-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K2WIve2oIADs02jUSnOhTsVkxiN+vx25ZMy6Ebk2+J16SiwYjtGaBKASHMJfeRZs CG/dontivQvePPoJ6rT2Sw== 0000890566-00-000380.txt : 20000329 0000890566-00-000380.hdr.sgml : 20000329 ACCESSION NUMBER: 0000890566-00-000380 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUCON INCORPORATED CENTRAL INDEX KEY: 0000843006 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 742418590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-10185 FILM NUMBER: 580859 BUSINESS ADDRESS: STREET 1: 7461 CALLAGHAN RD CITY: SAN ANTONIO STATE: TX ZIP: 78229 BUSINESS PHONE: 2105259221 MAIL ADDRESS: STREET 1: 7461 CALLAGHAN ROAD CITY: SAN ANTONIO STATE: TX ZIP: 78229 10KSB40 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999; OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 1-10185 DOCUCON, INCORPORATED --------------------- (Name of Small Business Issuer in its Charter) DELAWARE 74-2418590 - -------------------------------- ------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 20 VALLEY STREAM PARKWAY, SUITE 140 MALVERN, PENNSYLVANIA 19355 - ------------------------------------ ------------------- (Address of Principal Executive (Zip Code) Offices) Issuer's Telephone Number, Including Area Code: (610) 240-9600 -------------- Securities Registered Under Section 12(b) of the Exchange Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------- --------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NONE Securities Registered Under Section 12(g) of the Exchange Act: NONE Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State Issuer's revenues for its most recent fiscal year: $5,716,520 State the aggregate market value of the voting stock held by non-affiliates as of March 14, 2000: Common Stock, par value $.01 per share - $1,183,554 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 14, 2000 - ----------------------------------------------------------------------------- COMMON STOCK, PAR VALUE 3,508,767 SHARES $.01 PER SHARE DOCUMENTS INCORPORATED BY REFERENCE Certain documents are incorporated by reference into this Annual Report on Form 10-KSB. See Item 13. Transitional Small Business Issuer Format: Yes [ ] No [X] ================================================================================ PART I Certain statements contained in this Form 10-KSB, including statements regarding the anticipated development and expansion of the Company's business, expenditures, the intent, belief or current expectations of the Company, its directors or its officers, primarily with respect to the future operating performance of the Company and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Docucon, Incorporated ("Docucon" or the "Company") was incorporated under the laws of the State of Delaware in 1988 and is the successor by merger to a Texas corporation organized in 1986. The Company's primary business is document conversion. DOCUMENT CONVERSION SERVICES AND MARKETS Document conversion is an automated process in which source documents are converted into electronic form, including computer accessible images, indices and formats. These source documents may include letters, contracts, manuals, drawings, aperture cards, transcripts, microfilm and microfiche. After conversion, these documents are stored on various optical and magnetic media. These media are then accessed by document management systems which may be based on a wide range of computer systems. The process of document conversion involves the preparation and grading of the documents to be stored, the physical scanning of the documents and the creation of indices to facilitate retrieval of the converted documents. The indexing of the information to be stored is a significant activity in any document conversion system, and because Docucon creates custom indices and formats, the ultimate users can retrieve information from their own documents utilizing their own systems. Additionally, each of Docucon's document conversion systems can customize the format of the converted materials. Throughout all its operations, Docucon maintains a quality control program to ensure the integrity of the indexing, editing and grading processing of the databases which are converted. The Company provides document conversion services primarily at its operations center in San Antonio, Texas. The Company can also process documents at client-site locations. The Company currently markets conversion services to government and commercial customers that have substantial document storage and retrieval needs. Examples of the type of documents which the Company may convert include logistic support documents and technical manuals for the United States Department of Defense 2 ("DOD"), land files for petro-chemical companies and county governments, and personnel, financial and other records and forms for public and private companies and institutions. For the years ended December 31, 1999 and 1998, the Company spent approximately $377,000, and $280,000, respectively, for research and development activities related to ongoing operations. The Company does not own any patents. The Company uses the word "Docucon" alone and in combination with various designs and logos as a service mark to identify the Company's services. The Company has obtained federal trademark registration for the name "Docucon". The Company has performed conversion services since 1987 under four major contracts awarded by the DOD. A $14.8 million contract was awarded by the DOD in early 1996 and subsequently increased by $5.6 million and extended through February 1998. The Company provided approximately $14.7 million of services under this contract, which expired in February 1998. In December 1997 the DOD awarded an additional, similar contract with a term of one year for approximately $15.5 million. The terms of the contract include four additional option years so that the entire contract has a potential value of approximately $77.4 million. As of December 31, 1999, the Company had provided approximately $4 million of services under this contract. In 1999, 1998, and 1997 approximately 63%, 78%, and 87%, respectively, of the Company's operating revenues were derived from services provided DOD customers or contractors, including services provided under these DOD contracts. In March 1998, the General Services Administration (CSA) awarded a Federal Supply Schedule to the Company, which is effective until September 30, 2002. Federal Supply Schedules are centralized contracts established by the GSA for the use of all government agencies. There are no limitations to order size or cumulative order under such contracts. Under the Federal Supply Schedule awarded to Docucon, any government agency can buy a wide variety of document conversion services directly from Docucon. The Company has also performed conversion services for various commercial companies including Lucent Technologies, Loral Federal Systems, Westinghouse, QED, Texaco Exploration and Production, Inc., Computer Science Corporation, Amoco, Dowell Schlumberger, Ericsson GE, DuPont Pharmaceuticals and Johnson & Johnson. ASSET PURCHASE AGREEMENT WITH TAB PRODUCTS CO. In January 2000, the Company entered into a nonbinding letter of intent (LOI) and subsequently, in March 2000, signed a definitive asset purchase agreement (TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the TAB Asset Purchase Agreement, the Company has agreed, subject to stockholder approval, to sell substantially all of the operating assets of the Company to TAB for cash and the assumption of certain operating liabilities. The acquisition is expected to be consummated during the second quarter of 2000. In conjunction with entering into the LOI and subsequent TAB Asset Purchase Agreement, TAB has agreed to advance the Company cash in the form of secured promissory notes to fund the Company's working capital deficits until the transaction is consummated. Under the TAB Asset Purchase Agreement, these advances from TAB will be deducted from the cash proceeds paid at closing. As of March 17, 2000, TAB has advanced $550,000 under secured promissory notes. The notes bear interest at rates ranging from 10 percent to 13 percent per year and are due on the earlier to occur of the closing of the transaction or April 30, 2000. The notes are secured by a second priority interest in substantially all of the Company's assets. There are no assurances that TAB will continue to fund the Company's working capital deficits indefinitely or that the transaction will be consummated. Under the TAB Asset Purchase Agreement, a portion of the cash consideration and all of the liabilities assumed in the transaction are variable and are based on the book value of specific operating assets acquired and liabilities assumed, respectively, on the date of Closing. Liabilities not assumed by TAB will be 3 satisfied with a portion of the net cash proceeds from the transaction. The remaining cash proceeds from the transaction, after settlement of liabilities not assumed by TAB and payment of any costs incurred by the Company subsequent to closing, are expected to be distributed to stockholders during 2000. Because the variable portion of the cash consideration from the transaction will not be determined until the closing date and the amount of liabilities not assumed by TAB that must be satisfied out of the cash proceeds will not be known until after the closing, the amount of cash that will ultimately be available for distribution to stockholders in 2000 is not determinable at this time. COMPETITION The Company's services are sold in highly competitive markets, and its sales and earnings can be affected by changes in competitive prices, fluctuations in the level of activity in major markets or general economic conditions. The Company believes that the document conversion industry is highly fragmented, with numerous relatively small companies seeking to establish market positions. In addition, the Company believes that major hardware, software and service providers may seek to enter the field in the future. Many competitors and potential competitors have larger marketing organizations and greater resources than the Company. In addition, many government and commercial entities have or may develop in-house document conversion capabilities. Due to the rapidly changing technology used in connection with providing such services, competitive positions within the industry are subject to change. JFS TRANSACTION On March 16, 1994, the Company purchased substantially all of the assets, having a book value of approximately $1.0 million, and assumed certain liabilities in the approximate amount of $1.2 million of J. Feuerstein Systems, Inc. ("JFS"), for consideration of approximately $0.2 million. JFS was based in Parsippany, New Jersey and was engaged in the business of providing consulting and support services and software products to the legal market. On November 26, 1997, the Company sold all of the assets of the JFS division to Bowne & Co., Inc., a worldwide financial printing and services company, for approximately $6.5 million. The Company realized a gain of approximately $4.5 million on the sale. GOVERNMENT REGULATION The Company's ability to obtain contracts from the DOD is dependent upon its compliance with rules and regulations promulgated by that department, including regulations related to security and technological standards. Although the Company believes it is currently in compliance, there is no assurance that it will be able to comply with such rules and regulations promulgated in the future or to maintain its current clearances. See this Item, "Description of Business - Document Conversion Services and Markets" and "Description of Business - Competition," Item 3, "Legal Proceedings" and Item 6, "Management's Discussion and Analysis of Financial Condition and Results of Operations". 4 EMPLOYEES At March 1, 2000, the Company had approximately 98 full-time employees and one part-time employee. None of the Company's employees is represented by a labor union, and the Company is not aware of any current activities to unionize its employees. Management believes the relationship between the Company and its employees is good. In addition to its own employees, Docucon frequently supplements its own workforce by utilizing personnel supplied by temporary staffing companies. ITEM 2. DESCRIPTION OF PROPERTY. In October 1992, the Company purchased an eight-story, 52,000 square foot office building in San Antonio, Texas. In January 1999, the Company sold this building and leased it back from the new owner through December 1999. In December 1999 the Company moved into a new, 31,000 square foot leased facility. This facility is utilized for the Company's San Antonio operations center. The Company leases approximately 7,000 square feet of space in Malvern, Pennsylvania for its corporate headquarters and commercial sales office and approximately 1,000 square feet in Vienna, Virginia for its federal government sales office. In Management's opinion, the Company's physical properties are adequate for the Company's current needs, and are consistent with the Company's plans described elsewhere in this Annual Report on Form 10-KSB; however, in the event that the Company experiences significant growth, additional space may be required. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of its business, the Company may be subject, from time to time, to claims and legal actions by clients, suppliers and others. 5 On February 2, 1999 the Company contacted the Department of Defense's Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclosure Program is intended to encourage government contractors to voluntarily disclose potential violations of government contracting policies and procedures. In general, companies who volunteer information and cooperate with the government's investigation are not subject to criminal and administrative sanctions such as suspension and debarment from government contracting activities. Admission into the Voluntary Disclosure Program does not protect companies from any potential civil liability the government may assert. The Company's request for admission into the Voluntary Disclosure Program was the result of an internal review by the Company that indicated a billing practice, with respect to certain invoices submitted during the period from September 1996 through July 1997, that might be perceived by the government as a technical violation of DOD billing procedures. The DOD Inspector General formally admitted the Company into the Voluntary Disclosure Program in June 1999 and commenced its investigation of the Company's voluntary disclosure in the second half of that year. In February 2000, Company counsel was orally advised that the Government's investigation of the Company's voluntary disclosure is complete and that criminal prosecution has been declined. The Company remains potentially liable for civil damages. In 1998, the Company established a reserve for estimated legal costs and other expenses that it believes is adequate for the resolution of this matter. Except as noted above, no material actions are currently pending against the Company. The Company maintains general liability insurance and other insurance coverages which it believes to be adequate and typical in the industry. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of 1999. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, par value $.01 per share, is traded on The OTC Bulletin Board (Symbol: DOCU). In June 1998, the Company's stockholders approved a one-for-four reverse common stock split. Accordingly, all common stock and share information has been adjusted to reflect the reverse stock split. On March 10, 1999, the Company received notice that it was subject to delisting on the NASDAQ SmallCap Market System because the Company's average closing bid price per share had not exceeded $1.00 during the prior thirty-day period. The Company's Common Stock was delisted from the NASDAQ SmallCap Market on June 11, 1999. The Company's Common Stock now trades on The OTC Bulletin Board. The following table sets forth for the fiscal periods indicated the high and low bid prices per share for the Company's Common Stock in the NASDAQ Stock Market's SmallCap Market (for periods up to and including June 11, 1999) and The OTC Bulletin Board (for periods subsequent to June 11, 1999). REPORTED BID PRICE ----------------- HIGH LOW - ----------------------------------------------------------------------------- 1999 --------- First Quarter....................................... $ 0.97 $ 0.63 Second Quarter...................................... 0.69 0.44 Third Quarter....................................... 0.97 0.50 Fourth Quarter...................................... 0.75 0.41 1998 --------- First Quarter....................................... $ 4.00 $ 2.52 Second Quarter...................................... 3.00 1.13 Third Quarter....................................... 2.06 0.78 Fourth Quarter...................................... 1.31 0.78 The last reported sale price for the Common Stock on The OTC Bulletin Board on March 14, 2000, was $0.50 per share. Bid and asked prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. 7 There were approximately 215 holders of record of the Common Stock as of March 14, 2000, excluding those shares held by depository companies for certain beneficial owners. The Company has never paid cash dividends on its Common Stock. Under the terms of the Company's Series A Convertible Preferred Stock, the Company cannot pay dividends on its Common Stock until all accumulated but unpaid dividends on such Preferred Stock have been paid. At December 31, 1999, cumulative undeclared dividends on the Series A Convertible Preferred Stock were approximately $179,000. If the proposed transaction with TAB (see Item 1 - "Asset Purchase Agreement with TAB Products Co.") is consummated, the Company intends to make distributions to common stockholders after cumulative undeclared dividends on the Series A Convertible Preferred Stock are made. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 1999 COMPARED TO 1998 The Company reported a net loss applicable to common stockholders of approximately $3,586,000 for 1999, as compared to a net loss applicable to common stockholders of approximately $5,113,000 in 1998. Revenues were approximately $5,717,000 in 1999 as compared to approximately $2,693,000 in 1998. This increase is primarily attributable to new contracts or new business under existing contracts during 1999, which resulted in a significant increase in production during the year. Production costs increased from approximately $2,626,000 in 1998 to approximately $4,970,000 in 1999. This increase is primarily attributable to a corresponding increase in revenues in 1999. Production costs as a percentage of revenues decreased from 98% in 1998 to 87% in 1999. This decrease is primarily attributable to the cost efficiencies of operating at a greater revenue scale. Research and development costs increased to approximately $377,000 in 1999 as compared to approximately $280,000 in 1998. This increase is primarily attributable to costs associated with new document management technologies and ongoing development of the Company's internal workflow systems. General and administrative expenses increased from approximately $1,916,000 in 1998 to approximately $2,079,000 in 1999. This increase is primarily the result of a net increase of one person at the corporate staff level and increases in travel expenses and other corporate overhead. As a percentage of revenues, general and administrative expenses decreased from approximately 71% in 1998 to approximately 36% in 1999. This decrease is primarily attributable to substantially higher revenues with a comparatively modest increase in general and administrative expenses. Marketing costs increased from approximately $1,040,000 in 1998 to approximately $1,504,000 in 1999. This increase is primarily a result of extensive new marketing efforts focused on new business development in both the federal and commercial markets and an increase in sales commissions attributable to higher revenues during 1999. 8 The provision associated with the allowance for unbilled revenues was zero in 1999 as compared to $1,600,000 in 1998. The allowance in 1998 relates to certain work performed primarily during 1997 under its contract with the DOD (see "Liquidity and Capital Resources" below). Depreciation and amortization expense decreased from approximately $348,000 in 1998 to approximately $277,000 in 1999. This decrease is primarily attributable to an increase in fully-depreciated assets and the sale of the Company's San Antonio operations center building in January 1999. 1998 COMPARED TO 1997 The Company reported a net loss applicable to common stockholders of approximately $5,113,000 for 1998, as compared to net income applicable to common stockholders of $3,379,000 in 1997. Net income in 1997 included an approximate $4,472,000 gain recognized on the sale of the Company's JFS software division. Revenues were approximately $2,693,000 in 1998 as compared to approximately $6,664,000 in 1997. This decrease is primarily attributable to the loss of funding on a significant DOD project and the completion of several contracts that generated significant revenues in 1997 that were not replaced with a comparable volume of new contracts in 1998. Production costs decreased from approximately $4,636,000 in 1997 to approximately $2,626,000 in 1998. This decrease is primarily attributable to the corresponding reduction in revenues in 1998. Production costs as a percentage of revenues increased from 70% in 1997 to 98% in 1998. This increase is primarily attributable to the Company's decision to retain substantially all of its highly trained engineering and operations management personnel in anticipation of new contracts in 1999, despite the lower revenue volume in 1998. Research and development costs increased to approximately $280,000 in 1998 as compared to approximately $98,000 in 1997. This increase is primarily attributable to a substantial increase in the amount of software engineering devoted to development of the Company's proprietary document conversion processes and controls. General and administrative expenses increased from approximately $1,029,000 in 1997 to approximately $1,916,000 in 1998. This increase is primarily attributable to a charge of approximately $300,000 relating to the buyout of the employment agreement for the Company's former President and COO, costs relating to the transition to new management and new corporate headquarters office opened in April 1998 and an accrual for legal and other costs relating to the Company's request for admission into the DOD Voluntary Disclosure Program (see Item 3 - "Legal Proceedings"). Marketing costs increased from approximately $633,000 in 1997 to approximately $1,040,000 in 1998. This increase is primarily a result of the development of government and commercial sales forces. 9 The provision associated with the allowance for unbilled revenues was $1,600,000 in 1998 as compared to zero in 1997. The allowance in 1998 relates to certain work performed primarily during 1997 under the Company's contract with the DOD (see "Liquidity and Capital Resources" below). Depreciation and amortization expense decreased from approximately $412,000 in 1997 to approximately $348,000 in 1998. This decrease is primarily attributable to an increase in fully- depreciated assets and the Company's sale of its JFS software division in November 1997. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company's operations have been supplemented through bank borrowings, capital contributions, borrowings from affiliated and unaffiliated lenders, an initial public offering of the Company's Common Stock in 1989, the conversion of warrants into Common Stock and private preferred stock placements. The Company has performed conversion services since 1987 under four major contracts awarded by the DOD. A $14.8 million contract was awarded by the DOD in early 1996 and subsequently increased by $5.6 million and extended through February 1998. The Company provided approximately $14.7 million of services under this contract, which expired in February 1998. In December 1997 the DOD awarded an additional, similar contract with a term of one year for approximately $15.5 million. The terms of the contract includes four additional option years so that the entire contract has a potential value of approximately $77.4 million. As of December 31, 1999, the Company had provided approximately $4 million of services under this contract. In 1999, 1998, and 1997 approximately 63%, 78%, and 87%, respectively, of the Company's operating revenues were derived from services provided to DOD customers or contractors, including services provided under these DOD contracts. At December 31, 1999 and 1998, the Company had approximately $0.5 million and $0.2 million, respectively, of unbilled revenues, net of an allowance of approximately $1,600,000. The allowance for unbilled revenues at December 31, 1999 and 1998 relates primarily to conversion services performed for a DOD customer. The Company's ability to collect these unbilled revenues is dependent upon a number for factors including quality control acceptance and the availability of funding to the DOD customer. The Company was informed by its DOD customer in mid-1997 that funding for certain conversion services being performed under this delivery order had been depleted. Management completed the work that had been placed in production for this customer. As a result, the Company has been unable to invoice and collect approximately $1.6 million of conversion services for this customer, the substantial majority of which were performed during 1997. A substantial portion of the conversion products associated with the $1.6 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. Management of the Company believes that a significant portion of such unbilled revenues represent valid assets of the Company. However, due to the continued aging of the unbilled revenues, management believes it was prudent to provide an allowance on these unbilled revenues for the entire amount during the year ended December 31, 1998. There are no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to invoice and collect the unbilled revenues. 10 In March 1998, the General Services Administration (GSA) awarded a Federal Supply Schedule to the Company, which is effective until September 30, 2002. Federal Supply Schedules are centralized contracts established by the GSA for the use of all government agencies. There are no limitations to order size or cumulative order value under such contracts. Under the Federal Supply Schedule awarded to Docucon, any government agency can buy a wide variety of document conversion services directly from Docucon. In November 1997, the Company sold its software division for $6.5 million. Under the provisions of the Asset Purchase Agreement (Agreement) between the Company and the purchaser (Purchaser) of the software division, the Company sold all of the assets related to this division with the exception of certain office furniture and equipment and the Purchaser agreed to assume all of the liabilities of the division with the exception of trade payables, accrued liabilities and tax liabilities of the Company associated with the operations and disposition of the division. Under the terms of the Agreement, the Purchaser paid approximately $800,000 of the purchase price into an escrow fund for purposes of securing payment for any liability of the Company to the Purchaser under the Agreement, including the Purchaser's right to idemnification for uncollectible purchased receivables. The funds in the escrow account, net of any liabilities of the Company to the Purchaser under the agreement, were paid to the Company in the amount of $400,000 in 1998 and the remainder was released to the Company in 1999, which was reflected as a component of other current receivables on the accompanying balance sheet at December 31, 1998. In October 1996, the Company obtained long-term financing to replace the then existing mortgage note for its San Antonio operations center building. The new note bore interest at a fixed rate of 9.5%, payable monthly to a commercial bank, and was being amortized over a 20-year term with a 5-year maturity. The note was secured by the Company's building, other fixed assets, accounts receivable and inventory. Approximately $68,000 of debt issuance costs were incurred in connection with this refinancing. In January 1999, the Company sold its San Antonio operations center building. In connection with the sale, the Company paid off the remaining balance of the related secured indebtedness. The Company's proceeds from the sale, net of debt repayments, approximated $800,000. On June 18, 1999, the Company entered into an accounts receivable finance agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the terms of the agreement, as amended, the Company can receive funding from SVB for up to $1,500,000 of eligible accounts receivable with full recourse by SVB to the Company. The Company receives cash advances from the eligible receivables equal to the face amount of the eligible receivables financed, less a reserve established by SVB of not less than 20 percent of the aggregate face amount of the receivables. If the Company finances the maximum of $1,500,000 of accounts receivable, new receivables can be financed to replace previous accounts receivable that are collected. The Company is obligated to repay on demand the unpaid portion of any receivable financed by SVB under certain conditions including (i) an account receivable that remains uncollected 90 calendar days after the invoice date, (ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of the Financing Agreement by the Company. During the fourth quarter of 1999, and subsequent to December 31, 1999, the Company was in technical default under certain provisions of the Financing Agreement. While SVB has not made a declaration of default or demand for payment, it has the right to do so under the provisions of the Financing Agreement. 12 If such demand were made, it is unlikely that the Company would have the resources to make such payment except through the collections on the underlying secured receivables. The cash advances are reflected in the accompanying financial statements as short-term borrowings. The Company pays aggregate finance charges and administrative fees on the average daily balance of the uncollected financed accounts receivables of approximately 2.38 percent per month. The aggregate amount of advances and fees owed to SVB are secured by substantially all of the tangible assets of the Company. At December 31, 1999, the balances of the accounts receivables financed and the aggregate cash advanced on such receivables was approximately $1,147,000 and $899,000, respectively. Aggregate finance charges and administrative fees related to the Financing Agreement were approximately $130,000 for the year ended December 31, 1999, and are classified as interest expense. On September 29, 1999, two directors of the Company loaned the Company an aggregate of $325,000. The promissory notes (the Notes), issued in conjunction with these loans, carry a 12 percent annual interest rate. Principal and interest on the Notes are payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based financing (the Financing), as defined. In the event the principal and interest become payable as a result of a Financing, one-half of the then outstanding principal and accrued interest on the entire principal amount of the Notes are payable in cash to the Note holders and such Note holders will receive (i) a number of shares of Company securities, which shall be the same class issued in the Financing, calculated by dividing the remaining outstanding principal by the per share price of the securities issued in the Financing and/or (ii) a debt instrument of the same class issued in the Financing, the aggregate of such equity and/or debt securities equal to one-half of the outstanding principal amount of the Notes prior to the Financing. In conjunction with the Notes, the two directors were issued an aggregate of 243,750 warrants to purchase common stock of the Company. Warrants to purchase 162,500 shares of common stock of the Company were granted in September 1999 and the remaining 81,250 were granted in December 1999 based upon the nonoccurrence of certain events. The warrants are exercisable for a period of five years from the September 29,1999, issuance date of the warrants at a price equal to 75 percent of (i) in the event of a Financing, the common stock equivalent price per share of securities issued to the investor under such Financing or (ii) in the event of a sale of greater than 50 percent of the shares of common stock of the Company, the price per share for such shares of common stock. In the event that there is neither a Financing nor a sale of the Company, beginning on September 28, 2000, the warrant price shall be $0.50 per share. The warrants have been valued at an estimated fair market value of approximately $85,000, and have been recorded as an original issue discount on the Notes. The original issue discount on the Notes is being charged to expense as interest expense over the one-year maturity period of the Notes. Net cash and cash equivalents at December 31, 1999 were approximately $29,000. Trade accounts receivable, net of allowance for doubtful accounts were approximately $992,000 at December 31, 1999 and unbilled revenues, net of allowance were $523,000. Other receivables were approximately $4,000 at December 31, 1999. Accounts payable and accrued liabilities were approximately $2.6 million at December 31, 1999. Also included in current liabilities is secured indebtedness relating to the Company's accounts receivable Financing Agreement and related party notes from two of 13 the Company's directors. The Company had a net working capital deficit of approximately $2.1 million at December 31, 1999. The accompanying financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. Since its inception, the Company has incurred cumulative net losses of approximately $12.1 million, including losses of approximately $5.1 million in 1998 and $3.6 million in 1999. For the years ended December 31, 1999 and 1998, the Company had negative cash flows from operating activities of approximately $2.7 million and $2.1 million, respectively. At December 31, 1999, the Company had a working capital deficit of approximately $2.1 million and a total stockholders' deficit of approximately $1.9 million. A substantial portion of the Company's accounts payable at December 31, 1999 are past due. As discussed in Notes 3 and 8 to the Financial Statements, a significant portion of the Company's historical revenues has been earned from conversion services performed for agencies of the U.S. Government. The Company experienced significant declines in revenues from these agencies in 1997 and 1998 and, during 1998, provided an allowance of $1.6 million on certain unbilled revenues. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. If the Company is unable to generate positive cash flows from operations or obtain additional capital resources, or if the funds obtained in such efforts are not adequate to support the Company until a successful level of operations is attained, the Company would likely be unable to continue operating as a going concern. In January 2000, the Company entered into a nonbinding letter of intent (LOI) and, subsequently, in March 2000, signed a definitive asset purchase agreement (TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the TAB Asset Purchase Agreement, the Company has agreed, subject to stockholder approval, to sell substantially all of the operating assets of the Company to TAB for cash and the assumption of certain operating liabilities. The acquisition is expected to be consummated during the second quarter of 2000. In conjunction with entering into the LOI and subsequent TAB Asset Purchase Agreement, TAB has agreed to advance the Company cash in the form of secured promissory notes to fund the Company's working capital deficits until the transaction is consummated. Under the TAB Asset Purchase Agreement, these advances from TAB will be deducted from the cash proceeds paid at closing. As of March 17, 2000, TAB has advanced $550,000 under secured promissory notes. The notes bear interest at rates ranging from 10-13 percent per year and are due on the earlier to occur of the closing of the transaction or April 30, 2000. The notes are secured by a second priority interest in substantially all of the Company's assets. There are no assurances that TAB will continue to fund the Company's working capital deficits indefinitely or that the transaction will be consummated. Under the TAB Asset Purchase Agreement, a portion of the cash consideration and all of the liabilities assumed in the transaction are variable and are based on the book value of specific operating assets acquired and liabilities assumed, respectively, on the date of Closing. Liabilities not assumed by TAB will be satisfied with a portion of the net cash proceeds from the transaction. The remaining cash proceeds from the transaction, after settlement of liabilities not assumed by TAB and payment of any costs incurred by the Company subsequent to closing, are expected to be distributed to stockholders during 2000. Because the variable portion of the cash consideration from the transaction will not be determined until the closing date 14 and the amount of liabilities not assumed by TAB that must be satisfied out of the cash proceeds will not be known until after the closing, the amount of cash that will ultimately be available for distribution to stockholders in 2000 is not determinable at this time. The Company's lease of its corporate headquarters in Pennsylvania requires monthly payments of approximately $14,300 through June 2004, which are included as a component of future minimum lease payments for all noncancelable operating leases as described in Note 5. Under the provisions of the TAB Asset Purchase Agreement, the remaining commitment under this lease would not be assumed by TAB. In March 2000, the Company initiated conversations with the lessor with respect to a potential buy-out of the remaining term of this lease in anticipation of the consummation of the TAB Asset Purchase Agreement. While there can be no assurances that the Company will not be required to pay all future contractual amounts under this lease, the Company believes that it is likely that it would be able to buy-out the remaining term of the lease by making a payment to the lessor in an amount substantially less than the contractual amount. YEAR 2000 COMPLIANCE The efficient operation of the Company's business is dependent on its computer software programs and operating systems (collectively, "Programs and Systems"). These Programs and Systems are used in several key areas of the Company's business, including information management services and financial reporting, as well as in various administrative functions. During 1999, the Company evaluated its Programs and Systems to identify potential year 2000 compliance problems, as well as manual processes, external interfaces with customers, and services supplied by vendors to coordinate year 2000 compliance and conversion. The year 2000 problem refers to the limitations of the programming code in certain existing software programs to recognize data sensitive information for the year 2000 and beyond. Unless modified, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. To date, the Company has not experienced any significant problems or disruptions in its operations or management information systems as a result of the year 2000 issue. Although there can be no assurances that it will not encounter any year 2000 issues in the future, the Company believes that the risk of any such issues posing a significant operational problem for the Company is remote. The Company has not incurred significant costs and/or capital expenditures associated with year 2000 compliance and does not expect to incur any significant costs relating to the year 2000 problem in the future. 