SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for use of
[x] Definitive proxy statement the Commission only
[ ] Definitive additional materials (as permitted by Rule
[ ] Soliciting material pursuant to 14a-6(e)(20) )
Rule 14a-11(c) or 14a-12
PERFECTDATA CORPORATION
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
PERFECTDATA CORPORATION
- -------------------------------------------------------------------------------
(Name of Person (s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6 (i) (4) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a) (2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statements number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
PERFECTDATA CORPORATION
110 West Easy Street
Simi Valley, California 93065
(805) 581-4000
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 31, 2000
To the Shareholders of PERFECTDATA CORPORATION:
You are cordially invited to attend a Special Meeting of Shareholders
of PerfectData Corporation, a California corporation (the "Company"), which will
be held at the Beverly Hilton, 9876 Wilshire Blvd., The Beverly Hills, CA 90210
at 11:00 a.m., Pacific Standard Time, on Friday, March 31, 2000, for the
following purpose:
To approve a Stock Purchase Agreement and the implementation of the
related series of transactions contemplated thereunder, all as more fully
described in the Proxy Statement annexed hereto, which transactions would, if
consummated, effect a change in the control of the Company.
Only shareholders of record at the close of business on Tuesday, February 29,
2000, are entitled to notice of, and to vote at, the Meeting.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. THE PROXY MAY BE REVOKED
IN WRITING PRIOR TO THE MEETING OR, IF YOU ATTEND THE MEETING, YOU MAY REVOKE
THE PROXY AND VOTE YOUR SHARES IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
Joseph Mazin
President
Simi Valley, California
March 10, 2000
<PAGE>
PERFECTDATA CORPORATION
110 West Easy Street
Simi Valley, California 93065
(805) 581-4000
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
March 31, 2000
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of PerfectData Corporation (the "Company") of proxies
to be voted at the Company's Special Meeting of Shareholders (the "Meeting") to
be held on Friday, March 31, 2000, or at any adjournment thereof. The purpose
for which the Meeting is to be held is set forth in the preceding Notice of
Special Meeting. This Proxy Statement and the enclosed form of proxy are first
being mailed on or about Friday, March 10, 2000, to holders of record of the
Company's Common Stock, no par value (the "Common Stock"), at the close of
business on Tuesday, February 29, 2000 (the "Record Date"), which has been fixed
as the record date for the determination of the shareholders entitled to notice
of, and to vote at, the Meeting.
VOTING SECURITIES
On the Record Date, 3,238,306 shares of the Common Stock, which is the
only class of capital stock of the Company entitled to vote at the Meeting, were
issued, outstanding and entitled to vote. Each shareholder of record is entitled
to cast, in person or by proxy, one vote for each share of the Common Stock held
by such shareholder as of the close of business on the Record Date. Although the
shareholders may, subject to certain exceptions, have a cumulative voting right
with respect to the election of directors, they will not have such voting right
with respect to the sole proposal in the Notice of Special Meeting, even through
such proposal to approve a Stock Purchase Agreement and the implementation of
the related series of transactions contemplated thereunder has as one of such
transactions the selection of four new directors. For additional information as
to proposal, please see "The Sole Proposal - The Proposed Transactions"
elsewhere in this Proxy Statement. Voting at the Meeting on the proposal will,
accordingly, be on a noncumulative basis. [When a shareholder has cumulative
voting rights with respect to the election of directors the shareholder is
entitled to cast that number of votes as is determined by multiplying the number
of shares held by the shareholder by the number of directors to be elected. The
shareholder may then cast all of his, her or its votes so determined for one
person or spread his, her or its votes among two or more persons as he, she or
it sees fit.]
A majority of the votes cast at this Meeting voting in the affirmative
is necessary to approve the sole proposal being submitted for a vote at this
Meeting. Pursuant to the By-Laws of the Company, no other item not listed in the
Notice of Special Meeting may be voted upon at the Meeting.
A majority of the shares of the Common Stock entitled to vote,
represented in person or by proxy, shall constitute a quorum at the Meeting.
Abstentions and broker non-votes are treatedfor the purpose of determining a
quorum at the Meeting and are not treated as a vote for or against the sole
proposal set forth in the Notice of Special Meeting.
Proxies duly executed and returned by shareholders and received by the
Company before a vote at the Meeting will be voted in favor of the proposal to
approve a Stock Purchase Agreement and the related series of transactions
contemplated thereunder unless a contrary choice is specified in the proxy.
Where a specification is indicated as provided in the proxy, the shares
represented by the proxy will be voted in accordance with the specification
made.
The Company's transfer agent for the Common Stock will tabulate the
votes cast by proxy and received prior to the Meeting. Votes cast in person, or
by proxy given, at the Meeting will be tabulated by the Inspector of Election
appointed for the Meeting.
Your execution of the enclosed proxy will not affect your right as a
shareholder to attend the Meeting and to vote in person. Any shareholder giving
a proxy has a right to revoke it at any time by (i) a later-dated proxy, (2) a
written relocation of proxy sent to, and received by, the Secretary of the
Company prior to a vote at the Meeting, or (3) attendence at the Meeting and
voting in person.
A shareholder shall have no right to receive payment for his, her or
its shares of the Common Stock as a result of the approval of the sole proposal
in the Notice of Special Meeting.
The California Corporations Code does not require that the
shareholders of the Company vote on the sole proposal in the Notice of Special
Meeting. However, because the Common Stock is traded on the Nasdaq SmallCap
Market under the symbol "PERF" and Nasdaq Rule 4310(a)(25)(H)(i)(b) requires
shareholder approval of any issuance of shares of the Common Stock which will
result in a "change of control," the Board of Directors is seeking shareholder
approval of such proposal. In addition, in view of the importance of this vote
to the future direction of the Company, the Board of Directors deems its
desireable that the Company's shareholders pass on the proposal. If shareholder
approval is not obtained for the sole proposal, the Stock Purchase Agreement
will terminate and the stock purchase and other contemplated transactions
thereunder will not occur.
Joseph Mazin, Ronald M. Chodorow and Tracie Savage, the current
directors of the Company, have agreed to vote in favor of the sole proposal in
the Notice of Special Meeting an aggregate of 845,297 shares of the Common Stock
or 26.1 % of the shares eligible to vote. For information as to the shares which
they beneficially own, see "Security Ownership of Certain Beneficial Owners and
Management" elsewhere in this Proxy Statement. None of these three directors and
no person who is or was an executive officer of the Company since April 1, 1998
has any substantial interest, direct or indirect, by security holdings or
otherwise, in the sole proposal submitted to a vote at the Meeting other than
that Ms. Savage will continue as a director if such proposal is approved and
then implemented.
THE SOLE PROPOSAL - THE PROPOSED TRANSACTIONS
Stock Purchase Agreement
The Company and Millennium Capital Corporation ("Millennium") and JDK
Associates, Inc. ("JDK") have executed a Stock Purchase Agreement dated as of
January 20, 2000 (the "Stock Purchase Agreement"). A copy of the Stock Purchase
Agreement (without exhibits and schedules) is annexed to this Proxy Statement as
Appendix A and is incorporated herein by this reference. Millennium, JDK and any
of their associates who becomes a buyer between the date of the Stock Purchase
Agreement and the date on which the Closing (as hereinafter defined) is held
("Millennium, JDK and all such associates, if any, being collectively referred
to herein as the "Buyers") will purchase from the Company an aggregate of
1,333,333 shares (the "Buyers' Shares") of the Common Stock, or 29.2% of the
shares to be outstanding after the purchase, assuming no other stock
transactions between the Record Date and the date of the Closing, at $2.25 per
share or for an aggregate purchase price of $2,999,999.25. The Closing is
scheduled to be held three business days after all conditions provided in the
Stock Purchase Agreement are satisfied, of which the major condition precedent
is the obtaining of the shareholder approval as to which proxies are being
solicited by this Proxy Statement. The Stock Purchase Agreement contains the
customary representations and warranties given by a public company issuer and
purchasers of securities from such issuers, including those from the Buyers
necessary, in the opinion of the Company, to exempt the sale from the
registration requirement of Section 5 of the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to the exemption of Section 4(2) of the
Securities Act as a transaction not involving a public offering. In addition,
the Company has not given any commitment to the Buyers to register the Buyers'
Shares under the Securities Act for resale by them.
The Stock Purchase Agreement also provides that each of Joseph Mazin,
the Chairman, the President and the Chief Executive Officer of the Company, and
Ronald M. Chodorow will resign as a director at the Closing and that Tracie
Savage, as the remaining director of the Company, will thereafter vote to
increase the number of directors from three to five and to elect four nominees
of the Buyers to serve as directors to fill the vacancies caused by the
resignations and the increase in the number of directors. The four nominees of
the Buyers for such election as directors are Bryan Maizlish, Timothy D. Morgan,
Corey P. Schlossmann and Eugene J. Wolter, Jr. Information with respect to these
nominees is furnished in the section "The Proposed New Directors" under this
caption "The Sole Proposal - The Proposed Transactions." These actions to be
taken by Ms. Savage, as a follow-up to the prior Board of Directors'
authorization of execution of the Stock Purchase Agreement and the
implementation thereof, are permitted by both the By-Laws of the Company and the
California Corporations Code even without shareholder approval. Article III,
Section 2 of the By-Laws provides for the number of directors to be not less
than three nor more than five and fixes the number at three directors, subject
to change by either the shareholders or the Board amending this provision. Ms.
Savage's action would amend Article III, Section 2 of the Company's By-Laws to
substitute "five" for "three." The Board has previously amended this provision
on 11 occasions.
Mr. Mazin had agreed to continue to serve the Company as its President
for at least six months after the Closing and for an additional six months
thereafter as a consultant.
Consulting Agreement
Millennium and JDK (collectively the "Consultants") executed a letter
agreement also dated January 20, 2000 (the "Consulting Agreement") with the
Company pursuant to which the Consultants will act as the financial advisors to
the Company in seeking and closing acquisitions and financings. The Consulting
Agreement will not become effective unless and until there is a Closing under
the Stock Purchase Agreement. The Consultants will receive, for their services
as financial advisors, a five-year warrant to purchase 1,800,000 shares of the
Common Stock at $2.75 per share. The Consultants have agreed that the Company
may allocate 30,000 of such shares to warrants to be granted to employees of the
Company at the Closing. In addition, with respect to their assistance in seeking
and then closing acquisitions and financings for the Company, the Consultants
will receive a cash fee equal to 5% of the Consideration (as defined) received
or paid by the Company with respect to the acquisition or the financing
offering.
The Proposed New Directors
The following table contains certain information with respect to the
persons whom the Buyers intend to nominate for election as directors at the
Closing under the Stock Purchase Agreement, none of whom currently holds any
position or office with the Company:
Name of Nominee Age at Record Date Current Principal Occupation
Bryan Maizlish 38 Executive Vice President of Strategic
Planning and Development of Magnet
Interactive Group, Inc.
Timothy D. Morgan 45 Consultant
Corey P. Schlossmann 44 Chief Executive Officer of Nationwide
Auction Systems
Eugene J. Wolter, Jr. 56 Chairman, President and Principal Broker
of National Discount Corp.
If elected, each will serve until the next Annual Meeting of Shareholders and
until his successor is duly elected and qualified.
There are no family relationships among the nominees for election as
directors and the current directors and executive officers of the Company.
Business History
Ms. Tracie Savage, the sole current director who will remain as a
director if the transactions contemplated by the Stock Purchase Agreement are
consummated, assuming shareholder approval is obtained at the Meeting for the
proposal to approve the Stock Purchase Agreement and to implement the related
series of transactions thereunder, was 38 at the Record Date and was originally
elected as a director of the Company in July 1995. She joined NBC TV Los
Angeles, a television subsidiary of the National Broadcasting Company, Inc. in
March of 1994. Ms. Savage is the co-anchor of NBC 4's "Today in LA: Weekend" and
also serves as a general assignment reporter for the "Channel 4 News." From 1991
to 1994, she was a general assignment reporter for the independent Los Angeles
station, KCAL. Ms. Savage has been in broadcast journalism for more than ten
years and has been the recipient of numerous awards and honors in her field.
Bryan Maizlish has, since September 1998, been the Executive Vice
President of Strategic Planning and Business Development of Magnet Interactive
Group, Inc. ("Magnet"), a private company furnishing engineering comprehensive
interactive services. Since June 1999, he has also served as the acting Chief
Financial Officer of Magnet. From September 1996 to September 1998, he was a
consultant, serving such clients as Discovery Communications and the Democratic
National Committee. From March 1996 to September 1996, he was Director of
Strategic Planning of Turner Broadcasting. From September 1994 to March 1996, he
was Director of Marketing and Distribution of Magnet. Prior thereto, he held
various managerial positions with companies in the media communications
industry, such as MCA, Inc., Gulf & Western Corporation and Eugene Roddenbury's
Norway Corporation.
Timothy D. Morgan has, since October 1997, been a consultant on
matters of business strategies, taxation and financial asset protection
techniques. From 1980 through October 1997, he was a partner and principal of
Abacus Tax and Financial Services.
Corey P. Schlossman has been Chief Executive Officer since October
1999, and Chief Financial Officer since January 1999, of Nationwide Auction
Systems. Since January 1996, he also serves as a partner and board member of
Gordon, Fishburn & Schlossman, a management consulting and accounting firm.
Since October 1999, he has also served as a director of Entrade, Inc., a New
York Stock Exchange holding company whose online subsidiaries (including
Nationwide Auction Systems) provide auction and asset disposition services to
the utility and manufacturing industries, among others.
Eugene J. Wolter, Jr. has been, since January 1993, the Chairman,
President and Principal Broker of National Discount Corp., a mortgage and real
estate investment company. Prior thereto, Mr. Wolter founded The Art Collection,
Inc. in 1992, a wholesale provider of art to the cruise industry which he
manages with his wife and daughter, and, in 1998 founded Auction Co. of America,
a newly formed Internet based auction company. He had previously a 20-year
banking career beginning with the Hartford National Bank and First Co. in
Hartford, Connecticut and culminating in 1992 as the President of Jefferson Bank
of Broward in Ft. Lauderdale, Florida, a wholly-owned subsidiary of Jefferson
Bancorp., a regional publicly held bank.
Reasons for Contemplated Transactions
After consummation of the transactions contemplated by the Stock
Purchase Agreement, the Company will continue in the business of making cleaning
products for home and office equipment, including the PerfectData EcoDuster line
of compressed air and gas dusters for electronics, premoistened wipes for
monitors, lenses and other sensitive equipment and cleaners for disk drives,
printers and fax machines. However, the Company has experienced declining
financial results from these products during the past three fiscal years. Net
sales in the fiscal year ended March 31, 1999 ("fiscal 1999") decreased to
$1,689,000 from $3,299,000 in the fiscal year ended March 31, 1998 ("fiscal
1998") and $5,761,000 in the fiscal year ended March 31, 19997 ("fiscal 1997").
Net sales in the nine-month period ended December 31, 1999 increased to
$1,383,000 as compared to $1,271,000 in the year-earlier period. The net losses
in fiscal 1999, fiscal 1998 and 1997 were $402,000, $799,000 and $334,000,
respectively. The net loss during the nine-month period ended December 31, 1999
was $94,000 as compared with a net loss of $275,000 in the year-earlier period.
However, the loss from operations during the nine-month period increased to
$375,000 from $342,000 in the year-earlier period.
As a result of the Board's review of the Company's future prospects
with respect to itsa existing products, the directors concluded that the Company
should seek a strategic alliance or a buyer as the preferable method of
effecting a turnaround in the Company, in addition to implementing the
previously reported cost cutting measures. During April 1999, also as previously
reported, the Company signed an agreement with Hudson Group, Inc. ("Hudson") to
assist the Company in finding prospective acquisitions. Although this effort by
Hudson was not successful in achieving this objective and, accordingly, the
agreement with Hudson terminated effective on November 27, 1999, the Board
believes that the Company's negotiated arrangements with the Buyers and the
Consultants will have a better chance at enabling the Company to effect a
turnaround. Emphasis will be on adding existing businesses to what the Company
already has, rather then seeking a buyer for the Company. In addition, not only
will the Buyers infuse the Company with approximately $3,000,000 in additional
capital, which can be used for both working capital purposes for the existing
business and to seek acquisitions of new businesses, but also the Consultants
will actively assist the revised Board of Directors in seeking prospective
acquisitions. The Board intends to appoint at the Closing a special committee
for such purpose. In addition, the Board believes that the experience of the
Consultants in raising financing will also be of a benefit to the Company.
