SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10185
DOCUCON, INCORPORATED
(Name of Small Business Issuer in its Charter)
DELAWARE 74-2418590
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7461 CALLAGHAN ROAD
SAN ANTONIO, TEXAS 78229
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (210) 525-9221
Securities Registered Under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE BOSTON STOCK EXCHANGE
Securities Registered Under Section 12(g) of the Exchange Act: NONE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such Reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
State Issuer's revenues for its most recent fiscal year: $6,664,000
State the aggregate market value of the voting stock held by
non-affiliates as of March 16, 1998:
Common Stock, par value $.01 per share - $8,962,717
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 16, 1998
COMMON STOCK, PAR VALUE 13,160,792 SHARES
$.01 PER SHARE
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents are incorporated by reference into
this Annual Report on Form 10-KSB.
See Item 13.
Transitional Small Business Issuer Format: Yes [ ] No [X]
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PART I
Certain statements contained in this Form 10-KSB, including statements regarding
the anticipated development and expansion of the Company's business,
expenditures, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Docucon, Incorporated ("Docucon" or the "Company") was incorporated under
the laws of the State of Delaware in 1988 and is the successor by merger to a
Texas corporation organized in 1986. The Company has historically divided its
business into two areas: backfile conversion services and software products.
BACKFILE CONVERSION SERVICES
The automated conversion of source documents into electronic form,
including computer accessible images, indices and formats is referred to as
"backfile conversion". These source documents may include letters, contracts,
manuals, drawings, aperture cards, transcripts, microfilm and microfiche. After
conversion, these documents are stored on various optical and magnetic media.
These media are then accessed by document management systems which may be based
on a wide range of computer systems.
The process of document conversion involves the preparation and grading of
the documents to be stored, the physical scanning of the documents and the
creation of indices to facilitate retrieval of the converted documents. The
indexing of the information to be stored is a significant activity in any
document conversion system, and because Docucon creates custom indices and
formats, the ultimate users can retrieve information from their own documents
utilizing their own systems. Additionally, each of Docucon's document conversion
systems can customize the format of the converted materials. Throughout all its
operations, Docucon maintains a quality control program to ensure the integrity
of the indexing, editing and grading processing of the databases which are
converted. The Company provides backfile conversion services at its headquarters
in San Antonio, Texas. Upon client request, the Company can provide equipment to
process documents at remote client-site locations.
JFS TRANSACTION
On March 16, 1994, the Company purchased substantially all of the assets,
having an approximate book value of $1,015,000 and assumed certain liabilities
in the approximate amount of $1,179,000 of J. Feuerstein Systems, Inc. ("JFS"),
for consideration in the approximate amount of $200,000. JFS was based in
Parsippany, New Jersey and was engaged in the business of providing consulting
and support services and software products to the legal market.
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On November 26, 1997, the Company sold all of the assets of the JFS
division to Bowne & Co., Inc., a worldwide financial printing and services
company, for $6.5 million. The Company realized an approximate gain of
$4,472,000 on the sale. Operations relating to the software portion of the JFS
division resulted in losses totaling approximately $1.4 million since the date
of its purchase. All operations relating to the software portion of the JFS
division are considered discontinued operations for this report on Form 10-KSB.
STATUS OF PROPOSED RECAPITALIZATION
In October 1997, the Company announced that it had entered into a letter of
intent with a third party in connection with a proposed recapitalization of the
Company. Negotiations have ceased and there has been no communication between
the parties since the end of the 1997 fiscal year. The agreement expired on
March 31, 1998 without consummation of a transaction. The Company had indicated
that net proceeds of the JFS sale and the recapitalization were anticipated to
be distributed to shareholders. Without consummation of the proposed
recapitalization or another transaction, no proceeds will be distributed.
Proceeds from the JFS sale will be retained for investment in the conversion
services business. While the Company may consider and evaluate, from time to
time, acquisitions and opportunities for future growth, the Company has not
entered into any agreements with respect to future acquisitions. Should the
Company enter into any such agreements, the Company would, in all likelihood, be
required to raise outside capital to consummate such transactions.
BACKFILE CONVERSION SERVICES AND MARKETS
The Company currently markets backfile conversion services to governmental
and private organizations which have substantial document storage and retrieval
needs. These documents may be logistic support documents for the Department of
Defense ("DOD"), land files for petro-chemical companies and county governments,
personnel and financial records for corporations and institutions, or a number
of other similar requirements.
For the years ended December 31, 1997 and 1996, the Company spent $98,000,
and $205,000, respectively, for research and development activities related to
ongoing operations. The Company does not own any patents. The Company uses the
word "Docucon" alone and in combination with various designs and logos as a
service mark to identify the Company's services. The Company has obtained
federal trademark registration for the name "Docucon". The Company sold all of
its rights and registrations for trademarks for the name "JFS Litigator's
Notebook" and all other names associated with JFS software products to Bowne &
Co., Inc., in November 1997.
The Company has performed backfile conversion services since 1987 under
four major contracts awarded by the DOD. It is currently providing services to
the DOD under two contracts. A $14.8 million contract was awarded by the DOD in
early 1996 and subsequently increased by $5.6 million and extended through
February 1998. The contract provides for orders to be placed through April 1998.
As of March 1, 1998, the Company had provided approximately $14.5 million of
services under this contract. In December 1997 the DOD awarded an additional,
similar contract with a term of one year for approximately $15.5 million. The
terms of the contract includes four additional option years so that the entire
contract has a potential value of $77.8 million. In 1997, 1996, and 1995
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approximately 87 percent, 85 percent, and 64 percent, respectively, of the
Company's operating revenues were derived from services provided under DOD
contracts.
The Company has also performed conversion services for various commercial
companies and governmental agencies including Lucent Technologies, Loral Federal
Systems, Westinghouse, QED, Texaco Exploration and Production, Inc., Computer
Science Corporation, Amoco, Dowell Schlumberger, and Ericsson GE.
COMPETITION
The Company's services are sold in highly competitive markets, and its
sales and earnings can be affected by changes in competitive prices,
fluctuations in the level of activity in major markets or general economic
conditions. The Company believes that the document conversion industry is highly
fragmented, with numerous relatively small companies seeking to establish market
positions. In addition, the Company believes that major hardware, software and
service providers may seek to enter the field in the future. Many competitors
and potential competitors have larger marketing organizations and greater
resources than the Company. Due to the rapidly changing technology used in
connection with providing such services, competitive positions within the
industry are subject to change.
GOVERNMENT REGULATION
The Company's ability to obtain contracts from the DOD is dependent upon
its compliance with rules and regulations promulgated by that department,
including regulations related to security and technological standards. Although
the Company believes it is currently in compliance, there is no assurance that
it will be able to comply with such rules and regulations promulgated in the
future or to maintain its current clearances. See this Item, "Business -
Backfile Conversion Services and Markets" and "Business - Competition" and Item
6, "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
EMPLOYEES
At March 16, 1998, the Company had 118 full-time employees and no
temporary employees. None of the Company's employees is represented by a labor
union, and the Company is not aware of any current activities to unionize its
employees. Management believes the relationship between the Company and its
employees is good.
ITEM 2. DESCRIPTION OF PROPERTY.
In October 1992, the Company purchased an eight-story, 52,000-square foot
office building in San Antonio, Texas. This facility is located on 2.5 acres of
land and is utilized for office and production space. The Company leases
approximately 13,000 square feet of space on a year-to-year basis to Bowne &
Co., Inc. to headquarter operations of the JFS division which was sold to Bowne
& Co. Inc. in November 1997. In Management's opinion, the Company's physical
properties are adequate for the Company's current needs, and are consistent with
the Company's plans described
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elsewhere in this Annual Report on Form 10-KSB; however, in the event that the
Company experiences a significant influx of new business, additional space may
be required.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions by clients, suppliers and others. No
material actions are currently pending against the Company. The Company
maintains general liability insurance and other insurance coverages which it
believes to be adequate and typical in the industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, par value $.01 per share, is traded on The
NASDAQ Stock Market's(SM) SmallCap Market (Symbol: DOCU), and on the Boston
Stock Exchange (Symbol: DOC).
The following table sets forth for the fiscal periods indicated the high
and low bid prices per share for the Company's Common Stock in the NASDAQ Stock
Market's SmallCap Market, the principal market upon which the Company's Common
Stock is traded, as reported to the Company in monthly reports from NASDAQ.
REPORTED
BID PRICE
-----------------
HIGH LOW
------ ------
1996
First Quarter....................................... $ 1.44 $ .34
Second Quarter...................................... 1.53 .94
Third Quarter....................................... 1.31 .99
Fourth Quarter...................................... 1.25 .83
1997
First Quarter....................................... $ 1.44 $ .69
Second Quarter...................................... 1.06 .63
Third Quarter....................................... 1.25 .59
Fourth Quarter...................................... 1.38 .84
The last reported sale price for the Common Stock on The NASDAQ Stock
Market on March 16, 1998, was $.75 per share. Bid and asked prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
There were approximately 255 holders of record of the Common Stock as of
March 16, 1998, excluding those shares held by depository companies for certain
beneficial owners.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations. Under the terms of the Company's Series A Convertible
Preferred Stock, the Company cannot pay dividends on its Common Stock until all
accumulated but unpaid dividends on such Preferred Stock have been paid. At
December 31, 1997, cumulative undeclared dividends on the Series A Convertible
Preferred Stock were approximately $242,000.
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On March 31, 1998, the Company received notice that it was subject to
delisting on the NASDAQ SmallCap Market System because the Company's average
closing bid price per share had not exceeded $1.00 during the prior thirty day
period. The notice provides that the Company's shares are subject to delisting
ninety days after receipt of the notice, unless the Company's per share bid
price is $1.00 or greater for ten consecutive trading days within the ninety day
period. Management is currently evaluating its response to the above-described
notice, and shall take such action as it deems appropriate to maintain the
listing.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company reported net income applicable to common stockholders of
$3,378,829 for fiscal 1997, compared to net income applicable to common
stockholders of $708,983 in 1996. The improvement in net income was due to the
$4,472,409 gain recognized on the sale of the JFS division. Operating results
from backfile conversion services resulted in a loss for the fiscal year ended
December 31, 1997, of $323,859 as compared to net income of $811,903 in 1996 due
to a decrease in revenues. The loss from discontinued operations was also larger
during 1997 as compared to the prior year.
Operating revenues from continuing operations totaled $6,664,325 in fiscal
1997, a 36% decrease from 1996 operating revenues. The decrease is due to what
management believes to be a temporary discontinuation of funding for a specific
project which the Company has been performing under the DOD contract. Revenues
from discontinued operations decreased by 25% to $2,322,000 due to a shorter
revenue period in 1997 as well as the receipt of two large nonrecurring orders
in 1996.
Revenues earned under the DOD contracts decreased from approximately $8.9
million to $5.8 million, due to the discontinuation of funding by the DOD as
mentioned above. Revenues earned under commercial and government-related
subcontracts also decreased due to reduced marketing efforts during the earlier
part of the year when the Company devoted substantial resources to the DOD
conversion contract and the completion of certain commercial contracts.
Production costs from continuing operations decreased 32% in 1997 as
compared to 1996 in accordance with the decrease in revenues.
Research and development costs decreased 52 percent in 1997 as compared to
1996 as the Company employed much of its resources to improving existing
production lines. The Company, however, continues to devote resources to the
development of new document conversion capabilities.
General and administrative expenses decreased 10 percent in 1997 from the
fiscal year 1996 primarily as a result of the Company's decreased operations.
Depreciation and amortization expense decreased 20 percent during fiscal
1997 as compared to fiscal 1996 primarily due to equipment becoming fully
depreciated.
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FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Company reported net income applicable to common stockholders of
$708,983 for fiscal 1996, compared to a net loss applicable to common
stockholders of $665,897 in 1995. The improvement in operating income was
attributable to improved results from backfile conversion service revenues and
the absence of losses incurred from litigation support conversion services. The
Company discontinued providing litigation support services in 1995 as a result
of continuing losses incurred by the division.
Operating revenues totaled $10,427,000 in fiscal 1996, a 59 percent
increase over 1995 revenues. Revenues earned under DOD contracts increased from
approximately $4.2 million to $8.9 million, resulting from a $14.8 million
contract awarded in early 1996. Revenues earned under commercial and
government-related subcontracts decreased as the Company devoted substantial
production resources to the DOD conversion contract.
Production costs increased 68 percent in 1996 as compared to 1995. The
increase was slightly higher than the increase in revenues and reflects a small
increase in the cost of supplies and labor.
Research and development expenses increased 27 percent from 1995 to 1996
as the Company continued to devote resources to enhancement of its document
conversion capabilities.
General and administrative expenses increased 15 percent during 1996 as
compared to 1995. The increase was due primarily to management incentive bonus
plans activated by the increase in profitability in 1996 as compared to prior
years, as well as to increases in personnel.
Depreciation and amortization expense decreased 12 percent during fiscal
1996 as compared to fiscal 1995 primarily due to equipment becoming fully
depreciated.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been supplemented
through bank borrowings, capital contributions, borrowings from affiliated and
unaffiliated lenders, capital lease agreements, an initial public offering of
the Company's Common Stock in 1989, the conversion of warrants into Common Stock
and private preferred stock placements.
The Company has performed conversion services for the Department of
Defense (DOD) through contracts from the Defense Printing Services Office (DPS).
A 1991 award resulted in a contract totaling $16.8 million through April 1996. A
1996 award for $14.8 million was amended and extended by $5.6 million through
April 1998. During 1997, the Company generated approximately $5.8 million, or
87% of operating revenues through DOD contracts. In December 1997 the DOD
awarded an additional, similar contract with a term of one year for
approximately $15.5 million. The terms of the contract includes four additional
option years so that the entire contract has a potential value of $77.8 million.
Substantially all of the Company's unbilled revenues at December 31, 1997,
relate to conversion services performed for agencies of the U.S. Government. The
Company's ability to invoice
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these unbilled revenues is dependent upon a number of factors including quality
control acceptance and the availability of funding to the respective agencies.
The Company was contacted in mid-1997 and informed that funding for certain
conversion services being performed had been depleted. Management elected to
complete work that had been placed in production at that time despite the lack
of assurance that funding would become available. As a result, the Company has
been unable to invoice approximately $1.2 million of conversion services that
were performed during 1997. The conversion products associated with the $1.2
million of unbilled revenues have been shipped to the customer and are in
various stages of quality control review. Management of the Company, based upon
its past operating history and its ongoing discussions with various governmental
personnel regarding the availability of additional funding, believes that all of
such unbilled revenues at December 31, 1997, will be invoiced and collected
during 1998. However, there can be no assurances that the customer will accept
all of the work product nor are there any assurances that sufficient funding
will be made available to enable the Company to invoice unbilled revenues. The
inability of the Company to realize its unbilled revenues would have a material
adverse effect on the Company's future results of operations and its financial
position.
Additionally, in March 1998, the General Services Administration (GSA)
awarded a Federal Supply Schedule to the Company which is effective until
September 30, 2002. Federal Supply Schedules are centralized contracts
established by the GSA for the use of all government agencies. There are no
limitations to order size or cumulative order value under such contracts. Under
the Federal Supply Schedule awarded to Docucon, any government agency can buy a
wide variety of document conversion services directly from Docucon..
In March 1994, the Company purchased the assets and assumed certain
liabilities of J. Feuerstein Systems for approximately $200,000 cash. In
November 1997, the Company sold the assets of the division to Bowne & Co., Inc.,
for $6.5 million. A total of $800,000 was placed in an escrow account as
security for certain representations and warranties made to the buyer.
Management does not anticipate any material claims to be made against the
representations and warranties and expects the funds will be released from
escrow on November 25, 1998 and November 25, 1999 in two amounts of $400,000
each. Including the escrowed funds, net cash proceeds after expenses relating to
the sale were approximately $5.7 million. Cash proceeds were used to pay down
the Company's line of credit after year-end and to fund continuing operations.
The Company plans to invest excess proceeds in short-term securities which would
be available for capital or operational needs.
In October 1996 the Company obtained long term financing to replace the
existing mortgage note for its office building with December 1996 maturity. The
new note bears interest at a fixed rate of 9.5%, payable monthly to a commercial
bank, and is being amortized over a 20-year term with a 5-year maturity. The
note is secured by the Company's building, other fixed assets, accounts
receivable and inventory. Approximately $68,000 of debt issuance costs were
incurred in connection with this refinancing. In April 1998, certain of the
affirmative covenants relating to this note were modified. The Company believes
that it will be able to maintain compliance with all of the requirements under
the note payable, as modified, based upon anticipated operating results for
1998. However, if the Company is unable to comply with such requirements in the
future, the Company could be found in technical default under the note payable
and the lender would have the right to demand immediate repayment of the entire
amount outstanding. The Company believes that sufficient resources would be
available to fund repayment in the event of such acceleration. In connection
with obtaining modifications to the note agreement, the Company was required to
reserve, out of its cash balances, one year's worth of debt service payments of
approximately $173,000. The Company utilizes the
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building for office and production space and believes that the building will
fulfill its needs for the foreseeable future.
Net cash and cash equivalents increased $4.4 million from December 31,
1996 to December 31, 1997 as a result of the sale of the JFS division.
Additionally, the increase in net long-term assets is due to the long-term
nature of the agreement for one half of the escrow funds, or $400,000, which
will remain in escrow until late 1999. Trade accounts receivable decreased
approximately $879,000 from December 31, 1996 to December 31, 1997 as a result
of the lower year-end revenue levels for the DOD. Unbilled revenues decreased
only slightly as the Company awaits approximately $1.2 million in funding from
the DOD (see Note 3). Although funding has been anticipated for approximately
nine months, management believes that funding will be obtained and the unbilled
revenues will be invoiced and collected during 1998. Approximately $400,000 of
the escrow amount previously discussed is to be released to the Company in
November 1998, resulting in an increase in other receivables as compared to
December 31, 1996. Accounts payable and accrued liabilities decreased
approximately $1,137,000 for the comparable periods as a result of lower
expenses for the decreased level of revenue provided to the DOD at the 1997 year
end and payment of certain liabilities with a portion of the proceeds from the
JFS sale.
The Company expects to fund its operations and marketing activities
through utilization of cash on hand and cash generated from operations. These
funds are expected to be adequate for the Company's needs for at least the next
12 months. During 1997, the Company fully utilized its $750,000 revolving term
note to fund short-term cash needs. At December 31, 1997, $504,000 was
outstanding under the line of credit which was repaid in its entirety in January
1998. The Company voluntarily terminated the line of credit in April 1998. While
the Company may consider and evaluate, from time to time, acquisitions and
opportunities for future growth, the Company has not entered into any agreements
with respect to future acquisitions. Should the Company enter into any such
agreements, the Company would, in all likelihood, be required to raise outside
capital to consummate such transactions.
YEAR 2000 COMPLIANCE
The efficient operations of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize data sensitive information for
the year 2000 and beyond. Unless modified prior to the year 2000, such systems
may not properly recognize such information and could generate erroneous data or
cause a system to fail to operate properly.
Based on current information, the Company expects to attain year 2000
compliance and institute appropriate testing of its modifications and
replacements in a timely fashion and in advance of the year 2000 date change. It
is anticipated that modification or replacement of the Company's Programs and
Systems will be performed in-house by company personnel. The Company believes
that, with modifications to existing software and conversions to new software,
the year 2000 problem will not pose a significant operational problem for the
Company. However, because most computer
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systems are, by their very nature, interdependent, it is possible that
non-compliant third party computers may not interface properly with the
Company's computer systems. The Company could be adversely affected by the year
2000 problem if it or unrelated parties fail to successfully address this issue.
Management of the Company currently anticipates that the expenses and capital
expenditures associated with its year 2000 compliance project will not have a
material effect on its financial position or results of operations.
OUTLOOK
After considering various strategic options over the past twelve months,
the Company is currently in the process of expanding and diversifying its
services both within and beyond the government market. With respect to
government opportunities, the Company is pursuing two paths of growth. The
recent approvals to market under contracts awarded by the Department of Defense
and the General Services Administration offer the potential for significant new
orders. Additionally, to intensify such efforts, the Company is in the process
of opening a Washington D.C. sales office and hiring a senior executive to build
a sales and marketing organization in the market.
As part of its analysis of the Company's strategic options, the Board of
Directors and management has adopted a plan to expand its activities in the
document and knowledge management fields. The Company expects to diversify
beyond the historic scope of its conversion business. Such diversification could
include additional geographic and vertical markets, additional services and a
wider range in the size of the contracts under which it operates.
The appointment of Douglas P. Gill as successor to Edward P. Gistaro as
Chief Executive Officer on April 1, 1998 also provides the impetus for expansion
of the Company's services and capabilities. Mr. Gistaro retired from day-to-day
operations and remains as Chairman of the Board. Mr. Gill, a former General
Partner of a venture capital and buy-out firm, has significant experience in
mergers and acquisitions, capital markets and financial and operating
management.
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ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Company meeting the requirements of Regulation
S-B are filed on the succeeding pages of this Item 7 of this Annual Report on
Form 10-KSB, as listed below:
PAGE
----
Report of Independent Public Accountants 13
Balance Sheets as of December 31, 1997 and 1996 14
Statements of Operations for the Years Ended
December 31, 1997 and 1996 16
Statements of Stockholders' Equity for the
Years Ended December 31, 1997 and 1996 17
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 18
Notes to Financial Statements 19
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Docucon, Incorporated:
We have audited the accompanying balance sheets of Docucon, Incorporated (a
Delaware corporation), as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Docucon, Incorporated, as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 18, 1998 (except
with respect to the matters
discussed in Note 6, as to
which the date is April 14,
1998)
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DOCUCON, INCORPORATED
BALANCE SHEETS
DECEMBER 31
------------------------
ASSETS 1997 1996
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 4,597,183 $ 198,152
Accounts receivable-trade, net of allowance for
doubtful accounts of $4,444 in 1997 and 1996-
U.S. Government ................................ 620,934 1,492,509
Commercial ..................................... 335,300 342,574
Unbilled revenues ................................. 1,472,075 1,655,428
Other receivables ................................. 405,336 6,834
Prepaid expenses and other ........................ 77,044 169,795
Net current assets of discontinued operations ..... -- 186,166
----------- ----------
Total current assets ............ 7,507,872 4,051,458
----------- ----------
PROPERTY AND EQUIPMENT:
Conversion systems ................................ 4,589,473 4,732,297
Building and improvements ......................... 1,744,499 1,736,666
Land .............................................. 230,000 230,000
Furniture and fixtures ............................ 205,602 275,279
----------- ----------
Total property and equipment .... 6,769,574 6,974,242
Less- Accumulated depreciation and amortization ... 4,680,368 4,541,487
----------- ----------
Net property and equipment ...... 2,089,206 2,432,755
----------- ----------
OTHER ASSETS, net ................................... 472,490 64,556
----------- ----------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS ..... -- 1,047,408
----------- ----------
Total assets .................... $10,069,568 $7,596,177
=========== ==========
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ..................................... $ 482,076 $ 1,403,419
Accrued liabilities .................................. 616,615 833,040
Income taxes payable ................................. 191,000 52,619
Revolving term note .................................. 504,000 750,000
Deferred revenues .................................... -- 20,300
Current maturities of long-term debt ................. 30,722 27,729
Current maturities of capital lease obligations ...... 15,798 11,820
------------ -----------
Total current liabilities ................ 1,840,211 3,098,927
------------ -----------
LONG-TERM DEBT ......................................... 1,485,079 1,517,970
------------ -----------
CAPITAL LEASE OBLIGATIONS .............................. 49,547 51,211
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 10,000,000 shares
authorized-
Series A, 60 shares authorized, 12 and 19 shares
outstanding as of December 31, 1997 and 1996,
respectively ...................................... 12 19
Common stock, $.01 par value, 25,000,000 shares
authorized; 13,043,556 and 12,032,559 shares
outstanding as of December 31, 1997 and 1996,
respectively ........................................ 130,436 120,326
Additional paid-in capital ........................... 9,971,346 9,640,036
Accumulated deficit .................................. (3,407,063) (6,832,312)
------------ -----------
Total stockholders' equity ............... 6,694,731 2,928,069
------------ -----------
Total liabilities and stockholders' equity $ 10,069,568 $ 7,596,177
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING REVENUES ........................................ $ 6,664,325 $ 10,426,850
------------ ------------
COSTS AND EXPENSES:
Production .............................................. 4,636,087 6,843,212
Research and development ................................ 97,710 205,077
General and administrative .............................. 1,029,073 1,138,711
Marketing ............................................... 632,632 682,741
Depreciation and amortization ........................... 412,193 516,128
------------ ------------
6,807,695 9,385,869
------------ ------------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ........ (143,370) 1,040,981
OTHER INCOME (EXPENSE):
Interest expense ........................................ (207,805) (164,476)
Other, net .............................................. 73,736 28,086
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ............................................ (277,439) 904,591
Income tax expense ........................................ -- 37,000
------------ ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS .............. (277,439) 867,591
------------ ------------
Preferred stock dividend requirements ..................... 46,420 55,688
------------ ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
APPLICABLE TO COMMON STOCKHOLDERS ....................... (323,859) 811,903
Loss from discontinued operations ......................... (769,721) (102,920)
Gain on disposal of discontinued software
division, net of income tax expense of $191,000 ......... 4,472,409 --
------------ ------------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS .............. $ 3,378,829 $ 708,983
============ ============
Basic earnings (loss) from continuing operations per common
share ................................................... $ (.03) $ .07
Basic earnings (loss) from discontinued operations per
common share ............................................ .30 (.01)
------------ ------------
BASIC EARNINGS PER COMMON SHARE ........................... $ .27 $ .06
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ...... 12,521,485 11,945,504
============ ============
Diluted earnings (loss) from continuing operations per
common share and common share equivalents ............... $ (.03) $ .07
Diluted earnings (loss) from discontinued operations per
common share and common share equivalents ............... .30 (.01)
------------ ------------
DILUTED EARNINGS PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS ............................................. $ .27 $ .06
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING ................................. 12,521,485 12,485,322
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------
NUMBER NUMBER OF
OF SHARES AMOUNT SHARES AMOUNT
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ..................... 21 $ 21 11,771,228 $117,712
Director stock option exercises .............. -- -- 40,000 400
Stock option exercises ....................... -- -- 26,382 265
Options issued to vendor ..................... -- -- -- --
Shares issued pursuant to employee stock plans -- -- 100,583 1,006
Conversion of Series A preferred stock ....... (2) (2) 66,666 666
Shares issued to pay preferred stock dividends -- -- 27,700 277
Net income ................................... -- -- -- --
-------- -------- ---------- --------
BALANCE, December 31, 1996 ..................... 19 19 12,032,559 120,326
Stock option exercises ....................... -- -- 342,668 3,427
Shares issued pursuant to employee stock plans -- -- 286,050 2,860
Conversion of Series A preferred stock ....... (7) (7) 233,331 2,333
Shares issued to pay preferred stock dividends -- -- 148,948 1,490
Compensation expense ......................... -- -- -- --
Net income ................................... -- -- -- --
-------- -------- ---------- --------
BALANCE, December 31, 1997 ..................... 12 $ 12 13,043,556 $130,436
======== ======== ========== ========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
----------- ----------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1995 ..................... $ 9,506,553 $(7,596,983) $2,027,303
Director stock option exercises .............. 22,000 -- 22,400
Stock option exercises ....................... 14,465 -- 14,730
Options issued to vendor ..................... 7,787 -- 7,787
Shares issued pursuant to employee stock plans 90,172 -- 91,178
Conversion of Series A preferred stock ....... (664) -- --
Shares issued to pay preferred stock dividends (277) -- --
Net income ................................... -- 764,671 764,671
----------- ----------- ----------
BALANCE, December 31, 1996 ..................... 9,640,036 (6,832,312) 2,928,069
Stock option exercises ....................... 199,837 -- 203,264
Shares issued pursuant to employee stock plans 88,289 -- 91,149
Conversion of Series A preferred stock ....... (2,326) -- --
Shares issued to pay preferred stock dividends (1,490) -- --
Compensation expense ......................... 47,000 -- 47,000
Net income ................................... -- 3,425,249 3,425,249
----------- ----------- ----------
BALANCE, December 31, 1997 ..................... $ 9,971,346 $(3,407,063) $6,694,731
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations .......... $ (277,439) $ 867,591
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization ...................... 412,193 516,128
Changes in current assets and current liabilities-
(Increase) decrease in receivables and unbilled
revenues ........................................ 1,246,834 (1,488,797)
(Increase) decrease in prepaid expenses and other . 92,751 (117,980)
Increase (decrease) in accounts payable and accrued
liabilities ..................................... (1,209,279) 816,143
(Decrease) increase in deferred revenues .......... (20,300) 20,300
----------- -----------
Net cash provided by operating activities 244,760 613,385
----------- -----------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS .. 4,369,828 (477,941)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (220,146) (599,673)
----------- -----------
Net cash used in investing activities .... (220,146) (599,673)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving term note .................... 3,395,500 750,000
Payments on revolving term note ....................... (3,641,500) (400,000)
Proceeds from notes payable ........................... -- 1,550,000
Principal payments on notes payable ................... (29,898) (1,504,301)
Principal payments under capital lease obligations .... (13,926) (8,580)
Proceeds from employee stock purchase plan ............ 91,149 91,178
Proceeds from exercise of options ..................... 203,264 44,917
----------- -----------
Net cash provided by financing activities 4,589 523,214
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 4,399,031 58,985
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of year ............ 198,152 139,167
----------- -----------
CASH AND CASH EQUIVALENTS, end of year .................. $ 4,597,183 $ 198,152
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF THE COMPANY:
Docucon, Incorporated (the Company), was incorporated in June 1986. The
Company's primary business is the conversion of paper and microform documents to
a computer accessible medium for commercial and governmental customers. Paper or
microform documents are scanned by sophisticated computer equipment and stored
and indexed on optical disks or magnetic media. Substantially all of the
Company's customers are located in the U.S.
In March 1994, the Company acquired substantially all of the assets and assumed
certain liabilities of J. Feuerstein Systems, Inc. (JFS), a company which
provided software products to the legal market. In November 1997, the Company
sold its software division as disclosed in Note 12.
Since its inception, the Company has incurred cumulative net losses of
approximately $3.4 million. However, during the years ended December 31, 1997
and 1996, the Company reported net income of approximately $3.4 million and $.8
million, respectively. The 1997 net income amount includes a net gain on
disposal of the discontinued software division of approximately $4.5 million, a
loss from discontinued operations of approximately $.8 million and a loss from
continuing operations of $.3 million. The cumulative net losses have been funded
primarily through the Company's public offering of common stock, issuances of
preferred stock, the exercise of warrants and debt financing. The Company has
taken steps to improve its operating results including exiting the litigation
support services market, selling its software division and focusing on the
Company's document conversion business. The Company's management believes that
it is likely that the Company's results from operations for 1998 will improve
and will generate sufficient working capital, along with available cash, to
sustain its operations throughout the year. However, there can be no assurances
that the Company's focus on document conversion will improve its operating
results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at original cost. Maintenance and repairs
are charged to expense as incurred and betterments which increase the value or
extend the useful life of the property are capitalized. Gains or losses on sales
or other dispositions of property and equipment are credited or charged to
income.
Depreciation is provided using the straight-line method over the lesser of the
capital lease term or estimated useful lives of the related assets. The
Company's conversion system and furniture and fixtures are currently depreciated
over periods ranging from two to five years beginning in the month the property
is placed in service. The Company's building is being depreciated over 40 years.
REVENUE RECOGNITION
Revenues from conversion service contracts are recognized at the time services
are provided and are based upon the number of documents converted and the
conversion rates established in the contracts.
19
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
STATEMENTS OF CASH FLOWS-
SUPPLEMENTAL DISCLOSURES
The Company considers funds invested in highly liquid investments having a
maturity of 90 days or less when acquired to be cash equivalents.
The following relates to cash interest and income taxes paid by the Company for
the periods indicated:
YEAR ENDED
DECEMBER 31
----------------------
1997 1996
-------- --------
Cash paid during the year for interest ............. $220,599 $149,287
======== ========
Cash paid during the year for income taxes ......... $ 62,478 $ 13,173
======== ========
During the years ended December 31, 1997 and 1996, the Company had noncash
investing and financing activities consisting of new capital lease obligations
entered into of $16,240 and $68,504, respectively.
POST RETIREMENT AND POST EMPLOYMENT BENEFITS
The Company does not provide post retirement or post employment benefits to its
employees.
SELF-INSURANCE RISK
The Company self insures under its medical coverage for employees and dependents
based upon monthly attachment limits which are calculated based upon the number
of participants and monthly participant charges. The Company accrues for known
claims and an estimate of claims incurred but not reported up to the maximum
anticipated costs to the Company.
During 1997 and 1996, the Company recognized approximately $400,000 and
$300,000, respectively, in self-insurance expense under the attachment limits.