15 ITEM 7. FINANCIAL STATEMENTS. Financial statements of the Company meeting the requirements of Regulation S-B are filed on the succeeding pages of this Item 7 of this Annual Report on Form 10-KSB, as listed below: PAGE ---- Report of Independent Public Accountants...........................F-1 Balance Sheets as of December 31, 1999 and 1998....................F-2 Statements of Operations for the Years Ended December 31, 1999 and 1998.........................................F-4 Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1999 and 1998.............................F-5 Statements of Cash Flows for the Years Ended December 31, 1999 and 1998.........................................F-6 Notes to Financial Statements......................................F-7 16 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. The Company has had no disagreements with its independent accountants within the twenty-four months prior to December 31, 1999 or subsequent to that date. 17 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS, EXECUTIVE OFFICERS AND KEY TECHNICAL PERSONNEL The following table sets forth certain information with respect to the Company's Directors, executive officers and key technical personnel: NAME AGE POSITION ---- --- -------- Edward P. Gistaro 64 Chairman of the Board of Directors Douglas P. Gill 51 President, Chief Executive Officer, and Director Warren D. Barratt 40 Senior Vice President, Chief Financial Officer and Treasurer Michael C. Mooney 61 Senior Vice President - Sales Michael Nunley 55 Vice President - Operations and Technology Ralph Brown 66 Secretary and Director Al R. Ireton 65 Director Chauncey E. Schmidt 67 Director Robert W. Schwartz 55 Director 18 Edward P. Gistaro has served as Chairman of the Board since 1990. He served as Chief Executive Officer of the Company from June 4, 1988 until April 1, 1998, when the Board of Directors accepted his recommendation that he be replaced by Douglas P. Gill as Chief Executive Officer. Pursuant to Mr. Gistaro's retirement, the Board requested that he continue to serve as Chairman, and he accepted. Mr. Gistaro also served as President of the Company from July 10, 1988 until March 18, 1991. Mr. Gistaro was employed by Datapoint Corporation, a company involved in the manufacturing of computer systems, in various managerial positions from 1973 to 1987. From 1982 to 1985 Mr. Gistaro served as the President and Chief Operating Officer of Datapoint Corporation, and he served from 1985 to 1987 as its President and Chief Executive Officer. Douglas P. Gill was elected President and Chief Executive Officer on April 1, 1998. Mr. Gill was a general partner of Foster Management Company, a venture capital firm, from 1994 until 1998. From 1984 to 1994 Mr. Gill served as First Vice President of Janney Montgomery Scott, Inc., a regional investment banking and brokerage firm, and in various management capacities at Scott Paper Company from 1975 to 1984. Mr. Gill also served as a senior auditor at Arthur Andersen & Co. (now LLP) from 1972 to 1975. Warren D. Barratt was named Senior Vice President and Chief Financial Officer in December 1998 and was subsequently appointed Treasurer in March 1999. Mr. Barratt was Senior Vice President and Chief Financial Officer for U.S. Physicians, Inc., a physician practice management company, from 1996 to 1998. From 1994 to 1996, Mr. Barratt was Chief Financial Officer for The Pet Practice, Inc., a veterinary services company. Mr. Barratt was a Senior Manager with Price Waterhouse LLP from 1992 to 1994. Michael C. Mooney was named Senior Vice President, Federal Programs in July 1998 and Senior Vice President-Sales in June 1999. Prior to joining Docucon, Mr. Mooney served Litton-PRC as Vice President, General Manager for Business Development for Outsourcing Systems and Services and as a manager for PRC Logistics Systems. Mr. Mooney was Senior Vice President of Sales and Marketing for Raxco Software from 1989 to 1990 and from 1977 to 1989 held various senior sales positions at Boeing Computer Services, Computer Sciences Corporation, VM Software and Legent Corporation. Prior to his career in the private sector, Mr. Mooney served in the U.S. Marine Corps from 1961-1967 Michael Nunley was named Vice President Operations and Technology in January 1999. From 1985 to 1998 Mr. Nunley served in various positions with Lockheed Martin Corporation, most recently as Program Manager for Citibank Projects. Prior to joining Lockheed Martin, Mr. Nunley spent twenty years with the U.S. Air Force in various roles including the development and testing of automated communications systems and maintaining long radar systems. Ralph Brown, an attorney in private practice since 1968, has served as Secretary of the Company since May 1, 1987. From 1987 to 1989, he served also as Treasurer of the Company. Mr. Brown has also served since 1975 as President of Cherokee Ventures, Inc., a real estate leasing firm, since 1978 as President of East Central Development Corporation and since 1982 as President of Southeast Suburban Properties, Inc. The latter two businesses are real estate development firms. 19 Al R. Ireton was elected as a Director of the Company in May 1993. Mr. Ireton has been Chairman of Manchester Partners, an investment and growth strategy advisory organization providing capital and strategic assistance to growing companies, since October 1988. From 1985 through September 1988, he served as President and Chief Executive Officer of Texet Corporation, a desktop publishing company. Mr. Ireton has 25 years' experience serving as president and chief executive officer of growth-oriented companies, and has served on several corporate boards. Chauncey E. Schmidt was elected to the Board of Directors of the Company in February 1993. He has been Chairman of C. E. Schmidt & Associates, an investment firm, since April 1989. From 1987 to March 1989, he was Vice Chairman of the Board of AMFAC, Inc., a New York Stock Exchange-listed company engaged in diversified businesses. He has previously served as President of The First National Bank of Chicago and Chairman of the Board and Chief Executive Officer of The Bank of California, N.A. Mr. Schmidt is on the Board of Trustees of the U. S. Naval War College Foundation and is active in several civic and charitable organizations. Robert W. Schwartz was elected to the Board of Directors of the Company in April 1998. Mr. Schwartz founded the Schwartz Heslin Group, Inc. ("SHG"), an investment banking firm, in 1985. As Managing Director of SHG, Mr. Schwartz specializes in corporate planning, finance and development. From 1980 to 1985, he was founder, President and Chief Executive Officer of Winsource, Inc., a high tech firm which packaged and marketed integrated telephone and computer systems. Mr. Schwartz served as President, Chief Operating Officer and Director of Coradian Corporation and as Vice President and Chief Financial Officer of Garden Way Manufacturing Corporation from 1975 to 1980 and 1970 to 1975, respectively. SHG has been retained by the Company in the past to provide investment and financial advice. GENERAL Directors of the Company hold office until the next Annual Meeting of Stockholders of the Company and until their successors are elected and qualified. Executive officers of the Company are elected annually by, and serve at the discretion of the Board of Directors. There are no arrangements or understandings known to the Company between any of the Directors, nominees for Director or executive officers of the Company and any other person pursuant to which any of such persons was elected as a Director or an executive officer, except as set forth below under Item 10, "Executive Compensation Employment Agreements" and Item 12, "Certain Relationships and Related Transactions." There are no family relationships between any Directors, nominees for Director or executive officers of the Company. 20 Prior to joining the Company, Mr. Barratt served as Senior Vice President and Chief Financial Officer of U.S. Physicians, Inc. In October 1998, U.S. Physicians, Inc. filed a bankruptcy case under Chapter 11 of the U.S. Code (the Bankruptcy Code) and such case was subsequently converted to a case under Chapter 7 of the Bankruptcy Code. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and Directors, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, Directors and beneficial owners of more than 10% of the Company's Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no reports on Form 5 were required, the Company believes that for the period from January 1, 1999 through March 1, 2000, all officers, Directors and greater-than-10% beneficial owners complied with all Section 16(a) filing requirements applicable to them. 21 ITEM 10. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION -- GENERAL The following table sets forth compensation earned by or awarded to the Chief Executive Officer and the named executive officers for all services rendered to the Company in 1999, 1998 and 1997. 22 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------- -------------------- BONUS/ANNUAL OTHER ALL INCENTIVE ANNUAL SECURITIES LONG-TERM OTHER NAME AND PRINCIPAL AWARD COMPEN- UNDERLYING INCENTIVE COMPEN- POSITION YEAR SALARY(1) (2)(3) SATION(4) OPTIONS(5) PAYOUTS SATION(6) - ------------------ -------- -------- -------- -------- -------- -------- -------- Douglas P. Gill ........... 1999 $200,000 $ 10,407 $ -- 71,920 $ -- $ 20 President and 1998 149,020 50,000 -- 275,000 -- 20 Chief Executive Officer Warren D. Barratt ......... 1999 140,000 7,285 -- 116,825 -- 20 Senior Vice President, 1998 5,385 -- -- 100,000 -- 20 Chief Financial Officer, and Treasurer Michael C. Mooney ......... 1999 100,000 -- -- 39,625 -- 52,864 Vice President, Sales 1998 61,918 -- -- 32,650 -- 33,599 Paul M. Nunley ............ 1999 130,000 6,764 -- 98,460 -- 20 Vice President, Operations and Technology
(1) During 1999, the executive officers listed in the table above, and others, elected to delay payment of a portion of their salaries. The total amount of the unpaid salary is $85,846 for the executive officers listed in the table above and it remains unpaid as of March 17, 2000. (2) Messrs. Gill, Barratt and Nunley are each eligible to receive an annual bonus under his employment contract of up to 50% of his annual base salary, to be awarded at the discretion of the Board of Directors. For 1998, Mr. Gill was entitled to a bonus of 25% of his base salary. For 1999 Messrs. Gill, Barratt and Nunley were eligible to receive bonuses under the 1999 Bonus Plan for Senior Management, as approved by the Board of Directors, under which certain revenue, gross margin, operating profit and net income/loss targets must be met. During 1999, $24,456 was earned under this plan of which $20,962 remains unpaid at March 17, 2000. (3) During 1999, as payment for his 1998 bonus Mr. Gill received $8,333 in cash and 55,556 shares of the Company's common stock that had a current market value of $41,667 on the date it was issued. (4) Aggregate perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus listed above. (5) In April 1998, Mr. Gill was awarded options to purchase 225,000 shares of the Company's common stock at an exercise price of $4.00 per share. In December 1998, the exercise price of these options was reset to $1.00 per share. (6) Consists of premiums of $20 paid under the Company's group term life insurance program for Messrs. Gill Barratt, Mooney and Nunley. Mr. Mooney is eligible to receive a sliding-scale commission under his employment contract of 1.00% to 2.00% of the total value of monthly invoices to federal government and related customers. He is also eligible to receive a commission of 0.5% of the value of monthly invoices to non-federal government and related customers. 23 STOCK OPTION GRANTS IN 1999
INDIVIDUAL GRANTS ---------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING TO EMPLOYEES PRICE EXPIRATION NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE ---- ------------ ------------ ------------ ------------ Douglas P. Gill ............ 71,920 11.9% $ 1.00 07/30/09 Warren D. Barratt (1) ...... 116,825 19.4% 1.00 07/30/09 Michael C. Mooney (2) ...... 39,625 6.6% 1.00 07/30/09 Paul M. Nunley ............. 73,460 12.2% 1.00 07/30/09 Paul M. Nunley ............. 25,000 4.1% 1.00 01/11/09 Paul M. Nunley ............. 75,000(3) 12.4% 1.00 01/11/06 - ------------
(1) In December 1998, Mr. Barratt was granted an option to purchase 25,000 shares of the Company's common stock with an exercise price of $0.875 per share and an expiration date of 12/18/08 under the 1998 Employee Stock Option Plan. Also in December 1998, Mr. Barratt was granted an option to purchase 75,000 shares of the Company's common stock with an exercise price of $0.875 per share and an expiration date of 12/20/05 under the 1998 Executive Non-Statutory Plan. These options vest immediately and become exercisable on 9/20/05. Exercisability of the options is accelerated in 4,167 share increments for each $2.00 per share incremental increase in the quoted market price per share of the Company's common stock above $1.00 per share. These shares represented 3.0% and 8.9%, respectively, of all options granted to employees during 1998. (2) In June 1998, Mr. Mooney was granted an option to purchase 12,500 shares of the Company's common stock with an exercise price of $2.00 per share and an expiration date of 06/09/08 under the 1998 Employee Stock Option Plan. In July 1998, Mr. Mooney was granted an option to purchase 20,150 shares of the Company's common stock with an exercise price of $2.063 per share and an expiration date of 07/10/08 under the 1998 Employee Stock Option Plan. These shares represented 1.5% and 2.4%, respectively, of all options granted to employees during 1998. (3) In January 1999, Mr. Nunley was granted an option to purchase 75,000 shares of the Company's common stock with an exercise price of $1.00 per share and an expiration date of 01/11/06 under the 1998 Executive Non-Statutory Plan. These options vest immediately and become exercisable on 10/11/05. Exercisability of the options is accelerated in 4,167 share increments for each $2.00 per share incremental increase in the quoted market price per share of the Company's common stock above $1.00 per share. 24 STOCK OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
VALUE OF UNEXERCISED SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 ON VALUE ---------------------------- ---------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------------ ------------ ------------ ------------ ------------ Douglas P. Gill ........ -- $ -- 50,000 296,920 $ -- $ -- Warren D. Barratt ...... -- $ -- 8,334 208,491 $ -- $ -- Michael C. Mooney ...... -- $ -- 5,432 66,843 $ -- $ -- Paul M. Nunley ......... -- $ -- -- 173,460 $ -- $ --
TEN-YEAR OPTION REPRICINGS
SECURITIES LENGTH OF UNDERLYING MARKET PRICE EXERCISE PRICE ORIGINAL OPTION NUMBER OF OF STOCK AT OF STOCK AT TERM REMAINING OPTIONS TIME OF TIME OF NEW EXERCISE AT DATE OF NAME DATE REPRICED REPRICING REPRICING PRICE REPRICING ---- --------------- --------------- --------------- --------------- --------------- ----------------- Douglas P. Gill 12/15/98 225,000 $ 1.00 $ 4.00 $ 1.00 6 years, 5 months
EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Mr. Douglas P. Gill on April 1, 1998, which carries a seven-year term. Pursuant to the terms of the agreement, Mr. Gill is to be paid $200,000 per annum, an auto allowance, and an annual performance bonus to be determined by the Board of Directors. The Company entered into employment agreements with Messrs. Michael C. Mooney, Senior Vice President-Sales; Warren D. Barratt, Senior Vice President, Chief Financial Officer and Treasurer; and Paul M. Nunley, Vice President Operations and Technology, in May 1998, December 1998 and January 1999, respectively. Each of the agreements carries a three-year term and provides for a base salary and an annual performance bonus to be determined by the Board of Directors. 25 Each of the agreements for Messrs. Gill, Mooney, Barratt and Nunley are terminable upon 30 days prior written notice by either the Company or the employee, or by the Company "for cause" at any time. Further, each agreement requires that the employee keep Company matters confidential, restricts the employee from being directly or indirectly involved with any entity in a business competitive with that of the Company for specified periods of time following the termination of the agreement, and provides for a severance payment to the employee in the event he is terminated by the Company without cause. In the event the employees above were to be terminated by the Company without cause, the Company would be required to make aggregate severance payments of $720,000. The definition of termination without cause under each of the employee agreements includes a change of control of the Company and/or a sale of substantially all of the Company's assets. STOCK OPTIONS 1988 STOCK OPTION PLAN The Company has a 1988 Stock Option Plan, currently covering an aggregate of 415,000 shares of Common Stock. The 1988 Stock Option Plan provides for the grant to officers, Directors and key employees of the Company of incentive stock options ("ISOs") intended to qualify under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") and non-qualified stock options ("NQSOs"). The 1988 Stock Option Plan was approved by the stockholders of the Company on November 15, 1988. Amendments to the 1988 Stock Option Plan increasing the number of shares covered thereby were approved by the stockholders of the Company on April 21, 1989, May 14, 1991 May 7, 1992, and August 12, 1997. As of March 1, 2000, under the 1988 Stock Option Plan there were outstanding options to purchase 203,962 shares of the Company's Common Stock at prices ranging from $1.00 to $5.52 per share. Under the 1988 Stock Option Plan, which is administered by the Stock Option Committee of the Board of Directors, key employees may be granted options to purchase shares of the Company's Common Stock at 100% of fair market value on the date of grant (or 110% of fair market value in the case of an ISO granted to a 10% stockholder/grantee). The 1988 Stock Option Plan expired on October 31, 1998. Options granted under the 1988 Stock Option Plan must be exercised within ten years from the date of grant, vest at varying times, as determined by the Stock Option Committee, are nontransferable except by will or pursuant to the laws of descent and distribution, and are protected against dilution. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth in the option. Such payment must be made in cash or through delivery of shares of Common Stock or a combination of cash and Common Stock, all as determined by the Stock Option Committee. The Stock Option Committee may determine other terms applicable to particular options. No one person may receive ISO options for which the aggregate fair market value (determined at the time each ISO is granted) of options exercisable for the first time during any calendar year exceeds $100,000. 26 1991 DIRECTOR NON-STATUTORY STOCK OPTION PLAN The Company also has a 1991 Director Non-Statutory Stock Option Plan (the "1991 Director Plan"), currently covering an aggregate of 210,000 shares of Common Stock. The 1991 Director Plan was approved by the stockholders of the Company on May 7, 1992 and provides for the grant of NQSOs to non-employee Directors of the Company. An amendment to increase the number of shares offered and reserved for the 1991 Director Plan was approved by the stockholders of the Company on June 9, 1998. As of March 1, 2000, there were outstanding under the 1991 Director Non-Statutory Stock Option Plan options to purchase 130,000 shares of the Company's Common Stock at prices ranging from $0.875 to $5.52 per share. Under the 1991 Director Plan, which is administered by the Board of Directors, non-employee Directors are granted options to purchase 10,000 shares of the Company's Common Stock upon their initial election as Directors and 7,500 shares on the second anniversary date of such election at the then-current market price of such shares. One-third of the initial grant shall vest on each anniversary of the date of grant, and one-third of the second grant shall vest every six months after the date of grant. The 1991 Director Plan expires on February 10, 2001. Under an amendment to the 1991 Director Plan adopted by the Board of Directors in June 1998, each eligible Director will receive an additional annual grant of options covering 6,250 shares of Common Stock, commencing with the fiscal year of the Company immediately following the fiscal year in which all shares of Common Stock covered by the initial grant and the second grant described above are fully vested, and such annual grant will continue each fiscal year thereafter until options covering all shares reserved for issuance under the 1991 Director Plan have been granted. Options granted under the 1991 Director Plan must be exercised within ten years from the date of grant, are nontransferable except by will or pursuant to the laws of descent and distribution, are protected against dilution and expire within three months after termination of service as a Director of the Company, unless such termination is by reason of death or disability or for cause. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth in the option. Such payment must be made in cash or through delivery of shares of Common Stock or a combination of cash and Common Stock. The 1991 Director Plan may be amended at any time by vote of the Board of Directors. During 1999, Messrs. Ralph Brown, Al Ireton, and Chauncey Schmidt, all Directors of the Company, were granted options covering 6,250 shares each of Common Stock at an exercise price of $0.875 per share. Messrs. Edward Gistaro and Robert Schwartz, both Directors of the Company, were each granted options covering 7,500 shares of Common Stock at an exercise price of $0.875, respectively. The exercise price per share of each such option was not less than the closing price of the Common Stock reported on The OTC Bulletin Board on the date of the grant. 27 1998 EMPLOYEE STOCK OPTION PLAN On April 1, 1998, the Company approved the 1998 Employee Stock Option Plan (the 1998 Employee Plan) covering 187,500 shares of common stock. The plan was amended effective July 30, 1999 to increase the number of shares reserved to 687,500. Unless terminated earlier by the Board of Directors, the 1998 Plan will terminate on March 31, 2008. The purpose of the plan is to supplement and replace the 1988 Stock Option Plan (the 1988 Plan). The 1998 Employee Plan provides for the grant to key employees of the Company of incentive stock options (ISOs) intended to qualify under Section 422(b) of the Internal Revenue Code and nonqualified stock options (NQSOs). As of March 1, 2000, under the 1998 Stock Option Plan there were outstanding options to purchase 582,221 shares of the Company's Common Stock at prices ranging from $0.750 to $2.063 per share. Under the 1998 Employee Plan, which is administered by the Stock Option Committee of the board of directors, key employees may be granted options to purchase shares of the Company's common stock at 100 percent of fair market value on the date of grant (or 110 percent of fair market value in the case of an ISO granted to a 10 percent stockholder/grantee). Options granted under the 1998 Employee Plan must be exercised within 10 years from the date of grant, vest at varying times as determined by the Stock Option Committee, are nontransferable except by will or pursuant to the laws of descent and distribution and expire within three months after termination of employment, unless such termination is by reason of death or disability or for cause. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth on the option. Such payment must be made in cash or through delivery of shares of common stock or a combination of cash and common stock, all as determined by the Stock Option Committee. The Stock Option Committee may determine other terms applicable to particular options. The aggregate fair market value (determined at the time each ISO is granted) of the shares of common stock with respect to which ISOs issued to any one person under the 1998 Employee Plan are exercisable for the first time during any calendar year may not exceed $100,000. The 1998 Employee Plan may be amended at any time by a vote of the board of directors. However, no amendment made without approval of the stockholders of the Company may increase the total number of shares which may be issued under options granted pursuant to the 1998 Employee Plan, reduce the maximum exercise price or extend the latest date upon which options may be granted or change the class of employees eligible to receive the options. 1998 EXECUTIVE NON-STATUTORY PLAN In 1998, the Company approved the 1998 Executive Non-Statutory Plan (the 1998 NQSO Plan), covering 375,000 shares of common stock. Unless terminated earlier by the Board of Directors, the 1998 NQSO Plan will terminate on March 31, 2008. The 1998 NQSO Plan provides executives of the Company the added incentive of performance-based compensation and stock ownership through the grant of nonqualified stock options. The purpose of the plan is to stimulate the efforts of executive management to increase shareholder wealth by the performance of specific goals designed to increase shareholder wealth in the form of an increased market price of the Company's stock. As of March 1, 2000, under the 1998 Executive Non-Statutory Plan there were outstanding options to purchase 375,000 shares of the Company's Common Stock at prices ranging from $0.875 to $1.00 per share. 28 Under the 1998 NQSO Plan, identified executives may be granted long-term options to purchase shares of the Company's common stock at a price specified on the date of the grant subject to certain acceleration rights upon attainment of specific goals. The 1998 NQSO Plan is administered by the Stock Option Committee. Options granted under the 1998 NQSO Plan will expire 10 years from the date of grant, vest immediately or at varying times as determined by the NQSO Committee, are nontransferable except by will or pursuant to the laws of descent and distribution. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth on the option. Such payment must be made in cash or through delivery of shares of common stock or a combination of cash and common stock, all as determined by the NQSO Committee. The NQSO Committee may determine other terms applicable to particular options. The 1998 NQSO Plan may be amended at any time by a vote of the Board of Directors. EMPLOYEE STOCK PURCHASE PLAN The Company's 1993 Employee Stock Purchase Plan (the "Purchase Plan") was approved by the stockholders at the 1994 Annual Meeting of Stockholders and amended on August 12, 1997 and June 9, 1998. Under the Purchase Plan, eligible employees may elect to have up to 10% of their Base Pay (as defined) deducted and utilized for the purchase of Common Stock of the Company in annual or semiannual offerings to be made by the Company to eligible employees. The Company has reserved 350,000 shares of Common Stock for issuance pursuant to the Stock Purchase Plan. The Company's stockholders approved an increase of an additional 100,000 shares and an extension of the Purchase Plan until December 31, 2001 in June 1998. The Company issued 51,907 (plus 424 shares of treasury stock), 24,398 treasury shares and 26,809 new shares in December 1999, January 1999 and January 1998 pursuant to this Plan at purchase prices of $0.37, $0.77 and $3.40 per share, which represents 85% of the closing price on December 31, 1999, December 31,1998, and December 30, 1997, respectively. At March 1, 2000, 156,881 shares remain available for issuance. Under the Purchase Plan, the Company will make available in each year from January 1, 1994 through December 31, 2001 up to 50,000 shares of Common Stock. Such shares will be offered to participating employees in annual or semiannual offerings. Participating employees will be deemed to have been granted options to purchase Common Stock in each offering in an amount equal to the amount of their respective payroll deductions divided by 85% of the market value of the Common Stock of the Company on the applicable Offering Commencement Date. 29 The option price shall be the lesser of 85% of the closing price of the Common Stock on the Offering Commencement Date (or the next preceding trading day) or 85% of the closing price of Common Stock on the Offering Termination Date (or the next preceding trading day). Unless a participating employee terminates participation as provided in the Stock Purchase Plan, such employee shall be deemed to have exercised such option on the Offering Termination Date and shall be issued a corresponding number of shares of Common Stock. The Purchase Plan is administered by the Compensation Committee of the Board of Directors and will expire on December 31, 2001, unless sooner terminated or amended by the Board of Directors. 30 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 2000, by all persons known to the Company to own beneficially more than 5% of the Company's Common Stock. NAME AND AMOUNT AND ADDRESS OF NATURE OF PERCENT TITLE OF CLASS BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS - -------------- ------------------------ -------------------- -------- Common Stock, Edward P. Gistaro 377,219(1) 10.12 par value $.01 20 Valley Stream Parkway per share Suite 140 Malvern, PA 19355 - ---------------------- (1) Includes 9,167 shares subject to currently exercisable stock options and 150,000 shares underlying a warrant to purchase Common Stock. The percentage of ownership is based on 3,726,265 shares outstanding. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 2000 (a) by each of the Company's Directors, (b) by the Company's Chief Executive Officer and the other named executive officers, and (c) by all Directors and executive officers as a group. NAME AND AMOUNT AND ADDRESS OF NATURE OF PERCENT TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OF CLASS (3) - -------------------------------------------------------------------------------- Common Stock, Edward P. Gistaro 377,219 (4) 10.12 par value $.01 Douglas P. Gill 120,556 (5) 3.33 per share Ralph Brown 102,108 (6) 2.84 Al R. Ireton 50,708 (7) 1.41 Chauncey E. Schmidt 181,958 (8) 4.93 Robert W. Schwartz 20,501 (9) 0.57 Warren D. Barratt 8,334 (10) 0.23 Paul M. Nunley 8,334 (10) 0.23 Michael C. Mooney 25,432 (11) 0.71 All Directors and executive officers as a Group (9 persons including the above) 895,150 (12) 22.47 - -------------------- (1) The address for all persons named is 20 Valley Stream Parkway, Suite 140, Malvern, Pennsylvania 19355. (2) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, except as otherwise indicated. 31 (3) Unless otherwise indicated below, the percentage of ownership is based upon 3,567,098 shares of Common Stock outstanding, which includes 58,331 shares of Common Stock into which outstanding shares of Preferred Stock are convertible and which the holders of the Preferred Stock are entitled to vote. (4) Includes 9,167 shares subject to currently exercisable stock options and 150,000 shares underlying a warrant to purchase Common Stock. The percentage of ownership is based on 3,726,265 shares outstanding. (5) Includes 50,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,617,098 shares outstanding. (6) Includes 26,875 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,593,973 shares outstanding. (7) Includes 29,375 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,596,473 shares outstanding. (8) Includes 29,375 shares subject to currently exercisable stock options and 93,750 shares underlying a warrant to purchase Common Stock. The percentage of ownership is based on 3,690,223 shares outstanding. (9) Includes 5,834 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,572,932 shares outstanding. (10) Includes 8,334 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,575,432 shares outstanding. (11) Includes 5,432 shares subject to currently exercisable stock options. The percentage of ownership is based on 3,572,530 shares outstanding. (12) Includes 172,726 shares subject to currently exercisable stock options and 243,750 shares underlying warrants to purchase Common Stock. The percentage of ownership is based on 3,983,574 shares outstanding. 32 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 1996 the Company's former chief executive officer loaned the Company $100,000 for a period of 5 days. In January 1997 the former chief executive officer loaned the Company up to $420,000 over a period of 20 days. The loans were unsecured and bore interest at 9.5% and were paid in full in December 1996 and February 1997. In September and October 1997, the chief executive officer loaned the Company $45,000 and $150,000. The loan balances were applied to the amount due from the officer when he exercised employee stock options in October 1997. Interest at 9.5% was paid for 11 and 3 days respectively on the unsecured loans, and the balance after the stock option exercise was repaid to the officer. On September 29, 1999, two directors of the Company loaned the Company as aggregate of $325,000. The promissory notes (the Notes), issued in conjunction with these loans, carry a 12 percent annual interest rate. Principal and interest on the Notes are payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based financing (the Financing), as defined. In the event the principal and interest become payable as a result of a Financing, one-half of the then outstanding principal and accrued interest on the entire principal amount of the Notes are payable in cash to the Note holders and such Note holders will receive (i) a number of shares of Company securities, which shall be the same class issued in the Financing, calculated by dividing the remaining outstanding principal by the per share price of the securities issued in the Financing and/or (ii) a debt instrument of the same class issued in the Financing, the aggregate of such equity and/or debt securities equal to one-half of the outstanding principal amount of the Notes prior to the Financing. In conjunction with the Notes, the two directors were issued an aggregate of 243,750 warrants to purchase common stock of the Company. Warrants to purchase 162,500 shares of common stock of the Company were granted in September 1999 and the remaining 81,250 were granted in December 1999 based upon the nonoccurrence of certain events. The warrants are exercisable for a period of five years from the September 29,1999, issuance date of the warrants at a price equal to 75 percent of (i) in the event of a Financing, the common stock equivalent price per share of securities issued to the investor under such Financing or (ii) in the event of a sale of greater than 50 percent of the shares of common stock of the Company the price per share for such shares of common stock. In the event that there is neither a Financing nor a sale of the Company, beginning on September 28, 2000, the warrant price shall be $0.50 per share. The warrants have been valued at an estimated fair market value of approximately $85,000, and have been recorded as an original issue discount on the Notes. The original issue discount on the Notes is being charged to expense as interest expense over the one-year maturity period of the Notes. Since September 29, 1999, no officer, executive officer, or affiliate of the Company has entered into any other direct or indirect material transactions, or series of transactions, or had any direct or indirect material interest in any proposed transaction, or series of transactions, to which the Company is to be a party where the amount involved exceeds $60,000. 33 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The Exhibits required by Regulation S-B are set forth in the following list and are filed either by incorporation by reference from previous filings with the Securities and Exchange Commission or by attachment to this Annual Report on Form 10-KSB, as so indicated in such list. 2.1 Asset Purchase Agreement dated March 15, 1994, between Docucon, Incorporated and J. Feuerstein Systems, Inc., including the related Letter Agreement, dated January 28, 1994, between Jim Feuerstein and Docucon, Incorporated, as filed as Exhibit 2.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 3.1 Certificate of Incorporation of Docucon, Incorporated, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), is hereby incorporated herein by reference. 3.2 Certificate of Amendment to Certificate of Incorporation of Docucon, Incorporated, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 3.3 Bylaws of Docucon, Incorporated, filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), is hereby incorporated herein by reference. 3.4 Certificate of Merger of Docucon, Incorporated, a Delaware corporation, and Docucon, Incorporated, a Texas corporation, October 11, 1988, filed as Exhibit 3.4 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, is hereby incorporated herein by reference. 3.5 Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, May 29, 1990, filed as Exhibit 3.5 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, is hereby incorporated herein by reference. 3.6 Certificate of Designation Preferences of Series B Non-Convertible, Cumulative, Non-Voting, Redeemable Preferred Stock of Docucon, Incorporated, June 12, 1991, filed as Exhibit 3.6 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, is hereby incorporated herein by reference. 3.7 Certificate of Correction of Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, 34 June 1, 1990, filed as Exhibit 3.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, is hereby incorporated herein by reference. 4.1 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling D. H. Blair Investment Banking Corp. to purchase 80,000 shares of Common Stock at an exercise price of $.75 per share, expiring on November 5, 1995, as filed as Exhibit 4.1 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated herein by reference. 4.2 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling D. H. Blair Investment Banking Corp. to purchase 160,000 shares of Common Stock at an exercise price of $.70 per share, expiring on November 5, 1995, as filed as Exhibit 4.2 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 4.3 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling James Coleman to purchase 20,000 shares of Common Stock at an exercise price of $.75 per share, expiring on November 5, 1995, as filed as Exhibit 4.5 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated herein by reference. 4.4 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling James Coleman to purchase 40,000 shares of Common Stock at an exercise price of $.70 per share, expiring on November 5, 1995, as filed as Exhibit 4.6 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated herein by reference. 4.5 Stock Option Agreement, dated August 31, 1992, in which Docucon, Incorporated granted The Wall Street Group, Inc. a stock option to purchase up to 72,727 shares of Common Stock at a price of $1.375 per share, as filed as Exhibit 4.14 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated herein by reference. 10.1 Contract, dated as of May 8, 1991, between the Company and the U. S. Department of Defense, filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, is hereby incorporated herein by reference. 10.2 Employment Agreements between the Company and each of Edward P. Gistaro and Allan H. Hobgood, filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), are hereby incorporated herein by reference. 35 10.3 Amendment to Employment Agreement between the Company and Allan H. Hobgood, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 10.5 1988 Stock Option Plan, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, is hereby incorporated herein by reference. 10.6 1991 Director Non-Statutory Stock Option Plan, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 10.8 Note and Warrant Purchase Agreement, dated as of December 15, 1992, between the Company and Demuth, Folger & Terhune, including all Exhibits thereto (which include the form of Promissory Note, the form of Common Stock Purchase Warrant and the form of Deed of Trust executed and delivered in connection with the transaction), filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated December 16, 1992, is hereby incorporated herein by reference. 10.9 1993 Employee Stock Purchase Plan, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 10.10 Form of Promissory Note, Revolving, dated as of September 30, 1996, between Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit 10.12 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996, is hereby incorporated herein by reference. 10.11 Form of Promissory Note, dated as of September 30, 1996, between Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996, is hereby incorporated herein by reference. 10.12 Deed of Trust, Security Agreement and Financing Statement, dated as of September 30, 1996, executed in connection with the issuance of Promissory Notes in Exhibits 10.12 and 10.13, filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996 is hereby incorporated herein by reference. 10.13 Asset Sale and Purchase agreement, November 26, 1997, between Docucon, Incorporated and Bowne of Dallas, Inc., and Bowne 36 Litigation Solutions, L.P., filed as Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 is herein incorporated by reference. 10.14 Employment Agreement, January 5, 1998, between Docucon, Incorporated and Lori Turner, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 is herein incorporated by reference. 10.15 Employment Agreement, April 1, 1998, between Docucon, Incorporated and Douglas P. Gill, filed as Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 is herein incorporated by reference. 10.16 Employment Agreement, December 20, 1998, between Docucon, Incorporated and Warren D. Barratt. 10.17 Employment Agreement, January 4, 1999, between Docucon, Incorporated and Michael Nunley. 10.18 Amendment of Bylaws filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999 is herein incorporated by reference. 10.19 Accounts Receivable Purchase Agreement dated June 18, 1999, between Silicon Valley Bank and Docucon, Incorporated filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999 is herein incorporated by reference. 10.20 Asset Purchase Agreement by and among TAB Products Co., Bunt Acquisition Corp. and Docucon, Incorporated dated March 7, 1999 11 Computation of Earnings (Loss) Per Share. 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K. none 37 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. DOCUCON, INCORPORATED By: DOUGLAS P. GILL /s/ Douglas P. Gill President, Chief Executive Officer, and Director Date: March 27, 2000 In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE ------------ ------------ ---------- DOUGLAS P. GILL President, Chief Executive March 27, 2000 - ---------------------------- Officer and Director /S/ Douglas P. Gill (Principal Executive Officer) WARREN D. BARRATT Senior Vice President March 27, 2000 - ---------------------------- Chief Financial Officer and /S/ Warren D. Barratt Treasurer (Principal Financial and Accounting Officer) EDWARD P. GISTARO Chairman of the Board of Directors March 27, 2000 - ---------------------------- /S/ Edward P. Gistaro RALPH BROWN Director March 27, 2000 - ---------------------------- /S/ Ralph Brown AL R. IRETON Director March 27, 2000 - ---------------------------- /S/ Al R. Ireton CHAUNCEY E. SCHMIDT Director March 27, 2000 - ---------------------------- /S/ Chauncey E. Schmidt ROBERT W. SCHWARTZ Director March 27, 2000 - ---------------------------- /S/ Robert W. Schwartz 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Docucon, Incorporated: We have audited the accompanying balance sheets of Docucon, Incorporated, as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Docucon, Incorporated, as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring operating losses and negative operating cash flows which has resulted in working capital and stockholder equity deficiencies, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1, including entering into an agreement to sell substantially all of the Company's operating assets and the assumption of certain operating liabilities by the potential acquiror, subject to stockholder approval. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. /S/ ARTHUR ANDERSEN LLP San Antonio, Texas March 2, 2000 F-1 DOCUCON, INCORPORATED BALANCE SHEETS