There, of course, can be no assurance that these efforts will result in any
suitable acquisitions for the Company or that acceptable additional financing,
if required, will be obtained.
Recommendation
FOR THE REASONS DESCRIBED ABOVE, THE BOARD OF DIRECTORS RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE STOCK PURCHASE
AGREEMENT AND THE RELATED SERIES OF TRANSACTIONS CONTEMPLATED THEREUNDER.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, certain
information with respect to (1) any person known to the Company who beneficially
owned more than 5% of the Common Stock, (2) each director of the Company, (3)
the Chief Executive Officer of the Company and (4) all directors and executive
officers as a group. Each beneficial owner who is a natural person has advised
the Company that he or she has sole voting and investment power as to the shares
of the Common Stock, except that, until an option is exercised, there is no
right to vote or dispose of the underlying shares.
Name and Address of Number of Shares of Common Percentage of Common
Beneficial Owner Stock Beneficially Owned Stock Beneficially
Owned (1)
- ---------------------- ------------------------- ----------------------
Joseph Mazin(2)
110 West Easy Street
Simi Valley, CA 93065 897,697(3) 27.1%
Flamemaster Corporation
11120 Sherman Way
Sun Valley, CA 91252 613,497 18.9%
Leland P. Polak and Mark E.
Polak
11494 Burbank Blvd. North
Hollywood, CA 91601 316,000 9.8%
William R. Woodward
Successor & Special Trustee
Richard M. Dnysdale Trust
116 26th Street
Santa Monica, CA 90402 213,349 6.6%
Ronald M. Chodorow(4)
(address to come) 22,500 nil
Tracie Savage(4)
(address to come) 10,100(5) nil
All directors and officers
as a group (4 in
number) 931,297(6) 28.1%
- -------------------
1. The percentages computed in the table are based upon 3,238,306 shares of the
Common Stock which were outstanding on the Record Date. Effect is given,
pursuant to Rule 13d-3(l)(i) under the Securities Exchange Act of 1934, as
amended, to shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days of the Record Date.
2. President, Chief Executive Officer, Chairman of the Board and a director of
the Company.
3. The shares of the Common Stock reported in the table include (a) 613,497
shares owned by Flamemaster Corporation ("Flamemaster") for which Mr. Mazin has
voting power as the President, Chairman and Chief Executive Officer of
Flamemaster; (b) 37,700 shares owned by the Flamemaster Employees' Profit
Sharing Plan for which Mr. Mazin is the fiduciary; (c) 30,500 shares owned by
Altuis Investment Corporation ("Altuis") for which Mr. Mazin has shared voting
power as Chairman of Board of Altius; (d) 5,000 shares issuable upon the
exercise of an option expiring June 28, 2003; and (e) 65,000 shares issuable
upon exercise of an option expiring November 24, 2003.
4. A director of the Company.
5. The shares of the Common Stock reported in the table include 10,000 shares
issuable upon the exercise of an option expiring July 20, 2005.
6. The shares of the Common Stock reported in the table include (a) those
issuable upon the exercise of options reported in Notes (3) and (5), as well as
the other shares described in Note (3), and (b) 1,000 shares owned by an
executive officer of the Company.
FINANCIAL STATEMENTS
The following (1) audited financial statements and related management's
discussion and analysis which appeared in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1999 (the "Annual Report") and (2)
unaudited financial statements and related management's discussion and analysis
which appeared in the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 (the "Quarterly Report"), copies of which are annexed to
this Proxy Statement as Appendices B and C, respectively, are incorporated
herein by this reference.
Page in
Annual
Item in Annual Report Report
- --------------------- -------
1. Report of Beckman Kirkland & Whitney...................................21
2. Balance Sheets as of March 31, 1999 and 1998...........................22
3. Statements of Operations for the Years Ended March 31, 1999,
1998 and 1997..........................................................23
4 Statements of Shareholders' Equity for the Years Ended
March 31, 1999, 1998 and 1997..........................................24
5 Statements of Cash Flows for the Years Ended March 31, 1999,
1998 and 1997..........................................................25
6 Notes to Financial Statements..........................................26
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................9
Page in
Quarterly
Item in Quarterly Report Report
- ------------------------ ------
1 Balance Sheets as of December 31, 1999 and
March 31, 1999..........................................................2
2 Statements of Earnings and Comprehensive Income for the
quarters ended December 31, 1999 and 1998 and the nine
months ended December 31, 1999 and 1998.................................3
3 Statements of Shareholders' Equity for the nine months
ended December 31, 1999.................................................4
4 Statements of Cash Flows for the nine months ended
December 31, 1999 and...................................................5
5 Notes to Financial Statements...........................................6
6 Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................9
SHAREHOLDERS PROPOSALS
A shareholder who wishes to present a proposal for action at the next
Annual Meeting of Shareholders in 2000 (which has not been scheduled as yet) by
inclusion of such proposal in the Company's proxy statement for such Meeting (1)
must send the proposal so as to be received by the Secretary of the Company no
later than May 1, 2000 and (2) must satisfy the applicable conditions
established by the Securities and Exchange Commission for shareholder proposals.
If a shareholder intends to submit a proposal for consideration at the Annual
Meeting in 2000 by means other than inclusion of the proposal in the Company's
proxy statement for such Meeting, the shareholder must notify the Company on or
before July 9, 2000 or risk management exercising discretionary voting authority
with respect to the management proxies to defeat such proposal when and if
presented at the Meeting.
MISCELLANEOUS
The solicitation of proxies on the enclosed form of proxy is made by
and on behalf of the Board of Directors of the Company and the cost of this
solicitation is being paid by the Company. The Company may pay persons holding
shares in their names or in the names of their nominees for the benefit of
others, such as broker-dealer firms, banks, depositaries and other fiduciaries,
for costs incurred in forwarding soliciting material to their principals.
Members of the management of the Company may solicit some shareholders in
person, or by telephone or telegraph, for which services they will not be
separately compensated.
BY ORDER OF THE BOARD OF DIRECTORS
Joseph Mazin
President
Simi Valley, California
March 10, 2000
SHAREHOLDERS ARE URGED TO SPECIFY THEIR CHOICES, DATE, SIGN, AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL
AND YOUR COOPERATION WILL BE APPRECIATED.
The Proxy Statement herein may contain a forward-looking statement. These
statements are based on a number of assumptions and estimates which are
inherently subject to uncertainty and contingencies, many of which are beyond
the control of the Company and reflect future business decisions which are
subject to change.
<PAGE>
STOCK PURCHASE AGREEMENT
entered into on January 20, 2000
<PAGE>
Appendix A
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") entered into on
January 20, 2000 by and among the individuals and entities set forth on Exhibit
A hereto (collectively the "Buyers") and PerfectData Corp., a California
corporation (the "Company"). The Buyers and the Company are referred to
collectively herein as the "Parties".
The Buyers desire to purchase from the Company, and the Company
desires to sell to the Buyers, an aggregate of 1,333,333 shares of the Common
Stock of the Company on the terms and conditions set forth herein.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
ARTICLE I
DEFINITIONS
I.1......Definitions. The following terms shall have the following
meanings for the purposes of this Agreement.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys' fees and
expenses.
"Affiliate" means, with respect to any specified Person, (a) any other
Person which, directly or indirectly, controls, is under common control with, or
is controlled by, such specified Person, or (b) any director or executive
officer with respect to such Person.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision of
state, local, or foreign law.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Business Day" means any day excluding Saturday, Sunday and any day
which (a) is either a legal holiday under the laws of the State of New York or
(b) is a day on which banking institutions located in the State of New York are
closed.
"Buyers Representatives" means Millennium Capital Corporation and JDK
Associates, Inc. "COBRA" means the requirements of Part 6 of Subtitle B of Title
I of ERISA and Code Section 4980B.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Share" means any share of the Common Stock, no par value, of
the Company.
"Confidential Information" means any information concerning the
businesses and affairs of the Company that is not already generally available to
the public.
"Consulting Agreement" means the letter agreement dated the date
hereof by and among the Company and Millenium Capital Corporation and JDK
Associates, Inc. substantially in the form of Exhibit B hereto.
"Controlled Group" has the meaning set forth in Code Section 1563.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement, (b) qualified defined
contribution retirement plan or arrangement which is an Employee Pension Benefit
Plan, (c) qualified defined benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any Multiemployer Plan), or (d)
Employee Welfare Benefit Plan or material fringe benefit or other retirement,
bonus, or incentive plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and similar
provisions having the force or effect of law, all judicial and administrative
orders and determinations, and all common law concerning public health and
safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyl's, noise or radiation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means each entity which is treated as a single
employer with Seller for purposes of Code Section 414.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
"Governmental Authority" means any domestic or foreign government or
political subdivision thereof, whether on a federal, state or local level and
whether executive, legislative or judicial in nature, including any agency,
authority, board, bureau, commission, court, department or other instrumentality
thereof.
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names and corporate names together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations and renewals in connection therewith, (d) all mask
works and all applications, registrations and renewals in connection therewith,
(e) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights and
(h) all copies and tangible embodiments thereof (in whatever form or medium).
"Knowledge" means actual knowledge after reasonable investigation.
"Legal Requirements" means, as to any Person, all federal, state,
local or foreign laws, statutes, rules, regulations, ordinances, permits,
certificates, requirements, regulations, orders, judgments, decrees, rulings and
restrictions of any Governmental Authority applicable to such Person or any of
its properties or assets.
"Material Adverse Change" means, with respect to the Company and its
Subsidiaries, a change, during the period specified, in the Company's or any of
its Subsidiary's business, condition (financial and otherwise), operations,
results of operations, assets (including levels of working capital and
components thereof), liabilities or prospects, either individually or in the
aggregate, which has had, or could reasonably be expected to have, a Material
Adverse Effect on the Company.
"Material Adverse Effect" means, with respect to any Person, a
Material Adverse Effect on the business, properties, condition (financial and
otherwise), operations, results of operations, assets (including levels of
working capital and components thereof), capitalization, management, litigation,
liabilities, or prospects of such Person.
"Material" means any circumstance or state of facts which results in,
or would reasonably be expected to result in, losses or the expenditure or
commitment of $25,000.
"Most Recent Balance Sheet" means, with respect to the Company, the
balance sheet included in Part I of the Company's Quarterly Report on Form 10-Q
filed, pursuant to Section 13 of the Exchange Act, for the Most Recent Fiscal
Quarter End.
"Most Recent Fiscal Quarter End" means, with respect to the Company,
the end of the last fiscal quarter as to which the Company has filed a Quarterly
Report on Form 10-Q pursuant to Section 13 of the Exchange Act.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Proceeding" means any action, suit, proceeding, charge, complaint,
inquiry, audit, investigation or request for information.
"Prohibited Transaction" has the meaning set forth in ERISA Section
406 and Code Section 4975.
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Share" means any share of the Common Stock, no par value, of the
Company to be sold to a Buyer pursuant to this Agreement.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Taxes" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Returns" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
ARTICLE II
PURCHASE AND SALE OF STOCK
II.1.....Purchase and Sale of the Shares. On and subject to the terms
and conditions of this Agreement, the Buyers agree to purchase from the Company,
and the Company agrees to sell to the Buyers, the number of Shares aggregating
1,333,333 Shares, as allocated among the Buyers in accordance with Exhibit A
hereto and incorporated herein by this reference, for the consideration of $2.25
per Share.
II.2.....Purchase Price. As consideration for the tender of the
Shares, the Buyers shall pay to the Company at the Closing $2,999,999.25 in the
aggregate (the "Purchase Price") by wire transfer of immediately available
funds. The Purchase Price shall be allocated among the Buyers in accordance with
Exhibit A hereto.
II.3.....Additional Buyers. Anything in this Agreement to the contrary
notwithstanding, any Person may, subsequent to the date hereof and on or prior
to the date which is two Business Days preceding the Closing, become a Buyer,
provided that (a) the Buyers Representatives consent to the addition of such
Person as a Buyer and (b) each such Person executes an agreement in the form of
Exhibit C hereto agreeing to being bound by all of the terms and conditions
hereof.
ARTICLE III
CLOSING
III.1....Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Millard,
Pilchowski, Holwegerd & Child, counsel to the Company, located at 655 South Hope
Street, 12th floor, Los Angeles, California, commencing at 10:00 a.m. on the
third Business Day following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(other than conditions with respect to actions the respective Parties will take
at the Closing itself) or such other date as the Buyers Representatives and the
Company may mutually determine (the "Closing Date"); provided, however, that the
Closing Date shall be no later than June 30, 2000.
III.2....Deliveries at the Closing. At the Closing, (i) the Company
will deliver to the Buyers the various certificates, instruments, and documents
referred to in Section 8.1 hereof, (ii) the Buyers will deliver to the Company
the various certificates, instruments, and documents referred to in Section 8.2
hereof, (iii) the Company will deliver to each of the Buyers stock certificates
representing all of his or its Shares, endorsed in blank or accompanied by duly
executed assignment documents, and (iv) each of the Buyers will deliver to the
Company the consideration specified in Section 2.2 hereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
Each of the Buyers represents and warrants to the Sellers that the
statements contained in this Article IV are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Article IV) with respect to himself or itself.
IV.1.....Organization of Certain Buyers. If the Buyer is a
corporation, the Buyer is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation.
IV.2.....Authorization of Transaction. Each of the Buyers has full
power and authority (including, if the Buyer is a corporation, full corporate
power and authority) to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally binding
obligation of the Buyer, enforceable in accordance with its terms and
conditions. Except as set forth on Schedule 4.2 hereto, the Buyer need not give
any notice to, make any filing with, or obtain any authorization, consent, or
approval of, any Governmental Authority in order to consummate the transactions
contemplated by this Agreement.
IV.3.....Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any Legal Requirement to which the Buyer is subject or, if a
Buyer is a corporation, any provision of its charter or bylaws or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Buyer is a party or by which it is
bound or to which any of its assets is subject.
IV.4.....Brokers' Fees. The Buyer has no liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Company could become
liable or obligated.
IV.5.....Investment. The Buyer is acquiring its Shares solely for the
purpose of investment for the Buyer's own account, not as a nominee or agent,
and not with a view to, or for offer or sale in connection with, any
distribution thereof in any transaction which would be in violation of the
securities laws or regulations of the United States of America or any state
thereof. The Buyer does not have any contract, undertaking, agreement or
arrangement with any Person to sell, transfer or grant participation to any
third Person with respect to any of the Shares. The Buyer understands that the
Shares have not been registered under the Securities Act by reason of a specific
exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent as
expressed herein of the Buyer and the other Buyers.
IV.6.....Experience. The Buyer is experienced in evaluating companies
such as the Company, and has such knowledge and experience in financial and
business matters to enable such Buyer to evaluate the merits and risks of the
Buyer's prospective investment in the Company, and the Buyer has the ability to
bear the economic risks of such investment.
IV.7 ....Accredited Investor Status. The Buyer is an "accredited
investor" within the meaning of Section 501(a) of Regulation D promulgated under
the Securities Act.
IV.8.....Restricted Securities. The Buyer understands that its Shares
may not be sold, transferred or otherwise disposed of without registration under
the Securities Act and any applicable state securities law or pursuant to of an
exemption therefrom and that, in the absence of an effective registration
statement covering such Shares or an available exemption from registration, his
or its Shares must be held indefinitely. In the absence of an effective
registration statement under the Securities Act or applicable state securities
law with respect to the Shares, such Buyer (i) shall notify the Company of any
proposed disposition by such Buyer of any of its Shares, (ii) shall furnish the
Company with a statement of the circumstances surrounding the proposed
disposition and, if reasonably requested by the Company, (iii) shall furnish the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require the registration of such Shares under the
Securities Act and any applicable state securities law. Such Buyer shall not
sell, transfer or otherwise dispose of any Shares except in a manner fully
consistent with its representations contained in this Section 4.8 and otherwise
in full compliance with the terms and conditions of this Agreement and the
provisions of applicable law and related regulations. Such Buyer understands
that the Company is under no obligation to register any of the Shares under the
Securities Act or any applicable state securities law.
IV.9.....Disclosure of Information. Subject to completion of a due
diligence investigation with respect to the Company by Buyers Representatives
which they and the Company have agreed that they shall complete within one week
after receiving the last of the requested documents from the Company (such date
being referred to herein as the "Due Diligence Date"), the Buyer has received or
has had full access to all the information it considers necessary or appropriate
to make an informed investment decision with respect to the Shares to be
purchased by such Buyer pursuant to this Agreement. The Buyer further has had an
opportunity to ask questions and receive answers from the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished to such Buyer or to which such Buyer had access. The
foregoing, however, does not in any way limit or modify the representations and
warranties made by the Company in Article V hereof.
