SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from______ to ______
Commission file number 0-12254
SCIENTIFIC TECHNOLOGIES INCORPORATED
Incorporated in Oregon IRS Employer Identification Number:77-0170363
Address of principal executive offices: Telephone: (510) 608-3400
6550 Dumbarton Circle, Fremont, CA 94555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of Class which registered
- ----------------------------- ----------------------------
Common Stock, $.001 Par Value NASDAQ National Market System
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months, and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The issuer's revenue for the most recent fiscal year was $49,105,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing sales price of Common Stock on March 1,
2000 as reported by the NASDAQ Market System , was approximately $7,175,137
Such amount excludes shares held by registrant's current directors and officers
and by each person who owns 5% or more of the outstanding Common Stock in that
such persons may be deemed to be "affiliates" as that term is defined pursuant
to the Rules and Regulations of the Securities Exchange Act of 1934. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 1, 2000 was 9,641,204 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy statement to be filed with the
Securities and ExchangeCommission in connection with the Company's 1999 Annual
Annual Meeting of Shareholders ("the Proxy Statement") are incorporated by
reference in Part III of this Form 10K.
<PAGE>
Item 1. BUSINESS
Scientific Technologies Incorporated (the "Company" or "STI",
designs, manufactures and distributes electrical and electronic
industrial controls. The Company's products include safety light guards,
profiling scanners, factory automation sensors, controls, components,
microcomputers, fiber optics, power monitoring, safety mats, non-contact
ultrasonic sensors and controllers, and other electronic equipment
supplied to industrial automation, commercial and defense customers.
Eighty-six percent (86%) of the Company's capital stock is
currently held by Scientific Technology Inc., a California corporation
(the "Parent").
The Company is organized into two product groups, Safety
Automation Products and Automation Products, doing business in one
segment, factory automation. This new structure was initiated in 2000 to
allow each product group to target its area of specialization, customer-
focused applications and products. This organization is intended to
facilitate more efficient integration of new products and acquisitions.
Products
1. Safety Automation Products Group:
a. Safety Light Guards. The Company's leading product group,
which accounted for a significant majority of the Company's
sales in 1999, 1998 and 1997, is a family of safety light
guards, also called presence sensing devices or safety light
curtains, used to safeguard personnel in manufacturing
environments against injury which could be caused by robots
and moving machinery. STI offers several product variations,
providing customers with a complete line of optical guarding
solutions.
Safety light curtains are devices that emit a "curtain"
of harmless infrared light beams in front of the hazard area.
When any of the beams are blocked, the light curtain sends a
stop signal to the guarded machine. Light curtains are
extremely versatile and can guard areas that are more than 100
feet wide. By the use of mirrors, the light beams can be
diverted around corners to enclose a machine. Safety light
curtains are available with different light beam spacings,
which makes them suitable for many applications.
The Company manufactures and markets a miniaturized
light guard called the MiniSafe, designed for inclusion in
systems offered by original equipment manufacturers ("OEM's")
and other applications where space is limited.
Applications for safety light curtains are found in a
variety of manufacturing environments. STI customers use
safety light curtains to guard a wide variety of hazardous
applications including automotive assembly lines, robot work
cells, semiconductor production equipment, metal stamping and
forming, food processing, aircraft manufacturing, photographic
film production, tire manufacturing and hone appliance
production.
Scientific Technology, Scientific Technologies, Datricon, STI,
The STI logo, OptoSwitch, OptoData, OptoSafe and Fiberlens,
are registered trademarks of Scientific Technology
Incorporated. Aegis, MiniSafe, FlexSafe, MicroSafe, BeamSafe,
FastScan, SpectraData, PartScan and ValuScan are trademarks of
Scientific Technologies Incorporated, This Annual Report on
Form 10-K also refers to trademarks and service marks of other
companies and entities.
The MiniSafe MS4600 series is the Company's newest
product with a complete feature set and an easy-to-install
design which eliminates the need for a separate control
enclosure. All intelligence and feature settings are located
in the receiver. All of STI's most desired options are
standard in the MiniSafe MS 4600, including DeviceNet Standard
interface for communicating systems status data to the machine
control system.
The MiniSafe MS4300 is available in four-inch
increments ranging from four inches to 64 inches in coverage
height. The operating distance, the distance between the
transmitter and receiver, is up to 30 feet.
The MiniSafe MS4400 Series offers a longer-range
product, up to 100 feet, in a larger, more robust package. The
MS4400 series includes Individual Beam Indicators, an STI-
patented feature, which provide the customer with a visual
indicator of the status of each individual beam in the sensing
array. The Individual Beam Indicators assist in both the
installation and operation of the MiniSafe.
The FlexSafe is a segmented safety light curtain that
offers greater flexibility and machine guarding for unusually
shaped applications. Instead of a single transmitter and
receiver, the FlexSafe is offered with two or more segments
comprising each transmitter and receiver. The respective
transmitter and receiver segments are connected with flexible
cables to facilitate fitting to the machinery.
The Company also offers the MicroSafe safety light
curtain, which is more compact than the MiniSafe but has
comparable features. Designed for use in locations in which
space is limited, the small size of the MicroSafe allows it to
be integrated with the support framing used on many automated
industrial machines.
The DuoSafe controller allows the customer to configure
two independent safety light curtains to achieve common or
discrete outputs. The DuoSafe provides further application
flexibility for customers when selecting their safeguarding
solution.
Selected models of the safety light curtain products are
certified by independent laboratories to comply with safety
and electrical standards; including those standards required
in the European Union. Products which pass the stringent
European safety certifications carry the CE test mark.
b. Mechanical Safety Interlocks and Safety Relays. The Company
has had a relationship with EJA Engineering, Ltd. (EJA), the
manufacturer of Guardmaster mechanical safety interlocks based
in the United Kingdom. EJA is a subsidiary of Rockwell
International Guardmaster safety interlock switches are
utilized on hinged, sliding, or lift-off guards and barriers
that are often installed with STI safety light curtains. When
the guard is opened, the power supply to the machine is
disconnected. Safety relays are electromechanical devices
which often serve as a safety interface between the mechanical
safety interlocks and the machine's control system. The
function and design of Guardmaster interlocks are
complementary to the STI range of safety products. Since 1993,
STI has been the exclusive distributor of Guardmaster products
in the United States and Canada, and an affiliate of EJA has
been the distributor for the STI product line in the United
Kingdom.
Under a new agreement, signed in 1999, EJA/Rockwell will
have the non-exclusive right to distribute the Guardmaster
product worldwide and STI will have the right to distribute
the products on a private label basis under the STI brand.
c. Safety Mats and Controllers. STI safety mats are designed
for use in industrial environments where safety enhancements
or zone detection is required. The mats are sensitive to foot
or vehicular traffic. Safety mats are used with a mat
controller, which is the interface between the safety mat and
the control system of the guarded machine.
During 1998, STI commenced limited deliveries of a new
safety mat, the STI Universal Safety Mat ("UM Series"). The UM
Series is the first vinyl mat manufactured by STI, replaced a
previous safety mat, the OM Series, which was a product
manufactured by other suppliers.
In the first quarter of 1999, the UM Series mat and a
new safety mat controller were tested and certified by an
independent test agency to a new international safety mat
standard. Theses products carry the European CE test mark. The
UM Series and the associated controller was introduced to
STI's sales channel during 1999.
2. Automation Products Group:
a. Optical Profiling Scanners. In today's industrial
environment, non-contact, on-the-move sensing is vital to
control automated processes and improve industrial
productivity. STI has developed a line of optical profiling
scanner products. These scanners provide non-contact sensing
for a variety of customer applications.
STI scanners are a family of high speed,
microprocessor-based profiling scanners designed to provide an
economical way to measure the physical size of various
objects. The modular design of these scanners enables the user
to select among various output and programming functions,
including infrared beam spacings, size of the scanned area and
single or multiple axes. Software is included for a variety of
scanning applications. STI can customize the software for a
customer's specific needs.
The Company also manufactures and sells the STI Vehicle
Scanner Series of high speed, profiling scanners utilized in
automated highway toll collection systems. These scanners are
used for vehicle detection, separation and classification,
providing imaging information to a host computer, which
determines the appropriate toll to be charged in an automatic
fare collection application.
STI Vehicle Scanners have been selected or installed on
a number of bridges and toll roads both in the United States
and internationally. Locations include the Triborough and
Verrazano Narrows bridges in New York, a number of bridges in
the San Francisco Bay Area, including the Golden Gate Bridge
and the Oakland-San Francisco Bay Bridge, and toll roads in
Colorado, Florida, Maine, New Jersey and Kansas domestically,
as well as locations in France, Belgium, Singapore and Brazil.
b. Photoelectric and Fiberoptic Sensors. STI also manufactures
and/or markets a variety of photoelectric and fiberoptic
sensors used for detecting the presence or absence of objects
in a wide range of factory automation applications.
Fiberoptic sensors utilize flexible glass or
plastic fiberoptic cable to traverse the light beam from the
solid state light source to the receiving electronics. This
cable is very small, and is resistant to high temperatures,
corrosive chemicals or repeated flexing. Fiberoptic sensors
are often used in confined spaces and in environments in which
standard photoelectric sensors typically would not survive.
Typical uses and applications for photoelectric
and fiberoptic sensors include canning and bottling lines,
conveyor warehousing, palletizing, printing, food processing,
plastic molding, wood and forest products manufacturing,
automotive manufacturing, material handling and a variety of
other applications in an array of industries.
Users of STI photoelectric and fiberoptic sensors
include companies in the automotive, machine tool, metal
forming, robotics, electronics, material handling, packaging,
food processing, pulp and paper, forest products, personal
care products, printing, chemical, defense and textile
industries.
To cover this diversified industrial market, these
products are marketed primarily to end-users and original
equipment manufacturers through more than 275 US distributors
and sales representatives and 33 foreign distributors.
Customers include end-users and original equipment
manufacturers.
c. Control components, power monitoring and defense
electronics. The Company manufactures and markets a variety of
sensors and relays for commercial and defense customers. Such
products include custom magnetic components, current sensors,
RPM sensors, voltage sensors, current monitors, time delay
relays, flashers, phase sequence relays and indicators, DC to
DC converters, and isolation transformers.
STI is qualified as a supplier of a variety of military-
specified sensors and controls. Many of these products are
selected for use on military and general aviation aircraft and
ground support systems. Products are sold to original
equipment manufacturers, government agencies and end users.
STI markets and sells these products primarily through
its direct sales force.
d. Industrial control microcomputers, peripherals and
software. The Company also designs and produces modular,
board-level, computer products under the Datricon label. This
product line consists of a series of single printed circuit
board microcomputers and related peripheral boards for
industrial applications and use by original equipment
manufacturers, and printed circuit pre-packaged systems. Most
of the Datricon microcomputers are constructed on a single
circuit board and are designed using a set of electrical and
mechanical connections known as "STD-Bus". STD-Bus is one of
several electronic bus structures used for microcomputers and
peripherals in the industrial automation control marketplace.
Datricon products can be used in a range of customer
applications, including remote-controlled robots, process
control equipment, measuring instrumentation, plastics
manufacturing, lighting controls, semiconductor processing
equipment, photographic processing and automatic test
equipment. STI markets its Datricon products directly to end-
users and original equipment manufacturers.
e. Level and Flow Sensors. STI markets a variety of
level and flow sensing products imported from several
manufacturers. The principal provider of these products is
Nohken, the largest level control manufacturer in Japan. STI
is the exclusive US distributor of the Nohken products. These
products provide point level detection of solids, liquids and
solids/liquids, as well as contiguous measurement of
continuous flow of solids and liquids, in a wide variety of
environments.
f. Non-contact Ultrasonic Sensors and Controllers. In
April 1999, the Company acquired Lundahl Instruments, Inc. of
Logan Utah, a manufacturer of non-contact ultrasonic sensors
and controllers. Lundahl produces over 75 types of specialized
ultrasonic sensors and controller systems as well as custom
designed products. These products fall into 2 categories:
Sensor/Controller Systems, which are used for monitoring,
displaying or controlling level in tanks or bins, open channel
flow, tank volume, obstacle avoidance and product
dimensioning; Self-Contained Sensor Systems, in which all
electronics are located within the sensor, requiring no
separate controller or transmitting unit. These products are
used for linear position measurements in industrial and level
applications, as well as dimensioning and sorting, measurement
of roll diameter, loop control, monitoring liquids and bulk
solids and level gauging.
In January 2000, the Company created a new business unit
entitled STI Automation Sensors, by combining STI's Level and Flow
Products with the Lundahl Instruments operations. This new unit is
located in Logan, Utah and offers STI's customers one location to
obtain level, flow and positioning sensor expertise. Automation
Sensors is a part of the Automation Products Group.
Sources and availability of components
The Company maintains an inventory of components and parts for
its manufacturing activities. There are many sources for most of the
components needed; however STI purchases some products, components
and sub-assemblies from sole sources, which may be the only
available supplier or may enable the Company to obtain pricing or
supply efficiencies. In the event of supply interruptions from these
vendors, the Company believes it could obtain most sole source
components from alternate suppliers, but this would require the
Company to transfer tooling or designs or redesign its products to
facilitate use of alternate source components. STI could incur
delays by switching to an alternate source, which could have an
adverse effect on the its business, financial condition and results
of operations.
The Company also derives revenue from the distribution of
products from third party manufacturers, including, pursuant to its
relationship with EJA (See "Business - Products - Safety Automation
Products - Mechanical Safety Interlocks and Safety Relays"). In the
event such arrangements are terminated or third party products otherwise
become unavailable, the Company's results of operations could be
adversely affected. As of December 31, 1999, the Company had an open
purchase commitment with a vendor for $750,000.
Research and development
In order to meet the changing needs of its customers, the
Company engages in research and development both to introduce new
products and to improve existing products. In addition, the Company
modifies products as necessary to meet original equipment
manufacturers' requirements. At December 31, 1999, there were
approximately 24 employees engaged in research and development
activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Factors - Rapid
Technological Change and New Product Development."
In 1999, 1998, and 1997, the Company spent $4,780,000,
$3,314,000 and $3,135,000, respectively, on engineering, research
and development. In addition to new products such as DuoSafe and
enhancements to existing products, the Company's research and
development efforts are directed towards qualifying the Company's
light curtains, scanners and sensors for sale in foreign countries
and qualifying products the Company imports for sales in the U.S.
The Company anticipates that its level of research and development
expenditures may be higher in 2000.
Patents and trademarks
The Company holds eight US patents and nine US registered
trademarks. In addition, the Company has been licensed by its Parent
to use three patents for its products and six US registered
trademarks, including the use of the Parent's logo "STI". Products
are marketed under the following US registered trademarks:
"DUOSAFE," "OPTOFENCE," "MINISAFE," "OPTOSAFE," "FIBERLENS,"
"BEAMSAFE," "SPECTRADATA," "FLEXSAFE" and "MICROSAFE". The Company
has filed for additional patent protection on certain of its
technologies.
There can be no assurance that these patents or trademarks or
other steps taken by the Company to protect its intellectual
property will prove sufficient to prevent misappropriation of the
Company's technology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Factors -
Protection and Enforcement of Intellectual Property Rights."
Because of the rapid rate of technology change in the electronics
industry, the Company believes its success in the future depends on
the quality of its products and services and the technical skills of
its personnel to adapt to technological developments, rather than
solely on its patents.
Backlog
Because many customers place large orders for delivery
throughout the year and because of the possibility of customer
changes and cancellation of orders, the Company's backlog as of any
particular date may not be representative of the Company's sales for
any succeeding fiscal period. At February 28, 2000, the Company's
backlog was $4,171,000 compared to $5,135,000 at March 19, 1999. Of
this total, $195,000 is scheduled at the customer's request, to be
filled during periods after 2000. This total includes a $1.8 million
contract for vehicle scanner systems in New Jersey and Delaware.
Competition
The industry in which the Company operates is competitive and
subject to rapid technological change. Many of the Company's
competitors are significantly larger and possess greater financial
and other resources.
Competitors of STI include, among others, Honeywell, Rockwell
Automation, Eaton Corporation, Banner Engineering, Sick Optic-
Electronic, Inc., Cutler Hammer, Danaher Controls, Data Instruments,
Link Controls and Omron. Competitors of the control components
power monitoring and defense product lines include several of the
above-mentioned firms and also SCI Systems, Inc., Technitrol,
Logitek, Hi-G and Xentek. Certain of the Company's suppliers
(including Rockwell/EJA) also compete with the Company. The Datricon
line's competitors include Mizar, Pro-Log, and Ziatech. In addition,
the Company faces indirect competition from present and potential
end users who from time to time evaluate the "make or buy" decision
of whether to manufacture their own components or purchase them from
outside sources.
Competition is based primarily upon product quality,
performance and price. The Company believes that it generally
competes favorably with respect to these factors. To maintain its
competitive position, the Company will continue to devote
substantial resources to the development of new products and
improvements to current products. See "Business - Research and
Development."
Foreign operations
The Company has no foreign manufacturing operations. STI
Scientific Technologies GmbH, a wholly owned German subsidiary, was
established in 1995 as the Company's European sales office. The
Company's products are also sold in foreign countries by
distributors and independent sales representatives. Foreign sales
represented less than 10% of sales in each of 1999, 1998 and 1997.
Customers
NCC Electronics, an independent distributor, represented 14%
of sales in 1999 and 1998, and 18% of sales in 1997. No other
customer represented more than 10% of sales in such periods.
Aggregate sales to both government agencies and government
contractors represented less than 5% of sales in 1999, 1998 and
1997.
Costs and effects of compliance with environmental laws
Compliance with environmental protection laws or similar
ordinances is not expected to have any material affect on the
business of the Company.
Employees
At December 31, 1999, the Company employed approximately 289
full time employees. Included in this total were the common
manufacturing, support and administrative staff that the Company
shares with the Parent and other subsidiaries of the Parent at the
Dumbarton Circle facility, in Fremont, California.
None of the employees are represented by unions, and there has
never been a disruption of operations due to a labor dispute.
Many of the Company's employees are skilled in technical and
engineering disciplines and the future success of the Company will
depend, in part, upon its ability to attract and retain such
employees. The Company believes that its relations with its
employees are good.
