<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1 )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[x] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
EVTC, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE> 2
[EVTC, INC. LETTERHEAD]
March__, 2000
Dear Stockholders:
We cordially invite you to attend the Annual Meeting of the
Stockholders of EVTC, Inc., trading as Environmental Technologies Corp. (the
"Company") to be held at 1:00 P.M. on Friday, March 24, 2000, at the offices of
Greenbaum, Rowe, Smith, Ravin, Davis & Himmell, LLP, 99 Wood Avenue South,
Iselin, New Jersey 08830.
The purpose of this meeting is to vote upon the proposals described in
the accompanying Notice of Meeting and Proxy Statement.
The Board of Directors recommends that Stockholders vote in favor of
each of the proposals. We encourage all Stockholders to participate by voting
their shares by Proxy whether or not they plan to attend the meeting. Please
sign, date and mail the enclosed Proxy as soon as possible. If you do attend the
meeting, you may still vote in person.
Sincerely,
George Cannan
Chief Executive Officer
<PAGE> 3
EVTC, INC.
(trading as Environmental Technologies Corp.)
121 S. Norwood Drive
Hurst, Texas 76053
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on March 24, 2000
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of EVTC, Inc., trading as Environmental Technologies Corp. (the
"Company") will be held at 1:00 P.M. on March 24, 2000 at the offices of
Greenbaum, Rowe, Smith, Ravin, Davis & Himmell, LLP, 99 Wood Avenue South,
Iselin, New Jersey 08830 for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated
December 21, 1999, by and among afreegift.com, Inc., a Nevada
corporation, Sakoff Enterprises, Inc., a Delaware corporation,
Scott L. Sakoff and the Company, and the transactions
contemplated therein.
2. To elect five (5) members to the Board of Directors to serve
until the fiscal 2001 Annual Meeting of Stockholders or until
their successors are duly elected and qualified.
3. To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
common stock, par value .01 per share from 10,000,000 to
25,000,000 shares.
4. To approve the EVTC, Inc. 2000 Incentive and Non-Qualified
Stock Option Plan.
5. To approve the appointment of BDO Seidman, LLP as independent
public accountants of the Company.
6. To transact such other business as may properly come before
the Meeting or any adjournment thereof.
Only stockholders of record at the close of business on January 25,
2000 will be entitled to notice of and to vote at the Meeting.
Whether or not you intend to attend the Meeting, please complete, date
and sign the enclosed Proxy. Your Proxy will be revocable, either in writing or
by voting in person at the Meeting, at any time prior to its exercise.
By Order of the Board of Directors
--------------------------------------
George Cannan, Chief Executive Officer
Hurst, Texas
March __, 2000
<PAGE> 4
EVTC, INC.
(trading as Environmental Technologies Corp.)
121 S. Norwood Drive
Hurst, Texas 76053
PROXY STATEMENT
Accompanying this Proxy Statement is a Notice of Annual Meeting of
Stockholders of EVTC, Inc. (the "Company") and a form of Proxy for such meeting
solicited by the Board of Directors. The Board of Directors has fixed the close
of business on January 25, 2000, as the record date (the "Record Date") for the
determination of stockholders who are entitled to notice of and to vote at the
meeting or any adjournment thereof. The holders of a majority of the outstanding
shares of common stock, par value $.01 per share (the "Common Stock"), present
in person, or represented by Proxy, shall constitute a quorum at the meeting.
As of the Record Date, the Company had 5,869,651 outstanding shares of
Common Stock, the holders of which are entitled to one vote per share.
A Proxy that is properly submitted to the Company may be revoked at any
time before it is exercised by written notice to the Secretary of the Company,
and any stockholder attending the meeting may vote in person and by doing so
revokes any Proxy previously submitted by him. Where a stockholder has specified
a choice on his Proxy with respect to a proposal, it will be complied with. If
no direction is given, all the shares represented by the Proxy will be voted in
favor of each proposal.
The cost of soliciting Proxies will be paid by the Company, which will
reimburse brokerage firms, custodians, nominees and fiduciaries for their
expenses in forwarding proxy material to the beneficial owners of the Common
Stock. Officers and regular employees of the Company may solicit Proxies
personally and by telephone. The Annual Report of the Company for the year ended
September 30, 1999, containing audited financial statements for such year, is
enclosed with this Proxy Statement. This Proxy Statement and the enclosed Proxy
are being sent to the stockholders of the Company on or about March _, 2000.
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING IN PERSON ARE URGED
TO COMPLETE, SIGN, DATE AND RETURN THE PROXY IN THE ACCOMPANYING ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE> 5
PROPOSAL 1.
APPROVAL OF AGREEMENT AND
PLAN OF REORGANIZATION WITH
AFREEGIFT.COM, INC.
DESCRIPTION OF THE PROPOSAL
The board is requesting that the stockholders approve the Agreement and
Plan of Reorganization dated December 21, 1999 by and between afreegift.com,
Inc., a Nevada corporation, ("afreegift.com"), Sakoff Enterprises, Inc., a
Delaware corporation, Scott L. Sakoff, in his individual capacity and the
Company (the "afreegift Agreement") pursuant to which the Company will acquire
100% of the issued and outstanding capital stock of afreegift.com. afreegift.com
is an Oakbrook, Illinois based internet direct marketing company. A copy of the
afreegift Agreement is attached hereto as Appendix "A".
BUSINESS OF AFREEGIFT.COM
afreegift.com, based in Oak Brook, Illinois, is an internet direct
marketing company. Founded in June 1999, afreegift.com is classified as a
development stage company, which has focused its initial efforts in developing
its web site, initiating its marketing efforts and protecting its intellectual
property rights. afreegift.com will offer visitors who register with their
website a free gift. Visitors register by providing basic personal data and
grant permission to receive future marketing communications from sponsor
companies. Sponsor companies will tailor future marketing communications to gift
recipients based on proprietary, sponsor owned data mined from survey responses.
General. The afreegift Agreement provides that at the Effective Time
(as hereinafter defined) afreegift.com will be merged into e solutions
marketing, inc., a wholly subsidiary of the Company organized under the laws of
the state of Delaware ("esolutions"), and the separate existence of
afreegift.com will cease and the Certificate of Incorporation and Bylaws of
esolutions will govern the company. The merger will be consummated and deemed
effective (the "Effective Time") once the Company's stockholders have approved
the transaction, all other conditions to the transaction have been satisfied and
appropriate articles of merger have been filed with the Secretary of State of
the States of Delaware and Nevada, respectively.
Merger Consideration. At the Effective Time, Sakoff Enterprises, Inc.
will be entitled to receive 1000 shares of Common Stock (the "Initial Shares")
with the right to receive up to an additional 7,999,000 shares of Common Stock
upon satisfaction of the certain financial performance objectives (the "Earn-Out
Shares").
The number of Earn-Out Shares shall be determined based upon the amount
of "Gross Revenues" and "Pre-Tax Profits" (as hereinafter defined) generated by
esolutions for each fiscal quarter during the period beginning at the Effective
Time and ending on December 31, 2001 (the "Earn-Out Period"). As such, if, at
the end of a fiscal quarter, the sum of (i) the Initial Shares, (ii) the
Earn-Out Shares earned for the previous quarters plus (iii) those Earn-Out
Shares which otherwise would be earned based on the Gross Revenues and Pre-Tax
Profits for that fiscal quarter would exceed 49.9% of the number of shares of
common stock which would be outstanding immediately after the issuance of the
Earn-Out Shares with respect to that fiscal quarter ("Percentage Limitation"),
then the number of Earn-Out Shares which will be issued and delivered for that
fiscal quarter shall be reduced in order that the sum of the Initial Shares, the
previously earned Earn-Out Shares and the Earn-Out Shares actually issued with
respect to that quarter shall equal the Percentage Limitation. The additional
Earn-Out Shares which would have been issued with respect to any fiscal quarter
but for the Percentage Limitation are referred to as the "Excess Earn-Out
Shares."
The number of Earn-Out Shares, if any, to be issued will be computed as
follows:
(i) The number of Earn-Out Shares earned for each fiscal quarter shall
equal the sum of (a) one (1) share for each $1.00 of Gross Revenues received by
esolutions during the quarter plus (B) four (4) shares for each $1.00 of Pre-Tax
Profits earned by esolutions during that quarter plus (C) such number of Excess
Earn-Out Shares from previous fiscal quarters as may be issued and delivered
without violating the Percentage Limitation less (D) that number of shares which
has a "Fair Market Value" (as hereinafter defined) on the last business day of
such quarter, equal to the product of (x) the number of shares determined in
clauses (A) and (B) multiplied by (y) $1.20.
(ii) In the event that there is a loss before income taxes for any
fiscal quarter, then the formula for calculating the number of Earn Out Shares
shall be adjusted to provide for a reduction of four (4) shares for each $1.00
of loss.
(iii) From and after the time that either a minimum of $5,000,000 has
been raised either by esolutions or the Company for the benefit of esolutions,
whether in a private placement, public offering or otherwise, or if the Company
<PAGE> 6
breaches its obligations under the afreegift Agreement, then, in either case,
the deduction for losses set forth above shall not apply.
(iv) If, at the end of the Earn-Out Period, any Excess Earn-Out Shares
have not been issued, then the Company shall pay to Sakoff Enterprises, Inc. the
Fair Market Value, on the last day of the Earn-Out Period, of such excess
Earn-Out Shares. Such payment shall be made within 30 days of the determination
date for calculating the number of Earn-Out Shares earned for the last fiscal
quarter of the Earn-Out Period.
(v) Pre-Tax Profits (or loss before income taxes) of esolutions shall
be determined in accordance with GAAP consistently applied, except as follows:
a. In determining Gross Revenues, barter revenue, which is any
revenue received in the form of goods or services, shall be valued at
50% of the estimated cash value of such goods and services; provided,
however, that all barter revenues in excess of 10% of the total
revenues received in that quarter shall be excluded entirely.
b. In determining Pre-Tax Profits or loss before income taxes,
no general corporate expense allocations from the Company to esolutions
shall be deducted other than direct expenses incurred for esolutions.
c. In determining Pre-Tax or loss before income taxes, all
costs and expenses relating to the consummation of the merger and the
closing shall not be deducted.
d. In determining other Gross Revenues, Pre-Tax Profits or
losses before income taxes, those principles which are mutually agreed
upon from time to time by the Company and Sakoff Enterprises, Inc.
shall be used and applied.
e. Any stock option of the Company issued to esolutions'
employees shall be valued at the time of grant using the Black Sholes
Model and included as expense and included in Pre-Tax Profits for the
purpose of determining Earn-Out Shares.
(vi) The Fair Market Value of the Common Stock on a date shall mean the
average of the closing prices for such securities during the period of 10
consecutive trading days ending on that date as reported in the Wall Street
Journal or on Yahoo Finance.
If esolutions is meeting or exceeding at least 50% of the Gross Revenue
and Pre-Tax Profits targets as established by the parties, the balance of the
Earn-Out Shares shall be deemed earned by and shall be issued to Sakoff
Enterprises, Inc.
Board of Directors. At the Effective Time, the Board of Directors of
afreegift.com shall become the Board of Directors of esolutions. During the
Earn-Out Period, the majority of the persons serving on the esolutions board
shall be nominated by Mr. Sakoff. However, the obligation shall terminate on or
after the 9-month anniversary of the closing date if esolutions' gross revenues
and pre-tax profits are less than 50% of those amounts forecasted in the
afreegift.com business plan presented to the Company.
Furthermore, under the terms of the afreegift Agreement, Mr. Sakoff has
been nominated to serve as a member of the Board of Directors of the Company.
Mr. Sakoff's election is contingent upon the approval by the stockholders of
this proposal. If this proposal is not approved, Mr. Sakoff will not serve on
the board even if elected by the stockholders, and his vacancy will not be
filled. Also, if this proposal is approved, Mr. Sakoff will have the right to
appoint two additional members to the board to serve until the next meeting of
stockholders at which directors are elected or their earlier death, removal or
resignation. The identity of these individuals is not yet known to the Company.
Conditions To The Transaction. The respective obligations of the
Company and afreegift.com to consummate the merger are subject to the
satisfaction of the following conditions, any or all of which may be waived in
writing by the parties, in whole or in part, to the extent permitted by
applicable law: (a) the approval by the Company's stockholders of the afreegift
Agreement; and (b) no governmental entity or federal or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect and which has
the effect of making the merger illegal or otherwise prohibiting consummation of
the merger.
The obligation of the Company to effect the merger is also subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any or all of which may be waived in writing by the Company, in whole or in
part: (a) each of the representations and warranties of afreegift.com contained
in the afreegift Agreement shall be true and correct in all material respects as
of the Effective Time as though made as of the Effective Time; and (b)
afreegift.com shall have
<PAGE> 7
performed or complied in all material respects with all agreements and covenants
required by the afreegift Agreement to be performed or complied with by it on or
prior to the Effective Time.
The obligation of afreegift.com to effect the merger is also subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any or all of which may be waived in writing by afreegift.com, in whole or in
part: each of the representations and warranties of the Company contained in the
afreegift Agreement shall be true and correct in all material respects with all
agreements and covenants required by the afreegift Agreement to be performed or
complied with by it on or prior to the Effective Time.
There can be no assurance that all of the conditions to the merger will
be satisfied.
Representations and Warranties. The afreegift Agreement contains
various representations and warranties of the Company and afreegift.com relating
to, among other things, (i) the organization and similar corporate matters of
each, (ii) the capitalization of each, (iii) the authorization, execution,
delivery, performance and enforceability of the afreegift Agreement and related
matters, and the absence of conflicts, violations and defaults under their
respective charters and bylaws and certain other agreements and documents, (iv)
compliance with applicable laws, (v) the absence of certain changes and events,
(vi) litigation, (vii) employee benefit and labor matters, (viii) taxes, (ix)
certain business practices, (x) the vote required to approve the afreegift
Agreement, (xi) brokers, and (xii) the accuracy of certain information provided.
Termination or Amendment of The afreegift Agreement. The afreegift
Agreement may be terminated at any time prior to the Effective Time, whether
before or after approval of the afreegift Agreement and the merger by the
stockholders of the Company: (a) by mutual consent of the parties; (b) by the
Company, upon a breach of any material representation, warranty, covenant or
agreement on the part of afreegift.com set forth in the agreement, or if any
representation or warranty of afreegift.com shall have become untrue, in either
case such that the Company's conditions to effecting the merger would not be
satisfied, subject to a cure period under certain circumstances (a "Terminating
afreegift.com Breach"); (c) by afreegift.com, upon a breach of any material
representation, warranty, covenant or agreement on the part of the Company set
forth in the afreegift Agreement, or if any representation or warrant y of the
Company shall have become untrue, in either case such that afreegift.com's
conditions to effecting the merger would not be satisfied, subject to a cure
period under certain circumstances (a "Terminating Company"); (d) by either the
Company or afreegift.com, if there shall be any order, ruling or decree which is
final and nonappealable preventing the consummation of the merger, subject to a
limited exception; or (e) by either the Company of afreegift.com, if each of the
proposals set forth in this Proxy Statement fail to receive the requisite vote
for approval and adoption by the stockholders of the Company.
In the event of the termination of the agreement, the agreement shall
become void, there shall be no liability on the part of the Company or
afreegift.com to any other party and all rights and obligations of the parties
thereto shall cease, except that no party will be relieved from its obligations
with respect to any breach of the agreement. Afreegift.com will in turn be bound
by the terms of the Promissory Note and related Security Agreement referenced
below.
The agreement may be amended by the parties thereto by action taken by
or on behalf of their respective Boards of Directors at any time prior to the
Effective Time. At any time prior to the Effective Time, any party to the
agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other party thereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained therein or in any
document delivered pursuant thereto, and (c) waive compliance by the other party
with any of the agreements or conditions contained therein.
Rationale for the Proposal. The purpose of the afreegift.com
transaction is to diversify the Company's business segment and to take advantage
of the emerging eCommerce industry. The Company believes that afreegift.com is
well positioned to achieve this objective.
The Common Stock is currently traded on the Nasdaq SmallCap Market (the
"Nasdaq"). Nasdaq Marketplace rules require that the Company obtain stockholder
approval prior to the issuance of shares of Common Stock, if the number of
shares to be issued equals or exceeds 20% of the number of shares of Common
Stock outstanding, before such issuance. In the event afreegift.com satisfies
the financial performance criteria set forth in the afreegift Agreement, the
Company will be obligated to issue a number of shares of Common Stock which
exceeds 20% of the number of shares of Common Stock currently outstanding. To
insure compliance of Nasdaq Marketplace rules and to not subject the Company's
securities to delisting from the Nasdaq, the Company is seeking stockholder
approval of this proposal.
If Stockholder approval of this proposal is not gained, the afreegift
Agreement will be terminated and the parties will remain subject to only the
terms and conditions of the Funding Agreement, the Promissory Note and the
related Security Agreement.
<PAGE> 8
ADDITIONAL AGREEMENTS
In connection with the afreegift.com transaction, Mr. Sakoff has agreed
to enter into an employment agreement with afreegift.com, which agreement shall
become effective upon approval of the afreegift transaction by the stockholders
at the meeting. Under the terms of the employment agreement Mr. Sakoff shall be
paid an annual base salary of $120,000 and shall receive benefits commensurate
with those received by other executive officers of the Company. The term of the
employment agreement is for a period of one year and will be automatically
renewed for successive one-year terms unless terminated in accordance with the
terms of the employment agreement.
On December 21, 1999 the Company and afreegift.com also entered in to a
Funding Agreement pursuant to which the Company agreed to provide afreegift.com
an aggregate amount of $1,000,000 to assist it in meeting its short-term working
capital requirements. In the event the afreegift Agreement or the transactions
contemplated thereby are not approved by the stockholders at the meeting,
afreegift.com will be obligated to repay the $1,000,000 funding amount pursuant
to the terms of the Promissory Note, also dated December 21, 1999, executed by
afreegift.com in favor of the property, inventory and equipment currently owned
by afreegfit.com as set forth in the Security Agreement also entered into
between the parties on December 21, 1999.
<PAGE> 9
SELECTED CONSOLIDATED HISTORICAL AND UNAUDITED PROFORMA FINANCIAL INFORMATION
The following table sets forth selected consolidated historical
financial information of the Company for the five fiscal years ended September
30, 1999 and for the three months ended December 31, 1999 and 1998, and proforma
financial information for fiscal 1999 for the purpose of giving effect to the
afreegift.com transaction as if it was consummated on October 1, 1998. The
statement of operations data for the five years ended September 30, 1999; 1998;
1997; 1996; and 1995 and the balance sheet data as of September 30, 1999; 1998;
1997; 1996; and 1995 were derived from the audited consolidated financial
statements of the Company, as found in the Company's Form 10-K for the year
ended September 30, 1999. The statement of operations data for the three months
ended December 31, 1999 and 1998 and the balance sheet data as of December 31,
1999 and 1998 was derived from the unaudited consolidated financial statements
of the Company, as found in the Company's Form 10-Q for the period ended
December 31, 1999, which, in the opinion of Management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of the Company for such periods. The results of operations for
interim periods are not necessarily indicative of a full year's operations. All
information concerning afreegift.com was arrived from its audited financial
statements for the period from June 4, 1999 (done at inception) through December
31, 1999.
In the opinion of management, those proforma statements include all
material adjustments necessary to present proforma historical results of the
above-described transactions. The proforma information does not purport to be
indicative of the financial position or the results of operations which would
have been obtained if the acquisition had actually been consummated on the dates
indicated. In addition, the proforma financial information does not purport to
be indicative of the financial position or results of operations that may be
obtained in the future.
The proforma financial information contained below should be read in
connection with the historical financial statements and notes thereto of
afreegift.com and the related unaudited proforma information attached hereto as
Appendix "B".