IV.10....Information Concerning Buyer. Exhibit A hereto sets forth
each Buyer's jurisdiction of organization (if applicable), the location of said
Buyer's principal office and the jurisdiction in which such Buyer will accept
the Company's offer to sell to it its Shares and in which such Buyer will
purchase its Shares.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article V are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article V), except as set forth in the Schedules
attached hereto. Nothing in the Schedules shall be deemed adequate to disclose
an exception to a representation or warranty made herein unless the Schedule
identifies the exception with reasonable particularity. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself). An item
disclosed in any Schedule shall be deemed disclosed for purposes of all
Schedules, provided that reasonably particular cross references have been
included.
V.1......Organization, Qualification, and Corporate Power. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its incorporation. The Company is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification would not have a Material Adverse Effect on the Company. The
Company has full corporate power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
Schedule 5.1 hereto lists the directors and officers of the Company. The Company
has no Subsidiaries.
V.2......Capitalization. The entire authorized capital stock of the
Company consists of 10,000,000 Common Shares, of which 3,249,806 Common Shares
are issued and outstanding and no Common Shares are held in treasury, and
2,000,000 shares of Preferred Stock, none of which is issued and outstanding or
held in treasury. All of the issued and outstanding Common Shares have been duly
authorized, are validly issued, fully paid and nonassessable. Except as
indicated on Schedule 5.2 hereto, there are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other contracts or commitments that could require the
Company to issue, sell, or otherwise cause to become outstanding any shares of
its capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to the
Company. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of the capital stock of the Company.
V.3......Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any Legal Requirement to which the Company is subject or any
provision of the charter or bylaws of the Company or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license, instrument, or
other arrangement to which the Company is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets), except where such violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice or Security Interest would not be material to the Company or adversely
affect the ability of the Parties to consummate the transactions contemplated by
this Agreement. Except as set forth in Schedule 5.3 hereto, the Company does not
need to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any Governmental Authority in order for the Parties to
consummate the transactions contemplated by this Agreement, except where the
failure to give notice, to file, or to obtain any authorization, consent, or
approval would not be material to the Company or adversely affect the ability of
the Parties to consummate the transactions contemplated by this Agreement.
V.4......Brokers' Fees. The Company has no liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
V.5......Title to Assets. The Company has good and marketable title
to, or a valid leasehold interest in, the properties and assets used by it,
located on its premises, or shown on the Most Recent Balance Sheet or acquired
after the Most Recent Fiscal Quarter End, free and clear of all Security
Interests, except for properties and assets disposed of in the Ordinary Course
of Business since the date thereof.
V.6......Events Subsequent to Most Recent Fiscal Year End. Since the
Most Recent Fiscal Quarter End, there has not been any Material Adverse Change
in the Company taken as a whole. Without limiting the generality of the
foregoing, except as set forth on Schedule 5.6 hereto or as contemplated by this
Agreement, since that date:
(a) the Company has not sold, leased, transferred, or
assigned any material assets, tangible or intangible, outside the Ordinary
Course of Business;
(b) the Company has not entered into any material agreement,
contract, lease, or license outside the Ordinary Course of Business;
(c) no party (including the Company) has accelerated,
terminated, made material modifications to, or canceled any material agreement,
contract, lease, or license to which the Company is a party or by which any of
them is bound;
(d) the Company has not imposed any Security Interest upon
any of its assets, tangible or intangible;
(e) the Company has not made any material capital
expenditures outside the Ordinary Course of Business;
(f) the Company has not made any material capital investment
in, or any material loan to, any other Person outside the Ordinary Course of
Business;
(g) the Company has not created, incurred, assumed, or
guaranteed any indebtedness for borrowed money and capitalized lease
obligations;
(h) the Company has not granted any license or sublicense of
any material rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in the
charter or bylaws of the Company;
(j) the Company has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other rights
to purchase or obtain (including upon conversion, exchange, or exercise) any of
its capital stock;
(k) the Company has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock (whether in
cash or in kind) or redeemed, purchased, or otherwise acquired any of its
capital stock;
(l) the Company has not experienced any material damage,
destruction, or loss (whether or not covered by insurance) to its property;
(m) the Company has not made any loan to, or entered into
any other transaction with, any of its directors, officers and employees outside
the Ordinary Course of Business;
(n) the Company has not entered into any employment contract
or collective bargaining agreement, written or oral, or modified the terms of
any existing such contract or agreement;
(o) the Company has not granted any increase in the base
compensation of any of its directors, officers and employees outside the
Ordinary Course of Business;
(p) the Company has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers and
employees (or taken any such action with respect to any other Employee Benefit
Plan);
(q) the Company has not made any other material change in
employment terms for any of its directors, officers and employees outside the
Ordinary Course of Business; and
(r) the Company has not committed to effectuate any of the
foregoing.
V.7......Undisclosed Liabilities. The Company has no material
liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
Taxes), except for (i) liabilities set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) and (ii) liabilities which have
arisen after the Most Recent Fiscal Quarter End in the Ordinary Course of
Business.
V.8......Legal Compliance. The Company has complied with all Legal
Requirements and no Proceeding has been filed or commenced against it alleging
any failure so to comply, except where the failure to comply would not have a
Material Adverse Effect on the Company.
V.9......Tax Matters.
(a) The Company has duly and timely filed all Tax Returns
that it has been required to file for all periods through and including the
Closing Date. All such Tax Returns were correct and complete in all material
respects. All Taxes owed by the Company (whether or not shown on any Tax Return)
have been timely paid. The Company currently is not the beneficiary of any
extension of time within which to file any Tax Return.
(b) None of the Tax Returns that include the operations of
the Company has ever been audited or investigated by any Governmental Authority
and, to the Knowledge of the Company, no fact exists which would constitute
grounds for the assessment of any additional material Taxes by any Governmental
Authority with respect to the taxable years covered in such Tax Returns. To the
Knowledge of the Company, no issues have been raised in any examination by any
Governmental Authority with respect to the businesses and operations of the
Company which, by application of similar principles, reasonably could be
expected to result in a proposed adjustment to the liability for material Taxes
for any other period not so examined. To the Knowledge of the Company, the
Company has not received, or expects to receive, from any Governmental Authority
any written notice of a proposed adjustment, deficiency, underpayment of Taxes
or any other such notice which has not been satisfied by payment or been
withdrawn, and no claims have been asserted relating to such Taxes against the
Company. No claim has ever been made by a Governmental Authority in a
jurisdiction where any Company does not pay Taxes or file Tax Returns that it is
or may be subject to taxation by that jurisdiction.
(c) Schedule 5.9 hereto lists all federal, state, local, and
foreign Tax Returns filed with respect to the Company for taxable periods for
which the applicable statute of limitations has not expired, indicates those Tax
Returns that have been audited, and indicates those Tax Returns that currently
are the subject of audit. The Company has delivered to the Buyers
Representatives correct and complete copies of all federal Tax Returns,
examination reports, and statements of deficiencies assessed against, or agreed
to by the Company for taxable periods for which the applicable statute of
limitations has not expired. The Company has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
(d) The Company has withheld and paid all material Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder, or other third
party.
(e) The Company has not made, is not obligated to make, and
is not a party to any agreement that under certain circumstances could obligate
it to make any "excess parachute payment" as defined in Code Section 280G
(without regard to subsection (b)(4) thereof). The Company has not been a United
States real property holding corporation within the meaning of Code Section
897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii). The Company is not a party to any tax allocation or sharing
agreement. The Company is not subject to any joint venture, partnership or other
arrangement or contract which is treated as a partnership for federal income tax
purposes. The Company (i) has not been a member of an Affiliated Group filing a
consolidated federal income Tax Return and (ii) has no liability for the taxes
of any Person (other than the Company) under Code Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(f) The unpaid Taxes of the Company (i) did not, as of the
Most Recent Fiscal Quarter End, exceed by any material amount the reserve for
Tax liability (rather than any reserve for deferred taxes established to reflect
timing differences between book and tax income) set forth on the face of the
Most Recent Balance Sheet (rather than in any notes thereto) and (ii) will not
exceed by any material amount that reserve as adjusted for operations and
transactions through the Closing Date in accordance with the past custom and
practice of the Company in filing their Tax Returns.
V.10.....Real Estate
(a) The Company owns no real property.
(b)......Schedule 5.10(b) hereto lists and describes briefly
all real property leased or subleased to any of the Company. The Company has
delivered to the Buyers Representatives correct and complete copies of the
leases and subleases listed in Schedule 5.10(b) (as amended to date). With
respect to each material lease and sublease listed in Schedule 5.10(b):
(i) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect in all
material respects;
(ii) no party to the lease or sublease is in material breach
or default, and no event has occurred which, with
notice or lapse of time, would constitute a material
breach or default or permit termination, modification,
or acceleration thereunder;
(iii)no party to the lease or sublease has repudiated any
material provision thereof;
(iv) there are no material disputes, oral agreements, or
forbearance programs in effect as to the lease or
sublease;
(v) the Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest
in the leasehold or subleasehold; and
(vi) all facilities leased or subleased thereunder have
received all approvals of Governmental Authority
(including material licenses and permits) required in
connection with the operation thereof, and have been
operated and maintained in accordance with applicable
Legal Requirements in all material respects.
V.11 Intellectual Property.
(a) The Company has not interfered with, infringed upon,
misappropriated, or violated any material Intellectual Property rights of third
parties in any material respect, and none of the Company and the directors and
officers of the Company has ever received any charge, complaint, claim, demand,
or notice alleging any such interference, infringement, misappropriation, or
violation (including any claim that the Company must license or refrain from
using any Intellectual Property rights of any third party). To the Knowledge of
any of the Company and the directors and officers of the Company, no third party
has interfered with, infringed upon, misappropriated, or violated any material
Intellectual Property rights of the Company in any material respect.
(b) Schedule 5.11(b) hereto identifies each patent or registration
which has been issued to the Company with respect to any of its Intellectual
Property, identifies each pending patent application or application for
registration which the Company has made with respect to any of its Intellectual
Property, and identifies each material license, agreement, or other permission
which the Company has granted to any third party with respect to any of its
Intellectual Property (together with any exceptions). The Company has delivered
to the Buyers Representatives correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date). Schedule 5.11(b) also identifies each material trade name or
unregistered trademark used by the Company in connection with any of its
businesses. With respect to each item of Intellectual Property required to be
identified in Schedule 5.11(b):
(i) the Company possesses all right, title, and interest in
and to the item, free and clear of any Security
Interest, license, or other restriction;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(iii)no Proceeding is pending or, to the Knowledge of any
of the Company and the directors and officers of the
Company, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the
item; and
(iv) the Company has never agreed to indemnify any Person
for or against any interference, infringement,
misappropriation, or other conflict with respect to the
item.
(c) Schedule 5.11(c) hereto identifies each material item of
Intellectual Property that any third party owns and that the Company uses
pursuant to license, sublicense, agreement, or permission. The Company has
delivered to the Buyers Representatives correct and complete copies of all such
licenses, sublicenses, agreements and permissions (as amended to date). With
respect to each item of Intellectual Property required to be identified in
Schedule 5.11(c): (i) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable and in full force and effect in
all material respects;
(ii) no party to the license, sublicense, agreement, or
permission is in material breach or default, and no
event has occurred which with notice or lapse of time
would constitute a material breach or default or permit
termination, modification, or acceleration thereunder;
(iii)no party to the license, sublicense, agreement, or
permission has repudiated any material provision
thereof; and
(iv) the Company has not granted any sublicense or similar
right with respect to the license, sublicense,
agreement, or permission.
V.12 Tangible Assets. The buildings, machinery, equipment, and other
tangible assets that the Company owns and leases are free from material defects
(patent and latent), have been maintained in accordance with normal industry
practice and are in good operating condition and repair (subject to normal wear
and tear).
V.13 Inventory. The inventory of the Company consists of raw materials
and supplies, manufactured and processed parts, work in process, and finished
goods, all of which is merchantable and fit for the purpose for which it was
procured or manufactured, and none of which is slow-moving, obsolete, damaged,
or defective, subject only to the reserve for inventory writedown set forth on
the face of the Most Recent Balance Sheet (rather than in any notes thereto) as
adjusted for operations and transactions through the Closing Date in accordance
with the past custom and practice of the Company.
V.14 Contracts. Schedule 5.14 hereto lists the following contracts and
other agreements to which the Company is a party:
(a) any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease payments in
excess of $10,000 per annum;
(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or other
personal property, or for the furnishing or receipt of services, the performance
of which will extend over a period of more than one year or involve
consideration in excess of $10,000;
(c) any agreement concerning a partnership or joint venture;
(d) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, or under which it has
imposed a Security Interest on any of its assets, tangible or intangible;
(e) any material agreement concerning confidentiality or
noncompetition;
(f) any material agreement with any of the shareholders of
the Company and their Affiliates;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers, and
employees;
(h) any collective bargaining agreement;
(i) any agreement for the employment of any individual on a
full-time, part-time, consulting;
(j) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the Ordinary
Course of Business;
(k) any agreement under which the consequences of a default
or termination could have a Material Adverse Effect on the Company; or
(l) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $10,000.
The Company has delivered to the Buyers Representatives a correct and complete
copy of each written agreement listed in Schedule 5.14 (as amended to date) and
a written summary setting forth the material terms and conditions of each oral
agreement referred to in Schedule 5.14. With respect to each such agreement: (i)
the agreement is legal, valid, binding, enforceable and in full force and effect
in all material respects; (ii) no party is in material breach or default, and no
event has occurred which with notice or lapse of time would constitute a
material breach or default, or permit termination, modification, or
acceleration, under the agreement; and (iii) no party has repudiated any
material provision of the agreement.
V.15 Notes and Accounts Receivable. All notes and accounts receivable
of the Company are reflected properly on their books and records, are valid
receivables subject to no setoffs or counterclaims, are current and collectible,
and will be collected in accordance with their terms at their recorded amounts,
subject only to the reserve for bad debts set forth on the face of the Most
Recent Balance Sheet (rather than in any notes thereto) as adjusted for
operations and transactions through the Closing Date in accordance with the past
custom and practice of the Company.
V.16 Powers of Attorney. To the Knowledge of any of the Company and
the directors and officers of the Company, there are no material outstanding
powers of attorney executed on behalf of the Company.
V.17 Insurance. Schedule 5.17 hereto sets forth the following
information with respect to each material insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) with respect to which the Company is a party, a
named insured, or otherwise the beneficiary of coverage:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder,
and the name of each covered insured;
(c) the policy number and the period of coverage;
(d) the scope (including an indication of whether the
coverage is on a claims made, occurrence, or other basis) and amount (including
a description of how deductibles and ceilings are calculated and operate) of
coverage; and
(e) a description of any retroactive premium adjustments or
other material loss-sharing arrangements.
With respect to each such insurance policy: (i) the policy is legal, valid,
binding, enforceable, and in full force and effect in all material respects;
(ii) neither any of the Company nor any other party to the policy is in material
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse of
time, would constitute such a material breach or default, or permit termination,
modification, or acceleration, under the policy (including but not limited to
retroactive premium adjustments); and (iii) no party to the policy has
repudiated any material provision thereof. Schedule 5.17 describes any material
self-insurance arrangements affecting the Company.
V.18 Litigation. Schedule 5.18 hereto sets forth each instance in
which the Company (i) is subject to any outstanding Proceeding or (ii) is a
party or, to the Knowledge of the Company and the directors and officers of the
Company, is threatened to be made a party to any Proceeding, in, or before any
Governmental Authority or before any arbitrator.
V.19 Product Warranty. Substantially all of the products manufactured,
sold, leased and delivered by the Company have conformed in all material
respects with all applicable contractual commitments and all express and implied
warranties, and the Company has no material liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) for replacement or repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty claims set forth on the face of
the Most Recent Balance Sheet (rather than in any notes thereto) as adjusted for
operations and transactions through the Closing Date in accordance with the past
custom and practice of the Company. Schedule 5.19 hereto includes copies of the
standard terms and conditions of sale or lease for the Company (containing
applicable guaranty, warranty, and indemnity provisions).
V.20 Employees. To the Knowledge of any of the Company and the
directors and officers of the Company, no executive, key employee, or
significant group of employees plans to terminate employment with the Company
during the next 12 months. The Company is not a party to or bound by any
collective bargaining agreement, nor has any of them experienced any strike or
material grievance, claim of unfair labor practices, or other collective
bargaining dispute within the past three years. The Company has not committed
any material unfair labor practice. None of the Company and the directors and
officers of the Company has any Knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company.
V.21 Employee Benefits.