DECEMBER 31 ------------------------ ASSETS 1999 1998 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents ............................................ $ 28,835 $1,082,321 Accounts receivable, trade, net of allowance for doubtful accounts of $8,887 and $4,444 at December 31, 1999 and 1998, respectively ........................................................ 992,243 373,366 Unbilled revenues, net of allowance of $1,600,000 at December 31, 1999 and 1998 ....................................................... 523,014 193,722 Other receivables .................................................... 3,876 374,379 Prepaid expenses and other ........................................... 183,530 123,921 Asset held for sale, net ............................................. -- 1,668,467 ---------- ---------- Total current assets ............................... 1,731,498 3,816,176 ---------- ---------- PROPERTY AND EQUIPMENT: Conversion systems ................................................... 5,132,390 4,858,930 Furniture and fixtures ............................................... 254,907 243,167 Leasehold improvements ............................................... 55,047 9,476 ---------- ---------- Total property and equipment ....................... 5,442,344 5,111,573 Less- Accumulated depreciation and amortization ...................... 4,980,000 4,704,152 ---------- ---------- Net property and equipment ......................... 462,344 407,421 ---------- ---------- OTHER ASSETS, net ...................................................... 27,300 48,896 ---------- ---------- Total assets ....................................... $2,221,142 $4,272,493 ========== ==========
The accompanying notes are an integral part of these financial statements. F-2 DOCUCON, INCORPORATED BALANCE SHEETS
DECEMBER 31 ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998 ------------ ------------ CURRENT LIABILITIES: Accounts payable ..................................................... $ 1,385,635 $ 218,059 Accrued liabilities .................................................. 1,186,682 1,191,351 Deferred revenues .................................................... -- 40,601 Other current liabilities ............................................ 45,886 44,087 Current maturities of long-term debt ................................. -- 927,502 Current maturities of capital lease obligations ...................... 55,727 29,537 Secured indebtedness ................................................. 899,004 -- Related-party notes, net of unamortized discount of $70,665 .......... 254,335 -- ------------ ------------ Total current liabilities ................................... 3,827,269 2,451,137 ------------ ------------ CAPITAL LEASE OBLIGATIONS .............................................. 75,202 76,141 ------------ ------------ OTHER LONG-TERM OBLIGATIONS ............................................ 226,310 269,476 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 shares issued and outstanding as of December 31, 1999 and 1998 .......................................... 7 7 Common stock, $.01 par value, 25,000,000 shares authorized; 3,508,767 and 3,306,216 shares outstanding as of December 31, 1999 and 1998, respectively ...................... 35,088 33,062 Additional paid-in capital ........................................... 10,209,903 10,027,337 Accumulated deficit .................................................. (12,148,401) (8,581,573) Treasury stock, at cost, 4,495 shares and 2,917 shares as of December 31, 1999 and 1998, respectively ...................... (4,236) (3,094) ------------ ------------ Total stockholders' equity (deficit) ........................ (1,907,639) 1,475,739 ------------ ------------ Total liabilities and stockholders' equity (deficit) ........ $ 2,221,142 $ 4,272,493 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 --------------------------- 1999 1998 ----------- ----------- OPERATING REVENUES ................................. $ 5,716,520 $ 2,693,497 ----------- ----------- COSTS AND EXPENSES: Production ....................................... 4,969,905 2,626,315 Research and development ......................... 377,050 280,088 General and administrative ....................... 2,079,124 1,916,489 Allowance for unbilled revenues .................. -- 1,600,000 Marketing ........................................ 1,503,806 1,039,768 Depreciation and amortization .................... 277,115 347,556 ----------- ----------- Total costs and expenses ......... 9,207,000 7,810,216 ----------- ----------- OPERATING LOSS ..................................... (3,490,480) (5,116,719) OTHER INCOME (EXPENSE): Interest expense ................................. (188,547) (193,892) Interest income .................................. 31,452 200,037 Other, net ....................................... 80,747 -- ----------- ----------- LOSS BEFORE INCOME TAXES ........................... (3,566,828) (5,110,574) INCOME TAX BENEFIT ................................. -- 24,880 ----------- ----------- NET LOSS ........................................... (3,566,828) (5,085,694) ----------- ----------- PREFERRED STOCK DIVIDEND REQUIREMENTS .............. (19,250) (27,462) ----------- ----------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ......... $(3,586,078) $(5,113,156) =========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE ............ $ (1.06) $ (1.55) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,386,768 3,300,056 =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 DOCUCON, INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ----------------------------- ----------------------------- NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ BALANCE, December 31, 1997 ............................... 12 $ 12 3,260,889 $ 32,609 Stock option exercises ................................ -- -- 2,500 25 Shares issued pursuant to employee stock plans ........ -- -- 26,809 268 Shares issued to pay preferred stock dividends ........ -- -- 10,318 103 Purchase of treasury stock ............................ -- -- (36,250) (362) Conversion of Series A preferred stock ................ (5) (5) 41,950 419 Accrued dividends on preferred stock .................. -- -- -- -- Net loss .............................................. -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, December 31, 1998 ............................... 7 7 3,306,216 33,062 Warrants issued ....................................... -- -- -- -- Purchase of treasury stock ............................ -- -- (26,400) (264) Treasury shares issued pursuant to employee stock plans -- -- 24,822 249 Shares issued in satisfaction of accrued liabilities .. -- -- 152,222 1,522 Shares issued pursuant to employee stock plans ........ -- -- 51,907 519 Net loss .............................................. -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, December 31, 1999 ............................... 7 $ 7 3,508,767 $ 35,088 ============ ============ ============ ============ TOTAL ADDITIONAL STOCKHOLDERS' PAID-IN ACCUMULATED TREASURY EQUITY CAPITAL DEFICIT STOCK (DEFICIT) ------------ ------------ ------------ ------------ BALANCE, December 31, 1997 ............................... $ 10,069,173 $ (3,407,063) $ -- $ 6,694,731 Stock option exercises ................................ 5,475 -- -- 5,500 Shares issued pursuant to employee stock plans ........ (268) -- -- -- Shares issued to pay preferred stock dividends ........ (103) -- -- -- Purchase of treasury stock ............................ -- -- (49,620) (49,982) Conversion of Series A preferred stock ................ (46,940) -- 46,526 -- Accrued dividends on preferred stock .................. -- (88,816) -- (88,816) Net loss .............................................. -- (5,085,694) -- (5,085,694) ------------ ------------ ------------ ------------ BALANCE, December 31, 1998 ............................... 10,027,337 (8,581,573) (3,094) 1,475,739 Warrants issued ....................................... 85,312 -- -- 85,312 Purchase of treasury stock ............................ -- -- (25,550) (25,814) Treasury shares issued pursuant to employee stock plans (249) -- 24,408 24,408 Shares issued in satisfaction of accrued liabilities .. 78,561 -- -- 80,083 Shares issued pursuant to employee stock plans ........ 18,942 -- -- 19,461 Net loss .............................................. -- (3,566,828) -- (3,566,828) ------------ ------------ ------------ ------------ BALANCE, December 31, 1999 ............................... $ 10,209,903 $(12,148,401) $ (4,236) $ (1,907,639) ============ ============ ============ ============
F-5 DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................. $(3,566,828) $(5,085,694) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization .......................................... 277,115 347,556 Allowance for unbilled revenues ........................................ -- 1,600,000 Noncash compensation accrual ........................................... -- 313,563 Gain on sale of assets ................................................. 80,708 -- Amortization of discount on related-party notes ........................ 14,647 -- Changes in current assets and current liabilities- (Increase) decrease in net receivables and unbilled revenues ......... (577,666) 688,057 Increase in prepaid expenses and other ............................... (59,609) (25,351) Increase in accounts payable and accrued liabilities ................. 1,181,693 203,118 Increase (decrease) in taxes payable ................................. -- (191,000) Increase (decrease) in deferred revenues ............................. (40,601) 40,601 ----------- ----------- Net cash used in operating activities .................... (2,690,541) (2,109,150) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ...................................................... (260,219) (270,951) Proceeds from sale of building ............................................ 1,782,609 -- ----------- ----------- Net cash provided by (used in) investing activities ...... 1,522,390 (270,951) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from related-party notes and warrants ............................ 325,000 -- Payments under line of credit ............................................. -- (504,000) Increase in secured indebtedness, net ..................................... 899,004 -- Principal payments on long-term debt and other obligations ................ (968,869) (588,299) Principal payments under capital lease obligations ........................ (45,301) (16,766) Proceeds from employee stock purchase plan ................................ 19,461 18,786 Proceeds from exercise of stock options ................................... -- 5,500 Payment of preferred stock dividends ...................................... (88,816) -- Purchase of treasury stock ................................................ (25,814) (49,982) ----------- ----------- Net cash provided by (used in) financing activities ...... 114,665 (1,134,761) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (1,053,486) (3,514,862) CASH AND CASH EQUIVALENTS, beginning of year ................................. 1,082,321 4,597,183 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year ....................................... $ 28,835 $ 1,082,321 =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION, BACKGROUND AND CURRENT STATUS OF THE COMPANY: Docucon, Incorporated (the Company), a Delaware corporation, was incorporated in June 1986. The Company's primary business is the conversion of paper and microform documents to optical and other types of storage media for use in document management systems and internet applications for customers in the federal and commercial markets. Substantially all of the Company's customers are located in the United States. The accompanying financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. Since its inception, the Company has incurred cumulative net losses of approximately $12.1 million, including losses of approximately $3.6 million and $5.1 million during 1999 and 1998, respectively. For the years ended December 31, 1999 and 1998, the Company had negative cash flows from operating activities of approximately $2.7 million and $2.1 million, respectively. At December 31, 1999, the Company had a working capital deficit of approximately $2.1 million and a total stockholders' deficit of approximately $1.9 million. A substantial portion of the Company's accounts payable at December 31, 1999, are past due. As discussed in Notes 3 and 8, a significant portion of the Company's historical revenues has been earned from conversion services performed for agencies of the U.S. Government. The Company experienced significant declines in revenues from these agencies in 1997 and 1998 and, during 1998, provided an allowance of $1.6 million on certain unbilled revenues. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. If the Company is unable to generate positive cash flows from operations or obtain additional capital resources, or if the funds obtained in such efforts are not adequate to support the Company until a successful level of operations is attained, the Company would likely be unable to continue operating as a going concern. As discussed in Note 14, the Company has entered into a definitive agreement to sell substantially all of the Company's operating assets to TAB Products Co. (TAB). The agreement is subject to stockholder approval. In conjunction with this transaction, TAB has agreed to fund the Company's working capital deficits until the proposed acquisition can be consummated. However, there can be no assurances that TAB will continue to fund all of the Company's working capital deficits if the transaction does not close in a timely manner or that the proposed acquisition will be consummated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PROPERTY AND EQUIPMENT Property and equipment are recorded at original cost. Maintenance and repairs are charged to expense as incurred and betterments which increase the value or extend the useful life of the property are capitalized. Gains or losses on sales or other dispositions of property and equipment are credited or charged to operations. F-7 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Depreciation is provided using the straight-line method over the lesser of the capital lease term or estimated useful lives of the related assets. The Company's conversion systems and furniture and fixtures are currently depreciated over periods ranging from two to five years beginning in the month the property is placed in service. The Company's building was being depreciated over 40 years. In January 1999, the Company sold its San Antonio operations center building. In connection with the sale, the Company paid off the remaining balance of the related secured indebtedness. The Company's net cash proceeds from the sale, net of debt repayments, approximated $800,000. The Company entered into a noncancelable operating leaseback of the building through December 1999 at a gross rate of approximately $27,000 per month, before a cancelable month-to-month sublease arrangement of approximately $15,000 per month. The gain on the sale of the building was deferred and was recognized over the term of the operating leaseback as a component of other income, net. The Company moved into a new facility in December 1999 (see Note 5). REVERSE STOCK SPLIT In June 1998, the Company's stockholders approved a one-for-four reverse common stock split. Accordingly, all common stock and share information has been adjusted to reflect the reverse stock split. REVENUE RECOGNITION Revenues from conversion service contracts are recognized at the time services are provided and are based upon the number of documents converted and the conversion rates established in the contracts. The Company maintains an estimated reserve for returns and reconversions based upon an historical analysis. Such amounts have not been significant. STATEMENTS OF CASH FLOWS- SUPPLEMENTAL DISCLOSURES The Company considers funds invested in highly liquid investments having original maturities of 90 days or less to be cash equivalents. The following relates to cash interest and income taxes paid by the Company and noncash investing and financing activities for the periods indicated: YEAR ENDED DECEMBER 31 -------------------- 1999 1998 --------- --------- Cash payments- Cash paid for interest .............................. $ 146,495 $ 168,892 ========= ========= Cash paid for income taxes .......................... $ - $ 157,622 ========= ========= Noncash investing and financing activities- Capital lease obligations incurred .................. $ 70,552 $ 57,099 ========= ========= Preferred stock dividends payable ................... $ - $ 88,816 ========= ========= Stock issued in satisfaction of accrued liabilities . $ 80,083 $ - ========= ========= F-8 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) POST RETIREMENT AND POST EMPLOYMENT BENEFITS The Company does not provide post retirement or post employment benefits to its employees. SELF-INSURANCE RISK Through December 31, 1999, the Company self-insured medical coverage for its employees and their dependents up to specific attachment limits. The Company has accrued for known claims and an estimate of claims incurred but not reported through December 31, 1999, up to the maximum anticipated costs to the Company. The Company believes that such accrual is adequate. During 1999 and 1998, the Company recognized approximately $260,000 and $180,000, respectively, in self-insurance expense under the limits. The Company's insurer will pay cumulative claims above the limit up to $1 million lifetime per covered individual. The Company does not believe that claims reported and claims incurred but not reported will exceed the amounts to be covered by the insurer. Effective December 31, 1999, the Company terminated its self-insured arrangement and switched to fully insured employee medical coverage. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share (EPS) excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As the Company had a net loss for the years ended December 31, 1999 and 1998, diluted EPS equals basic EPS as potentially dilutive common stock equivalents are antidilutive. The average market price per share of the Company's common stock for the years ended December 31, 1999 and 1998, was $.72 and $2.01, respectively. Note 10 provides a detail of options and warrants outstanding and the corresponding exercise prices. If the Company would have had income for the years ended December 31, 1999 and 1998, the denominator (weighted average number of common shares and common share equivalents outstanding) in the diluted EPS calculation would have been increased, through application of the treasury stock method, for each class of option or warrant for which the average market price per share of the Company's common stock exceeded the common stock equivalent's exercise price. RECLASSIFICATIONS Certain reclassifications have been made to prior period amounts to conform to the 1999 presentation. F-9 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 3. UNBILLED REVENUES: The allowance for unbilled revenues at December 31, 1999 and 1998, relates to conversion services performed for agencies of the U.S. Government. The Company's ability to collect these unbilled revenues is dependent upon a number of factors including quality control acceptance and the availability of funding to the respective agencies. The Company was informed by a U.S. Government customer in mid-1997 that funding for certain conversion services being performed had been depleted. Management completed the work that had been placed in production for this customer. As a result, the Company has been unable to collect approximately $1.6 million of conversion services for this customer, the substantial majority of which were performed during 1997. A substantial portion of the conversion products associated with the $1.6 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. Management of the Company believes that a significant portion of such unbilled revenues represent valid assets of the Company. However, due to the continued aging of the unbilled revenues, management believes it was prudent to provide an allowance on these unbilled revenues for the entire amount during the year ended December 31, 1998. There are no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to collect the unbilled revenues. 4. ACCOUNTS RECEIVABLE FINANCING: On June 18, 1999, the Company entered into an accounts receivable finance agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the terms of the agreement, as amended, the Company can receive funding from SVB for up to $1,500,000 of eligible accounts receivable with full recourse by SVB to the Company. The Company receives cash advances from the eligible receivables equal to the face amount of the eligible receivables financed, less a reserve established by SVB of not less than 20 percent of the aggregate face amount of the receivables. If the Company finances the maximum of $1,500,000 of accounts receivable, new receivables can be financed to replace previous accounts receivables that are collected. The Company is obligated to repay on demand the unpaid portion of any receivable financed by SVB under certain conditions including (i) an account receivable that remains uncollected 90 calendar days after the invoice date, (ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of the Financing Agreement by the Company. During the fourth quarter of 1999, and subsequent to December 31, 1999, the Company was in technical default under certain provisions of the Financing Agreement. While SVB has not made a declaration of default or demand for payment, it has the right to do so under the provisions of the Financing Agreement. If such demand were made, it is unlikely that the Company would have the resources to make such payment except through the collections on the underlying secured receivables. The cash advances are reflected in the accompanying financial statements as short-term borrowings. The Company pays aggregate finance charges and administrative fees on the average daily balance of the uncollected financed accounts receivables of approximately 2.38 percent per month. The aggregate amount of advances and fees owed to SVB are secured by substantially all of the tangible assets of the Company. At December 31, 1999, the balances of the accounts receivables financed and the aggregate cash advanced on such receivables was approximately $1,147,000 and $899,000, respectively. Aggregate finance charges and administrative fees related to the Financing Agreement were approximately $129,500 for the year ended December 31, 1999, and are classified as interest expense. The Company's lease of its corporate headquarters in Pennsylvania requires monthly payments of approximately $14,300 through June 2004, which are included as a component of future minimum lease payments for all noncancelable operating leases as described in Note 5. Under the provisions of the TAB Asset Purchase Agreement, the remaining commitment under this lease would not be assumed by TAB. In March 2000, the Company initiated conversations with the lessor with respect to a potential buy-out of the remaining term of this lease in anticipation of the consummation of the TAB Asset Purchase Agreement. While there can be no assurances that the Company will not be required to pay all future contractual amounts under this lease, the Company believes that it is likely that it would be able to buy-out the remaining term of the lease by making a payment to the lessor in an amount substantially less than the contractual amount. F-10 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES: Certain office equipment and office space is leased under various noncancelable operating leases with terms ranging from one to six years. In November 1999, the Company entered into an operating lease agreement for its primary conversion facilities in San Antonio, Texas. The terms of this lease agreement provide for an initial lease term of 65 months, including a five-month rental abatement period. Lease expense is being recognized on a straight-line basis over the term of the lease including the abatement period. Base rents are approximately $30,000 per month before the Company's pro rata share of ad valorem taxes and operating expenses, which are initially estimated to approximate $5,700 per month. The lease provides for two, five-year optional renewal periods. Rent expense under all cancelable and noncancelable operating leases, net of sublease income, was approximately $390,000 and $59,000 for the years ended December 31, 1999 and 1998, respectively. Future minimum lease payments for all noncancelable operating leases, net of noncancelable subleases, as of December 31, 1999, are as follows: Year ending December 31- 2000 $ 505,928 2001 483,037 2002 486,279 2003 488,780 2004 424,408 Thereafter 119,994 ---------- Total future minimum lease payments $2,508,426 ========== During 1998 and 1999, the Company appointed several new key employees. The Company and the employees have entered into employment agreements with terms of two to seven years providing for base compensation ranging from $100,000 to $200,000 per year. The agreements are terminable by either party with 30 days' notice. In the event the employees were to be terminated by the Company without cause, the Company would be required to make aggregate severance payments of $880,000. The definition of termination without cause under each of the employment agreements includes a change of control of the Company and/or a sale of substantially all of the assets of the Company. See Note 14 for a description of a proposed sale of substantially all of the Company's assets. In September 1998, the Company granted early retirement to a member of senior management and terminated the related employment agreement. The employee was retained as a consultant to the Company for a period of two years at the rate of $2,500 per month. Additionally, during the same two-year period, the former employee receives retirement pay at the rate of $5,500 per month. For a 10-year period following the consultancy agreement, the former employee will receive retirement pay at the rate of $2,500 per month. The consulting payments are being charged to expense as the services are provided. The present value of the post-retirement payments, discounted at 5 percent, resulted in noncash compensation expense of approximately $300,000 during the year ended December 31, 1998. The present value of the post-retirement obligation is recorded as other long-term obligations on the accompanying balance sheet, with the current portion included as other current liabilities. F-11 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On February 2, 1999, the Company contacted the Department of Defense's (DOD) Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclosure Program is intended to encourage government contractors to voluntarily disclose potential violations of government contracting policies and procedures. In general, companies who volunteer information and cooperate with the government's investigation are not subject to criminal and administrative sanctions such as suspension and debarment from government contracting activities. Admission into the Voluntary Disclosure Program does not protect companies from any potential civil liability the government may assert. The Company's request for admission into the Voluntary Disclosure Program was the result of an internal review by the Company that indicated a billing practice, with respect to certain invoices submitted during the period from September 1996 through July 1997, might be perceived by the government as a technical violation of DOD billing procedures. The DOD Inspector General formally admitted the Company into the Voluntary Disclosure Program in June 1999 and commenced its investigation of the Company's voluntary disclosure in the second half of that year. In February 2000, Company counsel was orally advised that the Government's investigation of the Company's voluntary disclosure is complete and that criminal prosecution has been declined. The Company remains potentially liable for civil damages. In 1998, the Company established a reserve for estimated legal costs and other expenses which it believes is adequate for the resolution of this matter. 6. RELATED-PARTY LOAN TRANSACTION: On September 29, 1999, two directors of the Company loaned the Company an aggregate of $325,000. The promissory notes (the Notes), issued in conjunction with these loans, carry a 12 percent annual interest rate. Principal and interest on the Notes are payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based financing (the Financing), as defined. In the event the principal and interest become payable as a result of a Financing, one-half of the then outstanding principal and accrued interest on the entire principal amount of the Notes are payable in cash to the Note holders and such Note holders will receive (i) a number of shares of Company securities, which shall be the same class issued in the Financing, calculated by dividing the remaining outstanding principal by the per share price of the securities issued in the Financing and/or (ii) a debt instrument of the same class issued in the Financing, the aggregate of such equity and/or debt securities equal to one-half of the outstanding principal amount of the Notes prior to the Financing. In conjunction with the Notes, the two directors were issued an aggregate of 243,750 warrants to purchase common stock of the Company. Warrants to purchase 162,500 shares of common stock of the Company were granted in September 1999 and the remaining 81,250 were granted in December 1999 based upon the nonoccurrence of certain events. The warrants are exercisable for a period of five years from the September 29, 1999, issuance date of the warrants at a price equal to 75 percent of (i) in the event of a Financing, the common stock equivalent price per share of securities issued to the investor under such Financing or (ii) in the event of a sale of greater than 50 percent of the shares of common stock of the Company, the price per share for such shares of common stock. In the event that there is neither a Financing nor a sale of the Company, beginning on September 28, 2000, the warrant price shall be $.50 per share. The warrants have been valued at an estimated fair market value of $85,312 and have been recorded as an original issue discount on the Notes. The original issue discount on the Notes is being charged to expense as interest expense over the one-year maturity period of the Notes. F-12 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: In connection with the purchase of its San Antonio operations center building, the Company issued a four-year, 8 percent, $1.5 million promissory note originally due in December 1996. In October 1996, the Company refinanced the $1.5 million note. The new note was payable to a commercial bank, bore interest at a fixed rate of 9.5 percent per year and required monthly principal and interest payments of $14,448, with the remaining balance maturing in October 2001. The note payable was secured by the Company's building, other fixed assets, accounts receivable and inventory. Debt issuance costs of approximately $68,000 incurred in October 1996 related to this refinancing were capitalized and were being amortized over the five-year term. During 1998, the Company elected to sell the building. In November 1998, the Company entered into a contract to sell the building for an amount in excess of its net book value. Accordingly, the carrying value of the land, building and associated improvements were classified as a current asset held for sale at December 31, 1998. In January 1999, the Company sold its San Antonio operations center building and paid off the related secured indebtedness. See Note 2 for additional information related to this sale. Equipment held under capital leases and related obligations at December 31, 1999, are as follows: Office and production equipment requiring monthly principal and interest payments of $4,887, interest at 9.5 percent to 22.0 percent and maturing April 2001 to October 2003 ........ $133,000 Telecommunications equipment requiring monthly principal and interest payments of $977, interest at 9.3 percent and maturing July 2001 ......................................... 18,566 -------- Total capital lease payments ..................................... 151,566 Less- Amounts representing interest .............................. 20,637 -------- Capital lease obligations ........................................ $130,929 ======== Maturities of capital lease obligations as of December 31, 1999, are as follows: Year ending December 31- 2000 $ 55,727 2001 53,924 2002 14,886 2003 6,392 -------- Total $130,929 ======== 8. MAJOR CUSTOMER: The Company has historically earned a significant portion of total revenues from conversion services performed for the DOD. The Company had revenues of approximately $3.6 million and $2.1 million during the years ended December 31, 1999 and 1998, respectively, from services provided to the DOD. The Company had trade receivables of approximately $.4 million and $.3 million from the DOD at December 31, 1999 and 1998, respectively. F-13 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 9. PREFERRED STOCK AND COMMON STOCK: In 1990, the Company issued 46 shares of 11 percent Series A preferred stock at $25,000 per share. Each share of preferred stock is convertible into 8,333 shares of common stock. Through December 31, 1999, 39 shares of preferred stock have been converted. Additionally, 92,154 shares of common stock have been issued in lieu of accumulated dividends on the preferred stock which was converted. Each share of the Company's preferred stock ($25,000 stated value) is convertible into 8,333 shares of common stock and earns cash dividends of 11 percent per year. Each share of preferred stock is entitled to vote 8,333 common shares. Under the terms of the Company's preferred stock, the Company cannot pay dividends on its common stock until all accumulated but unpaid dividends on such preferred stock have been paid. If the transaction described in Note 14 is consummated, the Company can not make distributions to common stockholders until cumulative undeclared dividends on the preferred stock are paid. As of December 31, 1999, cumulative undeclared dividends on the preferred stock approximated $179,000. In 1999, the Company paid $88,816 related to cumulative dividends on preferred stock that was converted during the fourth quarter of 1998. This is reflected as a component of accrued liabilities on the accompanying balance sheet at December 31, 1998. As the remainder of the cumulative dividends are undeclared, they have not been recorded as a reduction of the Company's equity. Common stock is subordinate to preferred stock in the event of liquidation. The Company has never paid cash dividends on its common stock. On June 18, 1998, the Company announced that its board of directors authorized the repurchase of up to 500,000 shares of the Company's common stock in the open market. From June 19, 1998, through December 31, 1998, the Company acquired 36,250 treasury shares for $49,982. In 1998, 33,333 of such shares were reissued in connection with the conversion of Series A preferred stock. During 1999, the Company acquired 26,400 treasury shares for $25,814, of which 24,822 shares were reissued pursuant to employee stock plans. 10. STOCK OPTIONS: The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allowed for the granting of 415,000 stock options at the current market value of the common stock at the date of the grant to key employees. The 1988 Plan terminated on October 31, 1998. The 1991 Director Non-Statutory Stock Option Plan (the Director Plan) provides for the granting of options at the common stock's current market value to members of the board of directors of the Company who are not employees of the Company. In June 1998, the Company's stockholders authorized an 85,000 share increase in the number of shares of common stock reserved for issuance under the Director Plan. As a result, the Director Plan authorizes the granting of options to purchase up to 210,000 shares of the Company's common stock. The stock options granted under the 1988 Plan and the Director Plan are exercisable pursuant to the individual agreements between the Company and the grantee and range from a six-month to a three-year vesting period. All options granted under these plans must be exercised within 10 years from the date of grant and expire within three months after termination of employment or service as a director. F-14 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On April 1, 1998, the Company approved the 1998 Employee Stock Option Plan (the 1998 Employee Plan), covering 187,500 shares of common stock. Unless terminated earlier by the board of directors, the 1998 Plan will terminate on March 31, 2008. The purpose of the plan is to supplement and replace the 1988 Plan. The 1998 Employee Plan provides for the grant to key employees incentive stock options (ISOs) intended to qualify under Section 422(b) of the Internal Revenue Code and nonqualified stock options (NQSOs). Under the 1998 Employee Plan, which is administered by the Stock Option Committee of the board of directors, key employees may be granted options to purchase shares of the Company's common stock at 100 percent of fair market value on the date of grant (or 110 percent of fair market value in the case of an ISO granted to a 10 percent stockholder/grantee). Options granted under the 1998 Employee Plan must be exercised within 10 years from the date of grant, vest at varying times, as determined by the Stock Option Committee, are nontransferable except by will or pursuant to the laws of descent and distribution, and expire within three months after termination of employment, unless such termination is by reason of death or disability or for cause. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth on the option. Such payment must be made in cash or through delivery of shares of common stock or a combination of cash and common stock, all as determined by the Stock Option Committee. The 1998 Employee Plan may be amended at any time by a vote of the board of directors. However, no amendment made without approval of the stockholders of the Company may increase the total number of shares which may be issued under options granted pursuant to the 1998 Employee Plan, reduce the maximum exercise price or extend the latest date upon which options may be granted or change the class of employees eligible to receive the options. In June 1999, the Compensation Committee of the Board of Directors recommended and the Board approved, subject to stockholder approval of an increase in shares issuable under the 1998 Employee Plan, a grant to management and key employees of an aggregate of 460,000 options to purchase shares of common stock at an exercise price per share equal to the greater of fair market value or $1.00 on the effective date of the grant. The proposal to increase the number of shares issuable under the 1998 Employee Stock Option Plan to 687,500 shares was approved by vote of the Company's stockholders on July 30, 1999. The closing price per share of the Company's common stock on that date was $.875. In 1998, the Company approved the 1998 Executive Non-Statutory Plan (the 1998 NQSO Plan), covering 375,000 shares of common stock. Under the 1998 NQSO Plan, identified executives may be granted long-term options to purchase shares of the Company's common stock at a price specified on the date of the grant subject to certain acceleration rights upon attainment of specific goals. The 1998 NQSO Plan is administered by the Stock Option Committee. The 1998 NQSO Plan expires on March 31, 2008. Options granted under the 1998 NQSO Plan will expire 10 years from the date of grant, vest at varying times, as determined by the NQSO Committee, and are nontransferable except by will or pursuant to the laws of descent and distribution. In April 1998, the Company's board of directors granted options to certain members of the Company's senior management to purchase 125,000 shares of the Company's common stock at an exercise price of $4 per share under the 1998 NQSO Plan. Additionally, in April 1998, the Company appointed a new president and chief executive officer. The Company's board of directors granted this officer options to purchase 225,000 shares of the Company's common stock at an exercise price of $4 per share under a time accelerated restricted stock award. In December 1998, the exercise price on these options was reset to $1 per share. The time accelerated restricted stock award options become exercisable in March 2005. Exercisability of the time accelerated restricted stock award options is accelerated, in 12,500 share increments, for each $2 per share incremental increase in the quoted market price per share of the Company's common stock above $4 per share. F-15 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) A summary of activity in the Company's stock option plans is set forth below:
WEIGHTED AVERAGE EXERCISE OPTION PRICE PRICE ------------------------------ SHARES PER SHARE PER SHARE TOTAL ------------- ------------- ------------- ------------- Outstanding, December 31, 1997 273,778 $ 2.57 $2.12 - $5.52 $ 702,571 ============= ============= Exercisable, December 31, 1997 230,157 2.46 2.12 - 5.52 $ 565,547 ============= ============= Granted ...................... 875,501 2.45 .88 - 4.12 2,147,024 Exercised .................... (2,500) 2.24 2.24 - 2.24 (5,600) Terminated ................... (329,638) 3.80 2.12 - 4.88 (1,252,540) ------------- ------------- Outstanding, December 31, 1998 817,141 1.95 .88 - 5.52 $ 1,591,455 ============= ============= Exercisable, December 31, 1998 238,213 2.49 2.00 - 5.52 $ 593,150 ============= ============= Granted ...................... 636,551 .98 .75 - 1.00 625,256 Exercised .................... -- -- -- -- Terminated ................... (155,344) 2.91 .75 - 4.12 (451,957) ------------- ------------- Outstanding, December 31, 1999 1,298,348 1.36 .75 - 5.52 $ 1,764,754 ============= ============= Exercisable, December 31, 1999 289,817 2.46 .88 - 5.52 $ 711,501 ============= =============