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
AS ADJUSTED AS ADJUSTED
----------- -----------
1999(1) 1998 1997 1996 1995 1999(1) 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales ......................... $ 38,732 $ 38,483 $ 55,097 $ 31,657 $ 32,033 $ 4,775 $ 4,533
Income (Loss) From
Continuing Operations ............ 98 (5,188) 3,261 2,640 2,337 (693) (812)
Income (Loss) From
Continuing Operations Per Share
Basic .......................... .02 (1.04) 0.65 0.51 0.48 (0.12) (0.17)
Diluted ........................ .02 (1.04) 0.64 0.50 0.47 (0.12) (0.17)
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
AS ADJUSTED AS ADJUSTED
----------- -----------
1999(1) 1998 1997 1996 1995 1999(1) 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Working Capital ................... $ 5,353 $ 4,104 $ 14,893 $ 15,538 $ 15,489 $ 4,852 $ 3,622
Total Assets ...................... 22,259 23,561 37,546 31,907 22,164 19,585 $ 22,492
Total Debt ........................ 9,742 11,992 13,500 9,498 1,267 6,568 $ 11,992
Total Shareholders'
Equity ........................... $ 8,384 $ 7,110 $ 18,595 $ 19,064 $ 17,600 $ 7,947 $ 6,297
</TABLE>
(1) Proforma statements of operations data for the year ended September 30, 1999
and for the three months ended December 31, 1999 adjusted to give effect to the
afreegift.com transaction as if it was consummated on October 1, 1998. Proforma
balance sheet data as of September 30, 1999 and December 31, 1999 adjusted to
give effect to the afreegift.com transaction as if it was consummated on those
dates.
During July 1998, the Company adopted a plan to discontinue its
Recycling and Recovery Equipment Business. See Note 8 of Notes to the
Consolidated Financial Statements of the Company, as filed on the 10-K for the
period ended September 30, 1999. The Statement of Operations Data above has been
recast to exclude such discontinued operations.
<PAGE> 10
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board unanimously recommends that each stockholder vote in favor of
this proposal. A majority of the votes entitled to be cast by the holders of all
of the shares of Common Stock that are present at the meeting and entitled to
vote will be necessary to adopt this proposal.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE AFREEGIFT
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREIN.
PROPOSAL 2.
ELECTION OF DIRECTORS
The Board of Directors is currently composed of four (4) members. At
the Annual Meeting, all directors will be elected to serve for one year expiring
on the date of the Annual Meeting of Stockholders the following year. Each
director elected will continue in office until a successor has been elected or
until resignation or removal in the manner provided by the Company's Bylaws. The
names of the nominees for the Board of Directors are listed below. As described
in Proposal 1., Scott L. Sakoff is also a nominee to serve on the Board of
Directors. However, Mr. Sakoff's election to the board is contingent upon the
approval of the afreegift Agreement as described in Proposal 1. If the afreegift
Agreement is not approved, Mr. Sakoff will not accept election to the board and
his vacancy will not be filled. Shares represented by a properly executed Proxy
in the accompanying form will be voted for such nominees. However, discretionary
authority is reserved to vote such shares in the best judgment of the persons
named as proxies in the event that any person or persons other than the nominees
listed below are to be voted on at the meeting due to the unavailability of any
nominee so listed.
Except for Mr. Sakoff, all persons named below are directors of the
Company at the present time. There are no family relationships between any
nominee, director or executive officer of the Company.
NOMINEES
GEORGE CANNAN, SR. Mr. Cannan founded Environmental Materials Corp. ("EMC") a
wholly owned subsidiary of the Company in 1975 and has been President, Chief
Executive Officer and a director of EMC since that time. Mr. Cannan founded the
Company in 1989; was President and Chief Executive Officer until December 31,
1995; has been Chairman of the Board and a director of the Company since 1989;
and was reappointed Chief Executive Officer in 1999. In July 1992, EMC became a
wholly owned subsidiary of the Company. Mr. Cannan has been responsible for all
phases of the Company's operations since its inception. Prior to founding EMC,
Mr. Cannan was a manufacturer's representative in the automotive industry.
JOHN STEFIUK. Mr. Stefiuk is the President of Federal Bronze Products, Inc. a
metal servicing center and representative agency based in Newark, New Jersey.
Mr. Stefiuk joined Federal Bronze in 1972 and became President in 1978. During
his tenure at Federal Bronze, he has held various managerial and operating
positions.
JOHN D. MAZZUTO. Mr. Mazzuto is the President of Platinum Holdings, a private
investment company. Mr. Mazzuto has held prior positions with Asian Oceanic
Group, an international merchant bank where he served as President of the bank's
New York subsidiary and Group Managing Director of the parent company. Prior to
this, he held the position of Managing Director of Corporate Finance for
Chemical Bank.
ROBERT J. CASPER. Mr. Casper is the President and Chief Executive Officer of
R.J. Casper & Associates. Mr. Casper has held prior positions as Chairman of
Midwestern National Life Insurance Company, President of MC Equities,
President/Chief Operating Officer of U.S. Life Corporation and Executive Vice
President of Home Life Insurance Company. Mr. Casper's background encompasses
over 30 years of experience in the life insurance industry, with 25 years of
executive level, hands on management experience.
SCOTT L. SAKOFF. Mr. Sakoff is President/CEO of afreegift.com. Prior to forming
afreegift.com, Mr. Sakoff founded and directed the growth of Access Media &
Marketing Services, Inc., a Nationally recognized Media Management firm serving
Retail and Direct Response Marketers. Mr. Sakoff has developed
Advertising/Direct Marketing programs and consulted for clients such as Toshiba,
Sony, CBS TV, Telemundo (Spanish TV Network), Nationwide Auto Insurance and
leading National retailers such as Play It Again Sports and USA Baby. He has 20
years of hands on management and account development experience in the
Advertising/Marketing field.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE TO ELECT THE
AFOREMENTIONED NOMINEES TO SERVE ON THE BOARD OF DIRECTORS.
<PAGE> 11
INFORMATION CONCERNING BOARD
The Board of Directors met three times in fiscal 1999, and acted by
unanimous consent on one occasion.
The Board of Directors has an Audit Committee, a Compensation Committee
and an Executive Committee. The Audit Committee is responsible for reviewing the
Company's audited financial statements, meeting with the Company's independent
accountants to review the Company's internal controls and financial management
practices and examining all agreements or other transactions between the Company
and its directors and officers (other than those compensation functions assigned
to the Compensation Committee) to determine whether such agreements or
transactions are fair to the Company's stockholders. Jack Stefiuk and Robert
Casper serve on the Audit Committee.
The Compensation Committee is responsible for reviewing the
compensation and benefits of the Company's executive officers, making
recommendations to the Board of Directors concerning compensation and benefits
for such executive officers and administering the Company's stock option plans.
Jack Stefiuk and Robert Casper serve on the Compensation Committee.
The Company's Executive Committee has the authority to act, between
meetings of the full Board of Directors, on any matter than might properly be
brought before the Board of Directors, subject to exceptions for certain major
matters. George Cannan and John Mazzuto serve on the Executive Committee.
Directors of the Company receive no cash compensation for serving on
the Board of Directors, other than reimbursement of reasonable expenses incurred
in attending meetings. Directors receive options to purchase 5,000 shares of
common stock for serving on the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Proxy Statement,
the name and number of shares of Common Stock held by each person known to the
Company to own beneficially more than five percent (5%) of the Company's Common
Stock and the number of shares owned by each director of the Company, the
Company's Chief Executive Officer and its other four most highly compensated
executive officers, and all directors and executive officers as a group. Each of
the following has an address c/o EVTC, Inc., 121 S. Norwood Drive, Hurst, Texas
76053. All shares are owned directly by the named person.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
------ ----------
NAME OWNED CLASS(1)
---- ----- --------
<S> <C> <C>
George Cannan, Sr 1,710,060 29.6%
Caroline Costante 122,761 2.1%
David Keener 63,000 1.1%
John Stefiuk 65,000 1.1%
Robert Casper 31,000 0.5%
John Mazzuto 35,000 0.6 %
All Directors and
Officers as
a Group (6 persons) 2,026,821 35.1%
</TABLE>
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this report upon the
exercise of warrants or options. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within 60
days from the date of this report have been exercised.
<PAGE> 12
(2) Includes 40,000 shares of Common Stock issuable upon the exercise of stock
options (10,000 of which are presently exercisable).
(3) Includes 45,000 shares of Common Stock issuable upon the exercise of stock
options, and none of which are presently exercisable.
(4) Includes 15,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently exercisable.
(5) Includes 5,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently exercisable.
(6) Includes 35,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently exercisable.
CERTAIN TRANSACTIONS
The Company's refrigerant packaging and distribution operations are
located in a 21,000 square foot building situated at 550 James Street, Lakewood,
New Jersey 08701. The building is leased at a rental of $10,000 per month from
George Cannan, Sr., the Company's founder, Chairman and principal stockholder,
pursuant to a 5-year lease. The Company believes that the terms of such lease
are at least as favorable as those that it could obtain from a non-affiliated
third party.
As of September 30, 1999, the Company had a $371,016 note receivable
from George Cannan, Sr. This note receivable bears interest at 7% per annum and
is secured by the 21,000 square foot building located at 550 James Street in
Lakewood, New Jersey. The Company plans to purchase the Lakewood, New Jersey
facility for a fair market value of $871,000, financed by a mortgage for
approximately $500,000 and forgiveness of the note receivable due from Mr.
Cannan.
EXECUTIVE COMPENSATION
The following table sets forth compensation for the Company's Chairman
and Chief Executive Officer ("CEO) and each officer that earned over $100,000
during such years (the "Named Executives"):
<TABLE>
<CAPTION>
STOCK
NAME AND PRINCIPAL OPTIONS
POSITION YEAR SALARY($) BONUS($) (SHARES)
-------- ---- --------- ------- --------
<S> <C> <C> <C> <C>
George Cannan, Sr.
Chairman/CEO 1999 $ 200,000 (1) -0-
1998 $ 200,000 (1) -0-
1997 $ 200,000 (1) -0-
David A. Keener
Chief Financial Officer 1999 $ 123,077 (1) 45,000
1998 $ 85,998 -0-
James Hellauer (2)
CEO/President 1999 $ -0- (1) -0-
</TABLE>
(1) Represents less than 10% of the Executive's compensation.
(2) Mr. Hellauer resigned in 1999. Mr. Hellauer's salary was paid by Colmen
Capital Advisors from the monthly management fees paid by the Company to Colmen.
<PAGE> 13
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth stock options granted to the Chairman
and CEO and Named Executives as of September 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE EXPIRATION GRANT
NAME GRANTED AT EMPLOYEES ($/SHARE) DATE VALUE $
FISCAL YEAR END IN FISCAL YEAR
SEPTMBER 30, 1999 SEPTEMBER 30, 1999
- --------------------- ------------------------- --------------------------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
George Cannan,
Sr. 0 0.0% $0.000 -- $0.00
David Keener 45,000 11.8% $0.625 2-18-2009 $28,125.00
James Hellauer 0 0.0% $0.000 $0.00
</TABLE>
OPTION EXERCISES DURING, AND STOCK OPTIONS HELD AT END OF FISCAL 1999
The following table indicates the total number and value of exercisable
stock options held by the Named Executives as of September 30, 1999. No options
were exercised by the Named Executives in the fiscal year ended September 30,
1999:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (1)
-------------------------- ----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George Cannan,Sr. 0 0 $ 0 $ 0
David Keener 0 45,000 0 50,850
James Hellauer 0 0 0 0
</TABLE>
(1) Based on the last sale price for the Company's Common Stock on September 30,
1999 of $1.13 per share, as reported by NASDAQ.
STOCK OPTION PLANS
The Company maintains stock option plans designated as the 1992 Stock
Option Plan (the "1992 Plan") and the 1996 Stock Option Plan (the "1996 Plan"),
collectively the "Option Plans", pursuant to each of which 500,000 shares of
Common Stock have been reserved for issuance upon the exercise of options
designated as either (i) incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, amended (the "Code") or (ii) non-qualified options.
Nonqualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. In certain
circumstances, the exercise of stock options may have an adverse effect on the
market price of the Company's Common Stock.
The purpose of the Option Plans is to encourage stock ownership by
certain directors, officers and employees of the Company and certain other
people instrumental to the success of the Company and give them a greater
personal interest in the success of the Company. The Option Plans are
administered by the Board of Directors. The board, within the limitations of the
Option Plans, determines the persons to whom options will be granted, the number
of shares to be covered by each option, whether the options granted are intended
to be ISOs, the duration and rate of exercise of each option, the option
purchase price per share and the manner of exercise, the time, manner and form
of payment upon exercise of an option, and whether restrictions such as
repurchase rights by the Company are to be imposed on shares subject to options.
ISOs granted under the Option Plans may not be granted at a price less than the
fair market value of the Common Stock on the date of grant. Non-qualified
options granted under the Option Plans may not be granted at a price less than
the fair market value of the Common Stock on the date of grant. Options granted
under the Option Plans will expire not more than ten years from the date of
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company). Any options granted under the Option Plans are
not transferable during the optionee's lifetime but are transferable at death by
will or by the laws of descent and distribution.
<PAGE> 14
EMPLOYMENT AGREEMENTS
David Keener, the Company's President, as of January 7, 2000 and Chief
Financial Officer, is subject to the terms of an employment agreement whereby
Mr. Keener is entitled to receive a base compensation of $120,000, bonus and
benefits commensurate with other executive officers of the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee is comprised of Jack Stefiuk and Robert
Casper. The Compensation Committee reviews, recommends and approves changes to
the Company's compensation policies and programs and is responsible for
reviewing and approving the compensation of the Chief Executive Officer and
other senior officers of the Company.
The following report shall not be deemed incorporated by reference by
any general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933 (the "Securities Act") or under the
Securities Exchange Act of 1934 (the "Exchange Act"), except to the extent the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
COMPENSATION PHILOSOPHY
The Company believes that executive compensation should be based upon
value returned to stockholders. The Company has developed compensation programs
designed to reflect Company performance and to be competitive in the
marketplace. In designing its compensation programs, the Company attempted to
reflect both value created for stockholders while supporting the Company's
strategic goals. The Company's compensation programs reflect the following
themes:
o Compensation should be meaningfully related to the value created for
stockholders.
o Compensation programs should support the Company's short-term and
long-term strategic goals and objectives.
o Compensation programs should promote the Company's value and reward
individuals for outstanding contributions to the Company's success.
o Short-term and long-term compensation should be designed to attract
and retain superior executives.
The Company's executive compensation is based upon three components,
base salary, annual incentive bonuses and long-term incentives, which are
intended to serve the overall compensation philosophy.
BASE SALARY
The base salary of each executive officer is determined as a function
of three principal factors: the individual's performance, the relationship of
the individual's salary to similar executives in comparable companies, and
increases in the individual's responsibilities, whether through promotions or
otherwise. The base salaries of the named executives remained constant in Fiscal
1999.
ANNUAL INCENTIVE BONUS
The Company's annual incentive bonuses are designed to reflect the
individual officer's contribution to the profitability of the Company and any
special achievements by the respective officers. Each officer's bonus is based
upon the Company's performance in various areas, such as sales, profit margins,
operating expenses and earnings before interest and taxes as compared to a
pre-determined plan for each officer for each year.
The Compensation Committee
/s/ Jack Stefiuk
-----------------------------
Jack Stefiuk
/s/ Robert Casper
-----------------------------
Robert Casper
<PAGE> 15
PERFORMANCE TABLE
The comparative stock performance table below compares the cumulative
stockholder return on the Common Stock of the Company for the period from
September 30, 1994 through September 30, 1999 with the cumulative total return
(i) on the Total Return Index for the Nasdaq Stock Market (U.S. Companies) (the
"Nasdaq Composite Index"), and (ii) of a peer group of specialty chemical
industry companies (assuming the investment of $10,000 in the Company's Common
Stock, the Nasdaq Composite Index and the Peer Group on September 30, 1994 and
reinvestment of all dividends).
This table shall not be deemed incorporated by reference by any general
statement incorporating by reference this proxy statement into any filing under
the Securities Act or under the Exchange Act, except to the extent that the
Company specifically incorporate this graph by reference, and shall not
otherwise be deemed filed under such Acts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG EVTC, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP
[CHART]
COMPARISON OF CUMULATIVE TOTAL RETURN OF COMPANY, NASDAQ AND INDUSTRY INDEX
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Company 18,000 13,500 13,000 1,500 ___
NASDAQ 13,500 16,500 20,000 28,000 ___
Industry Index 11,000 11,500 13,000 11,200 ___
</TABLE>
<PAGE> 16
PROPOSAL 3.
INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
DESCRIPTION OF THE PROPOSAL
The board has approved, subject to the consideration and approval of
the stockholders of the Company, a proposed amendment to the Company's
Certificate of Incorporation to increase the authorized capital stock of the
Company by increasing the number of shares of Common Stock available for
issuance from 10,000,000 shares to 25,000,000 shares. The number of shares of
preferred stock available for issuance shall remain the same.
RATIONALE FOR THE PROPOSAL
The principal reason for recommending approval of this proposal is to
accommodate the potential issuance of up to an additional 8,000,000 shares of
Common Stock pursuant to the terms of the afreegift.com transaction and to have
sufficient shares available to raise additional equity capital in the future.
As of the Record Date, a total of 2,896,480 shares of Common Stock were
authorized but not issued or reserved for issuance. On the Record Date, a total
of 5,869,651 shares of Common Stock were issued and outstanding and a total of
1,233,869 shares of Common Stock were reserved or otherwise committed for
possible issuance by the Company to the holders of various warrants and to
employees pursuant to various benefit plans of the Company.
The proposal to increase the Company's authorized Common Stock is thus
intended to ensure that the Company has sufficient Common Stock to meet the
foregoing obligations and to provide additional authorized shares that could be
issued in connection with exercise of stock options, possible future stock
splits, stock dividends and mergers and acquisitions and to raise additional
capital, which could include public offerings or private placements of Common
Stock or securities convertible into Common Stock.
While the board believes it important that the Company have the
flexibility that would be provided by having available additional authorized
Common Stock, the Company does not now have any commitments, arrangements or
understandings which would require the issuance of such additional shares of
Common Stock. The availability of additional authorized shares of Common Stock
would simply permit the board to respond in a timely manner to future
opportunities and business needs of the Company as they may arise and would
avoid the possible necessity and expense of a special meeting of stockholders to
increase the authorized Common Stock.
If this proposal is not approved by the stockholders, the Company will
be unable to consummate the afreegift.com transaction.
EFFECTS OF THE ADOPTION OF THE PROPOSAL
If the authorized shares of Common Stock are increased as proposed, the
authorized shares of Common Stock would be available for issuance from time to
time upon such terms and for such purposes as the board may deem advisable
without further action by the stockholders of the Company except as may be
required by law or the rules of any stock exchange on which the Common Stock may
be listed. Such an issuance may decrease or increase the book value per share of
the Common Stock presently issued and outstanding, depending upon whether the
consideration paid for such newly issued shares is less or more than the book
value per share prior to issuance. The issuance of additional shares could
dilute the voting power and equity of the holders of outstanding Common Stock
and may have the effect of discouraging attempts by a person or group to take
control of the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Adoption of the proposal to increase the number of authorized shares of
Common Stock requires the affirmative vote of the holders of the majority of the
shares of the Common Stock outstanding on the Record Date. If approved by the
stockholders, such increase in the number of authorized shares will become
effective on the filing with the Secretary of State of Delaware of an amendment
to the Company's Certificate of Incorporation setting forth such increase in the
outstanding shares Common Stock.
THE BOARD RECOMMENDS A VOTE FOR THE INCREASE IN THE NUMBER OF AUTHORIZED SHARES
OF THE COMPANY'S COMMON STOCK TO 25,000,000 SHARES.
<PAGE> 17
PROPOSAL 4.
APPROVAL OF THE EVTC, INC.
2000 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
SUMMARY DESCRIPTION OF OPTIONS AND TAX STATUS
The full text of the 2000 Incentive and Non-Qualified Stock Option Plan (the
"2000 Plan") is set forth as Appendix "C" to this Proxy Statement and reference
is made thereto for a complete statement of the terms of the document.
SHARES RESERVED FOR ISSUANCE. Pursuant to the terms of the 2000 Plan, one
million (1,000,000) shares of the Company's Common Stock are reserved for
issuance thereunder. In the event there is any change in the number of issued
shares of the Common Stock of the Company without new consideration to the
Company (such as by stock dividends or stock splits), the number of shares
reserved for issuance under the 2000 Plan, the number of shares subject to any
outstanding option and the option price per share of each outstanding stock
option shall be appropriately adjusted. Similarly, if the Company shall be party
to a merger, consolidation, reorganization, sale or similar occurrence,
equitable adjustment in the option may be made.
ADMINISTRATION PLAN; AWARD OF OPTIONS. The 2000 Plan is administered by the
Board of Directors. Pursuant to its authority, the board may grant options to
purchase shares of Common Stock reserved under the Plan to all employees and
consultants of the Company.
