-----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, WhojiReoY5hgvI12r8SqzDV+Vwauw1PQvTGAUAdFg+E0mrQw7ARGeRF7mM1Ayyeq Axs8iHwc1Q/jWWfTiNscwg== 0001125282-02-001944.txt : 20020610 0001125282-02-001944.hdr.sgml : 20020610 20020607172008 ACCESSION NUMBER: 0001125282-02-001944 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20020607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA CONVERSION LABORATORY CENTRAL INDEX KEY: 0000902577 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-90090 FILM NUMBER: 02674167 BUSINESS ADDRESS: STREET 1: 184-13 HORACE HARDING EXPRESSWAY CITY: FRESH MEDOWS STATE: NY ZIP: 11365 BUSINESS PHONE: 7183578700 SB-2 1 b318755_sb2.txt FORM SB-2 As filed with the Securities and Exchange Commission on June 7, 2002 Registration No. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- DATA CONVERSION LABORATORY, INC. (Exact name of Registrant as specified in its charter)
New York 7374 11-2685851 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
184-13 Horace Harding Expressway Fresh Meadows, New York 11365 (718) 357-8700 (718) 357-8776 Facsimile (Address, including zip code, and telephone number, including area code, of Registrant's executive offices) ---------------- MARK GROSS President and Chief Executive Officer Data Conversion Laboratory, Inc. 184-13 Horace Harding Expressway Fresh Meadows, New York 11365 (718) 357-8700 (718) 357-8776 Facsimile (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: Joel J. Goldschmidt, Esq. Mark von Bergen, Esq. Morse, Zelnick, Rose & Lander LLP Joshua E. Husbands, Esq. 450 Park Avenue Holland & Knight LLP New York, New York 10022 2300 U.S. Bancorp Tower (212) 838-8269 111 S.W. Fifth Avenue (212) 838-9190 Facsimile Portland, Oregon 97204 (503) 243-2300 (503) 241-8014 Facsimile ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| (calculation of registration fee on next page) ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Aggregate Amount of Securities to be Registered Registered Per Unit/Share (1) Offering Price (1) Registration Fee - --------------------------------------------------------------------------------------------------------------------------------- Units, consisting of one common share, $.01 par value, and one warrant to purchase one common share 1,437,500(2) $8.50 $12,218,750 $1,124.13 - --------------------------------------------------------------------------------------------------------------------------------- Common shares included in the units 1,437,500(2) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Warrants to purchase common shares included in the units 1,437,500(2) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Common shares underlying the warrants included in the units(3) 1,437,500(2) $12.75 $18,328,125 $1,686.19 - --------------------------------------------------------------------------------------------------------------------------------- Common shares issuable upon declaration of dividend 287,500 -- -- (4) - --------------------------------------------------------------------------------------------------------------------------------- Representative's warrants 125,000 -- -- --(5) - --------------------------------------------------------------------------------------------------------------------------------- Units issuable upon exercise of the representative's warrants 125,000 $10.20 $1,275,000 $117.30 - --------------------------------------------------------------------------------------------------------------------------------- Common shares included in the units underlying the representative's warrants(3) 125,000 -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Warrants to purchase common shares included in units issuable upon exercise of the representative's warrants 125,000 -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Common shares underlying the warrants to purchase common shares included in units issuable upon exercise of the representative's warrants(3) 125,000 $12.75 $1,593,750 $146.63 - --------------------------------------------------------------------------------------------------------------------------------- Total $33,415,625 $3,074.25 - ---------------------------------------------------------------------------------------------------------------------------------
- ----------------------- (1) Estimated solely for purposes of calculating the amount of the registration fee paid pursuant to Rule 457(o) under the Securities Act. (2) Includes 187,500 shares issuable upon exercise of underwriters' over- allotment option. (3) Pursuant to Rule 416 under the Securities Act, there are also being registered hereby such additional indeterminate number of shares as may become issuable pursuant to the antidilution provisions of the warrants. (4) No registration fee required. (5) No registration fee required pursuant to Rule 457(g) of the Securities Act. PROSPECTUS (Subject to Completion) Dated June 7, 2002 1,250,000 Units [Data Conversion Laboratory LOGO] ---------------- This is our initial public offering. We are offering 1,250,000 units, each unit consisting of one common share and one unit warrant. We expect that the initial public offering price will be between $7.50 and $8.50 per unit. Each unit warrant will entitle its holder to purchase one common share at an exercise price equal to 150% of the unit offering price. The unit warrants are exercisable at any time after they become separately tradable until their expiration date, five years after the date of this prospectus. We may redeem some or all of the unit warrants, beginning six months after the date of this prospectus, at a price of $0.25 per unit warrant, if the closing price for our stock, as reported on the Nasdaq SmallCap Market for any ten consecutive trading days, is at or above 200% of the unit offering price. The common shares and the unit warrants will trade only as a unit for 30 days following this offering. After that date, the common shares and the unit warrants will trade separately. If our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. No public market currently exists for any of our securities. We are applying to the Nasdaq SmallCap Market to list the units, common shares and unit warrants under the symbols "DCLXU," "DCLX" and "DCLXW," respectively. Investing in these units involves significant risks. See "Risk Factors" beginning on page 7. ---------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the disclosures in this prospectus. Any representation to the contrary is a criminal offense. ----------------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Per Unit Total - -------------------------------------------------------------------------------- Initial public offering price........ $ $ - -------------------------------------------------------------------------------- Underwriting discount... $ $ - -------------------------------------------------------------------------------- Proceeds to us, before expenses.............. $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Paulson Investment Company, Inc. is the representative of the underwriters of this offering. We have granted the representative a 45-day option to purchase up to an additional 187,500 units to cover over-allotments. ---------------- PAULSON INVESTMENT COMPANY, INC. The date of this Prospectus is , 2002 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. INSIDE FRONT COVER [GRAPHICS TO BE SUPPLIED] This graphic illustrates the conversion process. The center of the graphic is a circle symbolizing our proprietary conversion software. The core of the circle is called "DCL Conversion Hub." Around the core are different segments representing various modules to the software. Above the circle is the original content, a short news article. Surrounding the article are graphics depicting the original format in which the article could have been produced: on CD ROM; in a book; as a newspaper article or on a computer in a word processing format. Arrows lead from the article through the software circle to the same article converted into XML with tags applied to describe the different elements of the article. Graphics surround the XML version, depicting some of the ways it can be viewed: on the Web, through a personal display unit, on a laptop computer or on a personal digital assistant. ------------------------ We have rights to the following unregistered names and marks: Data Conversion Laboratory and MindReader(sm). All other trademarks, trade names or service marks appearing in this prospectus belong to their respective owners. Prospectus Summary This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including our financial statements and the notes to those statements. Unless indicated to the contrary, historical financial information has not been adjusted to reflect a 1.345641-for-1 stock split in the form of a dividend effected on May 30, 2002. All other information regarding our securities has been adjusted to reflect this dividend. Unless stated to the contrary, references to "we," "us," "our," "DCL" or the "company" in this prospectus refer to Data Conversion Laboratory, Inc. and, where appropriate, its predecessors. Data Conversion Laboratory We are a leading independent provider of data conversion services. Since our inception in 1981, we have converted content from one format to another in response to evolving client preferences and advances in technology. Using our proprietary conversion methodology and software, we specialize in implementing and managing large, complex conversion projects, converting a broad range of content to and from a variety of formats. Currently, the majority of our business consists of converting content to the markup languages XML and SGML. These services enable our clients to publish, distribute, search, store and provide access to data and information over a wide range of electronic and digital communication channels, including the Internet, intranets, extranets and wireless personal communication devices. Our clients currently include large manufacturing companies, professional societies, publishers, defense contractors and the United States Department of Defense. Over the last few years, we have benefited from the rapid growth of the data conversion industry. From 2000 to 2001, our revenues grew 50.0%, increasing from $3.3 million to $4.9 million, and our gross margin increased from 35.0% to 42.9%. In 2001 we reported pre-tax income of $889,000 compared to a pre-tax loss of $94,000 in 2000. The industry's growth is attributable to a number of factors, including the increasing popularity of the Internet; the development of various markup languages, such as SGML and XML, that make it easier to publish, distribute, search, store and access content in digital format; government regulations mandating or otherwise encouraging the use of digital technology to publish and distribute content; and a general trend by large organizations to outsource their data conversion needs. We believe that we are well-positioned to capitalize on the anticipated continued growth of the data conversion industry because of our competitive advantages. Reputation and brand identity. We believe that, as a result of more than 20 years in the industry, we have developed a reputation as a high-quality, reliable and efficient provider of data conversion services. Software technology. We have developed comprehensive proprietary conversion software that automates substantially all of the conversion process. Conversion methodology. Our proprietary conversion methodology is designed to address the principal issues of a complex, large-scale conversion project. It allows us to efficiently and accurately design each conversion project to meet the client's requirements and provides a mechanism for the client to review the results of the project and provide feedback. Vendor network. Our network of high quality, low-cost vendors allows us to outsource the non-automated portions of the conversion process. As a result, we are able to reduce our costs, maintain flexibility and execute multiple conversion projects simultaneously. We intend to use these advantages to expand our existing client relationships and develop new ones. We currently have an established position in three large markets: scientific, technical and medical, or STM, publishing; corporate technical documentation; and defense. Recently, we have expanded into a fourth large market, educational publishing. We plan to use a portion of the net proceeds to hire additional sales and marketing personnel and to develop three new markets within the next year. We also intend to enter into strategic relationships and pursue strategic acquisitions that will enable us to expand our client base. 3 We commenced operations in 1981 and incorporated in 1984 under the name M.J. Gross & Company, Inc. Since inception, we have operated under the name Data Conversion Laboratory. In June 2002, we changed our name to Data Conversion Laboratory, Inc. Our offices are located at 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365, and our telephone number is (718) 357-8700. Our online address is www.dclab.com. None of the information on our Web site is part of this prospectus. The Offering Securities offered. . . . . . . . . . 1,250,000 units, each unit consisting of one common share and one redeemable unit warrant, to purchase one common share. The common shares and the unit warrants will trade as units for 30 days following the effective date of this prospectus. After that date, the common shares and the unit warrants will trade separately. Common shares to be outstanding after the offering . . . . . . . . . . . . 2,671,314 Stock dividend. . . . . . . . . . . . If our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. Unit warrants: Number to be outstanding after this offering. . . . . . . . . . . . . 1,250,000 Exercise terms. . . . . . . . . . The unit warrants are exercisable at any time after they become separately tradable. Each unit warrant entitles its holder to purchase one common share at an exercise price equal to 150% of the unit offering price. Expiration date . . . . . . . . . , 2007 Redemption. . . . . . . . . . . . We may redeem some or all of the unit warrants, commencing six months after the effective date of this prospectus, at a price of $0.25 per warrant, on 30 days notice to the holders of the unit warrants. However, we may only redeem the unit warrants if the closing price for our stock, as reported on the Nasdaq SmallCap Market, for any ten consecutive trading days, is at or above 200% of the initial unit offering price. Proposed Nasdaq SmallCap symbols. . . Units DCLXU Common shares DCLX Unit warrants DCLXW Risk factors. . . . . . . . . . . . . An investment in the units involves a high degree of risk. You should not consider this offer if you cannot afford to lose your entire investment. Please refer to "Risk Factors" for a description of the risk factors you should consider. 4 Use of proceeds . . . . . . . . . . . We will use the net proceeds we receive from this offering, which we estimate will be approximately $8.3 million, assuming an initial public offering price of $8.00 per unit, to expand our sales and marketing efforts, further enhance our proprietary software and make a final S corporation distribution to our pre-offering shareholders and for working capital and general corporate purposes. Unless otherwise stated, all information contained in this prospectus assumes no exercise of: o the unit warrants; o the over-allotment option to purchase up to 187,500 units; o warrants to purchase 125,000 units granted to the representative in connection with this offering; o outstanding options granted under our 2001 stock option plan to purchase 185,261 common shares, of which 134,530 have an exercise price of $2.60 per share and 50,731 have an exercise price of $8.00 per share; and o options to purchase 78,720 common shares, having an exercise price of $0.42359 per share. This information also assumes that no common shares will be issued as a dividend. Summary Financial Information Statement of Operations Data:
Three months ended Years ended December 31, March 31, ----------------------- ----------------------- 2000 2001 2001 2002 ---------- ---------- ---------- ---------- (unaudited) (in thousands, except share and per share data) Revenue ........................................................... $ 3,252 $ 4,879 $ 1,071 $ 1,422 Gross margin ...................................................... $ 1,138 $ 2,096 $ 405 $ 631 Selling, general and administrative expenses ...................... $ 1,124 $ 1,017 $ 324 $ 326 Other expenses .................................................... $ 108 $ 190 $ 51 $ 73 Income (loss) before provision for (benefit from) taxes ........... $ (94) $ 889 $ 30 $ 232 Net income (loss) ................................................. $ (94) $ 800 $ 30 $ 214 Basic net income (loss) per common share .......................... $ (0.09) $ 0.80 $ 0.03 $ 0.21 Diluted net income (loss) per common share ........................ $ (0.09) $ 0.75 $ 0.03 $ 0.20 Weighted-average number of shares outstanding - basic ............. 1,000,000 1,000,000 1,000,000 1,000,000 Weighted-average number of shares outstanding - diluted ........... 1,000,000 1,063,521 1,047,608 1,062,896
5 Since our inception, we have been an S corporation for federal and state income tax purposes. As a result, we do not pay federal and state corporate income taxes. Immediately before this offering is consummated, we will terminate our status as an S corporation. Had we been a C corporation in 2000 and 2001, income tax expense would have been materially different. The pro forma statement of operations data for the year ended December 31, 2001 and the three months ended March 31, 2002 set forth below reflects our operating results assuming we were not an S corporation for those periods. Pro Forma Statement of Operations Data:
Three months Year ended ended December 31, March 31, 2001 2002 ------------ ------------ (unaudited) (in thousands, except share and per share data) Net income ...................................... $ 800 $ 214 Pro forma provision for income taxes ............ 349 69 ---------- ---------- Pro forma net income ............................ $ 451 $ 145 ========== ========== Pro forma basic net income per share ............ $ 0.43 $ 0.14 ---------- ---------- Pro forma diluted net income per share .......... $ 0.40 $ 0.13 ========== ========== Pro forma weighted-average number of shares - basic.......................................... 1,056,250 1,056,250 ========== ========== Pro forma weighted-average number of shares - diluted........................................ 1,119,771 1,119,146 ========== ==========
The table below sets forth a summary of our balance sheet data as of December 31, 2001 and on an actual basis and as adjusted for this offering as of March 31, 2002. Balance sheet data as adjusted for this offering take into account the following: o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002; o 75,000 common shares to be issued to members of the firm of Morse, Zelnick, Rose & Lander LLP, our attorneys, on the date of this prospectus, which will be charged to paid-in capital as an expense of this offering; o 673 common shares purchased by a former employee in April 2002 for $1,750; o the receipt of $8.3 million of estimated net proceeds of this offering, assuming an initial public offering price of $8.00 per unit; and o an estimated final S corporation distribution of $450,000 to our pre- offering shareholders. Balance Sheet Data:
December 31, 2001 March 31, 2002 ----------------- ---------------------- (in thousands) As adjusted for Actual this offering ------ ------------- (unaudited) (in thousands) Current assets.......................................... $1,058 $1,015 $ 8,867 Working capital......................................... $ 7 $ 178 $ 8,030 Total assets............................................ $2,334 $2,317 $10,169 Total liabilities....................................... $1,144 $ 913 $ 913 Shareholders' equity.................................... $1,190 $1,405 $ 9,256