The Company's insurer will pay cumulative claims above the attachment limit up
to $1 million lifetime per covered individual. The Company does not believe that
claims reported and claims incurred but not reported will exceed the amounts to
be covered by the insurer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
20
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 replaces the presentation of Primary Earnings Per Share
(EPS) with Basic EPS and requires dual presentation of Basic and Diluted EPS on
the face of the statements of operations. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. SFAS No. 128 is effective for financial statements issued after
December 15, 1997, and, accordingly, the accompanying financial statements
reflect the adoption of SFAS No. 128. As the Company had a net loss from
continuing operations for the year ended December 31, 1997, Diluted EPS equals
Basic EPS as potentially dilutive common stock equivalents are antidilutive in
loss periods. Prior period EPS data has been restated as required by SFAS No.
128. The following table provides a reconciliation of the denominator (weighted
average common shares and common share equivalents outstanding) used to compute
Basic and Diluted EPS:
YEAR ENDED DECEMBER 31
------------------------
1997 1996
---------- ----------
Weighted average number of common shares
outstanding for Basic EPS ........................ 12,521,485 11,945,504
Weighted average incremental shares outstanding
upon assumed conversion of dilutive options
and warrants ..................................... -- 539,818
---------- ----------
Weighted average number of common shares and
common share equivalents outstanding for
Diluted EPS ...................................... 12,521,485 12,485,322
========== ==========
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to
the 1997 presentation.
3. UNBILLED REVENUES:
Substantially all of the Company's unbilled revenues at December 31, 1997,
relate to conversion services performed for agencies of the U.S. Government. The
Company's ability to invoice these unbilled revenues is dependent upon a number
of factors including quality control acceptance and the availability of funding
to the respective agencies. The Company was contacted in mid-1997 and informed
that funding for certain conversion services being performed had been depleted.
Management elected to complete work that had been placed in production at that
time despite the lack of assurance that funding would become available. As a
result, the Company has been unable to invoice approximately $1.2 million of
conversion services that were performed during 1997. The conversion products
associated with the $1.2 million of unbilled revenues have been shipped to the
customer and are in various stages of quality control review. Management of the
Company, based upon its past operating history and its ongoing discussions with
various governmental personnel regarding the availability of additional funding,
believes that all of such unbilled revenues at December 31, 1997, will be
invoiced and collected during 1998. However, there can be no assurances that the
customer will accept all of the work product nor are there any assurances that
sufficient funding will be made available to enable the Company to invoice the
unbilled revenues. The inability of the Company to realize its unbilled revenues
would have a material adverse effect on the Company's future results of
operations and its financial position.
21
<PAGE>
4. REVOLVING TERM NOTE:
In connection with the refinancing of the note payable discussed in Note 6, the
Company also obtained a $750,000 revolving term note (the Revolver) which was
originally scheduled to mature on October 31, 1997. During 1997, the maturity
date was extended to May 31, 1998. At December 31, 1997, $504,000 was
outstanding under the Revolver. The Revolver bears interest at the bank's Base
Rate (as defined) plus .75 percent (9.25 percent at December 31, 1997). Interest
is payable monthly and the Revolver is secured by the same collateral as the
note payable. Subsequent to December 31, 1997, the Company repaid the entire
balance outstanding under the Revolver and voluntarily terminated the Revolver.
5. LEASES:
Certain office equipment and office space is leased under various noncancelable
operating leases with lease terms ranging from one to five years. Rent expense
under all cancelable and noncancelable operating leases was approximately
$175,000 and $285,000 for the years ended December 31, 1997 and 1996,
respectively. Future minimum lease payments for all noncancelable operating
leases, net of noncancelable subleases, as of December 31, 1997, are as follows:
Year ending December 31-
1998 .................................. $ 8,205
1999 .................................. 7,957
2000 .................................. 1,484
-------
Total future minimum lease payments ... $17,646
=======
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
In connection with the purchase of its headquarter's building, the Company
issued a four-year, 8 percent, $1.5 million promissory note due in December
1996. Additionally, the Company issued 900,000 warrants, which expire in
December 1999, to purchase an equivalent number of shares of common stock at an
exercise price of $2.00 per share. In October 1996, the Company refinanced the
$1.5 million note. The new note is payable to a commercial bank, bears interest
at a fixed rate of 9.5 percent per annum and requires monthly principal and
interest payments of $14,448 with the remaining balance maturing in October
2001. The note payable is secured by the Company's building, other fixed assets,
accounts receivable and inventory. Debt issuance costs of approximately $68,000
incurred in October 1996 related to this refinancing were capitalized and are
being amortized over the five-year term. These costs are reflected as a
component of other assets, net, on the accompanying balance sheet.
As a result of the disposition of the Company's software division in 1997, in
April 1998, certain of the affirmative covenants relating to this note were
modified. The note agreement contains various affirmative and negative covenants
and requires the Company to maintain (as modified and as defined in the note
agreement); (i) a current ratio of not less than 1:1, (ii) a debt-to-net worth
ratio of not more than .75:1, (iii) a quarterly debt coverage ratio of not less
than 1.25:1 beginning in the quarterly period ending September 30, 1998, and
1.25:1 thereafter and (iv) a minimum tangible net worth of $5.5 million.
Management believes that the Company will be able to maintain compliance with
all of the requirements under the note payable, as modified, based upon
anticipated operating results for 1998. However, if the Company is unable to
comply with such requirements in the future, the Company could be found to be in
technical default under the note payable and the lender would have the right to
demand immediate repayment of the entire amount
22
<PAGE>
outstanding. Management believes that sufficient resources would be available to
fund such amounts in the event of such acceleration. At December 31, 1997,
approximately $1.5 million was outstanding under the note payable. In connection
with obtaining modifications to the note agreement, the Company was required to
reserve, out of its cash balances, one year's worth of debt service payments
(approximately $173,000) under the note agreement. During 1997, the Company
obtained a waiver from its lender for additional indebtedness that was incurred
relating to capital lease obligations incurred and short-term borrowings from
one of the Company's officers. The fair value of the Company's long-term debt
approximates its carrying value based upon the borrowing rates available to the
Company for long-term debt with similar terms.
Maturities of this note payable as of December 31, 1997, are as follows:
Year ending December 31-
1998 .................................... $ 30,722
1999 .................................... 33,506
2000 .................................... 36,831
2001 .................................... 1,414,742
----------
Total .......................... $1,515,801
==========
Equipment held under capital leases and related obligations at December 31,
1997, are as follows:
Office equipment requiring monthly principal and
interest payments of $339, interest at
9.5 percent and maturing April 2002 ......................... $ 17,649
Telecommunications equipment requiring monthly
principal and interest payments of $977,
interest at 9.3 percent and maturing July 2001 .............. 42,018
Office equipment requiring monthly principal and
interest payments of $458, interest at
9.5 percent and maturing April 2001 ......................... 18,318
--------
Total capital lease payments .................................. 77,985
Less- Amounts representing interest ........................... (12,640)
--------
Capital lease obligations ..................................... $ 65,345
========
Maturities of capital lease obligations as of December 31, 1997, are as follows:
Year ending December 31-
1998 ................................................ $15,798
1999 ................................................ 17,346
2000 ................................................ 19,047
2001 ................................................ 12,180
2002 ................................................ 974
-------
Total .......................................... $65,345
=======
23
<PAGE>
7. MAJOR CUSTOMER:
The Company has historically earned a significant portion of its total revenues
from conversion services performed for the Department of Defense (DOD). The
Company had revenues of approximately $5.8 million and $8.9 million during the
years ended December 31, 1997 and 1996, respectively, from services provided to
the DOD. Substantially all of the Company's accounts receivable from the U.S.
Government at December 31, 1997, were collected in early 1998.
8. PREFERRED STOCK:
In 1990, the Company issued 46 shares of 11 percent Series A preferred stock at
$25,000 per share. Each share of preferred stock is convertible into 33,333
shares of common stock. Through December 31, 1997, 34 shares of preferred stock
have been converted. Additionally, 368,617 shares of common stock have been
issued in lieu of accumulated dividends on the preferred stock which was
converted. As of December 31, 1997, cumulative undeclared dividends on the
outstanding preferred stock approximated $242,000.
9. STOCK OPTIONS:
The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allows for
the granting of stock options at the current market value of the common stock at
the date of the grant to key employees. In August 1997, the Company's
shareholders authorized a 300,000 share increase in the number of shares of
common stock reserved for issuance pursuant to the 1988 Plan. As a result, an
aggregate of 1,660,000 shares of common stock has been reserved for issuance
pursuant to the 1988 Plan.
The 1991 Director Non-Statutory Stock Option Plan (the Director Plan) provides
for the granting of options at the common stock's current market value to
members of the Board of Directors of the Company who are not employees of the
Company. The Director Plan authorizes the granting of options to purchase up to
500,000 shares of the Company's common stock. The stock options granted under
the 1988 Plan and the Director Plan are exercisable pursuant to the individual
agreements between the Company and the grantee and range from a six-month to a
three-year vesting period. All options granted under these plans must be
exercised within 10 years from the date of grant and expire within three months
after termination of employment or service as a director.
A summary of activity in the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE MARKET PRICE
EXERCISE OPTION PRICE AT DATE OF GRANT
PRICE ------------------------- ----------------------------
SHARES PER SHARE PER SHARE TOTAL PER SHARE TOTAL
--------- ------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, December 31, 1995 1,287,550 $ .56 $ .41 - $ .56 $ 716,039 $ .41 - $2.44 $ 1,257,463
========= ========= ===========
Granted ...................... 284,200 .93 .88 - 1.22 265,194 .88 - 1.22 265,194
Exercised .................... (66,383) .56 .53 - .56 (37,111) .53 - 1.44 (61,653)
Terminated ................... (40,617) .68 .44 - .56 (27,675) .44 - 1.44 (31,451)
--------- --------- -----------
Outstanding, December 31, 1996 1,464,750 .63 .41 - 1.22 $ 916,447 .41 - 2.44 $ 1,429,553
========= ========= ===========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE MARKET PRICE
EXERCISE OPTION PRICE AT DATE OF GRANT
PRICE ------------------------- ----------------------------
SHARES PER SHARE PER SHARE TOTAL PER SHARE TOTAL
--------- ------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercisable, December 31, 1996. 1,184,272 .59 .41 - 1.22 $ 702,410 .41 - 2.44 $ 1,187,191
========= ========= ===========
Granted........................ 293,452 .78 .66 - 1.38 229,341 .66 - 1.38 229,341
Exercised...................... (342,668) .61 .53 - 1.03 (208,264) .56 - 1.44 (289,954)
Terminated..................... (320,424) .73 .41 - 1.38 (234,953) .41 - 1.38 (269,437)
--------- --------- -----------
Outstanding, December 31, 1997. 1,095,110 .64 .53 - 1.38 $ 702,571 .41 - 2.44 $ 857,141
========= ========= ===========
Exercisable, December 31, 1997. 920,627 .61 .53 - 1.38 $ 565,547 .41 - 2.44 $ 933,045
========= ========= ===========
</TABLE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Entities electing to remain with the accounting prescribed by APB 25, as
the Company has, must make pro forma disclosures of net income and earnings per
share as if the fair value based method recommended by SFAS 123 had been
applied. The following provides pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting under SFAS 123 had
been applied.
Had compensation cost for these plans been determined consistent with SFAS 123,
the Company's net income and basic earnings per share would have been reduced to
the following pro forma amounts:
1997 1996
---------- --------
Net Income As Reported $3,425,249 $764,671
Pro Forma 3,309,238 592,978
Basic Earnings Per Share As Reported $ .27 $ .06
Pro Forma .26 .05
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
25
<PAGE>
The weighted average fair values per share of options granted during 1997 and
1996 were $.60 and $.65, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1997 and 1996,
respectively: risk-free interest rates of 6.0 percent and 6.0 percent, expected
dividend yields of 0 percent and 0 percent, expected lives of 5 years and 5
years and expected volatility of 125 percent and 87 percent.
Included as a component of pro forma expense for 1997 and 1996 is compensation
expense of approximately $17,000 and $71,000, respectively, related to the 1993
Employee Stock Purchase Plan described in Note 10.
In addition to the above stock option agreements, the Company has warrants
outstanding with certain lenders and other parties. As of December 31, 1997, the
total number of shares issuable under these warrants was 960,000. Warrants to
purchase 900,000 shares of common stock at $2 per share expire in December 1999
and warrants to purchase 60,000 shares of common stock at $1.25 per share expire
in June 2001.
10. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1994, the Company adopted the 1993 Employee Stock Purchase
Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, eligible
employees may elect to have up to 10 percent of their base pay (as defined)
deducted and utilized to purchase common stock of the Company in annual or
semiannual offerings. In August 1997, the Company's shareholders authorized an
increase in the number of shares of common stock reserved for issuance pursuant
to the Stock Purchase Plan by 200,000 shares. The Company has reserved 1,000,000
shares of common stock for issuance pursuant to the Stock Purchase Plan. In
January 1998 and 1997, the Company issued 107,236 and 286,048 shares of common
stock at purchase prices of $.85 and $.32 per share, respectively. The annual
purchase price is 85 percent of the lesser of the closing price of the Company's
common stock at the beginning or end of each calendar year. The purchase prices
represent 85 percent of the closing price on December 30, 1997, and January 2,
1996, respectively. The Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors and will expire on December 31, 1998, unless
sooner terminated or amended by the Board of Directors. At December 31, 1997,
435,150 shares remain available for issuance.
The Company also maintains a qualified employee benefit plan under Section
401(k) of the Internal Revenue Code. Under this plan, employees meeting certain
eligibility requirements may contribute up to 15 percent of their eligible
compensation to the plan on a pretax basis. In addition, the Company may make
voluntary matching contributions to the plan. At December 31, 1997 and 1996,
respectively, the Company had accrued approximately $56,000 and $28,000 as its
matching contributions to the plan.
11. INCOME TAXES:
The Company follows SFAS No. 109, "Accounting for Income Taxes." This statement
establishes financial accounting and reporting standards for deferred income tax
assets and liabilities that arise as a result of differences between the
reported amounts of assets and liabilities for financial reporting and income
tax purposes.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $2,600,000 for federal income tax purposes which are available to
reduce future taxable income and will expire in 2006 through 2010 if not
utilized.
26
<PAGE>
Income tax expense is included in the financial statements as follows:
YEAR ENDED
DECEMBER 31
----------------------
1997 1996
-------- -------
Continuing operations ............................. $ -- $37,000
Discontinued operations ........................... 191,000 --
-------- -------
Total income tax expense .............. $191,000 $37,000
======== =======
The components of income tax expense are as follows:
YEAR ENDED
DECEMBER 31
------------------------
1997 1996
-------- -------
Federal ....................................... $ 61,000 $ 3,000
State ......................................... 130,000 34,000
-------- -------
Total income tax expense ................ $191,000 $37,000
======== =======
Total income tax expense (benefit) from continuing operations differs from the
amount computed by applying the statutory federal income tax rate to income
(loss) from continuing operations before income taxes. The reasons for these
differences are as follows:
YEAR ENDED
DECEMBER 31
-----------------------
1997 1996
-------- ---------
Expected federal income tax expense
(benefit) ....................................... $(94,000) $ 308,000
State income taxes ................................ -- 34,000
Alternative minimum tax expense ................... -- 3,000
Tax loss carryforwards generated (utilized) ....... 94,000 (308,000)
-------- ---------
Total income tax expense from continuing
operations ................................... $ -- $ 37,000
======== =========
The tax effect of significant temporary differences representing income tax
assets (liabilities) is as follows:
DECEMBER 31
-----------------------------
1997 1996
---------- -----------
Deferred income tax assets
(liabilities)-
Tax loss carryforwards ................. $ 885,000 $ 1,932,000
Tax credit carryforwards ............... 81,000 20,000
Depreciation ........................... 135,000 135,000
Accruals ............................... 41,000 --
Deferred revenues ...................... -- 191,000
Software development costs ............. -- (61,000)
Other .................................. 20,000 46,000
---------- -----------
$1,162,000 $ 2,263,000
========== ===========
27
<PAGE>
A valuation reserve of $1,162,000 and $2,263,000 as of December 31, 1997 and
1996, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.
12. DISCONTINUED OPERATIONS:
In November 1997, the Company sold its software division to a third party for
$6.5 million, resulting in a pretax gain of approximately $4.7 million. As a
result of the sale, the division has been accounted for as a discontinued
operation and, accordingly, the Company has restated its financial statements
for all periods presented in accordance with APB No. 30. The following table
provides certain information related to the discontinued operation.
YEAR ENDED
DECEMBER 31
-----------------------------
1997 1996
----------- -----------
Revenues ................................... $ 2,322,221 $ 3,096,642
=========== ===========
Loss from discontinued operations .......... $ (769,721) $ (102,920)
=========== ===========
Gain on disposal of discontinued
software division, net of income
tax expense of $191,000 .................. $ 4,472,409 $ --
=========== ===========
Under the provisions of the Asset Purchase Agreement (Agreement) between the
Company and the purchaser (Purchaser) of the software division, the Company sold
all of the assets related to this division with the exception of certain office
furniture and equipment and the Purchaser agreed to assume all of the
liabilities of the division with the exception of trade payables, accrued
liabilities and tax liabilities of the Company associated with the operations
and disposition of the division. Under the terms of the Agreement, the Purchaser
paid $800,000 of the purchase price into an escrow fund for purposes of securing
payment for any liability of the Company to the Purchaser under the Agreement,
including the Purchaser's right to indemnification for uncollectible purchased
receivables. The funds in the escrow account, net of any liabilities of the
Company to the Purchaser under the Agreement, are to be released to the Company
in the amount of $400,000 in November 1998 and $400,000 in November 1999.
Management of the Company believes that the entire $800,000 held in escrow will
be paid to the Company and, accordingly, such amounts are reflected as a
component of other current receivables and other long-term assets, net, on the
accompanying balance sheet at December 31, 1997. The Company continued to fund
the payroll for the employees of the software division from the date of purchase
through December 31, 1997, on behalf of the Purchaser. Such amount is reflected
as a component of commercial accounts receivable at December 31, 1997, and was
reimbursed by the Purchaser subsequent to December 31, 1997. In connection with
the sale of the software division, certain terms of stock options to purchase
Company common stock held by employees of the division were modified resulting
in compensation expense of $47,000 which has been reflected as a reduction of
the gain on disposal of discontinued software division.
28
<PAGE>
The components of net current assets and net long-term assets of discontinued
operations at December 31, 1996, are shown below:
Accounts receivable, net ................................... $ 711,714
Prepaid expense and other .................................. 15,507
Deferred revenues .......................................... (541,055)
-----------
Net current assets of discontinued operations .............. $ 186,166
===========
Property and equipment, net ................................ $ 263,824
Software development costs, net ............................ 463,370
Goodwill, net .............................................. 320,214
-----------
Net long-term assets of discontinued
operations ............................................... $ 1,047,408
===========
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The results of operations by quarter for the years ended December 31, 1997 and
1996, were as follows:
<TABLE>
<CAPTION>
1997 QUARTER ENDED
-------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues ..... $ 2,489,648 $ 2,096,083 $ 1,317,352 $ 761,242 $ 6,664,325
============= ============= ============= ============= ===========
Net income (loss) from
continuing operations $ 98,093 $ 277,797 $ (135,587) $ (517,742) $ (277,439)
Net income (loss) from
discontinued
operations ........... (142,193) (215,698) (281,983) 4,342,562 3,702,688
------------- ------------- ------------- ------------- -----------
Net income (loss) ...... $ (44,100) $ 62,099 $ (417,570) $ 3,824,820 $ 3,425,249
============= ============= ============= ============= ===========
Basic income (loss) per
common share-
Continuing operations $ .01 $ .02 $ (.01) $ (.04)
Discontinued
operations ......... (.01) (.02) (.02) .34
------------- ------------- ------------- -------------
Basic income (loss) per
common share ......... $ -- $ -- $ (.03) $ .30
============= ============= ============= =============
Diluted income (loss)
per common share-
Continuing operations $ .01 $ .02 $ (.01) $ (.04)
Discontinued
operations ........ (.01) (.02) (.02) .34
------------- ------------- ------------- -------------
Diluted income (loss)
per common share ..... $ -- $ -- $ (.03) $ .30
============= ============= ============= =============
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
-------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ..... $ 1,788,276 $ 2,386,567 $ 3,146,312 $ 3,105,695 $ 10,426,850
============= ============= ============= ============= ============
Net income (loss) from
continuing operations $ 128,889 $ 84,494 $ 390,584 $ 263,624 $ 867,591
Net income (loss) from
discontinued
operations ........... (109,627) 128,909 101,629 (223,831) (102,920)
------------- ------------- ------------- ------------- ------------
Net income (loss) ...... $ 19,262 $ 213,403 $ 492,213 $ 39,793 $ 764,671
============= ============= ============= ============= ============
Basic income (loss) per
common share-
Continuing operations $ .01 $ .01 $ .03 $ .02
Discontinued
operations ......... (.01) .01 .01 (.02)
------------- ------------- ------------- -------------
Basic income (loss) per
common share ......... $ -- $ .02 $ .04 $ --
============= ============= ============= =============
Diluted income (loss)
per common share-
Continuing operations $ .01 $ .01 $ .03 $ .02
Discontinued
operations ........ (.01) .01 .01 (.02)
------------- ------------- ------------- -------------
Diluted income (loss)
per common share ..... $ -- $ .02 $ .04 $ --
============= ============= ============= =============
</TABLE>
30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1997 or subsequent to that date.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS AND KEY TECHNICAL PERSONNEL
The following table sets forth certain information with respect to the
Company's Directors, executive officers and key technical personnel:
NAME AGE POSITION
Edward P. Gistaro 62 Chairman of the Board of Directors
Douglas P. Gill 49 President, Chief Executive Officer, and
Director
Allan H. Hobgood 59 Chief Operating Officer and Vice
Chairman of the Board of Directors
Lori A. Turner 40 Chief Financial Officer and Treasurer
Ralph Brown 64 Secretary and Director
Al R. Ireton 63 Director
Chauncey E. Schmidt 65 Director
31
<PAGE>
Edward P. Gistaro has served as Chairman of the Board since 1990. He
served as Chief Executive Officer of the Company from June 4, 1988 until April
1, 1998, when the Board of Directors accepted his recommendation that he be
replaced by Douglas P. Gill as Chief Executive Officer. Pursuant to Mr.
Gistaro's retirement, the Board requested that he continue to serve as Chairman,
and he accepted. Mr. Gistaro also served as President of the Company from July
10, 1988 until March 18, 1991. Mr. Gistaro was employed by Datapoint
Corporation, a company involved in the manufacturing of computer systems, in
various managerial positions from 1973 to 1987. From 1982 to 1985 Mr. Gistaro
served as the President and Chief Operating Officer of Datapoint Corporation,
and he served from 1985 to 1987 as its President and Chief Executive Officer.
Douglas P. Gill was elected President and Chief Executive Officer on April
1, 1998. Mr. Gill was a general partner of Foster Management Company, a venture
capital firm, from 1994 until 1998. From 1984 to 1994 Mr. Gill served as First
Vice President of Janney Montgomery Scott, Inc., a regional investment banking
and brokerage firm, and in various management capacities at Scott Paper Company
from 1977 to 1984. Mr. Gill also served as a senior auditor at Arthur Andersen &
Co. (now L.L.P.) from 1972 to 1975.
Lori A. Turner, C.P.A., C.M.A., was appointed Chief Financial Officer in
late 1997. She joined the Company in May 1990 as Controller and was appointed
Treasurer in June 1990 and Vice President Finance in 1996. In July 1991, Ms.
Turner was elected Assistant Secretary to the Company. From 1984 through 1989,
Ms. Turner held various financial positions at Fuddruckers, Inc., a fast-food
restaurant chain. Prior to joining Docucon, she worked as a consultant for
Fuddruckers and other firms.
Ralph Brown, an attorney in private practice since 1968, has served as
Secretary of the Company since May 1, 1987. From 1987 to 1989, he served also as
Treasurer of the Company. Mr. Brown has also served since 1975 as President of
Cherokee Ventures, Inc., a real estate leasing firm, since 1978 as President of
East Central Development Corporation and since 1982 as President of Southeast
Suburban Properties, Inc. The latter two businesses are real estate development
firms.
Al R. Ireton was elected as a Director of the Company in May 1993. Mr.
Ireton has been Chairman of Manchester Partners, an investment and growth
strategy advisory organization providing capital and strategic assistance to
growing companies, since October 1988. From 1985 through September 1988, he
served as President and Chief Executive Officer of Texet Corporation, a desktop
publishing company. Mr. Ireton has 25 years' experience serving as president and
chief executive officer of growth-oriented companies, and has served on several
corporate boards.
Chauncey E. Schmidt was elected to the Board of Directors of the Company
in February 1993. He has been Chairman of C. E. Schmidt & Associates, an
investment firm, since April 1989. From 1987 to March 1989, he was Vice Chairman
of the Board of AMFAC, Inc., a New York Stock Exchange-listed company engaged in
diversified businesses. He has previously served as President of The First
National Bank of Chicago and Chairman of the Board and Chief Executive Officer
of The Bank of California, N.A. Mr. Schmidt is on the Board of Trustees of the
U. S. Naval War College Foundation and is active in several civic and charitable
organizations.
32
<PAGE>
GENERAL
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except as set forth below under Item 10, "Executive Compensation Employment
Agreements". There are no family relationships between any Directors, nominees
for Director or executive officers of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Boston Stock Exchange. Officers, Directors and beneficial
owners of more than 10% of the Company's Common Stock are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no reports on Form 5 were required, the
Company believes that for the period from January 1, 1997 through March 31,
1998, all officers, Directors and greater-than-10% beneficial owners complied
with all Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and the two other executive officers of the Company whose
compensation exceeded $100,000 for all services rendered to the Company in 1997
and 1996:
33
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- ----------------------
BONUS/ANNUAL SECURITIES LONG-TERM ALL
INCENTIVE UNDERLYING INCENTIVE OTHER COM-
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD (1) OPTIONS PAYOUTS PENSATION (2)
- --------------------------- ---- -------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Edward P. Gistaro ................. 1997 $133,901 $ 127,137 $ -- $ 4,843
Chairman of the Board 1996 131,682 $ 97,850 50,000 -- 1,468
and Chief Executive Officer
Allan H. Hobgood .................. 1997 101,337 63,526 25,000 -- 3,935
President and 1996 100,712 112,647 50,000 -- 1,468
Chief Operating Officer
Lori A. Turner .................... 1997 63,867 42,379 25,000 -- 2,464
Chief Financial Officer
</TABLE>
(1) Mr. Gistaro and Ms. Turner are eligible to receive bonuses based on
increases in revenues over the prior year and 3% and 1%, respectively, of
the Company's pre-tax quarterly profits under the 1997 Management Incentive
Bonus Plan as approved by the Compensation Committee of the Board of
Directors. The Bonus Plan also provides for subjective bonus payments for
successful completion of an acquisition or merger transaction in lieu of
profits, depending on price per share of transaction.
Mr. Hobgood is eligible to receive 5.5% of the profits from his area of
responsibility.
(2) Matching contributions under the Company's 401(k) Plan and tax return
preparation fees for certain executives attributable to company stock option
plans and grants.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
- ------------------ --------------- --------------- --------- ----------
<S> <C> <C> <C> <C>
Edward P. Gistaro ..... -- -- -- --
Allan H. Hobgood ...... 25,000 9.0% .66 09/11/07
Lori Turner ........... 25,000 9.0% .66 09/11/07
</TABLE>
STOCK OPTION EXERCISES IN 1997 AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward P. Gistaro ....... 315,000 $122,850 -- -- -- --
Allan H. Hobgood ........ -- -- 305,000 25,000 $ 118,450 $ 8,500
Lori Turner ............. -- -- 44,500 25,000 18,105 8,500
</TABLE>
34
<PAGE>
EMPLOYMENT AGREEMENTS
Mssrs. Edward P. Gistaro and Allan H. Hobgood and Ms. Lori A. Turner have
employment agreements with the Company. Mr. Gistaro's employment agreement
terminated pursuant to his retirement effective April 1, 1998. Mr. Hobgood's
agreement provides for an annual base salary of $96,000 and a bonus equal to
5.5% of the profits of the government and commercial division. Mr. Hobgood's
agreement was amended on April 1, 1998 to specify a thirty month employment term
and an ensuing five year consulting contract providing for payment of $30,000
per annum. The amendment also provides for a payment of $30,000 for another
five-year term following the term of the consulting contract. Ms. Turner's
agreement provides for an annual base salary of $80,000 and does not have a
fixed term.
The Company entered into an employment agreement with Mr. Douglas P. Gill
on April 1, 1998 which carries a seven-year term. Pursuant to the terms of the
agreement, Mr. Gill is to be paid $200,000 per annum, an auto allowance, and an
annual performance bonus to be determined by the Board of Directors.
Each agreement is terminable upon 30 days' prior written notice by either
the Company or the employee, or by the Company "for cause" at any time. Further,
each agreement requires that the employee keep Company matters confidential,
restricts the employee from being directly or indirectly involved with any
entity in a business competitive with that of the Company for a period of years
following the termination of the agreement, and provides for a severance payment
to the employee in the event he is terminated by the Company without cause.
STOCK OPTIONS
1988 STOCK OPTION PLAN
The Company has a 1988 Stock Option Plan, currently covering an aggregate
of 1,660,000 shares of Common Stock. The 1988 Stock Option Plan provides for the
grant to officers, Directors and key employees of the Company of incentive stock
options ("ISOs") intended to qualify under Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified stock options
("NQSOs"). The 1988 Stock Option Plan was approved by the stockholders of the
Company on November 15, 1988. Amendments to the 1988 Stock Option Plan
increasing the number of shares covered thereby were approved by the
stockholders of the Company on April 21, 1989, May 14, 1991 May 7, 1992, and
August 12, 1997. As of March 16, 1998, under the 1988 Stock Option Plan there
were outstanding options to purchase 851,775 shares of the Company's Common
Stock at prices ranging from $.53 to $1.38 per share.
Under the 1988 Stock Option Plan, which is administered by the Stock
Option Committee of the Board of Directors, key employees may be granted options
to purchase shares of the Company's Common Stock at 100% of fair market value on
the date of grant (or 110% of fair market value in the case of an ISO granted to
a 10% stockholder/grantee). The 1988 Stock Option Plan expires on October 31,
1998. Options granted under the 1988 Stock Option Plan must be exercised within
ten years from the date of grant, vest at varying times, as determined by the
Stock Option Committee, are nontransferable except by will or pursuant to the
laws of descent and distribution, and are protected
35
<PAGE>
against dilution. All shares purchased upon exercise of any option must be paid
in full at the time of purchase, in accordance with the terms set forth in the
option. Such payment must be made in cash or through delivery of shares of
Common Stock or a combination of cash and Common Stock, all as determined by the
Stock Option Committee. The Stock Option Committee may determine other terms
applicable to particular options. No one person may receive ISO options for
which the aggregate fair market value (determined at the time each ISO is
granted) of options exercisable for the first time during any calendar year
exceeds $100,000.
1991 DIRECTOR NON-STATUTORY STOCK OPTION PLAN
The Company also has a 1991 Director Non-Statutory Stock Option Plan (the
"1991 Director Plan"), currently covering an aggregate of 500,000 shares of
Common Stock. The 1991 Director Plan was approved by the stockholders of the
Company on May 7, 1992 and provides for the grant of NQSOs to non-employee
Directors of the Company. As of March 16, 1998, there were outstanding under the
1991 Director Non-Statutory Stock Option Plan options to purchase 230,000 shares
of the Company's Common Stock at prices ranging from $.53 to $1.38 per share.
Under the 1991 Director Plan, which is administered by the Board of
Directors, non-employee Directors are granted options to purchase 40,000 shares
of the Company's Common Stock upon their initial election as Directors and
30,000 shares on the second anniversary date of such election at the
then-current market price of such shares. One-third of the initial grant shall
vest on each anniversary of the date of grant, and one-third of the second grant
shall vest every six months after the date of grant. The 1991 Director Plan
expires on February 10, 2001. Under an amendment to the 1991 Director Plan
adopted by the Board of Directors in February 1992, each eligible Director will
receive an additional annual grant of options covering 10,000 shares of Common
Stock, commencing with the fiscal year of the Company immediately following the
fiscal year in which all shares of Common Stock covered by the initial grant and
the second grant described above are fully vested, and such annual grant will
continue each fiscal year thereafter until options covering all shares reserved
for issuance under the 1991 Director Plan have been granted. Options granted
under the 1991 Director Plan must be exercised within ten years from the date of
grant, are nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and expire within three months
after termination of service as a Director of the Company, unless such
termination is by reason of death or disability or for cause. All shares
purchased upon exercise of any option must be paid in full at the time of
purchase, in accordance with the terms set forth in the option. Such payment
must be made in cash or through delivery of shares of Common Stock or a
combination of cash and Common Stock. The 1991 Director Plan may be amended at
any time by vote of the Board of Directors.