(i) Schedule 5.21 hereto lists each Employee Benefit Plan
that the Company maintains or to which the Company contributes or has any
obligation to contribute.
(ii) Each such Employee Benefit Plan (and each related
trust, insurance contract, or fund) complies in form and in operation in all
material respects with the applicable requirements of ERISA, the Code and other
applicable laws.
(iii) All required reports and descriptions (including Form
5500 Annual Reports, summary annual reports, PBGC-l's, and summary plan
descriptions) have been timely filed and distributed appropriately with respect
to each such Employee Benefit Plan. The requirements of COBRA have been met in
all material respects with respect to each such Employee Benefit Plan which is
an Employee Welfare Benefit Plan.
(iv) All contributions (including all employer contributions
and employee salary reduction contributions) which are due have been paid to
each such Employee Benefit Plan which is an Employee Pension Benefit Plan and
all contributions for any period ending on or before the Closing Date which are
not yet due have been paid to each such Employee Pension Benefit Plan or accrued
in accordance with the past custom and practice of the Company. All premiums or
other payments for all periods ending on or before the Closing Date have been
paid with respect to each such Employee Benefit Plan which is an Employee
Welfare Benefit Plan.
(v) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the requirements of a "qualified plan" under Code
Section 401(a), has received, within the last two years, a favorable
determination letter from the Internal Revenue Service that it is a "qualified
plan" and the Company is not aware of any facts or circumstances that could
result in the revocation of such determination letter.
(vi) The market value of assets under each such Employee
Benefit Plan which is an Employee Pension Benefit Plan (other than any
Multiemployer Plan) equals or exceeds the present value of all vested and
nonvested liabilities thereunder determined in accordance with PBGC methods,
factors and assumptions applicable to an Employee Pension Benefit Plan
terminating on the date for determination.
(vii) The Company has delivered to the Buyers
Representatives correct and complete copies of the plan documents and summary
plan descriptions, the most recent determination letter received from the
Internal Revenue Service, the most recent Form 5500 Annual Report and all
related trust agreements, insurance contracts, and other funding agreements
which implement each such Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that any of the Company
or any ERISA Affiliate maintains or ever has maintained or to which any of them
contributes, ever has contributed, or ever has been required to contribute:
(i) No such Employee Benefit Plan which is an Employee
Pension Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a Reportable
Event as to which notices would be required to be filed with the PBGC.
No proceeding by the PBGC to terminate any such Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been instituted
or, to the Knowledge of any of the Company and the directors and
officers of the Company, threatened.
(ii) There have been no Prohibited Transactions with respect
to any such Employee Benefit Plan. No Fiduciary has any liability for
material breach of fiduciary duty or any other material failure to act
or comply in connection with the administration or investment of the
assets of any such Employee Benefit Plan. No Proceeding with respect
to the administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for benefits) is
pending or, to the Knowledge of any of the Company and the directors
and officers of the Company, threatened.
(iii) The Company has not incurred any material liability
(whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due) to the
PBGC (other than PBGC premium payments) or otherwise under Title IV of
ERISA (including any withdrawal liability as defined in ERISA Section
4201) or under the Code with respect to any such Employee Benefit Plan
which is an Employee Pension Benefit Plan.
(c) None of the Company and the other members of the
Controlled Group that includes the Company contributes to, ever has contributed
to, or ever has been required to contribute to any Multiemployer Plan or has any
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due), including any withdrawal
liability (as defined in ERISA Section 4201), under any Multiemployer Plan.
(d) The Company does not maintain, has never maintained and
does not contribute, has never contributed, and has never been required to
contribute, to any Employee Welfare Benefit Plan providing medical, health, or
life insurance or other welfare-type benefits for current or future retired or
terminated employees, their spouses, or their dependents (other than in
accordance with COBRA).
V.22 Guaranties. The Company is not a guarantor or is not otherwise
responsible for any liability or obligation (including indebtedness) of any
other Person.
V.23 Environmental, Health and Safety Matters.
(a) Each of the Company and its respective predecessors and
Affiliates has complied and is in compliance, in each case in all material
respects, with all Environmental, Health and Safety Requirements.
(b) Without limiting the generality of the foregoing, each
of the Company and its respective Affiliates has obtained, has complied with,
and is in compliance with, in each case in all material respects, all material
permits, licenses and other authorizations that are required pursuant to
Environmental, Health and Safety Requirements for the occupation of its
facilities and the operation of its business; a list of all such material
permits, licenses and other authorizations is set forth on the attached
"Environmental and Safety Permits Schedule."
(c) None of the Company, or its respective Affiliates, has
received any written or oral notice, report or other information regarding any
actual or alleged material violation of Environmental, Health and Safety
Requirements, or any material liabilities or potential material liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise), including
any material investigatory, remedial or corrective obligations, relating to any
of them or its facilities arising under Environmental, Health and Safety
Requirements.
(d) Except as set forth on the attached "Environmental and
Safety Matters Schedule", none of the following exists at any property or
facility owned or operated by the Company: (i) underground storage tanks, (ii)
asbestos-containing material in any friable and damaged form or condition, (iii)
materials or equipment containing polychlorinated biphenyl's, or (iv) landfills,
surface impoundment's, or disposal areas.
(e) None of the Company, or any of their respective
predecessors or Affiliates, has treated, stored, disposed of, arranged for or
permitted the disposal of, transported, handled, or released any substance,
including without limitation any hazardous substance, or owned or operated any
property or facility (and no such property or facility is contaminated by any
such substance) in a manner that has given or would give rise to material
liabilities, including any material liability for response costs, corrective
action costs, personal injury, property damage, natural resources damages or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA") or the Solid Waste
Disposal Act, as amended ("SWDA") or any other Environmental, Health and Safety
Requirements.
(f) Neither this Agreement nor the consummation of the
transaction that is the subject of this Agreement will result in any material
obligations for site investigation or cleanup, or notification to or consent of
government agencies or third parties, pursuant to any of the so-called
"transaction-triggered" or "responsible property transfer" Environmental, Health
and Safety Requirements.
V.24 Certain Business Relationships with the Company. Except as set
forth in Schedule 5.24 hereto or set forth in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1999, no Affiliate of the Company
or officer or director of the Company has been involved in any material business
arrangement or relationship with the Company within the past 12 months, and none
of the Affiliates of the Company or officers or directors of the Company owns
any material asset, tangible or intangible, which is used in the business of the
Company.
V.25 Shares. The Shares when issued, sold and delivered in accordance
with the terms of this Agreement will be duly authorized, validly issued, fully
paid and nonassessable, free of any liens, claims, charges, security interests,
pledges or encumbrances of any kind (other than any of the foregoing created by
any Buyer or as a result of applicable state and federal securities laws) and
will possess all of the rights, privileges and preferences provided therefor in
the Certificate of Incorporation of the Company. The Shares are not subject to
any preemptive rights or rights of first refusal.
V.26 No Registration Required. Based in part on the representations
made by the Buyers in Sections 4.5, 4.6, 4.7 and 4.8 hereof, the issuance of the
Shares to the Buyers will be exempt from the registration and prospectus
delivery requirements of the Securities Act and the registration and
qualification requirements of all applicable state securities laws.
V.27 Nasdaq Compliance. The Company has not received any notice from
The Nasdaq Stock Market Inc. ("Nasdaq") that the Company is not currently in
compliance with the Nasdaq criteria for continued reporting of the Common Shares
on The Nasdaq SmallCap Market. The Company covenants and agrees that it shall
use its best efforts to maintain the quotation of the Common Shares on The
Nasdaq SmallCap Market.
V.28 Periodic Reports. The Company, based solely on knowledge
subsequently obtained, is not aware of any material misstatements or omissions
in any periodic report previously filed by the Company pursuant to Section 13 of
the Securities Exchange Act or in any proxy material previously furnished to its
shareholders pursuant to Section 14 of the Securities Exchange Act.
V.29 Disclosure. The representations and warranties contained in this
Article V do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article V not misleading.
ARTICLE VI
COVENANTS AND ADDITIONAL AGREEMENTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
VI.1 General. Each of the Parties will use its best efforts to take
all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in Article
VIII hereof).
VI.2 Notices and Consents. The Company will give any notices to third
parties, and will use its best efforts to obtain any third party consents that
the Buyers Representatives reasonably may request in connection with the matters
referred to in this Agreement above. Each of the Parties will give any notices
to, make any filings with, and use its best efforts to obtain any
authorizations, consents, and approvals of any Governmental Authority in
connection with the matters referred to in Sections 4.2, 4.3, 5.3 and 6.3
hereof.
VI.3 Operation of Business. The Company will not engage in any
practice, take any action, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing, the
Company will not (i) declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or otherwise
acquire any of its capital stock, (ii) otherwise engage in any practice, take
any action, or enter into any transaction of the sort described in Section 5.6
hereof which could have a Material Adverse Effect on the Company.
VI.4 Preservation of Business The Company will keep its business and
properties substantially intact, including its present operations, physical
facilities, working conditions, and relationships with lessors, licensors,
suppliers, customers, and employees and will at all times maintain an aggregate
balance of at least One Million ($1,000,000) Dollars of cash, cash equivalents
and marketable securities.
VI.5 Full Access. The Company will permit the Buyers Representatives
to have full access at all reasonable times, and in a manner so as not to
interfere with the normal business operations of the Company, to all premises,
properties, personnel, books, records (including tax records), contracts, and
documents of or pertaining to the Company. The Buyers will treat and hold such
information it receives from the Company in the course of the reviews
contemplated by this Section 6.5, as Confidential Information and will not use
any of the Confidential Information except in connection with this Agreement, if
this Agreement is terminated for any reason whatsoever, will return to the
Company, all tangible embodiments (and all copies) of the Confidential
Information which are in its possession.
VI.6 Notice of Developments. The Company will give prompt written
notice to the Buyers Representatives of any material adverse development causing
a breach of any of the representations and warranties in Article V hereto or
which could otherwise have a Material Adverse Effect on the Company. Each Party
will give prompt written notice to the others of any material adverse
development causing a breach of any of his or its own representations and
warranties in Articles IV or V hereof. No disclosure by any Party pursuant to
this Section 6.6, however, shall be deemed to amend or supplement any Schedule
hereto or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
VI.7 Exclusivity. The Company will not (and the Company will not cause
or permit any of its respective representatives, advisers or Affiliates to) (i)
solicit, initiate, or encourage the submission of any proposal or offer from any
Person relating to the acquisition of any capital stock or other voting
securities, or any substantial portion of the assets, of the Company (including
any acquisition structured as a merger, consolidation, or share exchange) or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Joseph Mazin will not vote any of his Common Shares or Common Shares
as to which he controls the voting rights to vote in favor of any such
acquisition.
VI.8 Supplements to Schedules. From time to time prior to the Closing
Date, the Company will promptly supplement or amend the Schedules hereto which
they have delivered pursuant to this Agreement with respect to any matter
hereafter arising which, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in any such disclosure
schedule or which is necessary to correct any information in the Schedules
hereto which has been rendered inaccurate thereby. No disclosure by the Company
pursuant to this Section 6.8, however, shall be deemed to amend or supplement
any Schedule hereto or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant unless the transactions contemplated hereby are
consummated pursuant to this Agreement in which event any claims with respect to
any such misrepresentations or breaches shall be deemed waived by Buyers.
VI.9 Board of Directors. Upon the execution hereof, Ronald M. Chodorow
and Joseph Mazin shall deposit their resignations as members of the Company's
Board of Directors in escrow with Wachtel & Masyr, LLP, counsel to the Buyers.
On the Closing Date, said resignations shall be released from escrow and Tracie
Savage shall vote, as the remaining director, to increase the number of
directors to five and to fill the vacancies created on the Board with four
designees of the Buyers to be designated prior to the Closing. On the Closing
Date, the Board shall create a special committee responsible for seeking mergers
and acquisitions for the Company and shall elect to such committee an appointee
of current management, a designee of the Buyers and a person to be mutually
selected by the foregoing.
VI.10 Special Meeting of Stockholders.
(a) The Company shall promptly take all steps necessary to
cause a special meeting of its Shareholders (the "Special Meeting") to be duly
called, noticed, convened and held as soon as practicable after the execution
hereof for the purposes of voting to approve this Agreement, the transactions
contemplated hereby and all matters related thereto, as well as the
reincorporation of the Company under the laws of the State of Delaware. In
connection with the Special Meeting, the Board of Directors of the Company shall
unanimously recommend to its shareholders that the shareholders vote in favor of
the approval of this Agreement, the transactions contemplated hereby and all
matters related thereto, and each of the directors shall use his or her best
efforts to secure the required approval of the shareholders, including voting
any of his or her shares in favor of such approval.
(b) In connection with the Special Meeting, the Company will
prepare and cause to be mailed to its shareholders a notice of the Special
Meeting, a definitive proxy statement (the "Proxy Statement") and a form of
proxy as soon as practicable and, in any event, shall cause such notice to be
mailed no later than the time required by the Exchange Act and any other Legal
Requirements and the Company's Articles of Incorporation and Bylaws. The Buyers
shall provide the Company with any information for inclusion in the Proxy
Statement or any amendments or supplements thereto which is required by any
Legal Requirements or which is reasonably requested by the Company. The Company
shall consult with the Buyers Representatives with respect to the Proxy
Statement and shall afford the Buyers Representative reasonable opportunity to
comment thereon. If, at any time prior to the Special Meeting, any event should
occur relating to the Company which should be set forth in an amendment of, or a
supplement to, the Proxy Statement, the Company will promptly inform the Buyers
Representatives in writing. In each such case, the Company, with the cooperation
of the Buyers Representatives, will promptly prepare and mail such amendment or
supplement and the Company shall consult with the Buyers Representatives with
respect to such supplement or amendment and shall afford the Buyer
Representatives reasonable opportunity to comment thereon prior to such mailing.
The Company will notify the Buyer Representatives at least 48 hours prior to the
mailing to its shareholders of the Proxy Statement, or any amendment or
supplement thereto.
(c) Anything in this Article VI to the contrary
notwithstanding, the Company may use a consent solicitation, rather than a proxy
solicitation for a Special Meeting, if the Company and the Buyers
Representatives mutually agree that this procedure will expedite the
solicitation.
ARTICLE VII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing.
VII.1 General. In case at any time after the Closing any further
action is necessary to carry out the purposes of this Agreement, each of the
Parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Article IX
hereof).
VII.2 Litigation Support. Joseph Mazin agrees that, in the event and
for so long as the Company actively is contesting or defending against any
Proceeding in connection with any fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction on or prior to the Closing Date involving the
Company, he will cooperate with the Company, and provide such testimony as shall
be necessary in connection with the contest or defense, all at the sole cost and
expense of the Company.
ARTICLE VIII
CONDITIONS TO CLOSING
VIII.1 Conditions to Obligation of the Buyers. The obligation of the
Buyers to consummate the transactions to be performed by them in connection with
the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Article
V hereof shall be true and correct in all material respects at and as of the
Closing Date;
(b) the Company shall have performed and complied with all
of its covenants hereunder in all material respects through the Closing;
(c) the Company shall have procured all of the material
third party consents specified in Section 6.2 hereof;
(d) no Proceeding shall be pending wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement, (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (iii) affect adversely the right of the Buyers to own
the Shares and to control the Company, or (iv) have a Material Adverse Effect on
the Company;
(e) the Company shall have delivered to the Buyers a
certificate to the effect that each of the conditions specified above in
subsections (a) through (d) of this Section 8.1 is satisfied in all respects;
(f) the Parties shall have received all other material
authorizations, consents, and approvals of governments and governmental agencies
referred to in Section 6.2 hereof;
(g) the relevant parties shall have entered into the
Consulting Agreement and the same shall be in full force and effect;
(h) the Buyers shall have received from counsel to the
Company an opinion addressed to the Buyers and dated as of the Closing Date as
to such matters as counsel to the Buyers may reasonably request;
(i) the Buyers shall have received the resignations,
effective as of the Closing, of the directors as provided in Section 6.9 hereof
and those officers of the Company designated by the Buyers Representatives at
least two (2) Business Days prior to the Closing and the nominees of the Buyers
shall become directors of the Company;
(j) the Company shall have on the Closing Date an aggregate
balance of at least One Million ($1,000,000) Dollars in cash, cash equivalents
and marketable securities;
(k) the shareholders of the Company shall have approved this
Agreement and the consummation of the transactions contemplated hereby in
accordance with Company's Articles of Incorporation and Bylaws, the Legal
Requirements of the State of California, Nasdaq and the Exchange Act and the
regulations promulgated thereunder;
(l) the filing by the Company of all notices required by
Nasdaq regarding the issuance of the Shares by the Company; and
(m) all actions to be taken by the Company in connection
with consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Buyers.