Item 2. PROPERTIES
The Company owns no real estate. The Company's manufacturing
operations, corporate headquarters, administrative, engineering and
sales offices are located in a 95,000 square foot facility located
at 6550 Dumbarton Circle, Fremont, California. The facility is owned
by an affiliate of the Parent and the Company leases approximately
85,000 square feet, 89% of the total, for its use. Lundahl
Instruments is located in a 4,480 square foot facility at 429 S.
Main Street, Logan, Utah. The Company believes its current
facilities will be adequate for the foreseeable future. See Note 7
of Notes to Consolidated Financial Statements for information
regarding lease commitments.
The Company maintains insurance policies for property,
casualty, fire, business interruption, workers compensation, general
liability and product liability. There can be no assurance that in
the future, the Company will continue to be able to obtain such
insurance on commercially and economically feasible terms. In the
event the Company were to suffer a claim not covered by insurance or
if insurance coverage is insufficient, such claim could have an
adverse effect on the Company's operations or financial condition.
The Company anticipates that additional space will be needed during
2000 for the Automation Sensors operations.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company is traded on the Nasdaq
National Market under the symbol STIZ. The stock tables in most
daily newspapers list the Common Stock of the Company under
"SciTech".
Price of Common Stock
- ----------------------
1999 High Low 1998 High Low
- --------------- --------- --------- --------------- --------- ---------
1st Quarter $6-1/2 $5-3/16 1st Quarter $ 16 $ 9-3/4
2nd Quarter 6-3/4 4-17/32 2nd Quarter 12-1/2 8-1/4
3rd Quarter 7-3/8 4-7/16 3rd Quarter 10-5/8 6-1/4
4th Quarter 6-7/8 4 4th Quarter 7-1/2 4-3/4
The closing sales price of the Common Stock on March 1, 2000 was
$5.63 per share.
Holders
There were 791 stockholders of record on March 1, 2000.
Dividends
In 1999, regular quarterly dividends of $.0475 per share were
paid on April 1, July 1, September 1, and December 8. In 1998,
regular quarterly dividends of $.045 per share were paid on April 1,
July 1, September 9, and December 2. On March 6, 2000, the Company
declared a regular quarterly dividend of $.05 per share, payable on
April 1, 2000 to shareholders of record on March 19, 2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SCIENTIFIC TECHNOLOGIES INCORPORATED
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income statement data
- ---------------------------
Net sales $49,105 $43,465 $44,859 $38,294 $36,006
Income from operations 6,834 6,340 9,266 7,798 10,247
Net income 4,505 4,422 6,070 5,168 6,336
Basic income per common
share $0.47 $0.46 $0.63 $0.54 $0.66
Diluted income per common
share $0.47 $0.46 $0.62 $0.53 $0.66
December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance sheet data
- -------------------
Total assets $32,536 $29,821 $26,119 $21,713 $18,097
Long-term obligations -- -- -- -- 14
Stockholders equity 27,849 25,458 22,518 17,871 14,336
Dividends declared per
share $0.19 $0.18 $0.17 $0.16 $0.13
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
1999 First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Sales $11,560 $12,014 $12,804 $12,727
Gross Profit 5,751 6,064 6,394 6,127
Net Income 1,024 1,119 1,305 1,058
Basic income per common
share $0.11 $0.12 $0.14 $0.11
Diluted income per common
share $0.11 $0.12 $0.14 $0.11
1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Sales $11,113 $11,344 $10,161 $10,847
Gross Profit 5,727 5,668 4,803 5,823
Net Income 1,431 1,385 741 1,865
Basic income per common
share $0.15 $0.14 $0.08 $0.09
Diluted income per common
share $0.15 $0.14 $0.08 $0.08
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Such statements include statements regarding
anticipated future sales, margin and expense levels, future tax
rates, future cash flow and working capital requirements. Actual
results could differ materially from those projected in the forward
looking statements as a result of the risk factors set forth under
"Business Factors" and elsewhere in this report. The following
discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto. All references
to years are to fiscal years unless otherwise noted.
Results of Operations
Sales
Sales 1999 increased 13% from $43.5 million in 1998 to $49.1 million
in 1999. This was primarily due to increased units shipped of our
existing products, the introduction of new safety products, such as
the MS 4600, in 1999 and by sales related to the acquisition of
Lundahl Instruments Inc. in April 1999. Sales declined by 3% from
$44.9 million in 1997 to $43.5 million in 1998. During the latter
half of 1998, the General Motors labor dispute and the Asia economic
situation had an adverse impact on the Company's customers doing
business in those sectors, which in turn negatively impacted the
Company's sales in 1998. The table below summarizes operating costs
and expenses as a percent of sales for the most recent three years.
1998 1998 1997
---------- ---------- ----------
Sales 100% 100% 100%
---------- ---------- ----------
Gross margin 50% 51% 52%
---------- ---------- ----------
Operating expenses
Selling, general and administrative 26% 29% 24%
Research and development 10% 8% 7%
---------- ---------- ----------
Total operating expenses 36% 37% 31%
---------- ---------- ----------
Income from operations 14% 14% 21%
Interest income, net 1% 2% 1%
---------- ---------- ----------
Income before income taxes 15% 16% 22%
Provision for income taxes 6% 6% 8%
---------- ---------- ----------
Net income 9% 10% 14%
========== ========== ==========
Gross profit
1999 = $24.3 million
1998 = $22.0 million
1997 = $23.3 million
Increase in 1999 = 11%
Decrease in 1998 = (6%)
STI's gross margin was 50% of sales in 1999, 51% in 1998 and 52% in
1997. As a result of the higher level of shipments, gross profit
increased 11% over 1998. The decline in gross profit in 1998
compared to 1997 was attributable to a product mix change resulting
in increased sales of lower margin products as a percentage of total
sales. Gross margins in 1999 and 1998 were impacted by higher sales
of products manufactured by other companies and distributed by STI,
which generally have lower gross margins.
Selling, general and administrative expenses
1999 = $12.7 million
1998 = $12.4 million
1997 = $10.9 million
Increase in 1999 = 3%
Increase in 1998 = 14%
During 1999 selling, general and administrative expenses declined to
26% of sales compared to 29% in 1998 as a result of economies of
scale associated with the expanded sales revenue. Total expenditures
increased 3% from 1998 to 1999 primarily as the result of higher
expenditures relating to sales volume partially offset by non-
recurring legal expenses in 1998. During 1998 selling, general and
administrative expenses increased to 29% of sales compared to 24% in
1997. Total expenditures increased 14%, compared to 1997. During
1998, the Company continued to expand its sales force and began
distributing a product data book completed in 1997. The Company
anticipates that selling, general and administrative expenses will
increase in the future but may fluctuate as a percent of sales.
Research and development expenses
1999 = $4.8 million
1998 = $3.3 million
1997 = $3.1 million
Increase in 1999 = 44%
Increase in 1998 = 6%
Product creation, development and enhancement have always been and
continue to be an important factor in STI's long-term success.
Investments in this area enable the Company to serve the factory
automation market with increasingly sophisticated sensors and
manufacturing control products. During 1999, the Company undertook a
significant expansion of research and development efforts,
particularly in the use of outside consultants. In 1999 and 1998,
STI introduced a number of new products and product. The Company
anticipates that the level of research and development expenses will
increase in the future, although such expenses may fluctuate as a
percentage of sales. To date, all product development costs have
been expensed as incurred.
Income Tax
The Company's effective income tax rate was 38% in 1999, 1998 and
1997. The Company expects that its effective tax rate for 2000 will
be reasonably consistent with 1999. See Notes 1 and 5 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
STI's working capital needs have been met through funds generated
from operating activities. During 1999, operating funds were
provided by net income adjusted for depreciation, the sale of short-
term investments and increases in accounts payable and accrued
expenses. These operating funds were used to finance increased
accounts receivable and inventories, the acquisition of Lundahl
Instruments, Inc., to purchase fixed assets and to pay dividends.
Working capital amounted to $22.7 million at December 31, 1999. The
bank line of credit, consisting of a one year revolving line and
term loan commitment of $6.1 million, was renewed in 1999 and
extended to May 31, 2000. Secured by qualified receivables, fixed
assets and inventories, borrowing under this credit line bears
interest at the bank's prime rate. At December 31, 1999, none of the
revolving line of credit had been utilized. The Company has the
option to convert up to $1,000,000 of the credit line into a five-
year term note. See Note 4 of Notes to Consolidated Financial
Statements.
The Company made certain capital expenditures during 1999, primarily
for production, quality assurance, research and development
equipment, information systems and software. Consistent with its
customary operations and plans for growth, the Company plans to make
certain capital expenditures during 2000, primarily for production,
quality assurance and research and development equipment. While the
Company had no formal commitments at December 31, 1999, it is
anticipated that capital expenditures in 2000 will be approximately
$1,700,000.
STI believes that its cash flow from operations and available bank
borrowings will be sufficient to meet anticipated working capital
requirements through at least 2000. While the Company continues to
evaluate its financing alternatives from time to time, it has no
current plans to raise additional outside capital.
Relationship with Parent
Cash transfers, management service and interest charges from the
Parent to the Company, charges for income taxes and the Parent's
share of dividends are reflected as increases to the Payable to
Parent account or as decreases to the Receivable from Parent
account. The Parent files consolidated returns, including the
accounts of the Company, for federal and state income taxes. See
Note 2 of Notes to Consolidated Financial Statements.
Business Factors
Because of the variety of factors and uncertainties affecting the
Company's operating results, past financial performance and historic
trends may not be a reliable indicator of future performance. These
factors, as well as other factors affecting the Company's operating
performance, may result in significant volatility in the Company's
common stock price. Among the factors which could affect the
Company's future business, financial condition or operating results
are the following:
Variability of operating results
The Company has experienced fluctuations in annual and quarterly
operating results and anticipates that these fluctuations will
continue. These fluctuations are caused by a number of factors,
including the level and timing of customer orders, fluctuations in
complementary third party products with which STI products are sold,
the mix of products sold and the timing of operating expenditures.
Although STI conducts only a small amount of business with Asian
companies, a number of our original equipment manufacturer (OEM)
customers, primarily in the semiconductor equipment market, were
adversely affected by the Asian financial crisis in 1998.
Seasonality
The industrial manufacturing equipment industry can be subject to
seasonality. This is also true with respect to European markets
where business activity declines due to vacations taken in the
summer months.
Competition
The market for industrial sensors is highly competitive. Many
competitors have substantially greater name recognition and
technical, marketing and financial resources than the Company.
Competitive pressures could reduce market acceptance of the
Company's products and result in price reductions, decreased
revenues and increases in expenses.
Rapid technological change and new product development
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in
customer needs and frequent new product introductions. The Company's
future success will depend on its ability to enhance its current
products, develop new products and respond to emerging industry
standards, all on a timely and cost-effective basis. The
introduction of new products also requires the Company to manage the
transition from older products in order to minimize disruption of
customer orders, avoid excessive levels of older product inventories
and ensure that adequate supplies of new products can be delivered
to meet customer demands.
Dependence on indirect distribution channel
A majority of the Company's sales are through third party
distributors, system integrators and original equipment
manufacturers. These resellers are not required to offer the
Company's products exclusively. There can be no assurance that a
reseller will continue to offer the Company's products. In addition
many of the Company's resellers are privately owned firms and some
may not be well capitalized.
International sales
The Company's international sales may be disrupted by currency
fluctuations or other events beyond the Company's control, including
political or regulatory changes.
Protection and Enforcement of Intellectual Property Rights
The Company relies on a combination of patent, trademark and trade
secret laws and contractual restrictions to establish and protect
certain proprietary rights in its products and services. There can
be no assurance that the Company's patents, trademarks, or
contractual arrangements or other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology or defer independent
third party development of similar technologies. Moreover, there can
be no assurance that the technology licenses granted to the Company
from its Parent will continue to be available. The loss of any of
the Company's proprietary technology could require the Company to
obtain technology of lower quality or performance standards or at
greater cost, which could materially adversely affect the Company's
business, results of operations and financial condition.
Furthermore, the laws of certain foreign countries may not protect
the Company's products, services or intellectual property rights to
the same extent as do the laws of the United States.
To date, the Company has not been notified that any of its products
infringe the proprietary rights of third parties, but there can be
no assurance that third parties will not claim infringement by the
Company with respect to current or future products. Any such claim,
whether meritorious or not, could be time-consuming, result in
costly litigation or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to the Company or at all. As a
result, any such claim could have a material adverse affect upon the
Company's business, results and financial condition. See "Business -
Patents and Trademarks".
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements
Consolidated Balance Sheet - December 31, 1999 and 1998
Consolidated Statement of Operations - Years ended December 31, 1999,
1998 and 1997
Consolidated Statement of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity - Years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
required or applicable, or the information required to be set forth
therein is included in the Financial Statements or notes thereto.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,362 $2,577
Short-term investments 5,209 10,798
Accounts receivable, net 8,822 6,612
Inventories 8,414 5,812
Deferred income taxes 852 1,132
Other assets 740 345
--------- ---------
Total current assets 27,399 27,276
Intangible assets, net 2,271 --
Property and equipment, net 2,866 2,545
--------- ---------
Total assets $32,536 $29,821
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $2,695 $2,391
Accrued expenses 1,992 1,972
--------- ---------
Total current liabilities 4,687 4,363
--------- ---------
Commitments (Note 8)
Stockholders' Equity
Voting Preferred stock; shares authorized -
10,000; shares issued and outstanding -
none; $.10 par value -- --
Non-voting Preferred stock; shares authorized -
10,000; shares issued and outstanding -
none; $.10 par value -- --
Common stock; shares authorized - 100,000;
shares issued and outstanding - 9,633 and
9,671, respectively; $.001 par value 10 10
Capital in excess of par value 5,509 5,787
Retained earnings 22,330 19,661
--------- ---------
Total stockholders' equity 27,849 25,458
--------- ---------
Total liabilities and stockholders' equity $32,536 $29,821
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales $49,105 $43,465 $44,859
Cost of goods sold 24,769 21,444 21,510
---------- ---------- ----------
Gross profit 24,336 22,021 23,349
Operating expenses
Selling, general and administrative 12,722 12,367 10,948
Research and development 4,780 3,314 3,135
---------- ---------- ----------
Total operating expenses 17,502 15,681 14,083
---------- ---------- ----------
Income from operations 6,834 6,340 9,266
Interest income, net 432 794 524
---------- ---------- ----------
Income before income taxes 7,266 7,134 9,790
Provision for income taxes 2,761 2,712 3,720
---------- ---------- ----------
Net income $4,505 $4,422 $6,070
========== ========== ==========
Basic net income per common share $0.47 $0.46 $0.63
========== ========== ==========
Shares used to compure basic
net income per common share 9,658 9,650 9,615
========== ========== ==========
Diluted net income per common share $0.47 $0.46 $0.62
========== ========== ==========
Shares used to compure diluted
net income per common share 9,682 9,721 9,777
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $4,505 $4,422 $6,070
Adjustments to reconcile net income to
cash provided by (used in)
operating activities:
Depreciation and amortization 1,189 921 833
Changes in assets and liabilities:
Accounts receivable, net (2,210) 862 (782)
Inventories (2,602) (699) (1,047)
Other assets (115) (163) (196)
Trade accounts payable 304 457 (451)
Accrued expenses 20 305 210
---------- ---------- ----------
Cash flows provided by operating
activities 1,091 6,105 4,637
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and
equipment (1,471) (780) (1,042)
Acquisition of Lundahl Instruments,
net of cash (2,310)
Sale (purchase) of short-term
investments, net 5,589 (5,825) 16
---------- ---------- ----------
Cash flows used in investing activities 1,808 (6,605) (1,026)
---------- ---------- ----------
Cash flows from financing activities:
Payments on debt -- -- --
Issuance (repurchase) of common stock, ne (278) 255 213
Dividends (1,836) (1,737) (1,636)
---------- ---------- ----------
Cash flows used in financing activities (2,114) (1,482) (1,423)
---------- ---------- ----------
Change in cash and cash equivalents 785 (1,982) 2,188
Cash and cash equivalents at beginning
of year 2,577 4,559 2,371
---------- ---------- ----------
Cash and cash equivalents at end of year $3,362 $2,577 $4,559
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid to Parent for income taxes $2,761 $2,712 $3,720
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------
Capital
in excess
Par of par Retained
Shares Value Value Earnings Total
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balances December 31, 1995 9,602 $10 $5,319 $12,542 $17,871
Repurchase of common stock 33 -- 213 -- 213
Net income for the year -- -- -- 6,070 6,070
Dividends paid -- -- -- (1,636) (1,636)
--------- -------- --------- -------- ---------
Balances December 31, 1996 9,635 10 5,532 16,976 22,518
Issuance of common stock 36 -- 255 -- 255
Net income for the year -- -- -- 4,422 4,422
Dividends paid -- -- -- (1,737) (1,737)
--------- -------- --------- -------- ---------
Balances December 31, 1997 9,671 10 5,787 19,661 25,458
Issuance of common stock 27 -- 107 -- 107
Repurchase of common stock (65) -- (385) -- (385)
Net income for the year -- -- -- 4,505 4,505
Dividends paid -- -- -- (1,836) (1,836)
--------- -------- --------- -------- ---------
Balances December 31, 1998 9,633 $10 $5,509 $22,330 $27,849
========= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Scientific Technologies Incorporated
Notes to Consolidated Financial Statements
NOTE 1-OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
The Company
Scientific Technologies Incorporated (the "Company") develops,
manufactures and markets safety light curtains, industrial sensors,
optical profilers, microcomputers and power monitoring devices for
factory automation applications. A majority of the Company's outstanding
common stock is held by Scientific Technology Incorporated, a California
corporation (the "Parent").
The Company operates in one business segment - the development,
manufacture and marketing of electronic and infrared safety light
curtains, sensors and scanning products. Sales to foreign customers
represented less than 10% of total sales in 1999, 1998 and 1997. One
customer, a distributor, accounted for 14% of total sales in 1999 and
1998 and 18% of total sales in 1997.
The Company operates principally in the United States. The Company's
operations in Germany are insignificant to the Company as a whole.
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
at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could
differ from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions.
Revenues
Revenues from product sales are recognized when products are shipped.