During 1997, Messrs. Ralph Brown, Al Ireton, and Chauncey Schmidt, all
Directors of the Company, were granted options covering 10,000 shares each of
Common Stock at an exercise price of $.78, $.78, and $1.13 per share,
respectively. The exercise price per share of each such option was not less than
the closing bid price of the Common Stock reported on The NASDAQ Stock Market on
the date of the grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1993 Employee Stock Purchase Plan (the "Purchase Plan") was
approved by the stockholders at the 1994 Annual Meeting of Stockholders and
amended on August 12, 1997. Under the Purchase Plan, eligible employees may
elect to have up to 10% of their Base Pay (as defined)
36
<PAGE>
deducted and utilized for the purchase of Common Stock of the Company in annual
or semiannual offerings to be made by the Company to eligible employees. The
Company has reserved 1,000,000 shares of Common Stock for issuance pursuant to
the Stock Purchase Plan. The Company's Board of Directors has also approved an
increase of an additional 400,000 shares and an extension of the Purchase Plan
until December 31, 2001. The Company issued 107,236, 286,048, and 100,583 shares
in January 1998, 1997 and 1996 pursuant to this Plan at purchase prices of $.85,
$.32 and $.32 per share, which represents 85% of the closing price on December
30, 1997, January 2, 1996, and December 29, 1995, respectively. At March 16,
1998, 435,150 shares remain available for issuance.
Under the Purchase Plan, the Company will make available in each year from
January 1, 1994 through December 31, 1998 up to 200,000 shares of Common Stock.
Such shares will be offered to participating employees in annual or semiannual
offerings. Participating employees will be deemed to have been granted options
to purchase Common Stock in each offering in an amount equal to the amount of
their respective payroll deductions divided by 85% of the market value of the
Common Stock of the Company on the applicable Offering Commencement Date. The
option price shall be the lesser of 85% of the closing price of the Common Stock
on the Offering Commencement Date (or the next preceding trading day) or 85% of
the closing price of Common Stock on the Offering Termination Date (or the next
preceding trading day). Unless a participating employee terminates participation
as provided in the Stock Purchase Plan, such employee shall be deemed to have
exercised such option on the Offering Termination Date and shall be issued a
corresponding number of shares of Common Stock.
The Purchase Plan is administered by the Compensation Committee of the
Board of Directors and will expire on December 31, 1998, unless sooner
terminated or amended by the Board of Directors.
37
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1998, by all persons
known to the Company to own beneficially more than 5% of the Company's Common
Stock.
NAME AND AMOUNT AND
ADDRESS OF NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------
Common Stock, Demuth, Folger & Terhune 900,000 (1) 6.2
par value $.01 One Exchange Plaza
per share 55 Broadway
New York, New York 10006
(1) Consists of 900,000 shares of Common Stock underlying a Warrant to
Purchase Common Stock exercisable at an exercise price of $2.00 per share.
The percentage of ownership is calculated based on 14,450,788 shares of
outstanding.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1998 (a) by each of the
Company's directors, (b) by the Company's Chief Executive Officer and its only
other executive officer whose 1997 compensation exceeded $100,000, and (c) by
all Directors and executive officers as a group.
NAME AND AMOUNT AND
ADDRESS OF NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OF CLASS (3)
- --------------------------------------------------------------------------------
Common Stock, Edward P. Gistaro 701,006 5.17%
par value $.01 Allan H. Hobgood 436,089 (4) 3.05%
per share Lori A Turner 94,837 (5) .70%
Ralph Brown 283,100 (6) 2.08%
Al R. Ireton 75,000 (7) .55%
Chauncey E. Schmidt 225,000 (7) 1.65%
All Directors and
Executive Officers
as a Group (6
persons including
the above) 1,720,195 (8) 12.23%
- --------------------
(1) The address for all persons named is 7461 Callaghan Road, San Antonio,
Texas 78229.
(2) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
except as otherwise indicated.
38
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(3) Unless otherwise indicated below, the percentage of ownership is based
upon 13,550,788 shares of Common Stock outstanding, which includes 399,996
shares of Common Stock into which outstanding shares of Preferred Stock
are convertible and which the holders of the Preferred Stock are entitled
to vote.
(4) Includes 305,000 shares subject to currently exercisable stock options.
The percentage of ownership is based on 13,855,788 shares outstanding.
(5) Includes 44,500 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,595,288 shares outstanding.
(6) Includes 65,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,615,788 shares outstanding.
(7) Includes 75,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,625,788 shares outstanding.
(8) Includes 520,000 shares subject to currently exercisable stock options.
The percentage of ownership is based on 14,070,788 shares outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1996 the chief executive officer loaned the Company $100,000
for a period of 5 days in December 1996. In January 1997 the chief executive
officer loaned the Company up to $420,000 over a period of 20 days. The loans
were unsecured and bore interest at 9.5% and were paid in full in December 1996
and February 1997. In September and October 1997, the chief executive officer
loaned the Company $45,000 and $150,000. The loan balances were applied to the
amount due from the officer when he exercised employee stock options in October
1997. Interest at 9.5% was paid for 11 and 3 days respectively on the unsecured
loans, and the balance after the stock option exercise was repaid to the
officer. Since January 1, 1996, no officer, executive officer, or affiliate of
the Company has entered into any other direct or indirect material transactions,
or series of transactions, or had any direct or indirect material interest in
any proposed transaction, or series of transactions, to which the Company is to
be a party where the amount involved exceeds $60,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The Exhibits required by Regulation S-B are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-KSB, as so indicated in such list.
2.1 Asset Purchase Agreement dated March 15, 1994, between Docucon,
Incorporated and J. Feuerstein Systems, Inc., including the
related Letter Agreement, dated January 28, 1994, between Jim
Feuerstein and Docucon, Incorporated, as filed as Exhibit 2.1 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993, is hereby incorporated herein by
reference.
39
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3.1 Certificate of Incorporation of Docucon, Incorporated, filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-25561), is hereby incorporated herein by
reference.
3.2 Certificate of Amendment to Certificate of Incorporation of
Docucon, Incorporated, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1992, is hereby incorporated herein by reference.
3.3 Bylaws of Docucon, Incorporated, filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-25561), is hereby incorporated herein by reference.
3.4 Certificate of Merger of Docucon, Incorporated, a Delaware
corporation, and Docucon, Incorporated, a Texas corporation,
October 11, 1988, filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995,
is hereby incorporated herein by reference.
3.5 Certificate of Designation Preferences of Series A Convertible
Preferred Stock of Docucon, Incorporated, May 29, 1990, filed as
Exhibit 3.5 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, is hereby incorporated herein
by reference.
3.6 Certificate of Designation Preferences of Series B Non-Convertible,
Cumulative, Non-Voting, Redeemable Preferred Stock of Docucon,
Incorporated, June 12, 1991, filed as Exhibit 3.6 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995, is hereby incorporated herein by reference.
3.7 Certificate of Correction of Certificate of Designation Preferences
of Series A Convertible Preferred Stock of Docucon, Incorporated,
June 1, 1990, filed as Exhibit 3.7 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, is
hereby incorporated herein by reference.
4.1 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling D. H. Blair Investment Banking Corp. to purchase 80,000
shares of Common Stock at an exercise price of $.75 per share,
expiring on November 5, 1995, as filed as Exhibit 4.1 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-82018), is hereby incorporated herein by
reference.
4.2 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling D. H. Blair Investment Banking Corp. to purchase 160,000
shares of Common Stock at an exercise price of $.70 per share,
expiring on November 5, 1995, as filed as Exhibit 4.2 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-82018), is hereby incorporated by reference.
4.3 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling James Coleman to purchase 20,000 shares of Common Stock
at an exercise price of $.75 per share, expiring on November 5,
1995, as filed as Exhibit 4.5 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-82018),
is hereby incorporated herein by reference.
40
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4.4 Warrant to Purchase Common Stock of Docucon, Incorporated,entitling
James Coleman to purchase 40,000 shares of Common Stock at an
exercise price of $.70 per share, expiring on November 5, 1995, as
filed as Exhibit 4.6 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-82018),
is hereby incorporated herein by reference.
4.5 Stock Option Agreement, dated August 31, 1992, in which Docucon,
Incorporated granted The Wall Street Group, Inc. a stock option
to purchase up to 72,727 shares of Common Stock at a price of
$1.375 per share, as filed as Exhibit 4.14 to Amendment No. 1 to
the Company's Registration Statement on Form SB-2 (Registration No.
33-82018), is hereby incorporated herein by reference.
10.1 Contract, dated as of May 8, 1991, between the Company and the
U. S. Department of Defense, filed as Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, is hereby incorporated herein by reference.
10.2 Employment Agreements between the Company and each of Edward P.
Gistaro and Allan H. Hobgood, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No.
33-25561), are hereby incorporated herein by reference.
10.3 Amendment to Employment Agreement between the Company and Allan
H. Hobgood, filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1992, is
hereby incorporated herein by reference.
10.5 1988 Stock Option Plan, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, is hereby incorporated herein by reference.
10.6 1991 Director Non-Statutory Stock Option Plan, filed as Exhibit
10.10 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992, is hereby incorporated herein by
reference.
10.8 Note and Warrant Purchase Agreement, dated as of December 15, 1992,
between the Company and Demuth, Folger & Terhune, including all
Exhibits thereto (which include the form of Promissory Note, the
form of Common Stock Purchase Warrant and the form of Deed of Trust
executed and delivered in connection with the transaction), filed
as Exhibit 5.1 to the Company's Current Report on Form 8-K dated
December 16, 1992, is hereby incorporated herein by reference.
10.9 1993 Employee Stock Purchase Plan, filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1993, is hereby incorporated herein by reference.
41
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10.10 Form of Promissory Note, Revolving, dated as of September 30, 1996,
between Docucon, Incorporated and Bank One, Texas, N.A., filed as
Exhibit 10.12 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1996, is hereby incorporated herein
by reference.
10.11 Form of Promissory Note, dated as of September 30, 1996, between
Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit
10.13 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996, is hereby incorporated herein by
reference.
10.12 Deed of Trust, Security Agreement and Financing Statement, dated
as of September 30, 1996, executed in connection with the issuance
of Promissory Notes in Exhibits 10.12 and 10.13, filed as Exhibit
10.14 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996 is hereby incorporated herein by
reference.
10.13 Asset Sale and Purchase agreement, November 26, 1997, between
Docucon, Incorporated and Bowne of Dallas, Inc., and Bowne
Litigation Solutions, L.P.
10.14 Employment Agreement, January 5, 1998, between Docucon,
Incorporated and Lori Turner.
10.15 Employment Agreement, April 1, 1998, between Docucon, Incorporated
and Douglas P. Gill.
11 Computation of Earnings (Loss) Per Share.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DOCUCON, INCORPORATED
By DOUGLAS P. GILL
/S/ Douglas P. Gill
President, Chief Executive
Officer, and Director
Date: April 14, 1998
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE CAPACITY DATE
DOUGLAS P. GILL President, Chief Executive April 14, 1998
/S/ Douglas P. Gill Officer and Director
(Principal Executive Officer)
ALLAN H. HOBGOOD Chief Operating Officer April 14, 1998
/S/ Allan H. Hobgood and Vice Chairman
of the Board
LORI TURNER Chief Financial Officer April 14, 1998
/S/ Lori Turner Treasurer
(Principal Financial Officer)
EDWARD P. GISTARO Chairman of the Board of Directors April 14, 1998
/S/ Edward P. Gistaro
RALPH BROWN Director April 14, 1998
/S/ Ralph Brown
AL R. IRETON Director April 14, 1998
/S/ Al R. Ireton
CHAUNCEY E. SCHMIDT Director April 14, 1998
/S/ Chauncey E. Schmidt
43
EXHIBIT 10.13
ASSET PURCHASE AGREEMENT
BY AND AMONG
DOCUCON, INCORPORATED,
BOWNE OF DALLAS, INC.
AND
BOWNE LITIGATION SOLUTIONS, L.P.
DATED AS OF NOVEMBER 26, 1997
<PAGE>
PAGE
TABLE OF CONTENTS
ARTICLE I DEFINITIONS..................................................2
1.01. Definitions..........................................2
1.02. Index of Other Defined Terms.........................7
ARTICLE II TRANSFER OF ASSETS...........................................9
2.01. Transfer of Assets by Seller.........................9
2.02. Excluded Assets.....................................11
2.03. Assumption of Liabilities...........................11
2.04. Excluded Liabilities................................12
2.05. Assignment of Contracts and Rights..................13
2.06. Closing.............................................14
2.07. Purchase Price Allocation...........................15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER....................15
3.01. Corporate Existence and Power.......................15
3.02. Authorization.......................................15
3.03. Subsidiaries........................................16
3.04. Governmental Authorization..........................16
3.05. Non-Contravention...................................16
3.06. Financial Statements................................16
3.07. Absence of Certain Changes..........................17
3.08. Real Property; Leases...............................18
3.09. Condition and Sufficiency of and Title to the
Transferred Assets..................................19
3.10. Accounts Receivable.................................20
3.11. Affiliates..........................................20
3.12. No Undisclosed Liabilities..........................21
3.13. Litigation..........................................21
3.14. Contracts; Customers; Suppliers.....................22
3.15. Permits; Required Consents..........................23
3.16. Compliance with Applicable Laws.....................24
3.17. Employment Agreements; Change in Control;
and Employee Benefits...............................24
3.18. Labor and Employment Matters........................26
3.19. Intellectual Property...............................27
3.20. Advisory Fees.......................................28
3.21. Environmental Compliance............................29
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PAGE
3.22. Insurance...........................................30
3.23. Tax Matters.........................................30
3.24. Required SEC Filings................................31
3.25. Books and Records...................................31
3.26. Other Information...................................31
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER ................32
4.01. Existence and Power.................................32
4.02. Authorization.......................................32
4.03. Governmental Authority..............................32
4.04. Non-Contravention...................................32
4.05. Advisory Fees.......................................32
4.06. Litigation..........................................32
4.07. Purchase Price......................................33
ARTICLE V COVENANTS OF SELLER.........................................33
5.01. Conduct of the Business.............................33
5.02. Access to Information...............................36
5.03. Compliance with Terms of Required Governmental
Approvals and Required Contract Consents............36
5.04. Maintenance of Insurance Policies...................36
5.05. Confidentiality.....................................37
5.06. Taxes...............................................37
5.07. Interim Financial Statements........................38
5.08. Specific Performance................................38
ARTICLE VI COVENANTS OF THE BUYER......................................38
6.01. Access to Information...............................38
6.02. Compliance with Terms of Required Governmental
Approval and Required Contract Consents.............39
6.03. Confidentiality.....................................39
6.04. Specific Performance................................40
ARTICLE VII COVENANTS OF ALL PARTIES....................................40
7.01. Further Assurances..................................40
7.02. Certain Filings.....................................40
7.03. Public Announcements................................40
7.04. Administration of Accounts..........................40
ii
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PAGE
ARTICLE VIII CONDITIONS TO CLOSING.......................................41
8.01. Conditions to Obligation of the Buyer...............41
8.02. Conditions to Obligation of Seller..................44
ARTICLE IX EMPLOYMENT AND BENEFITS MATTERS.............................45
9.01. Hiring of Employees; No Prior Service Credit........45
9.02. Seller's Retention of Liability.....................45
9.03. Health Benefits.....................................46
9.04. No Third-Party Rights...............................46
9.05. Right to Terminate Employment and Terminate or
Modify Plans........................................46
ARTICLE X INDEMNIFICATION.............................................47
10.01. Agreement to Indemnify..............................47
10.02. Survival of Representation, Warranties and Covenants48
10.03. Claims for Indemnification..........................49
10.04. Defense of Claims...................................49
10.05. Nature of Payments..................................50
ARTICLE XI TERMINATION.................................................50
11.01. Grounds for Termination.............................50
11.02. Effect of Termination...............................52
ARTICLE XII AGREEMENT NOT TO COMPETE....................................52
12.01. Agreement not to Compete............................52
ARTICLE XIII MISCELLANEOUS...............................................53
13.01. Notices.............................................53
13.02. Amendments: No Waivers.............................54
13.03. Expenses............................................54
13.04. Successors and Assigns..............................54
13.05. Governing Law.......................................55
13.06. Counterparts; Effectiveness.........................55
13.07. Entire Agreement....................................55
13.08. Captions............................................55
13.09. Severability........................................55
13.10. Construction........................................55
iii
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PAGE
13.11. Arbitration of Claims...............................56
13.12. Cumulative Remedies.................................57
13.13. Third Party Beneficiaries...........................57
13.14. Jurisdiction........................................57
iv
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of
November 26, 1997, is by and among DOCUCON, INCORPORATED, a Delaware corporation
("Seller"), BOWNE LITIGATION SOLUTIONS, L.P., a Delaware limited partnership
("Buyer"), and BOWNE OF DALLAS, INC., a Delaware corporation and the sole
stockholder of Buyer's general partner ("Bowne Entity").
W I T N E S S E T H:
WHEREAS, Seller is in the business of providing software products
and consulting services related to such software products to the legal and
corporate markets through the J. Feuerstein Systems division, an unincorporated
division of the Seller (the "Division"); and
WHEREAS, Seller desires to sell, assign and transfer to Buyer, and
Buyer desires to purchase, substantially all of the assets relating to or used
or held for use in connection with the Division, all upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"ADVANTIS AGREEMENTS" means (i) the Application Provider Agreement
between the Division and Advantis, executed by the Division on January 24, 1997,
and (ii) the Customer Agreement between the Division and Advantis, effective May
21, 1996.
"AFFILIATE" means, with respect to any Person, any Person directly
or indirectly controlling, controlled by or under direct or indirect common
control with such other Person.
"APPLICABLE LAW" means, with respect to any Person, any domestic or
foreign, federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, code, writ, injunction, directive, judgment,
decree or other requirement of, or agreement with, any Governmental Authority
(including any Environmental Law) applicable to such Person or any of its Plan
Affiliates or Affiliates or any of their respective properties, assets,
officers, directors, employees, consultants or agents (in connection with such
officer's, director's,
2
<PAGE>
employee's, consultant's or agent's activities on behalf of such Person or any
of its Plan Affiliates or controlled Affiliates).
"ASSOCIATE" or "ASSOCIATED WITH" means, when used to indicate a
relationship with any Person, (a) any other Person of which such Person is an
officer or partner or is, directly or indirectly, the beneficial owner of ten
percent (10%) or more of any class of equity securities issued by such other
Person, (b) any trust or other estate in which such Person has a substantial
beneficial interest or as to which such Person serves as trustee or in a similar
fiduciary capacity, and (c) any relative or spouse of such Person, or any
relative of such spouse who has the same home as such Person or who is a
director or officer of such Person or any Affiliate thereof.
"BANK ONE DEBT" means all principal, interest, penalties, prepayment
fees and any other amounts owing under (i) the Promissory Notes dated September
30, 1996 with respective original principal amounts of $750,000 and $1,550,000,
each executed by the Seller in favor of Bank One, Texas, National Association,
and (ii) the related Bank One Loan Agreement.
"BANK ONE LOAN AGREEMENT" means the Loan Agreement, dated September
30, 1996, between the Seller and Bank One, Texas, National Association, as the
same may have been amended.
"BENEFIT ARRANGEMENT" means any material benefit arrangement that is
not an Employee Benefit Plan, including, without limitation, (i) each employment
or consulting agreement, (ii) each arrangement providing for insurance coverage
or workers' compensation benefits, (iii) each incentive bonus or deferred bonus
arrangement, (iv) each arrangement providing termination allowance, severance or
similar benefits, (v) each equity compensation plan, (vi) each deferred
compensation plan and (vii) each compensation policy and practice maintained by
Seller or any ERISA Affiliate of Seller covering the employees, former
employees, directors and former directors of Seller and the beneficiaries of any
of them.
"BENEFIT PLAN" means an Employee Benefit Plan or Employee Pension
Benefit Plan.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other
day on which commercial banks in New York, New York are authorized or required
by law to close.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, as set forth in Section 4980B of the Code and Part 6 of Title
I of ERISA.
"CODE" means the Internal Revenue Code of 1986, as amended.
"DAMAGES" means all demands, claims, actions or causes of action,
assessments, losses, damages, costs, expenses, liabilities, judgments, awards,
fines, sanctions, penalties, charges and amounts paid in settlement, including
without limitation, (i) interest on cash
2
<PAGE>
disbursements in respect of any of the foregoing at the Reference Rate in effect
from time to time, compounded quarterly, from the date each such cash
disbursement is made until the Person incurring the same shall have been
indemnified in respect thereof and (ii) reasonable costs, fees and expenses of
attorneys, accountants and other agents of such Person.
"DIVISION" has the meaning set forth in the recitals hereto.
"EMPLOYEE BENEFIT PLAN" means any employee benefit plan, as defined
in Section 3(3) of ERISA, that is sponsored or contributed to by Seller or any
ERISA Affiliate thereof covering employees or former employees of the Division.
"EMPLOYEE PENSION BENEFIT PLAN" means any employee pension benefit
plan, as defined in Section 3(2) of ERISA, that is subject to Title IV of ERISA,
and that is sponsored or contributed to by Seller or any ERISA Affiliate
thereof, other than a Multiemployer Plan.
"ENVIRONMENT" means all air, surface water, groundwater, or land,
including land surface or subsurface, including all fish, wildlife, biota and
all other natural resources.
"ENVIRONMENTAL CLAIM" means any and all administrative or judicial
actions, suits, orders, claims, liens, notices, notices of violations,
investigations, complaints, requests for information, proceedings, or other
communication (written or oral), whether criminal or civil, pursuant to or
relating to any applicable Environmental Law by any Person (including but not
limited to any Governmental Authority, private person and citizens' group) based
upon, alleging, asserting, or claiming any actual or potential (i) violation of
or liability under any Environmental Law, (ii) violation of any Environmental
Permit, or (iii) liability for investigatory costs, cleanup costs, removal
costs, remedial costs, response costs, natural resource damages, property
damage, personal injury, fines, or penalties arising out of, based on, resulting
from, or related to the presence, Release, or threatened Release into the
Environment, of any Hazardous Substance at any location, including but not
limited to any off-Site location to which Hazardous Substance or materials
containing Hazardous Substance were sent for handling, storage, treatment, or
disposal.
"ENVIRONMENTAL CLEAN-UP SITE" means any location which is listed or
proposed for listing on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System, or on any
similar state list of sites requiring investigation or cleanup, or which is the
subject of any pending or threatened action, suit, proceeding, or investigation
related to or arising from any alleged violation of any Environmental Law, or at
which there has been a Release, threatened or suspected Release of a Hazardous
Substance.
"ENVIRONMENTAL LAW" means any and all current and future, federal,
state, local, provincial and foreign, civil and criminal laws, statutes,
ordinances, orders, codes, rules, regulations, Environmental Permits, policies,
guidance documents, judgments, decrees, injunctions, or agreements with any
Governmental Authority, relating to the protection of health
3
<PAGE>
and the Environment, worker health and safety, and/or governing the handling,
use, generation, treatment, storage, transportation, disposal, manufacture,
distribution, formulation, packaging, labeling, or Release of Hazardous
Substances, whether now existing or subsequently amended or enacted, including
but not limited to: the Clean Air Act, 42 U.S.C. ss. 7401 ET SEQ.; the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. ss. 9601 ET SEQ.; the Federal Water Pollution Control Act, 33 U.S.C. ss.
1251 ET SEQ.; the Hazardous Material Transportation Act 49 U.S.C. ss. 1801 ET
SEQ.; the Federal Insecticide, Fungicide and Rodenticide Act 7 U.S.C. ss. 136 ET
SEQ.; the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. ss.
6901 ET SEQ.; the Toxic Substances Control Act, 15 U.S.C. ss. 2601 ET SEQ.; the
Occupational Safety & Health Act of 1970, 29 U.S.C. ss. 651 ET SEQ.; the Oil
Pollution Act of 1990, 33 U.S.C. ss. 2701 ET SEQ.; and the state analogies
thereto, all as amended or superseded from time to time; and any common law
doctrine, including but not limited to, negligence, nuisance, trespass, personal
injury, or property damage related to or arising out of the presence, Release,
or exposure to a Hazardous Substance.
"ENVIRONMENTAL LIABILITY" means Liability of a Person that arises
under any Environmental Law.
"ENVIRONMENTAL PERMIT" means any federal, state, local, provincial,
or foreign permits, licenses, approvals, consents or authorizations required by
any Governmental Authority under or in connection with any Environmental Law and
includes any and all orders, consent orders or binding agreements issued or
entered into by a Governmental Authority under any applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended and, except where the context otherwise requires, the regulations
promulgated thereunder.
"ERISA AFFILIATE" of any Person means any other Person that,
together with such Person as of the relevant measuring date under ERISA, was or
is required to be treated as a single employer under Section 414(b), (c), (m) or
(o) of the Code.
"GAAP" means United States generally accepted accounting principles
and practices.
"GOVERNMENTAL AUTHORITY" means any foreign, domestic, federal,
territorial, state, city or local governmental authority, quasi-governmental
authority, instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.
"GROUP HEALTH PLAN" means any group health plan, as defined in
Section 5000(b)(1) of the Code.
4
<PAGE>
"HAZARDOUS SUBSTANCE" means petroleum, petroleum hydrocarbons or
petroleum products, petroleum by-products, radioactive materials, asbestos or
asbestos-containing materials, gasoline, diesel fuel, pesticides, radon, urea
formaldehyde, lead or lead-containing materials, polychlorinated biphenyls; and
any other chemicals, materials, substances or wastes in any amount or
concentration which are now or hereafter become defined as or included in the
definition of "HAZARDOUS SUBSTANCES," "HAZARDOUS MATERIALS," "HAZARDOUS WASTES,"
"EXTREMELY HAZARDOUS WASTES," "RESTRICTED HAZARDOUS WASTES," "TOXIC SUBSTANCES,"
"TOXIC POLLUTANTS," "POLLUTANTS," "REGULATED SUBSTANCES," "SOLID WASTES," or
"CONTAMINANTS" or words of similar import, under any Environmental Law.
"IBM AGREEMENTS" means (i) the OEM Distribution Agreement between
Seller and International Business Machines Corporation ("IBM"), dated September
30, 1997, and (ii) the Independent Software Vendor Assistance Agreement (No.
AUS970559) between Seller and IBM.
"INDEMNIFYING PARTY" means: (i) with respect to any Buyer Indemnitee
asserting claim under Sections 10.01(a) or 13.11, the Seller, and (ii) with
respect to any Seller Indemnitee asserting a claim under Sections 10.01(b) or
13.11, the Buyer.
"INDEMNITEE" means: (i) each of the Buyer and its respective
Affiliates and Associates with respect to any claim for which the Seller is an
Indemnifying Party under Sections 10.01(a) or 13.11; and (ii) the Seller and its
respective Affiliates and Associates with respect to claims for which the Buyer
is an Indemnifying Party under Sections 10.01 (b) or 13.11.
"INTERSOLV AGREEMENT" means the Intersolv Driver Distributor License
Agreement between Seller and Intersolv, Inc., dated August 7, 1996, as amended.
"IRS" means the Internal Revenue Service.
"LEASE" has the meaning set forth in Section 8.01(l) hereof.
"LEASED PREMISES" means the premises to be leased by Buyer pursuant
to the Lease.
"LIABILITY" means, with respect to any Person, any liability or
obligation of such Person of any kind, character or description, whether known
or unknown, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, secured or unsecured, joint or several, due or to become due,
vested or unvested, executory, determined, determinable or otherwise and whether
or not the same is required to be accrued on the financial statements of such
Person.
"LIEN" means, with respect to any asset, any mortgage, title defect
or objection, lien, pledge, charge, security interest, hypothecation,
restriction, encumbrance or charge of any kind in respect of such asset.
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"MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in
Section 3(37) and 4001(a)(3) of ERISA, that is subject to Title IV of ERISA.
"PERMITTED LIENS" means (i) Liens for Taxes or governmental
assessments, charges or claims the payment of which is not yet due, or for Taxes
the validity of which are being contested in good faith by appropriate
proceedings; (ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other similar Persons imposed by
Applicable Law and incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith; (iii) Liens relating to deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security or to
secure the performance of leases, trade contracts or other similar agreements;
and (iv) Liens securing executory obligations under any Lease that constitutes
an "operating lease" under GAAP; PROVIDED, HOWEVER, that, with respect to each
of the foregoing clauses (i) through (v), to the extent that any such Lien arose
on or prior to the date of the Closing and relates to, or secures the payment
of, a Liability that is required to be accrued under GAAP, such Lien shall not
be a Permitted Lien unless adequate accruals for such Liability have been
established therefor on the Financial Statements in conformity with GAAP.
Notwithstanding the foregoing, no Lien arising under the Code or ERISA with
respect to the operation, termination, restoration or funding of any Benefit
Plan sponsored by, maintained by or contributed to by Seller or any of its ERISA
Affiliates or arising in connection with any excise tax or penalty tax with
respect to such Benefit Plan shall be a Permitted Lien.
"PERSON" means an individual, corporation, partnership, association,
trust, estate or other entity or organization, including a Governmental
Authority.
"PIXEL AGREEMENT" means the Software License Agreement by and
between Seller and Pixel Translations, Inc., dated March 1, 1995.
"PLAN AFFILIATE" means, with respect to any Person, any Benefit
Arrangement sponsored by, maintained by or contributed to by such Person, and
with respect to any Benefit Arrangement, any Person sponsoring, maintaining or
contributing to such plan or arrangement.
"PROHIBITED TRANSACTION" means a transaction that is prohibited
under Section 4975 of the Code or Section 406 of ERISA and not exempt under
Section 4975 of the Code or Section 408 of ERISA, respectively.
"PURCHASE PRICE" means Six Million Five Hundred Thousand Dollars
($6,500,000), payable as described in Section 2.06(b).
"REFERENCE RATE" means the per annum rate of interest publicly
announced from time to time by Citibank, N.A. as its prime rate (or reference
rate). Any change in the Reference
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Rate shall take effect at the opening of business on the day specified in the
public announcement of such change.
"RELEASE" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a
Hazardous Substance into the Environment.
"SEC" means the Securities and Exchange Commission.
"SITE" means any of the real properties currently or previously
owned, leased or operated by Seller, any predecessors of Seller or any entities
previously owned by Seller, including all soil, subsoil, surface waters and
groundwater thereat.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation
as to which more than 10% of the outstanding stock having ordinary voting rights
or power (and excluding stock having voting rights only upon the occurrence of a
contingency unless and until such contingency occurs and such rights may be
exercised) is owned or controlled, directly or indirectly, by such Person and/or
by one or more of such Person's Subsidiaries, and (ii) any partnership, joint
venture or other similar relationship between such Person (or any Subsidiary
thereof) and any other Person (whether pursuant to a written agreement or
otherwise) if such Person has a 10% or more equity interest therein.
"TAX" means all taxes, assessments, duties, fees, levies or other
governmental charges imposed of any nature, whether or not disputed, including,
without limitation, federal, state, local or foreign net income tax, alternative
or add-on minimum tax, profits or excess profits tax, franchise tax, gross
income, adjusted gross income or gross receipts tax, employment related tax
(including employee withholding or employer payroll tax, FICA or FUTA), real or
personal property tax or ad valorem tax, sales or use tax, excise tax, stamp tax
or duty, any withholding or back up withholding tax, value added tax, severance
tax, prohibited transaction tax, premiums tax or occupation tax, together with
any interest or any penalty, addition to tax or additional amount imposed by any
Governmental Authority responsible for the imposition of any such tax.
"TAX RETURN" means all returns, reports, forms or other information
required to be filed with respect to any Tax .