The Buyers Representatives may waive on behalf of the Buyers any condition
specified in this Section 8.1 if they execute a writing so stating at or prior
to the Closing.
VIII.2 Conditions to Obligation of the Company. The obligation of the
Company to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Article
IV above shall be true and correct in all material respects at and as
of the Closing Date;
(b) the Buyers shall have performed and complied with all of
their covenants hereunder in all material respects through the
Closing;
(c) no Proceeding shall be pending before any court or
quasi-judicial or administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge
would (i) prevent consummation of any of the transactions contemplated
by this Agreement or (ii) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(d) the Buyers shall have delivered to the Company a
certificate to the effect that each of the conditions specified above
in subsections (a) through (c) of this Section 8.2 is satisfied in all
respects;
(e) the Parties shall have received all other material
authorizations, consents, and approvals of governments and
governmental agencies referred to in Sections 4.2 and 5.3 hereof; and
(f) all actions to be taken by the Buyers in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Company.
The Company may waive any condition specified in this Section 8.2 if it executes
a writing so stating at or prior to the Closing.
ARTICLE IX
SURVIVAL AND REMEDY; INDEMNIFICATION
IX.1 Survival of Representations and Warranties. All of the terms and
conditions of this Agreement, together with the warranties, representations,
agreements and covenants contained herein or in any instrument or document
delivered or to be delivered pursuant to this Agreement, shall survive the
execution of this Agreement and the Closing Date, notwithstanding any
investigation heretofore or hereafter made by or on behalf of any Party hereto;
provided, further, that, unless otherwise stated, the agreements and covenants
set forth in this Agreement shall survive and continue until all obligations set
forth therein shall have been performed and satisfied. Notwithstanding the
foregoing, (a) the representations and warranties contained in Article IV of
this Agreement shall survive the Closing and continue in full force and effect
indefinitely; (b) the representations and warranties of the Company contained in
Sections 5.9, 5.21 and 5.23 of this Agreement shall survive the Closing and
continue in full force and effect until 60 days following the expiration of any
applicable statutes of limitations; and (c) all other representations and
warranties, and the related agreement of the Company to indemnify the Buyers set
forth in this Article IX, shall survive and continue for, and all
indemnification claims with respect thereto shall be made prior to the end of,
the first anniversary of the Closing Date, except for representations,
warranties and related indemnities for which an indemnification claim shall be
pending as of the end of the applicable period referred to above, in which event
such indemnities shall survive with respect to such indemnification claim until
the final disposition thereof (the "Indemnification Period").
IX.2 Indemnification by the Company.
(a) In the event that, during the Indemnification Period,
there is (i) a breach (or an alleged breach) of any of the representations or
warranties made by, or any breach or failure to perform any covenant, agreement
or obligation of, the Company in this Agreement or any other document
contemplated hereby, or in any document relating hereto or thereto or contained
in any Exhibit or Schedule to this Agreement, (ii) any Adverse Consequences
relating to the operation on or prior to the Closing of the business of the
Company (including redemption, clean-up or similar obligations or costs under
Environmental, Health and Safety Requirements and relating to the business and
activities or the ownership, operation or lease by the Company of facilities in
respect of any periods prior to the Closing), or (iii) any demands, assessments,
judgments, costs and reasonable legal and other expenses or other Adverse
Consequences arising from, or in connection with, any Proceeding incident to any
of the foregoing and, if there is an applicable survival period pursuant to
Section 9.1 hereof, then, in each case, provided that the Buyers Representatives
make a written claim for indemnification against the Company within such
survival period, the Company agrees (subject to the limitations set forth in
this Section 9.2) to indemnify the Buyers and its Affiliates, directors,
officers. employees, shareholders, representatives and agents (collectively the
"Buyers Indemnified Parties") from and against the entirety of any Adverse
Consequences the Buyers Indemnified Parties may suffer through and after the
date of the claim for indemnification (including any Adverse Consequences the
Buyers Indemnified Parties may suffer through and after the end of the
applicable survival period) resulting from, arising out of, relating to, in the
nature of, or caused by any breach (or alleged breach) of the foregoing;
provided, however, that (A) except for breaches of the representations and
warranties contained in Sections 5.9, 5.21 and 5.23 hereof, the Company shall
not have any obligation to indemnify the Buyers Indemnified Parties from and
against any Adverse Consequences resulting from, arising out of, relating to, in
the nature of, or caused by any breach (or alleged breach) by the Company until
the Buyers Indemnified Parties have suffered Adverse Consequences by reason of
all such breaches (or alleged breaches) in excess of a $5,000 aggregate
threshold (at which point the Company will be obligated to indemnify the Buyers
Indemnified Parties from and against all such Adverse Consequences) and (B)
there will be a $2,999,999 aggregate ceiling on the obligation to indemnify the
Buyers Indemnified Parties from and against Adverse Consequences resulting from,
arising out of, or relating to, the items identified in this Article IX.
(b) Subject to the provisions of subsection (a) of this
Section 9.2 (excluding any applicable threshold and ceiling provisions), the
Company agrees to indemnify the Buyers from and against the entirety of any
Adverse Consequences the Buyers may suffer resulting from, arising out of,
relating to, in the nature of, or caused by any liability of the Company (x) for
any Taxes of the Company and any entities owned by or affiliated with the
Company with respect to any Tax year or portion thereof ending on or before the
Closing Date (or for any Tax period beginning before and ending after the
Closing Date to the extent allocable to the portion of such period beginning
before and ending on the Closing Date), to the extent such Taxes are not
reflected in the reserve for Tax liability (rather than any reserve for deferred
Taxes established to reflect timing differences between book and Tax income)
shown on the face of the Most Recent Balance Sheet and (y) for the unpaid Taxes
of any Person (other than the Company) under Code Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign law) as a transferee or
successor by contract or otherwise.
IX.3 Indemnification by the Buyers. In the event that, during the
Indemnification Period, there is (i) a breach, or an alleged breach, of any of
the representations or warranties made by, or any breach or failure to perform
any covenant, agreement, or obligation of, the Buyers in this Agreement, or any
other document contemplated hereby or in any document relating hereto or thereto
or contained in any Exhibit or Schedule to this Agreement, or (ii) any demands,
assessments, judgments, costs, and reasonable legal and other expenses or other
Adverse Consequences arising from, or in connection with, any Proceeding
incident to any of the foregoing, and, if there is an applicable survival period
pursuant to Section 9.1 hereof, then, in each case, provided that the Company
makes a written claim for indemnification against the Buyers within such
survival period, the Buyers agree (subject to the limitations set forth in this
Section 9.3) to indemnify, defend and hold harmless the Company and its
directors, officers, employees, shareholders, representatives and agents
(collectively the "Company's Indemnified Parties") from and against the entirety
of any Adverse Consequences the Company's Indemnified Parties may suffer through
and after the date of the claim for indemnification (including any Adverse
Consequences the Company's Indemnified Parties may suffer through and after the
end of the applicable survival period) resulting from, arising out of, relating
to, in the nature of, or caused by any breach, or alleged breach of the
foregoing.
IX.4 Third-Party Claims.
(a) If any Indemnified Party shall notify the Indemnitor
with respect to any matter (a "Third Party Claim") which may give rise to a
claim for indemnification against the Indemnitor under this Article IX, then the
Indemnified Party shall promptly notify the Indemnitor thereof in writing;
provided, however, that no delay on the part of the Indemnified Party in
notifying the Indemnitor shall relieve the Indemnitor from any obligation
hereunder unless (and then solely to the extent) the Indemnitor thereby is
prejudiced.
(b) The Indemnitor will have the right to defend the
Indemnified Parties against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Parties so long as (A) the Indemnitor
notifies the Indemnified Parties in writing within 15 days after the Indemnified
Parties has given notice of the Third Party Claim that the Indemnitor will
indemnify the Indemnified Parties from and against the entirety of any Adverse
Consequences the Indemnified Parties may suffer resulting from, arising out of,
relating to, in the nature of, or caused by the Third Party Claim, (B) the
Indemnitor provides the Indemnified Parties with evidence reasonably acceptable
to the Indemnified Parties that the Indemnitor will have the financial resources
to defend against the Third Party Claim and fulfill his, her or its
indemnification obligations hereunder, (C) the Third Party Claim involves only
money damages and does not seek an injunction or other equitable relief, (D) the
settlement of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Parties, likely to establish
a precedential custom or practice materially adverse to the continuing business
interests of the Indemnified Parties, and (E) the Indemnitor conducts the
defense of the Third Party Claim actively and diligently.
(c) So long as the Indemnitor is conducting the defense of
the Third Party Claim in accordance with subsection (b) of this Section 9.3, (A)
the Indemnified Parties may retain separate co-counsel at his, her or its sole
cost and expense and participate in the defense of the Third Party Claim, (B)
the Indemnified Parties will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnitor (not to be withheld unreasonably), and (C) the
Indemnitor will not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior written
consent of the Indemnified Parties (not to be withheld unreasonably).
(d) In the event any of the conditions in subsection (b) of
this Section 9.3 is or becomes unsatisfied in the reasonable judgment of the
Indemnified Parties, (A) the Indemnified Parties 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 they reasonably may deem appropriate (and the
Indemnified Parties need not consult with, or obtain any consent from, the
Indemnitor in connection therewith), (B) the Indemnitor will reimburse the
Indemnified Parties promptly and periodically for the reasonable costs of
defending against the Third Party Claim (including attorneys' fees and
expenses), and (C) the Indemnitor will remain responsible for any Adverse
Consequences the Indemnified Parties 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 IX.
IX.5 Other Indemnification Provisions. The liability of the Indemnitor
under this Article IX shall be in addition to, and not exclusive of any other
liability that the Indemnitor may have at law or equity based on the
Indemnitor's fraudulent acts or omissions. None of the provisions of this
Agreement shall be deemed a waiver of any defenses which may be available in
respect of actions or claims for fraud, including but not limited to, defenses
of statutes of limitations or limitations of damages.
ARTICLE X
TERMINATION
X.1 Termination of Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(a) the Buyers Representatives and the Company may terminate
this Agreement by mutual written consent at any time prior to the Closing;
(b) the Buyers Representatives may terminate this Agreement
by giving written notice to the Company at any time prior to the Closing (i) in
the event the Company has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the Buyers
Representatives have notified the Company of the breach, and the breach has
continued without cure for a period of 30 days after the notice of breach; (ii)
if the Closing shall not have occurred on or before June 30, 2000 by reason of
the failure of any condition precedent under Section 8.1 hereof (unless the
failure results primarily from any of the Buyers themselves breaching any
representation, warranty, or covenant contained in this Agreement); or (iii) at
any time on or before the Due Diligence Date by reason of the Buyers
Representatives being unsatisfied in their sole and absolute discretion with
their due diligence.
(c) the Company may terminate this Agreement by giving
written notice to the Buyers at any time prior to the Closing (i) in the event
the Buyers have breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Company has notified
the Buyers of the breach, and the breach has continued without cure for a period
of 30 days after the notice of breach or (ii) if the Closing shall not have
occurred on or before June 30, 2000 by reason of the failure of any condition
precedent under Section 8.2 hereof (unless the failure results primarily from
the Company breaching any representation, warranty, or covenant contained in
this Agreement).
X.2 Effect of Termination If any Party terminates this Agreement
pursuant to Section 10.1 hereof, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); provided, however, that
the confidentiality provisions contained in Section 6.5 hereof shall survive
termination.
ARTICLE XI
MISCELLANEOUS
XI.1 Nature of Certain Obligations. The covenants of each of the
Buyers in Section 2.1 hereof concerning the purchase of its Shares from the
Company, the representations and warranties of each of the Buyers in Article IV
hereof and the indemnification obligations of the Buyers in Article IX hereof
concerning the transaction are several obligations. This means that the
particular Buyer making the representation, warranty, or covenant will be solely
responsible to the extent provided in Article IX hereof for any Adverse
Consequences the Buyers may suffer as a result of any breach thereof and that
only the particular Buyer whose act or omission gave rise to the right to
indemnification shall indemnify the Company Indemnification Parties pursuant to
Article IX hereof.
XI.2 Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyers Representatives
and the Company; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in which
case the disclosing Party will use its reasonable best efforts to advise the
other Parties prior to making the disclosure).
XI.3 No Third-Party Beneficiaries. Subject to the provisions of
Section 11.5 hereof, this Agreement shall not confer any rights or remedies upon
any Person other than the Parties and their respective successors and permitted
assigns.
XI.4 Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
XI.5 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the Buyers Representatives and the Company; provided, however, that
any Buyer may (i) assign any or all of its rights and interests hereunder to one
or more of its Affiliates, and (ii) designate one or more of its Affiliates to
perform its obligations hereunder (in any or all of which cases the Buyer
nonetheless shall remain responsible for the performance of all of its
obligations hereunder).
XI.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
XI.7 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
XI.8 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
Business Days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Buyers: Copy to:
Millenium Capital Corporation Wachtel & Masyr, LLP
245 East 63rd Street 110 East 59th Street
New York, New York 10021 New York, New York 10022
Attention: Scott J. Lesser, Esq.
If to the Company: Copy to:
PerfectData Corporation Millard, Pilchowski, Holweger & Child
110 West Easy Street 655 South Hope Street
Simi Valley, California 93065 Los Angeles, California 90017
Attention: Joseph Mazin, President Attention: Russell W. Shatz, Esq.
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
XI.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE
OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
XI.10 Forum Selection and Consent to Jurisdiction. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR
ANY OTHER AGREEMENT CONTEMPLATED HEREBY, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE COMPANY OR
BUYERS SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE STATE COURTS OR THE
UNITED STATES DISTRICT COURTS IN LOS ANGELES, CALIFORNIA.
XI.11 Waiver of Jury Trial. THE COMPANY AND THE BUYERS HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS EACH MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED
HEREBY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF THE PARTIES. THE COMPANY AND THE BUYERS ACKNOWLEDGE AND
AGREE THAT THEY HAVE RECEIVED FULL AND FAIR CONSIDERATION FOR THIS PROVISION AND
THAT THIS PROVISION IS A MATERIAL INDUCEMENT TO THE INVESTOR FOR ENTERING INTO
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
XI.12 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyers Representatives and the Company. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
XI.13 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
XI.14 Expenses. The Company will bear all of the Parties' reasonable
costs and expenses (including legal fees and expenses of one counsel to the
Buyers) incurred in connection with this Agreement and the transactions
contemplated hereby in the event of the Closing of the transactions contemplated
hereby. In the event that this Agreement and the transactions contemplated
thereby do not close, then the Parties will bear all of their own costs and
expenses incurred in connection with this Agreement.
XI.15 Construction. The term "this Agreement" means this agreement
together with all Schedules and Exhibits hereto, as the same may from time to
time be amended, modified, supplemented or restated in accordance with the terms
hereof. The use in this Agreement of the term "including" means "including,
without limitation." The words "herein," "hereof," "hereunder" and other words
of similar import refer to this Agreement as a whole, including the schedules
and exhibits, as the same may from time to time be amended, modified,
supplemented or restated, and not to any particular section, subsection,
paragraph, subparagraph or clause contained in this Agreement. All references to
sections, schedules and exhibits mean the sections of this Agreement and the
schedules and exhibits attached to this Agreement, except where otherwise
stated. The title of and the section and paragraph headings in this Agreement
are for convenience of reference only and shall not govern or affect the
interpretation of any of the terms or provisions of this Agreement. The use
herein of the masculine, feminine or neuter forms shall also denote the other
forms, as in each case the context may require or permit. Where specific
language is used to clarify by example a general statement contained herein,
such specific language shall not be deemed to modify, limit or restrict in any
manner the construction of the general statement to which it relates. The
language used in this Agreement has been chosen by the Parties to express their
mutual intent, and no rule of strict construction shall be applied against any
party. Unless expressly provided otherwise, the measure of a period of one month
or year for purposes of this Agreement shall be that date of the following month
or year corresponding to the starting date, provided that if no corresponding
date exists, the measure shall be that date of the following month or year
corresponding to the next day following the starting date. For example, one
month following February 18 is March 18, and one month following March 31 is May
1. The Parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the Parties
and no presumption or burden of proof shall arise favoring or disfavoring any
Party by virtue of the authorship of any of the provisions of this Agreement.
Any reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. The word "including" shall mean including
without limitation.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
PERFECTDATA CORPORATION
By: _________________________
Title: ______________________
BUYERS
MILLENIUM CAPITAL CORPORATION
By:__________________________
Title:_______________________
JDK ASSOCIATES, INC.