The Company warranties its products for 12 months from date of
installation and provides for warranty upon shipment.
Cash and Cash Equivalents and Short-Term Investments
The Company invests primarily in money market accounts and short-term
investments held at financial institutions and considers all highly
liquid investments with an original maturity of less than 90 days to be
cash equivalents.
Short-term investments consist of highly liquid investments which
generally mature in less than one year and are classified as "available
for sale". Interest income is accrued as earned. The investments are
carried at cost plus accrued interest, which approximates market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment, including furniture and fixtures, are recorded
at cost. Depreciation is provided using the straight-line method over
the estimated useful lives, which range from three to ten years.
Leasehold improvements are amortized over the shorter of the term of the
lease or the estimated life of the improvement.
Intangible assets
Intangible assets include technology, customer lists, a covenant not to
compete and goodwill acquired as part of the acquisition of Lundahl
Instruments, Inc. Goodwill represents the excess of the acquisition
costs over the fair market value of the assets acquired. Intangible
assets are generally amortized on a straight-line basis not exceeding
twenty years.
Income Taxes
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities.
The Company is included in the consolidated tax return of the Parent,
but provides for income taxes on a separate return basis pursuant to a
tax sharing arrangement, which limits the Company's tax liability to the
amount payable to the Parent. Income taxes payable are recorded as a
reduction to the receivable from Parent account or as an increase to the
payable to Parent account.
Foreign Currency
The Company's German subsidiary transacts its business in German Marks.
Translation and transaction gains and losses to date have been
immaterial.
Comprehensive Income
For the periods presented, there is no significant difference between
net income and comprehensive income.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, cash equivalents,
short-term investments, trade accounts receivable, accounts payable and
accrued expenses, the carrying amounts approximate fair value due to the
short maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents, short-term investments and trade accounts receivable.
The Company places its cash and cash equivalents in a variety of money
market accounts. The Company further limits its exposure to these
investments by placing such investments with various high quality
financial institutions. The Company routinely performs evaluations of
these financial institutions. The Company's short-term investments are
primarily composed of highly rated mutual funds and Treasury bonds. The
Company offers credit terms on the sale of its products to its
customers. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral
from its customers. The Company maintains an allowance for uncollectable
accounts receivable based upon the expected collectability of all
accounts receivable.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Parent provides certain management, marketing and sales services to
the Company. The costs are allocated to the Company based on the
percentage of the Company's sales to total sales of the Parent and its
subsidiaries. The amounts allocated to the Company for 1999, 1998 and
1997 were $977,000, $908,000 and $824,000, respectively.
The Company leases approximately 85,000 square feet in a 95,000 square
foot facility owned by an affiliate of the Parent. The lease term is for
ten years. Overhead costs are allocated primarily on the basis of square
footage utilized.
The Company utilizes a payable to Parent account to record activity
including cash received, cash disbursed and amounts owed to the Parent
for allocated charges and dividends. The net effect of transactions with
the Parent resulted in a zero balance at December 31, 1999, 1998 and
1997. The Company charges interest on the receivable from the Parent and
pays interest on payables to Parent at the Company's average interest
rate on bank borrowings. Interest expense amounted to $0 in 1999,
$20,000 in 1998 and $34,000 in 1997.
NOTE 3 - ACQUISITION OF LUNDAHL INSTRUMENTS, INC.
On April 1, 1999, the Company acquired all of the outstanding
capital stock of Lundahl Instruments, Inc. ("LII"). In the transaction,
accounted for as a purchase, the Company paid $2,659,000 in cash of
which $1,060,000 was allocated to goodwill, $1,000,000 was allocated to
technology, $250,000 to customer lists and $50,000 to a covenant not to
compete. Intangible assets acquired are generally amortized using the
straight-line method over twenty years. The operations and financial
position of LII were accounted for in the consolidated financial
statements of the Company beginning in April 1999. LII designs and
manufactures non-contact ultrasonic sensors and controllers for use in
the automation of industrial processes for applications involving level
and flow control, environmental monitoring, automated vehicle collision
avoidance and material positioning.
NOTE 4 - BALANCE SHEET DATA
December 31,
----------------------
1999 1998
---------- ----------
ACCOUNTS RECEIVABLE:
Trade accounts receivable $9,152 $7,001
Less: Allowance for doubtful accounts
and sales returns (330) (389)
---------- ----------
$8,822 $6,612
========== ==========
INVENTORIES:
Finished goods $3,108 $2,421
Work in process 263 482
Subassemblies 948 541
Raw materials 4,095 2,368
---------- ----------
$8,414 $5,812
========== ==========
PROPERTY AND EQUIPMENT:
Equipment $6,305 $5,106
Furniture and fixtures 1076 1030
Leasehold improvements 96 53
---------- ----------
7,477 6,189
Less: accumulated depreciation (4,611) (3,644)
---------- ----------
$2,866 $2,545
========== ==========
INTANGIBLE ASSETS
Goodwill $1,060 --
Technology 1,000 --
Customer list 250 --
Covenant not to compete 50 --
---------- ----------
$2,360 --
Less: accumulated amortization ($89) --
---------- ----------
$2,271 --
========== ==========
ACCRUED EXPENSES:
Accrued compensation and benefits $1,111 $937
Accrued commissions 210 230
Warranty reserve 321 298
Other 350 507
---------- ----------
$1,992 $1,972
========== ==========
The Company has a $6,100,000 line of credit with a bank, of which
no amount was outstanding at December 31, 1999 or December 31,
1998. The line, which is subject to certain financial statement
covenants, bears interest at the bank's prime rate (7.75% at
December 31, 1999), is secured by accounts receivable, inventories
and fixed assets, and expires on May 31, 2000.
NOTE 5 - INCOME TAXES
The provision for income taxes was as follows:
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Current tax expense:
Federal $1,941 $2,224 $3,142
State, net of federal benefit 540 600 758
---------- ---------- ----------
Sub total 2,481 2,824 3,900
Deferred tax benefit 280 (112) (180)
---------- ---------- ----------
Total $2,761 $2,712 $3,720
========== ========== ==========
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets of $852,000 and $1,132,000 were
comprised of $460,000 and $507,000 of inventory reserves and of other
accruals and reserves not currently deductible of $392,000 and $625,000
at December 31, 1999 and 1998, respectively.
The provision for income taxes differs from the amount of tax determined
by applying the applicable federal statutory income tax rate to pretax
income as a result of the following differences:
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Percentage of pretax income:
Statutory U.S. tax rate 34% 34% 34%
State income taxes, net of
federal benefit 6% 6% 6%
Research and development
and other credits -2% -2% -2%
---------- ---------- ----------
Effective tax rate 38% 38% 38%
========== ========== ==========
NOTE 6 - INCOME PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted income per common share computations is provided below.
In Thousands Per
---------------------- Share
Income Shares Amunt
---------- ---------- ----------
1999
Basic earnings per share calculation $4,505 9,658 $0.47
Effect of dilutive securities
Stock options -- 24 --
---------- ---------- ---------
Dilutive earnings per share calculation $4,505 9,682 $0.47
========== ========== =========
1998
Basic earnings per share calculation $4,422 9,650 $0.46
Effect of dilutive securities
Stock options -- 71 --
---------- ---------- ---------
Dilutive earnings per share calculation $4,422 9,721 $0.46
========== ========== =========
1997
Earnings per share of common stock $6,070 9,615 $0.63
Effect of dilutive securities
Stock options -- 162 $0.01
---------- ---------- ---------
Earnings per share of common stock-
assuming dilution $6,070 9,777 $0.62
========== ========== =========
NOTE 7 - DIVIDENDS
On March 6, 2000, the Company declared a regular quarterly dividend of
$.05 per share on all of its common shares, payable on April 3, 2000
to shareholders of record on March 17, 1999.
During 1999, the Company paid quarterly dividends of $.0475 per share.
During 1998, the Company paid quarterly dividends of $.045 per share.
During 1997, the Company paid regular quarterly dividends of $.0425 per
share.
NOTE 8 - COMMITMENTS
The Company leases certain office and manufacturing space and other
equipment under noncancellable operating leases. At December 31, 1999,
future minimum payments under these leases due in the years 2000 through
2005 were approximately $730,000 per year.
Rent expense under operating lease agreements was approximately $720,000
in 1999, $685,000 in 1998 and $630,000 in 1997, respectively.
As of December 31, 1999, the Company had an open purchase commitment
with a vendor for $750,000.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Scientific Technologies Incorporated
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of cash flows and of
changes in stockholders' equity present fairly, in all material
respects, the financial position of Scientific Technologies
Incorporated (a subsidiary of Scientific Technology Incorporated)
and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted
in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
March 3, 2000
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement for its 2000
Annual Meeting of Stockholders pursuant to Regulation 14A (the "Proxy
Statement") no later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is
incorporated herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's directors
and the Company's executive officers is incorporated by reference to the
sections entitled "Nominees" and "Management", respectively, appearing
in the Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation" and "Report of the
Compensation Committee" appearing in the Proxy Statement for its 2000
Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the sections entitled "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Proxy Statement for its 2000 Annual
Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the sections entitled "Certain Relationships and Related Transactions"
appearing in the Proxy Statement for its 2000 Annual Meeting of
Stockholders.
<PAGE>
PART IV
Item 14. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
Reference is made to the index appearing in Item 8(a) of
this report.
2. EXHIBITS AND EXHIBIT INDEX:
Exhibit 2.1 - Stock Acquisition Agreement by and Among Scientific
Technologies Incorporated,
Lundahl Instruments, Inc. and Mark Lundahl dated
March 31, 1999.
Exhibit 3.1 - Articles of Incorporation, as amended, are
incorporated by reference to the
Registrant's Form 10-K for the year ended December
31, 1988, Exhibit 3.1.
Exhibit 3.3 - By-Laws are incorporated by reference to the
Registrant's Form 10-K for the
year ended December 31, 1985, Exhibit 3.
Exhibit 4.1 - 1997 Employee Stock Purchase Plan is incorporated
by reference to the Registrant's
Registration Statement on Form S-8 dated October 2, 1998
Exhibit 4.2 - 1997 Stock Plan is incorporated by reference to the
Registrant's Registration Statement on Form S-8 dated
October 2, 1998.
Exhibit 10.1 - Lease agreement dated February 21, 1995 for 6550
Dumbarton Circle, Fremont, California 94555,
is incorporated by reference to the Registrant's
Form 10-KSB for the year ended
December 31, 1994, Exhibit 10.4.
Exhibit 10.2 - Bank agreement dated November 29, 1994 with Bank of
The West is incorporated by reference to the
Registrant's Form 10-KSB for the year ended
December 31, 1994, Exhibit 10.3.
Exhibit 10.3 - Amendment dated June 9, 1999 to Bank Agreement
dated November 29, 1994 with Bank of The West
Exhibit 21.1- Subsidiaries of the Registrant.
Exhibit 23.1 - Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
Exhibit 24.1 - Power of Attorney (included on page 28).
Exhibit 27.1 - Financial Data Schedule.
All other exhibits for which provision is made in Regulation S-K
of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have
been omitted.
(b) No Reports on Form 8-K were filed during the last quarter of 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIENTIFIC TECHNOLOGIES INCORPORATED
Dated: March 6, 2000 By /s/ Anthony R. Lazzara
-------------- ---------------------------------
Anthony R. Lazzara
Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony R. Lazzara and Joseph J. Lazzara, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ----------------------------------- ---------------
<S> <C> <C>
/s/ Anthony R. Lazzara Chairman of the Board and March 6,2000
- ------------------------ Director ---------------
Anthony R. Lazzara
/s/ Joseph J. Lazzara President, Chief Executive Officer, March 6,2000
- ------------------------ Treasurer, Director (Principal ---------------
Joseph J. Lazzara Executive and Financial Officer)
/s/ James A. Lazzara Vice President, Secretary and March 6, 2000
- ------------------------ Director ---------------
James A. Lazzara
/s/ James A. Ashford Vice President and Director March 6,2000
- ------------------------ ---------------
James A. Ashford
/s/ Carl H. Frei Director March 6, 2000
- ------------------------ ---------------
Carl H. Frei
/s/ Bernard J. Ploshay Director March 6, 2000
- ------------------------ ---------------
Bernard J. Ploshay
/s/ Richard O. Faria Vice President, Finance and March 6,2000
- ------------------------ Administration (Principal Accounting ---------------
Richard O. Faria Officer)
</TABLE>
<PAGE>
SCIENTIFIC TECHNOLOGIES INCORPORATED
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
EXHIBITS - TABLE OF CONTENTS
Exhibit 2.1 - Stock Acquisition Agreement between Lundahl Inc. and
Scientific Technologies Incorporated dated March 31, 1999
Exhibit 10.3 - Amendment dated June 9, 1999 to Bank Agreement
dated November 29, 1994
Exhibit 21.1 - Subsidiaries of the Registrant
Exhibit 23.1 - Consent of Independent Accountants
Exhibit 24.1 - Power of Attorney (included on page 28)
Exhibit 27.1 - Financial Data Schedule
<PAGE>
EXHIBIT 2.1
STOCK ACQUISITION AGREEMENT
BY AND AMONG
SCIENTIFIC TECHNOLOGIES INCORPORATED,
LUNDAHL INSTRUMENTS, INC.
AND
MARK LUNDAHL
Dated as of March 31, 1999
EXECUTION COPY
TABLE OF CONTENTS
Page
ARTICLE I THE PURCHASE AND SALE 1
1.1 The Purchase and Sale 1
1.2 The Closing 1
1.3 Purchase Price and Payment 2
1.4 Purchase Price Adjustment 2
1.5 Escrow 3
1.6 Deliveries by Shareholder and the Company 4
1.7 Deliveries by Buyer 4
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4
2.1 Organization of the Company 4
2.2 Company Capital Structure 5
2.3 Subsidiaries 5
2.4 Authority 5
2.5 Company Financial Statements 5
2.6 No Undisclosed Liabilities 6
2.7 No Changes 6
2.8 Tax Matters 7
2.9 Restrictions on Business Activities 8
2.10 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment 9
2.11 Intellectual Property 9
2.12 Agreements, Contracts and Commitments 10
2.13 Interested Party Transactions 12
2.14 Governmental Authorization 12
2.15 Litigation 12
2.16 Accounts Receivable 12
2.17 Minute Books 12
2.18 Environmental Matters 13
2.19 Brokers' and Finders' Fees; Third Party Expenses 13
2.20 Employee Benefit Plans 14
2.21 Insurance 16
2.22 Year 2000. 16
2.23 Compliance with Laws 17
2.24 Complete Copies of Materials 17
2.25 Representations Complete 17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER 17
3.1 Organization, Standing and Power 17
3.2 Authority 17
3.3 Litigation 18
ARTICLE IV CONDUCT PRIOR TO THE CLOSING 18
4.1 Conduct of Business of the Company 18
4.2 No Solicitation 19
4.3 No Encumbrance 20
ARTICLE V ADDITIONAL AGREEMENTS 20
5.1 Access to Information 20
5.2 Confidentiality 20
5.3 Expenses 20
5.4 Public Disclosure 21
5.5 Consents 21
5.6 Tax Matters 21
5.7 Best Efforts 21
5.8 Notification of Certain Matters 22
5.9 Additional Documents and Further Assurances 22
ARTICLE VI CONDITIONS TO THE ACQUISITION 22
6.1 Conditions to Obligations of Each Party to Effect the
Acquisition. 22
6.2 Additional Conditions to Obligations of Company. 23
6.3 Additional Conditions to the Obligations of Buyer 23
ARTICLE VII SURVIVAL; INDEMNIFICATION; ESCROW 25
7.1 Survival; Limitations on Indemnification. 25
7.2 Indemnification Procedures 26
7.3 Escrow Arrangements 27
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 30
8.1 Termination 30
8.2 Effect of Termination 31
8.3 Amendment 31
8.4 Extension; Waiver 31
ARTICLE IX GENERAL PROVISIONS 31
9.1 Notices 31
9.2 Interpretation 32
9.3 Counterparts 32
9.4 Entire Agreement; Assignment 32
9.5 Severability 33
9.6 Other Remedies 33
9.7 Governing Law 33
9.8 Rules of Construction 33
INDEX OF EXHIBITS
Exhibit Description
Exhibit A Consulting and Non-Competition Agreement
Exhibit B Schedule of Employees to Receive Retention Bonuses
Exhibit C Schedule of Employees to enter into Employment
Agreements
Exhibit D Form of Employment Agreement
Exhibit E Form of Legal Opinion to be rendered by Olson & Hoggan,
P.C.
Exhibit F Form of Proprietary Information Agreement
Exhibit G Schedule of Indemnifiable Losses
INDEX OF SCHEDULES
Company Schedule Description
2.3 Subsidiaries
2.4 Authority
2.5 Company Financial Statements
2.6 No Undisclosed Liabilities
2.7 No Changes
2.8 Tax Matters
2.9 Restrictions on Business Activities
2.10 Titles of Properties; Absence of Liens and
Encumbrances; Condition of Equipment
2.11 Intellectual Property
2.12 Agreements, Contracts and Commitments
2.14 Government Authorization
2.15 Litigation
2.16 Accounts Receivable
2.18 Environmental Matters
2.19 Brokers' and Finders' Fees; Third Party Expenses
2.20 Employee Benefit Plans
2.21 Insurance
2.22 Year 2000
4.1 Conduct of Business of the Company
5.1 Access to Information
5.6 Tax Matters
EXECUTION COPY
STOCK ACQUISITION AGREEMENT
This STOCK ACQUISITION AGREEMENT (this "Agreement") is made and
entered into as of March 31, 1999 by and among Scientific Technologies
Incorporated, an Oregon corporation ("Buyer"), Lundahl Instruments, Inc.,
a Utah corporation (the "Company") and Mark Lundahl, the sole shareholder
of the Company ("Shareholder").
RECITALS
A. The Boards of Directors of each of the Company and Buyer
believe it is in the best interests of each company and their respective
shareholders that Buyer acquire all of the outstanding capital stock of
the Company (the "Acquisition").
B. Shareholder is the owner of and has good and valid title to
all shares of capital stock of the Company, free and clear of any legal or
equitable encumbrances.
