery of the notice of the exercise of the
over-allotment option shall automatically be extended until the business day
following the 45th day after the date of the Prospectus. The Option Shares
shall be purchased severally, and not jointly, by each Underwriter, if
purchased at all, in the same proportion that the number of Firm Shares set
forth opposite the name of the Underwriter in Schedule I to this Agreement
bears to the total number of Firm Shares to be purchased by the Underwriters
under Section 3(a) above, subject to such adjustments as the Representatives
in their absolute discretion shall make to eliminate any fractional shares.
If the Underwriters elect to purchase less than all of the Option Shares,
then the Underwriters shall purchase from each Selling Stockholder his pro
rata portion of all the Option Shares. Delivery of certificates for the
Option Shares, and payment therefor, shall be made as provided in Section
3(c) and Section 3(d) below. Nothing contained in this Section 3 shall
relieve any defaulting Underwriter of its liability, if any, to the Company
or to the remaining Underwriters for damages occasioned by its default
hereunder.
(c) Delivery of the Firm Shares and payment therefor, shall be
made at the office of Van Kasper, 600 California Street, Suite 1700, San
Francisco, California 94108 (or at such other location as is agreed by the
parties), at 6:30 a.m., San Francisco time, on the third business day after
the date of this Agreement, or at such time on such other day, not later than
seven full business days after such third business day, as shall be agreed
upon in writing by the Company and the Representatives, or as provided in
Section 8(h) of this Agreement. The date and hour of delivery and payment
for the Firm Shares are referred to in this Agreement as the "Closing Date."
As used in this Agreement, "business day" means a day on which the Nasdaq
National Market is open for trading and on which banks in New York and
California are open for business and not permitted by law or executive order
to be closed.
(d) Delivery of the Option Shares and payment therefor, shall be
made at the office of Van Kasper, 600 California Street, Suite 1700, San
Francisco, California 94108 (or at such other location as is agreed by the
parties), at 6:30 a.m., San Francisco time, on the date specified by the
Representatives (which shall be three business days after the exercise of the
option, but not in excess of the period of time specified in the Rules and
Regulations).
(e) Payment of the purchase price for the Firm Shares by the
several Underwriters shall be made at the election of the Representatives by
(i) certified or official bank check or checks drawn in next-day funds,
payable to the order of the Company, or (ii) wire transfer of immediately
available funds to such account of the Company as the Company shall advise
the Representatives in writing at least three business days prior to the
Closing Date. Such payment shall be made upon delivery of certificates for
the Firm Shares to the Representatives for the respective accounts of the
several Underwriters. Certificates for the Firm Shares to be delivered to
the Representatives shall be registered in such name or names and shall be in
such denominations as the Representatives may request at least two business
days before the Closing
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Date. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of BT Alex Brown, New York,
New York, not less than one full business day prior to the Closing Date. It
is understood that the Representatives, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for Firm Shares to be purchased by any Underwriter whose check shall not have
been received by the Representatives on the Closing Date for the account of
such Underwriter. Any such payment shall not relieve such Underwriter from
any of its obligations hereunder.
(f) Payment of the purchase price for the Option Shares by the
several Underwriters shall be made at the election of the Representatives by
(i) certified or official bank check or checks drawn in next-day funds, payable
to the order of the Custodian, or (ii) wire transfer of immediately available
funds to such account of the Custodian as the Custodian shall advise the
Representatives in writing at least three business days prior to the date on
which any Option Shares are purchased. Such payment shall be made upon delivery
of certificates for the Option Shares to the Representatives for the respective
accounts of the several Underwriters. Certificates for the Option Shares to be
delivered to the Representatives shall be registered in such name or names and
shall be in such denominations as the Representatives may request at least one
business day before the date on which any Option Shares are purchased. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of BT Alex Brown, New York, New York, not less than
one full business day prior to the Closing Date. It is understood that the
Representatives, individually and not on behalf of the Underwriters, may (but
shall not be obligated to) make payment to the Custodian for Option Shares to be
purchased by any Underwriter whose check shall not have been received by the
Representatives on any date on which Option Shares are purchased for the account
of such Underwriter. Any such payment shall not relieve such Underwriter from
any of its obligations hereunder.
(g) It is understood that the several Underwriters propose to offer
the Shares for sale to the public as soon as the Representatives deems it
advisable to do so. The Firm Shares are to be initially offered to the public
at the public offering price set forth (or to be set forth) in the Prospectus.
The Representatives may from time to time thereafter change the public offering
price and other selling terms.
(h) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), the legend
respecting stabilization set forth on the inside front cover page and the
statements set forth under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitute the only information furnished by the Underwriters to the Company for
inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement.
4. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. The
Company and the Selling Stockholders covenant and agrees with the several
Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to
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become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will file the
Prospectus, properly completed (and in form and substance reasonably
satisfactory to the Underwriters) pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will not file the
Prospectus, any amended Prospectus, any amendment (including post-effective
amendments) to the Registration Statement or any supplement to the Prospectus
without (i) advising the Representatives of and, a reasonable time prior to
the proposed filing of such amendment or supplement, furnishing the
Representatives with copies thereof and (ii) obtaining the prior consent of
the Representatives to such filing. The Company will prepare and file with
the Commission, promptly upon the request of the Representatives, any
amendment to the Registration Statement or supplement to the Prospectus that
may be necessary or advisable in connection with the distribution of the
Shares by the Underwriters and use its best efforts to cause the same to
become effective as promptly as possible.
(b) The Company will promptly advise the Representatives (i) when
the Registration Statement becomes effective, (ii) when any post-effective
amendment thereof becomes effective, (iii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification of
the Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best efforts to prevent
the issuance of any such stop order or suspension and, if issued, to obtain as
soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
the Representatives and to Underwriters' counsel a signed copy of the
Registration Statement as originally filed and of each amendment thereto filed
prior to the time the Registration Statement becomes effective and, promptly
upon the filing thereof, a signed copy of each post-effective amendment, if any,
to the Registration Statement (together with, in each case, all exhibits thereto
unless and to the extent previously furnished to the Representatives) and all
documents filed by the Company with the Commission under the Exchange Act and
deemed to be incorporated by reference into any Preliminary Prospectus or the
Prospectus and will also deliver to the Representatives, for distribution to the
several Underwriters, a sufficient number of additional conformed copies of each
of the foregoing (excluding exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to each of
the Representatives and send to the several Underwriters, at such office or
offices as the Representatives may designate, as many copies of the Prospectus
as the Representatives may reasonably request and (iii) thereafter from time to
time during the period in which a prospectus is required by law to be delivered
by an Underwriter or a dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as many copies of any supplement to the
Prospectus and of any amended Prospectus, filed by the Company with the
Commission,
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as the Representatives may reasonably request for the purposes contemplated
by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading or so that the Prospectus will
not omit to state a material fact necessary to be stated therein, in each case
at the time the Prospectus is delivered to a purchaser of the Shares, or if it
shall be necessary to amend or to supplement the Prospectus to comply with the
Securities Act or the Rules and Regulations, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
Prospectus so that the Prospectus as so supplemented or amended will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein not misleading and so that it
then will otherwise comply with the Securities Act and the Rules and
Regulations. If, after the public offering of the Shares by the Underwriters
commences and during such period, the Underwriters propose to vary the terms of
offering thereof by reason of changes in general market conditions or otherwise,
the Representatives will advise the Company in writing of the proposed variation
and if, in the opinion either of counsel for the Company or counsel for the
Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended Prospectus setting forth
such variation. The Company authorizes the Underwriters and all dealers to whom
any of the Shares may be sold by the Underwriters to use the Prospectus, as from
time to time so amended or supplemented, in connection with the sale of the
Shares in accordance with the applicable provisions of the Securities Act and
the Rules and Regulations for such period.
(e) The Company will cooperate with the Representatives and
Underwriters' counsel in the qualification or registration of the Shares for
offer and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and, if applicable, in connection with
exemptions from such qualification or registration and, during the period in
which a Prospectus is required by law to be delivered by an Underwriter or a
dealer, in keeping such qualifications, registrations and exemptions in effect;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports and other
documents as are or may be required to continue such qualifications,
registrations and exemptions in effect for so long a period as the
Representatives may reasonably request for the distribution of the Shares.
(f) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to the Representatives and to each
Underwriter who may so request in writing copies of (i) all periodic and special
reports furnished by it to stockholders of the Company, (ii) all information,
documents and reports filed by it with the Commission, Nasdaq National Market,
any securities exchange or the NASD, (iii) all press releases and material news
items or articles in respect of the Company, its products or affairs released or
prepared by the Company (other than promotional and marketing materials
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disseminated solely to customers and potential customers of the Company in the
ordinary course of business) and (iv) any additional information concerning the
Company or its business which the Representatives may reasonably request.
(g) As soon as practicable, but not later than the 45th day
following the end of the fiscal quarter first ending after the first anniversary
of the Effective Date, the Company will make generally available to its
securities holders and furnish to the Representatives an earnings statement or
statements in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(h) The Company agrees that, without Van Kasper's prior written
consent, the Company will not, and will not allow the Holders to, in each
case directly or indirectly, issue, sell, offer, contract to sell, grant any
option to purchase or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable for or exercisable for Common Stock
or any rights to purchase or acquire Common Stock, for a period of 180 days
following the date of this Agreement, excluding only (i) the sale of the
Shares to be sold to the Underwriters pursuant to this Agreement and (ii) the
grant of options to purchase Common Stock (provided that none of such options
are or become exercisable during such 180-day period) or the issuance of
shares of Common Stock upon the exercise in accordance with of options
previously granted under the Company's presently authorized stock option
plans as described in the Prospectus or in documents incorporated therein, or
upon the exercise in accordance with their terms of previously granted
warrants which are described in the Prospectus or in documents incorporated
therein.
(i) Each Selling Stockholder agrees that, without Van Kasper's
prior written consent, such Selling Stockholder will not, directly or
indirectly, sell, offer, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, exchangeable for or exercisable for Common Stock or any rights to purchase
or acquire Common Stock, for a period of 180 days following the date of this
Agreement, excluding only the sale of the Option Shares to be sold to the
Underwriters pursuant to this Agreement.
(j) The Company will establish and maintain all financial control
and financial reporting systems customary for well-established public
companies, including but not limited to adequate management information and
reporting systems, and will employ and maintain, with adequate staffing
levels at headquarters and at each significant Subsidiary or significant
functional division, and at each level of responsibility, an employee staff
of well trained and highly qualified financial professionals. As soon as
practicable after the Closing Date, the Company will hire a full-time
corporate controller with sufficient experience and authority to assist the
Chief Financial Officer of the Company in managing and implementing adequate
management information and reporting systems.
(k) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus and for a period ending on the date which is five years after
the date of this Agreement the Company agrees that any expenditure or
authorization for any expenditure by the Company or any Subsidiary in
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excess of $10,000 shall be in writing signed by the Chief Executive Officer
and one additional officer who shall be the Chairman of the Board or the
Chief Financial Officer of the Company.
(l) The Company will, and at all times for a period of at least
five years after the date of this Agreement, unless such securities are then
listed on a national securities exchange, use its best efforts to cause the
Common Stock (including the Shares) to be included for listing on the Nasdaq
National Market, and the Company will comply with all registration, filing,
reporting and other requirements of the Exchange Act and the Nasdaq National
Market which may from time to time be applicable to the Company.
(m) The Company will use commercially reasonable efforts to
maintain insurance of the types and in the amounts which it deems adequate for
its business consistent with insurance coverage maintained by companies of
similar size and engaged in similar businesses including, but not limited to,
general liability insurance covering all real and personal property owned or
leased by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against.
(n) The Company will issue no press release prior to or within
70 days after the Closing Date without prior consultation with the
Representatives with respect to the contents thereof.
(o) Within a reasonable time after the Closing Date, the Company
shall supply to the Representatives and its counsel, at the Company's cost, up
to six bound volumes as requested by such counsel each containing all material
documents relating to the offering of the Shares.
5. FEES AND EXPENSES.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company and the Selling Stockholders will pay and
bear all costs and expenses in connection with: the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each
of them and any amendments or supplements to any of them; the duplication or, if
applicable, printing (including all drafts thereof) of this Agreement, the
Agreement Among Underwriters, any Selected Dealer Agreements, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and the Power of Attorney and the duplication and printing
(including of drafts thereof) of any other underwriting documents and material
(including but not limited to marketing memoranda and other marketing material)
in connection with the offering, purchase, sale and delivery of the Shares; the
issuance, transfer and delivery of the Shares under this Agreement to the
several Underwriters, including all expenses, taxes, duties, fees and
commissions on the purchase and sale of the Shares and Nasdaq National Market,
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Shares (x) incident to the sale and delivery of the
Shares by the Company and the Selling Stockholders to the Underwriters and
(y) incident to the
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sale and delivery of the Shares by the Underwriters to the initial purchasers
thereof; the cost of printing all stock certificates; the Transfer Agent's
and Registrar's fees; the Custodian's fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's
independent public accountants and any other experts named in the Prospectus;
the cost of furnishing to the several Underwriters copies of the Registration
Statement (including appropriate exhibits), Preliminary Prospectus(es) and
the Prospectus, the agreements and other documents and instruments referred
to above and any amendments or supplements to any of the foregoing; NASD
filing fees and fees and disbursements of Underwriters' counsel incurred in
connection with the review by the NASD of the terms of the Offering of the
Shares; the cost of qualifying or registering the Shares (or obtaining
exemptions from qualification or registration) under the laws of such
jurisdictions as the Representatives may designate (including filing fees in
connection with such state securities or blue sky qualifications,
registrations and exemptions) and preparing the preliminary and any final
Blue Sky Memorandum (including fees and disbursements of Underwriters'
counsel in connection therewith) and all such fees and costs shall be paid on
or prior to the Closing Date; all fees and expenses in connection with
qualification of the Shares for inclusion for listing on the Nasdaq National
Market; the Company's share of roadshow expenses; and all other expenses
incurred by the Company in connection with the performance of its obligations
hereunder. Except as provided in this Section 5, the Underwriters, including
the Representatives, shall bear all expenses incurred by it in connection
with the offering, including (but not limited to) the expenses of its own
counsel. The provisions of this Section 5(a)(i) are intended to relieve the
Underwriters from the payment of the expenses and costs which the Selling
Stockholders and the Company hereby agree to pay, but shall not affect any
agreement which the Selling Stockholders and the Company may make, or may
have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its obligations under Section 8(a) of
this Agreement, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any loss, claim, damage or liability described in
Section 8(a) of this Agreement, it will reimburse or advance to or for the
benefit of the Underwriters, and each of them, on a monthly basis (or more
often, if requested) for all legal and other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse or
advance for the benefit of the Underwriters for such expenses or the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any portion, or all, of any such
interim reimbursement payments or advances are so held to have been improper,
the Underwriters receiving the same shall promptly return such amounts to the
Company together with interest, compounded daily, at the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America, NT&SA, San Francisco, California (the
"Prime Rate"), but not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances that are not made to
or for the Underwriters within 30 days of a request for reimbursement or for an
advance shall bear interest at the Prime Rate, but not in excess of the maximum
rate permitted by applicable law, from the date of such request until the date
paid.
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(iii) In addition to his obligations under Section 8(b) of
this Agreement, each Selling Stockholder, severally and not jointly, agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
loss, claim, damage or liability described in Section 8(b) of this Agreement, he
will reimburse or advance to or for the benefit of the Underwriters, and each of
them, on a monthly basis (or more often, if requested) for all legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of such
Selling Stockholder's obligation to reimburse or advance for the benefit of the
Underwriters for such expenses or the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any portion, or all, of any such interim reimbursement payments or
advances are so held to have been improper, the Underwriters receiving the same
shall promptly return such amounts to such Selling Stockholder together with
interest, compounded daily, at the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time by
Bank of America, NT&SA, San Francisco, California (the "Prime Rate"), but not in
excess of the maximum rate permitted by applicable law. Any such interim
reimbursement payments or advances that are not made to or for the Underwriters
within 30 days of a request for reimbursement or for an advance shall bear
interest at the Prime Rate, but not in excess of the maximum rate permitted by
applicable law, from the date of such request until the date paid.
(b) In addition to their obligations under Section 8(c) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Firm Shares as set forth on Schedule I hereto, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 8(c) of this Agreement, they will reimburse or
advance to (for the benefit of the Company on a monthly basis (or more often, if
requested) for all legal and other expenses incurred by the Company in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety or enforceability of the
Underwriters' obligation to reimburse or advance for the benefit of the Company
for such expenses and the possibility that such payments or advances might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any portion, or all, of any such interim reimbursement payments or
advances are so held to have been improper, the Company shall promptly return
such amounts to the Underwriters together with interest, compounded daily, at
the Prime Rate, but not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances that are not made to
the Company within 30 days of a request for reimbursement or for an advance
shall bear interest at the Prime Rate, but not in excess of the maximum rate
permitted by applicable law, from the date of such request until the date paid.
(c) Any controversy arising out of the operation of the interim
reimbursement and advance arrangements set forth in Sections 5(a)(ii), 5(a)(iii)
and 5(b) above, including the amounts of any requested reimbursement payments or
advance, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted under the provisions of the Constitution and
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Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration
or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. If the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the
party responding to the demand or notice is authorized to do so. Any such
arbitration will be limited to the interpretation and obligations of the
parties under the interim reimbursement and advance provisions contained in
Sections 5(a)(ii), 5(a)(iii) and 5(b) above and will not resolve the ultimate
propriety or enforceability of the obligation to indemnify for or contribute
to expenses that is created by the provisions of Section 8 of this Agreement.
(d) If the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 6 of this Agreement is not satisfied, or because of any
termination pursuant to Section 9(b) of this Agreement, or because of any
refusal, inability or failure on the part of the Company to perform any material
covenant or agreement set forth in this Agreement or to comply with any
provision of this Agreement other than by reason of a default by any of the
Underwriters, the Company agrees to reimburse the Representatives upon demand
for, or pay directly, all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by the Representatives
in connection with investigating, preparing to market or marketing the Shares or
otherwise in connection with this Agreement or the offering of the Shares.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase and pay for the Shares shall be subject, to the
reasonable satisfaction of the Representatives, to the accuracy as of the date
of execution of this Agreement, the Closing Date and the date on which the
Option Shares are to be purchased, as the case may be, of the representations
and warranties of the Company and, with respect to any purchase of any Option
Shares, of the Selling Stockholders set forth in this Agreement and the accuracy
of the statements of the Company, its officers and the Selling Stockholders made
in any certificate delivered pursuant to this Agreement, to the performance by
the Company of all of their respective obligations to be performed under this
Agreement at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, to the satisfaction of all
conditions to be satisfied or performed by the Company and the Selling
Stockholders at or prior to that date and to the following additional
conditions:
(a) The Registration Statement shall have become effective (or, if
a post effective amendment is required to be filed pursuant to Rule 462(b) under
the Act, such post effective amendment shall become effective and the Company
shall have provided evidence satisfactory to the Representatives of such filing
and effectiveness) not later than 5:00 p.m., New York time, on the date of this
Agreement or at such later date and time as the Representatives may approve in
writing and, at the Closing Date or, with respect to the Option Shares, the date
on which such Option Shares are to be purchased; no stop order suspending the
effectiveness of the Registration Statement or any qualification, registration
or exemption from qualification or registration for the sale of the Shares in
any jurisdiction shall have been issued and no proceedings for that purpose
shall have been instituted or threatened; and any request for
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additional information on the part of the Commission shall have been complied
with to the reasonable satisfaction of the Representatives and Underwriters'
counsel.
(b) The Representatives shall have received from Gray Cary Ware &
Freidenrich LLP, counsel for the Underwriters, an opinion, dated as of the
Closing Date or, if applicable, the date on which the Option Shares are to be
purchased, and the Company shall have furnished such counsel with all documents
which they may reasonably request for the purpose of enabling them to pass upon
such matters.
(c) The Representatives shall have received on the Closing Date and
on any later date on which Option Shares are purchased, as the case may be, the
opinion of Cooley Godward LLP, counsel for the Company and the Selling
Stockholders, addressed to the Underwriters and dated as of the Closing Date or
such later date, with reproduced copies or signed counterparts thereof for each
of the Underwriters, covering the matters set forth in Annex A to this Agreement
and in form and substance reasonably satisfactory to the Representatives.
(d) The Representatives shall be satisfied that there has not been
any material change in the market for securities in general or in political,
financial or economic conditions as to render it impracticable in the
Representatives' sole judgment to make a public offering of the Shares, or a
material adverse change in market levels for securities in general or financial
or economic conditions which render it inadvisable to proceed.
(e) The Representatives shall have received on or before the
Closing Date and on any later date on which Option Shares are purchased a
certificate, dated as of the Closing Date or such later date, as the case may
be, and signed by the President and the Chief Financial Officer of the Company
stating that:
(i) the representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct with the same force
and effect as if expressly made at and as of the Closing Date or such later
date, and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or such later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or are threatened under the Securities Act; and
(iii) (A) the respective signers of the certificate have
carefully examined the Registration Statement in the form in which it originally
became effective and the Prospectus and any supplements or amendments to any of
them and, as of the Effective Date, the statements made in the Registration
Statement and the Prospectus were true and correct in all material respects and
neither the Registration Statement nor the Prospectus omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, (B) since the Effective Date, no event has
occurred that should have been set forth in an amendment to the Registration
Statement or a supplement or amendment to the Prospectus
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that has not been set forth in such an amendment or supplement, (C) since the
respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any Consolidated Material
Adverse Effect or any development involving a prospective Consolidated
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, neither the Company nor any of its direct or indirect
subsidiaries has entered into any material transaction not referred to in the
Registration Statement in the form in which it originally became effective
and the Prospectus contained therein, (D) there are not any pending or known
threatened legal proceedings to which the Company or any of its direct or
indirect subsidiaries is a party or of which property of the Company or any
of its direct or indirect subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus and
(E) there are not any license agreements, contracts, leases or other
documents that are required to be filed as exhibits to the Registration
Statement that have not been filed as required.
(f) You shall be satisfied that, and you shall have received a
certificate, dated the date on which Option Shares are to be purchased from the
Attorneys for each Selling Stockholder to the effect that, as of the date on
which Option Shares are to be purchased, they have not been informed that:
(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on the date
on which Option Shares are to be purchased; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the date on
which Option Shares are to be purchased.
(g) The Representatives shall have received from
PricewaterhouseCoopers LLP a letter or letters, addressed to the Underwriters
and dated as of the Closing Date and any later date on which Option Shares are
purchased, confirming that they are independent accountants with respect to the
Company within the meaning of the Securities Act and the applicable Rules and
Regulations thereunder and, based upon the procedures described in their letter,
referred to below, delivered to the Representatives concurrently with the
execution of this Agreement (the "Original Letter"), but carried out to a date
not more than five business days prior to the Closing Date or such later date on
which Option Shares are purchased, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. Such letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business, properties or
condition (financial or otherwise), results of operations or prospects of the
Company or any of its direct or indirect subsidiaries which, in the
Representatives' sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Shares or the purchase of the Option Shares as
contemplated by the
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Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). In addition, the Representatives shall have
received from PricewaterhouseCoopers LLP, on or prior to the Closing Date, a
letter addressed to the Company and made available to the Representatives for
the use of the Underwriters stating that their review of the Company's system
of internal controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements
as of June 30, 1998, or in delivering their Original Letter, did not disclose
any weaknesses in internal controls that they considered to be a material
weaknesses.
(h) Prior to the Closing Date, the Shares shall have been
designated national market system securities, duly authorized for listing on the
Nasdaq National Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from
all Holders executed agreements covering the matters described in Section 1(s)
of this Agreement.
(j) The Company shall have furnished to the Representatives such
further certificates and documents as the Representatives shall reasonably
request (including certificates of officers of the Company), as to the accuracy
of the representations and warranties of the Company set forth in this
Agreement, the performance by the Company of its obligations under this
Agreement and the other conditions concurrent and precedent to the obligations
of the Underwriters under this Agreement. Counsel to the Representatives shall
provide a written memorandum to the Company identifying closing documents which
such counsel deems necessary for the Underwriters' review, not less than two
business days before the Closing Date.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to the Representatives. The
Company will furnish the Representatives with such number of conformed copies of
such opinions, certificates, letters and documents as the Representatives shall
reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, time
being of the essence, or if any of the opinions and certificates mentioned
above or elsewhere in this Agreement shall not be in all material respects
reasonably satisfactory in form and substance to the Representatives and
Underwriters' counsel, this Agreement and all obligations of the Underwriters
hereunder may be canceled by the Representatives at, or at any time prior to,
the Closing Date or (with respect to the Option Shares) prior to the date upon
which the Option Shares are to be purchased, as the case may be. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telecopy confirmed in writing. Any such termination shall be without liability
of the Company to the Underwriters (except as provided in Section 5 or Section 8
of this Agreement) and without liability of the Underwriters to the Company
(except to the extent provided in Section 8 of this Agreement).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE SELLING
STOCKHOLDERS. The respective obligations of the Company and the Selling
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Stockholders to sell and deliver the Shares required to be delivered as and
when specified in this Agreement shall be subject to the condition that, at
the Closing Date or (with respect to the Option Shares) the date upon which
the Option Shares are to be purchased, no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise provided below, settlement
expenses and fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Company in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement in
the form originally filed or in any amendment thereto (including the Prospectus
as part thereof) or any post-effective amendment thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein 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 or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify or register the Shares
under the securities or Blue Sky laws thereof or to obtain an exemption from
such qualification or registration or filed with the Commission or any
securities association, the Nasdaq National Market, or any securities exchange,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that (1) the indemnity agreements of the Company contained in this Section 8(a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter
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through the Representatives specifically for use in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto and (2) the indemnity agreement contained in
this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Shares that
are the subject thereof (or to the benefit of any person controlling such
Underwriter) if the Company can demonstrate that at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) (excluding the documents incorporated
therein by reference) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), unless the failure is the result of noncompliance by the
Company with Section 4 of this Agreement. The indemnity agreements of the
Company contained in this Section 8(a) and the representations and warranties
of the Company contained in Section 1 of this Agreement shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares. This indemnity agreement shall be in addition to
any liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act or
other federal or state statute, law or regulation, at common law or otherwise,
specifically including but not limited to losses, claims, damages or liabilities
(or actions in respect thereof) related to negligence on the part of any
Underwriter, and each Selling Stockholder, severally and not jointly, agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise provided below, settlement expenses and
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding that may be brought against, the respective indemnified parties, in
each case insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon, in whole or in part, (i) any
breach of any representation, warranty, covenant or agreement of such Selling
Stockholder in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement in the form
originally filed or in any amendment thereto (including the Prospectus as part
thereof) or any post-effective amendment thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein 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 or (iv) any untrue
statement or alleged untrue statement of a material fact
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contained in any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order
to qualify or register the Shares under the securities or Blue Sky laws
thereof or to obtain an exemption from such qualification or registration or
filed with the Commission or any securities association, the Nasdaq National
Market, or any securities exchange, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, provided, however, that (1) the indemnity
agreements of the Selling Stockholders contained in this Section 8(b) shall
not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for use in the
Registration Statement, any Preliminary Prospectus or the Prospectus or any
such amendment thereof or supplement thereto, (2) the indemnity agreement
contained in this Section 8(b) with respect to any Preliminary Prospectus
shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the Shares that are the subject thereof (or to the benefit of any person
controlling such Underwriter) if the Selling Stockholder can demonstrate that
at or prior to the written confirmation of the sale of such Shares a copy of
the Prospectus (or the Prospectus as amended or supplemented) (excluding the
documents incorporated therein by reference) was not sent or delivered to
such person and the untrue statement or omission of a material fact contained
in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented), unless the failure is the result of
noncompliance by the Company with Section 4 of this Agreement and (3) the
indemnity agreements of the Selling Stockholders contained in this Section
8(b) shall apply in the case of subparagraphs (ii) and (iii) of this Section
8(b) to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or
such Underwriter by such Selling Stockholder, directly or through such
Selling Stockholder's representatives, specifically for use in the
preparation thereof. The indemnity agreements of the Selling Stockholders
contained in this Section 8(b) and the representations and warranties of the
Selling Stockholders contained in Section 2 of this Agreement shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares. This indemnity agreement shall be in addition to
any liabilities which the Selling Stockholders may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, each other Underwriter, each
Selling Stockholder and each person (including each partner or officer thereof)
who controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, or
other federal or state statute, law or regulation or at common law or otherwise
and to reimburse each of them for any legal or other expenses (including, except
as otherwise hereinafter provided, settlement expenses and fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with
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defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding that may
be brought against, the respective indemnified parties, in each case arising
out of or based upon (i) any breach of any representation, warranty, covenant
or agreement of the indemnifying Underwriter in this Agreement, (ii) any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (including the Prospectus as part thereof) or any
post-effective amendment thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto) or the
omission or alleged omission to state therein 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, but in
each case under clauses (ii) and (iii) above, as the case may be, only if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of such
indemnifying Underwriter through the Representatives specifically for use in
the Registration Statement, in any Preliminary Prospectus or the Prospectus
or any such amendment thereof or supplement thereto. The Company and the
Selling Stockholders acknowledge and agree that the matters described in
Section 3(g) of this Agreement constitute the only information furnished in
writing by or on behalf of the several Underwriters for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus. The
indemnity agreement of each Underwriter contained in this Section 8(c) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery
of and payment for the Shares. This indemnity agreement shall be in addition
to any liabilities which each Underwriter may otherwise have.
Notwithstanding anything to the contrary in this Section 8, no Underwriter
shall be required to make any payments in respect of any claim arising under
this Section 8(b) in excess of the underwriting discount applicable to the
Shares purchased by that Underwriter.
(d) Each person or entity indemnified under the provisions of
Sections 8(a), 8(b) and 8(c) above agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted against it
or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
Sections, it will, if a claim in respect thereunder is to be made against the
indemnifying party or parties under this Section 8, and give written notice (the
"Notice") of such service or notification to the party or parties from whom
indemnification may be sought hereunder within ten (10) calendar days after
receipt by them of written notice of the commencement of any actions against
them. No indemnification provided for in Sections 8(a), 8(b) and 8(c) above
shall be available to any person who fails to so give the Notice if the party to
whom such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related, but only to the
extent such party was materially prejudiced by the failure to receive the
Notice, and the omission so to notify such indemnifying party or parties shall
not relieve such indemnifying party or parties from any liability which it or
they may have to the indemnified
30
<PAGE>
party for contribution or otherwise than on account of Sections 8(a), 8(b)
and 8(c). Any indemnifying party shall be entitled at its own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of
the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to
the indemnified party or parties; provided, however, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal
defenses or rights available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then separate counsel for and selected by the indemnified party or parties
shall be entitled to conduct, at the expense of the indemnifying parties, the
defense of the indemnified parties to the extent determined by such counsel
to be necessary to protect the interests of the indemnified party or parties,
and (ii) provided, further, that the indemnifying party shall not be liable
for the fees and expenses of more than one separate counsel, reasonably
approved by the indemnifying party, for all of the indemnified parties, plus,
if applicable, local counsel in each jurisdiction. In addition, in any event,
the indemnified party or parties shall be entitled to have counsel selected
by such indemnified party or parties participate in, but not conduct, the
defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and, unless separate counsel is
to be chosen by the indemnified party or parties as provided above, the
counsel chosen by the indemnifying party or parties is reasonably
satisfactory to the indemnified party or parties, the indemnifying party or
parties will not be liable under Sections 8(a), 8(b) and 8(c) for any legal
or other expenses subsequently incurred by the indemnified party or parties
in connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear and
pay the legal and other expenses incurred in connection with the conduct of
the defense as referred to in clause (i) of the proviso to the preceding
sentence and (B) the indemnifying party or parties shall bear and pay such
other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 8(a), 8(b)
and 8(c) above (i) in such proportion as is appropriate to reflect the relative
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benefits received by each indemnifying party from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each party in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the Selling Stockholders and the Underwriters shall be deemed to
be in the same respective proportions as the total proceeds from the offering of
the Shares, net of the underwriting discounts, received by the Company and the
Selling Stockholders and the total underwriting discount retained by the
Underwriters bear to the aggregate public offering price of the Shares.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by a
party and the party's relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contribution
pursuant to this Section 8(e) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 8(e) and to the
considerations referred to in the third sentence of the first paragraph of this
Section 8(e). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating, preparing to defend or defending against any
action or claim which is the subject of this Section 8(e). Notwithstanding the
provisions of this Section 8(e), no Underwriter shall be required to contribute
any amount in excess of the underwriting discount applicable to the Shares
purchased by that Underwriter. For purposes of this Section 8(e), each person
who controls an Underwriter within the meaning of the Securities Act shall have
the same rights to contribution as such Underwriter, and each person who
controls the Company within the meaning of the Securities Act, each officer of
the Company who signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to the immediately preceding and immediately following sentences. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 1l(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute in this Section 8(e) are several in
proportion to their respective underwriting obligations and not joint.
Each party or other entity entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Section 8(d) above). This Section 8(e) shall not be
operative as to any Underwriter to the extent that the Company is entitled to
receive or has received indemnity under this Section 8.
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(f) The Company shall not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or not
such Underwriter or any person who controls such Underwriter within the meaning
of Section 15 of the Securities Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.
(g) No Underwriter shall, without the consent of the Company,
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
Company is a party to such claim, action, suit or proceeding), which consent
shall not be unreasonably withheld, unless such settlement, compromise or
consent includes an unconditional release of the Company, each of its
officers who signed the Registration Statement, each of its directors, each
Selling Stockholder and each person who controls the Company within the
meaning of Section 15 of the Securities Act, from all liability arising out
of such claim, action, suit or proceeding.
(h) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c) and
this Section 8 of this Agreement and that they are fully informed regarding
all such provisions. They further acknowledge that the provisions of
Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c) and this Section 8 of this
Agreement fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement, each Preliminary Prospectus
and the Prospectus as required by the Securities Act, the Rules and
Regulations, the Exchange Act and the rules and regulations of the Commission
under the Exchange Act. The parties are advised that federal or state
policy, as interpreted by the courts in certain jurisdictions, may be
contrary to certain provisions of Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c)
and this Section 8 of this Agreement and, to the extent permitted by law, the
parties hereto hereby expressly waive and relinquish any right or ability to
assert such public policy as a defense to a claim under Sections 5(a)(ii),
5(a)(iii), 5(b) or 5(c) or this Section 8 of this Agreement and further agree
not to attempt to assert any such defense.
9. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of the
Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 6
or Section 10 of this Agreement) to purchase and pay for the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters, the
Company shall immediately give notice thereof to the Representatives and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by the Representatives of such notice to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed
upon among the Representatives and such purchasing Underwriter or
Underwriters and upon the terms set forth herein, all or any part of the
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Firm Shares that such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail to make such arrangements
with respect to all such Shares, the number of Firm Shares that each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining Shares that the defaulting Underwriter or Underwriters agreed to
purchase, provided, however, that the non-defaulting Underwriters shall not
be obligated to purchase the Shares that the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such Shares
exceeds 10% of the total number of Firm Shares that all Underwriters agreed
to purchase under this Agreement. If the total number of Firm Shares that
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the first
24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to the Representatives for purchase
of such Shares on the terms set forth in this Agreement. In any such case,
either the Representatives or the Company shall have the right to postpone
the Closing Date determined as provided in Section 3(c) of this Agreement for
not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 3(c) in order that any necessary
changes in the Registration Statement, the Prospectus or any other documents
or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company makes
arrangements within the time periods provided in the first three sentences of
the first paragraph of this Section 9 for the purchase of all the Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter (except
as provided in Section 5 or Section 8 of this Agreement) and without any
liability on the part of any non-defaulting Underwriter to the Company (except
to the extent provided in Section 8 of this Agreement). Nothing in this
Section 9, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability, if any, to the Company or any non-defaulting
Underwriter for damages occasioned by its default under this Agreement. The
term "Underwriter" in this Agreement shall include any persons substituted for
an Underwriter under this Section 9.
10. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as the Representatives and the Company
shall agree upon the public offering price and the purchase price of the Shares.
If the public offering price and the purchase price of the Shares shall not have
been determined prior to 5:00 p.m., New York time, on the fifth full business
day after the Registration Statement has become effective, this Agreement shall
thereupon terminate without liability on the part of the Company to the
Underwriters (except as provided in Section 5 or Section 8 of this Agreement) or
the Underwriters to the Company (except as set forth in Section 8 of this
Agreement). By giving notice before the time this Agreement becomes effective,
the Representatives may prevent this Agreement from becoming effective without
liability of any party to the other party, except that the Company shall remain
obligated to pay
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<PAGE>
costs and expenses to the extent provided in Section 5 and Section 8 of this
Agreement. If the Registration Statement has been declared effective prior
to the date of this Agreement, this Agreement shall become effective upon
execution and delivery by the Representatives, the Company and the Attorneys.