AMENDMENTS. The Board of Directors may amend the Plan as it deems advisable. No
amendment may, without further approval of the stockholders of the Company
within twelve months before or after the date on which such amendment was
adopted, (a) increase the total number of shares which may be made to options
granted under the 2000 Plan, (b) change the manner of determining the option
price, (c) change the criteria of determining which employees are eligible to
receive options, (d) extend the period during which options may be granted or
exercised, or (e) withdraw the administration of the 2000 Plan from the Board of
Directors.
VESTING. Options granted to employees under the 2000 Plan are to vest and become
exercisable as specified in each grant provided that certain conditions are
satisfied. For a description of these conditions, see the subsection below
entitled "Termination of Employment."
EXERCISE PERIOD. The options granted to employees under the 2000 Plan may not be
exercised more than ten (10) years after the date of grant or five (5) years
after the date of grant in the case of an incentive option granted to a 10%
stockholder.
TERMINATION OF EMPLOYMENT. Outstanding incentive stock options must be exercised
during employment with the Company or within three months after termination of
employment with the Company (other than by reason of death or permanent
disability, in which case they must be exercised within three years after
termination). In addition, options are exercisable only to the extent that they
are vested as of the date of termination of employment.
NONTRANSFERABILITY. Each incentive option granted under the 2000 Plan is not
transferable by the holder except by will or the laws of descent and
distribution of the State wherein the holder is domiciled at the time of his
death. If the administrator makes an option transferable, such option shall
contain additional terms and conditions as the administrator deems appropriate.
MERGER OR ASSET SALE OF THE COMPANY. In the case of (i) a merger of the Company
with or into another corporation or (ii) the sale of substantially all of the
assets of the Company, all outstanding options may be assumed or equivalent
options may be substituted by the successor corporation or a parent or
subsidiary thereof. In the event an option is assumed or substituted for, the
option or substituted option shall continue to be exercisable as it would have
been in the absence of the transaction for so long as the optionee serves as a
employee of the successor corporation. If, following such an assumption or
substitution, the optionee's status as a employee is terminated other than as a
result of his or her voluntary resignation, his or her options shall become
fully exercisable and shall be exercisable for such period during which options
may generally be exercised under the plan by an individual who is no longer an
employee.
FEDERAL INCOME TAX TREATMENT OF OPTIONS. The options to be granted under the
2000 Plan may be deemed to be qualified or non-qualified within the meaning of
the Code, in the discretion of the Board of Directors. Generally, an optionee
will recognize ordinary income upon exercise of a non-qualified stock option
(or, if the stock subject to the option is restricted within the meaning of Code
Section 83 and the optionee does not otherwise elect to recognize income upon
the exercise of the stock option, at such time as the shares become transferable
or are no longer subject to a substantial risk of forfeiture) in an amount equal
to the excess (if any) of the fair market value of the shares purchased at the
time of exercise over the exercise price. The Company will be entitled to an
income tax deduction in the same amount and at the same time as the optionee
recognizes such income. Upon the sale of shares which were purchased upon the
exercise of an option, the
<PAGE> 18
optionee will recognize capital gain or loss measured by the difference between
the amount recognized in connection with the exercise (or possibly the grant) of
the stock option. Such capital gain or loss will be short-term or long -term,
depending upon the length of time thee shares were held by the optionee.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL
AND RATIFICATION OF THE COMPANY'S 2000 INCENTIVE AND NON-QUALIFIED STOCK OPTION
PLAN.
PROPOSAL 5.
APPROVAL OF THE APPOINTMENT
OF BDO SEIDMAN, LLP AS INDEPENDENT AUDITORS
The board has appointed, subject to approval of the stockholders, the
firm of BDO Seidman, LLP ("BDO Seidman") as independent public accountants to
audit the Company's consolidated financial statements for the fiscal year ending
September 30, 2000. BDO Seidman has served as the Company's independent public
accountants since 1999 and audited the books and records of the Company for its
fiscal year ended September 30, 1999. To the knowledge of management of the
Company, neither BDO Seidman nor any of their members has any direct or material
indirect financial interest in the Company, nor any connection with the Company
in any capacity other than as independent public accountants.
Stockholder approval of this appointment is not required; however, as a
matter of good corporate governance, the board is seeking approval of this
appointment. If the appointment is not approved, the board must then determine
whether to appoint other auditors prior to the end of the current fiscal year,
and in such case, the opinions of stockholders will be taken into consideration.
The following resolutions concerning the appointment of independent
auditors will be offered at the meeting:
RESOLVED, that the appointment by the Board of Directors of
BDO Seidman to audit the consolidated financial statements and related
books, records and accounts of the Company and its subsidiaries for the
fiscal year 2000 at a remunerations to be determined by the Board of
Directors of the Company is hereby ratified.
The enclosed Proxy will be voted as specified, but if no specifications
is made, it will be voted in favor of the adoption of the resolution of approval
of BDO Seidman as the Company's independent public accountants to audit the
Company's financial statements for the fiscal year ending September 30, 2000.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPOINTMENT
OF BDO SEIDMAN AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS TO AUDIT THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING SEPTEMBER
30, 2000.
GENERAL
The expense of this solicitation is to be borne by the Company. The
Company may also reimburse persons holding shares in their names or in the names
of their nominees for their expenses in sending proxies and proxy material to
their principals.
Unless otherwise directed, the persons named in the accompanying form
of Proxy intend to vote all Proxies received by them in favor of each of the
proposals identified herein. All Proxies will be voted as specified.
Management does not intend to present any business at the meeting other
than that set forth in the accompanying Notice of Annual Meeting, and it has no
information that others will do so. If other matters requiring the vote of the
stockholders properly come before the meeting and any adjournments thereof, it
is the intention of the persons named in the accompanying form of Proxy to vote
the Proxies held by them in accordance with their judgment on such matters.
<PAGE> 19
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Stockholder proposals for inclusion in the proxy materials related to
the 2000 Annual Meeting of Stockholders must be received by the Company no later
than November 1, 2000. A stockholder must have been a record or beneficial owner
of the Company's Common Stock for at least one year prior to November 1, 2000,
and the stockholder must continue to own such shares, worth at least $1,000,
through the date on which the meeting is held.
FORM 10-K ANNUAL REPORT
Upon written request by any stockholder entitled to vote at the 2000
Annual Meeting, the Company will furnish that person without charge a copy of
the Form 10-K Annual Report which it filed with the Securities and Exchange
Commission for 1999, including financial statements and schedules. If the person
requesting the report was not a stockholder of record on January 25, 2000, the
request must contain a good faith representation that the person making the
request was a beneficial owner of the Company's Common Stock at the close of
business on that date. Requests should be addressed to EVTC, Inc., Attention
Investor Relations, 121 S. Norwood Drive, Hurst, Texas 76053.
By Order of the Board of Directors
EVTC, INC.
-----------------------------------
GEORGE CANNAN
Chief Executive Officer
Hurst, Texas
March __, 2000
<PAGE> 20
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of the 21st day
of December, 1999 by and among afreegift.com, Inc., a Nevada corporation
("Target"), Sakoff Enterprises, Inc., a Delaware corporation ("Shareholder"),
Scott L. Sakoff ("Sakoff"), EVTC, Inc., a Delaware corporation ("Parent") and e
solutions marketing, inc., a Texas corporation in formation ("Sub"). (Target and
Sub are collectively referred to as the "Constituent Corporations.")
RECITALS
WHEREAS, Parent, Sub and Target desire to enter into a merger
("Merger") in accordance with the applicable provisions of the statutes of Texas
and Nevada;
WHEREAS, for federal income tax purposes, the parties intend that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended ("Code");
WHEREAS, the value of Target is difficult to determine, particularly
because of the characteristics of an e-commerce business and the early stage of
Target; and, therefore, the parties believe it to be fairest to all of them that
a substantial portion of the consideration in the Merger be the right to receive
stock based on future contingencies;
WHEREAS, Shareholder is the sole shareholder of Target and Sakoff is
the President of Shareholder; and
WHEREAS, each of the parties to this Agreement desires to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions thereto.
AGREEMENT
NOW, THEREFORE, in consideration of the Recitals, which are
incorporated by reference, and the mutual promises herein contained, the parties
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to the terms and conditions of this Agreement and any related agreement
executed by the parties in connection with the Merger, Target shall be merged
into Sub, and the separate existence of Target shall cease, in accordance with
the applicable provisions of the Texas Business Corporation Act ("TBCA") and
Section 78.010 et seq. of the Nevada Revised Statutes ("NCL").
(b) Sub will be the surviving corporation in the Merger and will be
governed by the laws of the State of Texas. (For periods after the Effective
<PAGE> 21
Time, Sub is sometimes referred to herein as the "Surviving Corporation.") The
separate corporate existence of Sub and all of its rights, privileges,
immunities and franchises, public or private, and all its duties and liabilities
as a corporation organized under the TBCA, will continue unaffected by the
Merger.
(c) The Merger will have the effects specified by the TBCA and the NCL.
1.2 Effective Time. As soon as practicable following fulfillment or waiver
of the conditions specified in Article VIII, and provided that this Agreement
has not been terminated or abandoned pursuant to Article IX, the Constituent
Corporations will cause the Articles of Merger (the "Articles of Merger") to be
filed with the Secretary of State of Texas, and will cause all documents
required to be filed or submitted by them under the NCL in connection with the
Merger to be so filed or submitted. Subject to and in accordance with the laws
of the States of Texas and Nevada, the Merger will become effective at the date
and time the Articles of Merger is filed with the Secretary of State of Texas or
such later time or date as may be specified in the Articles of Merger (the
"Effective Time"). Each of the parties will use its best efforts to cause the
Merger to be consummated as soon as practicable following the fulfillment or
waiver of the conditions specified in Article VIII.
ARTICLE II
THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of Sub
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation after the Effective Time.
2.2 By-Laws. The By-Laws of Sub as in effect immediately prior to the
Effective Time shall be the By-Laws of the Surviving Corporation after the
Effective Time.
2.3 Board of Directors. At the Effective Time, the Board of Directors of
Target shall become the Board of Directors of the Surviving Corporation. Through
the end of the "Earn-Out Period" (as defined in Section 3.2(a)), Parent shall
cause the Board of Directors of the Surviving Corporation always to consist of a
majority of persons designated by Shareholder (or any successor in interest to
Shareholder). Without limiting the generality of the foregoing, Parent also
agrees that if any person who had been designated by Shareholder or such
successor dies, resigns or is removed, such vacancy shall be filled by a person
designated by Shareholder or such successor. However, the obligations of Parent
under this Section 2.3 shall terminate on or after the 9-month anniversary of
the Closing Date if (x) both Surviving Corporation's actual cumulative "Gross
Revenues" and "Pre-Tax Profits" (as defined in Section 3.2(b)(v)) at the end of
any fiscal quarter are less than 50% of those amounts forecasted in Target's
business plan as revised on 12/1/99 ("Business Plan") which has been delivered
to Parent and (y) Parent has funded at least $1,000,000 in cash and/or stock to
Sub and/or its vendors.
<PAGE> 22
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion of Target Shares in the Merger. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of Target, all issued and outstanding shares of Common Stock, no
par value, of Target ("Target Common Stock") shall be converted into, and become
exchangeable for, the sum of (i) the number of "Initial Shares" of Common Stock,
$0.01 par value, of Parent ("Parent Common Stock") set forth in this Section 3.1
plus (ii) the right to receive such number of additional shares of Parent Common
Stock as shall be determined pursuant to Section 3.2 ("Earn-Out Shares"). The
number of Initial Shares shall be the sum of (i) 1,000 shares plus (ii) or a
greater amount if mutually agreed to by all parties (iii) such number of shares
as Parent and Shareholder agree would have been earned under Section 3.2 if the
first fiscal quarter of the Earn-Out Period had begun on the date hereof and
ended on the last day of the month immediately preceding the Effective Time. The
Initial Shares and, when earned, the Earn-Out Shares shall be validly issued,
fully paid and non-assessable. The Shareholder or any successor in interest
shall not have any rights as a shareholder of Parent with respect to any
Earn-Out Shares until those have been earned pursuant to Sections 3.2 and 3.3.
3.2 Earn-Out Shares.
(a) The number of Earn-Out Shares shall be determined based upon the
amount of "Gross Revenues" and "Pre-Tax Profits" (as defined in Section
3.2(b)(v)) generated by the Surviving Corporation for each fiscal quarter during
the period beginning at the Effective Time and ending on December 31, 2001 (the
"Earn-Out Period"). (However, solely for the purpose of determining the number
of Earn-Out Shares, the first fiscal quarter during the Earn-Out Period shall be
deemed to begin on the date of this Agreement and end on the last day of the
fiscal quarter during which "Closing," as defined in Section 7.1, occurs.)
However, in no event, shall the Target Common Stock be converted in the Merger
into more than 8,000,000 shares of Parent Common Stock, subject to adjustment
pursuant to Section 3.2(e). Notwithstanding the foregoing but subject to
Sections 3.2(b)(iv) and 3(d), if, at the end of a fiscal quarter, the sum of (i)
the Initial Shares, (ii) the Earn-Out Shares earned for the previous quarters
plus (iii) those Earn-Out Shares which otherwise would be earned based on the
Gross Revenues and Pre-Tax Profits for that fiscal quarter would exceed 49.9% of
the number of shares of Parent Common Stock which would be outstanding
immediately after the issuance of the Earn-Out Shares with respect to that
fiscal quarter ("Percentage Limitation"), then the number of Earn-Out Shares
which will be issued and delivered for that fiscal quarter shall be reduced in
order that the sum of the Initial Shares, the previously earned Earn-Out Shares
and the Earn-Out Shares actually issued with respect to that quarter shall equal
the Percentage Limitation. (The additional Earn-Out Shares which would have been
issued with respect to any fiscal quarter but for the Percentage Limitation are
referred to as the "Excess Earn-Out Shares.")
(b) The number of Earn-Out Shares, if any, to be issued will be
computed as follows:
(i) The number of Earn-Out Shares earned for each fiscal quarter
shall equal the sum of (A) one (1) share for each $1.00 of Gross
Revenues received by Surviving Corporation during the quarter plus (B)
four (4) shares for each $1.00 of Pre-Tax Profits earned by Surviving
Corporation during that quarter plus (C) such number of Excess
Earn-Out Shares from previous fiscal quarters as may be
<PAGE> 23
issued and delivered without violating the Percentage Limitation less
(D) that number of shares which has a "Fair Market Value," as defined
in Section 3.2(b)(vi), on the last business day of such quarter, equal
to the product of (x) the number of shares determined in clauses (A)
and (B) multiplied by (y) $1.20. For example, if (i) Surviving
Corporation had Gross Revenues of $100,000 and had Pre-Tax Profits of
$5,000 during a quarter, (ii) the Fair Market Value of each share was
$10.00 at the end of such quarter and (iii) there were 2,000 Excess
Earn-Out Shares from all previous quarters, then, subject to the
Percentage Limitation, Shareholder would receive 107,600 shares. This
would equate to 100,000 shares for the Gross Revenues and 20,000
shares for the Pre-Tax Profits less 14,400 shares (120,000 shares
multiplied by $1.20 divided by $10.00) plus the 2,000 Excess Earn-Out
Shares. However, if only 100,000 shares could be delivered to
Shareholder without violating the Percentage Limitation, then only
that number would be delivered to Shareholder and the balance of 7,600
shares would constitute Excess Earn-Out Shares.
(ii) In the event that there is a loss before income taxes for
any fiscal quarter, then, subject to Section 3.2(b)(iii), the
calculation in Section 3(b)(i) above shall be reduced by four (4)
shares for each $1.00 of such loss.
(iii) From and after the time that either a minimum of $5,000,000
has been raised either by Surviving Corporation or by Parent for the
benefit of Surviving Corporation, whether in a private placement,
public offering or otherwise, or Parent has breached its obligations
under Section 6.4, then, in either case, the deduction for losses in
Section 3.2(b)(ii) shall not apply.
(iv) If, at the end of the Earn-Out Period, any Excess Earn-Out
Shares have not been issued to Shareholder, then Parent shall pay to
Shareholder the Fair Market Value, on the last day of the Earn-Out
Period, of such Excess Earn-Out Shares. Such payment shall be made
within 30 days of the "Determination Date" (as defined in Section
3.2(c)) for calculating the number of Earn-Out Shares earned for the
last fiscal quarter of the Earn-Out Period.
(v) Pre-Tax Profits (or loss before income taxes) of Surviving
Corporation shall be determined in accordance with GAAP consistently
applied, except as follows:
(A) In determining Gross Revenues, barter revenue, which is
any revenue received in the form of goods or services, shall be
valued at 50% of the estimated cash value of such goods and
services; provided, however, that all barter revenues in excess
of 10% of the total revenues received in that quarter shall be
excluded entirely.
(B) In determining Pre-Tax Profits or loss before income
taxes, no general corporate expense allocations from the Parent
to Surviving Corporation shall be deducted other than direct
expenses incurred for Surviving Corporation.
(C) In determining Pre-Tax Profits or loss before income
taxes, all costs and expenses relating to the consummation of the
Merger and the closing under this Agreement shall not be
deducted.
<PAGE> 24
(D) In determining either Gross Revenues, Pre-Tax Profits or
losses before income taxes, those principles which are mutually
agreed upon from time to time by Parent and Shareholder (and
which are initially set forth in the Business Plan shall be used
and applied.
(E) Any stock options of EVTC issued to Target employees
shall be valued at the time of grant using the Black Sholes Model
and included as expense and included in Pre-Tax Profits for the
purpose of determining Earn-Out Shares.
(vi) The Fair Market Value of Parent Common Stock on a date shall
mean the average of the closing prices for those securities during the
period of ten consecutive trading days ending on that date as reported
in the Wall Street Journal or on Yahoo Finance.
(c) Within 15 business days following the end of each fiscal quarter
during the Earn-Out Period, Surviving Corporation shall deliver to Parent a
calculation of the Earn-Out Shares earned for that quarter (including Excess
Earn-Out Shares) as determined in accordance with Section 3.2(b). Unless Parent
objects to such calculation within 30 business days thereafter, such calculation
shall be binding and conclusive. If Parent does timely object, then it shall so
notify Shareholder setting out the disputed items in reasonable detail. Any
disputed item which has not been settled by the Shareholder and Parent within 10
business days thereafter shall be submitted to the independent certified public
accountant for Parent; and his determination of such disputed items shall be
binding and conclusive on all parties. Parent shall use commercially reasonable
efforts to cause such accountant to deliver its determination to Shareholder and
Parent within 75 business days of the close of the applicable period. All costs
and expenses of such accountant shall be borne by Parent. (Each determination of
the number of Earn-Out Shares earned for a quarter which has been agreed to by
Shareholder and Parent or otherwise has become binding and conclusive is
referred to as a "Determination"; and the date on which a Determination has been
agreed upon or has become binding and conclusive is referred to as a
"Determination Date.")
(d) Notwithstanding anything in this Agreement to the contrary
(including the Percentage Limitation), if the Surviving Corporation is meeting
or exceeding at least 50% of the Gross Revenue and Pre-Tax Profits as listed in
Target's Business Plan as adjusted pursuant to Section 3.2(e), then, without the
need for any action by Shareholder or Parent:
(i) The balance of the Earn-Out Shares shall be earned and
issued, and Shareholder shall be deemed to hold such balance,
immediately upon Parent ceasing to own at least 80% of the capital
stock of the Surviving Corporation (unless Shareholder consents)
during the Earn-Out Period.
(ii) A portion of the balance of the Earn-Out Shares shall be
earned and issued, and Shareholder shall be deemed to hold such
portion, immediately prior to the occurrence of any of the following
events or circumstances during the Earn-Out Period unless Shareholder
consents (which consent shall not be unreasonably withheld):
(A) The liquidation or dissolution of Parent.
<PAGE> 25
(B) The "Bankruptcy" of Parent.
(C) Immediately upon the termination without cause by Parent or the
Surviving Corporation of Sakoff's employment during the Earn-Out Period in
violation of the terms of Sakoff's Employment Agreement.