1.02. INDEX OF OTHER DEFINED TERMS. In addition to those terms
defined above, the following terms shall have the respective meanings given
thereto in the sections indicated below:
DEFINED TERM SECTION
"1996 Balance Sheet" 3.06
"AAA" 13.11(b)
"Accounts Receivable 2.01(a)(vi)
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"Action" 13.14
"Agreement" Preamble
"Allocation Statement" 2.08
"Annual Statements" 3.06
"Arbitration Notice" 13.11(c)
"Arbitrators' Report" 13.11(b)
"Assumed Liabilities" 2.03
"Bowne Entity" Preamble
"Buyer" Preamble
"Buyer Indemnitees" 10.01(a)
"Closing" 2.06(a)
"Closing Date" 2.06(a)
"Computer Equipment" 2.01(a)(i)
"Contracts" 2.01(a)(v)
"Disputes" 13.11(a)
"Employment Agreements" 3.17(a)
"Equipment" 2.01(a)(iii)
"Equity Securities" 6.01(b)(xii)
"Escrow Agent" 2.06(c)
"Escrow Agreement" 2.06(c)
"Exchange Act" 3.24
"Excluded Assets" 2.02
"Excluded Liabilities" 2.04(a)
"Financial Statements" 3.06
"Independent Accountants" 2.07
"Initiating Party" 13.11(c)
"Insurance Policies" 3.22
"Intellectual Property" 3.19(g)
"Interim Statements" 3.06
"ISRA" 3.21(f)
"Leases" 3.08(b)
"Leased Real Property" 3.08(b)
"Notice of Claim" 10.03
"Outside Date" 11.01(f)
"Permits" 3.15(a)
"Personal Property Leases" 3.08(b)
"Proceedings" 3.13
"Purchase Documents" 3.02
"Real Property Leases" 3.08(b)
"Required Consents" 3.15(b)
"Required Contract Consent" 3.15(b)
"Required Governmental Approval" 3.15(b)
"Scheduled Contracts" 3.14(a)
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"Securities Act" 3.24
"Seller" Preamble
"Seller Indemnitees" 10.01(b)
"Seller SEC Reports" 3.24
"Software" 2.01(a)(ii)
"Subsequent Material Contract" 5.01(b)(v)
"Trademark Assignment" 8.01(m)
"Transferred Assets" 2.01(a)
"Transferred Employees" 9.01
"WARN" 3.18(c)
ARTICLE II
TRANSFER OF ASSETS
2.01. TRANSFER OF ASSETS BY SELLER.
(a) Upon the terms and subject to the conditions set forth in
this Agreement and in reliance upon the representations, warranties, covenants
and agreements herein set forth, Buyer agrees to purchase from Seller and Seller
agrees to sell or cause to be sold to Buyer at the Closing, free and clear of
all Liens other than Permitted Liens, all of the assets, properties, rights,
licenses, permits, contracts, causes of action, claims, operations and
businesses of Seller of every kind and description as the same shall exist on
the Closing Date (other than the Excluded Assets), wherever located, whether
tangible or intangible, real, personal or mixed, that are used, useable or held
for use in the Division, whether or not reflected on the books and records of
Seller (the collective assets, properties, rights, licenses, permits, contracts,
causes of action, claims, operations and businesses to be transferred to Buyer
by Seller pursuant hereto are referred to collectively herein as the
"Transferred Assets"), including without limitation the following assets (to the
extent such assets are used, useable or held for use in the Division):
(i) all computer equipment, including processors,
monitors and keyboards, and all peripheral devices, including scanners,
printers, CD Rom devices, modems, output devices, servers, data storage
and retrieval systems, and all other related equipment of any kind
whatsoever and any and all instruction and operational manuals relating
thereto (the "Computer Equipment"), the principal items (which for the
purpose of this Agreement shall mean those having an original purchase
price in excess of $1,000 or more) of which are listed in SCHEDULE
2.01(a)(i);
(ii) all computer programs, computer software and all
available documentation and source codes, including without limitation,
all rights and licenses to any thereof owned by third parties (the
"Software"), which Software is listed on SCHEDULE 2.01(a)(ii);
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(iii) all machinery, equipment, furniture, office
equipment, facsimile machines, copying machines, communications equipment,
vehicles, storage tanks, spare and replacement parts, fuel and other
tangible property (and interests in any of the foregoing) (the
"Equipment"), the principal items (which for the purpose of this Agreement
shall mean those having an original purchase price of $1,000 or more) of
which are listed on SCHEDULE 2.01(a)(iii);
(iv) all items of inventory notwithstanding how
classified in the financial records of Seller, including all supplies,
paper and spare parts;
(v) all contracts, agreements, options, leases,
licenses, sales and purchase orders, commitments and other instruments of
any kind, whether written or oral, to which Seller is a party on the
Closing Date, including the Scheduled Contracts and the Subsequent
Material Contracts, in each case limited to those which Buyer has agreed
to assume on the Closing Date pursuant to Section 2.05 hereof (the
"Contracts");
(vi) all accounts, accounts receivable, notes receivable
and any other evidences of indebtedness and rights to receive payments
from any Person owing to the Seller, together with any unpaid interest or
fees accrued thereon or other amounts due with respect thereto, and any
security or collateral therefor, including recoverable advances and
deposits ("Accounts Receivable");
(vii) all prepaid charges and expenses of Seller,
including any such charges and expenses with respect to ad valorem taxes,
leases and rentals and utilities;
(viii)all rights of Seller under any insurance policy,
except any policy pertaining entirely to the Excluded Assets, including,
without limitation, all rights to any proceeds thereof;
(ix) all of Seller's rights, claims, credits, causes of
action or rights of set-off against third parties relating to the Division
or the Transferred Assets, whether liquidated or unliquidated, fixed or
contingent, including claims pursuant to all warranties, representations
and guarantees made by suppliers, manufacturers, contractors and other
third parties in connection with products or services purchased by or
furnished to Seller for use by the Division or affecting any of the
Transferred Assets;
(x) all of Seller's Intellectual Property;
(xi) all transferable franchises, licenses, permits or
other authorizations issued or granted by any Governmental Authority that
are owned by, granted to or held or used by Seller;
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(xii) all books, records, files and papers of Seller,
whether in hard copy or computer format, including bank account records,
books of account, invoices, engineering information, sales and promotional
literature, manuals and data, sales and purchase correspondence, lists of
present and former suppliers, personnel and employment records of present
and former employees, and documentation developed or used for accounting,
marketing, engineering, manufacturing or any other purpose related to the
conduct of the business of the Division at any time prior to the Closing;
(xiii) all lists of present customers and lists of former
customers as the same may exist on the Closing Date;
(xiv) all goodwill associated with the Division or any
Transferred Assets; and
(xv) except as specifically provided in Section 2.02 and
SCHEDULE 2.02, all other assets and properties of Seller used, useable or
held for use in, the Division which exist on the Closing Date, whether
tangible or intangible, real or personal, whether or not specifically
referred to in this Agreement.
(b) On the Closing Date, Seller shall sell, convey, transfer
and deliver good, valid and marketable title to the Transferred Assets to Buyer
free and clear of all Liens except for Permitted Liens.
2.02. EXCLUDED ASSETS. Buyer expressly understands and agrees that
the assets and properties set forth on SCHEDULE 2.02 (the "Excluded Assets")
shall be excluded from the Transferred Assets.
2.03. ASSUMPTION OF LIABILITIES. Upon the terms and subject to the
conditions of this Agreement and in reliance upon the representations,
warranties, covenants and agreements herein set forth, Buyer agrees, effective
on the Closing Date, to assume, perform and in due course pay and discharge all
Contracts listed on SCHEDULE 2.05(A), but only to the extent that the Required
Contract Consents have been obtained with respect thereto and only to the extent
of obligations arising thereunder after the Closing Date and excluding any
obligations, breaches and defaults thereunder which arose, or which relate to
periods, prior to the Closing Date (whether or not known or asserted until after
the Closing Date) or which are Excluded Liabilities (such obligations assumed
under the Contracts being herein called the "Assumed Liabilities").
Notwithstanding the foregoing, and whether or not any item is listed on the
Disclosure Schedules hereto, Buyer will not assume, and shall not be deemed to
have assumed, (i) any Real Property Lease or any contract granting any party the
right to sell the Division's products or services if, in each case, such
contract or Real Property Lease contains any obligations which extend beyond the
date which is six (6) months following the Closing Date, or (ii) any contract
requiring
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payments by Buyer after the Closing Date with respect to products or services
delivered to Seller or the Division prior to the Closing Date.
2.04. EXCLUDED LIABILITIES.
(a) Buyer does not assume, and shall not at any time hereafter
(including on or after the Closing Date) become liable for, any Liabilities of
Seller (whether or not asserted prior to the Closing Date), any of its
Associates, Affiliates, Plan Affiliates or ERISA Affiliates or any shareholder
of Seller, other than the Assumed Liabilities (such Liabilities not being
assumed being hereinafter referred to as the "Excluded Liabilities"). The
Excluded Liabilities shall include, but are not limited to, the following:
(i) any Liability whether presently in existence or
arising hereafter which is attributable to an Excluded Asset;
(ii) any Environmental Liability of Seller whether
presently in existence or arising hereafter and whether or not known or
asserted until after the Closing Date;
(iii) any Liability the existence of which constitutes a
breach of any representation or warranty of Seller hereunder;
(iv) any Liabilities for federal, state, local or
foreign income Taxes and any other Taxes of any kind whatsoever, including
interest or penalties with respect thereto, and any Tax sharing agreement
with respect thereto, including without limitation, any thereof which may
arise from the making of this Agreement or the consummation of the
transactions contemplated hereby;
(v) any indebtedness (principal or interest) or the
guaranty thereof;
(vi) any Liabilities in respect of pending or threatened
litigation, including without limitation, any Liabilities in respect of
any claims, actions, suits, Proceedings, arbitrations or investigations
arising out of events, occurrences or omissions prior to the Closing Date
(whether or not asserted prior to the Closing Date) in any court, before
any Governmental Authority or before any arbitration panel, whether or not
listed on any schedule to this agreement;
(vii) any Liabilities of Seller for expenses, including
without limitation legal and accounting fees and expenses incurred in
connection with the making of this Agreement or the consummation of the
transactions contemplated hereby;
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(viii) any obligations or Liabilities whatsoever under
any Benefit Plans or Benefit Arrangements;
(ix) any obligations or Liabilities under any contracts,
leases, commitments or understandings, written or oral;
(x) any Liabilities or claims arising out of
non-compliance with any law, rule or regulation of any Governmental
Authority;
(xi) any obligations or Liabilities of Seller for
severance pay of employees or consultants with respect to the transactions
contemplated by this Agreement;
(xii) any Liabilities or obligations of Seller in
respect of workers' compensation claims arising out of any injury
sustained or occupational disease contracted;
(xiii)any obligations or Liabilities of Seller of any
kind whatsoever to any of its shareholders, officers or directors,
including without limitation, any Liabilities for indemnification;
(xiv) any Liability whether currently in existence or
arising hereafter, relating to fees, commissions or expenses owed to any
broker, finder, investment banker, attorney or other intermediary or
advisor employed by Seller or any of its Affiliates, Associates or its
Plan Affiliates or ERISA Affiliates in connection with the transactions
contemplated hereby or otherwise; and
(xv) any contingent Liabilities of Seller related to any
transactions of Seller.
(b) Seller agrees to pay, perform and discharge all Excluded
Liabilities on or prior to the Closing Date; PROVIDED however that the
outstanding Excluded Liabilities of Seller identified on SCHEDULE 2.04(B) may be
paid, performed and discharged as and when they become due and payable.
2.05. ASSIGNMENT OF CONTRACTS AND RIGHTS.
(a) Subject to the terms and provisions hereof, Buyer shall
assume on the Closing Date all Contracts listed on SCHEDULE 2.05(A), and no
other contracts, agreements, leases, commitments, or understandings, but only to
the extent the Required Contract Consents have been obtained with respect
thereto, and, in any event, not including any obligations under such assumed
Contracts which are Excluded Liabilities or which relate to periods prior to the
Closing Date or with respect to any breach or default arising prior to the
Closing Date, in each
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case even if not known or asserted until after the Closing Date. With respect to
any Contract and any claim, right or benefit arising thereunder or resulting
therefrom, promptly after the date hereof to the extent requested by Buyer,
Seller will use its best efforts to obtain the written consent of the other
parties to any such Contract for the assignment thereof to Buyer or written
confirmation from such parties confirming that such consent is not required, in
form and substance reasonably satisfactory to Buyer.
(b) If the Required Contract Consent or such confirmation is
not obtained with respect to any such Contract and if notwithstanding the
provisions of Section 8.01(c), Buyer shall elect to consummate the Closing, then
(i) this Agreement shall not constitute an assignment of transfer or attempted
assignment or transfer of such Contracts for which Required Contract Consents
have not been obtained, and (ii) Seller and Buyer shall cooperate in an
arrangement reasonably satisfactory to Buyer and Seller under which Buyer would
obtain, to the extent practicable, the claims, rights and benefits and assume
the corresponding obligations under such Contract in accordance with this
Agreement, including subcontracting, sub-licensing or sub-leasing to Buyer, or
under which Seller would enforce for the benefit of Buyer, with Buyer assuming
Seller's obligations, any and all claims, rights and benefits of Seller against
a third party thereto. Seller will promptly pay to Buyer when received all
monies received by Seller under any Transferred Asset or any claim, right or
benefit arising thereunder not transferred to Buyer pursuant to this Section
2.05.
2.06. CLOSING.
(a) The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Morgan, Lewis
& Bockius LLP, 101 Park Avenue, New York, New York on the third Business Day
following the date on which the last of the conditions to Closing set forth in
Sections 8.01 and 8.02 have been satisfied or waived by the party or parties
entitled to waive the same or such other date as to which Buyer and Seller may
agree (the date and time of Closing are herein referred to as the "Closing
Date").
(b) At the Closing, Buyer shall deliver (i) five million six
hundred thousand dollars ($5,600,000; representing $5,700,000 less $100,000
delivered to Seller on November 18, 1997) to Seller in immediately available
funds by wire transfer to a bank account designated by Seller in writing at
least three Business Days prior to the Closing and (ii) eight hundred thousand
dollars ($800,000) to Fleet Bank, as Escrow Agent (the "Escrow Agent"), to be
held as collateral security for any Liability of Seller to Buyer under this
Agreement, but without limitation as to the amount of any such Liability,
pursuant to the Escrow Agreement in the form attached hereto as EXHIBIT A (the
"Escrow Agreement"), which Escrow Agreement shall be executed and delivered on
the Closing Date by each of the Buyer, the Seller and the Escrow Agent.
(c) At the Closing, (i) Seller shall deliver to Buyer such
bills of sale, certificates of title, endorsements, consents, assignments,
powers of attorney and other good and
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sufficient instruments of conveyance and assignment (which in the case of
Intellectual Property, shall be documents recordable in their delivered form in
the respective countries of origin) as the Buyer and its counsel shall deem
reasonably necessary or appropriate to vest in Buyer all of Seller's right,
title and interest in, to and under the Transferred Assets free and clear of all
Liens except Permitted Liens; (ii) Seller shall deliver the Transferred Assets
to the Leased Premises; and (iii) Buyer and Seller shall deliver to each other
the documents and agreements described in Sections 8.01 and 8.02 hereof.
2.07. PURCHASE PRICE ALLOCATION. Within sixty (60) days after the
Closing Date, Buyer and Seller, using the fair market value of the Transferred
Assets and the covenant contained in Section 12.01 as reasonably agreed to by
the parties, shall determine the allocation of the sum of the Purchase Price and
the Assumed Liabilities among the Transferred Assets and such covenant for
purposes of complying with Section 1060 of the Code and making any required
filings under state or local law and shall set forth such allocation on a
statement (the "Allocation Statement"). After the determination of the
Allocation Statement, from time to time, Buyer and Seller shall agree upon
revisions to the Allocation Statement for Tax purposes. Buyer and Seller shall
report the Tax consequences of the transactions contemplated by this Agreement
in a manner consistent with the Allocation Statement, as it may be revised from
time to time, and shall not take any position inconsistent therewith. Any
disputes as the Allocation Statement shall be submitted to an independent,
nationally recognized accounting firm (which shall not be an accounting firm
engaged for any purpose within the past five (5) years by either Buyer or
Seller) (the "Independent Accountants") for their prompt resolution, which shall
be binding on the parties.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Buyer to enter into this Agreement and to
consummate the transactions contemplated herein, Seller represents and warrants
to, and covenants and agrees with, Buyer as follows:
3.01. CORPORATE EXISTENCE AND POWER. Seller is a corporation duly
organized and validly existing and in good standing under the laws of Delaware,
and has all corporate power and authority required to carry on the business of
the Division as now conducted and to own and operate the Transferred Assets as
now owned and operated. Seller is not required to qualify to conduct business in
any state other than the states set forth in SCHEDULE 3.01, in which states
Seller is duly qualified to do business and is in good standing.
3.02. AUTHORIZATION. The execution, delivery and performance by
Seller of this Agreement and the other documents contemplated herein to be
signed by Seller (the "Purchase Documents") and the consummation by Seller of
the transactions contemplated hereby and
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thereby are within Seller's corporate powers and have been duly authorized by
all necessary corporate action on the part of Seller, including, without
limitation, any required approvals of its shareholders. This Agreement has been,
and the Purchase Documents shall be, duly and validly executed by Seller and
this Agreement constitutes, and the Purchase Documents when executed and
delivered shall constitute, the legal, valid and binding agreement of Seller,
enforceable against it in accordance with their respective terms, except as may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and subject to general
principles of equity.
3.03. SUBSIDIARIES. Seller has no Subsidiaries.
3.04. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Seller of this Agreement and the Purchase Documents require no
action by, consent or approval of, or filing with, any Governmental Authority.
3.05. NON-CONTRAVENTION. The execution, delivery and performance by
Seller of this Agreement and the Purchase Documents do not and will not (a)
contravene or conflict with the Articles of Incorporation or Bylaws of Seller,
true and correct copies of which have been delivered to Buyer by Seller, (b)
contravene or conflict with or constitute a violation of any provision of any
Applicable Law binding upon or applicable to Seller, the Division or any of the
Transferred Assets; (c) assuming receipt of the Required Consents and except as
set forth on SCHEDULE 3.05(C), constitute a default under or give rise to any
right of termination, cancellation or acceleration of, or to a loss of any
benefit to which Seller is entitled under, any Scheduled Contract, any
Subsequent Material Contract or any Permit or similar authorization relating to
the Division or included in any of the Transferred Assets or by which the
Division or any of the Transferred Assets may be bound; or (d) result in the
creation or imposition of any Lien on any Transferred Assets, other than
Permitted Liens.
3.06. FINANCIAL STATEMENTS. Attached hereto as EXHIBIT B are true
and complete copies of the balance sheet and related statement of operations and
retained earnings and of cash flows for the Seller for the years ended December
31, 1994, 1995 and 1996, in each case audited by Arthur Anderson, L.L.P., and
the unaudited balance sheet for the Division as at December 31, 1996 (the
"Annual Statements") and the Seller's unaudited balance sheet as at the end of
each month of calendar year 1997 ending prior to the date of this Agreement and
the Seller's statement of operations for each period then ended and the
Division's unaudited balance sheet as at September 30, 1997 and the Division's
statement of operations for the period then ended (collectively, the "Interim
Statements" and, together with the Annual Statements, the "Financial
Statements"). The unaudited December 31, 1996 balance sheet of the Division is
referred to herein as the "1996 Balance Sheet." Each of the Financial Statements
has been prepared based on the books and records of Seller in accordance with
GAAP and the Seller's normal accounting practices, consistent with past practice
throughout the periods covered thereby and with each other, and present fairly
the financial condition and results of operations of the Seller and the Division
as of the dates or for the periods indicated, except, with respect to the
Interim Financial
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Statements only, (i) for the absence of notes required by GAAP which if
presented would not differ materially from those included in the 1996 Balance
Sheet, and (ii) that such statement is subject to year-end adjustments
consisting of normal recurring items the effect of which, individually or in the
aggregate, will not be materially adverse.
3.07. ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE
3.07(A), since the date of the 1996 Balance Sheet the business of the Division
has been conducted in the ordinary course, consistent with past practice, and
there has not been:
(a) any event, occurrence, development or state of
circumstances or facts or change in the Transferred Assets, the Division or the
business of the Division (including any damage, destruction or other casualty
loss, whether or not covered by insurance) affecting Seller, the Division or any
Transferred Assets that has had or that may be reasonably expected to have,
either alone or together with all such events, occurrences, developments, states
of circumstances or facts or changes, a material adverse effect on the
operations, affairs, prospects, financial condition, results of operations,
assets, Liabilities or reserves of Seller or any other aspect of the Division;
(b) (i) any incurrence, assumption or guarantee of any
indebtedness for borrowed money by Seller in connection with the Division or any
of the Transferred Assets, (ii) any incurrence of any Liability relating to a
documentary or standby letter of credit by Seller in connection with the
Division, any of the Transferred Assets or otherwise, (iii) any change in any
Liability other than in the ordinary course of business consistent with past
practice, or (iv) any incurrence of any other Liability by Seller in connection
with the Division or any of the Transferred Assets, other than in the ordinary
course of business consistent with past practice which, individually or on the
aggregate, were not material.
(c) any creation, assumption or sufferance of the existence of
any Lien on any Transferred Asset, other than Permitted Liens;
(d) any transaction or commitment made, or any contract,
agreement or understanding entered into, by Seller (including the acquisition or
disposition of any Transferred Assets), or any waiver, amendment, termination or
cancellation of any Contract by Seller or any relinquishment of any rights
thereunder by Seller, or of any other right or debt owed to Seller, in each case
relating to the Division or any of the Transferred Assets, other than in each
such case actions taken in the ordinary course of business consistent with past
practice;
(e) any (i) grant of any severance, continuation or
termination pay to any director, officer, stockholder or employee of the
Division, (ii) entering into of any employment, deferred compensation or other
similar agreement (or any amendment to any such existing agreement) with any
director, officer, stockholder or employee of the Division, (iii) increase in
benefits payable or potentially payable under any severance, continuation or
termination pay policies or employment agreements with any director, officer,
stockholder or
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employee of the Division, (iv) increase in compensation, bonus or other benefits
payable or potentially payable to directors, officers, stockholders or employees
of the Division, (v) change in the terms of any bonus, pension, insurance,
health or other Benefit Plan or Benefit Arrangement relating to any employee of
the Division, or (vi) representation by Seller to any employee or former
employee of Seller that Buyer would assume, continue to maintain or implement
any Benefit Plan or Benefit Arrangement after the Closing Date;
(f) any loan to or guarantee or assumption of any loan or
obligation on behalf of any stockholder, director, officer or employee of the
Division or to any Associate or Affiliate of any of the foregoing, except
business expense advances occurring in the ordinary course of business
consistent with past practice;
(g) any material change by Seller in its accounting
principles, methods or practices or in the manner it keeps its books and records
or any material change by Seller of its current practices with regards to
inventory, sales, receivables, payables or accrued expenses which would affect
the timing of collection of receivables or the payment of payables;
(h) any distribution, dividend, bonus or other payment by
Seller to any officer, director, stockholder or Affiliate of Seller or any of
their respective Affiliates or Associates, except as set forth in SCHEDULE
3.07(H);
(i) any capital expenditure or capital additions or
betterments relating to the Transferred Assets or the Division, which exceeded
$10,000 in any one case, or $25,000 in the aggregate;
(j) any entering into of any contract or other arrangement or
understanding between Seller and any officer, director, stockholder or Affiliate
of Seller or any of their respective Affiliates or Associates, except as set
forth in SCHEDULE 3.07(J); or
(k) any payment, discharge or satisfaction of any Liabilities
of Seller, other than payments, discharges or satisfactions in the ordinary
course of business consistent with past practice or as contemplated by Section
8.01(i) hereunder.
3.08. REAL PROPERTY; LEASES.
(a) Seller owns the real property listed on SCHEDULE 3.08(A)
(the "Real Property"). The Real Property is not used, and is not necessary, in
connection with the operation of the Division. None of the Transferred Assets
can be considered fixtures located on the Real Property.
(b) SCHEDULE 3.08(B) sets forth a true and complete list of
all material personal property leases to which the Seller is a party or by which
the Seller is bound and which relate to the Division or the Transferred Assets
(the "Personal Property Leases") and all leases of
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real property which relate to the Division or the Transferred Assets (the "Real
Property Leases" and collectively with the Personal Property Leases, the
"Leases"), true copies of which have been delivered to Buyer. Such Schedule sets
forth the location of each parcel of real property subject to a Real Property
Lease (the "Leased Real Property"), the name of the landlord under each Real
Property Lease, and a brief description of the nature of the activities of
Seller conducted on such real property. Seller has a good and valid leasehold
interests in the property and assets subject to the Leases. Seller is in
possession of the premises demised by the Real Property Leases and has not
sublet any portion thereof. With respect to the Leases, except as set forth on
SCHEDULE 3.08(B), there exist no defaults by Seller, or, to the knowledge of
Seller, any default or threatened default by any lessor or third party
thereunder or any condition which, with notice or the passage of time or both,
would constitute a default, violation or breach on the part of any party to any
Lease. Assuming the Required Contract Consents are obtained, all Leases to which
a Seller is a party or by which it is bound may be assigned, transferred and
conveyed to Buyer without default, penalty or modification thereof.
(c) Except as disclosed in SCHEDULE 3.08(C), Seller has not
received notice of, nor is Seller aware of, any pending zoning or other land-use
regulation Proceedings or, to Seller's knowledge, any proposed change in any
Applicable Laws, which could reasonably be expected to detrimentally affect the
use or operation of any Leased Real Property, nor has Seller received notice of
any special assessment proceedings affecting the Leased Real Property, or
applied for any change to the zoning or land use status of the Leased Real
Property.
(d) Except as disclosed in SCHEDULE 3.08(D), Seller's current
use and operation of all Leased Real Property is in compliance with all
Applicable Laws (including without limitation all Environmental Laws and all
laws relating to zoning and land use) and public and private covenants,
restrictions and easements, and Seller has not received notice of noncompliance
with any Applicable Laws.
(e) Except as disclosed in SCHEDULE 3.08(E), and to Seller's
best knowledge after having made due inquiry, all water, sewer, gas, electric,
telephone and drainage facilities and all other utilities required by law or for
the normal use and operation of the Leased Real Property are (i) installed to
the property lines of each Leased Real Property and (ii) sufficient to service
the Leased Real Property as improved and to permit full compliance with all
Applicable Laws and normal usage of each Leased Real Property,
(f) Seller has obtained all licenses, permits, approvals,
easements and rights of way (and all such items are currently in full force and
effect) required from any Governmental Authority having jurisdiction over each
parcel of Leased Real Property or from private parties necessary for the current
use and operation of each such Leased Real Property
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3.09. CONDITION AND SUFFICIENCY OF AND TITLE TO THE TRANSFERRED
ASSETS.
(a) Seller has good, valid and marketable title to each of the
Transferred Assets free and clear of all Liens except Permitted Liens, including
all such assets (real, personal or mixed, tangible or intangible, including the
Intellectual Property) reflected in the 1996 Balance Sheet, except (i) those
assets disposed of in the ordinary course of business consistent with past
practice after the date thereof, (ii) any leased or licensed assets reflected in
the Schedules hereto, and (iii) the Excluded Assets. Upon consummation of the
transactions contemplated by this Agreement, Seller will have sold, assigned,
transferred and conveyed to Buyer good title to all of the Transferred Assets
free and clear of all Liens other than Permitted Liens, which assets constitute
all of the properties, assets, rights and services used, useable or held for use
in, or relating to, the Division (other than the Excluded Assets). The business
of the Division is a going concern and the transfer of the Transferred Assets to
Buyer pursuant to this Agreement will enable Buyer to operate the business of
the Division as a going concern with all operations of such business unimpaired
in any material respect immediately upon the Closing.
(b) All tangible properties and assets (other than inventory)
included in the Transferred Assets are in all material respects structurally
sound and are in good operating condition and repair and are adequate for the
uses to which they are put, and no properties or assets necessary for the
conduct of the business of the Division in substantially the same manner as it
has heretofore been conducted are in need of replacement, maintenance or repair
except for routine and not materially deferred replacement, maintenance and
repair.
(c) All Software owned by Seller, and, to Seller's knowledge
after due inquiry, all Computer Equipment owned by Seller, and, to Seller's
knowledge, all Computer Equipment and Software leased or licensed from third
parties, are free of any "Year 2000 Problem" and will function properly at the
turn of the century without requiring any modification or replacement thereof.
3.10. ACCOUNTS RECEIVABLE. The Accounts Receivable reflected on the
1996 Balance Sheet, or thereafter acquired through the Closing Date, have and
shall have risen only from bona fide transactions in the ordinary course of
business consistent with past practice. Such Accounts Receivable are payable on
trade terms consistent with the Seller's ordinary course of business of the
Division. The reserves for Accounts Receivable set forth on the 1996 Balance
Sheet were adequate as of the date thereof to reserve against all existing
accounts receivable as of said date which are or shall become uncollectible in
the ordinary course of business, and such reserves were calculated in accordance
with GAAP in a manner consistent with past practices of the business of the
Division. Except to the extent reserved against on the 1996 Balance Sheet, as
such reserves may have adjusted on the books of Seller for periods after the
date of the 1996 Balance Sheet in accordance with GAAP and consistent with past
practices, the Accounts Receivables as of the Closing Date are fully collectible
at the recorded amounts thereof within ninety (90) days and are not subject to
any counterclaim or set-off.
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3.11. AFFILIATES. Except as set forth in SCHEDULE 3.11, to the
knowledge of Seller, no stockholder of Seller nor any officers or directors of
Seller (or any immediate family member of any such officer or director):
(a) now has or at any time subsequent to January 1, 1994, had,
directly or indirectly, an equity or debt interest in any Person which furnishes
or sells or during such period furnished or sold services or products to Seller
or purchases or during such period purchased from Seller any goods or services,
or otherwise does or during such period did business with Seller which in any
way related to the Division or the Transferred Assets; PROVIDED, HOWEVER, that
no stockholder of Seller nor any of Seller's officers, directors or other
Affiliates shall be deemed to have such an interest solely by virtue of the
ownership of less than five percent (5%) of the outstanding voting stock or debt
securities of any publicly held company, the stock of which is traded on a
national stock exchange or quoted on the National Association of Securities
Dealers Automated Quotation System; or
(b) now is or at any time subsequent to January 1, 1994 was,
directly or indirectly, a party to any contract, agreement, commitment or
understanding to which Seller is or during such period was a party or under
which it is or was obligated or bound or to which its properties may be or may
have been subject, which relate to the Division or the Transferred Assets.
3.12. NO UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE
3.12, there are no Liabilities related to the Division or the Transferred Assets
that would or reasonably could constitute Liabilities that could become the
obligation of Buyer subsequent to the Closing if not discharged prior to the
Closing Date, other than,
(a) any Liability accrued as a Liability of the Division on
the 1996 Balance Sheet;
(b) Liabilities of the Division specifically disclosed and
identified as such in the Schedules to this Agreement; and
(c) Liabilities of the Division incurred in the ordinary
course of business since the date of the 1996 Balance Sheet consistent with past
practices that are not individually or in the aggregate material in amount or
material to the Division or to the Transferred Assets.
3.13. LITIGATION. Except as disclosed in SCHEDULE 3.13, (i) there
are no actions, suits, hearings, arbitrations, proceedings (public or private)
or governmental investigations, that have been brought by or against any
Governmental Authority or by or against any other Person (collectively,
"Proceedings") pending or, to the knowledge of Seller, threatened, against or by
Seller, that relate to or that may affect the Division or any of the Transferred
Assets or which seek to enjoin or rescind the transactions contemplated by this
Agreement or otherwise seek to
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prevent Seller, or may have the effect of preventing Seller, from complying with
the terms and provisions of this Agreement or any Purchase Document; and (ii)
there are no existing orders, judgments or decrees of any Governmental Authority
affecting any of the Transferred Assets, the Division or the transactions
contemplated by this Agreement or any Purchase Document.
3.14. CONTRACTS; CUSTOMERS; SUPPLIERS.
(a) SCHEDULE 3.14(A) sets forth a complete list of all
contracts, agreements, commitments or understandings (whether written or oral)
of Seller or the Division, relating to the Division or the Transferred Assets,
including without limitation the following (collectively with the Leases, and
the agreements, if any, referred to in SCHEDULES 3.11, 3.17(a), 3.18(a) and
3.19, the "Scheduled Contracts"):
(i) each contract, agreement, commitment or
understanding between Seller and (A) each present or former director,
officer or other member of management or other personnel of Seller, (B)
any supplier of services or products to the Division whose dollar volume
of sales to Seller exceeded in 1996, or is expected to exceed in 1997, Ten
Thousand Dollars ($10, 000), and (C) any Person where the aggregate
payments made to Seller under such contract, agreement, commitment or
understanding exceeded in 1996, or is expected to exceed in 1997, Ten
Thousand Dollars ($10,000);
(ii) each other contract, agreement, commitment or
understanding of Seller that requires the payment or incurrence of
Liabilities, or the rendering of services, by Seller, subsequent to the
date of this Agreement in an amount of more than Ten Thousand Dollars
($10,000);
(iii) all contracts, agreements, commitments or
understandings relating to, and evidences of or guarantees of, or
providing security for, indebtedness for borrowed money or the deferred
purchase price of property (whether incurred, assumed, guaranteed or
secured by any asset);
(iv) all partnership, joint venture or other similar
contracts, agreements, commitments or understandings;
(v) all license, sale, distribution, commission,
marketing, agent, franchise, technical assistance or similar contracts,
agreements, commitments or understandings relating to or providing for the
marketing and/or sale of products or services to which Seller is a party
or by which Seller is otherwise bound;
(vi) all contracts, agreements, commitments or
understandings restricting in any manner the right of Seller to compete
with any other Person or to engage in any line of business;
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(vii) all powers of attorney relating to the Division or
any of the Transferred Assets; and
(viii) any contract, agreement, commitment or
understanding which is out of the ordinary course of business or which is
material to Seller or the Division or the Transferred Assets.
(b) Except as disclosed in SCHEDULE 3.14(B), each Scheduled
Contract and each other contract, agreement, commitment or understanding
relating to the Division or any of the Transferred Assets is a legal, valid and
binding obligation of Seller and, to the knowledge of Seller, each other party
thereto, enforceable against Seller and, to the knowledge of Seller, each such
other party thereto, in accordance with its terms, and neither Seller nor, to
the knowledge of Seller, any other party thereto, is in material default (or
would be in material default on the giving of notice or the lapse of time or
both) or has failed to perform any material obligation thereunder. Complete and
correct copies of each Scheduled Contract (including all amendments thereto)
have been delivered to the Buyer.
