SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 1996
[] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from _______ to _________
Commission file number 0-21934
TELEPAD CORPORATION
(Name of Small Business Issuer in Its charter)
Delaware 52-1680936
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 Herndon Parkway, Suite 1900, Herndon, Virginia 20170
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (703) 834-9000
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, $0.01 par value ("Common Stock"), Class A Redeemable
Warrants ("Class A Warrants"), Class B Redeemable Warrants ("Class B Warrants"),
Class C Redeemable Warrants ("Class C Warrants") and Class D Redeemable Warrants
("Class D Warrants").
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form. [__]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$2,240,104.
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The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant, based upon the closing price of the issuer's
Class A Common Stock as reported by Nasdaq on March 17, 1997, was approximately
$30,760,000.
As of March 17, 1997, the latest practicable date for which such
information is available, there were issued and outstanding the following number
of shares of each of the registrant's classes of Common Stock:
Class of Common Stock Shares Outstanding
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Class A Common Stock 11,568,124 shares, $0.01 par value
Class B Common Stock 150,000 shares, $0.01 par value
Documents Incorporated by Reference
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The following documents are incorporated by reference herein: None.
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PART I
Item 1. Description of Business.
BUSINESS
General
The Company designs, develops and markets mobile computing and
communications systems for customers whose work forces include substantial
numbers of mobile field workers in remote locations ("field force workers"). The
Company's approach is to provide hardware and software products that support an
enterprise's field force workers, connect the field force workers to their home
office, and direct information to the home office staff and back to the workers
in the field. Through this approach, the Company believes that its customers can
significantly enhance profitability and customer service by providing more
effective tools and communications to their field force workers.
Field Force Solutions Strategy
The Company's value proposition is that its customers can gain
significant competitive advantages through automation of that portion of their
work forces which operate "in the field" outside a traditional office
environment. To that end, the Company endeavors to provide total "Field Force
Solutions" comprised of purpose-built computer hardware and software linked to
the enterprise through wireless communications. Recognizing the need to tailor
such solutions to each individual customer, the Company's "Field Force
Solutions" strategy incorporates consulting and systems integration services.
To implement its "Field Force Solutions" strategy, the Company
developed the TelePad line of computers and peripherals specifically designed
for the unique requirements of field force workers. It also offers its customers
the services of its staff of professional management consultants, engineers, and
application programmers. Furthermore, it supports the integration of its
products with third-party hardware products, software products, and wireless
services. Accordingly, a "Field Force Solution" may be comprised of
off-the-shelf products combined with custom-built or tailored products and
services.
As the "Field Force Solutions" strategy necessarily requires
expertise in the customers' business, the Company focuses on a limited set of
industries. Currently, these are utilities, cable television, transportation,
public safety, and military equipment maintenance.
From 1993 (the time of the Company's initial public offering) through
1996, the Company devoted most of its resources to developing and manufacturing
its TelePad line of computer hardware. The Company also developed a small
in-house capability for software programming and systems integration support,
but relied primarily on subcontractors and value-added resellers to deliver
those services to its customers. In the future, the Company intends to shift an
increasing portion of its resources to providing such services with its own
staff.
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Products
The Company's principal products are the TelePad mobile computers.
The Company's original product, the TelePad SL, was introduced in 1993 and
produced through 1996 (although in very limited quantities after 1995). The
Company's current product is the TelePad 3 which entered production in 1995. The
Company also makes various accessories and peripheral devices for the TelePad
computers.
Both the TelePad SL and the TelePad 3 are tablet-style
battery-powered portable computers which use pen input and handwriting
recognition as a primary user interface. Both can also be used on the desktop
with the addition of accessory keyboards. They differ primarily in processing
power, storage capacity and ability to support peripheral devices.
The Company contracts with third-party manufacturers for production
of its products. Both the TelePad SL and TelePad 3 were manufactured by
International Business Machines Corporation ("IBM") until early 1996 after which
Sanmina Corporation ("Sanmina") began manufacturing the TelePad 3. See "--
Manufacturing and Supply."
TelePad SL
The first generation TelePad, the TelePad SL, has pen and keyboard
interfaces but no sound capability. It uses Intel's 386-based microprocessor
technology and is equipped with eight megabytes of random access memory ("RAM"),
a wireless digitizer (for pen input), a low-cost hard drive (170-340 megabytes),
a PCMCIA (Personal Computer Manufacturers Card Interface Association) card slot,
and a data/facsimile modem. It includes "ports" for connecting an external
floppy drive, an external video monitor, or devices using industry-standard
serial or parallel interfaces.
Optional accessories for the TelePad SL include a stand-alone floppy
disk drive, a math co- processor that permits more rapid handling of
mathematical functions and calculations, network and communications upgrades, a
keyboard that can be used in addition to on-screen pen input, and a mount for
installing the TelePad SL in a vehicle. The TelePad SL works with most major
operating systems, including IBM's OS/2 and Microsoft's DOS, Windows and Pen for
Windows systems.
Production of the TelePad SL began in 1993. Although the 386 SL
microprocessor employed in the TelePad SL was largely superseded after 1994 by
faster, more powerful microprocessors, the Company continued to find customers
for the TelePad SL based on its unique ergonomic design and its ability to be
mounted in a vehicle. Approximately 1,500 TelePad SLs were sold from 1993
through 1996.
TelePad SLs were designed by the Company and manufactured under a
contract with IBM. When production ended, the Company purchased IBM's remaining
inventory of TelePad SL parts. See "-- Manufacturing and Supply." The Company is
using the parts inventory to build TelePad SLs in its own facility (primarily to
fill special orders from previous purchasers of the TelePad SL) and to service
units built by IBM.
The Company believes that the TelePad SL design would be highly
competitive in the future if it could be built with a more powerful motherboard
and sold at a competitive price. Company
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management believes that such an upgrade may be achievable with minimal research
and development costs if an appropriate motherboard can be purchased from a
third-party. Accordingly, it is investigating possible sources for such a board.
However, no decision has yet been reached on a future version of the TelePad SL.
TelePad 3
The Company began production of its second product, the TelePad 3, in
1995. The TelePad 3 is powered by IBM's Blue Lightning microprocessor (based on
Intel's 486 microprocessor technology) running at 66 MHz. It includes a
microphone and speaker as well as a pen interface, a detachable keyboard, a
dual-scan color display and up to 36 MB of internal RAM. The TelePad 3 works
with most major operating systems, including IBM's OS/2 and Microsoft's DOS,
Windows 95, Windows, Windows for Pen, and SCO UNIX systems.
A unique design feature of the TelePad 3 facilitates its adaptation
to a variety of peripheral hardware devices. The back of the tablet has three
docking bays that can accept any device which can be packaged in one of the
Company's three "modular" form factors and connected with an industry- standard
connector. The Company currently makes a variety of such devices including hard
disk drives in various sizes, adapters for PCMCIA cards, which incorporate
memory and communications capabilities in a standard format linking peripheral
devices such as facsimile modems, local area networks, or memory storage to the
pen computer, and a floppy disk drive.
In response to specific customer requests and opportunities pursuant
to the Company's "Field Force Solutions" strategy, the Company has adapted a
number of devices to the modular form factor of the TelePad 3. These include a
full-size CD-ROM module, a Global Positioning System ("GPS") module, a variety
of wireless LAN and other communications modules. The Company has created
conceptual designs for additional modules, but has adopted a policy of not
funding engineering development until customers express firm intent to purchase
such products.
The Company contracted with IBM for substantial portions of the
electrical design of the TelePad 3. The design belongs to the Company, although
it is obligated to pay IBM a royalty of $15 per TelePad 3 computer manufactured
by a third party with a non-IBM microprocessor card for certain IBM-proprietary
design elements incorporated in the TelePad 3.
Production of the TelePad 3 commenced at IBM at the end of June 1995.
After a series of disputes regarding manufacturing quality and business issues,
the Company and IBM agreed in December 1995 that the Company would seek another
contract manufacturer and that IBM would support the transition to the new
manufacturer. The Company then contracted with Sanmina which began TelePad 3
production in June 1996. Approximately 1,500 TelePad 3s were manufactured in
1995 and 1996; approximately 400 units by IBM and 1,100 units by Sanmina. See
"-- Manufacturing and Supply."
IBM has informed the Company that it no longer produces the Blue
Lightning microprocessor, which is a proprietary IBM product available only on
microprocessor cards manufactured by IBM. However, IBM agreed to continue to
manufacture such electronic card assemblies for the TelePad 3 until June 30,
1997, subject to certain minimum order restrictions. The Company has designed
and is currently testing a 586-class 32-bit microprocessor upgrade for the
TelePad 3. This 586-class 32-bit
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microprocessor is intended to replace the Blue Lightning microprocessor.
Although the Company expects to begin producing the new microprocessor before
the supply of IBM Blue Lightning microprocessors is exhausted, there is no
guarantee that the redesign will be available for production prior to the
exhaustion of the supply of IBM-built processor cards.
Services
The Company offers a range of consulting, systems integration,
programming and customer support services focused on field force automation. The
consulting group analyzes requirements, develops system architectures, and
provides a variety of project planning and management services. The systems
integration ("SI") group implements systems combining various manufacturers'
hardware, software, and wired and wireless communications. SI also collaborates
with the Company's hardware engineers on special purpose devices custom-designed
for individual customers.
The Company has a limited number of consulting and SI employees, and
supplements its own staff with subcontractors and temporary employees. The
Company has adopted a policy of not hiring permanent full-time consulting or SI
employees until justified by contracts with customers.
Manufacturing and Supply
The Company does not operate its own manufacturing facility for the
TelePad computers or any other hardware products. Instead, the Company contracts
with outside manufacturers. IBM was the Company's sole manufacturer of TelePad
products from 1993 through late 1995. Sanmina is currently the Company's sole
manufacturer of finished products.
The components of the TelePad computers, such as the plastic casing,
are supplied by various outside sources. In most instances, these suppliers were
selected by TelePad although the actual purchasing of components for TelePad
production is done by Sanmina. The Company believes that both the Company and
Sanmina have good relationships with current suppliers. While the Company
believes that alternative sources of supply generally are available at
competitive prices, certain of the components are highly technical in nature
and, with respect to such components there can be no assurance that the Company
would be able to locate, on a timely basis or at all, alternative sources of
supply.
The Company's software applications packages are written or modified
specifically to address each customer's needs. Types of software developed by
the Company include checklist generators and editors, checklist managers, report
generators and transaction processing systems. The Company has adopted a policy
of not funding software development until customers express firm intent to
purchase such software.
The Company has licensed certain Microsoft Corporation ("Microsoft")
products permitting the Company, in exchange for paying associated license fees
to Microsoft or by purchasing the products from an authorized Microsoft
distributor, to install such products on computers produced by the Company. The
Company purchases DOS, Windows, Windows 95 and Windows 95 Pen Services software
from an authorized distributor. The Company also has entered into a licensing
agreement with IBM to license and install IBM's OS/2 operating system on the
TelePad computers. There is no minimum royalty required under the Microsoft or
IBM license agreements.
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IBM
IBM was the Company's sole contract manufacturer for the TelePad SL
(produced from 1993 through 1995) and for the first 400 units of the TelePad 3
(in 1995). Throughout its relationship with IBM, the Company experienced
manufacturing defects which caused interruptions in production while the defects
were corrected. The Company and IBM also had a number of disagreements on
business issues. These problems caused the Company and IBM to agree to end their
manufacturing relationship in 1996.
From 1993 through 1996, the Company and IBM entered into various
contractual arrangements regarding design and production of the TelePad
computers. The original IBM Agreement provided for production of the TelePad SL.
In March 1994, the Company and IBM amended the IBM Agreement to include IBM's
services for the electrical and physical design, development and testing of the
internal circuitry and software for the TelePad 3. In June 1994, the Company and
IBM further amended the agreement to incorporate IBM's services for
manufacturing the TelePad 3.
The IBM Agreement was further modified by the parties in February
1995 to resolve certain disputed issues. Under the February 1995 amendment, the
Company agreed to release IBM, its agents, directors, officers, employees,
representatives, successors and assigns from all rights, claims demands, actions
and liabilities (collectively, "Claims") the Company ever had, has or may have
against IBM arising out of or resulting from the IBM Agreement. IBM agreed to
accept the return of approximately $943,000 of inventory components previously
invoiced to the Company in December 1994 and to reduce the product royalty
payment due to IBM for each TelePad 3 manufactured by a third party with a non-
IBM microprocessor to $15.00 per unit.
On January 25, 1996, IBM and the Company entered into the IBM
Resolution Agreement to facilitate transition of TelePad 3 manufacturing to a
new manufacturer, to address certain design issues relating to the TelePad 3, to
reschedule payments due IBM and to provide for purchase, by the Company, of
IBM's remaining inventory of TelePad SL components. The IBM Resolution Agreement
also settled all previously disputed financial matters remaining between the
companies.
Sanmina
The Company moved production of the TelePad 3 to Sanmina in a
two-stage process during the first half of 1996. The Company entered into a
Letter of Intent with Sanmina and, as of the date hereof, has negotiated but not
signed a definitive agreement with Sanmina. The Company believes its
relationship with Sanmina is good and that the unresolved contract issues are
administrative in nature and will be resolved in the near future. There can be
no assurance, however, as to when, if ever, the Company will enter into
acceptable contractual arrangements with Sanmina. The Company is not currently
in discussion with any alternative manufacturer.
TelePad 3 production commenced at Sanmina in June 1996. Approximately
1,100 units were built by Sanmina from June through December 1996.
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Distribution, Warranty and Service
The Company distributes its products directly to customers and
through resellers.
The Company warrants that each TelePad computer (excluding software
obtained from and warranted by third parties) is free from defects in material
and workmanship for one year from the date of delivery and acceptance. The
Company also offers selected customers extended warranties for an additional
charge. The Company handles all warranty claims of its customers, and relies on
its warranty from Sanmina to protect it from defects in manufacturing.
The Company's policy is to establish warranty reserves based upon
sales volume and experience to date. Warranty expense is recognized as incurred.
Research and Development
The Company's research and development ("R&D") activities involve
engineering design and production support for two types of products: (1)
existing products; and, (2) future products.
Existing products require continuing R&D support as a consequence of
the rapid evolution of computer technology. For example, the manufacturers of
components used in the TelePad computers frequently upgrade their components or
embedded software ("firmware"). Many upgrades require other modifications in the
production design. Changes which may effect radio frequency emissions require
re-certification for compliance with United States and European Union
regulations. Accordingly, the Company must devote a portion of its R&D resources
to its existing products.
R&D for future products is subject to available financial resources.
To the extent permitted and based on the anticipated profitability of new
products, the Company intends to maintain an active R&D program. The Company
intends when possible to minimize R&D cost and risk by purchasing or licensing
existing designs or design elements rather than creating completely original
designs. Completion of any design for production is dependent upon development
of the market for these products which would make production profitable. See
"Products." There can be no assurance that the Company will be successful in
developing any new products or upgrades to its TelePad products.
The Company has a limited number of R&D employees working under the
direction of its Chief Technology Officer. It contracts with other engineering
firms and consultants to support R&D activities which are beyond the capacity of
its in-house staff. The Company intends to employ additional engineering and
customer support personnel as its financial condition permits and its business
requires. See " Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Sales and Marketing
The Company's sales and marketing activities currently are conducted
internationally by four sales representatives, each covering a defined segment
of the market, under the direction of a vice president of sales. The Company
also anticipates that it will employ commissioned sales agents to market its
products. Additionally, the Company expects to add additional sales and
marketing personnel as the Company's financial condition permits and its
business requires.
The Company believes that the immediate market for its products lies
with large corporations and public entities that are heavily dependent on
information resources and that utilize dispersed and highly mobile workforces.
Specifically, the Company has focused on utilities, cable television,
transportation, public safety, and military equipment maintenance as the markets
presenting the greatest opportunity for the Company at present. The Company's
strategy is to reach the customers in these markets through its own sales force
supplemented by the sales activities of value added resellers ("VARs").
The Company's public relations efforts focus on its targeted markets.
The Company is seeking exposure through support of its value-added resellers at
shows and conventions at which such resellers exhibit. In addition, the Company
expects to engage in selective advertising of its products and to seek
additional exposure through targeted technical journals and popular computing
media.
During 1996, three customers accounted for approximately 53% of the
Company's total revenues. One customer accounted for approximately 12% of total
revenue during 1995.
Patents and Proprietary Rights
The Company holds four patents with respect to the multi-purpose
handle and adjustable, locking handle mechanism used on the TelePad computers.
These patents provide expanded coverage over the handle and the four positions
the computer can have, as well as the push button release mechanism used in the
TelePad SL. In addition, the Company's patent application for the industrial and
mechanical design of the portable electronic platform which is the basis of the
TelePad 3 has been allowed and the patent should be issued in the immediate
future.
The Company has received a Notice of Allowance from the U.S. Patent
and Trademark Office for its trademark application relating to the use of the
name "TelePad" with respect to certain communications and computer equipment
described in the application, and intends to file an application to register its
new logo.
Other than as described above, the Company currently does not have or
intend to seek patents relating to its products, because it does not believe
that the technology it employs is patentable.
It is the Company's practice to protect its proprietary materials and
processes by relying on trade secret laws and non-disclosure and confidentiality
agreements. There can be no assurance that confidentiality or trade secrets will
be maintained or that others will not independently develop or obtain access to
such materials or processes.
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Employees
At March 14, 1997, the Company had a total of 30 full-time employees,
consisting of 5 engineers, 3 employees in the consulting practice, 12 finance
and administrative personnel, 5 employees in customer and technical support, and
5 sales and marketing personnel. From time to time the Company employs part time
employees, however there are none as of the date of this report. No employee is
currently represented by a labor union. The Company has never experienced a work
stoppage or interruption due to a labor dispute. Management believes that its
relations with its employees are good.
Government Regulation
The TelePad 3 and the TelePad SL are subject to government regulation
of electromagnetic emissions that are conducted from the devices over power
lines, when the devices are operated from AC wiring, and radiated through the
air. In particular, the regulations of the Federal Communications Commission
("FCC") require products of this kind to have been approved by the FCC as
meeting the Class B digital device requirements under Parts 2 and 15 of the FCC
rules before the products may be marketed (i.e., imported, sold or leased or
advertised for sale or lease). These regulations are designed to minimize
interference with certain other electronic products and communications services.
FCC approvals (a form of equipment authorization known as
"certification") are granted only after the products have passed various
electromagnetic compatibility tests and an application submitted to the FCC has
been granted. The FCC approves equipment of the kind produced by the Company
only on the condition that operation of the equipment not cause interference to
licensed radio communications and that the equipment accept interference from
licensed radio facilities, even if the interference results in undesirable
operation of the equipment. Modems that the Company sells for the connection of
the TelePad SL and the TelePad 3 to the public switched telephone line are
subject to certification under the FCC Rules in the same manner and subject to
an additional approval requirement of "registration" under Part 68 of the FCC
Rules governing certain telephone equipment.
Although the TelePad 3 and TelePad SL have received FCC
certification, the devices must continue to comply with federal regulations.
Changes in the design of the products generally will require the Company to have
the products reexamined as to continued compliance. Depending on the nature of
the change, the products may be subject to the receipt of new or modified
approvals before the changed products may be marketed. Generally speaking, such
recertification focuses on the modification and is not as time-consuming or
expensive as the original certification processes.
The Company also must ensure that the TelePad 3 and TelePad SL comply
with the OSHA regulations requiring electrical equipment to have been approved
for safety by a nationally recognized testing laboratory. Safety approvals for
the TelePad SL and the TelePad 3 have been obtained. Changes in either device
may require retesting and further approvals, which could result in delay that
could have an adverse material effect on the Company.
To the extent that the Company desires to sell its products
internationally, it also will be required to comply with the regulations of
other nations as to electrical emissions and safety, some of which may be
expected to be more stringent than those imposed by the FCC or under regulations
adopted by OSHA. In particular, the TelePad 3 currently is certified for sale
within the European Union (the "EU"), whose
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standards are more stringent, in order to permit export to members of the EU,
including the United Kingdom.
To the extent that the Company sells products, directly or
indirectly, to the United States Government, the Company's contracts and
subcontracts will be subject to termination, reduction or modification at the
Government's convenience.
Failure to comply with FCC, OSHA and other governmental regulations
would have a material adverse effect on the Company. The delay associated with
obtaining any future approvals may also have a material adverse effect on the
Company.
Competition
The computing industry is characterized by intense competition and
rapidly changing technology and is becoming increasingly competitive. The
Company believes that it distinguishes itself in this competitive environment by
offering unique products combined with consulting and systems integration
services specifically focused on mobile workers. See "-- Field Force Solutions
Strategy." However, numerous other companies, including companies with greater
resources and experience than the Company, also are engaged in developing
products and services which could be competitive with those developed by the
Company. Therefore, there can be no assurance that the strategy of the Company
will succeed.
The Company's competitors or future competitors include, or can be
expected to include, IBM, Fujitsu Limited, Toshiba Corp., NEC Technologies,
Inc., Zenith Data Systems Corp., Symbol, Telxon, Motorola, Samsung, Ricoh and
others. In addition, the Company expects that other competitors will emerge and
competing products will be introduced in the near future. No assurance can be
given that the Company will be able to successfully compete against current and
future competitors or products or that competitive pressures faced by the
Company will not adversely affect its financial performance.
Stock Purchase Agreement
On January 27, 1997, the Company , entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with TelePad Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of the Company ("Acquisition"),
Federal Computer Corporation, a Virginia corporation ("Federal Computer"), and
Hartland Group, LLC, a Virginia limited liability company (the "LLC"), pursuant
to which Acquisition agreed to acquire from the LLC all of Federal Computer's
outstanding capital stock (the "Shares"). The purchase price is (i) $10 million,
subject to a post-closing net worth adjustment, consisting of $5.3 million in
cash at closing and a six-month, $4.7 million note, bearing interest at 8.5%
(the "Note"), secured by an irrevocable $4.7 million letter of credit, plus (ii)
a future payment (the "Additional Consideration"), based on Federal Computer's
future performance or a present value formula, secured by an irrevocable $5
million letter of credit. The Company would also be required to invest in
Federal Computer $5 million at closing and an additional $5 million 12 months
after closing (the "Investment Obligation"). The foregoing obligations will also
be secured by a pledge of all of the capital stock of Federal Computer and
Acquisition. The consummation of the Stock Purchase Agreement is subject to the
satisfaction of certain conditions, including that the Company obtain equity
financing of at least $15 million and within 10 days thereof, but in no event
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later than August 1, 1997, elect to purchase the Shares. If the purchase is not
consummated by August 1, 1997, the Stock Purchase Agreement may be terminated by
any party.
Federal Computer is a privately held systems integration company
headquartered in Falls Church, Virginia. It was founded in 1982 to serve the
information technology needs of the federal government. For the year ended
October 31, 1996, Federal Computer's annual revenues were approximately $27
million with a net income before taxes of approximately $2.4 million. Federal
Computer is currently owned by the LLC and managed by the LLC's six members,
each of whom is subject to an employment agreement with Federal Computer. The
Stock Purchase Agreement contemplates that Federal Computer will continue to be
managed by these six individuals for periods ranging from two and one-half to
three years after the closing.
Under the terms of the Stock Purchase Agreement, Federal Computer's
board of directors (the "Federal Computer Board") will consist of four designees
of the LLC and two designees of the Company, subject to the Company's right,
through Acquisition as Federal Computer's sole stockholder, to reconstitute the
Federal Computer Board at any time. If the Federal Computer Board is
reconstituted such that designees of the LLC no longer comprise a majority
thereof (other than as a result of the death or resignation of such designees
where the LLC elects not to fill the vacancies created thereby), and if the
Additional Consideration payment obligation has not otherwise accrued, the LLC
may elect to trigger such obligation and accelerate the Note if not already
paid. In such event, (i) the amount of the Additional Consideration will equal
the amount which, if invested on the date such obligation accrued with an annual
return of 8.5 percent compounded monthly, would equal $16 million as of the
third anniversary of the closing date, and (ii) certain negative covenants with
respect to the operation of Federal Computer would become applicable. In
addition, if the employment of William Hummel, Federal Computer's President, is
terminated without cause or due to (a) a change in his duties or title
materially inconsistent with his position and status with Federal Computer as of
the closing date or (b) a reduction in the base salary or benefits to which he
is entitled under his employment agreement, and if the Additional Consideration
obligation has not otherwise accrued, the LLC may elect to trigger the
Additional Consideration payment obligation (and accelerate the Note if not
already paid) in an amount which, if invested on the date such obligation
accrued with an annual return of 8.5% compounded monthly, would equal $16
million as of the third anniversary of the closing date. If the Additional
Consideration payment obligation accrues and is paid under either of the
foregoing scenarios, any uninvested portion of the Investment Obligation will no
longer be required.
The Additional Consideration payment obligation would otherwise
become payable on the earliest to occur of (a) the consummation of an Initial
Public Offering (as defined in the Stock Purchase Agreement); (b) the effective
date of a Transfer of Control (as defined in the Stock Purchase Agreement); or
(c) the third anniversary of the closing date (subject to the LLC's ability to
extend such date in two, one-year increments). If the Additional Consideration
obligation accrues as a result of any of the events in clauses (a), (b) or (c)
of the previous sentence, the amount of the payment will be determined pursuant
to certain valuation formulas set forth in Section 1.02 of the Stock Purchase
Agreement.
Upon the occurrence of either of the events described in clauses (b)
or (c) of the first sentence of the previous paragraph, the LLC may elect to
purchase the Shares from Acquisition for the amount (the "Offer Amount") by
which Federal Computer's Value (as defined in the Stock
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Purchase Agreement) exceeds the Additional Consideration. If the LLC so elects,
Acquisition may offer (the "Counterproposal") to pay the LLC an amount (the
"Counterproposal Amount") in excess of the Additional Consideration that would
have been payable to the LLC absent such election (the "Original Amount"). The
LLC may then accept the Counterproposal or elect to purchase the Shares for a
price which exceeds the Offer Amount by an amount in excess of the difference
between the Counterproposal Amount and the Original Amount. The LLC's failure to
timely respond to the Counterproposal will be deemed an acceptance thereof. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 2. Description of Property.
Properties
Since April 1, 1995, the Company's offices have been located at 380
Herndon Parkway, Suite 1900, Herndon, Virginia 20170. Under the amended terms of
its lease, the Company will lease for four years and three months, until June
30, 1999, approximately 19,155 square feet of office space on a single floor of
an office building. The lease arrangement provides for a monthly rental of
$13,231, plus designated operating expenses, and provides the Company with
certain concessions regarding rent abatement and tenant build-out allowances.
Since April 1, 1995, the rent has increased and will continue to increase on an
annual basis for the duration of the lease. The Company has installed leasehold
improvements for purposes of demonstrating its products and strategy to
customers and prospective customers. The Company believes that, in the event
additional space is required and cannot be leased on acceptable terms from its
current lessor, suitable alternative facilities exist in the local area at
comparable rental rates.
Item 3. Legal Proceedings.
The Company is not currently involved in any legal proceedings, but
has from time to time in the past been involved in routine litigation incidental
to its business.
Item 4. Submission of Matters to a Vote of Security-Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
As of March 20, 1997, the Company had approximately 118 holders of
record of its Class A Common Stock and one holder of its Class B Common Stock.
The Company's Class A Common Stock trades on the Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol: TPADA.
-13-
<PAGE>
On July 15, 1993, the Company's Registration Statement on Form SB-2
filed under the Securities Act of 1993 became effective and the Company became a
"reporting company" subject to the periodic reporting and other requirements
under the Securities Exchange Act of 1934. From July 16, 1993 until June 7, 1995
the Company's Class A Common Stock was traded on The Nasdaq SmallCap Market. The
Company's Class A Common Stock resumed trading on The Nasdaq SmallCap Market on
March 29, 1996. The high ask and low bid prices for the Class A Common Stock are
as reported by the National Quotation Bureau, Inc. for the period since June 7,
1995 and up to March 28, 1996, and by Nasdaq for the period from July 16, 1993
to June 7, 1995 and from March 29, 1996 are indicated below. Such prices are
interdealer prices without markups, markdowns or commissions, and may not
necessarily represent actual transactions.
1995 High Ask Low Bid
---- -------- -------
First Quarter $7.000 $4.750
Second Quarter $5.875 $1.750
Third Quarter $5.000 $2.000
Fourth Quarter $3.500 $1.500
1996 High Ask Low Bid
---- -------- -------
First Quarter $5.000 $0.750
Second Quarter $5.000 $3.188
Third Quarter $5.250 $4.031
Fourth Quarter $5.375 $4.000
The Company has never paid a cash dividend on its shares and does
not presently anticipate doing so in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Revenue in the year ended December 31, 1996 declined by approximately
14% from the same period in 1995, primarily as a result of lower sales of
professional service contracts. Sales of TelePad computers were approximately
equivalent to the volume achieved in 1995 even though production of the TelePad
was interrupted in November 1995 and only restarted in June 1996 at a new
manufacturer (Sanmina). The hiatus in production caused by a move in the
production facilities had a negative impact on sales due to a loss of sales
momentum and a nearly complete turnover in the sales force. Sales were further
affected by delays related to an increased attention to quality issues that were
introduced by production at a new facility with components from different
sources. In addition, the Company embarked on a concentrated effort to make
engineering changes to the TelePad 3 that were designed to enhance product
performance and manufacturing yields. These engineering changes also extended
the quality control process and delayed product availability. Early Sanmina
production units have, or are being, replaced with units which incorporate these
engineering changes.