C. Subject to the terms and conditions of this Agreement, Buyer
will purchase and Shareholder will sell all of the capital stock of the
Company in consideration for a check or wire transfer of United States
dollars, as set forth in Article I hereof.
D. A portion of the cash otherwise payable by Buyer in connection
with the purchase and sale of the capital stock of the Company will be
placed in escrow by Buyer, the release of which amount will be contingent
upon certain events and conditions, all as more fully set forth in
Article VII, Section 7.3 hereof.
E. The Company, Shareholder and Buyer desire to make certain
representations and warranties and enter into other agreements in
connection with the Acquisition.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the parties hereto agree as follows:
ARTICLE I
THE PURCHASE AND SALE
I.1 The Purchase and Sale. At the Closing (as defined in
Section 1.2 below) and subject to and upon the terms and conditions of
this Agreement, Shareholder agrees to sell and deliver to Buyer, and Buyer
agrees to purchase from Shareholder, all of the outstanding shares of the
Company's capital stock (the "Shares") free and clear of all liens, claims
and encumbrances.
I.2 The Closing. Unless this Agreement is earlier terminated
pursuant to Section 8.1, the closing of the Acquisition (the "Closing")
will take place as promptly as practicable, but no later than five (5)
business days, following satisfaction or waiver of the conditions set
forth in Article VI hereof, at the offices of Olson & Hoggan, P.C., 88
West Center, Logan, Utah, unless another place or time is mutually agreed
to in writing by Buyer and the Company. The date upon which the Closing
actually occurs is herein referred to as the "Closing Date".
I.3 Purchase Price and Payment. The aggregate purchase price to
be paid by Buyer to Shareholder for the Shares) will be, subject to
adjustment as set forth in Section 1.4 below, two million six hundred
thirty one thousand two hundred seventeen dollars and fifty six cents
($2,631,217.56), which number represents two million six hundred thirty-
seven thousand dollars ($2,637,000) (the "Aggregate Maximum
Consideration") less any and all payment obligations of the Company
(including all principal and interest payments) arising under, relating to
or otherwise in connection with (x) that certain Promissory Note dated
June 30, 1995 in the aggregate principal amount of $425,000, together with
interest accruing at the rate of 7.0% per annum, payable by the Company to
Ezra C. Lundahl, Inc. (the "ECL Note"), (y) any bank debt currently
outstanding and payable by the Company (the "Bank Debt") and (z) under the
ECL Consulting Agreement (defined in Section 6.3(l) below) (the Aggregate
Maximum Consideration, less any payment obligations of the Company under
the ECL Note, the Bank Debt and the ECL Consulting Agreement, shall be
hereinafter referred to as the "Purchase Price").
I.4 Purchase Price Adjustment. The Purchase Price will be subject
to adjustment as follows:
(a) Closing Balance Sheet. Within 30 days following the
Closing, Shareholder will prepare (or cause to be prepared) and deliver to
Buyer a balance sheet (the "Closing Balance Sheet") of the Company as of
the Closing Date audited or reviewed (at the sole discretion of Buyer) by
an independent auditing firm selected and paid for by Buyer. The Closing
Balance Sheet will be prepared in accordance with United States generally
accepted accounting principles ("GAAP") as in effect as of the Closing
Date consistent with the basis of accounting and classification
procedures, judgments and estimation methodologies employed by Shareholder
in preparation of the December 31 Balance Sheet (defined in Section
1.4(c)(i) below).
(b) Buyer's Review of the Closing Balance Sheet. Buyer and
Buyer's accountants will have 30 days (the "Buyer Review Period") from
Buyer's receipt of the Closing Balance Sheet to review the Closing Balance
Sheet and during such period Shareholder and its accountants will
cooperate with Buyer and Buyer's accountants and answer Buyer and Buyer's
accountants' questions and provide such additional schedules and materials
as Buyer and Buyer's accountants may reasonably request in order for Buyer
and Buyer's accountants to have a meaningful review of the Closing Balance
Sheet.
(c) Adjustment of Purchase Price. Subject to the provisions
of Section 1.4(d), the Purchase Price will be adjusted as follows:
(i) For purposes of this Agreement, the term "Closing
Net Book Value" will mean the amount obtained by subtracting (x) the total
liabilities from (y) the total assets, in each case as set forth on the
Closing Balance Sheet delivered by Shareholder, or, if any items on such
balance sheet are disputed by Buyer, the Closing Balance Sheet mutually
agreed upon by Buyer and Shareholder after resolution of their disputes,
or, if no resolution is had, the Closing Balance Sheet reflecting the
determination of the Accountants (as defined in Section 1.4(d)(ii) below);
and the term "December 31 Net Book Value" will mean the amount obtained by
subtracting (x) the total liabilities from (y) the total assets, in each
case as set forth on the reviewed, unaudited
balance sheet of the Company as of December 31, 1998 previously delivered
to Buyer by the Company (the "December 31 Balance Sheet").
(ii) If the December 31 Net Book Value shall exceed the
Closing Net Book Value, Shareholder will pay to Buyer within three
business days after the date on which the Closing Net Book Value is
finally determined pursuant to Section 1.4(d) hereof, an amount (the
"Adjustment") equal to such excess plus interest thereon at the rate of
8.00% per annum, compounded annually from the Closing Date to the date of
payment. The payment by Shareholder to Buyer of the Adjustment pursuant
to this Section 1.4(c)(ii) will be made by wire transfer of immediately
available funds to an account of Buyer at a bank specified by Buyer.
(iii) If the Closing Net Book Value shall exceed the sum
of the December 31 Net Book Value, Buyer will pay to Shareholder, within
three business days after the date on which the Closing Net Book Value is
finally determined pursuant to Section 1.4(d) hereof, an amount equal to
such excess plus interest thereon at the rate of 8.00% per annum,
compounded annually from the Closing Date to the date of payment. The
payment by Buyer to Shareholder of the Adjustment pursuant to this
Section 1.4(c)(iii) will be made by wire transfer of immediately available
funds to an account of Shareholder at a bank specified by Shareholder.
(d) Disputes.
(i) Subject to Section 1.4(d)(ii), the Closing Balance
Sheet delivered by Shareholder to Buyer will be final, binding and
conclusive on the parties hereto.
(ii) Buyer may dispute any amounts reflected or not
reflected on the Closing Balance Sheet to the extent the net effect of all
such disputed amounts in the aggregate would (x) affect the amount to be
paid by Shareholder pursuant to Section 1.4(c)(ii) or the amount to be
paid by Buyer pursuant to Section 1.4(c)(iii) and (y) amount to greater
than 5% of the Closing Net Book Value reflected on the Closing Balance
Sheet originally submitted to Buyer by Shareholder pursuant to
Section 1.4(a) hereof, provided, that, Buyer will notify Shareholder in
writing of each disputed item, and will specify the amount thereof in
dispute, not later than the expiration of the Buyer Review Period. If
Buyer and Shareholder are able to resolve all the disputed items, then the
Closing Balance Sheet agreed upon by Buyer and Shareholder will be final,
binding and conclusive on the parties hereto. If Buyer and Shareholder
are unable to resolve some or all of such disputed items and are therefore
unable to agree as to the Closing Balance Sheet and the resultant Closing
Net Book Value within 20 days following the expiration of the Shareholder
Review Period, Buyer and Shareholder will submit within five days the
items remaining in dispute for resolution to a nationally recognized
accounting firm (the member of which who will be primarily responsible for
resolving such disputes will have had substantial auditing experience and
substantial experience in arbitration or other dispute resolution
proceedings concerning accounting issues) selected by mutual agreement of
Buyer and Shareholder (or failing such agreement between Buyer and
Shareholder, as selected by mutual agreement of Buyer's independent
accountants and Shareholder's independent accountants, or failing such
agreement between Buyer's independent accountants and Shareholder's
independent accountants, as appointed by the American Arbitration
Association) (the "Accountants"), which will, within 30 days after
submission, determine, based solely on presentations by Buyer and
Shareholder (and their respective accountants) and not by independent
review, and render a written report to the parties upon, such remaining
disputed items and the resultant calculation of the Closing Balance Sheet
and the Closing Net Book Value in accordance with the provisions hereof,
and such report and the resultant Closing Balance Sheet will be final,
binding and conclusive on the parties hereto. Any arbitration pursuant to
this Section 1.4(d) shall be held in Salt Lake City (located in the State
of Utah). In resolving any disputed item, the Accountants may not assign
a value to such item greater than the greatest value for such item
claimed by either party or less than the smallest value for such item
claimed by either party. The fees and disbursements of the Accountants
(and of the American Arbitration Association, if any) (a) will be borne by
Buyer if the Closing Net Book Value finally determined pursuant to this
Section 1.4(d)(ii) shall be greater than 100% of the Closing Net Book
Value reflected on the Closing Balance Sheet originally submitted to Buyer
by Shareholder pursuant to Section 1.4(a) hereof, or (b) will be borne by
Shareholder if the Closing Net Book Value finally determined pursuant to
this Section 1.4(d)(ii) shall be equal to or less than 100% of the Closing
Net Book Value reflected on the Closing Balance Sheet originally submitted
to Buyer by Shareholder pursuant to Section 1.4(a) hereof.
I.5 Escrow. Promptly following the Closing, Buyer shall deposit
an aggregate cash amount of two hundred fifty thousand dollars ($250,000)
(the "Escrow Amount") into an escrow account in accordance with the
provisions of Article VII below.
I.6 Deliveries by Shareholder and the Company. At the Closing,
Shareholder shall deliver, or cause to be delivered share certificate or
certificates representing the Shares owned by Shareholder, duly endorsed
for transfer to Buyer. The Company shall deliver the following:
(a) a copy of the Company's Articles of Incorporation, as
amended through the date hereof, certified by the Secretary of State of
the State of Utah;
(b) a certificate of the Secretary of State of the State of
Utah to the effect that the Company is legally existing and in good
standing under the laws of such state;
(c) a certificate of the appropriate governmental
authorities of the State of Utah to the effect that the Company has filed
all tax returns required to be filed and has no outstanding tax liability
(so-called "tax good standing" certificates);
(d) to the extent not maintained at the Company's principal
executive office, the Company's minute books, stock books and corporate
seal; and
(e) a certificate of the Secretary of the Company certifying
as to the Company's Articles of Incorporation and Bylaws that the minutes
of the Board of Directors of the Company relating to the transactions
contemplated hereby are true, correct and complete and that such minutes
have not been rescinded, superseded or otherwise modified since the date
thereof.
I.7 Deliveries by Buyer. At the Closing, Buyer shall deliver the
following:
(a) the payment required by Section 1.3 hereof, by wire
transfer to such accounts as Shareholder shall indicate to Buyer at least
two (2) business days prior to the Closing; and
(b) a certificate of the Secretary of Buyer certifying as to
Buyer's Articles of Incorporation, Bylaws and resolutions of the Board of
Directors of Buyer relating to the transactions contemplated hereby and
attesting to the incumbency and signatures of the appropriate officers of
Buyer.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Each of the Company and Shareholder jointly and severally represents
and warrants to Buyer, subject to such exceptions as are specifically
disclosed in the disclosure letter supplied by the Company and Shareholder
to Buyer (the "Company Schedules") and dated as of the date hereof, as
follows:
II.1 Organization of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Utah, but is not qualified to do business as a foreign
corporation in any other jurisdiction. The Company has the corporate
power to own its properties and to carry on its business as now being
conducted. The Company has delivered a true and correct copy of its
Articles of Incorporation and Bylaws, each as amended to date, to Buyer.
II.2 Company Capital Structure. The authorized capital stock of
the Company consists of 50,000 shares, all of which are designated as
Common Stock, 5 shares of which are issued and outstanding (the
outstanding Common Stock is hereinafter referred to as the "Company
Capital Stock"). All of the Company Capital Stock is held by Shareholder.
All outstanding shares of the Company's Capital Stock are duly
authorized, validly issued, fully paid and non-assessable and not subject
to preemptive rights created by statute, the Articles of Incorporation or
Bylaws of the Company or any agreement to which the Company is a party or
by which it is bound.
II.3 Subsidiaries. Except as set forth on Schedule 2.3, the
Company does not have and has never had any subsidiaries or affiliated
companies and does not otherwise own and has never otherwise owned any
shares of capital stock or any interest in, or control, directly or
indirectly, any other corporation, partnership, association, joint venture
or other business entity.
II.4 Authority. The Company has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Company.
The Company's Board of Directors has unanimously approved the
Acquisition, this Agreement and the transactions contemplated hereby and
thereby. This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of the Company,
enforceable in accordance with its terms except as such enforceability may
be limited by principles of public policy and subject to the laws of
general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies. Except as set forth on Schedule 2.4, the
execution and delivery of this Agreement by the Company does not, and, as
of the Closing, the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under
(with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision
of the Articles of Incorporation or Bylaws of the Company or (ii) any
mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to the Company or its
properties or assets. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other federal, state, county, local
or foreign governmental authority, instrumentality, agency or Commission
("Governmental Entity") or any third party (so as not to trigger any
Conflict), is required by or with respect to the Company in connection
with the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal and state
securities laws and (ii) such other consents, waivers, authorizations,
filings, approvals and registrations which are set forth on Schedule 2.4.
II.5 Company Financial Statements. Schedule 2.5 sets forth the
December 31 Balance Sheet and the related reviewed, unaudited statements
of income for the twelve-month period then ended and the Company's
reviewed, unaudited balance sheets as of December 31, 1996 and 1997 and
the related reviewed, unaudited statements of income for the twelve-month
periods then ended (collectively, the "Company Financials"). The Company
Financials are true, complete and correct in all material respects and
have been prepared in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other. The
Company Financials present fairly the financial condition and operating
results of the Company as of the dates and during the periods indicated
therein, subject to normal year-end adjustments, which will not be
material in amount or significance in the aggregate.
II.6 No Undisclosed Liabilities. Except as set forth in
Schedule 2.6, the Company does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any
type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in
accordance with GAAP consistently applied), which individually or in the
aggregate, has not been reflected in the December 31 Balance Sheet.
II.7 No Changes. Except as set forth in Schedule 2.7, since the
date of the December 31 Balance Sheet, there has not been, occurred or
arisen any:
(a) transaction by the Company except in the ordinary course
of business as conducted on that date;
(b) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $20,000;
(c) destruction of, damage to or loss of any assets,
business or customer of the Company (whether or not covered by insurance);
(d) labor trouble or claim of wrongful discharge or other
unlawful labor practice or action;
(e) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company;
(f) revaluation by the Company of any of its assets;
(g) declaration, setting aside or payment of a dividend or
other distribution with respect to the capital stock of the Company, or
any direct or indirect redemption, purchase or other acquisition by the
Company of any of its capital stock;
(h) increase in the salary or other compensation payable or
to become payable by the Company to any of its officers, directors,
employees or advisors, or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company, of a bonus or
other additional salary or compensation to any such person except as
otherwise contemplated by this Agreement or the transactions contemplated
hereby, other than normal course of business salary increases in
connection with ongoing yearly reviews or promotions (none of which
exceeds 10% of the previous year's salary);
(i) acquisition, sale or transfer of any asset of the
Company, except in the ordinary course of business as conducted on that
date;
(j) amendment or termination of any material contract,
agreement or license to which the Company is a party or by which it is
bound;
(k) loan by the Company to any person or entity (other than
expense advances to employees, all of which are immaterial in any amount
and are issued in the normal course of business), incurring by the Company
of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of
any debt securities of others;
(l) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of
the Company;
(m) the commencement or notice or threat of commencement of
any lawsuit or proceeding against or investigation of the Company or its
affairs;
(n) notice of any claim of ownership by a third party of
Company Intellectual Property Rights (as defined in Section 2.11 below) or
of infringement by the Company of any third party's intellectual property
rights;
(o) issuance or sale by the Company of any of its shares of
capital stock, or securities exchangeable, convertible or exercisable
therefor, or of any other of its securities;
(p) change in pricing or royalties set or charged by the
Company;
(q) any event or condition of any character that has or
could be reasonably expected to materially impair the Company's business
or the value of such business; or
(r) negotiation or agreement by the Company or any officer
or employees thereof to do any of the things described in the preceding
clauses (a) through (q) (other than negotiations with Buyer and its
representatives regarding the transactions contemplated by this
Agreement).
II.8 Tax Matters.
(a) Definition of Taxes. For the purposes of this
Agreement, "Tax" or, collectively, a "Taxes", means any and all federal,
state, local and foreign taxes, assessments and other governmental
charges, duties, impositions and liabilities, including taxes based upon
or measured by gross receipts, income, profits, sales,
use and occupation, and value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes,
together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements
with any other person with respect to such amounts and including liability
for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in
Schedule 2.8:
(i) The Company as of the Closing will have prepared
and filed all required federal, state, local and foreign returns,
estimates, information statements and reports ("Returns") relating to any
and all Taxes concerning or attributable to the Company or its operations
and such Returns are true and correct in all material respects and have
been completed in accordance with applicable law in all material respects.
(ii) The Company as of the Closing: (A) will have paid
or accrued all Taxes it is required to pay or accrue and (B) will have
withheld with respect to its employees all federal and state income taxes,
FICA, FUTA and other Taxes required to be withheld.
(iii) The Company has not been delinquent in the payment
of any Tax nor is there any Tax deficiency outstanding, proposed or
assessed against the Company, nor has the Company executed any waiver of
any statute of limitations on or extending the period for the assessment
or collection of any Tax.
(iv) No audit or other examination of any Return of the
Company is presently in progress, nor has the Company been notified of any
request for such an audit or other examination.
(v) The Company does not have any liabilities for
unpaid federal, state, local and foreign Taxes which have not been
adequately accrued or reserved against on the December 31 Balance Sheet,
whether asserted or unasserted, contingent or otherwise, and the Company
has no knowledge of any basis for the assertion of any such liability
attributable to the Company, its assets or operations.
(vi) The Company has provided to Buyer or its legal
counsel copies of all federal and state income and all state sales and use
Tax Returns filed for all periods since the date of the Company's
inception.
(vii) There are (and as of immediately following the
Closing there will be) no liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("Liens") on the assets of the
Company relating to or attributable to Taxes.
(viii) The Company has no knowledge of any basis
for the assertion of any claim relating or attributable to Taxes which, if
adversely determined, would result in any Lien on the assets of the
Company.