(c) SCHEDULE 3.14(C) sets forth a list (by name, address and
persons to contact) of (i) the 10 largest customers of the Division and (ii) the
five primary suppliers of Computer Equipment and Software to the Division for
the 12-month periods ended December 31, 1995 and 1996 and the nine month period
ended September 30, 1997, together with the approximate dollar amount of sales
or expenses during such period and a summary description of the services
provided. The relationship with such customers and suppliers are good commercial
working relationships and no such customer or supplier has canceled or otherwise
terminated or threatened to cease or otherwise terminate its relationship with
the Division and no customer has during the past twelve months decreased
materially its usage of the Division's services except for normal cyclical
changes related to the customer's business.
3.15. PERMITS; REQUIRED CONSENTS.
(a) SCHEDULE 3.15(A) sets forth all material approvals,
authorizations, certificates, consents, licenses, orders and permits or other
similar authorizations of all Governmental Authorities (and all other Persons)
necessary for the operation of the Transferred Assets or the Division in
substantially the same manner as currently operated or affecting or relating in
any way to the Division or the Transferred Assets (the "Permits"). Except as set
forth in SCHEDULE 3.15(A), each Permit is valid and in full force and effect.
Assuming the Required Consents have been obtained prior to the Closing Date, the
Permits are or will be transferable by Seller, and none of the Permits will be
terminated or become terminable or impaired in any material respect as a result
of the transactions contemplated hereby.
(b) SCHEDULE 3.15(B) lists (i) each governmental or other
registration, filing, application, notice, transfer, consent, approval, order,
qualification and waiver (each, a
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"Required Governmental Approval") required under Applicable Law to be obtained
by Seller by virtue of the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, which, if not obtained,
would prevent Seller from consummating the transactions contemplated hereby or
transferring any Permit or other Transferred Asset to Buyer, and (ii) each
Scheduled Contract with respect to which the consent of the other party or
parties thereto must be obtained by Seller by virtue of the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby to avoid the invalidity of the transfer of such Scheduled Contract, the
termination thereof, a breach or default thereunder or any other change or
modification to the terms thereof (each, a "Required Contract Consent" and
collectively with the Required Governmental Approvals, the "Required Consents").
3.16. COMPLIANCE WITH APPLICABLE LAWS. Except as set forth in
SCHEDULE 3.16, the operation of the business of the Division and the condition
of the Transferred Assets have not violated or infringed, and do not violate or
infringe, any Applicable Law, or any order, writ, injunction or decree of any
Governmental Authority.
3.17. EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL; AND EMPLOYEE
BENEFITS.
(a) Except as set forth on SCHEDULE 3.17(A), there are no
employment, consulting, severance pay, continuation pay, termination pay or
indemnification agreements or other similar agreements of any nature whatsoever
(collectively, "Employment Agreements") between Seller, on the one hand, and any
current or former stockholder, officer, director, employee or Affiliate of the
Division or any of their respective Associates or any consultant or agent of the
Division, on the other hand, that are currently in effect. Except as set forth
on SCHEDULE 3.17(A), there are no Employment Agreements or any other similar
agreements to which Seller is a party under which the transactions contemplated
by this Agreement (i) will require any payment by Seller or Buyer, or any
consent or waiver from any stockholder, officer, director, employee or Affiliate
of Seller or any of their respective Associates or any consultant or agent of
Seller, or Buyer or (ii) will result in any change in the nature of any rights
of any stockholder, officer, director, employee or Affiliate of Seller or any of
their respective Associates or any consultant or agent of Seller under any such
Employment Agreement or other similar agreement.
(b) SCHEDULE 3.17(B) sets forth all Benefit Plans and Benefit
Arrangements of Seller. Seller has made true and correct copies of all governing
instruments, filings and related agreements pertaining to such Benefit Plans and
Benefit Arrangements available to Buyer.
(c) Except as set forth in SCHEDULE 3.17(C), neither Seller
nor its Affiliates, Plan Affiliates or ERISA Affiliates sponsors or has ever
sponsored, maintained, contributed to, or incurred an obligation to contribute
to, any Employee Pension Benefit Plan.
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(d) Neither Seller nor its Affiliates, Plan Affiliates or
ERISA Affiliates sponsors or has ever sponsored, maintained, contributed to or
incurred an obligation to contribute to, any Multiemployer Plan.
(e) Each Benefit Plan and each Benefit Arrangement, and the
administration thereof complies, and has at all times complied, in all material
respects with the requirements of all Applicable Law, including ERISA and the
Code, and each Benefit Plan intended to qualify under section 401(a) of the Code
has at all times since its adoption been so qualified, and each trust which
forms a part of any such plan has at all times since its adoption been
tax-exempt under section 501(a) of the Code.
(f) No direct, contingent or secondary liability has been
incurred or is expected to be incurred by Seller, nor its Affiliates, Plan
Affiliates or ERISA Affiliates under Title IV of ERISA to any party with respect
to any Benefit Plan, or with respect to any other plan presently or heretofore
maintained or contributed to by any Plan Affiliate or ERISA Affiliate.
(g) The "amount of unfunded benefit liabilities" within the
meaning of section 4001(a)(18) of ERISA does not exceed zero with respect to any
Benefit Plan subject to Title IV of ERISA.
(h) No "reportable event" (within the meaning of section 4043
of ERISA) has occurred with respect to any Benefit Plan or Benefit Arrangement
or any plan maintained by an Affiliate, Plan Affiliate or ERISA Affiliate.
(i) Neither the Seller, any Affiliate, Plan Affiliate nor
ERISA Affiliate has incurred or been assessed any liability for any tax imposed
under section 4971 through 4980B of the Code or civil liability under section
502(i) or (l) of ERISA, and no circumstances exist whereby the imposition of
such tax or liability may be reasonably expected or anticipated.
(j) No benefit under any Benefit Plan or Benefit Arrangement,
including, without limitation, any severance or parachute payment plan or
agreement, will be established or become accelerated, vested or payable by
reason of any transaction contemplated under this Agreement.
(k) No Benefit Plan provides health or death benefit coverage
beyond the termination of an employee's employment, except as required by COBRA
or any state laws requiring continuation of benefits coverage following
termination of employment.
(l) No suit, actions or other litigation (excluding claims for
benefits incurred in the ordinary course of plan activities) have been brought
or, to the knowledge of Seller, the Company or any Subsidiary, threatened
against or with respect to any Benefit Plan and there are no facts or
circumstances known to Seller, the Company or any Subsidiary that could
reasonably be expected to give rise to any such suit, action or other
litigation;
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(m) All contributions to Benefit Plans and Benefit
Arrangements that were required to be made under such Plans and Arrangements
have been made, and all benefits accrued under any unfunded Benefit Plan or
Benefit Arrangement have been paid, accrued or otherwise adequately reserved in
accordance with GAAP.
(n) With respect to any Group Health Plans maintained by
Seller or its Affiliates, Plan Affiliates or ERISA Affiliates, whether or not
for the benefit of the employees of Seller, its Affiliates, Plan Affiliates or
its ERISA Affiliates, Seller, its Affiliates, Plan Affiliates and ERISA
Affiliates have complied in all material respects with the provisions of COBRA.
Neither Seller nor its Affiliates, Plan Affiliates or ERISA Affiliates is
obligated to provide health care benefits of any kind to its retired employees
pursuant to any Employee Benefit Plan, including without limitation any Group
Health Plan, or pursuant to any agreement or understanding, other than under
COBRA.
3.18. LABOR AND EMPLOYMENT MATTERS.
(a) Except as set forth on SCHEDULE 3.18(A), no collective
bargaining agreement exists that is binding on Seller with respect to employees
of the Division, and, except as described on SCHEDULE 3.18(A), no petition has
been filed or proceedings instituted by an employee or group of employees with
any labor relations board seeking recognition of a bargaining representative at
any time subsequent to January 1, 1994 with respect to employees of the
Division. SCHEDULE 3.18(A) describes any organizational effort currently being
made or threatened by or on behalf of any labor union to organize any employees
of the Division.
(b) Except as set forth on SCHEDULE 3.18(B), there is no labor
strike, dispute, slow down or stoppage pending or, to the knowledge of Seller,
threatened, against or directly affecting the Division, (ii) no material
grievance or arbitration proceeding arising out of or under any collective
bargaining agreement or otherwise relating to any employees of the Division is
pending, and no claims therefor exist; and (iii) neither the Division nor any of
its Affiliates has received any notice or has any knowledge of any threatened
labor or civil rights dispute, controversy or grievance or any other unfair
labor practice, proceeding or breach of contract claim or action with respect to
claims of, or obligations to, any employee or group of employees of the
Division.
(c) If required under the Workers Adjustment and Retraining
Notification Act ("WARN") or other applicable state laws regulating plant
closings or mass layoffs, Seller and its Affiliates have timely caused to be
filed or distributed, as appropriate, all required filings and notices with
respect to employment losses occurring through the Closing Date.
(d) Seller and its Affiliates have complied and are currently
complying, in all material respects, in respect of all employees of Seller and
its Affiliates, with
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all Applicable Laws respecting employment and employment practices and the
protection of the health and safety of employees, from whatever source such law
may be derived, including. without limitation, statutes, ordinances, laws,
rules, regulations, policies, standards, judicial or administrative precedents,
judgments, orders, decrees, awards, citations, licenses, official
interpretations and guidelines.
(e) All individuals who are performing or have performed
services for Seller or any Affiliate thereof and are or during 1996 or 1997 were
classified by Seller or any Affiliate as "independent contractors" qualify for
such classification under Section 530 of the Revenue Act of 1978 or Section 1706
of the Tax Reform Act of 1986 (and any other similar provision of federal, state
or local law), as applicable, except for such instances which are not, in the
aggregate, material.
3.19. INTELLECTUAL PROPERTY.
(a) SCHEDULE 3.19(A) sets forth a complete and correct list of
each item of Intellectual Property and each license or licensing agreement
relating to any of the foregoing, in each case relating to, or held for use in
connection with, the Division or the Transferred Assets. Except as set forth in
SCHEDULE 3.19(A), (i) Seller owns all right, title and interest in, or has the
exclusive right to use the foregoing items of Intellectual Property, and (ii)
all registrations with and applications to any Governmental Authority in respect
of the foregoing items are valid and in full force and effect.
(b) Except as set forth in SCHEDULE 3.19(B), Seller has no
knowledge that any Intellectual Property owned, used, or licensed by Seller is
being infringed by any other Person. Seller has not during the three years
preceding the date of this Agreement been a party to any Proceeding, nor to the
knowledge of Seller is any Proceeding threatened, as to which there is a
reasonable possibility of a determination adverse to Seller that involved or may
involve a claim that Seller is infringing any Intellectual Property of any
Person (including any Governmental Authority). Except as set forth in SCHEDULE
3.19(B), no Intellectual Property owned, used or licensed by Seller is subject
to any outstanding order, judgment, decree, stipulation or agreement restricting
the use thereof by Seller, or restricting the licensing thereof by Seller to any
Person. The use by Seller in the business of the Division of any Intellectual
Property does not conflict with, infringe upon or violate any Intellectual
Property rights of any Person.
(c) Except as set forth in SCHEDULE 3.19(C), Seller either
owns the entire right, title and interest in, to and under, has a valid and
binding license to use, or has acquired in connection with the acquisition of
Computer Equipment, Software or Equipment an implied license to use, free and
clear of any and all Liens, any and all Intellectual Property used for the
conduct of the business of the Division and for the use of the Transferred
Assets in the manner that such business has heretofore been conducted and such
Transferred Assets have heretofore been used. No other Intellectual Property is
necessary for the unimpaired continued
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operation of the business of the Division after the Closing in the manner that
the business of the Division has heretofore been conducted.
(d) Except as set forth in SCHEDULE 3.19(D), there are no
restrictions on the direct or indirect transfer of any Intellectual Property or
license to use the Intellectual Property, or any interest therein, held by the
Seller in respect of such Intellectual Property.
(e) Except as set forth in SCHEDULE 3.19(E), (i) the Seller
has delivered to Buyer prior to the execution of this Agreement documentation
with respect to any invention, process, design, computer program or other
know-how or trade secret included in such Intellectual Property, which
documentation is accurate in all material respects and reasonably sufficient in
detail and content to identify and explain such invention, process, design,
computer program or other know-how or trade secret, and (ii) the Seller has
taken reasonable security measures to protect the secrecy, confidentiality and
value of its trade secrets.
(f) Except as set forth in SCHEDULE 3.19(F), the Seller is not
and has not received any notice that it is, in default (or with the giving of
notice or lapse of time or both, would be in default) under any license or other
agreement to use such Intellectual Property.
(g) As used in this SECTION 3.19, "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, (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 source code, data and related
documentation), (g) all other proprietary rights, (h) all copies and tangible
embodiments thereof (in whatever form or medium) and (i) all licenses or
agreements in connection with the foregoing.
3.20. ADVISORY FEES. Except for Concord Partners (whose fees and
expenses will be paid by Seller), there is no investment banker, broker, finder
or other intermediary or advisor that has been retained by or is authorized to
act on behalf of Seller or the Shareholders who might be entitled to any fee,
commission or reimbursement of expenses from Buyer or any of its Affiliates or
any of their respective Associates upon consummation of the transactions
contemplated by this Agreement.
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3.21. ENVIRONMENTAL COMPLIANCE.
(a) Except as disclosed in SCHEDULE 3.21(A), Seller has
obtained and holds all Environmental Permits of all Governmental Authorities, or
from any other Person, that are required under any Environmental Law to conduct
the business of the Division and use the Transferred Assets in the manner
presently conducted or used. SCHEDULE 3.21(A) sets forth all Environmental
Permits issued under any Environmental Law to Seller relating to the Division or
the Transferred Assets.
(b) Except as disclosed in SCHEDULE 3.21(B), Seller is in
compliance in all material respects with all terms and conditions of all
Environmental Permits or other similar authorizations of all Governmental
Authorities (and all other Persons) required under all Environmental Laws and
used in the business of the Division or that relate to the Transferred Assets,
and is also in compliance in all material respects with all Environmental Laws.
(c) To the knowledge of Seller, after due inquiry, except as
disclosed in SCHEDULE 3.21(C), there are no past, pending, or threatened
Environmental Claims against Seller, and Seller is not aware of any facts or
circumstances which could reasonably be expected to form the basis for any
Environmental Claim against the Seller; and there are no past or present events,
conditions, circumstances, activities, practices, incidents, actions, omissions
or plans relating to or in any way affecting Seller, the Division or the
Transferred Assets that may interfere with or prevent continued compliance with
any Environmental Law by Buyer after the Closing.
(d) No Releases of Hazardous Substances have occurred at,
from, in, to, on, or under any Site and no Hazardous Substances are present in,
on, about or migrating to or from any Site that could give rise to an
Environmental Claim against Seller.
(e) Neither Seller, any predecessor of the Seller, nor any
entity previously owned by Seller, has transported or arranged for the
treatment, storage, handling, disposal, or transportation of any Hazardous
Substance to any off-Site location which could result in an Environmental Claim
against Seller.
(f) No Site is a current or proposed Environmental Clean-up
Site. No site is subject to the New Jersey Industrial Site Recovery Act
("ISRA").
(g) There are no Liens (other than Permitted Liens) arising
under or pursuant to any Environmental Law on any Site and there are no facts,
circumstances, or conditions that could reasonably be expected to restrict,
encumber, or result in the imposition of special conditions under any
Environmental Law with respect to the ownership, occupancy, development, use, or
transferability of any Site.
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(h) There are no (a) underground storage tanks, active or
abandoned, (b) polychlorinated biphenyl containing equipment, or (c) asbestos
containing material at any site.
(i) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, on behalf of, or which
are in the possession of the Seller with respect to any Site which have not been
delivered to Buyer prior to execution of this Agreement and prior to the
Closing.
3.22. INSURANCE. SCHEDULE 3.22 sets forth a complete and correct
list of all insurance policies of any kind or nature whatsoever currently in
force or in force at any time subsequent to January 1, 1994 with respect to the
Division (the "Insurance Policies"), including all "occurrence based" liability
policies regardless of the period to which they relate. For each Insurance
Policy, SCHEDULE 3.22 indicates the type of coverage, the name of the insureds,
the insurer, the premium, the expiration date, the period to which it relates,
the deductibles and loss retention amounts, the amounts of coverage and any
claim made under such Insurance Policy subsequent to January 1, 1994. To the
best of Seller's knowledge, after due inquiry, the Insurance Policies described
as currently in effect are in full force and effect and are valid, outstanding
and enforceable, and all premiums due thereon have been paid.
3.23. TAX MATTERS.Except as set forth on SCHEDULE 3.23:
(a) There are no Taxes of Seller, or deficiencies in Taxes or
claims for Taxes against Seller, for any taxable period that could become a
Liability of, or which could be assessed or collected against, Buyer or become a
Lien on any Transferred Assets, as a result of the transfer of assets
contemplated by this Agreement.
(b) Seller has filed all federal, state, local and foreign Tax
Returns and reports required by law in the legally prescribed time and manner,
and has paid, or made adequate provision for the payment of (or shall have done
so prior to the Closing Date), all Taxes due and payable through the Closing
Date, and will promptly pay when due any Taxes that may become due or be
assessed thereafter. True and correct copies all of Seller's Tax Returns for the
past five years had been provided to Buyer.
(c) There are no Liens for Taxes, other than for current Taxes
not yet due and payable, on the Transferred Assets. Buyer will not become liable
under any Tax law for any Taxes of Seller as a result of acquiring the
Transferred Assets.
(d) All amounts that are required to be collected or withheld
by Seller, or with respect to Taxes of Seller, have been duly collected or
withheld and all such amounts that are required to be remitted to any taxing
authority have been duly remitted.
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(e) None of the Transferred Assets is property that is
required to be treated as owned by any other person pursuant to the "safe harbor
lease" provisions of former Section 168(f)(8) of the Internal Revenue Code of
1954 as amended and in effect immediately prior to the enactment of the Tax
Reform Act of 1986 and none of the Transferred Assets is "tax exempt use
property" within the meaning of Section 168(h) of the Code.
(f) None of the Transferred Assets secures any debt the
interest on which is tax exempt under Section 103 of the Code.
3.24. REQUIRED SEC FILINGS. Seller has filed all forms, reports and
documents required to be filed with the SEC and has made available to the Buyer
copies of (i) its Annual Report on Form 10-KSB for the fiscal years ended
December 31, 1995 and December 31, 1996, (ii) its Quarterly Reports on Form
10-QSB for the periods ended March 31, June 30 and September 30, 1997, (iii) all
proxy statements relating to Seller's meetings of stockholders (whether annual
or special) since December 31, 1996, (iv) all other reports or registration
statements filed by Seller with the SEC since December 31, 1996, and (v) all
amendments and supplements to all such reports and registration statements filed
by Seller with the SEC pursuant to the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange
Act") or the Securities Act of 1933, as amended, and the rules and regulations
thereunder (the "Securities Act") ((i)-(v) collectively, the "Seller SEC
Reports"). Except as disclosed in SCHEDULE 3.24, the Seller SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a subsequent filing, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
3.25. BOOKS AND RECORDS. The books and records of Seller (including
without limitation, the books of account and minute books) which have been made
available to Buyer are accurate and correct, and such minute books contain
accurate and complete records of all meetings held, and corporate action taken
by, the shareholders, the Board of Directors and any committee thereof.
3.26. OTHER INFORMATION. None of the information and documents
furnished or to be furnished by Seller to Buyer in connection with the execution
and delivery of this Agreement and consummation of the transactions contemplated
hereby is or will be false or misleading or contains or will contain any
material misstatement of fact or omits or will omit to state any material fact
required to be stated in order to make the statements therein not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
As an inducement to Seller to enter into this Agreement and to
consummate the transactions contemplated herein, Bowne Entity and Buyer hereby
represent and warrant to Seller that:
4.01. EXISTENCE AND POWER. Buyer is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all partnership power and authority to enter into this
Agreement and consummate the transactions contemplated hereby.
4.02. AUTHORIZATION. The execution, delivery and performance by
Buyer of this Agreement and the consummation by Buyer of the transactions
contemplated hereby are within the partnership powers of Buyer and have been
duly authorized by all necessary action on the part of Buyer. This Agreement
constitutes a legal, valid and binding agreement of Buyer, enforceable in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and subject to general principles of equity.
4.03. GOVERNMENTAL AUTHORITY. The execution, delivery and
performance by the Buyer of this Agreement require no action or consent or
approval of or filing with, any Governmental Authority other than (a) compliance
with the applicable disclosure requirements of the Exchange Act and the American
Stock Exchange, and (b) any actions, consents, approvals or filings which may
result from any fact or circumstance relating solely to Seller.
4.04. NON-CONTRAVENTION. The execution, delivery and performance by
the Buyer of this Agreement does not (a) contravene or conflict with the
Certificate of Limited Partnership or Agreement of Limited Partnership of Buyer,
or (b) assuming compliance with the matters referred to in Section 5.03,
contravene or conflict with or constitute a violation of any provision of any
Applicable Law binding upon or applicable to the Buyer.
4.05. ADVISORY FEES. There is no investment banker, broker, finder
or other intermediary or advisor that has been retained by or is authorized to
act on behalf of Buyer who might be entitled to any fee, commission or
reimbursement of expenses from Seller or its Affiliates upon consummation of the
transactions contemplated by this Agreement.
4.06. LITIGATION. There is no Proceeding pending against, or to the
knowledge of the Buyer, threatened against or affecting, Buyer before any court
or arbitrators or any Governmental Authority that challenges or seeks to
prevent, enjoin, alter or materially delay the transactions contemplated by this
Agreement.
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4.07. PURCHASE PRICE. Buyer has, or will obtain on or before the
Closing Date, sufficient cash to pay the portion of the Purchase Price due on
the Closing Date pursuant to Section 2.06(b) hereof and to satisfy the Assumed
Liabilities in due course.
ARTICLE V
COVENANTS OF SELLER
The Seller hereby covenants and agrees with Buyer that:
5.01. CONDUCT OF THE BUSINESS. From the date hereof until the
Closing Date, Seller shall conduct its business in the ordinary course
consistent with past practice, and use its reasonable best efforts to preserve
intact the Transferred Assets, the Division and the business organization and
relationships and goodwill of Seller with third parties and to keep available
the services of those present officers, employees, agents and other personnel of
the Division designated by Buyer. Without limiting the generality of the
foregoing, from the date hereof until the Closing Date:
(a) Seller will:
(i) (A) maintain the Transferred Assets in the ordinary
course of business consistent with past practice and in good operating
order and condition, reasonable wear and tear, damage by fire and other
casualty excepted, (B) promptly repair, restore or replace any Transferred
Assets if required in the ordinary course of business consistent with past
practice and (C) upon any damage, destruction or loss to any of the
Transferred Assets, apply any and all insurance proceeds received with
respect thereto to the prompt repair, replacement and restoration thereof
to the condition of the Transferred Assets before such event;
(ii) comply with all Applicable Laws;
(iii) file all foreign, federal, state and local Tax
Returns required to be filed and make timely payment of all applicable
Taxes when due;
(iv) use its best efforts to obtain, prior to the
Closing Date, all Required Consents;
(v) take all reasonable actions necessary to be in
compliance with, and to maintain the effectiveness of, all material
Permits;
(vi) promptly notify Buyer in writing of any action,
event, condition or circumstance, or group of actions, events, conditions
or circumstances, that
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results in, or could reasonably be expected to result in, a material
adverse effect on the Division, the Transferred Assets or the financial
condition or results of operations of Seller;
(vii) promptly notify Buyer in writing of the
commencement of any Proceeding by or against Seller, or Seller becoming
aware of any threat, claim, action, suit, inquiry, proceeding, notice of
violation, demand letter, subpoena, government audit or disallowance that
could reasonably be expected to result in a Proceeding related to or in
any way affecting the Division; and
(viii)promptly notify Buyer in writing of the occurrence
of any breach by Seller of any representation or warranty or any covenant
or agreement, contained in this Agreement.
(b) without the Buyer's prior written consent, Seller will not
and will not agree to:
(i) purchase or otherwise acquire assets for the
Division from any other Person, other than supplies in the ordinary course
of business consistent with past practice of the Division;
(ii) enter into any compromise or settle any litigation,
Proceeding or governmental investigation relating to the Transferred
Assets, the Division or the Contracts;
(iii) sell, assign, lease, license, transfer or
otherwise dispose of, or mortgage, pledge or encumber (other than with
Permitted Liens), any of its assets, which constitute Transferred Assets,
except the use or sale of inventory or supplies in the ordinary course of
business consistent with past practice of the Division;
(iv) enter any agreement or arrangement that requires
the rendering of services by the Division outside the ordinary course of
business consistent with past practice of the Division;
(v) amend or modify in any material respect or terminate
any Scheduled Contract or any other contract, agreement, commitment or
understanding entered into by Seller after the date hereof relating to the
Division and the Transferred Assets which, if in existence on the date
hereof, would be required to be set forth in the SCHEDULE 3.14(A) as a
Scheduled Contract (each, a "Subsequent Material Contract");
(vi) except in the ordinary course of business
consistent with past practice of the Division, waive, cancel or take any
other action materially impairing any of its rights relating to the
Division and the Transferred Assets;
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(vii) make or commit to make any capital expenditure, or
group of related capital expenditures relating to the Division and the
Transferred Assets, in excess of Twenty-Five Thousand Dollars ($25,000)
other than (A) capital expenditures set forth on SCHEDULE 5.01(B) and (B)
capital expenditures expressly required under any Scheduled Contract;
(viii) enter into or commit or propose to enter into any
Subsequent Material Contract;
(ix) (A) create, incur, assume, or guarantee any
indebtedness for borrowed money or (B) incur any Liability relating to a
documentary or standby letter of credit, other than in each such case
referred to in this clause (ix) in the ordinary course of business
consistent with past practice where the aggregate dollar amount of all of
the foregoing by Seller does not exceed fifty thousand dollars ($50,000);
(x) (A) increase the rate or terms of compensation
payable or to become payable to its directors, officers or employees
employed by the Division, except increases to non-officer employees in the
ordinary course of business consistent with past practice, (B) pay or
agree to pay any pension, retirement allowance or other employee benefit
not provided for by any Benefit Plan or Arrangement or Employment
Agreement set forth in the Schedules hereto, (C) commit itself with
respect to Division employees or former employees to any additional
pension, profit sharing, bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance pay, continuation pay, termination pay, retirement or other
employee benefit plan, agreement or arrangement, or increase the rate or
terms of any Benefit Plan or Arrangement, (D) enter into any Employment
Agreement with or for the benefit of any Person employed by the Division,
or (E) increase the rate of compensation under or otherwise change the
terms of any Employment Agreement set forth in SCHEDULE 3.17(A);
(xi) make any change in its accounting methods or in the
manner of keeping its books and records or any change in its current
practices with respect to inventory, sales, receivables, payables or
accrued expenses;
(xii) declare or pay any dividend or make any
distribution in respect of any of its capital stock, options, warrants, or
other rights to purchase capital stock of Seller (collectively, "Equity
Securities") or, directly or indirectly, redeem purchase or otherwise
acquire any of its Equity Securities or the Equity Securities of any of
its Affiliates or make any other payments of any kind to the holders of
any of its Equity Securities in respect thereof or to the holders of any
Equity Securities of any of its Affiliates in respect thereof, or enter
into any commitment or agreement to do any of the foregoing, PROVIDED,
HOWEVER, that Buyer's consent shall not be required with respect to the
foregoing if the proposed action by Seller would not effect the ability of
Seller to
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satisfy its obligations hereunder, including its obligation to satisfy all
Excluded Liabilities;
(xiii) solicit or encourage any customers or clients of
the Division to pay, prior to the time such amounts are due, any amounts
due to the Division; or
(xiv) take any action or course of action inconsistent
with compliance with the covenants and agreements of Seller hereunder or
which might result in any representations or warranties of Seller becoming
incorrect in any material respect or which might adversely affect the
interests of Buyer hereunder or diminish the value of the Transferred
Assets or of the Division or the business of the Division as a going
concern.
5.02. ACCESS TO INFORMATION. From the date hereof until the Closing
Date, Seller will promptly: (a) give Buyer and its counsel, financial advisors,
auditors and other authorized representatives reasonable access to the offices,
properties, books and records relating to the Division and the Transferred
Assets (and relating to Seller itself to the extent in the reasonable judgment
of Buyer such information relates to the transactions contemplated by this
Agreement) upon reasonable prior notice and during normal business hours, (b)
furnish to Buyer its counsel, financial advisors, auditors and other authorized
representatives such information relating to the Division or the Transferred
Assets (and relating to Seller itself to the extent in the reasonable judgment
of Buyer such information relates to the transactions contemplated by this
Agreement) as the Buyer may reasonably request and (c) instruct the directors,
officers, employees, counsel, auditors and financial advisors of Seller to
cooperate with Buyer and its counsel, financial advisors, auditors and other
authorized representatives in their investigation of the Division and the
Transferred Assets (and of Seller itself to the extent in the reasonable
judgment of Buyer such investigation relates to the transactions contemplated by
this Agreement). In addition, Buyer shall have the right, after consultation
with Seller (and in conjunction with Seller if requested) to meet with the
principal customers and suppliers of the Division, and Seller shall give Buyer
its full cooperation with respect thereto as reasonably requested. Nothing
contained in this Section 5.02 shall affect the survival of the representations,
warranties, covenants, agreements and indemnities of Seller as hereinafter
provided or the conditions to the obligations of Buyer under Section 8.01
hereof.
5.03. COMPLIANCE WITH TERMS OF REQUIRED GOVERNMENTAL APPROVALS AND
REQUIRED CONTRACT CONSENTS. On and after the Closing Date, Seller shall comply
at its own expense with all conditions and requirements set forth in (i) all
Required Governmental Approvals as necessary to keep the same in full force and
effect assuming continued compliance with the terms thereof by Buyer, and (ii)
all Required Contract Consents as necessary to keep the same effective and
enforceable against the Persons giving such Required Contract Consents assuming
continued compliance with the terms thereof by Buyer.
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5.04. MAINTENANCE OF INSURANCE POLICIES. On and after the date
hereof, Seller shall not take or fail to take any action if such action or
inaction, as the case may be, would adversely affect the effectiveness,
applicability or enforceability of any Insurance Policies in effect on the date
hereof that covers all or any part of the Transferred Assets or the Division.
Notwithstanding the foregoing, Seller shall not have any obligation to make any
monetary payment to maintain the effectiveness of any such Insurance Policy
after the Closing Date.
5.05. CONFIDENTIALITY.
(a) Seller will, and will cause its representatives to, treat
any data and information obtained with respect to Buyer or any of its Affiliates
(or with respect to the Division, to the extent provided pursuant to Section
6.01 hereof or retained pursuant to Section 2.01(a)(xiii) hereof) from any
representative, officer, director, or employee of Buyer, or from any books or
records of Buyer in connection with this Agreement, confidentially and with
commercially reasonable care and discretion, and will not disclose any such
information to third parties; PROVIDED, HOWEVER, that the foregoing shall not
apply to (i) information in the public domain or that becomes public through
disclosure by any party other than Seller or its Affiliates or representatives,
so long as such other party is not in breach of a confidentiality obligation,
(ii) information that may be required to be disclosed by Applicable Law, (iii)
information required to be disclosed to obtain any Required Consents, or (iv)
information disclosed to Seller's legal, accounting or financial advisors.
(b) In the event that the Closing fails to take place and this
Agreement is terminated, Seller, upon the written request of Buyer, will, and
will cause its representatives to, promptly deliver to Buyer any and all
documents or other materials furnished by Buyer (or its counsel) or any of its
Affiliates to Seller in connection with this Agreement without retaining any
copy thereof. In the event of such a request, all other documents, whether
analyses, compilations or studies, that contain or otherwise reflect the
information furnished by Buyer to Seller, shall be destroyed by Seller or shall
be returned to Buyer, and Seller shall confirm to Buyer in writing that all such
materials have been returned or destroyed. No failure or delay by Buyer in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other
further exercise thereof or the exercise of any right, power or privilege
hereunder.
5.06. TAXES.
(a) For a period of three years after the Closing Date, at
Buyer's expense for reasonable documented out-of-pocket costs incurred at the
request of Buyer, Seller shall (i) provide Buyer with such assistance as may
reasonably be requested in connection with the preparation of any Tax Return and
the conduct of any audit or other examination by any taxing authority or in
connection with judicial or administrative proceedings relating to any liability
for Taxes, (ii) retain and provide Buyer with all records or other information
that may be relevant to the preparation of any Tax Returns, or the conduct of
any audit or examination or
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other Tax Proceeding. For such three year period, Seller shall retain all
relevant documents, including prior year's Tax Returns, supporting work
schedules and other records or information that may be relevant to such returns
and shall not destroy or otherwise dispose of any such records without the prior
written consent of Buyer, and at the end of such three year period shall not
destroy or dispose of the same without allowing Buyer to take custody of such
records or to copy the same.
(b) All sales, value added, use, transfer, registration, stamp
and similar Taxes imposed in connection with the sale of the Transferred Assets
shall be borne by Seller.
(c) Pursuant to Section 1445(b)(2) of the Code, Seller shall
furnish Buyer an affidavit stating, under penalty of perjury, Seller's United
States taxpayer identification number and that Seller is not a foreign person.
