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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, 1999; 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
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(Name of Small Business Issuer in its Charter)
DELAWARE 74-2418590
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
20 VALLEY STREAM PARKWAY, SUITE 140
MALVERN, PENNSYLVANIA 19355
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(Address of Principal Executive (Zip Code)
Offices)
Issuer's Telephone Number, Including Area Code: (610) 240-9600
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Securities Registered Under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NONE
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: $5,716,520
State the aggregate market value of the voting stock held by
non-affiliates as of March 14, 2000:
Common Stock, par value $.01 per share - $1,183,554
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 14, 2000
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COMMON STOCK, PAR VALUE 3,508,767 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's primary business is document
conversion.
DOCUMENT CONVERSION SERVICES AND MARKETS
Document conversion is an automated process in which source documents are
converted into electronic form, including computer accessible images, indices
and formats. 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 document conversion services primarily at its
operations center in San Antonio, Texas. The Company can also process documents
at client-site locations.
The Company currently markets conversion services to government and
commercial customers that have substantial document storage and retrieval needs.
Examples of the type of documents which the Company may convert include logistic
support documents and technical manuals for the United States Department of
Defense
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("DOD"), land files for petro-chemical companies and county governments,
and personnel, financial and other records and forms for public and private
companies and institutions.
For the years ended December 31, 1999 and 1998, the Company spent
approximately $377,000, and $280,000, 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 has performed conversion services since 1987 under four major
contracts awarded by the DOD. 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 Company provided approximately $14.7 million of services
under this contract, which expired in February 1998. 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 include four additional
option years so that the entire contract has a potential value of approximately
$77.4 million. As of December 31, 1999, the Company had provided approximately
$4 million of services under this contract. In 1999, 1998, and 1997
approximately 63%, 78%, and 87%, respectively, of the Company's operating
revenues were derived from services provided DOD customers or contractors,
including services provided under these DOD contracts.
In March 1998, the General Services Administration (CSA) 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 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.
The Company has also performed conversion services for various commercial
companies including Lucent Technologies, Loral Federal Systems, Westinghouse,
QED, Texaco Exploration and Production, Inc., Computer Science Corporation,
Amoco, Dowell Schlumberger, Ericsson GE, DuPont Pharmaceuticals and Johnson &
Johnson.
ASSET PURCHASE AGREEMENT WITH TAB PRODUCTS CO.
In January 2000, the Company entered into a nonbinding letter of intent
(LOI) and subsequently, in March 2000, signed a definitive asset purchase
agreement (TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the
TAB Asset Purchase Agreement, the Company has agreed, subject to stockholder
approval, to sell substantially all of the operating assets of the Company to
TAB for cash and the assumption of certain operating liabilities. The
acquisition is expected to be consummated during the second quarter of 2000. In
conjunction with entering into the LOI and subsequent TAB Asset Purchase
Agreement, TAB has agreed to advance the Company cash in the form of secured
promissory notes to fund the Company's working capital deficits until the
transaction is consummated. Under the TAB Asset Purchase Agreement, these
advances from TAB will be deducted from the cash proceeds paid at closing. As of
March 17, 2000, TAB has advanced $550,000 under secured promissory notes. The
notes bear interest at rates ranging from 10 percent to 13 percent per year and
are due on the earlier to occur of the closing of the transaction or April 30,
2000. The notes are secured by a second priority interest in substantially all
of the Company's assets. There are no assurances that TAB will continue to fund
the Company's working capital deficits indefinitely or that the transaction will
be consummated.
Under the TAB Asset Purchase Agreement, a portion of the cash consideration and
all of the liabilities assumed in the transaction are variable and are based on
the book value of specific operating assets acquired and liabilities assumed,
respectively, on the date of Closing. Liabilities not assumed by TAB will be
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satisfied with a portion of the net cash proceeds from the transaction. The
remaining cash proceeds from the transaction, after settlement of liabilities
not assumed by TAB and payment of any costs incurred by the Company subsequent
to closing, are expected to be distributed to stockholders during 2000. Because
the variable portion of the cash consideration from the transaction will not be
determined until the closing date and the amount of liabilities not assumed by
TAB that must be satisfied out of the cash proceeds will not be known until
after the closing, the amount of cash that will ultimately be available for
distribution to stockholders in 2000 is not determinable at this time.
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. In addition, many government and commercial entities
have or may develop in-house document conversion capabilities. Due to the
rapidly changing technology used in connection with providing such services,
competitive positions within the industry are subject to change.
JFS TRANSACTION
On March 16, 1994, the Company purchased substantially all of the assets,
having a book value of approximately $1.0 million, and assumed certain
liabilities in the approximate amount of $1.2 million of J. Feuerstein Systems,
Inc. ("JFS"), for consideration of approximately $0.2 million. 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. 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 approximately
$6.5 million. The Company realized a gain of approximately $4.5 million on the
sale.
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, "Description of
Business - Document Conversion Services and Markets" and "Description of
Business - Competition," Item 3, "Legal Proceedings" and Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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EMPLOYEES
At March 1, 2000, the Company had approximately 98 full-time employees and
one part-time employee. 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. In addition to its own employees, Docucon frequently
supplements its own workforce by utilizing personnel supplied by temporary
staffing companies.
ITEM 2. DESCRIPTION OF PROPERTY.
In October 1992, the Company purchased an eight-story, 52,000 square foot
office building in San Antonio, Texas. In January 1999, the Company sold this
building and leased it back from the new owner through December 1999. In
December 1999 the Company moved into a new, 31,000 square foot leased facility.
This facility is utilized for the Company's San Antonio operations center.
The Company leases approximately 7,000 square feet of space in Malvern,
Pennsylvania for its corporate headquarters and commercial sales office and
approximately 1,000 square feet in Vienna, Virginia for its federal government
sales office.
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 elsewhere in this Annual Report on Form 10-KSB; however, in the event
that the Company experiences significant growth, 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.
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On February 2, 1999 the Company contacted the Department of Defense's
Voluntary Disclosure Program Office to request admission into its Voluntary
Disclosure Program. The Voluntary Disclosure Program is intended to encourage
government contractors to voluntarily disclose potential violations of
government contracting policies and procedures. In general, companies who
volunteer information and cooperate with the government's investigation are not
subject to criminal and administrative sanctions such as suspension and
debarment from government contracting activities.
Admission into the Voluntary Disclosure Program does not protect companies
from any potential civil liability the government may assert. The Company's
request for admission into the Voluntary Disclosure Program was the result of an
internal review by the Company that indicated a billing practice, with respect
to certain invoices submitted during the period from September 1996 through July
1997, that might be perceived by the government as a technical violation of DOD
billing procedures.
The DOD Inspector General formally admitted the Company into the Voluntary
Disclosure Program in June 1999 and commenced its investigation of the Company's
voluntary disclosure in the second half of that year. In February 2000, Company
counsel was orally advised that the Government's investigation of the Company's
voluntary disclosure is complete and that criminal prosecution has been
declined. The Company remains potentially liable for civil damages. In 1998, the
Company established a reserve for estimated legal costs and other expenses that
it believes is adequate for the resolution of this matter.
Except as noted above, 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 1999.
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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 OTC
Bulletin Board (Symbol: DOCU).
In June 1998, the Company's stockholders approved a one-for-four reverse
common stock split. Accordingly, all common stock and share information has been
adjusted to reflect the reverse stock split.
On March 10, 1999, 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 Company's Common Stock was delisted from the NASDAQ SmallCap Market
on June 11, 1999. The Company's Common Stock now trades on The OTC Bulletin
Board.
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 (for periods up to and including June 11, 1999) and The
OTC Bulletin Board (for periods subsequent to June 11, 1999).
REPORTED
BID PRICE
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HIGH LOW
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1999
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First Quarter....................................... $ 0.97 $ 0.63
Second Quarter...................................... 0.69 0.44
Third Quarter....................................... 0.97 0.50
Fourth Quarter...................................... 0.75 0.41
1998
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First Quarter....................................... $ 4.00 $ 2.52
Second Quarter...................................... 3.00 1.13
Third Quarter....................................... 2.06 0.78
Fourth Quarter...................................... 1.31 0.78
The last reported sale price for the Common Stock on The OTC Bulletin
Board on March 14, 2000, was $0.50 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.
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There were approximately 215 holders of record of the Common Stock as of
March 14, 2000, excluding those shares held by depository companies for certain
beneficial owners.
The Company has never paid cash dividends on its Common Stock. 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, 1999, cumulative undeclared
dividends on the Series A Convertible Preferred Stock were approximately
$179,000. If the proposed transaction with TAB (see Item 1 - "Asset Purchase
Agreement with TAB Products Co.") is consummated, the Company intends to make
distributions to common stockholders after cumulative undeclared dividends on
the Series A Convertible Preferred Stock are made.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1999 COMPARED TO 1998
The Company reported a net loss applicable to common stockholders of
approximately $3,586,000 for 1999, as compared to a net loss applicable to
common stockholders of approximately $5,113,000 in 1998.
Revenues were approximately $5,717,000 in 1999 as compared to
approximately $2,693,000 in 1998. This increase is primarily attributable to new
contracts or new business under existing contracts during 1999, which resulted
in a significant increase in production during the year.
Production costs increased from approximately $2,626,000 in 1998 to
approximately $4,970,000 in 1999. This increase is primarily attributable to a
corresponding increase in revenues in 1999. Production costs as a percentage of
revenues decreased from 98% in 1998 to 87% in 1999. This decrease is primarily
attributable to the cost efficiencies of operating at a greater revenue scale.
Research and development costs increased to approximately $377,000 in 1999
as compared to approximately $280,000 in 1998. This increase is primarily
attributable to costs associated with new document management technologies and
ongoing development of the Company's internal workflow systems.
General and administrative expenses increased from approximately
$1,916,000 in 1998 to approximately $2,079,000 in 1999. This increase is
primarily the result of a net increase of one person at the corporate staff
level and increases in travel expenses and other corporate overhead. As a
percentage of revenues, general and administrative expenses decreased from
approximately 71% in 1998 to approximately 36% in 1999. This decrease is
primarily attributable to substantially higher revenues with a comparatively
modest increase in general and administrative expenses.
Marketing costs increased from approximately $1,040,000 in 1998 to
approximately $1,504,000 in 1999. This increase is primarily a result of
extensive new marketing efforts focused on new business development in both the
federal and commercial markets and an increase in sales commissions attributable
to higher revenues during 1999.
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The provision associated with the allowance for unbilled revenues was zero
in 1999 as compared to $1,600,000 in 1998. The allowance in 1998 relates to
certain work performed primarily during 1997 under its contract with the DOD
(see "Liquidity and Capital Resources" below).
Depreciation and amortization expense decreased from approximately
$348,000 in 1998 to approximately $277,000 in 1999. This decrease is primarily
attributable to an increase in fully-depreciated assets and the sale of the
Company's San Antonio operations center building in January 1999.
1998 COMPARED TO 1997
The Company reported a net loss applicable to common stockholders of
approximately $5,113,000 for 1998, as compared to net income applicable to
common stockholders of $3,379,000 in 1997. Net income in 1997 included an
approximate $4,472,000 gain recognized on the sale of the Company's JFS software
division.
Revenues were approximately $2,693,000 in 1998 as compared to
approximately $6,664,000 in 1997. This decrease is primarily attributable to the
loss of funding on a significant DOD project and the completion of several
contracts that generated significant revenues in 1997 that were not replaced
with a comparable volume of new contracts in 1998.
Production costs decreased from approximately $4,636,000 in 1997 to
approximately $2,626,000 in 1998. This decrease is primarily attributable to the
corresponding reduction in revenues in 1998. Production costs as a percentage of
revenues increased from 70% in 1997 to 98% in 1998. This increase is primarily
attributable to the Company's decision to retain substantially all of its highly
trained engineering and operations management personnel in anticipation of new
contracts in 1999, despite the lower revenue volume in 1998.
Research and development costs increased to approximately $280,000 in 1998
as compared to approximately $98,000 in 1997. This increase is primarily
attributable to a substantial increase in the amount of software engineering
devoted to development of the Company's proprietary document conversion
processes and controls.
General and administrative expenses increased from approximately
$1,029,000 in 1997 to approximately $1,916,000 in 1998. This increase is
primarily attributable to a charge of approximately $300,000 relating to the
buyout of the employment agreement for the Company's former President and COO,
costs relating to the transition to new management and new corporate
headquarters office opened in April 1998 and an accrual for legal and other
costs relating to the Company's request for admission into the DOD Voluntary
Disclosure Program (see Item 3 - "Legal Proceedings").
Marketing costs increased from approximately $633,000 in 1997 to
approximately $1,040,000 in 1998. This increase is primarily a result of the
development of government and commercial sales forces.
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The provision associated with the allowance for unbilled revenues was
$1,600,000 in 1998 as compared to zero in 1997. The allowance in 1998 relates to
certain work performed primarily during 1997 under the Company's contract with
the DOD (see "Liquidity and Capital Resources" below).
Depreciation and amortization expense decreased from approximately
$412,000 in 1997 to approximately $348,000 in 1998. This decrease is primarily
attributable to an increase in fully- depreciated assets and the Company's sale
of its JFS software division in November 1997.
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, 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 since 1987 under four major
contracts awarded by the DOD. 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 Company provided approximately $14.7 million of services
under this contract, which expired in February 1998. 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 approximately
$77.4 million. As of December 31, 1999, the Company had provided approximately
$4 million of services under this contract. In 1999, 1998, and 1997
approximately 63%, 78%, and 87%, respectively, of the Company's operating
revenues were derived from services provided to DOD customers or contractors,
including services provided under these DOD contracts.
At December 31, 1999 and 1998, the Company had approximately $0.5 million
and $0.2 million, respectively, of unbilled revenues, net of an allowance of
approximately $1,600,000. The allowance for unbilled revenues at December 31,
1999 and 1998 relates primarily to conversion services performed for a DOD
customer. The Company's ability to collect these unbilled revenues is dependent
upon a number for factors including quality control acceptance and the
availability of funding to the DOD customer. The Company was informed by its DOD
customer in mid-1997 that funding for certain conversion services being
performed under this delivery order had been depleted. Management completed the
work that had been placed in production for this customer. As a result, the
Company has been unable to invoice and collect approximately $1.6 million of
conversion services for this customer, the substantial majority of which were
performed during 1997. A substantial portion of the conversion products
associated with the $1.6 million of unbilled revenues have been shipped to the
customer and are in various stages of quality control review. Management of the
Company believes that a significant portion of such unbilled revenues represent
valid assets of the Company. However, due to the continued aging of the unbilled
revenues, management believes it was prudent to provide an allowance on these
unbilled revenues for the entire amount during the year ended December 31, 1998.
There are 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 and collect the unbilled revenues.
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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 November 1997, the Company sold its software division for $6.5 million.
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 approximately $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 idemnification for
uncollectible purchased receivables. The funds in the escrow account, net of any
liabilities of the Company to the Purchaser under the agreement, were paid to
the Company in the amount of $400,000 in 1998 and the remainder was released to
the Company in 1999, which was reflected as a component of other current
receivables on the accompanying balance sheet at December 31, 1998.
In October 1996, the Company obtained long-term financing to replace the
then existing mortgage note for its San Antonio operations center building. The
new note bore interest at a fixed rate of 9.5%, payable monthly to a commercial
bank, and was being amortized over a 20-year term with a 5-year maturity. The
note was 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 January 1999, the Company sold
its San Antonio operations center building. In connection with the sale, the
Company paid off the remaining balance of the related secured indebtedness. The
Company's proceeds from the sale, net of debt repayments, approximated $800,000.
On June 18, 1999, the Company entered into an accounts receivable finance
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement, as amended, the Company can receive funding from SVB for
up to $1,500,000 of eligible accounts receivable with full recourse by SVB to
the Company. The Company receives cash advances from the eligible receivables
equal to the face amount of the eligible receivables financed, less a reserve
established by SVB of not less than 20 percent of the aggregate face amount of
the receivables. If the Company finances the maximum of $1,500,000 of accounts
receivable, new receivables can be financed to replace previous accounts
receivable that are collected. The Company is obligated to repay on demand the
unpaid portion of any receivable financed by SVB under certain conditions
including (i) an account receivable that remains uncollected 90 calendar days
after the invoice date, (ii) the bankruptcy or insolvency of any account debtor
or (iii) any breach of the Financing Agreement by the Company. During the fourth
quarter of 1999, and subsequent to December 31, 1999, the Company was in
technical default under certain provisions of the Financing Agreement. While SVB
has not made a declaration of default or demand for payment, it has the right to
do so under the provisions of the Financing Agreement.
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If such demand were made, it is unlikely that the Company would have the
resources to make such payment except through the collections on the underlying
secured receivables. The cash advances are reflected in the accompanying
financial statements as short-term borrowings. The Company pays aggregate
finance charges and administrative fees on the average daily balance of the
uncollected financed accounts receivables of approximately 2.38 percent per
month. The aggregate amount of advances and fees owed to SVB are secured by
substantially all of the tangible assets of the Company. At December 31, 1999,
the balances of the accounts receivables financed and the aggregate cash
advanced on such receivables was approximately $1,147,000 and $899,000,
respectively. Aggregate finance charges and administrative fees related to the
Financing Agreement were approximately $130,000 for the year ended December 31,
1999, and are classified as interest expense.
On September 29, 1999, two directors of the Company loaned the Company an
aggregate of $325,000. The promissory notes (the Notes), issued in conjunction
with these loans, carry a 12 percent annual interest rate. Principal and
interest on the Notes are payable on the earlier of (i) September 28, 2000, or
(ii) within 10 days of an equity-based financing (the Financing), as defined. In
the event the principal and interest become payable as a result of a Financing,
one-half of the then outstanding principal and accrued interest on the entire
principal amount of the Notes are payable in cash to the Note holders and such
Note holders will receive (i) a number of shares of Company securities, which
shall be the same class issued in the Financing, calculated by dividing the
remaining outstanding principal by the per share price of the securities issued
in the Financing and/or (ii) a debt instrument of the same class issued in the
Financing, the aggregate of such equity and/or debt securities equal to one-half
of the outstanding principal amount of the Notes prior to the Financing. In
conjunction with the Notes, the two directors were issued an aggregate of
243,750 warrants to purchase common stock of the Company. Warrants to purchase
162,500 shares of common stock of the Company were granted in September 1999 and
the remaining 81,250 were granted in December 1999 based upon the nonoccurrence
of certain events. The warrants are exercisable for a period of five years from
the September 29,1999, issuance date of the warrants at a price equal to 75
percent of (i) in the event of a Financing, the common stock equivalent price
per share of securities issued to the investor under such Financing or (ii) in
the event of a sale of greater than 50 percent of the shares of common stock of
the Company, the price per share for such shares of common stock. In the event
that there is neither a Financing nor a sale of the Company, beginning on
September 28, 2000, the warrant price shall be $0.50 per share. The warrants
have been valued at an estimated fair market value of approximately $85,000, and
have been recorded as an original issue discount on the Notes. The original
issue discount on the Notes is being charged to expense as interest expense over
the one-year maturity period of the Notes.
Net cash and cash equivalents at December 31, 1999 were approximately
$29,000. Trade accounts receivable, net of allowance for doubtful accounts
were approximately $992,000 at December 31, 1999 and unbilled revenues, net of
allowance were $523,000. Other receivables were approximately $4,000 at December
31, 1999. Accounts payable and accrued liabilities were approximately $2.6
million at December 31, 1999. Also included in current liabilities is secured
indebtedness relating to the Company's accounts receivable Financing Agreement
and related party notes from two of
13
<PAGE>
the Company's directors. The Company had a net working capital deficit of
approximately $2.1 million at December 31, 1999.
The accompanying financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. Since its
inception, the Company has incurred cumulative net losses of approximately $12.1
million, including losses of approximately $5.1 million in 1998 and $3.6 million
in 1999. For the years ended December 31, 1999 and 1998, the Company had
negative cash flows from operating activities of approximately $2.7 million and
$2.1 million, respectively. At December 31, 1999, the Company had a working
capital deficit of approximately $2.1 million and a total stockholders' deficit
of approximately $1.9 million. A substantial portion of the Company's accounts
payable at December 31, 1999 are past due. As discussed in Notes 3 and 8 to the
Financial Statements, a significant portion of the Company's historical revenues
has been earned from conversion services performed for agencies of the U.S.
Government. The Company experienced significant declines in revenues from these
agencies in 1997 and 1998 and, during 1998, provided an allowance of $1.6
million on certain unbilled revenues. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. The ability of the Company to continue as a going concern
is dependent upon the ongoing support of its customers, its ability to obtain
capital resources to support operations and its ability to successfully market
its services. If the Company is unable to generate positive cash flows from
operations or obtain additional capital resources, or if the funds obtained in
such efforts are not adequate to support the Company until a successful level of
operations is attained, the Company would likely be unable to continue operating
as a going concern.
In January 2000, the Company entered into a nonbinding letter of intent
(LOI) and, subsequently, in March 2000, signed a definitive asset purchase
agreement (TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the
TAB Asset Purchase Agreement, the Company has agreed, subject to stockholder
approval, to sell substantially all of the operating assets of the Company to
TAB for cash and the assumption of certain operating liabilities. The
acquisition is expected to be consummated during the second quarter of 2000. In
conjunction with entering into the LOI and subsequent TAB Asset Purchase
Agreement, TAB has agreed to advance the Company cash in the form of secured
promissory notes to fund the Company's working capital deficits until the
transaction is consummated. Under the TAB Asset Purchase Agreement, these
advances from TAB will be deducted from the cash proceeds paid at closing. As of
March 17, 2000, TAB has advanced $550,000 under secured promissory notes. The
notes bear interest at rates ranging from 10-13 percent per year and are due on
the earlier to occur of the closing of the transaction or April 30, 2000. The
notes are secured by a second priority interest in substantially all of the
Company's assets. There are no assurances that TAB will continue to fund the
Company's working capital deficits indefinitely or that the transaction will be
consummated.
Under the TAB Asset Purchase Agreement, a portion of the cash
consideration and all of the liabilities assumed in the transaction are variable
and are based on the book value of specific operating assets acquired and
liabilities assumed, respectively, on the date of Closing. Liabilities not
assumed by TAB will be satisfied with a portion of the net cash proceeds from
the transaction. The remaining cash proceeds from the transaction, after
settlement of liabilities not assumed by TAB and payment of any costs incurred
by the Company subsequent to closing, are expected to be distributed to
stockholders during 2000. Because the variable portion of the cash consideration
from the transaction will not be determined until the closing date
14
<PAGE>
and the amount of liabilities not assumed by TAB that must be satisfied out of
the cash proceeds will not be known until after the closing, the amount of cash
that will ultimately be available for distribution to stockholders in 2000 is
not determinable at this time.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004, which are included
as a component of future minimum lease payments for all noncancelable operating
leases as described in Note 5. Under the provisions of the TAB Asset Purchase
Agreement, the remaining commitment under this lease would not be assumed by
TAB. In March 2000, the Company initiated conversations with the lessor with
respect to a potential buy-out of the remaining term of this lease in
anticipation of the consummation of the TAB Asset Purchase Agreement. While
there can be no assurances that the Company will not be required to pay all
future contractual amounts under this lease, the Company believes that it is
likely that it would be able to buy-out the remaining term of the lease by
making a payment to the lessor in an amount substantially less than the
contractual amount.
YEAR 2000 COMPLIANCE
The efficient operation 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. During 1999, the
Company evaluated 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, such
systems may not properly recognize such information and could generate erroneous
data or cause a system to fail to operate properly.
To date, the Company has not experienced any significant problems or
disruptions in its operations or management information systems as a result of
the year 2000 issue. Although there can be no assurances that it will not
encounter any year 2000 issues in the future, the Company believes that the risk
of any such issues posing a significant operational problem for the Company is
remote. The Company has not incurred significant costs and/or capital
expenditures associated with year 2000 compliance and does not expect to incur
any significant costs relating to the year 2000 problem in the future.
15
<PAGE>
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...........................F-1
Balance Sheets as of December 31, 1999 and 1998....................F-2
Statements of Operations for the Years Ended
December 31, 1999 and 1998.........................................F-4
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1999 and 1998.............................F-5
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.........................................F-6
Notes to Financial Statements......................................F-7
16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The Company has had no disagreements with its independent accountants
within the twenty-four months prior to December 31, 1999 or subsequent to that
date.
17
<PAGE>
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 64 Chairman of the Board of Directors
Douglas P. Gill 51 President, Chief Executive Officer, and
Director
Warren D. Barratt 40 Senior Vice President, Chief Financial
Officer and Treasurer
Michael C. Mooney 61 Senior Vice President - Sales
Michael Nunley 55 Vice President - Operations and Technology
Ralph Brown 66 Secretary and Director
Al R. Ireton 65 Director
Chauncey E. Schmidt 67 Director
Robert W. Schwartz 55 Director
18
<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 1975 to 1984. Mr. Gill also served as a senior auditor at Arthur
Andersen & Co. (now LLP) from 1972 to 1975.
Warren D. Barratt was named Senior Vice President and Chief
Financial Officer in December 1998 and was subsequently appointed Treasurer in
March 1999. Mr. Barratt was Senior Vice President and Chief Financial Officer
for U.S. Physicians, Inc., a physician practice management company, from 1996 to
1998. From 1994 to 1996, Mr. Barratt was Chief Financial Officer for The Pet
Practice, Inc., a veterinary services company. Mr. Barratt was a Senior Manager
with Price Waterhouse LLP from 1992 to 1994.
Michael C. Mooney was named Senior Vice President, Federal Programs
in July 1998 and Senior Vice President-Sales in June 1999. Prior to joining
Docucon, Mr. Mooney served Litton-PRC as Vice President, General Manager for
Business Development for Outsourcing Systems and Services and as a manager for
PRC Logistics Systems. Mr. Mooney was Senior Vice President of Sales and
Marketing for Raxco Software from 1989 to 1990 and from 1977 to 1989 held
various senior sales positions at Boeing Computer Services, Computer Sciences
Corporation, VM Software and Legent Corporation. Prior to his career in the
private sector, Mr. Mooney served in the U.S. Marine Corps from 1961-1967
Michael Nunley was named Vice President Operations and Technology in
January 1999. From 1985 to 1998 Mr. Nunley served in various positions with
Lockheed Martin Corporation, most recently as Program Manager for Citibank
Projects. Prior to joining Lockheed Martin, Mr. Nunley spent twenty years with
the U.S. Air Force in various roles including the development and testing of
automated communications systems and maintaining long radar systems.
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.
19
<PAGE>
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.
Robert W. Schwartz was elected to the Board of Directors of the
Company in April 1998. Mr. Schwartz founded the Schwartz Heslin Group, Inc.
("SHG"), an investment banking firm, in 1985. As Managing Director of SHG, Mr.
Schwartz specializes in corporate planning, finance and development. From 1980
to 1985, he was founder, President and Chief Executive Officer of Winsource,
Inc., a high tech firm which packaged and marketed integrated telephone and
computer systems. Mr. Schwartz served as President, Chief Operating Officer and
Director of Coradian Corporation and as Vice President and Chief Financial
Officer of Garden Way Manufacturing Corporation from 1975 to 1980 and 1970 to
1975, respectively. SHG has been retained by the Company in the past to provide
investment and financial advice.
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" and Item 12, "Certain Relationships and Related Transactions." There
are no family relationships between any Directors, nominees for Director or
executive officers of the Company.
20
<PAGE>
Prior to joining the Company, Mr. Barratt served as Senior Vice
President and Chief Financial Officer of U.S. Physicians, Inc. In October 1998,
U.S. Physicians, Inc. filed a bankruptcy case under Chapter 11 of the U.S. Code
(the Bankruptcy Code) and such case was subsequently converted to a case under
Chapter 7 of the Bankruptcy Code.
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"). 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, 1999 through March 1, 2000, all officers, Directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them.
21
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation earned by or awarded to
the Chief Executive Officer and the named executive officers for all services
rendered to the Company in 1999, 1998 and 1997.
22
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- --------------------
BONUS/ANNUAL OTHER ALL
INCENTIVE ANNUAL SECURITIES LONG-TERM OTHER
NAME AND PRINCIPAL AWARD COMPEN- UNDERLYING INCENTIVE COMPEN-
POSITION YEAR SALARY(1) (2)(3) SATION(4) OPTIONS(5) PAYOUTS SATION(6)
- ------------------ -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Gill ........... 1999 $200,000 $ 10,407 $ -- 71,920 $ -- $ 20
President and 1998 149,020 50,000 -- 275,000 -- 20
Chief Executive Officer
Warren D. Barratt ......... 1999 140,000 7,285 -- 116,825 -- 20
Senior Vice President, 1998 5,385 -- -- 100,000 -- 20
Chief Financial
Officer, and Treasurer
Michael C. Mooney ......... 1999 100,000 -- -- 39,625 -- 52,864
Vice President, Sales 1998 61,918 -- -- 32,650 -- 33,599
Paul M. Nunley ............ 1999 130,000 6,764 -- 98,460 -- 20
Vice President, Operations
and Technology
</TABLE>
(1) During 1999, the executive officers listed in the table above, and others,
elected to delay payment of a portion of their salaries. The total amount of
the unpaid salary is $85,846 for the executive officers listed in the table
above and it remains unpaid as of March 17, 2000.
(2) Messrs. Gill, Barratt and Nunley are each eligible to receive an annual
bonus under his employment contract of up to 50% of his annual base salary,
to be awarded at the discretion of the Board of Directors. For 1998, Mr.
Gill was entitled to a bonus of 25% of his base salary. For 1999 Messrs.
Gill, Barratt and Nunley were eligible to receive bonuses under the 1999
Bonus Plan for Senior Management, as approved by the Board of Directors,
under which certain revenue, gross margin, operating profit and net
income/loss targets must be met. During 1999, $24,456 was earned under this
plan of which $20,962 remains unpaid at March 17, 2000.
(3) During 1999, as payment for his 1998 bonus Mr. Gill received $8,333 in cash
and 55,556 shares of the Company's common stock that had a current market
value of $41,667 on the date it was issued.
(4) Aggregate perquisites and other personal benefits did not exceed the lesser
of either $50,000 or 10% of the total annual salary and bonus listed above.
(5) In April 1998, Mr. Gill was awarded options to purchase 225,000 shares of
the Company's common stock at an exercise price of $4.00 per share. In
December 1998, the exercise price of these options was reset to $1.00 per
share.
(6) Consists of premiums of $20 paid under the Company's group term life
insurance program for Messrs. Gill Barratt, Mooney and Nunley. Mr. Mooney is
eligible to receive a sliding-scale commission under his employment contract
of 1.00% to 2.00% of the total value of monthly invoices to federal
government and related customers. He is also eligible to receive a
commission of 0.5% of the value of monthly invoices to non-federal
government and related customers.
23
<PAGE>
STOCK OPTION GRANTS IN 1999
<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>
Douglas P. Gill ............ 71,920 11.9% $ 1.00 07/30/09
Warren D. Barratt (1) ...... 116,825 19.4% 1.00 07/30/09
Michael C. Mooney (2) ...... 39,625 6.6% 1.00 07/30/09
Paul M. Nunley ............. 73,460 12.2% 1.00 07/30/09
Paul M. Nunley ............. 25,000 4.1% 1.00 01/11/09
Paul M. Nunley ............. 75,000(3) 12.4% 1.00 01/11/06
- ------------
</TABLE>
(1) In December 1998, Mr. Barratt was granted an option to purchase 25,000
shares of the Company's common stock with an exercise price of $0.875 per
share and an expiration date of 12/18/08 under the 1998 Employee Stock
Option Plan. Also in December 1998, Mr. Barratt was granted an option to
purchase 75,000 shares of the Company's common stock with an exercise price
of $0.875 per share and an expiration date of 12/20/05 under the 1998
Executive Non-Statutory Plan. These options vest immediately and become
exercisable on 9/20/05. Exercisability of the options is accelerated in
4,167 share increments for each $2.00 per share incremental increase in the
quoted market price per share of the Company's common stock above $1.00 per
share. These shares represented 3.0% and 8.9%, respectively, of all options
granted to employees during 1998.
(2) In June 1998, Mr. Mooney was granted an option to purchase 12,500 shares
of the Company's common stock with an exercise price of $2.00 per share and
an expiration date of 06/09/08 under the 1998 Employee Stock Option Plan. In
July 1998, Mr. Mooney was granted an option to purchase 20,150 shares of the
Company's common stock with an exercise price of $2.063 per share and an
expiration date of 07/10/08 under the 1998 Employee Stock Option Plan. These
shares represented 1.5% and 2.4%, respectively, of all options granted to
employees during 1998.
(3) In January 1999, Mr. Nunley was granted an option to purchase 75,000
shares of the Company's common stock with an exercise price of $1.00 per
share and an expiration date of 01/11/06 under the 1998 Executive
Non-Statutory Plan. These options vest immediately and become exercisable on
10/11/05. Exercisability of the options is accelerated in 4,167 share
increments for each $2.00 per share incremental increase in the quoted
market price per share of the Company's common stock above $1.00 per share.