(b) This Agreement may be terminated by the Representatives in
their absolute discretion by giving written notice to the Company at any time
on or prior to the Closing Date or, with respect to the purchase of the
Option Shares, on or prior to any later date on which the Option Shares are
to be purchased, as the case may be, if prior to such time any of the
following has occurred or, in the Representatives' opinion, is likely to
occur: (i) after the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective adverse change in or affecting
particularly the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and its direct and indirect
subsidiaries, taken as a whole, whether or not arising in the ordinary course
of business, occurs which would, in the Representatives' sole judgment, make
the offering or the delivery of the Shares impracticable or inadvisable; or
(ii) if there shall have been the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, or any
outbreak of hostilities or other national or international calamity or crisis
or change in economic or political conditions, if the effect of such
outbreak, calamity, crisis or change in economic or political conditions on
the financial markets of the United States would, in the Representatives'
sole judgment, make the offering or delivery of the Shares impracticable or
inadvisable; or (iii) if there shall have been suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or system; or (iv) if there shall have been the enactment, publication,
decree or other promulgation of any federal or state statute, regulation,
rule or order of, or commencement of any proceeding or investigation by, any
court, legislative body, agency or other governmental authority which in the
Representatives' sole judgment has or may have a Consolidated Material
Adverse Effect; or (v) if there shall have been the declaration of a banking
moratorium by federal, New York or California state authorities; or (vi) if
there shall have been the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in
the Representatives' sole judgment has a material adverse effect on the
securities markets in the United States; or (vii) existing international
monetary conditions shall have undergone a material change which, in your
sole judgment, makes the offering or delivery of the Shares impracticable or
inadvisable. If this Agreement shall be terminated pursuant to this Section
10, there shall be no liability of the Company or the Selling Stockholders to
the Underwriters (except pursuant to Section 5 and Section 8 of this
Agreement) and no liability of the Underwriters to the Company or the Selling
Stockholders (except to the extent provided in Section 8 of this Agreement).
11. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed,
telecopied or delivered to Van Kasper & Company, 600 California Street,
Suite 1700, San Francisco, California 90024,
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Attention: Syndicate Manager (telecopier: (415) 397-2744); and if to the
Company, shall be mailed, telecopied or delivered to it at 17891 Cartwright
Road, Irvine, CA 92614 (telecopier: (714/223-5138) Attention: President. All
notices given by telecopy shall be promptly confirmed by letter.
12. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 5 and Section 8 of this Agreement, the
several parties (in addition to the Company, the Selling Stockholders and the
several Underwriters) indemnified under the provisions of Section 5 and
Section 8, and their respective personal Representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision contained herein. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Shares from the several Underwriters.
13. GENERAL. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or any Selling Stockholder or their respective directors or officers
and (c) delivery and payment for the Shares under this Agreement; provided,
however, that if this Agreement is terminated prior to the Closing Date, the
provisions of Sections 4(f)-4(n) of this Agreement shall be of no further force
or effect.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument, and may be delivered by facsimile transmission.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF CALIFORNIA.
14. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement,
the Representatives will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by the Representatives, as Representatives
of the several Underwriters, will be binding on all the Underwriters.
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If the foregoing correctly sets forth your understanding, please so
indicate by signing in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among the Company, the Selling
Stockholders and the several Underwriters.
Very truly yours,
JAVELIN SYSTEMS, INC.
By:
-----------------------------------
Richard P. Stack
President and Chief Executive Officer
SELLING STOCKHOLDERS
By
------------------------------
Attorney-in-Fact for the Selling
Stockholders named in Schedule II hereto
The foregoing Agreement is hereby confirmed and accepted as of the date
first above written.
On their own behalf and on behalf of each of the several Underwriters named
in Schedule I hereto.
VAN KASPER & COMPANY
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
MERIDIAN CAPITAL GROUP, INC.
As Representatives of the
Several Underwriters
By: Van Kasper & Company
By:
-----------------------------
David H. Horwich
Senior Vice President
37
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriters Number of Firm Shares
- ------------ to be Purchased:
---------------
Van Kasper & Company . . . . . . . . . . . . . . . . . . . . .
L.H. Friend, Weinress, Frankson & Presson, Inc. . . . . . . .
Meridian Capital Group, Inc. . . . . . . . . . . . . . . . . .
Total.. . . . . . . . . . . . . . . . . . . . . . . . . .
I-1
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
Selling Stockholder Number of Option Shares
- ------------------- to be Sold:
-----------
Richard P. Stack
Robert D. Nichols
C. Norman Campbell
Steven S. Goodman
I-2
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of Delaware; each of CCI Group, Inc.
and POSNET Computers, Inc. (ogether, the "Subsidiaries") has been duly organized
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of formation;
(ii) The Company and each Subsidiary has the corporate power to own,
lease and operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company and each Subsidiary is duly qualified to do business
as a foreign corporation and is in good standing in all jurisdictions in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure so to qualify would not
have a Consolidated Material Adverse Effect on such entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the captions "Capitalization"
and "Description of Capital Stock" as of the dates stated therein; the issued
and outstanding shares of capital stock (or other securities) of the Company and
each Subsidiary have been duly and validly authorized and issued, are fully paid
and nonassessable and have not been issued in violation of any statutory, or, to
the best knowledge of such counsel, other preemptive right or other rights to
subscribe for or purchase securities or in violation of any applicable federal
or state securities laws; and except as reflected on Exhibit A to the
Underwriting Agreement, the Company directly or indirectly owns all of the
issued and outstanding equity securities of each of its Subsidiaries and, to
such counsel's actual, current knowledge, there are no outstanding options,
warrants or other rights to acquire any equity securities of any Subsidiary;
(v) The Shares will, upon issuance and delivery against payment
therefor in accordance with the terms of the Agreement, be duly authorized,
validly issued, fully paid and nonassessable and will not have been issued in
violation of any statutory, or, to the best knowledge of such counsel, other
preemptive right or other rights to subscribe for or purchase securities and
have been duly approved for listing on the Nasdaq National Market subject only
to official notice of issuance thereof;
(vi) The Company has corporate power to enter into the Agreement and to
issue, sell and deliver the Shares to the Underwriters.
(vii) The Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and, assuming its due authorization, execution and delivery by the
Representatives, is the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except insofar as the
indemnification and contribution provisions of the Agreement may be limited by
public policy concerns and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles;
<PAGE>
(viii) We have been informed by the staff of the Securities and Exchange
Commission that the Registration Statement has become effective under the
Securities Act and, to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(ix) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements and supporting
schedules included therein, as to which such counsel need express no opinion),
as of the effective date of the Registration Statement, complied as to form in
all material respects with the requirements of the Securities Act and the
applicable Rules and Regulations;
(x) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the forms of certificates evidencing
the Common Stock comply with Delaware law;
(xi) The information in the Prospectus under the captions "Description
of Capital Stock" and "Shares Eligible for Future Sale," to the extent it
constitutes matters of law or legal conclusions, has been reviewed by such
counsel and is correct in all material respects;
(xii) The description in the Registration Statement and the Prospectus
of the Certificate of Incorporation and Bylaws of the Company and of statutes
and, to the best knowledge of such counsel, contracts are accurate in all
material respects and fairly present in all material respects the information
required to be presented by the Securities Act and the Rules and Regulations;
(xiii) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or referred to
therein or filed as required;
(xiv) The execution and delivery of the Agreement do not, and the
Company's performance of the Agreement and the consummation of the transactions
contemplated thereby will not, conflict with, violate or result in the material
breach of or a material default (including without limitation with the giving of
notice, the passage of time or otherwise) under any of the terms and provisions
of the Company's Certificate of Incorporation or Bylaws or, to such counsel's
actual current knowledge, any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or, without limitation, other agreement
or instrument to which the Company or any Subsidiary is a party or by which any
of its or their properties are bound or any law, ordinance, rule or regulation
or, to the best knowledge of such counsel, any order, writ, injunction, judgment
or decree of any governmental agency or body or of any court or arbitration
tribunal having jurisdiction over the Company or any Subsidiary or over any of
its or their properties; provided, however, that no opinion need be rendered
concerning state securities or Blue Sky laws;
<PAGE>
(xv) No authorization, approval or consent or other order of any
governmental authority or agency is necessary in connection with the
consummation of the transactions contemplated by the Agreement, except such as
have been obtained under the Securities Act;
(xvi) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company or any
Subsidiary of a character which are required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act or the applicable Rules and
Regulations, other than those described therein;
(xvii) To the best knowledge of such counsel, neither the Company nor any
Subsidiary is presently in breach of, or in default under, any bond, debenture,
note or other evidence of indebtedness or any contract, indenture, mortgage,
deed of trust, loan agreement, lease, license or, without limitation, other
agreement or instrument to which the Company or any Subsidiary is a party or by
which any of its or their properties are bound which breach or default,
individually or in the aggregate, is reasonably likely to result in a
Consolidated Material Adverse Effect.
(xviii) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have unexercised registration rights with respect to
any securities of the Company;
In addition, such counsel shall state that such counsel has participated
in the preparation of the Registration Statement and Prospectus, including
participating in conferences with officers and other representatives of the
Company, the independent public accountants of the Company, the
Representatives and counsel to the Underwriters, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed and, although they have not independently verified the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention
of such counsel that caused them to believe that, at the time the
Registration Statement became effective, the Registration Statement (except
as to financial statements and supporting schedules contained therein, as to
which such counsel need express no opinion) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Prospectus contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
<PAGE>
EXHIBIT "A"
LIST OF SUBSIDIARIES
<PAGE>
EXHIBIT "B"
<PAGE>
DATED 1998
GARY GREEN
and
ROGER SCARLETT
and
LOUVRE TRUSTEES LIMITED
and
JAVELIN SYSTEMS, INC.
---------------------------------------------
AGREEMENT
for the sale and purchase of the
entire issued share capital
of RGB TRINET LIMITED
---------------------------------------------
Paul, Hastings, Janofsky & Walker LLP
The International Financial Centre
Old Broad Street
London EC2N 1HQ
Tel: 0171 562 4000
Fax: 0171 628 4444
<PAGE>
I N D E X
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions and Interpretation 1
2. Agreement to Sell and Purchase 5
3. Consideration 5
4. Conditions Precedent 6
5. Pre-emption Rights 6
6. Warranties 6
7. Limitations to the Warranties 8
8. Vendors' obligations prior to Completion 8
9. Purchaser's Remedies 9
10. Release of Guarantees 9
11. Completion 10
12. Restrictive Covenants 10
13. Post-Completion Effect 11
14. Successors and Assigns 11
15. Information and Confidentiality 11
16. Announcements and Publicity 11
17. Costs 11
18. Notices 12
19. Further Assurance 13
20. Waivers 13
21. Entire Agreement 13
22. Variation 14
23. Joint and Several Liability 14
24. Counterparts 14
25. Applicable Law 14
</TABLE>
Schedules
- ---------
1. Particulars of the Vendors
2. Particulars of the Company and Subsidiary
3. Particulars of the Premises
4. Part A - General Warranties
Part B - Taxation Warranties
Part C - Property Warranties
Part D - Intellectual Property Warranties
Part E - Environmental and Health and Safety Warranties
5. Completion Requirements
6. Tax Deed
7. Regulation S certificate and undertaking
8. Additional Limitations to the Warranties and Tax Deed
9. Earnout Agreement
i
<PAGE>
AGREEMENT FOR SALE AND PURCHASE OF SHARES
DATE: 1998
PARTIES:
(1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE
1 ("Individual Vendors");
(2) LOUVRE TRUSTEES LIMITED of Kings House, The Grange, St. Peter Port,
Guernsey, Channel Islands ("Trustee Vendor"); and
(3) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of
business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
OPERATIVE PROVISIONS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement and (save as provided in Clause 1.6) in the Schedules:-
"Accounting Date" means 30 June 1997 or, if the audited
accounts of the Company for the period
which commenced on 1 July 1997 and
ended on 30 June 1998 are provided to
the Purchaser on or prior to
Completion, 30 June 1998;
"Accounting Period" has the meaning ascribed thereto in
section 12 of the Taxes Act;
"Accounts" means the audited accounts of the
Company comprising a balance sheet as
at the Accounting Date, a profit and
loss account for the period which
commenced on 1 July 1996 or, if the
audited accounts of the Company for
the period which commenced on 1 July
1997 and ended on 30 June 1998 are
provided to the Purchaser on or prior
to Completion, 1 July 1997 and ended
on the Accounting Date, the notes
thereto and the Directors' and
auditors' reports thereon;
"agreed form" means in relation to any document such
document in the form agreed between
the parties and initialled by the
Purchaser and the Vendors for the
purposes of identification;
"Business Day" means any day which is not a Saturday,
a Sunday or a bank or public holiday
in England and Wales;
1
<PAGE>
"Change of Control" means, in relation to any company,
where that company ceases to be under
the control of the person or persons
who control such company on the date
of this Agreement and for the purpose
of this definition "control" means a
holding of securities in a company
conferring a majority of the voting
rights in it or the right to appoint
or remove a majority of its board of
directors or the right to participate
in 50% or more of the assets of the
company on its winding up;
"Claim" means any claim for breach of or
non-compliance with this Agreement
(including any Warranty Claim or Tax
Claim);
"Companies Act" means the Companies Act 1985;
"Company" means RGB TRINET LIMITED, particulars
relating to which are set out in
SCHEDULE 2, Part 1;
"Completion" means the completion of the sale and
purchase of the Shares in accordance
with Clause 11 and SCHEDULE 5;
"Completion Date" means the date fixed for Completion
pursuant to Clause 11;
"Connected Person" means a connected person as defined in
section 839 of the Taxes Act;
"Consideration Shares" means such number of Purchaser's
Shares calculated in accordance with
Clause 3.4 as are to be allotted and
issued credited as fully paid in
accordance with Clause 3.3;
"Directors" means the persons listed as directors
of the Company in SCHEDULE 2;
"Disclosed" means fairly disclosed to the
Purchaser expressly for the purposes
of this Agreement in the Disclosure
Letter;
"Disclosure Letter" means a letter of even date from the
Vendors to the Purchaser in the agreed
form;
"Earnout Agreement" means an agreement to be entered into
at Completion between (inter alia) the
Individual Vendors and the Purchaser
in respect of the entitlement and
issue of the Earnout Shares in the
form contained in SCHEDULE 9;
2
<PAGE>
"Earnout Shares" means such number of Purchaser's
Shares (if any) calculated, allotted
and issued credited as fully paid in
accordance with the Earnout Agreement;
"Employment Agreements" means the employment agreements in the
agreed form to be entered into at
Completion between the Company and
each of the Individual Vendors;
"Event" means an event as defined in the Tax
Deed;
"Intellectual Property Rights" means intellectual property rights as
defined in Part D of SCHEDULE 4;
"Jade Agreement" means the agreement of even date for
the sale and purchase of the issued
share capital of the Subsidiary not
held by the Company entered into
between (1) A. Sampson, (2) Contech
Consultants Limited, (3) B. Badminton,
and (4) the Purchaser;
"Management Accounts" means the respective unaudited
management accounts of the Company and
the Subsidiary comprising in each case
a balance sheet and a profit and loss
account for, in respect of the
Company, the period which commenced on
1 July 1998 and ended on 31 August
1998 and, in respect of the
Subsidiary, the period which commenced
on 18 March 1998 and ended on 31
August 1998, a copy of each of which
is to be provided at Completion;
"Premises" means the premises of the Company,
short particulars of which are set out
in SCHEDULE 3;
"Purchaser's Group" means the Purchaser and its subsidiary
undertakings or parent undertakings
for the time being or a subsidiary
undertaking for the time being of a
parent undertaking of the Purchaser
and includes, for the avoidance of
doubt, the Company and the Subsidiary
and references to a "member of the
Purchaser's Group" shall be construed
accordingly;
"Purchaser's Shares" means shares of the common stock,
$0.01 par value, of the Purchaser;
"Relief" means a relief as defined in the Tax
Deed;
"Shares" means the 1,000 ordinary shares of L1
each in the capital of the Company;
"Subsidiary" means JADE COMMUNICATIONS LIMITED,
particulars relating to which are set
out in SCHEDULE 2, Part 2;
3
<PAGE>
"Supplemental Disclosure
Letter" means the letter to be provided by the
Vendors at Completion to the Purchaser
in the agreed form disclosing matters
(if any) which have arisen between the
date hereof and the Completion Date
and which are necessary to qualify the
Warranties;
"Tax" means tax as defined in the Tax Deed;
"Tax Claim" means any claim under the Warranties
in SCHEDULE 4, Part B or the Tax Deed;
"Tax Deed" means a deed in the form set out in
SCHEDULE 6;
"Taxes Act" means the Income and Corporation Taxes
Act 1988;
"Vendors" means together the Individual Vendors
and the Trustee Vendor;
"Vendors' Solicitors" means Dibb Lupton Alsop, 101
Barbirolli Square, Manchester M2 3DL;
"Warranties" means the warranties, representations
and undertakings set out in SCHEDULE
4;
"Warranty Claim" means any claim for breach of or
non-compliance with any of the
Warranties in Parts A, C or D of
SCHEDULE 4.
1.2 The Schedules are deemed to be incorporated in this Agreement, and a
reference to "this Agreement" includes a reference to the Schedules.
1.3 In this Agreement:-
1.3.1 the index and the clause headings are included for convenience only
and shall not affect the construction of this Agreement;
1.3.2 words denoting the singular shall include the plural and vice
versa;
1.3.3 words denoting any gender shall include a reference to each other
gender; and
1.3.4 references to persons shall be deemed to include references to
natural persons, firms, partnerships, companies, corporations,
associations, organisations, foundations and trusts (in each case
whether or not having separate legal personality).
1.4 References in this Agreement to statutory provisions shall (where the
context so admits and unless otherwise expressly provided) be construed as
references to those provisions as respectively amended, consolidated,
extended or re-enacted as at the date of this Agreement and to the
corresponding provisions of any earlier legislation (whether repealed or
not) directly or indirectly amended, consolidated, extended, replaced or
re-enacted thereby and to any orders, regulations, instruments or other
subordinate legislation made under the relevant statute.
4
<PAGE>
1.5 Any statement qualified by the expression "to the best of the knowledge,
information and belief of the Vendors" or "so far as the Vendors are
aware" or any similar expression shall be deemed to include an additional
statement that it has been made after due, diligent and careful enquiry by
each of the Vendors of each other, the Directors, the Company's auditors
and the directors of the Subsidiary.
1.6 If any of the words or expressions defined in Clause 1.1 are also defined
in any of the Schedules then for the purposes of interpreting that
relevant Schedule such words and expressions shall have the meaning
ascribed to them in that Schedule.
2. AGREEMENT TO SELL AND PURCHASE
2.1 Each of the Vendors sells such of the Shares as are set out opposite his
name in column 2 of SCHEDULE 1 to the Purchaser and the Purchaser
purchases the Shares.
2.2 Each of the Vendors covenants with the Purchaser that:-
2.2.1 he has the right to sell and transfer the full legal and beneficial
interest in the Shares to the Purchaser on the terms set out in
this Agreement;
2.2.2 the Shares are sold free from all claims, charges, liens,
encumbrances, equities and adverse rights of any description and
together with all rights attached or accruing thereto as at and
from the date of this Agreement; and
2.2.3 he shall (and shall procure that any necessary third party shall),
at his own expense, do, execute and perform all such further acts,
deeds, documents and things as the Purchaser may reasonably request
from time to time as being necessary to vest any of the Shares in
the Purchaser.
2.3 Nothing in this Agreement shall oblige the Purchaser to purchase some only
of the Shares unless the Vendors shall at the same time complete the sale
to the Purchaser of all of the Shares.
3. CONSIDERATION
3.1 Subject to Clause 3.8, the initial consideration payable by the Purchaser
to the Vendors in respect of the sale of the Shares shall be 11,875
Purchaser's Shares and US$2,878,750 which:
3.1.1 in respect of US$2,878,750 shall be satisfied as to the amount of
US$1,492,812.50 in cash and as to US$1,385,937.50 shall be
satisfied by the issue of the Consideration Shares in accordance
with the remainder of this Clause 3; and
3.1.2 if and to the extent that the exchange rate of pounds sterling to
US dollars has increased above the rate of L1 = $1.70 (i.e., an
increase in value in pounds sterling) as at the Completion Date,
the sum of US$2,878,750 shall be increased accordingly by applying
the appropriate percentage thereto. If such exchange rate has
decreased below L1 = $1.70 (i.e., a decrease in value in pounds
sterling), no variation shall be made to the consideration under
this Agreement.
5
<PAGE>
3.2 By way of additional consideration of up to US$5,140,625 the Purchaser
will issue to the Vendors the Earnout Shares (if any) calculated in
accordance with the provisions of the Earnout Agreement in the percentages
set out in Column 6 of SCHEDULE 1.
3.3 The consideration referred to in Clause 3.1 shall be satisfied at
Completion by the payment of US$1,492,812.50 in cash to the Vendors'
Solicitors which shall be apportioned between the Vendors as set out in
Column 3 of SCHEDULE 1, by the issue of the 11,875 Purchaser's Shares
which shall be apportioned between the Vendors as set out in Column 4 of
SCHEDULE 1, and by the issue of Consideration Shares to the Vendors which
shall be apportioned between the Vendors as set out in Column 5 of
SCHEDULE 1.
3.4 The number of Consideration Shares to be allotted to the Vendors pursuant
to Clause 3.3 shall be such number of Purchaser's Shares as have an
aggregate value (determined in accordance with Clause 3.5) which is as
near as possible to, but not less than, US$1,385,937.50.
3.5 For the purpose of determining the aggregate value referred to in Clause
3.4, the value of each Purchaser's Share shall be deemed to be an amount
equal to the average of the closing prices of a Purchaser's Share, as
reported on the NASDAQ SmallCap Market System in the ten (10) trading days
immediately prior to the Business Day immediately prior to the Completion
Date.
3.6 No fraction of a Consideration Share shall be issued to the Vendors and
the number of Consideration Shares shall be adjusted accordingly to the
nearest whole number.
3.7 The Consideration Shares, on issue, shall rank pari passu in all respects
with the existing issued Purchaser's Shares.
3.8 By way of possible further consideration, if during November 1999 the
price per Purchaser's Share as reported on the NASDAQ SmallCap Market
shall remain below US$9.00 for five (5) consecutive trading days, then the
number of Consideration Shares to which the Vendors are entitled shall be
increased as follows:-
3.8.1 First, the number of Purchaser's Shares owned by the Vendors as of
1 November 1999 shall be subject to adjustment based on the
following formula:
S x (V1) - S = C
----
(V2)
where S = Number of Purchaser's Shares held by the Vendors
V1 = 9
V2 = US$9.00 or, if lower, the average closing price per
Purchaser's Share during trading on the NASDAQ SmallCap
Market in November 1999
C = the additional number of Consideration Shares to be
issued to the Vendors;
3.8.2 Second, the Purchaser shall issue and allot to the Vendors such
number of additional Consideration Shares as corresponds to the
figure represented by "C" in the above formula in the same
proportions as under Clause 3.3 no later
6
<PAGE>
than 31 December 1999 (and otherwise in accordance with the
foregoing provisions of this Clause 3).
3.9 Each of the Vendors agrees that he shall deliver to the Purchaser at
Completion and, if appropriate, upon the issue of Consideration Shares
pursuant to Clause 3.8 a certificate and undertaking substantially in the
form of SCHEDULE 7 making or giving such representations, warranties and
covenants as are necessary or advisable for the qualification of the
issuance of Purchaser's Shares to the Vendors under Regulation S
promulgated under the United States Securities Act of 1933, as amended.
3.10 If the Purchaser at any time proposes to register any of its equity
securities (as defined in the United States Securities Act of 1933 (the
"Act")), other than securities which are convertible into shares of its
common stock, under the Act on Forms S-1, S-2 or S-3 (but not Form S-4 or
S-8) or on any other form upon which may be registered securities similar
to the Consideration Shares, it will at each such time give written notice
at least fifteen (15) days prior to the filing of the registration
statement to the Vendors holding Consideration Shares (each a "Holder") of
its intention so to do. Such notice shall specify the proposed date of
the filing of the registration statement and advise each Holder of its
right to participate therein. Upon the written request of any Holder
given not less than seven (7) days prior to the proposed date of filing
set forth in such notice, the Purchaser will use all reasonable efforts to
cause the Consideration Shares which the Purchaser has been requested to
register by such Holder to be registered under the Act, all to the extent
requisite to permit the sale or other disposition by such of the
Consideration Shares so registered. If such registration statement is
being filed in connection with an underwritten offering, the Consideration
Shares held by the Holder may only be included in such registration if, in
the written opinion of the underwriter or underwriters managing the
offering, the total amount of all securities of the Purchaser to be so
registered will not exceed the maximum amount of securities of the
Purchaser which can then be successfully marketed (1) by the managing
underwriter in its sole reasonable discretion, and (2) without otherwise
materially and adversely affecting the entire offering. To the extent
that the amount of securities to be registered must be reduced in order to
obtain the opinion referred to in the preceding sentence, such reduction
shall be achieved by first eliminating from the registration some or all
of the securities to be offered by persons (including, but not limited to,
any persons or entities that have any registration rights with respect to
any securities) other than the Holder, PROVIDED, HOWEVER, that no such
reduction shall reduce the securities being offered directly by the
Purchaser through such underwriter or underwriters. The right of any
Holder to have its Consideration Shares included in any registration
statement being filed in connection with any underwritten offering shall
be subject to such Holder participating in the underwriting to the extent
required under the Act or any rule thereunder or to the extent reasonably
required by the underwriters and agreeing to be bound by the terms imposed
by the underwriters that such underwriters deem reasonably necessary to
the success of the offering.
7
<PAGE>
4. CONDITIONS PRECEDENT
4.1 This Agreement is conditional upon:
4.1.1 the Purchaser having secured sufficient funds to finance the cash
portion of the consideration stated in Clause 3.1; and
4.1.2 the price per Purchaser's Share as reported on the NASDAQ SmallCap
Market being not less than US$7.50 as at the close of business on
the date preceding the Completion Date.
4.2 If any of the above-mentioned conditions is not satisfied or waived on or
before 13 November 1998, this Agreement shall become null and void (save
for Clauses 15 and 16 which shall continue to have effect) and no party
shall have any claim against any other party arising from or in connection
with this Agreement.
4.3 The Purchaser shall use all reasonable endeavours to ensure the
satisfaction of the conditions set out in Clause 4.1 so far as lies within
its powers so to do.
4.4 Any waiver of the conditions set out in Clause 4.1 shall require the
consent of the Vendors and the Purchaser.
5. PRE-EMPTION RIGHTS
The Vendors irrevocably waive and undertake to procure that any other
person having such rights shall by Completion have irrevocably waived all
and any rights of pre-emption or other restrictions on transfer over or in
respect of the Shares existing by virtue of the articles of association of
the Company or otherwise.
6. WARRANTIES
6.1 The Individual Vendors represent and warrant to the Purchaser for the
benefit of the Purchaser, its successors and assigns in the terms set out
in SCHEDULE 4 and acknowledge that the Purchaser is entering into this
Agreement in reliance on the Warranties and that the Purchaser shall be
entitled to treat them as conditions of this Agreement. It is
acknowledged by the Purchaser that the only representation, warranty and
covenant that the Trustee Vendor shall provide are those set out in Clause
2.2 and paragraph 1.2 of Part A of SCHEDULE 4.
6.2 The Vendors agree with the Purchaser (for itself and as trustee for the
Company and the Subsidiary) that in making and giving the Warranties and
that in compiling and preparing the Disclosure Letter the Vendors have not
relied directly or indirectly on any information or opinions supplied to
them (or any of them) by the Company or the Subsidiary or any of the
officers, employees, servants or agents of the Company or the Subsidiary
and the Vendors waive all and any claims which they (or any of them) have
or may have against all or any of the foregoing in respect of any
information or opinions so supplied or omitted to be so supplied in
connection with any of the Warranties or the Disclosure Letter.
6.3 Each of the Warranties shall be separate and independent and shall not be
limited by reference to any other of the Warranties or any other provision
of this Agreement and no claim in respect or arising out of the same shall
be limited or otherwise affected by
8
<PAGE>
any knowledge (actual or constructive) which the Purchaser has or is
deemed to have in relation to the Company or the Subsidiary save for
matters set out in the Disclosure Letter or the Supplementary Disclosure
Letter or the disclosure letter or the supplementary disclosure letter
to the Jade Agreement.
6.4 Each of the Warranties shall be deemed to be given on the date of this
Agreement and shall be deemed to be repeated and given by the Vendors on
each day up to and including the Completion Date.
6.5 Save where any of the Warranties expressly or by clear implication relate
only to the Company, each of the Warranties is given in relation not only
to the Company, but also in relation to the Subsidiary as if the
Warranties had been repeated in full with the substitution of the name of
the Subsidiary for the Company.
6.6 The Purchaser represents and warrants to the Vendors that:
6.6.1 the existing issued ordinary share capital of the Purchaser is the
subject of listing on the NASDAQ exchange;
6.6.2 the Purchaser has sufficient authorised but unissued ordinary share
capital to enable it to issue the Consideration Shares and no
shareholder or other consents are required by the Purchaser prior
to issue of such shares;
6.6.3 the Consideration Shares shall rank pari passu in all respects with
the shares of the common stock of the Purchaser in issue at the
date hereof; and
6.6.4 this Agreement and all other documents to be entered into by the
Purchaser pursuant to this Agreement will when executed constitute
legal, valid and binding obligations of the Purchaser in accordance
with their respective terms.
7. LIMITATIONS TO THE WARRANTIES
7.1 The aggregate liability of the Vendors in respect of all Claims under the
Warranties and under the Tax Deed shall not exceed US$1,700,000.
7.2 The liability of the Vendors in respect of the Warranties and under the
Tax Deed shall be further limited by the provisions of SCHEDULE 8.
8. VENDORS' OBLIGATIONS PRIOR TO COMPLETION
8.1 The Vendors shall not (save as may be necessary to give effect to this
Agreement) and shall procure that neither the Company nor the Subsidiary
shall (save as aforesaid) do or allow or omit to be done before Completion
anything which is or might be a breach of any of the Warranties or which
would or might make any of the Warranties inaccurate or misleading or
which is or might be a breach of or which does or might otherwise give
rise to a claim under any other provision of this Agreement or any
provision of the Tax Deed and in particular (but without prejudice to the
generality of the foregoing) the Vendors shall procure that no breach of
Warranties 3.1 to 3.11 (both inclusive) of Part A of SCHEDULE 4 shall take
place at any time from the date hereof down to the Completion Date (both
dates inclusive).
8.2 The Vendors shall immediately disclose to the Purchaser in writing any
matter or thing which arises or becomes known to them or any of them
before Completion which is or might be a breach of the Warranties or which
would or might make any of
9
<PAGE>
the Warranties inaccurate or misleading or which is or might be a
breach of or which does or might otherwise give rise to a claim under
any other provision of this Agreement or any provision of the Tax Deed.
8.3 The Vendors shall procure that until Completion the Purchaser and its
advisers shall be given promptly on request such facilities and
information (including access to employees of the Company and the
Subsidiary) regarding the business, assets, liabilities, contracts and
affairs of the Company and the Subsidiary as they or any of them may
reasonably require.
9. PURCHASER'S REMEDIES
9.1 If it becomes apparent prior to Completion that the Vendors are or will be
in breach of any of the Warranties or any other term of this Agreement
(including any obligation which is to be performed at Completion) or any
provision of the Tax Deed, then the Purchaser, in addition to and without
prejudice to all other rights and remedies available to the Purchaser in
respect thereof, shall be entitled:-
9.1.1 to rescind this Agreement by notice in writing given to the Vendors
at any time prior to Completion, whereupon the Vendors shall
indemnify the Purchaser and keep the Purchaser indemnified in full
for and against all losses, liabilities, damages, costs, claims,
charges and expenses arising from such breach and the consequent
rescission (including but not limited to all legal and other
professional fees and expenses incurred by the Purchaser in
connection with the negotiation and preparation of this Agreement);
or
9.1.2 to complete this Agreement in accordance with Clause 11 and
SCHEDULE 5, provided that the Purchaser shall not thereby be deemed
to have waived or otherwise foregone or be estopped from exercising
any right to compensation, damages or any other right or remedy
available to the Purchaser by reason of such breach.
10. RELEASE OF GUARANTEES
10.1 The Purchaser shall use all reasonable endeavours (short of actual payment
of any monies or the substitution of the guarantees of any person other
than the Purchaser) to procure as soon as reasonably practicable after
Completion the release of each of the Vendors from each of the guarantees
which have been Disclosed and which have been given by them in respect of
any obligations of the Company. Pending such release the Purchaser shall
fully and effectually indemnify and keep indemnified each of the Vendors
from and against any and all costs, claims, demands or liabilities
incurred or arising from any such guarantees.
10.2 The Vendors shall on Completion procure the absolute and unconditional
release of the Company from all guarantees, suretyships, indemnities and
like undertakings given by the Company in respect of any obligations of
any person and shall fully and effectually indemnify and keep indemnified
the Purchaser (as trustee for the Company) from and against any and all
costs, claims, demands or liabilities incurred or arising from any such
guarantees, suretyships, indemnities and like undertakings.
10
<PAGE>
11. COMPLETION
Without prejudice to the provisions of Clause 4, Completion will take
place in accordance with SCHEDULE 5 at the offices of Paul, Hastings,
Janofsky & Walker LLP, 19th Floor, The International Financial Centre, Old
Broad Street, London EC2N 1HQ at 12:00 noon on such date as the Vendors
and the Purchaser may agree, but in any event no later than 16 November
1998, when the business described in SCHEDULE 5 will be transacted.
12. RESTRICTIVE COVENANTS
12.1 Each of the Vendors hereby undertakes to and covenants with the Purchaser
(for itself and as trustee for all purchasers of the Shares and as trustee
for the Company) that he will not either on his own account or jointly
with or as manager, agent, officer, employee or otherwise on behalf of any
other person, firm or corporation directly or indirectly (and so that each
undertaking below shall be a further and separate obligation):-
12.1.1 for a period of three years from the date of this Agreement carry
on or be engaged, concerned, or interested in or assist any
business which competes with any business of the Company as carried
on at the Completion Date;
12.1.2 for a period of three years from the date of this Agreement canvass
or solicit business, orders or custom for goods or services
supplied or provided by the Company from any person who at any time
within the period of one year preceding the Completion Date has
been a customer of or in the habit of dealing with the Company for
such goods or services;
12.1.3 for a period of three years from the date of this Agreement solicit
or entice away or endeavour to solicit or entice away from the
Company or employ any person who on the Completion Date or within
the six months prior to the Completion Date is or was a director,
officer, employee or other servant of the Company;
12.1.4 for a period of three years from the date of this Agreement induce
or attempt to induce any person (including without limitation any
agent or independent distributor) who in the six months prior to
the Completion Date has been a supplier of any goods or services to
the Company to cease to supply, or to restrict or vary the terms of
supply, to the Company; or
12.1.5 at any time after the Completion Date use or procure the use in
connection with any business of any corporate or business name
which is identical to or likely to be confused with the corporate
name or any business name of the Company or which might suggest a
connection with the business of the Company.
13. POST-COMPLETION EFFECT
This Agreement shall remain in full force and effect after and
notwithstanding Completion in respect of all obligations, agreements,
covenants, undertakings, conditions, representations, warranties or
indemnities which have not been done, observed or performed at or prior to
Completion.
11
<PAGE>
14. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and enure for the benefit of each
party's successors and shall be assignable by the Purchaser to the extent
that the rights and benefits under this Agreement shall enure for the
benefit of the Purchaser's assigns. Save as aforesaid this Agreement
shall not be assignable.
15. INFORMATION AND CONFIDENTIALITY
Each of the Vendors hereby undertakes to the Purchaser:-
15.1 that he will at any time and from time to time after Completion give to
the Purchaser on request all information in his possession concerning the
business, dealings, transactions or affairs of the Company and in
particular, but without prejudice to the generality of the foregoing,
relating to claims made or threatened against the Company and the source
from and consideration for which any assets of the Company were acquired
or derived; and
15.2 that he will not, and will use all reasonable endeavours to ensure that no
other person will, at any time after the date hereof, take away or
(directly or indirectly) make use of, divulge or communicate to any person
(except as may be necessary to comply with any statutory obligation or
order of any court or statutory tribunal of competent jurisdiction) any
confidential information or trade secrets of the Company or of any
supplier, customer or other person who has or who has had dealings with
the Company.
16. ANNOUNCEMENTS AND PUBLICITY
Any announcement or circular or other publicity relating to this Agreement
or any termination thereof shall prior to its publication be approved in
writing by each of the parties as to its content, form and manner of
publication (such approval not to be unreasonably withheld or delayed),
save that any announcement, circular or other publicity required to be
made or issued by the Purchaser pursuant to the regulations of rules
governing the NASDAQ National Market System or other recognised investment
exchange or by law may be made or issued by the Purchaser without such
approval.
17. COSTS
The parties shall pay their own costs and expenses in relation to the
preparation, execution and carrying into effect of this Agreement.
18. NOTICES
18.1 Any notice required to be given under this Agreement shall be sufficiently
given if delivered personally or if sent by first-class recorded delivery
post (express air courier service if sent overseas) or if sent by
facsimile transmission and a copy of such facsimile sent by post.
12
<PAGE>
18.2 Any notice which is sent or despatched in accordance with this Clause 18
shall be deemed to have been received by the addressee:-
18.2.1 if delivered personally, at the time of delivery;
18.2.2 in the case of a notice sent by post (or express air courier), 4
Business Days after the envelope containing the notice was
delivered to the postal authorities (or courier service);
18.2.3 in the case of a notice sent by facsimile transmission, if the
notice was sent during the normal business hours of the addressee,
on the day of transmission; otherwise on the next following
Business Day.
18.3 In proving service by post or express air courier, it shall be necessary
to prove only that the notice was sent or despatched and that the notice
was contained in an envelope properly addressed, stamped and delivered to
the postal authorities or courier service in the country from where
despatched. In proving service by facsimile transmission, it shall be
necessary to produce only a legible copy of the confirmation of the
facsimile transmission.
18.4 Any notice required to be given under this Agreement shall be sent:-
18.4.1 to the Vendors c/o Gary Green at:
"Trudos"
Heath Ride
Finchampstead
Wokingham
Berkshire RG40 3QJ
With a copy to:
Dibb Lupton Alsop
101 Barbirolli Square
Manchester M2 3DL
Facsimile No: +44 161 235 4118
For the attention of: Roger Gough
18.4.2 to the Purchaser at:
Javelin Systems, Inc.
17891 Cartwright Road
Irvine, CA 92614-6216
U.S.A.