By: _________________________
Title: ______________________
_____________________________________
Joseph Mazin, only with respect to
Sections 6.7, 6.9 and 7.2
_____________________________________
Tracie Savage, only with respect to
Section 6.9
________________________________________
Ronald M. Chodorow, only with respect to
Section 6.9
<PAGE>
B-1
Appendix B
Audited Financial Statements
And
Management's Discussion and Analysis
of Financial Condition and Results of Operations
For
Fiscal Year Ended March 31, 1999
<PAGE>
BECKMAN KIRKLAND & WHITNEY 5210 LEWIS ROAD, SUITE 14
CERTIFIED PUBLIC ACCOUNTANTS AGOURA HILLS, CA 91301
PHONE: (818) 868-0999
MEMBER FAX: (818) 865-0026
DIVISION FOR FIRMS E-MAIL: [email protected]
SEC PRACTICE SECITON
June 4, 1999
Board of Directors and Shareholders
PERFECTDATA CORPORATION
Simi Valley, California
We have audited the balance sheets of Perfectdata Corporation as of March 31,
1999 and 1998, and the related statements of earnings, shareholders' equity and
cash flows for the years ended March 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of PerfectData Corporation, as of March 31,
1999 and 1998, and the results of their operations and their cash flows for the
years ended March 31, 1999, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ Beckman Kirkland & Whitney
Beckman Kirkland & Whitney
Agoura Hills, California
<PAGE>
PERFECTDATA CORPORATION
Balance Sheets
(Dollars in thousands, except number of shares)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
--------------------------------
1999 1998
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents, including
short-term certificates of deposit of
$255 in 1999 and $365 in 1998 (Note 2) $ 1,074 $ 1,328
Accounts receivable, less allowance for
doubtful receivables of $9 and $12 in 1999
and 1998, respectively (Note 2) 186 289
Inventories (Note 4) 639 571
Prepaid expenses and other current assets 57 87
Marketable securities, short-term (Note 3) 327 448
Deferred income tax benefit (Note 8) 113 58
-------------- ---------------
Total current assets 2,396 2,781
Property, plant and equipment, net (Note 5) 86 118
Deferred income tax benefit (Note 8) 73 123
Other assets, net 31 31
============== ===============
$ 2,586 $ 3,053
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148 $ 111
Accrued expenses 85 94
Accrued salaries, wages and vacation 47 54
-------------- ---------------
Total current liabilities 280 259
-------------- ---------------
Commitments and contingencies (Note 12)
Shareholders' equity (notes 9 and 10)
Preferred stock. Authorized 2,000,000 shares; none issued.
Common stock, no par value. Authorized 10,000,000 shares;
issued and outstanding 3,155,000 and 3,164,000 shares in 1999
and 1998, respectively 8,110 8,117
Accumulated deficit (5,747) (5,345)
Allowance for loss on marketable securities (58) 22
-------------- ---------------
Net shareholders' equity 2,305 2,794
-------------- ---------------
$2,586 $ 3,053
============== ===============
</TABLE>
<PAGE>
PERFECTDATA CORPORATION
Statement of Operations
(Dollars in thousands, except number of shares)
<TABLE>
March 31,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ------------
<S> <C> <C> <C>
Net sales $ 1,689 $ 3,299 $ 5,761
---------------- --------------- ------------
Costs and expenses
Cost of goods sold 1,038 2,205 3,787
Selling, general and
administrative expenses 1,180 1,535 2,030
---------------- --------------- ------------
Total costs and expenses 2,218 3,740 5,817
---------------- --------------- ------------
Income from operations (529) (441) (56)
---------------- --------------- ------------
Other income and (expense)
Equity in earnings of affiliate 0 0 (15)
Interest income, net 39 33 28
Other, net 84 41 68
---------------- --------------- ------------
Total other income and (expense) 123 74 81
---------------- --------------- ------------
Income from continuing
operations before income taxes (406) (367) 25
Income tax benefit (or provision) (Note 8) 4 (250) (290)
---------------- --------------- ------------
Income from continuing operations (402) (617) (265)
Income from discontinued operations 0 0 0
Loss on disposal of discontinued operations 0 (182) (69)
---------------- --------------- ------------
Net income (loss) $ (402) $ (799) $ (334)
================ =============== ============
Net income (loss) per common share:
Basic:
Income (loss) from continuing operations $ (0.13) $ (0.20) $ (0.09)
Loss on disposal of discontinued operations 0.00 (0.06) (0.02)
================ =============== ============
$ (0.13) $ (0.26) $ (0.11)
================ =============== ============
Diluted:
Income (loss) from continuing operations $ (0.13) $ (0.20) $ (0.09)
Loss on disposal of discontinued operations 0 (0.06) (0.02)
================ =============== ============
$ (0.13) $ (0.26) $ (0.11)
================ =============== ============
</TABLE>
<PAGE>
<TABLE>
PERFECTDATA CORPORATION
Statements of Cash Flows
(Dollars in thousands)
March 31,
--------------------------------------------
------------- -------------- -----------
1999 1998 1997
------------- -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (402) # $ (799) $ (334)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
(Gain) loss on disposal of discontinued operations 0 181 111
Depreciation and amortization 37 39 95
Provision for doubtful receivables (3) 3 (2)
Unrealized (gain) loss on marketable securities (80) 0 17
Deferred income tax (benefit) provision (4) 250 290
Decrease (increase) in litigation deposit 0 305 0
(Increase) decrease in accounts receivable 106 416 198
(Increase) decrease in inventories (68) 612 62
(Increase) decrease in prepaid expenses and
other current assets 28 (10) 8
(Increase) decrease in other assets 0 0 (13)
Increase (decrease) in accounts payable 38 (213) (49)
Increase (decrease) in accrued expenses (9) (59) (39)
Decrease in accrued salaries, wages and vacation (8) (3) (13)
------------- -------------- -----------
Net cash provided (used) by operating activities (365) 722 331
------------- -------------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (4) (2) (2)
Decrease (increase) in investment in affiliated company 0 5 17
(Increase) decrease in investment securities, net 121 (22) (76)
------------- -------------- -----------
Net cash provided (used) in investing activities 117 (19) (61)
------------- -------------- -----------
Cash flows from financing activities:
Exercise of stock options 0 66 29
Repurchase of common stock (7) 0 (4)
------------- -------------- -----------
Net cash provided (used) by financing activities (7) 66 25
------------- -------------- -----------
Net cash provided (used) by continuing operations (255) 769 295
Cash provided (used) by discontinued operations 0 (332) (76)
------------- -------------- -----------
Increase (decrease) in cash and cash equivalents (255) 437 219
Cash and cash equivalents at beginning of year 1,328 891 672
============= ============== ===========
Cash and cash equivalents at end of year $ 1,073 $ 1,328 $ 891
============= ============== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income tax $ - $ - $ -
============= ============== ===========
Cash paid during the year for interest $ - $ - $ -
============= ============== ===========
</TABLE>
<PAGE>
<TABLE>
PERFECTDATA CORPORATION
Statement of Shareholders' Equity (Notes 8 and 9)
(In thousands)
Allowance Net
Common Stock Accumulated for gain/(loss) Shareholders'
Shares Amount deficit on mkt. sec. equity
----------- ------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 3,069 $ 8,026 $ (4,212) $ (22) $ 3,792
Stock issued upon exercise of
stock options 28 29 0 0 29
Stock repurchased and retired (3) (4) 0 0 (4)
Net unrealized gain/loss on
marketable securities 0 0 0 17 17
Net loss 0 0 (334) 0 (334)
=========== ============ =============== ================= =================
Balance at March 31, 1997 3,094 $ 8,051 $ (4,546) $ (5) $ 3,500
=========== ============ =============== ================= =================
Stock issued upon exercise
of stock options 70 66 0 0 66
Net unrealized gain/loss on
marketable securities 0 0 0 27 27
Net loss 0 0 (799) 0 (799)
=========== ============ =============== ================= =================
Balance at March 31, 1998 3,164 $ 8,117 $ (5,345) $ 22 $ 2,794
=========== ============ =============== ================= =================
Stock repurchased and retired (9) (7) (7)
Net unrealized gain/loss on
marketable securities (80) (80)
Net loss (402) (402)
=========== ============ =============== ================= =================
Balance at March 31, 1999 3,155 $ 8,110 $ (5,747) $ (58) $ 2,305
=========== ============ =============== ================= =================
</TABLE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998, and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PerfectData Corporation (the Company) designs, assembles and sells computer and
office equipment care and maintenance products.
Cash Equivalents
The Company considers all highly liquid, non-pledged certificates of deposit
with an original maturity of three months or less to be cash equivalents.
Certificates of deposit pledged as collateral, or otherwise restricted, are not
classified as cash equivalents.
Investment in Debt and Equity Securities
The Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity Securities,"
effective April 1, 1994.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with the Company's investment in equity securities. Securities available
for sale are carried at fair value, with the unrealized gains and losses
reported in a separate component of shareholders' equity, net of income taxes,
until realized.
The amortized cost of zero-coupon debt securities classified as available for
sale is adjusted for accretion of discounts to maturity. Such amortization and
interest are included in interest income. Realized gains and losses are included
in other income or expense. The cost of securities sold is based on specific
identification method.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using the
straight-line method based on estimated useful lives ranging as follows:
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Life of lease
Tooling 1 to 5 years
Revenue Recognition
Revenue from product sales is recognized upon shipment.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Post-Retirement Benefits
The Financial Accounting Standards Board has issued Statement 106, "Employer's
Accounting for Post-Retirement Benefits other than Pensions," a pronouncement on
accounting for post-retirement health care which is effective for fiscal years
beginning after December 31, 1992. The Company has never offered post-retirement
benefits to employees.
Earnings per Common Share
Basic earnings per common share is based on the weighted average number of
shares outstanding during each of the respective periods. Diluted earnings per
share is not presented, as the effect is antidilutive. The weighted average
number of shares outstanding during fiscal 1999 was 3,158,671.
Income Taxes
Provisions (benefits) for federal and state income taxes are calculated on
reported financial statement (income) loss based on current tax law and also
include in the current period, the cumulative effect of any changes in tax rates
from those used previously in determining deferred tax assets and liabilities.
Such provisions (benefits) differ from the amounts currently payable because
certain items of income and expense, known as temporary differences, are
recognized in different tax periods for financial reporting purposes than for
income tax purposes.
NOTE 2 - CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash, cash equivalents and trade
receivables.
As of March 31, 1999 the Company had approximately $964,000 of cash and cash
equivalents in three banks which exposes the Company to concentration of credit
risk. The cash deposited at each bank is federally insured up to $100,000.
The Company sells its principal products to a number of customers in the retail
industry. As of March 31, 1999, approximately 34%, 13% and 29% of recorded trade
receivables were from two wholesale/discount merchants and one foreign
distributor, respectively. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial conditions but does not generally
require collateral. New customers requiring large credit accounts are required
to provide letters of credit.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 3 - MARKETABLE SECURITIES:
Marketable securities classified as current assets at March 31, 1999, include
the following (dollars in thousands):
Fair Value Cost
Other government obligations $ 26 $ 27
Marketable equity securities 301 359
------------ ------------
$ 327 $ 386
============= ============
The contractual maturities of debt securities available for sale at March 31,
1999, follows:
Fair Value Cost
Due after ten years $ 26 $ 27
------------- -----------
$ 26 $ 27
============= ============
Net unrealized holding gains (losses) at March 31, 1999 and 1998, were
approximately ($58,448) and $22,100, respectively. During the year ended March
31, 1999, realized gains and losses from the sale of securities were $2,228 and
$7,821, respectively.
NOTE 4 - INVENTORIES:
Inventories, consisting of materials, labor and other costs, are stated at the
lower of cost (determined by the first-in, first-out method) or market and are
summarized as follows (dollars in thousands):
March 31,
--------------------------------------
1998 1998
------------ -------------
Raw materials $ 243 $ 238
Work in process 63 68
Finished products 333 265
--------- ---------
$ 639 $ 571
========= =========
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) Years ended March 31,
1999, 1998 and 1997
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of (dollars in thousands):
March 31,
---------------------------------
1999 1998
----------- ----------
Machinery and equipment $ 452 $ 467
Furniture and fixtures 124 149
Tooling 387 444
Leasehold improvements 155 155
---------- ----------
1,118 1,215
Less accumulated depreciation (1,032) (1,097)
---------- ----------
$ 86 $ 118
========== ==========
Depreciation expenses for the years ended March 31, 1999, 1998 and 1997 were $
36,000, $ 39,000 and $95,000, respectively.
NOTE 6 - INVESTMENT IN AFFILIATE:
The Company owned 15% and 58% of Starnet Universe Internet, Inc., at March 31,
1998 and 1997, respectively. Prior to March 31, 1997, this investment had been
consolidated with the Company. Subsequent to March 31, 1997, the Company's Board
of Directors resolved to dispose of substantially all of the Company's
investment in Starnet. As such, this investment was deemed to be temporary and
was not consolidated for fiscal 1997. Additionally, fiscal 1996 was restated to
conform with the presentation of 1997.
Prior to fiscal 1998, the Company recognized a loss from Starnet of $14,742 in
1997 and income of $183 in 1996. During fiscal 1998, the Company reduced its
ownership interest in Starnet to 15%. The Company reclassified the investment as
marketable securities available for sale, accounted for under the Cost Method.
The Company's cost basis in this investment was $5,399 at March 31, 1999.
NOTE 7 - NOTE PAYABLE:
During fiscal 1996, 1997 and up until August 31, 1997, the Company had a
$1,000,000 line of credit agreement with a bank. This line of credit was secured
by accounts receivable, inventory, equipment and general intangibles. The
agreement subjected the Company to certain covenants related to liquidity,
capital expenditures and commitments, net worth and the reacquisition of stock.
Interest on outstanding borrowings was payable monthly at prime plus 1.25%. The
agreement expired August 31, 1997 and was not renewed. No borrowings were
outstanding at March 31, 1999 or 1998.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 8 - INCOME TAXES:
The components of the income tax (benefit) provision attributable to continuing
operations were (dollars in thousands):
<TABLE>
March 31,
----------------------------------------------------------------
1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
Current:
Federa1 $ - $ - $ -
State 1 1 1
------------- ------------- -------------
1 1 1
Deferred:
Net increase (decrease) in deferred tax asset (5) 4 (43)
(Increase) decrease in benefit of NOL
carryforwards (180) (132) 96
Increase (decrease) in valuation allowance 180 377 236
------------- ------------ ------------
$ (4) $ 250 $ 290
============== ============ =============
</TABLE>
At March 31, 1999, the Company had net operating loss (NOL) carryforwards of
approximately $3,431,233 for federal income tax purposes expiring in varying
amounts through 2014. The NOL carryforwards, which are available to offset
future profits of the Company and are subject to limitations should a "change in
ownership" as defined in the Internal Revenue Code occur, will begin to expire
in 2001 if not utilized. Additionally, the Company has general business tax
credit carryforwards of $174,109 which will begin to expire in 1999.
In April 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Previously, the
Company used the APB 11 approach that gave no recognition to future events other
than the recovery of assets and settlement of liabilities at their carrying
amounts. Under SFAS 109 the Company recognizes to a greater degree the future
tax benefits of expenses which have been recognized in the financial statements.
PERFECTDATA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Years ended
March 31, 1999, 1998, and 1997
NOTE 8 - INCOME TAXES (CONTINUED):
SFAS 109 requires that the tax benefit of such NOLs be recorded using current
tax rates as an asset to the extent management assesses the utilization of such
NOLs to be more likely than not. Management has determined that future taxable
income of the Company will more likely than not be insufficient to realize the
recorded deferred tax asset of $1,234,687, and has recorded a valuation
allowance of $1,234,687.
Realization of the future tax benefits of the NOL carryforwards is dependent on
a Company's ability to generate taxable income within the carryforward period.
In assessing the likelihood of utilization of existing NOL carryforwards,
management considered the historical results of continuing operations over the
last three years and the current economic environment in which the Company
operates. Management did not consider any non-routine transactions in assessing
the likelihood of realization of the recorded deferred tax asset.
The following reconciles the federal statutory income tax rate to the effective
rate of the provision for income taxes.
