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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 0-19771
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DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
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Delaware 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 Route 17, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip code)
(201) 529-2026
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
|X| Yes |_| No
Number of shares outstanding of the registrant's common stock, as of July 31,
1999: 7,433,278
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 and June 30, 1999..................1
Consolidated Statements of Operations
for the three month and six month periods ended
June 30, 1998 and June 30, 1999............................2
Consolidated Statement of Changes in Shareholders' Equity
for the six month period ended
June 30, 1999..............................................3
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1998 and June 30, 1999............................4
Notes to Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........9
PART II. Other Information
Item 1. Legal Proceedings .............................................13
Item 4. Submission of Matters to a Vote of Security Holders ...........13
Item 6. Exhibits and Reports on Form 8-K...............................13
Signatures ...............................................................14
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company expects," "the Company anticipates," "the Company believes," "the
Company estimates," and other phrases of similar meaning. Whether such
statements ultimately prove to be accurate depends upon a variety of factors
that may affect the business and operations of the Registrant.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
------------ -----------
1998 1999
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,003 $ 510
Short-term interest bearing bank deposits 1,252 --
Marketable equity securities, available for sale 1,383 --
Restricted cash 752 459
Trade accounts receivable, net 7,244 7,255
Inventory 704 581
Other current assets 960 1,098
-------- --------
Total current assets 13,298 9,903
-------- --------
Investments 56,490 50,967
-------- --------
Property and equipment, net 1,738 1,499
-------- --------
Other assets:
Goodwill, net 190 2,260
License, net 471 401
Other 1,057 940
-------- --------
1,718 3,601
-------- --------
Total assets $ 73,244 $ 65,970
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 470 $ 2,520
Current maturities of long-term debt 504 127
Trade accounts payable 2,105 3,410
Accrued payroll, payroll taxes and social benefits 2,561 2,152
Other current liabilities 1,939 980
-------- --------
Total current liabilities 7,579 9,189
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 102 43
Other 585 511
-------- --------
Total long term liabilities 687 554
-------- --------
Commitments and contingencies
Minority interests 25,560 22,535
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized, 20,000,000 shares;
Issued, 7,923,540 shares 79 79
Additional paid-in capital 34,979 35,024
Deferred compensation expense (327) (200)
Retained earnings 6,942 1,154
-------- --------
41,673 36,057
Treasury stock, at cost - 490,262 shares (2,365) (2,365)
Accumulated other comprehensive income 110 --
-------- --------
Total shareholders' equity 39,418 33,692
-------- --------
Total liabilities and shareholders' equity $ 73,244 $ 65,970
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
------------------------- -------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Products $ 11,999 $ 6,317 $ 5,107 $ 3,898
Services 9,452 9,624 4,627 4,367
-------- -------- -------- --------
21,451 15,941 9,734 8,265
-------- -------- -------- --------
Cost of sales:
Products 9,454 4,985 3,571 2,953
Services 7,152 7,477 3,836 3,599
-------- -------- -------- --------
16,606 12,462 7,407 6,552
-------- -------- -------- --------
Gross profit 4,845 3,479 2,327 1,713
Research and development
expenses, net 758 581 416 272
Selling, general and
administrative expenses 7,756 5,662 2,867 2,872
-------- -------- -------- --------
Operating loss (3,669) (2,764) (956) (1,431)
Interest income 125 289 64 265
Interest expense (166) (115) (74) (75)
Gain on sale of division 5,998 -- 5,998 --
Other income (loss), net (382) (21) (427) (24)
-------- -------- -------- --------
Income (loss) before income taxes 1,906 (2,611) 4,605 (1,265)
Provision for income taxes 73 12 42 (25)
-------- -------- -------- --------
Income (loss) after income taxes 1,833 (2,623) 4,563 (1,240)
Minority interests 395 109 220 91
Loss in affiliates, net of minority interests (1,596) (3,274) (1,247) (1,761)
-------- -------- -------- --------
Net income (loss) 632 (5,788) 3,536 (2,910)
Other comprehensive income:
Unrealized gain on securities available
for sale -- -- -- (172)
-------- -------- -------- --------
Comprehensive income (loss) $ 632 $ (5,788) $ 3,536 (3,082)
======== ======== ======== ========
Basic net income (loss) per share $ 0.09 $ (0.78) $ 0.48 $ (0.39)
======== ======== ======== ========
Weighted average number of shares
outstanding 7,372 7,433 7,376 7,433
======== ======== ======== ========
Diluted net income (loss)
per share $ 0.09 $ (0.78) $ 0.48 $ (0.39)
======== ======== ======== ========
Weighted average number of shares
outstanding and common share
equivalents 7,374 7,433 7,378 7,433
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Deferred other
Common paid-in comp- Treasury Retained comprehensive
Shares stock capital ensation stock earnings income Total
------ ----------- ---------- -------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
January 1, 1999 7,924 $ 79 $ 34,979 $ (327) $ (2,365) $ 6,942 $ 110 $ 39,418
Amortization of
restricted stock
award compensation 45 127 172
Unrealized gain on securities
available for sale (110) (110)
Net loss (5,788) (5,788)
------ ----------- -------- -------- ----------- -------- ----------- --------
Balances as of
June 30, 1999
(unaudited) 7,924 $ 79 $ 35,024 $ (200) $ (2,365) $ 1,154 $ -- $ 33,692
====== =========== ======== ======== =========== ======== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1998 1999
------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 632 $(5,788)
Adjustments to reconcile net income (loss) to net cash used
in operating activities - see Schedule A (5,850) 2,982
------- -------
Net cash used in operating activities (5,218) (2,806)
------- -------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net (1,967) 1,252
Restricted cash 1,456 293
Investment in marketable securities (4,099) --
Proceeds from realization of marketable securities 4,416 1,520
Net proceeds from sale of division-see Schedule B 6,595 --
Acquisitions of property and equipment (743) (227)
Proceeds from sale of property and equipment 128 69
Acquisition of intangible assets (500) (2,182)
Decrease in other assets 1,070 --
------- -------
Net cash provided by investing activities 6,356 725
------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net 55 --
Proceeds from sale of shares received in partial conversion of note receivable 1,871 --
Short-term debt, net (2,176) 2,050
Proceeds of long-term debt -- 29
Repayments of long-term debt (633) (491)
------- -------
Net cash provided by (used in) financing activities (883) 1,588
------- -------
Net increase (decrease) in cash and cash equivalents 255 (493)
Cash and cash equivalents at beginning of period 1,424 1,003
------- -------
Cash and cash equivalents at end of period $ 1,679 $ 510
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 135 $ 114
======= =======
Income taxes $ 127 $ 65
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules To Consolidated Statements Of Cash Flows (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1998 1999
------- --------
<S> <C> <C>
A Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization $ 319 $ 542
Minority interests (1,494) (3,024)
Allowance for writeoff against note receivable 610 --
Earnings on marketable debt securities (17) --
Increase (decrease) in liability for severance pay 103 (74)
Loss in affiliates 1,596 5,523
Gain on sale of division - See Schedule B (5,998) --
Gain on sale of securities (192) (247)
(Gain) loss on sale of property, plant and equipment, net (37) 21
Amortization of restricted stock award compensation 98 172
Other 5 1
Increase in accounts receivable and other current assets (1,137) (149)
(Increase) decrease in inventory (307) 123
Decrease in long-term receivables 131 132
Increase in accounts payable and other current liabilities 220 6
Increase (decrease) in liability in respect of customer advances, net 250 (44)
------- -------
$(5,850) $ 2,982
======= =======
B. Assets/liabilities transferred upon sale of division:
Trade accounts receivable, net $ 754
Property and equipment, net 405
Accrued payroll, payroll taxes and social benefits (111)
Other current liabilities (452)
-------
$ 596
C Non-cash activities: Receipt of capital stock in partial
conversion of note receivable $ 1,871
=======
Reversal of unrealized gain on securities available for sale $ (172)
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Certain financial information, which is
normally included in financial statements prepared in accordance with generally
accepted accounting principles but which is not required for interim reporting
purposes, has been omitted. The accompanying consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. Certain amounts included in the consolidated statements of operations
for the three and six month periods ended June 30, 1998 have been reclassified
to conform with current presentation. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
Note 2: Investment in Tower
Although the Company maintains the effective control of Tower Semiconductor
Ltd. ("Tower"), the Company does not have voting control of Tower and therefore
consolidates Tower's operations on an equity basis.
Summarized statement of operations information of Tower is as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
---------------------------- ----------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 37,759 $ 29,142 $ 14,572 $ 14,825
Gross loss (2,248) (7,876) (3,238) (3,628)
Research and development expenses 4,210 4,825 2,070 2,499
Sales, general and administrative 4,038 4,032 2,091 1,841
Operating loss (10,496) (16,733) (7,399) (7,968)
</TABLE>
Note 3: Effects of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities,
requiring the recognition of all derivatives as either assets or liabilities and
the measurement of those instruments at fair value, as well as the
identification of the conditions for which a derivative may be specifically
designed as a hedge. SFAS 133 is effective for fiscal years beginning after June
15, 2000. Management is currently addressing the financial reporting measures
that will be needed in order to comply with this disclosure requirement.
-6-
<PAGE>
Note 4: Segment Information
<TABLE>
<CAPTION>
Computer VAR Data Multimedia
consulting computer communication Help desk entertainment
services hardware for utilities software software Other* Total
---------- -------- ------------- -------- ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1999:
Revenues from external customers $ 9,630 $ 5,146 $ 642 $ 38 $ 305 $ 15,761
Intersegment revenues .......... 86 16 346 -- -- 448
Segment profit (loss) .......... 268 (77) (1,362) 21 (336) (1,486)
Six months ended June 30, 1998:
Revenues from external customers $ 9,166 $ 10,423 $ 175 $ 785 $ 93 $ 629 $ 21,270
Intersegment revenues .......... 61 11 -- -- 158 -- 230
Segment profit (loss) .......... 5,444 1,225 (1,513) (1,330) (596) 227 3,457
Three months ended June 30, 1999:
Revenues from external customers $ 4,615 $ 2,865 $ 555 $ 21 $ 120 $ 8,176
Intersegment revenues .......... 52 2 346 -- -- 400
Segment profit (loss) .......... 257 21 (724) 15 (250) (681)
Three months ended June 30, 1998:
Revenues from external customers $ 4,480 $ 4,562 $ 48 $ 2 $ 61 $ 490 $ 9,643
Intersegment revenues .......... 32 1 -- -- 158 -- 191
Segment profit (loss) .......... 5,570 451 (852) (133) (126) 262 5,172
</TABLE>
- ----------
* Represents two operating segments below the quantitative thresholds of FAS
131, a VAR software operation in Israel and an Internet database venture.
<TABLE>
<CAPTION>
<S> <C>
Reconciliation of Segment Profit to Consolidated Net Loss
Six months ended June 30, 1999:
Total loss for reportable segments $(1,150)
Other operational segment loss (336)
Unallocated amounts: Net loss of corporate headquarters* (4,302)
-------
Total consolidated net loss $(5,788)
=======
----------
*Includes equity in losses of Tower (net of minority interest) of $3,227
Six months ended June 30, 1998:
Total income for reportable segments $ 3,230
Other operational segment income
227
Unallocated amounts: Net loss of corporate headquarters* (2,825)
-------
Total consolidated net income $ 632
=======
----------
*Includes equity in losses of Tower (net of minority interest) of $1,522
Three months ended June 30, 1999:
Total loss for reportable segments $ (431)
Other operational segment loss (250)
Unallocated amounts: Net loss of corporate headquarters* (2,229)
-------
Total consolidated net loss $(2,910)
=======
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*Includes equity in losses of Tower (net of minority interest) of $1,738
Three months ended June 30, 1998:
Total income for reportable segments $ 4,910
Other operational segment income 262
Unallocated amounts: Net loss of corporate headquarters* (1,636)
-------
Total consolidated net income $ 3,536
=======
----------
*Includes equity in losses of Tower (net of minority interest) of $1,240.
</TABLE>
-7-
<PAGE>
Note 5: Contingencies
Tower has been approached separately by two parties alleging that Tower is
infringing on certain semiconductor production patents owned by such parties and
requesting that Tower enter into negotiations for a royalty-bearing license for
the use of the technology covered by such patents.
Tower has successfully obtained, without royalty or other payments, a
license to use such technology from one of the parties and is engaged in
discussions with the other party to determine the merits of its claims. Tower
and the Company are unable to determine at this time with any certainty the
ultimate outcome of these discussions or the possible effect, if any, of this
matter on Tower's and the Company's financial condition, operating results and
business.
Note 6: Purchase of Outstanding Minority Interest in Subsidiary
In April 1999, the Company completed successfully a tender offer for all of
the publicly-held shares of a foreign subsidiary. The Company recorded goodwill
resulting from the purchase of the outstanding minority interest in the
subsidiary of approximately $2,200, which is being amortized over seven years.
The cost of the tender offer was approximately $2,700. The Company financed the
offer primarily by short-term bank credit and cash.
Note 7: Subsequent Event
The Company has entered into an agreement to acquire substantially all of
the assets of the Control Systems division of Scientific-Atlanta, Inc., which
would become an integral part of the Company's data communications solutions for
utilities segment. The purchase price for the acquisition is $5,000, subject to
certain adjustments. The closing of this acquisition, which is subject to the
satisfaction of certain conditions by both Scientific-Atlanta and the Company,
is expected to occur in the third quarter of 1999.