24
<PAGE>
STOCK OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas P. Gill ........ -- $ -- 50,000 296,920 $ -- $ --
Warren D. Barratt ...... -- $ -- 8,334 208,491 $ -- $ --
Michael C. Mooney ...... -- $ -- 5,432 66,843 $ -- $ --
Paul M. Nunley ......... -- $ -- -- 173,460 $ -- $ --
</TABLE>
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
SECURITIES LENGTH OF
UNDERLYING MARKET PRICE EXERCISE PRICE ORIGINAL OPTION
NUMBER OF OF STOCK AT OF STOCK AT TERM REMAINING
OPTIONS TIME OF TIME OF NEW EXERCISE AT DATE OF
NAME DATE REPRICED REPRICING REPRICING PRICE REPRICING
---- --------------- --------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Douglas P. Gill 12/15/98 225,000 $ 1.00 $ 4.00 $ 1.00 6 years, 5 months
</TABLE>
EMPLOYMENT AGREEMENTS
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.
The Company entered into employment agreements with Messrs. Michael
C. Mooney, Senior Vice President-Sales; Warren D. Barratt, Senior Vice
President, Chief Financial Officer and Treasurer; and Paul M. Nunley, Vice
President Operations and Technology, in May 1998, December 1998 and January
1999, respectively. Each of the agreements carries a three-year term and
provides for a base salary and an annual performance bonus to be determined by
the Board of Directors.
25
<PAGE>
Each of the agreements for Messrs. Gill, Mooney, Barratt and Nunley
are 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 specified periods of time
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.
In the event the employees above were to be terminated by the
Company without cause, the Company would be required to make aggregate severance
payments of $720,000. The definition of termination without cause under each of
the employee agreements includes a change of control of the Company and/or a
sale of substantially all of the Company's assets.
STOCK OPTIONS
1988 STOCK OPTION PLAN
The Company has a 1988 Stock Option Plan, currently covering an
aggregate of 415,000 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 1, 2000, under the 1988 Stock Option Plan there
were outstanding options to purchase 203,962 shares of the Company's Common
Stock at prices ranging from $1.00 to $5.52 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 expired 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 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.
26
<PAGE>
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 210,000 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. An amendment to increase the number of shares offered
and reserved for the 1991 Director Plan was approved by the stockholders of the
Company on June 9, 1998. As of March 1, 2000, there were outstanding under the
1991 Director Non-Statutory Stock Option Plan options to purchase 130,000 shares
of the Company's Common Stock at prices ranging from $0.875 to $5.52 per share.
Under the 1991 Director Plan, which is administered by the Board of
Directors, non-employee Directors are granted options to purchase 10,000 shares
of the Company's Common Stock upon their initial election as Directors and 7,500
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 June 1998, each eligible Director will receive an
additional annual grant of options covering 6,250 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 1999, Messrs. Ralph Brown, Al Ireton, and Chauncey Schmidt,
all Directors of the Company, were granted options covering 6,250 shares each of
Common Stock at an exercise price of $0.875 per share. Messrs. Edward Gistaro
and Robert Schwartz, both Directors of the Company, were each granted options
covering 7,500 shares of Common Stock at an exercise price of $0.875,
respectively. The exercise price per share of each such option was not less than
the closing price of the Common Stock reported on The OTC Bulletin Board on the
date of the grant.
27
<PAGE>
1998 EMPLOYEE STOCK OPTION PLAN
On April 1, 1998, the Company approved the 1998 Employee Stock
Option Plan (the 1998 Employee Plan) covering 187,500 shares of common stock.
The plan was amended effective July 30, 1999 to increase the number of shares
reserved to 687,500. Unless terminated earlier by the Board of Directors, the
1998 Plan will terminate on March 31, 2008. The purpose of the plan is to
supplement and replace the 1988 Stock Option Plan (the 1988 Plan). The 1998
Employee Plan provides for the grant to key employees of the Company of
incentive stock options (ISOs) intended to qualify under Section 422(b) of the
Internal Revenue Code and nonqualified stock options (NQSOs). As of March 1,
2000, under the 1998 Stock Option Plan there were outstanding options to
purchase 582,221 shares of the Company's Common Stock at prices ranging from
$0.750 to $2.063 per share.
Under the 1998 Employee 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 percent of fair market
value on the date of grant (or 110 percent of fair market value in the case of
an ISO granted to a 10 percent stockholder/grantee). Options granted under the
1998 Employee Plan must be exercised within 10 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 expire within three months after termination of employment,
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 on 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. The aggregate fair market value (determined at the time each
ISO is granted) of the shares of common stock with respect to which ISOs issued
to any one person under the 1998 Employee Plan are exercisable for the first
time during any calendar year may not exceed $100,000.
The 1998 Employee Plan may be amended at any time by a vote of the board
of directors. However, no amendment made without approval of the stockholders of
the Company may increase the total number of shares which may be issued under
options granted pursuant to the 1998 Employee Plan, reduce the maximum exercise
price or extend the latest date upon which options may be granted or change the
class of employees eligible to receive the options.
1998 EXECUTIVE NON-STATUTORY PLAN
In 1998, the Company approved the 1998 Executive Non-Statutory Plan
(the 1998 NQSO Plan), covering 375,000 shares of common stock. Unless terminated
earlier by the Board of Directors, the 1998 NQSO Plan will terminate on March
31, 2008. The 1998 NQSO Plan provides executives of the Company the added
incentive of performance-based compensation and stock ownership through the
grant of nonqualified stock options. The purpose of the plan is to stimulate the
efforts of executive management to increase shareholder wealth by the
performance of specific goals designed to increase shareholder wealth in the
form of an increased market price of the Company's stock. As of March 1, 2000,
under the 1998 Executive Non-Statutory Plan there were outstanding options to
purchase 375,000 shares of the Company's Common Stock at prices ranging from
$0.875 to $1.00 per share.
28
<PAGE>
Under the 1998 NQSO Plan, identified executives may be granted long-term
options to purchase shares of the Company's common stock at a price specified on
the date of the grant subject to certain acceleration rights upon attainment of
specific goals. The 1998 NQSO Plan is administered by the Stock Option
Committee. Options granted under the 1998 NQSO Plan will expire 10 years from
the date of grant, vest immediately or at varying times as determined by the
NQSO Committee, are nontransferable except by will or pursuant to the laws of
descent and distribution. 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
on 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 NQSO Committee. The NQSO Committee may determine other terms applicable to
particular options. The 1998 NQSO Plan may be amended at any time by a vote of
the Board of Directors.
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 and June 9, 1998. Under the Purchase
Plan, eligible employees may elect to have up to 10% of their Base Pay (as
defined) 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 350,000 shares of Common Stock for issuance
pursuant to the Stock Purchase Plan. The Company's stockholders approved an
increase of an additional 100,000 shares and an extension of the Purchase Plan
until December 31, 2001 in June 1998. The Company issued 51,907 (plus 424 shares
of treasury stock), 24,398 treasury shares and 26,809 new shares in December
1999, January 1999 and January 1998 pursuant to this Plan at purchase prices of
$0.37, $0.77 and $3.40 per share, which represents 85% of the closing price on
December 31, 1999, December 31,1998, and December 30, 1997, respectively. At
March 1, 2000, 156,881 shares remain available for issuance.
Under the Purchase Plan, the Company will make available in each year from
January 1, 1994 through December 31, 2001 up to 50,000 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.
29
<PAGE>
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, 2001, unless sooner
terminated or amended by the Board of Directors.
30
<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, 2000, 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, Edward P. Gistaro 377,219(1) 10.12
par value $.01 20 Valley Stream Parkway
per share Suite 140
Malvern, PA 19355
- ----------------------
(1) Includes 9,167 shares subject to currently exercisable stock options and
150,000 shares underlying a warrant to purchase Common Stock. The
percentage of ownership is based on 3,726,265 shares outstanding.
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of March 1, 2000 (a) by
each of the Company's Directors, (b) by the Company's Chief Executive Officer
and the other named executive officers, 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 377,219 (4) 10.12
par value $.01 Douglas P. Gill 120,556 (5) 3.33
per share Ralph Brown 102,108 (6) 2.84
Al R. Ireton 50,708 (7) 1.41
Chauncey E. Schmidt 181,958 (8) 4.93
Robert W. Schwartz 20,501 (9) 0.57
Warren D. Barratt 8,334 (10) 0.23
Paul M. Nunley 8,334 (10) 0.23
Michael C. Mooney 25,432 (11) 0.71
All Directors and
executive officers
as a Group (9
persons including
the above) 895,150 (12) 22.47
- --------------------
(1) The address for all persons named is 20 Valley Stream Parkway, Suite 140,
Malvern, Pennsylvania 19355.
(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.
31
<PAGE>
(3) Unless otherwise indicated below, the percentage of ownership is based
upon 3,567,098 shares of Common Stock outstanding, which includes 58,331
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 9,167 shares subject to currently exercisable stock options and
150,000 shares underlying a warrant to purchase Common Stock. The
percentage of ownership is based on 3,726,265 shares outstanding.
(5) Includes 50,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,617,098 shares outstanding.
(6) Includes 26,875 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,593,973 shares outstanding.
(7) Includes 29,375 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,596,473 shares outstanding.
(8) Includes 29,375 shares subject to currently exercisable stock options and
93,750 shares underlying a warrant to purchase Common Stock. The
percentage of ownership is based on 3,690,223 shares outstanding.
(9) Includes 5,834 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,572,932 shares outstanding.
(10) Includes 8,334 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,575,432 shares outstanding.
(11) Includes 5,432 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,572,530 shares outstanding.
(12) Includes 172,726 shares subject to currently exercisable stock options and
243,750 shares underlying warrants to purchase Common Stock. The
percentage of ownership is based on 3,983,574 shares outstanding.
32
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1996 the Company's former chief executive officer loaned the
Company $100,000 for a period of 5 days. In January 1997 the former 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.
On September 29, 1999, two directors of the Company loaned the Company as
aggregate of $325,000. The promissory notes (the Notes), issued in conjunction
with these loans, carry a 12 percent annual interest rate. Principal and
interest on the Notes are payable on the earlier of (i) September 28, 2000, or
(ii) within 10 days of an equity-based financing (the Financing), as defined. In
the event the principal and interest become payable as a result of a Financing,
one-half of the then outstanding principal and accrued interest on the entire
principal amount of the Notes are payable in cash to the Note holders and such
Note holders will receive (i) a number of shares of Company securities, which
shall be the same class issued in the Financing, calculated by dividing the
remaining outstanding principal by the per share price of the securities issued
in the Financing and/or (ii) a debt instrument of the same class issued in the
Financing, the aggregate of such equity and/or debt securities equal to one-half
of the outstanding principal amount of the Notes prior to the Financing. In
conjunction with the Notes, the two directors were issued an aggregate of
243,750 warrants to purchase common stock of the Company. Warrants to purchase
162,500 shares of common stock of the Company were granted in September 1999 and
the remaining 81,250 were granted in December 1999 based upon the nonoccurrence
of certain events. The warrants are exercisable for a period of five years from
the September 29,1999, issuance date of the warrants at a price equal to 75
percent of (i) in the event of a Financing, the common stock equivalent price
per share of securities issued to the investor under such Financing or (ii) in
the event of a sale of greater than 50 percent of the shares of common stock of
the Company the price per share for such shares of common stock. In the event
that there is neither a Financing nor a sale of the Company, beginning on
September 28, 2000, the warrant price shall be $0.50 per share. The warrants
have been valued at an estimated fair market value of approximately $85,000, and
have been recorded as an original issue discount on the Notes. The original
issue discount on the Notes is being charged to expense as interest expense over
the one-year maturity period of the Notes.
Since September 29, 1999, 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.
33
<PAGE>
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.
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,
34
<PAGE>
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.
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.
35
<PAGE>
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.
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
36
<PAGE>
Litigation Solutions, L.P., filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.14 Employment Agreement, January 5, 1998, between Docucon,
Incorporated and Lori Turner, filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.15 Employment Agreement, April 1, 1998, between Docucon,
Incorporated and Douglas P. Gill, filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.16 Employment Agreement, December 20, 1998, between Docucon,
Incorporated and Warren D. Barratt.
10.17 Employment Agreement, January 4, 1999, between Docucon,
Incorporated and Michael Nunley.
10.18 Amendment of Bylaws filed as Exhibit 10.18 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999 is herein incorporated by reference.
10.19 Accounts Receivable Purchase Agreement dated June 18, 1999,
between Silicon Valley Bank and Docucon, Incorporated filed as
Exhibit 10.19 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1999 is herein incorporated by
reference.
10.20 Asset Purchase Agreement by and among TAB Products Co., Bunt
Acquisition Corp. and Docucon, Incorporated dated March 7, 1999
11 Computation of Earnings (Loss) Per Share.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
none
37
<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: March 27, 2000
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 March 27, 2000
- ---------------------------- Officer and Director
/S/ Douglas P. Gill (Principal Executive Officer)
WARREN D. BARRATT Senior Vice President March 27, 2000
- ---------------------------- Chief Financial Officer and
/S/ Warren D. Barratt Treasurer (Principal Financial and
Accounting Officer)
EDWARD P. GISTARO Chairman of the Board of Directors March 27, 2000
- ----------------------------
/S/ Edward P. Gistaro
RALPH BROWN Director March 27, 2000
- ----------------------------
/S/ Ralph Brown
AL R. IRETON Director March 27, 2000
- ----------------------------
/S/ Al R. Ireton
CHAUNCEY E. SCHMIDT Director March 27, 2000
- ----------------------------
/S/ Chauncey E. Schmidt
ROBERT W. SCHWARTZ Director March 27, 2000
- ----------------------------
/S/ Robert W. Schwartz
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Docucon, Incorporated:
We have audited the accompanying balance sheets of Docucon, Incorporated, as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit) 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring operating losses and
negative operating cash flows which has resulted in working capital and
stockholder equity deficiencies, all of which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1, including entering into an agreement to
sell substantially all of the Company's operating assets and the assumption of
certain operating liabilities by the potential acquiror, subject to stockholder
approval. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 2, 2000
F-1
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
ASSETS 1999 1998
---------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 28,835 $1,082,321
Accounts receivable, trade, net of allowance for
doubtful accounts of $8,887 and $4,444 at December 31, 1999 and 1998,
respectively ........................................................ 992,243 373,366
Unbilled revenues, net of allowance of $1,600,000 at December 31,
1999 and 1998 ....................................................... 523,014 193,722
Other receivables .................................................... 3,876 374,379
Prepaid expenses and other ........................................... 183,530 123,921
Asset held for sale, net ............................................. -- 1,668,467
---------- ----------
Total current assets ............................... 1,731,498 3,816,176
---------- ----------
PROPERTY AND EQUIPMENT:
Conversion systems ................................................... 5,132,390 4,858,930
Furniture and fixtures ............................................... 254,907 243,167
Leasehold improvements ............................................... 55,047 9,476
---------- ----------
Total property and equipment ....................... 5,442,344 5,111,573
Less- Accumulated depreciation and amortization ...................... 4,980,000 4,704,152
---------- ----------
Net property and equipment ......................... 462,344 407,421
---------- ----------
OTHER ASSETS, net ...................................................... 27,300 48,896
---------- ----------
Total assets ....................................... $2,221,142 $4,272,493
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 1,385,635 $ 218,059
Accrued liabilities .................................................. 1,186,682 1,191,351
Deferred revenues .................................................... -- 40,601
Other current liabilities ............................................ 45,886 44,087
Current maturities of long-term debt ................................. -- 927,502
Current maturities of capital lease obligations ...................... 55,727 29,537
Secured indebtedness ................................................. 899,004 --
Related-party notes, net of unamortized discount of $70,665 .......... 254,335 --
------------ ------------
Total current liabilities ................................... 3,827,269 2,451,137
------------ ------------
CAPITAL LEASE OBLIGATIONS .............................................. 75,202 76,141
------------ ------------
OTHER LONG-TERM OBLIGATIONS ............................................ 226,310 269,476
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.00 par value, 10,000,000 shares authorized-
Series A, 60 shares authorized, 7 shares issued and outstanding as of
December 31, 1999 and 1998 .......................................... 7 7
Common stock, $.01 par value, 25,000,000 shares
authorized; 3,508,767 and 3,306,216 shares outstanding
as of December 31, 1999 and 1998, respectively ...................... 35,088 33,062
Additional paid-in capital ........................................... 10,209,903 10,027,337
Accumulated deficit .................................................. (12,148,401) (8,581,573)
Treasury stock, at cost, 4,495 shares and 2,917 shares
as of December 31, 1999 and 1998, respectively ...................... (4,236) (3,094)
------------ ------------
Total stockholders' equity (deficit) ........................ (1,907,639) 1,475,739
------------ ------------
Total liabilities and stockholders' equity (deficit) ........ $ 2,221,142 $ 4,272,493
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES ................................. $ 5,716,520 $ 2,693,497
----------- -----------
COSTS AND EXPENSES:
Production ....................................... 4,969,905 2,626,315
Research and development ......................... 377,050 280,088
General and administrative ....................... 2,079,124 1,916,489
Allowance for unbilled revenues .................. -- 1,600,000
Marketing ........................................ 1,503,806 1,039,768
Depreciation and amortization .................... 277,115 347,556
----------- -----------
Total costs and expenses ......... 9,207,000 7,810,216
----------- -----------
OPERATING LOSS ..................................... (3,490,480) (5,116,719)
OTHER INCOME (EXPENSE):
Interest expense ................................. (188,547) (193,892)
Interest income .................................. 31,452 200,037
Other, net ....................................... 80,747 --
----------- -----------
LOSS BEFORE INCOME TAXES ........................... (3,566,828) (5,110,574)
INCOME TAX BENEFIT ................................. -- 24,880
----------- -----------
NET LOSS ........................................... (3,566,828) (5,085,694)
----------- -----------
PREFERRED STOCK DIVIDEND REQUIREMENTS .............. (19,250) (27,462)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ......... $(3,586,078) $(5,113,156)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ............ $ (1.06) $ (1.55)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,386,768 3,300,056
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------- -----------------------------
NUMBER NUMBER OF
OF SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 ............................... 12 $ 12 3,260,889 $ 32,609
Stock option exercises ................................ -- -- 2,500 25
Shares issued pursuant to employee stock plans ........ -- -- 26,809 268
Shares issued to pay preferred stock dividends ........ -- -- 10,318 103
Purchase of treasury stock ............................ -- -- (36,250) (362)
Conversion of Series A preferred stock ................ (5) (5) 41,950 419
Accrued dividends on preferred stock .................. -- -- -- --
Net loss .............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 ............................... 7 7 3,306,216 33,062
Warrants issued ....................................... -- -- -- --
Purchase of treasury stock ............................ -- -- (26,400) (264)
Treasury shares issued pursuant to employee stock plans -- -- 24,822 249
Shares issued in satisfaction of accrued liabilities .. -- -- 152,222 1,522
Shares issued pursuant to employee stock plans ........ -- -- 51,907 519
Net loss .............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 ............................... 7 $ 7 3,508,767 $ 35,088
============ ============ ============ ============
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED TREASURY EQUITY
CAPITAL DEFICIT STOCK (DEFICIT)
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 ............................... $ 10,069,173 $ (3,407,063) $ -- $ 6,694,731
Stock option exercises ................................ 5,475 -- -- 5,500
Shares issued pursuant to employee stock plans ........ (268) -- -- --
Shares issued to pay preferred stock dividends ........ (103) -- -- --
Purchase of treasury stock ............................ -- -- (49,620) (49,982)
Conversion of Series A preferred stock ................ (46,940) -- 46,526 --
Accrued dividends on preferred stock .................. -- (88,816) -- (88,816)
Net loss .............................................. -- (5,085,694) -- (5,085,694)
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 ............................... 10,027,337 (8,581,573) (3,094) 1,475,739
Warrants issued ....................................... 85,312 -- -- 85,312
Purchase of treasury stock ............................ -- -- (25,550) (25,814)
Treasury shares issued pursuant to employee stock plans (249) -- 24,408 24,408
Shares issued in satisfaction of accrued liabilities .. 78,561 -- -- 80,083
Shares issued pursuant to employee stock plans ........ 18,942 -- -- 19,461
Net loss .............................................. -- (3,566,828) -- (3,566,828)
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 ............................... $ 10,209,903 $(12,148,401) $ (4,236) $ (1,907,639)
============ ============ ============ ============
</TABLE>
F-5
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(3,566,828) $(5,085,694)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization .......................................... 277,115 347,556
Allowance for unbilled revenues ........................................ -- 1,600,000
Noncash compensation accrual ........................................... -- 313,563
Gain on sale of assets ................................................. 80,708 --
Amortization of discount on related-party notes ........................ 14,647 --
Changes in current assets and current liabilities-
(Increase) decrease in net receivables and unbilled revenues ......... (577,666) 688,057
Increase in prepaid expenses and other ............................... (59,609) (25,351)
Increase in accounts payable and accrued liabilities ................. 1,181,693 203,118
Increase (decrease) in taxes payable ................................. -- (191,000)
Increase (decrease) in deferred revenues ............................. (40,601) 40,601
----------- -----------
Net cash used in operating activities .................... (2,690,541) (2,109,150)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (260,219) (270,951)
Proceeds from sale of building ............................................ 1,782,609 --
----------- -----------
Net cash provided by (used in) investing activities ...... 1,522,390 (270,951)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related-party notes and warrants ............................ 325,000 --
Payments under line of credit ............................................. -- (504,000)
Increase in secured indebtedness, net ..................................... 899,004 --
Principal payments on long-term debt and other obligations ................ (968,869) (588,299)
Principal payments under capital lease obligations ........................ (45,301) (16,766)
Proceeds from employee stock purchase plan ................................ 19,461 18,786
Proceeds from exercise of stock options ................................... -- 5,500
Payment of preferred stock dividends ...................................... (88,816) --
Purchase of treasury stock ................................................ (25,814) (49,982)
----------- -----------
Net cash provided by (used in) financing activities ...... 114,665 (1,134,761)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (1,053,486) (3,514,862)
CASH AND CASH EQUIVALENTS, beginning of year ................................. 1,082,321 4,597,183
----------- -----------
CASH AND CASH EQUIVALENTS, end of year ....................................... $ 28,835 $ 1,082,321
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION, BACKGROUND AND
CURRENT STATUS OF THE COMPANY:
Docucon, Incorporated (the Company), a Delaware corporation, was incorporated in
June 1986. The Company's primary business is the conversion of paper and
microform documents to optical and other types of storage media for use in
document management systems and internet applications for customers in the
federal and commercial markets. Substantially all of the Company's customers are
located in the United States.
The accompanying financial statements of the Company have been prepared on the
basis of accounting principles applicable to a going concern. Since its
inception, the Company has incurred cumulative net losses of approximately $12.1
million, including losses of approximately $3.6 million and $5.1 million during
1999 and 1998, respectively. For the years ended December 31, 1999 and 1998, the
Company had negative cash flows from operating activities of approximately $2.7
million and $2.1 million, respectively. At December 31, 1999, the Company had a
working capital deficit of approximately $2.1 million and a total stockholders'
deficit of approximately $1.9 million. A substantial portion of the Company's
accounts payable at December 31, 1999, are past due. As discussed in Notes 3 and
8, a significant portion of the Company's historical revenues has been earned
from conversion services performed for agencies of the U.S. Government. The
Company experienced significant declines in revenues from these agencies in 1997
and 1998 and, during 1998, provided an allowance of $1.6 million on certain
unbilled revenues. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties. The
ability of the Company to continue as a going concern is dependent upon the
ongoing support of its customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services. If the
Company is unable to generate positive cash flows from operations or obtain
additional capital resources, or if the funds obtained in such efforts are not
adequate to support the Company until a successful level of operations is
attained, the Company would likely be unable to continue operating as a going
concern.
As discussed in Note 14, the Company has entered into a definitive agreement to
sell substantially all of the Company's operating assets to TAB Products Co.
(TAB). The agreement is subject to stockholder approval. In conjunction with
this transaction, TAB has agreed to fund the Company's working capital deficits
until the proposed acquisition can be consummated. However, there can be no
assurances that TAB will continue to fund all of the Company's working capital
deficits if the transaction does not close in a timely manner or that the
proposed acquisition will be consummated.
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
operations.
F-7
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 systems 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 was being depreciated
over 40 years.
In January 1999, the Company sold its San Antonio operations center building. In
connection with the sale, the Company paid off the remaining balance of the
related secured indebtedness. The Company's net cash proceeds from the sale, net
of debt repayments, approximated $800,000. The Company entered into a
noncancelable operating leaseback of the building through December 1999 at a
gross rate of approximately $27,000 per month, before a cancelable
month-to-month sublease arrangement of approximately $15,000 per month. The gain
on the sale of the building was deferred and was recognized over the term of the
operating leaseback as a component of other income, net. The Company moved into
a new facility in December 1999 (see Note 5).
REVERSE STOCK SPLIT
In June 1998, the Company's stockholders approved a one-for-four reverse common
stock split. Accordingly, all common stock and share information has been
adjusted to reflect the reverse stock split.
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. The Company maintains an
estimated reserve for returns and reconversions based upon an historical
analysis. Such amounts have not been significant.
STATEMENTS OF CASH FLOWS-
SUPPLEMENTAL DISCLOSURES
The Company considers funds invested in highly liquid investments having
original maturities of 90 days or less to be cash equivalents.
The following relates to cash interest and income taxes paid by the Company and
noncash investing and financing activities for the periods indicated:
YEAR ENDED
DECEMBER 31
--------------------
1999 1998
--------- ---------
Cash payments-
Cash paid for interest .............................. $ 146,495 $ 168,892
========= =========
Cash paid for income taxes .......................... $ - $ 157,622
========= =========
Noncash investing and financing activities-
Capital lease obligations incurred .................. $ 70,552 $ 57,099
========= =========
Preferred stock dividends payable ................... $ - $ 88,816
========= =========
Stock issued in satisfaction of accrued liabilities . $ 80,083 $ -
========= =========
F-8
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
POST RETIREMENT AND POST EMPLOYMENT BENEFITS
The Company does not provide post retirement or post employment benefits to its
employees.
SELF-INSURANCE RISK
Through December 31, 1999, the Company self-insured medical coverage for its
employees and their dependents up to specific attachment limits. The Company has
accrued for known claims and an estimate of claims incurred but not reported
through December 31, 1999, up to the maximum anticipated costs to the Company.
The Company believes that such accrual is adequate.
During 1999 and 1998, the Company recognized approximately $260,000 and
$180,000, respectively, in self-insurance expense under the limits. The
Company's insurer will pay cumulative claims above the 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. Effective December 31, 1999, the Company terminated its
self-insured arrangement and switched to fully insured employee medical
coverage.
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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS) excludes dilution and is computed by
dividing net income (loss) 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. As
the Company had a net loss for the years ended December 31, 1999 and 1998,
diluted EPS equals basic EPS as potentially dilutive common stock equivalents
are antidilutive. The average market price per share of the Company's common
stock for the years ended December 31, 1999 and 1998, was $.72 and $2.01,
respectively. Note 10 provides a detail of options and warrants outstanding and
the corresponding exercise prices. If the Company would have had income for the
years ended December 31, 1999 and 1998, the denominator (weighted average number
of common shares and common share equivalents outstanding) in the diluted EPS
calculation would have been increased, through application of the treasury stock
method, for each class of option or warrant for which the average market price
per share of the Company's common stock exceeded the common stock equivalent's
exercise price.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to
the 1999 presentation.
F-9
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. UNBILLED REVENUES:
The allowance for unbilled revenues at December 31, 1999 and 1998, relates to
conversion services performed for agencies of the U.S. Government. The Company's
ability to collect 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 informed by a U.S. Government customer in
mid-1997 that funding for certain conversion services being performed had been
depleted. Management completed the work that had been placed in production for
this customer. As a result, the Company has been unable to collect approximately
$1.6 million of conversion services for this customer, the substantial majority
of which were performed during 1997. A substantial portion of the conversion
products associated with the $1.6 million of unbilled revenues have been shipped
to the customer and are in various stages of quality control review. Management
of the Company believes that a significant portion of such unbilled revenues
represent valid assets of the Company. However, due to the continued aging of
the unbilled revenues, management believes it was prudent to provide an
allowance on these unbilled revenues for the entire amount during the year ended
December 31, 1998. There are 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 collect the unbilled revenues.
4. ACCOUNTS RECEIVABLE FINANCING:
On June 18, 1999, the Company entered into an accounts receivable finance
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement, as amended, the Company can receive funding from SVB for
up to $1,500,000 of eligible accounts receivable with full recourse by SVB to
the Company. The Company receives cash advances from the eligible receivables
equal to the face amount of the eligible receivables financed, less a reserve
established by SVB of not less than 20 percent of the aggregate face amount of
the receivables. If the Company finances the maximum of $1,500,000 of accounts
receivable, new receivables can be financed to replace previous accounts
receivables that are collected. The Company is obligated to repay on demand the
unpaid portion of any receivable financed by SVB under certain conditions
including (i) an account receivable that remains uncollected 90 calendar days
after the invoice date, (ii) the bankruptcy or insolvency of any account debtor
or (iii) any breach of the Financing Agreement by the Company. During the fourth
quarter of 1999, and subsequent to December 31, 1999, the Company was in
technical default under certain provisions of the Financing Agreement. While SVB
has not made a declaration of default or demand for payment, it has the right to
do so under the provisions of the Financing Agreement. If such demand were made,
it is unlikely that the Company would have the resources to make such payment
except through the collections on the underlying secured receivables. The cash
advances are reflected in the accompanying financial statements as short-term
borrowings. The Company pays aggregate finance charges and administrative fees
on the average daily balance of the uncollected financed accounts receivables of
approximately 2.38 percent per month. The aggregate amount of advances and fees
owed to SVB are secured by substantially all of the tangible assets of the
Company. At December 31, 1999, the balances of the accounts receivables financed
and the aggregate cash advanced on such receivables was approximately $1,147,000
and $899,000, respectively. Aggregate finance charges and administrative fees
related to the Financing Agreement were approximately $129,500 for the year
ended December 31, 1999, and are classified as interest expense.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004, which are included
as a component of future minimum lease payments for all noncancelable operating
leases as described in Note 5. Under the provisions of the TAB Asset Purchase
Agreement, the remaining commitment under this lease would not be assumed by
TAB. In March 2000, the Company initiated conversations with the lessor with
respect to a potential buy-out of the remaining term of this lease in
anticipation of the consummation of the TAB Asset Purchase Agreement. While
there can be no assurances that the Company will not be required to pay all
future contractual amounts under this lease, the Company believes that it is
likely that it would be able to buy-out the remaining term of the lease by
making a payment to the lessor in an amount substantially less than the
contractual amount.
F-10
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Certain office equipment and office space is leased under various noncancelable
operating leases with terms ranging from one to six years. In November 1999, the
Company entered into an operating lease agreement for its primary conversion
facilities in San Antonio, Texas. The terms of this lease agreement provide for
an initial lease term of 65 months, including a five-month rental abatement
period. Lease expense is being recognized on a straight-line basis over the term
of the lease including the abatement period. Base rents are approximately
$30,000 per month before the Company's pro rata share of ad valorem taxes and
operating expenses, which are initially estimated to approximate $5,700 per
month. The lease provides for two, five-year optional renewal periods. Rent
expense under all cancelable and noncancelable operating leases, net of sublease
income, was approximately $390,000 and $59,000 for the years ended December 31,
1999 and 1998, respectively. Future minimum lease payments for all noncancelable
operating leases, net of noncancelable subleases, as of December 31, 1999, are
as follows:
Year ending December 31-
2000 $ 505,928
2001 483,037
2002 486,279
2003 488,780
2004 424,408
Thereafter 119,994
----------
Total future minimum lease payments $2,508,426
==========
During 1998 and 1999, the Company appointed several new key employees. The
Company and the employees have entered into employment agreements with terms of
two to seven years providing for base compensation ranging from $100,000 to
$200,000 per year. The agreements are terminable by either party with 30 days'
notice. In the event the employees were to be terminated by the Company without
cause, the Company would be required to make aggregate severance payments of
$880,000. The definition of termination without cause under each of the
employment agreements includes a change of control of the Company and/or a sale
of substantially all of the assets of the Company. See Note 14 for a description
of a proposed sale of substantially all of the Company's assets.
In September 1998, the Company granted early retirement to a member of senior
management and terminated the related employment agreement. The employee was
retained as a consultant to the Company for a period of two years at the rate of
$2,500 per month. Additionally, during the same two-year period, the former
employee receives retirement pay at the rate of $5,500 per month. For a 10-year
period following the consultancy agreement, the former employee will receive
retirement pay at the rate of $2,500 per month. The consulting payments are
being charged to expense as the services are provided. The present value of the
post-retirement payments, discounted at 5 percent, resulted in noncash
compensation expense of approximately $300,000 during the year ended December
31, 1998. The present value of the post-retirement obligation is recorded as
other long-term obligations on the accompanying balance sheet, with the current
portion included as other current liabilities.