6 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our financial statements and the notes to those statements, before you purchase any units. Risks Related to Our Business Our revenue is derived entirely from providing data conversion services. The data conversion industry is relatively new and evolving. If the market for data conversion services does not grow, our business, operations and financial condition will be adversely affected. All of our revenue, is and is expected in the foreseeable future to be, derived from providing data conversion services. As a consequence, our near- term future success depends on the growth of this industry and our ability to capitalize on this growth, neither of which may occur. The market for data conversion services is relatively new and its growth and market acceptance is uncertain. Content owners that have already adopted or that rely on other means of exchanging information may be reluctant or slow to adopt a new strategy that may render their existing structure obsolete. In anticipation of the growth of this industry, we have expanded our operations significantly in recent years. As a result, we have incurred new fixed operating expenses, such as additional administrative and managerial personnel. To capitalize on this investment, we need to develop new client relationships and expand existing ones. A decrease in the demand for data conversion services or its failure to achieve broad market acceptance would significantly harm our growth prospects, operating results and financial condition. If our revenues do not increase sufficiently to offset these increased expenses, our operating results may be adversely affected. Our operating history may not be indicative of our future prospects because our business is constantly evolving through the development and introduction of new products and services and changing client preferences. If we do not keep pace with these changes, our current services may become obsolete or unmarketable. Our operating history may not be a meaningful indicator of our future prospects. The data conversion industry is characterized by rapidly changing technologies, evolving industry standards, new product and service introductions and changing customer requirements. You should evaluate our chances of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a rapidly changing and highly competitive market. To be competitive and serve our clients effectively, we must respond in a timely and cost-efficient basis to changes in technology, industry standards, procedures and client preferences. We may experience technical or other difficulties that prevent or delay our responses. These delays could cause our current services to become obsolete and unmarketable. In addition, we may incur substantial costs if we need to modify our services or infrastructure to adapt to these changes. Our revenues are difficult to predict because they are generated on a project- by-project basis and projects may be cancelled with little or no notice. Since a large portion of our expenses is fixed, any decline in our revenues could adversely impact our operating results. Our revenues are derived primarily from fees for services generated from project-based client engagements. These projects vary in size and scope. Once we complete a project, we have no assurance that the client will retain us again in the future. In addition, clients may cancel, change or delay production requirements with little or no notice. As a result, our revenues are difficult to predict from period to period. Other factors may also contribute to fluctuations in our operating results including timing of client projects; volume of projects; the timing of our expenditures in anticipation of future projects; our effectiveness in managing the conversion process; changes in economic conditions; and unforeseen events. We make significant decisions based on our estimates of client requirements, including decisions regarding the levels of business we will seek and accept, production schedules, equipment procurement, personnel hiring and other resource acquisition. The nature of our clients' commitments and the possibility of changes in demand for 7 their products may reduce our ability to estimate accurately future client requirements. On occasion, clients may require rapid increases in production, which could stress our resources. We may not have sufficient capacity at all times to meet all of our clients' requirements. Finally, a substantial portion of our expenses, particularly those related to compensation, rent and equipment, is fixed. Consequently, a reduction in client demand for our services can adversely affect our operations and financial condition. Our government customers are subject to budgetary and political constraints, which may delay or prevent sales. We do a significant amount of business with U.S. government agencies, including the Department of Defense. These agencies often do not set their own budgets and, therefore, have little control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to use our services, it may be unable to do so as a result of budgetary or political constraints. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products and services by these agencies. Although military spending has recently increased, particularly since the September 11, 2001 terrorist attacks, there may be political pressure to use these funds for purposes other than data conversion services. The data conversion industry is highly competitive, and we expect competition to intensify. If we cannot compete effectively, our business and operations will be adversely affected. The market for our services is extremely competitive and fragmented, and we expect competition to intensify as the market evolves. As a result of this competitive environment, we may lose clients or have difficulty acquiring new ones. A significant source of competition is the in-house capability of our targeted client base. We cannot assure you that these clients and potential clients will outsource more of their needs or that they will not bring in- house services that they currently outsource. Some of our competitors have longer operating histories, larger client bases, more established relationships with their clients, greater brand or name recognition and significantly greater financial, technical and marketing resources than we do. Consequently, they may be in a better position than we are to respond quickly to new or emerging technologies, address changes in client requirements, adopt more aggressive pricing policies, make attractive offers to potential employees and strategic partners and devote resources to the development, promotion and sale of products and services. In addition, existing or future competitors may develop and offer competing services that are superior to, or have greater market acceptance than, ours. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which would have a material and adverse effect on our business, results of operations and financial condition. We generate a large portion of our revenues from a small number of clients, the loss of any one of which could adversely affect our business. For the quarter ended March 31, 2002, our largest client accounted for approximately 20.3% of our revenue, and our four largest clients, collectively accounted for 45.6% of our revenue. In 2001, our largest client accounted for approximately 13.7% of revenue, and our four largest clients, collectively, accounted for 35.1% of revenue. In 2000, our three largest clients each accounted for more than 10% of revenue and, collectively, accounted for 40.1% of revenue. We expect the relatively high level of client concentration to continue. We have no long-term contracts with any of these clients to ensure a continued stream of revenue from them. We cannot assure you that the volume of work performed for these clients will be sustained from year to year, and there is a risk that these clients may not retain us in the future. To the extent that any significant client uses less of our services or terminates its relationship with us, our revenues in the relevant fiscal period could substantially decline and our operating results could be adversely affected. If we fail to maintain our reputation and expand our name recognition, we may not be able to remain competitive. We believe that establishing and maintaining a strong reputation and name recognition as a high quality provider of data conversion services is critical for attracting and retaining clients. We also believe that the 8 importance of reputation and name recognition will increase as competition increases. If our reputation is damaged or if potential clients are not familiar with the services we provide, we may lose market share. To maintain and build our reputation, we must continue to provide high quality and efficient service and must expand our marketing efforts. We cannot assure you that we will be able to successfully and effectively maintain and expand our reputation and brand recognition. If we are unable to protect our proprietary technology and intellectual property rights against infringement or misappropriation, we may lose our competitive advantage and we may incur substantial costs to protect our rights. We believe that our future success and ability to compete depends, in part, on our proprietary methodology and proprietary software. We have not obtained or filed any applications for patents to protect these proprietary rights, and we have not registered or applied to register any trademarks, trade names, service marks, service names or copyrights that we may own. Essentially, we rely on trade secret laws and confidentiality agreements with employees and common law principles to protect our proprietary rights. These measures may prove inadequate to protect our proprietary rights. Despite our efforts, unauthorized parties may attempt to copy aspects of our methodology or the source code to our software or to obtain or use information that we regard as proprietary. In addition, the scope of any proprietary rights that we may have is uncertain and may not be sufficient to prevent others from developing and selling competing products and services, which could have a material adverse effect on our business. If any of our proprietary rights are misappropriated, we may have to incur substantial legal costs to enforce our rights, which could also have a material adverse effect on our financial condition and results of operations. If third parties ever assert that we have infringed on their intellectual property rights, we could incur substantial costs and experience diversion of management's attention and disruption of our business. In the future, third parties may assert infringement claims against us or claim that we have violated their intellectual property rights. Any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management's attention from our business. While we know of no basis for any future claims of this type, authorship of intellectual property rights can be difficult to verify. Competitors could assert, for example, that their former employees whom we have hired have misappropriated their proprietary information for our benefit. In such an event, even if the claim were not true, we might be forced to spend substantial amounts of management time and our available capital to defend the action and perhaps to pay a judgment or settlement, which could adversely impact our operations. If it is ultimately decided that we have infringed on a third party's proprietary rights, we could be required to enter into royalty or licensing agreements to continue using those rights. Royalty and licensing agreements, if required, may not be available on terms acceptable to us or at all. As part of our growth strategy, we intend to expand into new markets, which will require the expenditure of substantial sums of capital. If these efforts are unsuccessful, our business, operations and financial condition will be adversely affected. As part of our growth strategy, we are broadening our sales and marketing focus beyond our traditional base of customers. We believe that our future success and growth depends, in part, on our ability to successfully penetrate new markets. Our limited resources, the high cost of developing new markets and the lengthy sales cycle, limit the number of markets we can target and also limit our ability to effectively pursue marketing development activities in multiple markets simultaneously. As part of our growth strategy, we intend to seek strategic acquisitions. Integrating an acquired business may not be successful and could be disruptive to the historical parts of our operations. Our future growth depends, to a certain extent, on our ability to identify and acquire on acceptable terms businesses that enhance or complement our current operations. We may not be able to identify or complete strategic acquisitions or that any acquisitions that we do complete will have the benefits that we anticipated at the outset. Acquisitions involve a number of risks and challenges, including: 9 o expenses and difficulties in identifying appropriate targets and the costs associated with aborted transactions; o expenses, delays and difficulties of integrating an acquired business into our existing operations; o undisclosed or potential legal liabilities of the acquired business; o diverting management's attention from existing operations; o potential loss of key employees and clients of the acquired business; o lack of experience in the market of the acquired business; and o an increase in expenses and working capital requirements. These and other factors could adversely affect our ability to achieve anticipated levels of profitability or other anticipated benefits of an acquisition. Furthermore, acquisitions may require us to incur debt or obtain additional equity financing, which could increase our leverage or dilute the interests of our existing shareholders. We cannot assure that we will consummate any acquisitions in the future. We depend on the continued services of our key executives. Our future success depends to a large extent on the continued services of our key executives. There is an intense competition for qualified administrative and management personnel and skilled professionals, and we cannot assure you that we will be able to retain these executives and other employees. We could be materially and adversely affected by the loss of such personnel. In addition, we cannot assure that any non-compete and non- solicitation agreements that we may have with these employees are enforceable. Since we depend on our direct sales force to sell our services, our future growth will depend, in part, on our ability to hire, train and retain qualified sales personnel. We sell our services exclusively through our direct sales force, and we expect to continue to do so for the foreseeable future. Currently, our entire sales force consists of three people. Our ability to increase revenues depends, in part, on our ability to attract, train and retain qualified sales personnel. We believe that there is significant competition for qualified sales personnel with the advanced sales skills and technical knowledge that we need. If we are not able to attract, hire and retain experienced and competent sales personnel, our business will be harmed. In addition, any significant turnover in our sales force could harm our operations. Sales force turnover tends to slow sales efforts until replacement personnel can be recruited and trained. Our continued growth may strain our resources, which could adversely affect our business, financial condition and results of operations. A key part of our strategy is to grow organically and through acquisition, which could further strain our managerial, financial and other resources. We cannot assure you that we will be able to manage our growth effectively. To manage our future growth, we must continue to improve our operational and financial systems, procedures and controls and expand, train, retain and manage our employee base. If our systems, procedures, controls and management resources are inadequate to support our operations, our growth would be halted and we could lose the opportunity to gain significant market share. The failure to manage our growth effectively may lead to inefficiencies and redundancies and result in reduced growth prospects and profitability. We may need additional capital in the future, which may not be available to us. Raising additional capital would dilute the interests of our existing shareholders. In the future, we may need to raise additional capital through public or private debt or equity financing to take advantage of expansion or acquisition opportunities, enhance or upgrade our software, develop new solutions, penetrate new markets or meet working capital requirements. Any additional capital raised thought the sale of equity or equity-linked securities would dilute the ownership percentage of our existing shareholders. These securities could also have rights, preferences or privileges senior to those of our 10 outstanding capital stock. We cannot assure that we will be able to obtain additional financing when needed on acceptable terms or at all. If we cannot obtain additional financing when needed on acceptable terms, we may not be able to take advantage of business opportunities or respond to competitive developments, which could have a material adverse effect on our business, operations and financial condition. Terrorism and the uncertainty of war could have adverse effect on our business. The September 11, 2001 terrorist attacks and their aftermath have had and may continue to have a negative effect on our country's political and economic conditions and may adversely affect our business. Risks Related to this Offering The market price of our common shares could fluctuate significantly because of various factors, some of which are beyond our control. The stock market in recent years has experienced significant price and volume fluctuations that have affected market prices for the stock of technology companies. These fluctuations have often been unrelated to or disproportionately affected by the operating performance of these companies. In particular, the price levels at which many stocks were traded immediately following their initial public offering were often difficult to sustain. The market price of our common shares could fluctuate significantly after this offering in response to a variety of factors, some of which may be beyond our control. These factors may include one or more of the following: o quarterly operating results falling below or exceeding analysts' or investors' expectations in any given period; o changes in financial estimates or investment recommendations by securities analysts following our business; o changes in market valuations of, or earnings and other announcements by, our competitors; o announcements by our competitors of new technological innovations, service offerings, contracts, acquisitions or strategic relationships; o departures of key personnel; and o changes in business or regulatory conditions. In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were to be involved in securities litigation, we could incur a substantial cost and experience diversion of resources and the attention of management away from our business. We cannot predict the future performance of the capital markets in general and the technology stocks in particular, and we cannot assure you that the price for our common shares will not drop significantly subsequent to this offering, whether related to our business or to the capital markets generally. Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline. Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including changes in our operating expenses, market acceptance of our services, regulatory changes that may affect the marketability of our services, budgetary cycles of our principal clients, the mix and timing of client projects, and one-time nonrecurring and unusual charges. As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the near term and that you should not rely upon our performance in a particular period as indicative of our performance in any future period. We are controlled by a limited number of shareholders. Immediately after this offering, our principal shareholders, Mark and Judy Gross, will own 46.2% of our issued and outstanding common shares. If the over-allotment option is exercised in full, they will own 43.1%. 11 In either event, they will have the ability to exercise substantial control over our affairs and corporate actions requiring shareholder approval, including electing directors, selling all or substantially all of our assets, merging with another entity or amending our certificate of incorporation. This de facto control could delay, deter or prevent a change in control and could adversely affect the price that investors might be willing to pay in the future for our securities. The initial public offering price of the units does not necessarily relate to any established criteria of value so our securities may trade below the initial public offering price. The initial public offering price per unit in this offering has been determined through negotiations between the representative of the underwriters and us and does not necessarily relate to any established criteria of value. We cannot assure you that the trading price of our securities after this offering will equal or exceed the initial public offering price. An active trading market for our securities may not develop after this offering, and you may have difficulty selling your units, shares or unit warrants. There is currently no public market for the units, common shares or unit warrants. We cannot assure that an active public trading market for our common shares or unit warrants will develop or be sustained after this offering. If an active and liquid trading market does not develop or is not sustained, you may have difficulty selling your securities. We do not anticipate paying cash dividends in the foreseeable future. This could make our stock less attractive to potential investors. Some investors prefer companies that pay cash dividends. We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Aside from a final distribution of our S corporation profits to our pre-offering shareholders, we do not intend to declare or pay any cash dividends in the foreseeable future. Future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. If we pay a stock dividend that is not tax-free, you will have taxable income in an amount equal to the fair market value of the stock to the extent of our earnings and profits but we will not distribute cash with which you could pay the tax. We have agreed with the underwriters that, if our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. The proper tax treatment of this dividend is not certain. If the dividend is taxable, you will have ordinary income in an amount equal to the fair market value of the common shares you receive on the date of the distribution to the extent we have earnings and profits. We will not be distributing any cash that you can use to pay the taxes due on this dividend. The sale of common shares to generate cash to pay the taxes could have a depressing effect on the market price of our securities. You may not be able to exercise your unit warrants if we do not maintain an effective registration statement covering the unit warrants. We are required to use reasonable efforts to maintain a registration statement relating to the offer and sale of the common shares underlying the unit warrants and to qualify the unit warrants for sale in jurisdictions in which the unit warrantholders reside unless an exemption from registration or qualification exists. If registration is not maintained, you may not be able to exercise the unit warrants and/or sell the underlying shares. 