-8-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Data Systems & Software Inc. through its subsidiaries in the United States
and in Israel (collectively, the "Company"), (i) provides consulting and
development services for computer software and systems, (ii) is an authorized
dealer and a value-added-reseller ("VAR") of computer hardware, and (iii) is a
provider of data communications solutions for utilities. Through its equity
investment in Tower Semiconductor Ltd. ("Tower"), the Company also engages in
the manufacture of semiconductor products. Although the Company has retained
effective control of Tower, the Company does not control more than 50% of
Tower's voting shares, and accordingly accounts for its interest in Tower's
results under the equity investment method.
The Company's future operating results are subject to various risks and
uncertainties. See "Item 1. Business - Factors Which May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the six months and three months ended
June 30, 1998 and 1999, including the percentage of total revenues during each
period attributable to selected components of operations statement data, and for
the period to period percentage changes in such components.
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------- Change
from
1998 1999 1998
-------------------- ------------------------ -----
% of % of % of
($,000) sales ($,000) sales 1998
-------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Sales $ 21,451 100% $ 15,941 100% (26)%
Cost of sales 16,606 77 12,462 78 (25)
-------- -------- -------- --------
Gross profit 4,845 23 3,479 22 (28)
R&D expenses 758 4 581 4 (23)
SG&A expenses 7,756 36 5,662 35 (27)
-------- -------- -------- --------
Operating loss (3,669) (17) (2,764) (17) (25)
Interest income (expense), net (41) (--) 174 1 524
Gain on sale of division 5,998 28 -- --
Other loss, net (382) (2) (21) (--) 95
-------- -------- -------- --------
Income (loss) before
income taxes 1,906 9 (2,611) (16) (237)
Income tax expense 73 -- 12 -- (84)
-------- -------- -------- --------
Income (loss) after
income taxes 1,833 9 (2,623) (16) (243)
Minority interests 395 1 109 1 (72)
Loss in affiliates, net of
minority interests (1,596) (7) (3,274) (20) 105
-------- -------- -------- --------
Net income (loss) $ 632 3% $ (5,788) 36%
======== ======== ======== ========
<CAPTION>
Three months ended June 30,
--------------------------------------------- Change
from
1998 1999 1998
------------------- -------------------- ------
% of % of % of
($,000) sales ($,000) sales 1998
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Sales $ 9,734 100% $ 8,265 100% (15)%
Cost of sales 7,407 76 6,552 79 (12)
-------- -------- -------- --------
Gross profit 2,327 24 1,713 21 (26)
R&D expenses 416 4 272 3 (35)
SG&A expenses 2,867 30 2,872 35
-------- -------- -------- --------
Operating loss (956) (10) (1,431) (17) 50
Interest income (expense), net (10) -- 190 2
Gain on sale of division 5,998 62 -- --
Other loss, net (427) (4) (24) (--) (94)
-------- -------- -------- --------
Income (loss) before
income taxes 4,605 47 (1,265) (15) (128)
Income tax expense 42 -- (25) (--) (160)
-------- -------- -------- --------
Income (loss) after
income taxes 4,563 47 (1,240) (15) (127)
Minority interests 220 2 91 1 (58)
Loss in affiliates, net of
minority interests (1,247) (13) (1,761) (21) 41
-------- -------- -------- --------
Net income (loss) $ 3,536 36% $ (2,910) (34)% (182)%
======== ======== ======== ========
</TABLE>
-9-
<PAGE>
SALES. The decrease in sales in the six months and three months ended June
30, 1999, as compared to the same periods in 1998, was primarily due to
decreased VAR computer hardware segment sales. This decrease was partially
offset by increased sales in the data communication solutions for utilities
segment, which recorded over half a million dollars in sales during the second
quarter of 1999. Computer hardware VAR sales were up 26% in the second quarter
of 1999 as compared to the previous quarter, and the Company believes this
improvement will continue.
GROSS PROFIT. The decrease in gross profit in the six months and three
months ended June 30, 1999 as compared to the same periods in 1998, was
primarily due to the decrease in sales, as well as to slightly decreased gross
profit margins from the Company's consulting services provided in Israel. The
decrease in the gross profit margins in these periods as compared to the
comparable periods in 1998 was primarily due to decreased gross profit margins
in the VAR computer hardware segment and consulting services provided in Israel.
RESEARCH AND DEVELOPMENT ("R&D"). The decrease in R&D in the six months and
three months ended June 30, 1999, as compared to the same periods in 1998, is
due to lower development costs in the Company's data communication solutions for
utilities segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in SG&A
in the six months ended June 30, 1999, as compared to the same period in 1998,
was primarily due to the sale of the former help desk segment and the suspension
of operations of the multimedia entertainment software segment.
OPERATING LOSS. The decrease in the operating loss in the six months ended
June 30, 1999, as compared to the same period in 1998, was primarily
attributable to the decrease in SG&A and R&D, partially offset by the decrease
in gross profit for this period. The increase in the operating loss in the three
months ended June 30, 1999, as compared to the same period in 1998, was
primarily attributable to the decrease in gross profit, which exceeded the
aforementioned decrease in R&D expenses.
SHARE OF AFFILIATED COMPANY'S NET LOSS. The increase in the equity loss,
net of minority interests, in the six months ended June 30, 1999, as compared to
the same period in 1998, resulted from increased losses in Tower, primarily
attributable to a continued decrease in Tower sales and capacity utilization.
NET INCOME (LOSS). The net loss in the six months and three months ended
June 30, 1999 as compared with net income in the comparable periods in 1998, was
almost entirely due to a nonrecurring gain from the sale of the former help desk
segment in the second quarter of 1998, as well as to the aforementioned increase
in equity losses from the Company's Tower subsidiary. Net loss excluding this
gain on sale would have been $5.4 million in the six months ended June 30, 1998,
and $2.5 million in the three months ended June 30, 1998.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 30, 1999, the Company had working capital of $707,000, including
cash and cash equivalents of $510,000. The Company also had restricted cash of
approximately $459,000. DSSI has a credit line from a bank of up to $2.2
million, which is secured by accounts receivable and inventory of its US
subsidiaries, of which $1.4 million was being utilized at June 30, 1999.
The Company intends to finance its operating activities and the service on
its debt for the remainder of 1999 from cash on hand and credit lines, to the
extent available. The Company is also seeking additional financing for its data
communications solutions for utilities segment. The Company is considering
various avenues for financing its ongoing activities, including the selling of
certain assets and obtaining additional financing. To the extent that these
resources are unavailable or insufficient, the Company may have to curtail
and/or discontinue certain of its activities.
In the second quarter of 1999, the Company completed successfully a tender
offer for all of the publicly-held shares of a foreign subsidiary, approximately
77% of the shares of which it had owned up to the date of the tender offer. The
cost of the tender offer was approximately $2.7 million and was financed
primarily by short-term bank credit and also by cash that resulted in part from
the sale of the balance of the Company's marketable securities for $1.6 million.
-10-
<PAGE>
The Company has entered into an agreement to acquire substantially all of
the assets of the Control Systems division of Scientific-Atlanta, Inc., which
would become an integral part of the Company's data communications solutions for
utilities segment. The purchase price for the acquisition is $5 million subject
to certain adjustments. The closing of this acquisition is subject to the
satisfaction of certain conditions both by Scientific Atlanta and by the Company
and is currently anticipated to take place during the third quarter of 1999.
The decrease in trade accounts receivable during the second quarter of
1999, reflected both improved collections and the lower level of hardware sales
during the quarter. The increase in short term debt was attributable to
utilization of the credit line to fund, in part, the purchase by the Company of
the publicly held shares of DSI Israel.
Year 2000 Disclosure
The Company has conducted a review of its computer systems and operations,
both those for internal use and those developed for customers, to identify and
determine the extent to which any systems may be vulnerable to potential errors
and failures as a result of the "Year 2000 problem." Any of these programs that
have time-sensitive software could experience system failures or miscalculations
and result in disruption of operations.
The Company has completed a comprehensive review of these computer systems
to ensure that all such systems are Year 2000 compliant prior to the
commencement of the year 2000. The Company's plan for its Year 2000
compatibility effort includes the following: (i) conducting a comprehensive
inventory of the Company's internal systems, including non-information
technology systems (e.g. switching, billing and other platforms and electrical
systems) and any systems intended to be acquired by the Company, (ii) conducting
a comprehensive review of the systems developed by or licensed to the Company
for customers either under development or within their warranty period, (iii)
assessing and prioritizing any required mediation, and (iv) remediating any
problems by modifying, or replacing where appropriate, non-compliant systems.
In connection with its Year 2000 remediation efforts, the Company has not
and does not expect to incur any significant costs. Any such efforts are
expected to be handled by Company personnel as part of their regular duties. In
respect of Tower's remediation efforts, Tower expects to incur staff costs as
well as consulting and other expenses incremental to current spending levels.
Tower anticipates that such costs will not be material. Tower estimates that the
total cost associated with the Year 2000 projects will be $1.5 million, of which
approximately $1.1 million has been expended to date. Tower has financed its
Year 2000 related costs from its working capital and has expensed them as
incurred.
Both the Company and Tower do not believe that any of its products have any
direct material Year 2000 compliance problems.
In addition to assessing its own internal or externally supplied systems,
the Company has made efforts to identify and remedy potential implications to
the Company as a result of its suppliers' vulnerability to Year 2000 problems.
There can be no assurance that the Company has or will be able to identify all
aspects of its business that are subject to Year 2000 problems of customers or
suppliers that affect the Company's business. There can also be no assurance
that the Company's software suppliers are correct in their assertions that the
software is Year 2000 compliant. Should either the Company's internal systems or
the internal systems of any of the more significant suppliers or customers fail
to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected. The Company has reviewed all of its key
systems and has satisfied itself that it has identified substantially all
systems with potential problems and has either corrected or is in the process of
replacing them. As of June 30, 1999, the Company's Year 2000 remediation efforts
were approximately 90% completed. The Company expects to complete the
remediation by the end of the third quarter of 1999.
Tower believes that it has or will have addressed all Year 2000 issues
before the end of 1999, except with respect to certain embedded fab machinery as
a result of nonresponse on the part of certain vendors; however, there can be no
assurance that Tower will achieve Year 2000 compliance as scheduled.
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<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
General
The Company is required to make certain disclosures with respect to its
financial instruments, including derivatives, if any. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that imposes on one entity a contractual obligation either to deliver or receive
cash or another financial instrument to or from a second entity. Examples of
financial instruments include cash and cash equivalents, trade accounts
receivable, loans, investments, trade accounts payable, accrued expenses,
options and forward contracts. The disclosures below include, among other
matters, the nature and terms of derivative transactions, information about
significant concentrations of credit risk, and the fair value of financial
assets and liabilities.
Forward Exchange Agreements
The Company, through Tower, has entered into forward exchange agreements to
manage exposure to equipment purchase commitments denominated in Japanese yen.
These transactions qualified for hedge accounting in accordance with generally
accepted accounting principles and, accordingly, the results of such
transactions have been recorded concurrently with the realization of the related
items (i.e., receipt of the equipment and payment of the related liability).
Although the Company has retained effective control of Tower, the Company no
longer maintains voting control of Tower. The Company does not hold or issue
derivative financial instruments for trading purposes.
Foreign Exchange Transactions
No such transactions are reflected for the six-month and three-month
periods ended June 30, 1998 and 1999.
Fair Value of Financial Instruments
Fair values are estimated for financial instruments included in current
assets and current liabilities at book value, due to the short maturity of such
instruments. Fair value for long-term debt is estimated based on the current
rates offered to the Company for debt with the same remaining maturities. Fair
value of long-term equity marketable investments is estimated based on market
value. The estimation of fair value for non-marketable long-term equity
investments (book value of $286,000 as of June 30, 1999) was not practicable,
although the Company believes that the estimated fair value of such financial
instruments was not materially different from their book value.
The market value of the Company's investment in Tower as of June 30, 1999
was approximately $26.8 million, below the carrying value of the equity
investment (after minority interest) as of June 30, 1999 of $27.7 million. The
Company believes that the abovedescribed decline in the market price of Tower is
temporary.
Concentrations of Credit Risk
The Company is subject to credit risk through its trade receivables. As of
June 30, 1999, approximately 9% of the trade accounts receivable were due from a
major Israel government-owned company which, despite experiencing financial
difficulties, continues to pay its trade receivables over extended credit
periods. Approximately 17% of the trade accounts receivable were due from a U.S.
customer that continues to pay its trade receivables over usual credit periods.
The remaining balance consists primarily of receivables from various customers.
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of Stockholders (the "Meeting") was held on
June 16, 1999. The following individuals were elected as directors of the
Registrant at the Meeting:
George Morgenstern
Robert L. Kuhn
Harvey Eisenberger
Sheldon Krause
Susan L. Malley
Maxwell M. Rabb
Allen L. Schiff
The election of directors was the only matter voted upon at the meeting.
Set forth below is the number of votes cast for, against or withheld, as well as
the number of abstentions and/or broker non-votes with respect to the election
of directors.
There were 6,170,103 votes for and 206,469 votes withheld for the election
of each of the nominees, except for Mr. Rabb, who received 6,169,503 votes for
and 207,069 votes withheld. There were no broker non-votes.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset Purchase Agreement between Comverge Technologies, Inc. and
Scientific-Atlanta, Inc. dated as of June 11, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report of the Company on Form 8-K dated June 16, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: August 12, 1999
By: /s/ Yacov Kaufman
Yacov Kaufman
Chief Financial Officer
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================================================================================
ASSET PURCHASE AGREEMENT
by and between
SCIENTIFIC-ATLANTA, INC.
and
COMVERGE TECHNOLOGIES, INC.