<TABLE>
March 31,
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0 % 34.0%
Increases (reductions) in taxes due to:
State income taxes (net of federal benefit) 0.2% 0.3 % 4.0%
Valuation allowance adjustment (35.2)% (103.0)% 1,122.0%
Other, net 0% 0.6 % 0.0%
----------- ------------ -----------
(1.0)% (68.1)% 1,160.0%
=========== =========== ===============
</TABLE>
NOTE 9 - SHAREHOLDERS' EQUITY:
The articles of incorporation authorize a class of preferred stock issuable in
classes and series with such designations, voting rights, redemption provisions,
dividend rates, liquidation and conversion rights and other preferences and
limitations as may be determined by the Board of Directors. No preferred stock
was outstanding at March 31, 1999 or 1998.
During the year ended March 31, 1999, the Company reacquired approximately 8,800
shares of its common stock.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 10 - STOCK OPTION AND BONUS PLANS:
During November 1985, the Company adopted the 1985 stock option plan to grant
incentive and nonqualified stock options to officers and key employees of the
Company for the purchase of up to 500,000 shares of the Company's common stock.
During fiscal year 1997, the board of directors voted to extend the term of the
plan by 12 months thereby making the expiration date December 31, 1996. Under
the plan, options were granted at prices equal to or greater than fair market
value at date of grant. The shares, subject to various limitations, are
exercisable over terms not to exceed ten years. No options were granted during
the years ended March 31, 1998 or 1999. A total of 286,250 options were
exercised as of March 31, 1999, with 103,000 options left outstanding.
Activity under the plan is summarized as follows:
<TABLE>
OPTION PRICE
NUMBER OF PER SHARE
SHARES (AVERAGE) AGGREGATE
<S> <C> <C> <C>
Options outstanding at March 31, 1996 199,500 .970 206,195
Options granted 14,500 2.0625 29,906
Options exercised (27,500) 1.0625 (29,219)
Options cancelled or expired - - -
---------- ------------- ------------
Options outstanding at March 31, 1997 199,500 1.0370 206,882
Options exercised (70,000) .9375 (65,625)
Options cancelled or expired (11,500) 1.3102 (15,068)
---------- ----------- -----------
Options outstanding at March 31, 1998 118,000 1.0694 126,189
=========== =========== ===========
Options cancelled or expired (15,000) 1.5833 (23,750)
-------------- --------- ------------
Options outstanding at March 31, 1999 103,000 $ .9945 $ 102,439
============ =========== ===========
</TABLE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 11 - MAJOR CUSTOMER AND EXPORT SALES:
During the year ended March 31, 1999 two customers accounted for more than 10%
of sales. These customers accounted for 14% of sales each.
During the year ended March 31, 1998, one customer accounted for more than 10%
of sales. This customer, a large consumer discount house, accounted for 23% of
sales for fiscal 1998. In June of 1997, the Company learned that this customer
would not renew its purchase agreement for the next year and orders from the
customer ceased in August, 1997. The loss of this customer has had a significant
adverse effect on the Company's revenues. For fiscals 1999, 1998 and 1997, sales
to this customer were approximately $ 0, $759,000, and $2,403,000, respectively.
In addition, the Company had export sales to unaffiliated customers as follows
(dollars in thousands):
<TABLE>
Year Ended March 31,
---------------------------------------------------------
1999 1998 1997
--------------- ------------- ---------
<S> <C> <C> <C>
Europe $ 110 $ 242 $ 209
Canada 16 199 326
Australia - 20 32
Africa 9 30 36
Far East 22 19 26
Other geographic areas 3 16 20
---------------- ------------ -------------
$ 160 $ 526 $ 649
============ ========== ===========
Operations by geographic area are summarized as follow (dollars in thousands):
Year Ended March 31,
----------------------------------------------------------
1999 1998 1997
------------- ------------- -----------
Net Sales:
Domestic customers $ 1,529 $ 2,773 $ 5,112
International 160 526 649
------------ ------------- -------------
Total $ 1,689 $ 3,299 $ 5,761
========== =========== ===========
</TABLE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company leases facilities under noncancelable operating leases that expires
September 20, 2002. Rental expense was $136,000, $117,000, and $117,000 for the
years ended March 31, 1999, 1998, and 1997, respectively.
Minimum annual rental commitments under operating leases are summarized as
follows (in thousands):
2000 129
2001 133
2002 138
2003 69
----
$ 469
A lawsuit was filed against PerfectData in the Superior Court of Orange County,
California on May 11, 1995. The lawsuit involves product liability resulting in
a loss of life. On June 4, 1996, judgement was found in favor of the Company
with no liability. The plaintiff has appealed this ruling and the court has
ordered a hearing in which oral arguments will be heard. Due to a backlog in the
courts, the hearing is not scheduled until late 1999. PerfectData has little, if
any, exposure in this matter as they are covered by a general liability policy
issued by CNA Insurance with liability limits of $6,000,000. All court costs are
being borne by CNA Insurance.
As the result of a different lawsuit, in November 1995, a former employee won an
award against the Company for $203,403. The lawsuit related to the termination,
in October 1993, of an employment contract entered into between the company and
the individual during July 1993. This employment contract was entered into in
conjunction with the purchase, by the Company, of a computer cable business from
the individual. The award was comprised of damages of $136,525 and attorneys'
fees and other costs of $66,878. These legal expenses were expensed as part of
discontinued operations.
In January 1996, the Company filed a notice of appeal and on March 31, 1997 the
appeals court issued its opinion affirming the judgement against the Company.
This judgement became final on April 30, 1997. At the time of its appeal, the
Company posted a Certificate of Deposit in the amount of $305,000 to cover any
amount it would have to pay. This amount appears in the Company's balance sheet
as of March 31, 1997 as a deposit on litigation award.
In December 1995 the Company filed a complaint against the same former employee
and his company alleging that they copied PerfectData's trademark and trade
dress in an attempt to distribute or otherwise sell their product, "Perfect
Cleaner". The product would compete directly with the Company's line of products
known as PerfectDuster, PerfectDuster Plus and PerfectDuster II Plus. On
December 21, 1995, the Court granted the Company's motions for a restraining
order and preliminary injunction which enjoined the defendants from the
manufacture and distribution of the product in question.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
The parties reached a global settlement of both actions. Under terms of the
settlement, the Company paid the former employee the sum of $185,000 in exchange
for its right to seek further appeal. Defendants in the trademark infringement
action agreed to assign and transfer any and all right, title and interest in
the trademark, trade name, and trade dress of their canned air product "Perfect
Cleaner" and any and all goodwill of the Perfect Cleaner business to the
Company. The former employee and his company further agreed not to sell a canned
air product in the United States or Canada for three years.
Unresolved was the amount of attorneys' fees owed to the former employee's
counsel in his case against the Company. It was the contention of his counsel
that they were entitled to an award of attorneys' fees for services rendered
during the Company's appeal of the original judgement against the Company. The
parties agreed to have this issue decided by a judge. In fiscal 1997, the
Company accrued an additional $62,000 of loss to cover these actions, bringing
the total to $265,000 since the first suit was filed. This amount was comprised
of the $185,000 to be paid to the former employee and $80,000 to cover the
Company's and the former employee's legal costs. This additional $62,000 was
charged to discontinued operations for the year ended March 31, 1997. On July
21, 1997, a hearing was held in the Superior Court of Ventura County,
California. On October 17, 1997, the judge ruled in favor of the former employee
and awarded post-judgement attorney's fees in the amount of $96,268. During
November 1997, the parties settled the post-judgement attorney's fees for the
sum of $82,500 which the Company paid the former employee and his attorneys in
December, 1997. As a result of these actions, including final settlement of the
case, the Company recorded a charge to discontinued operations of $66,000 during
fiscal 1998.
In an unrelated case, the past CFO of Permabyte Magnetics, Inc. (PMI) has
brought an action for unpaid wages and fraudulent conveyence against PMI, the
Company, the Company's chairman and a director of the Company. The former CFO
claimed that PMI owed her approximately $30,000 for unpaid vacation which had
accrued prior to her termination.
During a demurrer to the First Amended Complaint, the former CFO failed to
properly seek leave of court to file a second amended complaint. Consequently,
the court dismissed the entire action. In August 1996, the former CFO filed a
notice of appeal with the 4th Appellate District Court of Appeal in San Diego,
California. On June 11,1998, in the San Diego Court of Appeal, 4th Appellate
District, oral arguments were heard.
In March of 1999, the parties agreed to a settlement and Mutual Release of All
Claims, whereby the Company paid the former CFO $14,000 to fully and completely
settle the action. The Company paid the $14,000 in May of 1999, and the court
dismissed the action without prejudice.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data from continuing operations for the eight quarters ended
March 31, 1997 is summarized as follows (dollars in thousands, except per share
amounts):
<TABLE>
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
<S> <C> <C> <C> <C>
Net sales $ 452 $ 423 $ 396 $ 418
Gross profit 166 175 151 159
Net earnings (72) (101) (102) (127)
Earnings per share (.02) (.04) (.03) (.04)
Weighted average
shares outstanding 3,164 3,161 3,156 3,155
======== ====== ======= =======
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
Net sales $ 1,452 $ 740 $ 525 $ 582
Gross profit 482 270 216 126
Net earnings 11 (104) ( 16) (408)
Earnings per share .00 (.03) (.04) (.13)
Weighted average
shares outstanding 3,094 3,094 3,143 3,164
======== ======== ======== =========
</TABLE>
NOTE 14 - DISCONTINUED OPERATION:
In May 1994, the Company adopted a formal plan to discontinue all products in
the telecommunications industry line which consisted of modems, cables and
switch boxes. As part of such plan, the Company discontinued production in May
1994 with the intent of either selling or abandoning the remaining assets and
corresponding operations during fiscal 1995. As a result, the Company recorded a
fourth quarter charge of $333,000, net of income tax benefit, to write down the
product line assets to their estimated net realizable values. Such fiscal 1994
losses are included in the Company's net operating loss carryforwards, disclosed
in Note 8.
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1999, 1998, and 1997
NOTE 14 - DISCONTINUED OPERATION (CONTINUED):
During fiscal 1995, most assets of the discontinued operations were disposed of,
and the balance, with the exception of deferred tax assets, were disposed of
during fiscal 1996.
As discussed in Note 12, during fiscal 1996, the Company lost a lawsuit to a
former employee who was employed in connection with the discontinued cable
operations. As a result of this unanticipated court decision, the Company
recorded a loss of approximately $186,000, offset by a deferred tax asset of
$88,000 to discontinued operations for fiscal 1996. For fiscal year 1997, the
Company has recorded an additional $62,000 of possible loss which has been
offset by an increased deferred tax asset of $27,000. This litigation award was
paid during fiscal 1998, thus eliminating the last remaining liabilities
associated with the Company's discontinued operations. Due to the unlikelihood
that the Company will realize the benefit of any deferred tax assets related to
its net operating loss carryforwards, the Company reserved the remaining
$115,000 of deferred tax assets related to its discontinued operations during
fiscal 1998.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal 1999 net sales from continuing operations decreased to $1,689,000
from $3,299,000 in fiscal 1998 and $5,761,000 in fiscal 1997.
The dramatic decline in sales in fiscal 1999 and 1998 is directly related
to the loss of a major customer. In June 1997, the Company lost its bid for the
continuing business of PriceCostco. During fiscal 1997, PriceCostco accounted
for 42% of the Company's total sales. The Company realized the loss of this
business during the second quarter of fiscal 1998.
Further contributing to the decline in fiscal 1999 sales was a decline in
the Company's international business. During the fourth quarter of fiscal 1998,
the Company's exclusive Canadian distributor discontinued this segment of their
business and no longer distributed the company's products. During fiscal 1998
sales to this Canadian distributor accounted for 6% of the Company's sales.
Also, the Company's European distributor lost one of its major accounts during
the fourth quarter of fiscal 1998. During fiscal 1998, sales to this European
distributor accounted for 7% of the Company's sales. The Company's sales to this
European distributor declined 50% during fiscal 1999.
The decrease in fiscal 1997 sales from fiscal 1996 was due to lower selling
prices, although the actual unit sales for fiscal 1997 had increased over fiscal
1996.
The United States Environmental Protection Agency announced a ban,
effective January 1, 1994 on Chlorodifluoromethane. This chemical was contained
in a compressed gas duster that represented approximately 16% of net sales in
fiscal 1995, and approximately 10% of net sales in fiscal 1996. This product was
offered in two different sizes. The Company promoted this product and depleted
its inventory of the most popular size in fiscal 1995, and the less popular size
in fiscal 1996. Approximately 47% of the decrease in fiscal 1996 sales was
attributed to the close-out sale of this product held during fiscal 1995.
The Company developed and offered replacement products during fiscal 1994
that did not contain the banned chemical. The Company offered a choice of
chemical fills in various sizes. During fiscal 1995, the replacement products
were more readily accepted and sales increased. Sales of the replacement
products during fiscal 1995 represented approximately 47% of net sales and 56%
of net sales during fiscal 1996.
The decrease in fiscal 1996 net sales was also due to increased competition
in the marketplace and inadequate sales and marketing efforts by the Company.
The Company subsequently reorganized its sales structure as well as set up a new
Sales Coordination Department to interface with an expanded sales representative
network.
Cost of sales from continuing operations as a percentage of net sales for
fiscal 1999, 1998 and 1997 were 62%, 67% and 66% respectively. The decrease in
cost of sales for fiscal 1999 is a result of a reduction in the Company's labor
costs as well as management's ability to negotiate with its suppliers to obtain
the best possible pricing for its materials.
The slight increase in cost of sales for fiscal 1998 directly relates to
inventory reserves made for the ergonomic products and accessories line. The
Company made the decision to discontinue this product line during the fourth
quarter of fiscal 1998.
Selling, General and Administrative Expenses from continuing operations for
fiscal 1999, 1998 and 1997 were $1,180,000, $1,535,000 and $2,030,000
respectively. The decrease in expenses in fiscal 1999 and 1998 directly relates
to the loss of the Company's major customer. Included in Selling, General and
Administrative Expenses are prepaid freight on qualifying orders, commission
paid to sales representatives, and co-op advertising allowances which are
variable expenses that fluctuate with sales. As sales declined, so did these
expenses. The decrease in costs and expenses in fiscal 1999 and 1998 also
relates to severe cost-cutting measures which included, amongst others, a
reduction in staff and a very tight control of all expenditures.
During the quarter ended September 30, 1998 the Company reorganized its
Sales and Marketing Departments and appointed a new director. When the Company
lost its major customer, it commenced seeking out a sub-tenant to share the
facility the Company occupies. Subsequent to fiscal 1999 year end, the Company
successfully found a sub-tenant to occupy a portion of its facility and reduce
the Company's facility costs.
Other income and expense for fiscal 1999, 1998 and 1997 was primarily
interest income of $39,000, $33,000 and $28,000 respectively; royalty income of
$2,000, $7,000 and $10,000 respectively; and dividend and option income of
$79,000, $55,000 and $47,000 respectively.
During the first quarter of fiscal 1995, the Company made the decision to
discontinue its operations in the telecommunications industry which consisted of
modems, cables and switch boxes. The substantial losses from this operation were
a result of declining sales, dramatically eroding profit margins and major
competitors who had all the financial resources and technology necessary to
compete in the increasingly volatile marketplace. The Company immediately
stopped the outflow of cash associated with these operations. By March 31, 1996,
the inventory had been liquidated. The loss from discontinued operations for
fiscal 1996 directly related to a judgement against the Company in favor of a
former employee for breach of an employment contract. The employee had been
employed to work exclusively in the Company's cable segment which had been
discontinued. The Company appealed the judgement and posted an appeal bond with
the Court. On March 31, 1997 the Appeals Court issued its opinion affirming the
judgement against the Company. The judgement became final on April 30, 1997. The
loss on discontinued operations for fiscal 1997 was primarily due to legal fees
relative to the appeal.
On October 17, 1997 the judge ruled in favor of the former employee and
awarded post judgement attorney fees in the amount of $96,268. During November
1997, the parties settled the post judgement attorney's fees for the sum of
$82,500. The loss from discontinued operations for fiscal 1998 directly relates
to legal fees incurred by the Company relative to the settlement, additional
reserves to cover the $82,500 settlement, and elimination of deferred tax assets
which are not expected to be recognized in the future.
Liquidity and Capital Resources
The cash position at March 31, 1999 is $1,074,000 including Certificates of
Deposit of $255,000. The Company has short-term marketable securities of
$327,000.
The Company has a current ratio of better than 8 to 1 at fiscal year end
and no long-term debt.
The Company believes that liquidity and working capital are adequate to
fund the Company's operations and Capital requirements for the 2000 fiscal year.
The Company continues to follow a plan to expand its distribution and sales
base by focusing on profitable new accounts using outside sales professionals
and electronic commerce.