12 The unit warrants may be redeemed on short notice. Following a six-month period after the date of this prospectus, we may redeem the unit warrants for $.25 per unit warrant on 30 days notice, provided the closing price for our stock, as reported on Nasdaq SmallCap, was, for any ten consecutive trading days, at or above 200% of the unit price. If we give notice of redemption, you will be forced to sell or exercise your unit warrants or accept the redemption price. The notice of redemption could come at a time when, under your personal circumstances, it is not advisable or possible for you to exercise the unit warrants. Future sales or the potential for sale of substantial number of our shares could cause the trading price of our common shares and unit warrants to decline. Sales of a substantial number of our common shares after this offering, or the perception that these sales may occur, could cause the market price of our common shares to decline and could materially impair our ability to raise capital through the sale of additional equity securities. The common shares sold in this offering, as well as the common shares issued when the unit warrants are exercised, other than shares held by an "affiliate," as that term is defined by the rules and regulations issued under the Securities Act of 1933, will be freely tradable without restriction under the Securities Act. The common shares held by existing shareholders are "restricted securities," as that term is defined in Rule 144 of the Securities Act, which are eligible for sale 90 days after the date of this prospectus. Of the 1,421,314 common shares that are restricted securities, 1,312,000 can be sold under Rule 144 and 33,641 may be sold without restriction under Rule 144(k). In addition, we have granted demand and piggyback registration rights to shareholders owning an aggregate of 112,731 common shares. If they exercise these rights, they could force us to register for resale the shares that they own. While we, our executive officers and directors and all of our existing shareholders have agreed not to sell any shares for a period of one year after this offering without the consent of the representative, the representative may waive that restriction in its sole discretion. The existence of outstanding unit warrants and previously issued options may dilute your investment in our shares and impair our ability to obtain additional equity financing. Once this offering is completed, in addition to the 2,671,314 common shares actually issued and outstanding, there will be another 2,203,720 common shares reserved for future issuance as follows: o up to 1,250,000 common shares underlying the unit warrants; o up to 375,000 common shares underlying the representative's over- allotment option, including the shares underlying the unit warrants included in that option; o up to 250,000 common shares underlying the representative's warrants, including the shares underlying the unit warrants includable in the representative's warrants; o up to 250,000 common shares underlying stock options previously granted, or to be granted, under our 2001 stock option plan; and o up to 78,720 common shares underlying stock options that were not granted under our stock option plan. In addition, if our audited pre-tax income for 2002 is less than $1.3 million, we will pay a 10% stock dividend to shareholders of record as of the record date for that dividend. The existence of these options and warrants and the possibility that we may have to issue the dividend shares could adversely affect the terms at which we could obtain additional equity financing. The holders of these options and warrants have the opportunity to profit from a rise in the value or market price of our common shares and to exercise them at a time when we could obtain equity capital on more favorable terms than those contained in these securities. Management has broad discretion over the use of proceeds from this offering. We may use the proceeds of this offering in ways that do not improve our operating results or the market value of our securities. We currently have identified specific uses for only a small portion of the net proceeds of this offering. We have significant flexibility as to the timing and the use of the proceeds. You will rely on our judgment with only limited information about our specific intentions regarding the use of proceeds. We may spend most of the net proceeds of this offering in ways with which you may not agree. If we fail to apply these 13 funds effectively, our business, results of operations and financial condition may be materially and adversely affected. You will experience immediate and substantial dilution of your investment. We anticipate that the initial public offering price of the units will be substantially higher than the net tangible book value per common share after the offering. We estimate that each investor who purchases units in this offering will incur immediate dilution of approximately $4.54, or 56.8% of the initial public offering price per unit, assuming an $8.00 price, in net tangible book value for each common share included in the units. In addition, you may experience further dilution to the extent that common shares are issued in connection with the exercise of existing stock options at exercise prices less than the initial public offering price per unit. Provisions of our certificate of incorporation and bylaws and New York law could deter takeover attempts that may offer you a premium, which could adversely affect our share price. Provisions of our certificate of incorporation, our bylaws and New York Business Corporation Law make acquiring control of us without the support of our board of directors difficult for a third party, even if the change of control would be beneficial to our shareholders. For example, our certificate of incorporation authorizes our board of directors to issue up to five million "blank check" preferred shares. This means that, without shareholder approval, the board of directors has the authority to attach special rights to preferred shares, including voting and dividend rights. With these rights, preferred shareholders could make it more difficult for a third party to acquire our company. In addition, a special meeting of shareholders may only be called by a majority of the board of directors or by our president, chief executive officer or chairman. Because shareholders do not have the ability to require the calling of a special meeting of shareholders, any third-party takeover not supported by the board of directors would be subject to significant delays and difficulties. In addition, removal of directors may only be done for cause upon the affirmative vote of the shareholders. The existence of these and other provisions may deprive you of an opportunity to sell your shares at a premium over prevailing prices. Your inability to obtain a control premium could adversely affect the market price for our common shares. You should not rely upon our forward-looking statements. Some of the statements made in this prospectus discuss future events and developments, including our future business strategy and our ability to generate revenue, income and cash flow. In some cases, you can identify forward-looking statements by words or phrases such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," "our future success depends," "seek to continue," or the negative of these words or phrases, or comparable words or phrases. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various facts, including the risks outlined in this "Risk Factors" section. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 14 USE OF PROCEEDS Assuming an initial public offering price of $8.00 per unit and after deducting the estimated underwriting discount, expense allowance, and estimated offering expenses of $650,000 payable by us, we estimate that the net proceeds to us from this offering will be approximately $8.3 million, or $9.6 million if the representative exercises the over-allotment option in full. We expect to use these net proceeds substantially as follows:
Approximate Approximate Percentage Dollar Amount of Net Proceeds ------------- --------------- Sales and marketing expenses ................ $3,500,000 42.2% Capital expenditures ........................ 1,500,000 18.1% Final S corporation distribution ............ 450,000 5.4% Working capital and general corporate purposes................................... 2,850,000 34.3% ---------- ----- $8,300,000 100.0% ========== =====
Sales and marketing expenses. This amount reflects the anticipated costs to increase our market share by expanding our relationship with our existing clients, increasing our presence in the markets we currently serve and entering new markets. It includes the cost of hiring additional sales and marketing personnel, consultant fees, and expenses relating to attending trade shows and conventions and producing marketing materials. Capital expenditures. This amount reflects the cost of new property, plant and equipment, such as computer hardware, as well as the anticipated costs to further upgrade, enhance and improve the functionality of our proprietary data conversion software. Final S corporation distribution. The actual amount of the final S corporation distribution will include the estimated taxes payable by our shareholders on our 2001 taxable income and on our 2002 taxable income from January 1 through the date of this prospectus plus $150,000 of previously taxed S corporation income. The estimated federal, state and local taxes payable by our shareholders on our taxable income for 2001 and for the period ended March 31, 2002 is $300,000. Working capital and general corporate purposes. These costs include general and administrative costs, including the cost of hiring additional administrative, financial, technical, editorial and customer service personnel, acquiring and enhancing our operating, support and management systems and capital expenditures for computers and other equipment. We may use the portion of the amount currently allocated to working capital and general corporate purposes to reduce our current liabilities. Although we currently have no agreements or commitments to do so, we may also use a portion of the net proceeds to license or acquire new products, technologies or intellectual property or to acquire or invest in businesses complementary to ours. If the representative exercises the over-allotment option, the additional net proceeds of approximately $1.3 million will be added to working capital. The above allocation represents our best estimate of the allocation of the net proceeds of this offering based upon the current status of our business. We will retain broad discretion in the allocation of the net proceeds within the categories listed above. The amounts actually expended for these purposes may vary significantly and will depend on a number of factors, including our rate of revenue growth, cash generated by operations, our overall financial performance, evolving business needs and the other factors described in "Risk Factors." Pending their use, we intend to invest the net proceeds in interest-bearing, investment grade securities. We expect that the net proceeds from this offering, together with cash flow from operations, will be sufficient to fund our operations and capital requirements for at least 12 months following this offering. We may be required to seek additional sources of capital sooner if our operating assumptions change or prove to be inaccurate, or we complete any significant strategic acquisitions. 15 DIVIDEND POLICY As an S corporation, in the past we have, from time to time, distributed a portion of our earnings to our shareholders. In general, these distributions reflected the amount of taxes our shareholders were required to pay on their share of our taxable income. Immediately after this offering, we intend to make a final distribution to our pre-offering shareholders based on our 2001 taxable income and our 2002 taxable income through the date of this offering. After this offering, our board of directors, in their discretion, will determine whether and to what extent dividends should be paid based on factors they deem to be relevant at the time. These factors may include our earnings, financial condition and capital requirements, as well as other economic and general conditions. At this time we expect to retain all of our earnings to finance the expansion and development of our business. If our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. This dividend would not apply to the common shares underlying the unit warrants. Shareholders owning an aggregate of 1,387,000 common shares have agreed to immediately contribute the dividend shares back to us a contribution to capital. S CORPORATION TERMINATION Since our inception, we have been an S corporation for federal and state income tax purposes. As a result, we do not pay federal or state corporate income taxes. Immediately before this offering, we will terminate our S corporation status and, as a result, we will, from that point on, be obligated to pay federal and state corporate income taxes at the regular corporate rates. Immediately after this offering is completed we will pay a final S corporation distribution to our pre-offering shareholders in an amount equal to the federal, state and local taxes they are obligated to pay on our 2001 taxable income and on our 2002 taxable income through the date of this offering plus an additional $150,000 of previously taxed S corporation income. Investors purchasing units in this offering will not receive any portion of this final distribution. Assuming our S corporation status terminated on March 31, 2002, the amount of the final S corporation distribution would have been approximately $450,000. 16 CAPITALIZATION The following table sets forth our capitalization as of March 31, 2002 on an actual basis and on an adjusted basis. Our capitalization as adjusted for this offering takes into account the following: o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002; o 75,000 common shares to be issued to members of the firm of Morse, Zelnick, Rose & Lander LLP, our attorneys, on the date of this prospectus, which will be charged to paid-in capital as an expense of this offering; o 673 common shares purchased by a former employee in April 2002 for $1,750; o the receipt of $8.3 million of estimated net proceeds of this offering, assuming an initial public offering price of $8.00 per unit; and o an estimated final S corporation distribution of $450,000 to our pre- offering shareholders.
March 31, 2002 -------------------- Actual As adjusted ------ ----------- (in thousands) Long-term obligations .................................. $ 76 $ 76 Shareholders' equity: Preferred shares, $0.01 par value: no shares authorized actual; 5,000,000 shares authorized, no shares issued and outstanding as adjusted............ -- -- Common shares, $0.01 par value: 12,000,000 shares authorized, 1,000,000 issued and outstanding actual; 25,000,000 authorized, 2,671,314 shares issued and outstanding, as adjusted............................. 10 27 Additional paid-in capital ............................. 1,395 9,229 Retained earnings ...................................... -- -- ------ ------ Total shareholders' equity ......................... 1,405 9,256 ------ ------ Total capitalization ............................... $1,481 $9,332 ====== ======
17 DILUTION If you purchase units in this offering, your interest will be diluted to the extent of the excess of the public offering price per common share over the as adjusted net tangible book value per common share after this offering. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of common shares outstanding. For purposes of the dilution computation and the following tables, we have allocated the full purchase price of a unit to the common share included in the unit and nothing to the unit warrant. At March 31, 2002, our net tangible book value was approximately $1.4 million, or $1.40 per common share. Our pro forma net tangible book value at that date was $0.67 after giving effect to the following: o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002; o 75,000 common shares to be issued to members of the firm of Morse, Zelnick, Rose & Lander LLP, our attorneys, on the date of this prospectus, which will be charged to paid-in capital as an expense of this offering; o 673 common shares purchased by a former employee in April 2002 for $1,750; and o an estimated final S corporation distribution of $450,000 to our pre- offering shareholders. After giving effect to the sale of the units in this offering at the assumed initial public offering price of $8.00 per unit, our net tangible book value of March 31, 2002 would have been approximately $9.3 million, or $3.46 per share. This represents an immediate increase of $2.79 per share to existing shareholders and immediate dilution of $4.54 per share to the new investors who purchase units in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per common share ........ $8.00 Pro forma net tangible book value per common share at March 31, 2002 ......................................................... $0.67 Increase in pro forma net tangible book value per common share attributable to new investors ................................ 2.79 ----- Pro forma, as adjusted net tangible book value per common share after the offering ..................................... 3.46 ----- Dilution per common share to new investors .................... $4.54 =====
The following table summarizes as of March 31, 2002 the differences between the existing shareholders and the new investors with respect to the number of common shares purchased, the total consideration paid and the average price per share paid:
Shares Purchased Total Consideration Average ------------------- --------------------- Price per Number Percent Amount Percent Share --------- ------- ----------- ------- --------- Existing shareholders.......................... 1,421,314 53.2% $ 56,750 0.6% $0.04 New investors.................................. 1,250,000 46.8% 10,000,000 99.4% $8.00 --------- ----- ----------- ----- Total....................................... 2,671,314 100.0% $10,056,750 100.0% ========= ===== =========== =====
If the representative exercises the over-allotment option in full, the new investors will purchase 1,437,500 common shares. The total purchase price for those shares would be $11,500,000, representing approximately 99.5% of the total consideration for 50.3% of the total number of common shares outstanding. In such event, our net tangible book value would be $3.71 per common share and the dilution to new investors would be $4.29 per common share. To the extent any options or warrants outstanding on the date of this prospectus are exercised, you will experience further dilution. 18 SELECTED FINANCIAL DATA The selected financial data set forth below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for each of the years in the two-year period ended December 31, 2001 and the balance sheet data at December 31, 2001 are derived from our financial statements, which have been audited by Goldstein Golub Kessler LLP, independent auditors, and are included elsewhere in this prospectus. The statement of operations data for the three-month periods ended March 31, 2001 and 2002 and the balance sheet data for March 31, 2002 are derived from our unaudited financial statements. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. Historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of results for the entire year.