THIS ASSET PURCHASE AGREEMENT ("Agreement") dated as of this 11th day of
June, 1999, is made and entered into by and between SCIENTIFIC-ATLANTA, INC., a
Georgia corporation ("S-A"), and COMVERGE TECHNOLOGIES, INC., a Delaware
corporation ("Comverge").
WHEREAS, the Control Systems business of S-A, which business is conducted
through S-A's Control Systems product line, manufactures, markets, sells and
distributes load control, power monitoring and utility communications products
(the "Business"); and
WHEREAS, S-A and Comverge desire to enter into this Agreement pursuant to
which S-A is agreeing to sell to Comverge and Comverge is agreeing to purchase
from S-A the Purchased Assets (as defined below) and Comverge is agreeing (i) to
pay in exchange therefor, subject to adjustment as provided herein, Five Million
Dollars ($5,000,000) which shall be paid in cash in two installments, and (ii)
to assume certain liabilities of the Business as hereinafter provided.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1.
DEFINITIONS
Certain capitalized terms used in this Agreement shall have the meanings
ascribed to such terms in Exhibit A.
ARTICLE 2.
PURCHASE AND SALE OF ASSETS
Section 2.1. Purchase and Sale. On the terms and subject to the
satisfaction or waiver of the conditions set forth herein, at the Closing, S-A
will sell and convey to Comverge, free and clear of any Encumbrances, and
Comverge will purchase and acquire from S-A all of S-A's right, title and
interest in and to all the assets and properties of every kind and character,
tangible or intangible, wherever situated, excluding the Excluded Assets, owned
and held by S-A and used primarily or exclusively in connection with the
Business, (collectively, the "Purchased Assets"); including, without limitation,
the following:
(a) the tangible assets, (including without limitation the machinery,
production equipment, tooling, equipment (including computer
equipment), supplies, office furniture and Other Current Assets) used
primarily or exclusively in connection with the Business, including,
without limitation, those listed on Section 2.1(a) of the Disclosure
Schedule;
<PAGE>
(b) the inventory (including inventory reserves) of raw materials,
work-in-process, finished goods, parts, scrap, wrapping, supply and
packaging items and finished goods used or to be used exclusively in
the Business (the "Inventory"), except for such finished goods
inventory as has been purchased by customers of S-A and is being held
for such customers, which inventory will be segregated at Closing and
retained by S-A. A listing of the Inventory as of a recent date is
included as Section 2.1(b) of the Disclosure Schedule;
(c) the intellectual property rights used exclusively or primarily in the
Business, including, without limitation, those listed on Section
2.1(c)(i) of the Disclosure Schedule, consisting of the patents and
pending patent applications and trademarks, trade names and service
marks, specifications, bills of materials, know-how, trade secrets,
good will of the Business as a going concern, together with the right
to represent oneself to third parties as a successor to the Business,
and all drawings and designs in S-A's possession relating to products
that are currently made or have been made by the Business, but
excluding the intellectual property rights described in Section 2.2(i)
and Section 5.13 (the "Intellectual Property"). To the extent
Intellectual Property is owned by S-A, all right, title and interest
to same, including all registrations thereof and renewal rights
thereto, together with the goodwill associated therewith, shall be
conveyed to Comverge at Closing, unless otherwise noted on Section
2.1(c)(ii) of the Disclosure Schedule as being licensed to Comverge.
To the extent Intellectual Property is licensed to S-A from persons or
entities other than its subsidiaries, S-A shall use its reasonable
efforts to transfer its interests in such licenses pursuant to Section
5.8, provided such interests are transferable. In the event that S-A's
interest in any Intellectual Property is not transferable, S-A shall
identify such interest on Section 2.1(c)(iii) of the Disclosure
Schedule;
(d) the books, records, manuals, documents, books of account,
correspondence, sales and credit reports, supplier lists, customer
lists, distributor lists, bid and quote information, literature,
catalogs, brochures, advertising material (including printers' proofs,
camera-ready art items and related mock-ups and "slicks") and the like
which are used primarily in the Business except for litigation files,
employee records (including, without limitation, personnel files,
employee medical files, and workers' compensation files), and
affirmative action plans of S-A;
(e) the contracts, agreements, backlog, commitments, and leases of
personal property with customers, suppliers, vendors, lessors, lessees
or others entered into by S-A exclusively for or on behalf of the
Business, including without limitation S-A's current contract with
Gulf Power Company and those contracts listed in Section 2.1(e) of the
Disclosure Schedule, but excluding computer-related license agreements
which are included in the definition of Intellectual Property (the
"Contracts"); and
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<PAGE>
(f) all Permits, to the extent lawfully transferable.
Section 2.2. Excluded Assets. S-A shall not sell to Comverge and Comverge
shall not purchase from S-A the following assets or types of assets (the
"Excluded Assets"), which shall be deemed to include the following:
(a) all of the accounts receivable and advance payments generated or
incurred by or in connection with the Business prior to the Closing
Date, including intercompany and intracompany receivables related to
purchase and sale activities between the Business and other divisions
or subsidiaries of S-A and including the reserves for accounts
receivable of the Business (the "Receivables");
(b) all of the retainage accounts generated by or in connection with the
Business for work performed but not yet billed to customers ,
excluding advance payments or deposits paid to S-A in connection with
work to be performed or orders to be filled by Comverge after the
Closing Date;
(c) except as specified in Section 2.1(a), any asset of any nature
whatsoever (including intellectual property) used by S-A primarily in
connection with any business of S-A, other than the Business;
(d) all finished goods inventory located at any facility of the Business
which is being held for a customer who previously purchased it;
(e) all of the cash (including petty cash), cash equivalents, bank
accounts, deposits, lock boxes and other similar accounts (whether
maintained at a bank, savings and loan or other financial
institution), marketable securities, including cash deposits and
investments of S-A as of the Closing Date and including all blank
check stock;
(f) all past, present or future claims, choses in action and rights or
actions by S-A against third parties arising from the operation of the
Business prior to the Closing;
(g) all assets of any retirement plan (defined contribution and defined
benefit), including, but not limited to, the right to receive any
assets of any such pension plan upon termination of the pension plan
if the pension plan's assets exceed its liabilities;
(h) any rights of reimbursement or otherwise of S-A against third parties
or the government in respect of expenditures made by S-A in connection
with compliance with Environmental Laws;
(i) except as provided in Section 5.13, all intellectual property rights
and use rights in or to the names "Scientific-Atlanta," "S-A," or any
derivations
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<PAGE>
thereof and associated logos (including but not limited to the
Scientific-Atlanta arcs logo);
(j) all claims for refunds of Taxes and other governmental charges or
assessments arising from or pertaining to periods, activities,
operations or events occurring on or prior to the Closing Date;
(k) all litigation files, all personnel and medical files of S-A employees
and all affirmative action plans of S-A;
(l) all rights of S-A pursuant to this Agreement and the instruments
delivered hereunder; and
(m) the assets listed as Excluded Assets on Section 2.2(m) of the
Disclosure Schedule.
Section 2.3. Assumed Liabilities. Except as assumed pursuant to this
Agreement, all liabilities, debts and other obligations of S-A with respect to
the Business shall remain the obligation of S-A. As partial consideration for
consummation of the transactions contemplated hereby, at the Closing, Comverge
shall assume and agree to thereafter perform and discharge when due the
following, and only the following, liabilities of S-A with respect to the
Business, whether known, unknown, fixed, contingent, or otherwise (the "Assumed
Liabilities"):
(a) all liabilities or obligations, expressly undertaken or assumed by
Comverge pursuant to this Agreement, including, without limitation,
all liabilities and obligations under the Contracts and all Warranty
Claims;
(b) all obligations and liabilities for all ad valorem property taxes on
the Purchased Assets which become due and payable on or after the
Closing Date;
(c) all liabilities, obligations, costs and expenses arising out of or
relating to the operation of the Business on or after the Closing
Date; and
(d) the liabilities listed as Assumed Liabilities on Section 2.3(d) of the
Disclosure Schedule.
Section 2.4. Excluded Liabilities. S-A shall retain liability for all
liabilities and obligations not assumed by Comverge pursuant to this Agreement
(the "Excluded Liabilities"), including, without limitation, the following:
(a) Accounts Payable;
(b) any liability of the Business for federal, state or local income
taxes, sales taxes on goods sold , or property taxes relating to the
ownership of any assets owned, and any penalties, interest, fines or
assessments with respect thereto, applicable to the conduct of the
Business prior to the Closing Date;
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<PAGE>
(c) obligations or expenses of S-A in connection with the transactions
contemplated hereby, including, without limitation, legal and
accounting fees and expenses and brokerage finders' fees due (except
such fees and expenses as S-A is entitled to receive from Comverge
pursuant to the indemnification provisions of Section 7.2);
(d) Product Claims;
(e) Claims of Environmental Liability with respect to the conduct of the
Business prior to the Closing Date;
(f) all liabilities or obligations arising out of or relating to any (i)
employment contract or employee benefit contract of S-A or (ii) claims
made pursuant to the Employee Retirement Income Security Act (ERISA)
arising out of or relating to the conduct of the Business prior to the
Closing Date; and
(h) all liabilities or obligations expressly undertaken by S-A pursuant to
the other provisions of this Agreement, including Section 5.8.
Section 2.5. Purchase Price. The purchase price (the "Purchase Price")
payable in consideration for the Purchased Assets (in addition to Comverge 's
assumption of the Assumed Liabilities) shall, subject to adjustment as provided
herein, be an amount equal to Five Million Dollars ($5,000,000) which shall be
paid in cash in two installments as follows:
(a) Four million dollars ($4,000,000), subject to adjustment as provided
in Section 6.4 hereof, on the Closing Date (the "Initial Payment");
(b) One million dollars ($1,000,000), less any adjustment pursuant to
Section 5.18 hereof on the first anniversary of the Closing (the
"Deferred Payment"). The Deferred Payment shall be guaranteed by DSSI
as provided in Section 6.3.
Section 2.6. Allocation of Purchase Price. The parties agree that the
Purchase Price shall be allocated among the Purchased Assets in accordance with
Exhibit B hereto. S-A and Comverge agree to complete IRS Form 8594 consistently
with such allocation and to furnish each other with a copy of such form prepared
in draft form within forty-five (45) days prior to the filing due date of such
form. Neither S-A nor Comverge shall file any return or take a position with any
taxing authority that is inconsistent with Exhibit B.
Section 2.7. Proration of Property Taxes. Notwithstanding anything herein
to the contrary, any personal property taxes (and any other Taxes not measured
or measurable, in whole or in part, by net or gross income or receipts) imposed
on the Purchased Assets that relate to a tax period beginning before the Closing
Date and ending after the Closing Date (an "Overlap Period") shall be
apportioned as of the Closing Date.
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<PAGE>
Should any amounts to be prorated not have been finally determined on the
Closing Date, a mutually satisfactory estimate of such amounts made on the basis
of S-A's records shall be used as a basis for settlement at Closing, and the
amount finally determined will be prorated as of the Closing Date and
appropriate settlement made as soon as practicable after such final
determination.
Section 2.8. Disclaimer of Warranties. Except with respect to the
warranties and representations specifically set forth in this Agreement, S-A
makes no warranty, express or implied, whether of merchantability, suitability
or fitness for a particular purpose, or quality as to the Purchased Assets, or
any part thereof, or as to the condition or workmanship thereof, or the absence
of any defects therein, whether latent or patent, it being understood that the
Purchased Assets are to be conveyed hereunder "AS IS" on the date hereof and in
their present condition, subject to reasonable use, wear and tear between the
date hereof and the Closing Date, and Comverge shall rely upon its own
examination thereof. Further, S-A makes no warranty or representation concerning
the prospects of the Business after the Closing.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF S-A
Except as set forth in the Disclosure Schedule, S-A hereby represents and
warrants to Comverge as follows:
Section 3.1. Corporate Organization and Authority.
(a) Incorporation; Authority. S-A is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
Georgia, with full corporate power and authority to conduct the
Business as now conducted and to own the Purchased Assets. S-A has the
power to enter into and perform its obligations pursuant to this
Agreement. S-A's execution, delivery and performance of this Agreement
and the sale to Comverge of the Purchased Assets hereunder have been
duly authorized by all requisite corporate action on the part of S-A.
This Agreement constitutes S-A's legal, valid and binding obligation,
enforceable against S-A in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, moratorium,
reorganization or similar laws affecting creditors' rights and to
equitable principles.
(b) Foreign Qualification. S-A is duly qualified and authorized to
transact business and is in good standing in those jurisdictions of
the United States in which S-A is required to be qualified to conduct
the Business, except where the failure to be so qualified would not
have a Material Adverse Effect.
Section 3.2. Absence of Conflicts and Consent Requirements. S-A's execution
and delivery of this Agreement, and the performance of its obligations
hereunder, do not
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<PAGE>
and will not (a) conflict with or violate any provision of S-A's Articles of
Incorporation or Bylaws, (b) violate or, alone or with notice or the passage of
time, result in the material breach or the termination of, or otherwise give any
contracting party the right to terminate or declare a default under, the terms
of any Material Contract; or (c) violate any judgment, order, decree, or to the
best knowledge of S-A, any material law, statute, regulation or other judicial
or governmental restriction to which S-A is subject. There is no requirement
applicable to S-A to make any filing with, or to obtain any permit,
authorization, consent or approval of, any governmental or regulatory authority
as a condition to the lawful performance by S-A of its obligations hereunder.