5.07. INTERIM FINANCIAL STATEMENTS. Prior to the Closing Date,
Seller shall prepare and provide to Buyer within twenty (20) days of the end of
each calendar month and calendar quarter a balance sheet and income statement of
Seller and the Division as at the end of such month or quarter and for the
period then ended, and Seller shall provide Buyer promptly after they are
available any other financial statements or financial reports generated by
Seller.
5.08. SPECIFIC PERFORMANCE. The parties hereto recognize and agree
that in the event of a breach by the Seller of this Article V, money damages
would not be an adequate remedy to the Buyer or its Affiliates for such breach
and, even if money damages were adequate, it would be impossible to ascertain or
measure with any degree of accuracy the damages sustained by the Buyer or its
Affiliates therefrom. Accordingly, if there should be a breach or threatened
breach by the Seller of provisions of this Article V, Buyer and its Affiliates
shall be entitled to an injunction restraining Seller from any breach without
showing or proving actual damage sustained by Buyer or its Affiliates, as the
case may be. Nothing in the preceding sentence shall limit or otherwise affect
any remedies that Buyer may otherwise have under Applicable Law.
ARTICLE VI
COVENANTS OF THE BUYER
6.01. ACCESS TO INFORMATION. Subject to compliance with Applicable
Laws, and subject to the confidentiality provisions of Section 5.05, after the
Closing Date, Buyer will promptly: (i) give Seller and its financial advisors,
auditors and other authorized representatives reasonable access during regular
business hours to the offices, properties, books and records relating to the
Division and the Transferred Assets (in each case for any periods prior to the
Closing Date and for reasonable business purposes such as preparation of Tax
Returns or financial statements) upon reasonable prior notice, and Seller shall
have the right, at its own
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expense, to make copies of any such records and filings, with such copies being
subject to the confidentiality provisions of Section 5.05, (ii) furnish to
Seller, its counsel, financial advisors, auditors and other authorized
representatives such information relating to the Division and the Transferred
Assets (in each case for any periods prior to the Closing Date and for
reasonable business purpose such as preparing Tax Returns or financial
statements) as the Buyer may reasonably request and (iii) instruct the
directors, officers, employees, counsel, auditors and financial advisors of
Buyer to cooperate with Seller and its counsel, financial advisors, auditors and
other authorized representatives in their preparation of all necessary
certificates or similar documents required to be prepared and delivered by
Seller to Buyer by this Agreement; provided, however, that all reasonable
out-of-pocket costs of Buyer in complying with the covenants set forth in this
Section 6.01 shall be paid by Seller.
6.02. COMPLIANCE WITH TERMS OF REQUIRED GOVERNMENTAL APPROVAL AND
REQUIRED CONTRACT CONSENTS. On and after the Closing Date, Buyer shall comply at
its own expense with all conditions and requirements set forth in (i) all
Required Governmental Approvals as necessary to keep the same in full force and
effect assuming continued compliance with the terms thereof by Seller and (ii)
all Required Contract Consents as necessary to keep the same effective and
enforceable against the Persons giving such Required Contract Consents assuming
continued compliance with the terms thereof by Seller; PROVIDED, HOWEVER, that
nothing herein shall require Buyer to agree to any particular condition or
requirement, or to make any payment, to obtain or maintain the effectiveness of
any Required Governmental Approval or Required Contract Consent or to make any
payments to comply with any such condition or requirements.
6.03. CONFIDENTIALITY.
(a) Buyer will, and will cause its representatives to, treat
any data and information obtained with respect to Seller from any
representative, officer, director or employee of Seller, or from any books or
records of Seller in connection with this Agreement, confidentially and with
commercially reasonable care and discretion, and will not disclose any such
information to third parties; PROVIDED, HOWEVER, that the foregoing shall not
apply to (i) information in the public domain or that becomes public through
disclosure by any party other than Buyer, or its Affiliates or representatives,
so long as such other party is not in breach of a confidentiality obligation,
(ii) information that may be acquired to be disclosed by Applicable Law, (iii)
information required to be disclosed to obtain any Required Consents; (iv) any
information that is disclosed by Buyer or its Affiliates to any of their actual
or prospective lenders in connection with financing the transactions
contemplated by this Agreement; or (v) any information that is disclosed to
Buyer's legal, accounting of financial advisors; PROVIDED, HOWEVER, that in the
event the Closing has occurred, this Section 6.03(a) shall cease to be effective
with respect to any data and information obtained with respect to the Division.
(b) In the event that the Closing fails to take place and this
Agreement is terminated, Buyer, upon the written request of Seller, will and
will cause its representatives to,
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promptly deliver to Seller any and all documents or other materials furnished by
Seller to Buyer in connection with this Agreement without retaining any copy
thereof. In the event of such request, all other documents, whether analyses,
compilations or studies, that contain or otherwise reflect the information
furnished by Seller to Buyer, shall be returned to Seller, and Buyer shall
confirm to Seller in writing that all such materials have been returned. No
failure or delay by Seller in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
right, power or privilege hereunder.
6.04. SPECIFIC PERFORMANCE. The parties hereto recognize and agree
that in the event of a breach by Buyer of this Article VI, money damages would
not be an adequate remedy to Seller for such breach and, even if money damages
were adequate, it would be impossible to ascertain or measure with any degree of
accuracy the damages sustained by Seller therefrom. Accordingly, if there should
be a breach or threatened breach by Buyer of provisions of this Article VI,
Seller shall be entitled to an injunction restraining Buyer from any breach
without showing or proving actual damage sustained by Seller. Nothing in the
preceding sentence shall limit or otherwise affect any remedies that Seller may
otherwise have under Applicable Law.
ARTICLE VII
COVENANTS OF ALL PARTIES
7.01. FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each party will use all reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary or
reasonably desirable under Applicable Law to consummate the transactions
contemplated by this Agreement.
7.02. CERTAIN FILINGS. The parties hereto shall cooperate with one
another and shall use all reasonable efforts to obtain on a timely basis all
Required Consents, and in taking such actions or making any filings in
connection with such Required Consents, the parties hereto shall furnish such
information required in connection therewith.
7.03. PUBLIC ANNOUNCEMENTS. Up to (and including) the Closing Date,
each party agrees that, without the consent of the other party, it will not,
except as may be required by Applicable Law, issue any press release or make any
public statement with respect to this Agreement or the transactions contemplated
hereby. Notwithstanding the foregoing, the parties may, on a confidential basis,
advise and release information regarding the existence and content of this
Agreement or the transactions contemplated hereby to their respective
Affiliates, Associates or any of their agents, accountants, attorneys and
prospective lenders or investors or to any party to a Contract or to a
Governmental Authority as required in connection with obtaining any Required
Consent, in connection with or related to the transactions contemplated by this
Agreement, including without limitation the financing of such transactions.
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7.04. ADMINISTRATION OF ACCOUNTS. All payments and reimbursements
made in the ordinary course by any third party in the name of or to Seller or
any Affiliate thereof in connection with or arising out of the Transferred
Assets, the Division or the Assumed Liabilities after the Closing Date shall be
held by Seller or such Affiliate in trust for the benefit of Buyer and,
immediately upon receipt by Seller or any such Affiliate of any such payment or
reimbursement, Seller shall pay, or cause to be paid, over to Buyer the amount
of such payment or reimbursement without right of set off.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01. CONDITIONS TO OBLIGATION OF THE BUYER. The obligations of
Buyer to consummate the Closing are subject to the satisfaction of each of the
following conditions:
(a) (i) Seller shall have performed and satisfied in all
material respects each of its covenants, agreements and obligations hereunder
required to be performed and satisfied by it on or prior to the Closing Date,
(ii) each of the representations and warranties of Seller contained in this
Agreement which are qualified as to materiality shall be true and correct in all
respects, and those not so qualified shall be true and correct in all material
respects, when made and (without giving effect to any matter disclosed between
the date hereof and the Closing Date) at and as of the Closing Date with the
same force and effect as if made as of the Closing Date, and (iii) the Buyer
shall have received a certificate signed by a duly authorized executive officer
of Seller to the foregoing effect and to the effect that to the knowledge of
such officer the conditions specified within this Section 8.01 have been
satisfied.
(b) All Required Governmental Approvals for the transactions
contemplated by this Agreement, including any governmental permits or licenses
required to be obtained by Buyer to operate the business of the Division after
the Closing, shall have been obtained without the imposition of any conditions
that are or would become applicable to the Division, the Transferred Assets or
Buyer (or any of its Affiliates) after the Closing that Buyer reasonably
determines would be adverse to the Division, the Transferred Assets or Buyer (or
any of its Affiliates) or their respective businesses substantially as such
businesses have been conducted prior to the Closing Date or as such businesses,
as of the date hereof would be reasonably expected to be conducted after the
Closing Date. All such Required Governmental Approvals shall be in effect, and
no Proceedings shall have been instituted or threatened by any Governmental
Authority with respect thereto as to which, in Buyer's opinion, there is a
material risk of a determination that would terminate the effectiveness of or
otherwise adversely modify the terms of, any such Required Governmental
Approval; all applicable waiting periods with respect to such Required
Governmental Approvals shall have expired; and all conditions and requirements
prescribed by Applicable Law or by such Required Governmental Approvals to be
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satisfied on or prior to the Closing Date shall have been satisfied allowing all
Required Governmental Approvals to be and to remain in full force and effect
assuming continued compliance with the terms thereof after the Closing.
(c) All Required Contract Consents, including without
limitation, the consents required pursuant to the IBM Agreements, the Advantis
Agreements, the Intersolv Agreement, the Pixel Agreement and any Real Property
Leases shall have been obtained without the imposition of any conditions that
are or would become applicable to the Division, the Transferred Assets, Buyer or
any of its Affiliates after the Closing that Buyer determines would be adverse
to the Division, the Transferred Assets or Buyer or any of its Affiliates or
their respective businesses substantially as such businesses have been conducted
prior to the Closing Date or as such businesses, as of the date hereof, would be
reasonably expected to be conducted after the Closing Date. All such Required
Consents (and with respect to the Subsequent Material Contracts, such other
consents as may be required) shall be in effect. All conditions and requirements
prescribed by any Required Contract Consent (or any such other consent) to be
satisfied on or prior to the Closing Date shall have been satisfied allowing all
such Required Contract Consents (and all such other consents) to be effective
and enforceable, and to remain effective and enforceable against the Persons
giving such Required Contract Consents (and such other consents) assuming
continued compliance with the terms thereof.
(d) The transactions contemplated by this Agreement and the
consummation of the Closing shall not violate any Applicable Law. No temporary
restraining order, preliminary or permanent injunction, cease and desist order
or other order issued by any court of competent jurisdiction or any competent
Governmental Authority or any other legal restraint or prohibition preventing
the transfer contemplated hereby or the consummation of the Closing, or imposing
Damages in respect thereto, shall be in effect, and there shall be no pending or
threatened actions or proceedings by any Governmental Authority (or
determinations by any Governmental Authority) or by any other Person seeking
material damages from Buyer with respect to the transactions contemplated
hereby, or challenging or in any manner seeking to restrict or prohibit the
transfer contemplated hereby or the consummation of the Closing, or to impose
conditions that Buyer reasonably determines would be adverse to the Division,
the Transferred Assets, Buyer or any of its Affiliates or their respective
businesses substantially as such businesses have been conducted prior to the
Closing Date or as said businesses, as of the date hereof, would be reasonably
expected to be conducted after the Closing Date.
(e) Since the date hereof, there shall not have been any
event, occurrence, development or state of circumstances or facts or any change
in the Transferred Assets or the Division (including any damage, destruction or
other casualty loss, but excluding any event, occurrence, development or state
of circumstances or facts or change resulting from changes in general economic
conditions) that has had or that may be reasonably expected to have, either
alone or together with all such events, occurrences, developments, states of
circumstances or facts or changes, a material adverse effect on the Transferred
Assets or the prospects, financial condition or results of operation of the
Division.
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(f) Jim Feuerstein shall have executed and delivered to Buyer
an Employment Agreement in the form attached hereto a EXHIBIT C (the "Feuerstein
Employment Agreement").
(g) Buyer shall have received an opinion from Rosenberg,
Tuggey, Agather & Rosenthal, counsel for Seller, in the form attached hereto as
EXHIBIT D.
(h) Seller shall have (i) satisfied all Excluded Liabilities
other than those set forth on SCHEDULE 2.04(B) (which shall be satisfied
pursuant to Section 2.04(b)), and (ii) caused all Liens on the Transferred
Assets which are not Permitted Liens to have been satisfied, terminated and
discharged, including without limitation all Liens on the Transferred Assets
relating to Bank One Debt;
(i) Buyer shall have received a good standing certificate for
Seller from the Secretary of State of Delaware or other appropriate office of
the State of Delaware, dated as a date not earlier than 5 days prior to the
Closing Date.
(j) Buyer shall be reasonably satisfied that the major
customers and suppliers of the Division will continue their relationship with
Buyer subsequent to the Closing on a basis satisfactory to Buyer.
(k) All proceedings, corporate or otherwise, taken by Seller
in connection with the transactions contemplated hereby and all instruments and
documents incident thereto shall be reasonably satisfactory in form and
substance to Buyer and its counsel.
(l) Seller shall have executed and delivered to Buyer a Lease
Agreement in the form attached hereto as EXHIBIT E (the "Lease") relating to
suite 100 and suite 300 in the building located at 7461 Callaghan Road, San
Antonio, Texas.
(m) Seller shall have executed and delivered to Buyer a
Trademark Assignment in the form attached hereto as EXHIBIT F (the "Trademark
Assignment").
(n) Buyer shall have received a copy of (i) the Certificate or
Articles of Incorporation of Seller, accompanied by a certificate of the
Secretary or an Assistant Secretary of Seller, dated as of the Closing Date,
stating that no amendments have been made to such document since such date, and
(ii) the By-laws of Seller, certified by the Secretary or an Assistant Secretary
of Seller.
(o) Buyer shall have received a certificate of an officer of
Seller certifying the names and signatures of the officers of Seller authorized
to sign any document required to be delivered by Seller hereunder.
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(p) Buyer shall have received from Seller evidence that any
agreements between the Seller or the Division and each of Manuel Guerrero,
Bridgitte Miklazewski, Tad Borek and Mark Fowler have been terminated.
8.02. CONDITIONS TO OBLIGATION OF SELLER. The obligations of Seller
to consummate the Closing are subject to the satisfaction of each of the
following conditions:
(a) (i) The Buyer shall have delivered the Purchase Price and
performed and satisfied in all material respects each of its other covenants,
agreements and obligations hereunder required to be performed and satisfied by
it on or prior to the Closing Date; (ii) each of the representations and
warranties of the Buyer contained in this Agreement which are qualified as to
materiality shall be true and correct in all respects, and those not so
qualified shall be true and correct in all material respects, when made and
(without giving effect to any matter disclosed between the date hereof and the
Closing Date) as of the Closing Date, with the same force and effect as if made
at and as of such date, and (iii) Seller shall have received a certificate
signed by a duly authorized executive officer of Buyer to the foregoing effect
and to the effect that to such officer's knowledge the conditions specified
within this Section 8.02 have been satisfied.
(b) All Required Governmental Approvals for the transactions
contemplated by this Agreement shall have been obtained. All such Required
Governmental Approvals shall be in effect, and no Proceedings shall have been
instituted or threatened by any Governmental Authority with respect thereto as
to which, in Seller's opinion, there is a material risk of a determination that
would terminate the effectiveness of, or otherwise adversely modify the terms
of, any such Required Governmental Approval. All applicable waiting periods with
respect to such Required Governmental Approvals shall have expired, and all
conditions and requirements prescribed by Applicable Law or by such Required
Governmental Approvals to be satisfied on or prior to the Closing Date shall
have been satisfied allowing all Required Governmental Approvals to be, and to
remain, in full force and effect assuming continued compliance with the terms
thereof after the Closing.
(c) The sale and transfer contemplated by this Agreement and
the consummation of the Closing hereunder shall not violate any Applicable Law.
No temporary restraining order, preliminary or permanent injunction, cease and
desist order or other order issued by any court of competent jurisdiction or any
competent Governmental Authority or any other legal restraint or prohibition
preventing the transfer contemplated hereby or the consummation of the Closing,
or imposing Damages in respect thereto, shall be in effect, and there shall be
no pending or threatened actions or proceedings by any Governmental Authority
(or determinations by any Governmental Authority) or by any other Person
challenging or in any manner seeking to restrict or prohibit the transfer
contemplated hereby or the consummation of the Closing.
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(d) Seller shall have received an opinion from Morgan, Lewis &
Bockius LLP, counsel to Buyer, in the form attached hereto as EXHIBIT G.
(e) Buyer shall have executed and delivered the Feuerstein
Employment Agreement.
ARTICLE IX
EMPLOYMENT AND BENEFITS MATTERS
9.01. HIRING OF EMPLOYEES; NO PRIOR SERVICE CREDIT.
(a) Buyer may, in its complete and absolute discretion, offer
employment to any employee, officer or consultant of Seller engaged in the
conduct of the business of the Division (the "Employees"), on such terms and
conditions as shall be mutually agreeable to Buyer and such Employees. All
Employees who are offered and accept such employment with Buyer are hereinafter
referred to as the "TRANSFERRED EMPLOYEES." Seller shall use its best efforts to
assist Buyer in hiring such Employees as Buyer shall offer employment to
hereunder, and shall not offer employment (or arrange to have another Person or
firm offer employment) to any such Employee without the prior written consent of
Buyer. The Transferred Employees shall be deemed to have accrued no prior
service credit for any purpose (including but not limited to vesting and benefit
accrual under any plan, arrangement or program, and seniority, title or duties
with respect to employment) in respect of their period of service with Seller,
or any prior employer, in connection with their employment with Buyer and under
any employee benefit plan, program or policy which Buyer may, in its absolute
discretion, establish for the benefit of the Transferred Employees; PROVIDED
however that the Transferred Employees shall be deemed to have accrued prior
service credit only for purposes of eligibility to participate under each, or in
any, employee benefit plan, program or policy of Buyer in which the Transferred
Employees are entitled to participate after the Closing.
(b) Seller shall (i) continue to employ the individuals listed
on SCHEDULE 9.01(B) hereto following the Closing Date, (ii) make all such
individuals available for the exclusive use of Buyer to perform such services as
determined by Buyer in its sole discretion, and (iii) use its reasonable best
efforts to assist Buyer and such individuals in obtaining any and all approvals
from Governmental Authorities sought by Buyer in connection with any transfer to
Buyer of the H1 visa and any other related work permits and papers of each such
individual. Buyer shall reimburse Seller for reasonable and direct out of pocket
costs incurred, pursuant to this Section 9.01(b), for salaries and benefits
(consistent with past salaries and benefits) for such individuals. If, within
one hundred twenty (120) days after the Closing Date, Buyer is unable to obtain
any of the approvals described in subsection (ii) hereof, Buyer may notify
Seller that it will no longer require the services of any such employee with
respect to which such approval
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was not obtained, and upon delivery of such notice, Buyer shall have no further
obligations to Seller (or to such individual) under this Section 9.01(b).
9.02. SELLER'S RETENTION OF LIABILITY. Effective as of the Closing,
Seller shall take all such action as may be necessary to cause all Transferred
Employees to cease to participate in all Benefit Plans and Benefit Arrangements,
and Buyer shall neither adopt nor become a sponsoring employer of, nor have any
obligations, duties or Liabilities under or with respect to such Benefit Plans
and/or Benefit Arrangements. Seller shall be solely responsible for any and all
Liabilities which have arisen or may arise in connection with any Benefit Plan
and/or Benefit Arrangements (including, but not limited to, (i) Liabilities
arising from income or excise tax assessments, participant benefit claims,
fiduciary conduct, or under ERISA or the Code, (ii) Liabilities under the
commission and bonus plans described in Schedule 3.17(a) hereof) and (iii) any
and all Liabilities which have arisen or may arise in any way from the
employment, compensation or benefits of any Employee or former employee of
Seller or any Affiliate, including but not limited to the Transferred Employees,
or the termination thereof, including, without limitation, any liability or
obligation arising out of or relating to any act or omission by Seller or any
Affiliate, any violation of or non-compliance with or obligation arising under
any applicable law respecting employment, compensation or benefits, and any and
all costs, Liabilities and obligations for severance pay (whether or not
triggered by virtue of the transactions contemplated by this Agreement), accrued
vacation pay, sick pay, health and medical claims and requests for
reimbursements, and similar and other benefits, relating to any period of
employment with Seller or any Affiliate, whether arising as a matter of
Contract, Law or otherwise. Seller agrees to comply with the Worker Adjustment
Notification and Retraining Act, 29 U.S.C. 2101 ET SEQ. to the extent required
with respect to the Employees.
9.03. HEALTH BENEFITS. If requested by Buyer, Seller shall cooperate
with Buyer in effecting an assignment to Buyer of any policies of insurance for
the provision of health or welfare benefits to Transferred Employees, and
administrative contracts relating thereto, provided, that the assignment of any
such policy shall not be construed as an assumption by Buyer of any plan of
Seller, or any liability thereunder. Without limiting the scope of Section 9.02
hereof, Seller shall be responsible for all claims regarding all expenses for
injuries or illnesses incurred prior to the Closing, and shall be responsible
for providing continuation health coverage as required under the provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1986, a amended, with
respect to any of Employees or Seller's former employees not employed by Buyer
as of the Closing or any Transferred Employee not covered under, or who may be
affected by any pre-existing condition clause contained in, any plan that may be
established by Buyer.
9.04. NO THIRD-PARTY RIGHTS. Nothing in this Article IX express or
implied shall confer upon any Transferred Employee or other Person or legal
representative thereof any rights or remedies, including any right to employment
or compensation or benefits of any nature or kind whatsoever.
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9.05. RIGHT TO TERMINATE EMPLOYMENT AND TERMINATE OR MODIFY PLANS.
Nothing in this Article IX express or implied shall be construed to prevent
Buyer from (i) terminating or modifying to any extent the employment or the
employment relationship of any Transferred Employee at any time for any reason,
or (ii) terminating or modifying to any extent or in any respect any employee
benefit plan, program or arrangement that Buyer may contribute to, maintain, or
establish for the benefit of Transferred Employees or such other employees,
directors, consultants, contractors, or otherwise, at any time for any reason.
ARTICLE X
INDEMNIFICATION
10.01. AGREEMENT TO INDEMNIFY.
(a) Buyer, Bowne Entity and their respective Affiliates,
officers, directors, shareholders, partners and employees (collectively, the
"Buyer Indemnitees") shall each be indemnified and held harmless to the extent
set forth in this Article X by Seller in respect, and Seller shall pay the full
amount, of any and all Damages incurred by any Buyer Indemnitee (i) as a result
of any misrepresentation in or breach of or failure to perform any
representation, warranty, covenant, agreement made by the Seller in this
Agreement or in any document delivered in connection herewith; (ii) in
connection with the assertion of any Excluded Liability of any kind whatsoever,
whether or not described in this Agreement or any Exhibit or Schedule hereto;
(iii) as a result of the failure by Seller to comply with any applicable bulk
sales law; (iv) as a result of any violations or infringements of any material
Applicable Law, or any order, writ, injunction or decree of any Governmental
Authority, but only to the extent that such violations or infringements occurred
prior to the Closing Date, whether or not known or asserted before such date;
(v) as a result of Taxes of Seller applicable to the Division or the Transferred
Assets for any period or portion thereof ending on or prior to the Closing Date;
or (vi) the sum of (x) the amount by which $190,000 (which Seller represents and
warrants is the amount of the Accounts Receivable transferred to Buyer (as part
of the Transferred Assets) which are related to the items of Deferred Income
reflected on the books of the Division on November 26, 1997, which items Seller
represents and warrants do not exceed the $639,333 of Deferred Income items
reflected on the Division's September 30, 1997 balance sheet) exceeds the
amounts actually collected by Buyer within 90 days of the Closing Date with
respect to such Accounts Receivable, plus (y) the actual amount in excess of
$108,000 that it costs Buyer to satisfy all of its obligations to customers with
respect to such Deferred Income items; PROVIDED, HOWEVER, that Seller shall have
no obligation under clause (i) of this Section 10.01(a) unless and until the
aggregate amount of Damages so incurred exceeds fifty thousand dollars
($50,000), whereupon Seller shall be liable to indemnify all amounts over fifty
thousand dollars ($50,000); PROVIDED, FURTHER, that the immediately preceding
PROVISO shall not be applicable with respect to any amounts that may be payable
to Buyer by Seller in respect of any breach described in clauses (i), (ii),
(iii) or (iv) of Section 10.02(b). The Liability of Seller for the indemnity
obligations under
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this Article X shall not exceed in the aggregate $6,500,000; PROVIDED, HOWEVER,
that there shall be no dollar limit to Seller's indemnity obligations with
respect to any of the matters covered by Sections 3.01, 3.02, 3.09(a), 3.19 and
3.21 or with respect to any claim based upon fraud or willful or criminal
misconduct.
(b) Seller and its Affiliates, officers, directors,
shareholders and employees (collectively, the "Seller Indemnitees") shall each
be indemnified and held harmless to the extent set forth in this Article X by
Buyer and Bowne Entity in respect of, and Buyer or Bowne Entity, as the case may
be, shall pay the full amount, of any and all Damages incurred by any Seller
Indemnitee (i) as a result of any misrepresentation in or breach of or failure
to perform any representation, warranty, covenant or agreement made by Buyer in
this Agreement or in any document delivered in connection herewith; or (ii) in
connection with any Assumed Liability; PROVIDED, HOWEVER, that Buyer shall have
no obligation under clause (i) of this Section 10.01(b) unless and until the
aggregate amount of Damages so incurred exceeds fifty thousand dollars
($50,000), whereupon Buyer shall be liable to indemnify all amounts over fifty
thousand dollars ($50,000); PROVIDED, FURTHER, that the immediately preceding
PROVISO shall not be applicable with respect to any amounts that may be payable
to Seller by Buyer in respect of any breach described in clauses (i), (ii) or
(iii) of Section 10.02(c). The Liability of Buyer and Bowne Entity for the
indemnity obligations under this Article X shall not exceed in the aggregate
$6,500,000; PROVIDED, HOWEVER, that there shall be no dollar limit to Buyer's
indemnity obligations with respect to any of the matters covered by Section 4.01
or with respect to any claims based upon fraud or willful or criminal
misconduct.
(c) The right to indemnification hereunder shall not be
affected by any investigation conducted with respect to, or any knowledge
acquired about, the Division or the Transferred Assets. The waiver of any
condition based on the accuracy of any representation or warranty, or the
performance of or the compliance with any covenant or obligation, will not
affect the right to indemnification or other remedy based on such
representation, warranty, covenant and obligation. Nothing set forth in this
Article X shall be deemed to prohibit or limit any Buyer Indemnitee's or Seller
Indemnitee's right at any time before, on or after the Closing Date, to seek
injunctive or other equitable relief for the failure of any Indemnifying Party
to perform any covenant or agreement contained herein.
10.02. SURVIVAL OF REPRESENTATION, WARRANTIES AND COVENANTS.
(a) Except as hereinafter provided in this Section 10.02, all
representations, warranties, covenants, agreements and obligations of each
Indemnifying Party contained herein and all claims of any Buyer Indemnitee or
Seller Indemnitee in respect of any breach of any representation, warranty,
covenant, agreement or obligation of any Indemnifying Party contained in this
Agreement, shall survive the Closing and shall expire on the third anniversary
of the Closing Date.
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(b) Notwithstanding Section 10.02(a), (i) the representations
and warranties made in Sections 3.01, 3.02, 3.09(a) and 3.21 and the agreement
of Seller to perform and timely pay and discharge all Excluded Liabilities shall
be unlimited in time, (ii) the representations and warranties made in Sections
3.08(a), 3.09(b), 3.09(c), 3.12, 3.13, 3.17, 3.19 and 3.20 shall survive until
sixty (60) days following the expiration of the applicable statute of
limitations or any extension thereof, by waiver or otherwise, (iii) the Seller's
breach of, or failure to perform, after the Closing Date any of the covenants,
agreements or obligations of Seller contained in this Agreement or in the
Exhibits attached hereto required to be performed after the Closing Date shall
survive until sixty (60) days following the expiration of the applicable statute
of limitations or any extension thereof, by waiver or otherwise, and (iv) the
representations and warranties in Section 3.23 respecting the Liability of
Seller for Taxes shall continue to survive until the later of (x) the time at
which all taxable periods to and including the Closing Date shall be closed to
any further assessment of Taxes or to any assessment of any penalties or
interest charges in respect of any such Taxes, by receipt of a final assessment,
in form and substance reasonably satisfactory to Buyer, from the appropriate tax
authorities, or (y) sixty (60) days following the expiration of the applicable
statute of limitations or any extension thereof, by waiver or otherwise.
(c) Notwithstanding Section 10.02(a), (i) the representations
and warranties made in Sections 4.01 and 4.02 and the agreement of Buyer to
perform and timely pay and discharge all Assumed Liabilities shall be unlimited
in time, (ii) the representations and warranties made in Section 4.05 shall
survive until sixty (60) days following the expiration of the applicable statute
of limitations or any extension thereof, by waiver or otherwise, and (iii) the
Buyer's breach of, or failure to perform, after the Closing Date any of the
covenants, agreements or obligations of Buyer contained in this Agreement or in
the Exhibits attached hereto required to be performed after the Closing Date
shall survive until sixty (60) days following the expiration of the applicable
statute of limitations or any extension thereof, by waiver or otherwise.
10.03. CLAIMS FOR INDEMNIFICATION. If any Indemnitee shall believe
that such Indemnitee is entitled to indemnification pursuant to this Article X
in respect of any Damages such Indemnitee shall give the appropriate
Indemnifying Party written notice thereof (a "Notice of Claim") (but such Notice
of Claim must be delivered within the time periods specified in Section
10.02(a), (b) and (c), and if so delivered shall be considered timely made even
if such claim is not resolved until after the expiration of the aforesaid
periods). Any such Notice of Claim shall set forth in reasonable detail and to
the extent then known the basis for such claim for indemnification. The failure
of such Indemnitee to give the Notice of Claim for indemnification promptly
shall not adversely affect such Indemnitee's right to indemnity hereunder except
to the extent that the defense of any claim is prejudiced by such failure.
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10.04. DEFENSE OF CLAIMS.
(a) In connection with any claim under this Article X
resulting from or arising out of any claim or Proceeding against an Indemnitee
by a Person that is not a party hereto, the Indemnifying Party may (unless such
Indemnitee elects not to seek indemnity hereunder for such claim), upon written
notice to the relevant Indemnitee, assume the defense of any such claim or
Proceeding if all Indemnifying Parties with respect to such claim or Proceeding
jointly acknowledge to the Indemnitee its right to indemnity pursuant hereto in
respect of the entirety of such claim (as such claim may be subsequently
modified through written agreement of the parties or arbitration hereunder) and
provide assurances, reasonably satisfactory to such Indemnitee, that the
Indemnifying Parties will be financially able to satisfy such claim in full if
such claim or Proceeding is decided adversely. If the Indemnifying Parties
assume the defense of any such claim or Proceeding, the Indemnifying Parties
shall select counsel reasonably acceptable to such Indemnitee to conduct the
defense of such claim or Proceeding, shall take all steps necessary in the
defense or settlement thereof and shall at all times vigorously, diligently and
promptly pursue the resolution thereof and keep the Buyer and its attorneys
reasonably informed as to the progress of the defense and any proposed
settlement. If the Indemnifying Parties shall have assumed the defense of any
claim or Proceeding in accordance with this Section 10.04, the Indemnifying
Parties shall be authorized to consent to a settlement of, or the entry of any
judgment arising from any claim or Proceeding, with the prior written consent of
such Indemnitee; PROVIDED, HOWEVER, that no consent shall be required from such
Indemnitee if the Indemnifying Party shall pay or cause to be paid all amounts
arising out of such settlement or judgment concurrently with the effectiveness
thereof; PROVIDED, FURTHER, that the Indemnifying Parties shall not be
authorized to encumber any of the assets of any Indemnitee or to agree to any
restriction that would apply to any Indemnitee or to its conduct of business;
and PROVIDED FURTHER, that a condition to any such settlement shall be a
complete release of such Indemnitee and its Affiliates, officers, employees,
consultants and agents with respect to such claim. Such Indemnitee shall be
entitled to participate in the defense of any such action at its own cost and
expense. Each Indemnitee shall, and shall cause each of its Affiliates,
officers, employees, consultants and agents to, reasonably cooperate with the
Indemnifying Parties in the defense of any claim or Proceeding being defended by
the Indemnifying Parties pursuant to this Section 10.04.
(b) If the Indemnifying Parties do not assume the defense of
any claim or Proceeding resulting therefrom or do not satisfy the provisions of
Section 10.04(a) for controlling the defense of such claim or Proceeding, such
Indemnitee, at the cost and expense of the Indemnifying Party, may defend
against such claim or Proceeding in such manner as it may deem appropriate,
including settling such claim or Proceeding after giving notice of the same to
the Indemnifying Parties, on such terms as such Indemnitee may deem appropriate.
If the Indemnifying Parties seek to question the manner in which such Indemnitee
defended such claim or Proceeding or the amount of or nature of any such
settlement, the Indemnifying Parties shall
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have the burden to prove by a preponderance of the evidence that such Indemnitee
did not defend such claim or Proceeding in a reasonably prudent manner.