At March 31, 1999 the Company had net operating loss and general business
tax credit carry forwards for income tax purposes of approximately $3,431,233
and $174,109 respectively, available to reduce future potential Federal income
taxes.
On December 8, 1998, the Company announced the signing of an agreement of
its intent to merge with Pego Systems, Inc. of Long Beach, California. Pego
Systems, Inc., an engineering and manufacturing Company, is a subsidiary of The
Hartcourt Companies. The merger was subject to further due diligence and the
signing of a definitive agreement as well as shareholder and regulatory
approvals. As part of the transaction, PerfectData and PerfectData shareholders
were to receive shares in The Hartcourt Companies. In reviewing the Pego
financials prior to closing of the agreement, they reflected a slight loss for
the year rather than the anticipated gain. Hartcourt has since spun off Pego
Systems to Hartcourt shareholders, along with other assets, by distributing
shares in ENOVA. Managements of both PerfectData and The Hartcourt Companies
continue to seek ways to create shareholder value by addressing the needs of
each entity and focusing on a transaction that is mutually beneficial.
PerfectData's management continues its discussions with potential merger
and joint venture partners including The Hartcourt Companies.
YEAR 2000 UPDATE
In 1998, the Company established and began to implement a program to
address the Year 2000 issue. The Year 2000 program included the implementation
of previously planned systems as well as specific Year 2000 programs. All
programs are on track for completion before the year 2000 with various
applications being upgraded or replaced as needed. The Company does not expect
the Year 2000 program to have a material impact on its results of operations,
liquidity, or financial condition. Additionally, the Year 2000 program has not
deferred any other company projects that will have a material impact on its
results of operations, liquidity, or financial condition.
IT Systems
In 1998, with the development of the Year 2000 program the Company began
undertaking changes to bring compliant systems and accompanying methodology on
board.
The IT systems have been inventoried and the necessary Year 2000 upgrades,
replacements and retrofits identified. These projects are presently in various
stages of analysis, development and implementation. The Year 2000 program is
currently scheduled to be completed by the fourth quarter of 1999.
Non-IT Systems
Non-IT Systems may contain date sensitive embedded technology requiring the
Year 2000 upgrades. Examples of this technology include security equipment such
as access and alarm systems, as well as facilities equipment such as heating and
air conditioning units.
The Company is a product manufacturer; therefore the "embedded chip" issue
relates to production line components as well as to the equipment used by the
Company. Production line components and facilities and equipment are being
inventoried and assessments are in progress.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's results of operations,
liquidity and financial condition. The estimated total cost of the Year 2000
effort is expected to be under $20,000. This estimate does not include the cost
of the Company's previously planned business systems upgrades, which have not
been accelerated due to the Year 2000 problem.
Risks and Contingency Planning
The Company has identified and assessed the areas that may result in an
interruption in, or failure of, certain normal business operations or
activities. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of the Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. The Year 2000 program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that through its Year 2000 program, the
possibility of significant interruptions of normal business operations should be
reduced.
Readers are cautioned that forward looking statements contained in the Year
2000 Update should be read in conjunction with the Company's disclosures under
the heading "Forward Looking Statements".
<PAGE>
Appendix C
Unaudited Financial Statements
And
Management's Discussion and Analysis
of Financial Condition and Results of Operation
For
Quarter and Nine Months Ended December 31, 1999
<PAGE>
PERFECTDATA CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except number of shares)
<TABLE>
December, 31 March 31,
1999 1999
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents, including
short-term certificates of deposit of
$257 at December and $255 at March $ 1,137 $ 1,074
Accounts receivable, less allowance
for doubtful receivables of
$92 at December and $9 at March 166 186
Inventories 540 639
Prepaid expenses and other current assets 74 57
Marketable securities, short-term 380 327
Deferred income tax benefit 125 113
Total current assets 2,422 2,396
Property, plant and equipment, net 63 86
Deferred Income Tax benefit 69 73
Other assets, net 31 31
$ 2,585 $ 2,586
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 171 $ 149
Accrued expenses 83 85
Accrued salaries, wages and vacation 37 47
Total current liabilities 291 281
Shareholders' equity:
Preferred Stock. Authorized 2,000,000
shares; none issued - -
Common Stock, no par value. Authorized
10,000,000 shares; issued and
outstanding 3,215,306 shares at
Dec. and 3,154,806 shares at March 8,147 8,110
Accumulated deficit (5,841) (5,747)
Allowance for gain (loss) on
marketable securities (12) (58)
Net shareholders' equity 2,294 2,305
$ 2,585 $ 2,586
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PerfectData Corporation
STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 387 $ 396 $ 1,383 $ 1,271
Costs and Expenses:
Cost of sales 281 245 929 779
Selling, general and administrative 214 266 829 834
Total costs and expenses 495 511 1,758 1,613
Income (loss) from operations (108) (115) (375) (342)
Other income and (expense):
Interest income, net 5 5 16 19
Other, net 171 14 258 73
Total other income and (expense) 176 19 274 92
Income (loss) before income taxes 68 (96) (101) (250)
Income tax (provision) benefit 44 (6) 7 (25)
Net income (loss) 112 (102) (94) (275)
Other Comprehensive Income,
Net of Income Tax
Unrealized holdings gain (loss) (54) 23 27 (48)
Comprehensive income (loss) $ 58 $ (79) $ (67) $ (323)
Net income (loss) per common share $ .03 $ (.03) $ (.03) $ (.09)
-------- ------- ------- --------
Weighted average shares outstanding 3,247 3,156 3,215 3,160
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PerfectData Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Period from March 31, 1999 through December 31, 1999
<TABLE>
Allowance Net
Common Stock Accumulated for gain/(loss) shareholders
Shares Amount deficit on mkt. sec. equity
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1999 3,155 $ 8,110 $ (5,747) $ (58) $ 2,305
Stock Issued for Services 75 52 - - 52
Stock Issued upon exercise
of Stock Options 20 19 - - 19
Stock repurchased
and retired (7) (6) - - (6)
Stock reacquired (28) (28) - - (28)
Net unrealized gain/
(loss) on marketable
securities - - - 46 46
Net earnings (loss) - - (94) - (94)
Balance at
December 31, 1999 3,215 $ 8,147 $ (5,841) $ (12) $ 2,294
================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PERFECTDATA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
Nine Month Period Ended
December 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (94) $(275)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 23 29
Stock Issued for Services 52 -
Deferred income tax (benefit) provision (8) 25
(Increase) decrease in accounts receivable 20 80
(Increase) decrease in inventories 99 (7)
(Increase) decrease in prepaid
expenses and other current assets (17) (129)
(Increase) decrease in other assets - -
Increase (decrease) in accounts payable 22 (74)
Increase (decrease) in accrued expenses (2) (3)
Increase (decrease) in accrued salaries, wages and vacation (10) (10)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 85 (364)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment $ - $ (3)
(Increase) decrease in investment securities, net (7) 12
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (7) 9
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 19 -
Repurchase of Common Stock (34) (6)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (15) (6)
Increase (decrease) in cash and cash equivalents 63 (361)
Cash and cash equivalents at beginning of period 1,074 1,328
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,137 $ 967
---------- --------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
information that is forward-looking, including, without limitation, statements
regarding the Company's future financial performance, the effect of government
regulations, national and local economic conditions, the competitive environment
in which the Company operates, results or success of discussions with other
entities on mergers, acquisitions, or alliance possibilities and expansion of
product offering. Actual results may differ materially from those described in
the forward-looking statement. The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company either oral or written.
2. In the opinion of the Company, the unaudited financial statements contained
in this report have been prepared on a basis consistent with the financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended March 31, 1999. All adjustments included in the financial statements are
of a normal recurring nature and are necessary to present fairly the Company's
financial position as of December 31, 1999 and the results of its operations and
cash flows for the nine months ended December 31, 1999 and 1998.
3. Marketable securities classified as current assets at December 31, 1999,
include the following (dollars in thousands):
Fair Value Cost
Other Government Obligations $ 24 $ 26
Marketable equity securities 356 331
------------ ------------
$ 380 $ 357
=========== ============
4. Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at December 31, 1999 and March 31, 1999
consist of the following:
(In thousands)
December 31, 1999 March 31, 1999
----------------- --------------
Raw materials $ 205 $ 243
Work in process 54 63
Finished products 281 333
--------------- --------------
$ 540 $ 639
============ ============
<PAGE>
5. Property, plant and equipment consist of (dollars in thousands):
December 31, 1999 March 31, 1999
----------------- --------------
Machinery and equipment $ 452 $ 452
Furniture and fixtures 99 124
Tooling 387 387
Leasehold improvements 155 155
------------ -----------
1,093 1,118
Less accumulated
depreciation (1,030) (1,032)
------------- ---------------
$ 63 $ 86
============== ===============
6. The components of the income tax (benefit) provision were (dollars in
thousands):
December 31, 1999
Current:
Federal $ -
State 1
---------
1
Deferred:
Net (increase) decrease in
deferred tax asset (7)
(Increase) decrease in benefit of
NOL carryforwards (46)
Increase (decrease) in valuation allowance 46
$ (6)
At December 31, 1999, the Company had net operating loss (NOL) carryforwards of
approximately $3,540,000 for federal income tax purposes expiring in varying
amounts through 2019. The NOL carryforwards, which are available to offset
future profits of the Company and are subject to limitations should a "change in
ownership" as defined in the Internal Revenue Code occur, will begin to expire
in 2001 if not utilized. Additionally, the Company has general business tax
credit carryforwards of $174,109 which will begin to expire in 1999.
SFAS 109 requires that the tax benefit of such NOLs be recorded using current
tax rates as an asset to the extent management assesses the utilization of such
NOLs to be more likely than not. Management has determined that future taxable
income of the Company will likely not be sufficient to realize the recorded
deferred tax asset of $1,281,000. As such, the Company has recorded a valuation
allowance of $1,281,000.
Realization of the future tax benefits of the NOL carryforwards is dependent on
a Company's ability to generate taxable income within the carryforward period.
In assessing the likelihood of utilization of existing NOL carryforwards,
management considered the historical results of continuing operations, the
current economic environment in which the Company operates, and the projected
results of the Company's cost-cutting measures as well as sales projections.
Management did not consider any non-routine transactions in assessing the
likelihood of realization of the recorded deferred tax asset.
7. During the six months ended September 30, 1999, the Company issued an
aggregate of 75,000 shares of the Company's Common Stock as a form of
compensation to retain the Hudson Consulting Group, Inc. to assist the Company
in acquisitions and mergers and assist with creating a market for the securities
of the Company.
8. During the quarter ended September 30, 1999, the Company issued 20,000 shares
of Common Stock to Mr. Mazin under the 1985 Employee Stock Option Plan for
consideration of $18,750.00.
9. During the quarter ended December 31, 1999, the Company repurchased an
aggregate of 6,700 shares of the Company's Common Stock on the open market for
an aggregate value of $5,618.
10. During the quarter ended December 31, 1999, the Company reacquired 27,800
shares of the Company's Common Stock pursuant to a legal settlement with the
estate of a former shareholder.
11. Net earnings (loss) per share is based on the weighted average number of
shares outstanding during each of the respective periods. Common Stock
equivalents are excluded from the calculation of weighted average shares
outstanding as their effect is immaterial or antidilutive.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the third fiscal quarter ended December 31, 1999 were $387,000
compared to $396,000 in the year-earlier period. Net sales for the nine months
ended December 31, 1999 increased approximately 9% to $1,383,000 from $1,271,000
in the year-earlier period. Upon losing its major customer in fiscal 1997, the
Company focused on increasing business with its existing customers as well as
pursuing new business. As a result of these efforts, sales have increased.
Cost of sales as a percentage of net sales has increased during the current
fiscal year. The increase primarily relates to an increase in the material cost
of the gases used in the Company's principal selling product line of compressed
gas dusters. The Company began realizing this cost increase during the quarter
ended September 30, 1999.
During April 1999, the Company signed an agreement with the Hudson Consulting
Group, Inc. to assist the Company in acquisitions and mergers and assist with
creating a market for the securities of the Company. Included in Selling,
General and Administrative Expenses for the nine months ended December 31, 1999
is $52,732 consulting expense which represents the value of an aggregate of
75,000 shares of the Company's Common Stock which were issued to the Hudson
Consulting Group for their services. During the quarter ended December 31, 1999,
the Company terminated this agreement.
In August 1999, one of the Company's customers filed a Chapter 11 Bankruptcy
Petition. This customer accounted for less than 10% of the Company's net sales.
Included in Selling, General and Administrative Expenses for the nine months
ended December 31, 1999 is a $77,000 allowance for doubtful receivables related
to this customer.
The Company continues to tightly control expenditures. During the first quarter
ended June 30, 1999 it successfully found a sub-tenant to occupy a portion of
its facility, thereby helping to reduce the Company's overhead costs.
The substantial increase in Other Income for the quarter ended December 31, 1999
primarily relates to realized gains on investments. During December 1999, the
Company sold its stock in El Guapo Foods to McCormick Co. and realized a gain of
approximately $84,000, which represents the single largest gain for the quarter.
PerfectData's management has continually sought out potential merger and joint
venture partners for strategic growth opportunities.
<PAGE>
Subsequent to the quarter ended December 31, 1999, the Company announced, on
January 25, 2000, it had executed an agreement with an investor group pursuant
to which the investors will provide equity capital and purchase newly issued
shares of the Company's Common Stock. The investor group would subsequently hold
28% of the Company's stock. Consummation of the purchase is subject to the
Company obtaining shareholder approval. If approved, an investment advisor
agreement will become effective pursuant to which advisors will assist the
Company in making acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The cash position at December 31, 1999 is $1,137,000 including certificates of
deposit of $257,000. The Company has a current ratio of better than 8 to 1 and
no long-term debt.
Management believes that the Company's liquidity and working capital
requirements are adequate to fund the Company's Operations and Capital
requirements for the 2000 fiscal year.
YEAR 2000
The Company has completed its Year 2000 ("Y2K") Project ("Project") as
scheduled, including addressing leap year calendar date calculation concerns.
The possibility of significant interruptions of normal operations has been
reduced. As of February 8, 2000, the Company's products, computing, and
communications infrastructure systems have operated without Y2K related problems
and appear to be Y2K ready. The Company is not aware that any of its major
customers or third-party suppliers have experienced significant Y2K related
problems.
The Company believes all its critical systems are Y2K ready. However, there is
no guarantee that the Company has discovered all possible failure points.
Specific factors contributing to this uncertainty include failure to identify
all systems, non-ready third parties whose systems and operations impact the
Company, and other similar uncertainties.
Contingency plans are complete and will be implemented if required. Should a
significant problem occur, the Company would revert to standard manual
contingency procedures to continue operation until the problem is corrected.
Readers are cautioned that forward looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements".
<PAGE>
============================================================================
Table of Contents
=============================================================================
Page
Notice of Special Meeting of Shareholders
Proxy Statement:...........................................N/A
Voting Securities............................................1
The Sole Proposal: The Proposed Transactions.................3
Stock Purchase Agreement..................................3
Consulting Agreement......................................4
The Proposed New Directors................................4
Business History..........................................4
Recommendation............................................6
Security Ownership of Certain Beneficial
Owners and Management.....................................6
Financial Statements.........................................8
Shareholders Proposals.......................................9
Miscellaneous................................................9
Appendix A - Stock Purchase Agreement......................A-1
Appendix B - Audited Financial Statements
Appendix C - Quarterly Unaudited Financial Statements
PERFECT DATA CORPORATION
Notice of Special Meeting of Shareholders
and Proxy Statement
for
Special Meeting of Shareholders
on
March 31, 2000
<PAGE>
PERFECTDATA CORPORATION
110 West Easy Street
Simi Valley, California 93065
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Joseph Mazin and Tracie Savage as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated below, all of the shares
of the Common Stock of PerfectData Corporation (the "Company") held of record by
the undersigned on February 29, 2000 at the Special Meeting of Shareholders to
be held on March 31, 2000 or at any adjournment thereof.
Proposal to Approve a Stock Purchase Agreement and the Implementation
of the Related Series of Transactions Contemplated Thereunder.
[ ]FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
This proxy, when executed, will be voted in the manner directed by the
undersigned shareholder(s). If no direction is made, this proxy will be voted
FOR the Proposal.
PLEASE MARK, SIGN, DATE, AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
I (we) shall attend the Special Meeting in person _____ Yes _____ No
Please sign exactly as your name appears
to the left. When shares are held by
joint tenants, please both sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by the President or other
authorized officer. If a partnership,
please sign in full partnership name by
a duly authorized person.
------------------------------------
Signature
------------------------------------
Signature, if held jointly
Date: _________________________, 2000