The weighted average remaining contractual life of options outstanding at December 31, 1999, is approximately 7.5 years. In October 1995, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 123 defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS No. 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities electing to remain with the accounting prescribed by APB 25, as the Company has, must make pro forma disclosures of net income (loss) and earnings (loss) per share as if the fair value based method recommended by SFAS No. 123 had been applied. The following provides pro forma disclosures of net loss and loss per share as if the fair value based method of accounting under SFAS No. 123 had been applied. F-16 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net loss applicable to common stockholders and Basic and Diluted loss per share would have been changed to the following pro forma amounts: 1999 1998 ----------- ----------- Net Loss Applicable to Common Stockholders As Reported $(3,586,078) $(5,113,156) Pro Forma $(3,835,717) $(5,389,493) Basic and Diluted Loss Per Share As Reported $ (1.06) $ (1.55) Pro Forma $ (1.13) $ (1.63) Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair values per share of options granted during 1999 and 1998 were $.72 and $1.51, respectively. The fair value of each option grant is estimated on the date of grant using an option pricing model with the following weighted average assumptions used for grants in 1999 and 1998, respectively: risk-free interest rates of 6.0 percent and 6.0 percent, expected dividend yields of 0 percent and 0 percent, expected lives of 5 years and 5 years and expected volatility of 108 percent and 110 percent. In addition to the above stock option agreements, the Company has warrants outstanding to purchase 15,000 shares of common stock at $5.00 per share which expire in June 2001 and additional warrants to purchase 243,750 shares of common stock as further described in Note 6. Substantially all of the Company's outstanding options become immediately exercisable upon a change of control of the Company and/or a sale of substantially all of the assets of the Company. See Note 14 for a description of a proposed sale of substantially all of the Company's assets. 11. EMPLOYEE BENEFIT PLANS: Effective January 1, 1994, the Company adopted the 1993 Employee Stock Purchase Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, eligible employees may elect to have up to 10 percent of their base pay (as defined) deducted and utilized to purchase common stock of the Company in annual or semiannual offerings. In August 1997 and June 1998, the Company's stockholders authorized an increase in the number of shares of common stock reserved for issuance pursuant to the Stock Purchase Plan by 50,000 shares and 100,000 shares, respectively. The Company has reserved 350,000 shares of common stock for issuance pursuant to the Stock Purchase Plan. In December 1999, the Company issued 51,907 shares of common stock (plus 424 treasury shares) at a purchase price of $.375 per share. In January 1999 and 1998, the Company issued 24,398 treasury shares and 26,809 new shares of common stock at purchase prices of $.77 and $3.40 per share, respectively. The annual purchase price is 85 percent of the lesser of the closing price of the Company's common stock at the beginning or end of each calendar year. The purchase prices represent 85 percent of the closing price on December 31, 1999, December 31, 1998, and December 30, 1997, respectively. The Stock Purchase Plan is administered by the Compensation Committee of the board of directors. In June 1998, the Company's stockholders amended the Stock Purchase Plan's termination date from December 31, 1998, to December 31, 2001. At December 31, 1999, 156,881 shares remain available for issuance. F-17 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The Company also maintains a qualified employee benefit plan under Section 401(k) of the Internal Revenue Code. Under this plan, employees meeting certain eligibility requirements may contribute up to 15 percent of their eligible compensation to the plan on a pretax basis. In addition, the Company may make voluntary matching contributions to the plan. At December 31, 1999 and 1998, respectively, the Company had accrued approximately $25,000 as its 1998 matching contributions to the plan. No matching contributions were declared in 1999. 12. INCOME TAXES: ------------- The Company follows SFAS No. 109, "Accounting for Income Taxes." This statement establishes financial accounting and reporting standards for deferred income tax assets and liabilities that arise as a result of differences between the reported amounts of assets and liabilities for financial reporting and income tax purposes. As of December 31, 1999, the Company had net operating loss carryforwards of approximately $9.1 million for federal income tax purposes which are available to reduce future taxable income and will expire in 2005 through 2019 if not utilized. Total income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate to loss before income taxes. The reasons for these differences are as follows: YEAR ENDED DECEMBER 31 ----------------------------- 1999 1998 ----------- ----------- Expected federal income tax benefit ........ $(1,213,000) $(1,725,000) Other ...................................... -- (24,880) Tax loss carryforwards generated ........... 1,213,000 1,725,000 ----------- ----------- Total income tax benefit ....... $ -- $ (24,880) =========== =========== The tax effects of significant temporary differences representing income tax assets (liabilities) are as follows: DECEMBER 31 -------------------------- 1999 1998 ---------- ---------- Deferred income tax assets (liabilities)- Tax loss carryforwards ....................... $3,100,000 $2,110,000 Tax credit carryforwards ..................... 81,000 81,000 Depreciation ................................. 62,000 94,000 Accruals ..................................... 671,000 555,000 Other ........................................ -- 14,000 ---------- ---------- $3,914,000 $2,854,000 ========== ========== As a result of the Company's recurring losses, a valuation reserve of $3,914,000 and $2,854,000 as of December 31, 1999 and 1998, respectively, representing the total of net deferred tax assets has been recognized by the Company. F-18 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 13. SALE OF SOFTWARE DIVISION: In November 1997, the Company sold its software division to a third party for $6.5 million. Under the provisions of the Asset Purchase Agreement (Agreement) between the Company and the purchaser (Purchaser) of the software division, the Company sold all of the assets related to this division with the exception of certain office furniture and equipment and the Purchaser agreed to assume all of the liabilities of the division with the exception of trade payables, accrued liabilities and tax liabilities of the Company associated with the operations and disposition of the division. Under the terms of the Agreement, the Purchaser paid approximately $800,000 of the purchase price into an escrow fund for purposes of securing payment for any liability of the Company to the Purchaser under the Agreement, including the Purchaser's right to indemnification for uncollectible purchased receivables. The funds in the escrow account, net of any liabilities of the Company to the Purchaser under the Agreement, were paid to the Company in the amount of $400,000 in 1998 and the remainder was released to the Company in 1999, which was reflected as a component of other current receivables on the accompanying balance sheet at December 31, 1998. 14. SUBSEQUENT EVENTS (UNAUDITED): In January 2000, the Company entered into a nonbinding letter of intent (LOI) and, subsequently, in March 2000, signed a definitive asset purchase agreement (TAB Asset Purchase Agreement) with TAB. Under the TAB Asset Purchase Agreement, the Company has agreed, subject to stockholder approval, to sell substantially all of the operating assets of the Company to TAB for cash and the assumption of certain operating liabilities. The acquisition is expected to be consummated during the second quarter of 2000. In conjunction with entering into the LOI and subsequent TAB Asset Purchase Agreement, TAB has agreed to advance the Company cash in the form of secured promissory notes to fund the Company's working capital deficits until the transaction is consummated. Under the TAB Asset Purchase Agreement, these advances from TAB will be deducted from the cash proceeds paid at closing. As of March 17, 2000, TAB has advanced $550,000 under secured promissory notes. The notes bear interest at rates ranging from 10 percent - 13 percent per year and are due on the earlier to occur of the closing of the transaction or April 30, 2000. The notes are secured by a second priority interest in substantially all of the Company's assets. There are no assurances that TAB will continue to fund the Company's working capital deficits indefinitely or that the transaction will be consummated. Under the TAB Asset Purchase Agreement, a portion of the cash consideration and all of the liabilities assumed in the transaction are variable and are based on the book value of specific operating assets acquired and liabilities assumed, respectively, on the date of closing. Liabilities not assumed by TAB will be satisfied with a portion of the net cash proceeds from the transaction. The remaining cash proceeds from the transaction, after settlement of liabilities not assumed by TAB and payment of any costs incurred by the Company subsequent to the closing, are expected to be distributed to stockholders during 2000. Because the variable portion of the cash consideration from the transaction will not be determined until the closing date and the amount of liabilities not assumed by TAB that must be satisfied out of the cash proceeds will not be known until after the closing, the amount of cash that will ultimately be available for distribution to stockholders in 2000 is not determinable at this time. The Company's lease of its corporate headquarters in Pennsylvania requires monthly payments of approximately $14,300 through June 2004, which are included as a component of future minimum lease payments for all noncancelable operating leases as described in Note 5. Under the provisions of the TAB Asset Purchase Agreement, the remaining commitment under this lease would not be assumed by TAB. In March 2000, the Company initiated conversations with the lessor with respect to a potential buy-out of the remaining term of this lease in anticipation of the consummation of the TAB Asset Purchase Agreement. While there can be no assurances that the Company will not be required to pay all future contractual amounts under this lease, the Company believes that it is likely that it would be able to buy-out the remaining term of the lease by making a payment to the lessor in an amount substantially less than the contractual amount. F-19 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The results of operations by quarter for the years ended December 31, 1999 and 1998, were as follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL --------------- --------------- --------------- --------------- --------------- 1999 Operating revenues .................... $ 851,079 $ 1,613,055 $ 2,013,425 $ 1,238,961 $ 5,716,520 =============== =============== =============== =============== =============== Net loss .............................. $ (1,138,943) $ (698,908) $ (572,579) $ (1,156,398) $ (3,566,828) =============== =============== =============== =============== =============== Basic and diluted loss per common share $ (.35) $ (.21) $ (.17) $ (.34) =============== =============== =============== =============== 1998 Operating revenues .................... $ 612,996 $ 869,982 $ 591,786 $ 618,733 $ 2,693,497 =============== =============== =============== =============== =============== Net loss .............................. $ (614,491) $ (455,214) $ (1,993,217) $ (2,022,772) $ (5,085,694) =============== =============== =============== =============== =============== Basic and diluted loss per common share $ (0.19) $ (0.14) $ (0.60) $ (0.61) =============== =============== =============== ===============
F-20 EX-10.20 2 EXHIBIT 10.20 ================================================================================ ASSET PURCHASE AGREEMENT by and among TAB Products Co., a Delaware corporation; and Bunt Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of TAB Products Co.; on the one hand and Docucon, Incorporated, a corporation organized under the laws of Delaware; on the other hand. ------------------------------- Dated as of March 7, 2000 ------------------------------- ================================================================================ TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS.......................................................1 1.1 "Accounts Payable"...............................................1 1.2 "Accounts Receivable"............................................1 1.3 "Acquisition"....................................................1 1.4 "Acquisition Proposal"...........................................2 1.5 "Additional Business Liabilities"................................2 1.6 "Affiliate"......................................................2 1.7 "Assets".........................................................2 1.8 "Assumed Contracts"..............................................2 1.9 "Assumed Liabilities"............................................2 1.10 "Business".......................................................2 1.11 "Business Financial Statements"..................................2 1.12 "Business Records"...............................................2 1.13 "Cash Payment"...................................................2 1.14 "Closing"........................................................2 1.15 "Closing Date"...................................................2 1.16 "Closing Net Assets Value".......................................3 1.17 "Closing Statement"..............................................3 1.18 "Code"...........................................................3 1.19 "Confidentiality Agreement"......................................3 1.20 "Contracts"......................................................3 1.21 "Dispute Notice".................................................3 1.22 "Encumbrances"...................................................3 1.23 "Environmental Laws".............................................3 1.24 "Equipment Leases"...............................................3 1.25 "ERISA"..........................................................3 1.26 "Excluded Assets"................................................3 1.27 "Excluded Liabilities"...........................................3 1.28 "Facility".......................................................3 1.29 "GAAP"...........................................................3 1.30 "Governmental Contracts".........................................4 1.31 "Governmental Entity"............................................4 1.32 "Handling" or "Handled"..........................................4 1.33 "Hazardous Materials"............................................4 1.34 "Indemnifiable Losses"...........................................4 1.35 Intentionally Omitted............................................4 1.36 Intentionally Omitted............................................4 1.37 "Initial Purchase Price".........................................4 1.38 "Intangibles"....................................................4 1.39 "Inventory"......................................................4 1.40 "Key Employees"..................................................4 1.41 "Knowledge" or "Known"...........................................4 i TABLE OF CONTENTS (CONTINUED) PAGE ---- 1.42 "Laws or Decrees"................................................4 1.43 "Liability"......................................................4 1.44 "Losses".........................................................5 1.45 "Material Adverse Change"........................................5 1.46 "Material Adverse Effect"........................................5 1.47 "Net Assets".....................................................5 1.48 "Permits"........................................................5 1.49 "Permitted Encumbrances".........................................5 1.50 "Person".........................................................5 1.51 "Prepaid Expenses"...............................................5 1.52 "Proxy Statement"................................................5 1.53 "Released".......................................................5 1.54 "Required Seller Stockholder Vote"...............................5 1.55 "Seller Accounting Principles"...................................6 1.56 "Seller Board Recommendation"....................................6 1.57 "Seller SEC Documents"...........................................6 1.58 "Seller Stockholders Meeting"....................................6 1.59 "Seller Triggering Event"........................................6 1.60 "Software Programs"..............................................6 1.61 "Superior Proposal"..............................................6 1.62 "Tangible Assets"................................................7 1.63 "Tax"............................................................7 1.64 "Tax Return".....................................................7 1.65 "Transaction"....................................................7 1.66 "Trust"..........................................................7 1.67 "Trust Account"..................................................7 1.68 Intentionally Omitted............................................7 1.69 Intentionally Omitted............................................7 1.70 "Withholding Taxes"..............................................7 ARTICLE II PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES...........7 2.1 Purchase and Sale of Assets and Assumption of Assumed Liabilities....................................................7 2.2 Assets...........................................................8 2.3 Excluded Assets..................................................9 2.4 Assumption of Liabilities........................................9 2.5 Liabilities Not Assumed.........................................10 2.6 Purchase Price..................................................11 2.7 Purchase Price Adjustment.......................................11 2.8 Allocation......................................................12 ARTICLE III THE CLOSING....................................................13 3.1 The Closing.....................................................13 ii TABLE OF CONTENTS (CONTINUED) PAGE ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER........................13 4.1 Organization....................................................13 4.2 Subsidiaries....................................................13 4.3 Authorization...................................................13 4.4 No Conflicts; Consents..........................................14 4.5 Title to Assets.................................................14 4.6 Tangible Assets.................................................14 4.7 Inventory.......................................................14 4.8 Litigation and Claims...........................................15 4.9 Compliance with Laws and Regulations; Governmental Licenses, Etc...........................................................15 4.10 Financial Statements, SEC Reports...............................15 4.11 Absence of Certain Changes or Events............................17 4.12 Intellectual Property...........................................18 4.13 Facilities......................................................21 4.14 Contracts and Arrangements......................................21 4.15 Insurance.......................................................22 4.16 Brokers.........................................................22 4.17 Accounts Receivable.............................................22 4.18 Warranties and Service Payment Obligations......................23 4.19 Business Records................................................23 4.20 No Suspension or Debarment......................................23 4.21 Environmental Matters...........................................23 4.22 Taxes...........................................................24 4.23 Employee Benefit Plans..........................................25 4.24 Employee Matters................................................27 4.25 Insurance.......................................................28 4.26 Compliance With Laws............................................28 4.27 Accuracy of Material Facts; Copies of Materials.................28 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER......................28 5.1 Organization and Good Standing..................................29 5.2 Power, Authorization and Validity...............................29 5.3 No Violation of Existing Agreements.............................29 5.4 Compliance With Other Instruments and Laws......................29 5.5 Litigation......................................................30 5.6 Brokers.........................................................30 5.7 Disclosure......................................................30 ARTICLE VI PRE-CLOSING COVENANTS OF SELLER.................................30 6.1 Advice of Changes...............................................30 6.2 Conduct of Business.............................................30 6.3 Access to Information...........................................31 iii TABLE OF CONTENTS (CONTINUED) PAGE ---- 6.4 Obtaining Necessary Consents and Addition of Purchaser as Party to Certain Contracts...................................32 6.5 Satisfaction of Conditions Precedent............................32 6.6 No Solicitation.................................................32 6.7 Proxy Statement.................................................33 6.8 Stockholders' Meeting...........................................33 6.9 Bulk Sales......................................................35 6.10 Collection of Accounts Receivable...............................35 6.11 Establishment of Trust; Satisfaction by Seller of Liabilities...35 6.12 Notice to Vendors...............................................35 6.13 Distribution from Seller's 401(k) Plan..........................36 ARTICLE VII PRE-CLOSING COVENANTS OF PARENT AND PURCHASER..................36 7.1 Advice of Changes...............................................36 7.2 Satisfaction of Conditions Precedent............................36 ARTICLE VIII MUTUAL COVENANTS..............................................36 8.1 Confidentiality and Publicity...................................36 8.2 Regulatory Filings; Consents; Reasonable Efforts................36 8.3 Governmental Filings............................................37 8.4 Further Assurances..............................................37 8.5 Communications Plan.............................................37 ARTICLE IX CONDITIONS TO CLOSING...........................................37 9.1 Conditions to Each Party's Obligations..........................37 9.2 Conditions to Obligations of Seller.............................38 9.3 Conditions to Obligations of Parent and Purchaser...............39 ARTICLE X POST-CLOSING MATTERS.............................................41 10.1 Employees.......................................................41 10.2 Further Assurances of Seller....................................42 10.3 Further Assurances of Purchaser.................................42 10.4 Access to Business Records......................................42 10.5 Tax Liability...................................................43 10.6 Group Health Plans..............................................43 10.7 Financial Statement.............................................43 ARTICLE XI TERMINATION OF AGREEMENT........................................43 11.1 Termination.....................................................43 11.2 Effect of Termination...........................................45 11.3 Expenses; Termination Fees......................................45 iv TABLE OF CONTENTS (CONTINUED) PAGE ---- ARTICLE XII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION....46 12.1 Survival of Representations and Warranties......................46 12.2 Indemnification by Seller.......................................46 12.3 Escrow Fund.....................................................47 12.4 Escrow Period; Release From Escrow..............................47 12.5 Claims Upon Escrow Fund.........................................48 12.6 Objections to Claims............................................48 12.7 Resolution of Conflicts and Arbitration.........................48 12.8 Third-Party Claims..............................................49 ARTICLE XIII GENERAL.......................................................49 13.1 Governing Law; Jurisdiction; Venue..............................49 13.2 Assignment; Binding upon Successors and Assigns.................50 13.3 Severability....................................................50 13.4 Entire Agreement................................................50 13.5 Counterparts....................................................50 13.6 Other Remedies..................................................50 13.7 Amendment and Waivers...........................................50 13.8 Waiver..........................................................50 13.9 Notices.........................................................51 13.10 Construction and Interpretation of Agreement....................52 13.11 No Joint Venture................................................52 13.12 Absence of Third Party Beneficiary Rights.......................52 v ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of March 7, 2000, by and among TAB Products Co., a Delaware corporation ("Parent"), Bunt Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent ("Purchaser") on the one hand, and Docucon, Incorporated, a Delaware corporation ("Seller") on the other hand. RECITALS A. Seller is engaged in the business of providing electronic imaging services to convert documents to electronic formats for computer system access (excluding the Excluded Assets, as defined below, the "Business"); and Purchaser is interested in purchasing, and Seller is interested in selling, the Business; and B. The parties hereto desire that Seller sell, assign, transfer and convey to Purchaser, and that Purchaser purchase from Seller, the Assets (as defined below) in exchange for cash, cancellation of indebtedness and assumption of the Assumed Liabilities (as defined below), all according to the terms and subject to the conditions set forth in this Agreement (the "Transaction"). NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the meanings set forth or referenced below: 1.1 "ACCOUNTS PAYABLE" shall mean those amounts owing by Seller under Assumed Contracts or otherwise arising in connection with the Business listed on SCHEDULE 1.2 as such SCHEDULE 1.1 may be updated through Closing to include those accounts payable arising in the ordinary course of business in connection with the Business subject to the review and approval of Parent. 1.2 "ACCOUNTS RECEIVABLE" shall mean the accounts receivable and notes receivable of or amounts owing or payable to Seller in connection with or relating to the Business, including those set forth on SCHEDULE 1.2. 1.3 "ACQUISITION" shall mean any transaction or series of transactions involving: (a) any merger, consolidation, share exchange, business combination, issuance of securities, Acquisition of securities, tender offer, exchange offer or other similar transaction (i) in which the Seller is a constituent corporation, (ii) in which a Person or "group" (as defined in the Exchange Act and the rules promulgated thereunder) of Persons directly or indirectly acquires beneficial or record ownership of securities representing more than 20% of the outstanding securities of any class of voting securities of Seller, or (iii) in which Seller issues securities representing more than 20% of the outstanding securities of any class of voting securities of Seller; (b) any sale, lease, exchange, transfer, license, acquisition or disposition of any business or businesses or assets that constitute or account for 10% or more of the consolidated net revenues, net income or assets of Seller; or (c) any liquidation or dissolution of Seller. 1.4 "ACQUISITION PROPOSAL" shall mean any offer, proposal, inquiry or indication of interest (other than an offer, proposal, inquiry or indication of interest by Parent) contemplating or otherwise relating to any Acquisition. 1.5 "ADDITIONAL BUSINESS LIABILITIES" shall mean the liabilities listed on SCHEDULE 1.5, as such schedule shall be updated through Closing to include liabilities arising in the ordinary course of business in connection with the Business through the Closing Date subject to review and approval of Parent. 1.6 "AFFILIATE" shall mean a Person that directly or indirectly, through one or more intermediaries, is controlled by, or is under common control with another Person. 1.7 "ASSETS" shall have the meaning set forth in Section 2.2 hereof. 1.8 "ASSUMED CONTRACTS" shall mean only those Contracts listed on SCHEDULE 1.8, as such schedule may be updated through the Closing Date to include Contracts entered into in the ordinary course of business and subject to review and approval of Parent. 1.9 "ASSUMED LIABILITIES" shall have the meaning set forth in Section 2.4(a) hereof. 1.10 "BUSINESS" shall have the meaning set forth in Recital A. 1.11 "BUSINESS FINANCIAL STATEMENTS" shall have the meaning set forth in Section 4.10(a). 1.12 "BUSINESS RECORDS" shall mean any and all books, records, files, drawings, documentation, data or information that have been or now are used in or with respect to, in connection with or otherwise relating to the Business, the Assets or the Assumed Liabilities. 1.13 "CASH PAYMENT" shall have the meaning set forth in Section 2.6(a)hereof. 1.14 "CLOSING" shall have the meaning set forth in Section 3.1 hereof. 1.15 "CLOSING DATE" shall have the meaning set forth in Section 3.1 hereof. 2 1.16 "CLOSING NET ASSETS VALUE" shall have the meaning set forth in Section 2.7(b) hereof. 1.17 "CLOSING STATEMENT" shall have the meaning set forth in Section 2.7(a) hereof. 1.18 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.19 "CONFIDENTIALITY AGREEMENT" shall mean the mutual confidentiality agreement, dated November 3, 1999, by and between Parent and Seller. 1.20 "CONTRACTS" shall mean all those contracts and arrangements relating to the Business. 1.21 "DISPUTE NOTICE" shall have the meaning set forth in Section 2.7(a) hereof. 1.22 "ENCUMBRANCES" shall mean any and all restrictions on or conditions to transfer or assignment, claims, liabilities, liens, pledges, mortgages, restrictions, and encumbrances of any kind, whether accrued, absolute, contingent or otherwise affecting the Assets. 1.23 "ENVIRONMENTAL LAWS" shall mean any and all applicable civil, criminal, and administrative laws (including common law), statutes, codes, rules, regulations, ordinances, orders, decrees, judgments, permits, licenses, approvals, authorizations, and other requirements, directives, consents and obligations lawfully imposed by any Governmental Entity pertaining to the protection of the environment, protection of ecology, protection of public health, protection of worker health and safety, and/or the treatment, emission and/or discharge of gaseous, particulate and/or effluent pollutants, and/or the Handling of Hazardous Materials, and regulations, guidelines, and policies promulgated under any of the foregoing, all as amended from time to time. 1.24 "EQUIPMENT LEASES" shall mean leases related to any of the Tangible Assets. 1.25 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.26 "EXCLUDED ASSETS" shall mean the assets of Seller as of the Closing set forth in SCHEDULE 2.3. 1.27 "EXCLUDED LIABILITIES" shall have the meaning set forth in Section 2.5 hereof. 1.28 "FACILITY" shall mean any facility or real property, including without limitation any improvement, equipment, structure, building, or fixture, that is or was owned, used, operated, occupied, controlled, or rented, in connection with the Business. 1.29 "GAAP" shall mean generally accepted accounting principles, as in effect in the United States from time to time, as supplemented by Regulation S-X as promulgated by the United States Securities and Exchange Commission, as in effect from time to time, consistently applied. 3 1.30 "GOVERNMENTAL CONTRACTS" shall mean all contracts listed on SCHEDULE 1.8 under which Seller is required to, or may, provide services to agencies of the United States Government. 1.31 "GOVERNMENTAL ENTITY" shall mean any court, or any federal, state, municipal, provincial or other governmental authority, department, commission, board, service, agency, political subdivision or other instrumentality. 1.32 "HANDLING" or "HANDLED" shall mean used, generated, manufactured, processed, contained, transferred, recycled, stored, treated, loaded, transported, removed or Released. 1.33 "HAZARDOUS MATERIALS" shall mean any substance, waste, material, chemical, compound or mixture which is defined, listed, designated, described or characterized under Environmental Laws or under any rules, guidances, policies, or regulations promulgated thereunder, as hazardous, toxic, a contaminant, a pollutant or words of similar import, and includes without limitation any asbestos, polychlorinated biphenyls, petroleum (including crude oil or any fraction or distillate thereof), natural gas, natural gas liquids, and liquefied natural gas. 1.34 "INDEMNIFIABLE LOSSES" shall have the meaning set forth in Section 12.2(a) hereof. 1.35 Intentionally Omitted. 1.36 Intentionally Omitted. 1.37 "INITIAL PURCHASE PRICE" shall have the meaning set forth in Section 2.6 hereof. 1.38 "INTANGIBLES" shall mean guarantees, rights, warranties, defenses and claims, choses in action, causes of action, demands, rights of recovery, suits, covenants not to compete and other rights in favor of Seller relating to the Assets, the Assumed Liabilities or the Business. 1.39 "INVENTORY" shall mean the inventory, including supplies, consumables, parts (including retainable parts), materials, spares, training and testing units, wherever located, owned, primarily employed or held for use in the conduct of the Business, including the items listed on SCHEDULE 1.39. 1.40 "KEY EMPLOYEES" shall mean those persons listed on SCHEDULE 1.40 attached hereto. 1.41 "KNOWLEDGE" or "KNOWN" shall mean the current actual knowledge, after reasonable inquiry, of any of the officers, directors or employees of a Person. 1.42 "LAWS OR DECREES" shall mean all applicable federal, state, provincial and local laws, ordinances, rules, statutes, regulations and all orders, writs, injunctions, awards, judgments or decrees. 1.43 "LIABILITY" shall mean any direct or indirect liability, indebtedness, obligation, guarantee or endorsement, whether known or unknown, whether accrued or unaccrued, whether absolute or contingent, whether due or to become due, or whether liquidated or unliquidated. 4 1.44 "LOSSES" shall mean any loss, demand, action, cause of action, assessment, damage, Liability, cost or expense, including without limitation, interest, penalties and reasonable attorneys' and other professional fees and expenses incurred in the investigation, prosecution, defense or settlement thereof, but excluding special or consequential damages (including without limitation loss of profits or revenues) related to any such loss, demand, action, cause of action, assessment, damage, liability, cost or expense, other than special or consequential damages actually awarded to a third party and paid or payable to such third party by a party hereto. 1.45 "MATERIAL ADVERSE CHANGE" shall mean any material adverse change in the Business, operations, properties, Assets, Intellectual Property, financial condition, Assumed Liabilities, results of operations or prospects, whether or not occurring in the ordinary course of business. 1.46 "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on the business, operations, properties, the Assets, financial condition, the Assumed Liabilities, results of operations or prospects, whether or not occurring in the ordinary course of business. 1.47 "NET ASSETS" shall mean the book value of the Assets, net of depreciation amortization and reserves, as set forth on SCHEDULE 1.47, as such schedule may be updated through the Closing Date. 1.48 "PERMITS" shall mean any and all licenses, permits, authorizations, certificates, franchises, variances, waivers, consents and other approvals from any Governmental Entity relating to the Business, the Assets or the Assumed Liabilities. 1.49 "PERMITTED ENCUMBRANCES" shall mean (a) liens for current taxes which are not past due, (b) liens described in any schedule hereto which secure Assumed Liabilities, and (c) easements, covenants, rights-of-way or other similar restrictions and imperfections of title. 1.50 "PERSON" shall mean an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity. 1.51 "PREPAID EXPENSES" shall mean all prepaid expenses, advances, deposits, and rights to volume and other rebates due from suppliers, as well as performance bonds, including those listed on SCHEDULE 1.51. 1.52 "PROXY STATEMENT" shall mean the proxy statement/prospectus to be sent to Seller's stockholders in connection with the Seller Stockholder's Meeting. 1.53 "RELEASED" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment, or in a manner or with a consequence not authorized by Environmental Laws. 1.54 "REQUIRED SELLER STOCKHOLDER VOTE" shall have the meaning set forth in Section 4.3. 5 1.55 "SELLER ACCOUNTING PRINCIPLES" shall have the meaning set forth in Section 2.7(a) hereof. 1.56 "SELLER BOARD RECOMMENDATION" shall have the meaning set forth in Section 6.8(b). 1.57 "SELLER SEC DOCUMENTS" shall have the meaning set forth in Section 4.10(c). 1.58 "SELLER STOCKHOLDERS MEETING" shall have the meaning set forth in Section 6.8(a). 1.59 "SELLER TRIGGERING EVENT" -- A "Seller Triggering Event" shall be deemed to have occurred if: (i) the board of directors of Seller shall have failed to recommend that Seller's stockholders vote to approve this Agreement, or shall have withdrawn or modified in a manner adverse to Parent the Seller Board Recommendation (as defined below), or shall have taken any other action which is reasonably determined by Parent to suggest that the Board of Directors of Seller might not support the Acquisition or might not believe that the Acquisition is in the best interests of Seller's stockholders; (ii) Seller shall have failed to include in the Proxy Statement the Seller Board Recommendation or a statement to the effect that the board of directors of Seller has determined and believes that the Acquisition is in the best interests of Seller's stockholders; (iii) the board of directors of Seller fails to reaffirm the Seller Board Recommendation, or fails to reaffirm its determination that the Acquisition is in the best interests of Seller's stockholders, within five business days after Parent requests in writing that such recommendation or determination be reaffirmed; (iv) the board of directors of Seller shall have approved, endorsed or recommended any Acquisition Proposal; (v) Seller shall have entered into any letter of intent or similar document or any Contract relating to any Acquisition Proposal; (vi) Seller shall have failed to hold the Seller Stockholders' Meeting as promptly as practicable; (vii) a tender or exchange offer relating to securities of Seller shall have been commenced and Seller shall not have sent to its securityholders, within ten business days after the commencement of such tender or exchange offer, a statement disclosing that Seller recommends rejection of such tender or exchange offer; (viii) an Acquisition Proposal is publicly announced, and Seller fails to issue a press release announcing its opposition to such Acquisition Proposal within ten business days after such Acquisition Proposal is announced; or (ix) Seller or any Representative of Seller shall have violated any of the restrictions set forth in Section 4.3. 1.60 "SOFTWARE PROGRAMS" shall mean software programs, including any available (a) source code (in all forms), object code, program descriptions, databases, interfaces, modifications, updates, previous versions, and (b) documentation relating to the foregoing, and (c) disks, tapes and other tangible embodiments of the foregoing. 1.61 "SUPERIOR PROPOSAL" shall mean an unsolicited, bona fide written offer made by a third party to purchase all or substantially all of the outstanding common stock of Seller or all or substantially all of the Assets and Liabilities of the Business on terms that the board of directors of Seller determines, in its reasonable judgment, based upon a written opinion of an independent financial advisor of nationally recognized reputation, to be more favorable to Seller's stockholders than the terms of the Acquisition; PROVIDED, HOWEVER, that any such offer shall not be deemed to be a "Superior Proposal" if any financing required to consummate the transaction 6 contemplated by such offer is not committed and is not reasonably capable of being obtained by such third party. 1.62 "TANGIBLE ASSETS" shall mean all tangible assets, equipment and other fixed assets, including all computer hardware, service tools, aids, manuals, schematics, diagnostics, machinery and office furnishings, owned, primarily employed or held for use in the conduct of the Business, including the Tangible Assets listed on SCHEDULE 1.62. 1.63 "TAX" shall mean any federal, provincial, territorial, local, or foreign income, profits, gross receipts, capital gains taxes, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, business license, occupation, value added, goods and service, alternative or add-on minimum, estimated, or other tax or governmental charge of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not, relating to the Assets or the Business. 1.64 "TAX RETURN" shall mean any return, declaration, report, estimates, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof, covering or relating to the Assets or the Business. 1.65 "TRANSACTION" shall have the meaning set forth in Recital B. 1.66 "TRUST" shall have the meaning set forth in Section 6.11 hereof. 1.67 "TRUST ACCOUNT" shall have the meaning set forth in Section 6.11 hereof. 1.68 Intentionally Omitted. 1.69 Intentionally Omitted. 