(ix) None of the Company's assets are treated as "tax-
exempt use property" within the meaning of Section 168(h) of the Internal
Revenue Code (the "Code").
(x) As of the Closing, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
the Company that, individually or collectively, could give rise to the
payment of any amount that would not be
deductible pursuant to Section 280G or 162 of the Code.
(xi) The Company has not filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xiii) The Company is not, and has not been at any
time, a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Code.
(xiv) The Company's tax basis in its assets for purposes
of determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on the Company's tax books
and records in all material respects.
(c) S Corporation Status. The Company has been an
S Corporation within the meaning of Section 1361 of the Code since its
inception.
II.9 Restrictions on Business Activities. Except as set forth on
Schedule 2.9, there is no agreement (non-compete or otherwise),
commitment, judgment, injunction, order or decree to which the Company is
a party or otherwise binding upon the Company which has or reasonably
could be expected to have the effect of prohibiting or impairing any
business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company.
II.10 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment.
(a) The Company owns no real property, nor has it ever owned
any real property. Schedule 2.10(a) sets forth a list of all real
property currently, or at any time in the past, leased by the Company, the
name of the lessor, the date of the lease and each amendment thereto and,
with respect to any current lease, the aggregate annual rental and/or
other fees payable under any such lease. All such current leases are in
full force and effect, are valid and effective in accordance with their
respective terms, and there is not with respect to the Company and to the
knowledge of the Company, any other party to such leases, under any of
such leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case
of leased properties and assets, valid leasehold interests in, all of its
tangible properties and assets, real, personal and mixed, used or held for
use in its business, free and clear of any Liens (as defined in
Section 2.8(vii)), except as reflected in the Company Financials or in
Schedule 2.10(b) and except for liens for taxes not yet due and payable.
(c) Except as described in Schedule 2.10(c), the equipment
(the "Equipment") owned or leased by the Company is, taken as a whole,
(i) adequate for the conduct of the business of the Company as currently
conducted and (ii) in good operating condition, regularly and properly
maintained, subject to normal wear and tear.
II.11 Intellectual Property.
(a) The Company owns, or is licensed or otherwise possesses
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks, net
lists, schematics, technology, know-how, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material (excluding Commercial
Software as defined in Paragraph (c) below) that are material to the
business of the Company as currently conducted or as proposed to be
conducted by the Company (collectively, the "Company Intellectual Property
Rights" and each, a "Company Intellectual Property Right").
(b) Schedule 2.11 sets forth a complete list of all patents,
trademarks, registered copyrights, registered maskworks, trade names and
service marks, and any applications therefor in respect of any of the
foregoing, included in the Company Intellectual Property Rights, and
specifies, where applicable, the jurisdictions in which each such Company
Intellectual Property Right has been issued or registered or in which an
application for such issuance and registration has been filed, including
the respective registration or application numbers and the names of all
registered owners. Schedule 2.11 also sets forth a complete list of all
material licenses, sublicenses and other agreements as to which the
Company is a party and pursuant to which the Company or any other person
is authorized to use any Company Intellectual Property Right (excluding
object code end-user licenses granted to end-users in the ordinary course
of business that permit use of software products without a right to
modify, distribute or sublicense the same ("End-User Licenses")) or other
trade secret material to the Company, and includes the identity of all
parties thereto, a description of the nature and subject matter thereof,
the applicable royalty and the term thereof. The Company is not in
violation of any license, sublicense or agreement described on such list.
The execution and delivery of this Agreement by the Company, and the
consummation of the transactions contemplated hereby, (A) will not cause
the Company to be in violation or default under any such license,
sublicense or agreement, (B) entitle any other party to any such license,
sublicense or agreement to terminate or modify such license, sublicense or
agreement or (C) will not require the Company to repay any funds already
received by it from a third party. The Company is the sole and exclusive
owner or licensee of, with all right, title and interest in and to (free
and clear of any liens or encumbrances), the Company Intellectual Property
Rights, and has sole and exclusive rights (and is not contractually
obligated to pay any compensation to any third party in respect thereof)
to the use thereof or the material covered thereby in connection with the
services or products in respect of which the Company Intellectual Property
Rights are being used.
(c) Except as set forth in Schedule 2.11, no claims with
respect to the Company Intellectual Property Rights have been asserted or
are threatened by any person nor are there any valid grounds, to the
knowledge of the Company, for any bona fide claims (i) to the effect that
the manufacture, sale, licensing or use of any of the products of the
Company as now manufactured, sold or licensed or used for manufacture,
use, sale or licensing by the Company infringes on any copyright, patent,
trade mark, service mark, trade secret or other proprietary right of any
third party, (ii) against the use by the Company of any trademarks,
service marks, trade names, trade secrets, copyrights, maskworks, patents,
technology, know-how or computer software programs and applications used
in the Company's business as currently conducted by the Company, or
(iii) challenging the ownership by the Company, validity or effectiveness
of any of the Company Intellectual Property Rights. All registered
patents, trademarks, service marks and copyrights held by the Company are
valid and subsisting. To the knowledge of the Company, there is no
material unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property Rights by any third party, including any
employee or former employee of the Company. No Company Intellectual
Property Right or product of the Company is subject to any outstanding
decree, order, judgment, or stipulation restricting in any manner the
licensing thereof by the Company. The Company has not entered into any
agreement (other than exclusive distribution agreements identified as such
in the Company Schedules) under which the Company is restricted from
selling, licensing or otherwise distributing any of its products to any
class of customers, in any geographic area, during any period of time or
in any segment of the market. The Company has a policy requiring each
employee and contractor to execute proprietary information and
confidentiality agreements substantially in the Company's standard forms
and all current and former employees and contractors of the Company have
executed such an agreement.
(d) "Commercial Software" means packaged commercially
available software programs generally available to the public through
retail dealers in computer software which have been licensed to the
Company pursuant to end-user licenses and which are used in the Company's
business but are in no way a component of or incorporated in or
specifically required to develop or support any of the Company's products
and related trademarks, technology and know-how.
II.12 Agreements, Contracts and Commitments.
(a) Except as set forth on Schedule 2.12(a), the Company
does not have, is not a party to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any
severance pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit
sharing or retirement plans, or any other employee benefit plans or
arrangements,
(iv) any employment or consulting agreement,
contract or commitment with an employee or individual consultant or
salesperson or consulting or sales agreement, contract or commitment with
a firm or other organization,
(v) any agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be increased, or the
vesting of benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value
individually in excess of $10,000,
(viii) any agreement of indemnification or
guaranty,
(ix) any agreement, contract or commitment containing
any covenant limiting the freedom of the Company to engage in any line of
business or to compete with any person,
(x) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $10,000,
(xi) any agreement, contract or commitment relating to
the disposition or acquisition of assets or any interest in any business
enterprise,
(xii) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or instruments
relating to the borrowing of money or extension of credit, including
guaranties referred to in clause (viii) hereof,
(xiii) any purchase order or contract for the
purchase of raw materials involving $10,000 or more other than purchases
in the ordinary course of business,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development
agreement, or
(xvi) any other agreement, contract or commitment that
involves $20,000 or more or is not cancelable without penalty within
thirty (30) days.
(b) Except for such alleged breaches, violations and
defaults, and events that would constitute a breach, violation or default
with the lapse of time, giving of notice, or both, all as noted in
Schedule 2.12(b), the Company has not breached, violated or defaulted
under, or received notice that it has breached, violated or defaulted
under, any of the terms or conditions of any agreement, contract or
commitment to which it is a party or by which it is bound (any such
agreement, contract or commitment, a "Contract"). Each Contract set forth
in any of the Company Schedules is in full force and effect and, except as
otherwise disclosed in Schedule 2.12(b), is not subject to any default
thereunder of which the Company has knowledge by any party obligated to
the Company pursuant thereto. The Company has obtained, or will obtain
prior to the Closing, all necessary consents, waivers and approvals of
parties to any Contract as are required in connection with the
Acquisition.
II.13 Interested Party Transactions. Except as set forth on
Schedule 2.13, no officer and director of the Company nor Shareholder (nor
any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has an
interest), has any direct or indirect (i) interest in any entity which
furnished or sold, or furnishes or sells, services or products that the
Company furnishes or sells, or proposes to furnish or sell, or
(ii) interest in any entity that purchases from or sells or furnishes to,
the Company, any goods or services or (iii) beneficial interest in any
contract or agreement set forth in Schedule 2.12; provided, that,
ownership of no more than one percent (1%) of the outstanding voting stock
of a publicly traded corporation shall not be deemed an "interest in any
entity" for purposes of this section 2.13.
II.14 Governmental Authorization. Schedule 2.14 accurately lists
each material consent, license, permit, grant or other authorization
issued to the Company by a governmental entity (i) pursuant to which the
Company currently operates or holds any interest in any of its properties
or (ii) which is required for the operation of its business or the holding
of any such interest (hereinafter collectively referred to as "Company
Authorizations"), which Company Authorizations are in full force and
effect and constitute all Company Authorizations required to permit the
Company to operate or conduct its business substantially as it is
currently and has been conducted or hold any interest in its properties or
assets.
II.15 Litigation. There is no action, suit, claim or proceeding of
any nature pending or threatened against the Company, Shareholder or their
respective properties or assets or any of the Company's officers or
directors (with respect to the operations of the Company), nor, to the
knowledge of the Company and Shareholder, is there any basis therefor.
Except as set forth in Schedule 2.15, there is no investigation pending or
threatened against the Company, Shareholder or their respective properties
or assets or any of the Company's officers or directors (nor, to the best
knowledge of the Company and Shareholder, is there any basis therefor) by
or before any governmental entity. Schedule 2.15 sets forth, with respect
to any pending or threatened action, suit, proceeding or investigation,
the forum, the parties thereto, the subject matter thereof and the amount
of damages claimed or other remedy hereby requested. No governmental
entity has at any time challenged or questioned the legal right of the
Company to manufacture, offer or sell any of its products in the present
manner or style thereof.
II.16 Accounts Receivable.
(a) The Company has made available to Buyer a list of all
accounts receivable of the Company reflected on the December 31 Balance
Sheet ("Accounts Receivable"), along with a range of days elapsed since
invoice.
(b) Except as set forth on Schedule 2.16(b), all Accounts
Receivable of the Company arose in the ordinary course of business, are
carried at values determined in accordance with generally accepted
accounting principles consistently applied and are collectible except to
the extent of reserves therefor set forth in the December 31 Balance
Sheet, except to the extent that the matters described in Schedule 2.5 may
affect the collectability of accounts receivable from the parties
described in such Schedule 2.5, to the extent described on Schedule 2.5.
No person has any Lien on any of such Accounts Receivable and no request
or agreement for material deduction or discount has been made with respect
to any of such Accounts Receivable.
II.17 Minute Books. The minute books of the Company made available
to counsel for Buyer are the only minute books of the Company and contain
a reasonably accurate summary of all meetings of directors (or committees
thereof) and shareholders or actions by written consent since the time of
incorporation of the Company.
II.18 Environmental Matters.
(a) Hazardous Material. Except as set forth on Schedule
2.18(a) and as reasonably would not be expected to result in a material
liability to the Company, no underground storage tanks and no amount of
any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous
or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to said laws, (a "Hazardous Material"),
but excluding office and janitorial supplies, are present, as a result of
the deliberate actions of the Company, or, to the Company's knowledge
(without duty of independent investigation), as a result of any actions of
any third party or otherwise, in, on or under any property, including the
land and the improvements, ground water and surface water thereof, that
the Company has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably
would not be expected to result in a material liability of the Company,
the Company has not transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has the
Company disposed of, transported, sold, manufactured or stored any product
containing a Hazardous Material (collectively "Hazardous Materials
Activities") in violation of any rule, regulation, treaty or statute
promulgated by any Governmental Entity in effect prior to or as of the
date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental
approvals, permits, licenses, clearances and consents (the "Environmental
Permits") necessary for the conduct of the Company's Hazardous Material
Activities and other businesses of the Company as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. No material action,
proceeding, revocation proceeding, amendment procedure, writ, injunction
or claim is pending or threatened concerning any Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of the Company.
The Company is not aware of any fact or circumstance which could involve
the Company in any material environmental litigation or impose upon the
Company any material environmental liability.
(e) Capital Expenditures. Except as set forth on
Schedule 2.18, the Company is not aware of any capital expenditures which
are required in order for it to comply with Environmental Laws.
II.19 Brokers' and Finders' Fees; Third Party Expenses. Other than
the fees and expenses incurred in connection with the services rendered to
the Company by Founders Capital Corporation, which fees and expenses shall
be borne by the Shareholder, the Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby. Schedule 2.19 sets forth
a reasonable estimate of all Third Party Expenses (as defined in
Section 5.3) expected to be incurred by the Company in connection with the
negotiation and effectuation of the terms and conditions of this Agreement
and the transactions contemplated hereby.
II.20 Employee Benefit Plans.
(a) Definitions. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity
under common control with the Company within the meaning of
Section 414(b), (c) or (m) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan,
program, policy, practice, contract, agreement or other arrangement
providing for compensation, severance, termination pay, performance
awards, stock or stock-related awards, fringe benefits or other employee
benefits or remuneration of any kind, whether formal or informal, funded
or unfunded and whether or not legally binding, including without
limitation, each "employee benefit plan", within the meaning of
Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any "Employee" (as defined below), and
pursuant to which the Company or any Affiliate has or may have any
material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or
retired employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each
management, employment, severance, consulting or similar agreement or
contract between the Company or any Affiliate and any Employee;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan"
(as defined below) which is a "multiemployer plan", as defined in
Section 3(37) of ERISA; and
(viii) "Pension Plan" shall refer to each Company
Employee Plan which is an "employee pension benefit plan", within the
meaning of Section 3(2) of ERISA.
(b) Schedule. Schedule 2.20(b) contains an accurate and
complete list of each Company Employee Plan and each Employee Agreement.
The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement,
to modify any Company Employee Plan or Employee Agreement (except to the
extent required by law or to conform any such Company Employee Plan or
Employee Agreement to the requirements of any applicable law, in each case
as previously disclosed to Buyer in writing, or as required by this
Agreement), or to enter into any Company Employee Plan or Employee
Agreement, nor does it have any intention or commitment to do any of the
foregoing.
(c) Documents. The Company has provided to Buyer where
applicable (i) correct and complete copies of all documents embodying or
relating to each Company Employee Plan and each Employee Agreement
including all amendments thereto and written interpretations thereof;
(ii) the most recent annual actuarial valuations, if any, prepared for
each Company Employee Plan; (iii) the two most recent annual reports
(Series 5500 and all schedules thereto), if any, required under ERISA in
connection with each Company Employee Plan or related trust; (iv) if the
Company Employee Plan is funded, the most recent annual and periodic
accounting of Company Employee Plan assets; (v) the most recent summary
plan description together with the most recent summary of material
modifications, if any, required under ERISA with respect to each Company
Employee Plan; (vi) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and correspondence
to or from the IRS or the Department of Labor ("DOL") with respect to any
Company Employee Plan; and (vii) all communications material to any
Employee or Employees relating to any Company Employee Plan and any
proposed Company Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would
result in any material liability to the Company.
(d) Employee Plan Compliance. With respect to the Company's
compliance under any Company Employee Plan, to the Company's knowledge,
(i) the Company has performed in all material respects all obligations
required to be performed by it under each Company Employee Plan and each
Company Employee Plan has been established and maintained in all material
respects in accordance with its terms and in material
compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (ii) no
"prohibited transaction", within the meaning of Section 4975 of the Code
or Section 406 of ERISA, has occurred with respect to any Company Employee
Plan; (iii) there are no actions, suits or claims pending, or, to the
knowledge of the Company, threatened or anticipated (other than routine
claims for benefits) against any Company Employee Plan or against the
assets of any Company Employee Plan; (iv) except as described in
Schedule 2.20(d), each Company Employee Plan can be amended, terminated or
otherwise discontinued after the Closing in accordance with its terms,
without liability to the Company, Buyer or any of its Affiliates (other
than ordinary administration expenses typically incurred in a termination
event); (v) there are no inquiries or proceedings pending or, to the
knowledge of the Company or any Affiliate, threatened by the IRS or DOL
with respect to any Company Employee Plan; and (vi) neither the Company
nor any Affiliate is subject to any penalty or tax with respect to any
Company Employee Plan under Section 402(i) of ERISA or Section 4975
through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it
ever, maintained, established, sponsored, participated in, or contributed
to, any Pension Plan which is subject to Part 3 of Subtitle B of Title I
of ERISA, Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company
contributed to or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee
Plan provides, or has any liability to provide, life insurance, medical or
other employee benefits to any Employee upon his or her retirement or
termination of employment for any reason, except as may be required by
statute, and the Company has never represented, promised or contracted
(whether in oral or written form) to any Employee (either individually or
to Employees as a group) that such Employee(s) would be provided with life
insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(h) Effect of Transaction.
(i) The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either
alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Company Employee Plan, Employee Agreement,
trust or loan that will or may result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Employee.
(ii) No payment or benefit which will or may be made by
the Company or Buyer or any of their respective affiliates with respect to
any Employee will be characterized as an "excess parachute payment",
within the meaning of Section 280G(b)(1) of the Code.
(i) Employment Matters. The Company (i) is in compliance in
all material respects with all applicable federal and state laws, rules
and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect
to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees (other than amounts which may be required to be withheld as a
result of an Employee's receipt of Acquisition Consideration); (iii) is
not liable for any arrears of wages or any taxes or any penalty for
failure to comply with any
of the foregoing; and (iv) is not liable for any payment to any trust or
other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other
benefits for Employees.
(j) Labor. No work stoppage or labor strike against the
Company is pending or threatened. The Company is not involved in or
threatened with, any labor dispute, grievance, or litigation relating to
labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in material liability to the Company. Neither the
Company nor any of its subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor Relations Act which
would, individually or in the aggregate, directly or indirectly result in
a material liability to the Company. The Company is not presently, nor
has it been in the past, a party to, or bound by, any collective
bargaining agreement or union contract with respect to Employees and no
collective bargaining agreement is being negotiated by the Company. The
Company is not aware that any employee of the Company has any present
intention of terminating such employee's employment with the Company.