-14-
<PAGE>
The cost of TelePad products sold in 1996 exceeded revenue by
approximately 5%. Product gross margins were constrained by the relatively high
cost of parts purchased by the prior manufacturer, but not used earlier due to
financial and technical delays. In addition, cost of products sold includes a
$47,000 charge to expense accessories for the TelePad 3 which were made obsolete
by design modifications. Cost of products sold also includes $23,000 for
warranty costs to incorporate recent engineering changes into TelePad 3 units
built in prior periods and approximately $94,000 for costs related to replacing
batteries that failed to meet product standards after a component change.
Costs in 1996 include a charge of $318,000 directly related to the
shift in manufacturers and restarting production in a new facility.
Research and development expenses for 1996 were $1,516,000 compared
to $1,417,000 in 1995. This 7% increase in R&D spending was due primarily to
design and development work to enhance the TelePad 3 and non-recurring expenses
associated with the start up of a new manufacturing facility in 1996 as compared
with expenditures for the initial design of the TelePad 3 for the same period in
1995.
Selling, general and administrative expenses in 1996 were $4,352,000
compared to $3,673,000 for the same period in 1995. The $679,000 (18%) increase
was primarily the result of increases in selling expenses in response to the new
supply of TelePad 3 units and the addition of new space and personnel to expand
the Company's capabilities.
Interest income increased by $509,000 in 1996 due to interest earned
on investment of the proceeds of the Unit Offering.
Interest expense of $253,000 and amortization of debt issue costs of
$118,000 in 1996 relate to the $4,000,000 in bridge notes and the $750,000
Promissory Note. These notes were retired with the proceeds from the Unit
Offering.
The weighted average number of shares outstanding increased primarily
as a result of 6,555,000 shares sold in the Unit Offering.
Liquidity and Capital Resources
The Company has incurred cumulative losses to date of approximately
$28,909,000, including $6,090,000 for the year ended December 31, 1996. The
Company has funded its working capital requirements substantially from the net
cash proceeds from its IPO in July 1993, from private placement offerings of
equity securities and from a public offering of equity securities in 1996.
Net cash used in operating activities in 1996 was $11,988,000 as
compared to $5,017,000 in the comparable period in 1995. Net losses accounted
for $6,090,000 of net cash used in operating activities in 1996 and $5,970,000
in 1995. In order to secure credit for production of the TelePad 3 computer, the
Company has provided a letter of credit to Sanmina in the amount of $2,000,000.
This letter of credit is secured by $2,000,000, which is invested in an
interest-bearing account and is pledged as security and is carried on the
balance sheet as restricted cash. Inventory increased by $3,071,000 in 1996 as
production of TelePad 3 computers exceeded sales and by the purchase of
-15-
<PAGE>
$300,000 in TelePad SL parts from IBM. The Company's arrangement with Sanmina
provides for ordering product four months in advance of production to
accommodate long lead items. At December 31, 1996, the Company had approximately
$3,500,000 in outstanding purchase orders issued to Sanmina. This includes
TelePad 3 computers based on a 586 microprocessor, which is being developed and
tested and is expected to be available for production in the second quarter of
1997. The $1,070,000 reduction in inventory which occurred in the same period in
1995 was primarily the result of selling an inventory of parts back to IBM as
part of a settlement with IBM.
On January 27, 1997, the Company, entered into a Stock Purchase
Agreement with TelePad Acquisition, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company, Federal Computer, and the LLC, pursuant
to which TelePad Acquisition, Inc. agreed to acquire from LLC all of the Shares
of Federal Computer. The consummation of the Stock Purchase Agreement is subject
to the satisfaction of certain conditions, including that the Company obtain
equity financing of at least $15 million and within 10 days thereof, but in no
event later than August 1, 1997, elect to purchase the Shares. The Company
intends to seek additional financing to consumate this transaction, but there
can be no assurance as to the availability or terms of any required additional
financing. See "Stock Purchase Agreement."
On April 3, 1996, the Company completed a public offering of 20,000
units (the "Units"). Each Unit consisted of 285 shares of Class A Common Stock
and 1,000 Class D Warrants and was sold for $1,000 per Unit, pursuant to which
the Company raised $20,000,000 (the "Unit Offering"). The net proceeds to the
Company from the Unit Offering amounted to $17,779,000. On April 25, 1996, the
underwriter exercised the over-allotment option to purchase an additional 3,000
Units pursuant to which the Company raised an additional $3,000,000. The Company
received net proceeds of $2,736,000 from the exercise of the over-allotment
option.
On February 15, 1996, the Company issued a promissory note (the
"Promissory Note") to an individual investor (the "Investor"), who had
previously provided his personal guaranty of the Company's obligations to IBM
for the production of 400 TelePad 3 computers, pursuant to which the Company
received net proceeds of $607,500 of which approximately $414,000 was paid to
IBM. The remaining net proceeds were used by the Company as working capital. The
Company allocated a portion of net proceeds of the Unit Offering to repay the
Promissory Note and accrued interest. The rate of interest on the Promissory
Note was 20%, one half of which was paid upon the making of the loan together
with a $67,500 loan origination fee, which amounts were deducted from the
principal and retained by the Investor. The remaining portion of the interest
was due upon repayment of the loan amount by the Company. The conditions of the
agreement required that a portion of the proceeds from the Promissory Note be
used to satisfy existing obligations to IBM and that IBM release the guaranty
previously provided by the Investor, which release was obtained, and for the
transfer of approximately $414,000 to IBM by the Investor to reduce the
Company's outstanding obligations to IBM.
Prior to the completion of the Unit Offering, the Company funded its
working capital requirements substantially from the net cash proceeds from its
IPO in July 1993 and from private placement offerings of equity securities. The
1993 IPO produced net proceeds of approximately $7.5 million. In 1994, the
Company obtained net proceeds of approximately $4.4 million through a private
placement of units consisting of 12,500 shares of Class A Common Stock and 6,250
Class C warrants. In 1995, the Company obtained net proceeds of approximately
$2.1 million through a second private placement of units consisting of Class A
Common Stock and Class C warrants. The unit price reflected the Company's
judgment, in consultation with its placement agent, of the highest price that
could successfully be obtained, which price reflected a discount from market
value because the units sold were unregistered securities.
The Company concluded engineering development on the TelePad 3 and
commenced production in June 1995. Prior to the start of production, the Company
and IBM renegotiated their manufacturing agreement to resolve various issues and
provide for manufacturing the TelePad 3, with payment for finished products
guaranteed by a $1.5 million letter of credit obtained on behalf of the Company
by a private investor (the "Investor"). The Company entered into an agreement
with an individual investor
-16-
<PAGE>
under which the investor guaranteed IBM's security interest in the production of
400 completed TelePad 3 computers. The guarantee, which is no longer in effect,
was backed by a $1.5 million irrevocable letter of credit provided by a
commercial bank. As part of the consideration for the Investor's guarantee, the
Company issued the Investor 50,000 shares of the Company's Class A Common Stock.
The Company valued this transaction at $312,000, which represented the market
value of the shares at the date of the transaction.
In September 1995, the Company completed the sale of $4.0 million in
principal amount of Bridge Notes and 2,000,000 1995 Bridge Warrants. Net
proceeds to the Company totaled approximately $3.4 million, after payment of
commissions and an expense allowance in the total amount of $574,000 to the
placement agent and other expenses of the private placement. The Bridge Notes
were repaid by the Company upon the closing of the Unit Offering.
The Company believes its existing capital resources, consisting
primarily of cash, short-term investments and restricted cash and funds from
operations will provide sufficient capital for at least the next 12 months. In
the event that the Company's internal estimates relating to its anticipated
expenditures prove materially inaccurate, the Company may be required to
reallocate funds among its planned activities and curtail or eliminate certain
expenditures. In any event, the Company anticipates that it may require
substantial additional financing after such time. The Company has no established
banking relationships and no available line of credit or other source of
liquidity. The Company may seek to leverage its working capital requirements
through borrowings, collaborative arrangements and strategic alliances, volume
discounts for mass purchases of TelePad computers and other products, and
additional public offerings. There can be no assurance as to the availability or
terms of any required additional financing, when and if needed.
Special Note Regarding Forward Looking Statements
A number of statements contained in this report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
Such statements include, but are not limited to, demand for the Company's
products and market acceptance risks, the effect of economic conditions, the
impact of competitive products and pricing, product development,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, the results of financing efforts, and other risks
detailed in the Company's Securities and Exchange Commission filings.
Item 7. Financial Statements.
The required financial statements are included in a separate section
following the signature page as an addendum to this Form 10-KSB.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
-17-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
Name Age Positions with the Company
- ---------------------- -------- ----------------------------------------
Donald W. Barrett 50 Chairman of the Board of Directors and
Chief Executive Officer
Ronald C. Oklewicz 50 President, Chief Operating Officer, and
Director
John P. Diesel 70 Director
Sydney H. Dankman 79 Director
Alan B. Salisbury 60 Director
E. Donald Shapiro 65 Director
John M. Toups 71 Director
Joseph J. Elkins 52 Vice President
Robert D. Russell 57 Vice President, Secretary, Treasurer and
Chief Financial Officer
- ----------------------
Donald W. Barrett became Chief Executive Officer of the Company and
Chairman of its Board of Directors on April 16, 1996. From 1991 through March
1996, Mr. Barrett was president and chief executive officer of Ideas, Inc. which
owned and operated a family of telecommunications and information systems
companies. Mr. Barrett was president of the Government Systems Group of Contel
Federal Systems, Inc., a network integrator, from 1987 through 1991 and
president of the Custom Products Group of Burroughs Corporation, a computer
manufacturer, from 1984 through 1987. Prior to that time, Mr. Barrett held
various marketing and technical positions with GTE and General Dynamics. Mr.
Barrett is currently a director of Objective Communications, Inc.
Ronald C. Oklewicz has been President, Chief Executive Officer and a
Director of the Company since August 1992. Mr. Oklewicz was Chief Executive
Officer from August 1992 until April 16, 1996. From November 1991 until August
1992, Mr. Oklewicz served as a consultant to the Company. Mr. Oklewicz served in
an executive capacity at Wollongong Group, a software communications firm, from
1990 through 1991. Mr. Oklewicz served in various positions at Apple Computer
from 1986 through 1990, including serving as general manager of the Federal
System Division. Mr. Oklewicz also spent 13 years with Xerox Corporation in
various sales and marketing positions.
John P. Diesel has been a Director of the Company since June 27,
1995. Mr. Diesel was Chairman of the Board of Directors from July 1995 until
April 16, 1996. Mr. Diesel, who has been retired since 1991, was formerly the
president of Tenneco Inc. from 1979 until 1991. Mr. Diesel currently is a
director of Aluminum Corporation of America and Brunswick Corporation.
-18-
<PAGE>
Sydney H. Dankman has been a Director of the Company since June 1990.
Mr. Dankman, who has been retired for a period in excess of five years, is an
investor in early development technology ventures.
Alan B. Salisbury has been a Director of the Company since July 1996.
Mr. Salisbury has been a director and the president of Learning Tree
International Inc. since April 1993 and has been a director of Sybase, Inc. and
Template Software. Mr. Salisbury served as Executive Vice President and chief
Operating Officer of Microelectronics & Computer Technology Corporation from May
1991 to April 1993.
E. Donald Shapiro has been the Joseph Solomon Distinguished Professor
of Law at New York Law School since 1983 where he served as both Dean and
Professor of Law from 1973 to 1983. He is Supernumerary Fellow of St. Cross
College at Oxford University, England and Visiting Distinguished Professor
Bar-Ilan University, Tel-Aviv, Israel. Mr. Shapiro received a J.D. degree at
Harvard Law School and has been conferred honorary degrees by both Oxford
University and New York Law School. He currently serves on the Boards of
Directors for several public companies including Loral Space and Communications
Corporation, Eyecare Products PLC, Kranzco Realty Trust, Premier Laser Systems,
Cafe USA, United Industrial Corporation, Vasomedical, Inc., Vion, Inc., and Bank
Leumi Trust Company. Mr. Shapiro is a Fellow, Institute of Judicial
Administration, NY, and American Academy of Forensic Sciences and a life member
of the American Law Institute. He is author or co-author of more than 50
publications including books and journal articles dealing with Medicine,
Forensic Science and the law.
John M. Toups has been a Director of the Company since April 1995.
Mr. Toups, who has been retired since 1987, was the president and chief
executive officer of Planning Research Corporation from 1978 until 1987. Mr.
Toups currently serves on the board of NVR Inc, CACI International and Halifax
Corporation. NVR, Inc. is the successor to NVR L.P.
Joseph J. Elkins has been Vice President of the Company since August
1993, Secretary of the Company from July 1994 to September 1996, and was Chief
Operating Officer from April 1995 to April 1996. In addition, Mr. Elkins served
as a director from September 1994 until July 1995 and as Chief Financial Officer
of the Company from August 1993 until April 1995. Prior to joining the Company,
Mr. Elkins was president of two information management firms, Blyth Software,
Inc. and Elkins and Company, following a 23-year tenure at KPMG Peat Marwick,
where he oversaw development of that firm's financial management software
products. Mr. Elkins is a certified public accountant.
Robert D. Russell has been Vice President, Treasurer and Chief
Financial Officer of the Company since May 1995 and Secretary of the Company
since September 1996. Prior to joining the Company, Mr. Russell was Vice
President, Finance and Administration, Secretary and Treasurer of Falcon
Microsystems, Inc. from 1986 until 1994 and an independent consultant from
August 1994 until May 1995.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
(The "Exchange Act") requires the Company's executive officer and directors, and
persons who beneficially own more than 10% of the Company's Common Stock, to
file initial reports of ownership and reports of changes of
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<PAGE>
ownership with the Securities and Exchange Commission and furnish copies of
those reports to the Company. Based solely on a review of the copies of the
reports furnished to the Company to date, or written representations that no
reports were required, the Company believes that all reports required to be
filed by such persons with respect to the Company's fiscal year ending December
31, 1996 were timely made, except for certain reports to be filed by Messrs.
Diesel, Toups, Oklewicz and Elkins.
Item 10. Executive Compensation.
Summary Compensation Table
The following sets forth the compensation paid by the Company during
the three fiscal years ended December 31, 1996 to its Chief Executive Officer
and Chief Operating Officers (the "Named Officers"). No other executive officer
of the Company received compensation in excess of $100,000 for the fiscal year
ended December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation Long-term
Compensation
Awards
----------------------------------------------------------------------------
Year Salary Other Annual Options
($) Compensation (#)
($)
- -------------------------------------------- ------------ ---------------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Donald W. Barrett(1)
Chief Executive Officer 1996 $177,083 $ 0 400,000(3)
Ronald C. Oklewicz(2)
President and Chief Operating Officer 1996 $150,000 $35,000
1995 $123,885 $ 0 200,000(4)
1994 $120,000 $ 5,376 30,000
Joseph J. Elkins
Vice President 1996 $110,000 $20,000
1995 $103,750 $ 0 40,000
1994 $ 85,000 $ 3,117 20,000
Robert D. Russell
Vice President, Secretary & Treasurer 1966 $ 85,000 $21,228
1995 $ 52,853 $ 0 20,000
</TABLE>
- -------------------
(1) Mr. Barrett became the Company's Chief Executive Officer on April 16,
1996.
(2) Mr. Oklewicz was the Company's Chief Executive Officer from August 5,
1992 until April 16, 1996 .
-20-
<PAGE>
(3) Represents options to purchase shares of Class A Common Stock at an
exercise price of $3.8125 per share (the average of the closing bid
and asked prices of the Common Stock on the date of grant), with
100,000 of such options being currently exercisable and 100,000
options becoming exercisable on December 31, 1997 and 200,000 options
becoming exercisable on December 31, 1998.
(4) Represents options to purchase shares of Class A Common Stock at an
exercise price of $1.75 per share (the average of the closing bid and
asked prices of the Common Stock on the date of grant).
Option Grants in Fiscal 1996
Shown below is information concerning stock option grants of Class A
Common Stock awarded to the Named Officers during the Company's 1996 fiscal
year.
Individual Grants
<TABLE>
<CAPTION>
Name Number of Shares % of Total Options Exercise or Expiration
Underlying Options Granted to Employees Base Price Date
Granted (1) in Fiscal 1996 ($/sh) (2)
- ------------------------- -------------------------- --------------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Donald W. Barrett 400,000 79.0% $3.8125 4/09/06
</TABLE>
- ------------------------
(1) The options are nonqualified stock options.
(2) The exercise price is equal to the fair market value of the shares of
Class A Common Stock on the date of grant of the option.
-21-
<PAGE>
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End
Option Values
The following table sets forth, for the Named Officers of the
Company, information regarding aggregate exercises of options in 1996 and the
number and value of unexercised options at December 31, 1996:
<TABLE>
<CAPTION>
Name Number of Value Number of Shares Value of
Shares Realized Underlying Unexercised Unexercised
Acquired on Options at End of In-the-Money
Exercise Fiscal Year Options at End of
Exercisable/ Fiscal 1996
Unexercisable Exercisable/
Unexercisable(1)
- --------------------------- ---------------- ---------- ------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Donald W. Barrett 0 0 100,000/300,000 $56,250/$168,750
Ronald C. Oklewicz 0 0 380,000/0 $770,925/$0
Joseph J. Elkins 0 0 46,667/33,333 $0/$0
Robert D. Russell 0 0 6,667/13,333 $0/$0
</TABLE>
- ------------------
(1) Based upon the difference between the exercise prices of the options
and the closing price of the Class A Common Stock, as reported on the
The Nasdaq SmallCap Market on December 31, 1996, of $4.375 per share.
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
The Company has entered into an employment agreement with Donald W.
Barrett, dated as of April 10, 1996. The employment is "at-will" and may be
terminated by either party at any time, subject only to the terms of the
employment agreement and the By-Laws of the Company. Pursuant to the agreement,
Mr. Barrett serves as Chairman of the Board and Chief Executive Officer of the
Company at a salary of $250,000 per annum. The agreement provides that Mr.
Barrett is entitled to receive specified bonuses in the aggregate amount of
$220,000 upon the occurrence of specified events and achievement of specified
sales and financial milestones by the Company, as well as other supplemental
benefits at the discretion of the Board of Directors. In addition, options to
purchase 396,500 shares of Class A Common Stock pursuant to Company's Amended
and Restated 1993 Stock Option Plan as amended (the "SOP"), and options to
purchase 3,500 shares of Class A Common Stock under the 1996 Stock Incentive
Plan, all at an exercise price of $3.8125 per share, were granted to Mr. Barrett
pursuant to such agreement. 100,000 of such options are immediately exercisable,
100,000 options become exercisable on December 31, 1997, and 200,000 of such
options shall become exercisable on December 31, 1998, subject to certain
acceleration provisions, including the occurrence of a change in control of the
Company or the termination of Mr. Barrett other than for cause or disability (as
such terms are defined in Mr. Barrett's employment agreement). The agreement
also provides that if Mr. Barrett is terminated other than for cause or
disability, the Company will pay to Mr. Barrett his compensation for 12 months
following such termination. During the term of employment and for a period of
one year after such employment has terminated, the agreement provides that Mr.
Barrett will not solicit the Company's employees.
-22-
<PAGE>
The Company has entered into an employment agreement with Ronald C.
Oklewicz, dated as of November 15, 1995, for a term ending December 31, 1997.
Pursuant to the agreement, Mr. Oklewicz serves as President and Chief Executive
Officer of the Company at a salary of $150,000 per annum. The agreement provides
that Mr. Oklewicz is entitled to receive specified bonuses in the aggregate
amount of $150,000 upon the occurrence of specified events and achievement of
specified sales and financial milestones by the Company, as well as other
supplemental benefits at the discretion of the Board of Directors. In addition,
options to purchase 200,000 shares of the Company's Class A Common Stock
pursuant to the SOP, (with an exercise price of $1.75 per share which are
currently exercisable), were granted to Mr. Oklewicz pursuant to the terms of
such agreement. The agreement also provides that if Mr. Oklewicz is terminated
other than for cause (as defined therein) or dies, the Company will pay to Mr.
Oklewicz (or his spouse or estate if he dies) his compensation and other
benefits for 12 months following termination. The agreement contains a
confidentiality provision and provides that during the term of employment and
for a period of one year after such employment has terminated, Mr. Oklewicz will
not interfere with the Company's customers or solicit the Company's employees.
-23-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth, as of March 19, 1997, certain
information as to the beneficial ownership of Class A Common Stock and Class B
Common Stock of each of the Company's directors and each of the executive
officers shown above, all executive officers and directors as a group, and all
persons known by the Company to be the beneficial owner of more than five
percent of the Company's Class A Common Stock and Class B Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Percent of Percent of Percent of
Beneficial Stockholder Nature of Class A (2) Class B Voting (2)
Beneficial
Ownership
(1)(2)
- ------------------------------------------------- -------------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Donald W. Barrett 100,000(3) * 0% *
380 Herndon Parkway Herndon, VA 20170
Sydney H. Dankman 155,077(4) 1.33% 0% 1.25%
380 Herndon Parkway Herndon, VA 20170
Ronald C. Oklewicz 401,219(5) 3.36% 0% 3.16%
380 Herndon Parkway Herndon, VA 20170
Joseph J. Elkins 67,267(6) * 0% *
380 Herndon Parkway Herndon, VA 20170
Robert D. Russell 13,333(7) * 0% *
380 Herndon Parkway Herndon, VA 20170
John M. Toups 45,555(8) * 0% *
380 Herndon Parkway Herndon, VA 20170
John P. Diesel 83,159(9) * 0% *
380 Herndon Parkway Herndon, VA 20170
E. Donald Shapiro 30,000(10) * 0% *
57 Worth Street
New York, NY 10013
Alan B. Salisbury 30,000(11) * 0% *
380 Herndon Parkway Herndon, VA 20170
Scott J. Dankman 187,500(12)(13) 0% 100% 7.42%
6040 Lands End Lane
Alexandria, VA 22315
All current officers and directors as a group (11 932,277 7.68% 0% 7.11%
persons)(14)
</TABLE>
-----------------------
* Indicates less than one percent.
(1) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all shares of Common Stock indicated.
Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Exchange Act. The Company has two classes of Common Stock outstanding,
being Class A and Class B Common Stock, with all outstanding shares of
Class B Common Stock being owned by Scott J. Dankman.
-24-
<PAGE>
(2) As adjusted to reflect the exercise of all outstanding immediately
exercisable Class A, Class B, Class C and Class D Warrants and all Class B
Warrants issuable upon exercise of outstanding Class A Warrants. Does not
reflect issuance of 3,926,147 shares of Class A Common Stock issuable upon
exercise of outstanding Unit Purchase Options, except as indicated with
respect to listed holders.
(3) Does not reflect 300,000 shares of Class A Common Stock underlying options
which shall vest and become exercisable as follows: 100,000 options which
shall vest and become exercisable on December 31, 1997 and 200,000 options
which shall vest and become exercisable on December 31, 1998; provided,
however, that in the event of a change in control (as defined in Mr.
Barrett's employment agreement) of the Company, the non-vested portion of
the options shall automatically accelerate to the date of such change in
control. Options to acquire 396,500 shares of Class A Common Stock have
been granted to Mr. Barrett under the Company's Amended and Restated 1993
Stock Option Plan. The Company has also granted Mr. Barrett additional
options to acquire 3,500 shares of Class A Common Stock under the 1996
Plan.
(4) Includes 69,791 shares of Class A Common Stock underlying immediately
exercisable stock options and Class C Warrants.
(5) Includes (i) 383,438 shares of Class A Common Stock underlying immediately
exercisable stock options and Class C Warrants acquired in the 1994 Private
Placement, and (ii) 17,781 shares of Class A Common Stock jointly owned by
Mr. Oklewicz and his spouse, who share power to vote and dispose of such
shares.
(6) Consists of (i) 66,667 shares of Class A Common Stock underlying
immediately exercisable options and (ii) 600 shares of Class A Common Stock
jointly owned by Mr. Elkins and his spouse, who share power to vote and
dispose of such shares.
(7) Consists of 13,333 shares of Class A Common Stock underlying immediately
exercisable options.
(8) Consists of 45,555 shares of Class A Common Stock underlying immediately
exercisable options.
(9) Includes 49,409 shares of Class A Common Stock underlying immediately
exercisable Class C Warrants.
(10) Consists of 30,000 shares of Class A Common Stock underlying immediately
exercisable options.
(11) Consists of 30,000 shares of Class A Common Stock underlying immediately
exercisable options.
(12) Includes 37,500 shares of Class B Common Stock underlying immediately
exercisable stock options. Mr. Dankman has granted a voting proxy covering
all of his shares of Class B Common Stock to the directors of the Company
who are not also employees. Therefore, such directors may be deemed to have
power to vote such shares.
(13) Each share owned by Mr. Scott Dankman is Class B Common Stock, which is
identical in all respects to the Class A Common Stock of the Company,
except that on every matter for which each share of Class A Common Stock is
entitled to one vote, each share of Class B Common Stock is entitled to
five votes.
(14) Includes all of the shares of Class A Common Stock that have been listed as
being included in notes (3), (4), (5), (6), (7), (8), (9), (10) and (11)
above. Does not include the voting power attributable to the 150,000 shares
of Class B Common Stock currently held by Mr. Scott Dankman, as to which
Mr. Dankman has granted a voting proxy to the directors of the Company who
are not also employees. Including such shares the Company's officers and
directors have 9.53% of the voting power of the Company's Common Stock.
-25-
<PAGE>
Item 12. Certain Relationships and Related Transactions.
None.
-26-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits: The following exhibits are filed herewith or
incorporated by reference: .
Exhibit Document
No.
------
3.1 Second Restated Certificate of Incorporation of the
Company. (Incorporated herein by reference to Exhibit 3.1
to the Registrant's Registration Statement on Form SB-2
(File No. 33-61328)).
3.2 Amendment to Second Restated Certificate of Incorporation
of the Company. (Incorporated herein by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form SB-2 (File No. 33-61328)).
3.3 Amendment to Second Restated Certificate of Incorporation
of the Company.
3.4 Form of By-laws of the Company. (Incorporated herein by
reference to Exhibit 3.3 to the Registrant's Registration
Statement on Form SB-2 (File No. 33-61328)).
4.1 Form of Warrant Agreement (including forms of Class A and
Class B Warrant Certificates). (Incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form SB-2 (File No. 33-61328)).
4.2 Form of Specimen of Class A Common Stock Certificate.
(Incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form SB-2 (File No.
33-61328)).
4.3 Form of Specimen of Class B Common Stock Certificate.
(Incorporated herein by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form SB-2 (File No.
33-61328)).
4.4 Form of Warrant Agreement (including form Class C Warrant
Certificate) from 1994 Private Placement. (Incorporated
herein by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
4.5 Form of Warrant Agreement (including form Class C Warrant
Certificate) from 1995 Private Placement. (Incorporated
herein by reference to Exhibit 10.24 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
4.6 Form of Warrant Agreement (including form of Class D
Warrant Certificate) from Bridge Offering. (Incorporated
herein by reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form SB-2 (File No. 33-90278)).
4.7 Form of Warrant Agreement (including Form of Class D
Warrant). (Incorporated herein by reference to Exhibit 4.8
to the Registrant's Registration Statement on Form SB-2
(File No. 33-90278)).
4.8 Form of Stock Option Agreement (Incorporated herein by
reference to Exhibit 4.7 to the Registrant's Registration
Statement on Form S-3 (File No. 333-17013)).
-27-
<PAGE>
4.9 Form of Stock Option Agreement for use in connection with
the 1992 Stock Option Plan (Incorporated herein by
reference to Exhibit 4.8 to the Registrant's Registration
Statement on Form S-3 (File No. 333-17013)).
4.10 Warrant to Purchase Shares of Class A Common Stock issued
to Morris Sedaka on May 30, 1993 (Incorporated herein by
reference to Exhibit 4.9 to the Registrant's Registration
Statement on Form S-3 (File No. 333-17013)).
10.1 Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.1 to the Registrant's Registration Statement on
Form SB-2 (File No. 33-61328)).
10.2 Employment Agreement between the Company and Ronald C.
Oklewicz. (Incorporated herein by reference to Exhibit
10.3 to the Registrant's Registration Statement on Form
SB-2 (File No. 333-00012)).
10.3 Employment Agreement between the Company and L. Charles
Ennis. (Incorporated herein by reference to Exhibit 10.4
to the Registrant's Registration Statement on Form SB-2
(File No. 33-61328)).