1.70 "WITHHOLDING TAXES" shall have the meaning set forth in Section 2.6(b). ARTICLE II PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES 2.1 PURCHASE AND SALE OF ASSETS AND ASSUMPTION OF ASSUMED LIABILITIES. (a) Upon the terms and subject to the conditions set forth in this Agreement, effective as of the Closing Date: (i) Seller agrees to sell, assign, transfer, convey and deliver to Parent or Purchaser, as designated by Parent at the Closing, and Parent or Purchaser, as the case may be, agrees to purchase from Seller, all of Seller's right, title and interest in and to the Assets, free and clear of all Encumbrances except Permitted Encumbrances; 7 (ii) Seller agrees to assign to Parent or Purchaser, as designated by Parent at the Closing, and Parent or Purchaser, as the case may be, agrees to assume from Seller, the Assumed Liabilities; and (iii) Seller agrees to assign to Parent or Purchaser, as designated by Parent at the Closing, and Parent or Purchaser, as the case may be, shall assume from Seller, all of Seller's rights and obligations under the Assumed Contracts, subject to the obtaining of all necessary consents by the other parties thereto. (b) In connection with the Transaction, on the Closing Date, Seller shall take (and shall cause its Affiliates to take) any and all actions that may be required, or reasonably requested by Purchaser, to transfer good and marketable title to all of the Assets free and clear of all Encumbrances (except Permitted Encumbrances) to Purchaser. Seller shall deliver possession of all of the Assets to Purchaser on the Closing Date at the location and by such means as are reasonably designated by Purchaser, and Seller shall further deliver to Purchaser proper assignments, bills of sale, conveyances and other instruments of sale and/or transfer in forms reasonably satisfactory to Purchaser in order to convey to Purchaser good and marketable title to all Assets, free and clear of all Encumbrances (except Permitted Encumbrances), as well as such other instruments of sale and/or transfer as counsel to Purchaser may reasonably request (whether at or after the Closing Date) to evidence and effect the Transaction contemplated herein. Seller agrees that, to the extent any Assets are owned or held by any Affiliate of Seller, Seller shall also cause good and marketable title to such Assets to be transferred and assigned to Purchaser free and clear of all Encumbrances (except Permitted Encumbrances) on the Closing Date. 2.2 ASSETS. As used in this Agreement, the term "Assets" means, collectively, all right, title and interest in and to all of the assets, properties, rights and claims owned or primarily employed or held for use in the conduct of the Business, including the following, but excluding the Excluded Assets (as defined below): (a) BUSINESS. The Business as a going concern, including without limitation, all of its goodwill; (b) INVENTORY. All Inventory; (c) ASSUMED CONTRACTS. All rights and benefits of Seller in existence on the Closing Date or arising from and after the Closing Date under the Assumed Contracts; (d) INTELLECTUAL PROPERTY. All Intellectual Property (as defined below) owned, primarily employed in or held for use in the Business; (e) TANGIBLE ASSETS. All Tangible Assets; (f) BUSINESS RECORDS. All Business Records; (g) PREPAID EXPENSES. All Prepaid Expenses; (h) PERMITS. All Permits to the extent transferable by Seller; 8 (i) ACCOUNTS RECEIVABLE. All Accounts Receivable; (j) INTANGIBLES. All Intangibles; (k) INVESTMENTS. All bank accounts and investments held for the benefit of the Business, including those bank accounts listed on SCHEDULE 2.2(K) and all securities held by Cross Securities; (l) CASH. All cash, cash equivalents, certificates of deposits, money market funds and other securities deposited or held at Bank One and/or with Dreyfus Money Market Fund, together with any such deposits in any other accounts for the benefit of the Business and all cash held as petty cash at the principal place of business of the Business, but excluding therefrom all cash (not to exceed Ten Thousand Dollars ($10,000.00)) deposited in an account held at Millennium Bank in Malvern, Pennsylvania; and (m) TELEPHONE AND FAX NUMBERS; WEBSITES. The telephone and fax numbers and websites set forth on SCHEDULE 2.2(M). 2.3 EXCLUDED ASSETS. Notwithstanding anything herein to the contrary, Seller shall retain all of its right, title and interest in and to, and neither Purchaser nor Parent shall acquire any interest in, the assets identified on SCHEDULE 2.3 (the "Excluded Assets"). 2.4 ASSUMPTION OF LIABILITIES. (a) Subject to and upon the terms and conditions of this Agreement, effective as of the Closing Date, Purchaser and Parent agree to assume from Seller and to thereafter pay, perform and/or otherwise discharge in a timely manner only the following Liabilities of Seller (the "Assumed Liabilities"): (i) Liabilities arising from and after the Closing Date under the Assumed Contracts OTHER THAN (A) Liabilities arising from any tort, infringement or violation of law by Seller that occurred (or arose from facts occurring) prior to the Closing Date, and (B) Liabilities arising from any performance, payment, breach or default of any Assumed Contracts to the extent occurring (or arising from facts and/or activities occurring) prior to the Closing Date; provided, however, the exception stated above under subparagraph 2.4(a)(i)(B) shall not apply to any Assumed Contract which is also a Government Contract, nor shall either exception stated under subparagraphs 2.4(a)(i)(A) or (B) apply to any items set forth in the attached Schedules; (ii) the Accounts Payable; and (iii) Additional Business Liabilities. (b) Each Government Contract listed on SCHEDULE 1.8 is assigned to Parent subject to approval by the United States Government of the novation of such Government Contract in favor of Parent in accordance with the Assignment of Claims Act. 9 (c) Nothing herein shall be deemed to deprive Parent, Purchaser or any Affiliate of Parent, or Purchaser, as applicable, of any defenses, set-offs or counterclaims which Seller may have had or which Parent, Purchaser, as applicable, or any Affiliate of Parent or Purchaser, as applicable, shall have (to the extent relating to the Assumed Liabilities) to any of the Assumed Liabilities (the "Defenses and Claims"). Effective as of the Closing, Seller agrees to assign, transfer and convey to Parent, Purchaser, as applicable, all Defenses and Claims and agrees to cooperate with Parent, Purchaser, as applicable, to maintain, secure, perfect and enforce such Defenses and Claims. 2.5 LIABILITIES NOT ASSUMED. Except as expressly set forth in Section 2.4 above, neither Parent nor Purchaser shall assume or become liable or obligated in any way, and Seller shall retain and remain solely liable for and obligated to discharge and indemnify and hold Parent or Purchaser, as applicable, harmless for, all debts, expenses, accounts payable, contracts, agreements, commitments, obligations, claims, suits and other liabilities of Seller of any nature whatsoever, whether or not related to the Business or the Assets, whether known or unknown, accrued or not accrued, fixed or contingent, current or arising hereafter, including, without limitation, any of the following (collectively referred to herein as "Excluded Liabilities"): (a) Any Liability arising out of or as a result of any legal or equitable action or judicial or administrative proceeding initiated at any time to the extent arising out of facts occurring prior to the Closing Date; (b) Any liability of the Seller for unpaid Taxes (with respect to the Business, the Assets, or Seller's employees or otherwise), any liability of the Seller for Taxes arising in connection with the consummation of the Acquisition (including any income Taxes) arising because the Seller is transferring the Assets or any liability of the Seller for the unpaid Taxes of any Person other than the Seller, or a transferee or successor of Seller, by contract or otherwise; (c) Any liabilities related to or arising from any breach or default by Seller or its Affiliates, whether before or after the Closing Date, of any Contract or related to or arising from any tort, infringement or violation of Laws or Decrees by Seller, in each case to the extent occurring or arising from facts occurring on or prior to the Closing Date; (d) Any liability of Seller or any of Seller's Affiliates incurred in connection with or under this Agreement (including, without limitation, with respect to any of Seller's or its Affiliates' representations, warranties, agreements, covenants or indemnities hereunder) relating to the execution or performance of this Agreement and the transactions contemplated herein; (e) Any Liability of Seller under any of Seller's Employee Plans with respect to any obligation of Seller to contribute or to make payments to or provide benefits on behalf of Seller's employees; provided, however, Purchaser shall assume "tail" liability on Seller's health insurance policy related to the Business to the extent the same has been accrued, and is shown, on the Business Financial Statements for the fiscal year ending December 31, 1999; (f) Any fees or expenses incurred by Seller or any of Seller's Affiliates or hereunder with respect to Seller's or any of its Affiliates' engagement of its counsel, or any investment banker, appraiser or accounting firm engaged to perform services hereunder; 10 (g) any outstanding obligations of Seller for borrowed money due and owing to banks or other lenders, other than obligations under the Assumed Contracts to the extent assumed pursuant to Section 2.4(a); or (h) any Liability of Seller not related to the Business, including the Liabilities set forth on SCHEDULE 2.5. 2.6 PURCHASE PRICE. (a) The aggregate consideration for the Business and the Assets shall be the assumption of the Assumed Liabilities pursuant to Section 2.4 and (i) the total dollar amount of the Net Assets as set forth on SCHEDULE 1.47 as delivered at Closing PLUS (ii) $1,900,000 (collectively, the dollar amounts determined pursuant to subsections (i) and (ii) are referred to as the "Initial Purchase Price"), subject to adjustment as provided in Section 2.7. At Closing the Initial Purchase Price, less any Withholding Taxes deducted pursuant to Section 2.6(b), shall be paid by (i) cancellation of all indebtedness, including principal and accrued interest, owing by Seller to Parent pursuant to one or more promissory notes issued by Seller to Parent from January 19, 2000, through the Closing (the "Notes") and (ii) the wire transfer to the Trust Account established by Seller pursuant to Section 6.11 of the Initial Purchase Price LESS the aggregate indebtedness cancelled pursuant to this Section 2.6(a) (the "Cash Payment"). (b) Purchaser may deduct from the Cash Payment any Taxes required to be withheld and paid by Purchaser for the account of Seller with respect to the consideration (the "Withholding Taxes"). Purchaser shall provide Seller with evidence of payment to the appropriate taxing authorities of the withheld Withholding Taxes. If for any reason the appropriate amount of Withholding Taxes is not withheld from the Cash Payment, such required Withholding Taxes not withheld shall remain Excluded Liabilities despite such nonwithholding. (c) Section 7 of the Convertible Secured Note issued by Seller to Parent dated January 19, 2000, in the principal amount of $200,000 (the "January 2000 Note") shall be void and have no further force and effect. 2.7 PURCHASE PRICE ADJUSTMENT. (a) CLOSING STATEMENT. As soon as possible, but in any event on or before the thirtieth (30th) day after Closing, Seller shall prepare and deliver to Parent a statement (and supporting schedules) (collectively the "Closing Statement") setting forth, in detail, calculation of the Closing Net Assets Value as of the Closing Date, which shall be certified by the Chief Accounting Officer of Seller as being prepared in accordance with the definitions herein and the accounting principles set forth on SCHEDULE 2.7(A), and to the extent a relevant principle is not set forth on SCHEDULE 2.7(A), then in accordance with those generally accepted accounting principles consistently applied with prior practice for earlier periods (collectively, the "Seller Accounting Principles"). For purposes of preparation of the Closing Statement, all calculations shall be made with precision, and lack of materiality shall not be a defense to the requirement of precise and proper determinations. Parent and its auditors or other representatives shall be provided an opportunity to review the procedures performed in connection with preparation of the Closing Statement. Immediately following delivery of the Closing Statement, Seller shall make 11 available, and shall cause its auditors to make available, all records, work papers and employees at Seller's expense reasonably requested by Parent in connection with its review of the Closing Statement. The Closing Statement, subject to any adjustments agreed to by Parent and Seller, shall be used for determining any post-Closing adjustments to the Initial Purchase Price, unless either party provides the other with a notice of dispute (a "Dispute Notice") within fifteen (15) days of receipt of the Closing Statement. If a Dispute Notice is given, Parent and Seller shall promptly meet in good faith to attempt to resolve any issues, and if any issues are unresolved within fifteen (15) days of the Dispute Notice, the unresolved issues shall be submitted to a "Big Five" auditing firm with no material existing relationship to Parent or Seller, which shall be selected by Parent and approved by Seller, which approval will not be unreasonably withheld or delayed. The independent auditor shall be directed to issue a final and binding decision as to the matters in dispute within thirty (30) days of its engagement. The fees and expenses of the independent auditor shall be divided equally between the parties. The Closing Statement in the form accepted by Parent and Seller, or determined by the independent auditor, shall be used to adjust the Initial Purchase Price in the manner set forth in Section 2.7(c) of this Agreement. Any payments provided for in Section 2.7(c) shall be made within five business days of the acceptance of the Closing Statement or the independent auditor's decision. The full force and effect of the representations and warranties contained herein shall not be diminished by the Closing Statement, the acceptance thereof by Parent or the decision of the independent auditor. (b) DEFINITIONS. "Closing Net Assets Value" shall mean the book value of the Assets, net of depreciation, amortization, and reserves, as of the Closing Date. (c) PURCHASE PRICE ADJUSTMENT. If the Closing Net Assets Value is less than the amount shown on SCHEDULE 1.47 delivered at Closing, Seller (through the Trust) shall pay Parent an amount equal to the difference. If the Closing Net Assets Value is greater than the amount shown on SCHEDULE 1.47 delivered at Closing, Parent shall pay Seller an amount equal to the difference. A payment to Seller shall be made by wire transfer to the Trust Account. A payment to Parent shall be made by wire transfer to an account designated in writing by Parent. 2.8 ALLOCATION. Seller and Parent shall cooperate in the preparation of a joint schedule (the "Allocation Schedule") allocating the purchase price (including the Assumed Liabilities) among the Assets. If Seller and Parent are able to agree upon the Allocation Schedule within 30 days following the Closing Date, Seller and Parent shall each file IRS Form 8594, and all federal, state, local and foreign tax returns, in accordance with the Allocation Schedule. If Parent and Seller are unable to complete the Allocation Schedule within 30 days following the Closing Date, each of Seller and Parent may file IRS Form 8594 and any federal, state, local and foreign tax returns, allocating the aggregate consideration (including the Assumed Liabilities) among the Assets in the manner each believes appropriate, provided such allocation is reasonable and in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. 12 ARTICLE III THE CLOSING 3.1 THE CLOSING. The consummation of the Acquisition will take place at a closing to be held at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California (the "Closing") on the date five (5) business days after all conditions (other than the respective delivery obligations of the parties) hereto have been satisfied or waived, or at such other time or date as may be agreed to by the parties to this Agreement (the "Closing Date"). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Except as otherwise set forth in the Seller Disclosure Schedule provided to each of Parent and Purchaser, a copy of which is attached hereto as SCHEDULE IV, the following representations and warranties are made, jointly and severally, by Seller as set forth below: 4.1 ORGANIZATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Seller is duly qualified or licensed to do business as a foreign corporation in each state of the United States in which it is required to be so qualified or licensed, except in states which the failure to qualify, in the aggregate, would not have a Material Adverse Effect on the Business. 4.2 SUBSIDIARIES. The Seller owns no equity interest, directly or indirectly, in any corporation, partnership, limited liability company, joint venture, business, trust or other entity, whether or not incorporated, which is engaged primarily in the Business. 4.3 AUTHORIZATION. This Agreement, the Escrow Agreement described in Section 12.3 below and all other agreements in connection with the Transaction to which Seller is or will be a party (such Escrow Agreement and any other agreements being referred to hereafter as the "Ancillary Agreements") have been, or upon their execution and delivery hereunder will have been, duly and validly executed and delivered by Seller and constitute, or will constitute, valid and binding agreements of Seller enforceable against Seller in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles or the exercise of judicial discretion in accordance with such principles. Seller has all requisite power and authority to execute and deliver this Agreement and, at the time of the Closing, will have all requisite power and authority to carry out the transactions contemplated in this Agreement and the Ancillary Agreements to which it is or will be a party. All requisite corporate action on the part of Seller has been taken to authorize the execution and delivery of this Agreement and the Ancillary Agreements to which Seller is or will be a party subject only to the approval of the Transaction and this Agreement by Seller's stockholders as contemplated by Section 6.8(a). The affirmative vote of the holders of a majority of the shares of common stock of Seller outstanding on the record date for the stockholders meeting called pursuant to Section 6.8(a) (the "Required Seller Stockholder Vote") is the only vote of the holders of any of Seller's capital stock necessary under Delaware Law to approve this Agreement and the 13 transactions contemplated hereby. The Board of Directors of Seller has unanimously (i) approved this Agreement and the Transaction, (ii) determined that in its opinion the Transaction and this Agreement is in the best interests of the stockholders of Seller and is on terms that are fair to such stockholders and (iii) recommended that the stockholders of Seller approve this Agreement and the Merger. 4.4 NO CONFLICTS; CONSENTS. The execution and the delivery of this Agreement and the Ancillary Agreements to which Seller is or will be a party by Seller, do not, and the consummation of the transactions contemplated herein and therein and compliance with the provisions hereof and thereof will not, conflict with, result in a breach of, constitute a default (with or without notice or lapse of time, or both) under or violation of, or result in the creation of any lien, charge or Encumbrance pursuant to, (a) any provision of the Certificate of Incorporation or Bylaws of Seller, (b) any Law or Decree or (c) any provision of any agreement, instrument or understanding to which Seller is a party or by which Seller or any of its properties or assets is bound or affected, nor will such actions give to any other Person or entity any interests or rights of any kind, including rights of termination, acceleration or cancellation, in or with respect to the Business, any of the Assets, the Assumed Liabilities or the Assumed Contracts. Except as set forth in the immediately preceding sentence, no consent of any third party or any Governmental Entity is required to be obtained on the part of Seller to permit the consummation of the transactions contemplated in this Agreement or the Ancillary Agreements to which Seller is or will be a party. 4.5 TITLE TO ASSETS. Seller has good and marketable title to all of the Assets, free and clear of all Encumbrances except for Permitted Encumbrances. At the Closing, Seller will sell, convey, assign, transfer and deliver to Parent and Purchaser good, valid and marketable title, and all Seller's respective right and interest, in and to all of the Assets, free and clear of any Encumbrances, except for Permitted Encumbrances. The Assets include all property, tangible and intangible, and all agreements and rights used in the Business. 4.6 TANGIBLE ASSETS. SCHEDULE 1.62 sets forth a complete and accurate list of the Tangible Assets used in the Business, which description identifies, to the extent available, original acquisition date and cost of such items. Except as set forth in SCHEDULE 1.62, each Tangible Asset is, and as of the Closing Date will be, in good operating condition and good repair, ordinary wear and tear excepted, will be free from all defect and damage, and are usable in the ordinary course of business. SCHEDULE 1.62 also sets forth by category the location of the Tangible Assets as of the Closing Date. 4.7 INVENTORY. The inventories shown on the Business Financial Statements or thereafter acquired by Seller were acquired and maintained in the ordinary course of business, are of good and merchantable quality, and consist of items of a quantity and quality usable or salable in the ordinary course of business. Since December 31, 1999, Seller has continued to replenish inventories in a normal and customary manner consistent with past practices. The values at which inventories are carried reflect the inventory valuation policy of Seller, which is consistent with its past practice and in accordance with generally accepted accounting principles applied on a consistent basis. Since December 31, 1999, adequate provision has been made on the books of Seller in the ordinary course of business consistent with past practices to provide for all slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values and 14 such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage. SCHEDULE 1.39 to this Agreement sets forth by category and amount the location of the Inventory as of the Closing Date. 4.8 LITIGATION AND CLAIMS. There are no claims, actions, suits, proceedings or, to Seller's Knowledge, investigations, pending before any Governmental Entity, or to Seller's Knowledge, threatened or reasonably expected, against Seller (a) relating to the Business, the Assets, the Assumed Liabilities or the Intellectual Property, (b) which questions or challenges the validity of this Agreement or any of the ANCILLARY Agreements to which either Seller is or will be a party, or any of the transactions contemplated herein or therein or (c) which might be reasonably expected to have a Material Adverse Effect on Seller. Seller is not a party to or subject to any decree, order or arbitration award (or agreement entered into in any administrative, judicial or arbitration proceeding with any Governmental Entity) with respect to or affecting the Business, or any of the Assets, the Assumed Liabilities or the Intellectual Property. 4.9 COMPLIANCE WITH LAWS AND REGULATIONS; GOVERNMENTAL LICENSES, ETC. Seller is in compliance with all applicable Laws or Decrees with respect to or affecting the Business or the Assets, the Assumed Liabilities or the Intellectual Property, including, without limitation, Laws or Decrees relating to anticompetitive or unfair pricing or trade practices, false advertising, consumer protection, export or import controls, government contracting, occupational health and safety, equal employment opportunities, fair employment practices, and sex, race, religious and age discrimination, except for such failure to comply as which would not result in a Material Adverse Effect on the Business, the Assets, the Assumed Liabilities or the Intellectual Property. Seller is not subject to any order, injunction or decree issued by any Governmental Entity which could impair the ability of Seller to consummate the transactions contemplated herein or which could adversely affect Purchaser's conduct of the Business or its use and enjoyment of the Assets or the Intellectual Property from and after the Closing Date. Seller possesses all Permits which are required in order for Seller to operate the Business as presently conducted, and is in compliance with all such Permits. SCHEDULE 4.9 to this Agreement contains a complete list of such Permits held by Seller relating to the Business, the date of expiration of each such Permit, and whether each such Permit is transferable. Neither the sale and transfer of the Assets pursuant to this Agreement, nor Purchaser's possession and use thereof from and after the Closing Date because of such sale and transfer will: (a) violate any law pertaining to bulk sales or transfers or to the effectiveness of bulk sales or transfers as against creditors of Seller or (b) result in the imposition of any liability upon Purchaser for appraisal rights or other liability owing to any shareholder of Seller. 4.10 FINANCIAL STATEMENTS, SEC REPORTS. (a) Seller has delivered to Purchaser copies of (i) Seller's unaudited balance sheets pertaining to the Business as of December 31, 1999 (the "Interim Balance Sheet") and statement of operations pertaining to the Business for the year then ended (collectively, the "Business Financial Statements"). The Business Financial Statements have been prepared in accordance with GAAP, and present fairly the financial position of the Business as of their respective dates and the results of operations and changes in financial position of the Business for the periods indicated, except that the unaudited Business Financial Statements do not contain all footnotes and other information required by GAAP. 15 (b) There is no debt, liability, or obligation of any nature, whether accrued, absolute, contingent, or otherwise, and whether due or to become due, that is not reflected or reserved against in the Business Financial Statements except for those (i) that have been incurred after December 31, 1999 or (ii) that are not required by GAAP to be included in a balance sheet or the notes thereto. All debts, liabilities, and obligations incurred by the Business after December 31, 1999 were incurred in the ordinary course of business. The Business Financial Statements in accordance with GAAP reflect all costs and expenses incurred in the operation of the Business. (c) Seller has made available to Parent or its counsel through EDGAR a true and complete copy of each statement, report, registration statement (with the prospectus in the form filed pursuant to Rule 424(b) of the Securities Act), definitive proxy statement, and other filing filed with the SEC by Seller since January 1, 1997, and, prior to the Closing, Seller will have made available to Parent or its counsel through EDGAR true and complete copies of any additional documents filed with the SEC by Seller prior to the Closing (collectively, the "Seller SEC Documents"). In addition, Seller has made available to Parent all exhibits to the Seller SEC Documents filed prior to the date hereof which are (i) requested by Parent and (ii) are not available in complete form through EDGAR ("Requested Confidential Exhibits") and will promptly make available to Parent all Requested Confidential Exhibits to any additional Seller SEC Documents filed prior to the Closing. All documents required to be filed as exhibits to the Parent SEC Documents have been so filed, and all material contracts so filed as exhibits are in full force and effect, except those which have expired in accordance with their terms, and neither Seller nor any of its subsidiaries is in default thereunder. As of their respective filing dates, none of the Seller SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Seller SEC Document prior to the date hereof. The financial statements of Seller, including the notes thereto, included in the Seller SEC Documents (the "Seller Financial Statements"), complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The Seller Financial Statements fairly present the consolidated financial condition and operating results of Seller and its subsidiaries at the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal, recurring year-end adjustments). There has been no change in Seller accounting policies except as described in the notes to the Seller Financial Statements. 4.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1999, Seller has conducted the Business in the ordinary and usual course consistent with past practices and, without limiting the generality of the foregoing, has not: (a) suffered any Material Adverse Change in the results of operation, financial condition, Assets, Intellectual Property, business, operation or prospects relating to the Business; 16 (b) suffered any damage, destruction or loss, whether or not covered by insurance, having a Material Adverse Change in the Assets, the Intellectual Property or the Business; (c) effected any acquisition, sale or transfer of any material asset of Seller or any of its subsidiaries other than in the ordinary course of business and consistent with past practice; (d) effected any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Seller or any revaluation by Seller of any of its or any of its subsidiaries' assets; (e) declared, set aside, or paid a dividend or other distribution with respect to the shares of Seller, or directly or indirectly redeemed, purchased or otherwise acquired any of its shares of capital stock; (f) entered into any Contract, other than in the ordinary course of business, or amended or terminated, or defaulted under, any material Contract to which Seller is a party or by which it is bound; (g) granted any increase in the compensation payable or to become payable by Seller to any Seller employees employed in the Business, except those occurring in the ordinary course of business, consistent with Seller's past practices; (h) granted any exclusive license with respect to the Intellectual Property; (i) incurred any liabilities relating to the Business except in the ordinary course of business and consistent with past practice; (j) permitted or allowed any of the Assets to be subjected to any Encumbrance of any kind (other than a Permitted Encumbrance) other than in the ordinary course of business consistent with past practices; (k) waived any rights under or terminated any Contract relating to the Business; (l) with respect to the Business or the Assumed Contracts, incurred any contingent liability as guarantor or otherwise with respect to the obligations of others, other than in the ordinary course, consistent with past practices; or (m) agreed to take any action described in this Section 4.11 or outside of its ordinary course of business or which would constitute a breach of any of the representations or warranties of Seller contained in this Agreement. 4.12 INTELLECTUAL PROPERTY. (a) For purposes of this Agreement, "Intellectual Property" means: 17 (i) all issued patents, reissued or reexamined patents, revivals of patents, utility models, certificates of invention, registrations of patents and extensions thereof, regardless of country or formal name (collectively, "Issued Patents"); (ii) all published or unpublished nonprovisional and provisional patent applications, reexamination proceedings, invention disclosures and records of invention (collectively "Patent Applications" and, with the Issued Patents, the "Patents"); (iii) all copyrights, copyrightable works, semiconductor topography and mask work rights, including all rights of authorship, use, publication, reproduction, distribution, performance transformation, moral rights and rights of ownership of copyrightable works, semiconductor topography works and mask works, and all rights to register and obtain renewals and extensions of registrations, together with all other interests accruing by reason of international copyright, semiconductor topography and mask work conventions (collectively, "Copyrights"); (iv) trademarks, registered trademarks, applications for registration of trademarks, service marks, registered service marks, applications for registration of service marks, trade names, registered trade names and applications for registrations of trade names (collectively, "Trademarks"); (v) all technology, ideas, inventions, designs, proprietary information, manufacturing and operating specifications, know-how, formulae, trade secrets, technical data, computer programs, hardware, software and processes; and (vi) all other intangible assets, properties and rights (whether or not appropriate steps have been taken to protect, under applicable law, such other intangible assets, properties or rights). (b) Seller and its subsidiaries own and have good and marketable title to, or possess legally enforceable rights to use, all Intellectual Property used or currently proposed to be used in the Business as currently conducted or as proposed to be conducted by Seller and its subsidiaries. The Intellectual Property owned by and licensed to Seller collectively constitute all of the Intellectual Property necessary to enable Seller to conduct the Business as the Business is currently being conducted. No current or former officer, director, stockholder, employee, consultant or independent contractor of Seller has any right, claim or interest in or with respect to any Intellectual Property used in the Business. There is no unauthorized use, disclosure or misappropriation of any Intellectual Property used in the Business by any employee or, to Seller's knowledge, former employee of Seller or any of its subsidiaries or, to Seller's knowledge, by any other third party. There are no royalties, fees or other payments payable by Seller to any Person under any written or oral contract or understanding by reason of the ownership, use, sale or disposition of Intellectual Property used in the Business. (c) With respect to each item of Intellectual Property used in the Business (except "off the shelf" or other software widely available through regular commercial distribution channels at a cost not exceeding $10,000 on standard terms and conditions, as modified for Seller's operations) ("Seller Intellectual Property") SCHEDULE 4.12 lists all Patents 18 and Patent Applications and all registered Trademarks, and trademark applications and all registered Copyrights, including the jurisdictions in which each such Intellectual Property has been issued or registered or in which any such application for such issuance and registration has been filed. (d) SCHEDULE 4.12 contains an accurate list as of the date of this Agreement of all licenses, sublicenses and other agreements to which Seller or its Subsidiaries are a party and pursuant to which Seller or its Subsidiaries are authorized to use any Intellectual Property owned by any third party, excluding "off the shelf" or other software at a cost not exceeding $10,000 and widely available through regular commercial distribution channels on standard terms and conditions ("Third Party Intellectual Property"). (e) There is no unauthorized use, disclosure, infringement or misappropriation of any Seller Intellectual Property, including any Third Party Intellectual Property by any third party, including any employee or former employee of Seller or any of its subsidiaries. Neither Seller nor any of its subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property. There are no royalties, fees or other payments payable by Seller to any Person by reason of the ownership, use, sale or disposition of Intellectual Property. (f) Seller is not in breach of any license, sublicense or other agreement relating to the Seller Intellectual Property or Third Party Intellectual Property. Neither the execution, delivery or performance of this Agreement or any ancillary agreement contemplated hereby nor the consummation of the Acquisition will contravene, conflict with or result in an infringement on the Parent's right to own or use any Seller Intellectual Property, including any Third Party Intellectual Property. (g) All Patents, registered Trademarks, registered service marks and registered Copyrights held by Seller are valid and subsisting. All maintenance and annual fees have been fully paid and all fees paid during prosecution and after issuance of any patent comprising or relating to such item have been paid in the correct entity status amounts. Seller is not infringing, misappropriating or making unlawful use of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of any proprietary asset owned or used by any third party. There is no proceeding pending or threatened to the knowledge of Seller, nor has any claim or demand been made, which challenges the legality, validity, enforceability or ownership of any item of Seller Intellectual Property or Third Party Intellectual Property or alleges a claim of infringement of any Patents, Trademarks, service marks, Copyrights or violation of any trade secret or other proprietary right of any third party. Seller has not brought a proceeding alleging infringement of Seller Intellectual Property or breach of any license or agreement involving Intellectual Property against any third party. (h) All current and former officers of Seller have executed and delivered to Seller an agreement (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to Seller of any Intellectual Property arising from services performed for Seller by such persons, the form of which has been supplied to Parent. All current and former consultants and independent 19 contractors to Seller involved in the development, modification, marketing and servicing of Seller Intellectual Property have executed and delivered to Seller an agreement in the form provided to Parent or its counsel (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to Seller of any Intellectual Property arising from services performed for Seller by such persons. It has at all times been Seller's practice and procedure to require all employees of Seller to execute and deliver to Seller an agreement (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to Seller of any Intellectual Property arising from services performed for Seller by such employees, the form of which has been provided to Parent; and substantially all of Seller's current and former employees, including all current and former software engineers, each of which have had access to the Seller's computer software, have executed such agreements, although some current or former employees other than those related to software may not have done so. To Seller's knowledge, no current or former officer, employee or independent contractor of Seller is in violation of any term of any agreement regarding the protection of proprietary information and the assignment to Seller of any Intellectual Property arising from services performed for Seller by such persons or any employment contract or any other contract or agreement relating to the relationship of any such officer, employee or independent contractor with Seller. No current or former officer, director, stockholder, employee, consultant or independent contractor has any right, claim or interest in or with respect to any Seller Intellectual Property. (i) Seller has taken all commercially reasonable and customary measures and precautions necessary to protect and maintain the confidentiality of all Seller Intellectual Property (except such Seller Intellectual Property whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the full value of all Intellectual Property it owns or uses. All use, disclosure or appropriation of Intellectual Property not otherwise protected by patents, patent applications or copyright ("Confidential Information") owned by Seller by or to a third party has been pursuant to the terms of a written agreement between Seller and such third party. All use, disclosure or appropriation of Confidential Information not owned by Seller has been pursuant to the terms of a written agreement between Seller and the owner of such Confidential Information, or is otherwise lawful. (j) No product liability claims have been communicated in writing to or, to Seller's knowledge, threatened against Seller. (k) A complete list of Seller's proprietary software ("Seller Software"), together with a brief description of each, is set forth in SCHEDULE 4.12. Seller Software conforms in all material respects with any specification, documentation, performance standard, representation or statement provided with respect thereto by or on behalf of Seller. (l) Seller is not subject to any proceeding or outstanding decree, order, judgment, or stipulation restricting in any manner the use, transfer, or licensing thereof by Seller, or which may affect the validity, use or enforceability of such Seller Intellectual Property. Seller is not subject to any agreement which restricts in any material respect the use, transfer, or licensing by Seller of the Seller Intellectual Property. 20 (m) Seller is not aware that any of Seller's Information Technology (as defined below) is not Year 2000 Compliant or will cause an interruption in the ongoing operations of Seller's business on or after January 1, 2000. For purposes of the foregoing, the term "Information Technology" shall mean and include all material software, hardware, firmware, telecommunications systems, network systems, embedded systems and other systems, components and/or services (other than general utility services including gas, electric, telephone and postal) that are owned or used by Seller in the conduct of the Business. Seller has implemented a comprehensive, detailed program to analyze and address the risk that the computer hardware and software used by them may be unable to recognize and properly execute date-sensitive functions involving certain dates prior to and any dates after December 31, 1999 (the "Year 2000 Problem"), and reasonably believe that such risk will be remedied on a timely basis and will not have a Material Adverse Effect and Seller believes, after due inquiry, that each suppler, vendor, customer or financial service organization used or serviced by Seller has remedied or will remedy on a timely basis the Year 2000 Problem, except to the extent that a failure to remedy by any such suppler, vendor, customer or financial service organization would not have a Material Adverse Effect. 