F-11
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
On February 2, 1999, the Company contacted the Department of Defense's (DOD)
Voluntary Disclosure Program Office to request admission into its Voluntary
Disclosure Program. The Voluntary Disclosure Program is intended to encourage
government contractors to voluntarily disclose potential violations of
government contracting policies and procedures. In general, companies who
volunteer information and cooperate with the government's investigation are not
subject to criminal and administrative sanctions such as suspension and
debarment from government contracting activities.
Admission into the Voluntary Disclosure Program does not protect companies from
any potential civil liability the government may assert. The Company's request
for admission into the Voluntary Disclosure Program was the result of an
internal review by the Company that indicated a billing practice, with respect
to certain invoices submitted during the period from September 1996 through July
1997, might be perceived by the government as a technical violation of DOD
billing procedures.
The DOD Inspector General formally admitted the Company into the Voluntary
Disclosure Program in June 1999 and commenced its investigation of the Company's
voluntary disclosure in the second half of that year. In February 2000, Company
counsel was orally advised that the Government's investigation of the Company's
voluntary disclosure is complete and that criminal prosecution has been
declined. The Company remains potentially liable for civil damages. In 1998, the
Company established a reserve for estimated legal costs and other expenses which
it believes is adequate for the resolution of this matter.
6. RELATED-PARTY LOAN TRANSACTION:
On September 29, 1999, two directors of the Company loaned the Company an
aggregate of $325,000. The promissory notes (the Notes), issued in conjunction
with these loans, carry a 12 percent annual interest rate. Principal and
interest on the Notes are payable on the earlier of (i) September 28, 2000, or
(ii) within 10 days of an equity-based financing (the Financing), as defined. In
the event the principal and interest become payable as a result of a Financing,
one-half of the then outstanding principal and accrued interest on the entire
principal amount of the Notes are payable in cash to the Note holders and such
Note holders will receive (i) a number of shares of Company securities, which
shall be the same class issued in the Financing, calculated by dividing the
remaining outstanding principal by the per share price of the securities issued
in the Financing and/or (ii) a debt instrument of the same class issued in the
Financing, the aggregate of such equity and/or debt securities equal to one-half
of the outstanding principal amount of the Notes prior to the Financing. In
conjunction with the Notes, the two directors were issued an aggregate of
243,750 warrants to purchase common stock of the Company. Warrants to purchase
162,500 shares of common stock of the Company were granted in September 1999 and
the remaining 81,250 were granted in December 1999 based upon the nonoccurrence
of certain events. The warrants are exercisable for a period of five years from
the September 29, 1999, issuance date of the warrants at a price equal to 75
percent of (i) in the event of a Financing, the common stock equivalent price
per share of securities issued to the investor under such Financing or (ii) in
the event of a sale of greater than 50 percent of the shares of common stock of
the Company, the price per share for such shares of common stock. In the event
that there is neither a Financing nor a sale of the Company, beginning on
September 28, 2000, the warrant price shall be $.50 per share. The warrants have
been valued at an estimated fair market value of $85,312 and have been recorded
as an original issue discount on the Notes. The original issue discount on the
Notes is being charged to expense as interest expense over the one-year maturity
period of the Notes.
F-12
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS:
In connection with the purchase of its San Antonio operations center building,
the Company issued a four-year, 8 percent, $1.5 million promissory note
originally due in December 1996. In October 1996, the Company refinanced the
$1.5 million note. The new note was payable to a commercial bank, bore interest
at a fixed rate of 9.5 percent per year and required monthly principal and
interest payments of $14,448, with the remaining balance maturing in October
2001. The note payable was 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 were being amortized over the five-year term. During 1998, the Company
elected to sell the building. In November 1998, the Company entered into a
contract to sell the building for an amount in excess of its net book value.
Accordingly, the carrying value of the land, building and associated
improvements were classified as a current asset held for sale at December 31,
1998. In January 1999, the Company sold its San Antonio operations center
building and paid off the related secured indebtedness. See Note 2 for
additional information related to this sale.
Equipment held under capital leases and related obligations at December 31,
1999, are as follows:
Office and production equipment requiring monthly principal
and interest payments of $4,887, interest at 9.5 percent
to 22.0 percent and maturing April 2001 to October 2003 ........ $133,000
Telecommunications equipment requiring monthly principal
and interest payments of $977, interest at 9.3 percent
and maturing July 2001 ......................................... 18,566
--------
Total capital lease payments ..................................... 151,566
Less- Amounts representing interest .............................. 20,637
--------
Capital lease obligations ........................................ $130,929
========
Maturities of capital lease obligations as of December 31, 1999, are as follows:
Year ending December 31-
2000 $ 55,727
2001 53,924
2002 14,886
2003 6,392
--------
Total $130,929
========
8. MAJOR CUSTOMER:
The Company has historically earned a significant portion of total revenues from
conversion services performed for the DOD. The Company had revenues of
approximately $3.6 million and $2.1 million during the years ended December 31,
1999 and 1998, respectively, from services provided to the DOD. The Company had
trade receivables of approximately $.4 million and $.3 million from the DOD at
December 31, 1999 and 1998, respectively.
F-13
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. PREFERRED STOCK AND COMMON 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 8,333
shares of common stock. Through December 31, 1999, 39 shares of preferred stock
have been converted. Additionally, 92,154 shares of common stock have been
issued in lieu of accumulated dividends on the preferred stock which was
converted.
Each share of the Company's preferred stock ($25,000 stated value) is
convertible into 8,333 shares of common stock and earns cash dividends of 11
percent per year. Each share of preferred stock is entitled to vote 8,333 common
shares. Under the terms of the Company's preferred stock, the Company cannot pay
dividends on its common stock until all accumulated but unpaid dividends on such
preferred stock have been paid. If the transaction described in Note 14 is
consummated, the Company can not make distributions to common stockholders until
cumulative undeclared dividends on the preferred stock are paid. As of December
31, 1999, cumulative undeclared dividends on the preferred stock approximated
$179,000. In 1999, the Company paid $88,816 related to cumulative dividends on
preferred stock that was converted during the fourth quarter of 1998. This is
reflected as a component of accrued liabilities on the accompanying balance
sheet at December 31, 1998. As the remainder of the cumulative dividends are
undeclared, they have not been recorded as a reduction of the Company's equity.
Common stock is subordinate to preferred stock in the event of liquidation. The
Company has never paid cash dividends on its common stock.
On June 18, 1998, the Company announced that its board of directors authorized
the repurchase of up to 500,000 shares of the Company's common stock in the open
market. From June 19, 1998, through December 31, 1998, the Company acquired
36,250 treasury shares for $49,982. In 1998, 33,333 of such shares were reissued
in connection with the conversion of Series A preferred stock. During 1999, the
Company acquired 26,400 treasury shares for $25,814, of which 24,822 shares were
reissued pursuant to employee stock plans.
10. STOCK OPTIONS:
The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allowed for
the granting of 415,000 stock options at the current market value of the common
stock at the date of the grant to key employees. The 1988 Plan terminated on
October 31, 1998.
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. In June 1998, the Company's stockholders authorized an 85,000 share
increase in the number of shares of common stock reserved for issuance under the
Director Plan. As a result, the Director Plan authorizes the granting of options
to purchase up to 210,000 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.
F-14
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
On April 1, 1998, the Company approved the 1998 Employee Stock Option Plan (the
1998 Employee Plan), covering 187,500 shares of common stock. Unless terminated
earlier by the board of directors, the 1998 Plan will terminate on March 31,
2008. The purpose of the plan is to supplement and replace the 1988 Plan. The
1998 Employee Plan provides for the grant to key employees incentive stock
options (ISOs) intended to qualify under Section 422(b) of the Internal Revenue
Code and nonqualified stock options (NQSOs).
Under the 1998 Employee 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 percent of fair market
value on the date of grant (or 110 percent of fair market value in the case of
an ISO granted to a 10 percent stockholder/grantee). Options granted under the
1998 Employee Plan must be exercised within 10 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 expire within three months after termination of employment,
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 on 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 1998 Employee Plan may be amended at any time by a vote of the
board of directors. However, no amendment made without approval of the
stockholders of the Company may increase the total number of shares which may be
issued under options granted pursuant to the 1998 Employee Plan, reduce the
maximum exercise price or extend the latest date upon which options may be
granted or change the class of employees eligible to receive the options.
In June 1999, the Compensation Committee of the Board of Directors recommended
and the Board approved, subject to stockholder approval of an increase in shares
issuable under the 1998 Employee Plan, a grant to management and key employees
of an aggregate of 460,000 options to purchase shares of common stock at an
exercise price per share equal to the greater of fair market value or $1.00 on
the effective date of the grant. The proposal to increase the number of shares
issuable under the 1998 Employee Stock Option Plan to 687,500 shares was
approved by vote of the Company's stockholders on July 30, 1999. The closing
price per share of the Company's common stock on that date was $.875.
In 1998, the Company approved the 1998 Executive Non-Statutory Plan (the 1998
NQSO Plan), covering 375,000 shares of common stock. Under the 1998 NQSO Plan,
identified executives may be granted long-term options to purchase shares of the
Company's common stock at a price specified on the date of the grant subject to
certain acceleration rights upon attainment of specific goals. The 1998 NQSO
Plan is administered by the Stock Option Committee. The 1998 NQSO Plan expires
on March 31, 2008. Options granted under the 1998 NQSO Plan will expire 10 years
from the date of grant, vest at varying times, as determined by the NQSO
Committee, and are nontransferable except by will or pursuant to the laws of
descent and distribution.
In April 1998, the Company's board of directors granted options to certain
members of the Company's senior management to purchase 125,000 shares of the
Company's common stock at an exercise price of $4 per share under the 1998 NQSO
Plan. Additionally, in April 1998, the Company appointed a new president and
chief executive officer. The Company's board of directors granted this officer
options to purchase 225,000 shares of the Company's common stock at an exercise
price of $4 per share under a time accelerated restricted stock award. In
December 1998, the exercise price on these options was reset to $1 per share.
The time accelerated restricted stock award options become exercisable in March
2005. Exercisability of the time accelerated restricted stock award options is
accelerated, in 12,500 share increments, for each $2 per share incremental
increase in the quoted market price per share of the Company's common stock
above $4 per share.
F-15
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A summary of activity in the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
PRICE ------------------------------
SHARES PER SHARE PER SHARE TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1997 273,778 $ 2.57 $2.12 - $5.52 $ 702,571
============= =============
Exercisable, December 31, 1997 230,157 2.46 2.12 - 5.52 $ 565,547
============= =============
Granted ...................... 875,501 2.45 .88 - 4.12 2,147,024
Exercised .................... (2,500) 2.24 2.24 - 2.24 (5,600)
Terminated ................... (329,638) 3.80 2.12 - 4.88 (1,252,540)
------------- -------------
Outstanding, December 31, 1998 817,141 1.95 .88 - 5.52 $ 1,591,455
============= =============
Exercisable, December 31, 1998 238,213 2.49 2.00 - 5.52 $ 593,150
============= =============
Granted ...................... 636,551 .98 .75 - 1.00 625,256
Exercised .................... -- -- -- --
Terminated ................... (155,344) 2.91 .75 - 4.12 (451,957)
------------- -------------
Outstanding, December 31, 1999 1,298,348 1.36 .75 - 5.52 $ 1,764,754
============= =============
Exercisable, December 31, 1999 289,817 2.46 .88 - 5.52 $ 711,501
============= =============
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1999, is approximately 7.5 years. In October 1995, Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," was issued. SFAS No. 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 No. 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
(APB) 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 (loss) and earnings
(loss) per share as if the fair value based method recommended by SFAS No. 123
had been applied. The following provides pro forma disclosures of net loss and
loss per share as if the fair value based method of accounting under SFAS No.
123 had been applied.
F-16
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net loss applicable to common stockholders and Basic and
Diluted loss per share would have been changed to the following pro forma
amounts:
1999 1998
----------- -----------
Net Loss Applicable to
Common Stockholders As Reported $(3,586,078) $(5,113,156)
Pro Forma $(3,835,717) $(5,389,493)
Basic and Diluted Loss Per
Share As Reported $ (1.06) $ (1.55)
Pro Forma $ (1.13) $ (1.63)
Because the SFAS No. 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.
The weighted average fair values per share of options granted during 1999 and
1998 were $.72 and $1.51, respectively. The fair value of each option grant is
estimated on the date of grant using an option pricing model with the following
weighted average assumptions used for grants in 1999 and 1998, 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 108 percent and 110 percent.
In addition to the above stock option agreements, the Company has warrants
outstanding to purchase 15,000 shares of common stock at $5.00 per share which
expire in June 2001 and additional warrants to purchase 243,750 shares of common
stock as further described in Note 6.
Substantially all of the Company's outstanding options become immediately
exercisable upon a change of control of the Company and/or a sale of
substantially all of the assets of the Company. See Note 14 for a description of
a proposed sale of substantially all of the Company's assets.
11. 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 and June 1998, the Company's stockholders
authorized an increase in the number of shares of common stock reserved for
issuance pursuant to the Stock Purchase Plan by 50,000 shares and 100,000
shares, respectively. The Company has reserved 350,000 shares of common stock
for issuance pursuant to the Stock Purchase Plan. In December 1999, the Company
issued 51,907 shares of common stock (plus 424 treasury shares) at a purchase
price of $.375 per share. In January 1999 and 1998, the Company issued 24,398
treasury shares and 26,809 new shares of common stock at purchase prices of $.77
and $3.40 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 31, 1999, December 31, 1998, and December 30, 1997,
respectively. The Stock Purchase Plan is administered by the Compensation
Committee of the board of directors. In June 1998, the Company's stockholders
amended the Stock Purchase Plan's termination date from December 31, 1998, to
December 31, 2001. At December 31, 1999, 156,881 shares remain available for
issuance.
F-17
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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, 1999 and 1998,
respectively, the Company had accrued approximately $25,000 as its 1998 matching
contributions to the plan. No matching contributions were declared in 1999.
12. 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, 1999, the Company had net operating loss carryforwards of
approximately $9.1 million for federal income tax purposes which are available
to reduce future taxable income and will expire in 2005 through 2019 if not
utilized.
Total income tax expense (benefit) differs from the amount computed by applying
the statutory federal income tax rate to loss before income taxes. The reasons
for these differences are as follows:
YEAR ENDED
DECEMBER 31
-----------------------------
1999 1998
----------- -----------
Expected federal income tax benefit ........ $(1,213,000) $(1,725,000)
Other ...................................... -- (24,880)
Tax loss carryforwards generated ........... 1,213,000 1,725,000
----------- -----------
Total income tax benefit ....... $ -- $ (24,880)
=========== ===========
The tax effects of significant temporary differences representing income tax
assets (liabilities) are as follows:
DECEMBER 31
--------------------------
1999 1998
---------- ----------
Deferred income tax assets (liabilities)-
Tax loss carryforwards ....................... $3,100,000 $2,110,000
Tax credit carryforwards ..................... 81,000 81,000
Depreciation ................................. 62,000 94,000
Accruals ..................................... 671,000 555,000
Other ........................................ -- 14,000
---------- ----------
$3,914,000 $2,854,000
========== ==========
As a result of the Company's recurring losses, a valuation reserve of $3,914,000
and $2,854,000 as of December 31, 1999 and 1998, respectively, representing the
total of net deferred tax assets has been recognized by the Company.
F-18
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
13. SALE OF SOFTWARE DIVISION:
In November 1997, the Company sold its software division to a third party for
$6.5 million. 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 approximately $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, were paid to
the Company in the amount of $400,000 in 1998 and the remainder was released to
the Company in 1999, which was reflected as a component of other current
receivables on the accompanying balance sheet at December 31, 1998.
14. SUBSEQUENT EVENTS (UNAUDITED):
In January 2000, the Company entered into a nonbinding letter of intent (LOI)
and, subsequently, in March 2000, signed a definitive asset purchase agreement
(TAB Asset Purchase Agreement) with TAB. Under the TAB Asset Purchase Agreement,
the Company has agreed, subject to stockholder approval, to sell substantially
all of the operating assets of the Company to TAB for cash and the assumption of
certain operating liabilities. The acquisition is expected to be consummated
during the second quarter of 2000. In conjunction with entering into the LOI and
subsequent TAB Asset Purchase Agreement, TAB has agreed to advance the Company
cash in the form of secured promissory notes to fund the Company's working
capital deficits until the transaction is consummated. Under the TAB Asset
Purchase Agreement, these advances from TAB will be deducted from the cash
proceeds paid at closing. As of March 17, 2000, TAB has advanced $550,000 under
secured promissory notes. The notes bear interest at rates ranging from 10
percent - 13 percent per year and are due on the earlier to occur of the closing
of the transaction or April 30, 2000. The notes are secured by a second priority
interest in substantially all of the Company's assets. There are no assurances
that TAB will continue to fund the Company's working capital deficits
indefinitely or that the transaction will be consummated.
Under the TAB Asset Purchase Agreement, a portion of the cash consideration and
all of the liabilities assumed in the transaction are variable and are based on
the book value of specific operating assets acquired and liabilities assumed,
respectively, on the date of closing. Liabilities not assumed by TAB will be
satisfied with a portion of the net cash proceeds from the transaction. The
remaining cash proceeds from the transaction, after settlement of liabilities
not assumed by TAB and payment of any costs incurred by the Company subsequent
to the closing, are expected to be distributed to stockholders during 2000.
Because the variable portion of the cash consideration from the transaction will
not be determined until the closing date and the amount of liabilities not
assumed by TAB that must be satisfied out of the cash proceeds will not be known
until after the closing, the amount of cash that will ultimately be available
for distribution to stockholders in 2000 is not determinable at this time.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004, which are included
as a component of future minimum lease payments for all noncancelable operating
leases as described in Note 5. Under the provisions of the TAB Asset Purchase
Agreement, the remaining commitment under this lease would not be assumed by
TAB. In March 2000, the Company initiated conversations with the lessor with
respect to a potential buy-out of the remaining term of this lease in
anticipation of the consummation of the TAB Asset Purchase Agreement. While
there can be no assurances that the Company will not be required to pay all
future contractual amounts under this lease, the Company believes that it is
likely that it would be able to buy-out the remaining term of the lease by
making a payment to the lessor in an amount substantially less than the
contractual amount.
F-19
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED):
The results of operations by quarter for the years ended December 31, 1999 and
1998, were as follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1999
Operating revenues .................... $ 851,079 $ 1,613,055 $ 2,013,425 $ 1,238,961 $ 5,716,520
=============== =============== =============== =============== ===============
Net loss .............................. $ (1,138,943) $ (698,908) $ (572,579) $ (1,156,398) $ (3,566,828)
=============== =============== =============== =============== ===============
Basic and diluted loss per common share $ (.35) $ (.21) $ (.17) $ (.34)
=============== =============== =============== ===============
1998
Operating revenues .................... $ 612,996 $ 869,982 $ 591,786 $ 618,733 $ 2,693,497
=============== =============== =============== =============== ===============
Net loss .............................. $ (614,491) $ (455,214) $ (1,993,217) $ (2,022,772) $ (5,085,694)
=============== =============== =============== =============== ===============
Basic and diluted loss per common share $ (0.19) $ (0.14) $ (0.60) $ (0.61)
=============== =============== =============== ===============
</TABLE>
F-20
EXHIBIT 10.20
================================================================================
ASSET PURCHASE AGREEMENT
by and among
TAB Products Co.,
a Delaware corporation; and
Bunt Acquisition Corp.,
a Delaware corporation and a wholly-owned subsidiary of TAB Products Co.;
on the one hand
and
Docucon, Incorporated,
a corporation organized under the laws of Delaware;
on the other hand.
-------------------------------
Dated as of March 7, 2000
-------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I DEFINITIONS.......................................................1
1.1 "Accounts Payable"...............................................1
1.2 "Accounts Receivable"............................................1
1.3 "Acquisition"....................................................1
1.4 "Acquisition Proposal"...........................................2
1.5 "Additional Business Liabilities"................................2
1.6 "Affiliate"......................................................2
1.7 "Assets".........................................................2
1.8 "Assumed Contracts"..............................................2
1.9 "Assumed Liabilities"............................................2
1.10 "Business".......................................................2
1.11 "Business Financial Statements"..................................2
1.12 "Business Records"...............................................2
1.13 "Cash Payment"...................................................2
1.14 "Closing"........................................................2
1.15 "Closing Date"...................................................2
1.16 "Closing Net Assets Value".......................................3
1.17 "Closing Statement"..............................................3
1.18 "Code"...........................................................3
1.19 "Confidentiality Agreement"......................................3
1.20 "Contracts"......................................................3
1.21 "Dispute Notice".................................................3
1.22 "Encumbrances"...................................................3
1.23 "Environmental Laws".............................................3
1.24 "Equipment Leases"...............................................3
1.25 "ERISA"..........................................................3
1.26 "Excluded Assets"................................................3
1.27 "Excluded Liabilities"...........................................3
1.28 "Facility".......................................................3
1.29 "GAAP"...........................................................3
1.30 "Governmental Contracts".........................................4
1.31 "Governmental Entity"............................................4
1.32 "Handling" or "Handled"..........................................4
1.33 "Hazardous Materials"............................................4
1.34 "Indemnifiable Losses"...........................................4
1.35 Intentionally Omitted............................................4
1.36 Intentionally Omitted............................................4
1.37 "Initial Purchase Price".........................................4
1.38 "Intangibles"....................................................4
1.39 "Inventory"......................................................4
1.40 "Key Employees"..................................................4
1.41 "Knowledge" or "Known"...........................................4
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
1.42 "Laws or Decrees"................................................4
1.43 "Liability"......................................................4
1.44 "Losses".........................................................5
1.45 "Material Adverse Change"........................................5
1.46 "Material Adverse Effect"........................................5
1.47 "Net Assets".....................................................5
1.48 "Permits"........................................................5
1.49 "Permitted Encumbrances".........................................5
1.50 "Person".........................................................5
1.51 "Prepaid Expenses"...............................................5
1.52 "Proxy Statement"................................................5
1.53 "Released".......................................................5
1.54 "Required Seller Stockholder Vote"...............................5
1.55 "Seller Accounting Principles"...................................6
1.56 "Seller Board Recommendation"....................................6
1.57 "Seller SEC Documents"...........................................6
1.58 "Seller Stockholders Meeting"....................................6
1.59 "Seller Triggering Event"........................................6
1.60 "Software Programs"..............................................6
1.61 "Superior Proposal"..............................................6
1.62 "Tangible Assets"................................................7
1.63 "Tax"............................................................7
1.64 "Tax Return".....................................................7
1.65 "Transaction"....................................................7
1.66 "Trust"..........................................................7
1.67 "Trust Account"..................................................7
1.68 Intentionally Omitted............................................7
1.69 Intentionally Omitted............................................7
1.70 "Withholding Taxes"..............................................7
ARTICLE II PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES...........7
2.1 Purchase and Sale of Assets and Assumption of Assumed
Liabilities....................................................7
2.2 Assets...........................................................8
2.3 Excluded Assets..................................................9
2.4 Assumption of Liabilities........................................9
2.5 Liabilities Not Assumed.........................................10
2.6 Purchase Price..................................................11
2.7 Purchase Price Adjustment.......................................11
2.8 Allocation......................................................12
ARTICLE III THE CLOSING....................................................13
3.1 The Closing.....................................................13
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER........................13
4.1 Organization....................................................13
4.2 Subsidiaries....................................................13
4.3 Authorization...................................................13
4.4 No Conflicts; Consents..........................................14
4.5 Title to Assets.................................................14
4.6 Tangible Assets.................................................14
4.7 Inventory.......................................................14
4.8 Litigation and Claims...........................................15
4.9 Compliance with Laws and Regulations; Governmental Licenses,
Etc...........................................................15
4.10 Financial Statements, SEC Reports...............................15
4.11 Absence of Certain Changes or Events............................17
4.12 Intellectual Property...........................................18
4.13 Facilities......................................................21
4.14 Contracts and Arrangements......................................21
4.15 Insurance.......................................................22
4.16 Brokers.........................................................22
4.17 Accounts Receivable.............................................22
4.18 Warranties and Service Payment Obligations......................23
4.19 Business Records................................................23
4.20 No Suspension or Debarment......................................23
4.21 Environmental Matters...........................................23
4.22 Taxes...........................................................24
4.23 Employee Benefit Plans..........................................25
4.24 Employee Matters................................................27
4.25 Insurance.......................................................28
4.26 Compliance With Laws............................................28
4.27 Accuracy of Material Facts; Copies of Materials.................28
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER......................28
5.1 Organization and Good Standing..................................29
5.2 Power, Authorization and Validity...............................29
5.3 No Violation of Existing Agreements.............................29
5.4 Compliance With Other Instruments and Laws......................29
5.5 Litigation......................................................30
5.6 Brokers.........................................................30
5.7 Disclosure......................................................30
ARTICLE VI PRE-CLOSING COVENANTS OF SELLER.................................30
6.1 Advice of Changes...............................................30
6.2 Conduct of Business.............................................30
6.3 Access to Information...........................................31
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
6.4 Obtaining Necessary Consents and Addition of Purchaser
as Party to Certain Contracts...................................32
6.5 Satisfaction of Conditions Precedent............................32
6.6 No Solicitation.................................................32
6.7 Proxy Statement.................................................33
6.8 Stockholders' Meeting...........................................33
6.9 Bulk Sales......................................................35
6.10 Collection of Accounts Receivable...............................35
6.11 Establishment of Trust; Satisfaction by Seller of Liabilities...35
6.12 Notice to Vendors...............................................35
6.13 Distribution from Seller's 401(k) Plan..........................36
ARTICLE VII PRE-CLOSING COVENANTS OF PARENT AND PURCHASER..................36
7.1 Advice of Changes...............................................36
7.2 Satisfaction of Conditions Precedent............................36
ARTICLE VIII MUTUAL COVENANTS..............................................36
8.1 Confidentiality and Publicity...................................36
8.2 Regulatory Filings; Consents; Reasonable Efforts................36
8.3 Governmental Filings............................................37
8.4 Further Assurances..............................................37
8.5 Communications Plan.............................................37
ARTICLE IX CONDITIONS TO CLOSING...........................................37
9.1 Conditions to Each Party's Obligations..........................37
9.2 Conditions to Obligations of Seller.............................38
9.3 Conditions to Obligations of Parent and Purchaser...............39
ARTICLE X POST-CLOSING MATTERS.............................................41
10.1 Employees.......................................................41
10.2 Further Assurances of Seller....................................42
10.3 Further Assurances of Purchaser.................................42
10.4 Access to Business Records......................................42
10.5 Tax Liability...................................................43
10.6 Group Health Plans..............................................43
10.7 Financial Statement.............................................43
ARTICLE XI TERMINATION OF AGREEMENT........................................43
11.1 Termination.....................................................43
11.2 Effect of Termination...........................................45
11.3 Expenses; Termination Fees......................................45
iv
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE XII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION....46
12.1 Survival of Representations and Warranties......................46
12.2 Indemnification by Seller.......................................46
12.3 Escrow Fund.....................................................47
12.4 Escrow Period; Release From Escrow..............................47
12.5 Claims Upon Escrow Fund.........................................48
12.6 Objections to Claims............................................48
12.7 Resolution of Conflicts and Arbitration.........................48
12.8 Third-Party Claims..............................................49
ARTICLE XIII GENERAL.......................................................49
13.1 Governing Law; Jurisdiction; Venue..............................49
13.2 Assignment; Binding upon Successors and Assigns.................50
13.3 Severability....................................................50
13.4 Entire Agreement................................................50
13.5 Counterparts....................................................50
13.6 Other Remedies..................................................50
13.7 Amendment and Waivers...........................................50
13.8 Waiver..........................................................50
13.9 Notices.........................................................51
13.10 Construction and Interpretation of Agreement....................52
13.11 No Joint Venture................................................52
13.12 Absence of Third Party Beneficiary Rights.......................52
v
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
March 7, 2000, by and among TAB Products Co., a Delaware corporation ("Parent"),
Bunt Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Parent ("Purchaser") on the one hand, and Docucon, Incorporated, a
Delaware corporation ("Seller") on the other hand.
RECITALS
A. Seller is engaged in the business of providing electronic imaging
services to convert documents to electronic formats for computer system access
(excluding the Excluded Assets, as defined below, the "Business"); and Purchaser
is interested in purchasing, and Seller is interested in selling, the Business;
and
B. The parties hereto desire that Seller sell, assign, transfer and convey
to Purchaser, and that Purchaser purchase from Seller, the Assets (as defined
below) in exchange for cash, cancellation of indebtedness and assumption of the
Assumed Liabilities (as defined below), all according to the terms and subject
to the conditions set forth in this Agreement (the "Transaction").
NOW, THEREFORE, in consideration of the representations, warranties and
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth or referenced below:
1.1 "ACCOUNTS PAYABLE" shall mean those amounts owing by Seller under
Assumed Contracts or otherwise arising in connection with the Business listed on
SCHEDULE 1.2 as such SCHEDULE 1.1 may be updated through Closing to include
those accounts payable arising in the ordinary course of business in connection
with the Business subject to the review and approval of Parent.
1.2 "ACCOUNTS RECEIVABLE" shall mean the accounts receivable and notes
receivable of or amounts owing or payable to Seller in connection with or
relating to the Business, including those set forth on SCHEDULE 1.2.
1.3 "ACQUISITION" shall mean any transaction or series of transactions
involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, Acquisition of securities, tender offer, exchange offer
or other similar transaction (i) in which the Seller is a constituent
corporation, (ii) in which a Person or "group"
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(as defined in the Exchange Act and the rules promulgated thereunder) of Persons
directly or indirectly acquires beneficial or record ownership of securities
representing more than 20% of the outstanding securities of any class of voting
securities of Seller, or (iii) in which Seller issues securities representing
more than 20% of the outstanding securities of any class of voting securities of
Seller;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or businesses or assets that constitute or account
for 10% or more of the consolidated net revenues, net income or assets of
Seller; or
(c) any liquidation or dissolution of Seller.
1.4 "ACQUISITION PROPOSAL" shall mean any offer, proposal, inquiry or
indication of interest (other than an offer, proposal, inquiry or indication of
interest by Parent) contemplating or otherwise relating to any Acquisition.
1.5 "ADDITIONAL BUSINESS LIABILITIES" shall mean the liabilities listed on
SCHEDULE 1.5, as such schedule shall be updated through Closing to include
liabilities arising in the ordinary course of business in connection with the
Business through the Closing Date subject to review and approval of Parent.
1.6 "AFFILIATE" shall mean a Person that directly or indirectly, through
one or more intermediaries, is controlled by, or is under common control with
another Person.
1.7 "ASSETS" shall have the meaning set forth in Section 2.2 hereof.
1.8 "ASSUMED CONTRACTS" shall mean only those Contracts listed on SCHEDULE
1.8, as such schedule may be updated through the Closing Date to include
Contracts entered into in the ordinary course of business and subject to review
and approval of Parent.
1.9 "ASSUMED LIABILITIES" shall have the meaning set forth in Section
2.4(a) hereof.
1.10 "BUSINESS" shall have the meaning set forth in Recital A.
1.11 "BUSINESS FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 4.10(a).
1.12 "BUSINESS RECORDS" shall mean any and all books, records, files,
drawings, documentation, data or information that have been or now are used in
or with respect to, in connection with or otherwise relating to the Business,
the Assets or the Assumed Liabilities.
1.13 "CASH PAYMENT" shall have the meaning set forth in Section
2.6(a)hereof.
1.14 "CLOSING" shall have the meaning set forth in Section 3.1 hereof.
1.15 "CLOSING DATE" shall have the meaning set forth in Section 3.1
hereof.
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1.16 "CLOSING NET ASSETS VALUE" shall have the meaning set forth in
Section 2.7(b) hereof.
1.17 "CLOSING STATEMENT" shall have the meaning set forth in Section
2.7(a) hereof.
1.18 "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.19 "CONFIDENTIALITY AGREEMENT" shall mean the mutual confidentiality
agreement, dated November 3, 1999, by and between Parent and Seller.
1.20 "CONTRACTS" shall mean all those contracts and arrangements relating
to the Business.
1.21 "DISPUTE NOTICE" shall have the meaning set forth in Section 2.7(a)
hereof.
1.22 "ENCUMBRANCES" shall mean any and all restrictions on or conditions
to transfer or assignment, claims, liabilities, liens, pledges, mortgages,
restrictions, and encumbrances of any kind, whether accrued, absolute,
contingent or otherwise affecting the Assets.
1.23 "ENVIRONMENTAL LAWS" shall mean any and all applicable civil,
criminal, and administrative laws (including common law), statutes, codes,
rules, regulations, ordinances, orders, decrees, judgments, permits, licenses,
approvals, authorizations, and other requirements, directives, consents and
obligations lawfully imposed by any Governmental Entity pertaining to the
protection of the environment, protection of ecology, protection of public
health, protection of worker health and safety, and/or the treatment, emission
and/or discharge of gaseous, particulate and/or effluent pollutants, and/or the
Handling of Hazardous Materials, and regulations, guidelines, and policies
promulgated under any of the foregoing, all as amended from time to time.
1.24 "EQUIPMENT LEASES" shall mean leases related to any of the Tangible
Assets.