Section 3.3. Absence of Undisclosed Liabilities. On the Closing Date, no
debts, liabilities or obligations of the Business of any nature whatsoever,
whether accrued, absolute, contingent or otherwise, shall be imposed on Comverge
by virtue of S-A's transfer of the Business to Comverge except for liabilities
that were incurred in the ordinary course of business and the Assumed
Liabilities.
Section 3.4. Environmental Matters.
(a) There is no pending or, to the knowledge of S-A, material threatened
Claim of Environmental Liability relating to the Business or the
Purchased Assets;
(b) To the knowledge of S-A, S-A currently holds all material permits,
licenses and approvals of governmental authorities and agencies
required under Environmental Laws for the current use, occupancy or
operation of the Purchased Assets and the Business, and S-A is in
substantial compliance with such permits, licenses, and approvals; and
(c) S-A is in substantial compliance, and has been in substantial
compliance for the twelve (12) months prior to the Closing, with
Environmental Laws with respect to the Purchased Assets and the
Business.
Section 3.5. Ownership of Personal Property. S-A has good and marketable
title to all of the material items of tangible personal property owned by S-A
and included in the Purchased Assets, free and clear of any Encumbrances, except
for (i) minor Encumbrances that in the aggregate are not substantial in amount,
do not materially detract from the value of the assets subject thereto, or
materially interfere with the present use thereof or (ii) other matters which
are insubstantial in amount or affecting assets which are not material to the
Business.
Section 3.6. Litigation. There are no material pending or, to the knowledge
of S-A, threatened in writing, arbitrations, actions, suits or proceedings
relating to the Business or the Purchased Assets filed or commenced by or before
any court or any governmental or administrative agency, and there are not any
orders, injunctions, awards, judgments or decrees outstanding against, affecting
or relating to the Business or any of
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<PAGE>
the Purchased Assets which, in any such case, would reasonably be anticipated
individually or in the aggregate to have a Material Adverse Effect on the
Business.
Section 3.7. Licenses, Permits and Compliance with Law. Except as provided
in Section 3.4:
(a) S-A holds all Permits which are necessary to conduct the Business as
presently carried on by S-A, except for such Permits the absence of
which would not have a Material Adverse Effect; and
(b) S-A is presently conducting the Business so as to comply with all
applicable statutes, ordinances, rules, regulations and orders of any
governmental authority, except for violations the existence of which
would not have a Material Adverse Effect.
Section 3.8. Intellectual Property Rights.
(a) S-A owns all right, title and interest in, or possesses all necessary
licenses or other rights to, the Intellectual Property. Except as set
forth on Section 2.1(c) (iii) of the Disclosure Schedule, all rights
of S-A in each item of Intellectual Property are transferable to
Comverge as herein contemplated.
(b) To the knowledge of SA, except as excluded pursuant to Sections 2.2(i)
and 5.13 or as disclosed in Section 2.1(c) of the Disclosure Schedule,
the Purchased Assets include all intangible assets necessary to permit
Comverge, upon consummation of the transactions contemplated hereby,
to carry on the Business substantially as currently conducted by S-A,
without any conflict with the rights of others.
(c) To the knowledge of S-A, within the twelve (12) months prior to the
date hereof, no claims or allegations of infringement or
misappropriation of any Intellectual Property have been threatened in
writing against S-A.
(d) Except as excluded pursuant to Sections 2.2(i) and 5.13, as a result
of the transactions contemplated hereby, Comverge shall own or possess
adequate and enforceable licenses, sublicenses or other rights to use
all the Intellectual Property.
(e) No use by S-A of any Intellectual Property licensed to it violates the
terms of any agreement pursuant to which such Intellectual Property is
licensed to S-A, copies of which have been provided to Comverge.
(e) Following the execution of this Agreement and prior to the Closing,
S-A shall provide Comverge with access to all employees of the
Business who are knowledgeable about the Intellectual Property.
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<PAGE>
(f) To the knowledge of S-A, (i) the patents, trademarks, trade dress,
service marks and copyrights set forth on Section 2.1(c)(i) of the
Disclosure Schedule are not invalid; (ii) except as set forth on
Section 3.8(f)(i) of the Disclosure Schedule, the trademark
registrations, trade dress registrations, service mark registrations,
copyright registrations and patents which are set forth in Section
2.1(c)(i) of the Disclosure Schedule have been duly issued and have
not been canceled, abandoned or otherwise terminated; and (iii) except
as set forth on Section 3.8(f)(ii) of the Disclosure Schedule, the
trademark applications, trade dress applications, service mark
applications, copyright applications and patent applications which are
set forth in Section 2.1(c)(i) of the Disclosure Schedule have been
duly filed.
Section 3.9. Inventory. The Inventory is valued on the Financial Statements
in accordance with GAAP and is relevant to the operation of the Business. The
finished goods inventory included in the Purchased Assets will not be obsolete
and will be saleable in the ordinary course of the Business as currently
conducted.
Section 3.10. Material Contracts. To the best knowledge of S-A, Section
3.10 of the Disclosure Schedule lists or describe the following agreements
relating to the Business (including, without limitation, leases of personal
property, purchase contracts and commitments) to which S-A is a party, or by
which the Business or any of the Purchased Assets may be materially bound,
copies of which have been furnished to or made available for inspection by
Comverge (collectively, the "Material Contracts"):
(a) Each Contract of the Business which involves future obligations of the
Business in an amount that is reasonably expected to exceed
Twenty-Five Thousand Dollars ($25,000);
(b) Each Contract with customers or suppliers which involves future
obligations on the part of S-A in an amount that is, individually or
in the aggregate with all Contracts for that customer or supplier,
reasonably expected to exceed Twenty-Five Thousand Dollars ($25,000);
(c) All joint ventures;
(d) All notes, bonds, mortgages, security agreements, guarantees and other
agreements and instruments for or relating to any lending by S-A of
any amount (exclusive of advances to employees for expenses in the
ordinary course of business) or any borrowing (including assumed debt)
that is reasonably expected to exceed Twenty-Five Thousand Dollars
($25,000) or more and which relates primarily to the Business;
(e) All contracts entered into by S-A for the Business not in the ordinary
course of the conduct of the Business;
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(f) All contracts with affiliates or contracts entered into on other than
an arm's length basis;
(g) Any covenant not to compete or confidentiality agreement entered into
with respect to the Business within the last 12 months; and
(h) All License or royalty agreements or contracts relating to the
Intellectual Property.
To S-A's best knowledge, (i) each contract described above is valid,
binding and enforceable in accordance with its terms, (ii) no other party to any
such contract is in breach or default of the express written terms of such
contracts, and (iii) there does not exist under any provision thereof any event
that, with the giving of notice or the passage of time or both, would constitute
such a breach or default. Section 3.10(a) of the Disclosure Schedule specifies
which of the above-described contracts require consents to assignment. Section
3.10(b) of the Disclosure Schedule also lists or describes each bid and each
quotation related to the Business which is in progress but has not resulted in
the award of a contract to date. With respect to such bids and quotations and
any possible award of contracts relating thereto, no representations or
warranties are given by S-A.
Section 3.11. Equipment. The equipment included in the Purchased Assets is
in good and workable condition consistent with its age and use by S-A and, with
respect to such equipment, S-A has substantially complied with applicable
maintenance schedules.
Section 3.12. Brokers, Finders, etc. S-A has not employed any broker,
finder, consultant or other intermediary in connection with the transactions
contemplated by this Agreement who might be entitled to a fee or commission in
connection with such transactions.
Section 3.13. Taxes. S-A has duly and timely filed all Tax returns required
to be filed by it in respect of the Business and the Purchased Assets and has
paid all Taxes which have become due with respect to the Business and the
Purchased Assets, including any Taxes which it was obligated to withhold from
amounts owing to any employee, creditor, or third party except such amounts as
are being contested in good faith. S-A has no knowledge of any pending,
threatened or proposed Tax audits, Tax assessments or claims from taxing
authorities for deficiencies, penalties or interest that are likely to have a
Material Adverse Effect.
Section 3.14. Financial Statements. The Financial Statements are true and
complete for the Business in all material respects as of the respective dates
thereof and fairly represent in all material respects the financial position and
results of operations of the Business as of and for the period set forth
therein.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF COMVERGE
Comverge hereby represents and warrants to S-A as follows:
Section 4.1. Corporate Organization and Authority. Comverge is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full corporate power and authority to conduct its
business as now conducted and to own its assets. Comverge has the power to enter
into and perform its obligations pursuant to this Agreement. Comverge 's
execution, delivery and performance of this Agreement, and its acquisition of
and payment for the Purchased Assets hereunder, have been duly authorized by all
requisite corporate action on the part of Comverge. This Agreement constitutes
Comverge 's legal, valid and binding obligation, enforceable against Comverge in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, moratorium, reorganization or similar laws affecting
creditors' rights generally and to equitable principles.
Section 4.2. Absence of Conflicts and Consent Requirements. Comverge's
execution and delivery of this Agreement, and the performance of its obligations
hereunder, do not (a) conflict with or violate Comverge 's Certificate of
Incorporation or Bylaws; (b) violate or, alone or with notice or passage of time
or both, result in the material breach or termination of, or otherwise give any
contracting party the right to terminate or declare a default under, the terms
of any material written agreement to which Comverge is a party or by which
Comverge or its assets is bound; or (c) violate any judgment, order, decree, or
to the best knowledge of Comverge, any material law, statute, regulation or
other judicial or governmental restriction to which Comverge is subject. There
is no requirement applicable to Comverge to make any filing with, or to obtain
any permit, authorization, consent or approval of, any governmental or
regulatory authority or any third party as a condition to the lawful performance
by Comverge of its obligations hereunder.
Section 4.3. Litigation Affecting Comverge. There is no claim, action,
proceeding or investigation pending or, to the best knowledge of Comverge,
threatened in writing, nor is there outstanding any writ, order, decree or
injunction that (a) calls into question Comverge 's authority or right to enter
into this Agreement and consummate the transactions contemplated hereby, or (b)
would otherwise prevent or delay the transactions contemplated by this
Agreement.
Section 4.4. Finders' Fees. Neither Comverge nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions, or finder's fees in connection
with the transactions contemplated herein.
Section 4.5. Financial Capability. Comverge has access to sufficient
financing to enable it to consummate the transactions contemplated by this
Agreement.
Section 4.6. Fraudulent Conveyance/Fraudulent Transfer Matters. After
giving effect to any and all financing to be entered into or incurred by
Comverge in connection with its consummation of the transactions contemplated
hereby, Comverge will not be as
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of the Closing Date (i) "insolvent" nor will it become "insolvent" as a result
of such transactions, (ii) engaged in a business or transaction for which any
property or assets remaining with Comverge would be "unreasonably little" or
"unreasonably small in relation to its business" or the transaction, or (iii) in
a position where it "intends to incur, or believes that [it] would incur, debts
that would be beyond its ability to pay as such debts mature," in each case as
such quoted terms are used in Section 548 of the United States Bankruptcy Code
of 1978, as amended, the Uniform Fraudulent Conveyances Act and the Uniform
Fraudulent Transfer Act.
ARTICLE 5.
COVENANTS OF S-A AND COMVERGE
Section 5.1. Investigation of Business; Access to Properties and Records.
(a) Subject to restrictions contained in non-disclosure agreements to
which S-A is subject with respect to any information relating to any
third party, from the date of this Agreement to the Closing Date (the
"Pre-Closing Period"), S-A shall give to Comverge and its legal
counsel, accountants and other representatives reasonable access
during normal business hours to the books, contracts, commitments and
records of the Business (excluding litigation, personnel and medical
files) and shall permit them to consult with management employees of
the Business, to allow Comverge full opportunity to make such
investigations as are necessary to analyze the affairs of the
Business. S-A shall describe to Comverge in writing the general nature
of the information or documents to which Comverge has not been given
access by reason of one or more non disclosure agreements. S-A shall
use its reasonable efforts to respond to reasonable requests from
Comverge, its lenders, counsel, accountants and other representatives
during such investigations. In addition, during the Pre-Closing
Period, Comverge shall be entitled to contact employees of the
Business for the purposes of interviewing and making offers of
employment to the employees of the Business following the Closing
Date, provided that such contacts have been approved and scheduled in
advance through John Morrow. Comverge shall be solely responsible for
such employment efforts and shall indemnify S-A from and against any
and all claims, losses or damages suffered or alleged as a result of
Comverge's hiring, interviewing or employment practices, policies,
decisions, acts or omissions, whether before or after the Closing Date
(collectively, "Comverge Employment Liabilities").
(b) Any information provided to or obtained by Comverge or its
representatives pursuant to this Agreement shall be held by Comverge
and its representatives in confidence as confidential information in
accordance with the terms of that certain nondisclosure agreement
between S-A and Comverge dated February 22, 1999 (the "Nondisclosure
Agreement").
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Section 5.2. Reasonable Efforts. Subject to the terms and conditions herein
provided, S-A and Comverge agree to use reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and to cooperate with the other
in connection with the foregoing, including using reasonable efforts:
(a) to obtain all necessary waivers, consents, releases and approvals from
other parties to loan agreements, guarantees and other Contracts;
(b) to obtain all consents, approvals and authorizations that are required
to be obtained under any federal, state, local or foreign law or
regulation;
(c) to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties hereto to consummate
the transactions contemplated hereby;
(d) to effect all necessary registrations and filings, and submissions of
information requested by governmental authorities; and
(e) to fulfill all conditions to this Agreement.