Facsimile No: +1 949 223 5138
For the attention of: Horace Hertz
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
The International Financial Centre
19th Floor
Old Broad Street
London EC2N 1HQ
Facsimile No: +44 171 628 4444
For the attention of: Ian Burton
13
<PAGE>
or to such other address or facsimile number as is notified in
writing from time to time by the Vendors (or any one of them) or the
Purchaser (as the case may be) to the other.
19. FURTHER ASSURANCE
The Vendors shall do, execute and perform and shall procure to be done,
executed and performed all such further acts, deeds, documents and things
as the Purchaser may require from time to time effectively to vest the
beneficial ownership of the Shares in the Purchaser or as it directs free
from all liens, charges, options, encumbrances or adverse rights of
interests of any kind and otherwise to give to the Purchaser the full
benefit of this Agreement.
20. WAIVERS
A failure by any party to exercise and any delay, forbearance or
indulgence by any party in exercising any right, power or remedy under
this Agreement shall not operate as a waiver of that right, power or
remedy or preclude its exercise at any subsequent time or on any
subsequent occasion. The single or partial exercise of any right, power
or remedy shall not preclude any other or further exercise of that right,
power or remedy or the exercise of any other right, power or remedy. No
custom or practice of the parties at variance with the terms of this
Agreement shall constitute a waiver of the rights of any party under this
Agreement.
21. ENTIRE AGREEMENT
21.1 This Agreement and any documents in the agreed form and the Disclosure
Letter (the "Acquisition Documents") constitute the entire agreement
between the parties with respect to the subject matter of this Agreement.
21.2 Except for any misrepresentation or breach of warranty which constitutes
fraud:
21.2.1 the Acquisition Documents supersede and extinguish all previous
agreements between the parties relating to the subject matter
thereof; and
21.2.2 each party hereby irrevocably and unconditionally waives any right
it may have to rescind this Agreement or any of the other
Acquisition Documents by reason of any misrepresentation and/or
warranty not set forth in any such document.
22. VARIATION
No variation of this Agreement shall be effective unless made in writing
and signed by or on behalf of each of the parties.
23. JOINT AND SEVERAL LIABILITY
23.1 All representations, warranties, undertakings, agreements, covenants,
indemnities and obligations made or given or entered into by the Vendors
under or pursuant to this Agreement are made or given or entered into by
the Vendors jointly and severally.
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<PAGE>
23.2 In relation to any two or more persons who are jointly and severally
liable under this Agreement, the liability under this Agreement of any one
or more of such persons shall not be prejudiced or affected in any way by
the giving of time or any forebearance or indulgence granted by the
Purchaser to any other or others of such persons or by the release or
compromise by the Purchaser of any liability under this Agreement of any
other or others of such persons.
24. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, and which together shall constitute one
and the same Agreement. Unless otherwise provided in this Agreement, this
Agreement shall become effective and be dated (and each counterpart shall
be dated) on the date on which this Agreement (or a counterpart of this
Agreement) is signed by the last of the parties to execute this Agreement
or, as the case may be, a counterpart thereof.
25. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit themselves to the non-exclusive
jurisdiction of the English courts.
A S W I T N E S S the hands of the parties hereto or their duly authorised
representatives the day and year first before written.
15
<PAGE>
SCHEDULE 1
PARTICULARS OF THE VENDORS AND OF THE SHARES
TO BE SOLD AND CONSIDERATION TO BE RECEIVED BY EACH OF THEM
<TABLE>
<CAPTION>
(2) (3) (4) (5) (6)
(1) NUMBER OF SHARES CASH ISSUE OF 11,875 NUMBER OF CONSIDERATION PERCENTAGE OF
NAME AND ADDRESS TO BE SOLD CONSIDERATION (US$) PURCHASER'S SHARES SHARES (AS PERCENTAGE) EARNOUT SHARES
---------------- ---------------- ------------------- ----------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
1. Gary Nigel Alan GREEN 500 NIL 11,875 100% 50%
"Trudos"
Heath Ride
Finchampstead
Wokingham
Berkshire RG40 3QJ
2. Roger Lionel SCARLETT 450 1,343,531.25 NIL NIL 50%
"Glen d'Or"
The Ridge
Cold Ash
Newbury
Berkshire RG16 9HY
3. Louvre Trustees Limited 50 149,281.25 NIL NIL NIL
Kings House
The Grange
St. Peter Port
Guernsey
Channel Islands
----------- ---------------- ---------- -------- --------
TOTALS 1,000 1,492,812.50 11,875 100% 100%
----------- ---------------- ---------- -------- --------
</TABLE>
16
<PAGE>
SCHEDULE 2
1. PARTICULARS CONCERNING THE COMPANY
1. Registered Office: Archway House, Bath Road, Padworth,
Berkshire RG7 5HR
2. Date of Incorporation: 13 June 1990
3. Registered Number: 2511516
4. Directors: Gary Green, Roger Scarlett
5. Secretary: Gary Green
6. Mortgages and Charges: None.
7. Share Capital: L1,000 divided into 1,000 ordinary
shares of L1 each, all of which have
been issued and are fully paid up.
2. PARTICULARS CONCERNING THE SUBSIDIARY
1. Registered Office: Archway House, Bath Road, Padworth,
Berkshire RG7 5HR
2. Date of Incorporation: 4 August 1993
3. Registered Number: 2842141
4. Directors: Gary Green, Roger Scarlett
5. Secretary: Gary Green
6. Mortgages and Charges: None, but note Isis Factoring
Agreement in place.
7. Share Capital: L1,000 divided into 1,000 ordinary
shares of L1 each, of which 200 have
been issued and are fully paid up.
8. Shareholder No. of shares held
----------- ------------------
The Company 95
Contech Consultants Limited 95
Anthony Sampson 10
---
200
17
<PAGE>
SCHEDULE 3
THE PREMISES
I. PART A: PREMISES OWNED AND OCCUPIED BY THE COMPANY
1. FREEHOLD
(NONE)
2. LEASEHOLD/LEASE DETAILS
Lease dated 26 June 1995 between (1) G. Green and R. Scarlett (landlord)
and (2) the Company (tenant) of first floor and part ground floor of
Archway House, Bath Road, Padworth, Berkshire RG7 5HR for a term of 10
years from 26 June 1995.
3. OTHER
(NONE)
4. DESCRIPTION of all leases, underleases, tenancies, licences and other
agreements subject to and/or with the benefit of which the Premises are
held:
Date Document Parties
---- -------- -------
(NONE)
18
<PAGE>
I. PART B: PREMISES OCCUPIED BY THIRD PARTIES
1. FREEHOLD
(NONE)
2. LEASEHOLD/LEASE DETAILS
(NONE)
3. OTHER
(NONE)
4. DESCRIPTION of all leases, underleases, tenancies, licences and other
agreements subject to and/or with the benefit of which the Premises are
held:
Date Document Parties
---- -------- -------
(NONE)
II. PART A: PREMISES OWNED AND OCCUPIED BY THE SUBSIDIARY
The Subsidiary is holding over following the termination of
its leases of Units 30, 35 and 36 at Stakehill Industrial
Estate, Whitbrook Way, Middleton, Manchester.
19
<PAGE>
SCHEDULE 4
PART A
GENERAL WARRANTIES
1. INFORMATION SUPPLIED AND CAPACITY OF VENDORS
1.1 All information contained in this Agreement and all matters contained in
the Disclosure Letter are true and accurate in every respect and there is
no fact or matter which has not been Disclosed which renders any such
matters or information untrue, incomplete or misleading in any material
respect.
1.2 The Vendors have full power and authority to enter into and perform this
Agreement and the Tax Deed, and this Agreement and the Tax Deed, when
executed, will constitute valid and binding obligations on the Vendors in
accordance with the respective terms thereof.
2. ACCOUNTS AND RECORDS
2.1 The Company has at all times properly and accurately maintained all books,
accounts and records of whatever kind required by law to be maintained.
2.2 The books, accounts and records of the Company accurately record all
matters required by law to be entered therein and fairly present and
reflect in accordance with generally accepted accounting principles and
practice the assets and liabilities (actual, prospective and contingent)
of the Company and all transactions to which it is or has been a party.
2.3 The Accounts comply with the requirements of the Companies Act and other
relevant statutes and generally accepted accounting principles, SSAPs and
FRSs and give a true and fair view of and properly reflect the financial
position of the Company as at the Accounting Date and are not affected by
any unusual or non-recurring items.
2.4 The Company has made what the Directors believed when preparing the
Accounts was adequate provision in the Accounts for all Tax liable to be
assessed on the Company or for which it is accountable in respect of
income, profits or gains earned, accrued or received on or before the
Accounting Date including distributions made down to that date.
2.5 The Management Accounts have been properly prepared in accordance with
good accounting practice and on a basis consistent with that previously
adopted and so far as the Vendors are aware fairly reflect levels of
turnover and expenses and provisions, assets and liabilities of the
Company as at 31 August 1998 and the two-month period then ended.
3. BUSINESS SINCE THE ACCOUNTING DATE
Since the Accounting Date:-
20
<PAGE>
3.1 the Company has carried on its business in the ordinary and usual course
both as regards the nature, scope and manner of conducting the same and so
as to maintain the same as a going concern;
3.2 the Company has not borrowed, raised or taken any money or any financial
facility;
3.3 the Company has paid its creditors within the times agreed with such
creditors and there are no debts outstanding by the Company which have
been due for more than ninety (90) days;
3.4 the Company has not entered into any capital commitments or any
transaction or agreement for the disposal of any asset or under which it
has incurred or will incur (otherwise than in the ordinary and usual
course of carrying on its business) any liabilities (including contingent
liabilities) not provided for in the Accounts;
3.5 the Company has not entered into any unusual, long-term (that is to say,
incapable of performance in accordance with its terms within six months
after the date on which it was entered into or undertaken) arrangements,
commitments or contracts;
3.6 the business of the Company has not been adversely affected by the loss of
or material reduction in orders from any customer or the loss of or
material reduction in any source of supply or by any abnormal factor not
affecting similar businesses to a like extent and none of the Vendors is
aware of any facts which are likely to give rise to any such adverse
effects;
3.7 no distribution of capital or income (including for the avoidance of
doubt, any dividend) has been declared, made or paid or agreed or resolved
to be declared, made or paid by the Company;
3.8 no loans have been made by the Company and no loan capital or loan has
been or has become liable to be repaid by the Company in whole or in part;
3.9 no sum has been paid or voted to any director or employee (or ex-director
or ex-employee) of the Company by way of remuneration or otherwise in
excess of the rates paid to him by the Company at the Accounting Date and
no new employment agreements have been made by the Company;
3.10 none of the fixed assets of the Company shown in the Accounts and none
acquired by the Company since the Accounting Date has been lost, damaged
or destroyed; and
3.11 there has been no material adverse change in the financial position or
trading prospects or turnover of the Company nor is any such material
change expected.
4. TRADING AND CONTRACTUAL ARRANGEMENTS
4.1 None of the contracts or obligations entered into by the Company is ultra
vires the Company or exceeds the powers of the Directors to bind the
Company and so far as the Vendors are aware the Company is not in default
under any such contracts or obligations.
21
<PAGE>
4.2 The Company is not a party to any contract, transaction, obligation,
commitment or liability which, whether by reason of its nature, term,
scope, price or otherwise is or may be material in relation to its
business, profits or assets or which:-
4.2.1 is in any way otherwise than in the ordinary course of the
Company's business;
4.2.2 is of an unusual or abnormal nature, or not fully on an arm's
length basis;
4.2.3 is of a long-term nature (that is to say incapable of performance
in accordance with its terms within six months after the date on
which it was entered into or undertaken);
4.2.4 is incapable of termination in accordance with its terms by the
Company on 60 days' notice or less;
4.2.5 cannot readily be fulfilled or performed by the Company on time
without undue or unusual expenditure of money or effort; or
4.2.6 involves the supply of goods and/or services the aggregate value of
which will represent in excess of five per cent of the budgeted
turnover for the current financial year of the Company.
4.3 No sums of whatever nature are owing by the Company to any of the Vendors
or any of the Directors or any person being a Connected Person of the
Vendors or the Directors or any of them respectively.
4.4 The Company has not been a party to any transaction to which any of the
provisions of sections 320 (substantial property transactions involving
directors, etc.), 322 (liability arising from contravention of section
320), or 330 (general restrictions on loans, etc. to directors and persons
connected with them) of the Companies Act may apply.
4.5 None of the Vendors nor any person being a Connected Person in relation to
any Vendor has any direct or indirect interest with any business which has
a close trading relationship with that of the Company or which is or is
likely to become competitive with the business of the Company.
4.6 There are no outstanding arrangements or understandings (whether legally
binding or not) between the Company and any person who is a shareholder
(or the beneficial owner of any interest in the Company or in any company
in which the Company is interested), or any person who is a Connected
Person of any such person, relating to the management of the Company's
business, or the appointment or removal of the Directors, or the ownership
or transfer of ownership, or the letting of any of the assets of the
Company, or the provision, supply, purchase or finance of goods, services
or other facilities to, by or from the Company or otherwise howsoever in
relation to the Company's affairs.
4.7 The Company is not and has not agreed to become bound by any debenture or
guarantee or contract for indemnity or suretyship or any like undertaking
and there is not now outstanding any guarantee or contract for indemnity
or suretyship or like undertaking given for the accommodation of or in
respect of any obligation on the part of the Company.
4.8 No person is entitled to receive from the Company any finders' fee,
brokerage or commission in connection with the sale of the Shares to the
Purchaser.
22
<PAGE>
5. ASSETS (OTHER THAN THE PREMISES)
5.1 The Company was at the Accounting Date the owner with good and marketable
title to all the assets (other than the Premises) included in the Accounts
and now so owns and has in its possession and under its control all such
assets (save for current assets subsequently disposed of in the ordinary
course of its business) and all assets acquired by it after the Accounting
Date and all such assets are the sole and absolute property of the Company
free from any charge, lien, encumbrance or equity and no other person has
or claims any rights in relation to such assets or any of them and in
particular all such assets are free from any hire-purchase, leasing or
rental agreement for payments on deferred terms or bill of sale.
5.2 In relation to any asset held by the Company which is the subject of any
hire-purchase, conditional sale, chattel leasing or retention of title
agreement or otherwise belonging to a third party, so far as the Vendors
are aware, no event has occurred which entitles or which upon intervention
or notice by any third party may entitle any such third party to repossess
the asset concerned, or terminate the agreement, or any licence in respect
of the same.
5.3 The stock in trade of the Company is in good condition and us capable of
being sold by the Company in the ordinary course of business within a
period of three months from the Completion Date in accordance with the
Company's current price lists and without rebate or allowance to a
purchaser.
5.4 The fixed and loose plant, machinery, furniture, fixtures, fittings,
equipment, vehicles and other moveable assets used in connection with the
business of the Company are not surplus to requirements and are in good
repair and condition and satisfactory working order.
5.5 Save in respect of the Subsidiary, the Company is not and has never been
the holder or beneficial owner of nor has it agreed to acquire any share
or loan capital of any other body corporate (whether incorporated in the
United Kingdom or elsewhere).
5.6 The Company is not entitled to the benefit of any debt otherwise than as
the original creditor and is not and has not agreed to become a party to
any factoring or discounting arrangement.
5.7 None of the debts due as at the Accounting Date remains unpaid at the date
of this Agreement nor has any debt which has subsequently become due to
the Company (or any part of any such debt) remained unpaid for more than
three months after the due date for payment or been released or written
off or proved to be irrevocable, nor is any such debt now regarded as
irrevocable.
6. EMPLOYEES AND AGENTS
6.1 The names of all employees of the Company together with copies of all
service contracts and contracts for services and full particulars of the
current terms of employment of all officers, employees, consultants and
agents of the Company have been Disclosed.
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6.2 There is not now outstanding any contract of service or for services
between the Company and any of its officers, employees, consultants or
agents which is not determinable by the Company at any time on three
months' notice or less without compensation (other than under the
Employment Rights Act 1996) or any liability (other than for accrued
salary, wages, commission or pension) on the part of the Company to or for
the benefit of any person who is or has been an officer, employee,
consultant or agent of the Company.
6.3 No present officer, employee, consultant or agent of the Company has given
or received notice terminating his employment or appointment and no such
officer, employee, consultant or agent is entitled nor (so far as any of
the Vendors is aware) intends or is likely as a result of this Agreement
or Completion or otherwise to terminate his employment or appointment with
the Company.
6.4 Particulars have been Disclosed of all loans and other benefits enjoyed by
any officer, employee, consultant or agent of the Company in relation to
the affairs of the Company and of all contracts, transactions and
arrangements made or entered into by the Company and to which any of
sections 330 to 338 of the Companies Act applies.
6.5 The Company is not under any legal or moral liability or obligation to pay
bonuses, pensions, gratuities, superannuation, allowances or the like to
any of its past or present officers or employees or their dependants nor
is it a party to any arrangement or promise to make or in the habit of
making ex gratia or voluntary payments by way of bonus, pension, gratuity,
superannuation, allowance or the like to any such persons and there are no
schemes or arrangements for payment of retirement pension or death benefit
or similar schemes or arrangements in operation or contemplated in
relation to the Company.
6.6 Save to the extent (if any) to which provision or allowance has been made
in the Accounts, no liability has been incurred by the Company to make any
redundancy payments or any protective awards or to pay damages or
compensation for wrongful or unfair dismissal or for failure to comply
with any order for the reinstatement or re-engagement of any employee and
no gratuitous payment has been made or promised by the Company in
connection with the actual or proposed termination or suspension of
employment or variation of any contract of employment of any present or
former director or employee.
6.7 The Company has not recognised any trade union or association of trade
unions or any other organisation of employees in respect of its employees
or any of them.
6.8 The Company has not in existence nor is proposing to introduce any share
incentive scheme, share option scheme or profit sharing scheme or any
other scheme analogous to any of the foregoing schemes for all or any of
its directors, officers or employees.
7. INSURANCE
7.1 The Company is covered by valid insurances against all risks normally
insured against by persons carrying on the same or similar businesses as
those carried on by the Company and in particular all assets are and have
at all material times been insured to the replacement or reinstatement
value advised by its insurers against fire and such other risks as
aforesaid and the Company is, and has at all material times been,
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covered against accident, damage, injury, third party loss (including
product liability), loss of profits and other risks normally insured
against by persons carrying on the same or similar businesses as those
carried on by the Company as advised by its insurers.
7.2 Particulars of all the Company's insurances have been Disclosed and there
are no outstanding claims or, so far as the Vendors are aware,
circumstances likely to give rise to a claim thereunder and, so far as the
Vendors are aware, nothing has been done or omitted to be done which has
made or could make any policy of insurance void or voidable or whereby the
premiums are likely to be increased.
7.3 None of the said policies is subject to any special or unusual terms or
restrictions or to the payment of any premium in excess of the normal
rate.
8. GRANTS
Particulars have been Disclosed of all investment and other grants and
allowances and of all loans or financial aid of any kind applied for or
received or receivable by the Company from any governmental department,
board, body or agency or any other supranational or national or local
authority, body or agency.
9. BANKING FACILITIES
Details of all overdrafts, loans or other financial facilities outstanding
or available to the Company and of all its bank and deposit accounts and
true and correct copies of all documents relating thereto have been
Disclosed and, so far as the Vendors are aware, none of the Vendors or the
Company has done or omitted to do anything whereby the continuance of any
such facilities in full force and effect might be adversely affected or
prejudiced.
10. DEFECTIVE AND UNSAFE PRODUCTS/SERVICES
10.1 There are no outstanding claims against the Company in respect of defects
in quality or delays in delivery or completion of contracts or
deficiencies of design or performance of equipment or otherwise relating
to liability for goods or services supplied or to be supplied by the
Company and no such claims are threatened or anticipated.
10.2 The Company has no knowledge that any goods or products for which the
Company has responsibility under section 2 of the Consumer Protection Act
1987 ("CPA") or for which the Company assumes responsibility under any
contract of indemnity or otherwise is defective within the meaning of
section 3 of the CPA or that the Company supplies or possesses for supply
any goods or products which are in breach of the general safety
requirement provided by section 10 of the CPA.
11. LITIGATION
Neither the Company nor, so far as the Vendors are aware, any person for
whose acts or omissions it may be vicariously liable is engaged in or
subject to any civil, criminal or arbitration proceedings and, as far as
any of the Vendors are aware, there are no such proceedings pending or
threatened by or against the Company or against any such person and, so
far as the Vendors are aware, there are no facts or circumstances likely
to give rise to any such proceedings.
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12. INSOLVENCY
12.1 No order has been made, or petition presented, or resolution passed for
the winding-up of the Company and there is not outstanding:-
12.1.1 any petition or order for the winding-up of the Company;
12.1.2 any appointment of a receiver over the whole or any part of the
undertaking or assets of the Company;
12.1.3 any petition or order for the administration of the Company;
12.1.4 any voluntary arrangement between the Company and any of its
creditors;
12.1.5 any distress or execution or other process levied in respect of the
Company, which remains undischarged; or
12.1.6 any unfulfilled or unsatisfied judgment or court order against the
Company.
12.2 The Company is not deemed unable to pay its debts within the meaning of
section 123 of the Insolvency Act 1986.
13. COMPLIANCE
All necessary licences, consents, permits and authorities (public and
private) have been obtained by the Company to enable the Company to carry
on its business effectively in the places and in the manner in which such
business is now carried on and all such licences, consents, permits and
authorities are valid and subsisting and none of the Vendors knows of any
reason why any of them should be suspended, cancelled or revoked or should
not be renewed upon the expiry of their existing term.
14. CHARGES
14.1 No charge in favour of the Company is void or voidable for want of
registration.
14.2 No event has occurred causing, or which upon intervention or notice by any
third party may cause, any floating created by the Company to crystallise
or any charge created by it to become enforceable nor has any such
crystallisation occurred or is such enforcement in process.
15. DIRECTORS AND OFFICERS
The Directors are the only directors of the Company and no person is a
shadow director (within the meaning of section 741 of the Companies Act)
of the Company.
16. CAPITAL OF THE COMPANY
16.1 The authorised and issued share capital of the Company is as set out in
part 1 of SCHEDULE 2.
16.2 The Vendors are the legal and beneficial owners and registered holders of
the Shares which have been issued in proper legal form and are fully paid
or credited as fully paid, and each of the Vendors is entitled to sell
such of the Shares as are set out opposite his name in Column 2 of
SCHEDULE 1 free from all claims, charges, liens, encumbrances, equities
and adverse rights of any description and together with all rights
attached or accruing thereto as at and from the Completion Date.
16.3 There is not now outstanding any loan capital of the Company nor any
agreement, arrangement or option under which any person may now or at any
time hereafter call for the creation, allotment, issue, sale or transfer
of any loan or share capital of the Company or require any loan or share
capital of the Company to be put under option.
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17. EFFECT OF AGREEMENT
So far as the Vendors are aware, there are no contracts or arrangements
(whether written or oral) to which the Company is a party which will by
their terms be determinable as a result of the provisions of this
Agreement or which will or may be terminated by completion of this
Agreement.
18. SUBSIDIARY
18.1 The Subsidiary is a private company limited by shares incorporated in
England and Wales and has the authorised and issued share capital set out
in part 2 of SCHEDULE 1.
18.2 All the issued shares of the Subsidiary have been issued in proper legal
form and are fully paid or credited as fully paid and the Company is the
legal and beneficial owner of 47.5% of such shares free from any claims,
charges, liens, encumbrances, equities and adverse rights of any
description.
18.3 The Subsidiary does not have any subsidiary as defined in section 736 of
the Companies Act.
18.4 The Subsidiary had not traded and had no assets or liabilities from the
date of its incorporation until its acquisition of its current business on
18 March 1998.
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SCHEDULE 4
PART B
WARRANTIES RELATING TO TAX
1. ADMINISTRATION AND RETURNS
1.1 The Company has no liability for Tax (whether actual, deferred or
contingent) in respect of any financial period down to and including the
Accounting Date or referable to profits (including income and gains) made
or deemed to have been made on or before the Accounting Date which has not
been provided for or disclosed in the Accounts.
1.2 At the date hereof the Company has duly paid all Tax which it has become
liable to pay.
1.3 The Company is under no liability to pay any interest, penalty, fine or
default surcharge in connection with any Tax nor, so far as the Vendors
are aware, is any such liability likely to arise.
1.4 The Company has properly and duly made all returns and supplied all
notices, accounts and information for the purposes of Tax required to have
been made or supplied to any Tax Authority.
1.5 None of the aforementioned returns, notices, accounts and information has
been or, so far as the Vendors are aware, is likely to be disputed by any
Tax Authority.
1.6 The Company's affairs have not been and, so far as the Vendors are aware,
are not likely to be the subject of any dispute, investigation or
discovery by or with any Tax Authority.
1.7 All claims, disclaimers, elections, appeals or applications which the
Company has made in the last 6 years in respect of Tax have been
Disclosed.
2. ANTI-AVOIDANCE
The Company has not at any time entered into any transaction, series of
transactions, schemes or arrangements of which the main purpose, or one of
the main purposes, was the avoidance of, or a reduction in liability to
Tax and the Company has not at any time entered into a transaction the
main purpose of which was a commercial purpose but into which a step or
series of steps have been inserted with a view to the avoidance of or a
reduction in, or the mitigation of, or the deferral of a liability to Tax.
3. CLOSE COMPANIES
3.1 The Company has not made any distribution prior to Completion within the
meaning of section 418 of the Taxes Act ("distribution" to include certain
expenses of close companies).
3.2 The Company is not and has never been a close investment holding company
within the meaning of section 13A of the Taxes Act.
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3.3 The Company has not made any loans or advances within the meaning of
section 419 (as extended by section 422) of the Taxes Act (loans to
participators etc.) which are currently outstanding or in respect of which
the Company has any potential liability.
3.4 No transfer of value (as defined in section 3 of the Inheritance Tax Act
1984) has ever been made by the Company so that the provisions of section
94 of the Inheritance Tax Act 1984 (charge on participators) could not
apply.
4. DISTRIBUTIONS
4.1 The Company has not made any distributions within the meaning of sections
209 and 210 of the Taxes Act except for dividends shown in its audited
accounts nor is the Company bound to make any such distributions.
4.2 The Company has not issued any security within the meaning of section 254
of the Taxes Act the interest or other consideration given in respect of
which falls to be taxed under section 209 of the Taxes Act.
4.3 The Company has not redeemed, repaid or purchased any of its own shares or
agreed to redeem, repay or repurchase any of its own shares or converted
or agreed to convert its share capital or capitalised or agreed to
capitalise in the form of redeemable shares or debentures any profits or
reserves of any class or description.
4.4 The Company has not been a party to an exempt distribution within the
meaning of sections 213 to 218 (inclusive) of the Taxes Act within the
last six years (demergers - exempt distributions).
4.5 The Company has not issued any share capital to which the provisions of
section 249 of the Taxes Act (stock dividends treated as income) could
apply nor does it own any such share capital (shares carrying the right to
bonus share capital).
5. EMPLOYMENT TAXES
5.1 At the date hereof the Company has duly paid and accounted for all sums
payable to the Inland Revenue in respect of income assessable to income
tax under Schedule E (including any sums payable in respect of benefits
provided to the Company's employees or former employees) under section 203
of the Taxes Act and all regulations made thereunder.
5.2 At the date hereof the Company has duly paid and accounted for all
National Insurance contributions required of it under the provisions of
the Social Security Contributions and Benefits Act 1992 and regulations
made thereunder.
6. FOREIGN MATTERS
The Company is and has at all times been resident in the United Kingdom
for Tax purposes.
7. INHERITANCE TAX
7.1 No circumstances exist whereby any power within section 212 of the
Inheritance Tax Act 1984 (powers to raise tax) could be exercised in
relation to any shares, securities or other assets of the Company.
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7.2 There is no Inland Revenue charge outstanding for unpaid inheritance tax
as provided by sections 237 and 238 of the Inheritance Tax Act 1984
(Inland Revenue charge for unpaid tax) over any asset of the Company or in
relation to any shares in the capital of the Company.
8. LOSSES AND RELIEFS
8.1 There has been no change in the ownership of the Company or major change
in the nature or conduct of a trade or business carried on by the Company
and as at the date of this Agreement and so far as the Vendors are aware
no event or series of events which might cause the disallowance of the
carry-forward of losses or excess charges under the provisions of section
768 of the Taxes Act or the disallowance of the carry-forward, set-off or
surrender of advance corporation tax under the provisions of section 245
of the Taxes Act (change of ownership of company; calculation and
treatment of advance corporation tax).
8.2 In relation to all surrenders of group relief under the provisions of
sections 402 to 413 (inclusive) of the Taxes Act (group relief) or under
the provisions of section 240 of the Taxes Act (surrender of advance
corporation tax) to which the Company has been a party, all surrenders
have been validly made, no actions are required and no payments are
outstanding.
9. MATTERS SINCE THE ACCOUNTING DATE
Since the Accounting Date:-
9.1 no Event (as defined in the Tax Deed) has occurred which has given or may
give rise to a Tax liability on the Company other than transactions
entered into in the ordinary course of business; and
9.2 save in relation to entertainment and car leasing expenditure, the Company
has not made any payment either alone or in aggregate with any other
payments of a similar nature which exceed L5,000 which will not be
deductible for the purposes of corporation tax in computing the taxable
profits of the Company.
10. VALUE ADDED TAX
10.1 The Company is a taxable person for the purposes of VAT and has duly
registered with its local Customs and Excise Office.
10.2 The Company has at all times issued correct tax invoices to all persons
properly requiring the same in respect of its taxable supplies either by
way of goods or of services and has likewise requested and received all
appropriate tax invoices from its suppliers and others and has kept all
necessary records and documents required to complete and verify its VAT
returns.
10.3 The Company has in all other material respects complied with the VAT
legislation and all regulations, notices, orders, provisions, directions
and conditions relating to VAT.
10.4 In relation to VAT, the Company is not in arrears with any payments or
returns under such legislation or liable to any abnormal or non-routine
payment or any forfeiture,
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penalty, interest or surcharge or to the operation of any penal, interest
or surcharge provisions contained therein.
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SCHEDULE 4
PART C
PROPERTY WARRANTIES
1. APPLICATION
In this Part C of SCHEDULE 4 these warranties apply to each and every one
of the Premises as set out in SCHEDULE 3.
2. THE PREMISES
2.1 The particulars of the Premises (and of any leases, underleases,
tenancies, licences and other agreements subject to and/or with the
benefit of which the same are held) as set out in Part A and Part B of
SCHEDULE 3 are true, complete and accurate.
2.2 The Company does not own, use or occupy any premises other than the
Premises and has no liability (existing or contingent) in respect of any
land or building previously owned, occupied or otherwise used by the
Company or in which it had an interest.
3. TITLE
3.1 The Company is solely entitled at law and in equity to the Premises and
has a good title to the Premises.
3.2 The Company is in physical possession and actual occupation of the whole
of the Premises on an exclusive basis and no right of occupation or
enjoyment has been acquired or is in the course of being acquired by any
third party or has been granted or agreed to be granted to any third
party, save for the rights of occupation of third parties set out in Part
B of SCHEDULE 3.
3.3 All of the title deeds and documents necessary to prove title to the
Premises are in the Company's possession and control, have been properly
stamped and, where necessary, have been duly registered. On Completion
the documents of title to be handed over to the Purchaser will consist of
the original documents or, where appropriate, properly examined abstracts.
3.4 No right, easement, quasi easement, profit, licence or informal
arrangement, public or private, is enjoyed or is in the course of being
acquired by or against the Premises and none has been proposed or is
necessary for the full use and continued beneficial occupation of the
Premises.
4. LEASEHOLD PREMISES
4.1 Each of the leasehold Premises is held under the lease ("Lease") details
of which are correctly set out in Part A of SCHEDULE 3.
4.2 The Lease is a headlease.
4.3 All monies due to the lessor under the Lease (whether or not reserved as
rent) have been paid as and when they became due and none have been
commuted, waived or paid in advance of the due date for payment.
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4.4 No monies, collateral assurances, undertakings, waivers or concessions
have been made paid or given by any party to the Lease.
4.5 The documents of title to the Premises include all necessary consents for
the grant of the Lease, satisfactory evidence of the reversioner's title
and of the current rent payable, all reversioner's consents required under
the Lease and all assignments.
4.6 The Company has strictly observed and performed all covenants,
restrictions, stipulations and other obligations contained in the Lease
and any deeds or documents supplemental thereto and there has been no
waiver (expressly or impliedly) of or acquiescence to any breach thereof.
5. UNDERLETTINGS
There are no leases, tenancies, licences and agreements to which the
Premises are subject.
6. PLANNING AND USER OF PREMISES
6.1 The current use of the Premises is the permitted use for the purposes of
the Town & Country Planning Acts 1971 to 1990 (the "Planning Acts").
6.2 All necessary consents have been obtained (copies of which have been
Disclosed) for the purposes of the Planning Acts and building regulations
for the current use of the Premises and any and all alterations and
improvements to it.
7. ENCUMBRANCES
7.1 The Premises are free from any mortgage, debenture (whether legal or
equitable and whether fixed or floating), charge, lien or other right in
the nature of security or any option, right of pre-emption or right of
first refusal, nor is there any agreement or commitment to give or create
any of the foregoing.
7.2 There are no covenants, restrictions, stipulations or other encumbrances
(whether of a private or public nature) affecting the Premises which are
of an onerous or unusual nature or affect their value or which conflict
with the current use of the Premises.
7.3 All covenants, restrictions, stipulations and other encumbrances affecting
the Premises (including all covenants under any Lease, underlease, licence
or other agreement or any consent or approval obtained thereunder) have
been strictly observed and performed.
8. COMPLAINTS AND DISPUTES
8.1 No notices, complaints or requirements have been issued or made (whether
formally or informally) by any competent authority or undertaking
exercising statutory or delegated powers in respect of the Premises or the
user thereof or any machinery, plant or equipment therein and the Vendors
do not expect and are not aware of any matter which could lead to any such
notice or complaint or requirement being issued or made.
8.2 No notices, orders or resolutions have been issued, made or passed by any
local, county or other competent authority for the compulsory acquisition,
closing,
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demolition or clearance of the Premises or any part thereof and the
Vendors do not expect and are not aware of any matter or circumstances
which could lead to any such notice, order or resolution.
8.3 There exists no dispute between the Company and the owner or occupier of
any other premises adjacent to or neighbouring the Premises or with any
lessor, lessee, licensee or other occupier of the Premises and the Vendors
do not expect and are not aware of any circumstances which may give rise
to any such dispute hereafter.
9. VAT STATUS
Where an election under paragraph 2 of Schedule 6A to the VAT Act 1983
(election to waive exemption) has been made in respect of the Premises
such fact is correctly indicated in Part A and Part B of SCHEDULE 3.
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SCHEDULE 4
PART D
INTELLECTUAL PROPERTY WARRANTIES
1. DEFINITIONS
In this Part D of SCHEDULE 4 and in SCHEDULE 5:-
"Intellectual Property" means patents, registered and
unregistered trade marks, registered
and unregistered service marks,
registered designs, utility models (in
each case for the full period thereof
and all extensions and renewals
thereof), applications for any of the
foregoing and the right to apply for
any of the foregoing in any part of
the world, inventions, confidential
information, know-how, business names,
trade names, brand names, copyright
and rights in the nature of copyright
and design rights and get-up and any
similar rights situated in any
country; and the benefit (subject to
the burden) of any and all agreements,
arrangements and licences in
connection with any of the foregoing;
"Intellectual Property Rights" means all Intellectual Property owned,
used or enjoyed by the Company in
connection with the business carried
on by the Company at Completion and
references to Intellectual Property
Rights shall be construed as including
references to each individual right
and all of them;
2. WARRANTIES
2.1 Details of all of the Intellectual Property Rights have been Disclosed.
2.2 All of the Intellectual Property Rights are in full force and effect.
2.3 The Company is the sole beneficial owner of all the Intellectual Property
which is required for the lawful carrying on of the Company's business as
conducted at Completion.
2.4 To the extent to the Intellectual Property Rights are capable of
registration, they have been registered in the name of the Company as sole
proprietor.
2.5 Complete and accurate details of all licences and/or authorities from any
third party under which any Intellectual Property is used by the Company
have been Disclosed.
2.6 The Company is not a party to any confidentiality agreement or any
agreement which restricts the free use or disclosure by the Company of any
information, documentation or other materials used in the Company's
business.
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2.7 Details of all corporate, business and trading names owned or used by the
Company have been Disclosed.
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SCHEDULE 4
PART E
ENVIRONMENTAL AND HEALTH AND SAFETY WARRANTIES
PART 1 - ENVIRONMENTAL WARRANTIES
1. DEFINITIONS
"Environment" means all or any of the air, water and
land including air within buildings
and other natural or man-made
structures above or below ground;
"Environmental Reports" means all surveys, audits,
investigations and reports relating to
the Premises and the extent to which
the Premises and the Company comply
with Environmental Law, the likelihood
of Harm arising out of the condition
of the Premises, noise, the
Environment, or the impact on the
Environment of any current, prior or
proposed use of the Premises;
"Environmental Authorisations" means any permits, licences, consents
or other authorisations required under
any Environmental Law for the carrying
on the Company's operations or the
occupation or use of the Premises by
the Company;
"Environmental Law" means all applicable statutes,
statutory instruments, common law,
treaties, regulations, directives,
codes of practice, circulars, guidance
notes and the like and other measures
imposed by any relevant body to which
the Company or the Premises is or has
been subject which relate to the
pollution or protection of the
Environment or the protection of the
health of humans, animals or plants;
"Harm" means harm to the health of living
organisms or other interference
with the ecological systems of
which they form part and, in the
case of man, includes offence
caused to any of his senses or harm
to his property and "harmful" has a
corresponding meaning.