1.25 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
1.26 "EXCLUDED ASSETS" shall mean the assets of Seller as of the Closing
set forth in SCHEDULE 2.3.
1.27 "EXCLUDED LIABILITIES" shall have the meaning set forth in Section
2.5 hereof.
1.28 "FACILITY" shall mean any facility or real property, including
without limitation any improvement, equipment, structure, building, or fixture,
that is or was owned, used, operated, occupied, controlled, or rented, in
connection with the Business.
1.29 "GAAP" shall mean generally accepted accounting principles, as in
effect in the United States from time to time, as supplemented by Regulation S-X
as promulgated by the United States Securities and Exchange Commission, as in
effect from time to time, consistently applied.
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1.30 "GOVERNMENTAL CONTRACTS" shall mean all contracts listed on SCHEDULE
1.8 under which Seller is required to, or may, provide services to agencies of
the United States Government.
1.31 "GOVERNMENTAL ENTITY" shall mean any court, or any federal, state,
municipal, provincial or other governmental authority, department, commission,
board, service, agency, political subdivision or other instrumentality.
1.32 "HANDLING" or "HANDLED" shall mean used, generated, manufactured,
processed, contained, transferred, recycled, stored, treated, loaded,
transported, removed or Released.
1.33 "HAZARDOUS MATERIALS" shall mean any substance, waste, material,
chemical, compound or mixture which is defined, listed, designated, described or
characterized under Environmental Laws or under any rules, guidances, policies,
or regulations promulgated thereunder, as hazardous, toxic, a contaminant, a
pollutant or words of similar import, and includes without limitation any
asbestos, polychlorinated biphenyls, petroleum (including crude oil or any
fraction or distillate thereof), natural gas, natural gas liquids, and liquefied
natural gas.
1.34 "INDEMNIFIABLE LOSSES" shall have the meaning set forth in Section
12.2(a) hereof.
1.35 Intentionally Omitted.
1.36 Intentionally Omitted.
1.37 "INITIAL PURCHASE PRICE" shall have the meaning set forth in Section
2.6 hereof.
1.38 "INTANGIBLES" shall mean guarantees, rights, warranties, defenses and
claims, choses in action, causes of action, demands, rights of recovery, suits,
covenants not to compete and other rights in favor of Seller relating to the
Assets, the Assumed Liabilities or the Business.
1.39 "INVENTORY" shall mean the inventory, including supplies,
consumables, parts (including retainable parts), materials, spares, training and
testing units, wherever located, owned, primarily employed or held for use in
the conduct of the Business, including the items listed on SCHEDULE 1.39.
1.40 "KEY EMPLOYEES" shall mean those persons listed on SCHEDULE 1.40
attached hereto.
1.41 "KNOWLEDGE" or "KNOWN" shall mean the current actual knowledge, after
reasonable inquiry, of any of the officers, directors or employees of a Person.
1.42 "LAWS OR DECREES" shall mean all applicable federal, state,
provincial and local laws, ordinances, rules, statutes, regulations and all
orders, writs, injunctions, awards, judgments or decrees.
1.43 "LIABILITY" shall mean any direct or indirect liability,
indebtedness, obligation, guarantee or endorsement, whether known or unknown,
whether accrued or unaccrued, whether absolute or contingent, whether due or to
become due, or whether liquidated or unliquidated.
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1.44 "LOSSES" shall mean any loss, demand, action, cause of action,
assessment, damage, Liability, cost or expense, including without limitation,
interest, penalties and reasonable attorneys' and other professional fees and
expenses incurred in the investigation, prosecution, defense or settlement
thereof, but excluding special or consequential damages (including without
limitation loss of profits or revenues) related to any such loss, demand,
action, cause of action, assessment, damage, liability, cost or expense, other
than special or consequential damages actually awarded to a third party and paid
or payable to such third party by a party hereto.
1.45 "MATERIAL ADVERSE CHANGE" shall mean any material adverse change in
the Business, operations, properties, Assets, Intellectual Property, financial
condition, Assumed Liabilities, results of operations or prospects, whether or
not occurring in the ordinary course of business.
1.46 "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on
the business, operations, properties, the Assets, financial condition, the
Assumed Liabilities, results of operations or prospects, whether or not
occurring in the ordinary course of business.
1.47 "NET ASSETS" shall mean the book value of the Assets, net of
depreciation amortization and reserves, as set forth on SCHEDULE 1.47, as such
schedule may be updated through the Closing Date.
1.48 "PERMITS" shall mean any and all licenses, permits, authorizations,
certificates, franchises, variances, waivers, consents and other approvals from
any Governmental Entity relating to the Business, the Assets or the Assumed
Liabilities.
1.49 "PERMITTED ENCUMBRANCES" shall mean (a) liens for current taxes which
are not past due, (b) liens described in any schedule hereto which secure
Assumed Liabilities, and (c) easements, covenants, rights-of-way or other
similar restrictions and imperfections of title.
1.50 "PERSON" shall mean an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a Governmental Entity.
1.51 "PREPAID EXPENSES" shall mean all prepaid expenses, advances,
deposits, and rights to volume and other rebates due from suppliers, as well as
performance bonds, including those listed on SCHEDULE 1.51.
1.52 "PROXY STATEMENT" shall mean the proxy statement/prospectus to be
sent to Seller's stockholders in connection with the Seller Stockholder's
Meeting.
1.53 "RELEASED" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment, or in a manner or with a consequence not
authorized by Environmental Laws.
1.54 "REQUIRED SELLER STOCKHOLDER VOTE" shall have the meaning set forth
in Section 4.3.
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1.55 "SELLER ACCOUNTING PRINCIPLES" shall have the meaning set forth in
Section 2.7(a) hereof.
1.56 "SELLER BOARD RECOMMENDATION" shall have the meaning set forth in
Section 6.8(b).
1.57 "SELLER SEC DOCUMENTS" shall have the meaning set forth in Section
4.10(c).
1.58 "SELLER STOCKHOLDERS MEETING" shall have the meaning set forth in
Section 6.8(a).
1.59 "SELLER TRIGGERING EVENT" -- A "Seller Triggering Event" shall be
deemed to have occurred if: (i) the board of directors of Seller shall have
failed to recommend that Seller's stockholders vote to approve this Agreement,
or shall have withdrawn or modified in a manner adverse to Parent the Seller
Board Recommendation (as defined below), or shall have taken any other action
which is reasonably determined by Parent to suggest that the Board of Directors
of Seller might not support the Acquisition or might not believe that the
Acquisition is in the best interests of Seller's stockholders; (ii) Seller shall
have failed to include in the Proxy Statement the Seller Board Recommendation or
a statement to the effect that the board of directors of Seller has determined
and believes that the Acquisition is in the best interests of Seller's
stockholders; (iii) the board of directors of Seller fails to reaffirm the
Seller Board Recommendation, or fails to reaffirm its determination that the
Acquisition is in the best interests of Seller's stockholders, within five
business days after Parent requests in writing that such recommendation or
determination be reaffirmed; (iv) the board of directors of Seller shall have
approved, endorsed or recommended any Acquisition Proposal; (v) Seller shall
have entered into any letter of intent or similar document or any Contract
relating to any Acquisition Proposal; (vi) Seller shall have failed to hold the
Seller Stockholders' Meeting as promptly as practicable; (vii) a tender or
exchange offer relating to securities of Seller shall have been commenced and
Seller shall not have sent to its securityholders, within ten business days
after the commencement of such tender or exchange offer, a statement disclosing
that Seller recommends rejection of such tender or exchange offer; (viii) an
Acquisition Proposal is publicly announced, and Seller fails to issue a press
release announcing its opposition to such Acquisition Proposal within ten
business days after such Acquisition Proposal is announced; or (ix) Seller or
any Representative of Seller shall have violated any of the restrictions set
forth in Section 4.3.
1.60 "SOFTWARE PROGRAMS" shall mean software programs, including any
available (a) source code (in all forms), object code, program descriptions,
databases, interfaces, modifications, updates, previous versions, and (b)
documentation relating to the foregoing, and (c) disks, tapes and other tangible
embodiments of the foregoing.
1.61 "SUPERIOR PROPOSAL" shall mean an unsolicited, bona fide written
offer made by a third party to purchase all or substantially all of the
outstanding common stock of Seller or all or substantially all of the Assets and
Liabilities of the Business on terms that the board of directors of Seller
determines, in its reasonable judgment, based upon a written opinion of an
independent financial advisor of nationally recognized reputation, to be more
favorable to Seller's stockholders than the terms of the Acquisition; PROVIDED,
HOWEVER, that any such offer shall not be deemed to be a "Superior Proposal" if
any financing required to consummate the transaction
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contemplated by such offer is not committed and is not reasonably capable of
being obtained by such third party.
1.62 "TANGIBLE ASSETS" shall mean all tangible assets, equipment and other
fixed assets, including all computer hardware, service tools, aids, manuals,
schematics, diagnostics, machinery and office furnishings, owned, primarily
employed or held for use in the conduct of the Business, including the Tangible
Assets listed on SCHEDULE 1.62.
1.63 "TAX" shall mean any federal, provincial, territorial, local, or
foreign income, profits, gross receipts, capital gains taxes, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental, customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, business license, occupation,
value added, goods and service, alternative or add-on minimum, estimated, or
other tax or governmental charge of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not, relating to the Assets or
the Business.
1.64 "TAX RETURN" shall mean any return, declaration, report, estimates,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof, covering or relating to the Assets or the Business.
1.65 "TRANSACTION" shall have the meaning set forth in Recital B.
1.66 "TRUST" shall have the meaning set forth in Section 6.11 hereof.
1.67 "TRUST ACCOUNT" shall have the meaning set forth in Section 6.11
hereof.
1.68 Intentionally Omitted.
1.69 Intentionally Omitted.
1.70 "WITHHOLDING TAXES" shall have the meaning set forth in Section
2.6(b).
ARTICLE II
PURCHASE AND SALE OF ASSETS;
ASSUMPTION OF LIABILITIES
2.1 PURCHASE AND SALE OF ASSETS AND ASSUMPTION OF ASSUMED LIABILITIES.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, effective as of the Closing Date:
(i) Seller agrees to sell, assign, transfer, convey and
deliver to Parent or Purchaser, as designated by Parent at the Closing, and
Parent or Purchaser, as the case may be, agrees to purchase from Seller, all of
Seller's right, title and interest in and to the Assets, free and clear of all
Encumbrances except Permitted Encumbrances;
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(ii) Seller agrees to assign to Parent or Purchaser, as
designated by Parent at the Closing, and Parent or Purchaser, as the case may
be, agrees to assume from Seller, the Assumed Liabilities; and
(iii) Seller agrees to assign to Parent or Purchaser, as
designated by Parent at the Closing, and Parent or Purchaser, as the case may
be, shall assume from Seller, all of Seller's rights and obligations under the
Assumed Contracts, subject to the obtaining of all necessary consents by the
other parties thereto.
(b) In connection with the Transaction, on the Closing Date, Seller
shall take (and shall cause its Affiliates to take) any and all actions that may
be required, or reasonably requested by Purchaser, to transfer good and
marketable title to all of the Assets free and clear of all Encumbrances (except
Permitted Encumbrances) to Purchaser. Seller shall deliver possession of all of
the Assets to Purchaser on the Closing Date at the location and by such means as
are reasonably designated by Purchaser, and Seller shall further deliver to
Purchaser proper assignments, bills of sale, conveyances and other instruments
of sale and/or transfer in forms reasonably satisfactory to Purchaser in order
to convey to Purchaser good and marketable title to all Assets, free and clear
of all Encumbrances (except Permitted Encumbrances), as well as such other
instruments of sale and/or transfer as counsel to Purchaser may reasonably
request (whether at or after the Closing Date) to evidence and effect the
Transaction contemplated herein. Seller agrees that, to the extent any Assets
are owned or held by any Affiliate of Seller, Seller shall also cause good and
marketable title to such Assets to be transferred and assigned to Purchaser free
and clear of all Encumbrances (except Permitted Encumbrances) on the Closing
Date.
2.2 ASSETS. As used in this Agreement, the term "Assets" means,
collectively, all right, title and interest in and to all of the assets,
properties, rights and claims owned or primarily employed or held for use in the
conduct of the Business, including the following, but excluding the Excluded
Assets (as defined below):
(a) BUSINESS. The Business as a going concern, including without
limitation, all of its goodwill;
(b) INVENTORY. All Inventory;
(c) ASSUMED CONTRACTS. All rights and benefits of Seller in
existence on the Closing Date or arising from and after the Closing Date under
the Assumed Contracts;
(d) INTELLECTUAL PROPERTY. All Intellectual Property (as defined
below) owned, primarily employed in or held for use in the Business;
(e) TANGIBLE ASSETS. All Tangible Assets;
(f) BUSINESS RECORDS. All Business Records;
(g) PREPAID EXPENSES. All Prepaid Expenses;
(h) PERMITS. All Permits to the extent transferable by Seller;
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(i) ACCOUNTS RECEIVABLE. All Accounts Receivable;
(j) INTANGIBLES. All Intangibles;
(k) INVESTMENTS. All bank accounts and investments held for the
benefit of the Business, including those bank accounts listed on SCHEDULE 2.2(K)
and all securities held by Cross Securities;
(l) CASH. All cash, cash equivalents, certificates of deposits,
money market funds and other securities deposited or held at Bank One and/or
with Dreyfus Money Market Fund, together with any such deposits in any other
accounts for the benefit of the Business and all cash held as petty cash at the
principal place of business of the Business, but excluding therefrom all cash
(not to exceed Ten Thousand Dollars ($10,000.00)) deposited in an account held
at Millennium Bank in Malvern, Pennsylvania; and
(m) TELEPHONE AND FAX NUMBERS; WEBSITES. The telephone and fax
numbers and websites set forth on SCHEDULE 2.2(M).
2.3 EXCLUDED ASSETS. Notwithstanding anything herein to the contrary,
Seller shall retain all of its right, title and interest in and to, and neither
Purchaser nor Parent shall acquire any interest in, the assets identified on
SCHEDULE 2.3 (the "Excluded Assets").
2.4 ASSUMPTION OF LIABILITIES.
(a) Subject to and upon the terms and conditions of this Agreement,
effective as of the Closing Date, Purchaser and Parent agree to assume from
Seller and to thereafter pay, perform and/or otherwise discharge in a timely
manner only the following Liabilities of Seller (the "Assumed Liabilities"):
(i) Liabilities arising from and after the Closing Date under
the Assumed Contracts OTHER THAN (A) Liabilities arising from any tort,
infringement or violation of law by Seller that occurred (or arose from facts
occurring) prior to the Closing Date, and (B) Liabilities arising from any
performance, payment, breach or default of any Assumed Contracts to the extent
occurring (or arising from facts and/or activities occurring) prior to the
Closing Date; provided, however, the exception stated above under subparagraph
2.4(a)(i)(B) shall not apply to any Assumed Contract which is also a Government
Contract, nor shall either exception stated under subparagraphs 2.4(a)(i)(A) or
(B) apply to any items set forth in the attached Schedules;
(ii) the Accounts Payable; and
(iii) Additional Business Liabilities.
(b) Each Government Contract listed on SCHEDULE 1.8 is assigned to
Parent subject to approval by the United States Government of the novation of
such Government Contract in favor of Parent in accordance with the Assignment of
Claims Act.
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(c) Nothing herein shall be deemed to deprive Parent, Purchaser or
any Affiliate of Parent, or Purchaser, as applicable, of any defenses, set-offs
or counterclaims which Seller may have had or which Parent, Purchaser, as
applicable, or any Affiliate of Parent or Purchaser, as applicable, shall have
(to the extent relating to the Assumed Liabilities) to any of the Assumed
Liabilities (the "Defenses and Claims"). Effective as of the Closing, Seller
agrees to assign, transfer and convey to Parent, Purchaser, as applicable, all
Defenses and Claims and agrees to cooperate with Parent, Purchaser, as
applicable, to maintain, secure, perfect and enforce such Defenses and Claims.
2.5 LIABILITIES NOT ASSUMED. Except as expressly set forth in Section 2.4
above, neither Parent nor Purchaser shall assume or become liable or obligated
in any way, and Seller shall retain and remain solely liable for and obligated
to discharge and indemnify and hold Parent or Purchaser, as applicable, harmless
for, all debts, expenses, accounts payable, contracts, agreements, commitments,
obligations, claims, suits and other liabilities of Seller of any nature
whatsoever, whether or not related to the Business or the Assets, whether known
or unknown, accrued or not accrued, fixed or contingent, current or arising
hereafter, including, without limitation, any of the following (collectively
referred to herein as "Excluded Liabilities"):
(a) Any Liability arising out of or as a result of any legal or
equitable action or judicial or administrative proceeding initiated at any time
to the extent arising out of facts occurring prior to the Closing Date;
(b) Any liability of the Seller for unpaid Taxes (with respect to
the Business, the Assets, or Seller's employees or otherwise), any liability of
the Seller for Taxes arising in connection with the consummation of the
Acquisition (including any income Taxes) arising because the Seller is
transferring the Assets or any liability of the Seller for the unpaid Taxes of
any Person other than the Seller, or a transferee or successor of Seller, by
contract or otherwise;
(c) Any liabilities related to or arising from any breach or default
by Seller or its Affiliates, whether before or after the Closing Date, of any
Contract or related to or arising from any tort, infringement or violation of
Laws or Decrees by Seller, in each case to the extent occurring or arising from
facts occurring on or prior to the Closing Date;
(d) Any liability of Seller or any of Seller's Affiliates incurred
in connection with or under this Agreement (including, without limitation, with
respect to any of Seller's or its Affiliates' representations, warranties,
agreements, covenants or indemnities hereunder) relating to the execution or
performance of this Agreement and the transactions contemplated herein;
(e) Any Liability of Seller under any of Seller's Employee Plans
with respect to any obligation of Seller to contribute or to make payments to or
provide benefits on behalf of Seller's employees; provided, however, Purchaser
shall assume "tail" liability on Seller's health insurance policy related to the
Business to the extent the same has been accrued, and is shown, on the Business
Financial Statements for the fiscal year ending December 31, 1999;
(f) Any fees or expenses incurred by Seller or any of Seller's
Affiliates or hereunder with respect to Seller's or any of its Affiliates'
engagement of its counsel, or any investment banker, appraiser or accounting
firm engaged to perform services hereunder;
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(g) any outstanding obligations of Seller for borrowed money due and
owing to banks or other lenders, other than obligations under the Assumed
Contracts to the extent assumed pursuant to Section 2.4(a); or
(h) any Liability of Seller not related to the Business, including
the Liabilities set forth on SCHEDULE 2.5.
2.6 PURCHASE PRICE.
(a) The aggregate consideration for the Business and the Assets
shall be the assumption of the Assumed Liabilities pursuant to Section 2.4 and
(i) the total dollar amount of the Net Assets as set forth on SCHEDULE 1.47 as
delivered at Closing PLUS (ii) $1,900,000 (collectively, the dollar amounts
determined pursuant to subsections (i) and (ii) are referred to as the "Initial
Purchase Price"), subject to adjustment as provided in Section 2.7. At Closing
the Initial Purchase Price, less any Withholding Taxes deducted pursuant to
Section 2.6(b), shall be paid by (i) cancellation of all indebtedness, including
principal and accrued interest, owing by Seller to Parent pursuant to one or
more promissory notes issued by Seller to Parent from January 19, 2000, through
the Closing (the "Notes") and (ii) the wire transfer to the Trust Account
established by Seller pursuant to Section 6.11 of the Initial Purchase Price
LESS the aggregate indebtedness cancelled pursuant to this Section 2.6(a) (the
"Cash Payment").
(b) Purchaser may deduct from the Cash Payment any Taxes required to
be withheld and paid by Purchaser for the account of Seller with respect to the
consideration (the "Withholding Taxes"). Purchaser shall provide Seller with
evidence of payment to the appropriate taxing authorities of the withheld
Withholding Taxes. If for any reason the appropriate amount of Withholding Taxes
is not withheld from the Cash Payment, such required Withholding Taxes not
withheld shall remain Excluded Liabilities despite such nonwithholding.
(c) Section 7 of the Convertible Secured Note issued by Seller to
Parent dated January 19, 2000, in the principal amount of $200,000 (the "January
2000 Note") shall be void and have no further force and effect.
2.7 PURCHASE PRICE ADJUSTMENT.
(a) CLOSING STATEMENT. As soon as possible, but in any event on or
before the thirtieth (30th) day after Closing, Seller shall prepare and deliver
to Parent a statement (and supporting schedules) (collectively the "Closing
Statement") setting forth, in detail, calculation of the Closing Net Assets
Value as of the Closing Date, which shall be certified by the Chief Accounting
Officer of Seller as being prepared in accordance with the definitions herein
and the accounting principles set forth on SCHEDULE 2.7(A), and to the extent a
relevant principle is not set forth on SCHEDULE 2.7(A), then in accordance with
those generally accepted accounting principles consistently applied with prior
practice for earlier periods (collectively, the "Seller Accounting Principles").
For purposes of preparation of the Closing Statement, all calculations shall be
made with precision, and lack of materiality shall not be a defense to the
requirement of precise and proper determinations. Parent and its auditors or
other representatives shall be provided an opportunity to review the procedures
performed in connection with preparation of the Closing Statement. Immediately
following delivery of the Closing Statement, Seller shall make
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available, and shall cause its auditors to make available, all records, work
papers and employees at Seller's expense reasonably requested by Parent in
connection with its review of the Closing Statement.
The Closing Statement, subject to any adjustments agreed to by Parent and
Seller, shall be used for determining any post-Closing adjustments to the
Initial Purchase Price, unless either party provides the other with a notice of
dispute (a "Dispute Notice") within fifteen (15) days of receipt of the Closing
Statement. If a Dispute Notice is given, Parent and Seller shall promptly meet
in good faith to attempt to resolve any issues, and if any issues are unresolved
within fifteen (15) days of the Dispute Notice, the unresolved issues shall be
submitted to a "Big Five" auditing firm with no material existing relationship
to Parent or Seller, which shall be selected by Parent and approved by Seller,
which approval will not be unreasonably withheld or delayed. The independent
auditor shall be directed to issue a final and binding decision as to the
matters in dispute within thirty (30) days of its engagement. The fees and
expenses of the independent auditor shall be divided equally between the
parties.
The Closing Statement in the form accepted by Parent and Seller, or
determined by the independent auditor, shall be used to adjust the Initial
Purchase Price in the manner set forth in Section 2.7(c) of this Agreement. Any
payments provided for in Section 2.7(c) shall be made within five business days
of the acceptance of the Closing Statement or the independent auditor's
decision. The full force and effect of the representations and warranties
contained herein shall not be diminished by the Closing Statement, the
acceptance thereof by Parent or the decision of the independent auditor.
(b) DEFINITIONS. "Closing Net Assets Value" shall mean the book
value of the Assets, net of depreciation, amortization, and reserves, as of the
Closing Date.
(c) PURCHASE PRICE ADJUSTMENT. If the Closing Net Assets Value is
less than the amount shown on SCHEDULE 1.47 delivered at Closing, Seller
(through the Trust) shall pay Parent an amount equal to the difference. If the
Closing Net Assets Value is greater than the amount shown on SCHEDULE 1.47
delivered at Closing, Parent shall pay Seller an amount equal to the difference.
A payment to Seller shall be made by wire transfer to the Trust Account. A
payment to Parent shall be made by wire transfer to an account designated in
writing by Parent.
2.8 ALLOCATION. Seller and Parent shall cooperate in the preparation of a
joint schedule (the "Allocation Schedule") allocating the purchase price
(including the Assumed Liabilities) among the Assets. If Seller and Parent are
able to agree upon the Allocation Schedule within 30 days following the Closing
Date, Seller and Parent shall each file IRS Form 8594, and all federal, state,
local and foreign tax returns, in accordance with the Allocation Schedule. If
Parent and Seller are unable to complete the Allocation Schedule within 30 days
following the Closing Date, each of Seller and Parent may file IRS Form 8594 and
any federal, state, local and foreign tax returns, allocating the aggregate
consideration (including the Assumed Liabilities) among the Assets in the manner
each believes appropriate, provided such allocation is reasonable and in
accordance with Section 1060 of the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
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ARTICLE III
THE CLOSING
3.1 THE CLOSING. The consummation of the Acquisition will take place at a
closing to be held at the offices of Gray Cary Ware & Freidenrich LLP, 400
Hamilton Avenue, Palo Alto, California (the "Closing") on the date five (5)
business days after all conditions (other than the respective delivery
obligations of the parties) hereto have been satisfied or waived, or at such
other time or date as may be agreed to by the parties to this Agreement (the
"Closing Date").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as otherwise set forth in the Seller Disclosure Schedule provided
to each of Parent and Purchaser, a copy of which is attached hereto as SCHEDULE
IV, the following representations and warranties are made, jointly and
severally, by Seller as set forth below:
4.1 ORGANIZATION. Seller is a corporation duly organized, validly existing
and in good standing under the laws of Delaware. Seller is duly qualified or
licensed to do business as a foreign corporation in each state of the United
States in which it is required to be so qualified or licensed, except in states
which the failure to qualify, in the aggregate, would not have a Material
Adverse Effect on the Business.
4.2 SUBSIDIARIES. The Seller owns no equity interest, directly or
indirectly, in any corporation, partnership, limited liability company, joint
venture, business, trust or other entity, whether or not incorporated, which is
engaged primarily in the Business.
4.3 AUTHORIZATION. This Agreement, the Escrow Agreement described in
Section 12.3 below and all other agreements in connection with the Transaction
to which Seller is or will be a party (such Escrow Agreement and any other
agreements being referred to hereafter as the "Ancillary Agreements") have been,
or upon their execution and delivery hereunder will have been, duly and validly
executed and delivered by Seller and constitute, or will constitute, valid and
binding agreements of Seller enforceable against Seller in accordance with their
respective terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles or the exercise of judicial
discretion in accordance with such principles. Seller has all requisite power
and authority to execute and deliver this Agreement and, at the time of the
Closing, will have all requisite power and authority to carry out the
transactions contemplated in this Agreement and the Ancillary Agreements to
which it is or will be a party. All requisite corporate action on the part of
Seller has been taken to authorize the execution and delivery of this Agreement
and the Ancillary Agreements to which Seller is or will be a party subject only
to the approval of the Transaction and this Agreement by Seller's stockholders
as contemplated by Section 6.8(a). The affirmative vote of the holders of a
majority of the shares of common stock of Seller outstanding on the record date
for the stockholders meeting called pursuant to Section 6.8(a) (the "Required
Seller Stockholder Vote") is the only vote of the holders of any of Seller's
capital stock necessary under Delaware Law to approve this Agreement and the
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transactions contemplated hereby. The Board of Directors of Seller has
unanimously (i) approved this Agreement and the Transaction, (ii) determined
that in its opinion the Transaction and this Agreement is in the best interests
of the stockholders of Seller and is on terms that are fair to such stockholders
and (iii) recommended that the stockholders of Seller approve this Agreement and
the Merger.
4.4 NO CONFLICTS; CONSENTS. The execution and the delivery of this
Agreement and the Ancillary Agreements to which Seller is or will be a party by
Seller, do not, and the consummation of the transactions contemplated herein and
therein and compliance with the provisions hereof and thereof will not, conflict
with, result in a breach of, constitute a default (with or without notice or
lapse of time, or both) under or violation of, or result in the creation of any
lien, charge or Encumbrance pursuant to, (a) any provision of the Certificate of
Incorporation or Bylaws of Seller, (b) any Law or Decree or (c) any provision of
any agreement, instrument or understanding to which Seller is a party or by
which Seller or any of its properties or assets is bound or affected, nor will
such actions give to any other Person or entity any interests or rights of any
kind, including rights of termination, acceleration or cancellation, in or with
respect to the Business, any of the Assets, the Assumed Liabilities or the
Assumed Contracts. Except as set forth in the immediately preceding sentence, no
consent of any third party or any Governmental Entity is required to be obtained
on the part of Seller to permit the consummation of the transactions
contemplated in this Agreement or the Ancillary Agreements to which Seller is or
will be a party.
4.5 TITLE TO ASSETS. Seller has good and marketable title to all of the
Assets, free and clear of all Encumbrances except for Permitted Encumbrances. At
the Closing, Seller will sell, convey, assign, transfer and deliver to Parent
and Purchaser good, valid and marketable title, and all Seller's respective
right and interest, in and to all of the Assets, free and clear of any
Encumbrances, except for Permitted Encumbrances. The Assets include all
property, tangible and intangible, and all agreements and rights used in the
Business.
4.6 TANGIBLE ASSETS. SCHEDULE 1.62 sets forth a complete and accurate list
of the Tangible Assets used in the Business, which description identifies, to
the extent available, original acquisition date and cost of such items. Except
as set forth in SCHEDULE 1.62, each Tangible Asset is, and as of the Closing
Date will be, in good operating condition and good repair, ordinary wear and
tear excepted, will be free from all defect and damage, and are usable in the
ordinary course of business. SCHEDULE 1.62 also sets forth by category the
location of the Tangible Assets as of the Closing Date.
4.7 INVENTORY. The inventories shown on the Business Financial Statements
or thereafter acquired by Seller were acquired and maintained in the ordinary
course of business, are of good and merchantable quality, and consist of items
of a quantity and quality usable or salable in the ordinary course of business.
Since December 31, 1999, Seller has continued to replenish inventories in a
normal and customary manner consistent with past practices. The values at which
inventories are carried reflect the inventory valuation policy of Seller, which
is consistent with its past practice and in accordance with generally accepted
accounting principles applied on a consistent basis. Since December 31, 1999,
adequate provision has been made on the books of Seller in the ordinary course
of business consistent with past practices to provide for all slow-moving,
obsolete, or unusable inventories to their estimated useful or scrap values and
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such inventory reserves are adequate to provide for such slow-moving, obsolete
or unusable inventory and inventory shrinkage. SCHEDULE 1.39 to this Agreement
sets forth by category and amount the location of the Inventory as of the
Closing Date.
4.8 LITIGATION AND CLAIMS. There are no claims, actions, suits,
proceedings or, to Seller's Knowledge, investigations, pending before any
Governmental Entity, or to Seller's Knowledge, threatened or reasonably
expected, against Seller (a) relating to the Business, the Assets, the Assumed
Liabilities or the Intellectual Property, (b) which questions or challenges the
validity of this Agreement or any of the ANCILLARY Agreements to which either
Seller is or will be a party, or any of the transactions contemplated herein or
therein or (c) which might be reasonably expected to have a Material Adverse
Effect on Seller. Seller is not a party to or subject to any decree, order or
arbitration award (or agreement entered into in any administrative, judicial or
arbitration proceeding with any Governmental Entity) with respect to or
affecting the Business, or any of the Assets, the Assumed Liabilities or the
Intellectual Property.
4.9 COMPLIANCE WITH LAWS AND REGULATIONS; GOVERNMENTAL LICENSES, ETC.
Seller is in compliance with all applicable Laws or Decrees with respect to or
affecting the Business or the Assets, the Assumed Liabilities or the
Intellectual Property, including, without limitation, Laws or Decrees relating
to anticompetitive or unfair pricing or trade practices, false advertising,
consumer protection, export or import controls, government contracting,
occupational health and safety, equal employment opportunities, fair employment
practices, and sex, race, religious and age discrimination, except for such
failure to comply as which would not result in a Material Adverse Effect on the
Business, the Assets, the Assumed Liabilities or the Intellectual Property.
Seller is not subject to any order, injunction or decree issued by any
Governmental Entity which could impair the ability of Seller to consummate the
transactions contemplated herein or which could adversely affect Purchaser's
conduct of the Business or its use and enjoyment of the Assets or the
Intellectual Property from and after the Closing Date. Seller possesses all
Permits which are required in order for Seller to operate the Business as
presently conducted, and is in compliance with all such Permits. SCHEDULE 4.9 to
this Agreement contains a complete list of such Permits held by Seller relating
to the Business, the date of expiration of each such Permit, and whether each
such Permit is transferable. Neither the sale and transfer of the Assets
pursuant to this Agreement, nor Purchaser's possession and use thereof from and
after the Closing Date because of such sale and transfer will: (a) violate any
law pertaining to bulk sales or transfers or to the effectiveness of bulk sales
or transfers as against creditors of Seller or (b) result in the imposition of
any liability upon Purchaser for appraisal rights or other liability owing to
any shareholder of Seller.
4.10 FINANCIAL STATEMENTS, SEC REPORTS.
(a) Seller has delivered to Purchaser copies of (i) Seller's
unaudited balance sheets pertaining to the Business as of December 31, 1999 (the
"Interim Balance Sheet") and statement of operations pertaining to the Business
for the year then ended (collectively, the "Business Financial Statements"). The
Business Financial Statements have been prepared in accordance with GAAP, and
present fairly the financial position of the Business as of their respective
dates and the results of operations and changes in financial position of the
Business for the periods indicated, except that the unaudited Business Financial
Statements do not contain all footnotes and other information required by GAAP.
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(b) There is no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the Business Financial
Statements except for those (i) that have been incurred after December 31, 1999
or (ii) that are not required by GAAP to be included in a balance sheet or the
notes thereto. All debts, liabilities, and obligations incurred by the Business
after December 31, 1999 were incurred in the ordinary course of business. The
Business Financial Statements in accordance with GAAP reflect all costs and
expenses incurred in the operation of the Business.