4.13 FACILITIES. SCHEDULE 4.13 provides an accurate and complete list of the current Facilities. Seller has provided Purchaser true and complete copies of (i) the leases for any rented Facilities, and (ii) any acquisition agreements, loan documents, and title reports applicable to any currently owned Facilities or applicable to any Facilities which Seller has contracted to acquire in connection with the Business. Seller enjoys peaceful and undisturbed possession of all current Facilities. Except as set forth on SCHEDULE 4.13, there exists no event of default by Seller (nor any event which with notice or lapse of time would constitute an event of default by Seller) with respect to any agreement or instrument with regard to any current Facility, and to Seller's Knowledge there exists no event of default by any of the other parties thereto (nor any event which with notice or lapse of time would constitute an event of default by any of the other parties thereto) with respect to any such agreement or instrument, except where such default would not have a Material Adverse Effect on the Business. Except as set forth on SCHEDULE 4.13, all such agreements and instruments are in full force and effect. 4.14 CONTRACTS AND ARRANGEMENTS. (a) SCHEDULE 4.14 hereto contains a true and accurate list of all Contracts, pursuant to which Seller enjoys any right or benefit or undertakes any obligation related to the Business, the Intellectual Property, the Assumed Liabilities or the Assets. Except for the Contracts, Seller is not a party to or otherwise bound by the terms of any contract, agreement or obligation, written or oral, affecting the Business, the Assets, Intellectual Property, or the Assumed Liabilities. Each of the Assumed Contracts is (assuming due authorization and execution by the other party or parties hereto) valid, binding and in full force and effect and enforceable by Seller in accordance with its terms, except as enforcement may be limited by general equitable principles and the exercise of judicial discretion in accordance with such principles. Neither Seller, nor, to Seller's Knowledge, any other party, is in default under any Assumed Contract, and there are no existing disputes or claims of default relating thereto, or any facts or conditions Known to Seller which, if continued, will result in a default or claim of default thereunder, which default could reasonably be expected to have a Material Adverse Effect on the Business, the Assets, the Assumed Contracts or the Assumed Liabilities. No 21 Assumed Contract contains any liquidated damages, penalty or similar provision. There is no Assumed Contract which Seller can reasonably foresee will result in any material loss upon the performance thereof by Purchaser from and after the Closing Date. To Seller's Knowledge, no party to any Contract has notified Seller that it intends to cancel, withdraw, modify or amend such Contract. Except as set forth on SCHEDULE 4.14 attached hereto, no consents are necessary for the effective assignment to and assumption by Parent or Purchaser of any of the Assumed Contracts. (b) To Seller's Knowledge, there are no unresolved claims between Seller and any of the principal licensors, vendors, suppliers, distributors, representatives or customers of the Business, and no event which could reasonably be expected to result in (i) a material breach of an Assumed Contract, (ii) a request for a material accommodation or concession in connection with the sale of services, distributors, representatives or customers or (iii) a significant impairment of the relationships of any Business with its principal licensors, vendors, suppliers, distributors, representatives, or customers, and none of such persons has advised Seller of its intention to cease doing business with Seller or with Parent or the Purchaser following the Closing Date, whether as a result of the transactions contemplated hereunder or otherwise. (c) Each accepted and unfilled order entered into by Seller for the provisions of services by Seller, and each agreement, contract or commitment for the purchase of supplies, included in the Contracts was made in the ordinary course of the Business. 4.15 INSURANCE. Seller maintains insurance policies relating to the Business providing coverage described on SCHEDULE 4.15. All of such policies are in full force and effect, and Seller is not in default with respect to any material provision of any of such policies. Seller has not received notice from any issuer of any such policies of its intention to cancel, terminate or refuse to renew any policy issued by it. 4.16 BROKERS. There is no broker, finder, investment banker or other person, other than Oak Tree Resources, Inc., whose fees are to be paid by Seller, who would have any valid claim against any of the parties to this Agreement for a commission or brokerage fee or payment in connection with this Agreement or the transactions contemplated herein as a result of any agreement of, or action taken by, Seller. 4.17 ACCOUNTS RECEIVABLE. Subject to any reserves set forth in the Business Financial Statements, the accounts receivable shown on the Business Financial Statements are valid and genuine, have arisen solely out of bona fide sales and deliveries of goods, performance of services, and other business transactions in the ordinary course of business consistent with past practices in each case with persons other than Affiliates, are not subject to any prior assignment, lien or security interest and are not subject to valid defenses, set-offs or counter claims. The accounts receivable will be collected in accordance with their terms at their recorded amounts, subject only to the reserve for doubtful accounts on the Business Financial Statements. 4.18 WARRANTIES AND SERVICE PAYMENT OBLIGATIONS. SCHEDULE 4.18 sets forth (a) copies of all forms of warranties or warranty agreements or obligations now in effect with respect to any of the services provided, or to be provided, by Seller in connection therewith, (b) a complete and accurate list of all agreements pursuant to which Seller is obligated to provide service or support 22 services, (c) a complete and accurate list of all other agreements of Seller which are either included in the Assumed Contracts or relate to any services, and pursuant to which Seller is obligated to make any other accommodation for such purchaser or distributor, including, without limitation, any warranties and (d) an analysis of the warranty reserve included in the Business Financial Statements for the year ended December 31, 1999. All services have been, or are being, made pursuant to the form of warranty set forth in SCHEDULE 4.18, or the terms of a Contract set forth in SCHEDULE 4.18 and no other warranty, express or implied, has been made or extended by Seller with respect to the services provided by Seller in relation thereto. 4.19 BUSINESS RECORDS. The Business Records to be delivered to Purchaser are complete, true and accurate in all material respects and accurately reflect all actions and transactions referred to in such Business Records. 4.20 NO SUSPENSION OR DEBARMENT. Neither Seller nor any of its Affiliates are presently debared, suspended, proposed for debarment, or declared ineligible for the award of contracts by any Federal agency; have,within the three year preceding the Closing, been convicted of or had a civil judgment rendered against any of them for commission of a fraud or criminal offense in connection with obtaining, attempting to obtain or performing a public (Federal, state or local) contract or subcontract, violation of Federal or state antitrust statutes relating to the submission of offers or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements or receiving stolen property; are presently indicted for or otherwise criminally or civilly charged by a Governmental Entity with, commission of any of the above offenses; and, within the three years preceding the Closing, have had one or more contracts terminated for default by any Federal agency. 4.21 ENVIRONMENTAL MATTERS. Seller has obtained all Permits required under Environmental Laws to conduct the Business (collectively, "Licenses"), and all such Licenses are current, valid and in good standing, and copies of all such Licenses have been provided to Purchaser. The Business is conducted and at all times has been conducted in compliance with Environmental Laws and Licenses, including without limitation, as may be applicable to the ownership, use, occupation, control, possession and rental of all prior and current Facilities. No civil, criminal or administrative actions, proceedings, directives, inquiries, or investigations are pending, or to the Knowledge of Seller threatened, pertaining to Seller or the Business and brought by any Governmental Entity or Person, regarding any alleged non-compliance by the Business or any Facility with Environmental Laws, or regarding any alleged Release of Hazardous Materials. No Governmental Entity or Person has, currently or in the past, alleged or, to the Knowledge of Seller threatened to allege, against Seller, an affiliate of Seller, or the Business, in connection with the Business or any Facility, that Hazardous Materials have been Handled improperly or in violation of Environmental Laws or in such a manner as to harm or threaten to harm human health, ecology, or the environment. Seller has not received any notice with respect to any Facility, and is not aware of the issuance, at any time, to any Person of any notice with respect to any Facility, alleging that (i) a Release of Hazardous Materials occurred, or is suspected of having occurred, at any time at a Facility, or (ii) a Facility has been listed or is proposed to be listed on any list, registry or inventory maintained by any Governmental Entity of sites where a Release of Hazardous Materials has occurred or is suspected of having occurred. No Release of Hazardous Materials has occurred at any time in connection with the Business or during any period that Seller owned, used, occupied, controlled, or rented any current or prior 23 Facility. There are no conditions existing at any Facility in connection with the Business which require any remedial action, removal action, corrective action, closure action, or other environmental response action under Environmental Laws or Licenses. There are not present at any current Facility, nor to Seller's Knowledge were there present at any prior Facility, nor are there any plans to install at any current Facility, any aboveground or underground storage tanks, vaults, containments, impoundments or other aboveground or underground structures or equipment, that are used, will be used, or were used, or that are or were intended to be used, for Handling Hazardous Materials. No equipment or improvements used in the Business presently require, or to the Knowledge of Seller may require, any expenditure of funds or any removal, closure, updating, modification or replacement to comply with Environmental Laws and Licenses. To the Knowledge of Seller, no Release of Hazardous Materials has migrated to or from, or threatens to migrate to or from, the soil, surface water, or groundwater of any current Facility. With respect to the Business and to the Knowledge of Seller, there are no conditions existing at any site to which Seller has sent Hazardous Materials at any time for transportation, transfer, recycling, treatment, storage, or disposal, which require any investigation, remedial action, removal action, corrective action, or other environmental response action pursuant to Environmental Laws. No employee of Seller and no other Person currently asserts, has asserted or, to the Knowledge of Seller threatened or has threatened to assert, a demand or claim pertaining to Seller, an affiliate of Seller, or the Business, based upon or relating to alleged damage to health caused by any Hazardous Material allegedly used in connection with the Business or which was allegedly present at any Facility. 4.22 TAXES. As used in this Agreement, the terms "Tax" and, collectively, "Taxes" mean any and all federal, state and local taxes of any country, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, stamp transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (a) Seller has prepared and timely filed all returns, estimates, information statements and reports (and extensions of time for filing any of the foregoing) required to be filed with any taxing authority ("Returns") relating to any and all Taxes concerning or attributable to Seller or its operations with respect to Taxes for any period ending on or before the Closing Date and such Returns are true and correct in all material respects and have been completed in accordance with applicable law. (b) Seller, as of the Closing Date: (i) will have paid all Taxes shown to be payable on such Returns covered by Section 4.22(a) and (ii) will have withheld with respect to its employees all Taxes required to be withheld. (c) There is no Tax deficiency outstanding or assessed or, to Seller's knowledge, proposed against Seller that is not reflected as a liability on the Seller Balance Sheet nor has Seller executed any agreements or waivers extending any statute of limitations on or extending the period for the assessment or collection of any Tax. 24 (d) Seller is not a party to any tax-sharing agreement or similar arrangement with any other party, and Seller has not assumed to pay any Tax obligations of, or with respect to any transaction relating to, any other person or agreed to indemnify any other person with respect to any Tax. (e) Seller's Returns have never been audited by a government or taxing authority, nor is any such audit in process or pending, and Seller has not been notified of any request for such an audit or other examination. (f) Seller has never been a member of an affiliated group of corporations filing a consolidated federal income tax return. (g) Seller has made available to Parent copies of all Returns filed for all periods since December 31, 1996. 4.23 EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 4.23 contains a complete and accurate list of each plan, program, policy, practice, contract, agreement or other arrangement providing for employment, compensation, retirement, deferred compensation, loans, severance, separation, relocation, repatriation, expatriation, visas, work permits, termination pay, performance awards, bonus, incentive, stock option, stock purchase, stock bonus, phantom stock, stock appreciation right, supplemental retirement, fringe benefits, cafeteria benefits, or other benefits, whether written or unwritten, including, without limitation, each "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") which is or has been sponsored, maintained, contributed to, or required to be contributed to by Seller, any subsidiary of Seller and, with respect to any such plans which are subject to Code Section 401(a), any trade or business (whether or not incorporated) which is or, at any relevant time, was treated as a single employer with Seller within the meaning of Section 414(b), (c),(m) or (o) of the Code (an "ERISA Affiliate"), for the benefit of any person who performs or who has performed services for Seller or with respect to which Seller, any subsidiary, or ERISA Affiliate has or may have any liability (including, without limitation, contingent liability) or obligation (collectively, the "Seller Employee Plans"). SCHEDULE 4.23 separately lists each Seller Employee Plan that has been adopted or maintained by Seller, whether formally or informally, for the benefit of employees outside the United States ("Seller International Employee Plans"). (b) DOCUMENTS Seller has furnished to Parent true and complete copies of documents embodying each of the Seller Employee Plans and related plan documents, including (without limitation) trust documents, group annuity contracts, plan amendments, insurance policies or contracts, participant agreements, employee booklets, administrative service agreements, summary plan descriptions, compliance and nondiscrimination tests for the last three plan years, standard COBRA forms and related notices, registration statements and prospectuses, and, to the extent still in its possession, any material employee communications relating thereto. With respect to each Seller Employee Plan which is subject to ERISA reporting requirements, Seller has provided copies of the Form 5500 reports filed for the last five plan years. Seller has furnished Parent with the most recent Internal Revenue Service determination or opinion letter issued with respect to each such Seller Employee Plan, and nothing has occurred since the 25 issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Seller Employee Plan subject to Code Section 401(a). (c) COMPLIANCE (i) Each Seller Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect, and Seller and each subsidiary or ERISA Affiliate have performed all material obligations required to be performed by them under, are not in material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Seller Employee Plans; (ii) any Seller Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code which are currently effective, or has time remaining to apply under applicable Treasury Regulations or Internal Revenue Service pronouncements for a determination or opinion letter and to make any amendments necessary to obtain a favorable determination or opinion letter; (iii) none of the Seller Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (iv) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Seller Employee Plan; (v) none of Seller, any subsidiary or any ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any Seller Employee Plan; (vi) all contributions required to be made by Seller, any subsidiary or ERISA Affiliate to any Seller Employee Plan have been paid or accrued; (vii) with respect to each Seller Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 or ERISA has occurred; (viii) each Seller Employee Plan subject to ERISA has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Seller Employee Plan; (ix) no suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of Seller is threatened, against or with respect to any such Seller Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor; and (x) there has been no amendment to, written interpretation or announcement by Seller, any subsidiary or ERISA Affiliate which would materially increase the expense of maintaining any Seller Employee Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in Seller's financial statements. (d) NO TITLE IV OR MULTIEMPLOYER PLAN None of Seller, any subsidiary or any ERISA Affiliate has ever maintained, established, sponsored, participated in, contributed to, or is obligated to contribute to, or otherwise incurred any obligation or liability (including, without limitation, any contingent liability) under any "multiemployer plan" (as defined in Section 3(37) of ERISA) or to any "pension plan" (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA or Section 412 of the Code. None of Seller, any subsidiary or any ERISA Affiliate has any actual or potential withdrawal liability (including, without limitation, any contingent liability) for any complete or partial withdrawal (as defined in Sections 4203 and 4205 of ERISA) from any multiemployer plan. 26 (e) COBRA, FMLA, HIPAA, CANCER RIGHTS With respect to each Seller Employee Plan, Seller and each of its United States subsidiaries have complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the regulations thereunder or any state law governing health care coverage extension or continuation; (ii) the applicable requirements of the Family and Medical Leave Act of 1993 and the regulations thereunder; (iii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"); and (iv) the applicable requirements of the Cancer Rights Act of 1998, except to the extent that such failure to comply would not in the aggregate have a Material Adverse Effect. Seller has no material unsatisfied obligations to any employees, former employees, or qualified beneficiaries pursuant to COBRA, HIPAA, or any state law governing health care coverage extension or continuation. (f) EFFECT OF ACQUISITION The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of Seller, any subsidiary or any ERISA Affiliate to severance benefits or any other payment (including, without limitation, unemployment compensation, golden parachute, bonus or benefits under any Seller Employee Plan), except as expressly provided in this Agreement or (ii) accelerate the time of payment or vesting of any such benefits or increase the amount of compensation due any such employee or service provider. No benefit payable or which may become payable by Seller pursuant to any Seller Employee Plan or as a result of or arising under this Agreement shall constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise Tax under Section 4999 of the Code or the deduction for which would be disallowed by reason of Section 280G of the Code. Each Seller Employee Plan can be amended, terminated or otherwise discontinued after the Closing in accordance with its terms, without material liability to Parent and/or Purchaser, as the case may be, or Seller (other than ordinary administration expenses typically incurred in a termination event). (g) SALE OF SUBSTANTIALLY ALL ASSETS. Seller agrees that the consummation of the transactions contemplated by this Agreement constitute, as provided in Code Section 401(k)(10)(A)(ii), a sale of substantially all the assets (within the meaning of Code Section 409(d)(2)) used by Seller in any trade or business. 4.24 EMPLOYEE MATTERS. Seller is in compliance with all currently applicable laws and regulations respecting terms and conditions of employment including, without limitation, applicant and employee background checking, immigration laws, discrimination laws, verification of employment eligibility, employee leave laws, classification of workers as employees and independent contractors, wage and hour laws, and occupational safety and health laws. There are no proceedings pending or, to Seller's knowledge, reasonably expected or threatened, between Seller, on the one hand, and any or all of its current or former employees, on the other hand, including, but not limited to, any claims for actual or alleged harassment or discrimination based on race, national origin, age, sex, sexual orientation, religion, disability, or similar tortious conduct, breach of contract, wrongful termination, defamation, intentional or negligent infliction of emotional distress, interference with contract or interference with actual or prospective economic disadvantage. There are no claims pending, or, to Seller's knowledge, reasonably expected or threatened, against Seller under any workers' compensation or long term 27 disability plan or policy. Seller is not a party to any collective bargaining agreement or other labor union contract, nor does Seller know of any activities or proceedings of any labor union to organize its employees. Seller has provided all employees with all wages, benefits, relocation benefits, stock options, bonuses and incentives, and all other compensation which became due and payable through the date of this Agreement. 4.25 INSURANCE. Seller and each of its subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Seller and its subsidiaries. There is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Seller and its subsidiaries are otherwise in compliance with the terms of such policies and bonds. Seller has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 4.26 COMPLIANCE WITH LAWS. Each of Seller and its subsidiaries has complied with, is not in violation of and has not received any notices of violation with respect to, any federal state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as do not and could not be reasonably expected to have a Material Adverse Effect on Seller. 4.27 ACCURACY OF MATERIAL FACTS; COPIES OF MATERIALS. No representation, warranty or covenant of Seller contained in this Agreement or in any certificate, schedule or exhibit delivered pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein and therein, taken as a whole, not misleading in light of the circumstances under which such statements were made. Seller has delivered to Purchaser complete and accurate copies of each contract, agreement, license, lease and similar document (or, if oral, summaries of same) referred to in any schedule hereto or included in the Assets or the Assumed Contracts, or the Assumed Liabilities. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER Except as otherwise set forth in the Purchaser Disclosure Schedule provided to Seller, a copy of which is attached as SCHEDULE V, each of Parent, and Purchaser, jointly and severally, hereby represents and warrants to Seller that: 5.1 ORGANIZATION AND GOOD STANDING. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has full power and authority to carry on its businesses as now conducted. Parent is duly qualified or licensed to do business as a foreign corporation in each state of the United States in which it is required to be so qualified or licensed except in such states in which failure to be so qualified or licensed would not have a Material Adverse Effect on Parent. Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has full power and authority to carry on its businesses as now conducted. Purchaser is duly qualified or licensed to do business as a foreign corporation in each state of the United States in 28 which is required to be so qualified or licensed, except in such states in which failure to be so qualified or licensed would not have a Material Adverse Effect on Purchaser. 5.2 POWER, AUTHORIZATION AND VALIDITY. Each of Parent and Purchaser has the right, power, legal capacity and authority to enter into and perform its respective obligations under this Agreement and the other Ancillary Agreements to which it is or will be a party. The execution and delivery of this Agreement and the other Ancillary Agreements to which any of Parent and Purchaser is or will be a party have been duly and validly approved and authorized by the respective boards of directors of each of Parent and Purchaser. No authorization or approval, corporate, governmental or otherwise, is necessary in order to enable each any of Parent and Purchaser to enter into and to perform the terms of this Agreement or the other Ancillary Agreements on its part to be performed, except for (i) filings under applicable securities laws, and (ii) the termination of any waiting period under any other applicable Law or Decree. This Agreement is and the other Ancillary Agreements, when executed and delivered by Parent and Purchaser shall be, the valid and binding obligations of Parent and Purchaser, enforceable in accordance with their respective terms, subject to (i) laws of general application relating to bankruptcy, insolvency, and the relief of debtors and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 5.3 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and delivery of this Agreement or any of the Ancillary Agreements to which any of Parent and Purchaser is or will be a party, nor the consummation of the transactions contemplated herein or therein will conflict with, or result in a material breach or violation of, or constitute a default (with or without notice, lapse of time or both) or give any party any right to terminate, accelerate or cancel any provision of Parent's or Purchaser's respective charter documents as currently in effect, any material instrument, contract or understanding to which any of Parent and Purchaser is a party or by which any of Parent and Purchaser is bound, or by which Parent or Purchaser or any of their respective properties are bound, or any federal, state or local judgment, writ, decree, order, statute, rule or regulation applicable to Parent or Purchaser. Neither the execution and delivery of this Agreement or any of the Ancillary Agreements to which each of Parent and Purchaser is or will be a party, nor the consummation of the transactions contemplated herein or therein, will have a Material Adverse Effect on the respective operations, assets, or financial condition of Parent and Purchaser. 5.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. Neither Parent nor Purchaser is in violation of (a) any provisions of its respective charter documents as currently in effect or (b) any applicable Law or Decree in any material respect. 5.5 LITIGATION. There is no suit, action, proceeding, claim or, to Purchaser's Knowledge, investigation, pending or, to Purchaser's Knowledge, threatened against Parent or Purchaser before any Governmental Entity which questions or challenges the validity of this Agreement or any of the Ancillary Agreements to which any of Parent or Purchaser is or will be a party, or any of the transactions contemplated herein or therein. 5.6 BROKERS. There is no broker, finder, investment banker or other person whose fees are to be paid by Parent or Purchaser, who would have any valid claim against any of the parties to this Agreement for a commission or brokerage fee or payment in connection with this 29 Agreement or the transactions contemplated herein as a result of any agreement of, or action taken by, Parent or Purchaser. 5.7 DISCLOSURE. No representation, warranty or covenant of each of Parent and Purchaser contained in this Agreement or in any certificate, schedule or exhibit to this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein and therein, taken as a whole, not misleading in light of the circumstances in which such statements were made. ARTICLE VI PRE-CLOSING COVENANTS OF SELLER 6.1 ADVICE OF CHANGES. Seller will promptly notify each of Parent and Purchaser in writing of (a) any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Parent and Purchaser contained in this Agreement, if made on or as of the date of that event or the Closing Date, untrue or inaccurate in any material respect and (b) any Material Adverse Change in the Assets, Assumed Liabilities, the Intellectual Property or the financial condition, results of operations, business or prospects of the Business. 6.2 CONDUCT OF BUSINESS. During the period on and from the date of this Agreement through and including the Closing Date, Seller will conduct the Business in the ordinary course consistent with past practices and will use its reasonable commercial efforts to retain Seller's employees employed in the Business, protect and preserve the Assets and the Intellectual Property, and maintain and preserve intact Seller's relationships with its consultants, independent contractors, licensors, suppliers, vendors, representatives, distributors and other customers and all others with whom it deals, all in accordance with the ordinary course of business. During the period on and from the date of this Agreement through and including the Closing Date, Seller will not without the prior written consent of each of Parent and Purchaser: (a) mortgage, pledge, subject to a lien, or grant a security interest in, or suffer to exist or otherwise encumber, any of the Assets; (b) sell, dispose of or license any of the Assets to any Person, except Inventory in the ordinary course of business consistent with past practices; (c) fail to maintain the Tangible Assets in good working condition and repair according to the standards it has maintained up to the date of this Agreement, subject only to ordinary wear and tear; (d) fail to pay and discharge any trade payables relating to the Assets or the Business in accordance with Seller's customary business practices as of the date of execution hereof; (e) enter into any agreement or arrangement to pay any bonus, increased salary, or special remuneration to any Seller employee employed in the Business (other than amounts not in excess of normal payments made on a regular basis and amounts paid to Seller 30 employees who, at the time of such agreement or arrangement, have not been extended an offer to become employees of Purchaser); (f) change accounting methods relating to or affecting the Assets, the Assumed Liabilities or the Business; (g) amend, terminate or waive any rights under any Contract, except in the ordinary course of the Business; (h) waive or release any right or claim relating to any Assets, except in the ordinary course of business consistent with past practices; (i) enter into any agreements or other obligations or commitments (excluding purchases of new materials) relating to the Business, except agreements or purchase orders (A) involving the payment by Seller, as applicable, of less than $50,000 individually, or $100,000 in the aggregate, and (B) which are on commercially reasonable terms in the ordinary course of business, consistent with past practices of Seller with respect to the Business; (j) fail to comply in any material respect with any Law or Decree applicable to the Business; (k) take any action to terminate or modify, or permit the lapse or termination of, the present insurance policies and coverages of Seller relating to or applicable to Seller, the Business or the Assets; (l) incur, with respect to the Business or the Assets, any Liabilities other than Liabilities incurred in the ordinary course of business consistent with past practices; or (m) agree to do any of the things described in the preceding clauses of this Section 6.2. 6.3 ACCESS TO INFORMATION. Until the Closing, Seller will allow each of Parent and Purchaser and its agents reasonable access upon reasonable notice and during normal working hours to the Business Records and Facilities relating to the Assets, all aspects of the Business and its financial and legal affairs and the financial condition of the Seller. Until the Closing, Seller shall cause its respective accountants to cooperate with each of Parent and Purchaser and its agents in making available all financial information requested, including without limitation the right to examine all working papers pertaining to all Business Financial Statements prepared or audited by such accountants. 6.4 OBTAINING NECESSARY CONSENTS AND ADDITION OF PURCHASER AS PARTY TO CERTAIN CONTRACTS. Seller shall use its reasonable commercial efforts to obtain any and all consents necessary for the effective assignment to and assumption by Parent or Purchaser of the Assumed Contracts, which consents are set forth on SCHEDULE 6.4 hereto. All such consents shall be in writing and executed counterparts thereof shall be delivered promptly to Parent and/or Purchaser, as applicable. Seller shall not agree to any modification of any Assumed Contract in the course of obtaining any such consent, where such modification would materially and adversely affect Parent's or Purchaser's ability to conduct the Business as heretofore conducted. To the extent 31 permitted by applicable law, in the event consents to the assignment of such Assumed Contracts are not obtained by Seller as of the Closing, and Parent and Purchaser agree to close the Acquisition, such Assumed Contracts shall be held, as and from the Closing Date, by Seller in trust for Parent or Purchaser as designated by Parent, and the covenants and obligations thereunder shall be performed by Parent or Purchaser in Seller's respective name and all benefits and obligations existing thereunder shall be for Parent's or Purchaser's, as applicable, account PROVIDED that such performance by Parent or Purchaser, as applicable, shall be contingent on the passing of all benefits of such Assumed Contracts to Parent and/or Purchaser. Seller shall take or cause to be taken such actions in its name or otherwise as Parent or Purchaser, as applicable, may reasonably request so as to provide Parent or Purchaser with the benefits of the Assumed Contracts and to effect collection of money or other consideration to become due and payable under the Assumed Contracts, and Seller shall promptly pay over to Purchaser all money or other consideration received by it in respect to all Assumed Contracts. The compliance of Seller with this provision shall not excuse Seller from any breach of the representations, warranties and covenants of Seller resulting from such non-assignment. 6.5 SATISFACTION OF CONDITIONS PRECEDENT. Seller will use its reasonable commercial efforts to satisfy or cause to be satisfied all the conditions precedent to the Closing hereunder, and to cause the transactions contemplated herein to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties, which may be necessary or reasonably required on its part in order to effect the transactions contemplated herein. 6.6 NO SOLICITATION. (a) Seller shall not directly or indirectly, and shall not authorize or permit any Affiliate or any Representative of the Seller directly or indirectly to, (i) solicit, initiate, encourage, induce or facilitate the making, submission or announcement of any Acquisition Proposal or take any action that could reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any information regarding Seller to any Person in connection with or in response to an Acquisition Proposal or an inquiry or indication of interest that could lead to an Acquisition Proposal, (iii) engage in discussions or negotiations with any Person with respect to any Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition Proposal or (v) enter into any letter of intent or similar document or any Contract contemplating or otherwise relating to any Acquisition; PROVIDED, HOWEVER, that prior to the adoption of this Agreement by the Required Seller Stockholder Vote, this Section 6.6(a) shall not prohibit Seller from furnishing nonpublic information regarding Seller to, or entering into discussions with, any Person in response to a Superior Proposal that is submitted to Seller by such Person (and not withdrawn) if (1) neither Seller nor any Representative of Seller shall have violated any of the restrictions set forth in this Section 6.6, (2) the board of directors of Seller concludes in good faith, after having taken into account the advice of its outside legal counsel, that such action is required in order for the board of directors of Seller to comply with its fiduciary obligations to Seller's stockholders under applicable law, (3) at least two business days prior to furnishing any such nonpublic information to, or entering into discussions with, such Person, Seller gives Parent written notice of the identity of such Person and of Seller's intention to furnish nonpublic information to, or enter into discussions with, such Person, and Seller receives from such Person an executed confidentiality agreement containing customary limitations on the use and disclosure of all 32 nonpublic written and oral information furnished to such Person by or on behalf of Seller, and (4) at least two business days prior to furnishing any such nonpublic information to such Person, Seller furnishes such nonpublic information to Parent (to the extent such nonpublic information has not been previously furnished by Seller to Parent). Without limiting the generality of the foregoing, Seller acknowledges and agrees that any violation of any of the restrictions set forth in the preceding sentence by any Representative of Seller, whether or not such Representative is purporting to act on behalf of Seller, shall be deemed to constitute a breach of this Section 6.6 by Seller. (b) Seller shall promptly (and in no event later than 24 hours after receipt of any Acquisition Proposal, any inquiry or indication of interest that could lead to an Acquisition Proposal or any request for nonpublic information) advise Parent orally and in writing of any Acquisition Proposal, any inquiry or indication of interest that could lead to an Acquisition Proposal or any request for nonpublic information relating to Seller (including the identity of the Person making or submitting such Acquisition Proposal, inquiry, indication of interest or request, and the terms thereof) that is made or submitted by any Person prior to Closing. Seller shall keep Parent fully informed with respect to the status of any such Acquisition Proposal, inquiry, indication of interest or request and any modification or proposed modification thereto. (c) Seller shall immediately cease and cause to be terminated any existing discussions with any Person that relate to any Acquisition Proposal. 6.7 PROXY STATEMENT. As promptly as practicable after the date of this Agreement, Seller shall prepare and cause to be filed with the SEC the Proxy Statement. Seller shall use all reasonable efforts to cause the Proxy Statement to comply with the rules and regulations promulgated by the SEC and to respond promptly to any comments of the SEC or its staff. Seller will use all reasonable efforts to cause the Proxy Statement to be mailed to Seller's stockholders as promptly as practicable. Parent shall promptly furnish to Seller all information concerning Parent that may be required or reasonably requested in connection with any action contemplated by this Agreement. If any event relating to Seller occurs, or if Seller becomes aware of any information, that should be disclosed in an amendment or supplement to the Proxy Statement, then Seller shall promptly inform Parent thereof and shall file such amendment or supplement with the SEC and, if appropriate, mail such amendment or supplement to the stockholders of Seller. 