Statement of Operations Data: Three months ended Years ended December 31, March 31, ----------------------- ----------------------- 2000 2001 2001 2002 ---------- ---------- ---------- ---------- (in thousands, except share and per share data) Revenue ................................................................. $ 3,253 $ 4,879 $ 1,071 $ 1,422 Cost of revenue ......................................................... 2,115 2,784 666 791 ---------- ---------- ---------- ---------- Gross margin ............................................................ 1,138 2,096 405 631 Selling expenses ........................................................ 552 455 101 139 General and administrative expenses ..................................... 572 562 223 187 Interest expense, net ................................................... 47 61 21 9 Depreciation and amortization expenses .................................. 60 129 30 64 ---------- ---------- ---------- ---------- Income (loss) before provision for (benefit from) income taxes .......... (94) 889 30 232 Provision for taxes ..................................................... -- 89 -- 18 ---------- ---------- ---------- ---------- Net income (loss) ....................................................... (94) 800 30 214 ========== ========== ========== ========== Basic net income (loss) per common share ................................ $ (0.09) $ 0.80 $ 0.03 $ 0.21 ========== ========== ========== ========== Diluted net income (loss) per common share .............................. $ (0.09) $ 0.75 $ 0.03 $ 0.20 ========== ========== ========== ========== Weighted-average number of common shares outstanding -- basic ........... 1,000,000 1,000,000 1,000,000 1,000,000 ========== ========== ========== ========== Weighted-average number of common shares outstanding -- diluted ......... 1,000,000 1,063,521 1,047,608 1,062,896 ========== ========== ========== ==========
Since our inception we have been an S corporation for federal and state income tax purposes. As a result, we do not pay federal and state corporate income taxes. Immediately before this offering is completed, we will terminate our status as an S corporation. Had we been a C corporation in 2000 and 2001, our income tax expense would have been materially different.
Balance Sheet Data: At At December 31, 2001 March 31, 2002 ----------------- -------------- (in thousands) Current assets ........................... $1,058 $1,015 Working capital .......................... $ 7 $ 178 Total assets ............................. $2,334 $2,317 Total liabilities ........................ $1,144 $ 913 Shareholders' equity ..................... $1,190 $1,405
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a leading independent provider of electronic data conversion services. Our primary focus is converting a broad range of content from any format to XML and SGML. Our clients include large manufacturing corporations, professional societies, publishers, defense contractors and the United States Department of Defense. The data conversion industry is relatively new but growing rapidly. In 1998 we recognized the potential growth in our industry and made the strategic decision to invest in infrastructure improvements that would enable us to exploit this opportunity. To that end, starting in late 1998 and continuing through the end of 2000, we took the following critical steps: o hired a chief operating officer for the first time in our history; o reorganized and upgraded our staff; o implemented new operational support systems, such as time sheets, project management, cost accounting and production control; o renovated and rewired our facility and invested in new capital equipment; o received approval to be included on the General Services Administration Schedule, which enables any federal employee to use our services at pre- negotiated rates; and o developed specialized capabilities and relationships in three high-margin markets: STM publishing, corporate technical documentation and defense. The cost of these initiatives, predominantly selling, general and administrative expenses, resulted in a loss for 2000. However, we began to see the benefits of these infrastructure improvements in 2001. In 2001, our revenues increased by 50.0% from the previous year. In addition, our gross margin increased to 42.9% from 35.0% and our profit margin for 2001 was 16.4%. We expect to continue to realize the benefits from these infrastructure improvements. Generally, we derive revenue from performing services. Revenue is recognized as the services are performed. When we accept a new project, we typically receive a fixed "set-up" fee at the beginning of our engagement to analyze and organize the conversion project. This fee is deferred and amortized over the life of the project itself. Once the project goes into production, we bill the client either twice per month or as batches of work packets are completed. Our fees are usually defined as a price-per-page. The actual price depends on various factors, particularly the complexity and degree of difficulty of the conversion. In 2000, 80.6% of our total revenue was attributable to four markets: STM publishing, corporate technical documentation, defense and educational publishing. Our STM publishing customers accounted for 56.9% of our total revenue in 2000. In 2001, 83.7% of our total revenue was attributable to the STM publishing, corporate technical documentation, defense and educational markets. STM publishing customers still accounted for the greatest portion of our revenue, 41.4%. However, the largest increases were generated from corporate technical documentation customers, who accounted for 23.5% of total revenue in 2001 compared to 10.3% in 2000, and educational publishing customers, who accounted for 12.0% of total revenue in 2001 compared to 5.3% in 2000. For the first quarter of 2002, STM publishing, corporate technical documentation, defense and educational publishing customers accounted for 48.0%, 14.2%, 11.0% and 5.8%, respectively, of total revenue. Historically, we have derived a significant amount of revenue from a limited number of clients. In 2000, three clients accounted for 15%, 14% and 11%, respectively, of total revenue. In 2001, our largest client accounted for 14% of total revenue. No other customer accounted for more than 10% of total revenue in 2001. For the first quarter of this year, our largest client accounted for 20.3% of total revenue and our four largest clients accounted for 45.6% of total revenue. However, we expect that, as the year progresses, client 20 concentration for 2002 will approximate client concentration in 2001 and we believe this trend will continue for the foreseeable future. Cost of revenue consists primarily of compensation and benefits payable to our employees who are directly involved in delivering services and payments to independent contractors. These employees consist of analysts and programmers as well as members of our production staff, including operators, editors, proofreaders and supervisors. Generally, cost of revenue is expensed as incurred. Similarly, costs associated with the start-up fee are expensed as incurred. Selling, general and administrative expenses consist primarily of administrative salaries and benefits, sales commissions, facilities costs, sales and marketing expenses, advertising expenses, professional fees, and office expenses. We have invested a considerable amount of capital in our proprietary conversion software. Costs incurred to develop this software were expensed as incurred. Direct costs incurred during the application stage are capitalized and amortized over the estimated useful life of the software. Maintenance costs are expensed as incurred. At December 31, 2001 and March 31, 2002, the recorded amount of computer software costs exceeded their tax basis by approximately $450,000 and $430,000, respectively, resulting in a deferred tax liability of $44,000 at December 31, 2001 and $41,000 at March 31, 2002. When our S corporation status terminates immediately before this offering, we will record an additional deferred tax liability of approximately $153,000. Since our inception we have been an S corporation for federal and state income tax purposes. As a result, we have not paid federal corporate income taxes, nor have we paid state income taxes at the regular corporate income tax rates. Immediately before this offering is consummated, we will terminate our status as an S corporation and, as of that date, we will begin paying federal and state corporate income taxes at the regular corporate tax rates. Provision for income taxes as reflected on our financial statements primarily represents New York City corporate income and franchise taxes. Results of Operations The following table sets forth for the periods presented, statement of operations data as a percentage of revenues. The trends suggested by this table may not be indicative of future operating results.
Year Three months ended ended December 31, March 31, ------------- ------------- 2000 2001 2001 2002 ----- ----- ----- ----- Revenue ........................................................................ 100.0% 100.0% 100.0% 100.0% Cost of revenue ................................................................ 65.0% 57.1% 62.2% 55.6% ----- ----- ----- ----- Gross margin ................................................................... 35.0% 42.9% 37.8% 44.4% Selling expenses ............................................................... 17.0% 9.3% 9.4% 9.8% General and administrative expenses ............................................ 17.6% 11.6% 20.8% 13.1% Interest expense ............................................................... 1.4% 1.2% 2.0% 0.6% Depreciation and amortization expense .......................................... 1.9% 2.6% 2.8% 4.5% ----- ----- ----- ----- Income (loss) before provision for (benefit from) income taxes ................. (2.9)% 18.2% 2.8% 16.4% Provision for (benefit from) income taxes ...................................... 0.0% 1.8% 0.0% 1.3% ----- ----- ----- ----- Net income (loss) .............................................................. (2.9)% 16.4% 2.8% 15.1% ===== ===== ===== =====
Three months ended March 31, 2002 and 2001 Revenue. Revenue for the three months ended March 31, 2002 was $1.4 million, an increase of $350,000, or 32.7%, from revenue of $1.1 million for the comparable 2001 period. 21 Cost of revenue. Cost of revenue for the three months ended March 31, 2002 was $791,000, an increase of $125,000, or 18.7%, over cost of revenue of $666,000 for the comparable 2001 period. In general, the increase in cost of revenue corresponds to the increase in revenue. Gross margin. Gross profit for the three months ended March 31, 2002 was $631,000, or 44.4% of revenue, compared to gross profit of $405,000, or 37.8% of revenue, for the comparable 2001 period. Selling, general and administrative expenses. Total selling, general and administrative expenses for the three months ended March 31, 2002 and 2001 were $326,000 and $323,000, respectively. As a percentage of revenue, selling, general and administrative expenses for the 2002 period were 22.9% compared to 30.2% for the comparable 2001 period. Selling expenses for the 2002 period were $139,000 compared to selling expenses for the 2001 period of $101,000. This increase is attributable to additional travel expenses and higher sales commissions based on a higher level of sales. General and administrative expenses in the 2002 period were lower than they were in the 2001 period, both in absolute terms and as a percentage of revenue, because of a bad debt expense of $78,000 in 2001. Other expenses. Other expenses include net interest expense and depreciation and amortization. For the period ended March 31, 2002, net interest expense was $9,000 compared to $21,000 for the period ended March 31, 2001. This decrease reflects a reduction in the amount due under our working capital line of credit. Depreciation and amortization expense for the first quarter of 2002 was $64,000 compared to $30,000 for the first quarter of 2001. The increase is attributable to the amortization of capitalized software development costs. Income before provision for income taxes. For the period ended March 31, 2002, income from operations was $232,000 compared to $30,000 for the comparable 2001 period. As a percentage of revenues, income from operations for the three months ended March 31, 2002 and 2001 was 16.4% and 2.8%, respectively. Income taxes. For the period ended March 31, 2002, we recorded an income tax expense of $18,000 representing New York City corporate income franchise taxes. Net income. Net income for the three months ended March 31, 2002 and 2001 was $214,000 and $30,000, respectively. As a percentage of revenue, net income for the two periods was 15.1% and 2.8%, respectively. Years ended December 31, 2001 and 2000 Revenue. Revenue for 2001 was $4.9 million, an increase of $1.6 million, or 50.0%, over 2000 revenue of $3.3 million. Cost of revenue. Cost of revenue for 2001 was $2.8 million, an increase of $700,000, or 31.6%, over 2000 cost of revenue of $2.1 million. Gross margin. Our gross margin for 2001 was $2.1 million, or 42.9% of revenue, compared to a gross margin of $1.1 million, or 35.0% of revenue, for 2000. We believe that our increased gross margin is a direct result of the infrastructure improvements that were implemented in prior years. These improvements enabled us to handle a larger volume of work without a corresponding increase in cost. Selling, general and administrative expenses. Selling, general and administrative expenses for 2001 were $1.0 million compared to $1.1 million for 2000. As a percentage of revenue, these expenses for 2001 were 20.8% compared to 34.6% in 2000. The higher level of selling, general and administrative expenses in 2000, both in absolute terms and as a percentage of revenue, reflects our ramp-up efforts that began in late 1998 and continued through 2000. Other expenses. In 2001, net interest expense was $61,000 compared to $47,000 in 2000. The additional interest expense in 2001 reflects additional borrowings under our line of credit. As our business has grown, so have our working capital needs. In 2001, depreciation and amortization expense was $129,000 compared to $60,000 in 2000. The additional depreciation and amortization expense is attributable to costs 22 incurred to enhance and upgrade the functionality of our proprietary software toolkit. In 2001, we capitalized $547,000 of software development costs compared to $199,000 in 2000. Income (loss) before provision for income taxes. In 2001 income from operations was $889,000 compared to a loss of $94,000 in 2000. The loss in 2000 was directly attributable to the selling, general and administrative costs in that year that allowed us to expand our business in 2001. Income taxes. Provision for taxes in 2001 and 2000 was $88,000 and $325, respectively. Net income (loss). For 2001 we had net income of $800,000, or 16.4% of revenue, compared to a net loss of $94,000 in 2000. Liquidity and Capital Resources To finance our business, we use a combination of cash flow from operations and bank debt. We have a $575,000 working capital line of credit with Merrill Lynch. Draw downs on this credit line bear interest at the rate of one percent above the prime rate. As of June 1, 2002, the rate was 5.75%. The balance due on the credit line was $515,000 at December 31, 2001 and $385,000 at March 31, 2002. The credit line expires April 30, 2003. In April 2000, we borrowed $150,000 from Merrill Lynch. The loan is evidenced by a note, bears interest at one percent above prime and matures in April 2004. Principal is payable in equal monthly installments of $3,125. At March 31, 2002, the balance due on this loan was $81,250. Our working capital at March 31, 2002was $178,000 and $6,899 at December 31, 2001. For the three months ended March 31, 2002, net cash provided by operating activities was $238,000. Net cash provided by operating activities for the years ended December 31, 2001 and 2000 was $757,000 and $10,000, respectively. The primary components of operating cash flows are net income, increases in accounts receivable, depreciation and amortization and increases in income tax payable. Capital expenditures include capitalized software development costs and purchases of property, plant and equipment and are funded out of cash flow from operations. For the three months ended March 31, 2002, capital expenditures, all of which were software development costs, were $89,000. Capital expenditures for the years ended December 31, 2001 and 2000 were $657,000 and $357,000, respectively. Capitalized software development costs for 2001 and 2000 were $547,000 and $199,000, respectively. Net cash used in financing activities for the three months ended March 31, 2002 was $147,000. For the year ended December 31, 2001, net cash used in financing activities was $92,000. Net cash used in financing activities reflects repayments on the working capital and term loans as well as, in the case of 2001, distributions to shareholders. For the year ended December 31, 2000, net cash provided by financing activities was $348,000, reflecting primarily the proceeds from draws on our line of credit. We intend to use the net proceeds from this offering to expand our sales and marketing efforts, enhance our proprietary software, make a final S corporation distribution to our pre-offering shareholders and for working capital and general corporate purposes to fund the further expansion of our business. As part of our growth strategy, we continuously evaluate potential acquisitions and the net proceeds from this offering may be used, in part, to fund such acquisitions. We have no current plans, agreements or commitments and are not currently engaged in any negotiations regarding any acquisition transactions. We believe that the net proceeds of this offering together with cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. Seasonality and Cyclicality Generally, our revenue has been lowest in the first quarter and highest in the fourth quarter. We believe that this is due to the fact that most organizations that we deal with define projects on an annual basis and the pressure to get projects completed increases progressively as the year goes on. In addition, as the year develops and they have excess funds available, additional projects are proposed that would not have been considered earlier in the year. 23 We have not detected any decrease in the volume of business during the most recent recession. To the contrary, our business has increased. We attribute this to a number of factors, including the competitive environment in the industries in which our clients operate. We believe that once a competitor within a market migrates to an XML-based format, other organizations in that market will follow in order to stay competitive. In addition, our services allow our clients to reduce their costs. Nevertheless, we anticipate that in the future our business will be impacted by general economic conditions. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," the effective date of which was deferred for all fiscal quarters of all fiscal years beginning after June 15, 2000 by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of SFAS 133." Our effective date was January 1, 2001. SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded for each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. We do not believe that this standard will impact our financial statements since we do not currently hold any derivative instruments or engage in hedging activities. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and indefinite life intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. We do not believe these standards will impact our financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is applicable to financial statements issued for fiscal years beginning after December 15, 2001. This statement supersedes SFAS No. 121 and provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also supersedes the provisions of APB No. 30 with regard to reporting the effects of a disposal of a segment of a business and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period in which the losses are incurred. We do not believe this standard will impact our financial statements. 