II.21 Insurance. With respect to the insurance policies and
fidelity bonds covering the assets, business, equipment, properties,
operations, employees, officers and directors of the Company, except as
set forth on Schedule 2.21, there is no claim by the Company pending under
any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All
premiums due and payable under all such policies and bonds have been paid
and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). The Company has no knowledge of any
threatened termination of, or material premium increase with respect to,
any of such policies.
II.22 Year 2000.
(a) All of the software products marketed or developed by
the Company are Year 2000 Compliant (as hereinafter defined) and, to the
knowledge of the Company, none of such products will be materially
adversely affected by the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century through
the year 2000 and into the twenty-first century. "Year 2000 Compliant"
means, as applied to a software product, that: (A) such software product
will operate and correctly store, represent and process (including sort)
all dates (including single and multi-century formulae and leap year
calculations), such that errors will not occur when the date used is in
the Year 2000, or in a year preceding or following the Year 2000; (B) such
software product has been written and tested to support numeric and date
transitions from the 20th century to the twenty-first century, and back
(including without limitation all calculations, reporting, printing,
displays, reversals, disaster and vital records recoveries); and (C) such
software product will function without error or interruptions from
functions which may involve date information from more than one century,
in each case.
(b) Except as set forth in Schedule 2.22 and except where
the same could not reasonably be expected to materially impair the
business of the Company or the value of such business, (A) all of the
Company's internal computer systems comprised of software, hardware,
databases or embedded control systems (microprocessor controlled, robotic
or other device) related to the Company's business (collectively, a
"Business System"), that constitutes any material part of, or is used in
connection with the use, operation or enjoyment of, any material tangible
or intangible asset or real property of the Company, including its
accounting systems, are Year 2000 Compliant and (B) to the Company's
knowledge, the conduct of the Company's business with customers
and suppliers will not be materially adversely affected by the advent of
the year 2000, the advent of the twenty-first century or the transition
from the twentieth century through the year 2000 and into the twenty-first
century.
II.23 Compliance with Laws. The Company has materially complied
with, is not in material violation of, and has not received any notices of
violation with respect to, any federal, state or local statute, law or
regulation, domestic or foreign.
II.24 Complete Copies of Materials. The Company has delivered or
made available true and complete copies of each document that has been
requested by Buyer or its counsel.
II.25 Representations Complete. None of the representations or
warranties made by the Company (as modified by the Company Schedules), nor
any statement made in any Company Schedule or certificate furnished by the
Company pursuant to this Agreement, or furnished in or in connection with
documents mailed or delivered to Shareholder in connection with soliciting
Shareholder's consent to this Agreement and the Acquisition, contains or
will contain at the Closing, any untrue statement of a material fact, or
omits or will omit at the Closing to state any material fact, necessary in
order to make the statements contained herein or therein, in the light of
the circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company as follows:
III.1 Organization, Standing and Power. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Oregon. Buyer has the corporate power to own its properties and
to carry on its business as now being conducted and is duly qualified to
do business and is in good standing in each jurisdiction in which the
failure to be so qualified would have a material adverse effect on the
ability of Buyer to consummate the transactions contemplated hereby.
III.2 Authority. Buyer has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement has been duly executed and delivered by Buyer and constitutes
the valid and binding obligations of Buyer, enforceable in accordance with
its terms, except as such enforceability may be limited by principles of
public policy and subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable
remedies.
III.3 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending, or as to which Buyer has received
any notice of assertion against Buyer which in any manner challenges or
seeks to prevent, enjoin, alter or materially delay Buyer's purchase of
the Company Capital Stock contemplated by this Agreement.
ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
IV.1 Conduct of Business of the Company. During the period from
the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Closing, the Company agrees to carry
on its business in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted, to pay its debts and Taxes when
due, to pay or perform other obligations when due, and, to the extent
consistent with such business, use all reasonable efforts consistent with
past practice and policies to preserve intact the Company's present
business organizations, keep available the services of its present
officers and key employees and preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others
having business dealings with it, all with the goal of preserving
unimpaired the Company's goodwill and ongoing businesses at the Closing.
The Company shall promptly notify Buyer of any event or occurrence or
emergency not in the ordinary course of business of the Company, and any
material event involving the Company. Except as expressly contemplated by
this Agreement or as set forth on Schedule 4.1, the Company shall not,
without the prior written consent of Buyer:
(a) Enter into any commitment or transaction not in the
ordinary course of business or any commitment or transaction of the type
described in Section 2.7 hereof;
(b) Transfer to any person or entity any Company
Intellectual Property Right (other than pursuant to end user licenses in
the ordinary course of business);
(c) Enter into or amend any agreements pursuant to which any
other party is granted marketing, distribution or similar rights of any
type or scope with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in
the ordinary course of business, or violate the terms of, any of the
agreements set forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of
its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of
the Company, or repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock (or options, warrants or other
rights exercisable therefor);
(g) Except for the issuance of shares of Company Capital
Stock upon exercise or conversion of presently outstanding Company Options
and warrants issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of
its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments
of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Articles of
Incorporation or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating
with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to the
business of the Company;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets;
(k) Incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities of the Company
or guarantee any debt securities of others;
(l) Grant any severance or termination pay (i) to any
director or officer or (ii) to any other employee except payments made
pursuant to standard written agreements outstanding on the date hereof or
as described in Schedule 2.12(a);
(m) Adopt or amend any employee benefit plan, or enter into
any employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage
rates of its employees;
(n) Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business;
(o) Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business of liabilities reflected or adequately
reserved against in the Company Financials (or the notes thereto);
(p) Make or change any material election in respect of
Taxes, adopt or change any accounting method in respect of Taxes, enter
into any closing agreement, settle any claim or assessment in respect of
Taxes, or consent to any extension or waiver of the limitation period
applicable to any claim or assessment in respect of Taxes;
(q) Enter into any strategic alliance or joint marketing
arrangement or agreement; or
(r) Take, or agree in writing or otherwise to take, any of
the actions described in Sections 4.1(a) through (q) above, or any other
action that would prevent the Company from performing or cause the Company
not to perform its covenants hereunder.
IV.2 No Solicitation. Until the Closing, the Company will not (nor
will the Company permit any of the Company's officers, directors, agents,
representatives or Affiliates (including without limitation Founders
Capital Corporation) to) directly or indirectly, take any of the following
actions with any party other than Buyer and its designees:
(a) solicit, encourage, initiate or participate in any
negotiations or discussions with respect to, any offer or proposal to
acquire all or any portion of the Company's business and properties or
capital stock whether by merger, private offering, consolidation, purchase
of assets, tender offer or otherwise,
(b) disclose any information not customarily disclosed to
customers and others in the ordinary course of business other than its
attorneys or financial advisors concerning the Company's business and
properties or afford to any person or entity access to its properties,
books or records, or
(c) assist or cooperate with any person to make any proposal
to purchase all or any part of the capital stock of the Company or assets,
other than selling products of the Company in the ordinary course of
business.
In the event the Company shall receive during the period specified
in this Section 4.2 any offer or proposal, directly or indirectly, of the
type referred to in clause (a) or (c) above, or any request for disclosure
or access pursuant to clause (b) above, the Company shall immediately
inform Buyer as to any such offer or proposal.
IV.3 No Encumbrance. Until the earlier of the Closing Date or the
date of termination of this Agreement, the Company and Shareholder will
not (nor will the Company or Shareholder permit any of the Company's or
Shareholder's respective officers, directors, agents, representatives or
Affiliates (including without limitation Founders Capital Corporation) to)
directly or indirectly, take any action which could in any way and at any
time impair Shareholder's good and valid title to all Company Capital
Stock or could cause or lead to the creation of any lien, claim, charge,
restriction, pledge, security interest, option, right of any nature or
other legal or equitable encumbrance with regard to any share or shares of
the Company Capital Stock.
ARTICLE V
ADDITIONAL AGREEMENTS
V.1 Access to Information. The Company shall afford Buyer and its
accountants, counsel and other representatives, reasonable access during
normal business hours during the period prior to the Closing to (a) all of
the Company's properties, books, contracts, commitments and records, and
(b) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law or by
contract, which contracts are listed in Schedule 5.1) of the Company as
Buyer may reasonably request. The Company agrees to provide to Buyer and
its accountants, counsel and other representatives copies of internal
financial statements promptly upon request. No information or knowledge
obtained in any investigation pursuant to this Section 5.1 shall affect or
be deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the
Acquisition.
V.2 Confidentiality. Each of the parties hereto hereby agrees to
keep such information or knowledge obtained in any investigation pursuant
to Section 5.1, or pursuant to the negotiation and execution of this
Agreement or the effectuation of the transactions contemplated hereby,
confidential ("Confidential Information"); provided, however, that the
foregoing shall not apply to information or knowledge which (a) a party
can demonstrate was already lawfully in its possession prior to the
disclosure thereof by the other party, (b) is generally known to the
public and did not become so known through any violation of law,
(c) became known to the public through no fault of such party, (d) is
later lawfully acquired by such party from other sources, (e) is required
to be disclosed by order of court or government agency with subpoena
powers, (f) is disclosed in the course of any litigation between any of
the parties hereto or (g) is developed independently by either party
without reference to, or specific knowledge of, the other parties'
Confidential Information.
V.3 Expenses. Whether or not the Acquisition is consummated, all
fees and expenses incurred in connection with the Acquisition including,
without limitation, all legal, accounting, financial advisory, consulting
and all other fees and expenses of third parties ("Third Party Expenses")
incurred by a party in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions
contemplated hereby, shall be the obligation of the respective party
incurring such fees and expenses.
V.4 Public Disclosure. Unless otherwise required by law, prior to
the Closing, no disclosure (whether or not in response to an inquiry) of
the subject matter of this Agreement shall be made by any party hereto
unless approved by Buyer and the Company prior to release, provided, that,
such approval shall not be unreasonably withheld, subject, in the case of
Buyer, to Buyer's obligation to comply with applicable securities laws.
V.5 Consents. The Company shall use its best efforts to obtain
the consents, waivers and approvals under any of the Contracts as may be
required in connection with the Acquisition (all of such consents and
approvals are set forth in Schedule 2.4) so as to preserve all rights of,
and benefits to, the Company thereunder.
V.6 Tax Matters.
(a) S Status. The Company shall maintain its tax status as
an S Corporation up to the Closing Date and Shareholder shall not revoke
or otherwise terminate the election of the Company to be treated as an
S Corporation.
(b) Tax Returns. Shareholder shall be responsible for
timely filing all federal and state income tax returns of the Company for
taxable periods ending on or prior to the Closing Date and shall have paid
or will pay all income taxes attributable to the income of the Company for
such periods. Such returns will be prepared and filed in accordance with
applicable law and in a manner consistent with past practices and shall be
subject to review and approval by Buyer, except as disclosed on Schedule
5.6(b). After the Closing Date, Buyer and the Company, on the one hand,
and Shareholder, on the other hand, will make available to the other, as
reasonably requested, all information, records or documents relating to
the liability for Taxes of the Company for all periods ending on or prior
to the Closing Date and will preserve such information, records or
documents until the expiration of any applicable statute of limitations or
extensions thereof.
(c) Election Under Section 338(h)(10). Shareholder shall
join with Buyer in making a joint election on Form 8023 for the Company
under Section 338(h)(10) of the Code, under Treasury Regulation
Section 1.338(h)(10)-1(d) and under any applicable similar provisions of
state law with respect to the purchase of the Shares ("Section 338
Election"). Buyer shall timely prepare IRS Form 8023 (and any required
attachments) and any similar state and local tax forms (and any required
attachments) required to make the Section 338 Election and Shareholder
agrees to execute such forms.
V.7 Best Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its best efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated hereby, to obtain all necessary waivers,
consents and approvals and to effect all necessary registrations and
filings and to remove any injunctions or other impediments or delays,
legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to
the parties hereto the benefits contemplated by this Agreement; provided,
that, Buyer shall
not be required to agree to any divestiture by Buyer or the Company or any
of Buyer's subsidiaries or affiliates of shares of capital stock or of any
business, assets or property of Buyer or its subsidiaries or affiliates or
the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to
own or exercise control of such assets, properties and stock.
V.8 Notification of Certain Matters. The Company shall give
prompt notice to Buyer, and Buyer shall give prompt notice to the Company,
of (i) the occurrence or non-occurrence of any event, the occurrence or
non-occurrence of which is likely to cause any representation or warranty
of the Company and Buyer, respectively, contained in this Agreement to be
untrue or inaccurate at or prior to the Closing and (ii) any failure of
the Company or Buyer, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.8 shall not limit or otherwise affect any remedies
available to the party receiving such notice.
V.9 Additional Documents and Further Assurances. Each party
hereto, at the request of another party hereto, shall execute and deliver
such other instruments and do and perform such other acts and things as
may be necessary or desirable for effecting completely the consummation of
this Agreement and the transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO THE ACQUISITION
VI.1 Conditions to Obligations of Each Party to Effect the
Acquisition. The respective obligations of each party to this Agreement
to effect the Acquisition shall be subject to the satisfaction at or prior
to the Closing of the following conditions:
(a) Corporate Approvals. This Agreement and the Acquisition
shall have been approved and adopted by the requisite vote of Shareholder.
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Acquisition shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; nor shall there be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Acquisition, which makes the
consummation of the Acquisition illegal.
(c) Consulting and Non-Competition Agreement. Buyer and
Shareholder shall have entered into a Consulting and Non-Competition
Agreement, substantially in the form attached hereto as Exhibit A (the
"Consulting Agreement") pursuant to which, among other things, Buyer shall
have agreed to pay to Shareholder (in addition to the Purchase Price
otherwise payable to Shareholder pursuant to this Agreement) an annualized
salary of $50,000 in exchange for consulting services set forth therein.
The Consulting Agreement shall have a one-year term.
(d) Employee Retention Bonuses. Promptly following the
Closing, Buyer agrees to establish a retention bonus program under which
the employees listed on Exhibit B hereto (each, an "Employee" and
collectively, the "Employees") shall be entitled to receive retention
bonuses in the aggregate amount of $100,000 (the "Retention Bonus"). The
Retention Bonus shall be payable to each such Employee in the respective
amount specified on Exhibit B hereto on the first anniversary of the
Closing Date, provided, that, such Employee continues to be an employee or
consultant of Buyer on such anniversary date. In the event that an
Employee is no longer an employee or consultant of Buyer on such
anniversary due to (x) a voluntary termination of such Employee or (y) an
involuntary termination of such Employee for Cause (as defined in an
Employment and Noncompetition Agreement of even date herewith by and
between Employee and Buyer (the "Employment Agreement")), then such
Employee's portion of the Retention Bonus indicated on Exhibit B hereto
and otherwise payable to such Employee on such date shall be forfeited by
such Employee and reallocated to Buyer. In the event that an Employee is
no longer an employee or consultant of Buyer on such anniversary due to
(x) an involuntary termination by such Employee for any reason other than
for Cause, (y) if such Employee becomes Totally Disabled (as defined in
the Employment Agreement) or (z) upon such Employee's death, then such
Employee (or such Employee's estate, as applicable) shall be entitled to
receive such Employee's portion of the Retention Bonus within ten (10)
days following the first anniversary of the Closing Date.
(e) Employment Agreements. Each person listed on Exhibit C
shall have executed and delivered to Buyer an Employment Agreement,
substantially in the form attached hereto as Exhibit D (the "Employment
Agreements") and all of the Employment Agreements shall be in full force
and effect.
VI.2 Additional Conditions to Obligations of Company. The
obligations of the Company to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at
or prior to the Closing of each of the following conditions, any of which
may be waived, in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The
representations and warranties of Buyer in this Agreement shall be true
and correct on and as of the Closing as though such representations and
warranties were made on and as of such time and Buyer shall have performed
and complied with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it as of the
Closing.
(b) Certificate of Buyer. Company shall have been provided
with a certificate executed on behalf of Buyer by one of its executive
officers to the effect that, as of the Closing:
(i) all representations and warranties made by Buyer
in this Agreement are true and correct in all material respects; and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Buyer on or before such date have been so
performed.
VI.3 Additional Conditions to the Obligations of Buyer. The
obligations of Buyer to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at
or prior to the Closing of each of the following conditions, any of which
may be waived, in writing, exclusively by Buyer:
(a) Representations, Warranties and Covenants. The
representations and warranties of the Company in this Agreement shall be
true and correct in all material respects on and as of the Closing as
though such representations and warranties were made on and as of such
time and the Company shall have performed and complied with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by it as of the Closing.
(b) Certificate of Company. Buyer shall have been provided
with a certificate executed on behalf of the Company by its President to
the effect that, as of the Closing:
(i) all representations and warranties made by the
Company in this Agreement are true and correct in all material respects;
and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by the Company on or before such date have been
so performed.
(c) Claims. There shall not have occurred any claims
(whether or not asserted in litigation) which may materially and adversely
affect the consummation of the transactions contemplated hereby or the
business assets (including intangible assets), financial condition or
results of operations of the Company.
(d) Third Party Consents. Any and all consents, waivers,
and approvals listed pursuant to Schedule 2.4 shall have been obtained.
(e) Legal Opinion. Buyer shall have received a legal
opinion from Olson & Hoggan, P.C., legal counsel to the Company,
substantially in the form of Exhibit E hereto.
(f) No Injunctions or Restraints on Conduct of Business. No
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint or provision challenging Buyer's proposed acquisition
of the Company, or limiting or restricting Buyer's conduct or operation of
the business of the Company (or its own business) following the
Acquisition shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be
pending.
(g) No Material Adverse Changes. There shall not have
occurred any material adverse change in the business, assets (including
intangible assets), results of operations, liabilities (contingent or
accrued), prospects or financial condition of the Company.
(h) Litigation. There shall be no action, suit, claim or
proceeding of any nature pending, or threatened, against Buyer or the
Company, their respective properties or any of their officers or
directors, arising out of, or in any way connected with, the Acquisition
or the other transactions contemplated by the terms of this Agreement.
(i) Property Information and Invention Assignment Agreement.
Each employee of and consultant to the Company shall have entered into a
Proprietary Information and Invention Assignment Agreement with Buyer in
substantially the form attached hereto as Exhibit F.