6.8 STOCKHOLDERS' MEETING. (a) Seller shall take all action necessary under all applicable legal requirements to call, give notice of and hold a meeting of the holders of Seller's common stock to vote on a proposal to approve this Agreement and the Acquisition (the "Seller Stockholders' Meeting"). The Seller Stockholders' Meeting shall be held (on a date selected by Seller in consultation with Parent) as promptly as practicable. Seller shall ensure that all proxies solicited in connection with Seller Stockholders' Meeting are solicited in compliance with all applicable legal requirements. (b) Subject to Section 6.8(c): (i) the Proxy Statement shall include a statement to the effect that the Board of Directors of Seller unanimously recommends that 33 Seller's stockholders vote to approve this Agreement and the Acquisition at the Seller Stockholders' Meeting (the unanimous recommendation of Seller's board of directors that Seller's stockholders vote to adopt this Agreement being referred to as the "Seller Board Recommendation"); and (ii) the Seller Board Recommendation shall not be withdrawn or modified in a manner adverse to Parent, and no resolution by the board of directors of Seller or any committee thereof to withdraw or modify the Seller Board Recommendation in a manner adverse to Parent shall be adopted or proposed. (c) Notwithstanding anything to the contrary contained in Section 6.8, at any time prior to the adoption of this Agreement by the Required Seller Stockholder Vote, the Seller Board Recommendation may be withdrawn or modified in a manner adverse to Parent if: (i) a proposal to acquire (by merger or otherwise) all of the outstanding shares of Seller's common stock is made to Seller and is not withdrawn; (ii) Seller provides Parent with at least five business days prior notice of any meeting of Seller's board of directors at which such board of directors will consider and determine whether such offer is a Superior Proposal; (iii) Seller's board of directors determines in good faith that such offer constitutes a Superior Proposal; (iv) Seller's board of directors determines in good faith, after having taken into account the advice of Seller's outside legal counsel, that, in light of such Superior Proposal, the withdrawal or modification of the Seller Board Recommendation is required in order for Seller's board of directors to comply with its fiduciary obligations to Seller's stockholders under applicable law; and (v) neither Seller nor any of its Representatives shall have violated any of the restrictions set forth in Section 6.6. (d) Seller's obligation to call, give notice of and hold the Seller Stockholders' Meeting in accordance with Section 6.8 shall not be limited or otherwise affected by the commencement, disclosure, announcement or submission of any Superior Proposal or other Acquisition Proposal, or by any withdrawal or modification of the Seller Board Recommendation. (e) Notwithstanding anything to the contrary contained in this Agreement, if the Seller Board Recommendation shall be withdrawn or modified in a manner adverse to Parent, then, at the request of Parent: (i) Seller shall call, give notice of and hold the Seller Stockholders' Meeting on a date and at a time and place determined by Parent; (ii) Seller shall set a record date for persons entitled to notice of, and to vote at, the Seller Stockholders' Meeting on a date determined by Parent; (iii) Seller shall cause its transfer agent to make a stockholder list and other stock transfer records relating to Seller available to Parent; (iv) Seller shall waive any standstill or similar provisions applicable to Parent; and (v) Seller shall render such other reasonable assistance to Parent in the solicitation of proxies by Parent in favor of the adoption of this Agreement as Parent shall request. 34 6.9 BULK SALES. Purchaser hereby waives compliance with applicable bulk transfer or similar laws, if any, and Seller hereby indemnifies and holds harmless Purchaser from any liabilities and obligations arising from claims made by third parties under applicable bulk transfer or similar laws, if any, applicable to the transactions contemplated in this Agreement herein. 6.10 COLLECTION OF ACCOUNTS RECEIVABLE. To the extent Seller receives any payment after the Closing from a customer on account of an Acount Receivable, Seller shall hold such payment in trust for the benefit of Purchaser, promptly notify Purchaser and remit such funds to Purchaser. 6.11 ESTABLISHMENT OF TRUST; SATISFACTION BY SELLER OF LIABILITIES. As of the Closing Date, Seller shall establish a trust (the "Trust") for the benefit of Seller's creditors for the payment of the Excluded Liabilities, and the Cash Payment shall be wired by Parent to the Trust account established by the Trust (the "Trust Account"). From and after the Closing Date, the Trust shall timely pay, and Seller shall timely pay, perform, discharge and/or settle (i) all Excluded Liabilities and any other Liability of Seller which is not an Assumed Liability, in all material respects unless contested by Seller in good faith and (ii) all covenants and obligations of this Agreement imposed on Seller. From and after the Closing Date, the Trust shall timely pay any invoice or account payable in accordance with its terms and, in the event that the Trust fails to so timely pay any of such invoices or accounts payable in accordance with its terms, and, in the reasonable judgment of Parent, such failure could aversely affect Parent's or Purchaser's relationship with any of Parent's vendors, then Parent shall have the right, but not the obligation, to pay such invoices or accounts payable on behalf of Seller and to obtain reimbursement out of the Escrow Fund pursuant to Section 12.5 and such reimbursement shall not be subject to the limitations set forth in Section 12.2(b). In connection with any settlement or other discharge of any obligation of Seller which is not accompanied by payment and/or performance in full of such obligations, Seller shall obtain a written settlement agreement with respect thereto that, among other things, provides for a full release of all claims against Seller and its successors and assigns. 6.12 NOTICE TO VENDORS. Purchaser shall, as soon as practicable following the Closing Date, send to each vendor under an Assumed Contract a written notice of the assignment to Purchaser of Seller's obligation under such Assumed Contract, which notice shall request such vendor's agreement to look solely to Purchaser for payment or performance of such Assumed Contract and to release Seller from all obligations thereunder. 6.13 DISTRIBUTION FROM SELLER'S 401(K) PLAN. To the extent that Parent and or Purchaser hire individuals who were employed by Seller as of the Closing Date ("Former Seller Employees"), Seller hereby agrees that it shall cause the accounts, if any, of such Former Seller Employees in Seller's 401(k) Plan to be distributed as provided by Code Section 401(k)(10)(A)(ii). 35 ARTICLE VII PRE-CLOSING COVENANTS OF PARENT AND PURCHASER 7.1 ADVICE OF CHANGES. Each of Parent and Purchaser will promptly notify Seller in writing of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Parent or Purchaser, as applicable, contained in this Agreement, if made on or as of the date of that event or the Closing Date, untrue or inaccurate in any material respect. 7.2 SATISFACTION OF CONDITIONS PRECEDENT. Subject to Subsection 7.2, each of Parent and Purchaser will use its reasonable commercial efforts to satisfy or cause to be satisfied all the conditions precedent to the Closing hereunder, and to cause the transactions contemplated herein to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties which may be necessary or reasonably required on its part in order to effect the transactions contemplated herein. ARTICLE VIII MUTUAL COVENANTS 8.1 CONFIDENTIALITY AND PUBLICITY. The parties acknowledge that the Confidentiality Agreement is binding upon the parties hereto and in full force and effect, except to the extent that the provisions hereof supersede provisions to similar effect contained in the Confidentiality Agreement. The terms of the Confidentiality Agreement (exclusive of such superseded provisions) are incorporated in this Agreement by this reference. 8.2 REGULATORY FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms and conditions of this Agreement, each of Seller and Purchaser shall use its respective reasonable commercial efforts to (a) make all necessary filings with respect to the Acquisition and this Agreement under the Securities Act, the Exchange Act and applicable blue sky or similar securities laws and obtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith, (b) make premerger notification or other appropriate filings with federal, state, provincial or local governmental bodies or applicable foreign governmental agencies and obtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith, (c) obtain all consents, waivers, approvals, authorizations and orders required in connection with the authorization, execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the Acquisition and (d) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated in this Agreement as promptly as practicable. 8.3 GOVERNMENTAL FILINGS. As promptly as practicable after the execution of this Agreement, each of Seller and Purchaser shall make any and all required governmental filings required with respect to the transactions contemplated in this Agreement and the Ancillary 36 Agreements, and shall use its respective best efforts to respond promptly to all inquiries or requests for additional information or documentation from any Governmental Entity. 8.4 FURTHER ASSURANCES. Prior to and following the Closing, each party to this Agreement agrees to cooperate fully with the other party and to execute such further instruments, documents and agreements, and to give such further written assurances, as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and the Ancillary Agreements and contemplated herein and therein and to carry into effect the intent and purposes of this Agreement. Prior to and after the Closing Date, Seller shall reasonably cooperate with Parent and/or Purchaser, as applicable, in attempting to obtain the agreement of parties to the Contracts necessary for Parent's or Purchaser's enjoyment of the Assets or the Intellectual Property or Parent's or Purchaser's conduct of the Business following the Closing Date to extend the benefits and obligations of such Contracts to Parent and/or Purchaser. 8.5 COMMUNICATIONS PLAN. Purchaser and Seller shall use their respective reasonable commercial efforts to carry out the communications plan as agreed to among the parties as of the date of this Agreement with respect to communications to their respective customers, suppliers, employees, investors and strategic partners concerning the transactions contemplated hereby. ARTICLE IX CONDITIONS TO CLOSING 9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to this Agreement to effect the transactions to be performed by such party at the Closing are, at the option of such party, subject to the satisfaction at or prior to the Closing of the following conditions: (a) NO ORDERS. No order shall have been entered, and not vacated, by a court or administrative agency of competent jurisdiction, in any action or proceeding which enjoins, restrains or prohibits the Acquisition or the consummation of any other transaction contemplated herein. (b) PERMITS, AUTHORIZATIONS AND APPROVALS. All permits, authorizations, approvals and orders required to be obtained under all applicable Laws or Decrees in connection with the transactions contemplated herein, including but not limited to any applicable consent or termination of any applicable waiting period under any Law shall have been obtained and shall be in full force and effect at the Closing Date. (c) NO LITIGATION. There shall be no litigation pending or threatened by any Governmental Entity in which (i) an injunction is or may be sought against the transactions contemplated herein or (ii) relief is or may be sought against any party hereto as a result of this Agreement and in which, in the good faith judgment of the board of directors of either Parent or Seller (relying on the advice of their respective legal counsel), such Governmental Entity has the probability of prevailing and such relief would have a Material Adverse Effect upon such party. 37 (d) STOCKHOLDER APPROVAL. This Agreement and the transactions contemplated hereby shall be approved by the shareholders of Seller by the requisite vote under applicable law and the Seller's Certificate of Incorporation. 9.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to effect the transactions to be performed by it at the Closing are, at the option of Seller, subject to the satisfaction at or prior to the Closing of the following additional conditions: (a) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Purchaser set forth in ARTICLE V hereof shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if such representations and warranties had been made at the Closing, and each of Parent and Purchaser shall have delivered to Seller a certificate (the "Purchaser Compliance Certificate") to such effect dated as of the Closing Date and signed by the President of Parent and Purchaser, respectively. (b) PERFORMANCE. All of the terms, covenants and conditions of this Agreement to be complied with and performed by each of Parent and Purchaser, as applicable, at or prior to the Closing shall have been duly complied with and performed in all material respects, and Purchaser shall have delivered to Seller the Purchaser Compliance Certificate to such effect. (c) PURCHASE PRICE CONSIDERATION. Purchaser shall have delivered the Initial Purchase Price to Seller in accordance with Section 2.6(a) hereof. (d) ANCILLARY AGREEMENTS. Each of Parent and Purchaser shall have executed and delivered to Seller each of the Ancillary Agreements, including the Escrow Agreement in the form attached hereto as EXHIBIT "A". (e) PURCHASER'S CLOSING DELIVERABLES. At the Closing, Purchaser will deliver to Seller the following items: (i) the Purchase Price; (ii) the Purchaser Compliance Certificate in accordance with Section 9.2(a) and (b) hereof; (iii) copies of each of the Ancillary Agreements executed by Parent or Purchaser, as applicable; (iv) a certificate, signed by the Secretary of Parent and Purchaser, as applicable, respectively, certifying as to and accuracy of, and attaching copies of, Parent's and Purchaser's respective charter documents and all board of directors resolutions adopted in connection with the Acquisition, of Parent and Purchaser, as applicable, respectively; and (v) all other documents required to be delivered to Seller under this Agreement. 9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND PURCHASER. The obligations of Parent and Purchaser to effect the transactions to be performed by it at the Closing are, at the option of 38 Parent and Purchaser, subject to the satisfaction at or prior to the Closing of the following additional conditions: (a) REPRESENTATIONS AND WARRANTIES. All the representations and warranties of Seller set forth in ARTICLE IV hereof shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if such representations and warranties had been made at the Closing, and Seller shall have delivered to each of Parent and Purchaser a certificate (the "Seller Compliance Certificate") to such effect dated as of the Closing Date and signed by the President of Seller. (b) PERFORMANCE. All of the terms, covenants and conditions of this Agreement to be complied with and performed by Seller at or prior to the Closing shall have been duly complied with and performed in all material respects, and Seller shall have delivered to each of Parent and Purchaser the Seller Compliance Certificate to such effect. (c) REQUIRED CONSENTS. Any and all required consents from third parties to the Assumed Contracts and other instruments required to allow the consummation of the Acquisition and the other transactions contemplated herein shall have been obtained, and evidence thereof satisfactory to Parent and Purchaser shall have been delivered to Parent and Purchaser. (d) BANK CONSENTS AND RELEASES. Silicon Valley Bank shall have consented to the transactions contemplated hereby and to the assignment and assumption of the Silicon Valley Bank Loan Agreement, all at no additional cost to Parent and Purchaser; or, at the option of Parent and Purchaser, Silicon Valley Bank shall allow the repayment of such financing at the Closing without penalty or premium. (e) MATERIAL ADVERSE CHANGE. There shall have been no Material Adverse Change relating the Assumed Liabilities, to the Assets or the Business. (f) ANCILLARY AGREEMENTS. Seller shall have executed and delivered to each of Parent and Purchaser, as applicable, each of the Ancillary Agreements to which it is a party, including the Escrow Agreement in the form attached hereto as EXHIBIT "A". (g) ASSIGNMENTS OF GOVERNMENT CONTRACTS; AND SECURITY CLEARANCE TRANSFER. Seller shall have obtained an effective novation of all the Governmental Contracts, set forth on SCHEDULE 1.8 hereof, all in form and substance reasonably satisfactory to counsel to Purchaser, and Parent shall have received a facilities securities clearance from all appropriate agencies of the Federal government. (h) TRANSFER DOCUMENTS. All documentation pursuant to which the transactions contemplated herein are to be accomplished, including bills of sale, assignments and other documents or instruments of transfer, shall have been presented to each of Parent and Purchaser and their counsel for review and shall have been consistent with this Agreement and reasonably satisfactory in form and substance to Parent and Purchaser and their counsel prior to the consummation of such transactions. All of the Assets, including the Assumed Contracts, shall have been transferred or assigned from Seller to Parent and Purchaser free and clear of all 39 Encumbrances (except Permitted Encumbrances), and Parent and Purchaser and their counsel shall have received evidences of such transfers reasonably satisfactory to them. (i) AUDITED FINANCIAL STATEMENTS. Seller shall have delivered to each of Parent and Purchaser audited balance sheets pertaining to the Seller as of December 31, 1998 and December 31, 1999 and audited statements of operations and cash flow pertaining to the Seller for the years then ended, all prepared in accordance with GAAP. (j) PRECLOSING PRO FORMA BALANCE SHEET. Seller shall have delivered to Parent and Purchaser at least five (5) days before the Closing a pro forma balance sheet of Seller as of the most recent calendar month end prior to the date of delivery of such statement together with a good faith reasonable projection of changes to such balance sheet through the Closing (after giving effect to the Transaction), the form and content of which shall be acceptable to Parent and Purchaser, such judgment to be exercised in good faith. (k) OPINION OF COUNSEL. Seller's counsel shall have delivered an opinion of counsel to Parent and Purchaser as to the matters set forth in EXHIBIT "B" in form and substance satisfactory to Parent and its counsel. (l) EMPLOYEES. As of the Closing Date, all of the Key Employees and at least eighty percent (80%) of the Seller employees employed by the Business who are not Key Employees shall be Seller employees and shall have accepted written offers of employment extended by Purchaser at substantially equal pay rates and pursuant to Parent's usual benefit package. (m) SELLER'S CLOSING DELIVERABLES. At the Closing, Seller will deliver to Purchaser the following items: (i) a bill of sale, intellectual property assignments, assignments and assumptions of contracts and such other good and sufficient instruments of conveyance, assignment and transfer, in form and substance reasonably satisfactory to counsel to Parent and Purchaser as shall be legally sufficient to vest in Parent and Purchaser, as applicable, good and marketable title to the Assets (including the Assumed Contracts); (ii) all Business Records; (iii) the Seller Compliance Certificate in accordance with Section 9.3(a) and (b) hereof; (iv) all required consents from third parties to the Contracts in accordance with Section 9.3(c) hereof; (v) the executed opinion of counsel to Seller in accordance with Section 9.3(k) hereof; (vi) intentionally omitted; (vii) executed copies of each of the Ancillary Agreements; 40 (viii) the audited financial statements in accordance with Section 9.3(i) hereto; (ix) a certificate, signed by the Secretary of Seller, certifying as to the truth and accuracy of, and attaching copies of, Seller's charter documents and board of directors and shareholder resolutions adopted in connection with the Transaction; (x) the assignments of the Assumed Contracts in accordance with Section 9.3(g) hereof; (xi) all other documents required to be delivered to Parent and/or Purchaser, as applicable, under the provisions of this Agreement. (n) TRUST. The Trust shall be established and the agreement establishing the Trust shall have been reasonably approved by Parent and Purchaser. Said agreement shall not be materially modified or terminated without the prior written consent of Parent and Purchaser, which consent shall not be unreasonably withheld. ARTICLE X POST-CLOSING MATTERS 10.1 EMPLOYEES. (a) EMPLOYMENT OFFER AND EMPLOYMENT TERMS AND CONDITIONS. An offer of employment shall be made by Parent or Purchaser to Seller employees employed by the Business ("Prospective New Purchaser Employees"). Seller agrees to use its best efforts to retain employees employed by the Business, including Key Employees, and shall notify Purchaser promptly if, notwithstanding the foregoing, any Seller employee employed by the Business submits a resignation to terminate employment or terminates employment prior to the Closing Date. (b) SELLER'S OBLIGATIONS AND LIABILITIES. (i) Seller shall be solely responsible for filing all tax returns with respect to its employment of any Seller employee through the Closing Date. (ii) Seller shall be solely liable for and obligated to pay, and shall indemnify and hold Parent and Sub and any Affiliates thereof harmless from, any and all liabilities with respect to Seller's termination of employment of any employee on or before the Closing Date. (iii) Seller shall be responsible for any liability for claims filed with respect to any employee of Seller eligible for coverage, reimbursement and/or benefits under the terms of any of Seller's Employee Plans, provided such liability (A) accrued or became payable during the period of such employee's employment with Seller on or before the Closing Date or (B) arose out of Seller's termination of such employee's employment on or before the Closing Date. Additionally, Seller shall be responsible for any liability for accrued benefits with respect 41 to any Prospective New Purchaser Employee who, as a result of employment with Seller on or before the Closing Date, was a participant in any of Seller's Employee Plan. (c) NO RIGHTS CONFERRED UPON EMPLOYEES. The parties hereby acknowledge that, except as otherwise provided in Section 10.1(a) and (b), Purchaser is not under any obligation to employ any current or future employee of Seller or any Affiliate thereof. Further, nothing in this Agreement shall confer any rights or remedies under this Agreement on any employee. 10.2 FURTHER ASSURANCES OF SELLER. Seller shall, from time to time, at the request of Purchaser, and without further consideration, execute and deliver such instruments of transfer, conveyance and assignment in addition to those delivered pursuant to Sections 2.1 and 9.3 hereof, and take such other actions, as may be reasonably necessary to assign, transfer, convey and vest in Purchaser, and to put Purchaser in possession of, the Assets, including but not limited to obtaining any and all required consents of third parties which Seller has not obtained as of the Closing Date. Seller shall use its reasonable commercial efforts to obtain for Purchaser any and all consents of third parties, as required under Section 6.4 which Seller has not obtained as of the Closing Date. 10.3 FURTHER ASSURANCES OF PURCHASER. Purchaser shall, from time to time at the request of Seller, and without further consideration, execute and deliver such instruments of assumption, and take such other action, as may be reasonably necessary to effectively confirm the assumption by Purchaser of the Assumed Liabilities. 10.4 ACCESS TO BUSINESS RECORDS. From and after the Closing Date, Purchaser shall use ordinary care to maintain the Business Records acquired by it pursuant hereto and, damage by fire or other casualty or accident excepted, shall not for a period of six (6) years after the Closing Date destroy or dispose of any such Business Records unless it shall first have notified Seller of its intention to do so and shall have afforded Seller an opportunity to take possession thereof. Seller shall have the right to retain a copy of the Business Records. Similarly, from and after the Closing Date, Seller shall use ordinary care to maintain Seller's copy of the Business Records and of any records relating to the Business not transferred to Purchaser and, damage by fire or other casualty or accident excepted, shall not for a period of six (6) years after the Closing Date destroy or dispose of any such records unless it shall first have notified Purchaser of its intention to do so and shall have afforded Purchaser an opportunity to take possession thereof. From and after the Closing Date, each party shall afford the other access to all preclosing Business Records and other information acquired or retained by it pursuant hereto, including data processing information, upon reasonable notice during ordinary business hours for all reasonable business purposes, and each party shall permit the other party to make copies of any such records and retain possession of such copies. Each of Purchaser and Seller shall use reasonable care to maintain the confidentiality of the Business Records in the possession of such party pursuant to the terms and subject to the conditions set forth in the Confidentiality Agreement. 10.5 TAX LIABILITY. (a) Except as set forth herein, Seller shall pay all Taxes arising from or relating to the transactions contemplated in this Agreement (the "Transaction Taxes"). If a resale 42 certificate, resale purchase exemption certificate, production machinery and equipment exemption certificate or other certificate or document of exemption is required to reduce or eliminate the Transaction Taxes, Purchaser will promptly furnish such certificate or document to Seller or Purchaser will cooperate with Seller to allow Seller to obtain such reduction or exemption from Transaction Taxes. (b) All ad valorem, property (whether real or personal) and similar taxes ("Property Taxes") with respect to the Assets for any tax period in which the Closing Date occurs shall be prorated between the Buyer and the Seller, with the Seller economically responsible for the Property Taxes for the portion of the tax year prior to and including the Closing Date. Seller shall be responsible for the preparation and filing of any tax returns or reports related to the Assets that are required to be filed on or before the Closing Date. Seller shall be responsible for all taxes imposed on or with respect to the Assets that are attributable to any whole or partial taxable period ending on or before the Closing Date. Buyer, with the cooperation of Seller, shall be responsible for the preparation and filing of all other tax returns or reports related to the Assets. 10.6 GROUP HEALTH PLANS. Seller shall maintain and keep in full force and effect, at Seller's sole cost, for a period of not less than six (6) months after the Closing, all currently maintained Seller Employee Plans which provide health and medical benefits to Seller's current and former employees. In addition, Seller acknowledges that it will be responsible for providing COBRA notices and applicable COBRA coverage for those employees and former employees who are or will be M&A qualified beneficiaries (as that term is defined in proposed treasury regulation section 54.4980B-9 Q&A 4). 10.7 FINANCIAL STATEMENT. Seller shall use its reasonable commercial efforts to cause its independent accountants ("Seller's Accountants"), at Purchaser's expense, to (i) consent to Purchaser's inclusion of Seller's Accountants' report on Seller's annual financial statements for the periods ending December 31, 1998 and December 31, 1999, and/or (ii) audit and consent to Purchaser's inclusion of Seller's Accountants' report on Seller's interim financial statements for periods after December 31, 1999 and/or the annual financial statements of the Business for the periods ending December 31, 1998 and December 31, 1999 and any interim periods thereafter, all as required by Regulation S-X under the Securities Act of 1933 to be included in Purchaser's reports filed with the SEC. ARTICLE XI TERMINATION OF AGREEMENT 11.1 TERMINATION. This Agreement may be terminated prior to the Closing (whether before or after approval of this Agreement by Seller's stockholders: (a) by mutual written consent of Parent and Seller; (b) by either Parent or Seller if the Closing shall not have occurred by June 30, 2000 (unless the failure to consummate the Transaction is attributable to a failure on the 43 part of the party seeking to terminate this Agreement to perform any material obligation required to be performed by such party at or prior to the Closing); (c) by either Parent or Seller if a court of competent jurisdiction or other Governmental Entity shall have issued a final and nonappealable order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; (d) by either Parent or Seller if (i) Seller Stockholders' Meeting (including any adjournments and postponements thereof) shall have been held and completed and Seller's stockholders shall have taken a final vote on a proposal to adopt this Agreement, and (ii) this Agreement shall not have been adopted at such meeting by the Required Seller Stockholder Vote (and shall not have been adopted at any adjournment or postponement thereof); PROVIDED, HOWEVER, that (A) a party shall not be permitted to terminate this Agreement pursuant to this Section 11.1(d) if the failure to obtain such stockholder approval is attributable to a failure on the part of such party to perform any material obligation required to be performed by such party at or prior to the Closing, and (B) Seller shall not be permitted to terminate this Agreement pursuant to this Section 11.1(d) unless Seller shall have made the payment required to be made to Parent pursuant to Section 11.3(a) and shall have paid to Parent any fee required to be paid to Parent pursuant to Section 11.3(b); (e) by Parent (at any time prior to the adoption of this Agreement by the Required Seller Stockholder Vote) if a Seller Triggering Event shall have occurred; (f) by Parent if (i) any of Seller's representations and warranties contained in this Agreement shall be inaccurate as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 9.3(a) would not be satisfied (it being understood that, for purposes of determining the accuracy of such representations and warranties as of the date of this Agreement or at any subsequent date, (A) all "Material Adverse Effect" qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (B) any update of or modification to Seller Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded), or (ii) any of Seller's covenants contained in this Agreement shall have been breached such that the condition set forth in Section 9.3(b) would not be satisfied; PROVIDED, HOWEVER, that if an inaccuracy in Seller's representations and warranties or a breach of a covenant by Seller is curable by Seller and Seller is continuing to exercise all reasonable efforts to cure such inaccuracy or breach, then Parent may not terminate this Agreement under this Section 11.1(f) on account of such inaccuracy or breach; (g) by Seller if (i) any of Parent's representations and warranties contained in this Agreement shall be inaccurate as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 9.2(a) would not be satisfied (it being understood that, for purposes of determining the accuracy of such representations and warranties as of the date of this Agreement or at any subsequent date, (A) all "Material Adverse Effect" qualifications and other materiality qualifications, and any similar qualifications, contained in 44 such representations and warranties shall be disregarded and (B) any update of or modification to the Parent Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded), or (ii) if any of Parent's covenants contained in this Agreement shall have been breached such that the condition set forth in Section 9.2(b) would not be satisfied; PROVIDED, HOWEVER, that if an inaccuracy in Parent's representations and warranties or a breach of a covenant by Parent is curable by Parent and Parent is continuing to exercise all reasonable efforts to cure such inaccuracy or breach, then Seller may not terminate this Agreement under this Section 11.1(g) on account of such inaccuracy or breach; or (h) by Parent if, since the date of this Agreement, there shall have occurred any Material Adverse Effect on the Business, the Assets or the Assumed Liabilities, or there shall have occurred any event or circumstance that, in combination with any other events or circumstances, could reasonably be expected to have a Material Adverse Effect on the Business, the Assets or the Assumed Liabilities. 11.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 11.1, this Agreement shall be of no further force or effect; PROVIDED, HOWEVER, that (i) this Section 11.2, Section 11.3 and ARTICLE XIII shall survive the termination of this Agreement and shall remain in full force and effect, and (ii) the termination of this Agreement shall not relieve any party from any liability for any willful breach of any representation, warranty or covenant contained in this Agreement. 11.3 EXPENSES; TERMINATION FEES. (a) Except as set forth in this Section 11.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such expenses, whether or not the Transaction is consummated; PROVIDED, HOWEVER, that if this Agreement is terminated by Parent or Seller pursuant to Section 11.1(d) or by Parent pursuant to Section 11.1(f), then Seller shall make a nonrefundable cash payment to Parent (in addition to any fee that may be payable pursuant to Section 11.3(b) or otherwise), at the time specified in the next sentence, in an amount equal to the aggregate amount of all fees and expenses (including all attorneys' fees, accountants' fees, financial advisory fees and filing fees) that have been paid or that may become payable by or on behalf of Parent in connection with the preparation and negotiation of this Agreement and otherwise in connection with the Transaction; and (b) If (i) this Agreement is terminated by Parent or Seller pursuant to Section 11.1(d) and at or prior to the time of such termination an Acquisition Proposal shall have been disclosed, announced, commenced, submitted or made, or (ii) this Agreement is terminated by Parent pursuant to Section 11.1(e), then, in either such case, Seller shall pay to Parent, in cash at the time specified in the next sentence (in addition to any payment required to be made pursuant to Section 11.3(a)), a nonrefundable fee in the amount of $250,000. In the case of termination of this Agreement by Seller pursuant to Section 11.1(d), the fee referred to in the preceding sentence shall be paid by Seller prior to such termination, and in the case of termination of this Agreement by Parent pursuant to Section 11.1(d) or Section 11.1(e), the fee referred to in the preceding sentence shall be paid by Seller within two business days after such termination. 45 ARTICLE XII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 12.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) The representations and warranties made by Seller or Purchaser herein, or in any certificate, schedule or exhibit delivered pursuant hereto, shall in no manner be limited by any investigation of the subject matter thereof made by or on behalf of either party or by the waiver or satisfaction of any condition to closing and shall survive the Closing and continue in full force and until the first anniversary of the Closing Date (the "Expiration Date"). (b) The obligations of Seller to indemnify members of the Purchaser Group (as defined below) for any Indemnifiable Losses is subject to the condition that Seller shall have received an Indemnification Claim for all Indemnifiable Losses for which indemnity is sought on or before the Expiration Date. 12.2 INDEMNIFICATION BY SELLER. (a) Subject to the terms and conditions of this ARTICLE XII, Seller agrees to indemnify, defend and hold harmless Parent, its shareholders, officers, directors, employees, attorneys, all subsidiaries and affiliates of Parent, and the respective officers, directors, employees and attorneys of such entities (all such persons and entities being collectively referred to as the "Purchaser Group") from, against, for and in respect of any and all Losses asserted against, relating to, imposed upon or incurred by Parent and/or any other member of the Purchaser Group by reason of, resulting from, based upon or arising out of any of the following (collectively, "Indemnifiable Losses"): (i) the breach, inaccuracy, untruth or incompleteness of any representation or warranty of Seller contained in or made pursuant to this Agreement or any certificate, schedule or exhibit delivered by Seller in connection with this Agreement; (ii) the breach or nonperformance of any covenant or agreement of Seller contained in or made pursuant to this Agreement or any of the Ancillary Agreements; (iii) any Losses arising out of any oral contract to which Seller is a party and which is not disclosed to Purchaser in writing on or prior to the date of this Agreement. (iv) any Excluded Liability; or (v) any breach by Seller of this ARTICLE XII. (b) Subject to Section 12.2(c), Seller shall not be required to indemnify Parent and/or any other member of the Purchaser Group for any Indemnifiable Losses under Section 12.2(a) until the aggregate amount of all Indemnifiable Losses under all individual Indemnification Claims shall exceed $50,000 (the "Seller's Indemnification Floor"); PROVIDED, HOWEVER, that if the aggregate amount of Indemnifiable Losses in respect of such Indemnification Claims shall exceed the Seller's Indemnification Floor, Seller shall indemnify Purchaser for all Indemnifiable Losses in respect of such Indemnification Claims, subject to the further limitations 46 set forth in this ARTICLE XII. The aggregate amount for which Seller may be liable under this ARTICLE XII shall not exceed $250,000. (c) Purchaser's sole and exclusive remedy against Seller for any Losses shall be indemnification under this ARTICLE XII; PROVIDED, HOWEVER, that (A) nothing contained in this ARTICLE XII shall limit in any manner any remedy at law or in equity to which Purchaser or any other member of the Purchaser Group shall be entitled against Seller as a result of willful fraud or intentional misrepresentation by Seller, or any of its representatives or agents and (B) the provisions of Sections 12.2(b) above shall not limit, in any manner, Seller's obligation to indemnify members of the Purchaser Group for any breach of any covenant or agreement of Seller to be performed by Seller following the Closing Date, including, without limitation, Seller's obligation to perform and discharge all Excluded Liabilities and Seller's obligations arising out of the Confidentiality Agreement, and the Ancillary Agreements. 12.3 ESCROW FUND. At the Closing, $250,000 shall be deposited with, Bank of America, NT&SA (or other institution selected by Parent with the reasonable consent of Seller) as escrow agent (the "Escrow Agent"), such deposit to constitute the Escrow Fund and to be governed by the terms set forth herein and in the Escrow Agreement attached hereto as EXHIBIT "A". The Escrow Fund shall be available to compensate Seller pursuant to the indemnification obligations of the shareholders of Seller. 12.4 ESCROW PERIOD; RELEASE FROM ESCROW. (a) The Escrow Period shall terminate six (6) months after the Closing (the "Termination Date"); provided, however, that a portion of the Escrow Fund, which, in the reasonable judgment of Parent, subject to the objection of Seller and the subsequent arbitration of the matter in the manner provided in Section 12.7 hereof, is necessary to satisfy any unsatisfied claims specified in any Officer's Certificate theretofore delivered to the Escrow Agent prior to termination of the Escrow Period with respect to facts and circumstances existing prior to expiration of the Escrow Period, shall remain in the Escrow Fund until such claims have been resolved. (b) Within three (3) business days after the Termination Date (the "Release Date"), the Escrow Agent shall release from escrow to Seller the Escrow Fund less the dollar amount equal to (A) any portion of the Escrow Fund delivered to Parent in accordance with Section 12.5 in satisfaction of indemnification claims by Parent and/or Purchaser (collectively, "Indemnitee") and (B) any portion of the Escrow Fund subject to delivery to Indemnitee in accordance with Section 12.4(a) with respect to any pending but unresolved indemnification claims of Indemnitee. Any portion of the Escrow Fund held as a result of clause (B) shall be released to Seller or released to Parent (as appropriate) promptly upon resolution of each specific indemnification claim involved. (c) The Escrow Agent is hereby granted the power to effect any transfer of the Escrow Fund contemplated by this Agreement. 12.5 CLAIMS UPON ESCROW FUND. Upon receipt by the Escrow Agent on or before the Release Date of a certificate signed by any officer of Parent (an "Officer's Certificate") stating 47 that with respect to the indemnification obligations of the Seller set forth in Section 12.2, damages exist and specifying in reasonable detail the individual items of such damages included in the amount so stated, the date each such item was paid, or properly accrued or arose, and the nature of the misrepresentation, breach of warranty, covenant or claim to which such item is related, the Escrow Agent shall, subject to the provisions of this ARTICLE XII, deliver to Parent out of the Escrow Fund, as promptly as practicable, cash held in the Escrow Fund having a value equal to such damages. 12.6 OBJECTIONS TO CLAIMS. (a) At the time of delivery of any Officer's Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate shall be delivered to Seller and for a period of thirty (30) days after such delivery, the Escrow Agent shall make no delivery of the Escrow Fund hereof unless the Escrow Agent shall have received written authorization from Seller to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of the portion of the Escrow Fund or other property in the Escrow Fund in accordance with Section 12.5 hereof, provided that no such payment or delivery may be made if Seller shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to the Escrow Agent and Parent prior to the expiration of such thirty (30) day period. (b) In case Seller shall so object in writing to any claim or claims by Parent made in any Officer's Certificate, Parent shall have thirty (30) days to respond in a written statement to the objection of Seller. If after such thirty (30) day period there remains a dispute as to any claims, Seller and Parent shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such claims. If Seller and Parent should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the cash from the Escrow Fund in accordance with the terms thereof. 