Section 5.3. Conduct of Business Prior to Closing. From the date hereof
through the Closing, except as otherwise provided for in this Agreement or
except as consented to by Comverge in writing, S-A shall:
(a) operate the Business in the ordinary and usual course in all material
respects in accordance with past practices (including paying Accounts
Payable and collecting Receivables in accordance with S-A's past
practices);
(b) use its reasonable efforts to preserve the Business and to preserve
generally the goodwill of customers, suppliers, creditors and others
having business relations with the Business;
(c) maintain all equipment included in the Purchased Assets in the same
manner and frequency as such equipment has been maintained by S-A
during the twelve (12) months immediately preceding the Closing Date
and shall make only such purchases of equipment as are required to
replace equipment being retired;
(d) maintain the books and records of the Business in accordance with past
practices and prepare and file all foreign, federal, state and local
tax returns and amendments thereto when due and required to be filed
by S-A, taking into account any extensions of time granted by the
applicable taxing authority; and
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(e) engage in no bulk sale of inventory or equipment, except that S-A may
enter into a bulk sale agreement with ACT (or such other manufacturer
as may be agreeable to Comverge) in furtherance of the execution of
firm manufacturing agreements as described in Section 6.2(e)(5)
hereof, provided that in the event of any such sale, the Purchase
Price shall be subject to adjustment as provided in Section 6.4.
Except for conduct expressly permitted under this Agreement, Comverge shall
not (i) interfere with S-A's conduct of the Business pending the Closing; (ii)
take any action which might impair S-A's relationships with customers, suppliers
and employees of the Business; or (iii) interfere with S-A's management of the
Business. In furtherance of Comverge 's covenant not to interfere with the
Business and S-A's management thereof, Comverge shall not contact any employee
of the Business unless such contact has been arranged by John K. Morrow pursuant
to Section 5.1(a) hereof.
Section 5.4. Public Announcements. Neither S-A nor Comverge shall make, nor
permit any agent, affiliate or parent corporation to make, any public
statements, including, without limitation, any press releases, with respect to
this Agreement and the transactions contemplated hereby without the prior
written consent of the other party hereto, except as may be required by law or
stock exchange rule.
Section 5.5. No Implied Representation. It is the explicit intent of each
party hereto that neither Comverge nor S-A is making any representation or
warranty whatsoever, express or implied, beyond those expressly given in this
Agreement. Without limiting the generality of the foregoing, it is understood
that any cost estimates, forecasts, projections or other predictions contained
or referred to in any of the offering memorandum, management presentations or
other materials that may have been provided to Comverge are not and shall not be
deemed to be representations or warranties of S-A.
Section 5.6. Construction of Certain Provisions. It is understood and
agreed that the specification of any dollar amount in the representations and
warranties contained in this Agreement or the inclusion of any specific item in
the Disclosure Schedule or Exhibits hereto is not intended to imply that such
amounts or higher or lower amounts, or the items so included or other items, are
or are not material, and neither party shall use the fact of the setting of such
amounts or the fact of the inclusion of any such item in the Disclosure Schedule
or Exhibits hereto in any dispute or controversy between the parties as to
whether any obligation, item or matter not described herein or included in the
Disclosure Schedule or an Exhibit hereto is or is not material for purposes of
this Agreement.
Section 5.7. Bulk Transfer Compliance. Comverge hereby waives compliance
with the provisions of any Bulk Sales Laws, to the extent applicable to the
transactions contemplated hereby.
Section 5.8. Assignment of Contracts. To the extent the assignment or
novation of any Contract, commitment, security or other asset to be assigned to
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Comverge pursuant to the provisions hereof shall require the consent of any
other person, this Agreement shall not constitute a contract to assign the same
if an attempted assignment would constitute a breach thereof or give rise to any
right of acceleration or termination. S-A shall use its reasonable efforts to
procure consents to any such assignment or novation, where applicable, prior to
the Closing. If any such consent or novation is not obtained, S-A shall use its
reasonable efforts to obtain any such consent or novation after the Closing and
shall cooperate with Comverge in any reasonable arrangement designed to provide
Comverge the benefit of any such Contract, commitment, security or other asset,
including, without limitation, (i) reasonable help in enforcement of any and all
rights of S-A against the other party thereto arising out of breach or
cancellation thereof by such party or otherwise and (ii) reasonable arrangements
for the remittance to Comverge by S-A of all payments received under such
non-assigned Contracts upon receipt of same.
Section 5.9. Employees.
(a) Comverge shall offer employment to each of the Designated Employees at
a comparable job with a compensation and benefits package that, taken
as a whole (including base salary or hourly rate, incentive pay (if
applicable) and benefits), is of substantially equal value to the
compensation and benefits package to which such Designated Employee
was entitled from S-A on the date hereof. The terms of such offers
have been or will be furnished to S-A.
(b) Comverge agrees to assume all Employment-Related Obligations with
respect to the Designated Employees, which obligations arise or accrue
on or after the Closing Date. For purposes of this Agreement,
"Employment-Related Obligations" shall include, without limitation:
(i) compensation for services performed for Comverge after the Closing
Date (and related employment and withholding taxes); (ii) benefits
accrued under any Comverge-sponsored employee welfare or pension
benefit plan (as defined under ERISA Sections 3(l) and 3(2),
respectively) covering any employees hired by Comverge (the
"Employees") after the Closing Date; (iii) benefits accrued under any
other employee benefit plan or arrangement of Comverge covering the
Employees after the Closing Date; (iv) workers' compensation benefits
with respect to claims related to any period after the Closing Date;
and (v) severance benefits or similar payments arising from Comverge's
termination of any Employee hired by Comverge.
(c) No assets or liabilities with respect to any Employee shall be
transferred as a result of this Agreement from any retirement plan of
S-A (defined contribution and defined benefit) to any plan maintained
or established by Comverge. S-A shall retain all obligations to fund
or otherwise provide benefits accrued on or before the Closing Date by
the Employees under S-A's retirement plans.
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(d) S-A and Comverge hereby agree to utilize the "Standard Procedure" set
forth in Revenue Procedure 96-60, I.R.B. 1996-53, or a corresponding
future revenue procedure or other administrative pronouncement, with
regard to the reporting requirements attributable to wages paid or to
be paid to Employees of the Business.
Section 5.10. Post-Closing Cooperation.
(a) During the Access Period, Comverge shall maintain in a reasonably
accessible location all books and records of the Business (including
all technical records) transferred by S-A pursuant to this Agreement.
Comverge shall notify S-A prior to disposing of any such books and
records after the Access Period has expired, and, upon request made by
S-A within sixty (60) days after receipt of such notice, Comverge
shall deliver such books and records to S-A at S-A's expense.
(b) In recognition of S-A's obligations with respect to the Excluded
Liabilities and other reasonable needs of S-A, Comverge shall, after
the Closing: (i) afford the officers, employees and authorized agents
and representatives of S-A access, during normal business hours, to
the offices, properties, books and records of Comverge with respect to
the Business, provided, however, that S-A may only have access to such
offices and properties of Comverge under the general security rules
and procedures of Comverge ; (ii) furnish to the officers, employees
and authorized agents and representatives of S-A such additional
financial and other information regarding the Business for the period
prior to the Closing as Comverge has in its possession and as S-A may
from time to time request; and (iii) make available via telephone
calls and for up to three (3) hours per person for "in person"
interviews in Comverge 's offices, without expense to S-A, the
employees of Comverge whose assistance, testimony or presence is
necessary to assist S-A in the evaluation of and/or in asserting or
defending any claims or litigation by or against S-A. In addition to
the foregoing, Comverge shall make available such employees for
depositions, hearings, trials and similar reasonable participation in
claims and litigation asserted by or against S-A, and S-A shall pay
all reasonable travel and other expenses of such employees related to
such activities and shall reimburse Comverge for the regular salary
paid by Comverge to such employees for the time spent by the employee
in connection with such activities. S-A will use its reasonable
efforts to avoid disrupting the Business of Comverge when it asserts
its rights under this Section 5.10.
Section 5.11. Right to Update. From time to time up to three business days
prior to the Closing, S-A shall have the right (but not the obligation) to
update or amend in any respect its disclosure of any matter set forth or
permitted to be set forth in the Disclosure Schedule; provided, however, that
should such updates, in the aggregate result in, (i) a
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Material Adverse Effect, (ii) a net decrease in the value of the Purchased
Assets of at least $100,000, or (iii) a net increase in the Assumed Liabilities
of at least $100,000, then Comverge shall have the option either to terminate
this Agreement by giving notice to S-A within two (2) business days after
Comverge's receipt of the such update or waive any objection or claim with
respect to such update.
Section 5.12. Tax Matters.
(a) Prior to the Closing, S-A will (i) file all Tax returns required by
governmental agencies due on or before the Closing Date (or timely
obtain extensions with respect thereto) and (ii) pay before delinquent
all Taxes, except such Taxes as are being contested in good faith,
upon or against the Purchased Assets so that no lien for Taxes (other
than liens assumed by Comverge hereunder) shall attach to the
Purchased Assets.
(b) Comverge agrees to assume liability for and to pay any sales, use or
transfer Taxes, fees or similar charges incurred as a result of the
transactions contemplated by this Agreement and any deficiency,
interest or penalty asserted with respect thereto.
(c) After the Closing Date, S-A and Comverge will provide each other with
such cooperation and information as such parties reasonably may
request in filing any Tax return, amended Tax return or claim for
refund, determining a liability for Taxes or a right to a refund of
Taxes or participating in or conducting any audit or other proceeding
in respect of Taxes. Such cooperation and information shall include,
without limitation, providing copies of relevant Tax returns or
portions thereof, together with accompanying schedules and related
work papers and documents relating to rulings or other determinations
by taxing authorities, but in no event shall the parties be required
to disclose to each other any information relating to their business
operations other than the operation of the Business for pre-Closing
periods. Each party shall make its employees available on a mutually
convenient basis to provide explanations of any documents or
information provided hereunder. Any information provided or obtained
under this Section shall be kept confidential, except as may otherwise
be necessary in connection with the filing of returns or claims for
refund or in conducting an audit or other Tax proceeding. In the event
of any contest with a taxing authority regarding property Taxes
relating to the Purchased Assets for any tax or assessment period
which is subject to proration under Section 2.7, S-A shall have the
right to control the contest, and reasonable out-of-pocket expenses
with respect to such contest shall be borne by the parties pro rata in
accordance with their responsibility for such Taxes as set forth in
this Agreement. Comverge shall provide S-A with the requisite
information to allow S-A to prepare federal, state and local income
tax returns for the period prior to and including the
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Closing Date. Such information shall be provided in form reasonably
satisfactory to S-A, on or before sixty (60) days after the Closing
Date.
(d) Comverge shall promptly notify S-A in writing upon receipt by Comverge
of notice of any pending or threatened Tax audits or assessments
relating to the Purchased Assets or to any member of S-A's Affiliated
Group (as defined in Section 1504 of the Code), in each case for
periods prior to the Closing or for Overlap Periods (as defined in
Section 2.7).
(e) Comverge shall timely file all sales and use Tax or other such Tax
returns for any Overlap Period (as defined in Section 2.7) and for
periods ending on or prior to the Closing Date where the due date for
such returns is a date after the Closing Date, and Comverge shall pay
the Taxes shown as due on any such returns. S-A shall pay to Comverge
S-A's share of any such Taxes (to the extent not already paid by S-A)
due pursuant to the filing of any such Tax returns under the
provisions of this Section 5.12(e) within thirty (30) business days of
receipt of notice of such filing and payment by Comverge, which notice
shall set forth in reasonable detail the calculations determining
S-A's share of such Taxes.
Section 5.13. Use of S-A's Name and Logo during Transition Period.
(a) Trademark License. Section 5.13 to the Disclosure Schedule sets forth
a list of S-A's trademarks and trade names used in the Business which
are not being sold and transferred to Comverge hereunder. For a term
of six (6) months from the Closing Date or such longer period as may
be reasonably necessary to allow for the full utilization of all
inventory and supplies bearing Licensed Marks and to allow for the
modification of all machine tools bearing such Licensed Marks in a
manner which is not disruptive to the continued operation of the
Business (the "Transition Period"), S-A grants to Comverge the right
to use S-A's trademarks shown in Section 5.13(a) to the Disclosure
Schedule (the "Licensed Marks") in conjunction with the products made
or distributed by the Business, for (i) displaying the Licensed Marks
on packaging transferred by S-A to Comverge at the Closing, (ii)
displaying the Licensed Marks on finished goods in the inventory of
the Business as of the Closing and on products constructed with parts
in such inventory as of the Closing or parts produced by Comverge
after the Closing with tooling containing the Licensed Marks, (iii)
displaying the Licensed Marks on advertising materials (including
brochures and catalogs) transferred to Comverge by S-A at the Closing.
Comverge agrees not to sublicense its right to use the Licensed Marks,
without the prior written consent of S-A. During the Transition Period
and for a period of two years following the Closing Date, Comverge
shall have the right to reference, verbally and in the text of
letters, the fact that S-A was the former owner of the Business and
that Comverge is the successor to S-A with respect to the Business.
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(b) Use of Other Marks. During the Transition Period, Comverge may affix
any mark owned or claimed by Comverge to any product or services
rendered by or through Comverge, but Comverge shall not combine any
other mark with any Licensed Mark. This section however, shall not
preclude Comverge from using its own mark(s) in advertising, which
includes advertising for the products and services rendered by or
through it, provided that appropriate footnotes or other notations are
displayed to indicate S-A's ownership of the Licensed Marks.