2. WARRANTIES
2.1 The Company complies and has complied at all times in all material
respects with all conditions, limitations, obligations, prohibitions and
requirements contained in or imposed by any Environmental Law and there
are no facts or circumstances which may give rise to any liability under
Environmental Law.
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2.2 All Environmental Authorisations have been obtained and maintained in full
force and effect and there are no facts or circumstances which have led or
so far as the Vendors are aware which may give rise to any breach,
revocation, modification, amendment, variation or suspension of them or
any of them or which have resulted or may result in any Environmental
Authorisation not being extended, renewed, granted or (where necessary)
transferred.
2.3 So far as the Vendors are aware, no work or expenditure is required under
any Environmental Law or Environmental Authorisation or in order to carry
on lawfully the business of the Company.
2.4 No claims, investigations or other proceedings have been brought or so far
as the Vendors are aware threatened by or against the Company or any of
its directors, officers or employees nor has the Company received any
complaints from any third party in respect of Harm to the Environment or
to human health caused by or as a result of occupation of the Premises or
occupation by the Company of any property formerly owned or occupied by
the Company whether under Environmental Law or otherwise and so far as the
Vendors are aware there are no facts or circumstances which may lead to
any such claims, investigations or proceedings or complaints.
2.5 Copies of all Environmental Authorisations and Environmental Reports
together with all assessments required to be carried out pursuant to the
Control of Substances Hazardous to Health Regulations 1994 have been
supplied to the Purchaser.
2.6 All information provided by and on behalf of the Company to any statutory
authority and all records and data required to be maintained by the
Company under the provisions of any Environmental Legislation regarding
the operation of the business of the Company including any processes
carried on at or emissions and discharges from the Premises is complete
and accurate.
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PART 2 - HEALTH AND SAFETY WARRANTIES
1. DEFINITIONS
"Health and Safety Legislation" means all applicable statutes,
statutory instruments, common law,
treaties, regulations, directives,
codes of practice, guidance notes
including (but without limitation) the
Fire Precautions Act 1971, the Health
and Safety at Work etc. Act 1974, the
Management of Health and Safety at
Work Regulations 1992 and the
Workplace (Health Safety & Welfare)
Regulations 1992 concerning the health
and safety of those who work for the
Company, whether as employees or
otherwise, visit the Premises or are
in any way affected by the undertaking
of the Company or by persons working
for the Company;
"Health and Safety Studies" means all reports, audits,
investigations or assessments required
to be carried out by the Company to
comply with Health and Safety
Legislation.
2. WARRANTIES
2.1 The Company has complied and continues to comply in all material respects
with all conditions, limitations, obligations, prohibitions and
requirements contained in any Health and Safety Legislation and so far as
the Vendors are aware there are no facts or circumstances which may lead
to any breach of any Health and Safety Legislation.
2.2 The Company has carried out all Health and Safety Studies and they have
been considered by the Vendors in giving these warranties.
2.3 There have been no claims, investigations or proceedings against or
threatened against the Company or any of its directors, officers or
employees in respect of accidents, injuries, illness, disease or any other
harm to the health and safety of employees, contractors or any other
persons caused by breaches of Health and Safety Legislation or otherwise
and so far as the Vendors are aware there are no facts or circumstances
which may lead to any such claims, investigations or proceedings.
2.4 The Company has and has maintained employers' liability and public
liability insurance cover having regard to the activities carried out by
the Company as recommended by its insurers. No claims in respect of
health and safety have been made or so far as the Vendors are aware are
contemplated under such insurance policies.
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SCHEDULE 5
COMPLETION REQUIREMENTS
1. OBLIGATIONS OF THE VENDORS
1.1 At Completion the Vendors shall deliver to the Purchaser:-
1.1.1 the Tax Deed duly executed as a deed by the parties thereto (other
than the Purchaser);
1.1.2 duly executed transfers of the Shares in favour of the Purchaser or
its nominees and the share certificates in respect of the Shares,
together with any power of attorney or other authority under which
such transfers have been executed and an indemnity in the agreed
form in relation to any missing certificates.
1.1.3 subject to paragraph 2.1.4 below, a release executed as a deed by
each of the Vendors in the agreed form releasing the Company from
all claims (actual or contingent) which he has or may have or might
thereafter have on account of or in relation to any act, matter,
cause or thing down to and inclusive of the Completion Date;
1.1.4 the statutory and other books duly written up to date, the
Certificate of Incorporation, Certificate(s) of Incorporation on
Change of Name and common seal of the Company;
1.1.5 the title deeds relating to the Premises and all insurance
policies, premium receipts, maintenance contracts and other
documents relating to the Premises;
1.1.6 all books of account and other books and records and copies of the
memorandum and articles of association of the Company;
1.1.7 all documents of title, certificates, deeds, licenses, agreements
and other documents relating to the Company's Intellectual Property
Rights and all manuals, drawings, plans, documents and other
materials and media on which the Company's know-how is recorded;
1.1.8 the Employment Agreements duly executed by each of the Individual
Vendors;
1.1.9 the certificate and undertaking as to Regulation "S" in the form
contained in SCHEDULE 7 duly executed by each of the Vendors; and
1.1.10 the Earnout Agreement in the form contained in SCHEDULE 9 duly
executed by each of the Individual Vendors and the Vendors under
the Jade Agreement.
1.2 At Completion the Vendors shall procure that:-
1.2.1 a board meeting of the Company be held at which:-
(a) it shall be resolved that the said transfers in respect of
the Shares be passed for registration subject only to
their being re-presented duly stamped;
(b) all existing bank mandates shall be revoked and new
instructions to banks shall be given in such form as the
Purchaser may require;
(c) Richard Stack and Horace Hertz shall be appointed
directors and Bertram Badminton shall be appointed
chairman of the Company; and
(d) the Employment Agreements shall be approved and executed
on behalf of the Company;
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1.2.2 all amounts owing to the Company by any of the Vendors or any of
the Directors or any Connected Person in relation to the Vendors,
the Directors or any of them shall be repaid in full; and
1.2.3 all the papers, books, records (in whatever medium) and all other
assets of the Company which are within the possession or under the
control of the Vendors, the Directors or any of them, or any
Connected Person of the Vendors the Directors of any of them are
delivered to the Company.
2. OBLIGATIONS OF THE PURCHASER
2.1 On Completion the Purchaser shall:-
2.1.1 deliver to the Vendors a counterpart of the Tax Deed duly executed
by the Purchaser;
2.1.2 deliver to the Vendors a counterpart of the Earnout Agreement duly
executed by the Purchaser;
2.1.3 satisfy the consideration for the Shares as provided in Clause 3 of
this Agreement by the payment of the sum of US$1,492,812.50 by
electronic funds transfer to the Vendors' Solicitors and by the
delivery of stock certificates in the names of the Vendors in
respect of the relevant 11,875 Purchaser's Shares and Consideration
Shares; and
2.1.4 procure that the Company repays the loans outstanding to the
Company from the Vendors as specified in the Disclosure Letter.
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SCHEDULE 6
TAX DEED
DATE: [ ] 1998
PARTIES:
(1) THE PERSONS whose names and addresses are set out in the Schedule
hereto ("Covenantors"); and
(2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place
of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
RECITAL
Pursuant to an agreement of today's date ("Agreement") the Purchaser has today
completed the purchase of the whole of the issued share capital of RGB Trinet
Limited in reliance (inter alia) upon the undertaking of the Covenantors to
enter into this Deed and the undertakings and covenants by the Covenantors
hereinafter contained.
NOW THIS DEED WITNESSES as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Deed (including the Schedule):-
"Accounts Relief" means any Relief arising prior to Completion
which has been taken into account in
computing, or in obviating the need for,
any provision for deferred tax in the
Accounts but which is not available to the
Company;
"Assessment" means any claim, assessment, notice, demand,
letter, counterclaim or other document
issued or made, or action taken, by or on
behalf of any Tax Authority (or any other
person, including the Company) by virtue of
which the Company has, or is alleged to
have, a Liability to Tax, or from which it
appears that the Company has, or will or
may have, a Liability to Tax, or from which
it is sought to impose upon the Company a
Liability to Tax;
"Claim" means any claim by the Purchaser against the
Covenantors pursuant to Clause 2;
"Deemed Tax Liability" has the meaning ascribed to that expression
in Clause 1.4;
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"Event" means any transaction (including entry into
the Agreement or the purchase or sale of an
asset), act (including Completion, the
migration of a company or the inclusion of
a company within a group of companies for
any purpose), omission, receipt,
distribution and failure to make sufficient
distributions to avoid an apportionment or
deemed distribution of income and any
combination of two or more such occurrences;
"Liability to Tax" means (i) a liability to pay Tax and (ii)
such sums treated as being a liability to tax
by Clause 1.3;
"Post Completion Relief" means any Relief which arises by reference to
an Event occurring after Completion;
"Relief" means any relief, loss, allowance, exemption,
set-off, deduction or credit in respect of
any Tax, or any set-off or deduction in
computing income, profits or gains for the
purpose of any Tax;
"Tax" means all taxes, and all duties, levies,
imposts, charges and withholdings of any
nature whatsoever, whether created or
imposed in the United Kingdom or elsewhere
and at whatever time created or imposed
which are collected and administered by any
Tax Authority, in all cases together with
all incidental or supplemental penalties,
charges, interest, fines and default
surcharges and costs;
"Tax Authority" means any taxing or other authority (whether
within or outside the United Kingdom)
competent to impose, administer or collect
any Tax.
1.2 In this Deed:-
1.2.1 references to the loss of a Relief or of a right to repayment of
Tax include references to the loss, withdrawal, nullifying or
cancellation of a Relief or of a right to repayment of Tax;
1.2.2 references to the utilisation of a Relief or of a right to
repayment of Tax include references to the utilisation or setting
off of a Relief or of a right to repayment of Tax; and
1.2.3 references to the loss or utilisation of a Relief shall be
construed accordingly.
1.3 Subject to Clause 1.4 there shall be treated as an amount equal to a
"Liability to Tax" which arises as a result of an Event occurring on or
before Completion:-
1.3.1 any amount of any Accounts Relief which is not available to the
Company;
1.3.2 the value of all or any part of a right to repayment of Tax which
has been treated as an asset of the Company in the Accounts or
which has been taken
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into account in computing, or in obviating the need for, any
provision for deferred tax in the Accounts which is not available
to the Company;
1.3.3 the value of all or any part of a right to repayment of Tax arising
after Completion which is used to set against any liability to make
an actual payment of Tax in circumstances where the Purchaser would
(but for such utilisation or set off) have been entitled to make a
Claim by virtue of such liability to make an actual payment of Tax;
1.3.4 the amount of any Accounts Relief or Post Completion Relief which
is used to relieve income, profits or gains in circumstances where
(but for such utilisation) the Purchaser would have been entitled
to make a Claim by virtue of such income, profits or gains; and
1.3.5 any amount the Company is obliged to pay by way of reimbursement,
recharge, indemnity or damages in relation to Tax:-
(a) in respect of or arising from any Event effected or demand
made effected on or before Completion; or
(b) by reference to any profits earned, accrued or received on or
before Completion.
1.4 In any case falling within Clause 1.3 the amount that is to be treated for
the purposes of this Deed as a Liability to Tax of the Company ("Deemed
Tax Liability") shall be determined as follows:-
1.4.1 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the
relevant Relief consisted of a deduction from or offset against
Tax, the Deemed Tax Liability shall be the amount of that deduction
or offset;
1.4.2 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the
relevant Relief consisted of a deduction from or offset against
income, profits or gains, the Deemed Tax Liability shall be:-
(a) if the Relief is not available, the amount of Tax which would,
on the basis of the rates of tax current at Completion, have
been saved had such Relief been available (assuming sufficient
income, profits or gains to be able fully to utilise the
Relief and all other Reliefs available to the Company); or
(b) if the Relief was the subject of such a utilisation, the
amount of tax which has been saved in consequence of the
utilisation;
1.4.3 in a case falling within Clause 1.3.2 or Clause 1.3.3 the Deemed
Tax Liability shall be the amount of such repayment of Tax or part
thereof;
1.4.4 in a case falling within Clause 1.3.5 the Deemed Tax Liability
shall be the amount which the Company is required to pay.
1.5 In this Deed references to an Event occurring on or before any date or on
or before other Events shall be deemed to include any combination of two
or more Events the first of which has taken place or took place on or
before that date or on or before that other Event.
1.6 Words and expressions (if any) which are defined in the Agreement and
which are not expressly defined in this Deed, and rules of interpretation
which are provided for in the Agreement and which are not otherwise
expressly provided for in this Deed, shall have the same meaning in and
shall apply to this Deed and shall be deemed to be incorporated in this
Deed.
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1.7 Words and expressions (if any) neither defined in this Deed nor in the
Agreement but which are defined or used in any legislation relating to Tax
which is relevant in the context shall have the same meaning in this Deed
as they have in such legislation.
1.8 In this Deed:-
1.8.1 references to income, profits or gains accrued, or being earned or
received, on or before a particular date or in respect of a
particular period shall include any profits deemed for Tax purposes
to have accrued, or to have been earned or received, on or before
that date or in respect of that period; and
1.8.2 references to "income, profits or gains" shall include receipts,
value and any other criterion used in establishing the incidence of
any Tax or measure in establishing the amount of any Liability to
Tax.
2. COVENANT
2.1 Subject as hereinafter provided the Covenantors hereby jointly and
severally covenant with the Purchaser as follows:-
2.1.1 to pay to the Purchaser an amount equal to any Liability to Tax of
the Company which arises as a consequence of or by reference to:
(a) any Event occurring on or before Completion; or
(b) any income, profits or gains which accrued, or which were
earned or received, on or before Completion or in respect of a
period ending on or before Completion,
in each case whether or not such Liability to Tax is also
chargeable against or attributable to any other person; and
2.1.2 to pay to the Purchaser from time to time amounts equal to any
costs and expenses reasonably incurred by the Purchaser or the
Company in connection with any Liability to Tax as is referred to
in Clause 2.1.1 and in respect of which the Covenantors are liable
to make payment under this Deed or in successfully (wholly or
partly) taking or defending any action against the Covenantors
pursuant to this Deed.
2.2 Each of the covenants contained in paragraphs (a) and (b) of Clause 2.1.1
shall be construed as giving rise to a separate and independent obligation
and shall not be restricted by the other, save that (for the avoidance of
doubt) any payment by the Covenantors in respect of a liability under one
covenant shall pro tanto discharge any liability under the other so far as
it arises from the same subject matter.
3. LIMITATIONS
3.1 The Covenantors shall not be liable under Clause 2 in relation to any
Liability to Tax of the Company:-
3.1.1 if and to the extent that specific provision or reserve in respect
of such Liability to Tax was made in the Accounts or discharged
prior to Completion;
3.1.2 if and to the extent that provision or reserve made in the Accounts
is insufficient only by reason of any increase in rates of Tax or
change in the law introduced after the date of the Agreement with
retrospective effect;
3.1.3 if that Liability to Tax arises as a result of an Event effected by
the Company in the ordinary course of its business occurring
between the Accounting Date and Completion;
3.1.4 if the Purchase or the Company have recovered an amount in respect
of such Liability to Tax from a person or persons other than the
Covenantors;
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3.1.5 if any Relief (other than an Accounts Relief or Post-Completion
Relief) is available to the Company (including by way of surrender
from another company) to set against or otherwise mitigate the
Liability to Tax;
3.1.6 if such Liability to Tax arises or is increased as a consequence of
any reduced entitlement to the small companies' rate of corporation
tax (section 13, Taxes Act) where such reduced entitlement results
solely from the Company becoming associated with a company or
companies at or following Completion; or
3.1.7 if such Liability to Tax would not have arisen but for the fact
that the accounting treatment of any asset or liability in the
future accounts of the Company is different from the treatment in
the Accounts and such difference does not arise so as to procure
that the said accounts comply with all relevant laws and generally
accepted accounting principles.
3.2 For the avoidance of doubt the following shall not be regarded as Tax
which arises in the ordinary course of business for the purposes of Clause
3.1.3:-
3.2.1 any Tax arising as a result of the application either of any
anti-avoidance provisions contained in any Tax legislation or of
any principles established in case law concerning anti-avoidance;
3.2.2 any Tax arising as a result of any dividend, distribution or deemed
distribution;
3.2.3 any Tax arising in respect of the acquisition, disposal or supply
or the deemed acquisition, disposal or supply of any assets, goods,
services or business facility of any kind (including a loan of
money or the letting, hiring or licensing of any tangible or
intangible property) for a consideration deemed for Tax purposes to
be different from that (if any) actually received, but only insofar
as such Tax is attributable to the difference between the
consideration actually received and the consideration deemed for
Tax purposes to have been received;
3.2.4 any Tax arising as a result of a failure duly to deduct, charge,
recover or account for Tax; or
3.2.5 any amount payable to HM Customs and Excise by the Subsidiary as a
result of Part XV of the Value Added Tax Regulations 1995 or
equivalent provisions in any other relevant jurisdiction.
4. CONDUCT OF CLAIMS
4.1 Upon the Purchaser becoming aware of any Assessment which does or may give
rise to a Claim the Purchaser shall as soon as reasonably practicable give
notice of such Assessment to the Covenantors PROVIDED THAT the giving of
such notice shall not be a condition precedent to the liability of the
Covenantors under this Deed.
4.2 If the Covenantors shall indemnify and secure the Company and the
Purchaser to their reasonable satisfaction against any Tax, additional
Tax, losses, fines, penalties, interest, charges, costs and expenses which
arise as a consequence thereof, the Purchaser shall and shall procure that
the Company shall take such action as the Covenantors may reasonably
request to avoid, dispute, resist, appeal, compromise, or defend such
Assessment ("the Covenantors' Action").
4.3 Neither the Purchaser nor the Company shall be obliged to appeal against
any Assessment if, having given the Covenantors notice of the receipt of
that Assessment,
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it has not within ten Business Days received instructions in writing from
the Covenantors in accordance with the preceding provisions of this
Clause to make that appeal.
4.4 Neither the Purchaser nor the Company shall be obliged to take any action
or further action in respect of any Assessment if it appears to the
Purchaser that either the Covenantors or the Company, prior to its being
in the ownership of the Purchaser, have committed acts or omissions which
may constitute fraud, misfeasance or negligence.
4.5 Neither the Purchaser nor the Company shall be required to take any action
which either interferes with the normal course of its business or which in
its opinion is likely to prejudice its business or its relationship with
any Tax Authority or result in the Purchaser or any Company which forms
part of the Purchaser's group incurring a Liability to Tax or an increased
Liability to Tax.
4.6 Neither the Purchaser nor the Company shall be obliged to take any action
pursuant to this Clause 4 which includes continuing the Covenantors'
Action or contesting an Assessment beyond the first appellate body
(excluding the Tax Authority demanding the Tax in question) in the
jurisdiction concerned.
4.7 Neither the Purchaser nor the Company shall be obliged to take any action
under this Clause 4 which involves continuing the Covenantors' Action or
contesting any Assessment before any court or other appellate body
(excluding the Tax Authority demanding the Tax in question) unless the
Covenantors furnish the Purchaser with the written opinion of leading Tax
counsel to the effect that an appeal against the Assessment in question
will, on the balance of probabilities, be won.
4.8 The Purchaser and the Company shall be at liberty without reference to the
Covenantors to admit, compromise, settle, discharge or otherwise deal with
any Assessment after whichever is the earliest of:-
4.8.1 the Purchaser or the Company being notified by the Covenantors that
they consider the Assessment should no longer be resisted;
4.8.2 the expiry of a period of seven Business Days following the service
of a notice by the Purchaser or the Company on the Covenantors,
requiring the Covenantors to clarify or explain the terms of any
request made under Clause 4.2 during which period no such
clarification or explanation has been received by the Purchaser or
the Company; and
4.8.3 if appropriate, the expiration of any period prescribed by
applicable legislation for the making of an appeal against either
the Assessment or the decision of any court or tribunal in respect
of any such Assessment, as the case may be.
4.9 The Covenantors shall be bound to accept for the purposes of this Deed any
admission, compromise, settlement or discharge of any Assessment and the
outcome of any proceedings relating thereto made or arrived at in
accordance with the provisions of this Clause 4.
4.10 None of the Purchaser's or Company's obligations under this Clause 4 shall
constitute a pre-condition to any payment due under Clause 2.
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5. DUE DATE FOR PAYMENT
5.1 Where the Covenantors become liable to make any payment pursuant to Clause
2, the due date for the making of that payment shall be:-
5.1.1 in a case that involves an actual payment of Tax by the Company,
the later of three Business Days after service of a notice on the
Covenantors in relation thereto and the date that is three Business
Days immediately before the last date on which the Company would
have had to have paid to the relevant Tax Authority the Tax that
has given rise to the Covenantors' liability under this Deed in
order to avoid incurring a liability to interest or a charge or
penalty in respect of that Liability to Tax;
5.1.2 in a case falling within Clause 1.3.1 the later of three Business
Days following service by the Purchaser of a written demand
therefor and the date on which the Accounts Relief would otherwise
have been used but for such non-availability;
5.1.3 in a case falling within Clause 1.3.2 or Clause 1.3.3, the later of
three Business Days after the Purchaser has served a written demand
therefor and the date on which repayment of Tax would have actually
been received or on which the liability to make an actual payment
of Tax would have fallen due but for such setting-off (as
appropriate); or
5.1.4 in a case falling within Clause 1.3.4, the later of three Business
Days following the service by the Purchaser of a written demand
therefor or the date on which an actual liability to make a payment
of Tax by the Company would have fallen due but for such
setting-off.
5.2 If any payment required to be made by the Covenantors under this Deed is
not made by the due date then that payment shall carry interest from that
due date until the date when the payment is actually made at the rate of 4
per cent above the base rate from time to time of National Westminster
Bank PLC.
6. DEDUCTIONS FROM PAYMENTS
6.1 All sums payable by the Covenantors to the Purchaser under this Deed shall
be paid free and clear of all deductions or withholdings whatsoever, save
only as may be required by law.
6.2 If any deduction or withholding in respect of Tax or otherwise is required
by law to be made from any of the sums payable as mentioned in Clause 5.1,
the Covenantors shall be obliged to pay to the Purchaser such greater sum
as will, after such deduction or withholding as is required to be made has
been made, leave the Purchaser with the same amount as it would have been
entitled to receive in the absence of any such requirement to make a
deduction or withholding.
7. OVER PROVISIONS AND RELIEFS
7.1 If the auditors of the Company certify that any provision for Tax in the
Accounts proves to be an over-provision, then the amount of such
over-provision shall be dealt with in accordance with Clause 7.3.
7.2 If any Liability to Tax which has resulted in a payment having been made
or becoming due from the Covenantors under this Deed will give rise to a
Relief or right to repayment of Tax for the Company which would not
otherwise have arisen, then as and when liability of the Company to make
an actual payment of or in respect of Tax
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is reduced by reason of that Relief or repayment of Tax is received the
amount by which that liability is so reduced or the value of the repayment
shall be dealt with in accordance with Clause 7.3.
7.3 Where it is provided under Clause 7.1 or 7.2 that any amount (the
"Relevant Amount") is to be dealt with in accordance with this Clause
7.3:-
7.3.1 the Relevant Amount shall first be set off against any payment then
due from the Covenantors under this Deed; and
7.3.2 to the extent that there is an excess, a refund shall forthwith be
made to the Covenantors of any previous payment or payments made by
the Covenantors under this Deed and not previously refunded under
this clause up to the amount of such excess; and
7.3.3 to the extent that the excess referred to in Clause 7.3.2 is not
exhausted under that paragraph, the remainder of that excess shall
be carried forward and set off against any figure payment or
payments which become due from the Covenantors under this Deed.
8. MITIGATION
Where the Company is entitled to recover from any other person any sum in
respect of any matter for which the Covenantors have or are liable to make
payment under this Deed, the Purchaser shall, or shall procure that the
Company shall (if requested by, and at the expense of the Covenantors and
upon the Covenantors indemnifying the Purchaser to the reasonable
satisfaction of the Purchaser, against all costs or expenses which may
thereby be incurred) take such action as the Covenantors shall reasonably
request to enforce such recovery against the person in question provided
that the Purchaser and the Company shall not be obliged to take action
which it is reasonable to consider prejudicial to the Purchaser's or the
Company's Tax position or business PROVIDED THAT the taking of action
hereunder shall not be a pre-condition to the obligation to make payment
of any amount under Clause 2. The Purchaser shall forthwith account to
the Covenantors for any sums so recovered (including any interest or
repayment supplement (as defined in section 825 Taxes Act) paid by such a
person) net of Tax (if any) on such sum up to an amount not exceeding the
amount paid by the Covenantors under this Deed in relation thereto.
9. COVENANT BY THE PURCHASER
9.1 The Purchaser covenants with the Covenantors to pay forthwith to the
Covenantors an amount equal to any Tax which is assessed on the
Covenantors pursuant to section 767AA of the Taxes Act by reason of Tax
assessed on the Company remaining unpaid, save that this clause shall not
apply in respect of Tax for which the Covenantors are otherwise liable to
the Purchaser under this Deed.
9.2 The covenant contained in Clause 9.1 will apply to (and hence give rise to
a liability upon the Purchaser to pay to the Covenantors an amount equal
to) any costs and expenses properly incurred by the Covenantors in
connection with any Tax assessed on the Covenantors.
9.3 The Purchaser's covenant contained in Clause 9.1 shall not be a
pre-condition to any obligation to make payment under Clause 2.
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10. GOVERNING LAW
This Deed shall be governed by and construed in all respects in accordance
with the laws of England and the parties hereby submit themselves to the
non-exclusive jurisdiction of the English courts for such purpose.
11. NOTICES
The provisions as to service of notices contained in the Agreement shall
apply for the purposes of this Deed.
IN WITNESS whereof this Deed has been duly executed the day and year first
before written.
THE SCHEDULE
Names and Addresses of the Covenantors
(the Individual Vendors)
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SCHEDULE 7
CERTIFICATE AS TO REGULATION S
INVESTMENT INTENT LETTER
This Investment Intent Letter (this "Agreement") dated as of
_______________, 1998, is entered into by and among the persons whose names
appear on the signature pages hereto as "Vendors" (collectively the
"Vendors") and Javelin Systems, Inc., a Delaware corporation ("Purchaser").
Unless otherwise defined herein, all capitalized terms used herein shall have
the meanings assigned to them in the Purchase Agreement (as defined below).
RECITALS
A. Vendors own all of the issued and outstanding ordinary shares
(the "Company Stock") of RGB Trinet Limited, a limited company organized
under the laws of England and Wales (the "Company").
B. Pursuant to the terms and conditions of that certain Agreement
for Sale and Purchase of Shares (the "Purchase Agreement") dated of even date
herewith by and among Purchaser and Vendors, Purchaser is acquiring all the
Company Stock.
C. In connection with the Purchase Agreement, the Vendors will be
issued shares of common stock, $.01 par value, of Purchaser (the "Purchaser's
Shares") in partial exchange for their shares of Company Stock (and the
Purchaser's Shares issued to the Vendors are herein referred to as the
"Consideration Shares").
D. The Vendors desire to make certain representations and
warranties to Purchaser to satisfy various United States federal and state
securities laws.
AGREEMENT
NOW THEREFORE, in consideration of the respective covenants and
promises contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. SHAREHOLDER REPRESENTATIONS AND WARRANTIES. As a condition
to the receipt of the Consideration Shares, each of the Vendors represents
and warrants to, and covenants with, Purchaser as follows:
(a) Such Vendor is aware of Purchaser's business affairs and has
acquired sufficient information about Purchaser to reach an informed and
knowledgeable decision to acquire the Consideration Shares. Such Shareholder
has been furnished by Purchaser with a copy of Purchaser's Form 10-KSB for
its fiscal year ended June 30, 1998, Purchaser's Form 10-QSBs for its fiscal
quarters ended September 30, 1997, December 31, 1997 and March 31, 1998, and
such Vendor has read such reports and understands and has evaluated the risks
of making an investment in the Purchaser's Shares. Such Vendor has been
afforded access to
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information concerning Purchaser and to its executive officers and has been
afforded the opportunity to ask questions of, and receive answers from,
Purchaser.
(b) Such Vendor is generally familiar with the open system,
touch-screen computer for point-of-sale applications industry since such
Vendor has either been employed in such industry or has invested in business
entities engaged in such industry.
(c) Such Vendor is taking the Consideration Shares for investment
for such Vendor's own account only and not with a view to, or for resale in
connection with, any unregistered "distribution" thereof within the meaning
of the Securities Act of 1933, as amended (the "ACT").
(d) Such Vendor understands that no United States federal or state
agency has passed on, or made any recommendation or endorsement of, the
Consideration Shares.
(e) Such Vendor understands that the Consideration Shares are being
offered and sold to it in reliance on specific exemptions from or
non-application of the registration requirements of federal and state
securities laws and that Purchaser is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgements and
understandings of such Vendor set forth herein in order to determine the
applicability of such exemptions and the suitability of such Vendor acquiring
the Consideration Shares.
(f) Vendor certifies that he, she or it is neither a citizen nor a
resident of the United States and that his, her or its address set forth in
the Purchase Agreement is correct.
(g) No public offer or solicitation of the Consideration Shares was
made to such Vendor and no offer of the Purchaser's Shares was made to such
Vendor while such Vendor was present in the United States.
(h) At the time any buy order for the Consideration Shares was
originated, such Vendor was located outside the United States and is outside
the United States on the date of the execution and delivery of this Agreement
and will be outside the United States on the Completion Date.
(i) Such Vendor is aware that the Consideration Shares have not been
registered under the Act and may only be offered or sold pursuant to
registration under the Act or an available exemption therefrom, and such
Vendor has not, and will not, engage in any public offering or distribution
of the Consideration Shares or engage in any hedging transaction with respect
thereto, except in accordance with the registration or exemptive provisions
of the Act.
(j) Except to the extent the Consideration Shares have been
registered under the Act, such Vendor (i) will not, during the period
commencing on the Completion Date and ending one year after the Completion
Date (the "Distribution Compliance Period"), offer or sell or agree to sell
the Consideration Shares in the United States, to a U.S. Person or for the
account or benefit of a U.S. Person other than in accordance with Regulation
S and (ii) will, after the expiration of the Distribution Compliance Period,
offer, sell, pledge or otherwise transfer the Consideration Shares only
pursuant to registration under the Act or an available exemption therefrom
and, in any case, in accordance with applicable United States federal and
state securities laws.
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(k) Such Vendor has been advised of, and is familiar with, has
complied, and will comply, with the offering restrictions, and any other
requirements, of Regulation S.
(l) The transactions contemplated by this Agreement (i) have not
been pre-arranged by such Vendor with a purchaser located in the United
States which is a U.S. Person, and (ii) are not part of a plan or scheme by
such Vendor to evade the registration provisions of the Act.
(m) Neither such Vendor nor any of his, her or its affiliates has
entered, has the intention of entering, or will during the Distribution
Compliance Period enter into, with any U.S. Person, any put option, short
position or other similar instrument or position with respect to the
Purchaser's Shares or participate in any other attempt designed to lower the
trading prices of Purchaser's Shares stock.
(n) Such Vendor (individually or together with such Vendor's
investor representative who is not affiliated with Purchaser) has such
knowledge and experience in financial, tax and business matters that such
Vendor is capable of evaluating the merits and risks of receiving the
Consideration Shares and of making an informed investment decision with
respect thereto.
(o) Such Vendor has determined that the Consideration Shares are a
suitable investment.
(p) Such Vendor acknowledges receipt of Purchaser's Insider Trading
Policy and agrees to abide by its terms, and further agrees to execute such
Policy upon the request of Purchaser.
(q) The certificates representing the Consideration Shares shall
bear the following legend:
"The securities represented hereby have been issued pursuant to
Regulation S ("Regulation S") promulgated under the Securities Act of
1933, as amended (the "1933 Act"), and have not been registered under
the 1933 Act. Unless so registered, such securities may not be
transferred, offered, hedged or sold prior to the end of the one-year
distribution compliance period prescribed by Regulation S unless such
transfer, offer, hedge or sale is made in an "offshore transaction" and
not to or for the account of or benefit of a "U.S. person" (as such
terms are defined in Regulation S) and is otherwise in accordance with
the requirements of Regulation S. Following expiration of any such
one-year distribution compliance period, the securities represented
hereby may not be offered, hedged, sold or otherwise transferred in the
United States or to a U.S. person unless the securities are registered
under the 1933 Act and applicable state securities laws, or such
offers, sales and transfers are made pursuant to an available exemption
from the registration requirements of those laws."
(r) Such Vendor shall indemnify Purchaser against any loss, cost or
damages (including reasonable attorneys' fees and expenses) directly incurred
as a result of such Vendor's breach of any representation, warranty, covenant
or agreement in this Agreement.
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SECTION 2. MISCELLANEOUS.
(a) AMENDMENTS, WAIVERS AND CONSENTS. No amendment or modification
of this Agreement, nor any termination or waiver of any provision of this
Agreement or consent to any departure by any party hereto therefrom, shall in
any event be effective without the written concurrence of the parties hereto.
(b) NOTICES. Notices and other communications under or in
connection with this Agreement shall be in writing and shall be deemed given
(i) if delivered personally, upon delivery, (ii) if delivered by courier,
then upon receipt, or (iii) if given by telecopy, upon confirmation of
transmission by telecopy (or, if such confirmation does not occur during
normal business hours on a Business Day (as defined in the Purchase
Agreement), then on the next Business Day), in each case to the parties at
the address for notice set forth on Schedule 1 to the Purchase Agreement.
(c) APPLICABLE LAW. This Agreement shall be construed, interpreted
and the rights of the parties determined in accordance with the laws of
California, United States of America and the United States federal securities
laws without reference to any choice of law rules that would require the
application of the laws of any other jurisdiction.
(d) SEVERABILITY. The provisions of this Agreement are severable,
and if any clause or provision shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof,
in such jurisdiction and shall not in any manner affect such clause or
provision in any other jurisdiction, or any other clause or provision of this
Agreement in any jurisdiction.
(e) INTERPRETATION. Time is of the essence of each provision of
this Agreement of which time is an element.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
shall together constitute one and the same agreement.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
VENDORS:
---------------------------------
GARY GREEN
---------------------------------
ROGER SCARLETT
---------------------------------
LOUVRE TRUSTEES LIMITED
JAVELIN SYSTEMS, INC.
a Delaware corporation
By:
-----------------------------
An Authorized Representative
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SCHEDULE 8
ADDITIONAL LIMITATIONS TO THE WARRANTIES AND TAX DEED
1. ACKNOWLEDGEMENT
The Purchaser:
1.1 admits and acknowledges that it has not entered into this Agreement
in reliance upon any warranties, representations, covenants,
undertakings, indemnities or other statements whatsoever other than
those expressly set out in this Agreement and the Tax Deed; and
1.2 subject and without prejudice to Clause 9 of this Agreement, agrees
that rescission shall not be available as a remedy for any breach
of this Agreement and agrees not to claim that remedy.
2. DISCLOSURE
The Purchaser shall not be entitled to make a Claim if and to the extent
that the facts or information upon which it is based have been Disclosed.
3. DURATION AND EXTENT
3.1 The aggregate liability of each Vendor in respect of all Claims under the
Warranties and the Tax Deed shall not exceed the amount of the total
consideration paid under this Agreement.
3.2 No amount shall be payable by the Vendors in respect of any Claim under
the Warranties:
3.2.1 unless the amount of the liability in respect of each such Claim
exceeds US$1,000; and
3.2.2 unless and until the aggregate cumulative liability of the Vendors
in respect of all such Claims exceeds US$250,000 in which case the
Vendors shall be liable for both the initial US$250,000 and the
excess.
3.3 The Vendors shall not be liable for any Claim unless the Vendors are given
notice in writing of that Claim stating in reasonable detail the nature of
the Claim and, if practicable, the amount claimed on or before the first
anniversary of Completion and unless legal proceedings shall have been
served in respect of any such Claim within six months of the Vendors being
notified of any such Claim.
3.4 Without prejudice to the parties' rights or obligations under the Jade
Agreement, where any Claim relates to the Subsidiary:
3.4.1 save in respect of the warranty in paragraph 18.4 of Part A of
SCHEDULE 4, for which the Vendors shall be 100% liable, the Vendors
shall not be liable for more than 47.5% of such Claim; and
3.4.2 no Claim shall be made to the extent the matters giving rise to the
Claim arise out of events or circumstances prior to 18 March 1998,
save for breach of the warranty in paragraph 18.4 of Part A of
SCHEDULE 4.
4. LIMITATIONS
No Claim shall be admissible and the Vendors shall not be liable under any
of the Warranties or under the Tax Deed:
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4.1 to the extent that provision, reserve or allowance has been made in the
Accounts or in the Management Accounts or was specifically referred to in
the notes to the Accounts or the Management Accounts in respect thereof or
to the extent that payment or discharge thereof has been taken into
account therein or in accordance with generally accepted accounting
principles has not been so taken account of, or referred to; or
4.2 to the extent that provision, reserve or allowance made in the Accounts or
the Management Accounts for any Liability to Tax proves to be insufficient
by reason only of any increase in the rates of taxation or variation in
the method of applying, or calculating, the rate of taxation made after
Completion whether or not with retrospective effect; or
4.3 to the extent that such liability arises or is increased as a result of
any change or changes in legislation (primary or delegated) including
without limitation any increase in rates of taxation or the introduction
of any changes or new form of taxation or in the practice of the Inland
Revenue or HM Customs and Excise or any other relevant authority (in the
United Kingdom or elsewhere) occurring after Completion whether or not
with retrospective effect; or
4.4 to the extent that the liability would not have arisen or would have been
reduced but for the fact that the treatment of any assets or liabilities
or of the taxation attributable to timing differences (including capital
allowances and stock relief) in future accounts of the Company or any
Subsidiary is different from the treatment in the Accounts or the
Management Accounts; or
4.5 to the extent that the liability would not have arisen or would have been
reduced or eliminated but for a failure or omission after Completion, on
the part of the Company or the Subsidiary or the Purchaser or any of them
to make any claim, election, surrender or disclaimer or to give any notice
or consent or to do any other thing under any enactment or regulation
relating to Tax, the making, giving or doing of which was taken into
account in computing the provision for Tax in the Accounts or in the
Management Accounts; or
4.6 to the extent that such liability would not have arisen but for any claim,
disclaimer or election made (including, without limitation, a disclaimer
of or a revision to a claim for capital allowances claimed before
Completion or assumed to be claimed in preparing the Accounts) where such
claim or disclaimer or election or revision is caused or made by the
Purchaser or the Company or the Subsidiary after Completion; or
4.7 to the extent that such liability occurs or arises as a result of or is
otherwise attributable wholly or partly to any voluntary act, transaction
or omission of the Company or the Subsidiaries or the Purchaser or their
respective directors, employees or agents on or after Completion otherwise
than in the ordinary and proper course of business or pursuant to a
legally binding commitment created on or before Completion by the Company
or the Subsidiary.