12.7 RESOLUTION OF CONFLICTS AND ARBITRATION. (a) If no agreement can be reached after good faith negotiation between the parties pursuant to Sections 12.6, either party may, by written notice to the other, demand arbitration of the matter unless the amount of the damages is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by one arbitrator. Parent and Seller shall agree on the arbitrator, provided that if Parent and Seller cannot agree on such arbitrator, either Parent or Seller can request that Judicial Arbitration and Mediation Services ("JAMS") select the arbitrator. The arbitrator shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrator, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrator shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a court of competent law or equity, should the arbitrator determine that discovery was sought 48 without substantial justification or that discovery was refused or objected to without substantial justification. The decision of the arbitrator shall be written, shall be in accordance with applicable law and with this Agreement, and shall be supported by written findings of fact and conclusion of law which shall set forth the basis for the decision of the arbitrator. The decision of the arbitrator as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in ARTICLE XII hereof, the Escrow Agent and the parties shall be entitled to act in accordance with such decision and the Escrow Agent shall be entitled to make or withhold payments out of the Escrow Fund in accordance therewith. (b) Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction. Any such arbitration shall be held in Santa Clara County, California under the commercial rules then in effect of the American Arbitration Association. For purposes of this Section 12.7(b), in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, the party seeking indemnification shall be deemed to be the Non-Prevailing Party unless the arbitrators award the party seeking indemnification more than one-half (1/2) of the amount in dispute, plus any amounts not in dispute; otherwise, the person against whom indemnification is sought shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of the arbitrator, any administrative fee of JAMS, and the expenses, including attorneys' fees and costs, reasonably incurred by the other party to the arbitration. 12.8 THIRD-PARTY CLAIMS. In the event Parent becomes aware of a third-party claim which Parent believes may result in a demand against the Escrow Fund, Parent shall notify Seller of such claim, and Seller shall be entitled, at its expense, to participate in any defense of such claim with the consent of Parent which shall not be unreasonably withheld. Parent shall have the right in its sole discretion to settle any such claim. In the event that Seller has consented to any such settlement, Seller shall have no power or authority to object under ARTICLE XII or any other provision of this Section 12.6 to the amount of any claim by Parent against the Escrow Fund for indemnity with respect to such settlement. ARTICLE XIII GENERAL 13.1 GOVERNING LAW; JURISDICTION; VENUE. It is the intention of the parties hereto that the internal laws of the State of California (irrespective of its choice of law principles) shall govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Any action to enforce, or which arises out of or in any way relates to, any of the provisions of this Agreement, or any of the Ancillary Agreements shall be brought and prosecuted exclusively in the United States District Court, Northern District of California (or, in the event such court does not have jurisdiction, the courts of the State of California located in such district), and the parties hereto hereby consent to the jurisdiction of such court or courts and to service of process by registered mail, return receipt requested, or by any other manner provided by the law of the State of California and the rules of such courts. 49 13.2 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. None of the parties hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that Parent may assign its rights under this Agreement (a) to any majority-owned subsidiary of Purchaser, provided that Parent guarantees the obligations of such subsidiary hereunder or (b) to any successor of Parent through any merger or consolidation, or purchase of all or substantially all of Parent's stock or all or substantially all of Parent's assets. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 13.3 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent be held to be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto. The parties further agree to replace such invalid or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve, to the extent possible, the economic, business and other purposes of the invalid or unenforceable provision. 13.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, the certificates referenced herein, the exhibits thereto, and the Confidentiality Agreement constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto including, without limitation, that certain letter of intent between the parties dated January 19, 2000. 13.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. 13.6 OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy shall not preclude the exercise of any other. 13.7 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof for default in payment of any amount due hereunder or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default. 13.8 WAIVER. Each party hereto may, by written notice to the others: (a) waive any of the conditions to its obligations hereunder or extend the time for the performance of any of the obligations or actions of the others, (b) waive any inaccuracies in the representations of the others contained in this Agreement or in any documents delivered pursuant to this Agreement, (c) waive compliance with any of the covenants of the others contained in this Agreement or 50 (d) waive or modify performance of any of the obligations of the others. No action taken pursuant to this Agreement, including without limitation any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, condition or agreement contained herein. Waiver of the breach of any one or more provisions of this Agreement shall not be deemed or construed to be a waiver of other breaches or subsequent breaches of the same provisions. 13.9 NOTICES. All notices and other communications hereunder will be in writing and will be deemed given (a) upon receipt if delivered personally (or if mailed by registered or certified mail), (b) the day after dispatch if sent by overnight courier, (c) upon dispatch if transmitted by telecopier or other means of facsimile transmission (and confirmed by a copy delivered in accordance with clause (a) or (b)), properly addressed to the parties at the following addresses: Seller: Docucon, Incorporated 20 Valley Stream Parkway Suite 140 Malvern, PA 19355 Attention: President Facsimile: (610) 240-9608 with a required copy to: Arter & Hadden LLP 700 North St. Mary's Street Suite 800 San Antonio, Texas 78205 Attention: Timothy N. Tuggey Facsimile: (210) 354-4034 Parent: Tab Products Co. 1400 Page Mill Road Palo Alto, CA 94303 Attention: Chief Executive Officer Facsimile: (650) 853-2563 with a required copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, California 94301 Attention: Diane Holt Frankle, Esq. Facsimile No.: (650) 327-3699 Either party may change its address for such communications by giving notice thereof to the other party in conformity with this Section. 51 13.10 CONSTRUCTION AND INTERPRETATION OF AGREEMENT. (a) This Agreement has been negotiated by the parties hereto and their respective attorneys, and the language hereof shall not be construed for or against either party by reason of its having drafted such language. (b) The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement, which shall be considered as a whole. (c) As used in this Agreement, any reference to any state of facts, event, change or effect being "material" with respect to any entity means a state of facts that is material to the current condition (financial or otherwise), properties, assets, liabilities, business or operations of such entity. Whenever the term "enforceable in accordance with its terms" or like expression is used in this Agreement, it is understood that excepted therefrom are any limitations on enforceability under applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting the enforcement of creditor's rights. 13.11 NO JOINT VENTURE. Nothing contained in this Agreement shall be deemed or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party shall have the power to control the activities and operations of any other and their status is, and at all times, will continue to be, that of independent contractors with respect to each other. No party shall have any power or authority to bind or commit any other. No party shall hold itself out as having any authority or relationship in contravention of this Section. 13.12 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this Agreement are intended, nor shall be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner of any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. 52 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the respective dates set forth next to their signatures below. DOCUCON, INCORPORATED, Executed on March 7, 2000 a Delaware corporation By: /s/ DOUGLAS P. GIL Title: President and Chief Executive Officer TAB PRODUCTS, Executed on March 8, 2000 a Delaware corporation By:_________________________________ Title: President and Chief Executive Officer BUNT ACQUISITION CORPORATION, Executed on March 8, 2000 a Delaware corporation By:_________________________________ Title: President and Chief Executive Officer 53 EXHIBITS AND SCHEDULES EXHIBIT DESCRIPTION ------- ----------- A Escrow Agreement B Opinion of Seller's Counsel SCHEDULE TITLE -------- ----- Schedule 1.1 Accounts Payable Schedule 1.2 Accounts Receivable Schedule 1.5 Additional Business Liabilities Schedule 1.8 Assumed Contracts Schedule 1.39 Inventory Schedule 1.40 Key Employees Schedule 1.47 Net Assets Schedule 1.51 Prepaid Expenses Schedule 1.62 Tangible Assets Schedule 2.2(k) Investments Schedule 2.2(m) Telephone and Fax Numbers; Website Schedule 2.3 Excluded Assets Schedule 2.5 Excluded Liabilities Schedule 2.7(a) Procedures Schedule IV Disclosure Schedule Provided to Parent and Purchaser Schedule 4.9 Permits Schedule 4.12 Intellectual Property Schedule 4.13 Facilities Schedule 4.14 Company-Wide Contracts Schedule 4.15 Insurance Schedule 4.18 Warranties and Service Payment Obligations Schedule 4.23 Employee Benefit Plans Schedule V Disclosure Schedule Provided to Seller Schedule 6.4 Necessary Consents SCHEDULE 1.1 ACCOUNTS PAYABLE o DOCUCON INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 1.1 1 of 5 DOCUCON, INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) NOT VENDOR ASSUMED ASSUMED TOTAL ------ ----------- ----------- ----------- United Parcel Service ............... $ 607 $ -- $ 607 1-800-Flowers ....................... 204 -- 204 A-1 Laminating ...................... 118 -- 118 Accu-Print .......................... 1,972 -- 1,972 Accutronics, Inc. ................... 1,945 -- 1,945 AccuData Services, Inc. ............. 5,882 -- 5,882 Accu-Temp ........................... 242 -- 242 ACS Dataline, Inc. .................. 8,738 -- 8,738 ACSYS Resources, Inc ................ -- 14,088 14,088 ASN Developer Program ............... 1,072 -- 1,072 ADP of San Antonio .................. 2,076 -- 2,076 ADT Security Systems, Inc. .......... 4,023 -- 4,023 Advertisers Disp. & Exh., Inc. ...... 7,320 -- 7,320 Assoc. for Info. & Image Mgnt ....... 13,725 -- 13,725 Allen/Patrick ....................... 344 -- 344 Allied Oregon Inv ................... 25 -- 25 Allied Poly. Service, Inc. .......... 65 -- 65 First Allmerica Financial ........... 12,869 -- 12,869 Altex Electronics, Inc. ............. 1,712 -- 1,712 Altec Products ...................... 60 -- 60 American Airlines ................... 25,302 -- 25,302 American Light ...................... 359 -- 359 Apple Pest Control .................. 399 -- 399 ARMA International .................. 4,443 -- 4,443 Arter & Hadden, LLP ................. 2,443 -- 2,443 Arthur Anderson LLP ................. -- 33,743 33,743 AT&T Business Services .............. 41 -- 41 AT&T ................................ 177 -- 177 Atlantis Laser Center ............... 598 -- 598 ATX Communications .................. 185 -- 185 AVIS Rent A Car Systems ............. 2,763 -- 2,763 Dru Baker ........................... 3,444 -- 3,444 BancTec ............................. 23,127 -- 23,127 Barratt/Warren D .................... -- 137 137 Basset Investigations ............... 66 -- 66 Bauer/Gary .......................... 2,949 -- 2,949 Bell Atlantic ....................... 3,646 -- 3,646 Bell Atlantic ....................... 142 -- 142 Bell Atlantic Mobile ................ 490 -- 490 Best Software ....................... -- 533 533 Sylvia S. Romo, CPA (S.A. R.E. tax) . 21,383 -- 21,383 BFI ................................. 1,026 -- 1,026 Boise Cascade ....................... 4,687 -- 4,687 Border Ornamental Iron & Fence ...... 225 -- 225 Boston Stock Exchange ............... -- 1,000 1,000 Boulevard Plaza Assoc ............... -- 9,653 9,653 BPA South West ...................... 9,019 -- 9,019 Brown/Ralph ......................... -- 1,279 1,279 SCHEDULE 1.1 2 OF 5 DOCUCON, INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) NOT VENDOR ASSUMED ASSUMED TOTAL ------ ----------- ----------- ----------- Burns International Security Services 22,941 -- 22,941 Business Coffee ..................... 2,951 -- 2,951 Cable & Wireless, USA ............... 10,034 -- 10,034 Cable & Wireless, Inc ............... 339 -- 339 Elledelia Castillo .................. 70 -- 70 Cathers & Associates ................ -- 755 755 CDW Computer, Inc ................... 1,783 -- 1,783 Champion Transportation Svcs ........ 2,500 -- 2,500 Chas. P. Young ...................... 17,812 17,812 Central Moving & Storage ............ 18,500 -- 18,500 CNA-VFL ............................. 161 -- 161 Computer Express .................... 8,838 -- 8,838 Commercial Lawn Service ............. 912 -- 912 Concentra Medical Centers ........... 350 -- 350 Convention Decorating Service ....... 587 -- 587 Corporate Travel Planners ........... 9,452 -- 9,452 Council for Electronic Govt ......... 250 -- 250 City Public Service ................. 16,172 -- 16,172 Crocodile Cafe ...................... -- 116 116 Daily Local News .................... -- 196 196 Data Comm Warehouse ................. 942 -- 942 Dechert, Price & Rohdes ............. 2,481 -- 2,481 Dell Direct Sales L.P. .............. -- 7,784 7,784 Dell Financial Services ............. -- 1,954 1,954 Depository Trust Co. ................ -- 2,200 2,200 Design Electric ..................... 2,044 -- 2,044 Desmond Hotel & Conf. Center ........ 410 -- 410 DG&A Advertising .................... 904 -- 904 Drug Information Assoc .............. 65 -- 65 Double Time Express ................. 76 -- 76 Dover Elevators ..................... 2,481 -- 2,481 Dun & Bradstreet .................... 625 -- 625 Dustless-Air Filter Co. ............. 107 -- 107 The Employment Choice ............... 10,574 -- 10,574 EDC Moving Systems .................. 205 -- 205 EEC Systems, Inc .................... 3,738 -- 3,738 The Employment Guide ................ 240 -- 240 J. Epstein & Assoc .................. 4,600 -- 4,600 E*Trade Business Solutions .......... -- 3,215 3,215 Exposure San Antonio ................ 100 -- 100 Extreme Networks .................... 119 -- 119 Federal Express Corp. ............... -- 1,039 1,039 Federal Express Corp. ............... 2,989 -- 2,989 Felco Office Systems ................ 2,149 -- 2,149 Filenet ............................. 1,500 -- 1,500 First Aid/Mr ........................ 456 -- 456 Frank Martin (FM Systems) ........... 4,703 -- 4,703 Federal Schedules, Inc .............. 10,000 -- 10,000 FSI, Inc. ........................... 3,072 -- 3,072 Leticia Vasquez ..................... 528 -- 528 Renita Galloway ..................... 26 -- 26 Global Knowledge .................... 1,495 -- 1,495 SCHEDULE 1.1 3 OF 5 DOCUCON, INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) NOT VENDOR ASSUMED ASSUMED TOTAL ------ ----------- ----------- ----------- General Neon Sign ................... 4,587 -- 4,587 Government Tech Conference .......... 4,363 -- 4,363 Grinnel Fire Protection Sys ......... 394 -- 394 Guaranteed Foliage, Inc. ............ -- 1,118 1,118 Harper/James ........................ 134 -- 134 Harris Trust and Savings Bank ....... -- 3,584 3,584 Hay Group, Inc. ..................... 23,760 -- 23,760 Herman Miller/Spectrum .............. -- 1,617 1,617 Bernard Hodes Advertising Inc. ...... -- 892 892 Homewood Suites ..................... 6,221 -- 6,221 HQ Tyson's Corner ................... 26,225 -- 26,225 Perfect Scents, Inc ................. 614 -- 614 In Phase ............................ -- 2,100 2,100 Insco Distributing .................. 80 -- 80 Insight ............................. 1,783 -- 1,783 Jackson Walker LLP .................. 171 -- 171 Jason's Deli ........................ 213 -- 213 The Job Seeker's Magazine ........... 680 -- 680 Joe's Lock Service .................. -- 233 233 Kalthoff International .............. 2,500 -- 2,500 L.C. Vending ........................ 2,385 -- 2,385 Leadership Directories, Inc ......... 214 -- 214 Learnkey, Inc ....................... 208 -- 208 Liberty Printing & Office Supp ...... -- 461 461 Lillie's Plantscapes ................ 224 -- 224 Macke Water Systems, Inc ............ 75 -- 75 MacKenzie Partners, Inc. ............ -- 6,402 6,402 Maestro Media ....................... 56 -- 56 Manpower ............................ 569,762 -- 569,762 MBS & Associates .................... 9,129 -- 9,129 MCI Telecommunications .............. 10,535 -- 10,535 MCI Worldcom ........................ 2,435 -- 2,435 MCI Worldcom ........................ 16 -- 16 MCI Worldcom ........................ 5,423 -- 5,423 MCI Worldcom ........................ 7,943 -- 7,943 McLaughlin/Chris .................... 261 -- 261 Media Technologies, Inc ............. 6,739 -- 6,739 Tony Mencio ......................... 126 -- 126 Microsoft Press ..................... 565 -- 565 MobileComm .......................... 2,841 -- 2,841 Mooney/Michael C .................... 102 -- 102 Morgan, Lewis & Bockius LLP ......... -- 3,980 3,980 NDIA ................................ 2,500 -- 2,500 Network Associates .................. 1,421 -- 1,421 NTFC Capital Corporation ............ 4,977 -- 4,977 Northstar Express Freight ........... 929 -- 929 NU Net, Inc ......................... 60 -- 60 Oakwood Corporate Housing ........... 6,864 -- 6,864 Oak Tree Resources .................. -- 1,279 1,279 Office Depot ........................ 12,906 -- 12,906 Pacific Inv. Services ............... 19 -- 19 Pack/Brian .......................... 192 -- 192 SCHEDULE 1.1 4 OF 5 DOCUCON, INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) NOT VENDOR ASSUMED ASSUMED TOTAL ------ ----------- ----------- ----------- Pack Mark Shipping Supplies ......... 905 -- 905 Pack/Karen .......................... 39 -- 39 Padgett, Stratemann & Co. LLP ....... 5,400 600 6,000 Pitney Bowes Credit Corp ............ -- 176 176 PC Wholesale ........................ 2,405 -- 2,405 Pension Benefits Inc. ............... -- 484 484 Petty Cash (S.A.) ................... 455 -- 455 Photomatrix Corp .................... 18,461 -- 18,461 Pioneer Electronics Svc. Inc ........ 999 -- 999 Pitney Bowes Inc .................... 1,219 -- 1,219 Pitney Bowes Inc .................... 1,982 -- 1,982 Pompan, Ruffner & Werfel ............ 4,395 -- 4,395 PR Newswire ......................... -- 425 425 PublicData.com.ai Ltd ............... 250 -- 250 Qwest ............................... 15,103 -- 15,103 QWIZ ................................ 2,550 -- 2,550 R.C. Lock Co. (San Antonio) ......... 426 -- 426 Rockford Industries, Inc ............ 1,143 -- 1,143 Rockford Industries, Inc ............ 2,001 -- 2,001 Rockford Industries, Inc ............ 784 -- 784 Rosenberg, Tuggey ................... 6,555 -- 6,555 San Antonio Business Journal ........ 69 -- 69 San Antonio Employment Guide ........ 480 -- 480 Sagamore Graphics, Inc .............. 108 -- 108 San Antonio Express News ............ 2,266 -- 2,266 Sanitors, Inc ....................... 5,523 -- 5,523 SANYO-Verbatim CD Co., LLC .......... 3,761 -- 3,761 San Antonio Water Systems ........... 3,589 -- 3,589 Southwestern Bell Wireless .......... 107 -- 107 Business Opportunities .............. 25 -- 25 Schwartz Heslin Group, Inc. ......... -- 1,223 1,223 Skelton Time & Controls, Inc ........ 618 -- 618 George F. Skinner ................... 1,229 -- 1,229 South Texas Computer Repair ......... 280 -- 280 Sir Speed Printing .................. -- 188 188 The Spencer Company ................. 1,000 -- 1,000 William C. Spencer .................. 4,514 -- 4,514 San Antonio Spurs ................... 884 -- 884 State of Delaware ................... -- 1,840 1,840 State of West Virginia .............. 45 -- 45 State of Oklahoma ................... 25 -- 25 Staybridge San Antonio .............. 656 -- 656 South Texas Computer Repair ......... 280 -- 280 Stivers Temporary Personnel ......... -- 1,687 1,687 Strategic Link ...................... 3,500 -- 3,500 Studebaker-Worthington Leasing ...... 1,424 -- 1,424 Sullivan/Carolyn .................... 560 -- 560 Southwestern Bell Telephone ......... 317 -- 317 Southwestern Bell ................... 4,968 -- 4,968 Southwestern Bell Telephone ......... 318 -- 318 Southwestern Bell Telephone ......... 256 -- 256 Southwestern Bell Wireless .......... 166 -- 166 SCHEDULE 1.1 5 OF 5 DOCUCON, INCORPORATED ACCOUNTS PAYABLE AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) NOT VENDOR ASSUMED ASSUMED TOTAL ------ ----------- ----------- ----------- Southwestern Bell Yellow Pages ...... 26 -- 26 Henry Swindell ...................... (75) -- (75) Tepco of Central Texas .............. 539 -- 539 Texas Wired Music, Inc .............. 496 -- 496 Thompson Publishing Group, Inc ...... 531 -- 531 TMS, Inc ............................ 300 -- 300 DeLange Fin Services (Tokai) ........ 4,278 -- 4,278 Totowa Systems International ........ 2,795 -- 2,795 Tru Brew Coffee Service ............. -- 335 335 Tuttle Plumbing, Inc ................ 966 -- 966 Tycon Towers I Parking .............. 1,232 -- 1,232 U Line .............................. 133 -- 133 Universal Pensions, Inc. ............ 1,218 135 1,354 United Parcel Service ............... 322 -- 322 United Parcel Service ............... 4,352 -- 4,352 United Parcel Service ............... 4,268 -- 4,268 Vanstar ............................. 4,633 -- 4,633 VNA Hospice of South Texas .......... 120 -- 120 Werling Associates, Inc. ............ 1,088 -- 1,088 Wickenhofer/Leonor .................. 30 -- 30 Williams Communications ............. -- 6,174 6,174 Williams Communications ............. -- 1,042 1,042 Worth Hydrochem of San Antonio ...... 1,209 -- 1,209 Wissahickon Spring Water ............ -- 93 93 Documation, Inc ..................... 1,981 -- 1,981 Xerox Corporation ................... -- 185 185 Xerox Corporation ................... -- 118 118 Xerox Corporation ................... -- 118 118 ----------- ----------- ----------- TOTALS .............................. $ 1,175,487 $ 131,994 $ 1,307,480 =========== =========== =========== SCHEDULE 1.2 ACCOUNTS RECEIVABLE o DOCUCON INCORPORATED, ACCOUNTS RECEIVABLE AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 1.2 DOCUCON, INCORPORATED Accounts Receivable As of December 31, 1999 (Subject to final year-end audit adjustments) Accounts Receivable - Trade (see attached aging) $1,001,130 Allowance for doubtful accounts (10,866) Silicon Valley Bank factored (see attached statement) (899,004) ---------- Net Accounts Receivable - Trade 91,260 ---------- Unbilled Revenues (see attached summary) 2,123,014 Allowance for doubtful accounts (1,598,021) ---------- Net Unbilled Revenues 524,993 ---------- Accounts Receivable - Employee 3,876 ---------- Total Accounts Receivable - net $ 620,129 ========== SCHEDULE 1.5 ADDITIONAL BUSINESS LIABILITIES o DOCUCON INCORPORATED ADDITIONAL LIABILITIES AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 1.5 DOCUCON, INCORPORATED ADDITIONAL LIABILITIES AS OF DECEMBER 31, 1999 (Subject to final year-end audit adjustments) INCLUDED EXCLUDED TOTAL ---------- ---------- ---------- ACCRUED LIABILITIES: Accrued salaries ...................... $ 106,609 $ 129,675 $ 236,284 Accrued temporary labor ............... 18,526 -- 18,526 Accrued vacation ...................... 89,097 34,072 123,169 Accrued GSA ........................... 1,737 -- 1,737 Accrued legal (Vountary Discl) ........ 265,324 -- 265,324 Accrued rework reserve ................ 15,650 -- 15,650 Accrued interest ...................... 30,849 10,203 41,052 Accrued bonus ......................... -- 26,505 26,505 Accrued commissions ................... 89,846 -- 89,846 Accrued franchise tax ................. 2,500 3,000 5,500 Accrued property tax .................. 10,620 -- 10,620 Accrued professional fees ............. -- 70,000 70,000 Accrued medical (tail coverage) 114,029 6,002 120,030 Accrued 401(k) ........................ 26,539 -- 26,539 Employee stock purchase plan .......... 11,319 8,143 19,462 ---------- ---------- ---------- TOTAL ACCRUED LIABILITIES ............. 782,645 287,600 1,070,244 ---------- ---------- ---------- ACCRUED OTHER: Shareholders Mtg ...................... $ -- $ 16,545 $ 16,545 Board Mtg Fees ........................ -- 10,000 10,000 HQ Global Vienna rent ................. 9,142 -- 9,142 CAN Premium accrual 12/99 ............. 2,399 -- 2,399 Accrue Park Ten rent .................. 39,614 -- 39,614 Hobgoog consulting .................... -- 10,000 10,000 Allmerica health ins 12/99 ............ 11,015 1,511 12,526 ---------- ---------- ---------- TOTAL ACCRUED OTHER ................... 62,170 38,056 100,227 ---------- ---------- ---------- Taxes payable ......................... 9,605 1,067 10,672 ---------- ---------- ---------- Capital leases ........................ 107,849 23,081 130,930 ---------- ---------- ---------- S/T and L/T retirement benefits ....... -- 272,195 272,195 ---------- ---------- ---------- Other A/P ............................. 117,706 16,172 133,878 ---------- ---------- ---------- Bridge loans, net ..................... -- 254,335 254,335 ---------- ---------- ---------- Totals ................................ $1,079,975 $ 892,506 $1,972,481 ========== ========== ========== SCHEDULE 1.8 ASSUMED CONTRACTS INCLUDING GOVERNMENT CONTRACTS LIST OF ACTIVE CONTRACTS o ACCOUNTS RECEIVABLE PURCHASE AGREEMENT, SILICON VALLEY BANK, DATED JUNE 18, 1999 o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK, DATED JULY 28, 1999 o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK, DATED DECEMBER 22, 1999 o ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT, SILICON VALLEY BANK, DATED FEBRUARY 11, 2000 o EMPLOYMENT AGREEMENTS * MICHAEL C. MOONEY, DATED MAY 5, 1998 o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT * BRIAN PACK, DATED OCTOBER 12, 1999 o MARKETING AGREEMENTS * FILENET AGREEMENT * ESPS AGREEMENT o LIST OF SERVICE AND SUPPORT CONTRACTS (ATTACHED) o FACILITY LEASES * SAN ANTONIO OPERATIONS CENTER * VIENNA VIRGINIA SALES OFFICE o MISCELLANEOUS OPERATING LEASES FOR OFFICE EQUIPMENT USED IN THE BUSINESS GOVERNMENT CONTRACTS o DEPARTMENT OF DEFENSE CONTRACT, DATED DECEMBER 19, 1997 o GSA SCHEDULE SCHEDULE 1.39 INVENTORY NONE. SCHEDULE 1.39 DOCUCON, Incorporated Inventory As of December 31, 1999 (Subject of final year-end audit adjustments) None $0 SCHEDULE 1.40 KEY EMPLOYEES o DOCUCON INCORPORATED KEY EMPLOYEES o DOCUCON INCORPORATED CORPORATE ORGANIZATION CHART o SAN ANTONIO ORGANIZATION CHART SCHEDULE 1.40 DOCUCON, INCORPORATED Key Employees NAME POSITION Brian Pack General Manager - San Antonio Operations Center Alice Hopkins-Valdez Human Resource Manager John Harts Operations Controller Kenneth Weber Chief Engineer James Frizell Senior Software Engineer David Lopez Senior Hardware Engineer Jerry Gallegos Support Manager Duane Fousie, Jr. Support Manager JoAnn Soto Support Manager Dan Young Director of Sales Support Michael Mooney Senior Vice President - Sales SCHEDULE 1.47 NET ASSETS (BOOK VALUE) o DOCUCON INCORPORATED NET ASSETS (BOOK VALUE) AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 1.47 DOCUCON, INCORPORATED Net Assets (Book Value) As of December 31, 1999 (Subject to final year-end audit adjustments) Investments (see Schedule 2.2(k)) $ 64,022 Accounts receivable, net (see Schedule 1.1) 620,129 Prepaids (see Schedule 1.51) 108,110 Deposits (see Schedule 1.51) 47,225 Property and equipment, net (see Schedule 1.62) 341,378 ----------- Total $ 1,180,864 =========== SCHEDULE 1.51 PREPAID EXPENSES o DOCUCON INCORPORATED PREPAID EXPENSES AND DEPOSITS AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 1.51 DOCUCON, INCORPORATED Prepaid Expenses and Deposits As of December 31, 1999 (Subject to final year-end audit adjustments) INCLUDED EXCLUDED TOTAL -------- -------- -------- PREPAID INSURANCE ....................... $ 5,783 $ 1,016 $ 6,799 -------- -------- -------- PREPAID OTHER: ACLP Park Ten ........................... 29,708 -- 29,708 Aiim Memebership Dues ................... 1,167 -- 1,167 Aiim 2000 tradeshow ..................... 11,600 -- 11,600 Asst Sec Patents & trademarks ........... 125 -- 125 Best software ........................... -- 42 42 Best Software-Support Plus .............. -- 489 489 Depository Trust ........................ -- 850 850 E-Trade Business Solutions .............. -- 2,679 2,679 Gov Technology Conference ............... 525 -- 525 Gov Technology Conference ............... 1,575 -- 1,575 Gov Technology Conference ............... 2,320 -- 2,320 Kalthoff-Sring 00 Show .................. 2,500 -- 2,500 Lodde typewriter maint .................. 22 -- 22 Lodde typewriter maint .................. 20 -- 20 Lodde typewriter maint .................. 22 -- 22 Pitney Bowes maint copier s/n50265 ...... 38 -- 38 Platinum/Epicor M/A ..................... -- 2,253 2,253 Rock4 Cap Lse payment, advance .......... 341 -- 341 BankTec maint agreement ................. 2,123 -- 2,123 NDIA fed gov show ....................... 2,500 -- 2,500 Dell Financial .......................... -- 983 983 State Workmen's Ins Fund PA ............. -- 1,013 1,013 Williams Commun: serv contract PA ....... -- 497 497 MSDN network subscription ............... 329 -- 329 Accutrn. Time Am badge reader maint ..... 816 -- 816 Quiz HR Testing service ................. 1,421 -- 1,421 Strategic Link computer support ......... -- 3,500 3,500 Met Life dental ins ..................... 2,388 112 2,500 Prudential: STD/LTD ins binder .......... 1,428 72 1,500 Boon group: group health ins binder ..... 24,500 1,500 26,000 Bank Tec CM#90161466 .................... 7,886 -- 7,886 EEC ..................................... 3,738 -- 3,738 Vienna rent ............................. 5,236 -- 5,236 -------- -------- -------- TOTAL PREPAID OTHER ..................... $102,327 $ 13,991 $116,318 ======== ======== ======== DEPOSITS - SHORT TERM Allmerica ............................... 7,500 -- 7,500 COSC Partners ........................... 22,077 -- 22,077 Rouse/Liberty ........................... -- 12,793 12,793 Rouse/Liberty ........................... -- 38,379 38,379 -------- -------- -------- TOTAL DEPOSITS - SHORT TERM ............. $ 29,577 $ 51,172 $ 80,749 ======== ======== ======== DEPOSITS - LONG TERM Rockford Leasing ........................ $ 591 $ -- $ 591 Rockford Leasing ........................ 543 -- 543 Rockford Leasing ........................ 331 -- 331 HQ Tyson's Corner ....................... 3,803 -- 3,803 Boulevard Plaza ......................... -- 9,653 9,653 Longwater/Heartland ..................... 1,298 -- 1,298 Studebaker Leasing ...................... 475 -- 475 HQ Tyson's Corner ....................... 3,608 -- 3,608 City Public Service ..................... 7,000 -- 7,000 -------- -------- -------- TOTAL DEPOSITS - LONG TERM .............. $ 17,648 $ 9,653 $ 27,300 ======== ======== ======== SCHEDULE 1.62 TANGIBLE ASSETS o DOCUCON INCORPORATED TANGIBLE ASSETS AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) o SEPARATE LISTING ADMINISTRATIVE EQUIPMENT INVENTORY SCHEDULE 1.62 DOCUCON, INCORPORATED Tangible Assets As of December 31, 1999 (subject final year-end audit adjustments) INCLUDED EXCLUDED TOTAL ----------- ----------- ----------- Leashold improvements ............. $ 28,367 $ 26,680 $ 55,047 Furniture & Fixtures - G&A ........ 80,898 -- 80,898 Furniture & Fixtures - R&D ........ 21,278 -- 21,278 Furniture & Fixtures - Production . 109,210 -- 109,210 Furniture & Fixtures - Virginia ... 6,076 -- 6,076 Furniture & Fixtures - Philadelphia -- 37,445 37,445 Equipment ......................... 314,190 -- 314,190 Equpment - R&D .................... 491,058 -- 491,058 Equipment - Ap Cards .............. 674,206 -- 674,206 Equipment - Production ............ 2,642,349 -- 2,642,349 Equipment - Tech Manuals .......... 61,405 -- 61,405 Equipment - ICR ................... 161,258 -- 161,258 Equipment - Virginia .............. 7,562 -- 7,562 Equipment - Microfilm/fische ...... 192,768 -- 192,768 Equipment - Amoco ................. 142,968 -- 142,968 Equipment - Philadelphia .......... -- 73,712 73,712 Software - Engineering ............ 81,080 -- 81,080 Software - Accounting ............. -- 56,090 56,090 Software - Govt Prod .............. 232,387 -- 232,387 Software - Marketing .............. 1,357 -- 1,357 ----------- ----------- ----------- 5,248,417 193,927 5,442,344 Accumulated depreciation .......... (4,907,039) (72,961) (4,980,000) ----------- ----------- ----------- NET TANGIBLE ASSETS ............... $ 341,378 $ 120,966 $ 462,344 =========== =========== =========== SCHEDULE 2.2(K) INVESTMENTS o DOCUCON INCORPORATED INVESTMENTS AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 2.2(K) DOCUCON, INCORPORATED Investments As of December 31, 1999 (Subject to final year-end audit adjustments) Petty cash - TX ............................................ $ 600 Dreyfus Money Market ....................................... 4,187 Cross Securities ........................................... 5,138 Bank One Controlled Disbursement ........................... -- Bank One Operating ......................................... 54,097 Bank One Payroll ........................................... -- ------- $64,022 ======= SCHEDULE 2.2(M) TELEPHONE AND FAX NUMBERS; WEB SITE o DOCUCON TELEPHONE DIRECTORY SCHEDULE 2.3 EXCLUDED ASSETS o DOCUCON INCORPORATED EXCLUDED ASSETS AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 2.3 DOCUCON, INCORPORATED Excluded Assets As of December 31, 1999 (Subject to final year-end audit adjustments) Accounts receivable (see Schedule 1.1) $ - Prepaids (see Schedule 1.51) 15,007 Deposits (see Schedule 1.51) 60,825 Property and equipment, net (see Schedule 1.62) 120,966 --------- $ 196,797 ========= SCHEDULE 2.5 EXCLUDED LIABILITIES o DOCUCON INCORPORATED EXCLUDED LIABILITIES AS OF DECEMBER 31, 1999 (SUBJECT TO FINAL YEAR-END AUDIT ADJUSTMENTS) SCHEDULE 2.5 DOCUCON, INCORPORATED Excluded Liabilities As of December 31, 1999 (Subject to final year-end audit adjustments) Accounts payable (see Schedule 1.2) $ 131,994 Additional liabilities (see Schedule 1.5) 892,506 ----------- $ 1,024,500 =========== SCHEDULE 2.7(A) PROCEDURES o DOCUCON INCORPORATED ACCOUNTING PRINCIPLES o DOCUCON INCORPORATED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Schedule 2.7(a) Page 1 of 3 DOCUCON, INCORPORATED Accounting Principles The Company's financial statements are prepared in accordance with generally accepted accounting principles. A summary of the Company's significant accounting policies is attached. SCHEDULE 4.9 PERMITS o SAN ANTONIO FACILITY CLEARANCE SCHEDULE 4.12 INTELLECTUAL PROPERTY o LIST OF PROPRIETARY DOCUCON-DEVELOPED SOFTWARE MODULES. o LIST OF PROPRIETARY PROCESS CONTROLLED BY THE COMPANY AND OTHER TRADE SECRETS. o LIST OF THIRD-PARTY SOFTWARE PROVIDERS. o SERVICE MARK 1,610,041 REGISTRATION DOCUMENTS o TRADEMARK 1,577,519 REGISTRATION DOCUMENTS o CONFIDENTIALITY AGREEMENT (4.12 (H)) FOR KEY EMPLOYEES AND OTHERS SCHEDULE 4.13 FACILITIES o SAN ANTONIO, TEXAS OPERATIONS CENTER o VIENNA, VIRGINIA SALES OFFICE SCHEDULE 4.14 COMPANY-WIDE CONTRACTS SEE CONTRACTS LISTED ON SCHEDULE 1.8 SCHEDULE 4.15 INSURANCE o INSURANCE COVERAGES FOR DOCUCON INCORPORATED AND DOCUCON INCORPORATED 401(K) PLAN 43 SCHEDULE 4.18 WARRANTIES o FORMS OF WARRANTIES AND GUARANTEES PROVIDED TO CUSTOMERS SCHEDULE 4.21 ENVIRONMENTAL MATTERS o PHASE I ENVIRONMENTAL SITE ASSESSMENT CONDUCTED BY RABA KISTNER ENGINEERS SCHEDULE 4.23 EMPLOYEE BENEFIT PLANS o DOCUCON INCORPORATED 1998 STOCK OPTION PLAN o DOCUCON INCORPORATED EMPLOYEE STOCK PURCHASE PLAN o DOCUCON INCORPORATED FLEXIBLE BENEFIT PLAN SUMMARY PLAN DESCRIPTION JANUARY 1, 2000 o DOCUCON INCORPORATED FLEXIBLE EMPLOYEE BENEFIT PLAN QUESTIONS & ANSWERS o ACCEPTANCE OF COBRA QUALIFYING EVENT NOTIFICATION RECEIPT o DOCUCON INCORPORATED 401(K) PLAN SUMMARY PLAN DESCRIPTION o DOCUCON POLICY STATEMENT I-9 VACATION o CIGNA HEALTH CARE, INSURANCE TRUST PLAN o ADMINISTRATION MANUAL FOR INTEGRATED SHORT & LONG TERM DISABILITY o EMPLOYMENT AGREEMENT, DOUGLAS GILL, DATED APRIL 1, 1998 o EMPLOYMENT AGREEMENT, WARREN D. BARRATT, DATED DECEMBER 20, 1998 o EMPLOYMENT AGREEMENT, PAUL M. NUNLEY, DATED JANUARY 4, 1999 o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT, MARK G. HARDIN, DATED OCTOBER 12, 1999 o CONFIDENTIALITY, NONCOMPETITION AND TERMINATION AGREEMENT, BRIAN PACK, DATED OCTOBER 12, 1999 o EMPLOYMENT AGREEMENT, MICHAEL C. MOONEY, DATED MAY 5, 1998 SCHEDULE IV DISCLOSURE SCHEDULE PROVIDED TO PARENT AND PURCHASER [ALL SELLER DISCLOSURES ARE SUBJECT TO YEAR-END AUDIT ADJUSTMENT] o PARA., 4.9, 4.23, 4.24, 4.26 - 401(K) - THREE LATE REMITTANCE ON EMPLOYEE WITHHOLDINGS IN 1999; IMPACT OF SUCH LATE CONTRIBUTIONS REMEDIED IN ACCORDANCE WITH ERISA. o PARA. 4.26, - APRIL 1998 TO JULY 1999 - NO WORKERS COMPENSATION COVERAGE FOR PENNSYLVANIA-BASED EMPLOYEES DURING THAT PERIOD; NO JOB-RELATED INJURIES DURING THIS PERIOD; PENNSYLVANIA WORKERS COMPENSATION COVERAGE CURRENTLY IN FORCE SINCE JUNE 1999. o PARA. 4.8, 4.14, - MULTIPLE VENDORS OF BUSINESS HAVE THREATENED LITIGATION FOR NONPAYMENT OF ACCOUNTS PAYABLE; TO BEST OF OUR KNOWLEDGE AND BELIEF, NO LITIGATION HAS BEEN INITIATED. o PARA. 4.4.,4.14 - FOURTH QUARTER COMPLIANCE CERTIFICATE REQUIRED UNDER SILICON VALLEY BANK LOAN AGREEMENT WAS NOT SUBMITTED. COMPANY MAY BE IN TECHNICAL DEFAULT OF ONE OR MORE PROVISIONS OF LOAN AGREEMENT. WE BELIEVE THAT BANK IS GENERALLY AWARE OF SUCH POTENTIAL TECHNICAL DEFAULT CONDITIONS, WHICH INCLUDE CREATION OF NEW LIENS ON ASSETS WITHOUT THE BANK'S PRIOR WRITTEN CONSENT AND AGREEMENT TO SELL ASSETS WITHOUT THEIR PRIOR WRITTEN CONSENT. BANK HAS NOT MADE ORAL OR WRITTEN DECLARATION OF DEFAULT AND NOT MADE DEMAND FOR PAYMENT. o PARA. 4.10, 4.14 - POTENTIAL LIABILITY FOR OVERPAYMENT ON CONTRACT PERFORMED IN 1998/1999; CURRENTLY BEING RESEARCHED IN CONJUNCTION WITH 1999 YEAR-END AUDIT; POTENTIAL LIABILITY FOR CUSTOMER OVERPAYMENT $0-$45,000. o PARA. 4.14 - AN ADMINISTRATIVE PROVISION OF COMPANY'S CURRENT DOD CONTRACT CALLS FOR MONTHLY REPORTING OF VOLUMES OF WORK PERFORMED UNDER THE CONTRACT. THE COMPANY HAS NOT HISTORICALLY PROVIDED THIS MONTHLY REPORT AND WAS RECENTLY ASKED BY REPRESENTATIVE OF CONTRACTING OFFICE TO BEGIN PROVIDING THIS REPORT. STEPS ARE CURRENTLY BEING UNDERTAKEN TO BEGIN PROVIDING THIS MONTHLY REPORT. WE INTEND TO BEGIN PROVIDING THIS MONTHLY ADMINISTRATIVE REPORTING FOR ALL ACTIVE DELIVERY ORDERS PRIOR TO CLOSING. o PARA. 4.8, 4.14 - INSPECTOR GENERAL, VOLUNTARY DISCLOSURE DEPARTMENT OF DEFENSE, MAY 24, 1999 o PARA. 4.23 - CERTAIN EMPLOYEE CONTRACTS PROVIDE FOR CHANGE OF CONTROL OR SEVERANCE BENEFITS SCHEDULE V DISCLOSURE SCHEDULE PROVIDED TO SELLER SCHEDULE V NONE. SCHEDULE 6.4 NECESSARY CONSENTS SEE SCHEDULE 1.8, ASSUMED CONTRACTS INCLUDING GOVERNMENT CONTRACTS. EX-11 3 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF LOSS PER SHARE
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 ----------- ----------- COMPUTATION OF BASIC LOSS PER SHARE: Net loss .................................................................... $(3,566,828) $(5,085,694) Less- Preferred stock dividend requirements .............................. (19,250) (27,462) ----------- ----------- Net loss applicable to common stockholders .................................. $(3,586,078) $(5,113,156) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING USED FOR COMPUTATION ............................................ 3,386,768 3,300,056 =========== =========== BASIC LOSS PER COMMON SHARE .................................................... $ (1.06) $ (1.55) =========== =========== COMPUTATION OF DILUTED LOSS PER SHARE: Net loss .................................................................... $(3,566,828) $(5,085,694) Preferred stock dividend requirements ....................................... (19,250) (27,462) Decrease in net loss applicable to common stock for preferred stock dividends not incurred upon assumed conversion of preferred stock .................. 19,250 27,462 ----------- ----------- Net loss applicable to common stockholders used for computation ....... $(3,566,828) $(5,085,694) =========== =========== Weighted average number of shares of common stock outstanding ............... 3,386,768 3,300,056 Weighted average incremental shares outstanding upon assumed conversion of options and warrants ....................................... 23,249 91,073 Weighted average incremental shares outstanding upon assumed conversion of the preferred stock ........................................ 58,331 82,975 ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR COMPUTATION ................................................................. 3,468,348 3,474,104 =========== =========== DILUTED LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ........................................................... $ (1.03)(a) $ (1.46)(a) =========== ===========
(a) This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K although it is not required by SFAS No. 128 because it is antidilutive. EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, included in this Form 10-KSB, into the Company's previously filed Registration Statement on Form S-8 (File No. 1-10185). /S/ ARTHUR ANDERSEN LLP San Antonio, Texas March 24, 2000 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON, INCORPORATED'S BALANCE SHEET AS OF DECEMBER 31, 1999, AND ITS STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 28,835 0 1,001,130 8,887 0 1,731,498 5,442,344 4,980,000 2,221,142 3,827,269 301,512 0 7 35,088 (1,942,734) 2,221,142 5,716,520 5,716,520 4,969,905 4,969,905 2,157,971 0 188,547 (3,566,828) 0 (3,566,828) 0 0 0 (3,566,828) (1.06) (1.06)
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