(c) Seller has made available to Parent or its counsel through EDGAR
a true and complete copy of each statement, report, registration statement (with
the prospectus in the form filed pursuant to Rule 424(b) of the Securities Act),
definitive proxy statement, and other filing filed with the SEC by Seller since
January 1, 1997, and, prior to the Closing, Seller will have made available to
Parent or its counsel through EDGAR true and complete copies of any additional
documents filed with the SEC by Seller prior to the Closing (collectively, the
"Seller SEC Documents"). In addition, Seller has made available to Parent all
exhibits to the Seller SEC Documents filed prior to the date hereof which are
(i) requested by Parent and (ii) are not available in complete form through
EDGAR ("Requested Confidential Exhibits") and will promptly make available to
Parent all Requested Confidential Exhibits to any additional Seller SEC
Documents filed prior to the Closing. All documents required to be filed as
exhibits to the Parent SEC Documents have been so filed, and all material
contracts so filed as exhibits are in full force and effect, except those which
have expired in accordance with their terms, and neither Seller nor any of its
subsidiaries is in default thereunder. As of their respective filing dates, none
of the Seller SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed Seller SEC Document prior to the date hereof. The financial statements of
Seller, including the notes thereto, included in the Seller SEC Documents (the
"Seller Financial Statements"), complied as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto as of their respective dates, and
have been prepared in accordance with generally accepted accounting principles
applied on a basis consistent throughout the periods indicated and consistent
with each other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in Quarterly Reports on Form 10-Qs, as
permitted by Form 10-Q of the SEC). The Seller Financial Statements fairly
present the consolidated financial condition and operating results of Seller and
its subsidiaries at the dates and during the periods indicated therein (subject,
in the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no change in Seller accounting policies except as described in
the notes to the Seller Financial Statements.
4.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1999, Seller
has conducted the Business in the ordinary and usual course consistent with past
practices and, without limiting the generality of the foregoing, has not:
(a) suffered any Material Adverse Change in the results of
operation, financial condition, Assets, Intellectual Property, business,
operation or prospects relating to the Business;
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(b) suffered any damage, destruction or loss, whether or not covered
by insurance, having a Material Adverse Change in the Assets, the Intellectual
Property or the Business;
(c) effected any acquisition, sale or transfer of any material asset
of Seller or any of its subsidiaries other than in the ordinary course of
business and consistent with past practice;
(d) effected any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by
Seller or any revaluation by Seller of any of its or any of its subsidiaries'
assets;
(e) declared, set aside, or paid a dividend or other distribution
with respect to the shares of Seller, or directly or indirectly redeemed,
purchased or otherwise acquired any of its shares of capital stock;
(f) entered into any Contract, other than in the ordinary course of
business, or amended or terminated, or defaulted under, any material Contract to
which Seller is a party or by which it is bound;
(g) granted any increase in the compensation payable or to become
payable by Seller to any Seller employees employed in the Business, except those
occurring in the ordinary course of business, consistent with Seller's past
practices;
(h) granted any exclusive license with respect to the Intellectual
Property;
(i) incurred any liabilities relating to the Business except in the
ordinary course of business and consistent with past practice;
(j) permitted or allowed any of the Assets to be subjected to any
Encumbrance of any kind (other than a Permitted Encumbrance) other than in the
ordinary course of business consistent with past practices;
(k) waived any rights under or terminated any Contract relating to
the Business;
(l) with respect to the Business or the Assumed Contracts, incurred
any contingent liability as guarantor or otherwise with respect to the
obligations of others, other than in the ordinary course, consistent with past
practices; or
(m) agreed to take any action described in this Section 4.11 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations or warranties of Seller contained in this Agreement.
4.12 INTELLECTUAL PROPERTY.
(a) For purposes of this Agreement, "Intellectual Property" means:
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(i) all issued patents, reissued or reexamined patents,
revivals of patents, utility models, certificates of invention, registrations of
patents and extensions thereof, regardless of country or formal name
(collectively, "Issued Patents");
(ii) all published or unpublished nonprovisional and
provisional patent applications, reexamination proceedings, invention
disclosures and records of invention (collectively "Patent Applications" and,
with the Issued Patents, the "Patents");
(iii) all copyrights, copyrightable works, semiconductor
topography and mask work rights, including all rights of authorship, use,
publication, reproduction, distribution, performance transformation, moral
rights and rights of ownership of copyrightable works, semiconductor topography
works and mask works, and all rights to register and obtain renewals and
extensions of registrations, together with all other interests accruing by
reason of international copyright, semiconductor topography and mask work
conventions (collectively, "Copyrights");
(iv) trademarks, registered trademarks, applications for
registration of trademarks, service marks, registered service marks,
applications for registration of service marks, trade names, registered trade
names and applications for registrations of trade names (collectively,
"Trademarks");
(v) all technology, ideas, inventions, designs, proprietary
information, manufacturing and operating specifications, know-how, formulae,
trade secrets, technical data, computer programs, hardware, software and
processes; and
(vi) all other intangible assets, properties and rights
(whether or not appropriate steps have been taken to protect, under applicable
law, such other intangible assets, properties or rights).
(b) Seller and its subsidiaries own and have good and marketable
title to, or possess legally enforceable rights to use, all Intellectual
Property used or currently proposed to be used in the Business as currently
conducted or as proposed to be conducted by Seller and its subsidiaries. The
Intellectual Property owned by and licensed to Seller collectively constitute
all of the Intellectual Property necessary to enable Seller to conduct the
Business as the Business is currently being conducted. No current or former
officer, director, stockholder, employee, consultant or independent contractor
of Seller has any right, claim or interest in or with respect to any
Intellectual Property used in the Business. There is no unauthorized use,
disclosure or misappropriation of any Intellectual Property used in the Business
by any employee or, to Seller's knowledge, former employee of Seller or any of
its subsidiaries or, to Seller's knowledge, by any other third party. There are
no royalties, fees or other payments payable by Seller to any Person under any
written or oral contract or understanding by reason of the ownership, use, sale
or disposition of Intellectual Property used in the Business.
(c) With respect to each item of Intellectual Property used in the
Business (except "off the shelf" or other software widely available through
regular commercial distribution channels at a cost not exceeding $10,000 on
standard terms and conditions, as modified for Seller's operations) ("Seller
Intellectual Property") SCHEDULE 4.12 lists all Patents
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and Patent Applications and all registered Trademarks, and trademark
applications and all registered Copyrights, including the jurisdictions in which
each such Intellectual Property has been issued or registered or in which any
such application for such issuance and registration has been filed.
(d) SCHEDULE 4.12 contains an accurate list as of the date of this
Agreement of all licenses, sublicenses and other agreements to which Seller or
its Subsidiaries are a party and pursuant to which Seller or its Subsidiaries
are authorized to use any Intellectual Property owned by any third party,
excluding "off the shelf" or other software at a cost not exceeding $10,000 and
widely available through regular commercial distribution channels on standard
terms and conditions ("Third Party Intellectual Property").
(e) There is no unauthorized use, disclosure, infringement or
misappropriation of any Seller Intellectual Property, including any Third Party
Intellectual Property by any third party, including any employee or former
employee of Seller or any of its subsidiaries. Neither Seller nor any of its
subsidiaries has entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property. There are no
royalties, fees or other payments payable by Seller to any Person by reason of
the ownership, use, sale or disposition of Intellectual Property.
(f) Seller is not in breach of any license, sublicense or other
agreement relating to the Seller Intellectual Property or Third Party
Intellectual Property. Neither the execution, delivery or performance of this
Agreement or any ancillary agreement contemplated hereby nor the consummation of
the Acquisition will contravene, conflict with or result in an infringement on
the Parent's right to own or use any Seller Intellectual Property, including any
Third Party Intellectual Property.
(g) All Patents, registered Trademarks, registered service marks and
registered Copyrights held by Seller are valid and subsisting. All maintenance
and annual fees have been fully paid and all fees paid during prosecution and
after issuance of any patent comprising or relating to such item have been paid
in the correct entity status amounts. Seller is not infringing, misappropriating
or making unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of any proprietary asset owned or
used by any third party. There is no proceeding pending or threatened to the
knowledge of Seller, nor has any claim or demand been made, which challenges the
legality, validity, enforceability or ownership of any item of Seller
Intellectual Property or Third Party Intellectual Property or alleges a claim of
infringement of any Patents, Trademarks, service marks, Copyrights or violation
of any trade secret or other proprietary right of any third party. Seller has
not brought a proceeding alleging infringement of Seller Intellectual Property
or breach of any license or agreement involving Intellectual Property against
any third party.
(h) All current and former officers of Seller have executed and
delivered to Seller an agreement (containing no exceptions or exclusions from
the scope of its coverage) regarding the protection of proprietary information
and the assignment to Seller of any Intellectual Property arising from services
performed for Seller by such persons, the form of which has been supplied to
Parent. All current and former consultants and independent
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contractors to Seller involved in the development, modification, marketing and
servicing of Seller Intellectual Property have executed and delivered to Seller
an agreement in the form provided to Parent or its counsel (containing no
exceptions or exclusions from the scope of its coverage) regarding the
protection of proprietary information and the assignment to Seller of any
Intellectual Property arising from services performed for Seller by such
persons. It has at all times been Seller's practice and procedure to require all
employees of Seller to execute and deliver to Seller an agreement (containing no
exceptions or exclusions from the scope of its coverage) regarding the
protection of proprietary information and the assignment to Seller of any
Intellectual Property arising from services performed for Seller by such
employees, the form of which has been provided to Parent; and substantially all
of Seller's current and former employees, including all current and former
software engineers, each of which have had access to the Seller's computer
software, have executed such agreements, although some current or former
employees other than those related to software may not have done so. To Seller's
knowledge, no current or former officer, employee or independent contractor of
Seller is in violation of any term of any agreement regarding the protection of
proprietary information and the assignment to Seller of any Intellectual
Property arising from services performed for Seller by such persons or any
employment contract or any other contract or agreement relating to the
relationship of any such officer, employee or independent contractor with
Seller. No current or former officer, director, stockholder, employee,
consultant or independent contractor has any right, claim or interest in or with
respect to any Seller Intellectual Property.
(i) Seller has taken all commercially reasonable and customary
measures and precautions necessary to protect and maintain the confidentiality
of all Seller Intellectual Property (except such Seller Intellectual Property
whose value would be unimpaired by public disclosure) and otherwise to maintain
and protect the full value of all Intellectual Property it owns or uses. All
use, disclosure or appropriation of Intellectual Property not otherwise
protected by patents, patent applications or copyright ("Confidential
Information") owned by Seller by or to a third party has been pursuant to the
terms of a written agreement between Seller and such third party. All use,
disclosure or appropriation of Confidential Information not owned by Seller has
been pursuant to the terms of a written agreement between Seller and the owner
of such Confidential Information, or is otherwise lawful.
(j) No product liability claims have been communicated in writing to
or, to Seller's knowledge, threatened against Seller.
(k) A complete list of Seller's proprietary software ("Seller
Software"), together with a brief description of each, is set forth in SCHEDULE
4.12. Seller Software conforms in all material respects with any specification,
documentation, performance standard, representation or statement provided with
respect thereto by or on behalf of Seller.
(l) Seller is not subject to any proceeding or outstanding decree,
order, judgment, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Seller, or which may affect the validity, use or
enforceability of such Seller Intellectual Property. Seller is not subject to
any agreement which restricts in any material respect the use, transfer, or
licensing by Seller of the Seller Intellectual Property.
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(m) Seller is not aware that any of Seller's Information Technology
(as defined below) is not Year 2000 Compliant or will cause an interruption in
the ongoing operations of Seller's business on or after January 1, 2000. For
purposes of the foregoing, the term "Information Technology" shall mean and
include all material software, hardware, firmware, telecommunications systems,
network systems, embedded systems and other systems, components and/or services
(other than general utility services including gas, electric, telephone and
postal) that are owned or used by Seller in the conduct of the Business. Seller
has implemented a comprehensive, detailed program to analyze and address the
risk that the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving certain dates
prior to and any dates after December 31, 1999 (the "Year 2000 Problem"), and
reasonably believe that such risk will be remedied on a timely basis and will
not have a Material Adverse Effect and Seller believes, after due inquiry, that
each suppler, vendor, customer or financial service organization used or
serviced by Seller has remedied or will remedy on a timely basis the Year 2000
Problem, except to the extent that a failure to remedy by any such suppler,
vendor, customer or financial service organization would not have a Material
Adverse Effect.
4.13 FACILITIES. SCHEDULE 4.13 provides an accurate and complete list of
the current Facilities. Seller has provided Purchaser true and complete copies
of (i) the leases for any rented Facilities, and (ii) any acquisition
agreements, loan documents, and title reports applicable to any currently owned
Facilities or applicable to any Facilities which Seller has contracted to
acquire in connection with the Business. Seller enjoys peaceful and undisturbed
possession of all current Facilities. Except as set forth on SCHEDULE 4.13,
there exists no event of default by Seller (nor any event which with notice or
lapse of time would constitute an event of default by Seller) with respect to
any agreement or instrument with regard to any current Facility, and to Seller's
Knowledge there exists no event of default by any of the other parties thereto
(nor any event which with notice or lapse of time would constitute an event of
default by any of the other parties thereto) with respect to any such agreement
or instrument, except where such default would not have a Material Adverse
Effect on the Business. Except as set forth on SCHEDULE 4.13, all such
agreements and instruments are in full force and effect.
4.14 CONTRACTS AND ARRANGEMENTS.
(a) SCHEDULE 4.14 hereto contains a true and accurate list of all
Contracts, pursuant to which Seller enjoys any right or benefit or undertakes
any obligation related to the Business, the Intellectual Property, the Assumed
Liabilities or the Assets. Except for the Contracts, Seller is not a party to or
otherwise bound by the terms of any contract, agreement or obligation, written
or oral, affecting the Business, the Assets, Intellectual Property, or the
Assumed Liabilities. Each of the Assumed Contracts is (assuming due
authorization and execution by the other party or parties hereto) valid, binding
and in full force and effect and enforceable by Seller in accordance with its
terms, except as enforcement may be limited by general equitable principles and
the exercise of judicial discretion in accordance with such principles. Neither
Seller, nor, to Seller's Knowledge, any other party, is in default under any
Assumed Contract, and there are no existing disputes or claims of default
relating thereto, or any facts or conditions Known to Seller which, if
continued, will result in a default or claim of default thereunder, which
default could reasonably be expected to have a Material Adverse Effect on the
Business, the Assets, the Assumed Contracts or the Assumed Liabilities. No
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Assumed Contract contains any liquidated damages, penalty or similar provision.
There is no Assumed Contract which Seller can reasonably foresee will result in
any material loss upon the performance thereof by Purchaser from and after the
Closing Date. To Seller's Knowledge, no party to any Contract has notified
Seller that it intends to cancel, withdraw, modify or amend such Contract.
Except as set forth on SCHEDULE 4.14 attached hereto, no consents are necessary
for the effective assignment to and assumption by Parent or Purchaser of any of
the Assumed Contracts.
(b) To Seller's Knowledge, there are no unresolved claims between
Seller and any of the principal licensors, vendors, suppliers, distributors,
representatives or customers of the Business, and no event which could
reasonably be expected to result in (i) a material breach of an Assumed
Contract, (ii) a request for a material accommodation or concession in
connection with the sale of services, distributors, representatives or customers
or (iii) a significant impairment of the relationships of any Business with its
principal licensors, vendors, suppliers, distributors, representatives, or
customers, and none of such persons has advised Seller of its intention to cease
doing business with Seller or with Parent or the Purchaser following the Closing
Date, whether as a result of the transactions contemplated hereunder or
otherwise.
(c) Each accepted and unfilled order entered into by Seller for the
provisions of services by Seller, and each agreement, contract or commitment for
the purchase of supplies, included in the Contracts was made in the ordinary
course of the Business.
4.15 INSURANCE. Seller maintains insurance policies relating to the
Business providing coverage described on SCHEDULE 4.15. All of such policies are
in full force and effect, and Seller is not in default with respect to any
material provision of any of such policies. Seller has not received notice from
any issuer of any such policies of its intention to cancel, terminate or refuse
to renew any policy issued by it.
4.16 BROKERS. There is no broker, finder, investment banker or other
person, other than Oak Tree Resources, Inc., whose fees are to be paid by
Seller, who would have any valid claim against any of the parties to this
Agreement for a commission or brokerage fee or payment in connection with this
Agreement or the transactions contemplated herein as a result of any agreement
of, or action taken by, Seller.
4.17 ACCOUNTS RECEIVABLE. Subject to any reserves set forth in the
Business Financial Statements, the accounts receivable shown on the Business
Financial Statements are valid and genuine, have arisen solely out of bona fide
sales and deliveries of goods, performance of services, and other business
transactions in the ordinary course of business consistent with past practices
in each case with persons other than Affiliates, are not subject to any prior
assignment, lien or security interest and are not subject to valid defenses,
set-offs or counter claims. The accounts receivable will be collected in
accordance with their terms at their recorded amounts, subject only to the
reserve for doubtful accounts on the Business Financial Statements.
4.18 WARRANTIES AND SERVICE PAYMENT OBLIGATIONS. SCHEDULE 4.18 sets forth
(a) copies of all forms of warranties or warranty agreements or obligations now
in effect with respect to any of the services provided, or to be provided, by
Seller in connection therewith, (b) a complete and accurate list of all
agreements pursuant to which Seller is obligated to provide service or support
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services, (c) a complete and accurate list of all other agreements of Seller
which are either included in the Assumed Contracts or relate to any services,
and pursuant to which Seller is obligated to make any other accommodation for
such purchaser or distributor, including, without limitation, any warranties and
(d) an analysis of the warranty reserve included in the Business Financial
Statements for the year ended December 31, 1999. All services have been, or are
being, made pursuant to the form of warranty set forth in SCHEDULE 4.18, or the
terms of a Contract set forth in SCHEDULE 4.18 and no other warranty, express or
implied, has been made or extended by Seller with respect to the services
provided by Seller in relation thereto.
4.19 BUSINESS RECORDS. The Business Records to be delivered to Purchaser
are complete, true and accurate in all material respects and accurately reflect
all actions and transactions referred to in such Business Records.
4.20 NO SUSPENSION OR DEBARMENT. Neither Seller nor any of its Affiliates
are presently debared, suspended, proposed for debarment, or declared ineligible
for the award of contracts by any Federal agency; have,within the three year
preceding the Closing, been convicted of or had a civil judgment rendered
against any of them for commission of a fraud or criminal offense in connection
with obtaining, attempting to obtain or performing a public (Federal, state or
local) contract or subcontract, violation of Federal or state antitrust statutes
relating to the submission of offers or commission of embezzlement, theft,
forgery, bribery, falsification or destruction of records, making false
statements or receiving stolen property; are presently indicted for or otherwise
criminally or civilly charged by a Governmental Entity with, commission of any
of the above offenses; and, within the three years preceding the Closing, have
had one or more contracts terminated for default by any Federal agency.
4.21 ENVIRONMENTAL MATTERS. Seller has obtained all Permits required under
Environmental Laws to conduct the Business (collectively, "Licenses"), and all
such Licenses are current, valid and in good standing, and copies of all such
Licenses have been provided to Purchaser. The Business is conducted and at all
times has been conducted in compliance with Environmental Laws and Licenses,
including without limitation, as may be applicable to the ownership, use,
occupation, control, possession and rental of all prior and current Facilities.
No civil, criminal or administrative actions, proceedings, directives,
inquiries, or investigations are pending, or to the Knowledge of Seller
threatened, pertaining to Seller or the Business and brought by any Governmental
Entity or Person, regarding any alleged non-compliance by the Business or any
Facility with Environmental Laws, or regarding any alleged Release of Hazardous
Materials. No Governmental Entity or Person has, currently or in the past,
alleged or, to the Knowledge of Seller threatened to allege, against Seller, an
affiliate of Seller, or the Business, in connection with the Business or any
Facility, that Hazardous Materials have been Handled improperly or in violation
of Environmental Laws or in such a manner as to harm or threaten to harm human
health, ecology, or the environment. Seller has not received any notice with
respect to any Facility, and is not aware of the issuance, at any time, to any
Person of any notice with respect to any Facility, alleging that (i) a Release
of Hazardous Materials occurred, or is suspected of having occurred, at any time
at a Facility, or (ii) a Facility has been listed or is proposed to be listed on
any list, registry or inventory maintained by any Governmental Entity of sites
where a Release of Hazardous Materials has occurred or is suspected of having
occurred. No Release of Hazardous Materials has occurred at any time in
connection with the Business or during any period that Seller owned, used,
occupied, controlled, or rented any current or prior
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Facility. There are no conditions existing at any Facility in connection with
the Business which require any remedial action, removal action, corrective
action, closure action, or other environmental response action under
Environmental Laws or Licenses. There are not present at any current Facility,
nor to Seller's Knowledge were there present at any prior Facility, nor are
there any plans to install at any current Facility, any aboveground or
underground storage tanks, vaults, containments, impoundments or other
aboveground or underground structures or equipment, that are used, will be used,
or were used, or that are or were intended to be used, for Handling Hazardous
Materials. No equipment or improvements used in the Business presently require,
or to the Knowledge of Seller may require, any expenditure of funds or any
removal, closure, updating, modification or replacement to comply with
Environmental Laws and Licenses. To the Knowledge of Seller, no Release of
Hazardous Materials has migrated to or from, or threatens to migrate to or from,
the soil, surface water, or groundwater of any current Facility. With respect to
the Business and to the Knowledge of Seller, there are no conditions existing at
any site to which Seller has sent Hazardous Materials at any time for
transportation, transfer, recycling, treatment, storage, or disposal, which
require any investigation, remedial action, removal action, corrective action,
or other environmental response action pursuant to Environmental Laws. No
employee of Seller and no other Person currently asserts, has asserted or, to
the Knowledge of Seller threatened or has threatened to assert, a demand or
claim pertaining to Seller, an affiliate of Seller, or the Business, based upon
or relating to alleged damage to health caused by any Hazardous Material
allegedly used in connection with the Business or which was allegedly present at
any Facility.
4.22 TAXES. As used in this Agreement, the terms "Tax" and, collectively,
"Taxes" mean any and all federal, state and local taxes of any country,
assessments and other governmental charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, stamp transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(a) Seller has prepared and timely filed all returns, estimates,
information statements and reports (and extensions of time for filing any of the
foregoing) required to be filed with any taxing authority ("Returns") relating
to any and all Taxes concerning or attributable to Seller or its operations with
respect to Taxes for any period ending on or before the Closing Date and such
Returns are true and correct in all material respects and have been completed in
accordance with applicable law.
(b) Seller, as of the Closing Date: (i) will have paid all Taxes
shown to be payable on such Returns covered by Section 4.22(a) and (ii) will
have withheld with respect to its employees all Taxes required to be withheld.
(c) There is no Tax deficiency outstanding or assessed or, to
Seller's knowledge, proposed against Seller that is not reflected as a liability
on the Seller Balance Sheet nor has Seller executed any agreements or waivers
extending any statute of limitations on or extending the period for the
assessment or collection of any Tax.
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(d) Seller is not a party to any tax-sharing agreement or similar
arrangement with any other party, and Seller has not assumed to pay any Tax
obligations of, or with respect to any transaction relating to, any other person
or agreed to indemnify any other person with respect to any Tax.
(e) Seller's Returns have never been audited by a government or
taxing authority, nor is any such audit in process or pending, and Seller has
not been notified of any request for such an audit or other examination.
(f) Seller has never been a member of an affiliated group of
corporations filing a consolidated federal income tax return.
(g) Seller has made available to Parent copies of all Returns filed
for all periods since December 31, 1996.
4.23 EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 4.23 contains a complete and accurate list of each
plan, program, policy, practice, contract, agreement or other arrangement
providing for employment, compensation, retirement, deferred compensation,
loans, severance, separation, relocation, repatriation, expatriation, visas,
work permits, termination pay, performance awards, bonus, incentive, stock
option, stock purchase, stock bonus, phantom stock, stock appreciation right,
supplemental retirement, fringe benefits, cafeteria benefits, or other benefits,
whether written or unwritten, including, without limitation, each "employee
benefit plan" within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") which is or has been
sponsored, maintained, contributed to, or required to be contributed to by
Seller, any subsidiary of Seller and, with respect to any such plans which are
subject to Code Section 401(a), any trade or business (whether or not
incorporated) which is or, at any relevant time, was treated as a single
employer with Seller within the meaning of Section 414(b), (c),(m) or (o) of the
Code (an "ERISA Affiliate"), for the benefit of any person who performs or who
has performed services for Seller or with respect to which Seller, any
subsidiary, or ERISA Affiliate has or may have any liability (including, without
limitation, contingent liability) or obligation (collectively, the "Seller
Employee Plans"). SCHEDULE 4.23 separately lists each Seller Employee Plan that
has been adopted or maintained by Seller, whether formally or informally, for
the benefit of employees outside the United States ("Seller International
Employee Plans").
(b) DOCUMENTS Seller has furnished to Parent true and complete
copies of documents embodying each of the Seller Employee Plans and related plan
documents, including (without limitation) trust documents, group annuity
contracts, plan amendments, insurance policies or contracts, participant
agreements, employee booklets, administrative service agreements, summary plan
descriptions, compliance and nondiscrimination tests for the last three plan
years, standard COBRA forms and related notices, registration statements and
prospectuses, and, to the extent still in its possession, any material employee
communications relating thereto. With respect to each Seller Employee Plan which
is subject to ERISA reporting requirements, Seller has provided copies of the
Form 5500 reports filed for the last five plan years. Seller has furnished
Parent with the most recent Internal Revenue Service determination or opinion
letter issued with respect to each such Seller Employee Plan, and nothing has
occurred since the
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issuance of each such letter which could reasonably be expected to cause the
loss of the tax-qualified status of any Seller Employee Plan subject to Code
Section 401(a).
(c) COMPLIANCE (i) Each Seller Employee Plan has been administered
in accordance with its terms and in compliance with the requirements prescribed
by any and all statutes, rules and regulations (including ERISA and the Code),
except as would not have, in the aggregate, a Material Adverse Effect, and
Seller and each subsidiary or ERISA Affiliate have performed all material
obligations required to be performed by them under, are not in material respect
in default under or violation of, and have no knowledge of any material default
or violation by any other party to, any of the Seller Employee Plans; (ii) any
Seller Employee Plan intended to be qualified under Section 401(a) of the Code
has either obtained from the Internal Revenue Service a favorable determination
letter as to its qualified status under the Code, including all amendments to
the Code which are currently effective, or has time remaining to apply under
applicable Treasury Regulations or Internal Revenue Service pronouncements for a
determination or opinion letter and to make any amendments necessary to obtain a
favorable determination or opinion letter; (iii) none of the Seller Employee
Plans promises or provides retiree medical or other retiree welfare benefits to
any person; (iv) there has been no "prohibited transaction," as such term is
defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any
Seller Employee Plan; (v) none of Seller, any subsidiary or any ERISA Affiliate
is subject to any liability or penalty under Sections 4976 through 4980 of the
Code or Title I of ERISA with respect to any Seller Employee Plan; (vi) all
contributions required to be made by Seller, any subsidiary or ERISA Affiliate
to any Seller Employee Plan have been paid or accrued; (vii) with respect to
each Seller Employee Plan, no "reportable event" within the meaning of Section
4043 of ERISA (excluding any such event for which the thirty (30) day notice
requirement has been waived under the regulations to Section 4043 of ERISA) nor
any event described in Section 4062, 4063 or 4041 or ERISA has occurred; (viii)
each Seller Employee Plan subject to ERISA has prepared in good faith and timely
filed all requisite governmental reports (which were true and correct as of the
date filed) and has properly and timely filed and distributed or posted all
notices and reports to employees required to be filed, distributed or posted
with respect to each such Seller Employee Plan; (ix) no suit, administrative
proceeding, action or other litigation has been brought, or to the knowledge of
Seller is threatened, against or with respect to any such Seller Employee Plan,
including any audit or inquiry by the IRS or United States Department of Labor;
and (x) there has been no amendment to, written interpretation or announcement
by Seller, any subsidiary or ERISA Affiliate which would materially increase the
expense of maintaining any Seller Employee Plan above the level of expense
incurred with respect to that Plan for the most recent fiscal year included in
Seller's financial statements.
(d) NO TITLE IV OR MULTIEMPLOYER PLAN None of Seller, any subsidiary
or any ERISA Affiliate has ever maintained, established, sponsored, participated
in, contributed to, or is obligated to contribute to, or otherwise incurred any
obligation or liability (including, without limitation, any contingent
liability) under any "multiemployer plan" (as defined in Section 3(37) of ERISA)
or to any "pension plan" (as defined in Section 3(2) of ERISA) subject to Title
IV of ERISA or Section 412 of the Code. None of Seller, any subsidiary or any
ERISA Affiliate has any actual or potential withdrawal liability (including,
without limitation, any contingent liability) for any complete or partial
withdrawal (as defined in Sections 4203 and 4205 of ERISA) from any
multiemployer plan.
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(e) COBRA, FMLA, HIPAA, CANCER RIGHTS With respect to each Seller
Employee Plan, Seller and each of its United States subsidiaries have complied
with (i) the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations thereunder or any state law governing health care coverage extension
or continuation; (ii) the applicable requirements of the Family and Medical
Leave Act of 1993 and the regulations thereunder; (iii) the applicable
requirements of the Health Insurance Portability and Accountability Act of 1996
("HIPAA"); and (iv) the applicable requirements of the Cancer Rights Act of
1998, except to the extent that such failure to comply would not in the
aggregate have a Material Adverse Effect. Seller has no material unsatisfied
obligations to any employees, former employees, or qualified beneficiaries
pursuant to COBRA, HIPAA, or any state law governing health care coverage
extension or continuation.
(f) EFFECT OF ACQUISITION The consummation of the transactions
contemplated by this Agreement will not (i) entitle any current or former
employee or other service provider of Seller, any subsidiary or any ERISA
Affiliate to severance benefits or any other payment (including, without
limitation, unemployment compensation, golden parachute, bonus or benefits under
any Seller Employee Plan), except as expressly provided in this Agreement or
(ii) accelerate the time of payment or vesting of any such benefits or increase
the amount of compensation due any such employee or service provider. No benefit
payable or which may become payable by Seller pursuant to any Seller Employee
Plan or as a result of or arising under this Agreement shall constitute an
"excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which
is subject to the imposition of an excise Tax under Section 4999 of the Code or
the deduction for which would be disallowed by reason of Section 280G of the
Code. Each Seller Employee Plan can be amended, terminated or otherwise
discontinued after the Closing in accordance with its terms, without material
liability to Parent and/or Purchaser, as the case may be, or Seller (other than
ordinary administration expenses typically incurred in a termination event).
(g) SALE OF SUBSTANTIALLY ALL ASSETS. Seller agrees that the
consummation of the transactions contemplated by this Agreement constitute, as
provided in Code Section 401(k)(10)(A)(ii), a sale of substantially all the
assets (within the meaning of Code Section 409(d)(2)) used by Seller in any
trade or business.
4.24 EMPLOYEE MATTERS. Seller is in compliance with all currently
applicable laws and regulations respecting terms and conditions of employment
including, without limitation, applicant and employee background checking,
immigration laws, discrimination laws, verification of employment eligibility,
employee leave laws, classification of workers as employees and independent
contractors, wage and hour laws, and occupational safety and health laws. There
are no proceedings pending or, to Seller's knowledge, reasonably expected or
threatened, between Seller, on the one hand, and any or all of its current or
former employees, on the other hand, including, but not limited to, any claims
for actual or alleged harassment or discrimination based on race, national
origin, age, sex, sexual orientation, religion, disability, or similar tortious
conduct, breach of contract, wrongful termination, defamation, intentional or
negligent infliction of emotional distress, interference with contract or
interference with actual or prospective economic disadvantage. There are no
claims pending, or, to Seller's knowledge, reasonably expected or threatened,
against Seller under any workers' compensation or long term
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disability plan or policy. Seller is not a party to any collective bargaining
agreement or other labor union contract, nor does Seller know of any activities
or proceedings of any labor union to organize its employees. Seller has provided
all employees with all wages, benefits, relocation benefits, stock options,
bonuses and incentives, and all other compensation which became due and payable
through the date of this Agreement.
4.25 INSURANCE. Seller and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Seller and its
subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Seller and its subsidiaries are
otherwise in compliance with the terms of such policies and bonds. Seller has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
4.26 COMPLIANCE WITH LAWS. Each of Seller and its subsidiaries has
complied with, is not in violation of and has not received any notices of
violation with respect to, any federal state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
do not and could not be reasonably expected to have a Material Adverse Effect on
Seller.