24 BUSINESS We are a leading independent provider of data conversion services. Since our inception in 1981, we have converted content from one format to another in response to evolving client preferences and advances in technology. Initially, we helped our clients convert their content as they migrated from mainframes and minicomputers to desktop personal computers. Next, we helped our clients convert their content from older word-processing formats to the newer ones such as WordPerfect and Microsoft Word. In the early 1990's, a significant portion of our business involved converting content to and from desktop publishing systems, such as Quark, Ventura and FrameMaker, and large-scale publishing systems, such as Xyvision. Today, using our proprietary conversion methodology and conversion software, we specialize in implementing and managing large, complex content conversion and enrichment projects. Our primary focus is converting a broad range of content to the markup languages, XML, SGML and HTML. These services enable our clients, including affiliates of Wolters Kluwer, Reed Elsevier, General Electric, Rolls Royce, Bombardier, Schlumberger and the United States Department of Defense, to publish, distribute, search, store and provide access to vast amounts of rich data and information over a variety of electronic and digital communication channels, including the Internet, intranets, extranets and wireless personal communication devices. We believe that a growing number of private and public sector content owners will look to convert their legacy and newly created content into XML or SGML and will recognize the advantages of outsourcing these projects. Industry Background Data conversion is the process by which content is converted from one format to another. As part of the conversion process, the content is tagged or "marked up" to increase its functionality. Once content has been tagged, it can be searched, stored and indexed more efficiently. In addition, the content can be used in multiple ways that were not possible when it was produced in its original format and for different purposes than originally intended. Examples of the things we do to make content more functional include adding hyperlinks and cross-references, identifying sections that can be used for multiple publications, and tagging elements, such as dates, names and parts numbers, to facilitate specialized indexing and searching functions. We believe that over the last decade, the data conversion industry has grown rapidly. The principal drivers of this growth have been the development and acceptance of a variety of electronic media, such as the Internet, as an accepted means to distribute and gather information, do research, communicate and interact, as well as the development of markup languages that facilitate the use of information. Converting content into a markup language is a key component for effectively utilizing data in the age of electronic communication. Until the development of markup languages, written content that was converted into digital format was difficult to index, catalogue and search and to repurpose for new uses. Commercial enterprises, from manufacturers to professional firms, as well as governmental units are addressing online strategies for making better and more efficient use of their data. Whether for the distribution and updating of equipment maintenance manuals, collecting and sharing of technical research and instructional documentation, searching legacy data or simply managing knowledge in a more cost efficient and non-duplicative way, markup languages are becoming necessary in many commercial and governmental sectors. Over the past 10 years, there has been a gradual migration from print publishing to electronic publishing. In particular, this migration has been gathering momentum in the case of scientific and technical publications, educational materials, encyclopedias and almanacs. For example, Forrester Research predicts that sales of digital textbooks will hit $1.3 billion, or 14% of all textbook sales, in 2003. By 2005, it estimates that digital textbooks will account for 25% of all textbook sales. Additionally, we have recently detected a trend by some of our clients to convert their content immediately into a markup language before it goes to composition, rather than wait until the printing function has been completed, leading us to believe that our services will become integral to the publishing process. 25 Markup Languages Generally, users of information expect to be able to access and use information quickly and easily. As a result, owners of content who have their content accessible in a flexible, easily revisable and easily transmittable format have a distinct competitive advantage. Content owners face a number of obstacles if they want to take full advantage of electronic media as a means to distribute their content. First, there is a substantial body of existing content that is in paper form. Converting this legacy material into an acceptable digital format can be a time-consuming and costly process. Second, even legacy material that is currently in a digital format may not be suitable for distribution over the Internet or other electronic media. For example, the content may have been produced in a format that is not recognized by or compatible with all of the various computer operating systems in use today. This is particularly true regarding content produced for distribution over the Internet, which may not be distributable over wireless personal communication devices or other forms of new media technology. Third, in the conversion process itself the integrity of the information may be compromised. For example, tables, charts, graphs and diagrams often get corrupted in the conversion process and formatting features, such as fonts, pitch and page breaks may be lost in the conversion process. Finally, to get the optimum use out of the opportunities offered by electronic media, the end user must be able to navigate easily through the document and any related documents. This is difficult to do with the most common digital formats, including the most popular word processing programs, WordPerfect and Microsoft Word, as well as the most commonly used data formats other than markup languages, TIFF and Adobe's PDF. The solution to these problems is the use of markup languages. With a markup language, descriptive tags are applied to text and data in a standard way to identify and facilitate the use of the content. There are three standard, commonly used, nonproprietary markup languages. o SGML -- Standard General Markup Language. SGML was developed in the 1980's as a non-proprietary, platform-independent method of describing the structure and elements of a document rather than its appearance. It provides an architecture for defining document tag sets, which allow the appearance and text to be separated and reformatted for different uses. The tags tell the viewer what the information means rather than how it looks. This allows for greater flexibility in terms of the way the information can be used and displayed. The content creator can design a customized markup language for limitless different types of documents. SGML has been adopted and implemented by many industries in many applications. o HTML -- Hyper Text Markup Language. HTML was developed in the early 1990's specifically to support files for display on the Web. HTML is a simple, predefined SGML tag set, which tells a Web browser how to display text and images. Since its tag set is limited, HTML is easy to implement. However, since HTML does not normally define the structure and elements of the content, only its appearance, it does not provide for complex searching, linking and document maintenance. o XML -- Extensible Markup Language. XML, developed in the late 1990's, is a streamlined version of SGML. It omits much of the complexity and the rarely used features of SGML while maintaining its core flexibility. At the same time, XML provides new features that make it more suitable for delivery and interoperability over the Web and other communication devices. Trends Affecting Growth We believe that the following factors have contributed to the recent growth of the data conversion industry and will continue to drive our growth in the future: Development of the Internet and other electronic media Over the last several years, the popularity of the Internet, particularly as a means to publish, distribute and search content has increased rapidly. As a result, commercial enterprises, from manufacturers to professional firms, as well as governmental units are addressing online strategies for making better and more efficient use of their data. For many organizations, digital media has been a key element in their distribution 26 strategies. We believe that the development and acceptance of other communication devices, particularly wireless and hand-held devices, is contributing to this trend. Widespread use of XML The development and increasing popularity of XML have contributed greatly to the growth of the data conversion industry. Since it was introduced, many large and influential corporations, including IBM Corp., Microsoft Corp. and General Electric, have been lending their support to XML, making it the de facto standard for data transfer. XML has a number of important advantages over the other markup languages. o XML is a media neutral format. XML is a robust, non-proprietary, verifiable file format for storing and transmitting text and data both on and off the Web. With XML, content is created once and can be easily distributed through a variety of media, including the Web, handheld and wireless devices and print. Also, XML can be used to store any kind of structured information and to enclose or encapsulate information to pass it between different computing systems, which would otherwise be unable to communicate. If implemented broadly and consistently, XML can make it significantly easier for organizations and individuals to identify, integrate and process complex information that may be widely dispersed among systems and organizations. o XML is a flexible format. Since XML is not limited to a predetermined set of tags, it allows for the flexible development of user-defined document types. The content creator can design its own markup language with as few or as many tags as it deems appropriate. Also, XML allows a user to modify the text and to have those modifications automatically reflected in every medium in which the content is published. In addition, XML content can be "repurposed," meaning it can be distributed over a variety of devices without having to be modified. For example, XML content can be published on the Web as well as downloaded onto a personal digital assistant simultaneously. Because of the tag sets, XML protects the integrity of the content and each page is distributed and produced in a manner most appropriate for that medium. With XML the content creator is assured that the information will be produced consistently and conforms to organizational standards. Finally, portions of the data can be reused and selectively combined with other data to create entirely different content. This is known as "component reuse." o XML enhances functionality. XML improves the functionality of content by providing more adaptable information identification. Content that is stored in XML format can be searched, selectively retrieved, enhanced, modified and reorganized in accordance with an infinite number of programmable applications. o XML is easy to render. The current versions of both Microsoft Internet Explorer and Netscape Navigator include support for XML natively within the software. Both implement a standard document transformation technology that allows the browser to seamlessly display an XML document as a Web page by converting it into an HTML document. In addition, traditional paper publishing of XML documents can now be accomplished directly with commercially available software that allows a user to transform an XML document directly to a sophisticated page layout. Both of these technologies are significant because they make it considerably easier to deliver XML documents to end-users. Government regulations and proposed initiatives Government regulation and initiatives have contributed to the growth of the data conversion industry. For example, the United States Department of Defense has adopted regulations requiring that all technical manuals be published in electronic format. As a result, all of the various branches of the United States military have started to convert significant portions of their technical documentation into SGML and XML. In addition, from time to time, members of Congress have proposed initiatives that would require the federal government to develop a plan that would enable information sharing through government-wide adoption of XML. Similarly, provisions of the E-Government Act of 2002, if enacted, would require better government management of XML initiatives. For example, the legislation calls for the administrator of a new Office of 27 Electronic Government, in coordination with the National Institute of Standards and Technology, to develop a policy framework and set standards for implementing XML. In addition, regulations mandating equal access for the disabled have had a direct impact on the educational publishing industry. As a result, many companies in this industry have been adopting an XML standard. In April 2002 the Instruction Materials Accessibility Act of 2002, or IMAA, was introduced in both the U.S. House of Representatives and the U.S. Senate. This legislation mandates the adoption of a standardized, national electronic file format to improve access to textbooks for students who are blind or who have other print disabilities. Publishers of instructional material will be required to submit an electronic file of all textbooks in this universal file format, such as a markup language, which will facilitate their conversion into accessible formats, such as Braille, synthesized speech and digital text and audio. Trend to outsourcing Until recently, most organizations, particularly large manufacturing companies, have been satisfying their data conversion needs largely through in-house solutions. In-house solutions, however, can be expensive and difficult to maintain, particularly since they are often manual operations that rely on fairly large labor pools. While this approach was suitable for small conversion projects, it is less efficient for large-scale, complex conversion projects. As a result, many of these businesses have begun to use third-party service providers to satisfy their data conversion needs. We believe this trend will continue as organizations continue to look for efficiencies in an increasingly competitive global economy. The DCL Solution Over the last 15 years, we have developed a business model that enables us to tailor the data conversion process to the specific needs of the client and manage the process efficiently in terms of speed, consistency and accuracy. This model has three basic components, each of which is discussed below. The DCL Conversion Methodology Our conversion methodology divides a conversion project into four distinct phases. The end of each phase represents a checkpoint at which the client can evaluate the project in terms of the client's expectations and the project's feasibility and cost. We believe that our conversion methodology identifies and addresses most potential problems as early as possible. In addition, our methodology reliably deals with the major issues in any large-scale conversion effort: time to completion; quality; cost; and reliability. o Phase 1: Planning and Concept. The purpose of this phase is to establish project goals and expectations, define the success criteria, lay out a preliminary approach, identify potential problem areas and prepare a preliminary budget. During this phase, we also undertake a preliminary evaluation of the content to be converted. Based on the information developed during this phase, we determine if the project is feasible and cost effective in light of the client's expectations. This phase typically takes several weeks to complete. o Phase 2: Proof of Concept. The purpose of this phase is to test the approach developed in Phase 1 on a limited scale, paying particular attention to areas identified as potential problems. It includes defining the sample set, analyzing requirements, inventorying materials, preparing the conversion specification document, developing proof of concept software and developing a hand-tagged sample. This phase typically lasts two to four weeks. o Phase 3: Analysis, Design and Engineering. The purpose of this phase is to prepare for volume production. We build on what was done in Phase 2 and expand the analysis, design and engineering components of the project to handle the full set of materials. The project specifications and the conversion software and production process for large-scale production are finalized. This phase typically takes four to six weeks. o Phase 4: Production. This phase includes full volume production, quality control, process improvement feedback, exception handling mechanisms, materials trafficking, packaging and delivery. 28 The DCL Software We have developed proprietary conversion software that automates substantially all of the conversion process. We own all the rights to this software and, we believe, none of our competitors has software that is adaptable to as many formats as ours or that automates the data conversion process to the extent that ours does. Our software is a "suite" of modules that can be combined and applied to different projects based on the specifications for that project. The software drives the data conversion process and also tags elements such as hyperlinks, cross-references and tables. Our software is designed to accommodate all major sources and target formats with specific modules to deal with complex scientific, technical and medical documentation. These types of documents are usually characterized by elaborate tables, charts, diagrams, equations, cross- referencing, footnotes and special characters, making them difficult to publish electronically in their original format and difficult to access, search and store. Utilizing a vast library of specially developed conversion modules that we have developed, we can adapt and modify our software to handle most data sets. We believe that our software provides us with a significant competitive advantage and also creates a significant barrier to entry. Our software allows us to achieve speed, consistency and accuracy. It also gives us greater control over the costs of a project. Since we are less dependent on manual labor than most, if not all, of our competitors, we are less susceptible to labor shortages and rising labor costs. In addition, our software enables us to pursue various government projects that many other data conversion service providers cannot. Many of our competitors are based offshore to take advantage of lower labor costs outside the United States. However, the Department of Defense, for example, requires that all its contractors perform their services in the United States. The DCL Vendor Network We have established relationships with a number of high-quality, low-cost vendors to whom we outsource the labor-intensive functions that cannot be done with our software. Some of these vendors are U.S.-based and others are located offshore. We believe that our network of vendors is a competitive advantage. By outsourcing the manual functions of the conversion process, we eliminate the overhead and capital investment associated with these functions, giving us greater flexibility to respond to variations in workflow. Also, outsourcing allows us to choose the vendor that is best suited for the particular task. Our Clients Our clients operate in the following markets: o STM Publishing. This market includes publishers of scientific, technical and medical journals and textbooks, such as Wolters Kluwer, Reed Elsevier, the British Medical Association and Blackwell Science Ltd., as well as content aggregators, who build Web sites that are dedicated to a single topic by collecting written content from multiple publishers. The STM market represents a substantial portion of the 150,000 journals listed on publist.com and the approximately 975,000 books published annually worldwide. Both STM publishers and content aggregators convert their content to SGML or XML so their users, both institutional, such as universities, hospitals and research centers, and individuals, such as doctors and engineers, can more effectively access and use their materials. For example, we currently convert articles in more than 600 journals and periodicals on an ongoing basis and, to date, have converted over 200 medical textbooks. o Corporate Technical Documentation. Manufacturers whose products have many parts, such as aviation and transportation, produce complex technical documentation like maintenance manuals, parts manuals and instruction manuals. By converting these manuals to SGML or XML, these manufacturers can maintain existing manuals and create new manuals more efficiently, distribute them more effectively and build "smart" manuals that make it easier to diagnose and fix their products, reducing their maintenance and help desk staffs and parts inventories. Many large manufacturers have committed themselves to SGML- or XML-based publishing systems for their new content. In addition, they have a substantial volume of legacy documentation that they want to convert to SGML or XML as well. Our primary focus to date has been the aviation industry, although we have some customers in 29 the automotive industry and heavy manufacturing industries. Our clients include affiliates of the Boeing Company, Delta Air Lines, Inc., Bombardier, Rolls Royce, General Electric, Saab AB, Deere & Co. and Schlumberger. o Defense. This market includes U.S. military agencies, such as the Army, Air Force and Marines, as well as the major system integrators like Lockheed Martin Corporation, Boeing, United Defense Industries, Inc. and CACI International Inc. Military technical manuals are converted to SGML or XML for the same reasons that corporate technical manuals are converted, as well as enhancing the readiness and safety of the United States armed services. We are currently involved in converting documentation relating to major weapons systems such as the B-52 and B1 bombers, the Blackhawk helicopter and the KC-135 tanker. We are also converting documentation relating to missile and communication systems. We have been advised that there are tens of millions of pages of technical manuals in the Department of Defense, of which only a small fraction have been converted to SGML or XML. In addition, as a result of new regulations, all documentation that is currently used by the U.S. military must be available in electronic format by a specific date. We believe that SGML or XML will be adopted as the standard by the military for a significant portion of its electronic documentation. o Educational Publishing. Publishers of educational materials, such as Pearson plc, McGraw-Hill, Inc. and Houghton Mifflin Company, are converting both legacy and newly-created content to XML to remain competitive and to comply with U.S. government regulations regarding equal access to the disabled. The DCL Growth Strategy Our objective is to become the leading independent provider of data conversion and associated editorial services. The key elements of our strategy are as follows: o Further develop and enhance our reputation and brand identity. We believe that we are a recognized leader in the market for data conversion and associated services. We have been in this business for almost 20 years and have consistently delivered high-quality data conversion services to our customers. In particular, we are known for our ability to successfully manage and complete large conversion projects involving highly complex and technical documents. Our senior executives regularly participate in trade shows and industry conferences and have written articles and textual materials on data conversion. For example, Mark Gross, our chief executive officer, is the author of the chapter on document conversions for Charles Goldfarb's XML Handbook (Prentice Hall, 3rd Edition, 2001). Mr. Goldfarb is widely recognized as one of the leading experts on SGML and XML. We will continue to focus on developing and enhancing our corporate identity by pursuing a targeted advertising and public relations campaign to enhance recognition of our brand and differentiate ourselves from our competitors. We plan to remain visible in the industry and to further the collective expertise of our staff through continuing education and new hires. o Continue to invest in software technology to maintain our leadership position. Our ability to deliver high quality services is a function of our proprietary software toolkit and associated production control software. Our software can convert from and to a majority of the most popular digital formats as well as perform a variety of associated content enrichment functions. To maintain this competitive advantage, in 2001 we spent $547,000 on software enhancements. We believe that further enhancements can be made to the software that will result in an even greater percentage of the conversion process being automated. We will continue to enhance and upgrade our software and maintain our technological leadership in the industry. o Continue to refine our conversion methodology. As part of our growth strategy we will continue to refine our conversion methodology, which, we believe, has been a significant contributor to our success to date. It enables us to define and carefully plan each conversion project. This not only helps us complete a project in a timely and efficient manner but also helps us understand our clients' needs and helps our clients understand the conversion process itself, what the end product will look like and the ultimate cost of the project. We believe this leads to greater client satisfaction. 