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5. SET-OFF
5.1 If the Vendors shall be liable in respect of any Claim, credit shall be
given to the Vendors against such liability for the following amounts
(each a "Relevant Amount") which shall be dealt with in accordance with
paragraph 5.3:
5.1.1 the amount by which any Tax for which the Company or the Subsidiary
is or may be liable is reduced or extinguished as a result of any
such liability and/or Claim;
5.1.2 the amount by which any provision for Tax (including deferred
taxation) or bad or doubtful debts contingent or other liabilities
(including deferred liabilities) contained in the Accounts proves
to be an over provision; or
5.1.3 the amount by which any repayment of Tax to the Company or to the
Subsidiary by the Inland Revenue or any other Tax Authority
contained in the Accounts proves to be an under-provision or no
provision is made as a result of any overpayment of Tax made prior
to Completion by any person.
5.2 If there shall be a dispute between any of the parties as to any Relevant
Amount, the Vendors or the Purchaser shall be entitled to request that the
Purchaser's Accountants are instructed to give a certificate as to the
Relevant Amount and in so doing the Purchaser's Accountants shall act as
experts and not as arbitrators and in the absence of manifest error and
subject to paragraphs 5.4 and 5.5 their decision shall be final and
binding on the parties hereto.
5.3 Where it is provided under paragraph 5.1 that any Relevant Amount is to be
dealt with in accordance with this paragraph 5.3:
5.3.1 the Relevant Amount shall first be set off against any payment then
due from the Vendors under the Warranties or the Tax Deed; and
5.3.2 to the extent there is an excess of the Relevant Amount after any
amounts have been set off under paragraph 5.3.1 a refund shall be
made to the Vendors of any previous payment or payments made by the
Vendors under the Warranties or the Tax Deed and not previously
refunded under this paragraph up to the amount of such excess; and
5.3.3 to the extent that the excess referred to in paragraph 5.3.2 is not
exhausted under that paragraph, the remainder of that excess shall
be carried forward and set off against any future payment or
payments which become due from the Vendors under the Warranties or
the Tax Deed.
5.4 In the event that the Purchaser's Accountants shall be unable or unwilling
to provide any certification requested under this paragraph 5, any
certification shall be effected by an independent firm of chartered
accountants to be agreed between the Purchaser and the Vendors or failing
agreement to be nominated by the President for the time being of the
Institute of Chartered Accountants in England and Wales (the "Independent
Accountants"). The proper and reasonable costs incurred by the
Purchaser's Accountants or the Independent Accountants in respect of any
certification required under this paragraph 5 shall be paid and borne as
such accountants shall consider just and equitable.
6. THIRD PARTY CLAIMS
6.1 Where the Purchaser and/or the Company and/or the Subsidiary are entitled
to recover from some other person (including any Tax Authority) any sum in
respect of any matter giving rise to a Claim the Purchaser shall and shall
procure that the Company
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or the Subsidiary shall take all reasonable steps to enforce such
recovery prior to taking any action against the Vendors (other than
notifying the Vendors of the Claim) and in the event that the Purchaser
or the Company or the Subsidiary shall recover any amount from such
other person the amount of the Claim against the Vendors shall be
reduced by the amount recovered (including any repayment supplement)
less all costs, charges and expenses incurred by the Purchaser or the
Company or the Subsidiary in recovering that sum from such other person.
6.2 If the Vendors pay to the Purchaser or to the Company or to the Subsidiary
an amount pursuant to a Claim and the Purchaser or the Company or the
Subsidiary within six months of such payment becomes entitled to recover
from some other person any material sum in respect of such Claim the
Purchaser shall and shall procure that the Company or the Subsidiary shall
take all reasonable steps to enforce such recovery and upon such recovery
shall forthwith repay to the Vendors so much of the amount paid by them to
the Purchaser or the Company or the Subsidiary as does not exceed the sum
recovered from such other person less all costs, charges and expenses
incurred by the Purchaser or the Company or the Subsidiary in recovering
that sum from such other person.
6.3 If any amount is repaid to the Vendors by the Purchaser or the Company or
the Subsidiary pursuant to paragraph 6.2 above an amount equal to the
amount so repaid shall be deemed never to have been paid by the Vendors
for the purposes of paragraph 3.2 and accordingly shall not be treated as
an amount in respect of which any liability has been incurred.
7. CONDUCT OF CLAIMS
7.1 The Vendors hereby appoint Mr. Gary Green as their representative for the
purposes of this paragraph (the "Vendors' Representative") and any action
taken or authorised by and any notice or document given to the Vendors'
Representative shall be deemed to be taken or authorised by or given to
each of the Vendors and shall be binding on each of them.
7.2 If the Purchaser becomes aware of a matter which might give rise to a
Claim the Purchaser shall (or shall procure that the Company or the
Subsidiary shall) as soon as reasonably practicable give written notice to
the Vendors' Representative of the matter and shall consult with the
Vendors' Representative with respect to such matter but such notice shall
not be a condition precedent to the liability of the Vendors.
8. MISCELLANEOUS
8.1 Any payment to the Purchaser or the Company or the Subsidiary under the
Warranties or under the Tax Deed shall be deemed to be a reduction of the
total consideration payable hereunder for the Shares.
8.2 Payment of any Claim whether under the Warranties or under the Tax Deed
shall pro tanto satisfy and discharge any other Claim which is capable of
being made in respect of the same subject matter and the Purchaser shall
at all times procure that there is no duplication of any Claim or Claims
relating to the same subject matter.
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SCHEDULE 9
EARNOUT AGREEMENT
THIS AGREEMENT is made the _______ day of ___________________ 1998
BETWEEN:
(1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE
1 ("Vendors"); and
(2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of
business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
WHEREAS:
(A) The Vendors and the Purchaser have on the date hereof entered into two
agreements (the "Purchase Agreements") for the sale and purchase of,
respectively, the entire issued share capital of RGB Trinet Limited (the
"Company") and 47.5% of Jade Communications Limited, and of the remaining
52.5% of Jade Communications Limited (the "Subsidiary").
(B) Pursuant to the provisions of each of the Purchase Agreements, the Vendors
and the Purchaser have agreed to enter into this Agreement for the purpose
of agreeing the Vendors' entitlement to further shares of the common stock
of the Purchaser as part of possible further consideration under the
Purchase Agreements.
IT IS AGREED AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement and in the Schedules:-
"Budget" the budget and business plan for the
Company and the Subsidiary for the
Earnout Period in the agreed form;
"Change of Control" means, in relation to any company,
where that company ceases to be under
the control of the person or persons
who control such company on the date
of this Agreement and for the purpose
of this definition "control" means a
holding of securities in a company
conferring a majority of the voting
rights in it or the right to appoint
or remove a majority of its board of
directors or the right to participate
in 50% or more of the assets of the
company on its winding up;
"Earnout Period" means the period of two years
commencing on 1 October 1998;
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"Pre-Tax Profits" means the pre-tax profits of the
Company and the Subsidiary as
calculated in accordance with SCHEDULE
2 for each three-month period during
the period commencing on 1 October
1998 and ending on 30 September 2000
as shown in unaudited management
accounts (comprising in each case a
balance sheet and a profit and loss
account) of the Company and the
Subsidiary;
"Quarterly Profit Estimate" means any of the estimates made in
respect of anticipated Pre-Tax Profits
for a particular financial quarter of
the Company, particulars of which are
continued in SCHEDULE 3.
1.2 The Schedules are deemed to be incorporated in this Agreement, and a
reference to "this Agreement" includes a reference to the Schedules.
1.3 In this Agreement:-
1.3.1 the index and the clause headings are included for convenience only
and shall not affect the construction of this Agreement;
1.3.2 words denoting the singular shall include the plural and vice
versa;
1.3.3 words denoting any gender shall include a reference to each other
gender; and
1.3.4 references to persons shall be deemed to include references to
natural persons, firms, partnerships, companies, corporations,
associations, organisations, foundations and trusts (in each case
whether or not having separate legal personality).
1.4 Words and expressions (if any) which are defined in the Purchase
Agreements and which are not expressly defined in this Agreement shall
have the same meaning in and shall apply to this Agreement as if expressly
defined herein.
2. CONSIDERATION
2.1 By way of additional consideration under the Purchase Agreements of up to
US$8,225,000, the Purchaser will issue to the Vendors the Earnout Shares
(if any) calculated in accordance with the following provisions of this
Agreement.
2.2 The consideration referred to in Clause 2.1 shall be apportioned between
the Vendors as set out in Column 2 of SCHEDULE 1.
3. EARNOUT PROVISIONS
3.1 The entitlement to Earnout Shares referred to in Clause 2.1 shall be
calculated in accordance with the following provisions:-
3.1.1 if the Pre-Tax Profits shall equal 100% of the relevant Quarterly
Profit Estimate, then the Purchaser shall in respect of that
quarter issue to the Vendors the Earnout Shares that are equivalent
in value to US$822,500 (the "Base Earnout Figure");
3.1.2 if the Pre-Tax Profits shall be at or between 50% and 125% of the
relevant Quarterly Profit Estimate, then the Purchaser shall issue
to the Vendors a number of Earnout Shares equivalent in value to a
percentage of the Base Earnout Figure, such percentage being the
same percentage as the Pre-Tax
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Profits are in relation to the relevant Quarterly Profit
Estimate, subject in all cases to a minimum of 50% and maximum
of 125% of the Base Earnout Figure. By way of illustration
only, if the Pre-Tax Profits are 110% of the Quarterly Profit
Estimate, then Earnout Shares equivalent in value to 110% of the
Base Earnout Figure shall be issued;
3.1.3 if the Pre-Tax Profits shall be below 50% of the relevant Quarterly
Profit Estimate, then (subject to Clause 3.1.4) no Earnout Shares
shall be issued in respect of that quarter;
3.1.4 if the Pre-Tax Profits exceed 125% of the relevant Quarterly Profit
Estimate, then after applying the provisions of Clause 3.1.2, the
Pre-Tax Profit in excess (the "Excess Profit") may be carried
forward or carried back to other financial quarters as follows:
3.1.4.1 the Excess Profit shall first be carried back and
applied to each previous quarter(s) in which the
Pre-Tax Profits were less than 125% of the relevant
Quarterly Profit Estimate. The Excess Profit shall be
applied in full to the earliest quarter first so as
notionally to raise the Pre-Tax Profits in such
quarter up to a maximum of 125%, and then any
remaining Excess Profit shall be applied to subsequent
quarters consecutively, in the same manner;
3.1.4.2 by applying the Excess Profit thereto, for each
quarter in which the entitlement to Earnout Shares is
created or increased by virtue of applying the
provisions of Clause 3.1.2, Javelin shall issue
further Earnout Shares to the Vendors in accordance
with the provisions of Clause 3.1.2;
3.1.4.3 if, after applying the Excess Profit to all earlier
quarters in accordance with Clauses 3.1.4.1, any of
the Excess Profit remains to be applied, it may be
carried forward to be applied in the same manner to
each subsequent quarter (next quarter first) in which
Pre-Tax Profits are below 125% of the relevant
Quarterly Profit Estimate.
3.1.5 For the avoidance of doubt, the maximum number of Earnout Shares
that can be issued in relation to any financial quarter of the
Company pursuant to Clauses 3.1.1 to 3.1.4 is a number equivalent
in value to 125% of the Base Earnout Figure (or US$1,028,125 in
Purchaser's Shares by value for each quarter).
3.2 Pursuant to Clause 3.1, the number of Earnout Shares to be allotted and
issued (if any) to the Vendors will be such number of Purchaser's Shares
as have an aggregate value which is as near as possible to, but not less
than, the Base Earnout Figure, as it may be adjusted in accordance with
Clause 3.1. The Earnout Shares shall be issued in the proportions
specified under Clause 2.2.
3.3 For the purpose of determining the aggregate value referred to in Clause
3.2:
3.3.1 the value of each Purchaser's Share shall be deemed to be an amount
equal to the average of the closing prices of a Purchaser's Share,
as reported on the NASDAQ SmallCap Market System, on the five (5)
trading days immediately prior to the end of the financial quarter
in question and on the first five (5) trading days after the end of
such quarter; and
3.3.2 where there is any carry-back or carry-forward pursuant to Clause
3.1.4, the valuation under Clause 4.3.1 shall be made in respect of
the relevant ten (10)
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trading days in the most recent quarters instead of the
quarter(s) to which the carry-back or carry-forward was made.
3.4 The verification and allotment of all Earnout Shares shall be completed no
later than forty-five (45) days after the end of each financial quarter.
A statement showing the Pre-Tax Profits and the number of Earnout Shares
to be issued (if any) to the Vendors pursuant to Clause 3.3 shall be
agreed by the Vendors and the Purchaser prior to the expiry of this 45-day
period, PROVIDED THAT failing such agreement the relevant Pre-Tax Profits
and the said number of Earnout Shares (if any) shall be ascertained and
certified by an independent firm of chartered accountants appointed by
agreement between the parties or in default of agreement on the
application of either party by the President for the time being of the
Institute of Chartered Accountants in England and Wales. The decision of
such expert shall be final and binding on the parties. The expert shall
be deemed to act as an expert and not as an arbitrator and the provisions
of the Arbitration Act 1996 shall not apply. The cost of the reference to
such expert shall be payable as determined by the expert.
3.5 No fraction of an Earnout Share shall be issued to the Vendors and the
number of Earnout Shares shall be adjusted accordingly to the nearest
whole number.
3.6 The Earnout Shares, on issue, shall rank pari passu in all respects with
the existing issued Purchaser's Shares.
3.7 Each of the Vendors agrees that he shall deliver to the Purchaser upon
issue of the Earnout Shares a certificate and undertaking substantially in
the form of Schedule 7 to the Purchase Agreements making or giving such
representations, warranties and covenants as are necessary or advisable
for the qualification of the issuance of Purchaser's Shares to the Vendors
under Regulation S promulgated under the United States Securities Act of
1933, as amended.
3.8 In the event of there being any Change of Control of the Purchaser prior
to 30 October 2000, immediately prior to such Change of Control and in
full and final satisfaction of the Purchaser's obligations pursuant to
this Agreement, the Purchaser shall issue to the Vendors such Purchaser's
Shares as are equal to US$822,500 in value (adopting the same valuation
method as in Clause 3.4) multiplied by the number of financial quarters
remaining in the Earnout Period including the period in which the Change
of Control takes place.
3.9 During the Earnout Period until all sums (if any) due under this Agreement
have been paid or satisfied the Purchaser shall and shall procure that the
Company and the Subsidiary comply with the provisions of SCHEDULE 2.
4. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and enure for the benefit of each
party's successors but shall not be assignable by either party.
5. VARIATION
No variation of this Agreement shall be effective unless made in writing
and signed by or on behalf of each of the parties.
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6. COUNTERPARTS
This Agreement may be executed in two or more counterparts each of which
shall be deemed to be an original, and which together shall constitute one
and the same agreement.
7. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit themselves to the non-exclusive
jurisdiction of the English courts.
AT WITNESS the hands of the parties hereto or their duly authorised
representatives the day and year first before written.
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SCHEDULE 1
PARTICULARS OF THE VENDORS AND OF THE EARNOUT SHARES
TO BE RECEIVED BY EACH OF THEM
<TABLE>
<CAPTION>
(1) NAME AND ADDRESS (2) EARNOUT SHARES EXPRESSED AS PERCENTAGE
OF TOTAL NUMBER ISSUED
<S> <C>
1. Gary GREEN 31.25
"Trudos"
Heath Ride
Finchampstead
Wokingham
Berkshire RG40 3QJ
2. Roger SCARLETT 31.25
"Glen d'Or"
The Ridge
Cold Ash
Newbury
Berkshire RG16 9HY
3. Anthony SAMPSON 3.75
31 Oakwood Lane
Bowdon
Cheshire WA14 3OL
4. Contech Consultants Limited 33.75
c/o 25 Turnbull's Lane
Gibraltar
------
100%
------
</TABLE>
65
<PAGE>
SCHEDULE 2
EARNOUT PROTECTIONS
PART 1
CALCULATION OF PRE-TAX PROFITS ("ELIGIBLE PROFIT")
1. The Eligible Profit for any financial quarter is (to the nearest L1) the
net pre-tax profit of the Company as shown in the Management Accounts for
the relevant financial period prepared in accordance with generally
accepted accounting principles, SSAPs and FRSs and adjusted as follows:
1.1 by adding back any payment or provision for Tax;
1.2 adding back any provision for or payment of any dividend or other
distribution by the Company or the Subsidiary;
1.3 adding back any sum specified as or proposed to be transferred to
reserves;
1.4 adding back any management (or similar) charges to the Purchaser
paid or provided for work carried out for the benefit of the
Company charged at the same rates as applied in respect of other
members of the Purchaser's Group;
1.5 adding back a charge by way of interest on any sums lent by the
Purchaser's Group to the Company or the Subsidiary in excess of
that rate of 1.5 per cent above the base rate of National
Westminster Bank plc;
1.6 adding a sum by way of interest on any sums lent by the Company or
the Subsidiary to the Purchaser at the rate of 3 per cent above the
base rate of National Westminster Bank plc;
1.7 adding in relation to any transactions entered into by the Company
or the Subsidiary on less than arms-length terms (in terms of
reward to the Company or the Subsidiary) a reasonable sum as profit
which might reasonably have been expected to accrue to the Company
or the Subsidiary had the transaction been on arms-length terms;
1.8 by adding back any amount written off in respect of goodwill or
other intangible assets;
1.9 by adding back audit fees in excess of L12,000 per annum and any
fees attributable to the tax affairs of the Purchaser; and
1.10 by adding back any sum deducted from gross profit in respect of the
emoluments paid or payable to or for the benefit of any person
appointed to the board of the Company by the Purchaser except as
arms' length consideration for services rendered to the Company or
the Subsidiary.
66
<PAGE>
PART 2
ACCOUNTING POLICIES TO BE USED IN CALCULATING THE ELIGIBLE PROFIT
TURNOVER
Turnover represents the amount derived from the provision of goods and services
to third party customers based on invoiced sales adjusted by an amount to
reflect the stage of completion of major contracts, less any returns or
allowances.
DEPRECIATION
Depreciation is provided to write off the cost less the estimated residual value
of tangible fixed assets by equal instalments over their estimated usual
economic lives as follows:
Leasehold improvements - 3 years
Computer and Test Equipment - 3 years
Fixtures and fittings - 3 years
Plant and Equipment - 3 years
Motor Vehicles - 3 years
STOCK AND WORK IN PROGRESS
(a) Stocks and work in progress
Stocks are stated at the lower of cost and net realisable value. In determining
the cost of raw materials, consumables and goods purchased for resale, the FIFO
method is used (cost is taken as production cost, which includes an appropriate
proportion of attributable overheads).
Work in progress is valued at the lower of cost and net realisable value and
costs include material cost, direct labour cost and other direct costs.
(b) Project work in progress
Projects are valued as per the contract ledger as follows:
Actual revenue recognised to date is compared with total budget revenue to
calculate the "stage of completion rate". "Stage of completion rate" is applied
to the total budget costs to calculate the cost of sales. Calculated cost of
sales is then compared to actual costs incurred to date. Where actual costs
incurred to date exceed calculated cost of sales a work in progress balance is
recognised (subject to making provision for future losses on contracts). Where
calculated cost of sales exceeds actual costs incurred to date, a cost of sales
accrual is recognised.
(c) Long term contracts
The amount of profit attributable to the stage of completion of a long term
contract is recognised when the outcome of the contract can be foreseen with
reasonable certainty. Turnover for such contracts is stated at cost appropriate
to their stage of completion plus
67
<PAGE>
attributable profits, less amounts recognised in previous years. Provision
is made for any losses as soon as they are foreseen.
Contract work in progress is stated at costs incurred, less those transferred
to the profit and loss account, after deducting foreseeable losses and
payments on account not matched with turnover. Amounts recoverable on
contracts are included in debtors and represents turnover recognised in
excess of payments on account.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to profits as incurred.
TAXATION
No charge for taxation will be made in the calculation of eligible profit.
FINANCE LEASES
Assets acquired under finance leases are capitalised and the outstanding
future lease obligations are shown in creditors.
68
<PAGE>
PART 3
VENDOR PROTECTION
The Purchaser acknowledges that (having regard to the manner in which the
Consideration for the Shares has been calculated) the Vendors have a
legitimate interest in ensuring that the Eligible Profit of the Company for
the Earnout Period is as high as may fairly and reasonably be achieved by the
Company and the Subsidiary (in this Part 3 jointly referred to as the
"Company") in those years (having due regard to the Purchaser's legitimate
interest in establishing a stable and secure business for the Company in the
long term). Accordingly, but subject in all cases to Clause 15 of this Part
3 of this Schedule, the Purchaser undertakes with the Vendors that during the
Earnout Period:
1. it will use its best endeavours to promote the business of the Company;
2. it will not do anything with the intention of adversely affecting the
Eligible Profit;
3. it will not develop or seek to develop any business competitive with that
of any material business of the Company carried on at Completion or at any
time during the Earnout Period;
4. it will not transfer, divert or direct the custom of any or any potential
customer or client of the Company elsewhere or seek to do so;
5. it will not seek to transfer or divert or direct elsewhere any orders or
enquiries for products or services available from the Company;
6. it will use its best endeavours to maintain the operations of the Company
in terms of fixed assets (including premises, plant and equipment) and
financial facilities to a standard being not less suitable for the
purposes of the business of the Company than that maintained by the
Company prior to Completion;
7. it will provide the Company with access to the financial management and
other facilities of the Purchaser's Group on a basis no less beneficial to
the conduct of the Company's business than that provided to any other
members of the Purchaser's Group.
8. it will not sell or procure the sale or otherwise dispose of the whole or
any substantial part of the business, undertaking or assets (other than
current assets disposed of in the normal course of business) of the
Company;
9. to procure that the Company does not pass any resolution to go into
voluntary liquidation (except if a relevant company is at that time
insolvent and a registered insolvency practitioner advises liquidation by
reason of insolvency);
10. to procure that the Company makes no material adverse alteration in the
nature, scope or conduct of its business;
69
<PAGE>
11. to procure that Eligible Profits are not adversely affected by any
service, management or similar charge (save as provided for in Part 1 of
this Schedule) or by any transaction or arrangement which is not a bona
fide commercial transaction or arrangement on arms-length terms;
12. it will not materially alter the number of employees of the Company or
make any increase in the emoluments of the employees of the Company
(including without limitation any employers contribution to pensions or in
benefits provided hours of work or holiday entitlement) which would have a
material adverse effect on Eligible Profit;
13. not to procure or permit any capital expenditure in relation to the
Company except;
13.1 in accordance with the Budget in agreed terms for the period
covered by the Earnout Period;
13.2 as is required to comply with the provisions in the legal
obligations (including the terms of any lease) of the Premises
occupied by the Company;
13.3 as is required to replace plant and equipment as it comes to the
end of its useful working life and in accordance with the policy
adopted by the Company immediately prior to Completion.
13.4 to procure that any goods or services provided to or in respect of
the Company whether by the Purchaser's Group or any third party are
provided on terms no less beneficial to the recipient than any
similar goods or services are provided to any other member of the
Purchaser's Group;
13.5 to procure that the Company does not depart from the ordinary
course of the conduct of its business as conducted in the financial
year ending on the Accounting Date;
14. The Purchaser further undertakes with the Vendors that the Company will:
14.1 not enter into any material abnormal contract or commitment or any
contract or commitment involving an aggregate expenditure by the
Company (in accordance with its normal accounting policies at
Completion) of more than L5,000 unless agreed by the Vendors;
14.2 not declare, make or pay any dividend or other distribution;
14.3 not create or agree to create any encumbrance or redeem or agree to
redeem any encumbrance (other than trade guarantees or indemnities
in the ordinary course of its business) of the type and scale given
in the financial year ending on the Accounting Date; and
14.4 not permit any of its insurance policies to lapse, become void or
voidable or do anything adversely to affect their renewal on the
insurers standard (or, if different, the existing) terms.
15. The Purchaser shall be obliged to comply with its undertakings in Clauses
1 to 14 above only if and for so long as the Company's Pre-Tax Profits
continue to meet the Quarterly Profit Estimates, such that if the
Company's Pre-Tax Profits fail to meet two consecutive Quarterly Profit
Estimates by 50% or more and the aggregate of any preceding Quarterly
Profit Estimates is below 50% of estimate the Purchaser shall henceforth
be released from all and any of its obligations under this Part 3 of this
Schedule.
70
<PAGE>
16. The Purchaser shall not give any direction to the trustee of the employee
benefit trust established by the Company without the consent of the
Vendors.
71
<PAGE>
SCHEDULE 3
QUARTERLY PROFIT ESTIMATES
<TABLE>
<CAPTION>
PERIOD PROFIT ESTIMATE L('000)
------ -----------------------
<S> <C>
October - December 1998 112
January - March 1999 141
April - June 1999 205
July - September 1999 350
October - December 1999 313
January - March 2000 309
April - June 2000 213
July - September 2000 419
</TABLE>
72
<PAGE>
SIGNED BY GARY GREEN )
in the presence of: )
SIGNED BY ROGER SCARLETT )
in the presence of: )
SIGNED BY: _________________ )
duly authorised and on )
behalf of LOUVRE TRUSTEES )
LIMITED )
in the presence of: )
SIGNED BY: _________________ )
duly authorised and on )
behalf of JAVELIN SYSTEMS, INC. )
in the presence of: )
73
<PAGE>
DATED 1998
ANTHONY SAMPSON
and
CONTECH CONSULTANTS LIMITED
and
BERTRAM BADMINTON
and
JAVELIN SYSTEMS, INC.
--------------------------------------------
AGREEMENT
for the sale and purchase of
105 ordinary shares
of JADE COMMUNICATIONS LIMITED
--------------------------------------------
Paul, Hastings, Janofsky & Walker LLP
The International Financial Centre
Old Broad Street
London EC2N 1HQ
Tel: 0171 562 4000
Fax: 0171 628 4444
<PAGE>
I N D E X
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Definitions and Interpretation 1
2. Agreement to Sell and Purchase 4
3. Consideration 5
4. Conditions Precedent 6
5. Pre-emption Rights 7
6. Warranties 7
7. Limitations to the Warranties 8
8. Vendors' obligations prior to Completion 8
9. Purchaser's Remedies 8
10. Release of Guarantees 9
11. Completion 9
12. Restrictive Covenants 9
13. Post-Completion Effect 10
14. Successors and Assigns 10
15. Information and Confidentiality 10
16. Announcements and Publicity 11
17. Costs 11
18. Notices 11
19. Further Assurance 12
20. Waivers 12
21. Entire Agreement 13
21. Variation 13
22. Joint and Several Liability 13
23. Counterparts 13
24. Applicable Law 13
</TABLE>
Schedules
- ---------
1. Particulars of the Vendors
2. Particulars of the Company and Subsidiary
3. Particulars of the Premises
4. Part A - General Warranties
Part B - Taxation Warranties
Part C - Property Warranties
Part D - Intellectual Property Warranties
Part E - Environmental and Health and Safety Warranties
5. Completion Requirements
6. Tax Deed
7. Regulation S certificate and undertaking
8. Additional Limitations to the Warranties and Tax Deed
9. Earnout Agreement
<PAGE>
AGREEMENT FOR SALE AND PURCHASE OF SHARES
DATE: 1998
PARTIES:
(1) ANTHONY SAMPSON of 31 Oakwood Lane, Bowdon, Cheshire WA14 3OL
("Mr. Sampson");
(2) CONTECH CONSULTANTS LIMITED (registered in Gibraltar no. 58300) whose
registered office is at 25 Turnbull's Lane, Gibraltar ("Contech");
(3) BERTRAM BADMINTON of 2 Totland Court, Victoria Road, Milford-on-Sea,
Lymington, Hampshire SO41 0NR ("Mr. Badminton); and
(4) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of
business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
OPERATIVE PROVISIONS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement and (save as provided in Clause 1.6) in the Schedules:-
"Accounts" means the respective unaudited
management accounts of the Company
comprising in each case a balance
sheet and a profit and loss account
for the period which commenced on the
Acquisition Date and ended on
31 August 1998, a copy of each of
which is annexed to the Disclosure
Letter;
"Acquisition Date" means 18 March 1998;
"agreed form" means in relation to any document such
document in the form agreed between
the parties and initialled by the
Purchaser and the Vendors for the
purposes of identification;
"Business Day" means any day which is not a Saturday,
a Sunday or a bank or public holiday
in England and Wales;
"Change of Control" means, in relation to any company,
where that company ceases to be under
the control of the person or persons
who control such company on the date
of this Agreement and for the purpose
of this definition "control" means a
holding of securities in a company
1
<PAGE>
conferring a majority of the voting
rights in it or the right to appoint
or remove a majority of its board of
directors or the right to participate
in 50% or more of the assets of the
company on its winding up;
"Claim" means any claim for breach of or
non-compliance with this Agreement
(including any Warranty Claim or Tax
Claim);
"Companies Act" means the Companies Act 1985;
"Company" means JADE COMMUNICATIONS LIMITED,
particulars relating to which are set
out in SCHEDULE 2;
"Completion" means the completion of the sale and
purchase of the Shares in accordance
with Clause 11 and SCHEDULE 5;
"Completion Date" means the date fixed for Completion
pursuant to Clause 11;
"Connected Person" means a connected person as defined in
section 839 of the Taxes Act;
"Consideration Shares" means such number of Purchaser's
Shares calculated in accordance with
Clause 3.4 as are to be allotted and
issued credited as fully paid in
accordance with Clause 3.3;
"Directors" means the persons listed as directors
of the Company in SCHEDULE 2;
"Disclosed" means fairly disclosed to the
Purchaser expressly for the purposes
of this Agreement in the Disclosure
Letter;
"Disclosure Letter" means a letter of even date from the
Vendors to the Purchaser in the agreed
form;
"Earnout Agreement" means an agreement to be entered into
at Completion between (inter alia) the
Vendors and the Purchaser in respect
of the entitlement and issue of the
Earnout Shares in the form contained
in SCHEDULE 9;
"Earnout Shares" means such number of Purchaser's
Shares (if any) calculated, allotted
and issued credited as fully paid in
accordance with the Earnout Agreement;
"Employment Agreements" means the employment agreements in the
agreed form to be entered into at
Completion between the Company and Mr.
Sampson and Mr. Badminton;
2
<PAGE>
"Event" means an event as defined in the Tax
Deed;
"Intellectual Property Rights" means intellectual property rights as
defined in Part D of SCHEDULE 4;
"RGB Agreement" means the agreement of even date for
the sale and purchase of the entire
issued share capital of RGB Trinet
entered into between (1) G. Green, (2)
R. Scarlett, (3) Louvre Trustees
Limited and (4) the Purchaser;
"Premises" means the premises of the Company,
short particulars of which are set out
in SCHEDULE 3;
"Purchaser's Group" means the Purchaser and its subsidiary
undertakings or parent undertakings
for the time being or a subsidiary
undertaking for the time being of a
parent undertaking of the Purchaser
and includes, for the avoidance of
doubt, the Company and the Subsidiary
and references to a "member of the
Purchaser's Group" shall be construed
accordingly;
"Purchaser's Shares" means shares of the common stock,
$0.01 par value, of the Purchaser;
"Relief" means a relief as defined in the Tax
Deed;
"RGB Trinet" means RGB TRINET LIMITED (registered
in England no. 2511516) whose
registered office is at Archway House,
Bath Road, Padworth, Berkshire RG7
5HR;
"Shares" means 105 ordinary shares of L1 each
in the capital of the Company;
"Supplemental Disclosure
Letter" means the letter to be provided by the
Vendors at Completion to the Purchaser
in the agreed form disclosing matters
(if any) which have arisen between the
date hereof and the Completion Date
and which are necessary to qualify the
Warranties;
"Tax" means tax as defined in the Tax Deed;
"Tax Claim" means any claim under the Warranties
in SCHEDULE 4, Part B or the Tax Deed;
"Tax Deed" means a deed in the form set out in
SCHEDULE 6;
"Taxes Act" means the Income and Corporation Taxes
Act 1988;
3
<PAGE>
"Vendors" means together Mr. Sampson and
Contech;
"Vendors' Solicitors" means Dibb Lupton Alsop, 101
Barbirolli Square, Manchester M2 3DL;
"Warranties" means the warranties, representations
and undertakings set out in
SCHEDULE 4;
"Warranty Claim" means any claim for breach of or
non-compliance with any of the
Warranties in Parts A, C or D of
SCHEDULE 4.
1.2 The Schedules are deemed to be incorporated in this Agreement, and a
reference to "this Agreement" includes a reference to the Schedules.
1.3 In this Agreement:-
1.3.1 the index and the clause headings are included for convenience only
and shall not affect the construction of this Agreement;
1.3.2 words denoting the singular shall include the plural and vice
versa;
1.3.3 words denoting any gender shall include a reference to each other
gender; and
1.3.4 references to persons shall be deemed to include references to
natural persons, firms, partnerships, companies, corporations,
associations, organisations, foundations and trusts (in each case
whether or not having separate legal personality).
1.4 References in this Agreement to statutory provisions shall (where the
context so admits and unless otherwise expressly provided) be construed as
references to those provisions as respectively amended, consolidated,
extended or re-enacted as at the date of this Agreement and to the
corresponding provisions of any earlier legislation (whether repealed or
not) directly or indirectly amended, consolidated, extended, replaced or
re-enacted thereby and to any orders, regulations, instruments or other
subordinate legislation made under the relevant statute.
1.5 Any statement qualified by the expression "to the best of the knowledge,
information and belief of the Vendors" or "so far as the Vendors are
aware" or any similar expression shall be deemed to include an additional
statement that it has been made after due, diligent and careful enquiry by
each of the Vendors of each other, the Directors, the Company's auditors
and the directors of RGB Trinet.
1.6 If any of the words or expressions defined in Clause 1.1 are also defined
in any of the Schedules then for the purposes of interpreting that
relevant Schedule such words and expressions shall have the meaning
ascribed to them in that Schedule.
2. AGREEMENT TO SELL AND PURCHASE
2.1 Each of the Vendors sells such of the Shares as are set out opposite his
name in column 2 of SCHEDULE 1 to the Purchaser and the Purchaser
purchases the Shares.
2.2 Each of the Vendors covenants with the Purchaser that:-
2.2.1 he has the right to sell and transfer the full legal and beneficial
interest in the Shares to the Purchaser on the terms set out in
this Agreement;
4
<PAGE>
2.2.2 the Shares are sold free from all claims, charges, liens,
encumbrances, equities and adverse rights of any description and
together with all rights attached or accruing thereto as at and
from the date of this Agreement; and
2.2.3 he shall (and shall procure that any necessary third party shall),
at his own expense, do, execute and perform all such further acts,
deeds, documents and things as the Purchaser may reasonably request
from time to time as being necessary to vest any of the Shares in
the Purchaser.
2.3 Nothing in this Agreement shall oblige the Purchaser to purchase some only
of the Shares unless the Vendors shall at the same time complete the sale
to the Purchaser of all of the Shares.
3. CONSIDERATION
3.1 Subject to Clause 3.8, the initial consideration payable by the Purchaser
to the Vendors in respect of the sale of the Shares shall be 13,125
Purchaser's Shares and US$104,495 which:
3.1.1 in respect of US$104,495 shall be satisfied by the issue of the
Consideration Shares in accordance with the remainder of this
Clause 3; and
3.1.2 if and to the extent that the exchange rate of pounds sterling to
US dollars has increased above the rate of L1 = $1.70 (i.e., an
increase in value in pounds sterling) as at the Completion Date,
the sum of US$104,495 shall be increased accordingly in line with
such increase by applying the appropriate percentage. If such
exchange rate has decreased below L1 = $1.70 (i.e., a decrease in
value in pounds sterling), no variation shall be made to the
consideration under this Agreement.
3.2 By way of additional consideration of up to US$3,084,375 the Purchaser
will issue to the Vendors the Earnout Shares (if any) calculated in
accordance with the provisions of the Earnout Agreement in the percentages
set out in Column 4 of SCHEDULE 1.
3.3 The consideration referred to in Clause 3.1 shall be apportioned between
the Vendors as set out in Column 3 of SCHEDULE 1 and shall be satisfied at
Completion by the issue of the 13,125 Purchaser's Shares and the
Consideration Shares to the Vendors.
3.4 The number of Consideration Shares to be allotted to the Vendors pursuant
to Clause 3.3 shall be such number of Purchaser's Shares as have an
aggregate value (determined in accordance with Clause 3.5) which is as
near as possible to, but not less than, US$104,495.