4.27 ACCURACY OF MATERIAL FACTS; COPIES OF MATERIALS. No representation,
warranty or covenant of Seller contained in this Agreement or in any
certificate, schedule or exhibit delivered pursuant to this Agreement contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained herein and therein, taken as
a whole, not misleading in light of the circumstances under which such
statements were made. Seller has delivered to Purchaser complete and accurate
copies of each contract, agreement, license, lease and similar document (or, if
oral, summaries of same) referred to in any schedule hereto or included in the
Assets or the Assumed Contracts, or the Assumed Liabilities.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Except as otherwise set forth in the Purchaser Disclosure Schedule
provided to Seller, a copy of which is attached as SCHEDULE V, each of Parent,
and Purchaser, jointly and severally, hereby represents and warrants to Seller
that:
5.1 ORGANIZATION AND GOOD STANDING. Parent is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has full power and authority to carry on its businesses as now
conducted. Parent is duly qualified or licensed to do business as a foreign
corporation in each state of the United States in which it is required to be so
qualified or licensed except in such states in which failure to be so qualified
or licensed would not have a Material Adverse Effect on Parent. Purchaser is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has full power and authority to carry on its
businesses as now conducted. Purchaser is duly qualified or licensed to do
business as a foreign corporation in each state of the United States in
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which is required to be so qualified or licensed, except in such states in which
failure to be so qualified or licensed would not have a Material Adverse Effect
on Purchaser.
5.2 POWER, AUTHORIZATION AND VALIDITY. Each of Parent and Purchaser has
the right, power, legal capacity and authority to enter into and perform its
respective obligations under this Agreement and the other Ancillary Agreements
to which it is or will be a party. The execution and delivery of this Agreement
and the other Ancillary Agreements to which any of Parent and Purchaser is or
will be a party have been duly and validly approved and authorized by the
respective boards of directors of each of Parent and Purchaser. No authorization
or approval, corporate, governmental or otherwise, is necessary in order to
enable each any of Parent and Purchaser to enter into and to perform the terms
of this Agreement or the other Ancillary Agreements on its part to be performed,
except for (i) filings under applicable securities laws, and (ii) the
termination of any waiting period under any other applicable Law or Decree. This
Agreement is and the other Ancillary Agreements, when executed and delivered by
Parent and Purchaser shall be, the valid and binding obligations of Parent and
Purchaser, enforceable in accordance with their respective terms, subject to (i)
laws of general application relating to bankruptcy, insolvency, and the relief
of debtors and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
5.3 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and
delivery of this Agreement or any of the Ancillary Agreements to which any of
Parent and Purchaser is or will be a party, nor the consummation of the
transactions contemplated herein or therein will conflict with, or result in a
material breach or violation of, or constitute a default (with or without
notice, lapse of time or both) or give any party any right to terminate,
accelerate or cancel any provision of Parent's or Purchaser's respective charter
documents as currently in effect, any material instrument, contract or
understanding to which any of Parent and Purchaser is a party or by which any of
Parent and Purchaser is bound, or by which Parent or Purchaser or any of their
respective properties are bound, or any federal, state or local judgment, writ,
decree, order, statute, rule or regulation applicable to Parent or Purchaser.
Neither the execution and delivery of this Agreement or any of the Ancillary
Agreements to which each of Parent and Purchaser is or will be a party, nor the
consummation of the transactions contemplated herein or therein, will have a
Material Adverse Effect on the respective operations, assets, or financial
condition of Parent and Purchaser.
5.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. Neither Parent nor
Purchaser is in violation of (a) any provisions of its respective charter
documents as currently in effect or (b) any applicable Law or Decree in any
material respect.
5.5 LITIGATION. There is no suit, action, proceeding, claim or, to
Purchaser's Knowledge, investigation, pending or, to Purchaser's Knowledge,
threatened against Parent or Purchaser before any Governmental Entity which
questions or challenges the validity of this Agreement or any of the Ancillary
Agreements to which any of Parent or Purchaser is or will be a party, or any of
the transactions contemplated herein or therein.
5.6 BROKERS. There is no broker, finder, investment banker or other person
whose fees are to be paid by Parent or Purchaser, who would have any valid claim
against any of the parties to this Agreement for a commission or brokerage fee
or payment in connection with this
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Agreement or the transactions contemplated herein as a result of any agreement
of, or action taken by, Parent or Purchaser.
5.7 DISCLOSURE. No representation, warranty or covenant of each of Parent
and Purchaser contained in this Agreement or in any certificate, schedule or
exhibit to this Agreement, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein and therein, taken as a whole, not misleading in light of the
circumstances in which such statements were made.
ARTICLE VI
PRE-CLOSING COVENANTS OF SELLER
6.1 ADVICE OF CHANGES. Seller will promptly notify each of Parent and
Purchaser in writing of (a) any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of Parent and
Purchaser contained in this Agreement, if made on or as of the date of that
event or the Closing Date, untrue or inaccurate in any material respect and (b)
any Material Adverse Change in the Assets, Assumed Liabilities, the Intellectual
Property or the financial condition, results of operations, business or
prospects of the Business.
6.2 CONDUCT OF BUSINESS. During the period on and from the date of this
Agreement through and including the Closing Date, Seller will conduct the
Business in the ordinary course consistent with past practices and will use its
reasonable commercial efforts to retain Seller's employees employed in the
Business, protect and preserve the Assets and the Intellectual Property, and
maintain and preserve intact Seller's relationships with its consultants,
independent contractors, licensors, suppliers, vendors, representatives,
distributors and other customers and all others with whom it deals, all in
accordance with the ordinary course of business. During the period on and from
the date of this Agreement through and including the Closing Date, Seller will
not without the prior written consent of each of Parent and Purchaser:
(a) mortgage, pledge, subject to a lien, or grant a security
interest in, or suffer to exist or otherwise encumber, any of the Assets;
(b) sell, dispose of or license any of the Assets to any Person,
except Inventory in the ordinary course of business consistent with past
practices;
(c) fail to maintain the Tangible Assets in good working condition
and repair according to the standards it has maintained up to the date of this
Agreement, subject only to ordinary wear and tear;
(d) fail to pay and discharge any trade payables relating to the
Assets or the Business in accordance with Seller's customary business practices
as of the date of execution hereof;
(e) enter into any agreement or arrangement to pay any bonus,
increased salary, or special remuneration to any Seller employee employed in the
Business (other than amounts not in excess of normal payments made on a regular
basis and amounts paid to Seller
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employees who, at the time of such agreement or arrangement, have not been
extended an offer to become employees of Purchaser);
(f) change accounting methods relating to or affecting the Assets,
the Assumed Liabilities or the Business;
(g) amend, terminate or waive any rights under any Contract, except
in the ordinary course of the Business;
(h) waive or release any right or claim relating to any Assets,
except in the ordinary course of business consistent with past practices;
(i) enter into any agreements or other obligations or commitments
(excluding purchases of new materials) relating to the Business, except
agreements or purchase orders (A) involving the payment by Seller, as
applicable, of less than $50,000 individually, or $100,000 in the aggregate, and
(B) which are on commercially reasonable terms in the ordinary course of
business, consistent with past practices of Seller with respect to the Business;
(j) fail to comply in any material respect with any Law or Decree
applicable to the Business;
(k) take any action to terminate or modify, or permit the lapse or
termination of, the present insurance policies and coverages of Seller relating
to or applicable to Seller, the Business or the Assets;
(l) incur, with respect to the Business or the Assets, any
Liabilities other than Liabilities incurred in the ordinary course of business
consistent with past practices; or
(m) agree to do any of the things described in the preceding clauses
of this Section 6.2.
6.3 ACCESS TO INFORMATION. Until the Closing, Seller will allow each of
Parent and Purchaser and its agents reasonable access upon reasonable notice and
during normal working hours to the Business Records and Facilities relating to
the Assets, all aspects of the Business and its financial and legal affairs and
the financial condition of the Seller. Until the Closing, Seller shall cause its
respective accountants to cooperate with each of Parent and Purchaser and its
agents in making available all financial information requested, including
without limitation the right to examine all working papers pertaining to all
Business Financial Statements prepared or audited by such accountants.
6.4 OBTAINING NECESSARY CONSENTS AND ADDITION OF PURCHASER AS PARTY TO
CERTAIN CONTRACTS. Seller shall use its reasonable commercial efforts to obtain
any and all consents necessary for the effective assignment to and assumption by
Parent or Purchaser of the Assumed Contracts, which consents are set forth on
SCHEDULE 6.4 hereto. All such consents shall be in writing and executed
counterparts thereof shall be delivered promptly to Parent and/or Purchaser, as
applicable. Seller shall not agree to any modification of any Assumed Contract
in the course of obtaining any such consent, where such modification would
materially and adversely affect Parent's or Purchaser's ability to conduct the
Business as heretofore conducted. To the extent
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permitted by applicable law, in the event consents to the assignment of such
Assumed Contracts are not obtained by Seller as of the Closing, and Parent and
Purchaser agree to close the Acquisition, such Assumed Contracts shall be held,
as and from the Closing Date, by Seller in trust for Parent or Purchaser as
designated by Parent, and the covenants and obligations thereunder shall be
performed by Parent or Purchaser in Seller's respective name and all benefits
and obligations existing thereunder shall be for Parent's or Purchaser's, as
applicable, account PROVIDED that such performance by Parent or Purchaser, as
applicable, shall be contingent on the passing of all benefits of such Assumed
Contracts to Parent and/or Purchaser. Seller shall take or cause to be taken
such actions in its name or otherwise as Parent or Purchaser, as applicable, may
reasonably request so as to provide Parent or Purchaser with the benefits of the
Assumed Contracts and to effect collection of money or other consideration to
become due and payable under the Assumed Contracts, and Seller shall promptly
pay over to Purchaser all money or other consideration received by it in respect
to all Assumed Contracts. The compliance of Seller with this provision shall not
excuse Seller from any breach of the representations, warranties and covenants
of Seller resulting from such non-assignment.
6.5 SATISFACTION OF CONDITIONS PRECEDENT. Seller will use its reasonable
commercial efforts to satisfy or cause to be satisfied all the conditions
precedent to the Closing hereunder, and to cause the transactions contemplated
herein to be consummated, and, without limiting the generality of the foregoing,
to obtain all consents and authorizations of third parties and to make all
filings with, and give all notices to, third parties, which may be necessary or
reasonably required on its part in order to effect the transactions contemplated
herein.
6.6 NO SOLICITATION.
(a) Seller shall not directly or indirectly, and shall not authorize
or permit any Affiliate or any Representative of the Seller directly or
indirectly to, (i) solicit, initiate, encourage, induce or facilitate the
making, submission or announcement of any Acquisition Proposal or take any
action that could reasonably be expected to lead to an Acquisition Proposal,
(ii) furnish any information regarding Seller to any Person in connection with
or in response to an Acquisition Proposal or an inquiry or indication of
interest that could lead to an Acquisition Proposal, (iii) engage in discussions
or negotiations with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into any
letter of intent or similar document or any Contract contemplating or otherwise
relating to any Acquisition; PROVIDED, HOWEVER, that prior to the adoption of
this Agreement by the Required Seller Stockholder Vote, this Section 6.6(a)
shall not prohibit Seller from furnishing nonpublic information regarding Seller
to, or entering into discussions with, any Person in response to a Superior
Proposal that is submitted to Seller by such Person (and not withdrawn) if (1)
neither Seller nor any Representative of Seller shall have violated any of the
restrictions set forth in this Section 6.6, (2) the board of directors of Seller
concludes in good faith, after having taken into account the advice of its
outside legal counsel, that such action is required in order for the board of
directors of Seller to comply with its fiduciary obligations to Seller's
stockholders under applicable law, (3) at least two business days prior to
furnishing any such nonpublic information to, or entering into discussions with,
such Person, Seller gives Parent written notice of the identity of such Person
and of Seller's intention to furnish nonpublic information to, or enter into
discussions with, such Person, and Seller receives from such Person an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all
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nonpublic written and oral information furnished to such Person by or on behalf
of Seller, and (4) at least two business days prior to furnishing any such
nonpublic information to such Person, Seller furnishes such nonpublic
information to Parent (to the extent such nonpublic information has not been
previously furnished by Seller to Parent). Without limiting the generality of
the foregoing, Seller acknowledges and agrees that any violation of any of the
restrictions set forth in the preceding sentence by any Representative of
Seller, whether or not such Representative is purporting to act on behalf of
Seller, shall be deemed to constitute a breach of this Section 6.6 by Seller.
(b) Seller shall promptly (and in no event later than 24 hours after
receipt of any Acquisition Proposal, any inquiry or indication of interest that
could lead to an Acquisition Proposal or any request for nonpublic information)
advise Parent orally and in writing of any Acquisition Proposal, any inquiry or
indication of interest that could lead to an Acquisition Proposal or any request
for nonpublic information relating to Seller (including the identity of the
Person making or submitting such Acquisition Proposal, inquiry, indication of
interest or request, and the terms thereof) that is made or submitted by any
Person prior to Closing. Seller shall keep Parent fully informed with respect to
the status of any such Acquisition Proposal, inquiry, indication of interest or
request and any modification or proposed modification thereto.
(c) Seller shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
6.7 PROXY STATEMENT. As promptly as practicable after the date of this
Agreement, Seller shall prepare and cause to be filed with the SEC the Proxy
Statement. Seller shall use all reasonable efforts to cause the Proxy Statement
to comply with the rules and regulations promulgated by the SEC and to respond
promptly to any comments of the SEC or its staff. Seller will use all reasonable
efforts to cause the Proxy Statement to be mailed to Seller's stockholders as
promptly as practicable. Parent shall promptly furnish to Seller all information
concerning Parent that may be required or reasonably requested in connection
with any action contemplated by this Agreement. If any event relating to Seller
occurs, or if Seller becomes aware of any information, that should be disclosed
in an amendment or supplement to the Proxy Statement, then Seller shall promptly
inform Parent thereof and shall file such amendment or supplement with the SEC
and, if appropriate, mail such amendment or supplement to the stockholders of
Seller.
6.8 STOCKHOLDERS' MEETING.
(a) Seller shall take all action necessary under all applicable
legal requirements to call, give notice of and hold a meeting of the holders of
Seller's common stock to vote on a proposal to approve this Agreement and the
Acquisition (the "Seller Stockholders' Meeting"). The Seller Stockholders'
Meeting shall be held (on a date selected by Seller in consultation with Parent)
as promptly as practicable. Seller shall ensure that all proxies solicited in
connection with Seller Stockholders' Meeting are solicited in compliance with
all applicable legal requirements.
(b) Subject to Section 6.8(c): (i) the Proxy Statement shall include
a statement to the effect that the Board of Directors of Seller unanimously
recommends that
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Seller's stockholders vote to approve this Agreement and the Acquisition at the
Seller Stockholders' Meeting (the unanimous recommendation of Seller's board of
directors that Seller's stockholders vote to adopt this Agreement being referred
to as the "Seller Board Recommendation"); and (ii) the Seller Board
Recommendation shall not be withdrawn or modified in a manner adverse to Parent,
and no resolution by the board of directors of Seller or any committee thereof
to withdraw or modify the Seller Board Recommendation in a manner adverse to
Parent shall be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in Section
6.8, at any time prior to the adoption of this Agreement by the Required Seller
Stockholder Vote, the Seller Board Recommendation may be withdrawn or modified
in a manner adverse to Parent if: (i) a proposal to acquire (by merger or
otherwise) all of the outstanding shares of Seller's common stock is made to
Seller and is not withdrawn; (ii) Seller provides Parent with at least five
business days prior notice of any meeting of Seller's board of directors at
which such board of directors will consider and determine whether such offer is
a Superior Proposal; (iii) Seller's board of directors determines in good faith
that such offer constitutes a Superior Proposal; (iv) Seller's board of
directors determines in good faith, after having taken into account the advice
of Seller's outside legal counsel, that, in light of such Superior Proposal, the
withdrawal or modification of the Seller Board Recommendation is required in
order for Seller's board of directors to comply with its fiduciary obligations
to Seller's stockholders under applicable law; and (v) neither Seller nor any of
its Representatives shall have violated any of the restrictions set forth in
Section 6.6.
(d) Seller's obligation to call, give notice of and hold the Seller
Stockholders' Meeting in accordance with Section 6.8 shall not be limited or
otherwise affected by the commencement, disclosure, announcement or submission
of any Superior Proposal or other Acquisition Proposal, or by any withdrawal or
modification of the Seller Board Recommendation.
(e) Notwithstanding anything to the contrary contained in this
Agreement, if the Seller Board Recommendation shall be withdrawn or modified in
a manner adverse to Parent, then, at the request of Parent:
(i) Seller shall call, give notice of and hold the Seller
Stockholders' Meeting on a date and at a time and place determined by Parent;
(ii) Seller shall set a record date for persons entitled to
notice of, and to vote at, the Seller Stockholders' Meeting on a date determined
by Parent;
(iii) Seller shall cause its transfer agent to make a
stockholder list and other stock transfer records relating to Seller available
to Parent;
(iv) Seller shall waive any standstill or similar provisions
applicable to Parent; and
(v) Seller shall render such other reasonable assistance to
Parent in the solicitation of proxies by Parent in favor of the adoption of this
Agreement as Parent shall request.
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6.9 BULK SALES. Purchaser hereby waives compliance with applicable bulk
transfer or similar laws, if any, and Seller hereby indemnifies and holds
harmless Purchaser from any liabilities and obligations arising from claims made
by third parties under applicable bulk transfer or similar laws, if any,
applicable to the transactions contemplated in this Agreement herein.
6.10 COLLECTION OF ACCOUNTS RECEIVABLE. To the extent Seller receives any
payment after the Closing from a customer on account of an Acount Receivable,
Seller shall hold such payment in trust for the benefit of Purchaser, promptly
notify Purchaser and remit such funds to Purchaser.
6.11 ESTABLISHMENT OF TRUST; SATISFACTION BY SELLER OF LIABILITIES. As of
the Closing Date, Seller shall establish a trust (the "Trust") for the benefit
of Seller's creditors for the payment of the Excluded Liabilities, and the Cash
Payment shall be wired by Parent to the Trust account established by the Trust
(the "Trust Account"). From and after the Closing Date, the Trust shall timely
pay, and Seller shall timely pay, perform, discharge and/or settle (i) all
Excluded Liabilities and any other Liability of Seller which is not an Assumed
Liability, in all material respects unless contested by Seller in good faith and
(ii) all covenants and obligations of this Agreement imposed on Seller. From and
after the Closing Date, the Trust shall timely pay any invoice or account
payable in accordance with its terms and, in the event that the Trust fails to
so timely pay any of such invoices or accounts payable in accordance with its
terms, and, in the reasonable judgment of Parent, such failure could aversely
affect Parent's or Purchaser's relationship with any of Parent's vendors, then
Parent shall have the right, but not the obligation, to pay such invoices or
accounts payable on behalf of Seller and to obtain reimbursement out of the
Escrow Fund pursuant to Section 12.5 and such reimbursement shall not be subject
to the limitations set forth in Section 12.2(b). In connection with any
settlement or other discharge of any obligation of Seller which is not
accompanied by payment and/or performance in full of such obligations, Seller
shall obtain a written settlement agreement with respect thereto that, among
other things, provides for a full release of all claims against Seller and its
successors and assigns.
6.12 NOTICE TO VENDORS. Purchaser shall, as soon as practicable following
the Closing Date, send to each vendor under an Assumed Contract a written notice
of the assignment to Purchaser of Seller's obligation under such Assumed
Contract, which notice shall request such vendor's agreement to look solely to
Purchaser for payment or performance of such Assumed Contract and to release
Seller from all obligations thereunder.
6.13 DISTRIBUTION FROM SELLER'S 401(K) PLAN. To the extent that Parent and
or Purchaser hire individuals who were employed by Seller as of the Closing Date
("Former Seller Employees"), Seller hereby agrees that it shall cause the
accounts, if any, of such Former Seller Employees in Seller's 401(k) Plan to be
distributed as provided by Code Section 401(k)(10)(A)(ii).
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ARTICLE VII
PRE-CLOSING COVENANTS OF PARENT AND PURCHASER
7.1 ADVICE OF CHANGES. Each of Parent and Purchaser will promptly notify
Seller in writing of any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of Parent or
Purchaser, as applicable, contained in this Agreement, if made on or as of the
date of that event or the Closing Date, untrue or inaccurate in any material
respect.
7.2 SATISFACTION OF CONDITIONS PRECEDENT. Subject to Subsection 7.2, each
of Parent and Purchaser will use its reasonable commercial efforts to satisfy or
cause to be satisfied all the conditions precedent to the Closing hereunder, and
to cause the transactions contemplated herein to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated herein.
ARTICLE VIII
MUTUAL COVENANTS
8.1 CONFIDENTIALITY AND PUBLICITY. The parties acknowledge that the
Confidentiality Agreement is binding upon the parties hereto and in full force
and effect, except to the extent that the provisions hereof supersede provisions
to similar effect contained in the Confidentiality Agreement. The terms of the
Confidentiality Agreement (exclusive of such superseded provisions) are
incorporated in this Agreement by this reference.
8.2 REGULATORY FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms
and conditions of this Agreement, each of Seller and Purchaser shall use its
respective reasonable commercial efforts to (a) make all necessary filings with
respect to the Acquisition and this Agreement under the Securities Act, the
Exchange Act and applicable blue sky or similar securities laws and obtain
required approvals and clearances with respect thereto and supply all additional
information requested in connection therewith, (b) make premerger notification
or other appropriate filings with federal, state, provincial or local
governmental bodies or applicable foreign governmental agencies and obtain
required approvals and clearances with respect thereto and supply all additional
information requested in connection therewith, (c) obtain all consents, waivers,
approvals, authorizations and orders required in connection with the
authorization, execution and delivery of this Agreement and the Ancillary
Agreements and the consummation of the Acquisition and (d) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated in this Agreement as promptly as practicable.
8.3 GOVERNMENTAL FILINGS. As promptly as practicable after the execution
of this Agreement, each of Seller and Purchaser shall make any and all required
governmental filings required with respect to the transactions contemplated in
this Agreement and the Ancillary
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Agreements, and shall use its respective best efforts to respond promptly to all
inquiries or requests for additional information or documentation from any
Governmental Entity.
8.4 FURTHER ASSURANCES. Prior to and following the Closing, each party to
this Agreement agrees to cooperate fully with the other party and to execute
such further instruments, documents and agreements, and to give such further
written assurances, as may be reasonably requested by any other party to better
evidence and reflect the transactions described herein and the Ancillary
Agreements and contemplated herein and therein and to carry into effect the
intent and purposes of this Agreement. Prior to and after the Closing Date,
Seller shall reasonably cooperate with Parent and/or Purchaser, as applicable,
in attempting to obtain the agreement of parties to the Contracts necessary for
Parent's or Purchaser's enjoyment of the Assets or the Intellectual Property or
Parent's or Purchaser's conduct of the Business following the Closing Date to
extend the benefits and obligations of such Contracts to Parent and/or
Purchaser.
8.5 COMMUNICATIONS PLAN. Purchaser and Seller shall use their respective
reasonable commercial efforts to carry out the communications plan as agreed to
among the parties as of the date of this Agreement with respect to
communications to their respective customers, suppliers, employees, investors
and strategic partners concerning the transactions contemplated hereby.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to this Agreement to effect the transactions to be performed by such
party at the Closing are, at the option of such party, subject to the
satisfaction at or prior to the Closing of the following conditions:
(a) NO ORDERS. No order shall have been entered, and not vacated, by
a court or administrative agency of competent jurisdiction, in any action or
proceeding which enjoins, restrains or prohibits the Acquisition or the
consummation of any other transaction contemplated herein.
(b) PERMITS, AUTHORIZATIONS AND APPROVALS. All permits,
authorizations, approvals and orders required to be obtained under all
applicable Laws or Decrees in connection with the transactions contemplated
herein, including but not limited to any applicable consent or termination of
any applicable waiting period under any Law shall have been obtained and shall
be in full force and effect at the Closing Date.
(c) NO LITIGATION. There shall be no litigation pending or
threatened by any Governmental Entity in which (i) an injunction is or may be
sought against the transactions contemplated herein or (ii) relief is or may be
sought against any party hereto as a result of this Agreement and in which, in
the good faith judgment of the board of directors of either Parent or Seller
(relying on the advice of their respective legal counsel), such Governmental
Entity has the probability of prevailing and such relief would have a Material
Adverse Effect upon such party.
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(d) STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall be approved by the shareholders of Seller by the
requisite vote under applicable law and the Seller's Certificate of
Incorporation.
9.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to
effect the transactions to be performed by it at the Closing are, at the option
of Seller, subject to the satisfaction at or prior to the Closing of the
following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of Purchaser set forth in ARTICLE V hereof shall be true and correct
in all material respects on and as of the Closing Date with the same force and
effect as if such representations and warranties had been made at the Closing,
and each of Parent and Purchaser shall have delivered to Seller a certificate
(the "Purchaser Compliance Certificate") to such effect dated as of the Closing
Date and signed by the President of Parent and Purchaser, respectively.
(b) PERFORMANCE. All of the terms, covenants and conditions of this
Agreement to be complied with and performed by each of Parent and Purchaser, as
applicable, at or prior to the Closing shall have been duly complied with and
performed in all material respects, and Purchaser shall have delivered to Seller
the Purchaser Compliance Certificate to such effect.
(c) PURCHASE PRICE CONSIDERATION. Purchaser shall have delivered the
Initial Purchase Price to Seller in accordance with Section 2.6(a) hereof.
(d) ANCILLARY AGREEMENTS. Each of Parent and Purchaser shall have
executed and delivered to Seller each of the Ancillary Agreements, including the
Escrow Agreement in the form attached hereto as EXHIBIT "A".
(e) PURCHASER'S CLOSING DELIVERABLES. At the Closing, Purchaser will
deliver to Seller the following items:
(i) the Purchase Price;
(ii) the Purchaser Compliance Certificate in accordance with
Section 9.2(a) and (b) hereof;
(iii) copies of each of the Ancillary Agreements executed by
Parent or Purchaser, as applicable;
(iv) a certificate, signed by the Secretary of Parent and
Purchaser, as applicable, respectively, certifying as to and accuracy of, and
attaching copies of, Parent's and Purchaser's respective charter documents and
all board of directors resolutions adopted in connection with the Acquisition,
of Parent and Purchaser, as applicable, respectively; and
(v) all other documents required to be delivered to Seller
under this Agreement.
9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND PURCHASER. The obligations of
Parent and Purchaser to effect the transactions to be performed by it at the
Closing are, at the option of
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Parent and Purchaser, subject to the satisfaction at or prior to the Closing of
the following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of Seller set forth in ARTICLE IV hereof shall be true and correct in
all material respects on and as of the Closing Date with the same force and
effect as if such representations and warranties had been made at the Closing,
and Seller shall have delivered to each of Parent and Purchaser a certificate
(the "Seller Compliance Certificate") to such effect dated as of the Closing
Date and signed by the President of Seller.
(b) PERFORMANCE. All of the terms, covenants and conditions of this
Agreement to be complied with and performed by Seller at or prior to the Closing
shall have been duly complied with and performed in all material respects, and
Seller shall have delivered to each of Parent and Purchaser the Seller
Compliance Certificate to such effect.
(c) REQUIRED CONSENTS. Any and all required consents from third
parties to the Assumed Contracts and other instruments required to allow the
consummation of the Acquisition and the other transactions contemplated herein
shall have been obtained, and evidence thereof satisfactory to Parent and
Purchaser shall have been delivered to Parent and Purchaser.
(d) BANK CONSENTS AND RELEASES. Silicon Valley Bank shall have
consented to the transactions contemplated hereby and to the assignment and
assumption of the Silicon Valley Bank Loan Agreement, all at no additional cost
to Parent and Purchaser; or, at the option of Parent and Purchaser, Silicon
Valley Bank shall allow the repayment of such financing at the Closing without
penalty or premium.
(e) MATERIAL ADVERSE CHANGE. There shall have been no Material
Adverse Change relating the Assumed Liabilities, to the Assets or the Business.
(f) ANCILLARY AGREEMENTS. Seller shall have executed and delivered
to each of Parent and Purchaser, as applicable, each of the Ancillary Agreements
to which it is a party, including the Escrow Agreement in the form attached
hereto as EXHIBIT "A".
(g) ASSIGNMENTS OF GOVERNMENT CONTRACTS; AND SECURITY CLEARANCE
TRANSFER. Seller shall have obtained an effective novation of all the
Governmental Contracts, set forth on SCHEDULE 1.8 hereof, all in form and
substance reasonably satisfactory to counsel to Purchaser, and Parent shall have
received a facilities securities clearance from all appropriate agencies of the
Federal government.
(h) TRANSFER DOCUMENTS. All documentation pursuant to which the
transactions contemplated herein are to be accomplished, including bills of
sale, assignments and other documents or instruments of transfer, shall have
been presented to each of Parent and Purchaser and their counsel for review and
shall have been consistent with this Agreement and reasonably satisfactory in
form and substance to Parent and Purchaser and their counsel prior to the
consummation of such transactions. All of the Assets, including the Assumed
Contracts, shall have been transferred or assigned from Seller to Parent and
Purchaser free and clear of all
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Encumbrances (except Permitted Encumbrances), and Parent and Purchaser and their
counsel shall have received evidences of such transfers reasonably satisfactory
to them.
(i) AUDITED FINANCIAL STATEMENTS. Seller shall have delivered to
each of Parent and Purchaser audited balance sheets pertaining to the Seller as
of December 31, 1998 and December 31, 1999 and audited statements of operations
and cash flow pertaining to the Seller for the years then ended, all prepared in
accordance with GAAP.
(j) PRECLOSING PRO FORMA BALANCE SHEET. Seller shall have delivered
to Parent and Purchaser at least five (5) days before the Closing a pro forma
balance sheet of Seller as of the most recent calendar month end prior to the
date of delivery of such statement together with a good faith reasonable
projection of changes to such balance sheet through the Closing (after giving
effect to the Transaction), the form and content of which shall be acceptable to
Parent and Purchaser, such judgment to be exercised in good faith.
(k) OPINION OF COUNSEL. Seller's counsel shall have delivered an
opinion of counsel to Parent and Purchaser as to the matters set forth in
EXHIBIT "B" in form and substance satisfactory to Parent and its counsel.
(l) EMPLOYEES. As of the Closing Date, all of the Key Employees and
at least eighty percent (80%) of the Seller employees employed by the Business
who are not Key Employees shall be Seller employees and shall have accepted
written offers of employment extended by Purchaser at substantially equal pay
rates and pursuant to Parent's usual benefit package.
(m) SELLER'S CLOSING DELIVERABLES. At the Closing, Seller will
deliver to Purchaser the following items:
(i) a bill of sale, intellectual property assignments,
assignments and assumptions of contracts and such other good and sufficient
instruments of conveyance, assignment and transfer, in form and substance
reasonably satisfactory to counsel to Parent and Purchaser as shall be legally
sufficient to vest in Parent and Purchaser, as applicable, good and marketable
title to the Assets (including the Assumed Contracts);
(ii) all Business Records;
(iii) the Seller Compliance Certificate in accordance with
Section 9.3(a) and (b) hereof;
(iv) all required consents from third parties to the Contracts
in accordance with Section 9.3(c) hereof;
(v) the executed opinion of counsel to Seller in accordance
with Section 9.3(k) hereof;
(vi) intentionally omitted;
(vii) executed copies of each of the Ancillary Agreements;
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(viii) the audited financial statements in accordance with
Section 9.3(i) hereto;
(ix) a certificate, signed by the Secretary of Seller,
certifying as to the truth and accuracy of, and attaching copies of, Seller's
charter documents and board of directors and shareholder resolutions adopted in
connection with the Transaction;
(x) the assignments of the Assumed Contracts in accordance
with Section 9.3(g) hereof;
(xi) all other documents required to be delivered to Parent
and/or Purchaser, as applicable, under the provisions of this Agreement.
(n) TRUST. The Trust shall be established and the agreement
establishing the Trust shall have been reasonably approved by Parent and
Purchaser. Said agreement shall not be materially modified or terminated without
the prior written consent of Parent and Purchaser, which consent shall not be
unreasonably withheld.
ARTICLE X
POST-CLOSING MATTERS
10.1 EMPLOYEES.
(a) EMPLOYMENT OFFER AND EMPLOYMENT TERMS AND CONDITIONS. An offer
of employment shall be made by Parent or Purchaser to Seller employees employed
by the Business ("Prospective New Purchaser Employees"). Seller agrees to use
its best efforts to retain employees employed by the Business, including Key
Employees, and shall notify Purchaser promptly if, notwithstanding the
foregoing, any Seller employee employed by the Business submits a resignation to
terminate employment or terminates employment prior to the Closing Date.
(b) SELLER'S OBLIGATIONS AND LIABILITIES.
(i) Seller shall be solely responsible for filing all tax
returns with respect to its employment of any Seller employee through the
Closing Date.
(ii) Seller shall be solely liable for and obligated to pay,
and shall indemnify and hold Parent and Sub and any Affiliates thereof harmless
from, any and all liabilities with respect to Seller's termination of employment
of any employee on or before the Closing Date.