30 o Expand our vendor network. Our vendor network is a key component of our overall strategy. It helps us reduce our costs, gives us flexibility and allows us to execute multiple large complex conversion projects simultaneously. As part of our growth strategy we plan to expand our existing relationships with these vendors as well as add new vendors to the network. o Develop current markets and new vertical markets. This aspect of our growth strategy has three parts and we intend to pursue all of them simultaneously. First, we believe that we can achieve significant growth simply by expanding our relationship with our existing clients. We recognize that, in most cases, we only account for a fraction of the data conversion needs of our existing clients. We further believe that expanding our relationship with existing clients would not require significant expenditures of working capital and could be achieved in a relatively short period of time. Second, we intend to expand our presence in the markets we already serve by offering our services to new clients within those markets. While this would require a greater expenditure of capital than the first part of this strategy, it can still be achieved economically and we will be able to see results fairly quickly. We will develop new vertical markets. Potential new markets include, libraries, transportation, financial services, pharmaceuticals and technical societies. This approach will require significant expenditures of working capital and will take the most time to develop. o Develop strategic relationships and pursue strategic acquisitions. We may develop new vertical markets through strategic relationships and acquisitions that will enable us to expand our client base. Potential strategic partners include printers, system integrators and other Internet professional services firms. We believe that content is being converted to XML much earlier in the publishing process -- in some cases even before or simultaneously with the printing process. By partnering with large commercial printers we will be able to take advantage of this trend. Similarly, we think system integrators represent a potential source of new business. These firms provide consulting services to assist their clients with issues relating to interoperability of different computing systems. Our data conversion services are a solution to this problem. In evaluating acquisition opportunities we will focus on entering new markets, expanding our client base, and acquiring technological expertise. Sales and Marketing Currently our sales and marketing staff consists of four people, including our vice president of sales. We obtain visibility through our Web site, which includes company and industry information, and by way of articles published in the trade press, through active participation in industry conferences and standards organizations and by speaking engagements at industry events. We also produce an industry newsletter that is distributed to over 6,000 readers. Sales and marketing activities also consists of trade show exhibitions and direct sales calls to decision makers at existing and prospective clients. Our project managers work closely with our sales and marketing staff to support the sales effort. These individuals assist the sales force in understanding the technical needs of the clients and providing solutions to these needs, including demonstrations, prototypes, pricing quotations and time estimates. In addition, account managers from our customer service group support our direct sales effort by providing ongoing project-level post-sale support to customers. Our sales and marketing efforts target our existing clients, for the purpose of expanding our existing relationships, as well potential clients in the same markets that we currently serve. After this offering is completed, we intend to expand our sales and marketing efforts to develop new markets. We have developed a marketing plan that divides the process of developing a new market into three stages. This will allow us to limit the risk involved to develop a new market. o Market Study. The market study allows us to determine if the targeted market is a viable one for us. The principal activity during this stage is developing a comprehensive study of the potential number of customers and the level of demand. o Market Development. The next step is to develop that market in a generic fashion by introducing our services to the major organizations in that market by participating in trade shows and conferences and by direct mailing of marketing materials to potential customers. 31 o Market Penetration. During this stage, we hire sales representatives to make direct calls on potential clients. Competition The data conversion industry is highly fragmented and extremely competitive. Some of our competitors are larger than we are and have significantly greater financial and human resources. Our competitors include independent data conversion services providers such as Innodata Corporation, SPI, Inc., Jouve, S.A. and IHS Corp., and systems integrators and consulting firms such as Electronic Data Systems Corp., KPMG Consulting, Inc. and Computer Sciences Corporation. In addition, some of our strongest competition comes from our existing and potential clients who still do a significant amount of data conversion internally. The most significant competitive factors are price, quality, reliability, scope and scale, and technical competence for complex conversion projects. We believe that we compete favorably on all of these factors. Our ability to compete favorably is due primarily to our proprietary conversion software and conversion methodology and our extensive vendor network. One of the advantages of a software-driven process like ours is that we rely less on manual labor. Software-driven processes are more dependable, produce consistent results and are less expensive. To compensate for the higher cost of manual labor relative to automated processing, many of our competitors are located offshore to take advantage of lower labor costs. However, we believe that global rising labor costs are increasing as the global economy continues to develop, decreasing the advantage of locating offshore. In addition, U.S. government contracts often require that the work be performed by U.S.-based vendors for both security-related and competitive reasons as well as a general desire to support U.S.-based businesses. For example, conversion of technical manuals for the Department of Defense must be performed in the United States. As a result, we can pursue projects that many of our competitors cannot. Government Regulation Aside from regulations that apply to all businesses in general, there are no specific government regulations that dictate how or limit our ability to conduct our business. However, specific regulations indirectly affect our business. For example, we believe that federal regulations requiring equal access for the disabled have a positive effect on our industry. In addition, various government initiatives have been proposed that would establish XML as the official computer language for the entire federal government. For example, proposed legislation would require the federal government to develop a policy framework and set standards for the implementation of XML. If any of these initiatives, proposals or legislation are ever adopted or enacted, we would expect that the demand for services such as ours would increase dramatically. For these reasons we intend to monitor these regulatory and legislative developments carefully. We are also affected by regulations that apply to our clients. For example, federal regulations that apply to the Department of Defense prohibit us from outsourcing labor-intensive tasks to offshore vendors in connection with services rendered to the U.S. military. Finally, federal, state, local and foreign governmental organizations also are considering, and may consider in the future, other legislative and regulatory proposals that would regulate the Internet. Areas of potential regulation include libel, pricing, product and service quality, taxation and intellectual property ownership. We cannot predict how courts will interpret both existing and new laws and, as a result, we do not know the effect new laws or the application of existing laws will have on our business. Increased regulation of the Internet may decrease the growth in the use of the Internet, which could decrease the demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. Intellectual Property Our success depends to a significant degree on our ability to maintain the proprietary aspects of our software toolkit and the DCL methodology and related documentation. We have not obtained any federal registration of the copyrights relating to those assets. Rather, we rely primarily on common law principles relating to trade secrets, proprietary methodology and copyrights as well as confidentiality agreements and contractual provisions with our employees to protect our intellectual property rights relating to these assets. In addition, we believe that there is significant value in the name "Data Conversion Laboratory." However, we 32 have not registered or attempted to register that name as a trademark, trade name, service mark or service name. Rather, we rely on common law principles to protect our rights to our name. Legal standards relating to the validity, enforceability and scope of protection of proprietary rights are uncertain and still evolving, and we cannot give you any assurance as to the future viability of value of any of our intellectual property rights or that the steps we have taken to protect our proprietary rights will be adequate. In addition, we cannot assure you that our common law rights, confidentiality agreements with employees and other contractual provisions purporting to protect our rights to intellectual property will provide adequate protection in the event of any unauthorized use or disclosure, that our employees, consultants, advisors or others will honor their obligations as set forth in those agreements and provisions or that proprietary information will not otherwise become known or be independently developed by our competitors. Any infringement or misappropriation of our proprietary rights or if they are developed independently could have a material adverse effect on our business, results of operations and financial condition. Operational Support Technology We have built a reliable, scalable infrastructure to support a growing, rapid-turnaround, high-volume production environment. The core of our system is our internally developed Production Control System that allows us to track the progress and location of every work packet and document through the entire production process. The system, built using industry standards and platforms such as Win2000, SQL server and IIS, is integrated with our timesheet, disbursement, and accounting systems to allow accurate collection of costs and accounting information. Additionally, through secure Web access, the system allows customers to access real-time information to track the progress of their projects. We continue to upgrade and enhance this system to provide more advanced workflow capabilities and greater automation of the production process. Our network architecture uses a combination of Windows and Macintosh workstations, supported by a switched 10/100 Base T Ethernet configuration using CAT 5 wiring. Virus protection is provided through multi-level virus scanning with an automated updating scheme. The system is backed up daily with regular offsite backups. Internet access is provided through dedicated high speed (T1) Internet connection with a backup ISDN line. Security is provided with a back-to-back firewall configuration with secure, encrypted connections for specific Web services. Employees As of June 1, 2002, we had 55 employees, one of which is part-time. All but two of our employees are based in our facility in Fresh Meadows, New York. We have one salesperson located in New Mexico and one in Virginia. In addition to our five senior executives, our employees include 11 production people, nine analysts, 15 editors, three sales and marketing people, 10 programmers and two administrative personnel. Our employees are not represented by any union and are retained on an at-will basis. We consider our relations with our employees to be good. Facilities Our executive and principal operating office is located in Fresh Meadows, New York. We occupy approximately 7000 square feet under a lease that expires October 31, 2002. The rent is $6,748.38 per month, which includes all additions to rent for real estate taxes and other expenses. We do not own any real property nor do we consider any specific location material to our operations; we believe that equally suitable alternative locations are available throughout the New York metropolitan area. We have had preliminary discussions with our landlord for a new lease, and we believe that we will be able to enter into a new lease before the current one expires. Legal Proceedings We are not a party to any material legal proceeding. 33 MANAGEMENT Executive Officers and Directors Our executive officers, director and director-nominees, and their ages, as of June 1, 2002, are as follows:
Name Age Position ---- --- -------- Mark Gross ..................... 50 Chairman of the board of directors, president, and chief executive officer Judy Gross ..................... 49 Vice president -- finance and administration, secretary, treasurer and director-nominee Amy Finfer ..................... 39 Vice president, chief operating officer and director-nominee Michael Gross .................. 46 Vice president, chief technology officer and director-nominee David Skurnik .................. 39 Vice president -- sales and director- nominee Andrew Weiss ................... 50 Director-nominee Donna Lynn ..................... 61 Director-nominee
All directors hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified. Officers are elected to service subject to the discretion of the board of directors. Set forth below is a brief description of the background and business experience of our executive officers and directors. Mark Gross, chairman of the board, president and chief executive officer, is one of our founding shareholders. He is married to Judy Gross. His experience spans various areas of the field of information technology, including software development, networking and training, and he is a frequent speaker on the topic of automated conversions to XML and SGML. Mark Gross holds a Bachelor of Science degree in engineering from Columbia University and a Masters of Business Administration degree from New York University. Judy Gross, vice president -- finance and administration, secretary, treasurer and a director-nominee, is one of our founding shareholders. She is married to Mark Gross. Mrs. Gross holds a Bachelor of Arts Degree in Economics and Psychology from Syracuse University and a Masters in Business Administration from New York University. Amy Finfer, vice president, chief operating officer and a director-nominee, joined us in 1998. Before then she was a management consultant at American Management Systems, providing consulting services in the areas of technology, strategy, business processes and organizational performance for leading organizations worldwide. Ms. Finfer holds a Bachelor of Science degree in Computer Science from the University of Florida and a Masters of Business Administration degree from the University of Maryland. Michael Gross, vice president, chief technology officer and a director- nominee, joined us in 1986. He is not related to Mark Gross or Judy Gross. Michael Gross holds a Bachelor of Science degree in Computer Engineering from the Case Institute of Technology at Case Western Reserve University. David Skurnik, vice president -- sales and a director-nominee, joined us in 1997. Before then he served as director of sales for the consumer Internet division at IDT Corp. Mr. Skurnik holds a Bachelor of Arts Degree in Psychology from Queens College at The City University of New York and a Masters of Business Administration Degree from Baruch College at The City University of New York. Andrew Weiss, director-nominee, is an executive vice president at The Trump Organization and has been in charge of all of its major development and construction projects in New York City. Mr. Weiss holds a Bachelor of Science degree in Civil Engineering from Columbia University and a Masters of Business Administration from New York University. Donna Lynn, director-nominee, is the chief operating officer and a member of the Board of Directors of KnowledgeMax, Inc., which she had co-founded in 1998. From 1996 to 1997 she was president of Silver Platter Information, Inc. Before then, she was the chief executive officer of Online Computer Systems, Inc., which was later merged with Reed Elsevier. 34 Judy Gross, Amy Finfer, Michael Gross, David Skurnik, Andrew Weiss and Donna Lynn will join our board of directors immediately after this offering is completed. We do not have a chief financial officer. We expect to hire someone to fill that position soon after this offering is completed. Until we hire a chief financial officer, Judy Gross is acting as our chief accounting officer. Committees of the Board of Directors Our board of directors has established compensation and audit committees. The members of the audit committee will be Mark Gross, Andrew Weiss and Donna Lynn. The members of the compensation committee will be Mr. Weiss and Ms. Lynn. The audit committee will meet with management and our independent public accountants to determine the adequacy of internal controls and other financial reporting matters. The compensation committee will review and recommend to the board of directors the compensation and benefits of all of our officers and general policy matters relating to compensation and benefits of our employees and will administer our stock option plans and the issuance of discretionary cash bonuses to our officers, employees, directors and consultants. Compensation of Directors Before this offering, directors were not compensated for their service on the board. Once this offering is completed, each non-employee director will be reimbursed for travel costs and other out-of-pocket expenses incurred in attending each directors' meeting. In addition, each non-employee director, upon election to the board, will receive options to purchase 5,000 common shares having an exercise price equal to the fair market value on the date of grant. These options will vest one-fourth on the date of grant and one-fourth at the end of each subsequent year of service on the board. Also, each non- employee director will receive options to purchase an additional 1,500 common shares on the date of our annual shareholders' meeting. These options will have an exercise price equal to the fair market value of the common shares on the date of grant and will vest one-third upon grant and one-third at the end of each subsequent year of service on the board. 401(k) and Cafeteria Plans We maintain a retirement plan intended to qualify under section 401(k) of the Internal Revenue Code. The 401(k) plan is a defined contribution plan that covers our employees who are at least 21 years of age and who have been employed by us for at least 90 days. Employees may contribute up to 15% of their annual wages as pre-tax salary deferral contributions. We have no obligation to make any contribution to the 401(k) plan on behalf of any of our employees. We also maintain a cafeteria plan intended to qualify under section 125 of the Internal Revenue Code. All employees who work at least 24 hours per week and who qualify to participate in our medical plan are eligible to participate in the cafeteria plan. Employees who participate in the cafeteria plan may choose to have a portion of their cash compensation applied to the cost of one or more fringe benefits that we make available to our employees, such as our medical plan. 35 Executive Compensation Summary compensation. The following table sets forth information regarding compensation earned by or paid to our chief executive officer and our other most highly compensated executive officers whose compensation exceeded $100,000 in 2001 for all services rendered to us in all capacities during 2001.