10.4 Sales Agreement between International Business Machines
Corporation and the Company dated January 27, 1993.
(Incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form SB-2 (File No.
33- 61328)).
10.5 Technology Partner Product Agreement between GTE Vantage
Solutions and the Company. (Incorporated herein by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form SB-2 (File No. 33-61328)).
10.6 Agreement for Repair and Inventory Management Service
between the Company and Logistics Management Incorporated.
(Incorporated herein by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form SB-2 (File No.
33-61328)).
10.7 Form of Non-Disclosure and Non-Interference Agreement
between the Company and its employees. (Incorporated
herein by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form SB-2 (File No. 33-61328)).
10.8 Letter Agreement between the Company and the Underwriter
regarding future financing transactions. (Incorporated
herein by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form SB-2 (File No. 33-61328)).
10.9 Employment Agreement, dated as of August 1, 1993, between
the Company and Joseph J. Elkins. (Incorporated herein by
reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31,
1993.)
10.10 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company, and
Supplements to same, dated February 28, 1994.
(Incorporated herein by reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1993.)
10.11 Agency Agreement with D.H. Blair Investment Banking Corp.
dated June 10, 1994 from 1994 Private Placement.
(Incorporated herein by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1994.)
10.12 Merger and Acquisition Agreement with D.H. Blair
Investment Banking Corp. dated June 21, 1994 from 1994
Private Placement. (Incorporated herein by reference to
Exhibit 10.19 to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994.)
10.13 Amended and Restated Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
-28-
<PAGE>
10.14 1994 Employee Stock Purchase Plan. (Incorporated herein by
reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31,
1994.)
10.15 Non-Employee Director Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
10.16 Investment Agreement and Various Exhibits from Private
Placement Transaction completed in March 1995.
(Incorporated herein by reference to Exhibit 10.23 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1994.)
10.17 Draft Agency Agreement with D.H. Blair Investment Banking
Corp. from 1995 Private Placement. (Incorporated herein by
reference to Exhibit 10.25 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31,
1994.)
10.18 Draft Merger and Acquisition Agreement with D.H. Blair
Investment Banking Corp. from 1995 Private Placement.
(Incorporated herein by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1994.)
10.19 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company referenced
in 10.6 above, and Supplements to same, dated as of June
3, 1994. (Incorporated herein by reference to Exhibit
10.27 to the Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1994.)
10.20 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company referenced
in 10.6 above, and Supplements to same, dated as of
February 23, 1995 and February 27, 1995. (Incorporated
herein by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.).
10.21 Agency Agreement with D.H. Blair Investment Banking
Corporation dated July 11, 1995. (Incorporated herein by
reference to Exhibit 10.28 to the Registrant's
Registration Statement on Form SB-2 (File No. 33-90378)).
10.22 Document relating to Private Placement to the Consultant
in March, 1995. (Incorporated herein by reference to
Exhibit 10.29 to the Registrant's Registration Statement
on Form SB-2 (File No. 33-90378)).
10.23 Agreement between the Company and an Insurance Company for
consulting and development services. (Incorporated herein
by reference to Exhibit 10.30 to the Registrant's
Registration Statement on Form SB-2 (File No. 33-90378)).
10.24 Agreement between the Company and IBM dated January 25,
1996, providing for resolution of certain disputes and
other matters. (Incorporated herein by reference to
Exhibit 10.31 to the Registrant's Registration Statement
on Form SB-2 (File No. 333-00012)).
10.25 Security Agreement between the Company and a certain
Lender dated February 16, 1996. (Incorporated herein by
reference to Exhibit 10.32 to the Registrant's
Registration Statement on Form SB-2 (File No. 333-00012)).
-29-
<PAGE>
10.26 Letter dated March 19, 1996, from IBM to the Company
granting extension to April 1, 1996, with respect to
certain credit requirements. (Incorporated herein by
reference to Exhibit 10.33 to the Registrant's
Registration Statement on Form SB-2 (File No. 333-00012)).
99.1 Stock Purchase Agreement with TelePad Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of the
Company and Federal Computer Corporation dated January 21,
1997.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELEPAD CORPORATION
Date: March , 1997 /s/ Donald W. Barrett
---------------------
Donald W. Barrett
Chairman and Chief Executive Officer
Date: March , 1997 /s/ Robert D. Russell
---------------------
Robert D. Russell
Vice President and Chief Financial Officer
Principal Financial and Accounting Officer
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: March , 1997 /s/ Sydney H. Dankman
---------------------
Sydney H. Dankman, Director
Date: March , 1997 /s/ John P. Diesel
------------------
John P. Diesel, Director
Date: March , 1997 /s/ Ronald C. Oklewicz
----------------------
Ronald C. Oklewicz, Director
Date: March , 1997 /s/ Alan B. Salisbury
---------------------
Alan B. Salisbury, Director
Date: March , 1997 /s/ E. Donald Shapiro
---------------------
E. Donald Shapiro, Director
Date: March , 1997 /s/ John M. Toups
-----------------
John M. Toups, Director
-31-
<PAGE>
TELEPAD CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ........................ F-2
Balance Sheets ........................................................... F-3
Statements of Operations ................................................. F-4
Statements of Stockholders' Equity (Deficit) ............................. F-5
Statements of Cash Flows ................................................. F-6
Notes to Financial Statements ............................................ F-7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
TelePad Corporation
We have audited the accompanying balance sheets of TelePad Corporation as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TelePad Corporation at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
March 7, 1997
F-2
<PAGE>
TELEPAD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,418,770 $ 1,257,948
Short-term investments 4,078,679 --
Restricted cash (Note 1) 2,000,000 --
Accounts receivable, less allowance of $107,000
at December 31, 1996 and $100,000 at December 31, 1995 668,922 472,724
Inventory, less allowance of $14,000 at December 31, 1996
and $80,000 at December 31, 1995 3,474,782 403,733
Other current assets 243,988 96,246
------------ ------------
Total current assets 11,885,141 2,230,651
------------ ------------
Furniture and equipment:
Office furniture and equipment 197,932 117,520
Computer equipment 880,656 527,908
------------ ------------
1,078,588 645,428
Less accumulated depreciation (505,639) (287,838)
------------ ------------
Net furniture and equipment 572,949 357,590
Deposits and other assets 27,689 21,061
------------ ------------
Total assets $ 12,485,779 $ 2,609,302
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,991,805 $ 2,821,741
Notes payable (Note 2) -- 3,881,698
Deferred revenue 34,643 17,718
------------ ------------
Total current liabilities 2,026,448 6,721,157
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued
Common stock, $.01 par value; 95,000,000 shares authorized:
Class A common stock, 94,406,937 shares designated, 11,558,905
and 4,436,175 shares issued and outstanding at December
31, 1996 and 1995, respectively 115,589 44,361
Class B common stock, 593,063 shares designated,
150,000 and 555,563 shares issued and outstanding
at December 31, 1996 and 1995, respectively 1,500 5,556
Additional paid-in capital 39,250,820 18,657,124
Accumulated deficit (28,908,578) (22,818,896)
------------ ------------
Total stockholders' equity (deficit) 10,459,331 (4,111,855)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 12,485,779 $ 2,609,302
============ ============
</TABLE>
See accompanying notes
F-3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1996 1995
----------- -----------
Revenues:
TelePad products $ 2,017,811 $ 2,034,066
Service contracts 222,293 559,528
----------- -----------
Total revenues 2,240,104 2,593,594
Costs and expenses:
Cost of goods sold - Telepad products 2,128,342 1,988,045
Cost of goods sold - service contracts 101,698 320,142
Loss on inventory purchase commitment -- 176,500
Costs related to manufacturing startup 317,607 --
Research and development 1,515,933 1,417,404
Selling, general and administrative 4,351,510 3,672,722
----------- -----------
Total costs and expenses 8,415,090 7,574,813
----------- -----------
Loss from operations (6,174,986) (4,981,219)
Interest income 542,447 32,601
Interest expense (253,197) (447,200)
Amortization of debt issue costs (118,302) (573,995)
Other expenses (85,644) --
----------- -----------
Net loss $(6,089,682) $(5,969,813)
=========== ===========
Net loss per share $ (0.62) $ (1.24)
=========== ===========
Weighted average shares outstanding 9,856,500 4,814,782
=========== ===========
See accompanying notes
F-4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Class A Class B Additional Accumulated Total
Common Stock Common Stock Paid-In Deficit Stockholders'
Shares Amount Shares Amount Capital Equity (Deficit)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,706,450 $ 37,064 555,563 $ 5,556 $15,803,474 $(16,849,083) $ (1,002,989)
Issuance of common stock and
warrants, net 643,750 6,437 -- -- 2,113,382 -- 2,119,819
Issuance of common stock
for services 54,000 540 -- -- 331,208 -- 331,748
Issuance of common stock warrants
in connection with notes payable -- -- -- -- 400,000 -- 400,000
Exercise of stock options 31,975 320 -- -- 9,060 -- 9,380
Net loss (5,969,813) (5,969,813)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,436,175 $ 44,361 555,563 $ 5,556 $18,657,124 $(22,818,896) $ (4,111,855)
Issuance of common stock and
warrants, net 6,555,000 65,550 -- -- 20,449,921 -- 20,515,471
Conversion of Class B common
stock 405,563 4,056 (405,563) (4,056) -- -- --
Exercise of common stock warrants 28,162 282 -- -- 98,218 -- 98,500
Exercise of stock options 134,005 1,340 -- -- 45,557 -- 46,897
Net loss -- -- -- -- -- (6,089,682) (6,089,682)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 11,558,905 $ 115,589 150,000 $ 1,500 $39,250,820 $(28,908,578) $ 10,459,331
==================================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,089,682) $ (5,969,813)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 217,801 164,128
Amortization of debt discount 118,302 281,698
Provision for loss on accounts receivable 7,169 91,000
Inventory allowance -- 80,000
Loss on disposal of property and equipment -- 12,584
Loss on inventory purchase commitment -- 176,500
Common stock issued in lieu of cash for consulting
and employment services -- 331,748
Changes in assets and liabilities:
Restricted cash (2,000,000) --
Accounts receivable (203,367) 3,139,432
Inventory (3,071,049) 1,069,521
Other current assets (147,742) 6,437
Deposits and other assets (6,628) (19,228)
Accounts payable and accrued expenses (829,936) (4,398,429)
Deferred revenue 16,925 17,718
------------ ------------
Net cash used in operating activities (11,988,207) (5,016,704)
INVESTING ACTIVITIES
Purchase of furniture and equipment (433,160) (233,207)
Purchase of short-term investments (14,878,679) --
Sales of short-term investments 10,800,000 --
------------ ------------
Net cash used in investing activities (4,511,839) (233,207)
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 20,660,868 2,129,199
Proceeds from warrants issued in connection with notes payable -- 400,000
Proceeds from notes payable 750,000 3,600,000
Repayment of notes payable (4,750,000) --
------------ ------------
Net cash provided by financing activities 16,660,868 6,129,199
------------ ------------
Net increase in cash 160,822 879,288
Cash and cash equivalents, beginning of period 1,257,948 378,660
------------ ------------
Cash and cash equivalents, end of period $ 1,418,770 $ 1,257,948
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Actual cash payments for interest $ 418,685 $ 206,985
============ ============
</TABLE>
See accompanying notes
F-6
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
TelePad Corporation (the Company) markets hardware and software products and
solutions to assist private businesses and governmental entities in managing,
communicating and processing information. The Company's principal products are
portable, notebook-sized, pen-based computers and related customized software.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company purchases all of its TelePad 3 computers, currently its only
product, from a single manufacturer, Sanmina Corporation ("Sanmina"). Although
management believes that alternative sources of supply are available, a change
in manufacturers could cause further delays in production and adversely affect
demand for the TelePad product and the Company's operating results.
While in the second half of 1996, the Company experienced an increase in demand
for its principal products, the Company has not generated sufficient revenues
from sales to cover operating expenses. Success of the Company's business
strategy is dependent upon growth in the Company's revenue from its TelePad 3
product and related services.
Revenue Recognition
Product sales are recognized when products are shipped to customers. Revenue on
service and development contracts is recognized as the services are performed
and as contract objectives are achieved.
Three customers accounted for approximately 53% of total revenue and one
customer accounted for approximately 12% of total revenue for the years ended
December 31, 1996 and 1995, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Short-term Investments
The short-term investments are stated at cost, which as of December 31, 1996
approximates market value, and are invested in a short-term, fixed income
securities fund.
F-7
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash
In order to secure credit for production of the TelePad 3 computer, the Company
has provided a letter of credit to Sanmina in the amount of $2,000,000. This
letter of credit is secured by $2,000,000, which is invested in an
interest-bearing account and is pledged as security.
Inventory
Inventory is stated at the lower of cost or market as determined on a FIFO
(first-in, first-out) basis. The Company provides for inventory reserves as
inventory is identified as being obsolete, slow-moving, or unsaleable.
Furniture and Equipment
Office furniture and equipment and computer equipment, including demonstration
units, are recorded at cost and depreciated using the straight-line method over
estimated useful lives ranging from three to seven years.
Warranty
The Company provides, by a current charge to operations, an amount it estimates
will be required to cover future warranty obligations for products sold during
the year. The accrued liability for warranty costs is included in the caption
"Accounts payable and accrued expenses" in the accompanying balance sheets.
Net Loss Per Share
Net loss per share is calculated using the weighted average number of common
shares outstanding during the period, with shares of Class A common stock and
Class B common stock treated as a single class for purposes of the calculation.
Shares issuable upon the exercise of stock options and warrants have been
excluded from the computation because the effect of their inclusion would be
antidilutive.
Debt Issue Costs
The costs related to the issuance of notes payable are expensed during the
period of borrowing.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock- Based Compensation", which is effective for the Company's
December 31, 1996 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123 or
under the provisions of APB 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
No. 123 had been adopted. The Company intends to continue accounting for its
stock-based compensation in accordance with the provisions of APB 25. As such,
the adoption of SFAS No. 123 will not impact the financial position or results
of operations of the Company.
F-8
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE
On February 15, 1996, the Company and an individual investor, who had previously
provided his personal guaranty of the Company's obligations to International
Business Machines Corporation ("IBM") for the production of 400 TelePad 3
computers, entered into an agreement whereby the individual investor loaned the
Company $750,000 evidenced by a promissory note which had a term of one year,
but included the right to require early retirement of the obligation at the
final closing of the secondary public offering. The promissory note carried
interest at the rate of 20% and contained a loan origination fee of
approximately $68,000. The promissory note was secured by all of the Company's
assets. The conditions of the agreement required that a portion of the proceeds
from the note be used to satisfy existing obligations to IBM and that IBM
release the guaranty. The Company received net proceeds, after disbursements to
IBM and prepayment of one-half of the annual interest due under the promissory
note, of approximately $193,000. On May 1, 1996, the Company paid $825,000 to
the individual investor to retire the promissory note. The $825,000 payment
included the principal amount of $750,000 and $75,000 in interest. The
respective security interest has been released.
During 1995, the Company was provided with bridge financing of $4,000,000 less
direct expenses of $573,995, through the sale of 80 bridge units. Each bridge
unit consisted of a $50,000 promissory note and 25,000 common stock bridge
warrants. The promissory notes bore interest at the rate of 10% per annum and
were due upon the earlier of July 26, 1996, or the closing of the Company's
secondary public offering (See Note 3). On April 25, 1996 the Company paid
$4,268,685 to repay the $4,000,000 principal amount of the promissory notes and
accrued interest in the amount of $268,685.
Each common stock bridge warrant entitled the holder to purchase one share of
the Company's Class A common stock at an exercise price of $2.50 per share,
subject to adjustment. The warrants expire on July 26, 2000. The Company
allocated $400,000 of the total notes payable proceeds to the warrants issued.
The $400,000 allocated to the warrants was amortized to interest expense using
the effective interest method over the period the related debt was expected to
be outstanding. Upon completion of the public offering, each common stock bridge
warrant automatically converted into one Class D warrant with the same terms as
those issued in the offering.
3. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
The Company's certificate of incorporation provides for 5,000,000 shares of
preferred stock, $.01 par value are authorized for future issuance, with rights
and preferences to be determined by the Board of Directors.
COMMON STOCK
On April 3, 1996, the Company completed a public offering of 20,000 units (the
"Units"). Each Unit consisted of 285 shares of Class A common stock and 1,000
Class D warrants and was sold for $1,000 per Unit, pursuant to which the Company
raised $20,000,000. The net proceeds to the Company from the Unit offering
amounted to approximately $17,779,000. On April 25, 1996, the underwriter
exercised the over-allotment option to purchase an additional 3,000 Units
pursuant to which the Company raised an additional $3,000,000. The Company
received net proceeds of approximately $2,736,000 from the exercise of the
over-allotment option.
F-9
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
During 1995, the Company completed a private placement of 51.5 units. Each unit
consisted of 12,500 Class A common shares and 6,738.5 Class C warrants. The
Company received proceeds of approximately $2,120,000, net of $455,000 in
expenses directly related to the offering. Each Class C warrant entitles the
holder to purchase, within five years from the closing date, one share of Class
A common stock at $4.00 per share, subject to adjustment. The shares and
warrants sold in this private placement have demand registration rights and the
issuance of such shares and warrants had a dilutive effect on the holders of
Class A warrants and Class B warrants. The placement agent in this offering
received a unit purchase option entitling it to purchase 15.45 units on the same
general terms and conditions as the participants in the private placement.
During 1995, the Company amended its certificate of incorporation to increase
authorized common stock to 95,000,000 shares, of which 94,406,937 are designated
as Class A common stock and the remaining 593,063 as Class B common stock. Class
B common stock is substantially identical to Class A common stock except that
holders of Class B common stock have five votes per share on each matter
considered by the stockholders. The Class B shares are each convertible into one
share of Class A common stock.
In March 1995, the Company issued 54,000 shares of Class A common stock in lieu
of cash as compensation for services. The aggregate market value of these shares
totaled approximately $332,000 on the dates of issuance and is reflected in
these financial statements as a charge against earnings and as additions to
common stock and additional paid-in capital. Two transactions were involved. In
the first, the Company entered into an agreement with an individual investor
under which the investor guaranteed IBM's security interest in the production of
400 completed TelePad 3 computers. The guarantee was backed by a $1.5 million
irrevocable letter of credit provided by a commercial bank (See Note 2). As part
of the consideration for the investor's guarantee, the Company issued the
investor 50,000 shares of the Company's Class A common stock. The Company valued
this first transaction at $311,748, which represents the market value of the
shares at the date of the transaction. In the second transaction, the Company
issued 4,000 shares of the Company's Class A common stock as consideration for
financial consulting services provided by an investment banker. The Company
F-10
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
valued this second transaction at $20,000, which represents the market value of
the shares at the date of the transaction.
At December 31, 1996, the Company had reserved 42,636,765 shares of common stock
for issuance upon exercise of stock options and purchase warrants. Shares of
unrestricted common stock issued for other than cash have been assigned amounts
equivalent to the fair market value of the shares issued. Compensatory stock
options issued have been assigned compensation values based upon the excess of
the fair value of the common stock underlying such options, at the grant date,
over the exercise price of the shares.
STOCK OPTIONS AND WARRANTS
The Non-Qualified Incentive Stock Option Plan (the "NQ Plan") was adopted by the
Board of Directors and approved by the stockholders during 1992. The purpose of
the NQ Plan is to compensate various key executives and key employees for
services rendered to or on behalf of the Company. No further options may be
issued under the NQ Plan.
The Company established an additional stock option plan in April 1993 (the "1993
Plan") providing for the grant of options to purchase shares of Class A common
stock to key employees and others at terms determined by the Board of Directors.
An amendment to the 1993 Plan, approved during 1994, increased the number of
options available under this plan from 150,000 to 975,000. In February 1995, the
Board of Directors canceled 600,000 of the options available for grant under the
1993 Plan. In June 1995, stockholders of the Company approved an amendment to
the 1993 Plan which increased the number of options available under this plan
from 375,000 to 975,000.
During 1994, two new plans were adopted by the Board of Directors and approved
by the stockholders. The Employee Stock Purchase Plan (the "SPP") was
established to provide eligible employees a means to purchase Class A common
stock through payroll deductions, subject to certain limitations. In addition,
the 1994 Non-Employee Director Stock Option Plan (the "NESOP") was established
to maintain the Company's ability to attract and retain the services of
experienced and highly qualified directors. Pursuant to the NESOP, eligible
directors will annually be granted an option, subject to vesting over a three
year period, to purchase 6,667 shares of Class A common stock.
A total of 250,000 shares of Class A common stock may be purchased under the SPP
and 175,000 shares may be available for purchase under the NESOP. At December
31, 1996, no shares had been purchased under the SPP.
F-11
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The Company established an additional stock option plan in September 1996 (the
"1996 Plan") providing for the grant of options to purchase shares of Class A
common stock to key employees (including directors and officers who are key
employees) and to consultants and directors who are not employees at terms
determined by the Board of Directors. The aggregate number of shares of Class A
common stock for which options may be granted under the 1996 Plan shall not
exceed 1,200,000.
From time to time, the Company has also granted options or warrants to purchase
common stock outside the above noted plans to investors, employees and
consultants some of which were in consideration for services performed.
The following table summarizes all option activity for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995
Shares Weighted- Shares Weighted-
Average Average
Exercise Price Exercise Price
-----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,245,638 $ 3.58 1,027,404 $ 3.98
Options granted 956,000 $ 4.46 326,001 $ 2.65
Options exercised (134,005) $ 0.35 (31,975) $ 0.33
Options canceled or expired (312,117) $ 5.39 (75,792) $ 6.38
---------- ----------
Outstanding at end of year 1,755,516 $ 3.99 1,245,638 $ 3.58
========== ==========
Options exercisable at year end 797,458 $ 2.82 776,857 $ 2.70
</TABLE>
F-12
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The options outstanding at December 31, 1996 range in price from $.33 per share
to $7.88 per share and have a weighted average remaining contractual life of 5.6
years.
The Company applies APB 25 in accounting for its stock option incentive plans
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS No. 123 on 1996 and 1995 pro
forma net loss as stated above is not necessarily representative of the effects
on reported net income or loss for future years due to, among other things, (1)
the vesting period of the stock options and (2) the fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1996 and 1995 would have been approximately $6.7
million, or $.68 per share, and $6.1 million and $1.26 per share, respectively.
The fair value of the options granted during 1996 and 1995 are estimated as
$1.30 and $1.82 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield 0%, volatility of 37.9% for 1996 and 105.6% for 1995, risk-free interest
rate of 6.12% for 1996 and 5.93% for 1995, and expected life of 3 years.
The following table summarizes all Class A, Class B, Class C, and Class D
warrant activity for the years ended December 31:
1996 1995
-------------------------------
Outstanding at beginning of year 7,291,730 4,944,688
Issued 23,000,000 2,347,042
Exercised (28,162) --
Outstanding at end of year 30,263,568 7,291,730
===============================
All warrants outstanding as of December 31, 1996, are at exercise prices of
$3.50 to $6.81 per share.
F-13
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
There was no provision for income taxes for the years ended December 31, 1996
and 1995 as a result of the Company's net loss for the years then ended.
Components of the net deferred tax asset at December 31, are as follows:
1996 1995
--------------------------
Deferred tax liabilities:
Depreciation and amortization $ 37,000 $ 14,000
Deferred tax assets:
Compensation expenses related to options 322,000 518,000
Net operating loss carryforward 9,105,000 7,558,000
Other 193,000 179,000
--------------------------
Total deferred tax assets 9,620,000 8,255,000
--------------------------
Net deferred tax assets before valuation allowance 9,583,000 8,241,000
Valuation allowance (9,583,000) (8,241,000)
==========================
Net deferred tax assets $ -- $ --
==========================
The effective income tax rate varied from the federal statutory tax rate for the
years ended December 31 as follows:
1996 1995
-------------------
Statutory rate: 34.0% 34.0%
State income taxes - net of federal income tax
benefit 4.0 4.0
Valuation allowance on net deferred tax benefits (38.0) (38.0)
Tax rate --% --%
===================
At December 31, 1996, the Company has available approximately $23,961,000 in net
operating loss and tax credit carryforwards which expire at varying dates
through 2011. These carryforwards may be significantly limited under the
Internal Revenue Code as a result of ownership changes experienced by the
Company.
F-14
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS
The Company's arrangement with Sanmina provides for ordering product four months
in advance of production to accommodate long lead items. At December 31, 1996,
the Company had approximately $3,500,000 in outstanding purchase orders issued
to Sanmina. This includes TelePad 3 computers based on a 586 microprocessor,
which is being developed and tested and is expected to be available for
production in the second quarter of 1997.
The Company leases office space in Herndon, Virginia under a noncancelable
operating lease which contains a renewal option. Total rent expense was $135,000
and $127,000 for the years ended December 31, 1996 and 1995, respectively.
Future minimum lease payments under the non-cancelable operating lease are as
follows:
1997 $ 165,273
1998 170,231
1999 86,373
-------------
Total $ 421,877
=============
The Company has entered into employment agreements with two of its officers
providing base salaries of $150,000 to $250,000. The base salaries are subject
to increase upon approval by the Board of Directors.
6. EMPLOYEE BENEFIT PLAN
During 1994, the Company established a defined contribution retirement plan (the
"Plan") covering all employees who have at least six months of service and are
21 years of age or older. Employees may elect to contribute up to 15% of their
annual compensation subject to limits detailed in the Internal Revenue Code.
Each year the Company may make a discretionary contribution to the Plan. During
the years ended December 31, 1996 and 1995, the Company did not make any
contributions to the Plan.
7. SUBSEQUENT EVENTS
On January 27, 1997, the Company, entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with TelePad Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company ("Acquisition"), Federal
Computer Corporation, a Virginia corporation ("Federal Computer"), and Hartland
Group, LLC, a Virginia limited liability company (the "LLC"), pursuant to which
Acquisition agreed to acquire from LLC all Federal Computer's outstanding
capital stock (the "Shares"). The purchase price is (i) $10 million, subject to
a post-closing net worth adjustment, consisting of $5.3 million in cash at
closing and a six-month, $4.7 million note, bearing interest at 8.5% (the
"Note"), secured by an irrevocable $4.7 million letter of credit, plus (ii) a
future payment (the "Additional Consideration"), based on Federal Computer's
future performance or a present value formula, secured by an irrevocable $5
million letter of credit. The Company would also be required to invest in
Federal Computer $5 million at closing and an additional $5 million 12 months
after closing (the "Investment Obligation"). The foregoing obligation will also
be secured by a pledge of all of the capital stock of Federal Computer and
Acquisition. The consummation of the Stock Purchase Agreement is subject to the
satisfaction of certain conditions, including that the Company obtain equity
financing of at least $15 million and within 10 days thereof, but in no event
later than August 1, 1997, elect to purchase the Shares. If the purchase is not
consummated by August 1, 1997, the Stock Purchase Agreement may be terminated by
any party.