(iii) The balance of the Earn-Out Shares which could be earned
under Section 3.2(d)(i)shall be the total of (i) 8,000,000 shares less (ii) the
Earn-Out Shares previously earned and less (iii) that number of shares which has
a Fair Market Value, immediately prior to such event, equal to the product of
(x) the number of shares determined in clauses (i) and (ii) multiplied by (y)
$1.20. The portion of the balance of the Earn-Out Shares which could be earned
pursuant to this Section 3.2(d)(ii) shall be equal to the product of (x) the
balance of the Earn-Out Shares multiplied by (y) the average of Surviving
Corporation's actual cumulative Gross Revenues for the applicable period
expressed as a percentage of the forecasted Gross Revenues for such period in
the Business Plan and of the Surviving Corporation's actual cumulative Pre-Tax
Profits during the applicable period expressed as a percentage of the amount
forecasted in Target's Business Plan for the applicable period multiplied by
(iii) 2; provided, however, that such portion may not exceed 100% of such
balance. The applicable period shall begin on the date of this Agreement and end
on the last day of the fiscal quarter immediately prior to the triggering event
or circumstance. (For example, if the balance of the Earn-Out Shares was
7,000,000, Surviving Corporation's cumulative Gross Revenues were 40% of the
amount forecasted in the Business Plan and Surviving Corporation's cumulative
Pre-Tax Profits were 30% of the amount forecasted in the Business Plan, then the
number of Earn-Out Shares which would be earned would be 7,000,000 multiplied by
35% (the average of 40% and 30%) times 2 and would equal 4,900,000 shares.) As
used in this Section 3.2(d), "Bankruptcy" shall mean:
(A) Parent or its successor in interest makes an assignment for the
benefit of creditors, or petitions or applies for the appointment of a
liquidator, receiver or custodian (or similar official) of it or of any
substantial part of its assets, or Parent or its successor in interest commences
any proceeding or case relating to it under the Bankruptcy Code or any other
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or
similar law of any jurisdiction, or takes any action to authorize any of the
foregoing; or
(B) Any petition or application of the type described in Section
3.2(d)(iii)(A) is filed or if any such proceeding or case is commenced against
Parent or its successor in interest and is not dismissed within sixty (60) days,
or Parent or its successor in interest indicates its approval thereof, consents
thereto or acquiesces therein, or an order is entered appointing any such
liquidator or receiver or custodian (or similar official), or adjudicating
Parent and/or its successor in interest bankrupt or insolvent, or approving a
petition in any such proceeding, or a decree or order for relief is entered in
respect of Parent or its successor in interest in an involuntary case under the
Bankruptcy Code or any other bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt or similar law of any jurisdiction.
<PAGE> 26
(e) At the time that the holders of then outstanding Parent Common
Stock become entitled to hold a different number of shares of Parent Common
Stock, or different or additional classes or series of securities, by reason of
a stock dividend, merger, consolidation, recapitalization of Parent's capital
stock, split-up, subdivision, combination, exchange of securities or any similar
transaction, then the number, classes and series of securities to be issued and
exchanged in the Merger shall be equitably adjusted by the Board of Directors of
Parent or its successor in interest in order that Shareholder shall be entitled
to receive the same number, classes and series of securities of Parent and its
successors during the Earn-Out Period as if all of the Earn-Out Shares had been
earned immediately prior to each such event. From and after each such event, the
term "Parent Common Stock" shall include all such different and additional
classes and series of securities. Any other issuance of Parent Common Stock
shall not effect the number of Earn-Out Shares.
3.3 Mechanics of Exchange of Securities. At the Closing, Shareholder shall
deliver to Sub a certificate or certificates representing the Target Common
Stock, duly endorsed, as more fully set forth in Section 7.2(b); and Parent
shall deliver to Shareholder a certificate or certificates representing the
Initial Shares, as more fully set forth in Section 7.3(b). However, regardless
of whether either such party delivers any of such certificates, at the Effective
Time, by virtue of the Merger, the Initial Shares shall be deemed to have been
issued and Shareholder shall be deemed to be a shareholder of Parent who holds
the Initial Shares. Within 10 days of each Determination Date, Parent also shall
deliver to Shareholder a certificate or certificates representing the Earn-Out
Shares then earned as shown in a Determination. However, regardless of whether
such certificates have actually been delivered, the Earn-Out Shares shown on
such Determination shall be deemed to have been issued and Shareholder shall be
deemed to hold such Earn-Out Shares on the Determination Date.
3.4 Status of Sub Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder of any capital stock of Sub,
each issued and outstanding share of common stock of Sub shall continue
unchanged and remain outstanding as a share of common stock of the Surviving
Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TARGET, SHAREHOLDER AND SAKOFF
Each of the Target, Shareholder and Sakoff, jointly and severally,
represent and warrant to Parent and Sub that:
4.1 Corporate Existence. Each of the Shareholder and Target is a
corporation duly organized, validly existing in good standing under the laws of
its respective jurisdiction of incorporation and has the corporate power to own,
operate or lease its respective properties and to carry on its business as now
being conducted. Complete and correct copies of the Articles of Incorporation of
Target and all amendments thereto, certified by the Secretary of State of
Nevada, and of the By-Laws of the Target and all amendments thereto, certified
by the Secretary of the Target, heretofore have been delivered to Parent. Target
is duly qualified to do business as a foreign corporation and is in good
<PAGE> 27
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities make such qualifications necessary,
except for those jurisdictions where failure to be so qualified would not have a
material adverse effect upon the business, operations, assets, properties,
rights or condition (financial or otherwise) or prospects of the Target or upon
the ability of Target to consummate the transactions contemplated by this
Agreement (a "Material Adverse Effect").
4.2 Authorization; Validity. Each of the Shareholder and Target has all
requisite corporate power and authority to enter into this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. No declaration, recording or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement, the
Registration Rights Agreement and the Shareholders Agreement by the Shareholder,
Target and Sakoff and the Employment Agreement by Sakoff or the consummation by
the Shareholder, Target and Sakoff of the transactions contemplated hereby or
thereby, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which are set forth in Article I or which,
if not made or obtained, as the case may be, would not, in the aggregate, have a
Material Adverse Effect. All necessary action has been taken, or will be taken,
by the Shareholder, Target and Sakoff with respect to the execution, delivery
and performance by the Shareholder, Target and Sakoff of this Agreement, the
Employment Agreement, the Registration Rights Agreement and the Shareholders
Agreement and the consummation of the transactions contemplated hereby and
thereby, as applicable. Assuming the due execution and delivery of this
Agreement, the Employment Agreement the Registration Rights Agreement and the
Shareholders Agreement by Parent and Sub, each of those agreements is or will be
a legal, valid and binding obligation of the Shareholder, Target and/or Sakoff,
as applicable, and enforceable against those parties in accordance with its
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium, and other similar laws of general application affecting the
enforcement of creditors' rights and general principles of equity (whether
applied in a proceeding at law or in equity).
4.3 No Breach of Statute or Contract. Neither the execution and delivery of
this Agreement, nor the consummation by each of the Shareholder, Target and
Sakoff of the transactions contemplated hereby, nor compliance by each of the
Shareholder, Target and Sakoff with any of the provisions hereof, will (a)
violate or cause a default under any statute (domestic or foreign), judgment,
order, writ, decrees, rule or regulation of any court or governmental authority
applicable to the Shareholder, Target, Sakoff or any of their respective
properties; (b) breach or conflict with any of the terms, provisions or
conditions of the respective Certificates of Incorporation or respective By-Laws
of Target or the Shareholder; or (c) violate, conflict with or breach or require
the authorization, consent or approval of any party under any agreement,
contract, mortgage, instrument, indenture or license to which the Shareholder,
Sakoff or Target is or may be bound, or constitute a default (in and of itself
or with the giving of notice, passage of time or both) thereunder, or result in
the creation or imposition of any encumbrance upon, or give to any other party
or parties any claim, interest or right, including rights of termination or
cancellation in, or with respect to , any of their respective properties or
Target Common Stock.
<PAGE> 28
4.4 Subsidiaries. Target has no subsidiaries or equity investments in any
other corporation, association, partnership, joint venture or any other entity.
4.5 Capitalization and Shareholdings. The authorized capital stock of
Target consists of 25,000 shares of Common Stock, of which 25,000 shares are
issued and outstanding. At the Closing, Shareholder will deliver a certificate
or certificates representing all Target Common Stock, free and clear of all
liens, claims, charges or encumbrances. Neither the Shareholder nor Target is a
party to or bound by any agreements, arrangements or understandings restricting
in any manner the conversion and exchange in the Merger of Target Common Stock.
The Target Common Stock is duly and validly issued and is fully paid and
non-accessible and free of preemptive rights. There is not outstanding, and
neither the Shareholder nor Target is bound by or subject to, any subscription,
option, warrant, call, right, contract, commitment, agreement, understanding or
arrangement to issue any additional shares of capital stock of Target, including
any right of conversion or exchange under any outstanding security or other
instrument, and no shares of the capital stock of Target are reserved for
issuance for any such purpose.
4.6 Financial Statements. The balance sheet of Target and the related
statement of income as of October 31, 1999, has been delivered to the Parent.
Target's Financial Statements (i) are true, correct, and complete, (ii) are in
accordance with the books and records of Target, and (iii) fairly, completely
and accurately present the financial position of Target at the dates specified
and the results of its operations for the periods covered.
4.7 Absence of Undisclosed Liabilities. Target has no undisclosed debts,
liabilities or obligations of any kind, whether accrued, absolute, contingent or
other, whether due or to become due, that would have a material adverse effect
other than those that are fully described and listed inSchedule 4.7. Any
undisclosed liabilities that are not listed in Schedule 4.7 that are not agreed
to in advance by Parent shall be the responsibility of Shareholder, and/or
Sakoff. If the Parent is required to pay any liability relating to Target,
Shareholder or Sakoff that relates to activities prior to this Agreement that
are not fully disclosed in Schedule 4.7, Parent has the right to offset Earn-Out
Shares due under this Agreement by such amount(s) paid by Parent. The amount of
offset shall be further increased by 25% for any and all cash or debt that Sub
or Parent has spent or issued to satisfy Target obligations originating prior to
this Agreement.
4.8 Absence of Certain Changes or Events. Since (the inception date of
Target), no event or circumstance has occurred resulting or reasonably likely to
result in a Material Adverse Effect.
4.9 Proprietary Rights. Schedule 4.9 sets forth a complete and accurate
list of all patents (including all reissues, reexaminations, continuations,
continuations-in-part and divisions thereof), inventions, trade secrets,
processes, proprietary rights, proprietary knowledge, know how, computer
<PAGE> 29
software, trademarks, names, service marks, trade names, copyrights, symbols,
logos, franchises and permits of Target and all applications therefor,
registrations thereof and licenses, sublicenses or agreements in respect thereof
that Target owns or has the right to use or to which Target is a party and all
filings, registrations or issuance of any of the foregoing with or by any
federal, state, local or foreign regulatory, administrative or governmental
office or offices (collectively, the "Intellectual Property Rights"). The
Intellectual Property Rights listed on Schedule 4.9 are all the proprietary
rights necessary to the conduct of Target's Business as now conducted. Except as
set forth on Schedule 4.9 or as would not be reasonably expected to have a
material adverse effect, (a) Target is the sole and exclusive owner of all
right, title and interest in and to all Intellectual Proprietary Rights free and
clear of all liens, claims, charges, equities, rights of use, encumbrances and
restrictions whatsoever, (b) no consent or approval of any party will be
required for the use of any of these Intellectual Property Rights by Surviving
Corporation following the Effective Time, and (c) no governmental registration
of any of these Intellectual Property Rights has lapsed or expired or been
canceled, abandoned, opposed or the subject of any reexamination request.
Except as disclosed in Schedule 4.9 or as would not be reasonably expected
to have a material adverse effect, (a) Target is not, nor will it be as a result
of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any license, sublicense or other
agreement to which it is a party and pursuant to which it is authorized to use
any third-party patents, trademarks, service marks or copyrights ("the Third
Party Intellectual Property Rights"); (b) no claims with respect to the patents,
registered and material unregistered trademarks and service marks, registered
copyrights, trade names and any applications therefor owned by Target (Target
Intellectual Property Rights), any trade secret material to Target , or
Third-Party Intellectual Property Rights to the extent arising out of any use,
reproduction or distribution of such Third-Party Intellectual Property Rights by
or through Target , are currently pending or, to the knowledge of the
Shareholder or Sakoff, threatened in writing by any person; and (c) the
Shareholder and Sakoff do not know of any valid ground for any bona fide claims
(i) to the effect that the manufacture, sale, licensing or use of any products
as now used, sold or licensed or proposed for use, sale or license by Target,
infringes on any copyright, patent, trademarks, service mark or trade secrets,
copyrights, patents, technology, know-how or computer software programs and
applications used in the business of Target as currently conducted or as
proposed to be conducted; (ii) challenging the ownership, validity or
effectiveness of any of Target Intellectual Property Rights or other trade
secret material to Target; or (iii) challenging the license or legally
enforceable right to use of the Third Party Intellectual Property Rights by
Target. Any money spent by Parent or Target after the date of this Agreement to
defend any asset listed in 4.9 for prior or future claims related to actions
that occurred prior to the date of this Agreement shall be the responsibility of
Shareholder, and/or Sakoff. Parent has the right to offset Earn-Out Shares due
under this Agreement by such amount(s) paid by Parent. The amount of offset
shall be further increased by 25% for any and all cash or debt that Parent has
spent or issued to defend or satisfy claims originating prior to this Agreement.
4.10 Absence of Litigation. There is no action, suit, proceeding, inquiry
or investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of Target or
Shareholder, threatened against or affecting Target, its subsidiaries
<PAGE> 30
or any Affiliate or their respective directors or officers which reasonably
could be expected to have a material adverse effect except as set forth on
Schedule 4.10. Any money spent by Parent or Target after the date of this
Agreement to defend any litigation related to actions that occurred prior to the
date of this Agreement shall be the responsibility of Shareholder, and/or
Sakoff. Parent has the right to offset Earn-Out Shares due under this Agreement
by such amount(s) paid by Parent. The amount of offset shall be further
increased by 25% for any and all cash or debt that Parent has spent or issued to
defend or satisfy claims originating prior to this Agreement.
4.11 Contracts and Commitments. Schedule 4.11 lists all personal property
leases, contracts, agreements, contract rights, license agreements, franchise
rights and agreements, policies, purchase and sales orders, quotations and
executory commitments, instruments, third party guarantees, indemnification's,
arrangements, obligations and understandings, whether oral or written, to which
Target is a party (whether or not legally bound thereby), that are currently in
effect and that require payments, individually or in the aggregate, in excess of
$25,000, other than purchase and sale orders, quotations and executory
commitments incurred in the ordinary course of business of Target (collectively,
the "Contracts"). Each of the Contracts is valid and binding, in full force and
effect and enforceable against Target in accordance with its provisions. Except
as set forth on Schedule 4.11, Target has not assigned, mortgaged, pledged,
encumbered, or otherwise hypothecated any of its right, title or interest under
any of the Contracts. Neither Target nor, to both the Shareholder's and Sakoff's
knowledge, any other party thereto is in violation of, in default in respect of
nor has there occurred an event or condition which, with the passage of time or
giving of notice (or both)), would constitute a material violation or a default
of any Contract. No notice has been received by the Shareholder or Target
claiming any such default by Target or indicating the desire or intention of any
other party thereto to amend, modify, rescind or terminate the same.
4.12 Governmental Consents; Compliance with Laws. Other than filings
described in Article I and filings with Federal and state securities authorities
in respect of the conversion and exchange of Target Common Stock, no consent,
approval, order, or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state, local or provincial
governmental authority on the part of Target is required in connection with the
consummation of the transactions contemplated by this Agreement. Target has
complied (and in carrying out its business Target will be in compliance) with
all laws, ordinances and regulations applicable to it and its business, which
the failure to comply with would, either individually or in the aggregate, have
a Material Adverse Effect. Target has obtained all federal, state, local, and
foreign governmental licenses and permits material to and necessary in the
conduct of its business, such licenses and permits are in full force and effect,
no material violations are or have been recorded in respect of any such licenses
or permits, and no proceeding is pending or threatened to revoke or limit any
thereof. There are no consents or waivers necessary for the consummation of the
transactions contemplated by this Agreement.
4.13 Taxes.
(a) Target has duly filed all federal, state, local and foreign tax
returns and tax reports required to have been filed by it prior to the date
hereof and will file, on or before the Closing Date, all such returns
<PAGE> 31
and reports that are required to be filed after the date hereof and on or before
the Closing Date, all such returns and reports are true, correct and complete in
all material respects, none of such returns and reports have been amended, and
all taxes, assessments, fees and other governmental charges arising under such
returns and reports (i) have been fully paid (or, with respect to any returns or
reports filed between the date hereof and the Closing Date, will be), or (ii)
are being contested in good faith by appropriate proceedings.
(b) Target has no material liabilities for taxes other than has shown
on Target Financial Statements, and no federal, state, local or foreign tax
authority is now asserting or, to the knowledge of the Shareholder, threatening
to assert any deficiency or assessment for additional taxes with respect to
Target.
(c) All amounts required to be withheld by Target and paid to
governmental agencies for income, social security, unemployment insurance,
sales, excise, use and other taxes have been collected or withheld and paid to
the proper taxing authority. Target has made all deposits required by law to be
made with respect to employees' withholding and other employment taxes.
4.14 Employee Benefit Plans. Target has no bonus, stock option, stock
purchase, benefit, profit sharing, savings, retirement, liability, insurance,
incentive, deferred compensation, and other similar fringe or employee benefit
plans, programs or arrangements for the benefit of or relating to, any employee
of, or independent contractor or consultant to, and all other compensation
practices, policies, terms or conditions, whether written or unwritten (the
"Employee Plans") which Target presently maintains, to which Target presently
contributes or under which Target has any liability and which related to
employees or independent contractors of Target.
4.15 Title to Property. Target has good and marketable title, or valid
leasehold rights (in the case of leased property), to all real property and all
personal property purported to be owned or leased by it or used in the operation
of its business, free and clear of all encumbrances. Target has provided Sub
with true, complete and correct copies of all title reports and insurance
policies relating to any of the real properties listed as being owned or leased
in Schedule 4.15 and of all leases under which Target is leasing each of the
properties listed in Schedule 4.15 as being leased. The fixed assets of Target
are affixed only to one or more of the real properties listed in Schedule 4.15
and, except as set forth therein, are well-maintained and adequate for the
purposes for which they presently are being used or held for use, ordinary wear
and tear excepted. All the property, plant and equipment of Target are in good
working order and condition, ordinary wear and tear expected, and adequate for
the purposes for which they presently are being used or held for use.
4.16 Investment.
(a) The Shareholder will acquire the Parent Common Stock solely for its
own account as an investment and not with a view to, or for offer or resale in
connection with, distribution thereof within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder.
(b) Shareholder, Sakoff or any assignee to this Agreement shall sign a
Stock Subscription Agreement prepared by Parent before they will receive any
shares of Parents Common Stock due under this agreement. An example of such
agreement is included at Schedule 4.16.
<PAGE> 32
(c) The Target, Shareholder and Sakoff have received and read and are
familiar with this Agreement. They have had an opportunity to ask questions of
and receive answers from representatives of the Parent or Sub concerning the
terms and conditions of the Merger. The Target, Shareholder and Sakoff have
substantial experience in evaluating the merits and risks of an investment in
Parent.
(d) The Target, Shareholder and Sakoff have been furnished access to
the business records of the Parent and such additional information and documents
as they have requested and have been afforded an opportunity to ask questions
of, and receive answers from, representatives of the Parent concerning the terms
and conditions of this Agreement.
4.17 Related Party Agreements. Except as set forth on Schedule 4.17, there
are no contracts or other agreements, written or oral, to which Target is a
party or is bound or by which any property of Target is bound or may be subject
and to which the Shareholder, Sakoff or any of their Affiliates (as such term is
defined in the Securities Act) also is a party.
4.18 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by or on behalf of the
Shareholder, Sakoff and Target in such a manner not to give rise to any claim
against the Parent, Sub or any Affiliate (as such term is defined in the rules
and regulations promulgated under the Securities Act) thereof, for a finder's
fee, brokerage commission, advisory fee or other similar payment.
4.19 Closing Date Effect. All of the representations and warranties of the
Shareholder and Sakoff are true and correct as of the date hereof and shall be
true and correct on and as of the Closing Date with the same force and effect as
if such representations and warranties were made by the Shareholder and Sakoff
to the Parent on the Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Shareholder and Sakoff that:
5.1 Corporate Existence. Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub is in
the process of becoming a corporation, which will be duly organized, validly
existing and in good standing under the laws of Texas. Complete and correct
copies of the Certificates of Incorporation of each of Parent and Sub and all
amendments thereto, certified by the Secretary of State of Delaware and Texas,
and the By-Laws of each of Parent and Sub, and all amendments thereto, certified
by the Secretary of that corporation, have been or will be delivered to the
Shareholder. The Parent is, and Sub shall be, duly qualified to do business as a
foreign corporation in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities make such
qualification necessary, except for those jurisdictions where failure to be so
qualified would not have a material adverse effect upon the business,
operations, assets, properties, rights or condition (financial or
<PAGE> 33
otherwise) or prospects of such corporation or upon the ability of the Parent or
Sub to consummate the transactions contemplated by this Agreement (a "Parent
Material Adverse Effect").