(iii) Seller shall be responsible for any liability for claims
filed with respect to any employee of Seller eligible for coverage,
reimbursement and/or benefits under the terms of any of Seller's Employee Plans,
provided such liability (A) accrued or became payable during the period of such
employee's employment with Seller on or before the Closing Date or (B) arose out
of Seller's termination of such employee's employment on or before the Closing
Date. Additionally, Seller shall be responsible for any liability for accrued
benefits with respect
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to any Prospective New Purchaser Employee who, as a result of employment with
Seller on or before the Closing Date, was a participant in any of Seller's
Employee Plan.
(c) NO RIGHTS CONFERRED UPON EMPLOYEES. The parties hereby
acknowledge that, except as otherwise provided in Section 10.1(a) and (b),
Purchaser is not under any obligation to employ any current or future employee
of Seller or any Affiliate thereof. Further, nothing in this Agreement shall
confer any rights or remedies under this Agreement on any employee.
10.2 FURTHER ASSURANCES OF SELLER. Seller shall, from time to time, at the
request of Purchaser, and without further consideration, execute and deliver
such instruments of transfer, conveyance and assignment in addition to those
delivered pursuant to Sections 2.1 and 9.3 hereof, and take such other actions,
as may be reasonably necessary to assign, transfer, convey and vest in
Purchaser, and to put Purchaser in possession of, the Assets, including but not
limited to obtaining any and all required consents of third parties which Seller
has not obtained as of the Closing Date. Seller shall use its reasonable
commercial efforts to obtain for Purchaser any and all consents of third
parties, as required under Section 6.4 which Seller has not obtained as of the
Closing Date.
10.3 FURTHER ASSURANCES OF PURCHASER. Purchaser shall, from time to time
at the request of Seller, and without further consideration, execute and deliver
such instruments of assumption, and take such other action, as may be reasonably
necessary to effectively confirm the assumption by Purchaser of the Assumed
Liabilities.
10.4 ACCESS TO BUSINESS RECORDS. From and after the Closing Date,
Purchaser shall use ordinary care to maintain the Business Records acquired by
it pursuant hereto and, damage by fire or other casualty or accident excepted,
shall not for a period of six (6) years after the Closing Date destroy or
dispose of any such Business Records unless it shall first have notified Seller
of its intention to do so and shall have afforded Seller an opportunity to take
possession thereof. Seller shall have the right to retain a copy of the Business
Records. Similarly, from and after the Closing Date, Seller shall use ordinary
care to maintain Seller's copy of the Business Records and of any records
relating to the Business not transferred to Purchaser and, damage by fire or
other casualty or accident excepted, shall not for a period of six (6) years
after the Closing Date destroy or dispose of any such records unless it shall
first have notified Purchaser of its intention to do so and shall have afforded
Purchaser an opportunity to take possession thereof. From and after the Closing
Date, each party shall afford the other access to all preclosing Business
Records and other information acquired or retained by it pursuant hereto,
including data processing information, upon reasonable notice during ordinary
business hours for all reasonable business purposes, and each party shall permit
the other party to make copies of any such records and retain possession of such
copies. Each of Purchaser and Seller shall use reasonable care to maintain the
confidentiality of the Business Records in the possession of such party pursuant
to the terms and subject to the conditions set forth in the Confidentiality
Agreement.
10.5 TAX LIABILITY.
(a) Except as set forth herein, Seller shall pay all Taxes arising
from or relating to the transactions contemplated in this Agreement (the
"Transaction Taxes"). If a resale
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certificate, resale purchase exemption certificate, production machinery and
equipment exemption certificate or other certificate or document of exemption is
required to reduce or eliminate the Transaction Taxes, Purchaser will promptly
furnish such certificate or document to Seller or Purchaser will cooperate with
Seller to allow Seller to obtain such reduction or exemption from Transaction
Taxes.
(b) All ad valorem, property (whether real or personal) and similar
taxes ("Property Taxes") with respect to the Assets for any tax period in which
the Closing Date occurs shall be prorated between the Buyer and the Seller, with
the Seller economically responsible for the Property Taxes for the portion of
the tax year prior to and including the Closing Date. Seller shall be
responsible for the preparation and filing of any tax returns or reports related
to the Assets that are required to be filed on or before the Closing Date.
Seller shall be responsible for all taxes imposed on or with respect to the
Assets that are attributable to any whole or partial taxable period ending on or
before the Closing Date. Buyer, with the cooperation of Seller, shall be
responsible for the preparation and filing of all other tax returns or reports
related to the Assets.
10.6 GROUP HEALTH PLANS. Seller shall maintain and keep in full force and
effect, at Seller's sole cost, for a period of not less than six (6) months
after the Closing, all currently maintained Seller Employee Plans which provide
health and medical benefits to Seller's current and former employees. In
addition, Seller acknowledges that it will be responsible for providing COBRA
notices and applicable COBRA coverage for those employees and former employees
who are or will be M&A qualified beneficiaries (as that term is defined in
proposed treasury regulation section 54.4980B-9 Q&A 4).
10.7 FINANCIAL STATEMENT. Seller shall use its reasonable commercial
efforts to cause its independent accountants ("Seller's Accountants"), at
Purchaser's expense, to (i) consent to Purchaser's inclusion of Seller's
Accountants' report on Seller's annual financial statements for the periods
ending December 31, 1998 and December 31, 1999, and/or (ii) audit and consent to
Purchaser's inclusion of Seller's Accountants' report on Seller's interim
financial statements for periods after December 31, 1999 and/or the annual
financial statements of the Business for the periods ending December 31, 1998
and December 31, 1999 and any interim periods thereafter, all as required by
Regulation S-X under the Securities Act of 1933 to be included in Purchaser's
reports filed with the SEC.
ARTICLE XI
TERMINATION OF AGREEMENT
11.1 TERMINATION. This Agreement may be terminated prior to the Closing
(whether before or after approval of this Agreement by Seller's stockholders:
(a) by mutual written consent of Parent and Seller;
(b) by either Parent or Seller if the Closing shall not have
occurred by June 30, 2000 (unless the failure to consummate the Transaction is
attributable to a failure on the
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part of the party seeking to terminate this Agreement to perform any material
obligation required to be performed by such party at or prior to the Closing);
(c) by either Parent or Seller if a court of competent jurisdiction
or other Governmental Entity shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger;
(d) by either Parent or Seller if (i) Seller Stockholders' Meeting
(including any adjournments and postponements thereof) shall have been held and
completed and Seller's stockholders shall have taken a final vote on a proposal
to adopt this Agreement, and (ii) this Agreement shall not have been adopted at
such meeting by the Required Seller Stockholder Vote (and shall not have been
adopted at any adjournment or postponement thereof); PROVIDED, HOWEVER, that (A)
a party shall not be permitted to terminate this Agreement pursuant to this
Section 11.1(d) if the failure to obtain such stockholder approval is
attributable to a failure on the part of such party to perform any material
obligation required to be performed by such party at or prior to the Closing,
and (B) Seller shall not be permitted to terminate this Agreement pursuant to
this Section 11.1(d) unless Seller shall have made the payment required to be
made to Parent pursuant to Section 11.3(a) and shall have paid to Parent any fee
required to be paid to Parent pursuant to Section 11.3(b);
(e) by Parent (at any time prior to the adoption of this Agreement
by the Required Seller Stockholder Vote) if a Seller Triggering Event shall have
occurred;
(f) by Parent if (i) any of Seller's representations and warranties
contained in this Agreement shall be inaccurate as of the date of this
Agreement, or shall have become inaccurate as of a date subsequent to the date
of this Agreement (as if made on such subsequent date), such that the condition
set forth in Section 9.3(a) would not be satisfied (it being understood that,
for purposes of determining the accuracy of such representations and warranties
as of the date of this Agreement or at any subsequent date, (A) all "Material
Adverse Effect" qualifications and other materiality qualifications, and any
similar qualifications, contained in such representations and warranties shall
be disregarded and (B) any update of or modification to Seller Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded), or (ii) any of Seller's covenants contained in this
Agreement shall have been breached such that the condition set forth in Section
9.3(b) would not be satisfied; PROVIDED, HOWEVER, that if an inaccuracy in
Seller's representations and warranties or a breach of a covenant by Seller is
curable by Seller and Seller is continuing to exercise all reasonable efforts to
cure such inaccuracy or breach, then Parent may not terminate this Agreement
under this Section 11.1(f) on account of such inaccuracy or breach;
(g) by Seller if (i) any of Parent's representations and warranties
contained in this Agreement shall be inaccurate as of the date of this
Agreement, or shall have become inaccurate as of a date subsequent to the date
of this Agreement (as if made on such subsequent date), such that the condition
set forth in Section 9.2(a) would not be satisfied (it being understood that,
for purposes of determining the accuracy of such representations and warranties
as of the date of this Agreement or at any subsequent date, (A) all "Material
Adverse Effect" qualifications and other materiality qualifications, and any
similar qualifications, contained in
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such representations and warranties shall be disregarded and (B) any update of
or modification to the Parent Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded), or (ii) if any of
Parent's covenants contained in this Agreement shall have been breached such
that the condition set forth in Section 9.2(b) would not be satisfied; PROVIDED,
HOWEVER, that if an inaccuracy in Parent's representations and warranties or a
breach of a covenant by Parent is curable by Parent and Parent is continuing to
exercise all reasonable efforts to cure such inaccuracy or breach, then Seller
may not terminate this Agreement under this Section 11.1(g) on account of such
inaccuracy or breach; or
(h) by Parent if, since the date of this Agreement, there shall have
occurred any Material Adverse Effect on the Business, the Assets or the Assumed
Liabilities, or there shall have occurred any event or circumstance that, in
combination with any other events or circumstances, could reasonably be expected
to have a Material Adverse Effect on the Business, the Assets or the Assumed
Liabilities.
11.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 11.1, this Agreement shall be of no further
force or effect; PROVIDED, HOWEVER, that (i) this Section 11.2, Section 11.3 and
ARTICLE XIII shall survive the termination of this Agreement and shall remain in
full force and effect, and (ii) the termination of this Agreement shall not
relieve any party from any liability for any willful breach of any
representation, warranty or covenant contained in this Agreement.
11.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 11.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses, whether or
not the Transaction is consummated; PROVIDED, HOWEVER, that if this Agreement is
terminated by Parent or Seller pursuant to Section 11.1(d) or by Parent pursuant
to Section 11.1(f), then Seller shall make a nonrefundable cash payment to
Parent (in addition to any fee that may be payable pursuant to Section 11.3(b)
or otherwise), at the time specified in the next sentence, in an amount equal to
the aggregate amount of all fees and expenses (including all attorneys' fees,
accountants' fees, financial advisory fees and filing fees) that have been paid
or that may become payable by or on behalf of Parent in connection with the
preparation and negotiation of this Agreement and otherwise in connection with
the Transaction; and
(b) If (i) this Agreement is terminated by Parent or Seller pursuant
to Section 11.1(d) and at or prior to the time of such termination an
Acquisition Proposal shall have been disclosed, announced, commenced, submitted
or made, or (ii) this Agreement is terminated by Parent pursuant to Section
11.1(e), then, in either such case, Seller shall pay to Parent, in cash at the
time specified in the next sentence (in addition to any payment required to be
made pursuant to Section 11.3(a)), a nonrefundable fee in the amount of
$250,000. In the case of termination of this Agreement by Seller pursuant to
Section 11.1(d), the fee referred to in the preceding sentence shall be paid by
Seller prior to such termination, and in the case of termination of this
Agreement by Parent pursuant to Section 11.1(d) or Section 11.1(e), the fee
referred to in the preceding sentence shall be paid by Seller within two
business days after such termination.
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ARTICLE XII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
12.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) The representations
and warranties made by Seller or Purchaser herein, or in any certificate,
schedule or exhibit delivered pursuant hereto, shall in no manner be limited by
any investigation of the subject matter thereof made by or on behalf of either
party or by the waiver or satisfaction of any condition to closing and shall
survive the Closing and continue in full force and until the first anniversary
of the Closing Date (the "Expiration Date").
(b) The obligations of Seller to indemnify members of the Purchaser
Group (as defined below) for any Indemnifiable Losses is subject to the
condition that Seller shall have received an Indemnification Claim for all
Indemnifiable Losses for which indemnity is sought on or before the Expiration
Date.
12.2 INDEMNIFICATION BY SELLER.
(a) Subject to the terms and conditions of this ARTICLE XII, Seller
agrees to indemnify, defend and hold harmless Parent, its shareholders,
officers, directors, employees, attorneys, all subsidiaries and affiliates of
Parent, and the respective officers, directors, employees and attorneys of such
entities (all such persons and entities being collectively referred to as the
"Purchaser Group") from, against, for and in respect of any and all Losses
asserted against, relating to, imposed upon or incurred by Parent and/or any
other member of the Purchaser Group by reason of, resulting from, based upon or
arising out of any of the following (collectively, "Indemnifiable Losses"):
(i) the breach, inaccuracy, untruth or incompleteness of any
representation or warranty of Seller contained in or made pursuant to this
Agreement or any certificate, schedule or exhibit delivered by Seller in
connection with this Agreement;
(ii) the breach or nonperformance of any covenant or agreement
of Seller contained in or made pursuant to this Agreement or any of the
Ancillary Agreements;
(iii) any Losses arising out of any oral contract to which
Seller is a party and which is not disclosed to Purchaser in writing on or prior
to the date of this Agreement.
(iv) any Excluded Liability; or
(v) any breach by Seller of this ARTICLE XII.
(b) Subject to Section 12.2(c), Seller shall not be required to
indemnify Parent and/or any other member of the Purchaser Group for any
Indemnifiable Losses under Section 12.2(a) until the aggregate amount of all
Indemnifiable Losses under all individual Indemnification Claims shall exceed
$50,000 (the "Seller's Indemnification Floor"); PROVIDED, HOWEVER, that if the
aggregate amount of Indemnifiable Losses in respect of such Indemnification
Claims shall exceed the Seller's Indemnification Floor, Seller shall indemnify
Purchaser for all Indemnifiable Losses in respect of such Indemnification
Claims, subject to the further limitations
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set forth in this ARTICLE XII. The aggregate amount for which Seller may be
liable under this ARTICLE XII shall not exceed $250,000.
(c) Purchaser's sole and exclusive remedy against Seller for any
Losses shall be indemnification under this ARTICLE XII; PROVIDED, HOWEVER, that
(A) nothing contained in this ARTICLE XII shall limit in any manner any remedy
at law or in equity to which Purchaser or any other member of the Purchaser
Group shall be entitled against Seller as a result of willful fraud or
intentional misrepresentation by Seller, or any of its representatives or agents
and (B) the provisions of Sections 12.2(b) above shall not limit, in any manner,
Seller's obligation to indemnify members of the Purchaser Group for any breach
of any covenant or agreement of Seller to be performed by Seller following the
Closing Date, including, without limitation, Seller's obligation to perform and
discharge all Excluded Liabilities and Seller's obligations arising out of the
Confidentiality Agreement, and the Ancillary Agreements.
12.3 ESCROW FUND. At the Closing, $250,000 shall be deposited with, Bank
of America, NT&SA (or other institution selected by Parent with the reasonable
consent of Seller) as escrow agent (the "Escrow Agent"), such deposit to
constitute the Escrow Fund and to be governed by the terms set forth herein and
in the Escrow Agreement attached hereto as EXHIBIT "A". The Escrow Fund shall be
available to compensate Seller pursuant to the indemnification obligations of
the shareholders of Seller.
12.4 ESCROW PERIOD; RELEASE FROM ESCROW.
(a) The Escrow Period shall terminate six (6) months after the
Closing (the "Termination Date"); provided, however, that a portion of the
Escrow Fund, which, in the reasonable judgment of Parent, subject to the
objection of Seller and the subsequent arbitration of the matter in the manner
provided in Section 12.7 hereof, is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate theretofore delivered to the Escrow Agent
prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been resolved.
(b) Within three (3) business days after the Termination Date (the
"Release Date"), the Escrow Agent shall release from escrow to Seller the Escrow
Fund less the dollar amount equal to (A) any portion of the Escrow Fund
delivered to Parent in accordance with Section 12.5 in satisfaction of
indemnification claims by Parent and/or Purchaser (collectively, "Indemnitee")
and (B) any portion of the Escrow Fund subject to delivery to Indemnitee in
accordance with Section 12.4(a) with respect to any pending but unresolved
indemnification claims of Indemnitee. Any portion of the Escrow Fund held as a
result of clause (B) shall be released to Seller or released to Parent (as
appropriate) promptly upon resolution of each specific indemnification claim
involved.
(c) The Escrow Agent is hereby granted the power to effect any
transfer of the Escrow Fund contemplated by this Agreement.
12.5 CLAIMS UPON ESCROW FUND. Upon receipt by the Escrow Agent on or
before the Release Date of a certificate signed by any officer of Parent (an
"Officer's Certificate") stating
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that with respect to the indemnification obligations of the Seller set forth in
Section 12.2, damages exist and specifying in reasonable detail the individual
items of such damages included in the amount so stated, the date each such item
was paid, or properly accrued or arose, and the nature of the misrepresentation,
breach of warranty, covenant or claim to which such item is related, the Escrow
Agent shall, subject to the provisions of this ARTICLE XII, deliver to Parent
out of the Escrow Fund, as promptly as practicable, cash held in the Escrow Fund
having a value equal to such damages.
12.6 OBJECTIONS TO CLAIMS.
(a) At the time of delivery of any Officer's Certificate to the
Escrow Agent, a duplicate copy of such Officer's Certificate shall be delivered
to Seller and for a period of thirty (30) days after such delivery, the Escrow
Agent shall make no delivery of the Escrow Fund hereof unless the Escrow Agent
shall have received written authorization from Seller to make such delivery.
After the expiration of such thirty (30) day period, the Escrow Agent shall make
delivery of the portion of the Escrow Fund or other property in the Escrow Fund
in accordance with Section 12.5 hereof, provided that no such payment or
delivery may be made if Seller shall object in a written statement to the claim
made in the Officer's Certificate, and such statement shall have been delivered
to the Escrow Agent and Parent prior to the expiration of such thirty (30) day
period.
(b) In case Seller shall so object in writing to any claim or claims
by Parent made in any Officer's Certificate, Parent shall have thirty (30) days
to respond in a written statement to the objection of Seller. If after such
thirty (30) day period there remains a dispute as to any claims, Seller and
Parent shall attempt in good faith for sixty (60) days to agree upon the rights
of the respective parties with respect to each of such claims. If Seller and
Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and shall
distribute the cash from the Escrow Fund in accordance with the terms thereof.
12.7 RESOLUTION OF CONFLICTS AND ARBITRATION.
(a) If no agreement can be reached after good faith negotiation
between the parties pursuant to Sections 12.6, either party may, by written
notice to the other, demand arbitration of the matter unless the amount of the
damages is at issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration; and in either such event the matter shall be
settled by arbitration conducted by one arbitrator. Parent and Seller shall
agree on the arbitrator, provided that if Parent and Seller cannot agree on such
arbitrator, either Parent or Seller can request that Judicial Arbitration and
Mediation Services ("JAMS") select the arbitrator. The arbitrator shall set a
limited time period and establish procedures designed to reduce the cost and
time for discovery while allowing the parties an opportunity, adequate in the
sole judgment of the arbitrator, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrator shall
rule upon motions to compel or limit discovery and shall have the authority to
impose sanctions, including attorneys' fees and costs, to the same extent as a
court of competent law or equity, should the arbitrator determine that discovery
was sought
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without substantial justification or that discovery was refused or objected to
without substantial justification. The decision of the arbitrator shall be
written, shall be in accordance with applicable law and with this Agreement, and
shall be supported by written findings of fact and conclusion of law which shall
set forth the basis for the decision of the arbitrator. The decision of the
arbitrator as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in ARTICLE XII hereof, the Escrow Agent and the
parties shall be entitled to act in accordance with such decision and the Escrow
Agent shall be entitled to make or withhold payments out of the Escrow Fund in
accordance therewith.
(b) Judgment upon any award rendered by the arbitrator may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section 12.7(b), in any
arbitration hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, the party seeking indemnification shall be
deemed to be the Non-Prevailing Party unless the arbitrators award the party
seeking indemnification more than one-half (1/2) of the amount in dispute, plus
any amounts not in dispute; otherwise, the person against whom indemnification
is sought shall be deemed to be the Non-Prevailing Party. The Non-Prevailing
Party to an arbitration shall pay its own expenses, the fees of the arbitrator,
any administrative fee of JAMS, and the expenses, including attorneys' fees and
costs, reasonably incurred by the other party to the arbitration.
12.8 THIRD-PARTY CLAIMS. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify Seller of such claim, and Seller shall be
entitled, at its expense, to participate in any defense of such claim with the
consent of Parent which shall not be unreasonably withheld. Parent shall have
the right in its sole discretion to settle any such claim. In the event that
Seller has consented to any such settlement, Seller shall have no power or
authority to object under ARTICLE XII or any other provision of this Section
12.6 to the amount of any claim by Parent against the Escrow Fund for indemnity
with respect to such settlement.
ARTICLE XIII
GENERAL
13.1 GOVERNING LAW; JURISDICTION; VENUE. It is the intention of the
parties hereto that the internal laws of the State of California (irrespective
of its choice of law principles) shall govern the validity of this Agreement,
the construction of its terms, and the interpretation and enforcement of the
rights and duties of the parties hereto. Any action to enforce, or which arises
out of or in any way relates to, any of the provisions of this Agreement, or any
of the Ancillary Agreements shall be brought and prosecuted exclusively in the
United States District Court, Northern District of California (or, in the event
such court does not have jurisdiction, the courts of the State of California
located in such district), and the parties hereto hereby consent to the
jurisdiction of such court or courts and to service of process by registered
mail, return receipt requested, or by any other manner provided by the law of
the State of California and the rules of such courts.
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13.2 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. None of the parties
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other party, which consent shall not be unreasonably
withheld; PROVIDED, HOWEVER, that Parent may assign its rights under this
Agreement (a) to any majority-owned subsidiary of Purchaser, provided that
Parent guarantees the obligations of such subsidiary hereunder or (b) to any
successor of Parent through any merger or consolidation, or purchase of all or
substantially all of Parent's stock or all or substantially all of Parent's
assets. This Agreement will be binding upon and inure to the benefit of the
parties hereto and their respective permitted successors and assigns.
13.3 SEVERABILITY. If any provision of this Agreement, or the application
thereof, shall for any reason and to any extent be held to be invalid or
unenforceable, the remainder of this Agreement and the application of such
provision to other persons or circumstances shall be interpreted so as best to
reasonably effect the intent of the parties hereto. The parties further agree to
replace such invalid or unenforceable provision of this Agreement with a valid
and enforceable provision which will achieve, to the extent possible, the
economic, business and other purposes of the invalid or unenforceable provision.
13.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto,
the certificates referenced herein, the exhibits thereto, and the
Confidentiality Agreement constitute the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof and thereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto including, without limitation, that
certain letter of intent between the parties dated January 19, 2000.
13.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
13.6 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party shall be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy shall not preclude the exercise of any other.
13.7 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby. The waiver by a party
of any breach hereof for default in payment of any amount due hereunder or
default in the performance hereof shall not be deemed to constitute a waiver of
any other default or any succeeding breach or default.
13.8 WAIVER. Each party hereto may, by written notice to the others: (a)
waive any of the conditions to its obligations hereunder or extend the time for
the performance of any of the obligations or actions of the others, (b) waive
any inaccuracies in the representations of the others contained in this
Agreement or in any documents delivered pursuant to this Agreement, (c) waive
compliance with any of the covenants of the others contained in this Agreement
or
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(d) waive or modify performance of any of the obligations of the others. No
action taken pursuant to this Agreement, including without limitation any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, condition or agreement contained herein. Waiver of the breach of any
one or more provisions of this Agreement shall not be deemed or construed to be
a waiver of other breaches or subsequent breaches of the same provisions.
13.9 NOTICES. All notices and other communications hereunder will be in
writing and will be deemed given (a) upon receipt if delivered personally (or if
mailed by registered or certified mail), (b) the day after dispatch if sent by
overnight courier, (c) upon dispatch if transmitted by telecopier or other means
of facsimile transmission (and confirmed by a copy delivered in accordance with
clause (a) or (b)), properly addressed to the parties at the following
addresses:
Seller: Docucon, Incorporated
20 Valley Stream Parkway
Suite 140
Malvern, PA 19355
Attention: President
Facsimile: (610) 240-9608
with a required copy to: Arter & Hadden LLP
700 North St. Mary's Street
Suite 800
San Antonio, Texas 78205
Attention: Timothy N. Tuggey
Facsimile: (210) 354-4034
Parent: Tab Products Co.
1400 Page Mill Road
Palo Alto, CA 94303
Attention: Chief Executive Officer
Facsimile: (650) 853-2563
with a required copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301
Attention: Diane Holt Frankle, Esq.
Facsimile No.: (650) 327-3699
Either party may change its address for such communications by giving
notice thereof to the other party in conformity with this Section.
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13.10 CONSTRUCTION AND INTERPRETATION OF AGREEMENT.
(a) This Agreement has been negotiated by the parties hereto and
their respective attorneys, and the language hereof shall not be construed for
or against either party by reason of its having drafted such language.
(b) The titles and headings herein are for reference purposes only
and shall not in any manner limit the construction of this Agreement, which
shall be considered as a whole.
(c) As used in this Agreement, any reference to any state of facts,
event, change or effect being "material" with respect to any entity means a
state of facts that is material to the current condition (financial or
otherwise), properties, assets, liabilities, business or operations of such
entity. Whenever the term "enforceable in accordance with its terms" or like
expression is used in this Agreement, it is understood that excepted therefrom
are any limitations on enforceability under applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting the
enforcement of creditor's rights.
13.11 NO JOINT VENTURE. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section.
13.12 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this
Agreement are intended, nor shall be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner of any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof shall be personal solely between the parties
to this Agreement.
52
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the respective dates set forth next to their signatures below.