F-15
STOCK PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
ARTICLE I SALE OF SHARES..................................................................1
1.01 Purchase and Sale of the Shares. ..............................................1
(a) Basic Transaction.....................................................1
(b) Preliminary Purchase Price............................................1
(c) The Closing...........................................................2
(d) Preparation of Adjustment Date Balance Sheet..........................2
(e) Adjustment to Preliminary Purchase Price. ...........................3
1.02 Additional Consideration........................................................3
(a) ......................................................................3
(b) Definitions...........................................................3
(c) Calculation of Additional Consideration...............................6
(d) Preparation of the Valuation Statement................................7
(e) Purchase Right........................................................7
1.03 Dispute Resolution..............................................................8
1.04 Deliveries by the LLC...........................................................9
1.05 Deliveries by TelePad and the Buyer............................................10
1.06 Further Assurances.............................................................11
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE LLC ..................................................11
2.01 Capital Stock..................................................................11
2.02 Investments....................................................................11
2.03 Corporate Organization; Etc....................................................12
2.04 Authorization; Etc.............................................................12
2.05 Restrictive Documents..........................................................13
2.06 Consents.......................................................................13
2.07 Books and Records..............................................................13
2.08 Bank Accounts and Powers of Attorney...........................................13
2.09 Financial Statements...........................................................14
2.10 Accounting Records; Internal Controls; Absence of Certain Payments.............14
(a) Accounting Records...................................................14
(b) Data Processing; Access..............................................15
2.11 Title to Properties; Encumbrances..............................................15
2.12 Real Property..................................................................15
2.13 Absence of Certain Changes.....................................................15
2.14 Accounts Receivable............................................................16
2.15 Leases.........................................................................16
2.16 Assets.........................................................................16
2.17 Patents, Trademarks, Trade Names, Etc..........................................17
-i-
<PAGE>
2.18 Government Contracts and Proposals. ..........................................17
2.19 Other Contracts and Commitments................................................19
2.20 Customers and Suppliers........................................................20
2.21 Labor Difficulties.............................................................20
2.22 Personnel......................................................................21
2.23 Employee Benefit Plans.........................................................21
(a) List of Plans........................................................21
(b) Status of Plans......................................................21
(c) Contributions........................................................22
(d) Tax Qualification....................................................22
(e) Compliance With Tax Reform Act of 1986...............................22
(f) Transactions.........................................................22
(g) Triggering Events....................................................23
(h) Other Plans..........................................................23
(i) Documents............................................................23
(j) Terminated Plan......................................................23
2.24 Litigation.....................................................................24
2.25 Compliance with Law............................................................24
2.26 Permits........................................................................24
2.27 Dividends and Other Distributions..............................................25
2.28 Undisclosed Liabilities........................................................25
2.29 Taxes..........................................................................25
2.30 Insurance......................................................................25
2.31 Environmental Laws and Regulations.............................................25
2.32 Absence of Certain Payments....................................................26
2.33 Insider Interests..............................................................27
2.34 Brokers and Finders............................................................27
2.35 Product or Service Liability...................................................27
2.36 Governmental Interaction.......................................................27
2.37 Security Matters...............................................................28
2.38 Government Furnished Property..................................................28
2.39 Estimates......................................................................28
2.40 Disclosure.....................................................................28
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
THE LLC RELATING TO THE SHARES...............................................28
3.01 Ownership......................................................................28
3.02 Title..........................................................................29
3.03 Right to Transfer..............................................................29
3.04 All Shares.....................................................................29
3.05 Binding Agreement..............................................................29
3.06 Conflicts......................................................................29
3.07 Investment.....................................................................29
-ii-
<PAGE>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF
TELEPAD AND THE BUYER........................................................30
4.01 Corporate Organization; Etc....................................................30
4.02 Authorization; Etc.............................................................30
4.03 No Violation...................................................................30
4.04 Brokers and Finders............................................................31
4.05 SEC Filings....................................................................31
4.06 Absence of Certain Changes or Events...........................................31
4.07 Litigation.....................................................................31
4.08 Solvency.......................................................................31
4.09 Assets.........................................................................31
4.10 Information Received...........................................................32
ARTICLE V PRE-CLOSING COVENANTS AND AGREEMENTS...........................................32
5.01 Conduct of Company's Business..................................................32
5.02 Conduct of TelePad's and the Buyer's Business..................................33
5.03 Inspections and Confidentiality................................................34
5.04 Announcements and Federal Securities Law Matters...............................36
5.05 Notification of Certain Matters................................................36
5.06 Permits and Approvals..........................................................36
5.07 Additional Agreements..........................................................37
ARTICLE VI SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION....................................................37
6.01 Survival of Representations....................................................37
6.02 Statements as Representations..................................................37
6.03 Indemnification Provisions for Benefit of TelePad and the Buyer................37
6.04 Indemnification Provisions for Benefit of the LLC..............................38
6.05 Matters Involving Third Parties................................................38
ARTICLE VII POST-CLOSING COVENANTS AND AGREEMENTS..................................................40
7.01 Board Composition..............................................................40
7.02 Investment Obligations.........................................................40
7.03 Delivery and Maintenance of Short Term Letter of Credit........................40
7.04 Delivery and Maintenance of Long Term Letter of Credit.........................41
7.05 Tax Matters....................................................................41
(a) Tax Periods Ending on or Before the Closing Date.....................41
(b) Tax Periods Beginning Before and Ending After the Closing Date.......42
(c) Cooperation on Tax Matters...........................................42
(d) Tax Sharing Agreements...............................................43
(e) Certain Taxes........................................................43
-iii-
<PAGE>
ARTICLE VIII DISPUTES; ARBITRATION.................................................................43
8.01 Disputes Generally.............................................................43
8.02 Selection of Arbitrator(s).....................................................43
8.03 Decision of Arbitrators........................................................43
8.04 Expense of Arbitration.........................................................44
ARTICLE IX MISCELLANEOUS PROVISIONS.......................................................44
9.01 Amendment and Modifications....................................................44
9.02 Waiver of Compliance...........................................................44
9.03 Expenses.......................................................................44
9.04 Reasonable Efforts; Further Assurances.........................................44
9.05 Remedies; Waiver...............................................................44
9.06 Knowledge Convention...........................................................45
9.07 Notices........................................................................45
9.08 Assignment.....................................................................46
9.09 Governing Law..................................................................46
9.10 Counterparts...................................................................46
9.11 Construction...................................................................46
9.12 Entire Agreement...............................................................46
9.13 Third Parties..................................................................47
</TABLE>
EXHIBITS
EXHIBIT A - Form of Buyer Note
EXHIBIT B - Illustration of Calculation of Additional Consideration
EXHIBIT C - Form of Pledge Agreement
EXHIBIT D - List of Directors
-iv-
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of this 27th day of January, 1997, by and among TelePad Corporation, a
Delaware corporation ("TelePad"), TelePad Acquisition, Inc., a Delaware
corporation (the "Buyer"), and Federal Computer Corporation, a Virginia
corporation (the "Company"), Hartland Group, LLC, a Virginia limited liability
company (the "LLC").
W I T N E S S E T H:
--------------------
WHEREAS, immediately prior to the execution of this Agreement Charles
F. Crowe, William E. Hummel, R. Joseph Market, R. Wayne Talley, Louis J. Fisher
and George R. Blick (individually, a "Stockholder" and collectively, the
"Stockholders") owned (a) in the aggregate 3,295 shares of the Company's common
stock, par value $.10 per share (the "Shares"), constituting 100% of the
Company's issued and outstanding capital stock, and (b) transferred the Shares
to the LLC as a capital contribution.
WHEREAS, the Stockholders own all of the interests in the LLC;
WHEREAS, the LLC desires to sell, and the Buyer desires to purchase,
the Shares pursuant to this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
SALE OF SHARES
1.01 Purchase and Sale of the Shares.
-------------------------------
(a) Basic Transaction. On and subject to the terms and conditions of
this Agreement, the Buyer agrees to purchase from the LLC, and the LLC agrees to
sell to the Buyer, all of the Shares for the consideration specified below in
this Article I.
(b) Preliminary Purchase Price. The Buyer agrees to pay to the LLC at
the Closing $10 million (the "Preliminary Purchase Price") by delivery of (i)
cash in the amount of $5.3 million by wire transfer or other delivery of
immediately available funds and (ii) its promissory note in the principal amount
of $4.7 million in the form of Exhibit A attached hereto (the "Buyer Note"). The
Preliminary Purchase Price will be subject to post-closing adjustment as set
forth below in this Article I.
<PAGE>
(c) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Arent Fox Kintner
Plotkin & Kahn, 1050 Connecticut Avenue, N.W., Washington, D.C. 20036,
concurrent with the satisfaction of the Closing Condition (as defined below).
The "Closing Condition" shall be the delivery by the Buyer to the LLC by wire
transfer or other immediately available funds, of $15 million in cash on or
before the date (the "Closing Date") which is the earlier of (i) ten business
days after TelePad has received on a cumulative basis since the date of this
Agreement at least $15 million in net proceeds from the issuance of its capital
stock, including pursuant to the exercise of warrants or options to purchase
such capital stock, or (ii) August 1, 1997. If the Closing Condition is not
satisfied on or before the Closing Date, this Agreement and all other agreements
executed pursuant hereto shall, absent fraud or other material breach of this
Agreement by a party hereto, become void and have no effect, and there shall be
no obligations or liability on the part of any party or its respective officers,
directors and members; provided that the obligations of the parties contained in
Sections 5.03, 5.04 and 9.03 shall survive such termination.
(d) Preparation of Adjustment Date Balance Sheet.
(i) No later than 60 days after the Closing Date, the Buyer
will prepare and deliver to the LLC a draft consolidated balance sheet
(the "Draft Adjustment Date Balance Sheet") for the Company and its
subsidiaries as of the close of business on the last day of the month
ending immediately prior to the Closing Date (the "Adjustment Date")
for the purpose of determining the amount by which the Preliminary
Purchase Price will be adjusted (the "Adjustment Amount"). The Buyer
will prepare the Draft Adjustment Date Balance Sheet in accordance
with generally accepted accounting principles of the United States
("GAAP") applied on a basis consistent with the preparation of the
Company's financial statements referred to in Section 2.09; provided,
however, that assets, liabilities, gains, losses, revenues and
expenses in interim periods or as of dates other than year-end (which
normally are determined through the application of so-called interim
accounting conventions or procedures) will be determined, for purposes
of the Draft Adjustment Date Balance Sheet, through full application
of the procedures used in preparing the Company's audited balance
sheet as of October 31, 1996. The LLC shall cooperate fully with the
Buyer at Buyer's reasonable request in the preparation of the Draft
Adjustment Date Balance Sheet.
(ii) If the LLC has any objections to the Draft Adjustment
Date Balance Sheet, it will deliver a reasonably detailed statement
describing its objections to the Buyer within 30 days after receiving
the Draft Adjustment Date Balance Sheet. If the LLC does not so object
within such period, such Draft Adjustment Date Balance Sheet shall be
deemed final and conclusive with respect to the determination of the
Adjustment Amount. If the LLC does object within such period, the
Buyer and the LLC will use reasonable efforts to resolve such
objections themselves before resorting to the dispute resolution
procedures set forth in Section 1.03.
-2-
<PAGE>
(e) Adjustment to Preliminary Purchase Price.
(i) For purposes of this Section 1.01(e), the following
terms shall have the following meanings:
"Consolidated Net Worth" means the excess of the Company's
total consolidated assets over its total consolidated liabilities as
shown on the Adjustment Date Balance Sheet.
"Net Worth Excess" means the amount, if any, by which the
Consolidated Net Worth exceeds $5,350,000.
"Net Worth Deficiency" means the amount, if any, by which
$5,250,000 exceeds the Consolidated Net Worth.
(ii) If there is a Net Worth Excess, the Adjustment Amount
shall equal the Net Worth Excess and TelePad shall make an equity
contribution to the Buyer in the amount of the Adjustment Amount (plus
interest thereon at the rate of 8.5% per annum from the Closing Date)
and the Buyer shall pay such amount to the LLC by wire transfer or
other delivery of immediately available funds within ten days after
the date on which the Adjustment Amount is finally determined pursuant
to this Article I.
(iii) If there is a Net Worth Deficiency, the Adjustment
Amount shall equal the Net Worth Deficiency and the LLC shall pay the
Adjustment Amount (plus interest thereon at the rate of 8.5% per annum
from the Closing Date) to TelePad by wire transfer or other delivery
of immediately available funds within ten days after the date on which
the Adjustment Amount is finally determined pursuant to this Article
I.
The Preliminary Purchase Price as so adjusted is referred to herein as the
"Initial Purchase Price." The Initial Purchase Price plus the Additional
Consideration determined in accordance with Section 1.02 is referred to herein
as the "Purchase Price."
1.02 Additional Consideration.
------------------------
(a) As additional consideration for the purchase of the Shares, the
Buyer agrees to pay the Additional Consideration to the LLC in cash on the
Payment Date by wire transfer or other delivery of immediately available funds.
(b) Definitions. For purposes of this Section 1.02, the following
terms shall have the following meanings:
-3-
<PAGE>
"Additional Consideration" means the amount determined in accordance
with Section 1.02(c).
"Company Value" means the Value of the Company on a consolidated
basis excluding the Investment Subsidiary.
"Consolidated Value" means the Value of the Company and its
subsidiaries, including the Investment Subsidiary.
"Initial Public Offering" means an initial underwritten public
offering of the Company's or the Buyer's capital stock, registered under the
Securities Act of 1933, as amended, on a registration statement on Form S-1 or
SB-2.
"Investment Subsidiary" means the subsidiary, if any, of the Company
formed for the purpose of investing the Investment Amount as defined in Section
1.02(c)(ii).
"Net Worth" means, as of the Valuation Date, an Entity's total assets
less its total liabilities, as determined in accordance with GAAP applied on a
consistent basis.
"Payment Date" means 10 days after the final determination of the
Additional Consideration pursuant to this Section 1.02.
"Subsidiary Value" means the Value of the Investment Subsidiary on a
stand-alone basis.
"Trailing EBITDA" means, for the 12-month period immediately
preceding the Valuation Date, the Entity's net income from continuing operations
and discontinued operations (i.e., income after applicable income taxes, but
excluding extraordinary items and the cumulative effect of accounting changes),
determined in accordance with GAAP applied on a consistent basis, adjusted as
follows: (i) add interest and other finance charges expensed, (ii) add non-cash
charges for depreciation and amortization expensed, and (iii) add income taxes
expensed.
"Trailing Net Income" means, for the 12-month period immediately
preceding the Valuation Date, the Entity's net income, as determined in
accordance with GAAP applied on a consistent basis.
"Transfer of Control" means the happening of any of the following
events: (a) except for an Excluded Person (as defined below), any "person,"
including a "group," as such terms are defined in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder (collectively the "Exchange Act"), becomes the beneficial owner, as
defined under the Exchange Act, directly or indirectly, whether by purchase or
acquisition or agreement to act in concert or otherwise, of 45% or more of the
Company's or the Buyer's outstanding capital stock; or (b) except in the case of
a merger or consolidation in which (i) the Company or the Buyer is the surviving
corporation and (ii) Excluded Persons beneficially own,
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directly or indirectly, more than 66 2/3% of the Company's or the Buyer's
outstanding capital stock immediately after such merger or consolidation, the
Company or the Buyer, as the case may be, consummates a merger, consolidation,
liquidation or sale of all or substantially all of the Company's or the Buyer's
assets. An "Excluded Person" shall mean TelePad or any wholly owned subsidiary
of TelePad including the Buyer.
"Valuation Date" means the earliest to occur of (a) the consummation
by the Company or the Buyer of the Initial Public Offering; (b) the effective
date of a Transfer of Control; (c) the third anniversary of the Closing Date,
provided that the date set forth in this clause (c) may be extended in one-year
increments by the LLC in its sole discretion (i) to the fourth anniversary of
the Closing Date upon written notice thereof received by the Buyer during the
30-day period ending 180 days before the third anniversary of the Closing Date
and, provided the first one-year extension has been elected, (ii) to the fifth
anniversary of the Closing Date upon written notice thereof received by the
Buyer during the 30-day period ending 180 days before the fourth anniversary of
the Closing Date; (d) the effective date of the termination of William Hummel's
employment (i) by the Company "without cause" (as defined in his employment
agreement to be executed pursuant to Section 1.04(i)), or (ii) by Mr. Hummel due
to (A) a change in his duties or title materially inconsistent with his position
and status with the Company as of the Closing Date or (B) a reduction in the
base salary or benefits to which he is entitled under such employment agreement,
provided that the LLC delivers to TelePad written notice of its election to
treat any such event as a Valuation Date hereunder within 10 days of such
effective date; or (e) the date as of which designees or appointees of the LLC
no longer comprise a majority of the Company's board of directors (the "Board")
(other than as a result of the death or resignation of such designees or
appointees where the LLC elects not to fill the vacancies created thereby),
provided that the LLC delivers to TelePad written notice of its election to
treat such event as a Valuation Date hereunder within 10 days of such date.
"Value" means, as it applies to (a) the Company on a consolidated
basis including the Investment Subsidiary, (b) the Company on a consolidated
basis excluding the Investment Subsidiary, or (c) the Investment Subsidiary on a
stand-alone basis (in each case, an "Entity"), one of the following amounts, as
elected by the LLC pursuant to Section 1.01(d)(i), determined as of the
Valuation Date:
(i) one-third of the sum of (x) the Entity's Trailing EBIDTA
multiplied by five, (y) the Entity's Trailing Net Income multiplied by
13, and (z) the Entity's Net Worth multiplied by two (collectively,
the "Internal Value"); or
(ii) an external valuation of the Entity resulting from the
Initial Public Offering ("IPO Value"); or
(iii) an external valuation of the Entity resulting from a
Transfer of Control ("Transfer of Control Value").
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<PAGE>
(c) Calculation of Additional Consideration. The amount of the
Additional Consideration shall be determined as follows:
(i) If TelePad has not yet made an investment in the Company
pursuant to Section 7.02, the Additional Consideration shall equal the
sum of (A) the amount, up to a maximum of $16 million, by which the
Company Value exceeds the Initial Purchase Price and (B) the product
(the "Back-End Amount") obtained by multiplying (i) .6154 times (ii)
the amount, if any, by which the Company Value exceeds the sum of the
Initial Purchase Price and $16 million.
(ii) If TelePad has made an investment in the Company
pursuant to Section 7.02 (the "Investment Amount"), the Additional
Consideration shall equal either of the following amounts, as elected
by the LLC, in its sole discretion, in accordance with Section 7.02.
(A) the sum of (i) the amount, up to a maximum of
$16 million, by which the Consolidated Value exceeds the sum
of (x) the Initial Purchase Price and (y) the Investment
Amount plus a return thereon equal to 25% compounded
annually, and (ii) the product obtained by multiplying (x)
.6154 times (y) the amount, if any, by which the
Consolidated Value exceeds the sum of (1) the Initial
Purchase Price, (2) $16 million and (3) the Investment
Amount plus a return equal to 25% compounded annually; or
(B) (i) the sum of (x) the amount, up to a maximum
of $16 million, by which the Company Value exceeds the
Initial Purchase Price, and (y) the Back-End Amount; plus
(ii) the Subsidiary Value multiplied by
a fraction, the numerator of which equals the
amount, up to $16 million, by which the Subsidiary
Value exceeds the Investment Amount, and the
denominator of which equals the sum of the
numerator, the Investment Amount and the Initial
Purchase Price.
(iii) Notwithstanding the foregoing, if
the obligation to pay the Additional Consideration
accrues pursuant to clause (d) or (e) under the
definition of "Valuation Date", the amount of the
Additional Consideration shall equal the amount
which, if invested on the Valuation Date with an
annual return of 8.5 percent compounded monthly,
would equal $16 million as of the third
anniversary of the Closing Date.
(iv) Examples of the manner in which
Additional Consideration is calculated are set
forth in Exhibit B hereto.
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<PAGE>
(d) Preparation of the Valuation Statement.
--------------------------------------
(i) Within 30 days after the Valuation Date, the LLC shall
deliver a written notice to the Buyer setting forth which of the three
methods set forth in Section 1.02(b) for determining Value is to be
used in the determination of the amount of the Additional
Consideration. Within 30 days of receiving such notice, the Buyer will
prepare and deliver to the LLC a draft valuation statement (the "Draft
Valuation Statement") setting forth the amount of the Additional
Consideration, determined in accordance with Section 1.02(c)(i) or
(ii), as applicable, including a detailed statement as to the manner
in which such amount was determined.
(ii) If the LLC has any objections to the Draft Valuation
Statement, it will deliver a reasonably detailed statement describing
its objections to the Buyer within 30 days after receiving the Draft
Valuation Statement. If the LLC does not so object within such period,
such Draft Valuation Statement shall be deemed final and conclusive
with respect to the determination of the Additional Consideration. If
the LLC does object within such period, the Buyer and the LLC will use
reasonable efforts to resolve such objections themselves before
resorting to the dispute resolution procedures set forth in Section
1.03.
(e) Purchase Right.
(i) If the Company receives written notice of a proposed
bona fide Transfer of Control, the LLC may elect, by written notice to
the Buyer (the "Purchase Notice") delivered within 10 days of the
LLC's receipt of notice of such Transfer of Control, in lieu of
receiving the Additional Consideration after the occurrence of the
Transfer of Control, to purchase the Shares from the Buyer, prior to
the earlier of the occurrence of the Transfer of Control or the
disposition of such Shares in connection with such Transfer of
Control, for an amount (the "Offer Amount") equal to the amount by
which the Transfer of Control Value exceeds the Additional
Consideration.
(ii) If the Additional Consideration is determined based
upon the Valuation Date occurring on the third, fourth or fifth
anniversary date of the Closing Date, as applicable, the LLC may
elect, by written notice to the Buyer (the "Purchase Notice"), in lieu
of receiving the Additional Consideration, to purchase the Shares from
the Buyer on or before the Payment Date for an amount (the "Offer
Amount") equal to the amount by which the Internal Value exceeds the
Additional Consideration.
(iii) If the LLC elects to purchase the Shares from the
Buyer pursuant to clause (i) or (ii) above, the Buyer may, within 10
days of its receipt of the Purchase Notice, deliver to the LLC an
offer (the "Counterproposal") to pay to the LLC an amount (the
"Counterproposal Amount") in excess of the Additional Consideration
that would
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<PAGE>
have been payable to the LLC absent such election (the "Original
Amount"). Within 10 days of its receipt of the Counterproposal, the
LLC shall deliver a written notice to the Buyer (a) accepting the
Counterproposal, or (b) electing to purchase the Shares from the Buyer
for a purchase price which exceeds the Offer Amount by an amount in
excess of the difference between the Counterproposal Amount and the
Original Amount. The failure of the LLC to timely deliver such notice
shall be deemed to be an acceptance of the Counterproposal.
(iv) Payments by the Buyer to the LLC or by the LLC to the
Buyer pursuant to this Section 1.02(e) shall be in cash by wire
transfer or other delivery of immediately available funds.
(v) The rights set forth in this Section 1.02(e) shall
expire upon the fixing of a Valuation Date as a result of the
occurrence of the Initial Public Offering.
1.03 Dispute Resolution.
------------------
(a) If the parties do not obtain a final resolution within 30 days
after the Buyer has received the statement of objections with respect to the
Draft Adjustment Date Balance Sheet or the Draft Valuation Statement, as the
case may be, the Buyer and the LLC will select an accounting firm mutually
acceptable to them to resolve any remaining objections. If the Buyer and the LLC
are unable to agree on the choice of an accounting firm, they will select a
nationally-recognized accounting firm by lot (after excluding their respective
regular outside accounting firms). The Buyer shall provide to the accounting
firm access to all information and personnel reasonably relevant to the
calculation in dispute. The parties shall not be bound by or restricted to the
claims theretofore made or the positions theretofore asserted. The Buyer and the
LLC shall each be free to assert such claims, take such positions and submit to
the accounting firm such additional documentary or other evidence as such
parties or party may desire (subject only to such rules of procedure or
determinations of materiality and relevance as the accounting firm may make).
The determination of any accounting firm so selected will be set forth in
writing and will be conclusive and binding upon the parties. The Buyer will
revise the Draft Adjustment Date Balance Sheet or the Draft Valuation Statement
as appropriate to reflect the resolution of any objections thereto pursuant to
this Section 1.03(a). The "Adjustment Date Balance Sheet" shall mean the Draft
Adjustment Date Balance Sheet together with any revisions thereto pursuant to
this Section 1.03(a).
(b) If the parties submit any unresolved objections to an accounting
firm for resolution as provided in Section 1.03(a), the Buyer and the LLC will
share responsibility for the fees and expenses of the accounting firm as
follows:
(i) if the accounting firm resolves all of the unresolved
objections in favor of the Buyer (the Consolidated Net Worth or
Additional Consideration so
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<PAGE>
determined is referred to herein as the "Low Value"), the LLC will be
responsible for all of the fees and expenses of the accounting firm;
(ii) if the accounting firm resolves all of the unresolved
objections in favor of the LLC (the Consolidated Net Worth or
Additional Consideration so determined is referred to herein as the
"High Value"), the Buyer will be responsible for all of the fees and
expenses of the accounting firm; and
(iii) if the accounting firm resolves some of the unresolved
objections in favor of the Buyer and the rest of the unresolved
objections in favor of the LLC (the Consolidated Net Worth or
Additional Consideration so determined is referred to herein as the
"Actual Value"), the LLC will be responsible for that fraction of the
fees and expenses of the accounting firm equal to (A) the difference
between the High Value and the Actual Value over (B) the difference
between the High Value and the Low Value, and the Buyer will be
responsible for the remainder of the fees and expenses.
(c) The Buyer will make the work papers and back-up materials used in
preparing the Draft Adjustment Date Balance Sheet and the Draft Valuation
Statement available to LLC and its accountants and other representatives at
reasonable times and upon reasonable notice at any time during (i) the
preparation by the Buyer of the Draft Adjustment Date Balance Sheet or the Draft
Valuation Statement, (ii) the review by the LLC of the Draft Adjustment Date
Balance Sheet or the Draft Valuation Statement and (iii) the resolution by the
parties of any objections thereto.
1.04 Deliveries by the LLC. At the Closing, the LLC shall deliver to
---------------------
TelePad and the Buyer:
(a) the certificates representing the Shares, duly endorsed in blank,
or accompanied by stock powers duly executed in blank by the LLC, with all
necessary transfer taxes and revenue stamps, acquired at the LLC's expense,
affixed and cancelled;
(b) all required consents, approvals and Permits (as defined in
Section 2.26) listed in Sections 2.06 and 2.26 of the Disclosure Schedule, each
in form and substance reasonably satisfactory to TelePad and the Buyer;
(c) evidence of termination effective as of the Closing Date of the
Stockholder Agreement dated as of July 25, 1996, as amended, by and among the
Company and the Stockholders;
(d) a release, executed by each of the Stockholders, the LLC and the
Company, as agreed to in accordance with Section 5.07 (the "Release").
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<PAGE>
(e) certificates from appropriate authorities, dated the most recent
practicable date, as to the good standing and qualification to do business of
each of the Company and the LLC in each jurisdiction where it is so qualified;
(f) copies of (i) the Company's Articles of Incorporation certified by
the State Corporation Commission of Virginia, (ii) the Company's Bylaws
certified by the Company's Secretary and (iii) the LLC's Articles of
Organization and Operating Agreement certified by a duly authorized
representative, in each case as in effect on the Closing Date;
(g) a Stock Pledge, Assignment and Security Agreement, executed by the
LLC, in the form of Exhibit C hereto (the "Pledge Agreement");
(h) a tax sharing agreement between the Company and TelePad, executed
by the Company, in a form satisfactory to the Company and Telepad;
(i) an executed employment agreement between the Company and William
Hummel, in a form satisfactory to TelePad and the LLC;
(j) an assignment of the Company's life insurance policies on each of
the Stockholders, executed by the Company, in a form satisfactory to the LLC;
(k) executed amendments, if any, to existing employment agreements
with the Stockholders other than William Hummel, as agreed to in accordance with
Section 5.07; and
(l) all other documents specified in this Agreement, or otherwise
agreed to by the parties to be delivered by the LLC on the date of this
Agreement.
1.05 Deliveries by TelePad and the Buyer. At the Closing, TelePad and the
-----------------------------------
Buyer, as applicable, shall deliver to the LLC:
(a) the executed Buyer Note;
(b) the Pledge Agreement executed by TelePad and the Buyer in the form
of Exhibit C hereto, along with the Buyer's Certificate representing the Shares
and TelePad's certificate representing all of the issued and outstanding capital
stock of the Buyer; and
(c) certificates from appropriate authorities, dated the most recent
practicable date, as to the good standing and qualification to do business of
each of TelePad and the Buyer in each jurisdiction where it is so qualified;
(d) or each of TelePad and the Buyer, copies of its (i) certificate of
incorporation certified by the Secretary of State of the State of Delaware and
(ii) bylaws certified by its secretary, in each case as in effect on the Closing
Date;
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<PAGE>
(e) a tax sharing agreement between the Company and TelePad, executed
by TelePad, in a form satisfactory to TelePad and the Company; and
(f) all other documents specified in this Agreement, or otherwise
agreed to by the parties, to be delivered by TelePad or the Buyer on the date of
this Agreement.
1.06 Further Assurances. From time to time after the date of this
-------------------
Agreement, each party hereto will, at the request of any other party but without
further consideration, execute and deliver such other and further instruments of
sale, assignment, transfer and conveyance and take such other and further action
as such other party may reasonably request in order to carry out and implement
the transactions contemplated herein.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE LLC
The Company has delivered to TelePad and the Buyer prior to the execution
of this Agreement, a disclosure schedule (the "Disclosure Schedule") containing
information about the Company and identifying certain documents relating to the
Company. The Company and the LLC, jointly and severally, represent and warrant
to TelePad and the Buyer as follows:
2.01 Capital Stock. The Company has an authorized capitalization consisting
-------------
of 20,000 shares of capital stock, including 10,000 shares of common stock, $.10
par value, 3,295 of which are issued and outstanding, and 10,000 shares of
preferred stock, $.10 par value, none of which are issued or outstanding. All of
the Shares have been duly authorized and validly issued and are fully paid and
non-assessable and have been issued in compliance with all applicable securities
laws. There are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts or
commitments that could require the Company to issue, sell, transfer or otherwise
dispose of any the Company's capital stock, other than as contemplated by this
Agreement. Any equity securities of the Company which were issued and reacquired
by the Company were so reacquired in compliance with all applicable laws and the
Company has no outstanding obligation or liability with respect thereto. There
are no voting trusts, proxies or other agreements or understandings with respect
to the voting of any of the Company's capital stock.