3.5 For the purpose of determining the aggregate value referred to in Clause
3.4, the value of each Purchaser's Share shall be deemed to be an amount
equal to the average of the closing prices of a Purchaser's Share, as
reported on the NASDAQ SmallCap Market System in the ten (10) trading days
immediately prior to the Business Day immediately prior to the Completion
Date.
3.6 No fraction of a Consideration Share shall be issued to the Vendors and
the number of Consideration Shares shall be adjusted accordingly to the
nearest whole number.
5
<PAGE>
3.7 The Consideration Shares, on issue, shall rank pari passu in all respects
with the existing issued Purchaser's Shares.
3.8 By way of possible further consideration, if during November 1999 the
price per Purchaser's Share as reported on the NASDAQ SmallCap Market
shall remain below US$9.00 for five (5) consecutive trading days, then the
number of Consideration Shares to which the Vendors are entitled shall be
increased as follows:-
3.8.1 First, the number of Purchaser's Shares owned by the Vendors as of
1 November 1999 shall be subject to adjustment based on the
following formula:
S x (V1) - S = C
----
(V2)
where S = Number of Purchaser's Shares held by the Vendors
V1 = 9
V2 = US$9.00 or, if lower, the average closing price
per Purchaser's Share during trading on the NASDAQ
SmallCap Market in November 1999
C = the additional number of Consideration Shares to
be issued to the Vendors;
3.8.2 Second, the Purchaser shall issue and allot to the Vendors such
number of additional Consideration Shares as corresponds to the
figure represented by "C" in the above formula in the same
proportions as under Clause 3.3 no later than 31 December 1999 (and
otherwise in accordance with the foregoing provisions of this
Clause 3).
3.9 Each of the Vendors agrees that he shall deliver to the Purchaser at
Completion and, if appropriate, upon the issue of Consideration Shares
pursuant to Clause 3.8 a certificate and undertaking substantially in the
form of SCHEDULE 7 making or giving such representations, warranties and
covenants as are necessary or advisable for the qualification of the
issuance of Purchaser's Shares to the Vendors under Regulation S
promulgated under the United States Securities Act of 1933, as amended.
3.10 If the Purchaser at any time proposes to register any of its equity
securities (as defined in the United States Securities Act of 1933 (the
"Act")), other than securities which are convertible into shares of its
common stock, under the Act on Forms S-1, S-2 or S-3 (but not Form S-4 or
S-8) or on any other form upon which may be registered securities similar
to the Consideration Shares, it will at each such time give written notice
at least fifteen (15) days prior to the filing of the registration
statement to the Vendors holding Consideration Shares (each a "Holder") of
its intention so to do. Such notice shall specify the proposed date of
the filing of the registration statement and advise each Holder of its
right to participate therein. Upon the written request of any Holder
given not less than seven (7) days prior to the proposed date of filing
set forth in such notice, the Purchaser will use all reasonable efforts to
cause the Consideration Shares which the Purchaser has been requested to
register by such Holder to be registered under the Act, all to the extent
requisite to permit the sale or other disposition by such of the
Consideration Shares so registered. If such registration statement is
being filed in connection with an underwritten offering, the
6
<PAGE>
Consideration Shares held by the Holder may only be included in such
registration if, in the written opinion of the underwriter or underwriters
managing the offering, the total amount of all securities of the Purchaser
to be so registered will not exceed the maximum amount of securities of
the Purchaser which can then be successfully marketed (1) by the managing
underwriter in its sole reasonable discretion, and (2) without otherwise
materially and adversely affecting the entire offering. To the extent
that the amount of securities to be registered must be reduced in order to
obtain the opinion referred to in the preceding sentence, such reduction
shall be achieved by first eliminating from the registration some or all
of the securities to be offered by persons (including, but not limited to,
any persons or entities that have any registration rights with respect to
any securities) other than the Holder, PROVIDED, HOWEVER, that no such
reduction shall reduce the securities being offered directly by the
Purchaser through such underwriter or underwriters. The right of any
Holder to have its Consideration Shares included in any registration
statement being filed in connection with any underwritten offering shall
be subject to such Holder participating in the underwriting to the extent
required under the Act or any rule thereunder or to the extent reasonably
required by the underwriters and agreeing to be bound by the terms imposed
by the underwriters that such underwriters deem reasonably necessary to
the success of the offering.
4. CONDITIONS PRECEDENT
4.1 This Agreement is conditional upon:
4.1.1 the Purchaser having secured sufficient funds to finance the cash
portion of the consideration stated in Clause 3.1; and
4.1.2 the price per Purchaser's Share as reported on the NASDAQ SmallCap
Market being not less than US$7.50 as at the close of business on
the date preceding the Completion Date.
4.2 If any of the above-mentioned conditions is not satisfied or waived on or
before 13 November 1998, this Agreement shall become null and void (save
for Clauses 15 and 16 which shall continue to have effect) and no party
shall have any claim against any other party arising from or in connection
with this Agreement.
4.3 The Purchaser shall use all reasonable endeavours to ensure the
satisfaction of the conditions set out in Clause 4.1 so far as lies within
its powers so to do.
4.4 Any waiver of the conditions set out in Clause 4.1 shall require the
consent of the Vendors and the Purchaser.
5. PRE-EMPTION RIGHTS
The Vendors irrevocably waive and undertake to procure that any other
person having such rights shall by Completion have irrevocably waived all
and any rights of pre-emption or other restrictions on transfer over or in
respect of the Shares existing by virtue of the articles of association of
the Company or otherwise.
7
<PAGE>
6. WARRANTIES
6.1 The Vendors and Mr. Badminton represent and warrant to the Purchaser for
the benefit of the Purchaser, its successors and assigns in the terms set
out in SCHEDULE 4 and acknowledge that the Purchaser is entering into this
Agreement in reliance on the Warranties and that the Purchaser shall be
entitled to treat them as conditions of this Agreement.
6.2 The Vendors agree with the Purchaser (for itself and as trustee for the
Company) that in making and giving the Warranties and that in compiling
and preparing the Disclosure Letter the Vendors and Mr. Badminton have not
relied directly or indirectly on any information or opinions supplied to
them (or any of them) by the Company or any of the officers, employees,
servants or agents of the Company and the Vendors and Mr. Badminton waive
all and any claims which they (or any of them) have or may have against
all or any of the foregoing in respect of any information or opinions so
supplied or omitted to be so supplied in connection with any of the
Warranties or the Disclosure Letter.
6.3 Each of the Warranties shall be separate and independent and shall not be
limited by reference to any other of the Warranties or any other provision
of this Agreement and no claim in respect or arising out of the same shall
be limited or otherwise affected by any knowledge (actual or constructive)
which the Purchaser has or is deemed to have in relation to the Company
save for matters set out in the Disclosure Letter or the Supplementary
Disclosure Letter or the disclosure letter or the supplementary disclosure
letter to the RGB Agreement.
6.4 Each of the Warranties shall be deemed to be given on the date of this
Agreement and shall be deemed to be repeated and given by the Vendors and
Mr. Badminton on each day up to and including the Completion Date.
6.5 The Purchaser represents and warrants to the Vendors and Mr. Badminton
that:
6.5.1 the existing issued ordinary share capital of the Purchaser is the
subject of listing on the NASDAQ exchange;
6.5.2 the Purchaser has sufficient authorised but unissued ordinary share
capital to enable it to issue the Consideration Shares and no
shareholder or other consents are required by the Purchaser prior
to issue of such shares;
6.5.3 the Consideration Shares shall rank pari passu in all respects with
the shares of the common stock of the Purchaser in issue at the
date hereof; and
6.5.4 this Agreement and all other documents to be entered into by the
Purchaser pursuant to this Agreement will when executed constitute
legal, valid and binding obligations of the Purchaser in accordance
with their respective terms.
7. LIMITATIONS TO THE WARRANTIES
7.1 The aggregate liability of the Vendors and Mr. Badminton in respect of all
Claims under the Warranties and under the Tax Deed shall not exceed
US$305,000.
7.2 The liability of the Vendors and Mr. Badminton in respect of the
Warranties and under the Tax Deed shall be further limited by the
provisions of SCHEDULE 8.
8
<PAGE>
8. VENDORS' OBLIGATIONS PRIOR TO COMPLETION
8.1 The Vendors shall not (save as may be necessary to give effect to this
Agreement) and shall procure that the Company shall not (save as
aforesaid) do or allow or omit to be done before Completion anything which
is or might be a breach of any of the Warranties or which would or might
make any of the Warranties inaccurate or misleading or which is or might
be a breach of or which does or might otherwise give rise to a claim under
any other provision of this Agreement or any provision of the Tax Deed and
in particular (but without prejudice to the generality of the foregoing)
the Vendors shall procure that no breach of Warranties 3.1 to 3.11 (both
inclusive) of Part A of SCHEDULE 4 shall take place at any time from the
date hereof down to the Completion Date (both dates inclusive).
8.2 The Vendors shall immediately disclose to the Purchaser in writing any
matter or thing which arises or becomes known to them or any of them
before Completion which is or might be a breach of the Warranties or which
would or might make any of the Warranties inaccurate or misleading or
which is or might be a breach of or which does or might otherwise give
rise to a claim under any other provision of this Agreement or any
provision of the Tax Deed.
8.3 The Vendors shall procure that until Completion the Purchaser and its
advisers shall be given promptly on request such facilities and
information (including access to employees of the Company) regarding the
business, assets, liabilities, contracts and affairs of the Company as
they or any of them may reasonably require.
9. PURCHASER'S REMEDIES
9.1 If it becomes apparent prior to Completion that the Vendors are or will be
in breach of any of the Warranties or any other term of this Agreement
(including any obligation which is to be performed at Completion) or any
provision of the Tax Deed, then the Purchaser, in addition to and without
prejudice to all other rights and remedies available to the Purchaser in
respect thereof, shall be entitled:-
9.1.1 to rescind this Agreement by notice in writing given to the Vendors
at any time prior to Completion, whereupon the Vendors shall
indemnify the Purchaser and keep the Purchaser indemnified in full
for and against all losses, liabilities, damages, costs, claims,
charges and expenses arising from such breach and the consequent
rescission (including but not limited to all legal and other
professional fees and expenses incurred by the Purchaser in
connection with the negotiation and preparation of this Agreement);
or
9.1.2 to complete this Agreement in accordance with Clause 11 and
SCHEDULE 5, provided that the Purchaser shall not thereby be deemed
to have waived or otherwise foregone or be estopped from exercising
any right to compensation, damages or any other right or remedy
available to the Purchaser by reason of such breach.
9
<PAGE>
10. RELEASE OF GUARANTEES
10.1 The Purchaser shall use all reasonable endeavours (short of actual payment
of any monies or the substitution of the guarantees of any person other
than the Purchaser) to procure as soon as reasonably practicable after
Completion the release of each of the Vendors from each of the guarantees
which have been Disclosed and which have been given by them in respect of
any obligations of the Company. Pending such release the Purchaser shall
fully and effectually indemnify and keep indemnified each of the Vendors
from and against any and all costs, claims, demands or liabilities
incurred or arising from any such guarantees.
10.2 The Vendors shall on Completion procure the absolute and unconditional
release of the Company from all guarantees, suretyships, indemnities and
like undertakings given by the Company in respect of any obligations of
any person and shall fully and effectually indemnify and keep indemnified
the Purchaser (as trustee for the Company) from and against any and all
costs, claims, demands or liabilities incurred or arising from any such
guarantees, suretyships, indemnities and like undertakings.
11. COMPLETION
Without prejudice to Clause 4 above, Completion will take place in
accordance with SCHEDULE 5 at the offices of Paul, Hastings, Janofsky &
Walker LLP, 19th Floor, The International Financial Centre, Old Broad
Street, London EC2N 1HQ at 12:00 noon on such date as the Vendors and the
Purchaser may agree, but in any event no later than 16 November 1998, when
the business described in SCHEDULE 5 will be transacted.
12. RESTRICTIVE COVENANTS
12.1 Each of the Vendors and Mr. Badminton hereby undertakes to and covenants
with the Purchaser (for itself and as trustee for all purchasers of the
Shares and as trustee for the Company) that he will not either on his own
account or jointly with or as manager, agent, officer, employee or
otherwise on behalf of any other person, firm or corporation directly or
indirectly (and so that each undertaking below shall be a further and
separate obligation):-
12.1.1 for a period of three years from the date of this Agreement carry
on or be engaged, concerned, or interested in or assist any
business which competes with any business of the Company as carried
on at the Completion Date;
12.1.2 for a period of three years from the date of this Agreement canvass
or solicit business, orders or custom for goods or services
supplied or provided by the Company from any person who at any time
within the period of one year preceding the Completion Date has
been a customer of or in the habit of dealing with the Company for
such goods or services;
12.1.3 for a period of three years from the date of this Agreement solicit
or entice away or endeavour to solicit or entice away from the
Company or employ any person who on the Completion Date or within
the six months prior to the Completion Date is or was a director,
officer, employee or other servant of the Company;
12.1.4 for a period of three years from the date of this Agreement induce
or attempt to induce any person (including without limitation any
agent or independent
10
<PAGE>
distributor) who in the six months prior to the Completion Date has
been a supplier of any goods or services to the Company to cease
to supply, or to restrict or vary the terms of supply, to the
Company; or
12.1.5 at any time after the Completion Date use or procure the use in
connection with any business of any corporate or business name
which is identical to or likely to be confused with the corporate
name or any business name of the Company or which might suggest a
connection with the business of the Company.
13. POST-COMPLETION EFFECT
This Agreement shall remain in full force and effect after and
notwithstanding Completion in respect of all obligations, agreements,
covenants, undertakings, conditions, representations, warranties or
indemnities which have not been done, observed or performed at or prior to
Completion.
14. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and enure for the benefit of each
party's successors and shall be assignable by the Purchaser to the extent
that the rights and benefits under this Agreement shall enure for the
benefit of the Purchaser's assigns. Save as aforesaid this Agreement
shall not be assignable.
15. INFORMATION AND CONFIDENTIALITY
Each of the Vendors and Mr. Badminton hereby undertakes to the Purchaser:-
15.1 that he will at any time and from time to time after Completion give to
the Purchaser on request all information in his possession concerning the
business, dealings, transactions or affairs of the Company and in
particular, but without prejudice to the generality of the foregoing,
relating to claims made or threatened against the Company and the source
from and consideration for which any assets of the Company were acquired
or derived; and
15.2 that he will not, and will use all reasonable endeavours to ensure that no
other person will, at any time after the date hereof, take away or
(directly or indirectly) make use of, divulge or communicate to any person
(except as may be necessary to comply with any statutory obligation or
order of any court or statutory tribunal of competent jurisdiction) any
confidential information or trade secrets of the Company or of any
supplier, customer or other person who has or who has had dealings with
the Company.
11
<PAGE>
16. ANNOUNCEMENTS AND PUBLICITY
Any announcement or circular or other publicity relating to this Agreement
or any termination thereof shall prior to its publication be approved in
writing by each of the parties as to its content, form and manner of
publication (such approval not to be unreasonably withheld or delayed),
save that any announcement, circular or other publicity required to be
made or issued by the Purchaser pursuant to the regulations of rules
governing the NASDAQ National Market System or other recognised investment
exchange or by law may be made or issued by the Purchaser without such
approval.
17. COSTS
The parties shall pay their own costs and expenses in relation to the
preparation, execution and carrying into effect of this Agreement.
18. NOTICES
18.1 Any notice required to be given under this Agreement shall be sufficiently
given if delivered personally or if sent by first-class recorded delivery
post (express air courier service if sent overseas) or if sent by
facsimile transmission and a copy of such facsimile sent by post.
18.2 Any notice which is sent or despatched in accordance with this Clause 18
shall be deemed to have been received by the addressee:-
18.2.1 if delivered personally, at the time of delivery;
18.2.2 in the case of a notice sent by post (or express air courier), 4
Business Days after the envelope containing the notice was
delivered to the postal authorities (or courier service);
18.2.3 in the case of a notice sent by facsimile transmission, if the
notice was sent during the normal business hours of the addressee,
on the day of transmission; otherwise on the next following
Business Day.
18.3 In proving service by post or express air courier, it shall be necessary
to prove only that the notice was sent or despatched and that the notice
was contained in an envelope properly addressed, stamped and delivered to
the postal authorities or courier service in the country from where
despatched. In proving service by facsimile transmission, it shall be
necessary to produce only a legible copy of the confirmation of the
facsimile transmission.
18.4 Any notice required to be given under this Agreement shall be sent:-
18.4.1 to the Vendors c/o Anthony Sampson at:
31 Oakwood Lane
Bowdon
Cheshire WA14 3OL
With a copy to:
Dibb Lupton Alsop
101 Barbirolli Square
Manchester M2 3DL
12
<PAGE>
Facsimile No: +44 161 235 4118
For the attention of: Roger Gough
18.4.2 to the Purchaser at:
Javelin Systems, Inc.
17891 Cartwright Road
Irvine, CA 92614-6216
U.S.A.
Facsimile No: +1 949 223 5138
For the attention of: Horace Hertz
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
The International Financial Centre
19th Floor
Old Broad Street
London EC2N 1HQ
Facsimile No: +44 171 628 4444
For the attention of: Ian Burton
or to such other address or facsimile number as is notified in writing
from time to time by the Vendors (or any one of them) or the Purchaser (as
the case may be) to the other.
19. FURTHER ASSURANCE
The Vendors shall do, execute and perform and shall procure to be done,
executed and performed all such further acts, deeds, documents and things
as the Purchaser may require from time to time effectively to vest the
beneficial ownership of the Shares in the Purchaser or as it directs free
from all liens, charges, options, encumbrances or adverse rights of
interests of any kind and otherwise to give to the Purchaser the full
benefit of this Agreement.
20. WAIVERS
A failure by any party to exercise and any delay, forbearance or
indulgence by any party in exercising any right, power or remedy under
this Agreement shall not operate as a waiver of that right, power or
remedy or preclude its exercise at any subsequent time or on any
subsequent occasion. The single or partial exercise of any right, power
or remedy shall not preclude any other or further exercise of that right,
power or remedy or the exercise of any other right, power or remedy. No
custom or practice of the parties at variance with the terms of this
Agreement shall constitute a waiver of the rights of any party under this
Agreement.
21. ENTIRE AGREEMENT
21.1 This Agreement and any documents in the agreed form and the Disclosure
Letter (the "Acquisition Documents") constitute the entire agreement
between the parties with respect to the subject matter of this Agreement.
13
<PAGE>
21.2 Except for any misrepresentation or breach of warranty which constitutes
fraud:
21.2.1 the Acquisition Documents supersede and extinguish all previous
agreements between the parties relating to the subject matter
thereof; and
21.2.2 each party hereby irrevocably and unconditionally waives any right
it may have to rescind this Agreement or any of the other
Acquisition Documents by reason of any misrepresentation and/or
warranty not set forth in any such document.
22. VARIATION
No variation of this Agreement shall be effective unless made in writing
and signed by or on behalf of each of the parties.
23. JOINT AND SEVERAL LIABILITY
23.1 All representations, warranties, undertakings, agreements, covenants,
indemnities and obligations made or given or entered into by the Vendors
and Mr. Badminton under or pursuant to this Agreement are made or given or
entered into by the Vendors and Mr. Badminton jointly and severally.
23.2 In relation to any two or more persons who are jointly and severally
liable under this Agreement, the liability under this Agreement of any one
or more of such persons shall not be prejudiced or affected in any way by
the giving of time or any forebearance or indulgence granted by the
Purchaser to any other or others of such persons or by the release or
compromise by the Purchaser of any liability under this Agreement of any
other or others of such persons.
24. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, and which together shall constitute one
and the same Agreement. Unless otherwise provided in this Agreement, this
Agreement shall become effective and be dated (and each counterpart shall
be dated) on the date on which this Agreement (or a counterpart of this
Agreement) is signed by the last of the parties to execute this Agreement
or, as the case may be, a counterpart thereof.
25. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit themselves to the non-exclusive
jurisdiction of the English courts.
A S W I T N E S S the hands of the parties hereto or their duly authorised
representatives the day and year first before written.
14
<PAGE>
SCHEDULE 1
Particulars of the Vendors and of the Shares
to be sold and Consideration to be received by each of them
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Share of 13,125 Purchaser's
Shares and Consideration
Number of Shares Shares (expressed as Percentage of
Name and Address to be sold percentage of total) Earnout Shares
- ---------------- ---------------- ---------------------------- --------------
<S> <C> <C> <C>
1. Anthony SAMPSON 10 9.52% 3.75%
31 Oakwood Lane
Bowdon
Cheshire WA14 3OL
2. Contech Consultants Limited 95 90.48% 33.75%
c/o 25 Turnbull's Lane
Gibraltar
--------- ----------- -----------
TOTALS 105 100% 37.5%
--------- ----------- -----------
</TABLE>
15
<PAGE>
SCHEDULE 2
PARTICULARS CONCERNING THE COMPANY
<TABLE>
<CAPTION>
<S> <C> <C>
1. Registered Office: Archway House, Bath Road, Padworth,
Berkshire RG7 5HR
2. Date of Incorporation: 4 August 1993
3. Registered Number: 2842141
4. Directors: Gary Green, Roger Scarlett
5. Secretary: Gary Green
6. Mortgages and Charges: None, but note Isis Factoring Agreement in
place.
7. Share Capital: L1,000 divided into 1,000 ordinary shares of
L1 each, of which 200 have been issued and
are fully paid up.
8. Shareholder No. of shares held
----------- ------------------
RGB Trinet 95
Contech Consultants Limited 95
Anthony Sampson 10
---
200
</TABLE>
16
<PAGE>
SCHEDULE 3
----------
THE PREMISES
------------
I. PART A: PREMISES OWNED AND OCCUPIED BY THE COMPANY
------ ------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1. FREEHOLD
(NONE)
2. LEASEHOLD/LEASE DETAILS
The Company is holding over following the termination of its leases
of Units 30, 35 and 36 at Stakehill Industrial Estate, Whitbrook
Way, Middleton, Manchester.
3. OTHER
(NONE)
4. DESCRIPTION of all leases, underleases, tenancies, licences and
other agreements subject to and/or with the benefit of which the
Premises are held:
Date Document Parties
---- -------- -------
(NONE)
</TABLE>
17
<PAGE>
SCHEDULE 4
PART A
GENERAL WARRANTIES
1. INFORMATION SUPPLIED AND CAPACITY OF VENDORS
1.1 All information contained in this Agreement and all matters contained in
the Disclosure Letter are true and accurate in every respect and there is
no fact or matter which has not been Disclosed which renders any such
matters or information untrue, incomplete or misleading in any material
respect.
1.2 The Vendors and Mr. Badminton have full power and authority to enter into
and perform this Agreement and the Tax Deed, and this Agreement and the
Tax Deed, when executed, will constitute valid and binding obligations on
the Vendors and Mr. Badminton in accordance with the respective terms
thereof.
2. ACCOUNTS AND RECORDS
2.1 The Company has at all times properly and accurately maintained all books,
accounts and records of whatever kind required by law to be maintained.
2.2 The books, accounts and records of the Company accurately record all
matters required by law to be entered therein and fairly present and
reflect in accordance with generally accepted accounting principles and
practice the assets and liabilities (actual, prospective and contingent)
of the Company and all transactions to which it is or has been a party.
2.3 Prior to the Acquisition Date the Company had not carried on business or
traded nor entered into any contracts or obligations since its date of
incorporation, and was dormant within the meaning of section 250(3) of the
Companies Act.
2.4 The Accounts have been properly prepared in accordance with good
accounting practice and on a basis consistent with that previously adopted
and so far as the Vendors are aware fairly reflect levels of turnover and
expenses and provisions, assets and liabilities of the Company as at
31 August 1998.
3. BUSINESS SINCE 31 AUGUST 1998
Since 31 August 1998:-
3.1 the Company has carried on its business in the ordinary and usual course
both as regards the nature, scope and manner of conducting the same and so
as to maintain the same as a going concern;
3.2 the Company has not borrowed, raised or taken any money or any financial
facility;
3.3 the Company has paid its creditors within the times agreed with such
creditors and there are no debts outstanding by the Company which have
been due for more than ninety (90) days;
18
<PAGE>
3.4 the Company has not entered into any capital commitments or any
transaction or agreement for the disposal of any asset or under which it
has incurred or will incur (otherwise than in the ordinary and usual
course of carrying on its business) any liabilities (including contingent
liabilities) not provided for in the Accounts;
3.5 the Company has not entered into any unusual, long-term (that is to say,
incapable of performance in accordance with its terms within six months
after the date on which it was entered into or undertaken) arrangements,
commitments or contracts;
3.6 the business of the Company has not been adversely affected by the loss of
or material reduction in orders from any customer or the loss of or
material reduction in any source of supply or by any abnormal factor not
affecting similar businesses to a like extent and none of the Vendors is
aware of any facts which are likely to give rise to any such adverse
effects;
3.7 no distribution of capital or income (including for the avoidance of
doubt, any dividend) has been declared, made or paid or agreed or resolved
to be declared, made or paid by the Company;
3.8 no loans have been made by the Company and no loan capital or loan has
been or has become liable to be repaid by the Company in whole or in part;
3.9 no sum has been paid or voted to any director or employee (or ex-director
or ex-employee) of the Company by way of remuneration or otherwise in
excess of the rates paid to him by the Company at 31 August 1998 and no
new employment agreements have been made by the Company;
3.10 none of the fixed assets of the Company shown in the Accounts and none
acquired by the Company since the Acquisition Date has been lost, damaged
or destroyed; and
3.11 there has been no material adverse change in the financial position or
trading prospects or turnover of the Company nor is any such material
change expected.
4. TRADING AND CONTRACTUAL ARRANGEMENTS
4.1 None of the contracts or obligations entered into by the Company is ultra
vires the Company or exceeds the powers of the Directors to bind the
Company and so far as the Vendors are aware the Company is not in default
under any such contracts or obligations.
4.2 The Company is not a party to any contract, transaction, obligation,
commitment or liability which, whether by reason of its nature, term,
scope, price or otherwise is or may be material in relation to its
business, profits or assets or which:-
4.2.1 is in any way otherwise than in the ordinary course of the
Company's business;
4.2.2 is of an unusual or abnormal nature, or not fully on an arm's
length basis;
4.2.3 is of a long-term nature (that is to say incapable of performance
in accordance with its terms within six months after the date on
which it was entered into or undertaken);
4.2.4 is incapable of termination in accordance with its terms by the
Company on 60 days' notice or less;
19
<PAGE>
4.2.5 cannot readily be fulfilled or performed by the Company on time
without undue or unusual expenditure of money or effort; or
4.2.6 involves the supply of goods and/or services the aggregate value of
which will represent in excess of five per cent of the budgeted
turnover for the current financial year of the Company.
4.3 No sums of whatever nature are owing by the Company to any of the Vendors
or any of the Directors or any person being a Connected Person of the
Vendors or the Directors or any of them respectively.
4.4 The Company has not been a party to any transaction to which any of the
provisions of sections 320 (substantial property transactions involving
directors, etc.), 322 (liability arising from contravention of section
320), or 330 (general restrictions on loans, etc. to directors and persons
connected with them) of the Companies Act may apply.
4.5 None of the Vendors nor any person being a Connected Person in relation to
any Vendor has any direct or indirect interest with any business which has
a close trading relationship with that of the Company or which is or is
likely to become competitive with the business of the Company.
4.6 There are no outstanding arrangements or understandings (whether legally
binding or not) between the Company and any person who is a shareholder
(or the beneficial owner of any interest in the Company or in any company
in which the Company is interested), or any person who is a Connected
Person of any such person, relating to the management of the Company's
business, or the appointment or removal of the Directors, or the ownership
or transfer of ownership, or the letting of any of the assets of the
Company, or the provision, supply, purchase or finance of goods, services
or other facilities to, by or from the Company or otherwise howsoever in
relation to the Company's affairs.
4.7 The Company is not and has not agreed to become bound by any debenture or
guarantee or contract for indemnity or suretyship or any like undertaking
and there is not now outstanding any guarantee or contract for indemnity
or suretyship or like undertaking given for the accommodation of or in
respect of any obligation on the part of the Company.
4.8 No person is entitled to receive from the Company any finders' fee,
brokerage or commission in connection with the sale of the Shares to the
Purchaser.
20
<PAGE>
5. ASSETS (OTHER THAN THE PREMISES)
5.1 The Company was at 31 August 1998 the owner with good and marketable title
to all the assets (other than the Premises) included in the Accounts and
now so owns and has in its possession and under its control all such
assets (save for current assets subsequently disposed of in the ordinary
course of its business) and all assets acquired by it after 31 August 1998
and all such assets are the sole and absolute property of the Company free
from any charge, lien, encumbrance or equity and no other person has or
claims any rights in relation to such assets or any of them and in
particular all such assets are free from any hire-purchase, leasing or
rental agreement for payments on deferred terms or bill of sale.
5.2 In relation to any asset held by the Company which is the subject of any
hire-purchase, conditional sale, chattel leasing or retention of title
agreement or otherwise belonging to a third party, so far as the Vendors
are aware, no event has occurred which entitles or which upon intervention
or notice by any third party may entitle any such third party to repossess
the asset concerned, or terminate the agreement, or any licence in respect
of the same.
5.3 The stock in trade of the Company is in good condition and us capable of
being sold by the Company in the ordinary course of business within a
period of three months from the Completion Date in accordance with the
Company's current price lists and without rebate or allowance to a
purchaser.
5.4 The fixed and loose plant, machinery, furniture, fixtures, fittings,
equipment, vehicles and other moveable assets used in connection with the
business of the Company are not surplus to requirements and are in good
repair and condition and satisfactory working order.
5.5 The Company is not and has never been the holder or beneficial owner of
nor has it agreed to acquire any share or loan capital of any other body
corporate (whether incorporated in the United Kingdom or elsewhere).
5.6 The Company is not entitled to the benefit of any debt otherwise than as
the original creditor and is not and has not agreed to become a party to
any factoring or discounting arrangement.
5.7 None of the debts due as at 31 August 1998 remains unpaid at the date of
this Agreement nor has any debt which has subsequently become due to the
Company (or any part of any such debt) remained unpaid for more than three
months after the due date for payment or been released or written off or
proved to be irrevocable, nor is any such debt now regarded as
irrevocable.
6. EMPLOYEES AND AGENTS
6.1 The names of all employees of the Company together with copies of all
service contracts and contracts for services and full particulars of the
current terms of employment of all officers, employees, consultants and
agents of the Company have been Disclosed.
6.2 There is not now outstanding any contract of service or for services
between the Company and any of its officers, employees, consultants or
agents which is not
21
<PAGE>
determinable by the Company at any time on three months' notice or less
without compensation (other than under the Employment Rights Act 1996)
or any liability (other than for accrued salary, wages, commission or
pension) on the part of the Company to or for the benefit of any person
who is or has been an officer, employee, consultant or agent of the
Company.
6.3 No present officer, employee, consultant or agent of the Company has given
or received notice terminating his employment or appointment and no such
officer, employee, consultant or agent is entitled nor (so far as any of
the Vendors is aware) intends or is likely as a result of this Agreement
or Completion or otherwise to terminate his employment or appointment with
the Company.
6.4 Particulars have been Disclosed of all loans and other benefits enjoyed by
any officer, employee, consultant or agent of the Company in relation to
the affairs of the Company and of all contracts, transactions and
arrangements made or entered into by the Company and to which any of
sections 330 to 338 of the Companies Act applies.
6.5 The Company is not under any legal or moral liability or obligation to pay
bonuses, pensions, gratuities, superannuation, allowances or the like to
any of its past or present officers or employees or their dependants nor
is it a party to any arrangement or promise to make or in the habit of
making ex gratia or voluntary payments by way of bonus, pension, gratuity,
superannuation, allowance or the like to any such persons and there are no
schemes or arrangements for payment of retirement pension or death benefit
or similar schemes or arrangements in operation or contemplated in
relation to the Company.
6.6 Save to the extent (if any) to which provision or allowance has been made
in the Accounts, no liability has been incurred by the Company to make any
redundancy payments or any protective awards or to pay damages or
compensation for wrongful or unfair dismissal or for failure to comply
with any order for the reinstatement or re-engagement of any employee and
no gratuitous payment has been made or promised by the Company in
connection with the actual or proposed termination or suspension of
employment or variation of any contract of employment of any present or
former director or employee.
6.7 The Company has not recognised any trade union or association of trade
unions or any other organisation of employees in respect of its employees
or any of them.
6.8 The Company has not in existence nor is proposing to introduce any share
incentive scheme, share option scheme or profit sharing scheme or any
other scheme analogous to any of the foregoing schemes for all or any of
its directors, officers or employees.
7. INSURANCE
7.1 The Company is covered by valid insurances against all risks normally
insured against by persons carrying on the same or similar businesses as
those carried on by the Company and in particular all assets are and have
at all material times been insured to the replacement or reinstatement
value advised by its insurers against fire and such other risks as
aforesaid and the Company is, and has at all material times been, covered
against accident, damage, injury, third party loss (including product
liability), loss of profits and other risks normally insured against by
persons carrying on the
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same or similar businesses as those carried on by the Company as advised
by its insurers.
7.2 Particulars of all the Company's insurances have been Disclosed and there
are no outstanding claims or, so far as the Vendors are aware,
circumstances likely to give rise to a claim thereunder and, so far as the
Vendors are aware, nothing has been done or omitted to be done which has
made or could make any policy of insurance void or voidable or whereby the
premiums are likely to be increased.
7.3 None of the said policies is subject to any special or unusual terms or
restrictions or to the payment of any premium in excess of the normal
rate.
8. GRANTS
Particulars have been Disclosed of all investment and other grants and
allowances and of all loans or financial aid of any kind applied for or
received or receivable by the Company from any governmental department,
board, body or agency or any other supranational or national or local
authority, body or agency.
9. BANKING FACILITIES
Details of all overdrafts, loans or other financial facilities outstanding
or available to the Company and of all its bank and deposit accounts and
true and correct copies of all documents relating thereto have been
Disclosed and, so far as the Vendors are aware, none of the Vendors or the
Company has done or omitted to do anything whereby the continuance of any
such facilities in full force and effect might be adversely affected or
prejudiced.
10. DEFECTIVE AND UNSAFE PRODUCTS/SERVICES
10.1 There are no outstanding claims against the Company in respect of defects
in quality or delays in delivery or completion of contracts or
deficiencies of design or performance of equipment or otherwise relating
to liability for goods or services supplied or to be supplied by the
Company and no such claims are threatened or anticipated.
10.2 The Company has no knowledge that any goods or products for which the
Company has responsibility under section 2 of the Consumer Protection Act
1987 ("CPA") or for which the Company assumes responsibility under any
contract of indemnity or otherwise is defective within the meaning of
section 3 of the CPA or that the Company supplies or possesses for supply
any goods or products which are in breach of the general safety
requirement provided by section 10 of the CPA.
11. LITIGATION
Neither the Company nor, so far as the Vendors are aware, any person for
whose acts or omissions it may be vicariously liable is engaged in or
subject to any civil, criminal or arbitration proceedings and, as far as
any of the Vendors are aware, there are no such proceedings pending or
threatened by or against the Company or against any such person and, so
far as the Vendors are aware, there are no facts or circumstances likely
to give rise to any such proceedings.
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12. INSOLVENCY
12.1 No order has been made, or petition presented, or resolution passed for
the winding-up of the Company and there is not outstanding:-
12.1.1 any petition or order for the winding-up of the Company;
12.1.2 any appointment of a receiver over the whole or any part of the
undertaking or assets of the Company;
12.1.3 any petition or order for the administration of the Company;
12.1.4 any voluntary arrangement between the Company and any of its
creditors;
12.1.5 any distress or execution or other process levied in respect of the
Company, which remains undischarged; or
12.1.6 any unfulfilled or unsatisfied judgment or court order against the
Company.
12.2 The Company is not deemed unable to pay its debts within the meaning of
section 123 of the Insolvency Act 1986.
13. COMPLIANCE
All necessary licences, consents, permits and authorities (public and
private) have been obtained by the Company to enable the Company to carry
on its business effectively in the places and in the manner in which such
business is now carried on and all such licences, consents, permits and
authorities are valid and subsisting and none of the Vendors knows of any
reason why any of them should be suspended, cancelled or revoked or should
not be renewed upon the expiry of their existing term.
14. CHARGES
14.1 No charge in favour of the Company is void or voidable for want of
registration.
14.2 No event has occurred causing, or which upon intervention or notice by any
third party may cause, any floating created by the Company to crystallise
or any charge created by it to become enforceable nor has any such
crystallisation occurred or is such enforcement in process.
15. DIRECTORS AND OFFICERS
The Directors are the only directors of the Company and no person is a
shadow director (within the meaning of section 741 of the Companies Act)
of the Company.
16. CAPITAL OF THE COMPANY
16.1 The authorised and issued share capital of the Company is as set out in
part 1 of SCHEDULE 2.
16.2 The Vendors are the legal and beneficial owners and registered holders of
the Shares which have been issued in proper legal form and are fully paid
or credited as fully paid, and each of the Vendors is entitled to sell
such of the Shares as are set out opposite his name in Column 2 of
SCHEDULE 1 free from all claims, charges, liens, encumbrances, equities
and adverse rights of any description and together with all rights
attached or accruing thereto as at and from the Completion Date.
16.3 There is not now outstanding any loan capital of the Company nor any
agreement, arrangement or option under which any person may now or at any
time hereafter call for the creation, allotment, issue, sale or transfer
of any loan or share capital of the Company or require any loan or share
capital of the Company to be put under option.
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17. EFFECT OF AGREEMENT
So far as the Vendors are aware, there are no contracts or arrangements
(whether written or oral) to which the Company is a party which will by
their terms be determinable as a result of the provisions of this
Agreement or which will or may be terminated by completion of this
Agreement.