(c) No Use of Other Marks in Comverge's Name. Except as permitted in
Sections 5.13(a) and (b), Comverge shall not use any Licensed Marks or
any mark or label confusingly similar to the Licensed Marks in
Comverge's firm name or in any trade name, trademark or service mark
of Comverge and Comverge shall not use, in its stationery, letterhead,
advertising, or otherwise, any Licensed Marks in such a way as may
cause any confusion between Comverge and S-A to third parties.
(d) Ownership of the Licensed Marks. Comverge acknowledges the validity of
S-A's right, title and interest in and to the use of the Licensed
Marks. Apart from its license rights under this Section 5.13, Comverge
shall not be deemed to acquire any right, title or interest in or any
right to the use of any Licensed Marks during or after the Transition
Period. In connection with the use of the Licensed Marks, Comverge
shall not in any manner represent that it has any ownership in the
Licensed Marks or registrations thereof, and Comverge acknowledges
that use of the Licensed Marks shall inure to the benefit of S-A.
Comverge will not at any time adopt or use without S-A's prior
consent, any word or mark which is likely to be similar to or confused
with the Licensed Mark.
Section 5.14. Customer Notification; Assistance. During the Transition
Period, S-A and Comverge will cooperate in customer and vendor notification of
existing S-A Control Systems accounts and S-A will assist Comverge in the
transfer of existing Control Systems accounts from S-A to Comverge. Such
assistance will include, but not be limited to, joint customer and vendor
visits, jointly defined written notification and expression of S-A's confidence
in Comverge for the continued operation of the Business.
Section 5.15. Financial Statements. S-A agrees to deliver to Comverge such
consolidated financial statements for the Business, audited by S-A's independent
public accounts in accordance with generally accepted auditing standards and
prepared in accordance with GAAP, as required pursuant to Item 7 of Form 8-K
within sixty (60) days after the Closing Date to allow sufficient time for
Comverge's corporate parent, Data Systems & Software Inc. ("DSSI") to timely
file a Form 8-K with the SEC.
5.16. Preferred Status. If during the one-year period following the Closing
Date, (i) S-A actively enters into the data communications for utilities
business utilizing
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satellite communication, or manufactures and/or markets a satellite
communication meter-reading module, it shall discuss with Comverge regarding the
use of Comverge as a preferred distributor of such products on terms to be
mutually acceptable to S-A and Comverge, or (ii) S-A actively engages in the
manufacture, marketing and/or distribution of data communications products for
energy related data using the cable television set-top boxes, it shall discuss
with Comverge regarding the use of Comverge as a preferred supplier of
components for the manufacture of such products and as a preferred distributor
of such products on terms to be mutually acceptable to S-A and Comverge. In
neither event shall either party have any obligation to the other absent a
signed agreement setting forth the terms and conditions of the proposed
relationship.
5.17 Non-Competition. S-A agrees that, without the written consent of
Comverge, neither S-A nor any subsidiary or affiliate or any entity controlling
or controlled by S-A will for a period of one year following the Closing Date,
sell or market to electric utilities any products identical to or functionally
equivalent to the products of the Business as of the Closing Date (it being
understood that S-A may, without any restriction pursuant to this Agreement,
market and sell its "little Leo" products and related applications and may
engage in the activities described in Section 5.16). S-A acknowledges that any
breach of the terms conditions or covenants set forth in this Section 5.17 would
be competitively unfair and may cause irreparable damage to Comverge, and that
Comverge's recovery of damages at law would not be adequate remedy. Accordingly,
S-A agrees that for any breach of the covenants and agreements of this Section
5.17 a restraining order or injunction or both may be issued against S-A, in
addition to any other rights or remedies Comverge may have.
5.18 Warranty Claims. Pursuant to Section 2.3 hereof, Comverge assumes
liability for all Warranty Claims relating to products sold prior to the Closing
Date ("Pre-Closing Warranty Claims") and agrees to provide standard warranty
service with respect to such claims in accordance with S-A's warranties. For a
period of one year following the Closing, S-A shall reimburse Comverge for the
cost of such warranty service as provided below, up to a maximum aggregate
amount of $75,000. To be reimbursed pursuant to this section, such warranty
service shall be limited to the specific contractual obligation of S-A assigned
to Comverge hereunder, regardless of the actual warranty service provided by
Comverge. For warranty claims for which Comverge has an election regarding the
type of warranty support to be offered, S-A shall be liable only for the least
expensive alternative. Comverge shall bear the cost of administrative, support
and other similar internal and external charges and allocations, and S-A's
liability shall be limited to the direct parts, labor and shipping costs
incurred. S-A shall not be responsible for the costs of any on-site installation
or deinstallation services, unless such services were part of the original S-A
commitment to its customer. Comverge shall submit quarterly invoices relating to
all Pre-Closing Warranty Claims to S-A, together with or followed by such
supporting documentation as S-A shall reasonably request, and S-A shall remit
payment of approved invoices within 30 days of receipt; provided that such
approval shall not be unreasonably withheld or delayed. In the event that
approved invoices relating to Pre-Closing Warranty Claims exceed $75,000, the
Deferred Payment shall be
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reduced by the excess of the aggregate invoiced amount over $75,000. Not less
than 30 days prior to the date on which the Deferred Payment is due, S-A and
Comverge shall negotiate in good faith as to the adjustment, if any, to be made
to the Deferred Payment to reflect the anticipated future costs to be borne by
Comverge with respect to Pre-Closing Warranty Claims. In determining such
adjustment, the parties shall consider such factors as the parties reasonably
consider relevant to the determination, including, without limitation,
historical claims experience, anticipated claims, warranty life, product life,
technological advances, and passage of time since initial product sale.
5.19 Use of Premises; Shipment of Purchased Assets (a) S-A agrees that
Comverge shall be entitled to use the premises currently utilized by the
Business located at 4356 Communications Drive, Norcross, Georgia without payment
of rent for a period of 60 (sixty) days following the Closing Date. In addition,
Comverge shall have the option to continue such use for an additional 60 (sixty)
days at a cost of $12 per month per square foot of space leased (which shall not
be less than 4,700 square feet nor more than 6,000 square feet).
(b) S-A shall pack and ship the Purchased Assets to one or more locations
in the Greater Atlanta area at no cost to Comverge. If Comverge shall designate
a location beyond a 10-mile radius from the Norcross facility, Comverge shall
pay all costs associated therewith.
ARTICLE 6.
CLOSING
Section 6.1. Time and Place of Closing. The Closing (the "Closing") of the
transactions contemplated by this Agreement will be held at 9:00 a.m. on the
earlier of (a) June 28, 1999 or (b) the fifth (5th) business day after the
fulfillment or waiver of the conditions set forth in Sections 6.2 and 6.3, at
the offices of S-A, One Technology Parkway South, Norcross, Georgia 30092, or at
such other time and place as the parties may agree. It is understood that the
Closing shall be deemed to take place effective as of 12:01 a.m. local Atlanta,
Georgia time, regardless of the time at which the Closing actually occurs on the
Closing Date.
Section 6.2. Conditions to Comverge 's Obligation. The obligation of
Comverge to complete the Closing is contingent upon the fulfillment of each of
the following conditions on or before the Closing Date, except to the extent
that Comverge may, in its absolute discretion, waive any one or more thereof in
whole or in part:
(a) Representations, Warranties and Covenants of S-A. The representations
and warranties of S-A in this Agreement shall be true and correct in
all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on
and as of such date, except for representations and warranties that
speak as of a specific date or time other than the Closing Date (which
need only be true and correct in all
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material respects as of such date or time), and the covenants and
agreements of S-A to be performed on or before the Closing Date in
accordance with this Agreement shall have been duly performed in all
material respects.
(b) Filings; Consents. All registrations, filings, applications, notices,
covenants, approvals, waivers, authorizations, qualifications and
orders required by this Agreement to be filed, made or obtained by
Comverge shall have been filed, made or obtained and copies thereof
shall have been delivered to Comverge.
(c) No Injunction. At the Closing Date, there shall be no injunction,
restraining order or decree of any nature of any court or governmental
agency or body of competent jurisdiction that is in effect that
restrains or prohibits the consummation of the transactions
contemplated hereunder or imposes conditions on such consummation not
otherwise provided for herein.
(d) Absence of Litigation. (1) No claim, action, suit, arbitration,
investigation, inquiry or other proceeding by any United States
federal or state governmental, regulatory or administrative agency or
authority or any other person shall be pending on the Closing Date and
(2) prior to the Closing Date, no party to this Agreement shall have
been advised by any United States federal or state governmental,
regulatory or administrative agency or authority (which advisory has
not been officially withdrawn by such agency or authority on or prior
to the Closing Date) that such agency or authority is investigating
the transactions contemplated by this Agreement to determine whether
to file or commence any litigation, which, in the case of (1) or (2)
above, seeks or would seek to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement or to
impose limitations on the ability of Comverge to continue the Business
as presently conducted with the Purchased Assets or to require the
divestiture by Comverge of all of the Purchased Assets.
(f) Deliveries by S-A. S-A shall have delivered or shall have caused to be
delivered to Comverge:
(1) True and correct copies of the Articles of Incorporation of S-A,
certified by the Secretary of State of the State of Georgia as of
a date within five (5) business days preceding the Closing Date,
and true and correct copies of the bylaws of S-A, certified as of
the Closing Date by the Secretary or any Assistant Secretary of
S-A;
(2) A Certificate of Existence relating to S-A from the State of
Georgia;
(3) A resolution of the Board of Directors of S-A or an executive
committee thereof authorizing the execution and delivery of this
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Agreement and the performance of the transactions contemplated
hereby, certified by the Secretary or an Assistant Secretary of
S-A;
(4) A Secretary's or an Assistant Secretary's Certificate attesting
to the incumbency of the S-A's officers executing this Agreement
and the other certificates and agreements delivered by S-A at the
Closing;
(5) An Officer's Certificate attesting to (i) the matters set forth
in Section 6.2(a) and (ii) the fact that no Material Adverse
Effect to the Business has occurred since April 2, 1999;
(6) Such assignments, bills of sale, certificates of title and other
instruments of transfer, all in form reasonably satisfactory to
Comverge, as are necessary to convey fully and effectively to
Comverge the Business and the Purchased Assets in accordance with
the terms hereof;
(7) An executed firm manufacturing agreement or other commitment from
ACT Manufacturing, Inc. ("ACT") or other manufacturer reasonably
acceptable to Comverge providing for the manufacture by ACT or
such manufacturer of DCUs and MainGates at prices reasonably
acceptable to Comverge as agreed to by S-A and Comverge in
writing on or before the date hereof.
(8) In connection with the assignment of the Gulf Power contract: (i)
consent to or acknowledgment of such assignment executed by Gulf
Power; (ii) waiver of any past defaults or certificate of no
defaults executed by Gulf Power; and (iii) signed meeting minutes
or other evidence reasonably satisfactory to Comverge of the
MainGate technical issues to be resolved.
(9) An opinion of counsel to S-A, which counsel may be in-house
counsel of S-A, in substantially the form of Exhibit C; and
(10) A closing statement reflecting the proration of Taxes as provided
in Section 2.7.
Section 6.3. Conditions to S-A's Obligations. The obligations of S-A to
complete the Closing are contingent upon the fulfillment of each of the
following conditions on or before the Closing Date, except to the extent that
S-A may, in its absolute discretion, waive any one or more thereof in whole or
in part:
(a) Representations, Warranties and Covenants of Comverge. The
representations and warranties of Comverge in this Agreement shall be
true and correct in all material respects on and as of the Closing
Date with the same effect as though such representations and
warranties had been made on
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and as of such date except for representations and warranties that
speak as of a specific date or time other than the Closing Date (which
need only be true and correct in all material respects as of such date
or time), and the covenants and agreements of Comverge to be performed
on or before the Closing Date in accordance with this Agreement shall
have been duly performed in all material respects.
(b) Filings; Consents. All registrations, filings, applications, notices,
covenants, approvals, waivers, authorizations, qualifications and
orders required by this Agreement to be filed, made or obtained by S-A
shall have been filed, made or obtained and copies thereof shall have
been delivered to S-A.
(c) No Injunction. At the Closing Date, there shall be no injunction,
restraining order or decree of any nature of any court or governmental
agency or body of competent jurisdiction that is in effect that
restrains or prohibits the consummation of the transactions
contemplated hereunder or imposes conditions on such consummation not
otherwise provided for herein.
(d) Deliveries by Comverge. Comverge shall have delivered or shall have
caused to be delivered to S-A:
(1) True and correct copies of the Certificate of Incorporation of
Comverge, certified by the Secretary of State of the State of
Delaware as of a date within five (5) business days preceding the
Closing Date, and true and correct copies of the bylaws of
Comverge, certified as of the Closing Date by the Secretary or
any Assistant Secretary of Comverge;
(2) Good standing certificates relating to Comverge from the State of
Delaware;
(3) A resolution of the Board of Directors of Comverge authorizing
the execution and delivery of this Agreement and the performance
of the transactions contemplated hereby, certified by the
Secretary or any Assistant Secretary of Comverge;
(4) A Secretary's Certificate attesting to the incumbency of the
officers executing this Agreement and the other certificates and
agreements delivered by Comverge at the Closing;
(5) An Officer's Certificate attesting to the matters set forth in
Section 6.3(a);
(6) An opinion of counsel of Ehrenreich Eilenberg Krause & Zivian
LLP, in substantially the form of Exhibit D;
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(7) Instruments executed by Comverge, in form and substance
reasonably satisfactory to counsel for S-A, pursuant to which
Comverge assumes the Assumed Liabilities;
(8) Comverge shall have paid to S-A the Initial Payment;
(9) A closing statement reflecting the proration of Taxes as provided
in Section 2.7; and
(10) A guaranty in form satisfactory to S-A by DSSI of Comverge's
obligations to pay the Deferred Payment as required herein.