2.02 Investments. Section 2.02 of the Disclosure Schedule sets forth for
-----------
each corporation with respect to which the Company or a subsidiary of the
Company owns a majority of the common stock or has the power to vote or direct
the voting of sufficient securities to elect a majority of the directors
(individually, a "Subsidiary" and collectively, the "Subsidiaries") (i) its name
and jurisdiction of incorporation, (ii) the number of shares of authorized
capital stock, (iii)
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<PAGE>
the number of issued and outstanding shares of each class of its capital stock,
the names of the holders thereof, and the number of shares held by each such
holder, and (iv) the number of shares of its capital stock held in treasury. All
of the issued and outstanding shares of capital stock of each Subsidiary have
been duly authorized and are validly issued, fully paid and nonassessable. The
Company holds of record and owns beneficially all of the outstanding shares of
each Subsidiary, free and clear of any restrictions on transfer (other than
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and state securities laws), taxes, security interests, options, warrants,
purchase rights, contracts, commitments, equities, claims, and demands. There
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts or
commitments that could require any of the Company and its Subsidiaries to issue,
sell, transfer or otherwise dispose of any capital stock of any of its
Subsidiaries. There are no outstanding stock appreciation, phantom stock, profit
participation or similar rights with respect to any Subsidiary. There are no
voting trusts, proxies or other agreements or understandings with respect to the
voting of any capital stock of any Subsidiary. None of the Company or its
Subsidiaries controls directly or indirectly or has any direct or indirect
equity participation in any corporation, partnership, trust, joint venture or
other business association which is not a Subsidiary.
2.03 Corporate Organization; Etc. The Company and each of the Subsidiaries
----------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, as set forth in Section 2.03 of the
Disclosure Schedule. The Company and each of the Subsidiaries has all requisite
corporate power and authority to carry on its business as it is now being
conducted and to own the properties and assets it now owns. The Company and each
of the Subsidiaries is duly qualified or licensed to do business and is in good
standing in the jurisdictions listed in Section 2.03 of the Disclosure Schedule,
which are the only jurisdictions in which the character or location of the
properties owned or leased by the Company and each of the Subsidiaries or the
nature of the business conducted by the Company and each of the Subsidiaries
makes such qualification or licensing necessary, except where the failure to be
so qualified would not have a material adverse effect on the business, assets,
operations or financial condition of the Company or any of its Subsidiaries or
the ability of any of them to perform their respective obligations, if any,
under this Agreement or under any other agreement required to be executed by
them pursuant to this Agreement ("Material Adverse Effect"). Section 2.03 of the
Disclosure Schedule correctly lists the current directors and executives of the
Company and each of the Subsidiaries.
2.04 Authorization; Etc. The Company has full corporate power and authority
------------------
to enter into this Agreement and to carry out the transactions contemplated
hereby. The Company has taken all action required by law, its Articles of
Incorporation (as amended) and Bylaws (as amended) or otherwise to authorize the
execution and delivery of this Agreement and the transactions contemplated
hereby, and this Agreement is a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except to the
extent that enforcement may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium,
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<PAGE>
fraudulent transfer or similar laws affecting the enforcement of rights of
creditors and other obligees generally and the scope of equitable remedies which
may be available.
2.05 Restrictive Documents. Except as set forth in Section 2.05 of the
----------------------
Disclosure Schedule, neither the Company nor any of the Subsidiaries is subject
to, or a party to, any charter, bylaw, mortgage, lien, lease, Permit, agreement,
contract, instrument, law, rule, ordinance, regulation, order, judgment or
decree, or any other restriction of any kind or character, which materially and
adversely affects the business practices, operations or financial condition of
the Company, the Subsidiaries or any of their assets or property, or which would
prevent consummation of the transactions contemplated by this Agreement,
compliance by the Company with the terms, conditions and provisions hereof or
the continued operation of the business of the Company or the Subsidiaries after
the date hereof on substantially the same basis as heretofore operated or which
would materially restrict the ability of the Company or any Subsidiary to
acquire any property or conduct business in any area.
2.06 Consents. Section 2.06 of the Disclosure Schedule contains a list of
--------
all consents of any person necessary for the consummation of the transactions
contemplated hereby including, without limitation, consents from parties to
loans, contracts, leases or other agreements and consents from governmental
agencies, whether federal, state or local. All such consents have been obtained
and evidence thereof has been provided to TelePad and the Buyer, except where
the failure to obtain any consent or consents would not in the aggregate have a
Material Adverse Effect.
2.07 Books and Records. The minute books of the Company and the
-------------------
Subsidiaries, as previously made available to TelePad and its representatives,
contain (i) a true, correct and complete copy of the charter documents of the
Company and the Subsidiaries, and (ii) materially accurate records of all
meetings of, and corporate action taken by (including actions taken by written
consent) the stockholders and the board of directors and all committees thereof
of the Company and the Subsidiaries. Neither the Company nor any of the
Subsidiaries has any of its records, systems, controls, data or information
recorded, stored, maintained, operated or otherwise wholly or partly dependent
upon or held by any means (including any electronic, mechanical or photographic
process, whether computerized or not) which (including all means of access
thereto and therefrom) are not under the exclusive ownership and direct control
of the Company or such Subsidiary.
2.08 Bank Accounts and Powers of Attorney. Set forth in Section 2.08 of the
------------------------------------
Disclosure Schedule is an accurate and complete list showing (a) the name and
address of each bank in which the Company and each of the Subsidiaries has an
account or safe deposit box, the number of any such account or any such box and
the names of all persons authorized to draw thereon or to have access thereto,
and (b) the names of all persons, if any, holding powers of attorney from the
Company and each of the Subsidiaries and a summary statement of the terms
thereto.
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2.09 Financial Statements. The Company has heretofore furnished TelePad
---------------------
with audited consolidated balance sheets of the Company and the Subsidiaries
dated as of October 31, 1994, 1995 and 1996 and the related consolidated
statements of earnings, statements of changes in stockholders' equity and
statements of cash flows for the years then ended, all certified by Coopers &
Lybrand (the Company's audited consolidated balance sheet as at October 31, 1996
is hereinafter referred to as the "Balance Sheet"). Such financial statements,
including the footnotes thereto, except as indicated therein, have been prepared
in accordance with GAAP consistently followed throughout the periods indicated.
The Balance Sheet fairly presents in all material respects the financial
condition of the Company and the Subsidiaries at the date thereof and, except as
indicated therein, reflects, to the extent required by GAAP, all claims against
and all debts and liabilities of the Company and the Subsidiaries, fixed or
contingent, as at the date thereof and the related statements of earnings,
statements of changes in stockholders' equity and statements of cash flows
fairly present in all material respects the results of operations of the Company
and the Subsidiaries and the changes in its financial position for the period
indicated. Such other balance sheets fairly present in all material respects the
financial condition of the Company and the Subsidiaries at the respective dates
thereof and, except as indicated therein, reflect, to the extent required by
GAAP, all claims against and all debts and liabilities of the Company and the
Subsidiaries, fixed or contingent, as at the respective dates thereof, and the
related statements of earnings, statements of changes in stockholders' equity
and statements of cash flows fairly present in all material respects the results
of operations of the Company and the Subsidiaries and the changes in financial
position for the periods indicated. Since October 31, 1996 (the "Balance Sheet
Date") there has been (x) no material adverse change in the assets or
liabilities, or in the business or financial condition, or in the results of
operations, of the Company or the Subsidiaries, whether as a result of any
legislative or regulatory change, revocation of any license or right to do
business, fire, explosion, accident, casualty, labor trouble, flood, drought,
riot, storm, condemnation or act of God or other public force or otherwise and
(y) no change in the assets or liabilities, or in the business or financial
condition, or in the results of operations, of the Company or the Subsidiaries
except in the ordinary course of business or as contemplated by this Agreement;
and to the Company's best knowledge, information and belief no fact or condition
exists or is contemplated or threatened which might cause such a change. The
total liabilities of the Company on a consolidated basis, as determined in
accordance with GAAP applied on a consistent basis, do not exceed $15 million as
of the date of this Agreement.
2.10 Accounting Records; Internal Controls; Absence of Certain Payments.
------------------------------------------------------------------
(a) Accounting Records. The Company has records that accurately and
validly reflect in all material respects the transactions of the Company and the
Subsidiaries, and accounting controls sufficient to insure that such
transactions are (i) executed in accordance with management's general or
specific authorization and (ii) recorded in conformity in all material respects
with GAAP so as to maintain accountability for assets.
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(b) Data Processing; Access. Such records, to the extent they contain
important information that is not easily and readily available elsewhere, have
been duplicated, and such duplicates are stored safely and securely.
2.11 Title to Properties; Encumbrances. Except for properties and assets
-----------------------------------
reflected in the Balance Sheet or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business, the
Company and each of the Subsidiaries has good, valid and marketable title to (a)
all of its properties and assets (personal, tangible and intangible), including,
without limitation, all of the properties and assets reflected in the Balance
Sheet, except as indicated in the notes thereto, and (b) all of the properties
and assets purchased by the Company and each of the Subsidiaries since the
Balance Sheet Date, except where the failure to have such title would not in the
aggregate have a Material Adverse Effect; in each case subject to no
encumbrance, lien, charge or other restriction of any kind or character, except
as set forth in Section 2.11 of the Disclosure Schedule.
2.12 Real Property. Neither the Company nor any of the Subsidiaries owns
-------------
or, except as set forth in Section 2.12 of the Disclosure Schedule, has ever
owned any real property or any interest (other than leasehold interests)
therein.
2.13 Absence of Certain Changes. Since the Balance Sheet Date, neither the
--------------------------
Company nor any of the Subsidiaries has:
(a) conducted its business other than in the usual and ordinary manner
and in the ordinary course of business, including making all regularly scheduled
payments and commitments (e.g., payroll, taxes, rent and lease payments) coming
due through the Closing Date;
(b) suffered any material adverse change in its working capital,
financial condition, assets, liabilities (absolute, accrued, contingent or
otherwise), reserves, business or operations;
(c) written down the value of any inventory;
(d) waived any claims or rights of substantial value;
(e) sold, transferred, or otherwise disposed of any its properties or
assets (real, personal or mixed, tangible or intangible), except in the ordinary
course of business and consistent with past practice;
(f) disposed of or disclosed to any person other than representatives
of TelePad any trade secret, formula, process or know-how of the Company or the
Subsidiary not theretofore a matter of public knowledge, the disclosure of which
would have a material adverse affect on the business, operations, assets or
financial condition of the Company;
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(g) granted any general increase in the compensation of its employees
(including any such increase pursuant to any bonus, pension, profit sharing or
other plan or commitment) or any increase in the compensation payable or to
become payable to any employee, other than in the ordinary course of business or
pursuant to the terms of any existing compensation arrangement otherwise
described in the Disclosure Schedule;
(h) made any change in any method of accounting of accounting practice
which would have a Material Adverse Effect; or
(i) agreed, whether in writing or otherwise, to take any action
described in this Section.
2.14 Accounts Receivable. All accounts receivable, unbilled work in process
-------------------
and other debts due or recorded in the records and books of account of the
Company and the Subsidiaries as being due to either of the Company or any of the
Subsidiaries as at the date of this Agreement and the Closing Date (less the
amount of any provision or reserve therefor made in such records and books of
account) were or will have been actually made in the ordinary course of business
and will be good and collectible in full in the ordinary course of business and
in any event no later than 60 days after the Closing Date; and none of such
accounts receivable or other debts is, or will at the Closing Date be, subject
to any counterclaim or set-off. The Company has delivered to TelePad a
materially complete and accurate aging list of all receivables of the Company
and the Subsidiaries.
2.15 Leases. Attached as an exhibit to Section 2.15 of the Disclosure
------
Schedule are true, correct and complete copies of each equipment and real
property lease to which the Company or any of the Subsidiaries is a party (the
"Leases") and all modifications, amendments and notices relating thereto. The
Leases are valid, binding and enforceable in accordance with their terms, and
are in full force and effect; in each case, the Company or the Subsidiary has
been in peaceable possession since the commencement of the Lease; there are no
existing defaults by the Company or the Subsidiary or, to the Company's
knowledge, the lessors thereunder; no event of default by the Company or any of
the Subsidiaries has occurred which (whether with or without notice, lapse of
time or the happening or occurrence of any other event) would constitute such a
default thereunder; neither the Company, the applicable Subsidiary nor, to the
Company's knowledge, the lessor has violated any of the terms or conditions of
any such lease in any material respect; no waiver, indulgence or postponement of
the obligations of the Company or the Subsidiaries thereunder has been granted
by the lessor; and the Company or the applicable Subsidiary has, or will have,
paid, satisfied or discharged all its obligations under such leases through the
Closing Date, including the payment of rent and operating expenses.
2.16 Assets. The tangible assets and equipment of the Company and the
------
Subsidiaries are as of the date of this Agreement, and will be as of the Closing
Date, in good operating condition and repair and none of such assets or
equipment is or will be at the Closing Date in need of maintenance or repairs
except for ordinary, routine maintenance and repairs which are not
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<PAGE>
material in nature or cost. The assets listed in Section 2.16 of the Disclosure
Schedule (the "Assets") constitute all of the assets and properties of the
Company and the Subsidiaries and all of the assets and properties utilized in
the business of the Company and the Subsidiaries as of January 27, 1997.
2.17 Patents, Trademarks, Trade Names, Etc.
--------------------------------------
Neither the Company nor any of the Subsidiaries owns nor leases from any
third party any patents, patent applications, trademarks, service marks, trade
names or copyrights. To conduct its business as it is now being conducted,
neither the Company nor any of the Subsidiaries requires ownership of any
patent, copyright, trademark, service mark or trade name or rights to use any
such property of any third party. Neither the Company nor any of the
Subsidiaries has, nor has it been alleged to have, infringed upon any patent,
trademark, trade name or copyright and there exists no basis for such an
allegation except where such infringement would not have a Material Adverse
Effect.
2.18 Government Contracts and Proposals.
----------------------------------
(a) For purposes of this Agreement, "Government Contracts" means with
respect to any person, any contract, agreement, license and order between such
person and the United States Government or any department, agency or
instrumentality thereof or any state or local governmental agency or authority
(the "Government"), and any subcontract at any tier held by such person under a
prime government contract. Section 2.18 of the Disclosure Schedule sets forth a
true, correct and complete list of (i) all Government Contracts to which the
Company or any Subsidiary is a party, (ii) all pending written proposals for
Government Contracts submitted by the Company or a Subsidiary (the "Proposals")
and (iii) all written and material oral teaming arrangements and understandings
between the Company or any Subsidiary and any third party with respect to any
Proposal. Except as set forth in Section 2.18 of the Disclosure Schedule, with
respect to the Government Contracts to which the Company or a Subsidiary is a
party: (i) such Government Contracts constitute valid and binding obligations of
the Company or the Subsidiary, as applicable, and to the Company's knowledge,
the other party or parties thereto, enforceable in accordance with their terms;
(ii) the Company or the Subsidiary, as applicable, has made no materially
incorrect representation or certification and provided no defective cost or
pricing data in connection with the award of, and is in compliance in all
material respects with the terms of, all Government Contracts to which it is a
party and all laws, regulations and contract provisions applicable to the
obtaining, formation, pricing, performance, billing, administration and other
aspects of its Government Contracts, including compliance in all material
respects with the Truth in Negotiations Act (as amended) and with all defective
pricing, price reduction, or similar clauses contained or incorporated in its
Government Contracts, and the Company or the Subsidiary, as applicable, is in
compliance in all material respects with the False Claims Act (as amended), or
any similar applicable statutes or regulations concerning false claims, false
statements, defective pricing, misrepresentation or procurement integrity
concerning any Government Contract; (iii) neither the Company nor the
Subsidiary, as applicable, nor any other party has terminated,
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<PAGE>
canceled or waived any material terms or condition of any Government Contract;
(iv) the cost accounting, estimating, property and procurement systems relating
to the Government Contracts of the Company and the Subsidiaries are in
compliance in all material respects with applicable laws, regulations and
contract provisions, including applicable cost principles and applicable cost
accounting standards; and (v) the execution of this Agreement and the
consummation of the transactions contemplated by this Agreement will not cause
or result in any breach or default under any of the Government Contracts or
cause any of the Government Contracts to become terminable or cause any Proposal
to become ineligible for future consideration.
(b) In addition to the representations and warranties set forth in
Section 2.14, (i) each billed account receivable represents a bona fide claim
against the Government for sales, services performed, or other charges arising
on or prior to the date hereof, and all the products delivered and services
performed which gave rise to such accounts were delivered or performed in all
material respects in accordance with applicable Government Contracts; and (ii)
except as set forth in Section 2.18(b) of the Disclosure Schedule, all unbilled
or unreserved amounts included in accounts receivable will, in the ordinary
course of business as currently conducted and consistent with past practices,
mature into and become billed accounts receivable in the same or greater amount.
(c) Except as set forth in Section 2.18 of the Disclosure Schedule,
none of such Government Contracts has a currently incurred or currently
projected cost overrun or loss.
(d) Except for "Permitted Liens" which for purposes of this Agreement
shall mean liens securing obligations under the Company's existing line of
credit with Crestar Bank and those liens made in accordance with the Assignment
of Claims Act (as amended), 31 U.S.C. ss. 3727, and the Assignment of Contracts
Act (as amended), 31 U.S.C. ss. 15, neither the Company nor a Subsidiary has
assigned or otherwise conveyed or transferred, or agreed to assign, to any
person, any Government Contracts to which it is a party, or any account
receivable relating thereto, whether as a security interest or otherwise.
(e) Since December 31, 1994, neither the Company nor a Subsidiary has
received any notice or other communication in any form from the Government
regarding its actual or threatened disqualification, suspension or debarment
from contracting with the Government including without limitation any show cause
notice or cure notice.
(f) Except as set forth on Section 2.18 of the Disclosure Schedule,
there is no: (i) to the Company's knowledge, pending or threatened investigation
relating to any Government Contract, to which the Company or a Subsidiary is a
party, (ii) existing or (to the Company's knowledge) threatened claim, cost
disallowance, pricing adjustment or adverse audit finding relating to any
Government Contract with which the Company or a Subsidiary is a party, (iii)
termination for default or cure notice or show cause notice proposed or
currently in effect, relating to any Government Contract to which the Company or
a Subsidiary is a party, or (iv)
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<PAGE>
proposed or (to the Company's knowledge) threatened termination for convenience
of any Government Contract to which the Company or a Subsidiary is a party.
(g) To the Company's knowledge, each Proposal is under active
consideration by the office or agency to which it was submitted and has not been
withdrawn or rejected.
2.19 Other Contracts and Commitments.
--------------------------------
(a) Except as set forth in Section 2.18 or 2.19 of the Disclosure
Schedule, or as contemplated by this Agreement or the agreements and instruments
executed in connection herewith, neither the Company nor any of the Subsidiaries
has or is bound by:
(i) any agreement, contract or commitment which involves or
could involve in excess of $10,000 (or $5,000 if not entered into in
the ordinary course of business) or which had an unexpired term in
excess of five years;
(ii) any agreement, contract or instrument that grants a
power of attorney, agency or similar authority to another person or
entity (other than officers of the Company acting within the scope of
their authority);
(iii) any loan or advance to, investment in, guaranty or
other contingent liability in respect of any indebtedness or
obligation of, any individual, partnership, joint venture,
corporation, trust, unincorporated organization, government or other
entity or any agreement, contract or commitment relating to the making
of any such loan, advance or investment;
(iv) any agreement, contract or commitment relating to the
employment of any person by the Company or any of the Subsidiaries, or
any bonus, deferred compensation, pension, severance, profit sharing,
stock option, employee stock purchase, retirement or other employee
benefit plan;
(v) any management service, consulting, sales
representative, distributor or similar type of contract;
(vi) any confidentiality, non-disclosure or similar
agreement;
(vii) any sales contracts, commitments or proposals which
continue for a period of more than 12 months;
(viii) any agreement, contract or commitment which might
reasonably be expected to have a Material Adverse Effect;
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<PAGE>
(ix) any agreement, contract or commitment limiting the
freedom of the Company or any of the Subsidiaries to engage in any
line of business or compete with any person or which restricts in any
material respect the ability of the Company or any of the Subsidiaries
to conduct its business in any manner or place;
(x) any contract or agreement that contains a right of first
refusal; or
(xi) any contract or agreement requiring the Company or any
of the Subsidiaries to buy or sell goods or services with respect to
where there will be costs and expenses materially in excess of
expected receipts.
(b) Each contract, agreement and commitment listed in Section 2.19 of
the Disclosure Schedule is valid and in full force and effect, and there exists
no default or event of default or event, occurrence, condition or act (including
the purchase of the Shares hereunder) which, with the giving of notice, the
lapse of time or the happening of any other event or condition, would become a
default or event of default thereunder by the Company or a Subsidiary or, to the
Company's knowledge, by any other party thereto. The Company and any applicable
Subsidiary have fully performed all of the terms or conditions of any contract
or agreement set forth in Section 2.19 of the Disclosure Schedule (or required
to be set forth in Section 2.19 of the Disclosure Schedule) in all material
respects, and, to the Company's best knowledge, information and belief, all of
the covenants to be performed by any other party thereto have been fully
performed in all material respects. A true, correct, accurate and complete copy
of each contract, agreement or commitment listed in Section 2.19 of the
Disclosure Schedule has heretofore been delivered or made available to TelePad
and the Buyer by the Company.
2.20 Customers and Suppliers. Section 2.20 of the Disclosure Schedule lists
-----------------------
the names of and describes all contracts with and the appropriate percentage of
business attributable to the ten largest customers of and ten most significant
suppliers of the Company's business on a consolidated basis at the date of this
Agreement, and any sole-source suppliers of significant goods or services (other
than electricity, gas, telephone or water) to the Company or any of the
Subsidiaries with respect to which alternative sources of supply are not readily
available on comparable terms and conditions. There has not been any material
adverse change in the business relationship of the Company or any of the
Subsidiaries with any material customer of, or supplier to, the Company or any
of the Subsidiaries since the Balance Sheet Date.
2.21 Labor Difficulties. Except to the extent set forth in Section 2.21 of
------------------
the Disclosure Schedule, (a) each of the Company and the Subsidiaries is in
compliance in all material respects with all federal, state or other applicable
laws respecting employment and employment practices, terms and conditions of
employment and wages and hours, and is not engaged in any unfair labor practice;
(b) there is no labor strike, dispute, slowdown or stoppage actually pending or,
to the Company's knowledge, threatened against or affecting the Company or the
Subsidiaries; (c) none of the employees of the Company or the Subsidiaries are
covered by a collective bargaining agreement or are members of a union and no
representation question exists respecting
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<PAGE>
the employees of the Company or the Subsidiaries; (d) there exists no basis for
the assessment of unpaid wages with respect to the employees of the Company or
the Subsidiaries ; (e) neither the Company nor any of the Subsidiaries has
experienced any other labor problems; and (f) there has not been, and to the
Company's knowledge, there will not be, any material adverse change in relations
with the employees of the Company or the Subsidiaries as a result of any
announcement of the transactions contemplated by this Agreement.
2.22 Personnel. Section 2.22 of the Disclosure Schedule sets forth, as of
---------
the date hereof, a true and complete list of:
(a) the name and current salary of all salaried employees of the
Company and the Subsidiaries;
(b) the name and wage rate of all hourly employees of the Company and
the Subsidiaries;
(c) the name and compensation arrangements of any other employees or
consultants of the Company and the Subsidiaries not listed in the Disclosure
Schedule pursuant to paragraph (a) or (b) above; and
(d) the name and employment status of each employee of the Company or
the Subsidiaries currently on long-term or short-term disability, workers'
compensation, sick leave, personal leave, military leave or any similar leave
arrangement.
2.23 Employee Benefit Plans.
----------------------
(a) List of Plans. Set forth in Section 2.23 of the Disclosure
Schedule is an accurate and complete list of all employee benefit plans
("Employee Benefit Plans") within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"), whether or not any such Employee Benefit Plans
are otherwise exempt from the provisions of ERISA, established, maintained or
contributed to by the Company or any of the Subsidiaries (including, for this
purpose and for the purpose of all of the representations in this Section 2.23,
all employers (whether or not incorporated) which by reason of common control
are treated together with the Company as a single employer within the meaning of
Section 414 of the Internal Revenue Code of 1986, as amended (the "Code") since
September 2, 1974. None of the Employee Benefit Plans is, or has ever been,
subject to Title IV of ERISA or Part 3 of Title I of ERISA.
(b) Status of Plans. Neither the Company nor any of the Subsidiaries
maintains or contributes on behalf of the employees of the Company or the
Subsidiaries to any Employee Benefit Plan subject to ERISA which is not, or in
the past has not been, in substantial compliance with ERISA.
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<PAGE>
Neither the Company nor any of the Subsidiaries maintains any Employee
Benefit Plan which is a "Group Health Plan" (as such term is defined in Section
5000(b)(1) of the Code) that has not been administered and operated in all
material respects in compliance with the applicable requirements of Section 601
of ERISA and Section 4980B of the Code and neither the Company nor any of the
Subsidiaries is subject to any liability, including, but not limited to,
additional contributions, fines, penalties or loss of tax deduction as a result
of such administration and operation. Neither the Company nor the Subsidiaries
maintains any Employee Benefit Plan (whether qualified or nonqualified within
the meaning of Section 401(a) of the Code) providing for retiree health and/or
life benefits and having unfunded liabilities. Neither the Company nor any of
the Subsidiaries maintains any Employee Benefit Plan which is an "Employee
Welfare Benefit Plan" (as such term is defined in Section 3(1) of ERISA) nor has
the Company or any of the Subsidiaries provided any benefit in Section 4976(b)
of the Code) for which an excise tax would be imposed. Subject to compliance
with applicable law, to the Company's knowledge, except as set forth in Section
2.23 of the Disclosure Schedule, no condition exists which would prevent the
Buyer from amending on a prospective basis or terminating any Employee Welfare
Benefit Plan providing health or medical benefits in respect of any active or
former employee of the Company or any of the Subsidiaries (excluding with
respect to pre-existing medical conditions).
(c) Contributions. Full payment has been made of all amounts which the
Company or any of the Subsidiaries is required, under applicable law or under
any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan
to which the Company or any of the Subsidiaries is a party to have paid as
contributions thereto as of the last day of the most recent fiscal year of such
Employee Benefit Plan ended prior to the date hereof. Each of the Company and
the Subsidiaries has made adequate provision for reserves to meet contributions
that have not been made because they are not yet due under the terms of any
Employee Benefit Plans and each such plan as is represented and has not been
increased subsequent to the date as of which documents have been provided.
(d) Tax Qualification. Each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code has been determined to be so
qualified by the Internal Revenue Service and, to the Company's knowledge,
nothing has occurred since the date of the last such determination which
resulted in or is likely to result in the revocation of such determination.
(e) Compliance With Tax Reform Act of 1986. Each of the Company and
the Subsidiaries has either adopted on a timely basis all amendments to Employee
Benefit Plans which are required by the Tax Reform Act of 1986 so as to avoid
discrimination in participation or benefits in favor of the highly compensated
employees or has complied with the requirements for obtaining "anti-cutback"
relief provided under Internal Revenue Service Notice 88-131 and the subsequent
Internal Revenue Service pronouncements covering the subject matter of Notice
88- 131 by adopting appropriate amendments to such Employee Benefit Plans.
(f) Transactions. Except as set forth in Section 2.23 of the
Disclosure Schedule, neither the Company nor any of the Subsidiaries has engaged
in any transaction with
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<PAGE>
respect to the Employee Benefit Plans which would subject it to a tax, penalty
or liability for prohibited transactions under ERISA or the Code nor has any of
its directors, officers or, to the Company's knowledge, employees to the extent
they or any of them are fiduciaries with respect to such plans, breached any of
their responsibilities or obligations imposed upon fiduciaries under Title I of
ERISA or would result in any claim being made under or by or on behalf of any
such plans by any party with standing to make such a claim.
(g) Triggering Events. The execution of, and consummation of the
transactions contemplated by, this Agreement do not constitute a triggering
event under any Employee Benefit Plan, policy, arrangement, statement,
commitment or agreement, whether or not legally enforceable, which (either alone
or upon the occurrence of any additional or subsequent event) will or may
reasonably be expected to result in any payment (whether of severance pay or
otherwise), acceleration, vesting or increase in benefits to any employee or
former employee or director of the Company or any of the Subsidiaries.
(h) Other Plans. Neither the Company nor any of the Subsidiaries
presently maintains on behalf of its employees any employee benefit plan or any
other foreign pension, welfare or retirement benefit plans other than those
listed in Section 2.23 of the Disclosure Schedule. Any foreign pension, welfare
or retirement benefit plan listed in Section 2.23 of the Disclosure Schedule is
in substantial compliance with applicable law.
(i) Documents. The Company has delivered or caused to be delivered to
TelePad and the Buyer and their counsel true and complete copies of (i) all
Employee Benefit Plans as in effect, together with all amendments thereto which
will become effective at a later date, as well as the latest Internal Revenue
Service determination letter obtained with respect to any such Employee Benefit
Plan qualified under Section 401(a) or tax-exempt under Section 501(a) of the
Code and (ii) Form 5500 for the most recent completed fiscal year for each
Employee Benefit Plan required to file such form.