10.05. NATURE OF PAYMENTS. Any payment under this Article X shall be
treated for tax purposes as an adjustment of the Purchase Price to the extent
such characterization is proper and permissible under relevant Tax authorities,
including court decisions, statutes, regulations and administrative
promulgations or, alternatively, by Buyer as an offset to a tax benefit item, if
such characterization is permissible under such Tax authorities.
ARTICLE XI
TERMINATION
11.01. GROUNDS FOR TERMINATION. This Agreement may be terminated at
any time prior to the Closing:
(a) by mutual written agreement of all the parties hereto;
(b) by Buyer by written notice to Seller if Buyer is not then
in material breach of any material provision of this Agreement and there has
been any one or more misrepresentations in or breaches of the representations or
warranties made by Seller contained herein that, if not cured on or prior to the
Closing Date, could be reasonably expected to give Buyer grounds not to close
under Section 8.01 when taken into account with all other uncured
misrepresentations in or breaches of such representation or warranties as to
which Buyer shall have given notice to Seller as provided in this clause (b); a
termination pursuant to this paragraph (b) shall become effective (i) fifteen
(15) days after such notice with respect to such a misrepresentation or breach
that is not capable of being cured on or prior to the Closing Date, or (ii)
immediately prior to the Closing with respect to such a misrepresentation or
breach that is capable of being cured, but is not cured, on or prior to the
Closing Date;
(c) by Buyer if Buyer is not then in material breach of any
material provision of this Agreement after written notice to Seller of the
failure by Seller to perform and satisfy in any material respect any of its
material obligations required to be performed and satisfied by Seller on or
prior to the Closing Date, if the aggregate of all such failures shall be
material; a termination pursuant to this paragraph (c) shall become effective
(i) fifteen (15) days after such notice with respect to such a failure that is
not capable of being cured on or prior to the Closing Date, or (ii) immediately
prior to the Closing with respect to such a failure that is capable of being
cured, but is not cured, on or prior to the Closing Date;
(d) by Seller after written notice to Buyer if Seller is not
then in material breach of any material provision of this Agreement and there
has been one or more material misrepresentations in or material breaches of the
representations or warranties made by
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Buyer herein which, if not cured on or prior to the Closing Date, could be
reasonably expected to give Seller grounds not to close under Section 8.02 when
taken into account with all other uncured misrepresentations in or breaches of
such representations or warranties as to which the Seller shall have given
notice to the Buyer as provided in this paragraph (d); a termination pursuant to
this paragraph (d) shall become effective (i) fifteen (15) days after such
notice with respect to such a misrepresentation or breach that is not capable of
being cured on or prior to the Closing Date, or (ii) immediately prior to the
Closing with respect to such a misrepresentation or breach that is capable of
being cured, but is not cured, on or prior to the Closing Date;
(e) by Seller if Seller is not then in material breach of any
material provision of this Agreement after written notice to Buyer of Buyer's
failure to perform and satisfy in any material respect any of its material
obligations under this Agreement required to be performed and satisfied by Buyer
on or prior to the Closing Date, if the aggregate of all such failures shall be
material; a termination pursuant to this paragraph (e) shall become effective
(i) fifteen (15) days after such notice with respect to such a failure that is
not capable of being cured on or prior to the Closing Date, or (ii) immediately
prior to the Closing with respect to such a failure that is capable of being
cured, but is not cured, on or prior to the Closing Date;
(f) by Buyer, or by Seller, if the Closing shall not have been
consummated by November 26, 1997 (the "Outside Date"); PROVIDED, HOWEVER, that
neither Buyer nor Seller may terminate this Agreement pursuant to this paragraph
(f) if the Closing shall not have been consummated within such time period by
reason of the failure of such party or any of its Affiliates to perform in all
material respects any of its or their respective covenants or agreements
contained in this Agreement; and
(g) by any party hereto if any federal, state or foreign law
or any rule or regulation thereunder shall hereafter be enacted or become
applicable that makes the transaction contemplated hereby or the consummation of
the Closing illegal or otherwise prohibited, or if any judgment, injunction,
order or decree enjoining either party hereto from consummating the transactions
contemplated hereby is entered and such judgment, injunction, order or decree
shall become final and nonappealable.
The party desiring to terminate this Agreement pursuant to clauses
(b) through (g) shall give written notice of such termination to the other
party.
11.02. EFFECT OF TERMINATION. If this Agreement is terminated as
permitted by Section 11.01, such termination shall be without liability of any
party to any other party to this Agreement except as hereinafter expressly
provided in this Section 11.02. If such termination shall result from the breach
by any party of its representations, warranties or covenants contained in this
Agreement, such party shall be fully liable for any and all Damages incurred or
suffered by the other parties as a result of such failure or breach and such
termination shall not be deemed to be an election of remedies. In addition, the
provisions of Sections 5.05, 6.03, 13.01, 13.02, 13.03, 13.04, 13.05, 13.07,
13.10, 13.11, 13.12, 13.13 and 13.14 shall survive any termination of
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this Agreement pursuant to this Article XI, and each party hereto shall be fully
responsible for any breach of Section 5.05, 6.03 or 13.03, whether or not such
breach occurs prior to the termination of this Agreement.
ARTICLE XII
AGREEMENT NOT TO COMPETE
12.01. AGREEMENT NOT TO COMPETE. Seller agrees that for a period of
two (2) years after the Closing Date, it will not compete, directly or
indirectly, or participate through agents or representatives, as director,
officer, employee, agent, representative or otherwise in any business competing,
directly or indirectly, with the present business of the Division in any
geographic area where Seller is on the Closing Date conducting such business of
the Division. If any provision of this Article XII shall, for any reason, be
adjudged by any court of competent jurisdiction to be invalid or unenforceable,
such judgment shall not affect, impair or invalidate the remainder of this
Article XII but shall be confirmed in its operation to the provision of this
Article XII directly involved in the controversy in which such judgment shall
have been rendered. In the event of a breach of this Article XII, Buyer, in
addition to any other rights and remedies they may have, shall be entitled to an
injunction restraining Seller from doing or continuing to do any such act in
violation of this Article XII.
ARTICLE XIII
MISCELLANEOUS
13.01. NOTICES. All notices, requests, demand, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) if
personally delivered, when so delivered, against written receipt, (ii) if mailed
by registered or certified mail, return receipt requested, postage prepaid and
addressed to the intended recipient as set forth below, five (5) Business Days
after being so mailed, (iii) if given by telecopier, once such notice or other
communication is transmitted to the telecopier number specified below and the
appropriate answer back or telephonic confirmation is received, provided that
such notice or other communication is promptly thereafter delivered in
accordance with the provisions of clauses (i), (ii) or (iv) hereof, or (iv) if
sent by a nationally recognized overnight delivery service which guarantees next
day delivery, one (1) Business Day after being so sent;
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If to Seller:
Docucon, Incorporated
7461 Callaghan Road
San Antonio, Texas 78229
Attn: Mr. Edward Gistaro
Telecopier No.: (210) 525-0145
with a copy to:
Rosenberg, Tuggey, Agather & Rosenthal
140 East Houston Street, Suite 220
San Antonio, Texas 78205
Attn: Timothy N. Tuggey, Esq.
Telecopier No.: (210) 225-1800
If to Bowne Entity or Buyer:
Bowne Entity or Buyer, as the case may be
c/o Bowne & Co., Inc.
345 Hudson Street
New York, New York 10014
Attn: Mr. Bruce Bezpa
Telecopier No.: (212) 229-7392
with a copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Attn: Samuel S. Friedman, Esq.
Telecopier No.: (212) 309-6273
Any Party may give any notice, request, demand, claim or other
communication hereunder using any other means (including 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 individual for whom it is intended. 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.
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13.02. AMENDMENTS: NO WAIVERS.
(a) Any provision of this Agreement may be amended or waived
if, and only if, such amendment or waiver is in writing and signed, in the case
of an amendment, by all parties hereto, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) No waiver by a 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 occurrence. No failure or delay by a party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
13.03. EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with this Agreement shall be paid by the party
incurring such cost or expense.
13.04. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. No party hereto may assign, in whole or in part, whether
by operation of law or otherwise, either this Agreement or any of its rights,
interests or obligations hereunder without the prior written approval of each
other party; PROVIDED, HOWEVER, that (i) Buyer may assign this Agreement to any
of its subsidiaries or to any subsidiary of Bowne & Co., Inc. as long as Buyer
remains fully liable hereunder and (ii) Seller may assign its rights under this
Agreement to any of its Affiliates created in any recapitalization of Seller as
long as Seller remains fully liable hereunder.
13.05. GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the internal laws (without reference to choice
or conflict of laws) of the State of New York.
13.06. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other parties hereto.
13.07. ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits referred to herein which are hereby incorporated by reference)
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements
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(including the Letter of Intent, dated September 4, 1997), understandings and
negotiations, both written and oral, between the parties with respect to the
subject matter of this Agreement.
13.08. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof. All references to an Article or Section include all subparts thereof.
13.09. SEVERABILITY. If any provision of this Agreement, or the
application thereof to any Person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other Persons,
places and circumstances shall not be effected thereby and remain in full force
and effect only if, after excluding the portion deemed to be unenforceable, the
remaining terms shall provide for the consummation of the transactions
contemplated hereby in substantially the same manner as originally set forth at
the later of the date this Agreement was executed or last amended.
13.10. CONSTRUCTION.
(a) The language used in this Agreement will be deemed to be
the language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against either party. Any reference
to any Applicable Law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. Whenever required
by the context, any gender shall include any other gender, the singular shall
include the plural and the plural shall include the singular. The words
"herein," "hereof," "hereunder," and words of similar import refer to the
Agreement as a whole and not to a particular section. Whenever the word
"including" is used in this Agreement, it shall be deemed to mean "including,
without limitation," "including, but not limited to" or other words of similar
import such that the items following the word "including" shall be deemed to be
a list by way of illustration only and shall not be deemed to be an exhaustive
list of applicable items in the context thereof.
(b) The parties hereto intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty or covenant contained herein
in any respect, the fact that there exists another representation, warranty or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) that the party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
13.11. ARBITRATION OF CLAIMS.
(a) Except as provided in Sections 5.08, 6.04 and 12.01
hereof, any dispute, claim, controversy or difference between or among the
parties arising out of this Agreement or the transactions contemplated hereby (a
"Dispute"), including without limitation
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any dispute between an Indemnitee and any Indemnifying Party under Article X,
which the parties are unable to resolve themselves shall be submitted to and
resolved by arbitration as herein provided.
(b) Any Dispute subject to arbitration shall be arbitrated in
New York, New York under the commercial rules then in effect of the American
Arbitration Association (the "AAA"). The arbitrators shall be instructed to
deliver a written report of their determination (an "Arbitrators' Report") to
the Buyer and the Seller (or the Indemnitee and the Indemnifying Party, as the
case may be). Each party to such arbitration agrees that any award of the
arbitrators shall be final, conclusive and binding and that they will not
contest any action by any other party thereto in accordance with an award of the
arbitrators. It is specifically understood and agreed that any party may enforce
any award rendered pursuant to the arbitration provisions of this Section 13.11
by bringing suit in any court of competent jurisdiction.
(c) A party demanding arbitration under this Agreement (an
"Initiating Party") shall initiate such arbitration by delivering written notice
(the "Arbitration Notice") to the party with whom arbitration is sought (i) with
respect to any claim for indemnification under Article X hereof, within thirty
(30) days after the receipt of the relevant Notice of Claim by the Indemnifying
Party, and (ii) with respect to any other Disputes, within a reasonable time,
and in any event, not after the date when institution of legal or equitable
proceedings based on such Dispute would be barred by this Agreement or the
applicable statute of limitations. Any Arbitration Notice shall contain a
statement setting forth the nature of the Dispute, the amount involved, if any,
and the remedy sought.
(d) The arbitration panel shall consist of three (3)
arbitrators appointed within twenty (20) Business Days after receipt of notice
from an Initiating Party, one of whom shall be appointed by the Seller and one
of whom shall be appointed by the Buyer. The two arbitrators thus appointed
shall choose the third arbitrator; provided, however, that if the two
arbitrators are unable to agree on the appointment of the third arbitrator, such
arbitrator shall be designated by the President of the AAA. If any arbitrator
resigns or is unable to continue serving as such, the successor to such
arbitrator shall be appointed by the party or parties who appointed such
arbitrator or by the remaining arbitrators if they had appointed such
arbitrator, or by the then President of the AAA, as the case may be. A
stenographic record of the arbitration proceedings shall be made and in the
event a successor arbitrator must be appointed he or she may rely on such record
and no rehearing shall be required.
(e) All fees, costs and expenses (including reasonable
attorneys' fees and expenses) incurred by the party that prevails in any such
arbitration commenced pursuant to this Section 13.11 or any judicial action of
proceeding seeking to enforce the agreement to arbitrate disputes as set forth
in this Section 13.11 or seeking to enforce any order or award of any
arbitration commenced pursuant to this Section 13.11 may be assessed against the
party or parties that do not prevail in such arbitration in such manner as the
arbitrators or the court in such judicial action, as the case may be, may
determine to be appropriate under the circumstances. All
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costs and expenses attributable to the arbitrators shall be allocated among the
parties to the arbitration in such manner as the arbitrators shall determine to
be appropriate under the circumstances.
(f) Notwithstanding the foregoing, it is hereby agreed that no
arbitration panel shall have any power to add to, alter or modify the terms and
conditions of this Agreement or any other agreement executed and delivered in
connection herewith or to decide any issue which does not arise from the
interpretation or application of the provisions of this Agreement.
13.12. CUMULATIVE REMEDIES. The rights, remedies, powers and
privileges herein provided are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law.
13.13. THIRD PARTY BENEFICIARIES. Except as provided in Article X,
no provision of this Agreement shall create any third party beneficiary rights
in any Person, including any employee of Buyer or employee or former employee of
Seller or any Affiliate or Associate thereof (including any beneficiary or
dependent thereof).
13.14. JURISDICTION. Seller hereby (i) submits to the exclusive
jurisdiction of the state courts of the State of New York located in New York
County and the United States Federal District Court of the Southern District of
New York for the purpose of any suit, action or other proceeding arising out of
or based upon this Agreement or the subject matter hereof brought by Buyer, any
Indemnified Party or their respective heirs, legal representatives, successors
or assigns (an "Action") and (ii) waives, and agrees not to assert by way of
motion, a defense, or otherwise, in any such Action, any claim that it or he is
not subject personally to the jurisdiction of the above-named courts, that its
or his property is exempt or immune from attachment or execution, that the
Action is brought in an inconvenient forum, that the venue of the Action is
improper, or that this Agreement or the subject matter hereof may not be
enforced in or by such court. The Seller hereby irrevocably appoints CT
Corporation System as its authorized agent to receive service of process with
respect to any such Action on its behalf, which service may be made on such
agent in accordance with legal procedures prescribed by such courts and CT
Corporation system has delivered concurrently with the execution and delivery of
this Agreement a written acceptance of such appointment.
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IN WITNESS WHEREOF, the parties hereto have caused this Asset
Purchase Agreement to be duly executed as of the day and year first above
written.
DOCUCON, INCORPORATED
By:/s/ EDWARD P. GISTARO
Name: Edward P. Gistaro
Title: CEO
BOWNE OF DALLAS, INC.
By:/s/ DENISE K. FLETCHER
Name: Denise K. Fletcher
Title: Treasurer
BOWNE LITIGATION SOLUTIONS, L.P.
BY BOWNE SOLUTIONS, INC., ITS GENERAL PARTNER
By:/s/ THOMAS P. MEOLA
Name: Thomas P. Meola
Title: President
59
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the 6th
day of January 1998, by and between Docucon, Incorporated, a corporation
organized and existing under the laws of the State of Delaware ("Company"), and
Lori Turner, an individual residing in San Antonio, Bexar County, Texas
("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and the
mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. INTRODUCTION. It is the intent and purpose of Company and Employee to
specify in this Agreement the terms and conditions of Employee's employment with
Company.
2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts
employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
3. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall
serve in the capacity of, Chief Financial Officer of Company. Employee shall
have the duties and responsibilities normally performed by an executive officer
in such position, and shall perform services commensurate with such position for
Company as may be determined from time to time by the Board of Directors of
Company. Employee shall report to the President/Chief Executive Officer of
Company and shall perform services hereunder as directed by the President/Chief
Executive Officer of Company. During the term of this Agreement Employee's
primary business interest shall be the Company, and Employee shall devote such
of his time, attention, skills and energies as may be necessary to discharge his
duties and responsibilities hereunder. Employee shall, in the performance of
services hereunder, use his best efforts to serve and advance the interest of
Company well and faithfully.
4. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to or accruing to Employee under this Agreement shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
4.01 SALARY. As compensation for all services of whatever type
rendered by Employee in the performance of his duties under this Agreement and
for all other agreements and undertakings of Employee hereunder, Company pay to
Employee a minimum annual salary as set forth in this Section 4.01. Employee's
annual base salary ("Base Salary") shall be Eighty Thousand Dollars
($80,000.00). Such Base Salary shall be payable in equal regular installments in
accordance with Company's customary payroll payment policy. As used in this
Agreement, the term "Payroll Payment Period" shall mean the period commencing on
a payroll payment date of the Company and terminating on the day immediately
preceding such payroll payment date. As used in this
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Agreement, the term "Payroll Payment Period" shall mean the period commencing on
a payroll payment date of the Company and terminating on the day immediately
preceding the next following payroll payment date of the Company. Employee's
annual salary will be reviewed periodically by the Board of Directors of the
Company for adjustment based on performance in accordance with Company's normal
compensation policies and practices. It is specifically understood and agreed
that a portion of Employee's annual salary hereunder is attributable to
Employee's agreement, pursuant to Section 9 hereof, to maintain the
confidentiality of "Confidential Information" (as herein defined), both during
and after the term of this Agreement, and that Employee did not agree to be
bound by the terms of Section 9. It is further understood and agreed that a
portion of Employee's annual salary is attributable to Employee's agreement,
pursuant to Section 10 hereof, not to compete with Company either during or for
a specified period of time after the expiration or termination of this Agreement
and that Employee's annual salary would be reduced significantly if Employee did
not agree to be bound by the terms of Section 10 hereof. Employee agrees that he
is being fairly and reasonably compensated for the agreements undertaken by
Employee pursuant to Sections 9 and 10 hereof.
4.02 BENEFITS. Employee shall be entitled to a reasonable paid
vacation each year, the times for such vacation to be mutually agreed upon by
Employee and Company. As an executive officer of Company, Employee shall be
entitled to participate in the Company benefit programs designed for Company
employees with similar salaries, duties and/or responsibilities.
4.03 EXPENSES. Company shall pay or reimburse Employee for all
reasonable and necessary expenses actually incurred or paid by Employee during
the term of this Agreement in the performance of Employee's services under this
Agreement, upon presentation of expense statements or vouchers or such other
supporting documents as Company may reasonably require; PROVIDED, HOWEVER, that
the maximum amount available for such expenses during any period may, upon
written notice to Employee, be fixed in advance by the Board of Directors of
Company.
5. INSURANCE. Company may, in its sole and absolute discretion, at any time
after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Employee, in such amounts and in such forms as
Company may choose. Employee shall have no interest whatsoever in any insurance
policy or policies obtained by Company, but Employee shall, at Company's
request, submit to such medical examinations, supply such information and
execute and deliver such documents as may be required or reasonably requested by
Company or the insurance company or companies to which Company has applied for
such insurance.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents,
warrants and agrees that: (i) Employee is not currently bound by any employment
agreement, restriction or other obligation of any kind which would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder, (ii) Employee will not, during the term of this
Agreement, become engaged as an employee, consultant, independent contractor or
representative or in any other capacity or otherwise perform services of any
kind for any person or entity or assume any such obligations or restrictions, in
whatever capacity, which would in any way materially interfere with or be
inconsistent with the services to be provided by Employee to Company hereunder;
(iii) Employee is free to enter into this Agreement and the services and work
product provided by Employee to Company hereunder will be original works of
Employee and no
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portion of such services or work product, or the use or distribution thereof by
Company, violates or will violate, or is or will be protected by, the right,
title or interest of any patent, copyright, license or other similar property or
proprietary right of any third person or entity; and (iv) in no event and at no
time shall Employee, whether during or after the term of this Agreement,
disparage, denigrate or otherwise defame Company or the business, services,
properties or assets, or any of the officers, directors, employees, agents or
other representatives, of Company to any person or entity. The representations
contained in this Section shall survive the expiration or termination of this
Agreement.
7. REGULATIONS AND POLICIES. Employee shall, during the term of
this Agreement, comply with all Company regulations and policies, including,
without limitation, security regulations.
8. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used
herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) know, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, which are
marked with a confidentiality legend by Company or which Employee knows or
reasonably should know constitute trade secrets of Company or information
belonging to third parties to whom Company may have an obligation of
confidentiality or which embody, comprise, relate to, are incorporated in or
constitute "Intellectual Property" (as herein defined) in any stage of
development; including, in each case, all trade secrets and other proprietary
ideas, concepts, know-how, methodologies and information incorporated therein;
PROVIDED, HOWEVER, that Confidential Information shall not include any
information or materials which are or become generally available to the public
other than as a result of any breach of the provisions of this Agreement or any
other agreement between Employee and Company (or their respective successors,
assigns or affiliates). The term "Intellectual Property", as used herein, shall
include any and all information or materials, in any medium, of a technical or a
business nature relating to the actual or reasonably anticipated business of
Company, such as ideas, discoveries, designs, inventions, improvements, trade
secrets, know-how, manufacturing processes, product formulae, design
specifications, writings and other works of authorship, computer software,
financial figures, marketing plans, customer lists and data, business plans or
methods and any other material relating to the actual or reasonably anticipated
business of the Company. In connection with computer software, the term
"Intellectual Property" shall include, without limitation, the data bases, data
processing and communications networking systems, practices and procedures and
other internal systems, logic and controls, and the object code, source code,
source listings, programming systems, programming or systems documentation and
specifications, and user, operations or systems manuals or documentation related
thereto or incorporated therein, firmware, models, sketches, writings, flow
charts, diagrams, graphs or data related thereto, together with all
modifications, enhancements, improvements, accessions, amendments, supplements
or other additions to any of the foregoing.
9. CONFIDENTIALITY. Employee acknowledges and agrees that in his employment
by Company he occupies a position of trust and confidence and that during the
term of his employment under this Agreement he will have access to and will
become familiar with Company's Confidential Information. Employee further
acknowledges and agrees that the Confidential Information, including any and all
copies thereof, constitutes trade secrets of Company and is confidential and
proprietary information of Company. Employee further acknowledges and agrees
that he has no right, title,
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interest or claim in or to any of the Confidential Information or any copies
thereof. Employee agrees to maintain the confidentiality of the Confidential
Information and agrees that he will not take, or permit to be taken, any action
with respect to the Confidential Information (or any portion thereof) which is
inconsistent with the confidential and proprietary nature of such information.
Without limiting the generality of the foregoing, Employee agrees that he will
not, directly or indirectly, without the prior specific written consent of
Company, except as specifically required in the course of his employment,
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership, corporation or other
entity, or
(ii) use any confidential Information in any manner except as
specifically required in connection with the performance of services hereunder,
or
(iii) copy, reproduce or otherwise duplicate any Confidential
Information in any fashion, in whole or in part.
Employee agrees to take any and all steps reasonably necessary to protect the
confidentiality of the Confidential Information. Employee shall, upon
termination of this Agreement, immediately return to Company all Confidential
Information in Employee's control or possession, including, without limitation,
any and all copies thereof. This Section shall survive the expiration or
termination of this Agreement.
10. RESTRICTIVE COVENANT AND NONCOMPETITION.
10.01 NONCOMPETE. During the term of this Agreement, Employee
shall not, directly or indirectly, own, manage, operate, join, control or
participate in, or be connected with, directly or indirectly, as an officer,
director, stockholder, employee, advisor, consultant, partner, owner, agent,
representative or in any other capacity, any "Competitive Business"; PROVIDED,
HOWEVER, that the foregoing shall not prohibit Employee from becoming a
shareholder owning less that five percent (5%) of the shares of a corporation
whose shares are publicly traded. As used herein, the term "Competitive
Business" shall mean and include any person, firm, corporation or other entity
which offers services relating to the conversion or transferring of information
form paper or microform to computer accessible media or which engages in
document conversion, storage and/or retrieval services or which otherwise
competes in any fashion with any products or services offered by Company or
which it is reasonably anticipated will be offered by Company or which it is
reasonably anticipated will be offered by Company in the foreseeable future.
10.02 UPON TERMINATION. As an independent covenant, Employee
agrees that, for a period of one (1) year commencing upon the termination or
expiration of this Agreement for any reason, he will not, unless granted express
written permission by the Board of Directors of Company, directly or indirectly,
own, manage, operate, join, control or participate in, or be connected with,
directly or indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other capacity, any
Competitive Business; PROVIDED, HOWEVER,
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that the foregoing shall not prohibit Employee from becoming a shareholder
owning less than five percent (5%) of the shares of a corporation whose shares
are publicly traded.
10.03 NO USURPATION. As an independent covenant, Employee agrees,
during the term of this Agreement and, upon termination or expiration of this
Agreement for any reason, for a period of one (1) year thereafter, unless
granted express written permission by the Board of Directors of Company, not to
divert, take, solicit and/or accept on his own behalf or on behalf of any other
person, firm, company or other entity, any business of any customer or client of
Company whose identity became known to Employee through his employment by or
involvement with Company which constitutes business relating to the actual or
reasonably anticipated business of Company.
10.04 COMPANY EMPLOYEES. As an independent covenant, Employee
agrees, during the term of this Agreement and, upon termination or expiration of
this Agreement for any reason, for a period of one (1) year thereafter, not to
induce or attempt to influence any employee of Company to terminate his or her
employment with Company.
10.05 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect the
legitimate business interests of Company, including Company's interest in
Confidential Information, and not to restrict his mobility or to prevent him
from utilizing his skills. Employee recognizes and acknowledges the necessarily
national and international scope of the market served by Company and agrees that
the restrictions set forth in this Section are reasonable.
10.06 SURVIVAL. This Section 10 shall survive the expiration or
termination of this Agreement.
11. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS.
11.01 DEVELOPMENT. Employee agrees that any and all Intellectual
Property and any and all other material relating to the actual or reasonably
anticipated business or services of Company, developed, prepared, conceived,
made, discovered or suggested by Employee, solely or jointly with others, during
the term of this Agreement, whether on or off the premises of Company
(collectively "Developments"), including all such Developments as are originated
or conceived during the term of this Agreement but which are completed or
reduced to practice thereafter, shall be deemed to be "works made for hire"
within the meaning of Title 17, U.S.C. 101, and shall be and remain the sole and
exclusive property of Company. To the extent that any such Developments may not,
by operation of law, be "works made for hire", Employee hereby assigns,
transfers and conveys to Company the ownership of all right, title and interest
in and to such Developments, including, without limitation, all copyrights,
patents and other proprietary and property rights applicable thereto, and
Company shall have the right to obtain and hold in its own name such copyrights,
patents or other proprietary protection which may be available or become
available in such Developments. Employee agrees that Company shall have the
right to keep such Developments as trade secrets, if Company chooses.
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11.02 COOPERATION. Employee agrees, at any time during the term
of this Agreement and thereafter, to execute such documents and provide such
additional cooperation as Company may reasonably request or require in order to
perfect, evidence, protect or secure Company's right, title and interest in and
to any and all such Developments. Without limiting the generality of the
foregoing, either during or subsequent to Employee's employment, upon the
request and at the expense of Company, and for no remuneration in addition to
that due Employee hereunder pursuant to his employment by Company, Employee
agrees to execute, acknowledge and deliver to Company or its attorneys any and
all instruments which in the judgment of Company or its attorneys may be
necessary or desirable to secure or maintain for the benefit of Company adequate
patent, copyright and/or other property or proprietary rights protection in the
United States and/or foreign countries with respect to any Developments,
including, but not limited to: (i) domestic and foreign patents, trademarks,
service marks and copyright applications, (ii) any other applications for
securing, protecting or registering any property or proprietary right, and (iii)
powers of attorney, assignments, oaths, affirmations, supplemental oaths and
sworn statements.
11.03 DISCLOSURE TO COMPANY. Employee shall, during the term of
this Agreement and for a period of one (1) year thereafter, disclose promptly in
writing to Company all Developments, whether copyrightable, patentable or not,
made, discovered, written, conceived, first reduced to practice or developed by
Employee, either alone or in conjunction with any other person or entity. Any
Developments disclosed by Employee within one (1) year following termination of
his employment with Company shall be deemed to be owned by Company under the
terms of Section 11.01 hereof, unless proved by Employee to have been conceived
after termination of Employee's employment.
11.04 SURVIVAL. This Section 11 shall survive the expiration or
termination of this Agreement.
12. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the
value of the Confidential Information and the success and long-term viability of
Company depends largely upon Employee's performance of his obligation under
Sections 9, 10 and 11 of this Agreement.
13. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event
of any unauthorized use or disclosure of Confidential Information in violation
of the terms and conditions of Section 9 of this Agreement by Employee, or any
breach of any of the terms and conditions of Sections 10 or 11 of this Agreement
by Employee, Company will suffer irreparable injury not compensable by money
damages and therefore will not have an adequate remedy available at law.
Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Sections 9, 10 or 11 of this Agreement, Company shall be entitled
to obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to and
without prejudice to such other rights as Company may have at law or in equity.
14. TERMINATION.
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14.01 TERMINATION. Employee's employment hereunder is terminable,
with or without cause, at the will of either Company or Employee upon the giving
of 30 days' prior written notice by either party. If Employee's termination is
voluntary or "for cause", Company shall discontinue Employee's compensation as
of the effective date of the termination of Employee's employment. If Employee's
termination is involuntary and/or without cause, including, without limitation,
termination resulting from the death or mental or physical disability of
Employee, Employee's regular Base Salary shall continue to be paid for a period
of one (1) year from the effective date of termination of Employee's employment.
(In the event of Employee's death or disability, the above-described
compensation shall be paid to Employee's estate or legal representative). For
purposes of this Agreement, "for cause" shall mean:
(a) Any willful or intentional act of Employee which has or
will have the effect of injuring the reputation or business
relationships of Company or its affiliates;
(b) Employee's conviction of or entering a plea of nolo
contendere to a charge of felony or a misdemeanor involving
dishonesty or fraud;
(c) Employee's material breach of any of the terms, covenants
or conditions contained in this Agreement; PROVIDED, HOWEVER, that
with respect to any breach which can be effectively cured by some
act of Employee, such termination of this Agreement shall be revoked
if, within ten (10) days after receipt of notice of such breach from
Company, Employee cures such breach to the reasonable satisfaction
of Company or, if such cure cannot reasonably be accomplished within
such ten (10) day period, if Employee initiates efforts to cure such
breach within such ten (10) day period and diligently pursues such
cure efforts thereafter until such cure is accomplished; or
(d) Employee's repeated or continuous failure, neglect or
refusal to perform his duties under this Agreement.
Until the effective date of termination, Employee, if requested to do so by
Company, shall continue to render services to Company.
14.02 EXCESS PARACHUTE PAYMENTS. Notwithstanding the foregoing
provisions of this Section 14, if Employee will be considered (as determined in
the sole opinion of a national accounting firm employed by Employee) as
receiving payments, any part of which constitutes excess parachute payments,
such payments shall be reduced by or, if already paid, refunded to Company in
the minimum amount (such minimum amount shall be determined by the national
accounting firm employed by Employee, who shall interpret and apply all
applicable law and regulations in the way which results in the most favorable
results for Employee and who shall so instruct Company of its determination)
required to result in there being no excess parachute payments; PROVIDED,
however, (i) the payments to be made to Employee pursuant to this Section 14
shall be reduced first and in the manner requested by Employee, and (ii) if the
compensation to be paid to Employee after the termination of his employment is
reduced to $0.00 as a result of the operation of this subparagraph, no further
reduction of any kind in any other payments to Employee shall be made,
notwithstanding that any part of such remaining payments may constitute excess
parachute payments. As used herein,
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the terms excess parachute payment and parachute payment shall have the same
definition as such terms are given in Section 280G of the Internal Revenue Code
of 1986, as amended and as may be amended after the date hereof ("IRC"), or as
defined in any section of the IRC hereafter enacted to succeed Section 280G.
14.03 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post employment payment or benefit paid or provided
to Employee under this Agreement by seeking other employment or otherwise, nor
shall the amount of any such payment or benefit paid or provided to Employee
under this Agreement be reduced or offset by any compensation earned by Employee
as the result of employment by another employer or otherwise.
15. EFFECT OF TERMINATION. Upon the termination or expiration of this
Agreement: (i) Employee shall immediately return to Company and all Confidential
Information in his possession or control (including, without limitation, all
copies thereof and all materials incorporating such Confidential Information),
(ii) Employee shall have no further obligation to perform services for Company
hereunder, PROVIDED, HOWEVER, that Employee shall continue to be bound by the
terms of Sections 9, 10 and 11 hereof, and (iii) except to the extent
specifically provided in Section 14 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
16. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the
contrary contained in this Agreement, it is specifically understood and agreed
that Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
and that such Business Experience, to the extent it applies to business
operations generally and not to the specific operations, technologies or trade
secrets of Company, shall not be deemed to constitute Confidential Information,
and nothing contained in Section 9 of this Agreement shall be deemed to prevent
Employee from using such general Business Experience in such a manner as does
not violate any of the other terms and conditions of this Agreement.