5.2 Authorization; Validity. Parent has, and Sub will have, all requisite
corporate power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby,
subject, however, to the requisite approvals of Parent's shareholders. Except as
described in Article II, no declaration, recording or registration with, or
notice to, or authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for the execution and delivery of this
Agreement by Parent or Sub or the consummation by Parent or Sub of the
transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not made
or obtained, as the case may be, would not, in the aggregate, have a Parent
Material Adverse Effect. Subject to the approvals of Parent's shareholders, all
necessary corporate action has been taken by Parent, and will be taken by Sub,
with respect to the execution, delivery and performance by Parent and Sub of
this Agreement and the consummation of the transactions contemplated hereby.
Assuming the due execution and delivery of this Agreement by the Shareholder,
Target and Sakoff, this Agreement is a legal, valid and binding obligation of
Parent, and, upon incorporation of Sub, will be a legal, valid and binding
obligation of Sub, enforceable against each corporation in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws of general application affecting the enforcement of
creditor's rights and general principles of equity (whether applied in a
proceeding at law or in equity). There does not exist any circumstances that
would operate to terminate, reduce, alter or impair the obligations of either
corporation under this Agreement or that gives rise to or would give rise to a
right of set-off by Parent or Sub or any defense to the performance of Parent's
or Sub's obligations in accordance with the terms of this Agreement. Parent
shall cause Sub to be incorporated and qualified to do business as set forth in
Section 5.1 and to approve this Agreement and all transactions contemplated
thereby.
5.3 No Breach of Statute or Contract. Neither the execution and delivery of
this Agreement, nor the consummation by the Parent or Sub of the transactions
contemplated hereby, nor compliance by Parent or Sub with any of the provisions
hereof, will (a) violate or cause a default under any statute (domestic or
foreign), judgment, order, writ, decree, rule or regulation of any court or
governmental authority applicable to Parent or Sub or any of their respective
material properties: (b) breach or conflict with any of the terms, provisions or
conditions of the Articles of Incorporation or By-laws of Parent or Sub; or (c)
violate, conflict with or breach or require the authorization, consent or
approval of any party under any agreement, contract, mortgage, instrument,
indenture or license to which Parent or Sub is a party or by which Parent or Sub
is or may be bound, or constitute a default (in and of itself or with the giving
of notice, passage of time or both) thereunder, or result in the creation or
imposition of any encumbrance upon, or give to any other party or parties, any
claim, interest or right, including rights of termination or cancellation, in or
with respect to any of Parent's or Sub's properties.
5.4 Capitalization; Parent Common Stock. Parent's authorized capital stock
consists of (i) 10,000,000 shares of Parent Common Stock, of which 5,010,719
shares are issued and outstanding on the date hereof and (ii) shares
<PAGE> 34
of Preferred Stock, $0.01 par value, of which there are 0 shares issued and
outstanding on the date hereof. Except as set forth in the "Parent SEC Reports"
(as defined in Section 5.5), there are no subscriptions, options, warrants,
calls, rights, contracts, commitments, understandings, restrictions, or
arrangements of any kind relating to the issuance, sale or transfer by Parent of
its capital stock, including without limitation, any rights of conversion or
exchange under any outstanding securities or other instruments. The issuance and
delivery of the Parent Common Stock has been duly and validly authorized by all
necessary corporate action on the part of the Parent, subject to approval by
Parent's shareholders, and will be duly and validly issued, fully paid and
non-assessable. The Parent Common Stock will be issued and delivered to the
Shareholder free and clear of any and all liens, claims, charges, encumbrances,
restrictions and agreements of any nature whatsoever. The Parent Common Stock
will not be issued, transferred, and delivered to the Shareholder in violation
of any preemptive rights, rights of first refusal or other similar rights.
5.5 SEC Reports and Financial Statements. Parent has timely filed with the
SEC, and has heretofore made available to the Shareholder and Sakoff, true and
complete copies of, all forms, reports, schedules, statements and other
documents required to be filed by it under the Securities Act of 1933, as
amended ("Securities Act") and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). (Such documents as they have been amended or supplemented
since the time of their filing or, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively, collectively are defined as "Parent SEC Reports.") Except as set
forth in subsequently filed SEC documents, at the time of filing, the Parent's
SEC Reports (including any financial statements or schedules included therein),
(a) did not contain any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (b) complied in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act, as case may be. The audited consolidated financial statements and
unaudited interim consolidated financial statements (including the related
notes) of Parent included in the Parent SEC Reports, as amended, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects the financial position of Parent and
its subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein (which will not be
material individually or in the aggregate).
5.6 Closing Date Effect. All of the representatives and warranties of
Parent are true and correct as of the date hereof and shall be true and correct
on and as of the Closing Date with the same force and effect as if such
representations and warranties were made by Parent to the Shareholder and Sakoff
on the Closing Date.
<PAGE> 35
ARTICLE VI
COVENANTS
6.1. Access to Information.
(a) The Shareholder and Sakoff shall cause Target to afford to Parent
and Sub and their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") full access during normal
business hours throughout the period prior to the Closing Date to all of
Target's properties, books, contracts, commitments and records (including, but
not limited to, tax returns) and, during such period, shall furnish promptly to
the Parent, Sub or Parent Representatives such other information concerning
Target's business as they shall request. Parent and Sub shall treat, and shall
cause the Parent Representatives to treat, all such materials and information in
accordance with Section 6.5 hereof.
(b) Parent and Sub shall afford the Shareholder and Sakoff and their
respective accounts, counsel, financial advisors and other representatives (the
"Shareholder Representatives") full access during normal business hours
throughout the period prior to the Closing date to all of the respective
properties, books, contracts, commitments and records (including, but not
limited to, tax returns) of Parent and its subsidiaries and, during such period,
shall furnish promptly to the Shareholder, Sakoff or the Shareholder
Representatives (i) a copy of each Parent SEC Report filed in connection with
the Merger and other transactions contemplated by this Agreement or that may
have a material effect on the businesses of Parent or Sub, and (ii) such other
information concerning Parent's and Sub's businesses as Shareholder, Sakoff and
Shareholder Representatives shall request. The Shareholder and Sakoff shall
treat, and shall cause the Shareholder Representatives to treat, all such
materials and information in accordance with Section 6.5 hereof.
6.2 Agreement to Cooperate. Subject to the terms and conditions herein
provided, each of the parties hereto shall use all 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 under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary or appropriate
waivers, consents and approvals and to effect all necessary filings and
submissions.
6.3. Conduct of Business Prior to the Closing Date.
(a) During the period from the date of this Agreement to the Closing
Date, except as otherwise contemplated by this Agreement or approved by Parent
or Sub, the Shareholder and Sakoff shall cause Target (i) to conduct its
business in the usual, regular and ordinary course consistent with past
practices and prudent business principles and (ii) to use its reasonable efforts
to maintain and preserve intact its business organization, employees, goodwill
with customers and advantageous business relationships and to retain the
services of its officers and key employees.
(b) The Shareholder and Sakoff agree that, on and or after the date
hereof and prior to the Closing Date, without the consent of the Parent, the
Shareholder and Sakoff shall not cause or otherwise suffer or permit the Target
to:
(i) Incur or become subject to, or agree to incur or become
subject to, any
<PAGE> 36
obligation or liability (absolute or contingent) except current
liabilities incurred, and obligations under contracts entered into, in
the ordinary course of business;
(ii) Mortgage, pledge or subject to lien, charge or any
encumbrance, any of Target's properties or agree so to do;
(iii) Sell or transfer or agree to sell or transfer any of its
assets, properties or services or cancel or agree to cancel any debt
or claim, except in each case in the ordinary course of business;
(iv) Consent or agree to a waiver of any right of substantial
value;
(v) Terminate any contract, agreement, license or other instrument
to which it is a party that provides for monthly payments by or to
Target in excess of $10,000; and
(vi) Authorize or enter into any agreement to do any of the
foregoing.
6.4. Financing.
(a) From the date hereof through the Closing Date, Parent will lend
Target a minimum of $1,000,000 in accordance with Schedule 6.4. Following the
Closing Date, the Parent shall use its commercially reasonable good faith
efforts to raise additional funds of at least $10,000,000 through equity or debt
financing over a period of no more than 180 days from the Closing. Such funds
raised after the Closing Date shall be contributed to the capital of Surviving
Corporation to be used for the further development of Surviving Corporation's
business. Surviving Corporation and Shareholder shall use their respective
reasonable good faith efforts to assist the Parent in securing such additional
financing.
(b) For a period of two years after the Closing Date, in the event that
the Parent commences an offering of its securities, the Shareholder and Sakoff
agree to enter into with the managing underwriter of such offering, and perform
their respective obligations under, a lock-up agreement similar in form and
substance to lock-up agreements executed by other executive officers and
directors of the Parent in connection with such offering.
6.5 Confidentiality. Each of the parties to this Agreement covenants and
agrees to hold in strict confidence all data and information obtained from any
other party hereto (or any subsidiary, division, associate, representative,
agent or affiliate of any such party) including, but not limited to, information
furnished prior to the date hereof (unless such information is or becomes
publicly available, without the fault of such party or any representatives of
such party, or public disclosure of such information is required by law in the
reasonable opinion of counsel to such party). Each of the parties to this
Agreement agree that its representatives shall not disclose information to
others without the prior written consent of the party who had provided such
information, and, in the event of the termination of this Agreement, to cause
its representatives to return promptly every document furnished by any other
party hereto (or any subsidiary, division, associate, representative, agent, or
affiliate of any such party) in connection with the transactions contemplated
<PAGE> 37
hereby and any copies thereof which may have been made, other than documents
which are publicly available.
6.6 Announcements. None of the parties to this Agreement nor any of their
respective Affiliates shall make any public announcements prior to the Closing
date with respect to this Agreement or the transactions contemplated hereby
without the mutual written consent of the parties, unless such disclosure is
required by law.
6.7 Satisfaction of Conditions. Each of the parties hereto shall use its
commercially reasonable efforts in good faith to fulfill or obtain the
fulfillment of all of those conditions to closing which it must fulfill.
6.8 Reporting Status. Until one year after the date as of which the
Shareholder may sell all of the Parent Common Stock without restriction pursuant
to Rule 144(k) of the General Rules and Regulations promulgated under the
Securities Act, the Parent shall use its reasonable efforts to (i) timely file
all reports and documents required to be filed with the SEC pursuant to the
Exchange Act and (ii) maintain Parent's status as an issuer required to file
reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would otherwise permit such termination.
6.9 Target Information. Target and Shareholder shall promptly furnish the
Parent and Sub with all information concerning Target's business and financial
statements and affairs which, in the reasonable judgment of the Parent, Sub or
their respective counsel, may be required or appropriate. Such information shall
be held in confidence pursuant to Section 6.5.
6.10 Covenants Relating to Earn-Out Shares.
In order to protect Shareholder's ability to earn the Earn-Out Shares and
to protect the value of the Earn-Out Shares, Parent agrees that, unless
Shareholder or its successor in interest consents, during the Earn-Out Period,
the Board of Directors of Parent shall always consist of at least three persons
designated by Shareholder (or the successor in interest to Shareholder). Without
limiting the generality of the foregoing, Shareholder agrees that any person who
has been designated by Shareholder must be acceptable to Parent and Parent
agrees that it will not unreasonably object to such persons designated by
Shareholder. In addition, if the Board of Directors of Parent is expanded to
more than seven directors, then, during the Earn-Out Period, such additional
directors shall be mutually satisfactory to Parent and Shareholder. However, the
obligations of Parent under this Section 6.10 shall terminate on or after the
6-month anniversary of the Closing Date if (x) both Surviving Corporation's
actual cumulative Gross Revenues and Pre-Tax Profits at the end of any fiscal
quarter are less than 50% of those amounts forecasted in Target's Business Plan
which has been delivered to Parent, (y) Parent has provided funding under
Section 6.4(a), directly to Target and/or indirectly by paying Target's
obligations to its vendors, of at least $1,000,000 in cash and/or Parent Common
Stock (valued as per agreements with such vendors).
<PAGE> 38
ARTICLE VII
CLOSING
7.1 Closing. The closing ("Closing") of the transactions contemplated by
this Agreement shall take place (a) at 121 S. Norwood Drive, Hurst Texas 76053
at 10:00 a.m., local time, on the later of (i) February 1, 2000, and (ii) the
second business day immediately following the date on which the last of the
conditions set forth in Article VIII hereof has been fulfilled or waived, or (b)
at such other time and place and on such other date as Parent and Shareholder
shall agree ("Closing Date").
7.2 Deliveries by the Shareholder and Sakoff. On or prior to the Closing
Date, the Shareholder and Sakoff shall deliver to Parent and/or Sub, as
applicable, the following documents duly and properly executed:
(a) Articles of Merger executed by Target.
(b) A certificate or certificates representing the Target Common Stock,
duly endorsed in blank for transfer or accompanied by separate stock powers duly
executed in blank, with all necessary documentary stamps evidencing the payment
of all applicable transfer taxes.
(c) Resolutions of the Board of Directors of Target and Shareholder
authorizing the execution and delivery of this Agreement by Target and
Shareholder and the performance of their respective obligations hereunder,
certified by the Secretary of the Shareholder.
(d) A certificate of the Secretary of State of Nevada dated as of a
recent date as to the good standing of Target in such state.
(e) The Sakoff Employment Agreement executed by Sakoff.
(f) The Registration Rights Agreement executed by Shareholder.
(g) Certificates, dated the Closing Date, executed by Sakoff and
Target's President and Secretary, to the effect that (i) the conditions set
forth in Sections 8.1(a) and (b) and, to the best knowledge of such officers,
Section 8.1(c) and (e), have been satisfied and (ii) the Articles of
Incorporation and By-laws of Target shall have not been amended since the date
upon which certified copies of each had been delivered to Parent and remain in
full force and effect.
(h) Such other separate instruments or documents that the Parent or Sub
may reasonably deem necessary or appropriate in order to consummate the
transactions contemplated by this Agreement.
7.3 Deliveries by Parent. On or prior to the Closing Date, Parent shall
deliver to the Shareholder and Sakoff the following documents duly and properly
executed:
(a) Articles of Merger executed by Parent and Sub.
(b) A certificate or certificates representing the Initial Shares duly
and validly issued in the name of Shareholder.
<PAGE> 39
(c) A certificate of the Secretary of State of Delaware dated as of a
recent date as to the good standing of Parent in such state.
(d) Resolutions of the Board of Directors and shareholders of Parent
authorizing the execution and delivery of this Agreement by Parent and the
performance of its obligations hereunder, certified by the Secretary of Parent.
(e) A certificate of the President and Secretary of Parent dated the
Closing Date to the effect that (i) the conditions set forth in Sections 8.2(a),
(b), (d) and (e) and, to the best knowledge of such officers, Section 8.2(c)
have been satisfied and (ii) the Articles of Incorporation and By-laws of the
Parent shall not have been amended since the date upon which certified copies of
each had been delivered to Shareholder and remain in full force and effect.
(f) The Sakoff Employment Agreement executed by Parent.
(g) The Registration Rights Agreement executed by Parent.
(h) Such other separate instruments or documents that Sakoff or
Shareholder may reasonably deem necessary or appropriate in order to consummate
the transactions contemplated by this Agreement.
7.4 Deliveries by Sub. On or prior to the Closing Date, Sub shall deliver
to the Shareholder and Sakoff the following documents duly and properly
executed:
(a) A certificate of the Secretary of State of Texas dated as of a
recent date as to the good standing of Sub in such state.
(b) Resolutions of the Board of Directors and shareholders of Sub
authorizing the execution and delivery of this Agreement by Sub and the
performance of its obligations hereunder, certified by the Secretary of Sub.
(c) A certificate of the President and Secretary of Sub dated the
Closing Date to the effect that (i) the conditions set forth in Sections 8.2(a)
and (b) and, to the best knowledge of such officers, Sections 8.2(c) and (e)
have been satisfied and (ii) the Certificate of Incorporation and By-laws of the
Sub shall not have been amended since the date upon which certified copies of
each had been delivered to Shareholder and remain in full force and effect.
(d) The Sakoff Employment Agreement executed by Sub.
(e) Such other separate instruments or documents that Sakoff or
Shareholder may reasonably deem necessary or appropriate in order to consummate
the transactions contemplated by this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
8.1 Conditions to Obligations of Parent and Sub. Each and every obligation
of Parent and Sub to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Parent or Sub, as applicable):
<PAGE> 40
(a) Representations and Warranties. The Shareholder's and Sakoff's
representations and warranties set forth in Article IV of this Agreement shall
have been true and correct in all material respects at and as of the Closing
Date as if such representations and warranties were made as of the Closing Date,
except for changes permitted or contemplated by this Agreement and except to the
extent that any representation or a warranty is made as of a specified date, in
which case such representation or warranty shall be true in all material
respects as of such date.
(b) Performance of Agreement. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with by
the Shareholder or Sakoff shall have been fully performed and complied with on
or prior to the Closing Date, including, without limitation, the delivery of the
duly executed instruments and documents in accordance with Section 7.2 hereof.
(c) No Adverse Proceeding. There shall not be any litigation or
proceeding, judicial or administrative, or governmental investigation against
Parent or Sub, which has enjoined or prevented the consummation of this
Agreement.
(d) Shareholder Approval. The shareholders of Parent shall have duly
approved the issuance of Parent Common Stock in the Merger and such other
matters as counsel for Parent shall reasonably deem necessary in connection with
this Agreement.
(e) Consents and Approvals. The Merger shall have become effective
under the TBCA and NCL. All other consents, approvals, and authorizations of all
material contracts, licenses, agreements or instruments required for
consummation of the transactions contemplated by this Agreement shall have been
received and shall be in force and effect.
8.2 Conditions to Obligations of the Shareholder and Sakoff. Each and every
obligation of the Shareholder and Sakoff to be performed on the Closing Date
shall be subject to the satisfaction as of or before the Closing Date of the
following conditions (unless waived by the Shareholder or Sakoff):
(a) Representations and Warranties. Parent's and Sub's representations
and warranties set forth in Article V of this Agreement shall have been true and
correct in all material respects when made and shall be true and correct in all
material respects at and as of the Closing Date as if such representations and
warranties were made as of the Closing Date, except for the changes permitted or
contemplated by this Agreement and except to the extent that any representation
or a warranty is made as of a specific date, in which case such representation
or warranty shall be true in all material respects as of such date.
(b) Performance of Agreement. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with by
Parent and Sub shall have been fully performed or complied with on or prior to
the Closing Date including, without limitation, the delivery of the duly
executed instruments and documents in accordance with Sections 7.3 and 7.4
hereof.
<PAGE> 41
(c) No Adverse Proceeding. There shall be no pending or threatened
claim, action, litigation or proceeding, judicial or administrative, or
governmental investigation against the Parent or Sub for the purpose of
enjoining or preventing the consummation of this Agreement, or otherwise
claiming that this Agreement or the consummation hereof is illegal.
(d) Consents and Approvals. The Merger shall have become effective
under the TBCA and NCL. All other consents, approvals, and authorizations of all
material contracts, licenses, agreements or instruments required for
consummation of the transactions contemplated by this Agreement shall have been
received and shall be in force and effect.
(e) Shareholder Approval. The shareholders of Parent shall have duly
approved the issuance of Parent Common Stock in the Merger and such other
matters as counsel for Parent shall reasonably deem necessary in connection with
this Agreement.
ARTICLE IX
TERMINATION
9.1 Termination by Parent or Sub. This Agreement may be terminated and
cancelled at any time prior to the Closing Date by Parent or Sub upon written
notice to the Shareholder and Sakoff if:
(a) Any of the representations or warranties of the Target, Shareholder
or Sakoff contained herein shall prove to be inaccurate or untrue in any
respect; or any obligation, term or condition listed in Section 8.1(a) or (b) to
be performed kept or observed by the Shareholder or Sakoff hereunder has not
been performed, kept or observed in any material respect at or prior to the time
specified in this Agreement; provided, however, that (i) Parent or Sub has given
the Shareholder and Sakoff written notice of all reasons for the proposed
termination and (ii) the Shareholder or Sakoff has not cured any such condition
within 10 days of receiving Parent's or Sub's notice.
(b) The performance of this Agreement would result in the Parent Common
Stock being delisted from the NASDAQ National Market System.