Section 6.4 Purchase Price Adjustment.
(a) The Purchase Price is based on the assumption that Closing Date Net
Tangible Asset Value shall be equal to $2.3 million. In the event the Closing
Date Net Tangible Asset Value exceeds or is less than $2.3 million, the
following adjustments shall be made at the Closing:
(i) If the Closing Date Net Tangible Asset Value shall be less than $2.3
million, then the Initial Payment to be made by Comverge to S-A shall
be reduced, dollar-for-dollar, by the amount of the difference between
$2.3 million and the Closing Date Net Tangible Asset Value.
(ii) If the Closing Date Net Tangible Asset Value is greater than $2.3
million, then the Initial Payment to be made by Comverge to S-A shall
be increased, dollar-for-dollar, by the amount of the excess, up to a
maximum increase of $250,000; provided that the Initial Payment shall
not be increased if and to the extent that such excess is due to a
decrease in inventory reserves or accumulated depreciation, from those
reflected on the Calculation of Asset Book Value dated April 2, 1999,
included in the Disclosure Schedule.
(b) For purposes of effecting the Closing, an estimate of the Closing Date
Tangible Asset Value shall be determined by S-A in good faith at its expense and
the calculation thereof set forth in a schedule to be prepared by S-A and
delivered to Comverge no later than five business days prior to the Closing.
(c) In connection with the completion and delivery of the audited
statements referred to in Section 5.15, S-A's auditors shall prepare and deliver
to the parties a schedule of the Closing Date Net Tangible Asset Value. To the
extent that net asset values as set forth in such audited schedule shall reflect
a variance from the Closing Date Net Tangible Asset Value reflected in the
schedule prepared by S-A estimate, then the Deferred Payment shall be reduced or
increased in accordance with paragraphs 6.4(a)(i) or (ii) above.
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ARTICLE 7.
SURVIVAL; INDEMNIFICATION
Section 7.1. Survival. Subject to the limitations and other provisions of
this Agreement, the representations, warranties and covenants (as stated in
Article 5) of the parties hereto contained herein shall survive the Closing and
shall remain in full force and effect for a period of one (1) year after the
Closing Date; provided, however, that:
(a) the covenants contained in Section 5.10 shall survive for the Access
Period;
(b) the covenant stated in Section 5.12 shall survive for the applicable
statutes of limitation, including the period covered by any waivers or
extensions thereof; and
(c) the covenants stated in Sections 5.13, 5.14, 5.15, 5.16, 5.17 and 5.19
shall survive for the respective periods stated therein.
Section 7.2. Indemnification.
(a) Indemnification by S-A. S-A hereby agrees to indemnify and hold
Comverge harmless from any and all Indemnifiable Damages which
Comverge may suffer or incur by reason of (1) the breach by S-A of any
of the covenants or agreements made by it herein, and (2) from and
after the Closing:
(i) the breach or inaccuracy of any of the representations and
warranties of S-A contained in this Agreement which survive the
Closing,
(ii)any claims against or liabilities or obligations of S-A which do
not constitute Assumed Liabilities, including, without
limitation, (A) any such obligations or liabilities arising out
of or relating to the conduct of the Business prior to the
Closing Date, (B) any and all such Claims of Environmental
Liability arising out of or relating to the conduct of the
Business prior to the Closing Date, (C) any and all such claims
arising out of or relating to S-A's employment or employee
benefit contract or arising under ERISA and relating to the
conduct of the Business prior to the Closing Date, and (D) any
and all actions, suits, proceedings, demands, assessments,
judgments, costs and expenses, including reasonable attorneys'
fees, incidental to any of the foregoing; or
(iii) any and all losses and expenses (except for those arising out of
Assumed Liabilities) arising out of the failure to comply with
the Bulk Sales Laws.
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(b) Indemnification by Comverge. Comverge hereby agrees to indemnify and
hold S-A harmless from any and all Indemnifiable Damages which it may
suffer or incur by reason of (1) the breach by Comverge of any of the
covenants or agreements made by it herein, (2) any Comverge Employment
Liabilities, (3) from and after the Closing, (i) the breach or
inaccuracy of any of the representations or warranties of Comverge
contained in this Agreement that survive the Closing, and (ii) any
Assumed Liabilities including, without limitation, (A) any obligations
or liabilities arising out of or relating to the conduct of the
Business on and following the Closing Date; and (B) any and all
actions, suits, proceedings, demands, assessments, judgments, costs
and expenses, including reasonable attorneys' fees, incidental to any
of the foregoing.
(c) Third-Party Claims. If any claim or demand is asserted against the
indemnified party by a third party with respect to any matter under
the indemnities set forth in Sections 7.2(a) or (b) (a "Third Party
Claim"), the indemnified party shall promptly give written notice and
details thereof, including copies of all pleadings and the pertinent
documents, to the indemnifying party. Within thirty (30) days of
receipt of such notice, the indemnifying party shall (i) pay the Third
Party Claim either in full or upon compromise agreed to by the
indemnifying party or (ii) notify the indemnified party that the
indemnifying party disputes the Third Party Claim and intends to
defend against it, and thereafter so defend and pay any adverse final
judgment or award or settlement amount in regard thereto. Such defense
shall be controlled by the indemnifying party, and the cost of such
defense shall be borne by it, except that the indemnified party shall
have the right to participate in such defense at its own expense.
If the indemnifying party fails to take action within thirty (30)
days as set forth above, then the indemnified party shall have the
right to pay, compromise or defend any Third Party Claim and to assert
the amount of any payment on the Third Party Claim plus the expense of
defense or settlement as an indemnity claim. The indemnified party
shall also have the right, exercisable in good faith, to take such
action as may be necessary to avoid a default prior to the assumption
of the defense of the Third Party Claim by the indemnifying party and
any expenses incurred by so acting shall be paid by the indemnifying
party.
(d) Payment. Payment of Third Party claims shall be made in accordance
with Section 7.2(c). With respect to all claims other than Third Party
Claims, the indemnifying party shall promptly pay or reimburse the
indemnified party in respect of any claim or liability for
Indemnifiable Damages to which the foregoing indemnities relate after
receipt of written notice from the indemnified party outlining with
reasonable particularity the nature and amount of the claim(s). All
claims for indemnity hereunder must be submitted
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by the indemnified party to the indemnifying party within the
applicable time periods set forth below. In the event the indemnifying
party fails or refuses to make payment for such claims within a period
of thirty (30) days from the date of notice to the indemnifying party,
the indemnified party shall be entitled to exercise all legal means of
relief available.
(e) Access and Information. With respect to any claim for indemnification
hereunder, the indemnified party will give to the indemnifying party
and its counsel, accountants and other representatives full and free
access, during normal business hours and upon the giving of reasonable
prior notice, to their books and records relating to such claims, and
to their employees, accountants, counsel and other representatives,
all without charge to the indemnifying party, except for reimbursement
of reasonable out-of-pocket expenses. In this regard, the indemnified
party agrees to maintain any of its books and records which may relate
to a claim for indemnification hereunder for such period of time as
may be necessary to enable the indemnifying party to resolve such
claim.
(f) Monetary Limitations on Indemnification.
(1) S-A shall not be obligated hereunder to indemnify Comverge with
respect to any liabilities, losses, claims, judgments, damages,
expenses and costs as to which Comverge is entitled to
indemnification under Section 7.2(a)(2)(i) unless and until the
aggregate amount of indemnification so asserted exceeds the
Basket Amount, and thereafter Comverge shall be entitled to
indemnity from S-A hereunder only with respect to any amounts in
excess of the Basket Amount. Notwithstanding anything in this
Agreement to the contrary, S-A's maximum aggregate obligation to
Comverge pursuant to Section 7.2(a)(2)(i) shall not exceed Three
Million Dollars ($3,000,000); provided, however, that if Comverge
shall fail to make the Deferred Payment, then S-A's maximum
aggregate obligation to Comverge pursuant to Section 7.2(a)(2)(i)
shall not exceed Two Million Dollars ($2,000,000);
(2) The liability of S-A under this Section 7.2 shall be offset
dollar for dollar by: (A) any other recovery made by Comverge
from any third party on account of the item of Indemnifiable
Damages involved and (B) any adjustment to the Purchase Price on
account of the item of Indemnifiable Damages involved.
(g) Other Limitations on Indemnification.
(1) Notwithstanding any provision of this Agreement, S-A shall not be
liable to Comverge for any Indemnifiable Damages arising out of
any breach of any representation or warranty of which the
Comverge had
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knowledge, as defined in this Section 7.2(g), at the time of the
Closing unless Comverge discloses such breach to S-A in writing
prior to the Closing. For purposes of this Section 7.2(g),
Comverge shall be deemed to have "knowledge" if Comverge had
actual knowledge of the untruth of such representation or
warranty. In the determination of whether Comverge had such
actual knowledge, each of the persons listed in Section 7.2(g) to
the Disclosure Schedule shall be deemed to have read this
Agreement, the Disclosure Schedule and Exhibits hereto and the
actual knowledge of any such person shall be imputed to Comverge.
It is understood that actual knowledge by Comverge of a breach of
a representation or warranty by S-A shall not operate as a waiver
by Comverge of the obligation of S-A to satisfy the conditions to
Closing set forth in Section 6.2 unless the Closing shall occur.
(2) Neither indemnifying party shall have any obligation to indemnify
the indemnified party with respect to any matter unless the
indemnified party shall have taken all reasonable steps to
mitigate the liabilities, losses, claims, judgments, damages,
expenses and costs involved upon and after becoming aware of such
matter. In no event shall the indemnifying party shall be liable
for consequential, incidental or punitive damages, including lost
profits.
(3) Anything in this Agreement to the contrary notwithstanding, no
claim may be asserted nor any action commenced against S-A for
breach of any representation, warranty, covenant or agreement
contained herein, unless written notice of such claim or action
is received by S-A describing in reasonable detail the facts and
circumstances with respect to the subject matter of such claim or
action on or prior to the date on which the representation,
warranty, covenant or agreement on which such claim or action is
based ceases to survive as set forth in this Agreement
irrespective of whether the subject matter of such claim or
action shall have occurred before or after such date.
Section 7.3. Exclusive Remedy.
(a) Each of Comverge and S-A hereby acknowledges and agrees that its sole
and exclusive remedy with respect to any and all claims relating to
the representations, warranties, covenants and agreements contained in
this Agreement and any Exhibit shall be pursuant to the
indemnification provisions set forth in this Article 7. In furtherance
of the foregoing, each of Comverge and S-A hereby waives, to the
fullest extent permitted under applicable law, any and all rights,
claims and causes of action it may have against S-A or Comverge, as
the case may be, arising under or based upon any federal, state or
local statute, law, ordinance, rule or regulation (including,
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without limitation, any such rights, claims or causes of action
arising under or based upon common law or otherwise) with respect to
such representations, warranties and covenants.
(b) Notwithstanding Section 7.3(a), nothing contained in this Section 7.3
shall prevent any party hereto from seeking and obtaining specific
performance by the other party hereto of any of its obligations under
this Agreement from seeking and obtaining injunctive relief against
the other party's activities in breach of this Agreement.
(c) Anything herein to the contrary notwithstanding, no breach of any
representation, warranty, covenant or agreement contained herein shall
give rise to any right on the part of Comverge after the Closing to
rescind this Agreement or any of the transactions contemplated hereby.
ARTICLE 8.
TERMINATION
Section 8.1. Termination. This Agreement may be terminated at any time
prior to Closing by:
(a) the mutual consent of S-A and Comverge; or
(b) either S-A or Comverge, if the Closing has not occurred by the close
of business on June 28, 1999, so long as the failure to consummate the
transaction on or before such date did not result solely from the
failure by the party or its affiliate seeking termination of this
Agreement to fulfill any undertaking or commitment on its part
provided for herein prior to Closing.
Section 8.2. Procedure and Effect of Termination. In the event of
termination of this Agreement pursuant to Section 8.1, written notice thereof
shall forthwith be given by the terminating party to the other party hereto, and
this Agreement shall thereupon terminate and become void and have no effect, and
the transactions contemplated hereby shall be abandoned without further action
by the parties hereto, except that the provisions of Sections 5.4, 7.2(a)(1),
7.2(b)(1), 7.3,9.2, 9.3, 9.5, 9.11, and 9.12, this Article 8 and the
Nondisclosure Agreement shall survive the termination of this Agreement;
provided, however, that such termination shall not relieve any party hereto of
any liability for any breach of this Agreement.
Section 8.3. Wrongful Termination. Notwithstanding anything to the contrary
in this Agreement, if a party wrongfully terminates this Agreement, that party
shall be liable for any Indemnifiable Damages caused thereby.
Section 8.4. Non-Solicitation of S-A Employees. In the event that the
Closing of the sale of the Business does not occur, Comverge agrees that for a
period of twelve
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(12) months after the date which this Agreement is signed it will not, (i)
directly or indirectly, recruit, solicit, or induce or attempt to recruit,
solicit or induce any employee of the Business, to leave his or her employment
with S-A to go to work, as an employee, consultant or independent contractor,
for Comverge or any affiliated entity of Comverge, or (ii) make any offer to
hire any Employee of the Business.