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SCHEDULE 4
PART B
WARRANTIES RELATING TO TAX
1. ADMINISTRATION AND RETURNS
1.1 The Company has no liability for Tax (whether actual, deferred or
contingent) in respect of any financial period down to and including the
Acquisition Date or referable to profits (including income and gains) made
or deemed to have been made on or before the Acquisition Date which has
not been provided for or disclosed in the Accounts.
1.2 At the date hereof the Company has duly paid all Tax which it has become
liable to pay.
1.3 The Company is under no liability to pay any interest, penalty, fine or
default surcharge in connection with any Tax nor, so far as the Vendors
are aware, is any such liability likely to arise.
1.4 The Company has properly and duly made all returns and supplied all
notices, accounts and information for the purposes of Tax required to have
been made or supplied to any Tax Authority.
1.5 None of the aforementioned returns, notices, accounts and information has
been or, so far as the Vendors are aware, is likely to be disputed by any
Tax Authority.
1.6 The Company's affairs have not been and, so far as the Vendors are aware,
are not likely to be the subject of any dispute, investigation or
discovery by or with any Tax Authority.
1.7 All claims, disclaimers, elections, appeals or applications which the
Company has made in respect of Tax have been Disclosed.
2. EMPLOYMENT TAXES
2.1 At the date hereof the Company has duly paid and accounted for all sums
payable to the Inland Revenue in respect of income assessable to income
tax under Schedule E (including any sums payable in respect of benefits
provided to the Company's employees or former employees) under section 203
of the Taxes Act and all regulations made thereunder.
2.2 At the date hereof the Company has duly paid and accounted for all
National Insurance contributions required of it under the provisions of
the Social Security Contributions and Benefits Act 1992 and regulations
made thereunder.
3. FOREIGN MATTERS
The Company is and has at all times been resident in the United Kingdom
for Tax purposes.
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4. MATTERS SINCE THE ACQUISITION DATE
Since the Acquisition Date:-
4.1 no Event (as defined in the Tax Deed) has occurred which has given or may
give rise to a Tax liability on the Company other than transactions
entered into in the ordinary course of business; and
4.2 save in relation to entertainment and car leasing expenditure, the Company
has not made any payment either alone or in aggregate with any other
payments of a similar nature which exceed L5,000 which will not be
deductible for the purposes of corporation tax in computing the taxable
profits of the Company.
5. VALUE ADDED TAX
5.1 The Company is a taxable person for the purposes of VAT and has duly
registered with its local Customs and Excise Office.
5.2 The Company has at all times issued correct tax invoices to all persons
properly requiring the same in respect of its taxable supplies either by
way of goods or of services and has likewise requested and received all
appropriate tax invoices from its suppliers and others and has kept all
necessary records and documents required to complete and verify its VAT
returns.
5.3 The Company has in all other material respects complied with the VAT
legislation and all regulations, notices, orders, provisions, directions
and conditions relating to VAT.
5.4 In relation to VAT, the Company is not in arrears with any payments or
returns under such legislation or liable to any abnormal or non-routine
payment or any forfeiture, penalty, interest or surcharge or to the
operation of any penal, interest or surcharge provisions contained
therein.
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SCHEDULE 4
PART C
PROPERTY WARRANTIES
1. APPLICATION
In this Part C of SCHEDULE 4 these warranties apply to each and every one
of the Premises as set out in SCHEDULE 3.
2. THE PREMISES
2.1 The particulars of the Premises (and of any leases, underleases,
tenancies, licences and other agreements subject to and/or with the
benefit of which the same are held) as set out in Part A of SCHEDULE 3 are
true, complete and accurate.
2.2 The Company does not own, use or occupy any premises other than the
Premises and has no liability (existing or contingent) in respect of any
land or building previously owned, occupied or otherwise used by the
Company or in which it had an interest.
3. TITLE
3.1 The Company is solely entitled at law and in equity to the Premises and
has a good title to the Premises.
3.2 The Company is in physical possession and actual occupation of the whole
of the Premises on an exclusive basis and no right of occupation or
enjoyment has been acquired or is in the course of being acquired by any
third party or has been granted or agreed to be granted to any third
party.
3.3 All of the title deeds and documents necessary to prove title to the
Premises are in the Company's possession and control, have been properly
stamped and, where necessary, have been duly registered. On Completion
the documents of title to be handed over to the Purchaser will consist of
the original documents or, where appropriate, properly examined abstracts.
3.4 No right, easement, quasi easement, profit, licence or informal
arrangement, public or private, is enjoyed or is in the course of being
acquired by or against the Premises and none has been proposed or is
necessary for the full use and continued beneficial occupation of the
Premises.
4. LEASEHOLD PREMISES
4.1 Each of the leasehold Premises is held under the lease ("Lease") details
of which are correctly set out in Part A of SCHEDULE 3.
4.2 Each Lease is a headlease.
4.3 All monies due to the lessor under the Lease (whether or not reserved as
rent) have been paid as and when they became due and none have been
commuted, waived or paid in advance of the due date for payment.
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4.4 No monies, collateral assurances, undertakings, waivers or concessions
have been made paid or given by any party to the Lease.
4.5 The documents of title to the Premises include all necessary consents for
the grant of the Lease, satisfactory evidence of the reversioner's title
and of the current rent payable, all reversioner's consents required under
the Lease and all assignments.
4.6 The Company has strictly observed and performed all covenants,
restrictions, stipulations and other obligations contained in the Lease
and any deeds or documents supplemental thereto and there has been no
waiver (expressly or impliedly) of or acquiescence to any breach thereof.
5. UNDERLETTINGS
There are no leases, tenancies, licences and agreements to which the
Premises are subject.
6. PLANNING AND USER OF PREMISES
6.1 The current use of the Premises is the permitted use for the purposes of
the Town & Country Planning Acts 1971 to 1990 (the "Planning Acts").
6.2 All necessary consents have been obtained (copies of which have been
Disclosed) for the purposes of the Planning Acts and building regulations
for the current use of the Premises and any and all alterations and
improvements to it.
7. ENCUMBRANCES
7.1 The Premises are free from any mortgage, debenture (whether legal or
equitable and whether fixed or floating), charge, lien or other right in
the nature of security or any option, right of pre-emption or right of
first refusal, nor is there any agreement or commitment to give or create
any of the foregoing.
7.2 There are no covenants, restrictions, stipulations or other encumbrances
(whether of a private or public nature) affecting the Premises which are
of an onerous or unusual nature or affect their value or which conflict
with the current use of the Premises.
7.3 All covenants, restrictions, stipulations and other encumbrances affecting
the Premises (including all covenants under any Lease, underlease, licence
or other agreement or any consent or approval obtained thereunder) have
been strictly observed and performed.
8. COMPLAINTS AND DISPUTES
8.1 No notices, complaints or requirements have been issued or made (whether
formally or informally) by any competent authority or undertaking
exercising statutory or delegated powers in respect of the Premises or the
user thereof or any machinery, plant or equipment therein and the Vendors
do not expect and are not aware of any matter which could lead to any such
notice or complaint or requirement being issued or made.
8.2 No notices, orders or resolutions have been issued, made or passed by any
local, county or other competent authority for the compulsory acquisition,
closing, demolition or clearance of the Premises or any part thereof and
the Vendors do not
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expect and are not aware of any matter or circumstances
which could lead to any such notice, order or resolution.
8.3 There exists no dispute between the Company and the owner or occupier of
any other premises adjacent to or neighbouring the Premises or with any
lessor, lessee, licensee or other occupier of the Premises and the Vendors
do not expect and are not aware of any circumstances which may give rise
to any such dispute hereafter.
9. VAT STATUS
Where an election under paragraph 2 of Schedule 6A to the VAT Act 1983
(election to waive exemption) has been made in respect of the Premises
such fact is correctly indicated in Part A and Part B of SCHEDULE 3.
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SCHEDULE 4
PART D
INTELLECTUAL PROPERTY WARRANTIES
1. DEFINITIONS
In this Part D of SCHEDULE 4 and in SCHEDULE 5:-
"Intellectual Property" means patents, registered and
unregistered trade marks, registered
and unregistered service marks,
registered designs, utility models (in
each case for the full period thereof
and all extensions and renewals
thereof), applications for any of the
foregoing and the right to apply for
any of the foregoing in any part of
the world, inventions, confidential
information, know-how, business names,
trade names, brand names, copyright
and rights in the nature of copyright
and design rights and get-up and any
similar rights situated in any
country; and the benefit (subject to
the burden) of any and all agreements,
arrangements and licences in
connection with any of the foregoing;
"Intellectual Property Rights" means all Intellectual Property owned,
used or enjoyed by the Company in
connection with the business carried
on by the Company at Completion and
references to Intellectual Property
Rights shall be construed as including
references to each individual right
and all of them;
2. WARRANTIES
2.1 Details of all of the Intellectual Property Rights have been Disclosed.
2.2 All of the Intellectual Property Rights are in full force and effect.
2.3 The Company is the sole beneficial owner of all the Intellectual Property
which is required for the lawful carrying on of the Company's business as
conducted at Completion.
2.4 To the extent to the Intellectual Property Rights are capable of
registration, they have been registered in the name of the Company as sole
proprietor.
2.5 Complete and accurate details of all licences and/or authorities from any
third party under which any Intellectual Property is used by the Company
have been Disclosed.
2.6 The Company is not a party to any confidentiality agreement or any
agreement which restricts the free use or disclosure by the Company of any
information, documentation or other materials used in the Company's
business.
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2.7 Details of all corporate, business and trading names owned or used by the
Company have been Disclosed.
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SCHEDULE 4
PART E
ENVIRONMENTAL AND HEALTH AND SAFETY WARRANTIES
PART 1 - ENVIRONMENTAL WARRANTIES
1. DEFINITIONS
"Environment" means all or any of the air, water and
land including air within buildings
and other natural or man-made
structures above or below ground;
"Environmental Reports" means all surveys, audits,
investigations and reports relating to
the Premises and the extent to which
the Premises and the Company comply
with Environmental Law, the likelihood
of Harm arising out of the condition
of the Premises, noise, the
Environment, or the impact on the
Environment of any current, prior or
proposed use of the Premises;
"Environmental Authorisations" means any permits, licences, consents
or other authorisations required under
any Environmental Law for the carrying
on the Company's operations or the
occupation or use of the Premises by
the Company;
"Environmental Law" means all applicable statutes,
statutory instruments, common law,
treaties, regulations, directives,
codes of practice, circulars, guidance
notes and the like and other measures
imposed by any relevant body to which
the Company or the Premises is or has
been subject which relate to the
pollution or protection of the
Environment or the protection of the
health of humans, animals or plants;
"Harm" means harm to the health of living
organisms or other interference with
the ecological systems of which they
form part and, in the case of man,
includes offence caused to any of his
senses or harm to his property and
"harmful" has a corresponding meaning.
2. WARRANTIES
2.1 The Company complies and has complied at all times in all material
respects with all conditions, limitations, obligations, prohibitions and
requirements contained in or imposed by any Environmental Law and there
are no facts or circumstances which may give rise to any liability under
Environmental Law.
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2.2 All Environmental Authorisations have been obtained and maintained in full
force and effect and there are no facts or circumstances which have led or
so far as the Vendors are aware which may give rise to any breach,
revocation, modification, amendment, variation or suspension of them or
any of them or which have resulted or may result in any Environmental
Authorisation not being extended, renewed, granted or (where necessary)
transferred.
2.3 So far as the Vendors are aware, no work or expenditure is required under
any Environmental Law or Environmental Authorisation or in order to carry
on lawfully the business of the Company.
2.4 No claims, investigations or other proceedings have been brought or so far
as the Vendors are aware threatened by or against the Company or any of
its directors, officers or employees nor has the Company received any
complaints from any third party in respect of Harm to the Environment or
to human health caused by or as a result of occupation of the Premises or
occupation by the Company of any property formerly owned or occupied by
the Company whether under Environmental Law or otherwise and so far as the
Vendors are aware there are no facts or circumstances which may lead to
any such claims, investigations or proceedings or complaints.
2.5 Copies of all Environmental Authorisations and Environmental Reports
together with all assessments required to be carried out pursuant to the
Control of Substances Hazardous to Health Regulations 1994 have been
supplied to the Purchaser.
2.6 All information provided by and on behalf of the Company to any statutory
authority and all records and data required to be maintained by the
Company under the provisions of any Environmental Legislation regarding
the operation of the business of the Company including any processes
carried on at or emissions and discharges from the Premises is complete
and accurate.
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PART 2 - HEALTH AND SAFETY WARRANTIES
1. DEFINITIONS
"Health and Safety Legislation" means all applicable statutes,
statutory instruments, common law,
treaties, regulations, directives,
codes of practice, guidance notes
including (but without limitation) the
Fire Precautions Act 1971, the Health
and Safety at Work etc. Act 1974, the
Management of Health and Safety at
Work Regulations 1992 and the
Workplace (Health Safety & Welfare)
Regulations 1992 concerning the health
and safety of those who work for the
Company, whether as employees or
otherwise, visit the Premises or are
in any way affected by the undertaking
of the Company or by persons working
for the Company;
"Health and Safety Studies" means all reports, audits,
investigations or assessments required
to be carried out by the Company to
comply with Health and Safety
Legislation.
2. WARRANTIES
2.1 The Company has complied and continues to comply in all material respects
with all conditions, limitations, obligations, prohibitions and
requirements contained in any Health and Safety Legislation and so far as
the Vendors are aware there are no facts or circumstances which may lead
to any breach of any Health and Safety Legislation.
2.2 The Company has carried out all Health and Safety Studies and they have
been considered by the Vendors in giving these warranties.
2.3 There have been no claims, investigations or proceedings against or
threatened against the Company or any of its directors, officers or
employees in respect of accidents, injuries, illness, disease or any other
harm to the health and safety of employees, contractors or any other
persons caused by breaches of Health and Safety Legislation or otherwise
and so far as the Vendors are aware there are no facts or circumstances
which may lead to any such claims, investigations or proceedings.
2.4 The Company has and has maintained employers' liability and public
liability insurance cover having regard to the activities carried out by
the Company as recommended by its insurers. No claims in respect of
health and safety have been made or so far as the Vendors are aware are
contemplated under such insurance policies.
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SCHEDULE 5
COMPLETION REQUIREMENTS
1. OBLIGATIONS OF THE VENDORS
1.1 At Completion the Vendors shall deliver to the Purchaser:-
1.1.1 the Tax Deed duly executed as a deed by the parties thereto (other
than the Purchaser);
1.1.2 duly executed transfers of the Shares in favour of the Purchaser or
its nominees and the share certificates in respect of the Shares,
together with any power of attorney or other authority under which
such transfers have been executed and an indemnity in the agreed
form in relation to any missing certificates.
1.1.3 subject to paragraph 2.1.4 below, a release executed as a deed by
each of the Vendors in the agreed form releasing the Company from
all claims (actual or contingent) which he has or may have or might
thereafter have on account of or in relation to any act, matter,
cause or thing down to and inclusive of the Completion Date;
1.1.4 the statutory and other books duly written up to date, the
Certificate of Incorporation, Certificate(s) of Incorporation on
Change of Name and common seal of the Company;
1.1.5 the title deeds relating to the Premises and all insurance
policies, premium receipts, maintenance contracts and other
documents relating to the Premises;
1.1.6 all books of account and other books and records and copies of the
memorandum and articles of association of the Company;
1.1.7 all documents of title, certificates, deeds, licenses, agreements
and other documents relating to the Company's Intellectual Property
Rights and all manuals, drawings, plans, documents and other
materials and media on which the Company's know-how is recorded;
1.1.8 the Employment Agreements duly executed by each of Mr. Sampson and
Mr. Badminton;
1.1.9 the certificate and undertaking as to Regulation "S" in the form
contained in SCHEDULE 7 duly executed by each of the Vendors; and
1.1.10 the Earnout Agreement in the form contained in SCHEDULE 9 duly
executed by each of the Vendors and the Individual Vendors under
the RGB Agreement.
1.2 At Completion the Vendors shall procure that:-
1.2.1 a board meeting of the Company be held at which:-
(a) it shall be resolved that the said transfers in respect of the
Shares be passed for registration subject only to their being
re-presented duly stamped;
(b) all existing bank mandates shall be revoked and new
instructions to banks shall be given in such form as the
Purchaser may require;
(c) Richard Stack and Horace Hertz shall be appointed directors
and Bertram Badminton shall be appointed chairman of the
Company;
(d) the Employment Agreements shall be approved and executed on
behalf of the Company;
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1.2.2 all amounts owing to the Company by any of the Vendors or any of
the Directors or any Connected Person in relation to the Vendors,
the Directors or any of them shall be repaid in full; and
1.2.3 all the papers, books, records (in whatever medium) and all other
assets of the Company which are within the possession or under the
control of the Vendors, the Directors or any of them, or any
Connected Person of the Vendors the Directors of any of them are
delivered to the Company.
2. OBLIGATIONS OF THE PURCHASER
2.1 On Completion the Purchaser shall:-
2.1.1 deliver to the Vendors a counterpart of the Tax Deed duly executed
by the Purchaser;
2.1.2 deliver to the Vendors a counterpart of the Earnout Agreement duly
executed by the Purchaser;
2.1.3 satisfy the consideration for the Shares as provided in Clause 3 of
this Agreement by the delivery of stock certificates in the names
of the Vendors in respect of the relevant 13,125 Purchaser's Shares
and Consideration Shares; and
2.1.4 procure that the Company repays the loans outstanding to the
Company from the Vendors as specified in the Disclosure Letter.
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SCHEDULE 6
TAX DEED
DATE: 1998
PARTIES:
(1) THE PERSONS whose names and addresses are set out in the Schedule hereto
("Covenantors"); and
(2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of
business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
RECITAL
Pursuant to an agreement of today's date ("Agreement") the Purchaser has today
completed the purchase of the whole of the issued share capital of Jade
Communications Limited in reliance (inter alia) upon the undertaking of the
Covenantors to enter into this Deed and the undertakings and covenants by the
Covenantors hereinafter contained.
NOW THIS DEED WITNESSES as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Deed (including the Schedule):-
"Accounts Relief" means any Relief arising prior to
Completion which has been taken into
account in computing, or in obviating
the need for, any provision for
deferred tax in the Accounts but which
is not available to the Company;
"Assessment" means any claim, assessment, notice,
demand, letter, counterclaim or other
document issued or made, or action
taken, by or on behalf of any Tax
Authority (or any other person,
including the Company) by virtue of
which the Company has, or is alleged
to have, a Liability to Tax, or from
which it appears that the Company has,
or will or may have, a Liability to
Tax, or from which it is sought to
impose upon the Company a Liability to
Tax;
"Claim" means any claim by the Purchaser
against the Covenantors pursuant to
Clause 2;
"Deemed Tax Liability" has the meaning ascribed to that
expression in Clause 1.4;
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"Event" means any transaction (including entry
into the Agreement or the purchase or
sale of an asset), act (including
Completion, the migration of a company
or the inclusion of a company within a
group of companies for any purpose),
omission, receipt, distribution and
failure to make sufficient
distributions to avoid an
apportionment or deemed distribution
of income and any combination of two
or more such occurrences;
"Liability to Tax" means (i) a liability to pay Tax and
(ii) such sums treated as being a
liability to tax by Clause 1.3;
"Post Completion Relief" means any Relief which arises by
reference to an Event occurring after
Completion;
"Relief" means any relief, loss, allowance,
exemption, set-off, deduction or
credit in respect of any Tax, or any
set-off or deduction in computing
income, profits or gains for the
purpose of any Tax;
"Tax" means all taxes, and all duties,
levies, imposts, charges and
withholdings of any nature whatsoever,
whether created or imposed in the
United Kingdom or elsewhere and at
whatever time created or imposed which
are collected and administered by any
Tax Authority, in all cases together
with all incidental or supplemental
penalties, charges, interest, fines
and default surcharges and costs;
"Tax Authority" means any taxing or other authority
(whether within or outside the United
Kingdom) competent to impose,
administer or collect any Tax.
1.2 In this Deed:-
1.2.1 references to the loss of a Relief or of a right to repayment of
Tax include references to the loss, withdrawal, nullifying or
cancellation of a Relief or of a right to repayment of Tax;
1.2.2 references to the utilisation of a Relief or of a right to
repayment of Tax include references to the utilisation or setting
off of a Relief or of a right to repayment of Tax; and
1.2.3 references to the loss or utilisation of a Relief shall be
construed accordingly.
1.3 Subject to Clause 1.4 there shall be treated as an amount equal to a
"Liability to Tax" which arises as a result of an Event occurring on or
before Completion:-
1.3.1 any amount of any Accounts Relief which is not available to the
Company;
1.3.2 the value of all or any part of a right to repayment of Tax which
has been treated as an asset of the Company in the Accounts or
which has been taken
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into account in computing, or in obviating the need for, any
provision for deferred tax in the Accounts which is not available
to the Company;
1.3.3 the value of all or any part of a right to repayment of Tax arising
after Completion which is used to set against any liability to make
an actual payment of Tax in circumstances where the Purchaser would
(but for such utilisation or set off) have been entitled to make a
Claim by virtue of such liability to make an actual payment of Tax;
1.3.4 the amount of any Accounts Relief or Post Completion Relief which
is used to relieve income, profits or gains in circumstances where
(but for such utilisation) the Purchaser would have been entitled
to make a Claim by virtue of such income, profits or
gains; and
1.3.5 any amount the Company is obliged to pay by way of reimbursement,
recharge, indemnity or damages in relation to Tax:-
(a) in respect of or arising from any Event effected or demand
made effected on or before Completion; or
(b) by reference to any profits earned, accrued or received on or
before Completion.
1.4 In any case falling within Clause 1.3 the amount that is to be treated for
the purposes of this Deed as a Liability to Tax of the Company ("Deemed
Tax Liability") shall be determined as follows:-
1.4.1 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the
relevant Relief consisted of a deduction from or offset against
Tax, the Deemed Tax Liability shall be the amount of that deduction
or offset;
1.4.2 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the
relevant Relief consisted of a deduction from or offset against
income, profits or gains, the Deemed Tax Liability shall be:-
(a) if the Relief is not available, the amount of Tax which would,
on the basis of the rates of tax current at Completion, have
been saved had such Relief been available (assuming sufficient
income, profits or gains to be able fully to utilise the
Relief and all other Reliefs available to the Company); or
(b) if the Relief was the subject of such a utilisation, the
amount of tax which has been saved in consequence of the
utilisation;
1.4.3 in a case falling within Clause 1.3.2 or Clause 1.3.3 the Deemed
Tax Liability shall be the amount of such repayment of Tax or part
thereof;
1.4.4 in a case falling within Clause 1.3.5 the Deemed Tax Liability
shall be the amount which the Company is required to pay.
1.5 In this Deed references to an Event occurring on or before any date or on
or before other Events shall be deemed to include any combination of two
or more Events the first of which has taken place or took place on or
before that date or on or before that other Event.
1.6 Words and expressions (if any) which are defined in the Agreement and
which are not expressly defined in this Deed, and rules of interpretation
which are provided for in the Agreement and which are not otherwise
expressly provided for in this Deed, shall have the same meaning in and
shall apply to this Deed and shall be deemed to be incorporated in this
Deed.
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1.7 Words and expressions (if any) neither defined in this Deed nor in the
Agreement but which are defined or used in any legislation relating to Tax
which is relevant in the context shall have the same meaning in this Deed
as they have in such legislation.
1.8 In this Deed:-
1.8.1 references to income, profits or gains accrued, or being earned or
received, on or before a particular date or in respect of a
particular period shall include any profits deemed for Tax purposes
to have accrued, or to have been earned or received, on or before
that date or in respect of that period; and
1.8.2 references to "income, profits or gains" shall include receipts,
value and any other criterion used in establishing the incidence of
any Tax or measure in establishing the amount of any Liability to
Tax.
2. COVENANT
2.1 Subject as hereinafter provided the Covenantors hereby jointly and
severally covenant with the Purchaser as follows:-
2.1.1 to pay to the Purchaser an amount equal to any Liability to Tax of
the Company which arises as a consequence of or by reference to:
(a) any Event occurring on or before Completion; or
(b) any income, profits or gains which accrued, or which were
earned or received, on or before Completion or in respect of a
period ending on or before Completion,
in each case whether or not such Liability to Tax is also
chargeable against or attributable to any other person; and
2.1.2 to pay to the Purchaser from time to time amounts equal to any
costs and expenses reasonably incurred by the Purchaser or the
Company in connection with any Liability to Tax as is referred to
in Clause 2.1.1 and in respect of which the Covenantors are liable
to make payment under this Deed or in successfully (wholly or
partly) taking or defending any action against the Covenantors
pursuant to this Deed.
2.2 Each of the covenants contained in paragraphs (a) and (b) of Clause 2.1.1
shall be construed as giving rise to a separate and independent obligation
and shall not be restricted by the other, save that (for the avoidance of
doubt) any payment by the Covenantors in respect of a liability under one
covenant shall pro tanto discharge any liability under the other so far as
it arises from the same subject matter.
3. LIMITATIONS
3.1 The Covenantors shall not be liable under Clause 2 in relation to any
Liability to Tax of the Company:-
3.1.1 if and to the extent that specific provision or reserve in respect
of such Liability to Tax was made in the Accounts or discharged
prior to Completion;
3.1.2 if and to the extent that provision or reserve made in the Accounts
is insufficient only by reason of any increase in rates of Tax or
change in the law introduced after the date of the Agreement with
retrospective effect;
3.1.3 if that Liability to Tax arises as a result of an Event effected by
the Company in the ordinary course of its business occurring
between the Acquisition Date and Completion;
3.1.4 if the Purchase or the Company have recovered an amount in respect
of such Liability to Tax from a person or persons other than the
Covenantors;
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3.1.5 if any Relief (other than an Accounts Relief or Post-Completion
Relief) is available to the Company (including by way of surrender
from another company) to set against or otherwise mitigate the
Liability to Tax;
3.1.6 if such Liability to Tax arises or is increased as a consequence of
any reduced entitlement to the small companies' rate of corporation
tax (section 13, Taxes Act) where such reduced entitlement results
solely from the Company becoming associated with a company or
companies at or following Completion; or
3.1.7 if such Liability to Tax would not have arisen but for the fact
that the accounting treatment of any asset or liability in the
future accounts of the Company is different from the treatment in
the Accounts and such difference does not arise so as to procure
that the said accounts comply with all relevant laws and generally
accepted accounting principles.
3.2 For the avoidance of doubt the following shall not be regarded as Tax
which arises in the ordinary course of business for the purposes of Clause
3.1.3:-
3.2.1 any Tax arising as a result of the application either of any
anti-avoidance provisions contained in any Tax legislation or of
any principles established in case law concerning anti-avoidance;
3.2.2 any Tax arising as a result of any dividend, distribution or deemed
distribution;
3.2.3 any Tax arising in respect of the acquisition, disposal or supply
or the deemed acquisition, disposal or supply of any assets, goods,
services or business facility of any kind (including a loan of
money or the letting, hiring or licensing of any tangible or
intangible property) for a consideration deemed for Tax purposes to
be different from that (if any) actually received, but only insofar
as such Tax is attributable to the difference between the
consideration actually received and the consideration deemed for
Tax purposes to have been received;
3.2.4 any Tax arising as a result of a failure duly to deduct, charge,
recover or account for Tax; or
3.2.5 any amount payable to HM Customs and Excise by the Subsidiary as a
result of Part XV of the Value Added Tax Regulations 1995 or
equivalent provisions in any other relevant jurisdiction.
4. CONDUCT OF CLAIMS
4.1 Upon the Purchaser becoming aware of any Assessment which does or may give
rise to a Claim the Purchaser shall as soon as reasonably practicable give
notice of such Assessment to the Covenantors PROVIDED THAT the giving of
such notice shall not be a condition precedent to the liability of the
Covenantors under this Deed.
4.2 If the Covenantors shall indemnify and secure the Company and the
Purchaser to their reasonable satisfaction against any Tax, additional
Tax, losses, fines, penalties, interest, charges, costs and expenses which
arise as a consequence thereof, the Purchaser shall and shall procure that
the Company shall take such action as the Covenantors may reasonably
request to avoid, dispute, resist, appeal, compromise, or defend such
Assessment ("the Covenantors' Action").
4.3 Neither the Purchaser nor the Company shall be obliged to appeal against
any Assessment if, having given the Covenantors notice of the receipt of
that Assessment,
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it has not within ten Business Days received instructions in writing from
the Covenantors in accordance with the preceding provisions of this Clause
to make that appeal.
4.4 Neither the Purchaser nor the Company shall be obliged to take any action
or further action in respect of any Assessment if it appears to the
Purchaser that either the Covenantors or the Company, prior to its being
in the ownership of the Purchaser, have committed acts or omissions which
may constitute fraud, misfeasance or negligence.
4.5 Neither the Purchaser nor the Company shall be required to take any action
which either interferes with the normal course of its business or which in
its opinion is likely to prejudice its business or its relationship with
any Tax Authority or result in the Purchaser or any Company which forms
part of the Purchaser's group incurring a Liability to Tax or an increased
Liability to Tax.
4.6 Neither the Purchaser nor the Company shall be obliged to take any action
pursuant to this Clause 4 which includes continuing the Covenantors'
Action or contesting an Assessment beyond the first appellate body
(excluding the Tax Authority demanding the Tax in question) in the
jurisdiction concerned.
4.7 Neither the Purchaser nor the Company shall be obliged to take any action
under this Clause 4 which involves continuing the Covenantors' Action or
contesting any Assessment before any court or other appellate body
(excluding the Tax Authority demanding the Tax in question) unless the
Covenantors furnish the Purchaser with the written opinion of leading Tax
counsel to the effect that an appeal against the Assessment in question
will, on the balance of probabilities, be won.
4.8 The Purchaser and the Company shall be at liberty without reference to the
Covenantors to admit, compromise, settle, discharge or otherwise deal with
any Assessment after whichever is the earliest of:-
4.8.1 the Purchaser or the Company being notified by the Covenantors that
they consider the Assessment should no longer be resisted;
4.8.2 the expiry of a period of seven Business Days following the service
of a notice by the Purchaser or the Company on the Covenantors,
requiring the Covenantors to clarify or explain the terms of any
request made under Clause 4.2 during which period no such
clarification or explanation has been received by the Purchaser or
the Company; and
4.8.3 if appropriate, the expiration of any period prescribed by
applicable legislation for the making of an appeal against either
the Assessment or the decision of any court or tribunal in respect
of any such Assessment, as the case may be.
4.9 The Covenantors shall be bound to accept for the purposes of this Deed any
admission, compromise, settlement or discharge of any Assessment and the
outcome of any proceedings relating thereto made or arrived at in
accordance with the provisions of this Clause 4.
4.10 None of the Purchaser's or Company's obligations under this Clause 4 shall
constitute a pre-condition to any payment due under Clause 2.
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5. DUE DATE FOR PAYMENT
5.1 Where the Covenantors become liable to make any payment pursuant to Clause
2, the due date for the making of that payment shall be:-
5.1.1 in a case that involves an actual payment of Tax by the Company,
the later of three Business Days after service of a notice on the
Covenantors in relation thereto and the date that is three Business
Days immediately before the last date on which the Company would
have had to have paid to the relevant Tax Authority the Tax that
has given rise to the Covenantors' liability under this Deed in
order to avoid incurring a liability to interest or a charge or
penalty in respect of that Liability to Tax;
5.1.2 in a case falling within Clause 1.3.1 the later of three Business
Days following service by the Purchaser of a written demand
therefor and the date on which the Accounts Relief would otherwise
have been used but for such non-availability;
5.1.3 in a case falling within Clause 1.3.2 or Clause 1.3.3, the later of
three Business Days after the Purchaser has served a written demand
therefor and the date on which repayment of Tax would have actually
been received or on which the liability to make an actual payment
of Tax would have fallen due but for such setting-off (as
appropriate); or
5.1.4 in a case falling within Clause 1.3.4, the later of three Business
Days following the service by the Purchaser of a written demand
therefor or the date on which an actual liability to make a payment
of Tax by the Company would have fallen due but for such
setting-off.
5.2 If any payment required to be made by the Covenantors under this Deed is
not made by the due date then that payment shall carry interest from that
due date until the date when the payment is actually made at the rate of 4
per cent above the base rate from time to time of National Westminster
Bank PLC.
6. DEDUCTIONS FROM PAYMENTS
6.1 All sums payable by the Covenantors to the Purchaser under this Deed shall
be paid free and clear of all deductions or withholdings whatsoever, save
only as may be required by law.
6.2 If any deduction or withholding in respect of Tax or otherwise is required
by law to be made from any of the sums payable as mentioned in Clause 5.1,
the Covenantors shall be obliged to pay to the Purchaser such greater sum
as will, after such deduction or withholding as is required to be made has
been made, leave the Purchaser with the same amount as it would have been
entitled to receive in the absence of any such requirement to make a
deduction or withholding.
7. OVER PROVISIONS AND RELIEFS
7.1 If the auditors of the Company certify that any provision for Tax in the
Accounts proves to be an over-provision, then the amount of such
over-provision shall be dealt with in accordance with Clause 7.3.
7.2 If any Liability to Tax which has resulted in a payment having been made
or becoming due from the Covenantors under this Deed will give rise to a
Relief or right to repayment of Tax for the Company which would not
otherwise have arisen, then as and when liability of the Company to make
an actual payment of or in respect of Tax
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is reduced by reason of that Relief or repayment of Tax is received the
amount by which that liability is so reduced or the value of the repayment
shall be dealt with in accordance with Clause 7.3.
7.3 Where it is provided under Clause 7.1 or 7.2 that any amount (the
"Relevant Amount") is to be dealt with in accordance with this Clause
7.3:-
7.3.1 the Relevant Amount shall first be set off against any payment then
due from the Covenantors under this Deed; and
7.3.2 to the extent that there is an excess, a refund shall forthwith be
made to the Covenantors of any previous payment or payments made by
the Covenantors under this Deed and not previously refunded under
this clause up to the amount of such excess; and
7.3.3 to the extent that the excess referred to in Clause 7.3.2 is not
exhausted under that paragraph, the remainder of that excess shall
be carried forward and set off against any figure payment or
payments which become due from the Covenantors under this Deed.
8. MITIGATION
Where the Company is entitled to recover from any other person any sum in
respect of any matter for which the Covenantors have or are liable to make
payment under this Deed, the Purchaser shall, or shall procure that the
Company shall (if requested by, and at the expense of the Covenantors and
upon the Covenantors indemnifying the Purchaser to the reasonable
satisfaction of the Purchaser, against all costs or expenses which may
thereby be incurred) take such action as the Covenantors shall reasonably
request to enforce such recovery against the person in question provided
that the Purchaser and the Company shall not be obliged to take action
which it is reasonable to consider prejudicial to the Purchaser's or the
Company's Tax position or business PROVIDED THAT the taking of action
hereunder shall not be a pre-condition to the obligation to make payment
of any amount under Clause 2. The Purchaser shall forthwith account to
the Covenantors for any sums so recovered (including any interest or
repayment supplement (as defined in section 825 Taxes Act) paid by such a
person) net of Tax (if any) on such sum up to an amount not exceeding the
amount paid by the Covenantors under this Deed in relation thereto.
9. COVENANT BY THE PURCHASER
9.1 The Purchaser covenants with the Covenantors to pay forthwith to the
Covenantors an amount equal to any Tax which is assessed on the
Covenantors pursuant to section 767AA of the Taxes Act by reason of Tax
assessed on the Company remaining unpaid, save that this clause shall not
apply in respect of Tax for which the Covenantors are otherwise liable to
the Purchaser under this Deed.
9.2 The covenant contained in Clause 9.1 will apply to (and hence give rise to
a liability upon the Purchaser to pay to the Covenantors an amount equal
to) any costs and expenses properly incurred by the Covenantors in
connection with any Tax assessed on the Covenantors.
9.3 The Purchaser's covenant contained in Clause 9.1 shall not be a
pre-condition to any obligation to make payment under Clause 2.
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10. GOVERNING LAW
This Deed shall be governed by and construed in all respects in accordance
with the laws of England and the parties hereby submit themselves to the
non-exclusive jurisdiction of the English courts for such purpose.
11. NOTICES
The provisions as to service of notices contained in the Agreement shall
apply for the purposes of this Deed.
IN WITNESS whereof this Deed has been duly executed the day and year first
before written.
THE SCHEDULE
Names and Addresses of the Covenantors
(the Vendors and Mr. Badminton)
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SCHEDULE 7
CERTIFICATE AS TO REGULATION S
INVESTMENT INTENT LETTER
This Investment Intent Letter (this "Agreement") dated as of
______________, 1998, is entered into by and among the persons whose names
appear on the signature pages hereto as "Vendors" (collectively the "Vendors")
and Javelin Systems, Inc., a Delaware corporation ("Purchaser"). Unless
otherwise defined herein, all capitalized terms used herein shall have the
meanings assigned to them in the Purchase Agreement (as defined below).
RECITALS
A. Vendors own 105 of the issued and outstanding ordinary shares (the
"Company Stock") of Jade Communications Limited, a limited company organized
under the laws of England and Wales (the "Company").
B. Pursuant to the terms and conditions of that certain Agreement for
Sale and Purchase of Shares (the "Purchase Agreement") dated of even date
herewith by and among Purchaser and Vendors, Purchaser is acquiring all the
Company Stock.
C. In connection with the Purchase Agreement, the Vendors will be
issued shares of common stock, $.01 par value, of Purchaser (the "Purchaser's
Shares") in partial exchange for their shares of Company Stock (and the
Purchaser's Shares issued to the Vendors are herein referred to as the
"Consideration Shares").
D. The Vendors desire to make certain representations and warranties
to Purchaser to satisfy various United States federal and state securities laws.