(c) Any condition listed in Section 8.1(c), (d) or (e) has not been
satisfied.
9.2 Termination by tnhe Shareholder and Sakoff. This Agreement may be
terminated and cancelled at any time prior to the Closing Date by the
Shareholder and Sakoff upon written notice to the Parent and Sub if:
(a) Any of the representations or warranties of Parent or Sub contained
herein shall prove to be inaccurate or untrue in any material respect; or any
material obligation, term or condition listed in Section 8.2(a) or 8.2(b) to be
performed, kept or observed by Parent or Sub hereunder has not been performed,
kept or observed in any material respect at or prior to the time specified in
this Agreement; provided, however, that (i) the Shareholder or Sakoff has given
<PAGE> 42
Parent and Sub written notice of all reasons for the proposed termination and
(ii) Parent or Sub, as applicable, has not cured any such condition within 10
days of receiving the termination notice from Shareholder and Sakoff.
(b) The Parent Common Stock is delisted from the NASDAQ National Market
System for any reason.
(c) Any condition listed in Section 8.2(c), (d) or (e) has not been
satisfied.
9.3 Termination by Any Party. Any party hereto shall have the right to
terminate and cancel this Agreement if (i) the Closing Date shall not have
occurred on or before February 1, 2000, unless extended pursuant to Section 7.1
hereof; provided that such failure of occurrence shall not have resulted from
the delay, default or breach of such party; or (ii) a court of competent
jurisdiction shall have issued an order, decree or ruling permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement, and such order, decree, ruling or other action shall have become
final and unappealable.
9.4. Termination by Mutual Consent. This Agreement may be terminated and
cancelled at any time prior to the Closing Date by mutual written consent of
Parent, Sub, Shareholder and Sakoff.
9.5. Effect of Termination. Subject to Section 9.6, in the event of
termination of this Agreement by any party hereto as provided in this Article
IX, this Agreement shall forthwith become void and there shall be no further
obligation on the part of any party or their respective officers or directors
(except as set forth in this Section 9.5, Section 6.5 and Section 6.6 which
shall survive the termination). Nothing in this Section 9.5 shall relieve any
party from liability for any willful breach or failure of observance of the
provisions of this Agreement.
9.6. Termination Fees.
(a) In the event that this Agreement is terminated by Parent or Sub
pursuant to either (i) Section 9.1(a) or (ii) Section 9.3 if the failure to
close resulted from the delay, default or breach by Shareholder or Sakoff, then,
in either case, Shareholder shall pay the Parent a termination fee of $100,000.
(b) In the event that this Agreement is terminated by Shareholder or
Sakoff (i) pursuant to Section 9.2(a), (ii) pursuant to 9.2(c) because Parent's
shareholders have not approved any matter in connection with the Merger and
consummation of the transactions contemplated in this Agreement but the
provisions of Section 9.6(c) have not been satisfied or (iii) pursuant to
Section 9.3 if the failure to close resulted from the delay, default or breach
by Parent or Sub, then, in any case, the Parent shall pay Shareholder a
termination fee of $100,000.
(c) Parent and Sub may terminate this Agreement prior to February 29,
2000 without paying any termination fee if the (i) Parent has duly and timely
called a meeting of its shareholders to be held prior to February 28, 2000 to
approve this Agreement, (ii) neither Parent, Sub nor any of Parent's affiliates
has breached this Agreement or the Shareholders Agreement, (iii)
<PAGE> 43
Parent has used reasonable efforts to cause a proxy statement for such meeting
that meets the requirements of the Exchange Act to be timely mailed to the
Parent's stockholders and (iv) Parent has used its best efforts to have its
shareholders approve the issuance of Parent Common Stock and any other matter
which counsel for Parent reasonably believes such shareholders are required to
approve in connection with the consummation of the transactions contemplated by
this Agreement but Parent's shareholders have not approved such issuance or
other matter.
9.7. Monies Advanced to Target Prior to Close Any cash or stock advanced to
Target prior to closing on the Agreement shall be in the form of a Note due from
Target to Parent. Such note shall be secured by the assets of Target and shall
be due in 1 year. Such note shall be in substantially the form of Exhibit A. The
security for the note shall be on substantially the terms and conditions of the
Security Agreement in the form of Exhibit B.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Survival of Representations and Warranties and Agreements. All
representations, warranties, covenants and agreements of the Parent, the
Shareholder and Sakoff in this Agreement shall survive the execution, delivery
and performance of this Agreement for a period of one year from the Closing
Date, and shall be deemed to have been made again by the Parent, the
Shareholder, and Sakoff at and as of the Closing. The obligation of the
indemnity provided herein shall survive the Closing.
10.2 Notices. All notices and demands required or permitted under this
Agreement shall be in writing and shall be given (i) by actual delivery of the
notice into the hands of the person entitled to receive it, (ii) by mailing such
notice by registered or certified mail, return receipt requested, in which case
the notice shall be deemed to be given on the second day after the date of its
mailing or (iii) by depositing such notice with any nationally recognized
overnight carrier for priority delivery, in which case the notice shall be
deemed to be given as of the date it is so deposited. All notices to a party
shall be addressed as follows:
If To the Parent or Sub: If To the Shareholder, Sakoff:
Environmental Technologies, Inc. afreegift.com, Inc.
121 S. Norwood Drive 1100 Jorie Blvd.-Suite 173
Hurst, Texas 76053 Oak Brook, Illinois 60523
Attn: David Keener, President Attn: Scott L. Sakoff, President
If to Target:e solutions marketing, Inc.
1100 Jorie Blvd. - Suite 173
Oak Brook, Illinois 60523
Atten: Chairman of the Board
With copy to: With copy to:
Ray Felton Zane M. Cohn
Greenbaum, Rowe, Smith, Ravin, Zane M. Cohn & Associates, P.C.
Davis & Himmel LLP Three First National Plaza
99 Wood Ave South Suite 3700
Iselin, NJ 08830 Chicago, Illinois 60602
<PAGE> 44
Any party may specify a different address, which change shall become effective
upon receipt of such notice by all other parties.
10.3 Entire Agreement. This Agreement, the documents referred to herein,
and the other matters agreed to in writing by the parties on the date hereof,
embody the entire agreement and understanding of the parties hereto with respect
to the subject matter hereof, and supersede all prior and contemporaneous
agreements and understandings, oral or written, relative to said subject matter.
10.4 Binding Effect; Assignment. This Agreement and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
the Parent, Sub, the Shareholder, Sakoff and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be transferred or assigned by either of the parties
hereto except (i) with the prior written consent of the other party, (ii) by
operation of law or (iii) by will or the laws of descent and distribution. Any
transfer or assignment of any of the rights, interests or obligations hereunder
in violation of the terms hereof shall be void and of no force or effect.
10.5 Captions. The Article and Section headings of this Agreement are
inserted for convenience only and shall not constitute a part of this Agreement
in construing or interpreting any provision hereof.
10.6 Expenses of Transaction. The Shareholder and Sakoff shall pay all
costs and expenses incurred by them and Target, in connection with this
Agreement and the transactions contemplated hereby. Parent and Sub shall pay all
costs and expenses incurred by them in connection with this Agreement and the
transactions contemplated hereby.
10.7 Waiver; Consent. This Agreement may not be changed, amended,
terminated, augmented, rescind, or discharged (other than by performance), in
whole or in part, except by a writing executed by each of the parties hereto,
and no waiver of any of the provisions or conditions of this Agreement or any of
the rights of a party hereto shall be effective or binding unless such waiver
shall be in writing and signed by the party to have given or consented thereto.
Except to the extent that a party hereto may have otherwise agreed in writing,
no waiver by that party of any condition of this Agreement or breach by the
other party of any of its obligations, representations or warranties hereunder
shall be deemed to be a waiver of any other condition or subsequent or prior
breach of the same or any other obligation or representation or warranty by such
other party, nor shall any forbearance by the first party to seek a remedy for
any noncompliance or breach by such other party be deemed to be a waiver by the
first party of its rights and remedies with respect to such noncompliance or
breach.
10.8 No Third Party Beneficiaries. Nothing herein, 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 the provisions of the Agreement.
<PAGE> 45
10.9 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
10.10 Gender. Whenever the context requires, words used in the singular
shall be construed to mean or include the plural and vice versa, and pronouns of
any gender shall be deemed to include and designate the masculine, feminine or
neuter gender.
10.11 Governing Law. This Agreement shall in all respects be construed in
accordance with and governed by the laws of the state of Texas, without regard
to the principles of conflicts of laws thereof.
10.12 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this part of the Agreement are incorporated herein by reference
and made a part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
PARENT: TARGET:
EVTC, INC. AFREEGIFT.COM, INC.
By: /s/ George Cannan By: /s/ Scott Safoff
------------------------------- --------------------------------
George Cannan, as its Chairman Scott Safoff, as its Director
SUB: SHAREHOLDER:
E SOLUTIONS MARKETING, INC. SAKOFF ENTERPRISES, INC.
By: /s/ David Keener By: /s/ Scott L. Sakoff
------------------------------- ---------------------------------
David Keener, as its Director Scott L. Sakoff, as its CEO
SAKOFF:
/s/ Scott L. Sakoff
------------------------------------
Scott L. Sakoff
Name: Scott L. Sakoff
Title: President
<PAGE> 46
APPENDIX B
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (JUNE 4, 1999) TO SEPTEMBER 30, 1999
<PAGE> 47
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
================================================================================
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
Balance sheet 4
Statement of loss 5
Statement of capital deficit 6
Statement of cash flows 7
Notes to financial statements 8 - 12
</TABLE>
<PAGE> 48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
afreegift.com, Inc.
We have audited the accompanying balance sheet of afreegift.com, Inc., (a
development stage company) (the "Company") as of September 30, 1999 and the
related statements of loss, capital deficit, and cash flows for the period from
inception (June 4, 1999) to September 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of September 30,
1999, and the results of its operations and its cash flows for the period from
inception (June 4, 1999) to September 30, 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has no recurring source of revenue and has
incurred losses since inception. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to this matter are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Dallas, Texas
February 18, 2000
3
<PAGE> 49
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
September 30, 1999
- ------------- ----------
ASSETS
Current
Cash $ --
Total current assets --
----------
Web site development costs 101,600
----------
$ 101,600
==========
LIABILITIES AND CAPITAL DEFICIT
Current liabilities
Accounts payable and accrued expenses,
including $35,000 due related parties $ 208,991
Advance payable 93,830
----------
Total current liabilities 302,821
----------
Commitments and contingencies (Note 5)
CAPITAL DEFICIT
Common stock, 25,000 shares authorized, issued and
outstanding, no par 1
Accumulated deficit (201,222)
----------
Total capital deficit (201,221)
----------
$ 101,600
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
4
<PAGE> 50
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF LOSS (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
Period from Inception (June 4, 1999) to September 30, 1999
- ----------------------------------------------------- ----------
<S> <C>
OPERATING EXPENSES:
Professional fees $ 20,000
Marketing 28,722
Salaries and benefits 47,294
Other administrative expenses 3,592
Recruiting 26,200
Development and production 42,764
Travel and entertainment 32,650
----------
Total Operating Expenses 201,222
----------
Net Loss $ 201,222
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
5
<PAGE> 51
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CAPITAL DEFICIT
PERIOD ENDED SEPTEMBER 30, 1999 (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
Common Stock
No Par
---------------------------- Accumulated Total
Shares Amount Deficit Capital Deficit
---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, June 4, 1999 25,000 $ 1 $ -- $ 1
Net loss, for the period -- -- (201,222) (201,222)
---------- ---------- ---------- ----------
Balance, September 30, 1999 25,000 $ 1 $ (201,222) $ (201,221)
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
6
<PAGE> 52
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (NOTE 1)
================================================================================
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Period from Inception (June 4, 1999) to September 30, 1999 1999
- ---------------------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Loss from operations $ (201,222)
Adjustments to reconcile loss from operations to
cash used in operating activities:
Change in assets and liabilities:
Accounts payable and accrued expenses 208,991
----------
Net cash flows used in operating activities 7,769
----------
Cash Flows from Investing Activity:
Web site development costs (101,600)
Shareholder contributions to capital 1
----------
Net cash flows used in investing activities (101,599)
----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES -
Proceeds from advance payable 93,830
----------
Increase (decrease) in cash --
Cash, beginning of period --
----------
Cash, ending of period $ --
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Noncash activities: $ --
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
7
<PAGE> 53
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF
ACCOUNTING
POLICIES
NATURE OF BUSINESS afreegift.com, Inc., (a development stage
company) (the "Company") is an Oak Brook,
Illinois, based internet direct marketing
company. The Company commenced operations in
June 1999 and is in the start-up phase.
MERGER AND GOING On December 22, 1999, the Company entered
CONCERN into an Agreement and Plan of Reorganization
(the "Agreement") with EVTC, Inc. Under the
Agreement, the Company will merge into e
solutions marketing, inc., a new wholly owned
subsidiary formed by EVTC, Inc. in December
of 1999, ("e solutions"), in exchange for
common stock of EVTC, Inc.
The consummation of the transactions
contemplated by the Agreement is subject to
approval by EVTC, Inc.'s stockholders. An
annual meeting of the EVTC, Inc.'s
stockholders is scheduled March 24, 2000 for
the purpose of seeking ratification and
approval of the Agreement and the
transactions contemplated thereby. Subject to
stockholder approval and satisfaction of
certain pre-closing conditions, the
Shareholder of the Company will be entitled
to receive at the closing a number of shares
of EVTC, Inc.'s common stock to be agreed
upon prior to the closing and the right to
receive additional shares of the EVTC Inc.'s
common stock (the "Earn-Out Shares") upon
satisfaction of certain financial performance
objectives. In no event shall the number of
shares issued at closing and Earn-Out Shares
exceed 8,000,000.
If the merger is consummated, EVTC, Inc.
expects to expand its board of directors to
seven members. The management of the Company
will have the right to three seats on EVTC,
Inc.'s board so long as the Company meets
specified financial performance objectives.
Also, at the closing of the merger, the
Company's CEO, Mr. Sakoff, will enter into an
employment agreement with e solutions under
which he will serve as President and Chief
Executive Officer of e solutions. Pending
EVTC, Inc. stockholder action on the merger,
EVTC, Inc. is obligated to lend $1,000,000 to
the Company at times specified in a funding
agreement. In exchange, EVTC, Inc. will
receive a note payable from the Company
secured by all of its assets. The note is to
be repaid in a year and bears interest at 9%.
Through February 18, 2000, $500,000 has been
funded under the Agreement. Upon the closing
of the Agreement, the amounts due EVTC, Inc.
under this arrangement will be forgiven or
converted to equity.
8
<PAGE> 54
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company expects to formally close on the
transaction by March 31, 2000.
The accompanying financial statements have
been prepared assuming the Company will
continue as a going concern. The Company has
been in the development stage since
inception. The Company has no recurring
source of revenue and has recorded net losses
from operations since inception that raise
substantial doubt about the Company's ability
to continue as a going concern. Management's
plans in regard to this matter are described
in the preceding paragraphs. The financial
statements do not include any adjustments
that might result from the outcome of this
uncertainty.
While there is no assurance that the
Agreement will be consummated; the Company
believes that, given the funding provided by
EVTC, Inc., its liquidity will be sufficient
to support its operating requirements through
the end of 2000.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclose of contingent assets and
liabilities at the date of the financial
statements and reported amounts of revenues
and expenses during the reporting period.
Actual results could differ from those
estimates.
REVENUE RECOGNITION The Company is currently not generating
revenue and expects to begin its first
Permission Marketing web site in Spring 2000.
WEB SITE Web site development costs consist of third
DEVELOPMENT COSTS party costs incurred related to web-site
development and trademarks. These capitalized
costs shall be amortized over their estimated
useful life, not to exceed three years.
IMPAIRMENT OF LONG- The Company reviews for impairment long-lived
LIVED ASSETS AND assets and certain identifiable intangibles
LONG-LIVED ASSETS TO whenever events or changes in circumstances
BE DISPOSED OF indicate that the carrying amount of an asset
may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of the
assets to the future net cash flows expected
to be generated by the asset. If such assets
are considered to be impaired, the impairment
to be recognized is measured by the amount by
which the carrying amount of the assets
exceeds the fair value of the assets.
INCOME TAXES Income taxes are provided for the tax effects
of transactions reported in the financial
statements and consist of taxes currently due
plus deferred taxes related primarily to
differences between the basis of assets and
liabilities for financial and income tax
reporting. The net deferred tax
9
<PAGE> 55
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
assets and liabilities represent the future
tax return consequences of those differences,
which will either be taxable or deductible
when the assets and liabilities are recovered
or settled.
CASH AND CASH For purposes of the statements of cash flows,
EQUIVALENTS the Company considers all highly liquid debt
instruments purchased with an initial
maturity of three months or less to be cash
equivalents.
FAIR VALUE OF Statement of Financial Accounting Standards
FINANCIAL INSTRUMENTS No. 107, "Disclosures about Fair Value of
Financial Instruments" requires that the
Company disclose the estimated fair values
for its financial instruments for which it is
practicable to estimate their values.
Accounts payable, accrued expenses and
advance payable - The carrying value of
accounts payable, accrued expenses and
advance payable approximates fair value
because of the short-maturity of these
instruments.
NEW ACCOUNTING In July 1998, the Financial Accounting
STANDARDS Standards Board (FASB) issued SFAS No. 133
"Accounting for Derivative Instruments and
Hedging Activities.", which establishes
accounting and reporting standards for
derivative instruments and hedging
activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the balance sheet and measure
those instruments at fair value. Management
does not believe this will have a material
effect on the operations. Implementation of
this standard has recently been delayed by
the FASB for a 12-month period through the
issuance of SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities
- deferral of the effective date of FASB
Statement No. 133".
INTERIM ACCOUNTING The statement of operations for the period
POLICY ended September 30, 1999, are not necessarily
indicative of the results of operations to be
expected for a full year of operations.
2. ADVANCE PAYABLE Advance payable consists of amounts advanced
to the Company for operating requirements.
The amount at September 30, 1999, was
advanced by a third party under a separate
agreement (see Note 5). Subsequent to
September 30, 1999, the agreement under which
these advances were made was terminated.
3. TRANSACTIONS The Company purchased services from a related
WITH RELATED party totaling $25,764 during the period. In
PARTIES addition, the Company rents space from a
related party on a month to month basis.
Total rent expense paid to the related party
was $2,000 in the period.
10
<PAGE> 56
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company received advances from a related
party totaling $35,000 during the period.
4. INCOME TAXES Management established a 100 percent
valuation allowance since it is more likely
than not that the deferred tax asset will not
be realized based on the weight of available
evidence.
In accordance with the Internal Revenue Code,
the availability to carry forward net
operating losses incurred prior to the Merger
may be limited due to a potential significant
change in ownership. If not utilized, these
net operating losses will begin to expire in
2019.
The net deferred tax asset in the
accompanying balance sheet, created by the
current period net operating loss, includes
the following at September 30, 1999:
<TABLE>
<S> <C>
Deferred tax asset $ 63,000
Less valuation allowance (63,000)
Net deferred tax asset $ --
The valuation allowance activity for the
period ended September 30, 1999 consists of
the following:
Balance, beginning of period $ --
Current period net operating
loss (63,000)
Balance, end of period $(63,000)
</TABLE>
5. COMMITMENTS AND The Company is generally self-insured for
CONTINGENCIES losses and liabilities related primarily to
workers' compensation, health and welfare
claims, physical damage to property, business
interruption resulting from certain events,
and comprehensive general, product and
vehicle liability.
In June 1999, the Company entered into a
Stock Purchase Agreement (the "old
Agreement") with a third party buyer (the
"buyer") to sell the Company under the terms
and conditions of that agreement. Under the
old Agreement, among other things, the buyer
agreed to advance certain funds for costs
related to development and start-up.
Management of the Company believes that the
buyer materially breached the Agreement in
1999 and therefore the Agreement was
terminated. Management also believes that the
amounts advanced by the buyer are not
obligated to be repaid because of the breach.
The Company received demand letters from the
buyer requesting repayment with interest.
Management does not know of any litigation in
this matter and does not expect it to have a
11
<PAGE> 57
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
material effect on its future operations.
The Company is involved in various claims and
legal actions arising in the ordinary course
of business. In the opinion of management,
the ultimate disposition of these matters
will not have a material adverse effect on
the Company's financial position, results of
operations or liquidity.
In January 2000, the Company entered into a
consulting agreement with an internet design
firm. The initial commitment for services to
be rendered is a $50,000 retainer, with
additional fees potentially totaling $85,000.