DOCUCON, INCORPORATED,
Executed on March 7, 2000 a Delaware corporation
By: /s/ DOUGLAS P. GIL
Title: President and Chief
Executive Officer
TAB PRODUCTS,
Executed on March 8, 2000 a Delaware corporation
By:_________________________________
Title: President and Chief
Executive Officer
BUNT ACQUISITION CORPORATION,
Executed on March 8, 2000 a Delaware corporation
By:_________________________________
Title: President and Chief
Executive Officer
53
<PAGE>
EXHIBITS AND SCHEDULES
EXHIBIT DESCRIPTION
------- -----------
A Escrow Agreement
B Opinion of Seller's Counsel
SCHEDULE TITLE
-------- -----
Schedule 1.1 Accounts Payable
Schedule 1.2 Accounts Receivable
Schedule 1.5 Additional Business Liabilities
Schedule 1.8 Assumed Contracts
Schedule 1.39 Inventory
Schedule 1.40 Key Employees
Schedule 1.47 Net Assets
Schedule 1.51 Prepaid Expenses
Schedule 1.62 Tangible Assets
Schedule 2.2(k) Investments
Schedule 2.2(m) Telephone and Fax Numbers; Website
Schedule 2.3 Excluded Assets
Schedule 2.5 Excluded Liabilities
Schedule 2.7(a) Procedures
Schedule IV Disclosure Schedule Provided to Parent and Purchaser
Schedule 4.9 Permits
Schedule 4.12 Intellectual Property
Schedule 4.13 Facilities
Schedule 4.14 Company-Wide Contracts
Schedule 4.15 Insurance
Schedule 4.18 Warranties and Service Payment Obligations
Schedule 4.23 Employee Benefit Plans
Schedule V Disclosure Schedule Provided to Seller
Schedule 6.4 Necessary Consents
<PAGE>
<EXHIBIT A INTENTIONIALLY OMITTED>
<PAGE>
<EXHIBIT B INTENTIONIALLY OMITTED>
<PAGE>
SCHEDULE 1.1
ACCOUNTS PAYABLE
o DOCUCON INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (SUBJECT TO
FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 1.1
1 of 5
DOCUCON, INCORPORATED
ACCOUNTS PAYABLE
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
NOT
VENDOR ASSUMED ASSUMED TOTAL
------ ----------- ----------- -----------
United Parcel Service ............... $ 607 $ -- $ 607
1-800-Flowers ....................... 204 -- 204
A-1 Laminating ...................... 118 -- 118
Accu-Print .......................... 1,972 -- 1,972
Accutronics, Inc. ................... 1,945 -- 1,945
AccuData Services, Inc. ............. 5,882 -- 5,882
Accu-Temp ........................... 242 -- 242
ACS Dataline, Inc. .................. 8,738 -- 8,738
ACSYS Resources, Inc ................ -- 14,088 14,088
ASN Developer Program ............... 1,072 -- 1,072
ADP of San Antonio .................. 2,076 -- 2,076
ADT Security Systems, Inc. .......... 4,023 -- 4,023
Advertisers Disp. & Exh., Inc. ...... 7,320 -- 7,320
Assoc. for Info. & Image Mgnt ....... 13,725 -- 13,725
Allen/Patrick ....................... 344 -- 344
Allied Oregon Inv ................... 25 -- 25
Allied Poly. Service, Inc. .......... 65 -- 65
First Allmerica Financial ........... 12,869 -- 12,869
Altex Electronics, Inc. ............. 1,712 -- 1,712
Altec Products ...................... 60 -- 60
American Airlines ................... 25,302 -- 25,302
American Light ...................... 359 -- 359
Apple Pest Control .................. 399 -- 399
ARMA International .................. 4,443 -- 4,443
Arter & Hadden, LLP ................. 2,443 -- 2,443
Arthur Anderson LLP ................. -- 33,743 33,743
AT&T Business Services .............. 41 -- 41
AT&T ................................ 177 -- 177
Atlantis Laser Center ............... 598 -- 598
ATX Communications .................. 185 -- 185
AVIS Rent A Car Systems ............. 2,763 -- 2,763
Dru Baker ........................... 3,444 -- 3,444
BancTec ............................. 23,127 -- 23,127
Barratt/Warren D .................... -- 137 137
Basset Investigations ............... 66 -- 66
Bauer/Gary .......................... 2,949 -- 2,949
Bell Atlantic ....................... 3,646 -- 3,646
Bell Atlantic ....................... 142 -- 142
Bell Atlantic Mobile ................ 490 -- 490
Best Software ....................... -- 533 533
Sylvia S. Romo, CPA (S.A. R.E. tax) . 21,383 -- 21,383
BFI ................................. 1,026 -- 1,026
Boise Cascade ....................... 4,687 -- 4,687
Border Ornamental Iron & Fence ...... 225 -- 225
Boston Stock Exchange ............... -- 1,000 1,000
Boulevard Plaza Assoc ............... -- 9,653 9,653
BPA South West ...................... 9,019 -- 9,019
Brown/Ralph ......................... -- 1,279 1,279
<PAGE>
SCHEDULE 1.1
2 OF 5
DOCUCON, INCORPORATED
ACCOUNTS PAYABLE
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
NOT
VENDOR ASSUMED ASSUMED TOTAL
------ ----------- ----------- -----------
Burns International Security Services 22,941 -- 22,941
Business Coffee ..................... 2,951 -- 2,951
Cable & Wireless, USA ............... 10,034 -- 10,034
Cable & Wireless, Inc ............... 339 -- 339
Elledelia Castillo .................. 70 -- 70
Cathers & Associates ................ -- 755 755
CDW Computer, Inc ................... 1,783 -- 1,783
Champion Transportation Svcs ........ 2,500 -- 2,500
Chas. P. Young ...................... 17,812 17,812
Central Moving & Storage ............ 18,500 -- 18,500
CNA-VFL ............................. 161 -- 161
Computer Express .................... 8,838 -- 8,838
Commercial Lawn Service ............. 912 -- 912
Concentra Medical Centers ........... 350 -- 350
Convention Decorating Service ....... 587 -- 587
Corporate Travel Planners ........... 9,452 -- 9,452
Council for Electronic Govt ......... 250 -- 250
City Public Service ................. 16,172 -- 16,172
Crocodile Cafe ...................... -- 116 116
Daily Local News .................... -- 196 196
Data Comm Warehouse ................. 942 -- 942
Dechert, Price & Rohdes ............. 2,481 -- 2,481
Dell Direct Sales L.P. .............. -- 7,784 7,784
Dell Financial Services ............. -- 1,954 1,954
Depository Trust Co. ................ -- 2,200 2,200
Design Electric ..................... 2,044 -- 2,044
Desmond Hotel & Conf. Center ........ 410 -- 410
DG&A Advertising .................... 904 -- 904
Drug Information Assoc .............. 65 -- 65
Double Time Express ................. 76 -- 76
Dover Elevators ..................... 2,481 -- 2,481
Dun & Bradstreet .................... 625 -- 625
Dustless-Air Filter Co. ............. 107 -- 107
The Employment Choice ............... 10,574 -- 10,574
EDC Moving Systems .................. 205 -- 205
EEC Systems, Inc .................... 3,738 -- 3,738
The Employment Guide ................ 240 -- 240
J. Epstein & Assoc .................. 4,600 -- 4,600
E*Trade Business Solutions .......... -- 3,215 3,215
Exposure San Antonio ................ 100 -- 100
Extreme Networks .................... 119 -- 119
Federal Express Corp. ............... -- 1,039 1,039
Federal Express Corp. ............... 2,989 -- 2,989
Felco Office Systems ................ 2,149 -- 2,149
Filenet ............................. 1,500 -- 1,500
First Aid/Mr ........................ 456 -- 456
Frank Martin (FM Systems) ........... 4,703 -- 4,703
Federal Schedules, Inc .............. 10,000 -- 10,000
FSI, Inc. ........................... 3,072 -- 3,072
Leticia Vasquez ..................... 528 -- 528
Renita Galloway ..................... 26 -- 26
Global Knowledge .................... 1,495 -- 1,495
<PAGE>
SCHEDULE 1.1
3 OF 5
DOCUCON, INCORPORATED
ACCOUNTS PAYABLE
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
NOT
VENDOR ASSUMED ASSUMED TOTAL
------ ----------- ----------- -----------
General Neon Sign ................... 4,587 -- 4,587
Government Tech Conference .......... 4,363 -- 4,363
Grinnel Fire Protection Sys ......... 394 -- 394
Guaranteed Foliage, Inc. ............ -- 1,118 1,118
Harper/James ........................ 134 -- 134
Harris Trust and Savings Bank ....... -- 3,584 3,584
Hay Group, Inc. ..................... 23,760 -- 23,760
Herman Miller/Spectrum .............. -- 1,617 1,617
Bernard Hodes Advertising Inc. ...... -- 892 892
Homewood Suites ..................... 6,221 -- 6,221
HQ Tyson's Corner ................... 26,225 -- 26,225
Perfect Scents, Inc ................. 614 -- 614
In Phase ............................ -- 2,100 2,100
Insco Distributing .................. 80 -- 80
Insight ............................. 1,783 -- 1,783
Jackson Walker LLP .................. 171 -- 171
Jason's Deli ........................ 213 -- 213
The Job Seeker's Magazine ........... 680 -- 680
Joe's Lock Service .................. -- 233 233
Kalthoff International .............. 2,500 -- 2,500
L.C. Vending ........................ 2,385 -- 2,385
Leadership Directories, Inc ......... 214 -- 214
Learnkey, Inc ....................... 208 -- 208
Liberty Printing & Office Supp ...... -- 461 461
Lillie's Plantscapes ................ 224 -- 224
Macke Water Systems, Inc ............ 75 -- 75
MacKenzie Partners, Inc. ............ -- 6,402 6,402
Maestro Media ....................... 56 -- 56
Manpower ............................ 569,762 -- 569,762
MBS & Associates .................... 9,129 -- 9,129
MCI Telecommunications .............. 10,535 -- 10,535
MCI Worldcom ........................ 2,435 -- 2,435
MCI Worldcom ........................ 16 -- 16
MCI Worldcom ........................ 5,423 -- 5,423
MCI Worldcom ........................ 7,943 -- 7,943
McLaughlin/Chris .................... 261 -- 261
Media Technologies, Inc ............. 6,739 -- 6,739
Tony Mencio ......................... 126 -- 126
Microsoft Press ..................... 565 -- 565
MobileComm .......................... 2,841 -- 2,841
Mooney/Michael C .................... 102 -- 102
Morgan, Lewis & Bockius LLP ......... -- 3,980 3,980
NDIA ................................ 2,500 -- 2,500
Network Associates .................. 1,421 -- 1,421
NTFC Capital Corporation ............ 4,977 -- 4,977
Northstar Express Freight ........... 929 -- 929
NU Net, Inc ......................... 60 -- 60
Oakwood Corporate Housing ........... 6,864 -- 6,864
Oak Tree Resources .................. -- 1,279 1,279
Office Depot ........................ 12,906 -- 12,906
Pacific Inv. Services ............... 19 -- 19
Pack/Brian .......................... 192 -- 192
<PAGE>
SCHEDULE 1.1
4 OF 5
DOCUCON, INCORPORATED
ACCOUNTS PAYABLE
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
NOT
VENDOR ASSUMED ASSUMED TOTAL
------ ----------- ----------- -----------
Pack Mark Shipping Supplies ......... 905 -- 905
Pack/Karen .......................... 39 -- 39
Padgett, Stratemann & Co. LLP ....... 5,400 600 6,000
Pitney Bowes Credit Corp ............ -- 176 176
PC Wholesale ........................ 2,405 -- 2,405
Pension Benefits Inc. ............... -- 484 484
Petty Cash (S.A.) ................... 455 -- 455
Photomatrix Corp .................... 18,461 -- 18,461
Pioneer Electronics Svc. Inc ........ 999 -- 999
Pitney Bowes Inc .................... 1,219 -- 1,219
Pitney Bowes Inc .................... 1,982 -- 1,982
Pompan, Ruffner & Werfel ............ 4,395 -- 4,395
PR Newswire ......................... -- 425 425
PublicData.com.ai Ltd ............... 250 -- 250
Qwest ............................... 15,103 -- 15,103
QWIZ ................................ 2,550 -- 2,550
R.C. Lock Co. (San Antonio) ......... 426 -- 426
Rockford Industries, Inc ............ 1,143 -- 1,143
Rockford Industries, Inc ............ 2,001 -- 2,001
Rockford Industries, Inc ............ 784 -- 784
Rosenberg, Tuggey ................... 6,555 -- 6,555
San Antonio Business Journal ........ 69 -- 69
San Antonio Employment Guide ........ 480 -- 480
Sagamore Graphics, Inc .............. 108 -- 108
San Antonio Express News ............ 2,266 -- 2,266
Sanitors, Inc ....................... 5,523 -- 5,523
SANYO-Verbatim CD Co., LLC .......... 3,761 -- 3,761
San Antonio Water Systems ........... 3,589 -- 3,589
Southwestern Bell Wireless .......... 107 -- 107
Business Opportunities .............. 25 -- 25
Schwartz Heslin Group, Inc. ......... -- 1,223 1,223
Skelton Time & Controls, Inc ........ 618 -- 618
George F. Skinner ................... 1,229 -- 1,229
South Texas Computer Repair ......... 280 -- 280
Sir Speed Printing .................. -- 188 188
The Spencer Company ................. 1,000 -- 1,000
William C. Spencer .................. 4,514 -- 4,514
San Antonio Spurs ................... 884 -- 884
State of Delaware ................... -- 1,840 1,840
State of West Virginia .............. 45 -- 45
State of Oklahoma ................... 25 -- 25
Staybridge San Antonio .............. 656 -- 656
South Texas Computer Repair ......... 280 -- 280
Stivers Temporary Personnel ......... -- 1,687 1,687
Strategic Link ...................... 3,500 -- 3,500
Studebaker-Worthington Leasing ...... 1,424 -- 1,424
Sullivan/Carolyn .................... 560 -- 560
Southwestern Bell Telephone ......... 317 -- 317
Southwestern Bell ................... 4,968 -- 4,968
Southwestern Bell Telephone ......... 318 -- 318
Southwestern Bell Telephone ......... 256 -- 256
Southwestern Bell Wireless .......... 166 -- 166
<PAGE>
SCHEDULE 1.1
5 OF 5
DOCUCON, INCORPORATED
ACCOUNTS PAYABLE
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
NOT
VENDOR ASSUMED ASSUMED TOTAL
------ ----------- ----------- -----------
Southwestern Bell Yellow Pages ...... 26 -- 26
Henry Swindell ...................... (75) -- (75)
Tepco of Central Texas .............. 539 -- 539
Texas Wired Music, Inc .............. 496 -- 496
Thompson Publishing Group, Inc ...... 531 -- 531
TMS, Inc ............................ 300 -- 300
DeLange Fin Services (Tokai) ........ 4,278 -- 4,278
Totowa Systems International ........ 2,795 -- 2,795
Tru Brew Coffee Service ............. -- 335 335
Tuttle Plumbing, Inc ................ 966 -- 966
Tycon Towers I Parking .............. 1,232 -- 1,232
U Line .............................. 133 -- 133
Universal Pensions, Inc. ............ 1,218 135 1,354
United Parcel Service ............... 322 -- 322
United Parcel Service ............... 4,352 -- 4,352
United Parcel Service ............... 4,268 -- 4,268
Vanstar ............................. 4,633 -- 4,633
VNA Hospice of South Texas .......... 120 -- 120
Werling Associates, Inc. ............ 1,088 -- 1,088
Wickenhofer/Leonor .................. 30 -- 30
Williams Communications ............. -- 6,174 6,174
Williams Communications ............. -- 1,042 1,042
Worth Hydrochem of San Antonio ...... 1,209 -- 1,209
Wissahickon Spring Water ............ -- 93 93
Documation, Inc ..................... 1,981 -- 1,981
Xerox Corporation ................... -- 185 185
Xerox Corporation ................... -- 118 118
Xerox Corporation ................... -- 118 118
----------- ----------- -----------
TOTALS .............................. $ 1,175,487 $ 131,994 $ 1,307,480
=========== =========== ===========
<PAGE>
SCHEDULE 1.2
ACCOUNTS RECEIVABLE
o DOCUCON INCORPORATED, ACCOUNTS RECEIVABLE AS OF DECEMBER 31, 1999 (SUBJECT
TO FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 1.2
DOCUCON, INCORPORATED
Accounts Receivable
As of December 31, 1999
(Subject to final year-end audit adjustments)
Accounts Receivable - Trade (see attached aging) $1,001,130
Allowance for doubtful accounts (10,866)
Silicon Valley Bank factored (see attached statement) (899,004)
----------
Net Accounts Receivable - Trade 91,260
----------
Unbilled Revenues (see attached summary) 2,123,014
Allowance for doubtful accounts (1,598,021)
----------
Net Unbilled Revenues 524,993
----------
Accounts Receivable - Employee 3,876
----------
Total Accounts Receivable - net $ 620,129
==========
<PAGE>
SCHEDULE 1.5
ADDITIONAL BUSINESS LIABILITIES
o DOCUCON INCORPORATED ADDITIONAL LIABILITIES AS OF DECEMBER 31, 1999
(SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 1.5
DOCUCON, INCORPORATED
ADDITIONAL LIABILITIES
AS OF DECEMBER 31, 1999
(Subject to final year-end audit adjustments)
INCLUDED EXCLUDED TOTAL
---------- ---------- ----------
ACCRUED LIABILITIES:
Accrued salaries ...................... $ 106,609 $ 129,675 $ 236,284
Accrued temporary labor ............... 18,526 -- 18,526
Accrued vacation ...................... 89,097 34,072 123,169
Accrued GSA ........................... 1,737 -- 1,737
Accrued legal (Vountary Discl) ........ 265,324 -- 265,324
Accrued rework reserve ................ 15,650 -- 15,650
Accrued interest ...................... 30,849 10,203 41,052
Accrued bonus ......................... -- 26,505 26,505
Accrued commissions ................... 89,846 -- 89,846
Accrued franchise tax ................. 2,500 3,000 5,500
Accrued property tax .................. 10,620 -- 10,620
Accrued professional fees ............. -- 70,000 70,000
Accrued medical (tail coverage) 114,029 6,002 120,030
Accrued 401(k) ........................ 26,539 -- 26,539
Employee stock purchase plan .......... 11,319 8,143 19,462
---------- ---------- ----------
TOTAL ACCRUED LIABILITIES ............. 782,645 287,600 1,070,244
---------- ---------- ----------
ACCRUED OTHER:
Shareholders Mtg ...................... $ -- $ 16,545 $ 16,545
Board Mtg Fees ........................ -- 10,000 10,000
HQ Global Vienna rent ................. 9,142 -- 9,142
CAN Premium accrual 12/99 ............. 2,399 -- 2,399
Accrue Park Ten rent .................. 39,614 -- 39,614
Hobgoog consulting .................... -- 10,000 10,000
Allmerica health ins 12/99 ............ 11,015 1,511 12,526
---------- ---------- ----------
TOTAL ACCRUED OTHER ................... 62,170 38,056 100,227
---------- ---------- ----------
Taxes payable ......................... 9,605 1,067 10,672
---------- ---------- ----------
Capital leases ........................ 107,849 23,081 130,930
---------- ---------- ----------
S/T and L/T retirement benefits ....... -- 272,195 272,195
---------- ---------- ----------
Other A/P ............................. 117,706 16,172 133,878
---------- ---------- ----------
Bridge loans, net ..................... -- 254,335 254,335
---------- ---------- ----------
Totals ................................ $1,079,975 $ 892,506 $1,972,481
========== ========== ==========
<PAGE>
SCHEDULE 1.8
ASSUMED CONTRACTS INCLUDING GOVERNMENT CONTRACTS
LIST OF ACTIVE CONTRACTS
o ACCOUNTS RECEIVABLE PURCHASE AGREEMENT, SILICON VALLEY BANK, DATED JUNE
18, 1999
o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK,
DATED JULY 28, 1999
o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK,
DATED DECEMBER 22, 1999
o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK,
DATED FEBRUARY 11, 2000
o EMPLOYMENT AGREEMENTS
* MICHAEL C. MOONEY, DATED MAY 5, 1998
o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT
* BRIAN PACK, DATED OCTOBER 12, 1999
o MARKETING AGREEMENTS
* FILENET AGREEMENT
* ESPS AGREEMENT
o LIST OF SERVICE AND SUPPORT CONTRACTS (ATTACHED)
o FACILITY LEASES
* SAN ANTONIO OPERATIONS CENTER
* VIENNA VIRGINIA SALES OFFICE
o MISCELLANEOUS OPERATING LEASES FOR OFFICE EQUIPMENT USED IN THE BUSINESS
GOVERNMENT CONTRACTS
o DEPARTMENT OF DEFENSE CONTRACT, DATED DECEMBER 19, 1997
o GSA SCHEDULE
<PAGE>
SCHEDULE 1.39
INVENTORY
NONE.
<PAGE>
SCHEDULE 1.39
DOCUCON, Incorporated
Inventory
As of December 31, 1999
(Subject of final year-end audit adjustments)
None $0
<PAGE>
SCHEDULE 1.40
KEY EMPLOYEES
o DOCUCON INCORPORATED KEY EMPLOYEES
o DOCUCON INCORPORATED CORPORATE ORGANIZATION CHART
o SAN ANTONIO ORGANIZATION CHART
<PAGE>
SCHEDULE 1.40
DOCUCON, INCORPORATED
Key Employees
NAME POSITION
Brian Pack General Manager - San Antonio Operations Center
Alice Hopkins-Valdez Human Resource Manager
John Harts Operations Controller
Kenneth Weber Chief Engineer
James Frizell Senior Software Engineer
David Lopez Senior Hardware Engineer
Jerry Gallegos Support Manager
Duane Fousie, Jr. Support Manager
JoAnn Soto Support Manager
Dan Young Director of Sales Support
Michael Mooney Senior Vice President - Sales
<PAGE>
SCHEDULE 1.47
NET ASSETS (BOOK VALUE)
o DOCUCON INCORPORATED NET ASSETS (BOOK VALUE) AS OF DECEMBER 31, 1999
(SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 1.47
DOCUCON, INCORPORATED
Net Assets (Book Value)
As of December 31, 1999
(Subject to final year-end audit adjustments)
Investments (see Schedule 2.2(k)) $ 64,022
Accounts receivable, net (see Schedule 1.1) 620,129
Prepaids (see Schedule 1.51) 108,110
Deposits (see Schedule 1.51) 47,225
Property and equipment, net (see Schedule 1.62) 341,378
-----------
Total $ 1,180,864
===========
<PAGE>
SCHEDULE 1.51
PREPAID EXPENSES
o DOCUCON INCORPORATED PREPAID EXPENSES AND DEPOSITS AS OF DECEMBER 31, 1999
(SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 1.51
DOCUCON, INCORPORATED
Prepaid Expenses and Deposits
As of December 31, 1999
(Subject to final year-end audit adjustments)
INCLUDED EXCLUDED TOTAL
-------- -------- --------
PREPAID INSURANCE ....................... $ 5,783 $ 1,016 $ 6,799
-------- -------- --------
PREPAID OTHER:
ACLP Park Ten ........................... 29,708 -- 29,708
Aiim Memebership Dues ................... 1,167 -- 1,167
Aiim 2000 tradeshow ..................... 11,600 -- 11,600
Asst Sec Patents & trademarks ........... 125 -- 125
Best software ........................... -- 42 42
Best Software-Support Plus .............. -- 489 489
Depository Trust ........................ -- 850 850
E-Trade Business Solutions .............. -- 2,679 2,679
Gov Technology Conference ............... 525 -- 525
Gov Technology Conference ............... 1,575 -- 1,575
Gov Technology Conference ............... 2,320 -- 2,320
Kalthoff-Sring 00 Show .................. 2,500 -- 2,500
Lodde typewriter maint .................. 22 -- 22
Lodde typewriter maint .................. 20 -- 20
Lodde typewriter maint .................. 22 -- 22
Pitney Bowes maint copier s/n50265 ...... 38 -- 38
Platinum/Epicor M/A ..................... -- 2,253 2,253
Rock4 Cap Lse payment, advance .......... 341 -- 341
BankTec maint agreement ................. 2,123 -- 2,123
NDIA fed gov show ....................... 2,500 -- 2,500
Dell Financial .......................... -- 983 983
State Workmen's Ins Fund PA ............. -- 1,013 1,013
Williams Commun: serv contract PA ....... -- 497 497
MSDN network subscription ............... 329 -- 329
Accutrn. Time Am badge reader maint ..... 816 -- 816
Quiz HR Testing service ................. 1,421 -- 1,421
Strategic Link computer support ......... -- 3,500 3,500
Met Life dental ins ..................... 2,388 112 2,500
Prudential: STD/LTD ins binder .......... 1,428 72 1,500
Boon group: group health ins binder ..... 24,500 1,500 26,000
Bank Tec CM#90161466 .................... 7,886 -- 7,886
EEC ..................................... 3,738 -- 3,738
Vienna rent ............................. 5,236 -- 5,236
-------- -------- --------
TOTAL PREPAID OTHER ..................... $102,327 $ 13,991 $116,318
======== ======== ========
DEPOSITS - SHORT TERM
Allmerica ............................... 7,500 -- 7,500
COSC Partners ........................... 22,077 -- 22,077
Rouse/Liberty ........................... -- 12,793 12,793
Rouse/Liberty ........................... -- 38,379 38,379
-------- -------- --------
TOTAL DEPOSITS - SHORT TERM ............. $ 29,577 $ 51,172 $ 80,749
======== ======== ========
DEPOSITS - LONG TERM
Rockford Leasing ........................ $ 591 $ -- $ 591
Rockford Leasing ........................ 543 -- 543
Rockford Leasing ........................ 331 -- 331
HQ Tyson's Corner ....................... 3,803 -- 3,803
Boulevard Plaza ......................... -- 9,653 9,653
Longwater/Heartland ..................... 1,298 -- 1,298
Studebaker Leasing ...................... 475 -- 475
HQ Tyson's Corner ....................... 3,608 -- 3,608
City Public Service ..................... 7,000 -- 7,000
-------- -------- --------
TOTAL DEPOSITS - LONG TERM .............. $ 17,648 $ 9,653 $ 27,300
======== ======== ========
<PAGE>
SCHEDULE 1.62
TANGIBLE ASSETS
o DOCUCON INCORPORATED TANGIBLE ASSETS AS OF DECEMBER 31, 1999 (SUBJECT TO
FINAL YEAR-END AUDIT ADJUSTMENTS)
o SEPARATE LISTING ADMINISTRATIVE EQUIPMENT INVENTORY
<PAGE>
SCHEDULE 1.62
DOCUCON, INCORPORATED
Tangible Assets
As of December 31, 1999
(subject final year-end audit adjustments)
INCLUDED EXCLUDED TOTAL
----------- ----------- -----------
Leashold improvements ............. $ 28,367 $ 26,680 $ 55,047
Furniture & Fixtures - G&A ........ 80,898 -- 80,898
Furniture & Fixtures - R&D ........ 21,278 -- 21,278
Furniture & Fixtures - Production . 109,210 -- 109,210
Furniture & Fixtures - Virginia ... 6,076 -- 6,076
Furniture & Fixtures - Philadelphia -- 37,445 37,445
Equipment ......................... 314,190 -- 314,190
Equpment - R&D .................... 491,058 -- 491,058
Equipment - Ap Cards .............. 674,206 -- 674,206
Equipment - Production ............ 2,642,349 -- 2,642,349
Equipment - Tech Manuals .......... 61,405 -- 61,405
Equipment - ICR ................... 161,258 -- 161,258
Equipment - Virginia .............. 7,562 -- 7,562
Equipment - Microfilm/fische ...... 192,768 -- 192,768
Equipment - Amoco ................. 142,968 -- 142,968
Equipment - Philadelphia .......... -- 73,712 73,712
Software - Engineering ............ 81,080 -- 81,080
Software - Accounting ............. -- 56,090 56,090
Software - Govt Prod .............. 232,387 -- 232,387
Software - Marketing .............. 1,357 -- 1,357
----------- ----------- -----------
5,248,417 193,927 5,442,344
Accumulated depreciation .......... (4,907,039) (72,961) (4,980,000)
----------- ----------- -----------
NET TANGIBLE ASSETS ............... $ 341,378 $ 120,966 $ 462,344
=========== =========== ===========
<PAGE>
SCHEDULE 2.2(K)
INVESTMENTS
o DOCUCON INCORPORATED INVESTMENTS AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL
YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 2.2(K)
DOCUCON, INCORPORATED
Investments
As of December 31, 1999
(Subject to final year-end audit adjustments)
Petty cash - TX ............................................ $ 600
Dreyfus Money Market ....................................... 4,187
Cross Securities ........................................... 5,138
Bank One Controlled Disbursement ........................... --
Bank One Operating ......................................... 54,097
Bank One Payroll ........................................... --
-------
$64,022
=======
<PAGE>
SCHEDULE 2.2(M)
TELEPHONE AND FAX NUMBERS; WEB SITE
o DOCUCON TELEPHONE DIRECTORY
<PAGE>
SCHEDULE 2.3
EXCLUDED ASSETS
o DOCUCON INCORPORATED EXCLUDED ASSETS AS OF DECEMBER 31, 1999 (SUBJECT TO
FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 2.3
DOCUCON, INCORPORATED
Excluded Assets
As of December 31, 1999
(Subject to final year-end audit adjustments)
Accounts receivable (see Schedule 1.1) $ -
Prepaids (see Schedule 1.51) 15,007
Deposits (see Schedule 1.51) 60,825
Property and equipment, net (see Schedule 1.62) 120,966
---------
$ 196,797
=========
<PAGE>
SCHEDULE 2.5
EXCLUDED LIABILITIES
o DOCUCON INCORPORATED EXCLUDED LIABILITIES AS OF DECEMBER 31, 1999 (SUBJECT
TO FINAL YEAR-END AUDIT ADJUSTMENTS)
<PAGE>
SCHEDULE 2.5
DOCUCON, INCORPORATED
Excluded Liabilities
As of December 31, 1999
(Subject to final year-end audit adjustments)
Accounts payable (see Schedule 1.2) $ 131,994
Additional liabilities (see Schedule 1.5) 892,506
-----------
$ 1,024,500
===========
<PAGE>
SCHEDULE 2.7(A)
PROCEDURES
o DOCUCON INCORPORATED ACCOUNTING PRINCIPLES
o DOCUCON INCORPORATED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<PAGE>
Schedule 2.7(a)
Page 1 of 3
DOCUCON, INCORPORATED
Accounting Principles
The Company's financial statements are prepared in accordance with
generally accepted accounting principles.
A summary of the Company's significant accounting policies is attached.
<PAGE>
SCHEDULE 4.9
PERMITS
o SAN ANTONIO FACILITY CLEARANCE
<PAGE>
SCHEDULE 4.12
INTELLECTUAL PROPERTY
o LIST OF PROPRIETARY DOCUCON-DEVELOPED SOFTWARE MODULES.
o LIST OF PROPRIETARY PROCESS CONTROLLED BY THE COMPANY AND OTHER TRADE
SECRETS.
o LIST OF THIRD-PARTY SOFTWARE PROVIDERS.
o SERVICE MARK 1,610,041 REGISTRATION DOCUMENTS
o TRADEMARK 1,577,519 REGISTRATION DOCUMENTS
o CONFIDENTIALITY AGREEMENT (4.12 (H)) FOR KEY EMPLOYEES AND OTHERS
<PAGE>
SCHEDULE 4.13
FACILITIES
o SAN ANTONIO, TEXAS OPERATIONS CENTER
o VIENNA, VIRGINIA SALES OFFICE
<PAGE>
SCHEDULE 4.14
COMPANY-WIDE CONTRACTS
SEE CONTRACTS LISTED ON SCHEDULE 1.8
<PAGE>
SCHEDULE 4.15
INSURANCE
o INSURANCE COVERAGES FOR DOCUCON INCORPORATED AND DOCUCON INCORPORATED
401(K) PLAN
43
<PAGE>
SCHEDULE 4.18
WARRANTIES
o FORMS OF WARRANTIES AND GUARANTEES PROVIDED TO CUSTOMERS
<PAGE>
SCHEDULE 4.21
ENVIRONMENTAL MATTERS
o PHASE I ENVIRONMENTAL SITE ASSESSMENT CONDUCTED BY RABA KISTNER
ENGINEERS
<PAGE>
SCHEDULE 4.23
EMPLOYEE BENEFIT PLANS
o DOCUCON INCORPORATED 1998 STOCK OPTION PLAN
o DOCUCON INCORPORATED EMPLOYEE STOCK PURCHASE PLAN
o DOCUCON INCORPORATED FLEXIBLE BENEFIT PLAN SUMMARY PLAN DESCRIPTION
JANUARY 1, 2000
o DOCUCON INCORPORATED FLEXIBLE EMPLOYEE BENEFIT PLAN QUESTIONS & ANSWERS
o ACCEPTANCE OF COBRA QUALIFYING EVENT NOTIFICATION RECEIPT
o DOCUCON INCORPORATED 401(K) PLAN SUMMARY PLAN DESCRIPTION
o DOCUCON POLICY STATEMENT I-9 VACATION
o CIGNA HEALTH CARE, INSURANCE TRUST PLAN
o ADMINISTRATION MANUAL FOR INTEGRATED SHORT & LONG TERM DISABILITY
o EMPLOYMENT AGREEMENT, DOUGLAS GILL, DATED APRIL 1, 1998
o EMPLOYMENT AGREEMENT, WARREN D. BARRATT, DATED DECEMBER 20, 1998
o EMPLOYMENT AGREEMENT, PAUL M. NUNLEY, DATED JANUARY 4, 1999
o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT, MARK G.
HARDIN, DATED OCTOBER 12, 1999
o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT, BRIAN PACK,
DATED OCTOBER 12, 1999
o EMPLOYMENT AGREEMENT, MICHAEL C. MOONEY, DATED MAY 5, 1998
<PAGE>
SCHEDULE IV
DISCLOSURE SCHEDULE PROVIDED TO PARENT AND PURCHASER
[ALL SELLER DISCLOSURES ARE SUBJECT TO YEAR-END AUDIT ADJUSTMENT]
o PARA., 4.9, 4.23, 4.24, 4.26 - 401(K) - THREE LATE REMITTANCE ON EMPLOYEE
WITHHOLDINGS IN 1999; IMPACT OF SUCH LATE CONTRIBUTIONS REMEDIED IN
ACCORDANCE WITH ERISA.
o PARA. 4.26, - APRIL 1998 TO JULY 1999 - NO WORKERS COMPENSATION COVERAGE
FOR PENNSYLVANIA-BASED EMPLOYEES DURING THAT PERIOD; NO JOB-RELATED
INJURIES DURING THIS PERIOD; PENNSYLVANIA WORKERS COMPENSATION COVERAGE
CURRENTLY IN FORCE SINCE JUNE 1999.
o PARA. 4.8, 4.14, - MULTIPLE VENDORS OF BUSINESS HAVE THREATENED LITIGATION
FOR NONPAYMENT OF ACCOUNTS PAYABLE; TO BEST OF OUR KNOWLEDGE AND BELIEF,
NO LITIGATION HAS BEEN INITIATED.
o PARA. 4.4.,4.14 - FOURTH QUARTER COMPLIANCE CERTIFICATE REQUIRED UNDER
SILICON VALLEY BANK LOAN AGREEMENT WAS NOT SUBMITTED. COMPANY MAY BE IN
TECHNICAL DEFAULT OF ONE OR MORE PROVISIONS OF LOAN AGREEMENT. WE BELIEVE
THAT BANK IS GENERALLY AWARE OF SUCH POTENTIAL TECHNICAL DEFAULT
CONDITIONS, WHICH INCLUDE CREATION OF NEW LIENS ON ASSETS WITHOUT THE
BANK'S PRIOR WRITTEN CONSENT AND AGREEMENT TO SELL ASSETS WITHOUT THEIR
PRIOR WRITTEN CONSENT. BANK HAS NOT MADE ORAL OR WRITTEN DECLARATION OF
DEFAULT AND NOT MADE DEMAND FOR PAYMENT.
o PARA. 4.10, 4.14 - POTENTIAL LIABILITY FOR OVERPAYMENT ON CONTRACT
PERFORMED IN 1998/1999; CURRENTLY BEING RESEARCHED IN CONJUNCTION WITH
1999 YEAR-END AUDIT; POTENTIAL LIABILITY FOR CUSTOMER OVERPAYMENT
$0-$45,000.
o PARA. 4.14 - AN ADMINISTRATIVE PROVISION OF COMPANY'S CURRENT DOD CONTRACT
CALLS FOR MONTHLY REPORTING OF VOLUMES OF WORK PERFORMED UNDER THE
CONTRACT. THE COMPANY HAS NOT HISTORICALLY PROVIDED THIS MONTHLY REPORT
AND WAS RECENTLY ASKED BY REPRESENTATIVE OF CONTRACTING OFFICE TO BEGIN
PROVIDING THIS REPORT. STEPS ARE CURRENTLY BEING UNDERTAKEN TO BEGIN
PROVIDING THIS MONTHLY REPORT. WE INTEND TO BEGIN PROVIDING THIS MONTHLY
ADMINISTRATIVE REPORTING FOR ALL ACTIVE DELIVERY ORDERS PRIOR TO CLOSING.
o PARA. 4.8, 4.14 - INSPECTOR GENERAL, VOLUNTARY DISCLOSURE DEPARTMENT OF
DEFENSE, MAY 24, 1999
o PARA. 4.23 - CERTAIN EMPLOYEE CONTRACTS PROVIDE FOR CHANGE OF CONTROL OR
SEVERANCE BENEFITS
<PAGE>
SCHEDULE V
DISCLOSURE SCHEDULE PROVIDED TO SELLER
<PAGE>
SCHEDULE V
NONE.
<PAGE>
SCHEDULE 6.4
NECESSARY CONSENTS
SEE SCHEDULE 1.8, ASSUMED CONTRACTS INCLUDING GOVERNMENT CONTRACTS.
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss .................................................................... $(3,566,828) $(5,085,694)
Less- Preferred stock dividend requirements .............................. (19,250) (27,462)
----------- -----------
Net loss applicable to common stockholders .................................. $(3,586,078) $(5,113,156)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION ............................................ 3,386,768 3,300,056
=========== ===========
BASIC LOSS PER COMMON SHARE .................................................... $ (1.06) $ (1.55)
=========== ===========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss .................................................................... $(3,566,828) $(5,085,694)
Preferred stock dividend requirements ....................................... (19,250) (27,462)
Decrease in net loss applicable to common stock for preferred stock dividends
not incurred upon assumed conversion of preferred stock .................. 19,250 27,462
----------- -----------
Net loss applicable to common stockholders used for computation ....... $(3,566,828) $(5,085,694)
=========== ===========
Weighted average number of shares of common stock outstanding ............... 3,386,768 3,300,056
Weighted average incremental shares outstanding upon assumed
conversion of options and warrants ....................................... 23,249 91,073
Weighted average incremental shares outstanding upon assumed
conversion of the preferred stock ........................................ 58,331 82,975
----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION ................................................................. 3,468,348 3,474,104
=========== ===========
DILUTED LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS ........................................................... $ (1.03)(a) $ (1.46)(a)
=========== ===========
</TABLE>
(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
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INCORPORATED'S BALANCE SHEET AS OF DECEMBER 31, 1999, AND ITS STATEMENT OF
OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,835
<SECURITIES> 0
<RECEIVABLES> 1,001,130
<ALLOWANCES> 8,887
<INVENTORY> 0
<CURRENT-ASSETS> 1,731,498
<PP&E> 5,442,344
<DEPRECIATION> 4,980,000
<TOTAL-ASSETS> 2,221,142
<CURRENT-LIABILITIES> 3,827,269
<BONDS> 301,512
0
7
<COMMON> 35,088
<OTHER-SE> (1,942,734)
<TOTAL-LIABILITY-AND-EQUITY> 2,221,142
<SALES> 5,716,520
<TOTAL-REVENUES> 5,716,520
<CGS> 4,969,905
<TOTAL-COSTS> 4,969,905
<OTHER-EXPENSES> 2,157,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,547
<INCOME-PRETAX> (3,566,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,566,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,566,828)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