17. GENERAL.
17.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND Covenants. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
17.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
successors, assigns and legal representatives, but shall not be assignable by
Employee. Any purported assignment in violation of the foregoing shall be
invalid and of no force and effect. No assignment of this Agreement shall
relieve the assigning party of any obligation or liability hereunder.
17.03 NOTICES. Any notice, demand, payment, request, response or
other communication provided for herein or given hereunder to a party hereto
shall be in writing and shall be deemed to have been duly given if signed by the
party giving it. Notice shall be deemed effective upon delivery by hand, or on
the third business day after it is deposited in the United States mail, postage
prepaid
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(registered or certified mail) or on the business day after it is sent by
federal express or similar overnight service to the address of the parties
listed below:
if to Company: 7461 Callaghan Road
San Antonio, Texas 78229
if to Employee: Lori Turner
7461 Callaghan Road
San Antonio, Texas 78229
or to such other address as the party to receive such communication has last
designated by notice delivered to the other party in accordance with the
foregoing provisions.
17.04 WAIVER. Failure or delay in insisting upon strict
compliance with any provision hereof shall not be deemed a waiver of such
provision or any other provision hereof with respect to prior, such provision or
any other provision hereof with respect to prior, contemporaneous or subsequent
occurrences. No waiver by either party of any right hereunder or of any default
shall be binding upon such party unless such waiver is in writing and signed by
Employee (in the case of Employee) or a duly authorized officer or partner of
Company in the case of Company.
17.05 GOVERNING LAW; VENUE. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas. Employee and
Company hereby agree that the sole and exclusive place of jurisdiction and venue
for resolution of any disputes arising hereunder or relating hereto shall be San
Antonio, Bexar County, Texas, and Employee hereby specifically consents to
personal jurisdiction in such location.
17.06 ENTIRE AGREEMENT. Any and all previous employment
agreements, whether written or oral, existing between Company and Employee shall
be deemed to be revoked and cancelled for all purposes on the Effective Date.
This Agreement, as may be amended from time to time, shall represent the sole
and entire agreement between Employee and Company respecting the employment
relationship between Company and Employee. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties hereto relating to the employment relationship between Company and
Employee which are not fully expressed in this Agreement.
17.07 SEVERABILITY. The provisions of this Agreement are
severable and the invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability of any other provision. In addition,
in the event that any provision of this Agreement (or portion thereof) is
determined by a court to be unenforceable as drafted by virtue of the scope,
duration, extent or character of any obligation contained therein, the parties
acknowledge that it is their intention that such provision (or portion thereof)
shall be construed in a manner designed to effectuate the purposes of such
provision to the maximum extent enforceable under applicable law.
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17.08 ATTORNEY'S FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
17.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to and not in lieu of any other
remedies available to either party under this or any other agreement between the
parties or at law, in equity or otherwise.
17.10 LANGUAGE. The language used in this Agreement shall be
deemed to be language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction against any party shall apply to any
term or condition of this Agreement.
17.11 AMENDMENT. This Agreement may not be modified or amended
except by written agreement executed by all of the parties to this Agreement at
the time of such amendment.
17.12 HEADINGS. The descriptive headings of the sections,
paragraphs and subparagraphs hereof are inserted for convenience only and do not
constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DOCUCON, INCORPORATED
("COMPANY")
/s/ LORI TURNER BY: /s/ EDWARD P. GISTARO
LORI TURNER ("EMPLOYEE")
ITS: CEO
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EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
1st day of April, 1998, by and between DOCUCON, INCORPORATED, a corporation
organized and existing under the laws of the State of Delaware ("Company"), and
DOUGLAS P. GILL, an individual residing at 667 Church Rd., Wayne, Pennsylvania
19087 ("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and the
mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. INTRODUCTION. It is the intent and purpose of Company and Employee to specify
in this Agreement the terms and conditions of Employee's employment with
Company.
2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts
employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
3. TERM OF EMPLOYMENT. This Agreement shall be effective as of the date first
set above (the "Effective Date") through the seventh (7th) anniversary of such
date (the "Ending Date").
4. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall serve
in the capacity of, President/Chief Executive Officer of Company. In such
capacity, Employee shall also serve as a member of the Board of Directors of the
Company. Employee shall have the duties and responsibilities normally performed
by a chief executive officer in such position, shall perform services
commensurate with such position for Company as may be reasonably determined from
time to time by the Board of Directors of Company, and shall at all times be the
highest ranking officer of Company. During the term of this Agreement,
Employee's primary business interest shall be the Company. Employee shall devote
substantially all of his working time, attention, skills and energies as may be
necessary to discharge his duties and responsibilities hereunder. Employee
shall, in the performance of services hereunder, use his best efforts to serve
and advance the interests of Company well and faithfully.
5. COMPENSATION AND BENEFITS. The compensation and other benefits payable to or
accruing to Employee under this Agreement shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
5.01 BASE SALARY. As compensation for all services of whatsoever type
rendered by Employee in the performance of his duties under this Agreement and
for all other agreements and undertakings of Employee hereunder, Company shall
pay to Employee a minimum annual base salary of Two Hundred Thousand Dollars
($200,000.00). Such salary shall be payable in equal regular installments in
accordance with Company's customary payroll payment policy. Employee's base
salary shall never be decreased below its then current level. Employee shall be
entitled to an annual increase in his base salary, as determined by the
Compensation Committee of the Board of Directors of the Company not later than
30 days prior to the end of the Company's fiscal year. The increase shall be
based on performance in accordance with the Company's normal compensation
policies and practices. In no event, however, shall the increase be less than
the then applicable annual percentage increase of the Consumer Price Index, as
published by the United States Department of Labor. It is specifically
understood and agreed that a portion of Employee's annual base salary hereunder
is attributable to Employee's agreement, pursuant to Section 10 hereof, to
maintain the confidentiality of "Confidential Information" (as herein defined),
both during and after the term of this Agreement, and that Employee's salary
would be reduced significantly if Employee did not agree to be bound by the
terms of Section 10. It is further understood and agreed that a portion of
Employee's annual base salary is attributable to Employee's agreement, pursuant
to Section 11 hereof, not to compete with Company either during or for a
specified period of time after the expiration or termination of this Agreement
and that Employee's annual salary would be reduced significantly if Employee did
not agree to be bound by the terms of Section 11 hereof.
5.02 BONUS. In addition to the base salary set forth above, Employee shall
be eligible for an annual bonus of up to fifty percent (50%) of Employee' s base
salary, which may be awarded by the Compensation Committee of the Board of
Directors, in its reasonable discretion. Any such award shall be determined and
paid not later than one hundred twenty (120) days after the end of the Company's
fiscal year. Notwithstanding any foregoing provision to the contrary, Company
shall pay to Employee at the ----- end of the Company's fiscal year for 1998, a
minimum bonus payment equal to twenty-five percent (25%) of Employee's initial
base salary (or such higher percentage as may be decided by the Compensation
Committee).
5.03 BENEFITS. Employee shall be entitled to a paid vacation each year of
not less than four (4) weeks, the times for which shall be mutually agreed upon
by Employee and Company. As an executive officer of Company, Employee shall be
entitled to participate in all the Company benefit programs designed for Company
employees with similar salaries, duties and/or responsibilities.
5.04 EXPENSES. Company shall pay or reimburse Employee for all reasonable
and necessary expenses actually incurred or paid by Employee during the term of
this Agreement in the performance of Employee's services under this Agreement,
upon presentation of expense statements or vouchers or such other supporting
documents as Company may reasonably require. In addition, Company shall pay
Employee the amount of $750.00 per month as allowance for an automobile in
addition to other expenses paid or reimbursed hereunder.
5.05 STOCK OPTIONS. Upon the Effective Date, Company shall award to
Employee stock options to purchase up to 200,000 shares of the common stock of
the Company. Such award shall be made under Company's existing stock option
plans. Additionally, Company shall award to Employee certain stock options under
a "Time Accelerated Restricted Stock Award Plan" ("TARSAP") to be designated as
the Company's "1998 Employee Non-Statutory Stock Option Plan". The terms and
conditions of the foregoing stock options and awards shall be governed
exclusively by the applicable plan and related stock option agreements.
5.06 COMPANY RELOCATION. Within one (1) year of the Effective Date, the
Company shall move its Company headquarters to an office established and opened
in the Philadelphia, Pennsylvania metropolitan area (the "Philadelphia office").
The Company shall locate and transfer such functions to the Philadelphia office
as Employee deems necessary and appropriate, on such timetables as he shall
reasonably decide. Once the Philadelphia office is opened, Employee will work
primarily from that office. Prior to the opening of the Philadelphia office,
Employee will work from the Philadelphia metropolitan area approximately
two-thirds (2/3) of the time.
6. INSURANCE. Company may, in its sole and absolute discretion, at any time
after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Employee, in such amounts and in such forms as
Company may choose. Employee shall have no interest whatsoever in any insurance
policy or policies obtained by Company, but Employee shall, at Company's
request, submit to such medical examinations, supply such information and
execute and deliver such documents as may be required or reasonably requested by
Company or the insurance company or companies to which Company has applied for
such insurance.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents, warrants and
agrees that: (i) Employee is not currently bound by any employment agreement or
other contractual obligation of any kind which would in any way materially
interfere with or be inconsistent with the services to be provided by Employee
to Company hereunder; (ii) Employee will not, during the term of this,
Agreement, (a) become engaged as an employee, consultant, independent
contractor, representative or in any other capacity which would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder, or (b) otherwise perform services of any kind for
any person or entity or assume any such obligations or restrictions, in whatever
capacity, which would in any way materially interfere with or be inconsistent
with the services to be provided by Employee to Company hereunder; and (iii) to
the best of Employee's knowledge, the services and work product provided by
Employee hereunder, and the use or distribution thereof by Company, will not
violate any patent, copyright, license or other similar property or proprietary
right of any third person or entity.
8. REGULATIONS AND POLICIES. Employee and Company shall each, during the term of
this Agreement, abide by Company regulations and policies.
9. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used
herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) known, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, (i) which
Employee knows or reasonably should know constitute trade secrets of Company,
(ii) which belong to third parties to whom Company has an obligation of
confidentiality, (iii) or which embody, comprise, relate to, are incorporated in
or constitute "Intellectual Property" (as herein defined) in any stage of
development; PROVIDED HOWEVER, that Confidential Information shall not include
(a) any information or materials which are or become generally available to the
public other than as a result of any breach of the provisions of this Agreement
or any other agreement between Employee and Company (or their respective
successors, assigns or affiliates); (b) information or materials that can be
lawfully obtained, compiled or recreated by a third party through reasonable
effort and expense; or (c) information or materials known to or in the
possession of Employee prior to his employment hereunder. The term "Intellectual
Property", as used herein, shall include any and all information or materials,
in any medium, of a technical or a business nature relating to the actual or
reasonably anticipated business of Company, such as ideas, discoveries, designs,
inventions, improvements, trade secrets, know-how, manufacturing processes,
product formulae, design specifications, writings and other works of authorship,
computer software, financial figures, marketing plans, customer lists and data,
business plans or methods and any plans, customer lists and data, business plans
or methods and any other material relating to the actual or reasonably
anticipated business of the Company. In connection with computer software, the
term "Intellectual Property" shall include, without limitation, the data bases,
data processing and communications networking systems, practices and procedures
and other internal systems, logic and controls, and the object code, source
code, source listings, programming systems, programming or systems documentation
and specifications, and user, operations or systems manuals or documentation
related thereto or incorporated therein, firmware, models, sketches, writings,
flow charts, diagrams, graphs or data related thereto, together with all
modifications, enhancements, improvements, accessions, amendments, supplements
or other additions to any of the foregoing.
10. CONFIDENTIALITY. Employee acknowledges and agrees that in his employment by
Company he occupies a position of trust and confidence and that during the term
of his employment under this Agreement he will have access to and will become
familiar with Company's Confidential Information. Employee further acknowledges
and agrees that the Confidential Information, including any and all copies
thereof, constitutes trade secrets of Company and is confidential and
proprietary information of Company. Employee further acknowledges and agrees
that he has no right, title, interest or claim in or to any of the Confidential
Information or any copies thereof. Employee agrees to maintain the
confidentiality of the Confidential Information and agrees that he will not
take, or permit to be taken, any action with respect to the Confidential
Information (or any portion thereof) which is consistent with the confidential
and proprietary nature of such information. Without limiting the generality of
the foregoing, Employee agrees that he will not, directly or indirectly, without
the prior specific written consent of Company, except as specifically required
in the course of his employment:
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership,
corporation or other entity, or (ii) use any Confidential
Information in any manner except a specifically required in
connection with the performance of services hereunder, or (iii)
copy, reproduce or otherwise duplicate any Confidential Information
in any fashion, in whole or in part.
Employee agrees to take any and all step reasonably necessary to protect the
confidentiality of the Confidential Information. Employee shall, upon
termination of this Agreement, immediately return to Company all Confidential
information in Employee's control or possession, including, without limitation,
any and all copies thereof. This Section shall survive the expiration or
termination of this Agreement.
11. RESTRICTIVE COVENANT AND NONCOMPETITION.
11.01 NONCOMPETE. During the term of this Agreement, Employee shall not,
directly or indirectly, own, manage, operate, join, control or participate in,
or be connected with, directly or indirectly, as an officer, director,
stockholder, employee, advisor, consultant, partner, owner, agent,
representative or in any other capacity, any "Competitive Business"; PROVIDED,
HOWEVER, that the foregoing shall not prohibit Employee from becoming a
shareholder owning less than five percent (5%) of the shares of a corporation
whose shares are publicly traded. As used herein, the term "Competitive
Business" shall mean and include any person, firm, corporation or other entity
which offers services relating to the conversion or transferring of information
from paper or microform to computer accessible media or which engages in
document conversion, storage and/or retrieval services ("Document Conversion")
or which otherwise competes in any fashion with any products or services offered
by Company or which it is reasonably anticipated will be offered by company in
the foreseeable future.
11.02 UPON TERMINATION. As an independent covenant, Employee agrees that,
for a period of eighteen (18) months commencing upon the termination or
expiration of this Agreement for any reason, he will not, unless granted express
written permission by the Board of Directors of Company, directly or indirectly,
own, manage, operate, join, control or participate in, or be connected with,
directly or indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other capacity, any
Competitive Business; PROVIDED, HOWEVER, that the foregoing shall not prohibit
Employee from becoming a shareholder owning less than five percent (5%) of the
shares of a corporation whose shares are publicly traded. As used in this
sub-paragraph, Competitive Business shall not include any person, firm,
corporation or other entity that derives less than 30% of its revenues from
Document Conversion, provided Employee is not himself providing services to,
for, or in connection with the Document Conversion portion of such business.
11.03 NO USURPATION. As an independent covenant, Employee agrees, during
the term this Agreement and upon termination or expiration of this Agreement for
any reason, for a period of eighteen (18) months thereafter, unless granted
express written permission by the Board of Directors of Company, not to divert,
take, solicit and/or accept on his own behalf or on behalf of any other person,
firm, company or other entity, any business of any customer or client of Company
whose identity became known to Employee through his employment by or involvement
with Company which constitutes business relating to the actual or reasonably
anticipated business of Company.
11.04 COMPANY EMPLOYEES. As an independent covenant, employee agrees,
during the term of this Agreement and, upon termination or expiration of this
Agreement for any reason, for a period of eighteen (18) months thereafter, not
to induce or attempt to influence any employee of Company to terminate his or
her employment with Company.
11.05 REASONABLENESS. Employee acknowledges and agrees that the covenants
and agreements set forth in this Section are made to protect the legitimate
business interests of Company, including Company's interest in Confidential
Information and not to restrict his mobility or to prevent him from utilizing
his skills.
11.06 SURVIVAL. This Section 11 shall survive the expiration or
termination of this Agreement.
12. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS.
12.01 DEVELOPMENT. Employee agrees that any and all Intellectual Property
developed, prepared, conceived, made, discovered or suggested by Employee,
solely or jointly with others, during the term of this Agreement, whether on or
off the premises of Company (collectively "Developments"), including all such
Developments as are originated or conceived during the term of this Agreement
but which are completed or reduced to practice thereafter, shall be deemed to be
"works made for hire" within the meaning of Title 17, U.S.C. ss. 101, and shall
be and remain the sole and exclusive property of Company. To the extent that any
such Developments may not, by operation of law, be "works made for hire",
Employee hereby assigns, transfers and conveys to Company the ownership of all
right, title and interest in and to such Developments, including, without
limitation, all copyrights, patents and other proprietary and property rights
applicable thereto, and Company shall have the right to obtain and hold in its
own name such copyrights, patents or other proprietary protection which may be
available or become available in such Developments. Employee agrees that Company
shall have the right to keep such Developments as trade secrets, if Company
chooses.
12.02 COOPERATION. Employee agrees, at any time during the term of this
Agreement and thereafter, to execute such documents and provide such additional
cooperation as Company may reasonably request or require in order to perfect,
evidence, protect or secure Company's right, title and interest in and to any
and all such Developments. Without limiting the generality of the foregoing,
either during or subsequent to Employee's employment, upon the request and at
the expense of Company, and for no remuneration in addition to that due Employee
hereunder pursuant to his employment by Company, Employee agrees to execute,
acknowledge and deliver to Company or its attorneys any and all instruments
which in the reasonable judgment of Company or its attorneys may be necessary or
desirable to secure or maintain for the benefit of Company adequate patent,
copyright and/or other property or proprietary rights protection in the United
States and/or foreign countries with respect to any Developments, including, but
not limited to: (1) domestic and foreign patents, trademarks, service marks and
copyright applications, (ii) any other applications for securing, protecting or
registering any property or proprietary right, and (iii) powers of attorney,
assignments, oaths, affirmations, supplemental oaths and sworn statements.
12.03 DISCLOSE TO COMPANY. As reasonably requested in writing by Employer,
Employee shall, during the term of this Agreement and for a period of eighteen
(18) months thereafter, disclose with reasonable promptness in writing to
Company all Developments, whether copyrightable, patentable or not, that
Employee can reasonably recall making, discovering, writing, conceiving, first
reducing to writing, or developing, either alone or in conjunction with any
other person or entity, while employed by Employer.
12.04 SURVIVAL. This Section 12 shall survive the expiration or
termination of this Agreement.
13. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the value of
the Confidential Information and the success and long-term viability of Company
depend largely upon Employee's performance of his obligations under Section 10,
11 and 12 of this Agreement.
14. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event of any
unauthorized use or disclosure of Confidential Information in violation of the
terms and conditions of Section 10 of this Agreement by Employee, or any breach
of any of the terms and conditions of Sections 11 or 12 of this Agreement by
Employee, Company may suffer irreparable injury not compensable by money damages
and therefore may not have an adequate remedy available at law. Accordingly, if
Company institutes an action or proceeding to enforce the provisions of Sections
10, 11 or 12 of this Agreement, Company shall, to the extent it is suffering or
is in imminent danger of suffering irreparable harm, be entitled to obtain such
injunctive relief or other equitable remedy from a court of competent
jurisdiction as may be necessary or appropriate to prevent or curtail any such
breach, threatened or actual. The foregoing shall be in addition to and without
prejudice to such other rights as Company may have at law or in equity.
<PAGE>
15. TERMINATION.
15.01 VOLUNTARY AND INVOLUNTARY TERMINATION. Employee's employment
hereunder is terminable, with or without cause or good reason, by Company or
Employee upon thirty (30) days' prior written notice by either party. If Company
terminates Employee's employment for "cause" (as defined below), or Employee
voluntarily terminates his employment without "good reason" (as defined below),
Employee shall continue to be paid his compensation hereunder through the
effective date of the termination of his employment. If Employer terminates
Employee's employment without "cause" (as defined below), or Employee
voluntarily terminates his employment for "good reason" (as defined below),
Employee's compensation hereunder shall continue to be paid for a period of
eighteen (18) months from the effective date of termination of employment. Until
the effective date of termination, Employee, if requested to do so by Company,
shall continue to render services to Company.
15.01.1 DEFINITION OF "CAUSE". For purposes of this Agreement, "cause"
shall mean:
(a) Any willful or intentional act of Employee which has or will
have the effect of materially injuring the reputation or business
relationships of Company or its affiliates; (b) Employee's
conviction of or entering a plea of nolo contendere to a charge of
felony or a misdemeanor involving dishonesty or fraud; (c)
Employee's material breach of any of the terms, covenants or
conditions contained in this Agreement; or (d) Employee's willful
and repeated or continuous failure, neglect or refusal to perform
his duties under this Agreement;
provided, however, for any ground that is reasonably susceptible of being either
cured or satisfactorily explained by Employee, "cause" shall not exist unless
Company first provides Employee with written notice specifying why it believes
it has grounds to terminate Employee's employment for cause, and, within 20 days
after receipt of such notice, Employee fails to cure or provide a reasonable
explanation for such grounds. If the ground specified in Company's notice is
capable of being cured by Employee, but not within 20 days, then cause shall not
exist provided Employee initiates efforts to cure within the 20-day period, and
diligently pursues such cure efforts thereafter until the cure is accomplished.
15.01.2 DEFINITION OF "GOOD REASON". For purposes of this Agreement, "good
reason" shall mean:
(a) The assignment to Employee of a job position or title that is
junior or inferior to that of President and Chief Executive Officer;
(b) The assignment to Employee of duties that are materially
different from the duties of President and Chief Executive Officer:
(c) Any reduction in Employee's salary or bonus opportunity;
(d) Any breach by Company of any Stock Option Agreement to which
Employee is a party;
(e) the Company's material breach of its obligations under this
Agreement or under any other plan or agreement relating to Employee's
employment or compensation;
(f) Any request or directive by the Company or its Board of
Directors calling for Employee to commit, implement or participate
in actions that are dishonest, unlawful or a material violation of
Company policy;
(g) Any "change in control" (as defined below);
(h) Any failure by Company to obtain the assumption of this
Agreement by an assignee or successor, as required in Section 18.02 below;
or
(i) If the Company is at any time precluded from contracting with
the United States Government by acts or omissions arising prior to the
Effective Date, provided Employee resigns within one hundred eighty (180)
days of such preclusion; provided, however, for any ground that is
reasonably susceptible of being cured by Company, "good reason" shall not
exist unless Employee first provides written notice to Company specifying
why he believes he has grounds to terminate his employment for good
reason, and, within 20 days of receipt of such notice, Company does not
cure such grounds. If the ground specified in Employee's notice is capable
of being cured by Company, but not within 20 days, then good reason shall
not exist provided the Company initiates efforts to cure within the 20-day
period, and diligently pursues such cure efforts thereafter until the cure
is accomplished.
For purposes of this Agreement, "change in control" shall mean a
transaction or series of transactions (including any cash tender or securities
exchange offer, merger, sale of assets, or other business combinations or
contested election of directors, of any combination thereof) as the result of
which (a) any person (other than the Corporation, a subsidiary of the
Corporation an employee benefit plan of the Corporation or of a subsidiary of
the Corporation) together with all affiliates and associates of such person
(within the meaning of Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended), shall become the Beneficial Owner
of 40% or more of the aggregate combined Voting Power of all Voting Securities
of the Corporation then outstanding, or (b) during any period of two consecutive
calendar years there is a change of 50% or more in the composition of the Board
of Directors of the Corporation in office at the beginning of such two-year
period except for changes approved by at least two-thirds of the directors than
in office who were directors at the beginning of the period. For purposes of
this Agreement, a Change of Control shall be deemed to have occurred on the date
upon which either of the foregoing results is consummated or becomes effective.
For purposes of this Agreement, "Voting Power" means with respect to any Voting
Security the maximum number of votes that such security is or would be entitled
to cast generally for the election of directors, and in the case of a
convertible, exercisable, or exchangeable Voting Security, considering such
security both on an unconverted, unexercised, or unexchanged basis, as the case
may be. "Voting securities' means to the common stock and any other securities
of the Corporation entitled to vote generally for the election of directors, any
security convertible into or exchangeable for or exercisable for the purchase of
common stock of the Corporation (other than employee stock options or other
employee stock purchase rights), and other securities of the Corporation
entitled to vote generally for the election of directors.
15.02 DEATH AND DISABILITY. In the event of the termination of this
Agreement by reason of Employee's death or his mental or physical disability,
Employee's compensation shall continue to be paid for a period of eighteen (18)
months from the effective date of such termination.
15.03 NO DUTY TO MITIGATE. Employee shall not be required to mitigate the
amount of any post employment payment or benefit paid or provided to Employee
under this Agreement by seeking other employment or otherwise, nor shall the
amount of any such payment or benefit paid or provided to Employee under this
Agreement be reduced or offset by any compensation earned by Employee as the
result of employment by another employer or from any other source.
16. EFFECT OF TERMINATION. Upon the termination or expiration of this Agreement:
(i) Employee shall immediately return to Company any and all Confidential
Information in his possession or control (including, without limitation, all
copies thereof and all materials incorporating such Confidential Information),
(ii) Employee shall have no further obligation to perform services for Company
hereunder; PROVIDED, HOWEVER, that Employee shall continue to be bound by the
terms of Sections 10, 11 and 12 hereof, and (iii) except to the extent
specifically provided in Section 15 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
17. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the contrary
contained in this Agreement, it is specifically understood and agreed that
Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
and that such Business Experience, to the extent it applies to business
operations generally and not to the specific operations, technologies or trade
secrets of Company, shall not be deemed to constitute either Confidential
Information, Intellectual Property or Developments hereunder, and nothing
contained in Section 10 of this Agreement shall be deemed to prevent Employee
from using such general Business Experience in such a manner as does not violate
any of the other terms and conditions of this Agreement.
18. GENERAL.
18.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
18.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors, assigns and legal representatives, but shall not be assignable by
Employee. Any purported assignment in violation of the foregoing shall be
invalid and of no force and effect. No assignment of this Agreement shall
relieve the assigning party of any obligation or liability hereunder. In the
event Company wishes to assign this Agreement, it must require the assignee
expressly to assume this Agreement and agree to perform under it in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. Such assumption, however, shall not
constitute a release or novation with respect to the Company's obligation's
hereunder.
18.03 NOTICES. Any notice, demand, payment, request, response or other
communication provided for herein or given hereunder to a party hereto shall be
in writing and shall be deemed to have been duly given if signed by the party
giving it. Notice shall be deemed effective upon delivery by hand, or on the
third business day after it is deposited in the United States mail, postage
prepaid (registered or certified mail) or on the business day after it is sent
<PAGE>
by Federal Express of similar overnight service to the address of the parties
listed below:
If to Company: Chairman of the Board
Docucon, Inc.
9100 IH-10 West, Suite 100
San Antonio, Texas 78230
With a copy to: Timothy N. Tuggey, Esq.
Rosenberg, Tuggey, Agather,
Rosenthal & Rodriguez
140 East Houston St.
Suite 220
San Antonio, Texas 78205-2228
If to Employee: Douglas P. Gill
667 Church Road
Wayne, Pennsylvania 19087
With a copy to: Peter J. Weidman, Esq.
Kaufman, Coren, Ress & Weidman, P.C.
1525 Locust St., 17th Fl.
Philadelphia, PA 19102
or to such other address as the party to receive such communication has last
designated by notice delivered to the other party in accordance with the
foregoing provisions.
18.04 WAIVER. Failure or delay in insisting upon strict compliance with
any provision hereof shall not be deemed a waiver of such provision or any other
provision hereof with respect to prior, contemporaneous or subsequent
occurrences. No waiver by either party of any right hereunder or of any default
shall be binding upon such party unless such waiver is in writing and signed by
Employee (in the case of Employee) or a duly authorized officer or partner of
Company in the case of Company.
18.05 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state in which the corporate headquarters is
located as of the date when the cause of action arose or the events in question
occurred.
18.06 ENTIRE AGREEMENT. Any and all previous employment agreements,
whether written or oral, existing between Company and Employee shall be deemed
to be revoked and canceled for all purposes on the Effective Date. This
Agreement, as may be amended from time to time, shall represent the sole and
entire agreement between Employee and Company respecting the employment
relationship between Company and Employee. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties hereto relating to the employment relationship between Company and
Employee which are not fully expressed in this Agreement.
18.07 SEVERABILITY. The provisions of this Agreement are severable and the
invalidity or unenforceability of any provision hereof shall not affect the
validity or enforceability of any other provision. In addition, in the event
that any provision of this Agreement (or portion thereof) is determined by a
court to be unenforceable as drafted by virtue of the scope, duration, extent or
character of any obligation contained therein, the parties acknowledge that it
is heir intention that such provision (or portion thereof) shall be construed in
a manner designed to effectuate the purposes of such provision to the maximum
extent enforceable under applicable law.
18.08 REMEDIES CUMULATIVE. All remedies provided for in this Agreement
shall be cumulative and in addition to and not in lieu of any other remedies
available to either party under this or any other agreement between the parties
or at law, in equity or otherwise.
18.09 LANGUAGE. The language used in this Agreement shall be deemed to be
language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction against any party shall apply to any term or
condition of this Agreement.
18.10 AMENDMENT. This Agreement may not be modified or amended except by
written agreement executed by all of the parties to this Agreement at the time
of such amendment.
18.11 HEADINGS. The descriptive headings of the sections, paragraphs and
subparagraphs hereof are inserted for convenience only and do not constitute a
part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DOCUCON, INCORPORATED ("Company")
/s/ DOUGLAS P. GILL By: /s/ EDWARD P. GISTARO
Douglas P. Gill ("Employee")
Its: Chairman of the Board
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) from continuing operations ............ $ (277,439) $ 867,591
Less- Preferred stock dividend requirements ............ (46,420) (55,688)
------------ ------------
Net income (loss) from continuing operations applicable
to common stockholders ................................. (323,859) 811,903
Net income (loss) from discontinued operations applicable
to common stockholders ................................. 3,702,688 (102,920)
------------ ------------
Net income applicable to common stockholders
used for computation ............................. $ 3,378,829 $ 708,983
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION ........................ 12,521,485 11,945,504
============ ============
Basic earnings (loss) from continuing operations per
common share ........................................... $ (.03) $ .07
Basic earnings (loss) from discontinued operations per
common share ........................................... .30 (.01)
------------ ------------
BASIC EARNINGS PER COMMON SHARE ........................... $ .27 $ .06
============ ============
COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) from continuing operations ............ $ (277,439) $ 867,591
Preferred stock dividend requirements ................... (46,420) (55,688)
Increase in net income applicable to common stock for
preferred stock dividends not incurred upon assumed
conversion of preferred stock .......................... 46,420 55,688
------------ ------------
Net income (loss) from continuing operations
applicable to common stockholders used for
computation ...................................... (277,439) 867,591
Net income (loss) from discontinued operations applicable
to common stockholders ................................. 3,702,688 (102,920)
------------ ------------
Net income applicable to common stockholders used
for computation .................................. $ 3,425,249 $ 764,671
============ ============
Weighted average number of shares of common stock
outstanding ............................................ 12,521,485 11,945,504
Weighted average incremental shares outstanding upon
assumed conversion of options and warrants ............. 511,931 539,818
Weighted average incremental shares outstanding upon
assumed conversion of the preferred stock .............. 562,734 672,779
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION ............................................. 13,596,150 13,158,101
============ ============
</TABLE>
<PAGE>
EXHIBIT 11
(Continued)
YEAR ENDED DECEMBER 31
--------------------
1997 1996
-------- --------
Diluted earnings (loss) from continuing operations
per common share and common share equivalents ...... $ (.02) $ .07
Diluted earnings (loss) from discontinued operations
per common share and common share equivalents ...... .27 (.01)
-------- --------
DILUTED EARNINGS PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS (a) ..................................... $ .25(a) $ .06 (a)
======== ========
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into the Company's previously filed
Registration Statement on Form S-8 (File No. 1-10185).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DOCUCON, INCORPORATED'S FORM 10K-SB AS OF AND FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,597,183
<SECURITIES> 0
<RECEIVABLES> 960,678
<ALLOWANCES> 4,444
<INVENTORY> 27,087
<CURRENT-ASSETS> 7,507,872
<PP&E> 6,769,574
<DEPRECIATION> 4,680,368
<TOTAL-ASSETS> 10,069,568
<CURRENT-LIABILITIES> 1,840,211
<BONDS> 1,485,079
0
12
<COMMON> 130,436
<OTHER-SE> 6,564,283
<TOTAL-LIABILITY-AND-EQUITY> 10,069,568
<SALES> 6,664,325
<TOTAL-REVENUES> 6,664,325
<CGS> 4,636,087
<TOTAL-COSTS> 6,087,695
<OTHER-EXPENSES> (73,736)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,805
<INCOME-PRETAX> (277,439)
<INCOME-TAX> 0
<INCOME-CONTINUING> (277,439)
<DISCONTINUED> 3,702,688
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,378,829
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