AGREEMENT
NOW THEREFORE, in consideration of the respective covenants and promises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. SHAREHOLDER REPRESENTATIONS AND WARRANTIES. As a condition to
the receipt of the Consideration Shares, each of the Vendors represents and
warrants to, and covenants with, Purchaser as follows:
(a) Such Vendor is aware of Purchaser's business affairs and has
acquired sufficient information about Purchaser to reach an informed and
knowledgeable decision to acquire the Consideration Shares. Such Shareholder
has been furnished by Purchaser with a copy of Purchaser's Form 10-KSB for its
fiscal year ended June 30, 1998, Purchaser's Form 10-QSBs for its fiscal
quarters ended September 30, 1997, December 31, 1997 and March 31, 1998, and
such Vendor has read such reports and understands and has evaluated the risks of
making an investment in the Purchaser's Shares. Such Vendor has been afforded
access to
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information concerning Purchaser and to its executive officers and has been
afforded the opportunity to ask questions of, and receive answers from,
Purchaser.
(b) Such Vendor is generally familiar with the open system,
touch-screen computer for point-of-sale applications industry since such
Vendor has either been employed in such industry or has invested in business
entities engaged in such industry.
(c) Such Vendor is taking the Consideration Shares for investment for
such Vendor's own account only and not with a view to, or for resale in
connection with, any unregistered "distribution" thereof within the meaning of
the Securities Act of 1933, as amended (the "ACT").
(d) Such Vendor understands that no United States federal or state
agency has passed on, or made any recommendation or endorsement of, the
Consideration Shares.
(e) Such Vendor understands that the Consideration Shares are being
offered and sold to it in reliance on specific exemptions from or
non-application of the registration requirements of federal and state
securities laws and that Purchaser is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgements and
understandings of such Vendor set forth herein in order to determine the
applicability of such exemptions and the suitability of such Vendor acquiring
the Consideration Shares.
(f) Vendor certifies that he, she or it is neither a citizen nor a
resident of the United States and that his, her or its address set forth in the
Purchase Agreement is correct.
(g) No public offer or solicitation of the Consideration Shares was
made to such Vendor and no offer of the Purchaser's Shares was made to such
Vendor while such Vendor was present in the United States.
(h) At the time any buy order for the Consideration Shares was
originated, such Vendor was located outside the United States and is outside the
United States on the date of the execution and delivery of this Agreement and
will be outside the United States on the Completion Date.
(i) Such Vendor is aware that the Consideration Shares have not been
registered under the Act and may only be offered or sold pursuant to
registration under the Act or an available exemption therefrom, and such Vendor
has not, and will not, engage in any public offering or distribution of the
Consideration Shares or engage in any hedging transaction with respect thereto,
except in accordance with the registration or exemptive provisions of the Act.
(j) Except to the extent the Consideration Shares have been registered
under the Act, such Vendor (i) will not, during the period commencing on the
Completion Date and ending one year after the Completion Date (the "Distribution
Compliance Period"), offer or sell or agree to sell the Consideration Shares in
the United States, to a U.S. Person or for the account or benefit of a U.S.
Person other than in accordance with Regulation S and (ii) will, after the
expiration of the Distribution Compliance Period, offer, sell, pledge or
otherwise transfer the Consideration Shares only pursuant to registration under
the Act or an available exemption therefrom and, in any case, in accordance with
applicable United States federal and state securities laws.
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(k) Such Vendor has been advised of, and is familiar with, has
complied, and will comply, with the offering restrictions, and any other
requirements, of Regulation S.
(l) The transactions contemplated by this Agreement (i) have not been
pre-arranged by such Vendor with a purchaser located in the United States which
is a U.S. Person, and (ii) are not part of a plan or scheme by such Vendor to
evade the registration provisions of the Act.
(m) Neither such Vendor nor any of his, her or its affiliates has
entered, has the intention of entering, or will during the Distribution
Compliance Period enter into, with any U.S. Person, any put option, short
position or other similar instrument or position with respect to the Purchaser's
Shares or participate in any other attempt designed to lower the trading prices
of Purchaser's Shares stock.
(n) Such Vendor (individually or together with such Vendor's investor
representative who is not affiliated with Purchaser) has such knowledge and
experience in financial, tax and business matters that such Vendor is capable of
evaluating the merits and risks of receiving the Consideration Shares and of
making an informed investment decision with respect thereto.
(o) Such Vendor has determined that the Consideration Shares are a
suitable investment.
(p) Such Vendor acknowledges receipt of Purchaser's Insider Trading
Policy and agrees to abide by its terms, and further agrees to execute such
Policy upon the request of Purchaser.
(q) The certificates representing the Consideration Shares shall bear
the following legend:
"The securities represented hereby have been issued pursuant to Regulation
S ("Regulation S") promulgated under the Securities Act of 1933, as
amended (the "1933 Act"), and have not been registered under the 1933 Act.
Unless so registered, such securities may not be transferred, offered,
hedged or sold prior to the end of the one-year distribution compliance
period prescribed by Regulation S unless such transfer, offer, hedge or
sale is made in an "offshore transaction" and not to or for the account of
or benefit of a "U.S. person" (as such terms are defined in Regulation S)
and is otherwise in accordance with the requirements of Regulation S.
Following expiration of any such one-year distribution compliance period,
the securities represented hereby may not be offered, hedged, sold or
otherwise transferred in the United States or to a U.S. person unless the
securities are registered under the 1933 Act and applicable state
securities laws, or such offers, sales and transfers are made pursuant to
an available exemption from the registration requirements of those laws."
(r) Such Vendor shall indemnify Purchaser against any loss, cost or
damages (including reasonable attorneys' fees and expenses) directly incurred as
a result of such Vendor's breach of any representation, warranty, covenant or
agreement in this Agreement.
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SECTION 2. MISCELLANEOUS.
(a) AMENDMENTS, WAIVERS AND CONSENTS. No amendment or modification of
this Agreement, nor any termination or waiver of any provision of this Agreement
or consent to any departure by any party hereto therefrom, shall in any event be
effective without the written concurrence of the parties hereto.
(b) NOTICES. Notices and other communications under or in connection
with this Agreement shall be in writing and shall be deemed given (i) if
delivered personally, upon delivery, (ii) if delivered by courier, then upon
receipt, or (iii) if given by telecopy, upon confirmation of transmission by
telecopy (or, if such confirmation does not occur during normal business hours
on a Business Day (as defined in the Purchase Agreement), then on the next
Business Day), in each case to the parties at the address for notice set forth
on Schedule 1 to the Purchase Agreement.
(c) APPLICABLE LAW. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of California,
United States of America and the United States federal securities laws without
reference to any choice of law rules that would require the application of the
laws of any other jurisdiction.
(d) SEVERABILITY. The provisions of this Agreement are severable, and
if any clause or provision shall be held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction and shall
not in any manner affect such clause or provision in any other jurisdiction, or
any other clause or provision of this Agreement in any jurisdiction.
(e) INTERPRETATION. Time is of the essence of each provision of this
Agreement of which time is an element.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same agreement.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
VENDORS:
------------------------------------
ANTHONY SAMPSON
------------------------------------
CONTECH CONSULTANTS LIMITED
JAVELIN SYSTEMS, INC.
a Delaware corporation
By:
---------------------------------
An Authorized Representative
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SCHEDULE 8
ADDITIONAL LIMITATIONS TO THE WARRANTIES AND TAX DEED
1. ACKNOWLEDGEMENT
The Purchaser:
1.1 admits and acknowledges that it has not entered into this Agreement
in reliance upon any warranties, representations, covenants,
undertakings, indemnities or other statements whatsoever other than
those expressly set out in this Agreement and the Tax Deed; and
1.2 subject and without prejudice to Clause 9 of this Agreement, agrees
that rescission shall not be available as a remedy for any breach
of this Agreement and agrees not to claim that remedy.
2. DISCLOSURE
The Purchaser shall not be entitled to make a Claim if and to the extent
that the facts or information upon which it is based have been Disclosed.
3. DURATION AND EXTENT
3.1 The aggregate liability of each Vendor and Mr. Badminton in respect of all
Claims under the Warranties and the Tax Deed shall not exceed the amount
of the total consideration paid under this Agreement.
3.2 No amount shall be payable by the Vendors and Mr. Badminton in respect of
any Claim under the Warranties:
3.2.1 unless the amount of the liability in respect of each such Claim
exceeds US$1,000; and
3.2.2 unless and until the aggregate cumulative liability of the Vendors
and Mr. Badminton in respect of all such Claims exceeds US$20,000
in which case the Vendors and Mr. Badminton shall be liable for
both the initial US$20,000 and the excess.
3.3 The Vendors and Mr. Badminton shall not be liable for any Claim unless the
Vendors and Mr. Badminton are given notice in writing of that Claim
stating in reasonable detail the nature of the Claim and, if practicable,
the amount claimed on or before the first anniversary of Completion and
unless legal proceedings shall have been served in respect of any such
Claim within six months of the Vendors and Mr. Badminton being notified of
any such Claim.
3.4 No Claim shall be made to the extent the matters giving rise to the Claim
arise out of events or circumstances prior to 18 March 1998, save for
breach of the warranty in paragraph 2.3 of Part A of SCHEDULE 4.
4. LIMITATIONS
No Claim shall be admissible and the Vendors and Mr. Badminton shall not
be liable under any of the Warranties or under the Tax Deed:
4.1 to the extent that provision, reserve or allowance has been made in the
Accounts or to the extent that payment or discharge thereof has been taken
into account therein or in
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<PAGE>
accordance with generally accepted accounting principles has not been so
taken account of, or referred to; or
4.2 to the extent that provision, reserve or allowance made in the Accounts
for any Liability to Tax proves to be insufficient by reason only of any
increase in the rates of taxation or variation in the method of applying,
or calculating, the rate of taxation made after Completion whether or not
with retrospective effect; or
4.3 to the extent that such liability arises or is increased as a result of
any change or changes in legislation (primary or delegated) including
without limitation any increase in rates of taxation or the introduction
of any changes or new form of taxation or in the practice of the Inland
Revenue or HM Customs and Excise or any other relevant authority (in the
United Kingdom or elsewhere) occurring after Completion whether or not
with retrospective effect; or
4.4 to the extent that the liability would not have arisen or would have been
reduced but for the fact that the treatment of any assets or liabilities
or of the taxation attributable to timing differences (including capital
allowances and stock relief) in future accounts of the Company is
different from the treatment in the Accounts; or
4.5 to the extent that the liability would not have arisen or would have been
reduced or eliminated but for a failure or omission after Completion, on
the part of the Company or the Purchaser or either of them to make any
claim, election, surrender or disclaimer or to give any notice or consent
or to do any other thing under any enactment or regulation relating to
Tax, the making, giving or doing of which was taken into account in
computing the provision for Tax in the Accounts; or
4.6 to the extent that such liability would not have arisen but for any claim,
disclaimer or election made (including, without limitation, a disclaimer
of or a revision to a claim for capital allowances claimed before
Completion or assumed to be claimed in preparing the Accounts) where such
claim or disclaimer or election or revision is caused or made by the
Purchaser or the Company after Completion; or
4.7 to the extent that such liability occurs or arises as a result of or is
otherwise attributable wholly or partly to any voluntary act, transaction
or omission of the Company or the Purchaser or their respective directors,
employees or agents on or after Completion otherwise than in the ordinary
and proper course of business or pursuant to a legally binding commitment
created on or before Completion by the Company.
5. SET-OFF
5.1 If the Vendors and Mr. Badminton shall be liable in respect of any Claim,
credit shall be given to them against such liability for the following
amounts (each a "Relevant Amount") which shall be dealt with in accordance
with paragraph 5.3:
5.1.1 the amount by which any Tax for which the Company is or may be
liable is reduced or extinguished as a result of any such liability
and/or Claim;
5.1.2 the amount by which any provision for Tax (including deferred
taxation) or bad or doubtful debts contingent or other liabilities
(including deferred liabilities) contained in the Accounts proves
to be an over provision; or
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5.1.3 the amount by which any repayment of Tax to the Company by the
Inland Revenue or any other Tax Authority contained in the Accounts
proves to be an under-provision or no provision is made as a result
of any overpayment of Tax made prior to Completion by any person.
5.2 If there shall be a dispute between any of the parties as to any Relevant
Amount, the Vendors or the Purchaser shall be entitled to request that the
Purchaser's Accountants are instructed to give a certificate as to the
Relevant Amount and in so doing the Purchaser's Accountants shall act as
experts and not as arbitrators and in the absence of manifest error and
subject to paragraphs 5.4 and 5.5 their decision shall be final and
binding on the parties hereto.
5.3 Where it is provided under paragraph 5.1 that any Relevant Amount is to be
dealt with in accordance with this paragraph 5.3:
5.3.1 the Relevant Amount shall first be set off against any payment then
due from the Vendors and Mr. Badminton under the Warranties or the
Tax Deed; and
5.3.2 to the extent there is an excess of the Relevant Amount after any
amounts have been set off under paragraph 5.3.1 a refund shall be
made to the Vendors and Mr. Badminton of any previous payment or
payments made by the Vendors and Mr. Badminton under the Warranties
or the Tax Deed and not previously refunded under this paragraph up
to the amount of such excess; and
5.3.3 to the extent that the excess referred to in paragraph 5.3.2 is not
exhausted under that paragraph, the remainder of that excess shall
be carried forward and set off against any future payment or
payments which become due from the Vendors and Mr. Badminton under
the Warranties or the Tax Deed.
5.4 In the event that the Purchaser's Accountants shall be unable or unwilling
to provide any certification requested under this paragraph 5, any
certification shall be effected by an independent firm of chartered
accountants to be agreed between the Purchaser and the Vendors or failing
agreement to be nominated by the President for the time being of the
Institute of Chartered Accountants in England and Wales (the "Independent
Accountants"). The proper and reasonable costs incurred by the
Purchaser's Accountants or the Independent Accountants in respect of any
certification required under this paragraph 5 shall be paid and borne as
such accountants shall consider just and equitable.
6. THIRD PARTY CLAIMS
6.1 Where the Purchaser and/or the Company are entitled to recover from some
other person (including any Tax Authority) any sum in respect of any
matter giving rise to a Claim the Purchaser shall and shall procure that
the Company shall take all reasonable steps to enforce such recovery prior
to taking any action against the Vendors and Mr. Badminton (other than
notifying the Vendors of the Claim) and in the event that the Purchaser or
the Company shall recover any amount from such other person the amount of
the Claim against the Vendors and Mr. Badminton shall be reduced by the
amount recovered (including any repayment supplement) less all costs,
charges and expenses incurred by the Purchaser or the Company in
recovering that sum from such other person.
6.2 If the Vendors and Mr. Badminton pay to the Purchaser or to the Company an
amount pursuant to a Claim and the Purchaser or the Company within six
months of such
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<PAGE>
payment becomes entitled to recover from some other person any material
sum in respect of such Claim the Purchaser shall and shall procure that
the Company shall take all reasonable steps to enforce such recovery and
upon such recovery shall forthwith repay to the Vendors so much of the
amount paid by them to the Purchaser or the Company as does not exceed
the sum recovered from such other person less all costs, charges and
expenses incurred by the Purchaser or the Company in recovering that
sum from such other person.
6.3 If any amount is repaid to the Vendors and Mr. Badminton by the Purchaser
or the Company pursuant to paragraph 6.2 above an amount equal to the
amount so repaid shall be deemed never to have been paid by the Vendors
and Mr. Badminton for the purposes of paragraph 3.2 and accordingly shall
not be treated as an amount in respect of which any liability has been
incurred.
7. CONDUCT OF CLAIMS
7.1 The Vendors and Mr. Badminton hereby appoint Anthony Sampson as their
representative for the purposes of this paragraph (the "Vendors'
Representative") and any action taken or authorised by and any notice or
document given to the Vendors' Representative shall be deemed to be taken
or authorised by or given to each of the Vendors and Mr. Badminton and
shall be binding on each of them.
7.2 If the Purchaser becomes aware of a matter which might give rise to a
Claim the Purchaser shall (or shall procure that the Company shall) as
soon as reasonably practicable give written notice to the Vendors'
Representative of the matter and shall consult with the Vendors'
Representative with respect to such matter but such notice shall not be a
condition precedent to the liability of the Vendors and Mr. Badminton.
8. MISCELLANEOUS
8.1 Any payment to the Purchaser or the Company under the Warranties or under
the Tax Deed shall be deemed to be a reduction of the total consideration
payable hereunder for the Shares.
8.2 Payment of any Claim whether under the Warranties or under the Tax Deed
shall pro tanto satisfy and discharge any other Claim which is capable of
being made in respect of the same subject matter and the Purchaser shall
at all times procure that there is no duplication of any Claim or Claims
relating to the same subject matter.
55
<PAGE>
SCHEDULE 9
EARNOUT AGREEMENT
THIS AGREEMENT is made the day of 1998
BETWEEN:
(1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE
1 ("Vendors"); and
(2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of
business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A.
("Purchaser").
WHEREAS:
(A) The Vendors and the Purchaser have on the date hereof entered into two
agreements (the "Purchase Agreements") for the sale and purchase of,
respectively, the entire issued share capital of RGB Trinet Limited (the
"Company") and 47.5% of Jade Communications Limited, and of the remaining
52.5% of Jade Communications Limited (the "Subsidiary").
(B) Pursuant to the provisions of each of the Purchase Agreements, the Vendors
and the Purchaser have agreed to enter into this Agreement for the purpose
of agreeing the Vendors' entitlement to further shares of the common stock
of the Purchaser as part of possible further consideration under the
Purchase Agreements.
IT IS AGREED AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement and in the Schedules:-
"Budget" the budget and business plan for the
Company and the Subsidiary for the
Earnout Period in the agreed form;
"Change of Control" means, in relation to any company,
where that company ceases to be under
the control of the person or persons
who control such company on the date
of this Agreement and for the purpose
of this definition "control" means a
holding of securities in a company
conferring a majority of the voting
rights in it or the right to appoint
or remove a majority of its board of
directors or the right to participate
in 50% or more of the assets of the
company on its winding up;
"Earnout Period" means the period of two years
commencing on 1 October 1998;
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<PAGE>
"Pre-Tax Profits" means the pre-tax profits of the
Company and the Subsidiary as
calculated in accordance with SCHEDULE
2 for each three-month period during
the period commencing on 1 October
1998 and ending on 30 September 2000
as shown in unaudited management
accounts (comprising in each case a
balance sheet and a profit and loss
account) of the Company and the
Subsidiary;
"Quarterly Profit Estimate" means any of the estimates made in
respect of anticipated Pre-Tax Profits
for a particular financial quarter of
the Company, particulars of which are
continued in SCHEDULE 3.
1.2 The Schedules are deemed to be incorporated in this Agreement, and a
reference to "this Agreement" includes a reference to the Schedules.
1.3 In this Agreement:-
1.3.1 the index and the clause headings are included for convenience only
and shall not affect the construction of this Agreement;
1.3.2 words denoting the singular shall include the plural and vice
versa;
1.3.3 words denoting any gender shall include a reference to each other
gender; and
1.3.4 references to persons shall be deemed to include references to
natural persons, firms, partnerships, companies, corporations,
associations, organisations, foundations and trusts (in each case
whether or not having separate legal personality).
1.4 Words and expressions (if any) which are defined in the Purchase
Agreements and which are not expressly defined in this Agreement shall
have the same meaning in and shall apply to this Agreement as if expressly
defined herein.
2. CONSIDERATION
2.1 By way of additional consideration under the Purchase Agreements of up to
US$8,225,000, the Purchaser will issue to the Vendors the Earnout Shares
(if any) calculated in accordance with the following provisions of this
Agreement.
2.2 The consideration referred to in Clause 2.1 shall be apportioned between
the Vendors as set out in Column 2 of SCHEDULE 1.
3. EARNOUT PROVISIONS
3.1 The entitlement to Earnout Shares referred to in Clause 2.1 shall be
calculated in accordance with the following provisions:-
3.1.1 if the Pre-Tax Profits shall equal 100% of the relevant Quarterly
Profit Estimate, then the Purchaser shall in respect of that
quarter issue to the Vendors the Earnout Shares that are equivalent
in value to US$822,500 (the "Base Earnout Figure");
3.1.2 if the Pre-Tax Profits shall be at or between 50% and 125% of the
relevant Quarterly Profit Estimate, then the Purchaser shall issue
to the Vendors a number of Earnout Shares equivalent in value to a
percentage of the Base Earnout Figure, such percentage being the
same percentage as the Pre-Tax
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<PAGE>
Profits are in relation to the relevant Quarterly Profit Estimate,
subject in all cases to a minimum of 50% and maximum of 125% of the
Base Earnout Figure. By way of illustration only, if the Pre-Tax
Profits are 110% of the Quarterly Profit Estimate, then Earnout
Shares equivalent in value to 110% of the Base Earnout Figure shall
be issued;
3.1.3 if the Pre-Tax Profits shall be below 50% of the relevant Quarterly
Profit Estimate, then (subject to Clause 3.1.4) no Earnout Shares
shall be issued in respect of that quarter;
3.1.4 if the Pre-Tax Profits exceed 125% of the relevant Quarterly Profit
Estimate, then after applying the provisions of Clause 3.1.2, the
Pre-Tax Profit in excess (the "Excess Profit") may be carried
forward or carried back to other financial quarters as follows:
3.1.4.1 the Excess Profit shall first be carried back and
applied to each previous quarter(s) in which the Pre-Tax
Profits were less than 125% of the relevant Quarterly
Profit Estimate. The Excess Profit shall be applied in
full to the earliest quarter first so as notionally to
raise the Pre-Tax Profits in such quarter up to a
maximum of 125%, and then any remaining Excess Profit
shall be applied to subsequent quarters consecutively,
in the same manner;
3.1.4.2 by applying the Excess Profit thereto, for each quarter
in which the entitlement to Earnout Shares is created or
increased by virtue of applying the provisions of Clause
3.1.2, Javelin shall issue further Earnout Shares to the
Vendors in accordance with the provisions of Clause
3.1.2;
3.1.4.3 if, after applying the Excess Profit to all earlier
quarters in accordance with Clauses 3.1.4.1, any of the
Excess Profit remains to be applied, it may be carried
forward to be applied in the same manner to each
subsequent quarter (next quarter first) in which Pre-Tax
Profits are below 125% of the relevant Quarterly Profit
Estimate.
3.1.5 For the avoidance of doubt, the maximum number of Earnout Shares
that can be issued in relation to any financial quarter of the
Company pursuant to Clauses 3.1.1 to 3.1.4 is a number equivalent
in value to 125% of the Base Earnout Figure (or US$1,028,125 in
Purchaser's Shares by value for each quarter).
3.2 Pursuant to Clause 3.1, the number of Earnout Shares to be allotted and
issued (if any) to the Vendors will be such number of Purchaser's Shares
as have an aggregate value which is as near as possible to, but not less
than, the Base Earnout Figure, as it may be adjusted in accordance with
Clause 3.1. The Earnout Shares shall be issued in the proportions
specified under Clause 2.2.
3.3 For the purpose of determining the aggregate value referred to in Clause
3.2:
3.3.1 the value of each Purchaser's Share shall be deemed to be an amount
equal to the average of the closing prices of a Purchaser's Share,
as reported on the NASDAQ SmallCap Market System, on the five (5)
trading days immediately prior to the end of the financial quarter
in question and on the first five (5) trading days after the end of
such quarter; and
3.3.2 where there is any carry-back or carry-forward pursuant to Clause
3.1.4, the valuation under Clause 4.3.1 shall be made in respect of
the relevant ten (10)
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trading days in the most recent quarters instead of the quarter(s)
to which the carry-back or carry-forward was made.
3.4 The verification and allotment of all Earnout Shares shall be completed no
later than forty-five (45) days after the end of each financial quarter.
A statement showing the Pre-Tax Profits and the number of Earnout Shares
to be issued (if any) to the Vendors pursuant to Clause 3.3 shall be
agreed by the Vendors and the Purchaser prior to the expiry of this 45-day
period, PROVIDED THAT failing such agreement the relevant Pre-Tax Profits
and the said number of Earnout Shares (if any) shall be ascertained and
certified by an independent firm of chartered accountants appointed by
agreement between the parties or in default of agreement on the
application of either party by the President for the time being of the
Institute of Chartered Accountants in England and Wales. The decision of
such expert shall be final and binding on the parties. The expert shall
be deemed to act as an expert and not as an arbitrator and the provisions
of the Arbitration Act 1996 shall not apply. The cost of the reference to
such expert shall be payable as determined by the expert.
3.5 No fraction of an Earnout Share shall be issued to the Vendors and the
number of Earnout Shares shall be adjusted accordingly to the nearest
whole number.
3.6 The Earnout Shares, on issue, shall rank pari passu in all respects with
the existing issued Purchaser's Shares.
3.7 Each of the Vendors agrees that he shall deliver to the Purchaser upon
issue of the Earnout Shares a certificate and undertaking substantially in
the form of Schedule 7 to the Purchase Agreements making or giving such
representations, warranties and covenants as are necessary or advisable
for the qualification of the issuance of Purchaser's Shares to the Vendors
under Regulation S promulgated under the United States Securities Act of
1933, as amended.
3.8 In the event of there being any Change of Control of the Purchaser prior
to 30 October 2000, immediately prior to such Change of Control and in
full and final satisfaction of the Purchaser's obligations pursuant to
this Agreement, the Purchaser shall issue to the Vendors such Purchaser's
Shares as are equal to US$822,500 in value (adopting the same valuation
method as in Clause 3.4) multiplied by the number of financial quarters
remaining in the Earnout Period including the period in which the Change
of Control takes place.
3.9 During the Earnout Period until all sums (if any) due under this Agreement
have been paid or satisfied the Purchaser shall and shall procure that the
Company and the Subsidiary comply with the provisions of SCHEDULE 2.
4. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and enure for the benefit of each
party's successors but shall not be assignable by either party.
5. VARIATION
No variation of this Agreement shall be effective unless made in writing
and signed by or on behalf of each of the parties.
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6. COUNTERPARTS
This Agreement may be executed in two or more counterparts each of which
shall be deemed to be an original, and which together shall constitute one
and the same agreement.
7. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit themselves to the non-exclusive
jurisdiction of the English courts.
AT WITNESS the hands of the parties hereto or their duly authorised
representatives the day and year first before written.
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SCHEDULE 1
PARTICULARS OF THE VENDORS AND OF THE EARNOUT SHARES
TO BE RECEIVED BY EACH OF THEM
<TABLE>
<CAPTION>
(1) NAME AND ADDRESS (2) EARNOUT SHARES AS PERCENTAGE
OF TOTAL NUMBER ISSUED
<S> <C>
1. Gary GREEN 31.25
"Trudos"
Heath Ride
Finchampstead
Wokingham
Berkshire RG40 3QJ
2. Roger SCARLETT 31.25
"Glen d'Or"
The Ridge
Cold Ash
Newbury
Berkshire RG16 9HY
3. Anthony SAMPSON 3.75
31 Oakwood Lane
Bowdon
Cheshire WA14 3OL
4. Contech Consultants Limited 33.75
c/o 25 Turnbull's Lane
Gibraltar
---------
100%
---------
</TABLE>
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SCHEDULE 2
EARNOUT PROTECTIONS
PART 1
CALCULATION OF PRE-TAX PROFITS ("ELIGIBLE PROFIT")
1. The Eligible Profit for any financial quarter is (to the nearest L1) the
net pre-tax profit of the Company as shown in the Management Accounts for
the relevant financial period prepared in accordance with generally
accepted accounting principles, SSAPs and FRSs and adjusted as follows:
1.1 by adding back any payment or provision for Tax;
1.2 adding back any provision for or payment of any dividend or other
distribution by the Company or the Subsidiary;
1.3 adding back any sum specified as or proposed to be transferred to
reserves;
1.4 adding back any management (or similar) charges to the Purchaser
paid or provided for work carried out for the benefit of the
Company charged at the same rates as applied in respect of other
members of the Purchaser's Group;
1.5 adding back a charge by way of interest on any sums lent by the
Purchaser's Group to the Company or the Subsidiary in excess of
that rate of 1.5 per cent above the base rate of National
Westminster Bank plc;
1.6 adding a sum by way of interest on any sums lent by the Company or
the Subsidiary to the Purchaser at the rate of 3 per cent above the
base rate of National Westminster Bank plc;
1.7 adding in relation to any transactions entered into by the Company
or the Subsidiary on less than arms-length terms (in terms of
reward to the Company or the Subsidiary) a reasonable sum as profit
which might reasonably have been expected to accrue to the Company
or the Subsidiary had the transaction been on arms-length terms;
1.8 by adding back any amount written off in respect of goodwill or
other intangible assets;
1.9 by adding back audit fees in excess of L12,000 per annum and any
fees attributable to the tax affairs of the Purchaser; and
1.10 by adding back any sum deducted from gross profit in respect of the
emoluments paid or payable to or for the benefit of any person
appointed to the board of the Company by the Purchaser except as
arms' length consideration for services rendered to the Company or
the Subsidiary.
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PART 2
ACCOUNTING POLICIES TO BE USED IN CALCULATING THE ELIGIBLE PROFIT
TURNOVER
Turnover represents the amount derived from the provision of goods and services
to third party customers based on invoiced sales adjusted by an amount to
reflect the stage of completion of major contracts, less any returns or
allowances.
DEPRECIATION
Depreciation is provided to write off the cost less the estimated residual value
of tangible fixed assets by equal instalments over their estimated usual
economic lives as follows:
Leasehold improvements - 3 years
Computer and Test Equipment - 3 years
Fixtures and fittings - 3 years
Plant and Equipment - 3 years
Motor Vehicles - 3 years
STOCK AND WORK IN PROGRESS
(a) Stocks and work in progress
Stocks are stated at the lower of cost and net realisable value. In determining
the cost of raw materials, consumables and goods purchased for resale, the FIFO
method is used (cost is taken as production cost, which includes an appropriate
proportion of attributable overheads).
Work in progress is valued at the lower of cost and net realisable value and
costs include material cost, direct labour cost and other direct costs.
(b) Project work in progress
Projects are valued as per the contract ledger as follows:
Actual revenue recognised to date is compared with total budget revenue to
calculate the "stage of completion rate". "Stage of completion rate" is applied
to the total budget costs to calculate the cost of sales. Calculated cost of
sales is then compared to actual costs incurred to date. Where actual costs
incurred to date exceed calculated cost of sales a work in progress balance is
recognised (subject to making provision for future losses on contracts). Where
calculated cost of sales exceeds actual costs incurred to date, a cost of sales
accrual is recognised.
(c) Long term contracts
The amount of profit attributable to the stage of completion of a long term
contract is recognised when the outcome of the contract can be foreseen with
reasonable certainty. Turnover for such contracts is stated at cost appropriate
to their stage of completion plus
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attributable profits, less amounts recognised in previous years. Provision
is made for any losses as soon as they are foreseen.
Contract work in progress is stated at costs incurred, less those transferred to
the profit and loss account, after deducting foreseeable losses and payments on
account not matched with turnover. Amounts recoverable on contracts are
included in debtors and represents turnover recognised in excess of payments on
account.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to profits as incurred.
TAXATION
No charge for taxation will be made in the calculation of eligible profit.
FINANCE LEASES
Assets acquired under finance leases are capitalised and the outstanding future
lease obligations are shown in creditors.
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<PAGE>
PART 3
VENDOR PROTECTION
The Purchaser acknowledges that (having regard to the manner in which the
Consideration for the Shares has been calculated) the Vendors have a legitimate
interest in ensuring that the Eligible Profit of the Company for the Earnout
Period is as high as may fairly and reasonably be achieved by the Company and
the Subsidiary (in this Part 3 jointly referred to as the "Company") in those
years (having due regard to the Purchaser's legitimate interest in establishing
a stable and secure business for the Company in the long term). Accordingly,
but subject in all cases to Clause 15 of this Part 3 of this Schedule, the
Purchaser undertakes with the Vendors that during the Earnout Period:
1. it will use its best endeavours to promote the business of the Company;
2. it will not do anything with the intention of adversely affecting the
Eligible Profit;
3. it will not develop or seek to develop any business competitive with that
of any material business of the Company carried on at Completion or at any
time during the Earnout Period;
4. it will not transfer, divert or direct the custom of any or any potential
customer or client of the Company elsewhere or seek to do so;
5. it will not seek to transfer or divert or direct elsewhere any orders or
enquiries for products or services available from the Company;
6. it will use its best endeavours to maintain the operations of the Company
in terms of fixed assets (including premises, plant and equipment) and
financial facilities to a standard being not less suitable for the
purposes of the business of the Company than that maintained by the
Company prior to Completion;
7. it will provide the Company with access to the financial management and
other facilities of the Purchaser's Group on a basis no less beneficial to
the conduct of the Company's business than that provided to any other
members of the Purchaser's Group.
8. it will not sell or procure the sale or otherwise dispose of the whole or
any substantial part of the business, undertaking or assets (other than
current assets disposed of in the normal course of business) of the
Company;
9. to procure that the Company does not pass any resolution to go into
voluntary liquidation (except if a relevant company is at that time
insolvent and a registered insolvency practitioner advises liquidation by
reason of insolvency);
10. to procure that the Company makes no material adverse alteration in the
nature, scope or conduct of its business;
65
<PAGE>
11. to procure that Eligible Profits are not adversely affected by any
service, management or similar charge (save as provided for in Part 1 of
this Schedule) or by any transaction or arrangement which is not a bona
fide commercial transaction or arrangement on arms-length terms;
12. it will not materially alter the number of employees of the Company or
make any increase in the emoluments of the employees of the Company
(including without limitation any employers contribution to pensions or in
benefits provided hours of work or holiday entitlement) which would have a
material adverse effect on Eligible Profit;
13. not to procure or permit any capital expenditure in relation to the
Company except;
13.1 in accordance with the Budget in agreed terms for the period
covered by the Earnout Period;
13.2 as is required to comply with the provisions in the legal
obligations (including the terms of any lease) of the Premises
occupied by the Company;
13.3 as is required to replace plant and equipment as it comes to the
end of its useful working life and in accordance with the policy
adopted by the Company immediately prior to Completion.
13.4 to procure that any goods or services provided to or in respect of
the Company whether by the Purchaser's Group or any third party are
provided on terms no less beneficial to the recipient than any
similar goods or services are provided to any other member of the
Purchaser's Group;
13.5 to procure that the Company does not depart from the ordinary
course of the conduct of its business as conducted in the financial
year ending on the Acquisition Date;
14. The Purchaser further undertakes with the Vendors that the Company will:
14.1 not enter into any material abnormal contract or commitment or any
contract or commitment involving an aggregate expenditure by the
Company (in accordance with its normal accounting policies at
Completion) of more than L5,000 without the consent of the Vendors;
14.2 not declare, make or pay any dividend or other distribution;
14.3 not create or agree to create any encumbrance or redeem or agree to
redeem any encumbrance (other than trade guarantees or indemnities
in the ordinary course of its business) of the type and scale given
in the financial year ending on the Acquisition Date; and
14.4 not permit any of its insurance policies to lapse, become void or
voidable or do anything adversely to affect their renewal on the
insurers standard (or, if different, the existing) terms.
15. The Purchaser shall be obliged to comply with its undertakings in Clauses
1 to 14 above only if and for so long as the Company's Pre-Tax Profits
continue to meet the Quarterly Profit Estimates, such that if the
Company's Pre-Tax Profits fail to meet two consecutive Quarterly Profit
Estimates by 50% or more and the aggregate of any preceding Quarterly
Profit Estimates is below 50% of estimate the Purchaser shall henceforth
be released from all and any of its obligations under this Part 3 of this
Schedule.
66
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16. The Purchaser shall not give any direction to the trustee of the employee
benefit trust established by the Company without the consent of the
Vendors.
67
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SCHEDULE 3
QUARTERLY PROFIT ESTIMATES
<TABLE>
<CAPTION>
PERIOD PROFIT ESTIMATE L('000)
------ -----------------------
<S> <C>
October - December 1998 112
January - March 1999 141
April - June 1999 205
July - September 1999 350
October - December 1999 313
January - March 2000 309
April - June 2000 213
July - September 2000 419
</TABLE>
68
<PAGE>
SIGNED BY ANTHONY SAMPSON )
in the presence of: )
SIGNED BY BERTRAM BADMINTON )
in the presence of: )
SIGNED BY: )
--------------------
duly authorised and on )
behalf of CONTECH CONSULTANTS )
LIMITED )
in the presence of: )
SIGNED BY: )
--------------------
duly authorised and on )
behalf of JAVELIN SYSTEMS, INC. )
in the presence of: )
69
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated August 25, 1998,
relating to the consolidated financial statements of Javelin Systems, Inc.,
which appears in such Prospectus. We also consent to the references to us
under the heading "Experts" and "Selected Consolidated Financial Information"
in such Prospectus. However, it should be noted that PricewaterhouseCoopers
LLP has not prepared or certified such "Selected Consolidated Financial
Information."
PricewaterhouseCoopers LLP
Costa Mesa, California
October 6, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and
"Selected Consolidated Financial Information" and to the use of our report
dated August 1, 1997, in Amendment No. 1 to the Registration Statement (Form
SB-2) and related Prospectus of Javelin Systems, Inc. for the registration of
1,437,500 shares of its common stock.
Ernst & Young LLP
Orange County, California
October 6, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in Javelin Systems, Inc.'s Registration
Statement on Form SB-2 of our report dated January 21, 1998 relating to the
financial statements of Posnet Computers, Inc. as of and for the twelve month
period ended October 31, 1997, which appear in such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ CORBIN & WERTZ
CORBIN & WERTZ
Irvine, California
October 1, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Javelin Systems, Inc.
We hereby consent to the use of our report dated February 6, 1998 on the
consolidated financial statements of CCI Group, Inc. and subsidiaries
included in the Javelin Systems, Inc. Registration Statement on Form SB-2 as
filed with the Securities & Exchange Commission on September 22, 1998 and to
the reference to our Firm under the caption "Experts" in the related
Prospectus.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
September 29, 1998