(j) Terminated Plan. Pursuant to the ESOP Stock Redemption Agreement
(the "Redemption Agreement") dated October 29, 1996 between the Company and
Citizens Bank of Maryland, in its capacity as trustee of the Federal Computer
Corporation Employee Stock Ownership Trust (the "Trust"), established pursuant
to the Federal Computer Corporation Employee Stock Ownership Plan (the "Plan"),
(i) as of October 29, 1996, all of the 3,824 shares of the Company's convertible
preferred stock were redeemed from the Trust, and (ii) as of October 29, 1996
the Plan ceased to be an employee stock ownership plan as defined under ERISA
and the Code and became a profit sharing plan (the "Profit Sharing Plan") as
described in the Code. The Company has paid and satisfied all of its liabilities
and obligations under the Redemption Agreement, the Plan and the Profit Sharing
Plan. The redemption of such convertible preferred stock qualified for the
exemption described in Section 408(e) of ERISA and Section 4975(d)(3) of the
Code, and the Plan pursuant to which the Trust was established has continued to
be qualified under Section 401(a) of the Code.
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<PAGE>
2.24 Litigation. Except as set forth in Section 2.24 of the Disclosure
----------
Schedule, there is no action, suit, inquiry, proceeding or, to the Company's
knowledge, investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to the Company's
knowledge, threatened against or involving the Company or any of the
Subsidiaries which, if adversely determined, would in the aggregate have a
Material Adverse Effect, or which questions or challenges the validity of this
Agreement or any action taken or to be taken by the Company pursuant to this
Agreement or in connection with the transactions contemplated hereby; nor, to
the Company's knowledge, is there any valid basis for any such action,
proceeding or investigation. Neither the Company nor any of the Subsidiaries is
in default under or in violation of, nor, to the Company's knowledge, is there
any valid basis for any claim of default under or violation of, any contract,
commitment, indebtedness or restriction to which it is a party or by which it is
bound except for violations or defaults which in the aggregate would not have a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries is
subject to any judgment, order or decree entered in any lawsuit or proceeding
which could reasonably be expected to have a Material Adverse Effect. Except as
set forth in Section 2.24 of the Disclosure Schedule, there is no matter as to
which the Company or any of the Subsidiaries has received any notice, claim or
assertion, or, to the best knowledge, information and belief of the Company,
which otherwise has been threatened or is reasonably expected to be threatened
or initiated, against or affecting any director, officer, agent or
representative of the Company or any of the Subsidiaries or any other person,
nor to the Company's knowledge is there any reasonable basis therefor, in
connection with which any such person has or may reasonably be expected to have
any right to be indemnified by the Company or any of the Subsidiaries.
2.25 Compliance with Law. The business and the other operations of the
--------------------
Company and the Subsidiaries have been conducted in accordance with all
applicable laws, regulations, rules and other requirements of all national
governmental authorities, and of all states, municipalities and other political
subdivisions and agencies thereof, having jurisdiction over the Company and the
Subsidiaries, the non-compliance with which in the aggregate would have a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries has
received any notification of any asserted present or past failure by the Company
or the Subsidiaries to comply with such laws, rules or regulations.
2.26 Permits. Each of the Company and the Subsidiaries hold all permits,
-------
licenses, accreditations, approvals and authorization ("Permits") that are
required by any governmental entity to permit it to conduct its business as now
conducted except where the failure to hold any such permit would not in the
aggregate have a Material Adverse Effect, and all such Permits are valid, in
full force and effect and will remain so upon consummation of the transactions
contemplated by this Agreement, except where the failure to be in full force and
effect would not in the aggregate have a Material Adverse Effect. To the
Company's knowledge, no suspension, cancellation or termination of any of such
Permits is threatened or imminent which suspension, cancellation or termination
could reasonably be expected to have a Material Adverse Effect.
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<PAGE>
2.27 Dividends and Other Distributions. Except as set forth in Section 2.27
---------------------------------
of the Disclosure Schedule, there has been no dividend or other distribution of
assets by the Company or any of the Subsidiaries whether consisting of money,
property or any other thing of value, declared, issued or paid to or for the
benefit of the Stockholders or the LLC subsequent to the Balance Sheet Date.
2.28 Undisclosed Liabilities. Neither the Company nor any of the
-------------------------
Subsidiaries has any outstanding claims, liabilities or indebtedness of any
nature, whether accrued, absolute, contingent or otherwise, and whether due, or
to become due, probable of assertion or not, except liabilities (i) set forth in
the Balance Sheet or referred to in the footnotes thereto, (ii) incurred
subsequent to the Balance Sheet Date in the ordinary course of business not
involving borrowings by the Company or any of the Subsidiaries, or (iii) set
forth in Section 2.28 of the Disclosure Schedule.
2.29 Taxes. Each of the Company and the Subsidiaries has filed or caused to
-----
be filed, within the times and within the manner prescribed by law, all federal,
state, local and foreign tax returns and tax reports which are required to be
filed by, or with respect to, the Company or the Subsidiaries. Such returns and
reports, including amendments to date have been prepared in good faith and
reflect completely and accurately in all material respects all liability for
taxes of the Company or the Subsidiaries for the periods covered thereby,
whether or not due and payable and whether or not disputed. All federal, state,
local and foreign income, profits, franchise, sales, use, occupancy, excise and
other taxes and assessments (including interest and penalties) payable by, or
due from, the Company or the Subsidiaries have been fully paid or adequately
disclosed and fully provided for in the Company's books and financial
statements. The federal income tax liability of the Company and the Subsidiaries
has been finally determined for all fiscal years to and including the fiscal
year ended October 31, 1995. To the Company's knowledge, no examination of any
tax return of the Company or any of the Subsidiaries is currently in progress.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any tax return of the Company or any of the
Subsidiaries.
2.30 Insurance. Set forth in Section 2.30 of the Disclosure Schedule is a
---------
complete list of insurance policies which the Company or any of the Subsidiaries
maintains with respect to its business, operations, properties or employees.
Such policies are in full force and effect and are free from any right of
termination on the part of the insurance carriers. Such policies, with respect
to their amounts and types of coverage, are adequate to insure fully against
risks to which the Company or any of the Subsidiaries and its property and
assets are normally exposed in the operation of its business. To the Company's
knowledge, since January 1, 1997, there has not been any material adverse change
in the relationship of the Company or any of the Subsidiaries with its insurers
or in the premiums payable pursuant to such policies.
2.31 Environmental Laws and Regulations. Section 2.31 of the Disclosure
------------------------------------
Schedule contains information relating to the following items:
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<PAGE>
(a) the nature and quantities of any Hazardous Materials (as defined
below) generated, transported or disposed of by the Company or any of the
Subsidiaries during the past three years (other than raw material awaiting
manufacturing, work-in-process or finished goods and through the sale of
products in the ordinary course of business), together with a description of the
location of each such activity; and
(b) a summary of the nature and quantities of any Hazardous Materials
that have been disposed of or found at any site or facility owned or operated
presently or at any previous time by the Company or any of the Subsidiaries
(other than raw material awaiting manufacturing, work-in-process or finished
goods and through the sale of products in the ordinary course of business).
Each of the Company and the Subsidiaries is in compliance in all material
respects with all applicable federal, state and local laws and regulations
relating to product registration, pollution control and environmental
contamination including, but not limited to, all laws and regulations governing
the generation, use, collection, discharge or disposal of Hazardous Materials
and all laws and regulations with regard to recordkeeping, notification and
reporting requirements respecting Hazardous Materials. Except as disclosed in
Section 2.31 of the Disclosure Schedule, neither the Company nor any of the
Subsidiaries has been alleged to be in violation of, nor has it been subject to
any administrative or judicial proceeding pursuant to, such laws or regulations
either now or any time during the past three years. Except as disclosed in
Section 2.31 of the Disclosure Schedule, there are no facts or circumstances
which could reasonably be expected to form the basis for the assertion of any
Claim (as defined below) against the Company or any of the Subsidiaries relating
to environmental practices asserted under CERCLA (as defined below) and RCRA (as
defined below), or any other federal, state or local environmental statute,
which might have a Material Adverse Effect.
For purposes of this Section 2.31, the following terms shall have the
following meanings:
(a) "Hazardous Materials" shall mean materials defined as "hazardous
substances", "hazardous wastes" or "solid wastes" in (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
ss.ss.9601-9657, and any amendments thereto ("CERCLA"), (ii) the Resource
Conservation and Recovery Act, 42 U.S.C. ss.ss.6901-6987 and any amendments
thereto ("RCRA") and (iii) any similar federal, state or local environmental
statute; and
(b) "Claim" shall mean any and all claims, demands, causes of action,
suits, proceedings, administrative proceedings, losses, judgments, decrees,
debts, damages, liabilities, court costs, attorneys' fees and any other expenses
incurred, assessed or sustained by or against the Company or any of the
Subsidiaries.
2.32 Absence of Certain Payments. In connection with the business and
----------------------------
operations of the Company and the Subsidiaries, neither the Company, the
Subsidiaries nor any director, officer,
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agent, employee or other person acting on behalf of the Company or any of the
Subsidiaries has used any corporate or other funds for unlawful contributions,
payments, gifts or entertainment, or made any unlawful expenditures relating to
political activity to government officials or others or established or
maintained any unlawful or unrecorded funds. With respect to the business and
operations of the Company and the Subsidiaries, neither the Company, the
Subsidiaries nor any director, officer, or, to the Company's knowledge, agent,
employee or other person acting on their behalf, has accepted or received any
unlawful contributions, payments, gifts or expenditures.
2.33 Insider Interests. Except as set forth in Section 2.33 of the
------------------
Disclosure Schedule, no officer or employee of the Company or any of the
Subsidiaries has any material interest in any property, real or personal,
tangible or intangible of the Company or any of the Subsidiaries, is indebted or
otherwise obligated to the Company or any of the Subsidiaries, has any
contractual relationship with the Company or any of the Subsidiaries or, to the
Company's knowledge, is an officer, director, employee or consultant of a
competitor of the Company or any of the Subsidiaries. Neither the Company nor
any of the Subsidiaries is indebted or otherwise obligated to any such person,
except for amounts due under normal arrangements applicable to all employees
generally as to salary or reimbursement of ordinary business expenses not
unusual in amount or significance. Except as set forth in Section 2.33 of the
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not (either alone, or upon the occurrence of any act or event, or
with the lapse of time, or both) result in any benefit or payment (severance or
other) arising or become due from the Company or the Subsidiaries or the
successor or assign of any thereof to any person.
2.34 Brokers and Finders. Neither the Company, the Subsidiaries nor any of
-------------------
their officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated by this Agreement.
2.35 Product or Service Liability. There is no action, suit, inquiry,
-----------------------------
proceeding or, to the Company's knowledge, investigation by or before any court
or governmental or other regulatory or administrative agency or commission
pending or, to the Company's knowledge, threatened against the Company or any of
the Subsidiaries relating to any services alleged to have been performed by the
Company or any of the Subsidiaries and alleged to have been defective or
improperly rendered, or any products delivered or sold by the Company or any of
the Subsidiaries which are alleged to be defective, which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect.
2.36 Governmental Interaction. Section 2.36 of the Disclosure Schedule
-------------------------
lists all governmental reviews, audits, and, to the Company's knowledge,
investigations, whether pending or completed or, to the Company's knowledge,
threatened, within the three year period preceding the date of this Agreement,
relating to the business or operations of the Company or any of the
Subsidiaries.
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2.37 Security Matters. The Company and the Subsidiaries are in compliance
-----------------
in all material respects with all security and related requirements on its
classified contracts. Section 2.37 of the Disclosure Schedule describes the
status and findings of all security compliance inspections completed within the
past two years and all on-going security investigations or inquiries known to
the Company relating to the Company and the Subsidiaries and any of their
directors, officers or employees. Section 2.37 of the Disclosure Schedule also
describes all security problems, incidents or occurrences known to the Company
occurring within the past two years which involve non-compliance by the Company,
the Subsidiaries or their directors, officers or employees with applicable
security requirements.
2.38 Government Furnished Property. Any property or equipment furnished to
-----------------------------
the Company or any of the Subsidiaries prior to the date of this Agreement by
the United States Government or any other customer that has not been returned to
such customer is properly accounted for and in the possession of the Company or
such Subsidiary. Any such property is in good operating condition and state of
repair, ordinary wear and tear excluded.
2.39 Estimates. All documents, schedules and other information provided by
---------
the Company or its authorized agents to TelePad or the Buyer relating to the
Company or the Subsidiaries, including estimates to complete and cash flow for
the active contracts of the Company or the Subsidiaries, represent the Company's
best estimates of the results reasonably expected to occur and represent a good
faith assessment of projected future results.
2.40 Disclosure. None of this Agreement, the Financial Statements, any
----------
Schedule, Exhibit or certificate attached hereto or delivered in accordance with
the terms hereof or any document or statement in writing which has been supplied
by or on behalf of the Company, LLC or the Stockholders in connection with the
transactions contemplated by this Agreement contains any untrue statement of
material fact, or omits any statement of material fact necessary in order to
make the statements contained herein or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE LLC RELATING TO THE SHARES
The LLC represents and warrants to TelePad and the Buyer with respect to
the Shares, as follows:
3.01 Ownership. Each Stockholder was the record and beneficial owner of the
---------
number of Shares set forth in Section 3.01 of the Disclosure Schedule on the
date they were transferred to the LLC as contemplated by this Agreement. As of
the date of this Agreement, the LLC is the sole record and beneficial owner of
the Shares.
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3.02 Title. On the date of this Agreement the LLC has, and on the Closing
-----
Date the LLC will have, good and marketable title to the Shares free and clear
of all adverse claims, options, liens, security interests, restrictions and
other encumbrances, other than restrictions of a general nature arising under
federal and state securities laws, or as a result of the transactions
contemplated by or related to this Agreement.
3.03 Right to Transfer. On the date of this Agreement the LLC has, and on
-----------------
the Closing Date the LLC will have, full legal right and power to transfer and
deliver to the Buyer the Shares pursuant to Section 1.01, and the Buyer will
receive good and marketable title thereto, free and clear of all adverse claims,
options, liens, security interests, restrictions and other encumbrances, other
than restrictions of a general nature arising under federal and state securities
laws, or as a result of the transactions contemplated by or related to this
Agreement.
3.04 All Shares. On the date of this Agreement and on the Closing Date, the
----------
Shares represent and will represent the LLC's entire ownership interest in the
Company's capital stock and the LLC has and will have no other options,
warrants, rights, calls, commitments, conversion rights, rights of exchange,
plans or other agreements of any character providing for the purchase by the LLC
of any of the Company's capital stock, other than rights arising under this
Agreement or any agreement or instrument contemplated hereby.
3.05 Binding Agreement. The LLC is duly organized and validly existing
------------------
under the laws of the Commonwealth of Virginia. The Stockholders own all of the
interests in the LLC. The LLC has the requisite power and authority to execute,
deliver and perform this Agreement and the Release. This Agreement and the
Release have been duly and validly authorized by the LLC and its members, as
applicable. The LLC has duly executed and delivered this Agreement and the
Release, and this Agreement and the Release are valid and binding obligations of
the LLC enforceable against the LLC in according with their terms, except to the
extent that enforcement may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or similar laws affecting the
enforcement of rights of creditors and other obligees generally and the scope of
equitable remedies which may be available.
3.06 Conflicts. The LLC is not subject to, or a party to, any mortgage,
---------
lien, lease, Permit, agreement, contract, instrument, law, rule, ordinance,
regulation, order, judgment or decree, or any other restriction of any kind or
character which would prevent consummation of the transactions contemplated by
this Agreement or compliance by the LLC with the terms, conditions and
provisions hereof. No consent of any person which has not been obtained is
necessary for the consummation of the transactions contemplated hereby by the
LLC.
3.07 Investment. The LLC (a) understands that the Buyer Note has not been,
----------
and will not be, registered under the Securities Act or under any state
securities laws, and are being offered and sold in reliance upon federal and
state exemptions for transactions not involving any public offering, (b) is
acquiring the Buyer Note solely for its own account for investment purposes, and
not with a view to the distribution thereof, (c) is a sophisticated investor
with
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knowledge and experience in business and financial matters, (d) has received
certain information concerning TelePad and the Buyer and has had the opportunity
to obtain additional information as desired in order to evaluate the merits and
the risks inherent in holding the Buyer Note, (e) is able to bear the economic
risk and lack of liquidity inherent in holding the Buyer Note, and (f) is an
accredited investor as defined in Regulation D under the Securities Act.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
TELEPAD AND THE BUYER
Each of TelePad and the Buyer, jointly and severally, represents and
warrants to the Company and the LLC as follows:
4.01 Corporate Organization; Etc. Each of TelePad and the Buyer is a
-----------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. TelePad owns all of the Buyer's issued and outstanding
capital stock.
4.02 Authorization; Etc. Each of TelePad and the Buyer has full corporate
-------------------
power and authority to enter into each of this Agreement, the Stock Pledge
Agreement and the Buyer Note, as applicable, and to carry out the transactions
contemplated hereby and thereby. Each of TelePad and the Buyer has taken all
action required by law, its Certificate of Incorporation and By-Laws or
otherwise to authorize the execution and delivery of each of this Agreement, the
Stock Pledge Agreement and the Buyer Note, as applicable, and the transactions
contemplated hereby and thereby, and each of this Agreement, the Stock Pledge
Agreement and the Buyer Note, as applicable, is a valid and binding agreement of
TelePad and the Buyer enforceable against TelePad and the Buyer, as applicable,
in accordance with its terms, except to the extent that enforcement may be
limited by the effect of bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or similar laws affecting the enforcement of rights of
creditors or other obligees generally and the scope of equitable remedies which
may be available.
4.03 No Violation. Neither the execution and delivery of this Agreement,
------------
the Stock Pledge Agreement, the Buyer Note, or any other agreement or instrument
contemplated hereby, as applicable, nor the consummation of the transactions
contemplated hereby or thereby will violate any provisions of the Certificate of
Incorporation (as amended) or By-Laws (as amended) of TelePad or the Buyer or
violate, or be in conflict with, or constitute a default under, or cause the
acceleration of the maturity of any debt or obligation pursuant to, any
agreement or commitment to which TelePad or the Buyer is a party or by which
TelePad or the Buyer is bound, or violate any statute or law or any judgment,
decree, order, regulation or rule of any court or governmental authority.
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4.04 Brokers and Finders. Neither TelePad, the Buyer nor any of their
---------------------
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated by this Agreement.
4.05 SEC Filings. TelePad has delivered to the LLC TelePad's annual report
-----------
on Form 10-KSB for the year ended December 31, 1995, its quarterly report on
Form 10-QSB for the period ended September 30, 1996 and its registration
statement on Form S-3, filed November 27, 1996, as amended. As of their
respective dates, such reports and statement (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of material fact or omit to state 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. The
audited financial statements and unaudited interim financial statements of
TelePad included or incorporated by reference in such reports have been prepared
in accordance with GAAP applied on a consistent basis during the period involved
(except as may be indicated in the notes thereto), and fairly present in all
material respects the assets, liabilities and financial position of TelePad 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 any
unaudited interim financial statements, to normal year-end adjustments).
4.06 Absence of Certain Changes or Events. Except as contemplated by this
-------------------------------------
Agreement, or reflected in any financial statement or note thereto referred to
in Section 4.05, since September 30, 1996 there has not been (a) any material
adverse change in TelePad's business, assets, operations or financial condition;
(b) any damage, destruction or loss, whether covered by insurance or not, having
a material adverse effect upon TelePad's properties or business; (c) any entry
by TelePad into any commitment or transaction material to TelePad, which is not
in the ordinary course of business; or (d) any change by TelePad in accounting
principles or methods except insofar as may be required by a change in GAAP.
4.07 Litigation. There is no action, suit, inquiry, proceeding or, to the
----------
knowledge of TelePad or the Buyer, investigation by or before any court or
governmental or other regulatory or administrative agency or commission pending
or, to the knowledge of TelePad or the Buyer, threatened which, if adversely
determined, would have a material adverse effect on the business, assets,
operations or financial condition of TelePad or the Buyer or on the ability of
either of them to perform its obligations under this Agreement or under any
other agreement required to be executed by it pursuant to this Agreement.
4.08 Solvency. Neither TelePad nor the Buyer will be rendered insolvent as
--------
a result of the purchase of the Shares pursuant to this Agreement.
4.09 Assets. The Buyer has no assets or liabilities other than those
------
created or incurred in connection with the execution and consummation of this
Agreement.
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4.10 Information Received. Section 2.19 of the Disclosure Schedule is an
---------------------
accurate and complete list of the contracts, agreements or commitments received
by the Buyer and TelePad from the Company.
ARTICLE V
PRE-CLOSING COVENANTS AND AGREEMENTS
5.01 Conduct of Company's Business. The Company and the LLC agree that,
-------------------------------
from and after the date hereof through the Closing Date or the earlier
termination of this Agreement:
(a) The business and operations of the Company and the Subsidiaries
will be conducted only in the ordinary course in all material respects. The
Company will use its reasonable efforts to preserve and maintain the business
and properties of the Company and the Subsidiaries intact, keep available the
services of their employees, and preserve for TelePad and the Buyer the
relationships of the Company and the Subsidiaries with its employees, suppliers,
customers, sales representatives and others having business relations with them.
Notwithstanding the foregoing, the Company may, prior to the Closing, transfer
all of the capital stock or assets of its subsidiary, United World
Communications, Inc., to the Stockholders or any other entity.
(b) Except (i) as may be required by existing contracts or applicable
law, (ii) for such obligations as will be satisfied in full on or prior to the
Closing Date, and (iii) increases not exceeding ten percent per annum to
employees made in the ordinary course of business, the Company will not
increase, or obligate itself to increase, the compensation payable or to become
payable by the Company to any of the directors, officers or employees of the
Company or the Subsidiaries or incur any additional obligations with respect to
any such directors, officers or employees or take any action with respect to the
grant or increase of severance or termination pay payable after the Closing Date
or institute an increase in or otherwise amend any deferred compensation,
insurance, retirement, medical, disability, welfare or other employee benefit
plan, agreement, trust or fund. Notwithstanding the foregoing, the Company shall
be entitled to hire employees in the ordinary course of business.
(c) The Company will furnish to the Buyer when they become available
interim unaudited consolidated financial statements of the Company for periods
ending after October 31, 1996.
(d) Neither the LLC nor any affiliate of the LLC will enter into any
material transaction with the Company or any Subsidiary, except as otherwise
contemplated hereby.
(e) The Company will maintain its books and records in all material
respects in accordance with prior practice.
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(f) The Company will comply in all material respects with all laws,
rules and regulations applicable to it and it will cause the Subsidiaries to do
so.
(g) The Company will provide to the Buyer, promptly upon receipt
thereof, a copy of any notice from any governmental authority of the revocation,
suspension, violation, or limitation of the rights under, or of any proceeding
for the revocation, suspension, or limitation of the rights under (or that such
authority may in the future, as the result of failure to comply with laws or
regulations or for any other reason, revoke, suspend, or limit the rights under)
any Permit held by the Company or any Subsidiary.
(h) The Company will notify the Buyer promptly after learning of the
institution or threat of any action against the Company or any Subsidiary in any
court, or any action against the Company or any Subsidiary before any other
government authority, and notify the Buyer promptly upon receipt of any
administrative or court order relating to any of the assets or business of the
Company or any Subsidiary.
(i) The Company will not issue any capital stock or any warrants,
options or other rights to acquire capital stock or securities convertible into
or exercisable or exchangeable for any the Company capital stock, nor will the
Company authorize or agree to do any of the foregoing or cause any Subsidiary to
do any of the foregoing with respect to such Subsidiary's capital stock.
(j) The LLC shall not sell, pledge, assign, transfer or otherwise
dispose of or encumber any of the Company capital stock, nor grant any right to
vote or acquire any of the Company capital stock.
(k) The Company will not enter into any transaction or take any action
which individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect.
(l) One time prior to the Closing Date, within five days after receipt
of a written request from TelePad and the Buyer, the Company and the LLC will
update their representations and warranties set forth in Article II and III
hereof as if such representations and warranties were made as of the date of
such update.
5.02 Conduct of TelePad's and the Buyer's Business. TelePad and the Buyer,
---------------------------------------------
as applicable, agree that, from and after the date hereof through the Closing or
the earlier termination of this Agreement:
(a) TelePad's business and operations will be conducted only in the
ordinary course in all material respects. TelePad will use its reasonable
efforts to preserve and maintain its business and properties intact, keep
available the services of its employees, and preserve the relationships of
TelePad with its employees, suppliers, customers, sales representatives and
others having business relations with it.
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(b) TelePad will furnish to the Company all of the reports TelePad
files with the Securities and Exchange Commission or otherwise distributes
publicly after the date hereof.
(c) TelePad will maintain its books and records in all material
respects in accordance with prior practice.
(d) Each of TelePad and the Buyer will comply in all material respects
with all laws, rules and regulations applicable to it.
(e) TelePad will provide to the Company, promptly upon receipt
thereof, a copy of any notice from any governmental authority of the revocation,
suspension, violation, or limitation of the rights under, or of any proceeding
for the revocation, suspension, or limitation of the rights under (or that such
authority may in the future, as the result of failure to comply with laws or
regulations or for any other reason, revoke, suspend, or limit the rights under)
any license or Permit held by TelePad or the Buyer.
(f) TelePad will notify the Company promptly after learning of the
institution or threat of any action against TelePad or the Buyer in any court,
or any action against TelePad or the Buyer before any other government
authority, and notify the Company promptly upon receipt of any administrative or
court order relating to any of its assets or business.
(g) TelePad will not enter into any transaction or take any action
which individually or in the aggregate could reasonably be expected to have a
material adverse effect on TelePad or the Buyer or the consummation of the
transactions contemplated hereby.
(h) TelePad and the Buyer will update their representations and
warranties set forth in Article IV at the same time as, and as of the same date
as, the update to be provided by the Company and the LLC pursuant to Section
5.01(l).
(i) The Buyer will not acquire assets, incur any liability or conduct
any business except as contemplated by this Agreement.
5.03 Inspections and Confidentiality.
--------------------------------
(a) Except as may unreasonably interfere with the conduct of or
otherwise jeopardize business of the Company or TelePad, as the case may be,
TelePad, the Company and their respective representatives will have the right at
reasonable times, and upon reasonable prior notice, to examine assets, business
and records of the Company and TelePad, respectively, and to interview the
employees, agents and representatives of the Company and TelePad, respectively,
concerning the operations, business, assets, financial condition and prospects
of such corporation, as may be reasonably requested by the respective party.
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(b) In connection with the transactions contemplated by this
Agreement, the Company and the LLC will furnish to TelePad and the Buyer and
TelePad and the Buyer will furnish to the Company and the LLC certain
information regarding their respective businesses. All information furnished
hereunder to TelePad and the Buyer or to the Company and the LLC or their
respective directors, officers, employees, agents or representatives, including
attorneys, accountants, consultants and financial advisors (collectively
"representatives") and all analyses, compilations, data, studies or other
documents prepared by any party hereto or its respective representatives
containing, or based in whole or in part on, any such information are
hereinafter collectively referred to as the "Information." For all purposes
hereof, however, the term "Information" shall not include (i) information that
is or becomes lawfully available to the public other than as a result of
disclosure by any party hereto in breach of this Agreement; (ii) information
that is or becomes available to any party hereto or their representatives on a
nonconfidential basis; and (iii) information that has been furnished prior to
the date hereof on a nonconfidential basis to TelePad or the Buyer by the
Company or the LLC, or its representatives or to the Company or the LLC by
TelePad or its representatives.
(c) (i) The Information will be kept confidential and will not,
without prior written consent of the party hereto which provided the Information
hereunder, be disclosed by the party to which the Information was provided or
their representatives.
(ii) Subject to the provisions of Section 5.04 hereof, no party
hereto will disclose to any other person or entity the terms,
conditions or other facts with respect to the transactions
contemplated by this Agreement, including the status thereof, except
such disclosure as has been previously approved and as may be required
by law, as reasonably determined by the applicable party based on the
advice of counsel.
(d) If this Agreement is terminated or expires, TelePad and the Buyer
shall, as requested by the Company or the LLC, return or destroy the Information
provided to it by the Company and the LLC, and the Company and the LLC shall, as
requested by TelePad, return or destroy the Information provided to them by
TelePad.
(e) If any party hereto or any of representatives of any party hereto
is requested or becomes legally compelled (by oral questions, interrogatories,
request for information or documents, subpoena, criminal or civil investigative
demand or similar process) to disclose any of the Information relating to a
party other than itself, such other party will be provided with prompt written
notice so that it may seek a protective order or other appropriate remedy and/or
waive compliance with the provisions of this Agreement. If such protective order
or other remedy is not obtained, or if the party that provided the Information
waives compliance with the provisions of this Agreement, the person who has been
the subject of such request or legal compulsion will furnish only that portion
of the Information which is legally required and will exercise all reasonable
efforts to obtain reliable assurance that confidential treatment will be
accorded the Information. Notwithstanding anything herein to the contrary, each
party hereto shall be free to disclose any Information during the course of or
in connection with any litigation,
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arbitration or other proceeding based upon or in connection with the subject
matter of this Agreement.