Section 8.5. Non-Solicitation of Comverge Employees. For a period of twelve
(12) months following the closing, S-A agrees that it will not directly or
indirectly, recruit, solicit, or induce or attempt to recruit, solicit or induce
any Employee of the Business, to leave his or her employment with Comverge to go
to work, as an employee, consultant or independent contractor, for S-A or any
affiliated entity of S-A, or (ii) make any offer to hire any Employee of the
Business.
ARTICLE 9.
MISCELLANEOUS
Section 9.1. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
Section 9.2. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia, without reference
to the choice of law principles thereof.
Section 9.3. No Third Party Beneficiaries. Nothing in this Agreement or any
ancillary documents, whether expressed or implied, is intended or shall be
construed to confer upon or give to any person, firm, corporation or legal
entity, other than the parties hereto, any rights, remedies or other benefits
under or by reason of this Agreement.
Section 9.4. Entire Agreement. This Agreement (including agreements
incorporated herein) and the Schedules and Exhibits hereto contain the entire
agreement between the parties with respect to the subject matter hereof, and
there are no agreements, understandings, representations and warranties between
the parties other than those set forth or referred to herein. The Letter of
Intent dated April 22, 1999, as amended May 27, 1999 and June 2, 1999, between
S-A and Comverge is hereby terminated and superseded and shall be of no further
force or effect.
Section 9.5. Expenses. Except as otherwise set forth in this Agreement,
whether or not the transactions contemplated by this Agreement are consummated,
all legal and other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
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Section 9.6. Notices. All notices hereunder shall be sufficiently given for
all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service, or to the extent receipt is confirmed,
telecopy, telefax or other electronic transmission service to the appropriate
address or number as set forth below. Notices to S-A shall be addressed to:
Scientific-Atlanta, Inc.
PO Box 6850
4356 Communications Drive
Norcross, Ga 30091
Attn: John K Morrow
Telephone: 770-903-3227
Telecopier: 770-903-6300
with a copy to:
Scientific-Atlanta, Inc.
One Technology Parkway, South
Norcross, Georgia 30092
Attn: General Counsel
Telephone: 770-903-4623
Telecopier: 770-903-4751
or at such other address and to the attention of such other person as S-A may
designate by written notice to Comverge. Notices to Comverge shall be addressed
to:
Comverge Technologies, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ 07932-1514
Attn: Frank A. Magnotti, President
Telephone: 973-360-2220
Telecopier: 973-360-2227
with a copy to:
Ehrenreich Eilenberg Krause & Zivian LLP
11 East 44th Street, 17th Floor
New York, New York 10017
Attn: Sheldon Krause, Esquire
Telephone: 212-986-9700
Telecopier: 212-986-2399
or to such other address and to the attention of such other person as Comverge
may designate by written notice to S-A.
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Section 9.7. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns; provided, however, Comverge will not assign its rights or
delegate its obligations under this Agreement without the express prior written
consent of S-A.
Section 9.8. Headings; Definitions. The section and article headings
contained in this Agreement are inserted for convenience and reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated. All capitalized terms defined herein are
equally applicable to both the singular and plural forms of such terms.
Section 9.9. Disclosure Schedule. The inclusion of any matter in the
Disclosure Schedule shall be deemed to relate to all parts of this Agreement,
despite any references therein to particular sections of this Agreement.
Section 9.10. Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Either
party hereto may, only by an instrument in writing, waive compliance by the
other party hereto with any term or provision of this Agreement. The waiver by
any party hereto of a breach of any term or provision of this Agreement shall
not be construed as a waiver of any subsequent breach.
Section 9.11. Severability of Provisions. If any provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon any such determination, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
Section 9.12. Consent to Jurisdiction. Comverge hereby irrevocably submits
to the jurisdiction of any Georgia state court sitting in Georgia or any federal
court sitting in the Northern District of Georgia, in any action or proceeding
arising out of or relating to this Agreement. Comverge hereby irrevocably
appoints Sheldon Krause as its agent for service of process in respect of any
such action or proceeding.
Section 9.13. References. As used in this Agreement, unless otherwise
specifically designated, all references to Articles, Sections, Exhibits or
Schedules shall be deemed to refer to the specific Article or Section of, or
Exhibit or Schedule to, this Agreement. All Exhibits and Schedules are
incorporated by reference into this Agreement.
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by or on
behalf of the parties as of the date first above written.
SCIENTIFIC-ATLANTA, INC.
By: /s/ Theodore R. Wieber
--------------------------------------------
Theodore R. Wieber, President, Satellite Networks
COMVERGE TECHNOLOGIES, INC.
By: /s/Frank A. Magnotti
--------------------------------------------
Frank A. Magnotti, President
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SCHEDULES AND EXHIBITS
Disclosure Schedule Sections:
Section Item
------- ----
1.25 S-A Knowledge List
2.1(a) Tangible Assets
2.1(b) Inventory
2.1(c)(i) Transferred Intellectual Property
2.1(c)(ii) S-A Licensed Intellectual Property
2.1(c)(iii) Non-Transferable Intellectual Property
2.1(e) Contracts
2.2(m) Excluded Assets
2.3(d) Other Assumed Liabilities
3.8(f)(i) Intellectual Property Registrations cancelled,
terminated or not duly issued
3.8(f)(ii) Intellectual Property Applications not duly filed
3.10 Material Contracts
3.10(a) Consents Required
3.10(b) Bids in Progress
5.1 Nondisclosure Agreements by which S-A is bound
5.13 S-A Trademarks and Tradenames Licensed to Comverge
for Transition Period
7.2 Comverge Knowledge List
Exhibits:
---------
A - Definitions
B - Allocation of Purchase Price
C - Form of Opinion of Counsel to S-A
D - Form of Opinion of Counsel to Comverge
<PAGE>
EXHIBIT A
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
Access Period means the longer of (a) a period of three (3) years from and
after the Closing Date or (b) the period of time commencing on the Closing Date
and ending on the date on which taxes may no longer be assessed against S-A with
respect to the operations of the Business under the applicable statutes of
limitation, including the period covered by any waivers or extensions thereof.
Accounts Payable means all of S-A's accounts payable, accrued expenses and
other current liabilities (including any and all reserves classified as
liabilities and accrued on the Financial Statements for the Business, such as
the reserves for property taxes and workers compensation claims, except the
reserves for warranty claims) with respect to the Business as of the Closing
Date, but excluding the Other Liabilities.
ACT shall have the meaning set forth in Section 6.2(f)(7).
Assumed Liabilities shall have the meaning set forth in Section 2.3.
Basket Amount means an amount equal to One Hundred Thousand Dollars
($100,000).
Bulk Sales Laws means any applicable Bulk Transfer Act under the Uniform
Commercial Code in effect in any applicable jurisdiction.
Claim of Environmental Liability means any and all claims, liabilities,
obligations, judgments, penalties, expenses, losses or damages relating to the
Purchased Assets or the Business, resulting from (i) any suit, action,
administrative proceeding, notice, investigation or demand asserted or
threatened by any third-party (including any governmental agency or authority)
arising under any Environmental Law, (ii) requirements imposed by any
Environmental Law, including costs of investigation and remediation or costs
incurred in complying with Environmental Laws, or (iii) the presence or release
into the environment of any Hazardous Substances.
Closing shall have the meaning set forth in Section 6.1.
Closing Date means the date and effective time at which the Closing occurs.
Closing Date Net Tangible Asset Value shall mean the book value on the
Closing Date of the tangible assets included in the Purchased Assets, net of
inventory reserves and accumulated depreciation, and excluding the value of the
"hidden assets" listed on Section 2.1 (a) of the Disclosure Schedule, determined
in accordance with GAAP.
-2-
<PAGE>
Comverge Employment Liabilities shall have the meaning set forth in Section
5.1(a).
Contracts shall have the meaning set forth in Section 2.1(e).
Designated Employees means the employees listed in a letter from Comverge
to S-A dated on or before the date hereof.
Disclosure Schedule means the Disclosure Schedule, dated as of the date of
this Agreement, delivered to Comverge by S-A, as amended and updated pursuant to
this Agreement.
Employees shall have the meaning set forth in Section 5.9.
Employment-Related Obligations shall have the meaning set forth in Section
5.9(b).
Encumbrances shall mean any liens, claims, charges, options, rights of
tenants or others, rights of first refusal or other encumbrances of any nature
whatsoever.
Environmental Law means any federal, state, or local law, rule, regulation,
order, writ, judgment, injunction, decree, or determination as in effect at the
Closing Date relating expressly to the protection of the environment, the
release of any Hazardous Substances into the environment, the management,
transportation, storage, treatment and disposal of Hazardous Substances, or the
pollution of air, soil, groundwater or surface water (including, without
limitation, the Clean Air Act, the Clean Water Act, the Comprehensive
Environmental Response, Compensation and Liability Act, and the Resource
Conservation and Recovery Act or their state counterparts).
Excluded Assets shall have the meaning set forth in Section 2.2.
Excluded Liabilities shall have the meaning set forth in Section 2.4.
Financial Statements means the unaudited, unadjusted statement of results
of operations of the Business for the nine-month period ended April 2, 1999 and
the net assets of the Business as of April 2, 1999, copies of which Financial
Statements are included with the Disclosure Schedule.
GAAP means generally accepted accounting principles applied on a consistent
basis.
Hazardous Substances means any hazardous substances or hazardous wastes, as
defined in any Environmental Law and any petroleum.
Indemnifiable Damages means any and all liabilities, losses, claims,
judgments, damages, expenses and costs (including, without limitation,
reasonable counsel fees and costs and expenses incurred in connection
therewith).
-3-
<PAGE>
Intellectual Property shall have the meaning set forth in Section 2.1(c).
Inventory shall have the meaning set forth in Section 2.1(b).
Knowledge as used in the phrases "to the knowledge of S-A," "to the best
knowledge of S-A" or "to S-A's knowledge" or similar references to the knowledge
of S-A means the actual knowledge after reasonable inquiry of those persons set
forth in Section 1.25 to the Disclosure Schedule.
Licensed Marks shall have the meaning set forth in Section 5.13(a).
Material Adverse Effect means any change in, or effect on, the Business as
currently conducted by S-A that is or is reasonably likely to be materially
adverse to the results of operations or financial condition of the Business,
taken as a whole, after giving effect to this Agreement (including the exhibits
thereto) and the cancellation of all intercompany service and other arrangements
in effect immediately prior to the Closing and the settlement of all
intercompany indebtedness.
Material Contracts shall have the meaning set forth in Section 3.10.
Nondisclosure Agreement shall have the meaning set forth in Section 5.1(b).
Other Current Assets means the security deposits, prepaid and deferred
items and claims for refund (other than tax refunds) generated or incurred by or
in connection with the Business and listed on Section 2.1(a) to the Disclosure
Schedule as Purchased Assets.
Overlap Period shall have the meaning set forth in Section 2.7.
Permits means governmental licenses, certificates, permits, franchises,
approvals, exemptions, registrations, and rights of the Business, including, but
not limited to, export and import licenses, but excluding permits related to the
Real Property.
Pre-Closing Period shall have the meaning set forth in Section 5.1(a).
Pre-Closing Warranty Claims shall have the meaning set forth in Section
5.18.
Product Claims means obligations, liabilities, costs and expenses in
respect of or arising in connection with personal injury or property damage
claims pertaining to products of the Business, whether based on theories of
tort, contract or strict liability, excluding obligations, liabilities, costs
and expenses related to claims asserted in accordance with the express
warranties and guarantees granted to customers of the Business or in accordance
with the implied warranties provided under applicable laws.
Purchase Price shall have the meaning set forth in Section 2.5.
Purchased Assets shall have the meaning set forth in Section 2.1.
-4-
<PAGE>
Receivables shall have the meaning set forth in Section 2.2(a).
Release means any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, or disposing into the
environment.
S-A Warranty Claims shall have the meaning set forth in Section 5.18.
Tax or Taxes means all income, gross receipts, sales, use, employment,
franchise, profits, property, excise, occupation, capital, environmental,
severance, production, transfer, workers' compensation, social security, stamp,
withholding or similar taxes and any other tax or other governmental fee, duty,
assessment or charge of any kind whatsoever imposed by any country or political
subdivision thereof (whether payable directly or by withholding), together with
all interest and all penalties, additions to tax or additional amounts imposed
with respect thereto.
Third Party Claim shall have the meaning set forth in Section 7.2(c).
Transition Period shall have the meaning set forth in Section 5.13 (a).
Warranty Claims means any and all obligations, liabilities, costs and
expenses related to claims asserted in accordance with express warranties and
guaranties set forth in the Contracts or in accordance with the implied
warranties provided under applicable laws, relating to the products manufactured
or sold by the Business, regardless of whether they were manufactured or sold
prior to or after the Closing.
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 969
<SECURITIES> 0
<RECEIVABLES> 7,340
<ALLOWANCES> 85
<INVENTORY> 581
<CURRENT-ASSETS> 9,903
<PP&E> 4,839
<DEPRECIATION> 3,340
<TOTAL-ASSETS> 65,970
<CURRENT-LIABILITIES> 9,189
<BONDS> 43
0
0
<COMMON> 79
<OTHER-SE> 33,613
<TOTAL-LIABILITY-AND-EQUITY> 65,970
<SALES> 6,317
<TOTAL-REVENUES> 15,941
<CGS> 4,985
<TOTAL-COSTS> 12,462
<OTHER-EXPENSES> 6,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> (2,611)
<INCOME-TAX> 12
<INCOME-CONTINUING> (2,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,788)
<EPS-BASIC> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