6. YEAR 2000 The Company has assessed the potential issues
(UNAUDITED) and costs associated with the year 2000 and
believe that it has addressed such issues.
The Company has implemented revisions to
effect year 2000 compliance of all its
accounting and operations systems. The
Company has reviewed year 2000 compliance
issues with its vendors, suppliers, and
customers. At the present time, the Company
believes that costs or consequences of
unforeseen issues would not result in the
occurrence of a material event or uncertainty
reasonably likely to have a material adverse
effect on the Company.
12
<PAGE> 58
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
================================================================================
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (JUNE 4, 1999) TO DECEMBER 31, 1999
<PAGE> 59
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
================================================================================
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (JUNE 4, 1999) TO DECEMBER 31, 1999
<PAGE> 60
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
================================================================================
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
Balance sheet 4
Statement of loss 5
Statement of capital deficit 6
Statement of cash flows 7
Notes to financial statements 8 - 12
</TABLE>
<PAGE> 61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
afreegift.com, Inc.
We have audited the accompanying balance sheet of afreegift.com, Inc., (a
development stage company) (the "Company") as of December 31, 1999 and the
related statements of loss, capital deficit, and cash flows for the period from
inception (June 4, 1999) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the period from
inception (June 4, 1999) to December 31, 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has no recurring source of revenue and has
incurred losses since inception. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to this matter are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Dallas, Texas
February 18, 2000
3
<PAGE> 62
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
December 31, 1999
----------
<S> <C>
ASSETS
Current
Cash $ --
----------
Total current assets --
----------
Web site development costs 107,500
----------
$ 107,500
==========
LIABILITIES AND CAPITAL DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 141,138
Due to related party 15,000
Note payable 250,000
Advance payable 93,830
----------
Total current liabilities 499,968
----------
Commitments and contingencies (Note 5)
----------
CAPITAL DEFICIT
Common stock, 25,000 shares authorized, issued and
outstanding, no par 1
Accumulated deficit (392,469)
----------
Total capital deficit (392,468)
----------
$ 107,500
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
4
<PAGE> 63
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF LOSS (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
Period from Inception (June 4, 1999) to December 31, 1999
----------
<S> <C>
OPERATING EXPENSES:
Professional fees $ 20,000
Marketing 25,206
Salaries and benefits 107,315
Other administrative expenses 21,645
Recruiting 48,450
Development and production 125,336
Travel and entertainment 44,517
----------
Total Operating Expenses 392,469
----------
Net Loss $ 392,469
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
5
<PAGE> 64
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CAPITAL DEFICIT
PERIOD ENDED DECEMBER 31, 1999 (NOTE 1)
================================================================================
<TABLE>
<CAPTION>
Common Stock
No Par
--------------------- Accumulated Total
Shares Amount Deficit Capital Deficit
------ ---------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, June 4, 1999 25,000 $ 1 $ -- $ 1
Net loss, for the period -- -- (392,469) (392,469)
------ ---------- ---------- ----------
Balance, December 31, 1999 25,000 $ 1 $ (392,469) $ (392,468)
====== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
6
<PAGE> 65
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (NOTE 1)
================================================================================
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Period from Inception (June 4, 1999) to December 31, 1999 1999
----------
<S> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Loss from operations $ (392,469)
Adjustments to reconcile loss from operations to
cash used in operating activities:
Change in assets and liabilities:
Accounts payable and accrued expenses 141,138
----------
Net cash flows used in operating activities (251,331
----------
CASH FLOWS FROM INVESTING ACTIVITY:
Development costs (107,500
Shareholder contributions to capital 1
----------
Net cash flows used in investing activities (107,499
----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES -
Net proceeds from advance and notes payable 358,830
----------
Increase (decrease) in cash --
Cash, beginning of period --
----------
Cash, ending of period $ --
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Noncash activities: $ --
==========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
7
<PAGE> 66
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. SUMMARY OF ACCOUNTING
POLICIES
NATURE OF BUSINESS afreegift.com, Inc., (a development stage
company) (the "Company") is an Oak Brook,
Illinois, based internet direct marketing
company. The Company commenced operations in
June 1999 and is in the start-up phase.
MERGER AND GOING CONCERN On December 22, 1999, the Company entered
into an Agreement and Plan of Reorganization
(the "Agreement") with EVTC, Inc. Under the
Agreement, the Company will merge into e
solutions marketing, inc., a new wholly owned
subsidiary formed by EVTC, Inc. in December
of 1999, ("e solutions"), in exchange for
common stock of EVTC, Inc.
The consummation of the transactions
contemplated by the Agreement is subject to
approval by EVTC, Inc.'s stockholders. An
annual meeting of the EVTC, Inc.'s
stockholders is scheduled March 24, 2000 for
the purpose of seeking ratification and
approval of the Agreement and the
transactions contemplated thereby. Subject to
stockholder approval and satisfaction of
certain pre-closing conditions, the
Shareholder of the Company will be entitled
to receive at the closing a number of shares
of EVTC, Inc.'s common stock to be agreed
upon prior to the closing and the right to
receive additional shares of the EVTC Inc.'s
common stock (the "Earn-Out Shares") upon
satisfaction of certain financial performance
objectives. In no event shall the number of
shares issued at closing and Earn-Out Shares
exceed 8,000,000.
If the merger is consummated, EVTC, Inc.
expects to expand its board of directors to
seven members. The management of the Company
will have the right to three seats on EVTC,
Inc.'s board so long as the Company meets
specified financial performance objectives.
Also, at the closing of the merger, the
Company's CEO, Mr. Sakoff, will enter into an
employment agreement with e solutions under
which he will serve as President and Chief
Executive Officer of e solutions.
Pending EVTC, Inc. stockholder action on the
merger, EVTC, Inc. is obligated to lend
$1,000,000 to the Company at times specified
in a funding agreement. In exchange, EVTC,
Inc. will receive a note payable from the
Company secured by all of its assets. The
note is to be repaid in a year and bears
interest at 9%. At December 31, 1999 $250,000
was funded under this funding agreement.
Through February 18, 2000, $500,000 has been
funded under the Agreement. Upon the closing
of the Agreement, the amounts due EVTC, Inc.
under this arrangement will be forgiven or
converted to equity.
8
<PAGE> 67
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
The Company expects to formally close on the
transaction by March 31, 2000.
The accompanying financial statements have
been prepared assuming the Company will
continue as a going concern. The Company has
been in the development stage since its
inception. The Company has no recurring
source of revenue and has recorded net losses
from operations since inception that raise
substantial doubt about the Company's ability
to continue as a going concern. Management's
plans in regard to this matter are described
in the preceding paragraphs. The financial
statements do not include any adjustments
that might result from the outcome of this
uncertainty.
While there is no assurance that the
Agreement will be consummated; the Company
believes that, given the funding provided by
EVTC, Inc., its liquidity will be sufficient
to support its operating requirements through
the end of 2000.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclose of contingent assets and
liabilities at the date of the financial
statements and reported amounts of revenues
and expenses during the reporting period.
Actual results could differ from those
estimates.
REVENUE RECOGNITION The Company is currently not generating
revenue and expects to begin its first
Permission Marketing web site in Spring 2000.
WEB SITE DEVELOPMENT Web site development costs consist of third
COSTS party costs incurred related to web-site
development and trademarks. These capitalized
costs shall be amortized over their estimated
useful life, not to exceed three years.
IMPAIRMENT OF LONG- The Company reviews for impairment long-lived
LIVED ASSETS AND LONG- assets and certain identifiable intangibles
LIVED ASSETS TO BE whenever events or changes in circumstances
DISPOSED OF indicate that the carrying amount of an asset
may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of the
assets to the future net cash flows expected
to be generated by the asset. If such assets
are considered to be impaired, the impairment
to be recognized is measured by the amount by
which the carrying amount of the assets
exceeds the fair value of the assets.
INCOME TAXES Income taxes are provided for the tax effects
of transactions reported in
9
<PAGE> 68
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
the financial statements and consist of taxes
currently due plus deferred taxes related
primarily to differences between the basis of
assets and liabilities for financial and
income tax reporting. The net deferred tax
assets and liabilities represent the future
tax return consequences of those differences,
which will either be taxable or deductible
when the assets and liabilities are recovered
or settled.
CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows,
the Company considers all highly liquid debt
instruments purchased with an initial
maturity of three months or less to be cash
equivalents.
FAIR VALUE OF FINANCIAL Statement of Financial Accounting Standards
INSTRUMENTS No. 107, "Disclosures about Fair Value of
Financial Instruments," requires that the
Company disclose the estimated fair values
for its financial instruments for which it is
practicable to estimate their values.
Accounts payable, accrued expenses
and advance and note payable - The carrying
value of accounts payable, accrued expenses
and advance and note payable approximates
fair value because of the short-maturity of
these instruments.
NEW ACCOUNTING STANDARDS In July 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133
"Accounting for Derivative Instruments and
Hedging Activities.", which establishes
accounting and reporting standards for
derivative instruments and hedging
activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the balance sheet and measure
those instruments at fair value. Management
does not believe this will have a material
effect on the operations. Implementation of
this standard has recently been delayed by
the FASB for a 12-month period through the
issuance of SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities
- deferral of the effective date of FASB
Statement No. 133".
INTERIM ACCOUNTING POLICY The statement of operations for the period
ended December 31, 1999, are not necessarily
indicative of the results of operations to be
expected for a full year of operations.
2. ADVANCE PAYABLE Advance payable consists of amounts advanced
to the Company for operating requirements.
The amount at December 31, 1999, was advanced
by a third party under a separate agreement
(see Note 5). During the period ended
December 31, 1999, the agreement under which
these advances were made was terminated.
10
<PAGE> 69
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
3. TRANSACTIONS WITH RELATED The Company purchased services from a related
PARTIES party totaling $25,764 during the period. In
addition, the Company rents space from a
related party on a month to month basis.
Total rent expense was paid to the related
party $3,000 in the period.
The Company received $50,000 advanced from
related parties for the period ended December
31, 1999. $35,000 was repaid during the
period.
4. INCOME TAXES Management established a 100 percent
valuation allowance since it is more likely
than not that the deferred tax asset will not
be realized based on the weight of available
evidence.
In accordance with the Internal Revenue Code,
the availability to carry forward net
operating losses incurred prior to the Merger
may be limited due to a potential significant
change in ownership. If not utilized, these
net operating losses will begin to expire in
2019.
The net deferred tax asset in the
accompanying balance sheet, created by the
current period net operating loss, includes
the following at December 31, 1999:
<TABLE>
<S> <C>
Deferred tax asset $ 127,000
Less valuation allowance (127,000)
----------------
Net deferred tax asset $ -
================
</TABLE>
The valuation allowance activity for the
period ended December 31, 1999 consists of
the following:
<TABLE>
<S> <C>
Balance, beginning of period $ -
Current period net operating
loss 127,000
----------------
Balance, end of period $ 127,000
================
</TABLE>
5. COMMITMENTS AND The Company is generally self-insured for
CONTINGENCIES losses and liabilities related primarily to
workers' compensation, health and welfare
claims, physical damage to property, business
interruption resulting from certain events,
and comprehensive general, product and
vehicle liability.
In June 1999, the Company entered into a
Stock Purchase Agreement (the "old
Agreement") with a third party buyer (the
"buyer") to sell the Company under the terms
and conditions of that agreement. Under the
old Agreement, among other things, the buyer
agreed to advance certain
11
<PAGE> 70
afreegift.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
funds for costs related to development and
start-up. Management of the Company believes
that the buyer materially breached the
Agreement in 1999 and therefore the Agreement
was terminated. Management also believes that
the amounts advanced by the buyer are not
obligated to be repaid because of the breach.
The Company received demand letters from the
buyer requesting repayment with interest.
Management does not know of any litigation in
this matter and does not expect it to have a
material effect on its future operations.
The Company is involved in various claims and
legal actions arising in the ordinary course
of business. In the opinion of management,
the ultimate disposition of these matters
will not have a material adverse effect on
the Company's financial position, results of
operations or liquidity.
In January 2000, the Company entered into a
consulting agreement with an internet design
firm. The initial commitment for services to
be rendered is a $50,000 retainer, with
additional fees potentially totaling $85,000.
6. YEAR 2000 (UNAUDITED) The Company has assessed the potential issues
and costs associated with the year 2000 and
believe that it has addressed such issues.
The Company has implemented revisions to
effect year 2000 compliance of all its
accounting and operations systems. The
Company has reviewed year 2000 compliance
issues with its vendors, suppliers, and
customers. At the present time, the Company
believes that costs or consequences of
unforeseen issues would not result in the
occurrence of a material event or uncertainty
reasonably likely to have a material adverse
effect on the Company.
12
<PAGE> 71
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
(the "Pro Forma Financial Statements") are based on the historical consolidated
financial statements of the Company and afreegift.com, Inc., a development stage
company (afreegift). The Company has entered into a definitive agreement (the
"Agreement") with respect to afreegift and presently expects to consummate this
transaction subject to the satisfaction of certain conditions.
The pro forma condensed consolidated statements of operations for the year ended
September 30, 1999 and for the three months ended December 31, 1999 give effect
to the afreegift transaction as if it was consummated on October 1, 1998. The
pro forma condensed consolidated balance sheet gives effect to the afreegift
transaction as if it was consummated on December 31, 1999. All pro forma
adjustments are described more fully in the accompanying notes.
The afreegift historical financial statements reflected in the Pro Forma
Financial Statements represents the accounts and operations of afreegift from
the date of inception, June 4, 1999. The period presented does not represent a
full year of operations of afreegift and therefore may not be indicative of the
results of operations of afreegift if it had operated for an entire year.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
presented for informational purposes only and do not purport to be indicative of
the results of operations that actually would have been achieved had such a
transaction been consummated on the date or for the periods indicated and do not
purport to be indicative of the balance sheet data or results of operations as
of any future date or for any future period.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes of
the Company and afreegift incorporated by reference or included elsewhere in
this Proxy Statement.
The afreegift transaction, if consummated, will be accounted for using the
purchase method of accounting. The purchase method of accounting allocates the
aggregate purchase price to the assets acquired and liabilities assumed based
upon their respective fair values. The allocation of the aggregate purchase
price to the afreegift transaction reflected in the Pro Forma Financial
Statements is preliminary. The final allocation of the aggregate purchase price
is contingent upon valuations that have not yet been completed. In addition, the
afreegift Agreement has significant contingent consideration and earn-out
provisions based on future operations and profitability of afreegift. At the
consummation of the transaction, the shareholder of afreegift is entitled to
receive a number of common shares of the Company to be agreed upon prior to the
closing (preliminarily 1000 shares) and the right to receive additional shares
of the Company's common stock (the "Earn-Out Shares") upon satisfaction of
certain performance objectives. In no event shall the number of shares issued at
closing and Earn-Out Shares exceed 8,000,000. The pro forma adjustments do not
include the effect of the earn-out provisions, as that consideration is
considered contingent on future events. Management is unable to predict whether
any adjustments as a result of the foregoing will have a material effect on the
unaudited Pro Forma Financial Statements.
<PAGE> 72
EVTC, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
----------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS RESULTS
---------------------- ------------- -----------
EVTC AFREEGIFT (A)
<S> <C> <C> <C> <C>
Net sales $ 38,732 $ -- $ -- $ 38,732
Cost of Sales 32,362 -- -- 32,362
-------- -------- -------- --------
Gross Profit 6,370 -- -- 6,370
Selling, General
and Administrative 5,264 201 170 (B)(D) 5,635
-------- -------- --------
Operating income (loss) 1,106 (201) (170) 735
Other:
Interest expense (1,015) -- -(E) (1,015)
Other - net 78 -- -- 78
-------- -------- --------
Income (loss) from Continuing
Operations before income tax 169 (201) (170) (202)
Income taxes (300) -- -- (300)
-------- -------- -------- --------
Income (loss) from Continuing
Operations $ 469 $ (201) $ (170) $ 98
-------- -------- -------- --------
Income per share (C)
Basic - Continuing operations $ .09 $ .02
Diluted - Continuing operations $ .09 $ .02
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<PAGE> 73
EVTC, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS RESULTS
---------------------- ------------- -----------
EVTC AFREEGIFT (A)
<S> <C> <C> <C> <C>
Net sales $ 4,775 $ -- $ -- $ 4,775
Cost of Sales 3,642 -- -- 3,642
------- ------- ------- -------
Gross Profit 1,133 -- -- 1,133
Selling, General
and Administrative 1,594 192 42(B)(D) 1,828
------- ------- ------- -------
Operating income (loss) (461) (192) (42) (695)
------- ------- ------- -------
Other:
Interest expense (221) -- --(E) (221)
Other - net (13) -- -- (13)
------- ------- ------- -------
Income (loss) from Continuing
Operations before income tax (695) (192) (42) (929)
Income taxes (236) -- -- (236)
------- ------- ------- -------
Income (loss) from Continuing
Operations $ (459) $ (192) $ (42) $ (693)
------- ------- ------- -------
Loss per share (C)
Basic - Continuing operations $ (.08) $ (.12)
Diluted - Continuing operations $ .(08) $ (.12)
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<PAGE> 74
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(A) afreegift commenced operation in June 1999 and is considered a development
stage company; therefore its results in the Pro Forma Condensed
Consolidated Statements of Operations are for the periods from June 1999.
(B) Reflects employment agreements entered into as part of the
Agreement and additional amortization of acquired intangibles;
approximately $110,000 and $60,000, respectively. For the
three months ended December 31, 1999, reflects one quarter of
such employment agreements and intangible amortization.
(C) For the year ended September 30, 1999, the number of shares
used for the historic income per share is 4,989,719 for Basic
and 5,148,657 for Diluted. For the quarter ended December 31,
1999, the number of shares used for the historic loss per
share is 5,797,010. The pro forma Basic and Diluted per share
information gives effect to the shares to be issued at the
closing of the transaction (preliminarily 1000 common shares
of the Company).
(D) At the consummation of the Transaction, the shareholder of
afreegift is entitled to receive a number of common shares of
the Company to be agreed upon prior to the closing
(preliminarily 1000 shares) and the right to receive
additional shares of the Company's common stock (the "Earn-Out
Shares") upon satisfaction of certain financial performance
objectives. In no event shall the number of shares issued at
closing and Earn-Out Shares exceed 8,000,000. The value of
additional Earn-Out Shares issued, if any, will be added to
intangibles, common shares and paid-in-capital. Any additional
consideration given in the form of the Earn-Out Shares will
result in greater intangibles and, accordingly, additional
amortization over an estimated seven year period.
The number of Earn-Out Shares, if any, to be issued will be
computed in accordance with the Agreement. A summary of the
provisions of the Earn-Out Shares follows: The number of
Earn-Out Shares shall be determined based upon the amount of
Gross Revenue and Pre-Tax Profit, as defined. In no event
shall the number of shares be greater than 8,000,000 or 49.9%
of the number of shares of the Company's common shares
outstanding immediately after the issuance of the Earn-Out
Shares. The number of Earn-Out Shares earned for each fiscal
quarter shall equal the sum (a) one share for each dollar of
Gross Revenue received during the quarter plus (b) four shares
for each dollar of Pre-Tax Profits earned during the quarter,
plus (C) such number of Excess Earn-Out Shares, as defined,
from previous fiscal quarters as may be issued and delivered
without violating the aforementioned maximum total or
percentage shares, less (D) the number of shares which has a
Fair Market Value, as defined, on the last business day of
such quarter equal to the product of the number of shares
determined in (A) and (B) multiplied by $1.20. For example, if
afreegift had (i)Gross Revenue of $100,000 and Pre-Tax Profits
of $5,000 during the quarter, (ii) the Fair Market Value of
each share was $10 at the end of that quarter, and (iii) there
were 2000 Excess Earn-Out Shares from all previous quarters,
then, subject to the aforementioned percentage limitation, the
shareholder of afreegift would receive 107,600 shares. This
would equate to 100,000 shares for Gross Revenue, 20,000
shares for Pre-Tax Profits, less 14,400 shares (120,000 shares
multiplied by $1.20 divided by $10) plus the 2000 Excess
Earn-Out Shares.
A loss before income taxes for any fiscal quarter results in a
loss of four shares for each dollar of loss.
(E) The Company is obligated to lend $1,000,000 to afreegift at
times specified in the Agreement. In exchange, the Company
will receive a note from afreegift secured by all of its
assets. The note is to be repaid within one year and bears
interest at 9%. As the Company has funded the note to date out
of cash flow and the amounts would eliminate in consolidation,
this transaction has been excluded from the pro formas.