5.04 Announcements and Federal Securities Law Matters.
------------------------------------------------
(a) Each party hereto and its representatives will exercise all
reasonable efforts to maintain confidentiality with respect to the existence of
this Agreement and the transactions contemplated by this Agreement at all times
prior to the public announcement of the execution and delivery of this
Agreement, except that it is understood that TelePad will, after consulting with
the Company, release a press statement announcing the existence of this
Agreement and the transactions contemplated by this Agreement and file with the
Securities and Exchange Commission a report including disclosure of this
Agreement and the transactions contemplated by this Agreement and a copy hereof
as an exhibit. The provisions of this Section 5.04 will be subject to each
party's obligation to comply with applicable requirements of federal or state
laws or any governmental order or regulation; and in this regard, the Company
and the LLC understand that TelePad is a publicly held corporation and as a
result has disclosure obligations under federal and state securities laws.
(b) The Company and the LLC (i) acknowledge that they are and their
representatives to whom Information will be provided hereunder by TelePad will
be (A) aware that the United States securities laws prohibit any person who has
material nonpublic information about a company from purchasing or selling
securities of such company (whether debt or equity securities), or from
communicating such information to any other person under circumstances in which
it is reasonably foreseeable that such person is likely to purchase or sell such
securities and (B) familiar with the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder and (ii) agree
that neither the Company nor the LLC will use, cause any third party to use and
permit its representatives to use, any such Information in contravention of such
Act or any such rules and regulations, including Rule 10b-5.
5.05 Notification of Certain Matters. The Company and the LLC shall give
--------------------------------
prompt notice to TelePad and the Buyer, and TelePad and the Buyer shall give
prompt notice to the Company and the LLC, of (i) the occurrence, or failure to
occur, of any event that would be likely to cause any representation or warranty
contained in this Agreement and made by such party to be untrue or inaccurate in
any material respect at any time from the date of this Agreement to the Closing
Date and (ii) any failure of TelePad, the Buyer, the Company or the LLC, as the
case may be, to comply with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement.
5.06 Permits and Approvals.
---------------------
(a) TelePad, the Buyer, the Company and the LLC each agree to
cooperate and use their best efforts to obtain (and will immediately prepare all
filings, applications, requests and notices preliminary to) all approvals and
permits that may be necessary or which may be
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reasonably requested by any such party to consummate the transactions
contemplated by this Agreement.
(b) To the extent that the approval of a third party with respect to
any contract is required in connection with the transactions contemplated by
this Agreement, the Company and the LLC shall use its best efforts to obtain
such approval prior to the Closing Date and if any such approval is not
obtained, the Company and the LLC shall cooperate with TelePad and the Buyer to
ensure that TelePad and the Buyer obtain the benefits of each such contract.
5.07 Additional Agreements. The parties agree to finalize the following
----------------------
documents no later than February 26, 1997: (i) an employment agreement between
the Company and William Hummel; (ii) amendments to existing employment
agreements with the other Stockholders; (iii) an assignment from the Company to
the Stockholders or the LLC of certain life insurance policies; and (iv) a
release, which shall include, inter alia, a release by the Company of claims
with respect to the period after the Closing Date against the Stockholders based
upon their status as former stockholders of the Company.
ARTICLE VI
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
6.01 Survival of Representations. Except for actions based upon (a) fraud
----------------------------
or (b) a breach of representations and warranties contained in Section 2.23,
2.29 or 2.31 (each of which shall continue in full force and effect without
limitation until expiration of the applicable statute of limitations), and
except for those covenants and agreements which, by their terms, expressly
survive for a different period, all representations, warranties, covenants and
agreements of the parties contained in this Agreement or expressly incorporated
herein by reference shall survive the Closing Date and any investigation made by
or on behalf of any party hereto for a period of 18 months after the Closing
Date. Claims relating to fraud or breaches of such representations, warranties,
covenants and agreements occurring prior to the expiration of the applicable
survival period may be asserted up to 30 days after the expiration of such
survival period.
6.02 Statements as Representations. All statements contained herein, in the
-----------------------------
Disclosure Schedule or in any certificate or other document delivered pursuant
to this Agreement, shall be deemed representations and warranties within the
meaning of Section 5.01 hereof.
6.03 Indemnification Provisions for Benefit of TelePad and the Buyer.
---------------------------------------------------------------
(a) If the Company or the LLC (the "Seller Parties") breaches (or in
the event any third party alleges facts that, if true, would mean any of such
parties has breached) any of their representations, warranties and covenants
contained herein, then each of the Seller Parties,
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jointly and severally, agrees to indemnify TelePad and the Buyer from and
against the entirety of any Adverse Consequences (as defined below) TelePad and
the Buyer may suffer through and after the date of the claim for indemnification
resulting from, arising out of, relating to, in the nature of, or caused by the
breach (or the alleged breach). "Adverse Consequences" means all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues, penalties,
fines, costs, amounts paid in settlement, liabilities, obligations, taxes,
liens, losses, expenses and fees, including court costs and reasonable
attorneys' fees and expenses.
(b) Each of the Seller Parties, jointly and severally, agrees to
indemnify TelePad and the Buyer from and against the entirety of any Adverse
Consequences TelePad and the Buyer may suffer resulting from, arising out of,
relating to, in the nature of, or caused by any liability of any of the Company
and the Subsidiaries for any taxes of the Company and the Subsidiaries with
respect to any tax year or portion thereof ending on or before the Closing Date
(or for any tax year beginning before and ending after the Closing Date to the
extent allocable to the portion of such period beginning before and ending on
the Closing Date), to the extent such taxes are not reflected in the reserve for
tax liability (rather than any reserve for deferred taxes established to reflect
timing differences between book and tax income) shown on the face of the
Adjustment Date Balance Sheet.
(c) Each of the Seller Parties, jointly and severally, agrees to
indemnify TelePad and the Buyer from and against the entirety of any Adverse
Consequences TelePad and the Buyer may suffer resulting from, arising out of,
relating to, or caused by any action or inaction of the Company, its
Subsidiaries, or their officers, directors, employees, stockholders,
representatives or agents, including the Trustee, with respect to the Plan, the
Trust, the Redemption Agreement or the Profit Sharing Plan, notwithstanding the
absence of any breach of any representation, warranty or covenant hereunder.
6.04 Indemnification Provisions for Benefit of the LLC. If TelePad or the
--------------------------------------------------
Buyer (individually, a "Buyer Party" and collectively, the "Buyer Parties")
breaches (or in the event any third party alleges facts that, if true, would
mean a Buyer Party has breached) any of its representations, warranties, and
covenants contained herein, then the applicable Buyer Party agrees to indemnify
the LLC from and against the entirety of any Adverse Consequences the LLC may
suffer through and after the date of the claim for indemnification resulting
from, arising out of, relating to, in the nature of, or caused by the breach (or
the alleged breach).
6.05 Matters Involving Third Parties.
-------------------------------
(a) If any third party shall notify any of the Seller Parties or the
Buyer Parties (the "Indemnified Party") with respect to any matter (a "Third
Party Claim") which may give rise to a claim for indemnification against any
other party (the "Indemnifying Party") under this Article VI, then the
Indemnified Party shall promptly notify each Indemnifying Party thereof in
writing; provided, however, that no delay on the part of the Indemnified Party
in notifying any
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Indemnifying Party shall relieve the Indemnifying Party from any obligation
hereunder unless (and then solely to the extent) the Indemnifying Party thereby
is prejudiced.
(b) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the Indemnifying
Party's choice reasonably satisfactory to the Indemnified Party so long as (i)
the Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party, subject to the terms and conditions hereof, will indemnify
the Indemnified Party from and against the entirety of any Adverse Consequences
the Indemnified Party may suffer resulting from, arising out of, relating to, in
the nature of, or caused by the Third Party Claim, (ii) the Indemnifying Party
provides the Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Indemnifying Party will have the financial resources
to defend against the Third Party Claim and fulfill its indemnification
obligations hereunder, (iii) the Third Party Claim involves only money damages
and does not seek an injunction or other equitable relief, (iv) settlement of,
or an adverse judgment with respect to, the Third Party Claim is not, in the
good faith judgment of the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing business interests of
the Indemnified Party, and (v) the Indemnifying Party conducts the defense of
the Third Party Claim actively and diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 6.05(b), (i) the Indemnified Party
may retain separate co- counsel at its sole cost and expense and participate in
the defense of the Third Party Claim, (ii) the Indemnified Party will not
consent to the entry of any judgment or enter into any settlement with respect
to the Third Party Claim without the prior written consent of the Indemnifying
Party (not to be withheld unreasonably), and (iii) the Indemnifying Party will
not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably).
(d) If any of the conditions in Section 6.05(b) is or becomes
unsatisfied, however, (i) the Indemnified Party may defend against, and consent
to the entry of any judgment or enter into any settlement with respect to, the
Third Party Claim in any manner it reasonably may deem appropriate (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys' fees
and expenses), and (iii) the Indemnifying Parties will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third Party
Claim to the fullest extent provided in this Article VI.
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ARTICLE VII
POST-CLOSING COVENANTS AND AGREEMENTS
7.01 Board Composition. On the Closing Date, the Board shall consist of the
-----------------
six (6) individuals listed on Exhibit D hereto. Until such time as designees of
the LLC no longer comprise a majority of the Board, directors without the
requisite government clearance shall be excluded from participation in
discussions concerning, and the review of documents reflecting, classified
matters.
7.02 Investment Obligations. On each of (a) the Closing Date and (b) the
-----------------------
date which is 12 months after the Closing Date, TelePad shall negotiate with the
Company in respect of making a $5 million investment in the Company or the
Investment Subsidiary. Each such investment shall be in the form of an equity
contribution the proceeds of which shall be used for the purpose or purposes
determined by a majority of the Company's directors; provided, however, that
either or both of such investment obligations may be nullified by (i) a vote of
a majority of the Company's directors, so long as (A) designees or appointees of
the LLC comprise a majority thereof or (B) the Additional Consideration has
already been paid, or (ii) the LLC, if the LLC's designees no longer comprise a
majority of the Board and the Additional Consideration has not been paid. As a
condition to TelePad's obligation to make each such $5 million investment, the
LLC must, concurrent with the Company's specification of the form of such
investment, advise TelePad in writing as to the formula to be used for the
calculation of Additional Consideration under Section 1.02(c)(ii).
7.03 Delivery and Maintenance of Short Term Letter of Credit. On or before
-------------------------------------------------------
the Closing Date, the Buyer shall deliver to the LLC a letter of credit in the
face amount of $4.7 million (the "Short Term Letter of Credit"), in form and
substance reasonably satisfactory to the LLC, and issued by Central Fidelity
Bank or another bank acceptable to the Buyer and the LLC (the "Bank"), as
collateral security for the Buyer's obligations under the Buyer Note. The Short
Term Letter of Credit shall expire on the earlier of full payment of the Buyer
Note or five business days after the "maturity date" of the Buyer Note (as
defined therein) (the "Short Term Expiration Date"), be irrevocable and
unconditional, shall not be transferable, shall permit partial draws, and shall
permit drafts drawn under it to be payable to the order of an escrow agent to be
agreed upon by the Buyer and the LLC (the "Escrow Agent"). The Short Term Letter
of Credit shall specify that a draft in proper form and the original Short Term
Letter of Credit must be presented to draw drafts payable to the Escrow Agent
under it. Drafts may be payable to another payee if the LLC presents to the Bank
written authorization of the Buyer to honor a draft for the amount agreed to by
the parties, payable at sight, and drawn under the Short Term Letter of Credit.
If the Buyer does not agree to issue the foregoing authorization, the LLC may
nonetheless draw upon the Short Term Letter of Credit after it has obtained and
presented to the Bank a final order or decree of a court of competent
jurisdiction or other appropriate agency or arbitrator adjudicating a claim with
respect to the Buyer Note in favor of the LLC. If one day prior to the Short
Term Expiration Date there is a dispute pending with respect to the Buyer's
obligations under the Buyer
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Note, the LLC may draw a draft against the Short Term Letter of Credit in the
amount of the claim under dispute, payable to the order of the Escrow Agent. The
LLC shall deliver to the Escrow Agent all drafts payable to the order of the
Escrow Agent. The LLC and the Buyer agree to finalize and enter into an escrow
agreement with the Escrow Agent with respect to the Short Term Letter of Credit
prior to the Closing Date. The Buyer shall be solely responsible for all fees
and charges related to the issuance of the Short Term Letter of Credit.
7.04 Delivery and Maintenance of Long Term Letter of Credit. On or before
-------------------------------------------------------
the date which is six months after the Closing Date, unless the Additional
Consideration has already been paid, the Buyer shall deliver to the LLC a letter
of credit in the face amount of $5 million (the "Long Term Letter of Credit"),
in form and substance reasonably satisfactory to the LLC, and issued by the
Bank, as collateral security for the Buyer's obligations to pay the Additional
Consideration to the LLC pursuant to Section 1.02 hereof. The Long Term Letter
of Credit shall expire on the earlier of the Payment Date or five business days
after the fifth anniversary of the Closing Date (the "Long Term Expiration
Date"), be irrevocable and unconditional, shall not be transferable, shall
permit partial draws, and shall permit drafts drawn under it to be payable to
the order of the Escrow Agent. The Long Term Letter of Credit shall specify that
a draft in proper form and the original Long Term Letter of Credit must be
presented to draw drafts payable to the Escrow Agent under it. Drafts may be
payable to another payee if the LLC presents to the Bank written authorization
of the Buyer to honor a draft for the amount agreed to by the parties, payable
at sight, and drawn under the Long Term Letter of Credit. If the Buyer does not
agree to issue the foregoing authorization, the LLC may nonetheless draw upon
the Long Term Letter of Credit after it has obtained and presented to the Bank a
final order or decree of a court of competent jurisdiction or other appropriate
agency or arbitrator adjudicating a claim with respect to the Additional
Consideration in favor of the LLC. If five days before the Long Term Expiration
Date there is a dispute pending with respect to the Buyer's obligations with
respect to the Additional Consideration, the LLC may draw a draft against the
Long Term Letter of Credit in the amount of the claim under dispute, payable to
the order of the Escrow Agent. The LLC shall deliver to the Escrow Agent all
drafts payable to the order of the Escrow Agent. The LLC and the Buyer agree to
finalize and enter into an escrow agreement with the Escrow Agent with respect
to the Long Term Letter of Credit prior to the date which is six months after
the Closing Date. The Buyer shall be solely responsible for all fees and charges
related to the issuance of the Long Term Letter of Credit.
7.05 Tax Matters. The following provisions shall govern the allocation of
-----------
responsibility as between the Buyer and the LLC for certain tax matters
following the Closing Date:
(a) Tax Periods Ending on or Before the Closing Date. The LLC shall
prepare or cause to be prepared and file or cause to be filed all tax returns
for the Company and the Subsidiaries for all periods ending on or prior to the
Closing Date which are filed after the Closing Date. The LLC shall permit the
Buyer to review and comment on each such tax return described in the preceding
sentence prior to filing. The LLC shall reimburse TelePad and the Buyer for
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taxes of the Company and the Subsidiaries with respect to such periods within 15
days after payment by the Buyer or the Company and the Subsidiaries of such
taxes to the extent such taxes are not reflected in the reserve for tax
liability (rather than any reserve for deferred taxes established to reflect
timing differences between book and tax income) shown on the face of the
Adjustment Date Balance Sheet.
(b) Tax Periods Beginning Before and Ending After the Closing Date.
The Buyer shall prepare or cause to be prepared and file or cause to be filed
any tax returns of the Company and the Subsidiaries for tax periods which begin
before the Closing Date and end after the Closing Date and have not been filed
as of the date of this Agreement. The LLC shall pay to the Buyer within 15 days
after the date on which taxes are paid with respect to such periods an amount
equal to the portion of such taxes which relates to the portion of such taxable
period ending on the Closing Date to the extent such taxes are not reflected in
the reserve for tax liability (rather than any reserve for deferred taxes
established to reflect timing differences between book and tax income) shown on
the face of the Closing Date Balance Sheet. For purposes of this Section, in the
case of any taxes that are imposed on a periodic basis and are payable for a
taxable period that includes (but does not end on) the Closing Date, the portion
of such tax which relates to the portion of such taxable period ending on the
Closing Date shall (i) in the case of any taxes other than the taxes based upon
or related to income or receipts, be deemed to be the amount of such tax for the
entire taxable period multiplied by a fraction the numerator of which is the
number of days in the taxable period ending on the Closing Date and the
denominator of which is the number of days in the entire taxable period, and
(ii) in the case of any tax based upon or related to income or receipts, be
deemed equal to the amount which would be payable if the relevant taxable period
ended on the Closing Date. Any credits relating to a taxable period that begins
before and ends after the Closing Date shall be taken into account as though the
relevant taxable period ended on the Closing Date. All determinations necessary
to give effect to the foregoing allocations shall be made in a manner consistent
with prior practice of the Company and the Subsidiaries.
(c) Cooperation on Tax Matters. The parties shall cooperate fully, as
and to the extent reasonably requested by another party, in connection with the
filing of tax returns pursuant to this Section and any audit, litigation or
other proceeding with respect to taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. The parties agree (i) to retain all books and records with respect to
tax matters pertinent to the Company and the Subsidiaries relating to any
taxable period beginning before the Closing Date until the expiration of the
statute of limitations (and, to the extent notified by another party, any
extensions thereof) of the respective taxable periods, and to abide by all
record retention agreements entered into with any taxing authority, and (ii) to
give the other party reasonable written notice prior to transferring, destroying
or discarding any such books and records and, if the other party so requests, to
allow such other party to take possession of such books and records.
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(d) Tax Sharing Agreements. All tax sharing agreements or similar
agreements with respect to or involving the Company and the Subsidiaries shall
be terminated as of the Closing Date and, after the Closing Date, the Company
and the Subsidiaries shall not be bound thereby or have any liability
thereunder. On or before the Closing Date the Company and TelePad shall enter
into a mutually acceptable tax sharing agreement.
(e) Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other like taxes and fees (including any penalties and
interest) incurred in connection with the Buyer's purchase of the Shares under
this Agreement shall be paid by the LLC when due, and the LLC will, at its own
expense, file all necessary tax returns and other documentation with respect to
all such taxes and fees, and, if required by applicable law, the Buyer and the
Company, as applicable, will, and will cause its affiliates to, join in the
execution of any such tax returns and other documentation.
ARTICLE VIII
DISPUTES; ARBITRATION
8.01 Disputes Generally. The parties hereby undertake to use good faith
-------------------
efforts to settle all disputes arising under this Agreement. Failing settlement,
except as provided with respect to disputes under Article I hereof, all
disputes, including without limitation claims of breach of contract, fraud in
the inducement and negligence shall be referred to binding arbitration in
Washington, D.C. in accordance with the Commercial Rules of Arbitration of the
American Arbitration Association.
8.02 Selection of Arbitrator(s). If, within seven days after receipt by one
--------------------------
party of the other party's notice of intention to arbitrate, the parties are
unable to agree on a single arbitrator, each party shall have 20 days to appoint
its own arbitrator, and the two arbitrators thus chosen shall together, within
seven days of their appointment, appoint a third arbitrator. If either party
fails to appoint its own arbitrator within the specified period, the arbitrator
appointed by the other party shall be the sole arbitrator. If both parties fail
to appoint arbitrators within the specified period, or if the arbitrators
appointed by the parties fail to appoint a third arbitrator within the specified
period, the American Arbitration Association shall make the appointment. The
parties shall use their best efforts to appoint arbitrators who are
knowledgeable in the data processing field.
8.03 Decision of Arbitrators. The decision of the arbitrator(s) shall be
-----------------------
reduced to writing with a full explanation of its factual and legal basis and
shall be rendered within 30 days after all evidence and arguments have been
submitted. Such decision shall be final and may be enforced in any court of
competent jurisdiction.
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8.04 Expense of Arbitration. Each party in any proceeding shall bear (a)
-----------------------
his or its own expenses incurred in connection with arbitration, including all
legal, accounting and other professional fees and expenses and (b) his or its
proportional share of the fees and expenses of the arbitrators.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 Amendment and Modifications. Subject to applicable law, this Agreement
---------------------------
may be amended, modified and supplemented only by written agreement between the
parties hereto which states that it is intended to be a modification of this
Agreement.
9.02 Waiver of Compliance. Any failure of the Company and the LLC, on the
---------------------
one hand, or TelePad and the Buyer, on the other, to comply with any obligation,
covenant, agreement or condition herein may be expressly waived in writing by
the other party, but such waiver or failure to insist upon strict compliance
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
9.03 Expenses. Except as otherwise provided herein, the parties agree that
--------
all fees and expenses incurred by them in connection with this Agreement and the
transactions contemplated hereby shall be borne by the party incurring such fees
and expenses, including, without limitation, all fees of counsel, actuaries and
accountants. The Company shall be responsible for any legal, accounting or other
fees and expenses incurred by the Company in connection with the transactions
contemplated hereby and all such fees and expenses incurred through the
Adjustment Date shall be fully accrued, paid or estimated as of the Adjustment
Date and taken into account in calculating the Company's Consolidated Net Worth.
9.04 Reasonable Efforts; Further Assurances. Each party will use its
-----------------------------------------
reasonable efforts to cause all conditions to its and the other parties
obligations hereunder to be timely satisfied and to perform and fulfill all
obligations on its part to be performed and fulfilled under this Agreement, to
the end that the transactions contemplated in this Agreement shall be effected
substantially in accordance with its terms as reasonably practicable. The
parties shall cooperate with each other in such actions and in securing
requisite approvals. Each party shall execute and deliver both before and after
the Closing such further certificates, agreements and other documents and take
such other actions as the other party may reasonably request to consummate or
implement the transactions contemplated hereby or to evidence such events or
matters.
9.05 Remedies; Waiver. To the maximum extent permitted by law, all rights
-----------------
and remedies existing under this Agreement are cumulative to and not exclusive
of, any rights or remedies otherwise available under applicable law. No failure
on the part of any party to exercise
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or delay in exercising any right hereunder shall be deemed a waiver thereof, nor
shall any single or partial exercise preclude any further or other exercise of
such or any other right.
9.06 Knowledge Convention. Whenever any statement herein or in any
---------------------
schedule, exhibit, certificate or other documents delivered to any party
pursuant to this Agreement is made "to the knowledge" or "to the best knowledge"
or words of similar intent or effect of the Company or the LLC or its
representatives, such person shall make such statement only after making
reasonable inquiry of each of the Stockholders and the officers of the Company
to the extent that such person could reasonably be expected to possess the
requisite knowledge and each statement shall be deemed to include a
representation that such inquiry has been conducted. Whenever any statement
herein or in any schedule, exhibit, certificate or other documents delivered to
any party pursuant to this Agreement is made "to the knowledge" or "to the best
knowledge" or words of similar intent or effect of TelePad or the Buyer or its
representatives, such person shall make such statement only after making
reasonable inquiry of each of the officers of TelePad and the Buyer to the
extent that such person could reasonably be expected to possess the requisite
knowledge, and each statement shall be deemed to include a representation that
such inquiry has been conducted
9.07 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed, certified or registered mail
with postage prepaid:
(a) if the Company or the LLC, to:
Federal Computer Corporation
2745 Hartland Road
Falls Church, Virginia 22043
Attention: William E. Hummel, President
with a copy to:
Swidler & Berlin, Chartered 3000 K Street, N.W.
Suite 300
Washington, D.C. 20007
Attention: Morris F. DeFeo, Jr., Esquire
or to such other person or address as the Company or the LLC shall furnish to
TelePad and the Buyer in writing;
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(b) if to TelePad or the Buyer, to:
TelePad Corporation
380 Herndon Parkway
Suite 1900
Herndon, Virginia 22070
Attention: Donald W. Barrett, Chairman and Chief
Executive Officer
with a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Carter Strong, Esquire
or to such other person or address as TelePad or the Buyer shall furnish to the
Company and the LLC in writing.
9.08 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties.
9.09 Governing Law. This Agreement and the legal relations among the
--------------
parties hereto shall be governed by and construed in accordance with the laws of
the Commonwealth of Virginia, excluding such jurisdiction's principles of
conflicts of laws.
9.10 Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and same instrument.
9.11 Construction. The headings of Sections and Articles of this Agreement
------------
are inserted for convenience only and shall not constitute a part hereof or
affect in any way the meaning or interpretation of this Agreement. All
references herein to Articles, Sections and Exhibits shall be deemed to refer to
Articles, Sections and Exhibits of this Agreement.
9.12 Entire Agreement. This Agreement, including the Exhibits and Schedules
----------------
hereto, the Disclosure Schedule and the other documents and certificates
delivered pursuant to the terms hereof, set forth the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein, and supersede all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto.
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9.13 Third Parties. Except as specifically set forth or referred to herein,
-------------
nothing herein expressed or implied is intended or shall be construed to confer
upon or give to any person or corporation other than the parties hereto and
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and, if applicable, their respective corporate seals to be affixed
hereto, all as of the day and year first above written.
TELEPAD CORPORATION
By: ____________________________________________
Title:___________________________________________
TELEPAD ACQUISITION, INC.
By: ____________________________________________
Title:___________________________________________
FEDERAL COMPUTER CORPORATION
By: ____________________________________________
Title:___________________________________________
HARTLAND GROUP, LLC
By: ____________________________________________
Title:___________________________________________
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EXHIBIT A
---------
PROMISSORY NOTE
---------------
$4,700,000.00, Virginia _______, 1997
FOR VALUE RECEIVED, on or before one hundred and eighty (180) days
after the date hereof (__________, 1997), the undersigned, TELEPAD ACQUISITION,
INC., a Delaware corporation (the "Maker"), promises to pay to the order of
Hartland Group, LLC, a Virginia limited liability company (the "Lender", which
shall include any holder of this Note), with offices at 2745 Hartland Road,
Falls Church, Virginia 22043, or at such other place as the holder hereof may
from time to time designate in writing, the principal sum of Four Million Seven
Hundred Thousand Dollars ($4,700,000.00), plus interest on the principal balance
thereof from time to time outstanding at a rate which is at all times eight and
one-half percent (8.5%) per annum, payable in equal successive monthly
installments of interest only, commencing on _____________, 1997, and continuing
on the ___ day of each succeeding month thereafter until the date which is one
hundred and eighty (180) days after the date hereof, the "maturity date" hereof,
when the entire principal balance hereof, all accrued and unpaid interest
thereon, and all applicable fees, costs and charges if any, shall be due and
payable in full, unless the payment of such amount is accelerated subject to the
terms hereof.
Interest hereon shall be calculated on the basis of the actual number
of days elapsed in a 360-day year. All payments of principal and/or interest
hereon shall be payable in lawful money of the United States and in immediately
available funds.
In the event that any payment of principal and/or interest is not
actually received by the holder hereof within five (5) business days of the date
such payment is due, the Maker agrees to pay a late charge equal to five percent
(5%) of the total amount of the delinquent installment. All payments received
hereon shall be applied, at the Lender's option, first to late charges, if any,
then to interest and then to principal.
Notwithstanding anything set forth herein to the contrary, after the
maturity date of this Note, whether at the stated maturity date or by
acceleration, interest on this Note shall be payable at a rate of thirteen and
one-half percent (13.5%) per annum, but in no event shall the rate of interest
applicable hereto be greater than the highest rate permissible under law.
Any of the following shall constitute a default hereunder: (1) if
default be made: (a) in the payment of any installment (or part thereof) due
hereunder; or (b) in the performance or observance in any material respect of
any other covenant or agreement set forth in this Note or in any other of the
"Loan Documents" (hereinafter defined) and such non-monetary default continues
for more than ten (10) business days after notice thereof is delivered to the
Maker; (2) if any warranty or representation of the Maker or TelePad
Corporation, a Delaware corporation ("TelePad") in the Loan Documents is untrue
or misleading in any material respect; (3) the
<PAGE>
inability of the Maker or TelePad to pay its debts generally as they become due,
or the insolvency of the Maker or TelePad or any assignment for the benefit of
creditors, or the filing of a petition by or against the Maker or TelePad under
the provisions of any bankruptcy (provided that, in the case of an involuntary
filing for bankruptcy protection under the United States Bankruptcy Code against
Maker, such petition is not dismissed within thirty (30) days), insolvency, or
similar law for the relief of debtors, or the issuance or service of any
attachment, levy or garnishment against the Maker or TelePad or any of the
Maker's property or the property of TelePad; (4) if TelePad shall dissolve or
cease to be a going concern; (5) the acceleration of the maturity of any
indebtedness, obligation or liability of any kind and/or nature of Maker (or any
subsidiary or affiliate) to any person or entity, including but not limited to
Lender, whether now existing or hereafter created or arising, direct or
indirect, matured or unmatured, and whether absolute or contingent, joint,
several or joint and several, and howsoever owned, held or acquired, the
principal amount of which exceeds an aggregate of One Hundred Thousand Dollars
($100,000.00); or (6) the failure of Maker (or any subsidiary or affiliate) to
satisfy any judgments in excess of the aggregate amount of One Hundred Thousand
Dollars ($100,000.00) within thirty (30) days after such judgment becomes final
and enforceable by lien, levy and execution under applicable law, unless such
execution is stayed.