(j) Zions Note Release. Shareholder shall have satisfied in
full all payment obligations (including all principal and interest
payments) arising under, relating to or otherwise in connection with that
certain Promissory Note dated September 9, 1998 in the aggregate principal
amount of $252,000, together with interest accruing thereon at a rate of
LIBOR plus 3.10% per annum, payable by the Company to Zions First National
Bank (the "Zions Note"), and such satisfaction shall be evidenced by a
receipt, a release and such other documentation reasonably requested by
Buyer or Buyer's counsel. In connection with such satisfaction, the
Company shall be fully relieved of any and all such payment obligations
under the Zions Note.
(k) Transfer of Lundahl Name. Ezra C. Lundahl, Inc. shall
have (x) licensed to the Company all rights to use the "Lundahl" trade
name, together with any and all trade names, trademarks, service marks and
the like which incorporate the "Lundahl" name that it owns (collectively,
the "Lundahl Name") and (y) transferred all right, title and interest in
certain specified intellectual property, pursuant to an instrument of
transfer executed by the President of Ezra C. Lundahl, Inc., in form and
substance satisfactory to Buyer. Such license of the Lundahl Name shall
be on a nonexclusive basis, provided, however, that Ezra C. Lundahl, Inc.
shall agree that it will not license to any third party any right to use,
own or otherwise exploit the "Lundahl Name" if such third party is
engaged, either directly or indirectly, in the sale, marketing,
manufacture, development, design, engineering or production of any
products, goods or equipment which directly or indirectly compete with the
products or services of the Company, or the business of the Company as
conducted or currently proposed to be conducted (including without
limitation the manufacture, sale or distribution of ultrasonic sensors,
sensor technology and sensor instrumentation). Upon the Closing, Buyer
shall possess such rights to use the Lundahl Name previously granted to
the Company.
(l) Termination of ECL Consulting Agreement. The Company
and Ezra C. Lundahl, Inc. shall have terminated that certain Consulting
Agreement dated June 30, 1995 by and between such parties (the "ECL
Consulting Agreement").
(m) ECL Note Release. Ezra C. Lundahl, Inc. shall have
released the Company from any and all payment obligations or liability
arising under, relating to or otherwise in connection with the ECL Note
pursuant to an instrument reasonably satisfactory to Buyer and Buyer's
counsel.
ARTICLE VII
SURVIVAL; INDEMNIFICATION; ESCROW
VII.1 Survival; Limitations on Indemnification.
(a) The representations and warranties and covenants and
agreements of the parties contained herein will survive the Closing (even
if the damaged party knew or had reason to know of any misrepresentation
or breach of warranty at the time of Closing), subject to the time
limitations set forth in Section 7.1(b) below. Notwithstanding the first
sentence of this Section 7.1, and without limiting the generality thereof,
any representation or warranty, covenant or agreement in respect of which
indemnity may be sought under any section of this Agreement will survive
the time at which it would otherwise terminate pursuant to this Agreement,
if notice of the breach of the representation or warranty, covenant or
agreement giving rise to such indemnity shall have been given to the party
against whom such indemnity may be sought, prior to such time.
(b) If the Closing occurs, Shareholder will have no
liability (for indemnification or otherwise) pursuant to this Article VII
with respect to any representation or warranty, or covenant or obligation
to be performed and complied with prior to the Closing Date, other than
those contained in Sections 2.2, 2.8, 2.18 and 5.6, unless on or before
the date that is twelve (12) months after the date of Closing, Buyer
notifies Shareholder of a claim specifying the factual basis of that claim
in reasonable detail to the extent then known to Buyer (in accordance with
Section 7.2). Any claim made by Buyer with respect to Sections 2.2, 2.8,
2.18 or 5.6, or relating to the matters set forth on Exhibit G hereto, may
be made at any time, subject to applicable statutes of limitations.
(c) The maximum liability of Shareholder (for
indemnification or otherwise) with respect to any representation or
warranty, or covenant or obligation to be performed and complied with
prior to the Closing Date pursuant to this Article VII, other than those
in Sections 2.2, 2.8, 2.18 and 5.6, shall be $450,000 (which amount shall
be inclusive of any amounts disbursed to Buyer from the Escrow Fund
(defined below)). There shall be no maximum liability with respect to
matters related to Sections 2.2, 2.8, 2.18 and 5.6, or matters set forth
on Exhibit G hereto. Notwithstanding anything in this Article VII to the
contrary, nothing herein shall limit any remedy that Buyer or Shareholder
may have for fraud or wilful misconduct.
VII.2 Indemnification Procedures.
(a) Subject to Section 7.1(c), Shareholder will indemnify
Buyer against and agree to hold harmless from any and all damage, loss,
liability, claim, obligation of any nature whatsoever and expense
(including without limitation, reasonable expenses of investigation and
reasonable attorneys' fees and expenses) ("Loss") incurred by Buyer, its
officers, directors, or affiliates arising out of any breach of any
representation or warranty, covenant or other agreement of Shareholder or
the Company contained or incorporated by reference herein. In addition,
and subject to Section 7.1(c), notwithstanding any disclosures made
pursuant to this Agreement or any other disclosures made by Shareholder or
the Company to Buyer, Shareholder will also indemnify Buyer, its officers,
directors, and affiliates against and agree to hold harmless from any Loss
relating to or resulting from any liabilities, obligations or commitments
of, and all claims against the Company arising from or based upon any
condition, event or action existing on or occurring prior to the Closing
Date (including without limitation any payment obligations otherwise
incurred or to be incurred by the Company set forth on Exhibit G attached
hereto), except for (i) liabilities set forth on the face of the Closing
Balance Sheet (as adjusted, if at all, pursuant to the provisions of
Section 1.4(d) hereof) to the extent of the amount recorded for such
liabilities on the face of such balance sheet, and (ii) payment or
performance obligations (other than those set forth on Exhibit G hereto)
arising out of contracts and agreements to which the Company is a party
and which are disclosed pursuant to Sections 2.11 or 2.12 of this
Agreement or are not required to be disclosed pursuant to the terms of
Sections 2.11 or 2.12 hereof.
(b If seeking indemnification pursuant to Section 7.2,
Buyer, its officers, directors, or affiliates, as the case may be (the
"indemnified party"), will give prompt notice to Shareholder (the
"indemnifying party") of the assertion of any claim, or the commencement
of any action or proceeding, in respect of which indemnity may be sought
hereunder. The indemnified party will have the right in its sole
discretion to control the defense of and settle any such claim; provided,
however, that except with the consent of the indemnifying party, no
settlement of any such claim will alone be determinative of the amount of
any indemnity hereunder. In the event that the indemnifying party has
consented to any such settlement, the indemnifying party will have no
power or authority to object under any provision of this Article VII to
the amount of any indemnification claim by Buyer with respect to such
settlement. The indemnifying party will be entitled, at its expense, to
participate in such
defense. No investigation by the indemnified party at or prior to the
Closing will relieve the indemnifying party of any liability hereunder.
(c If any third party shall notify the indemnified party
with respect to any matter (a "Third Party Claim") which may give rise to
a claim for indemnification against the indemnifying party under this
Article VII, the indemnified party shall promptly notify the indemnifying
party thereof in writing; provided, however, that no delay on the part of
the indemnified party in notifying any indemnifying party shall relieve
the indemnifying party from any obligation hereunder unless (and then
solely to the extent) the indemnifying party thereby is substantially
prejudiced.
(d The indemnified party may defend against, and consent to
the entry of any judgment or enter into any settlement with respect to,
the Third Party Claim in any manner such indemnified party reasonably may
deem appropriate (and such indemnified party need not consult with, or
obtain any consent from, any indemnifying party in connection therewith),
and the indemnifying party will remain responsible for any Losses the
indemnified party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim to the fullest extent
provided in this Article VII. Notwithstanding the foregoing sentence,
counsel for the indemnifying party shall be permitted to monitor the
indemnified party's defense of a Third Party Claim for the purpose of
advising the indemnifying party of the status and progress of the defense.
Any such activity shall be at the sole expense of the indemnifying party.
(e Without limiting the generality of the foregoing, except
with respect to any tax jurisdiction that does not recognize
S corporations as pass-through entities and to the extent any tax
jurisdiction does not accord S corporation tax treatment to nonresident
shareholders, Shareholder hereby agrees to indemnify and hold Buyer
harmless from, against and in respect of any U.S. federal or state income
Tax liability (including interest and penalties), if any, resulting from
the Company failing to qualify as an S corporation under
Section 1361(a)(1) of the Code (or state counterpart) for every taxable
year on or before the Closing Date as to which the Company (or, as
applicable, Buyer) filed or files Tax Returns claiming status as an
S corporation.
VII.3 Escrow Arrangements.
(a Escrow Fund. At the Closing, Shareholder will be deemed
to have received and deposited with the Escrow Agent (as defined below)
the Escrow Amount (together with any interest earned thereon during the
term of the escrow set forth in this Section 7.3, the "Escrow Fund")
without any act of Shareholder. As soon as practicable after the Closing
Date, the Escrow Amount, without any act of Shareholder, will be deposited
with Hickman Land Title Company of Logan, Utah (the "Escrow Agent"). The
Escrow Fund will be governed by the terms set forth herein. The Escrow
Fund will be available to effect any Adjustment to the Purchase Price made
pursuant to Section 1.4 and to serve as partial security for Shareholder's
indemnification obligations under Section 7.2(a) hereof.
(b Escrow Period; Distribution upon Termination of Escrow
Period. Subject to the following requirements, the Escrow Fund will be in
existence immediately following the Closing Date and will terminate at
5:00 p.m., Utah time, on the earlier of the date twelve (12) months from
the Closing Date or the date the full amount of the Escrow Fund has been
disbursed pursuant to Section 7.3(d) below (the "Escrow Period");
provided, that, the Escrow Period will not terminate with respect to such
amount (or some portion thereof) if in a reasonable judgement of Buyer,
subject to the objection of Shareholder and the subsequent arbitration of
the matter in the manner provided in Section 7.3(f) hereof, such amount
(or some portion thereof) together with the
aggregate amount remaining in the Escrow Fund is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate delivered to the
Escrow Agent prior to termination of such Escrow Period with respect to
facts and circumstances existing prior to the termination of such Escrow
Period. As soon as all such claims have been resolved, the Escrow Agent
will deliver to Shareholder the remaining portion of the Escrow Fund not
required to satisfy such claims.
(c Protection of Escrow Fund. The Escrow Agent will hold
and safeguard the Escrow Fund during the Escrow Period, will treat such
fund as a trust fund in accordance with the terms of this Agreement and
not as the property of Buyer or Shareholder and will hold and dispose of
the Escrow Fund only in accordance with the terms hereof. The Escrow Fund
will be invested subject to the discretion of the Escrow Agent in demand
and time deposits in banks or savings institutions, short term
certificates of deposits or Treasury bills, or money market account
instruments.
(d Claims Upon Escrow Fund. Upon receipt by the Escrow
Agent at any time on or before the last day of the Escrow Period of a
certificate signed by any officer of Buyer (an "Officer's Certificate"):
(A) stating that Buyer has paid or properly accrued or reasonably
anticipates that it will have to pay or accrue Losses, and (B) specifying
in reasonable detail the individual items of Losses included in the amount
so stated, the date each such item was paid or properly accrued, or the
basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is
related, the Escrow Agent will, subject to the provisions of
Section 7.2(f) hereof, deliver to Buyer (x) out of the Escrow Fund or
(y) in the event that the Escrow Fund is or becomes exhausted, by wire
transfer (within three business days) of immediately available funds to an
account of Buyer at a bank specified by Buyer, as promptly as practicable,
an amount equal to such Losses.
(e Objections to Claims. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such
certificate will be delivered to Shareholder and for a period of thirty
(30) days after such delivery, the Escrow Agent will make no delivery to
Buyer of any Escrow Funds pursuant to Section 7.2(d) hereof unless the
Escrow Agent shall have received written authorization from Shareholder to
make such delivery. After the expiration of such thirty (30) day period,
the Escrow Agent will make delivery from the Escrow Fund in accordance
with Section 7.2(d) hereof, provided, that, no such payment or delivery
may be made if Shareholder shall object in a written statement to the
claim made in the Officer's Certificate, and such statement shall have
been delivered to the Escrow Agent prior to the expiration of such thirty
(30) day period.
(f Resolution of Conflicts; Arbitration.
(i0 In case Shareholder shall so object in writing to
any claim or claims made in any Officer's Certificate, Buyer and
Shareholder will attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If Buyer and
Shareholder should so agree, a memorandum setting forth such agreement
will be prepared and signed by both parties and will be furnished to the
Escrow Agent. The Escrow Agent will be entitled to rely on any such
memorandum and distribute funds from the Escrow Fund in accordance with
the terms thereof.
(ii0 If no such agreement can be reached after good
faith negotiation, either Buyer or Shareholder may demand arbitration of
the matter unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration will not be
commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter will be settled by
arbitration conducted by three arbitrators. Buyer and Shareholder will
each select one arbitrator, and the two arbitrators so selected will
select
designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgement of the arbitrators,
to discover relevant information from the opposing parties about the
subject matter of the dispute. The arbitrators will rule upon motions to
compel or limit discovery and will have the authority to impose sanctions,
including attorneys fees and costs, to the extent of a court of competent
law or equity, should the arbitrators determine that discovery was sought
without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of a majority
of the three arbitrators as to the validity and amount of any claim in
such Officer's Certificate will be binding and conclusive upon the parties
to this Agreement, and notwithstanding anything in Section 7.2(e) hereof,
the Escrow Agent will be entitled to act in accordance with such decision
and make or withhold payments out of the Escrow Fund in accordance
therewith. Such decision will be written and will be supported by written
findings of fact and conclusions which will set forth the award, judgment,
decree or order awarded by the arbitrators.
(iii0 Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction. Any such
arbitration will be held in Salt Lake City, Utah, under the rules then in
effect of the American Arbitration Association. For purposes of this
Section 7.2(f), in any arbitration hereunder in which any claim or the
amount thereof stated in the Officer's Certificate is at issue, Buyer will
be deemed to be the "Non-Prevailing Party" in the event that the
arbitrators award Buyer less than the sum of seventy-five percent (75%) of
the disputed amount plus any amounts not in dispute; otherwise,
Shareholder will be deemed to be the "Non-Prevailing Party." The Non-
Prevailing Party to an arbitration will pay its own expenses, the fees of
each arbitrator, the administrative fee of the American Arbitration
Association, and the expenses, including without limitation, reasonable
attorneys' fees and costs, incurred by the other party to the arbitration.
(g Escrow Agent's Duties.
(i0 The Escrow Agent will be obligated only for the
performance of such duties as are specifically set forth herein, and as
set forth in any additional written escrow instructions which the Escrow
Agent may receive after the date of this Agreement which are signed by an
officer of Buyer and an officer of the Company, and may rely and will be
protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented by
the proper party or parties. The Escrow Agent will not be liable for any
act done or omitted hereunder as Escrow Agent while acting in good faith
and in the exercise of reasonable judgment, and any act done or omitted
pursuant to the advice of counsel will be conclusive evidence of such good
faith.
(ii0 The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by
any other person, excepting only orders or process of courts of law, and
is hereby expressly authorized to comply with and obey orders, judgments
or decrees of any court. In case the Escrow Agent obeys or complies with
any such order, judgment or decree of any court, the Escrow Agent will not
be liable to any of the parties hereto or to any other person by reason of
such compliance, notwithstanding any such order, judgment or decree being
subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
(iii0 The Escrow Agent will not be liable in any respect
on account of the identity, authority or rights of the parties executing
or delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv0 The Escrow Agent will not be liable for the
expiration of any rights under any statute of limitations with respect to
this Agreement or any documents deposited with the Escrow Agent.
(v0 In performing any duties under the Agreement, the
Escrow Agent will not be liable to any party for damages, losses, or
expenses, except for gross negligence or willful misconduct on the part of
the Escrow Agent. The Escrow Agent will not incur any such liability for
(A) any act or failure to act made or omitted in good faith, or (B) any
action taken or omitted in reliance upon any instrument, including any
written statement of affidavit provided for in this Agreement that the
Escrow Agent shall in good faith believe to be genuine, nor will the
Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with legal counsel in
connection with Escrow Agent's duties under this Agreement and shall be
fully protected in any act taken, suffered, or permitted by him/her in
good faith in accordance with the advice of counsel. The Escrow Agent is
not responsible for determining and verifying the authority of any person
acting or purporting to act on behalf of any party to this Agreement.
(vi0 If any controversy arises between the parties to
this Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be
required to determine the controversy or to take any action regarding it.
The Escrow Agent may hold all documents and the Escrow Fund and may wait
for settlement of any such controversy by final appropriate legal
proceedings or other means as, in the Escrow Agent's discretion, the
Escrow Agent may be required, despite what may be set forth elsewhere in
this Agreement. In such event, the Escrow Agent will not be liable for
damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader requiring the parties to answer and litigate any
claims and rights among themselves. The Escrow Agent is authorized to
deposit with the clerk of the court all documents and funds held in
escrow, except all cost, expenses, charges and reasonable attorney fees
incurred by the Escrow Agent due to the interpleader action and which the
parties jointly and severally agree to pay. Upon initiating such action,
the Escrow Agent shall be fully released and discharged of and from all
obligations and liability imposed by the terms of this Agreement.
(vii0 The parties and their respective successors and
assigns agree jointly and severally to indemnify and hold the Escrow Agent
harmless against any and all losses, claims, damages, liabilities, and
expenses, including reasonable costs of investigation, counsel fees, and
disbursements that may be imposed on the Escrow Agent or incurred by the
Escrow Agent in connection with the performance of his/her duties under
this Agreement, including but not limited to any litigation arising from
this Agreement or involving its subject matter.