<PAGE> 75
EVTC, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS RESULTS
---------------------- ------------- -----------
EVTC AFREEGIFT
<S> <C> <C> <C> <C>
ASSETS
Cash $ 95 $ -- $ -- $ 95
Marketable securities 54 -- -- 54
Accounts receivable, net 4,299 -- -- 4,299
Deferred income taxes 537 -- -- 537
Note receivable 250 -- (250)(ii) --
Inventories 10,138 -- -- 10,138
Other 667 -- -- 667
Assets of discontinued operations 956 -- -- 956
-------- -------- -------- --------
Total current assets 16,996 -- (250) 16,746
Property and equipment, net 1,319 -- -- 1,319
Goodwill, net 500 -- 399(i) 899
Investments and Other 399 -- -- 399
Due from officer 371 -- -- 371
Development costs -- 107 -- 107
-------- -------- -------- --------
Total Assets 19,585 107 149 19,841
-------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY (CAPITAL DEFICIT)
Note payable 750 250 (250)(ii) 750
Line of Credit 5,818 -- -- 5,818
Accounts payable 3,577 141 -- 3,718
Liabilities of discontinued
operations 242 -- -- 242
Accrued liabilities 1,257 -- -- 1,257
Advance payable -- 109 -- 109
-------- -------- -------- --------
Total current liabilities 11,644 500 (250) 11,894
-------- -------- -------- --------
STOCKHOLDERS' EQUITY
(CAPITAL DEFICIT)
Common stock 58 -- -- 58
Paid-in-capital 12,155 -- 6(i) 12,161
Accumulated other
Comprehensive income 55 -- -- 55
Deficit (4,327) (393) 393 (4,327)
-------- -------- -------- --------
Total Stockholders' equity
(capital deficit) 7,941 (393) 399 7,947
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity (Capital Deficit) $ 19,585 $ 107 $ 149 $ 19,841
-------- -------- -------- --------
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
<PAGE> 76
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(i) At the consummation of the transaction, the shareholder of afreegift is
entitled to receive a number of common shares of the Company to be
agreed upon prior to the closing (preliminarily 1000 shares) and the
right to receive additional shares of the Company's common stock (the
"Earn-Out Shares") upon satisfaction of certain financial performance
objectives. In no event shall the number of shares issued at closing
and Earn-Out Shares exceed 8,000,000. The value of additional Earn-Out
Shares issued, if any, will be added to intangibles, common shares and
paid-in-capital. Additional consideration will result in greater
intangibles and, accordingly, additional amortization over an estimated
seven year period.
The number of Earn-Out Shares, if any, to be issued will be computed in
accordance with the Agreement. A summary of the provisions of the
Earn-Out Shares follows: The number of Earn-Out Shares shall be
determined based upon the amount of Gross Revenue and Pre-Tax Profit,
as defined. In no event shall the number of shares be greater than
8,000,000 or 49.9% of the number of shares of the Company's common
shares outstanding immediately after the issuance of the Earn-Out
Shares. The number of Earn-Out Shares earned for each fiscal quarter
shall equal the sum (a) one share for each dollar of Gross Revenue
received during the quarter plus (b) four shares for each dollar of
Pre-Tax Profits earned during the quarter, plus (C) such number of
Excess Earn-Out Shares, as defined, from previous fiscal quarters as
may be issued and delivered without violating the aforementioned
maximum total or percentage shares, less (D) the number of shares which
has a Fair Market Value, as defined, on the last business day of such
quarter equal to the product of the number of shares determined in (A)
and (B) multiplied by $1.20. For example, if afreegift had (i)Gross
Revenue of $100,000 and Pre-Tax Profits of $5,000 during the quarter,
(ii) the Fair Market Value of each share was $10 at the end of that
quarter, and (iii) there were 2000 Excess Earn-Out Shares from all
previous quarters, then, subject to the aforementioned percentage
limitation, the shareholder of afreegift would receive 107,600 shares.
This would equate to 100,000 shares for Gross Revenue, 20,000 shares
for Pre-Tax Profits, less 14,400 shares (120,000 shares multiplied by
$1.20 divided by $10) plus the 2000 Excess Earn-Out Shares.
A loss before income taxes for any fiscal quarter results in a loss of
four shares for each dollar of loss.
(ii) The Company is obligated to lend $1,000,000 to afreegift at times
specified in the Agreement. In exchange, the Company will receive a
note from afreegift secured by all of its assets. The note is to be
repaid within one year and bears interest at 9%. Through December 31,
1999, the Company loaned $250,000 under the Agreement. As the Company
funded the note to date out of cash flow, the amounts are eliminated in
the consolidation.
<PAGE> 77
APPENDIX C
EVTC, INC.
2000 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
PURPOSES OF PLAN. The purposes of the EVTC, Inc. 2000 Incentive and
Non-Qualified Stock Option Plan (hereinafter referred to as the "Plan") are to
provide to employees of, and consultants to, EVTC, Inc., a Delaware corporation
(hereinafter referred to as the "Corporation"), as well as employees of
subsidiary or parent corporations which may currently exist or be formed or
acquired in the future, an opportunity for investment in the Corporation's
common stock (hereinafter referred to as the "Shares"), as an inducement for
such individuals to remain with the Corporation, and to encourage them to
increase their efforts to make the Corporation's business more successful.
EFFECTIVE DATE AND TERMINATION OF PLAN. The effective date of the Plan
is January 11, 2000, the date on which the Plan was adopted by the Board of
Directors of the Corporation. The Plan shall terminate on, and no option shall
be granted hereunder, after January 11, 2010; provided, however, that the Board
of Directors may at any time prior to that date terminate the Plan; and provided
further that any option granted hereunder prior to the termination of the Plan
shall remain exercisable in accordance with its terms as then in effect.
ADMINISTRATION OF PLAN. The Plan shall be administered by the Board of
Directors of the Corporation. The Board of Directors may, however, to the extent
permissible under the Corporation's Certificate of Incorporation, By-laws and
applicable law, delegate any of its functions under this Plan to a committee of
the Board of Directors or any other committee. Wherever in this Plan the term
"Board of Directors" is used it shall be construed to mean such committee to the
extent that the Board of Directors may have delegated any of its functions to
said committee and only to the extent of any such delegation. The acts of a
majority of the members present at any meeting of the Board of Directors at
which a quorum is present, or acts approved in writing by a majority of the
entire Board, shall be the acts of the Board of Directors for purposes of the
Plan.
ELIGIBILITY AND GRANT OF OPTIONS. Subject to the provisions of the
Plan, the Board of Directors shall (i) authorize the granting of incentive stock
options, non-qualified stock options or a combination of incentive stock options
and non-qualified stock options (hereinafter collectively referred to as
"options" unless otherwise stated); (ii) determine and designate from time to
time those employees (from the group consisting of all employees of the Company)
and consultants to whom options are to be granted and the number of Shares to be
optioned to each employee; (iii) determine the number of Shares subject to each
option; and (iv) determine the time or times when and the manner in which each
option shall be exercisable and the duration of the exercise period. In
determining the eligibility of an individual to receive an option, as well as in
determining the number of Shares to be optioned to any individual, the Board of
Directors shall consider the position and responsibilities of the employee, the
nature and value to the Corporation, parent or subsidiary of his services and
accomplishments, his present and potential contribution to the success of the
Corporation, parent or subsidiary, and such other factors as the Board may deem
relevant. To be eligible to receive an incentive stock option or non-qualified
stock option an individual must be an employee of, or consultant to, the
Corporation, parent or subsidiary. A Director shall abstain from voting on the
grant of any options to himself, his spouse, his children, grandchildren and
parents. The grant of each option shall be confirmed by a Stock Option Agreement
(in the form prescribed by the Board of Directors) which shall be executed by
the Corporation and the optionee as promptly as practicable after such grant.
More than one option may be granted to an individual.
Incentive stock options shall be those options which satisfy the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended and
which the Board of Directors has specifically identified as incentive stock
options in the Stock Option Agreement executed by the Corporation and the
optionee. In the case of incentive stock options, the aggregate fair market
value, determined at the time incentive stock options are granted, of the stock
with respect to which the incentive stock options are exercisable for the first
time by such individual during any calendar year (under all such plans the
Corporation may adopt) shall not exceed one hundred thousand dollars
($100,000.00). In the event that an incentive stock option granted pursuant to
the terms of this Plan is granted to an employee who, prior to the grant, holds
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation, its parent or a subsidiary ("10% Shareholder") the
option price under such grant shall be at least one hundred ten percent (110%)
of the fair market value, and such option, by its terms, shall not be
exercisable more than five (5) years from the date of grant.
<PAGE> 78
Nothing in the Plan or in any option granted pursuant to the Plan shall
confer on any individual any right to continue in the employ of the Corporation
or any parent or subsidiary or interfere in any way with the right of the
Corporation to terminate his employment at any time.
NUMBER OF SHARES SUBJECT TO OPTIONS. The Board of Directors, prior to
the time options under the Plan become exercisable, shall reserve for the
purposes of the Plan a total of One Million (1,000,000) Shares, which Shares may
be either authorized and unissued Shares, or previously issued Shares held in
the treasury of the Corporation, or both. Shares as to which an option granted
under the Plan shall remain unexercised at the expiration or termination
thereof, and Shares subject to options which are canceled, may be the subject of
the grant of further options. Shares reserved pursuant to this paragraph may be
adjusted to reflect changes in the Corporation's capital structure as discussed
in paragraph 19 hereof.
OPTION PRICE. The option price per Share shall be determined in each
case by the Board of Directors and shall not be less than one hundred percent
(100%) (one hundred ten percent (110%) in the case of an incentive stock option
granted to a 10% Shareholder) of the fair market value thereof as determined by
the Board by any reasonable method using market quotations on the date the
option is granted.
PERIOD OF OPTION AND WHEN EXERCISABLE. No option may be granted under
this Plan whose exercise date is later than ten (10) years after the date of the
grant or five (5) years after the date of grant in the case of an incentive
stock option granted to a 10% Shareholder. Generally, an option may be exercised
only by the optionee and subject to the rules set forth below only if, at all
times during the period beginning on the date of the granting of such option and
ending with the date of exercise of such option, the optionee is an employee of
the Corporation, its parent or a subsidiary.
(i) Except as otherwise provided herein, in the case of an employee who
terminates employment, options which are vested but unexercised as of the date
of termination of employment must be exercised within three (3) months of
termination. In the case of an employee who is discharged for cause, as
determined in the sole discretion of the Board of Directors, all previously
vested but unexercised options shall be forfeited immediately.
(ii) In the case of an employee who dies during the three (3) month
period discussed in (i) above, options which are vested but unexercised as of
the date of termination of employment must be exercised within twelve (12)
months of death.
(iii) Options which are vested but unexercised as of the date of
termination of employment due to death, must be exercised within twelve (12)
months after the death of an optionee.
(iv) In the event that the employee becomes disabled as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, options which
are vested but unexercised as of the date of termination of employment due to
disability must be exercised within twelve (12) months following the date of
termination of the optionee's said employment.
(v) In the event an optionee's employment is terminated for any reason
(including but not limited to, voluntary or involuntary termination or
termination resulting from the death or disability of the optionee), all
unvested options shall be immediately forfeited.
Notwithstanding the foregoing, options may not be exercised after the
original five (5) or ten (10) year term. Options may be exercised on behalf of
the estate of a former employee by the person or persons entitled to do so under
the optionee's will or, if the optionee shall have failed to make testamentary
disposition of such option or shall have died intestate, by the optionee's legal
representative or representatives. Such person, persons, representative, or
representatives are hereinafter referred to as the "Successors of an Optionee."
VESTING. Options granted to a participant shall be exercisable in
accordance with a schedule to be established by the Board for each Option grant
at the time of such grant. Non-vested options shall be immediately forfeited
upon the termination of employment for any reason. Vested options shall be
forfeited upon the termination of employment as provided in paragraph 7 hereof.
EXERCISE OF OPTIONS. Subject to Plan restrictions and vesting, an
option may be exercised, and payment in full of the option price made, by an
optionee only by written notice (in the form prescribed by the Board of
Directors) to the Corporation specifying the number of Shares to be so
purchased. Such notice shall state that the option price will be paid in full in
cash (which in the discretion of the Board of Directors may be obtained
<PAGE> 79
through a loan from the Corporation or from a third party and guaranteed by the
Corporation) or other property, in the discretion of the Corporation. If the
Corporation accepts a request to pay in stock of the Corporation in satisfaction
of the exercise price, the fair market value of said stock shall at least equal
the option price, and, in the case of incentive stock options, prior to such
acceptance the Corporation must be furnished with evidence that the acquisition
of said stock and its transfer in payment of the option price satisfies the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended and
other applicable law. As soon as practicable after receipt by the Corporation of
such notice and of payment in full of the option price of all the Shares with
respect to which an option has been exercised, a certificate or certificates
representing such Shares shall be registered (subject to the provisions of
paragraph 16 hereof) in the name of the optionee or the Successors of an
Optionee as defined under this Plan and delivered to the optionee or to the
Successors of an Optionee.
SALE OF THE CORPORATION. In the case of a Sale of the Corporation as
herein defined, in the discretion of the Board of Directors options granted but
unexercised shall become fully vested (100%) and exercisable for a period of
twenty (20) days from the date notice of such Sale is given to the optionees.
Upon the expiration of the twenty (20) day period, all then unexercised options
shall be permanently canceled. For purposes of this paragraph, a Sale shall be
deemed to occur upon the happening of any one of the following:
(i) A sale of all or substantially all of the Corporation's assets
outside the ordinary course of business;
(ii) An offer to purchase at least a majority of the Corporation's
issued and outstanding common stock or an offer to the Corporation's
shareholders to tender for sale at least a majority of the Corporation's issued
and outstanding common stock, which offer is accepted or tender made with
respect to at least a majority of the Corporation's issued and outstanding
shares of common stock;
(iii) The merger or consolidation of the Corporation with another
corporation or entity; or
(iv) A dissolution or liquidation of the Corporation.
EMPLOYER WITHHOLDING. In the case of non-qualified stock options, the
Corporation shall be required to withhold additional income taxes attributable
to that amount which is considered compensation includible in the optionee's
gross income by reason of the exercise of such options. The Corporation in its
discretion shall determine the method and amount of withholding.
EXERCISE BY SUCCESSORS AND PAYMENT IN FULL. An option may be exercised,
and payment in full of the option price made, by the Successors of an Optionee
only by written notice (in the form prescribed by the Board of Directors) to the
Corporation specifying the number of Shares to be purchased. Such notice shall
state that the option price will be paid in full in cash (which in the
discretion of the Board of Directors may be obtained through a loan from the
Corporation or from a third party and guaranteed by the Corporation), property
or stock of the Corporation in conformance with paragraph 9 hereof. As soon as
practicable after receipt by the Corporation of such notice and of payment in
full of the option price of all the Shares with respect to which an option has
been exercised, a certificate or certificates representing such Shares shall be
registered (subject to the provisions of paragraph 16 hereof) in the name or
names of such Successors of an Optionee and shall be delivered to him.
NON-TRANSFERABILITY OF OPTION. Each option granted under the Plan shall
by its terms be nontransferable by the optionee except by will or the laws of
descent and distribution of the state wherein the optionee is domiciled at the
time of his death.
OTHER TERMS OF OPTIONS. Options granted pursuant to the Plan shall
contain such terms, provisions, and conditions not inconsistent herewith as
shall be determined by the Board of Directors.
REGISTRATION OF CERTIFICATES. Certificates representing Shares may be
registered either in the name of the Optionee or in the name or names of the
Successors of an Optionee. Designation of the appropriate form of registration
of certificates shall be made in the written notice given to the Corporation
upon exercise of an option.
<PAGE> 80
LISTING AND REGISTRATION OF SHARES. If at any time the Board of
Directors of the Corporation shall determine, in its discretion, that the
listing, registration, or qualification of any of the Shares subject to options
under the Plan upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of or in connection with the granting of options or the
purchase or issue of Shares thereunder, no further options may be granted and
outstanding options may not be exercised in whole or in part unless and until
such listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Board of Directors shall have the authority to cause the
Corporation at its expense to take any action related to the Plan which may be
required in connection with such listing, registration, qualification, consent,
or approval. The Board of Directors may require that any person exercising an
option hereunder shall make such representations and agreements and furnish such
information as it deems appropriate to assure compliance with the foregoing or
any other applicable legal requirement.
INTERPRETATION AND AMENDMENTS. The Board of Directors may make such
rules and regulations and establish such procedures for the administration of
the Plan as it deems appropriate. In the event of any dispute or disagreements
as to the interpretation of this Plan or of any rule, regulation, or procedure,
or as to any question, right or obligation arising from or related to the Plan,
the decision of the Board of Directors shall be final and binding upon all
persons. The Board of Directors may amend this Plan as it shall deem advisable.
However, in no event shall any such amendment adversely affect the rights of an
optionee under any existing stock option agreement without the consent of such
optionee.
INDEMNIFICATION AND EXCULPATION.
(a) Each person who is or shall have been a member of the
Board of Directors shall be indemnified and held harmless by the Corporation
against and from any and all loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be or become a party or
in which he may be or become involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid by him in
settlement thereof (with the Corporation's written approval) or paid by him in
satisfaction of a judgment in any such action, suit, or proceeding, except a
judgment in favor of the Corporation based upon a finding of his lack of good
faith; subject, however, to the condition that upon the institution of any
claim, action, suit, or proceeding against him, he shall in writing give the
Corporation an opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive of any other right to which such
person may be entitled as a matter of law or otherwise, or any power that the
Corporation may have to indemnify him or hold him harmless.
(b) Each member of the Board of Directors, and each officer
and employee of the Corporation shall be fully justified in relying or acting in
good faith upon any information furnished in connection with the administration
of the Plan by any appropriate person or persons other than himself. In no event
shall any person who is or shall have been a member of the Board of Directors,
or an officer or employee of the Corporation be held liable for any
determination made or other action taken or any omission to act in reliance upon
any such information, or for any action (including the furnishing of
information) taken or any failure to act, if in good faith.
CHANGES IN CAPITAL STRUCTURE. In the event that a dividend shall be
declared upon the Shares payable in Shares, the number of Shares then subject to
any option outstanding under the Plan and the number of Shares reserved for the
grant of options pursuant to the Plan but not yet subject to option shall be
adjusted by adding to each such Share the number of Shares which would be
distributable in respect thereof if such Shares had been outstanding on the date
fixed for determining the shareholders of the Corporation entitled to receive
such Share dividend. In the event that the outstanding Shares shall be changed
into or exchanged for a different number of Shares or other securities of the
Corporation or of another corporation, whether through reorganization,
recapitalization, split-up, combination of shares, merger, or consolidation,
then there shall be substituted for each Share subject to any such option and
for each Share reserved for the grant of options pursuant to the Plan but not
yet subject to option the number and kind of Shares or other securities into
which each outstanding Share shall have been so changed or for which each such
Share shall have been exchanged. In the event there shall be any change, other
than as specified above in this paragraph, in the number or kind of outstanding
Shares or of any shares or other securities into which such Shares shall have
been changed or for which they shall have been exchanged, then if the Board of
Directors shall in its sole discretion determine that such change equitably
requires an adjustment in the number or kind of Shares theretofore reserved for
the grant of options pursuant to the Plan but not yet subject to
<PAGE> 81
option and of the Shares then subject to an option or options, such adjustments
shall be made by the Board of Directors and shall be effective and binding for
all purposes of the Plan and of each option outstanding thereunder. In the case
of any such substitution or adjustment as provided for in this paragraph, the
aggregate option exercise price set forth for all outstanding options for all
Shares covered thereby prior to such substitution or adjustment will be the
option exercise price for all shares or other securities which shall have been
adjusted pursuant to this paragraph. No adjustment or substitution provided for
in this paragraph shall require the Corporation to sell a fractional Share, and
the total substitution or adjustment with respect to each outstanding option
shall be limited accordingly. Upon any adjustment made pursuant to this
paragraph, the Corporation will, upon request, deliver to the optionee or to his
successors a certificate setting forth the option price thereafter in effect and
the number and kind of shares or other securities thereafter purchasable on the
exercise of the option.
NOTICES. All notices under the Plan shall be in writing, and if to the
Corporation, shall be delivered to the Treasurer of the Corporation or mailed to
its principal office, addressed to the attention of the Treasurer; and if to the
optionee, shall be delivered personally or mailed to the optionee at the address
appearing in the payroll records of the Corporation. Such addresses may be
changed at any time by written notice to the other party.