Any of the following shall constitute an "Acceleration Event"
hereunder: (a) except for an "Excluded Person" (as defined below), any "person,"
including a "group," as such terms are defined in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder (collectively, the "Exchange Act"), becomes the "beneficial owner"
(as defined under the Exchange Act), directly or indirectly, whether by purchase
or acquisition or agreement to act in concert or otherwise, of forty-five
percent (45%) or more of the outstanding capital stock of the Maker, TelePad or
Federal Computer Corporation, a Virginia corporation ("FCC"); (b) except in the
case of a merger or consolidation in which (i) the Maker, TelePad or FCC is the
surviving corporation, and (ii) in the case of a merger or consolidation of
Maker or FCC, Excluded Persons beneficially own, directly or indirectly, more
than sixty-six and two-thirds percent (66 2/3%) of the Maker's or FCC's
outstanding capital stock immediately after such merger or consolidation, the
Maker, TelePad or FCC consummates a merger, consolidation, liquidation or sale
of all or substantially all of the Maker's, TelePad's or FCC's assets; (c) the
consummation by the Maker or FCC of an initial underwritten public offering of
FCC's or the Maker's capital stock, registered under the Securities Act of 1933,
as amended, on a registration statement on Form S-1 or SB-2; or (d) the
composition of the board of directors of FCC (the "Board") is altered, modified
or otherwise amended such that the designees or appointees of the Lender do not
comprise a majority of the Board and the Lender elects to receive the
"Additional Consideration" (as defined in the "Purchase Agreement" hereinafter
defined) as a result thereof pursuant to Section 1.02 of the "Purchase
Agreement" (hereinafter defined). As used herein, an "Excluded Person" shall
mean TelePad or any wholly owned subsidiary of TelePad.
In the event of any default hereunder, subject to any applicable cure
period provided herein, or in the event of an Acceleration Event, as applicable:
(1) the entire principal
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<PAGE>
balance hereof, all accrued and unpaid interest thereon, and all other
applicable fees, costs and charges, if any, shall at once become due and payable
at the option of the holder of this Note; (2) the Lender shall have all other
rights and remedies provided hereunder and under the other Loan Documents and
available at law or in equity, which rights and remedies shall be cumulative and
not alternative and may be exercised successively or concurrently; and (3) the
Lender may set-off against the balance hereof, or may seize, hold and/or
impress, any and all credits, money, stocks, bonds or other security or property
of any nature whatsoever on deposit with, or held by, or in the possession of,
the Lender, to the credit of or for the account of the Maker, without notice to
or consent by the Maker.
This Note may be prepaid, in whole, without penalty; provided however,
that any prepayments of principal shall be applied against the installments or
other payments of principal hereunder in their inverse order of maturity.
Each party liable hereon in any capacity, whether as maker, endorser,
surety, guarantor or otherwise, (i) waives presentment, demand, protest and
notice of presentment, notice of protest and notice of dishonor of this debt and
each and every other notice of any kind respecting this Note (except as
otherwise expressly provided for herein), (ii) agrees that the holder hereof, at
any time or times, without notice to it or its consent, may grant extensions of
time, without limit as to the number or the aggregate period of such extensions,
for the payment of any principal and/or interest due hereon[, and (iii) to the
extent not prohibited by law, waives the benefit of any law or rule of law
intended for its advantage or protection as an obligor hereunder or providing
for its release or discharge from liability hereon, in whole or in part, on
account of any facts or circumstances other than full and complete payment of
all amounts due hereunder].
THE MAKER AND ANY OTHER PARTY LIABLE HEREON IN ANY CAPACITY, WHETHER
AS ENDORSER, SURETY, GUARANTOR, OR OTHERWISE IF ANY, EACH WAIVES TRIAL BY JURY
WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING
OUT OF THE LOAN EVIDENCED HEREBY AND/OR THE CONDUCT OF THE RELATIONSHIP BETWEEN
THE LENDER, THE MAKER AND/OR ANY OTHER PARTY LIABLE HEREON IN ANY CAPACITY,
WHETHER AS ENDORSER, SURETY, GUARANTOR, OR OTHERWISE.
The Maker promises to pay all costs of collection, including, but not
limited to, reasonable attorneys' fees, if this Note is not paid in full when
due, whether at the stated maturity or by reason of acceleration of maturity
under the terms hereof or under the terms of any other of the Loan Documents,
whether suit be brought or not.
In case any one or more of the provisions contained in this Note or in
any other of the Loan Documents shall be invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions of this Note and the other of the Loan Documents shall in no way be
affected or impaired thereby.
-3-
<PAGE>
This Note may not be changed orally, but only by an agreement in
writing signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
This Note is secured by (i) that certain Stock Pledge, Assignment and
Security Agreement of even date herewith, by and between the Maker, TelePad and
the Lender, providing the Lender with an assignment and a first priority lien,
as applicable, against certain property including one hundred percent (100%) of
the outstanding capital stock of the Maker and one hundred percent (100%) of
FCC's outstanding capital stock being purchased in connection herewith by the
Maker, as more particularly described therein (the "Pledge Agreement"); and (ii)
that certain Irrevocable Letter of Credit in the amount of Four Million Seven
Hundred Thousand Dollars ($4,700,000.00), as more particularly set forth in the
"Purchase Agreement" (as defined below) (the "Letter of Credit"). This Note is
issued in connection with that certain Stock Purchase Agreement dated January
27, 1997, by and among the Maker, TelePad, the Lender, and FCC (the "Purchase
Agreement"). This Note, the Pledge Agreement, the Letter of Credit, and the
Purchase Agreement, together with all other documents now and/or hereafter
issued, executed and/or delivered in connection with the loan evidenced hereby,
are herein collectively referred to as the "Loan Documents".
All of the terms, covenants, provisions, conditions, stipulations,
promises and agreements contained in the Loan Documents to be kept, observed and
performed by the Maker and/or by any other parties to any one or more of the
Loan Documents (except for the Lender) are hereby made a part of this Note and
incorporated herein by reference to the same extent and with the same force and
effect as if they were fully set forth herein, and the Maker promises and agrees
to keep, observe and perform them or cause them to be kept, observed and
performed, strictly in accordance with the terms and provisions thereof.
The Maker warrants and represents that the loan evidenced hereby is
being made for business or investment purposes. The Maker warrants, represents
and covenants that the debt evidenced by this Note shall be senior to any and
all other debt now existing or hereinafter incurred by the Maker.
This Note shall be governed in all respects by the laws of the
Commonwealth of Virginia and shall be binding upon and shall insure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, successors and assigns. This Note
shall not be assigned or transferred by the Lender without the express prior
written consent of the Maker, which shall not be unreasonably withheld,
conditioned or delayed.
-4-
<PAGE>
WITNESS the due execution hereof under seal the day and year first
above written.
ATTEST: TELEPAD ACQUISITION, INC., a
Delaware corporation
- ----------------------
By:______________________________
Name:____________________________
Title:___________________________
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<PAGE>
EXHIBIT B
---------
[TO BE PROVIDED AND INSERTED HERE]
<PAGE>
EXHIBIT C
---------
STOCK PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT
-----------------------------------------------
TELEPAD ACQUISITION, INC., a Delaware corporation ("Debtor"), with
principal place of business located at 380 Herndon Parkway, Suite 1900, Herndon,
Virginia 22070, requests that Hartland Group, LLC, a Virginia limited liability
company ("Lender"), extend financial accommodations to Debtor, subject to the
terms and conditions hereof and evidenced by Debtor's promissory note referenced
below and that certain Stock Purchase Agreement of even date herewith, by and
between Debtor, Lender, TelePad Corporation, a Delaware corporation ("TelePad"),
and Federal Computer Corporation, a Virginia corporation ("FCC") (the "Purchase
Agreement"). In consideration of Lender's extending such accommodations, Debtor
and TelePad make the representations and warranties to Lender contained herein
and, as long as this Agreement has not been terminated by Lender, agree with
Lender as follows:
1. Commitment.
----------
(a) Lender shall extend to Debtor a secured term loan in the amount of
Four Million Seven Hundred Thousand Dollars ($4,700,000.00), bearing interest
and being payable to the order of Lender in the original principal amount of
Four Million Seven Hundred Thousand Dollars ($4,700,000.00), together with all
extensions, renewals and modifications thereof, and substitutions therefor
(collectively, the "Term Note"). The Term Note is secured by, among other
things, the pledge of one hundred percent (100%) of the outstanding capital
stock of FCC, being purchased in connection herewith by Debtor (the "FCC
Shares") and one hundred percent (100%) of the outstanding capital stock of
Debtor (the "Newco Shares," the Newco Shares and the FCC Shares are collectively
referred to as the "Property"), as more particularly described on Schedule A
hereto and incorporated herein. The Term Note shall also be secured by a certain
Irrevocable Letter of Credit in the amount of Four Million Seven Hundred
Thousand Dollars ($4,700,000.00) issued in accordance with the terms of the
Purchase Agreement (the "Short Term Letter of Credit"). This Agreement, the
Purchase Agreement, the Term Note, the "Letters of Credit" (hereinafter
defined), and any other document executed in connection therewith are
hereinafter referred to as the "Loan Documents."
(b) Pursuant to Section 1.02 of the Purchase Agreement, Debtor is
obligated to pay the "Additional Consideration" (as defined in the Purchase
Agreement) under certain circumstances. The satisfaction of the Additional
Consideration obligation shall be further secured by a certain Irrevocable
Letter of Credit in the amount of Five Million Dollars ($5,000,000.00), issued
in accordance with the terms of the Purchase Agreement (the "Long Term Letter of
Credit"). The Short Term Letter of Credit and the Long Term Letter of Credit
shall be collectively referred to as the "Letters of Credit."
(c) The obligations evidenced by the Loan Documents are sometimes
herein referred to as the "Loan."
<PAGE>
2. Grant of Security Interest and Assignment. As collateral security for
------------------------------------------
the Loan, as well as for any and all other liabilities and obligations of Debtor
and TelePad to Lender, whether now existing or hereafter created or arising,
direct or indirect, matured or unmatured, and whether absolute or contingent,
joint, several, or joint and several, and no matter how the same may be
evidenced or shall arise, including without limitation all sums due under the
Term Note or in connection with the Loan and the obligation to pay to Lender the
Additional Consideration provided for in Section 1.02 of the Purchase Agreement,
up to the aggregate amount of $16 million (all of which are hereinafter
collectively called the "Obligations"), (A) TelePad hereby grants to Lender a
security interest in, and pledges to Lender, the Newco Shares free and clear of
any mortgage, pledge, lien on, security interest in, hypothecation, assignment,
charge, right, encumbrance or other restriction or liability, other than those
which result by operation of the Loan Documents (collectively "Liens"), (B)
Debtor hereby grants a security interest in, and pledges to Lender, the FCC
Shares, free and clear of all Liens, and (C) TelePad and Debtor, as applicable,
hereby pledge, grant and convey to Lender (i) all cash, securities, dividends
and other property at any time and from time to time received, receivable or
otherwise distributed in respect of or in exchange for any of the Newco Shares
or FCC Shares; (ii) all additional shares of stock of any class issued by Newco
or FCC at any time and from time to time in any manner, and the certificates
representing such additional shares, and all cash, securities, dividends, and
other property at any time and from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
additional shares; and (iii) all securities hereafter delivered hereunder to
Lender in substitution for or in addition to any of the foregoing, all
certificates and instruments representing or evidencing such securities, and all
cash, securities, dividends and other property at any time and from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of the foregoing (the "Collateral").
3. Delivery of Property. Debtor and TelePad shall, upon the full execution
--------------------
of this Agreement, deliver to Lender, or its respective duly appointed nominee,
the certificates representing the Property, together with stock powers in blank
duly executed by Debtor or TelePad (or such nominee). If at any time and from
time to time following the execution of this Agreement Debtor or TelePad shall
become entitled to receive or shall receive in connection with any of the
Property, any:
(i) stock certificate, including, without limitation, any certificate
representing a stock dividend or in connection with any increase
or reduction of capital, reclassification, merger, consolidation,
sale of assets, combination of shares, stock split, spinoff of
splitoff; or
(ii) option, warrant, or right, whether as an addition to or in
substitution of or in exchange for any of the Property or
otherwise;
then, Debtor or TelePad, as the case may be, shall accept the same as Lender's
agent, in trust for Lender (as part of the Collateral), and shall deliver the
same immediately to Lender, in the exact form received, with the appropriate
endorsement when necessary, or appropriate stock powers
-2-
<PAGE>
duly executed in blank, together with any documentary tax stamps and any other
documents necessary to cause Lender to have a good, valid and perfected first
pledge of, lien on, and security interest in the Collateral, as applicable, free
and clear of any Lien. At any time following an "Event of Default" (as defined
in Section 13 hereof), any or all securities comprising the Collateral held by
Lender hereunder may, at the option of Lender, be registered in the name of
Lender or in the name of its nominee, and Debtor or TelePad, as the case may be,
hereby covenants that, upon demand therefor by Lender, Debtor or TelePad, as the
case may be, shall effect such registration or cause such registration to be
effected. Nothing in this Section 3 shall be construed to authorize the issuance
by FCC, Debtor or TelePad of any securities, or the taking of any other action,
the issuance or taking of which would constitute a default hereunder.
4. Rights Incident to Property. Until the occurrence of an Event of
------------------------------
Default, Debtor or TelePad, as the case may be, shall be granted a revocable
license to all voting rights with respect to the Property. Immediately, and
without further notice, upon the occurrence of an Event of Default, whether or
not the Collateral shall have been registered in the name of Lender or its
nominee, the abovereferenced license shall be deemed immediately and
automatically revoked and Lender or its nominee shall have, with respect to the
Collateral, the right to exercise all voting rights as to all of the Collateral,
together with all other corporate rights and all conversion, exchange,
subscription or other rights, privileges or options pertaining thereto as if it
were the absolute owner thereof, including, without limitation, the right to
exchange any or all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of the issuer thereof, or
upon the exercise by such issuer of any right, privilege, or option pertaining
to any of the Collateral to any committees, depository, transfer agent,
registrar or other designated agency upon such terms and conditions as it may
determine, all without liability except to account for Collateral actually
received by it; but Lender shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any failure to do
so or delay in doing so.
5. Dividends. Until the occurrence of an Event of Default, Debtor or
---------
TelePad, as the case may be, shall be granted a revokable license entitling
Debtor or TelePad to receive and retain regular cash dividends payable on the
FCC Shares and the Newco Shares, respectively, but any and all other dividends
or stock or liquidation dividends, distributions of property, returns of capital
or other distributions made on or in respect of the Property, whether resulting
from a subdivision, combination or reclassification of the outstanding capital
stock of Debtor or FCC or received in exchange for the Property or any part
thereof, any and all cash and other property received in exchange for or
redemption of any Property, shall become part of the Collateral to be held by
the Lender in accordance with the terms hereof. The Lender shall execute and
deliver to TelePad and Debtor all such powers of attorney, dividend orders, and
other instruments as TelePad or Debtor may request for the purpose of enabling
TelePad or Debtor to receive the dividends which it is authorized to receive and
retain pursuant to this Section 5. Upon the occurrence of an Event of Default,
such license shall be deemed immediately and automatically revoked and Lender
shall be entitled to any and all cash dividends thereafter (or simultaneously)
made for the benefit of Debtor or TelePad, as the case may be, which shall be
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<PAGE>
promptly delivered to Lender as additional security hereunder or applied toward
the satisfaction of the Obligations in Lender's sole discretion. Nothing
contained in this Section 5 or in Section 4 hereof shall be construed to
authorize the payment of any dividend, in cash or otherwise, or the making of
any distribution, or the taking of any action by FCC, Debtor or TelePad or
otherwise, the making, taking or payment of which is otherwise prohibited, or
which would otherwise constitute a default hereunder.
6. Business and Status of Debtor, Authorization. Debtor is and will remain
--------------------------------------------
a corporation under the laws of Delaware, in good standing, licensed and in full
compliance with all applicable laws and regulations. The execution and delivery
of this Agreement by each of Debtor and TelePad is duly authorized and will not
contravene any agreement, order or regulation to which Debtor or TelePad is
subject.
7. Financial Statements.
--------------------
(a) Debtor or TelePad, as the case may be, shall provide Lender: (i)
on or before ninety (90) days after the close of each of Debtor's fiscal years,
Debtor's balance sheet as of the end of such year and related statements of
income and retained earnings and of cash flow for each fiscal year, reported on
by an independent certified public accountant; (ii) on or before fortyfive (45)
days after the end of each of the first three (3) fiscal quarters for each
fiscal year of Debtor, the unaudited balance sheet of Debtor as of the end of
each such quarter and the related unaudited statements of income and retained
earnings and of cash flow of Debtor, certified by a senior officer of Debtor as
being fairly stated in all material respects when considered in relation to
Debtor's audited annual financial statements (subject to normal yearend
adjustments); or (iii) all Securities and Exchange Commission ("SEC") reports
and filings submitted by TelePad within three (3) days after filing with the
SEC. All such financial statements of Debtor and TelePad which have been or may
be delivered to Lender are or will be complete and do or will fully and fairly
reflect Debtor's and TelePad's respective financial condition and results of
operations as of and for the periods presented. Debtor will maintain books and
financial records in accordance with generally accepted accounting principles
consistently applied.
(b) Debtor agrees at all reasonable times to permit a representative
of Lender to examine and audit Debtor's books and records and to keep Lender
fully advised regarding any litigation involving Debtor the adverse
determination of which might substantially prejudice repayment of the
Obligations.
8. Insurance. In addition to any other agreement which may be entered into
---------
between Lender and Debtor with reference to insurance, Debtor will at all times
carry adequate insurance with responsible companies satisfactory to Lender in
such amounts and against such risks as is usually carried by similar businesses
and by owners of similar property in the same general area. Debtor will obtain
and keep in force such additional insurance as Lender may from time to time
require. All policies covering any tangible portion of the Collateral shall name
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<PAGE>
Lender as mortgagee under a "standard" mortgage clause. Policies and
endorsements or satisfactory evidence thereof are to be delivered to Lender.
9. Taxes. Each of Debtor and TelePad has filed all U.S., state and local
-----
tax returns required to be filed and has paid or made provision for payment of
all taxes due pursuant thereto. Each of Debtor and TelePad will pay when due all
taxes, assessments and similar levies including, but not limited to, income,
franchise and sales taxes imposed on Debtor, TelePad, the Collateral or the
Property and/or any other of Debtor's property.
10. Warranties and Representations. Each of Debtor and TelePad represents
-------------------------------
and warrants that:
(i) It has all requisite power and authority to enter into this
Agreement, to pledge and assign, as applicable, the Collateral,
and to carry out the transactions contemplated by this Agreement;
(ii) It is the legal and beneficial owner of all of the Collateral
(including the Property which is currently outstanding);
(iii)The Property constitutes one hundred percent (100%) of the FCC
Shares and the Newco Shares (collectively, the "Shares");
(iv) All of the Shares currently outstanding have been duly and
validly issued, are fully paid and nonassessable, and are owned
by Debtor (with respect to the FCC Shares) or by TelePad (with
respect to the Newco Shares) free of any Lien;
(v) The Shares represent the only class of capital stock of Debtor
and FCC, respectively, that are authorized or outstanding on the
date hereof; and
(vi) Upon delivery of the Property to Lender or its agent, this
Agreement shall be the valid and binding obligation of Debtor and
TelePad, fully enforceable in accordance with its terms, and
shall create a valid first lien upon and perfected security
interest in, and assignment of, as applicable, the Collateral,
including the Property, and the proceeds and products thereof,
subject to no prior Liens or agreements purporting to grant to
any third party a security interest in or assignment of the
property or assets of Debtor or TelePad which would include the
Collateral.
11. Affirmative Covenants. Debtor and TelePad each covenants and agrees
----------------------
that, until this Agreement has been terminated, Debtor and TelePad (as
applicable) shall:
-5-
<PAGE>
(i) Pay all of the Obligations when due.
(ii) Keep Debtor's books and records at the address specified in the
introductory paragraph of this Agreement.
(iii)Remain liable for any deficiency resulting from a sale of any or
all of the Collateral and pay any such deficiency to Lender
forthwith on demand.
(iv) Take such steps and promptly execute and deliver such financing
statements, continuation statements and other papers as may be
necessary or advisable to comply with the Assignment of Claims
Act of 1940 and to perfect or continue any security interests
granted to Lender hereby, and to execute and deliver such further
documents as Lender may from time to time request to more fully
carry out the intent of this Agreement. Each of Debtor and
TelePad warrants and covenants that it will, at its own expense,
defend Lender's right, title, special property and security
interest in and to and assignment of the Collateral against the
claims of any person, firm, corporation or other entity (other
than claims relating to the validity of the transfer of title to
the FCC Shares from Lender to Debtor).
(v) Upon demand from Lender at any time or times, provide Lender with
such additional documents and/or further assurances of title to
the Collateral as Lender may request in order to perfect Lender's
pledge, security interest therein and assignment thereof, as
applicable.
12. Negative Covenants. Each of TelePad and Debtor covenants and agrees
-------------------
that, until this Agreement has been terminated, and without the express, prior
written consent of Lender, Debtor shall not, and shall cause FCC not to:
(a) Sell, exchange, assign, loan, deliver, lease, mortgage or
otherwise transfer or dispose of any of its assets, except in the
ordinary course of FCC's business.
(b) Excluding any borrowings pursuant to or arising under any
existing credit facilities or Loan Documents, create, incur,
assume or in any manner become liable in any respect for (or
otherwise redeem or repay) any indebtedness whether for borrowed
money, as deferred payment for the purchase of assets, or
otherwise, other than to Lender, except for (i) normal trade
debts incurred in the ordinary course of FCC's business, in an
amount not to exceed at any time an aggregate of Fifteen Million
Dollars ($15,000,000.00), and (ii) indebtedness that is
-6-
<PAGE>
not senior to the Obligations, in an amount not to exceed at any time an
aggregate of Fifteen Million Dollars ($15,000,000.00), on terms reasonably
satisfactory to Lender.
(c) Merge, consolidate into or with any company, enterprise or other
entity, nor purchase or acquire any other entity, any substantial part of any
other entity's assets or business, nor otherwise substantially change its legal
structure or the general character of its business as it is presently conducted;
or sell or otherwise acquire or transfer all or any substantial part of its
assets to any other person, firm, corporation or other entity.
(d) (i) Make any dividend or other distribution on the capital stock
of FCC or (ii) purchase, repurchase, redeem, retire or otherwise acquire any
Debtor or FCC capital stock or indebtedness subordinated to the Term Note, other
than cash dividends or acquisitions which do not exceed, in the aggregate, ten
percent (10%) of FCC's net income (less one hundred percent (100%) of losses)
subsequent to September 30, 1996, taken as one period; provided, however, that
dividends once properly made in compliance with the terms of the Loan Documents
shall not be subject to recision or otherwise rendered invalid as a result of
any subsequent losses.
(e) Consent to, approve or authorize the issuance of any additional
shares of any class of capital stock of FCC or Debtor or any securities
convertible voluntarily by the holder thereof or automatically upon the
occurrence or nonoccurrence of any event or condition into, or exchangeable for,
any such shares; or any warrants, options, rights or other commitments entitling
any person, firm, corporation or other entity to purchase or otherwise acquire
any such shares.
(f) Modify or otherwise amend the Charter or Bylaws of FCC.
Notwithstanding anything to the contrary contained in this Section 12, the
restrictions with respect to FCC contained in these negative covenants shall not
apply unless and until the designees or appointees of Lender do not comprise a
majority of the board of directors of FCC.
13. Default. Any one of the following events shall be considered an "Event
-------
of Default": Any default under the Term Note; or any failure of Debtor to make
the Additional Consideration payments to Lender; or if Debtor or TelePad shall
fail to perform any other covenant or agreement herein or in any of the other
Loan Documents, and such failure shall remain unremedied for ten (10) days after
notice thereof; or if any warranty or representation of Debtor or TelePad made
to Lender in any of the Loan Documents shall be untrue in any material respect.
14. Remedies. If Debtor or TelePad shall default in the performance when
--------
due of any of the provisions of this Agreement, the Term Note, or any other of
the Loan Documents, Lender may perform the same for Debtor's account and any
monies expended in so doing shall be chargeable with interest to Debtor (at the
default rate provided for in the Term Note) and shall be
-7-
<PAGE>
added to the indebtedness secured hereby and the same shall be immediately due
and payable upon demand. Upon the occurrence of any Event of Default, Lender
may, in its sole discretion, do any one or more of the following:
(a) Declare all principal, interest and other sums on the Obligations
immediately due and payable without demand, protest, notice of protest, notice
of default, presentment for payment or further notice of any kind, all of which
are hereby waived by Debtor;
(b) Offset against the Obligations any and all credits, stocks, bonds,
or other securities or property of any nature whatsoever on deposit with, or
held by, or in the possession of, Lender, to the credit of or for the account of
Debtor, without notice;
(c) Proceed to enforce such other and additional rights and remedies
as Lender may have hereunder or under any other Loan Documents or as may be
provided by law.
15. Termination. Upon indefeasible satisfaction of the Obligations, this
-----------
Agreement shall terminate and the Collateral not otherwise applied toward such
satisfaction shall be promptly returned to TelePad or Debtor, as applicable.
Lender shall not be deemed to have made any representation or warranty with
respect to the Collateral so returned, except that such Collateral is free and
clear, on the date of delivery, of any and all liens, charges and encumbrances
arising from Lender's own acts.
16. Miscellaneous. All rights and remedies of Lender hereunder are
-------------
cumulative and not alternative. Indulgence by Lender with respect to any of the
terms and conditions herein contained or the failure of Lender to exercise any
of its rights hereunder shall not constitute a waiver thereof, and Debtor and
TelePad shall remain liable for the strict performance hereof until all of the
Obligations shall have been fully paid in accordance with their terms and this
Agreement shall have been terminated. No provision hereof may be waived or
modified orally, but all such waivers or modifications shall be in writing. This
Agreement and the other written Loan Documents issued in conjunction herewith or
pursuant hereto constitute the entire agreement of the parties and shall
continue in full force and effect for so long as all of the Obligations shall
have been fully satisfied and released in accordance with their terms, until
this Agreement shall have been terminated by Lender, and until all liabilities
of Debtor to Lender incurred or contracted before receipt of such notice shall
have been fully paid, plus applicable interest, fees, costs and attorneys' fees.
All warranties, representations and agreements of Debtor and TelePad herein
shall survive the execution and delivery hereof. In addition to any other sums
payable by Debtor hereunder, after the occurrence of any "Event of Default",
Debtor agrees to pay Lender's costs of collection and reasonable attorneys' fees
incurred in the enforcement of any provision hereof, whether suit be brought or
not. This Agreement shall be governed in all respects by the laws of the
Commonwealth of Virginia, excluding such jurisdiction's conflict of laws
principles, and shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, personal
representatives, successors and assigns.
-8-
<PAGE>
This Agreement is signed, sealed and delivered this day of , 1997.
ATTEST: TELEPAD ACQUISITION, INC., a
Delaware corporation
By:____________________________ By:__________________________________
Name:__________________________ Name:________________________________
Title:_________________________ Title:_______________________________
ATTEST: TELEPAD CORPORATION, a Delaware
corporation
By:____________________________ By:__________________________________
Name:__________________________ Name:________________________________
Title:_________________________ Title:_______________________________
ATTEST: HARTLAND GROUP, LLC, a
Virginia limited liability corporation
By:____________________________ By:__________________________________
Name:__________________________ Name:________________________________
Title:_________________________ Title:_______________________________
-9-
<PAGE>
EXHIBIT D
---------
List of Directors
-----------------
Designees of the LLC
- --------------------
George R. Block
Charles F. Crowe
William E. Hummel
R. Joseph Market
Designees of TelePad
- --------------------
Donald W. Barrett
Robert D. Russell
-v-
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-17013) of TelePad Corporation and in the related Prospectuses, the
Registration Statement (Form S-8 No. 333-08471) pertaining to the Stock Option
Plan for Non-Employee Directors of TelePad Corporation, and the Registration
Statement (Form S-8 No. 333-08473) pertaining to the Amended and Restated 1993
Stock Option Plan of TelePad Corporation of our report dated March 7, 1997, with
respect to the financial statements of TelePad Corporation included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
Vienna, Virginia /s/ Ernst & Young LLP
March 31, 1997 ERNST & YOUNG LLP
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<NAME> TELEPAD CORPORATION
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