(viii0 The Escrow Agent may resign at any time upon
giving at least thirty (30) days written notice to the parties; provided,
however, that no such resignation will become effective until the
appointment of a successor escrow agent which will be accomplished as
follows: Buyer and Shareholder will use their best efforts to mutually
agree on a successor escrow agent within thirty (30) days after receiving
such notice. If Buyer and Shareholder fail to agree upon a successor
escrow agent within such time, the Escrow Agent will have the right to
appoint a successor escrow agent authorized to do business in the State of
Utah. The successor escrow agent will execute and deliver an instrument
accepting such appointment and it will, without further acts, be vested
with all the estates, properties, rights, powers, and duties of the
predecessor escrow agent as if originally named as escrow agent. The
Escrow Agent will be discharged from any further duties and liability
under this Agreement.
(h Fees. Half of all fees of the Escrow Agent for
performance of its duties hereunder will be paid by Shareholder and half
of all such fees will be paid by Buyer. It is understood that the fees
and usual charges agreed upon for services of the Escrow Agent will be
considered compensation for ordinary services as contemplated by this
Agreement. In the event that the conditions of this Agreement are not
promptly fulfilled, or if the Escrow Agent renders any service not
provided for in this Agreement, or if the parties request a substantial
modification of its terms, or if any controversy arises, or if the Escrow
Agent is made a party to, or intervenes in, any litigation pertaining to
this escrow or its subject matter, the Escrow Agent will be reasonably
compensated for such extraordinary services and reimbursed for all costs,
attorney's fees, and expenses occasioned by such default, delay,
controversy or litigation. Each of Buyer and Shareholder promises to pay
one half of these sums upon demand.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
VIII.1 Termination. Except as provided in Section 8.2 below,
this Agreement may be terminated and the Acquisition abandoned at any time
prior to the Closing:
(a by mutual consent of the Company and Buyer;
(b by Buyer or the Company if: (i) the Closing has not
occurred by April 15, 1999 (it being understood that the parties hereto
shall use commercially reasonable best efforts to effect the Closing on or
before April 1, 1999); (ii) there shall be a final nonappealable order of
a federal or state court in effect preventing consummation of the
Acquisition; or (iii) there shall be any statute, rule, regulation or
order enacted, promulgated or issued or deemed applicable to the
Acquisition by any governmental entity that would make consummation of the
Acquisition illegal;
(c by Buyer if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Acquisition by any Governmental Entity, which
would: (i) prohibit Buyer's or the Company's ownership or operation of all
or a portion of the business of the Company or (ii) compel Buyer or the
Company to dispose of or hold separate all or a portion of the business or
assets of the Company or Buyer as a result of the Acquisition;
(d by Buyer if it is not in material breach of its
obligations under this Agreement and there has been a material breach of
any representation, warranty, covenant or agreement contained in this
Agreement on the part of the Company and such breach has not been cured
within five (5) business days after written notice to the Company
(provided, that, no cure period shall be required for a breach which by
its nature cannot be cured);
(e by the Company if it is not in material breach of its
obligations under this Agreement and there has been a material breach of
any representation, warranty, covenant or agreement contained in this
Agreement on the part of Buyer and such breach has not been cured within
five (5) business days after written notice to Buyer (provided, that, no
cure period shall be required for a breach which by its nature cannot be
cured).
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by
the Board of Directors (as applicable) of the party taking such action.
VIII.2 Effect of Termination. In the event of termination of
this Agreement as provided in Section 8.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Buyer or the Company, or their respective officers, directors or
shareholders, provided, that, each party shall remain liable for any
breaches of this Agreement prior to its termination; and provided,
further, that the provisions of Sections 4.2, 5.2, 5.3 and Article IX of
this Agreement shall remain in full force and effect and survive any
termination of this Agreement.
VIII.3 Amendment. Except as is otherwise required by
applicable law after Shareholder approves this Agreement, this Agreement
may be amended by the parties hereto at any time by execution of an
instrument in writing signed on behalf of each of the parties hereto.
VIII.4 Extension; Waiver. At any time prior to the Closing,
Buyer, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in
any document delivered pursuant hereto, and (iii) waive compliance with
any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
IX.1 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail
(return receipt requested) or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a if to Buyer, to:
Scientific Technologies Incorporation
6550 Dumbarton Circle
Fremont, CA 94555
with a copy at the same address to the attention of
Mr. Joe Lazzara
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Caine T. Moss, Esq.
(b if to the Company, to:
Lundahl Instruments, Inc.
429 S. Main
Logan, Utah 84321
with a copy to:
Olson & Hoggan, P.C.
88 West Center
Logan, Utah 84321
Attention: Miles Jensen, Esq.
(c) if to Shareholder, to:
Mark Lundahl
3230 North 1200 East
North Logan, Utah 84341
IX.2 Interpretation. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed
by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
IX.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart.
IX.4 Entire Agreement; Assignment. This Agreement, the schedules
and Exhibits hereto, and the documents and instruments and other
agreements among the parties hereto referenced herein: (a) constitute the
entire agreement among the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof;
(b) are not intended to confer upon any other person (including, without
limitation, those persons listed on Exhibits B, C and D hereof) any rights
or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Buyer
may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates.
IX.5 Severability. In the event that any provision of this
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder
of this Agreement will continue in full force and effect and the
application of such provision to other persons or circumstances will be
interpreted so as reasonably to effect the intent of the parties hereto.
The parties further agree to replace such void or unenforceable provision
of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes
of such void or unenforceable provision.
IX.6 Other Remedies. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or
by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy.
IX.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California,
regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
IX.8 Rules of Construction. The parties hereto agree that they
have been represented by counsel during the negotiation and execution of
this Agreement and, therefore, waive the application of any law,
regulation, holding or rule of construction providing that ambiguities in
an agreement or other document will be construed against the party
drafting such agreement or document.
IN WITNESS WHEREOF, Buyer and the Company have caused this Stock
Acquisition Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
Buyer: Company:
Scientific Technologies Incorporated Lundahl Instruments, Inc.
By: /s/Joseph J. Lazzara By: /s/Mark Lundahl
Name Joseph J. Lazzara MarkLundahl
Title President and CEO Title President
Shareholder:
/s/Mark Lundahl
Mark Lundahl
Escrow Agent:
(with respect to Article VII)
Hickman Land Title Company of Logan, Utah
By: /s/Marilyn J. Adams
Name: Marilyn J. Adams_____________
Title President
***STOCK ACQUISITION AGREEMENT***
Exhibit G
Schedule of Indemnifiable Losses
1. Any and all payment obligations of the Company arising under,
relating to or otherwise in connection with the Zions Note, the ECL Note
and/or the Bank Debt.
2. Any and all payment obligations of the Company under, relating
to or otherwise in connection with that certain Consulting Agreement dated
June 30, 1998 by and between the Company and Ezra C. Lundahl, Inc.,
including without limitation any transfer fees set forth in Section 2.02
thereof.
3. Any and all payment obligations of the Company under, relating
to or otherwise in connection with any key man life insurance policy
payable on the life of Shareholder.
4. Verbal or written payment agreements, obligations or
arrangements between Shareholder and any employee of the Company.
Exhibit 10.3
FIFTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Fifth
Amendment") is dated as of June 30, 1999 and is entered into between
SCIENTIFIC TECHNOLOGIES INCORPORATED WHICH WILL DO BUSINESS IN CALIFORNIA AS
OREGON SCIENTIFIC TECHNOLOGIES, an Oregon corporation (the "Borrower"), and
BANK OF THE WEST, a California banking corporation (the "Bank").
RECITALS:
A. Borrower and Bank have entered into that certain Loan and
Security Agreement dated November 29, 1994, that certain First Amendment
to Loan and Security Agreement dated as of May 31, 1995, that certain
Second Amendment to Loan and Security Agreement dated as of May 31, 1996,
and that certain third Amendment to Loan and Security Agreement dated as
of May 31, 1997 and that certain third Amendment to Loan and Security
Agreement dated as of June 9, 1998 (collectively, the "Loan Agreement")
and that certain Equipment Purchase Line Note dated December 6, 1994 (the
"Equipment Purchase Line Note");
B. Borrower and Bank intend to further amend the Loan Agreement
and/or the Equipment Purchase Line Note as provided by this Fifth
Amendment.
AMENDMENT:
NOW, THEREFORE, Borrower and Bank hereby agree as follows:
1. This Fifth Amendment shall modify and, to the extent
inconsistent with, amend the Loan Agreement and/or the Equipment Purchase
Line Note. Any capitalized term not specifically defined herein shall
have the meaning assigned to it in the Loan Agreement.
2. The last sentence of Section 3.1(a) of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
For the purpose of this Agreement, "Draw Period" shall mean
the period between the date of this Loan and Security
Agreement and the earlier of: (i) June 30, 2000 or (ii) the
date on which the aggregate of all advances made pursuant to
this Section 3.1 equals One Million and 00/100 Dollars
($1,000,000.00).
3. The second sentence of the first paragraph of Section 4.1 of
the Loan Agreement is hereby deleted in its entirety and is replaced with
the following:
Borrower's right to obtain advances under Section 2.1 and to
enter into foreign
1
exchange contracts under the FX Facility provided by Section
14.1 shall remain in full force and effect until June 30,
2000, and shall continue on a month-to-month basis thereafter
until terminated by either party on thirty (30) days prior
written notice to the other.
4. Bank shall have the right, but not the obligation, to charge
any amounts owing by Borrower to Bank under the Loan Agreement, the
Equipment Purchase Line Note, or this Fifth Amendment against any accounts
maintained by Borrower with Bank and Borrower consents thereto.
5. Concurrently with the execution of this Fifth Amendment,
Borrower shall pay to Bank a fee in an amount equal to Seven Thousand Five
Hundred Dollars ($7,500.00), which fee shall represent an unconditional
and non-refundable payment to Bank in consideration of Bank's agreement to
enter into this Fifth Amendment.
6. Bank's duties to extend and renew the Obligations and to make
advances in accordance with this Fifth Amendment shall be subject to (i)
there being no outstanding and uncured defaults under the Loan Agreement,
the Equipment Purchase Line Note or any other obligation owing by Borrower
to Bank and (ii) the satisfaction of each of the conditions precedent set
forth in Article 6 of the Loan Agreement, each of which is incorporated
herein by this reference; (iii) the executions and delivery of this fifth
amendment and such other documents as Bank may request (including, without
limitation, a Corporate Resolution to Borrow and Pledge, an Insurance
Information Questionnaire, a Warranties and Representations of Officers,
an Automatic Transfer Authorization, and a declaration of Purpose
Statement).
7. Except as amended by this Fifth Amendment, all of the terms
and conditions of the Loan Agreement (and each and every document or
instrument executed and delivered in connection therewith) is and shall
remain in full force and effect.
8. Except as amended by this Fifth Amendment, Borrower hereby
ratifies, reaffirms, and remakes as of the date hereof each and every
representation and warranty contained in the Loan Agreement, the Equipment
Purchase Line Note, or in any document executed and delivered in
connection therewith.
IN WITNESS WHEREOF, Borrower has executed and delivered this Fifth
Amendment to Bank on the date first above written at Walnut Creek,
California.
"BORROWER"
SCIENTIFIC TECHNOLOGIES INCORPORATED WHICH
WILL DO BUSINESS IN CALIFORNIA AS OREGON
SCIENTIFIC TECHNOLOGIES, an Oregon
corporation
By: /s/Joseph J. Lazzara
Its: President and Chief Executive
Officer
IN WITNESS WHEREOF, Bank hereby accepts this Fifth Amendment to be
effective as of the date first above written in Walnut Creek,
California.
"BANK"
BANK OF THE WEST,
a California banking corporation
By: /s/Barry E. Anderson
Its: Vice President
EXHIBIT "A"
EQUIPMENT PURCHASE LINE NOTE
$1,000,000.00
Walnut Creek, California
In consideration of all loans and advances ("Advances") from time to
time made by BANK OF THE WEST (the "Bank") to or for the benefit of the
undersigned (the "Borrower") pursuant to that certain Loan and Security
Agreement between Borrower and Bank dated November 29, 1994, as amended,
extended or renewed (collectively the "Loan Agreement"), during the Draw
Period (as defined in the Loan Agreement), Borrower promises to pay Bank,
or order, at 2000 Franklin Street, Suite 420, East Bay Business Banking
Group (Group 054), Oakland, California 94612, on the dates and in the
manner hereinafter set forth, all outstanding Advances, plus any interest
thereon then unpaid, at a rate (the "Rate") of interest equal to the
Bank's Prime Rate (as hereinafter defined), which Rate shall vary
concurrently with any change in the Prime Rate. For the purpose of this
Note, the "Prime Rate" shall mean the variable rate of interest, per
annum, most recently announced by Bank at its headquarters office in San
Francisco, California, as its "prime rate." The undersigned understands
that Bank's "prime rate" is one of its base rates with respect to loans
making reference thereto and may not be the lowest of Bank's base rates.
Interest shall be computed on the outstanding principal balance on the
basis of three hundred sixty (360) days per year and actual days elapsed.
Commencing on the last day of the calendar month after the date of
this Note, and continuing on the last day of each month thereafter until
the Principal Repayment Commencement Date (as hereinafter defined),
Borrower shall make (i) monthly interest payments on the outstanding
amount of the Advances at the Rate and (ii) payments of all Bank Expenses
(as defined in the Loan Agreement) incurred by Bank in connection with or
attributable to this Note. If not so paid, such unpaid interest and/or
Bank Expenses shall become part of the principal, at the option of Bank.
Commencing on the last day of the month after the end of the Draw
Period (the "Principal Repayment Commencement Date") and continuing on
the last day of each month thereafter until the Equipment Line Maturity
Date (as hereinafter defined), Borrower shall make (i) equal and
consecutive monthly principal payments with each payment being in an
amount sufficient to repay the aggregate principal amount of advances
under the Equipment Purchase Line outstanding as of the Principal
Repayment Commencement Date over sixty (60) months on a straight-line
basis, (ii) monthly interest payments at the Rate on the outstanding
amount of advances under the Equipment Purchase Line, and (iii) all Bank
Expenses incurred by Bank in connection with Equipment Purchase Line. For
the purpose of this Agreement, the "Equipment Line Maturity Date" shall
be sixty (60) months after the Principal Repayment Commencement Date.
The aggregate unpaid balance of all Advances made hereon at any time
shall not exceed One Million Dollars ($1,000,000.00). In the event that
the amount of all Advances hereunder shall exceed One Million Dollars
($1,000,000.00), Borrower shall immediately, and without demand, make
payment to Bank in an amount sufficient to reduce the balance hereof to an
amount that is less than said limitation. All Advances shall be
conclusively presumed to have been made to, for the benefit of, and at the
request of Borrower when deposited or credited to the account of Borrower
with Bank or made in accordance with the terms of the Loan Agreement or
the oral or written instructions of Borrower, or any one signing below for
or on behalf of the undersigned.
Bank may, at its option, elect to treat any due but unpaid interest
and Bank Expenses as advances under the Credit, and all such advances
shall bear interest on the Daily Balance thereof, at a per annum rate
applicable to the Credit under the terms of this Agreement. The receipt
of any check or other item of payment by Bank shall not be considered a
payment until such check or other item of payment is honored when
presented for payment, in which event, said check or other item of payment
shall be deemed to have been paid to Bank in accordance with Bank's rules
and regulations relating to credits to deposit accounts or, in Bank's
discretion, two (2) calendar days after the date Bank actually receives
possession of such check or other item of payment.
Upon the occurrence of an Event of Default under the Loan Agreement
which has not been cured as therein provided or waived by Bank in writing,
the whole sum of principal, interest and Bank Expenses relating to such
Advances shall become due immediately at the option of Bank.
Upon the occurrence of an Event of Default under the Loan Agreement
(which has not been cured as therein provided or waived by Bank in
writing) and at the option of Bank, interest may be charged on the
Advances outstanding on the date of such Event of Default at the rate of
five (5) percentage points greater than the Rate (the "Default Rate"). The
Default Rate shall commence on the day following any Event of Default and
shall continue until such Event of Default has been cured to the
satisfaction of Bank.
If this Note is not paid when due, Borrower promises to pay all
costs and expenses of collection and all attorneys' fees and costs
incurred by Bank on account of such collection, whether or not suit is
filed, which said costs, expenses and fees shall become part of principal.
The indebtedness evidenced hereby shall be payable in lawful money of the
United States of America.
This Note is subject to the terms and conditions of the Loan
Agreement. The obligations arising under this Note constitute Obligations
under and pursuant to the terms of the Loan Agreement and are secured
under and pursuant to the terms thereof.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its officers thereunto duly authorized and directed by a
Resolution of its Board of Directors.
SCIENTIFIC TECHNOLOGIES INCORPORATED WHICH
WILL DO BUSINESS IN CALIFORNIA AS OREGON
SCIENTIFIC TECHNOLOGIES, an Oregon
corporation
By: /s/Joseph J. Lazzara
Its: President and Chief Executive
<PAGE>
EXHIBIT 21.1
SCIENTIFIC TECHNOLOGIES INCORPORATED
Annual Report on Form 10-K
Year ended December 31, 1999
Subsidiaries of the Registrant.
Applied Electro Technology, International, a California corporation
Zaisan Inc., a Texas corporation
STI Scientific Technologies GmbH, a German corporation
Lundahl Instruments, Inc., a Utah corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Forms S-8 (No. 33-30195 and 33-
21892) of Scientific Technologies Inc. of our report dated
March 3, 2000 appearing on page 26 in this Annual Report on
Form 10-K.
PricewaterhouseCoopers, LLP
San Jose, California
March 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Consolidated Balance Sheet and Consolidated Statement of
Income included in the Company's Form 10-K for the period ended
December 31, 1997 and is qualified in its entirety by reference to
such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 3,362
<SECURITIES> 5,209
<RECEIVABLES> 9,152
<ALLOWANCES> 330
<INVENTORY> 8,414
<CURRENT-ASSETS> 27,399
<PP&E> 7,477
<DEPRECIATION> 4,611
<TOTAL-ASSETS> 32,536
<CURRENT-LIABILITIES> 4,687
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 27,839
<TOTAL-LIABILITY-AND-EQUITY> 32,536
<SALES> 49,105
<TOTAL-REVENUES> 49,105
<CGS> 24,769
<TOTAL-COSTS> 24,769
<OTHER-EXPENSES> 17,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,266
<INCOME-TAX> 2,761
<INCOME-CONTINUING> 4,505
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,505
<EPS-BASIC> $0.47
<EPS-DILUTED> $0.47
</TABLE>