Annual Compensation ----------------------- Other Securities Name Annual Underlying ---- Year Salary Compensation Options ---- -------- ------------ ---------- Mark Gross, chairman of the board, president and chief executive officer .......... 2001 $128,000 $16,700(1) -0- Amy Finfer, vice president and chief operating officer ............................ 2001 $131,750 * -0- Michael Gross, vice president and chief technology officer ........................ 2001 $121,000 * 639 David Skurnik, vice president -- sales ............................................ 2001 $130,370(2) * 10,092
- --------------- * Less than $50,000 or 10% of the total annual salary. (1) Includes $7,150 for health insurance premiums, $1,430 for life insurance premiums, $1,192 for disability insurance premiums, $3,250 for a car lease and $3,677 for car insurance. (2) Includes $31,370 of commission income. The following tables provide information with respect to stock options granted during the fiscal year ended December 31, 2001 to each of the executives named in the summary compensation table above and the number and aggregate value of unexercised options held by those executives as of December 31, 2001. The per share exercise price of all options was equal to the estimated fair market value of a share of common stock on the date of grant. No options granted to any named executives have been exercised. Option Grants in Fiscal Year Ended December 31, 2001
Number of Securities Percent of Total Underlying Options Granted to Exercise Price Expiration Name Options Employees in Fiscal Year ($/Sh) Date ---- ---------- ------------------------ -------------- ---------- Mark Gross ................................................ -0- -0- -0- -0- Amy Finfer ................................................ -0- -0- -0- -0- Michael Gross ............................................. 639 0.5% $2.60 1/2/2011 David Skurnik ............................................. 20,185 13.4% $2.60 1/2/2011
2001 Year-End Option Values
Number of Shares Underlying Value of Unexercised In- Unexercised the-Money Options at Fiscal Year-End Options At Fiscal Year-End (#) ($) --------------------------- --------------------------- Name ---- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Mark Gross .......................................................... -0- -0- -0- -0- Amy Finfer .......................................................... -0- -0- -0- -0- Michael Gross ....................................................... 79,354 -0- $599,866 -0- David Skurnik ....................................................... 6,055 14,130 $ 32,697 $76,302
Employment Agreements We have not entered into employment agreements with any of our employees. However, all employees, including our senior executives, have signed an Employee's Confidentiality Agreement. Under this agreement, the employee agrees to devote all working time to the company, not to disclose any of our confidential information and, in the event of termination of employment, not to compete with us for one year following termination. 36 Stock Option Plans To attract and retain persons necessary for our success, in January 2001 we adopted our 2001 stock option plan and reserved 250,000 common shares for future grants. Under the plan, employees and consultants are eligible to receive incentive and/or non-qualified stock options. The plan has a term of 10 years and is administered by the board of directors or by a committee appointed for this purpose by the board of directors. The board of directors or the committee, as the case may be, has the sole discretion to determine who is eligible to receive options, how many options they will receive, the exercise price for the options and other conditions relating to the exercise of the options. Incentive stock options granted under the plans must be exercised within 10 years from the date of grant at an exercise price that is not less than the fair market value of the common shares on the date of the grant. The exercise price of options granted to shareholders owning more than 10% of our outstanding common shares must be at least 110% of the fair market value of the common shares on the date of the grant, and the options must be exercised within five years from the date of grant to qualify as incentive stock options. In 2001, we granted options under our 2001 plan covering 150,678 common shares. These options have an exercise price of $2.60 per share, a ten-year term and, generally, vest ratably in four equal annual installments beginning with the date of grant. In April 2002, a former employee exercised options covering 673 common shares. As of the date of this prospectus, options covering 134,530 remain outstanding. In 2002, we granted options under our 2001 plan covering 50,731 common shares. These options have an exercise price of $8.00 per share, a ten-year term and vest ratably in four equal annual installments beginning with the date of grant. All of these options are outstanding. In addition, in June 1999, we granted options covering 78,720 common shares. These options have an exercise price of $0.42359 per share and can be exercised at any time before January 1, 2011. Limitation of Directors' Liability and Indemnification Our certificate of incorporation limits the liability of individual directors for specified breaches of their fiduciary duty. The effect of this provision is to eliminate the liability of directors for monetary damages arising out of their failure, through negligent or grossly negligent conduct, to satisfy their duty of care, which requires them to exercise informed business judgment. The liability of directors under the federal securities laws is not affected. A director may be liable for monetary damages only if a claimant can show a breach of the individual director's duty of loyalty to us, a failure to act in good faith, intentional misconduct, a knowing violation of the law, an improper personal benefit or an illegal dividend or stock purchase. There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which we are required or permitted to provide indemnification. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. Our certificate of incorporation also provides that we will indemnify and hold harmless each of our directors or officers against all expense, liability and loss, including attorneys fees, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid or to be paid in settlement, reasonably incurred or suffered by such person by reason of the fact that he or she was an officer or director, to the fullest extent authorized by the New York Business Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons under our certificate of incorporation, we have been informed that, in the opinion of the SEC, indemnification is against public policy as expressed in the Securities Act and is unenforceable. CERTAIN TRANSACTIONS Mark Gross, our principal stockholder and chief executive officer, has personally guaranteed repayment of the term loan and amounts due under the credit line facility to Merrill Lynch. We have adopted a policy that, in the future, all transactions with any officer, director or 5% shareholder must be approved by the audit committee. 37 PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our common shares as of the date of this prospectus by: o each person known by us to be the beneficial owner of more than 5% of our outstanding common shares; o each of our director and director-nominees; o each executive officer named in the summary compensation table above; and o all of our directors, director-nominees and executive officers as a group. The following table does not take into account any common shares sold as a result of the exercise of the over-allotment option granted to the underwriters. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all of the common shares owned by them. All information concerning their respective beneficial ownership has been furnished to us by the individual shareholders.
Percent of Common Shares Beneficially Owned ----------------------------------- Name and Address of Beneficial Owner (1) Common Shares ---------------------------------------- Beneficially Owned(2) Before Offering(3) After Offering --------------------- ------------------ -------------- Mark Gross......................................................... 1,232,910(4) 91.6% 46.2% Judy Gross......................................................... 1,232,910(4) 91.6% 46.2% Amy Finfer......................................................... 79,090 5.9% 3.0% Michael Gross...................................................... 79,359(5) 5.6% 2.9% David Skurnik...................................................... 10,765(5) * * Andrew Weiss....................................................... 1,250(5) * * Donna Lynn......................................................... 1,250(5) * * All directors, director-nominees and executive officers as a group (7 persons)...................................................... 1,404,624(6) 97.6% 50.8%
- --------------- * Less than 1% (1) All addresses are c/o Data Conversion Laboratory, Inc., 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365. (2) According to the rules and regulations of the SEC, common shares that a person has a right to acquire within 60 days of the date of this prospectus are deemed to be outstanding for the purpose of computing the percentage ownership of that person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (3) Percent of common shares beneficially owned before offering does not include 75,000 common shares to be issued to members of Morse, Zelnick, Rose & Lander LLP in connection with this offering. (4) Mark Gross and Judy Gross are husband and wife. Common shares beneficially owned includes the aggregate number of shares owned by both of them. (5) Represents shares underlying options exercisable within 60 days of the date of this prospectus. (6) Includes 92,624 common shares underlying options exercisable within 60 days of this prospectus. All of the common shares set forth in the above table are covered by lock-up agreements prohibiting their sale, assignment or transfer for one year from the date of this prospectus without the prior written consent of the representative. 38 DESCRIPTION OF SECURITIES As of the date of this prospectus, our authorized capital stock consists of 25,000,000 common shares, par value $.01 per share and 5,000,000 preferred shares, par value of $.01 per share. After this offering, we will have 2,671,314 common shares issued and outstanding, 2,858,814 if the over- allotment option is exercised in full, and no preferred shares outstanding. As of the date of this prospectus, we have outstanding 1,346,314 common shares held of record by five shareholders. Units Each unit consists of one common share and one warrant to purchase one common share. The common shares and the unit warrants will trade only as units for 30 days following the effective date of this offering, after which time they will trade separately. We will announce in advance the separation of the units by a public press release. Upon separation, unit holders who wish to hold physical certificates will receive certificates for common shares and for unit warrants in exchange for their unit certificates. Common Shares The holders of outstanding common shares are entitled to receive dividends out of legally available assets when and to the extent determined by our board of directors from time to time. Each shareholder is entitled to one vote for each common share held by him on all matters submitted to a vote of shareholders. The holders of a majority of the common shares voting can elect all of the directors then standing for election. The common shares are not entitled to preemptive rights and are not convertible or redeemable. If we are liquidated or dissolved or our business is otherwise wound up, the holders of common shares would be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and the payment of the liquidation preference of any outstanding preferred shares. Each outstanding common share is, and all common shares to be outstanding upon completion of this offering will be, fully paid and nonassessable. If our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. The rights of the holders of common shares are subordinate to the rights of any holders of preferred shares outstanding from time to time. Preferred Shares The board of directors has the authority, within the limitations and restrictions stated in our certificate of incorporation, to provide by resolution for the issuance of preferred shares, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. The issuance of preferred shares could have the effect of decreasing the market price of our common shares and could adversely affect the voting and other rights of the holders of our common shares. There are no preferred shares outstanding. Warrants Unit Warrants General. The unit warrants issued in this offering may be exercised at any time beginning 30 days after this offering and ending on _____________ ___, 2007. Each unit warrant entitles the holder to purchase one common share at an exercise price of $_______ per share (150% of the initial public offering price of the units). This exercise price will be adjusted if specific events, summarized below, occur. A unit warrantholder will not be deemed a holder of the underlying common share for any purpose until the unit warrant is exercised. 39 Redemption. Beginning six months after the effective date of this offering, we will have the right to redeem the unit warrants at a price of $0.25 per unit warrant, after providing 30 days' prior written notice to the unit warrantholders, at any time after the closing price for our common stock, as reported on the Nasdaq SmallCap Market, was at or above 200% of the initial unit offering price for any ten consecutive trading days. We will send a written notice of redemption by first class mail to unit warrantholders at their last known addresses appearing on the registration records maintained by the transfer agent for our unit warrants. No other form of notice or publication or otherwise will be required. If we call the unit warrants for redemption, the unit warrantholders will then have to decide whether to sell the unit warrants, exercise the unit warrants before the close of business on the business day preceding the specified redemption date or hold them for redemption. Exercise. The unit warrantholders may exercise the unit warrants only if an appropriate registration statement is then in effect with the SEC and if the common shares underlying the unit warrants are qualified for sale under the securities laws of the state in which the holder resides. To exercise a unit warrant, the holder must deliver to our transfer agent the unit warrant certificate on or prior to the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of unit warrants being exercised. Fractional shares of common stock will not be issued upon exercise of our redeemable unit warrants. Adjustments of exercise price. The exercise price of the unit warrants will be adjusted if we declare any stock dividend to stockholders, other than the 10% stock dividend issuable if our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, or effect any split or share combination with respect to our common stock. Therefore, if we effect any stock split or stock combination with respect to our common stock, the exercise price in effect immediately prior to this stock split or combination will be proportionately reduced or increased, as the case may be. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a unit warrant or, if we elect, an adjustment of the number of unit warrants outstanding. Options As of the date of this prospectus, under our 2001 stock option plan, there are outstanding options to purchase 185,261 common shares of which 134,530 have an exercise price of $2.60 and 50,731 have an exercise price of $8.00. There are an additional 64,739 common shares reserved for issuance under our 2001 plan. In addition, options to purchase 78,720 common shares at an exercise price of $0.42359 per share are also outstanding. These options were not granted under the option plan. Authorized But Unissued Shares The authorized but unissued common shares and all of the preferred shares are available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued common shares and preferred shares could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. The New York Business Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless the corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation does not impose any supermajority vote requirements. Anti-takeover Effects of Our Certificate of Incorporation and Bylaws Certain provisions of our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt, including attempts that might result in a premium being paid over the market price for the shares held by shareholders. Special meetings of shareholders. Special meetings of our shareholders may be called only by the president, the chief executive officer, the chairman of the board of directors or by a majority of the board of directors then in office. This provision could make it more difficult for shareholders to take actions opposed by the board of directors. 40 Issuance of "blank check" preferred shares. As of the date of this prospectus, our certificate of incorporation authorizes our board of directors to issue up to five million "blank check" preferred shares. This means that, without shareholder approval, the board of directors has the authority to attach special rights to preferred shares, including voting and dividend rights. With these rights, preferred shareholders could make it more difficult for a third party to acquire our company. Removal of directors only "for cause." Our bylaws provide that members of our board of directors may only be removed for "cause" by the affirmative vote of holders of at least a majority of the shares of the company entitled to vote. Listing on The Nasdaq SmallCap Market We are applying to list the units, common shares and the unit warrants on The Nasdaq SmallCap Market under the symbols "DCLXU," "DCLX" and "DCLXW," respectively. Transfer Agent, Warrant Agent and Registrar The transfer agent and registrar for our common shares and the warrant agent for our unit warrants will be Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004. 41 SHARES ELIGIBLE FOR FUTURE SALE Before this offering there was no public market for our common shares. We cannot predict the effect, if any, that sales of, or the availability for sale of, our common shares will have on the market price of our common shares from time to time. Future sales of substantial amounts of our common shares in the public market, including shares issuable upon the exercise of the unit warrants or options granted or to be granted under our stock option plans, could adversely affect the prevailing market price of our common shares and could impair our ability to raise capital in the future through the sale of securities. When this offering is completed, we will have outstanding 2,671,314 common shares. Of these shares, all of the shares sold in this offering, as well as any dividend shares that will be issued if our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by an "affiliate" of us as that term is defined in Rule 144 under the Securities Act. The remaining 1,421,314 common shares held by existing shareholders are "restricted securities" as that term is defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. Under Rule 144, without regard to the lock-up agreements described below, 1,345,641 of the "restricted securities" will be eligible for sale 90 days after the date of this prospectus, 673 common shares will be eligible for sale in April 2003 and 75,000 common shares will be eligible for sale one year from the date of this prospectus. In addition to the common shares actually issued and outstanding, on the date of this prospectus there are 263,981 common shares issuable upon exercise of outstanding options. This does not include common shares underlying the unit warrants and the representative's warrants issued in connection with this offering. Lock-Up Agreements All of our officers, directors and shareholders have signed lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, any shares of common stock, or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of one year after the date of this prospectus. Transfer or dispositions can be made sooner with the prior written consent of the representative or to any trust for the benefit of the transferring shareholders or members of their families. At the expiration of the lock-up period, one year after the date of this prospectus, all of the restricted shares, other than restricted shares that are also "144(k) shares," will be available for resale to the public in accordance with the volume and trading limitations of Rule 144. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three- month period a number of shares that does not exceed the greater of: o 1% of the number of shares of common stock then outstanding which will equal approximately 26,714 shares immediately after this offering; or o the average weekly trading volume of the common stock on The Nasdaq SmallCap Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 42 Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Of the restricted securities, 33,641 common shares are eligible for sale under Rule 144(k). Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, some of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock plan or other written agreement may be eligible to resell these shares. Resales under Rule 701 must be effected 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with many of the restrictions, including the holding period, contained in Rule 144. Registration Rights We have granted registration rights to two of our shareholders owning 112,731 common shares in the aggregate. As a result, we may be required to register some or all of their common shares for sale if they exercise their rights. Both shareholders have waived their registration rights to the extent they apply to this offering and have agreed not to exercise those rights for the one-year period beginning on the date of this prospectus. 43 UNITED STATES INCOME TAX CONSEQUENCES The following summary describes the material United States federal income tax consequences of the ownership of our securities applicable to holders who are natural persons. This discussion does not address all aspects of United States federal income taxation in light of a holder's particular facts and circumstances, nor does it address foreign, state or local income tax consequences or estate tax consequences that apply to a holder of our securities. Furthermore, this discussion is based on provisions of the Internal Revenue Code of 1986, as amended, or the Code, and the income tax regulations, Internal Revenue Service rulings and judicial decisions promulgated and issued as of the date of this prospectus. The provisions, regulations, rulings and decisions may be amended, repealed, revoked, modified or overturned with retroactive effect so as to result in tax consequences different from those discussed below. Persons considering purchasing our securities should consult with their own tax advisors concerning the United States federal income tax consequences of their ownership of our securities in light of their particular circumstances as well as under the laws of any other taxing jurisdiction. As used in this section, a "U.S. holder" is a an individual who holds any of our securities and is either a U.S. citizen or a resident alien of the United States and a "non-U.S. holder" is an individual who holds any of our securities and is neither a U.S. citizen nor a resident alien of the United States. Dividends A U.S. holder will be required to include in gross income and taxed as ordinary income the amount of any distribution paid on our common shares to the extent the distribution is paid out of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of the distribution that exceeds our current and accumulated earnings and profits will be applied against and will reduce the U.S. holder's tax basis in his common shares until the basis is reduced to zero. The amount of the distribution that exceeds our current and accumulated earnings and profits and the U.S. holder's tax basis is treated as capital gain and taxed accordingly. The amount of the distribution is the cash distributed and the fair market value of any property distributed. In the case of a non-U.S. holder, the portion of a distribution that constitutes a dividend will be subject to a withholding tax of 30% of a such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States and, generally, where a treaty applies, are attributable to a United States permanent establishment of the non-U.S. holder, are not subject to withholding tax, but instead are subject to United States federal income tax on a net basis at the applicable graduated rates. Certain certification and disclosure requirements must be complied with in order for effectively connected income to be exempt from withholding. A non-U.S. holder of common shares who wishes to claim the benefit of an applicable treaty rate (and avoid backup withholding) for dividends paid will be required to satisfy applicable certification and other requirements and may be required to obtain a United States taxpayer identification number. A non-U.S. holder of common shares eligible for a reduced rate of United States withholding tax may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service. If our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of or decrease in the exercise price for the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. Our executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to us as a contribution to capital. The proper tax treatment of this dividend is not certain. Generally, stock dividends are tax free. In this case, however, the dividend may be deemed disproportionate among the shareholders since some shareholders have agreed to return any dividend shares they may receive to us, in which case the dividend would be taxable to the recipient. If the dividend is taxable, you will have ordinary income in an amount equal to the value of the dividend shares on the date they are distributed to the extent of our earnings and profits. We will not distribute any cash as part of this dividend. 44 Basis The measure of income or loss from a sale or exchange of the unit or the securities underlying the unit depends on the tax basis of the unit and the common share and the unit warrant underlying the unit. Each unit will have a tax basis equal to the initial public offering price per unit. The tax basis for the securities underlying the unit will be determined by allocated the initial public offering price for the unit to the common share and the unit warrant included in the unit in proportion to the relative fair market values of these securities at the time of the offering. In the case of common shares received as a result of a stock dividend, the basis of those shares would depend on whether or not the dividend was taxable. If the dividend were tax-free, a pro rata portion of the basis of the common shares to which they relate would be allocated to the dividend shares. If the dividend were taxable, your basis in those dividend shares would be their fair market value on the date of the distribution. Dispositions A U.S. holder will recognize gain or loss when he sells or otherwise disposes of a security in a taxable transaction in an amount equal to the difference between the amount realized by the U.S. holder and the U.S. holder's tax basis in that security. The gain or loss will be a capital gain or loss if the security is a capital asset in the hands of the U.S. holder and will be long-term capital gain or loss if the U.S. holder has held the security for more than one year. A non-U.S. holder generally will not be subject to U.S. federal income tax on the gain recognized from the sale or other disposition of the security unless the (1) gain is effectively connected with a trade or business of the non-U.S. holder in the United States and, generally, where a tax treaty applies, is attributable to a United States permanent establishment of the non-U.S. holder or (2) the non-U.S. holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and other conditions are met. A non-U.S. holder described in clause (1) above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. A non-U.S. holder described in clause (2) above will be subject to a flat 30% tax on gain derived from the sale, which may be offset by United Source capital losses even though the individual is not considered a resident of the United States. If the holder of a unit warrant allows the unit warrant to expire without exercise, the expiration will be treated as a sale or exchange of the unit warrant on the expiration date. The holder will have a taxable loss in an amount equal to the holder's tax basis in the unit warrant at the time of the lapse. No gain or loss will be recognized when the holder exercises the unit warrant. The tax basis of the common share received upon exercise of the unit warrant will equal the sum of the holder's tax basis for unit warrant and the exercise price. The holding period of the common share underlying for purposes of determining whether any gain or loss recognized upon a subsequent sale or other disposition of the underlying common share will begin on the date the unit warrant was acquired. Information Reporting and Backup Withholding We must report annually to the Internal Revenue Service and to each holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding as required. Copies of the information returns, reporting such dividends and withholding may also be made available to the tax authorities in the country in which a non-U.S. holder resides under the provisions of an applicable income tax treaty. A non-U.S. holder may be subject to backup withholding at the rate of 31% unless applicable certification requirements are met. Payment of the proceeds of a sale of the securities within the United States or conducted through certain United States related financial intermediaries is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a non-U.S. holder and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person or the holder otherwise establishes an exemption. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder's United States federal income tax liability provided the required information is furnished to the Internal Revenue Service. 45 UNDERWRITING Paulson Investment Company, Inc. is acting as the representative of the underwriters of this offering. We and the underwriter have entered into an underwriting agreement with respect to the units being offered. In connection with this offering and subject to certain conditions, each of the underwriters named below has agreed to purchase, and we have agreed to sell, the number of units set forth opposite the name of each underwriter.
Underwriter Number of Units ----------- --------------- Paulson Investment Company, Inc. ............................ --------- Total ..................................................... 1,250,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all of the units offered by this prospectus, other than those covered by the over-allotment option, if any units are purchased. The underwriting agreement also provides that the obligations of the underwriters to pay for and accept delivery of the units are subject to the approval of certain legal matters by counsel and certain other conditions. These conditions include the requirements that no stop order suspending the effectiveness of the registration statement be in effect and that no proceedings for such purpose have been instituted or threatened by the Securities and Exchange Commission. The representative has advised us that the underwriters propose to offer our units to the public initially at the offering price set forth on the cover page of this prospectus and to selected dealers at such price less a concession of not more than $_____ per unit. The underwriters and selected dealers may reallow a concession to other dealers, including the underwriters, of not more than $_____ per unit. After completion of the initial public offering of the units, the offering price, the concessions to selected dealers and the reallowance to their dealers may be changed by the underwriters. The underwriters have informed us that they do not expect to confirm sales of our units offered by this prospectus to any accounts over which they exercise discretionary authority. Over-allotment option Pursuant to the underwriting agreement, we have granted Paulson Investment Company, Inc. an option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional 187,500 units on the same terms as the units being purchased by the underwriters from us. Paulson Investment Company, Inc. may exercise the option solely to cover over-allotments, if any, in the sale of the units that the underwriters have agreed to purchase. If the over-allotment option is exercised in full, the total public offering price, underwriting discount and proceeds to us before offering expenses will be $________, $________ and $________, respectively. Stabilization Until the distribution of the units offered by this prospectus is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for and to purchase units. As an exception to these rules, the underwriters may engage in transactions that stabilize the price of the units. The underwriters may engage in over-allotment sales, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. o Over-allotment sales involve syndicate sales in excess of the offering size, which creates a syndicate short position. o Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. o Syndicate covering transactions involve purchases of the common stock and public warrants in the open market after the distribution has been completed in order to cover syndicate short positions. The 46 underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option to purchase additional units as described above. o Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Covered short sales are sales made in an amount not greater than the representative's over- allotment option to purchase additional shares in this offering. In determining the source of shares to close out the covered short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through the over-allotment option. Naked short sales are sales in excess of the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. In general, the purchase of a security to stabilize or to reduce a short position could cause the price of the security to be higher than it might be otherwise. These transactions may be effected on the Nasdaq Smallcap Market or otherwise. Neither we nor the underwriters can predict the direction or magnitude of any effect that the transactions described above may have on the price of the units. In addition, neither we nor the underwriters can represent that the underwriters will engage in these types of transactions or that these types of transactions, once commenced, will not be discontinued without notice. Indemnification The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. Underwriters' compensation We have agreed to sell the units to the underwriters at the initial offering price of $_____, less the __% underwriting discount. The underwriting agreement also provides that upon the closing of the units offered, the representative will be paid a nonaccountable expense allowance equal to __% of the gross proceeds from the sale of the units offered by this prospectus, including the over-allotment option. We have also agreed to issue warrants to the representative to purchase from us up to 125,000 units at an exercise price per unit equal to 120% of the offering price per unit. These warrants and the securities underlying the warrants are exercisable during the four-year period beginning one year from the date of effectiveness of the registration statement and are not redeemable. These warrants are not transferable for one year following the effective date of the registration, except to an individual who is an officer or partner of an underwriter, by will or by the laws of descent and distribution. These warrants will have registration rights. We will cause the registration statement to remain effective until the earlier of the time that all of the representative's warrants have been exercised and the date which is five years after the effective date of this offering. The common stock and warrants issued to the representative upon exercise of these warrants will be freely tradeable. The holders of the representative's warrants will have, in that capacity, no voting, dividend or other stockholder rights. Any profit realized by the representative on the sale of the securities issuable upon exercise of the representative's warrants may be deemed to be additional underwriting compensation. The securities underlying the representative's warrants are being registered on the registration statement. During the term of the representative's warrants, the holders thereof are given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while 47 the representative's warrants are outstanding. At any time at which the representative's warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms. Lock-up agreements Our officers, directors and other stockholders have agreed that for a period of one year from the date this registration statement becomes effective that they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, other than through intra-family transfers or transfers to trusts for estate planning purposes, without the consent of the representative, which consent will not be unreasonably withheld. The representative may consent to an early release from the one-year lock-up period if in its opinion the market for the common stock would not be adversely impacted by such sales and in cases of an officer, director or other stockholder's financial emergency. We are unaware of any officer, director or current stockholder who intends to ask for consent to dispose of any of our equity securities during the lock-up period. Determination of offering price Before this offering, there has been no public market for the units and the common stock and unit warrants contained in the units. Accordingly, the initial public offering price of the units offered by this prospectus and the exercise price of the unit warrants were determined by negotiation between us and the representative. Among the factors considered in determining the initial public offering price of the units and the exercise price of the unit warrants were: o our history and our prospects; o the industry in which we operate; o the status and development prospects for our proposed products and services; o our past and present operating results; o the previous experience of our executive officers; and o the general condition of the securities markets at the time of this offering. The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the units. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the units, or the common stock and unit warrants contained in the units, can be resold at or above the initial public offering price. LEGAL MATTERS The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Partners of Morse, Zelnick et al. own 75,000 common shares. Holland & Knight LLP will pass upon certain matters for the underwriters named in this prospectus in connection with this offering. EXPERTS Goldstein Golub Kessler LLP, independent auditors, have audited our financial statements as of December 31, 2001 and for each of the two years in the period then ended as set forth in their report. We have included these financial statements in the prospectus and elsewhere in the registration statement in reliance on Goldstein Golub Kessler LLP's report, given on their authority as experts in accounting and auditing. 48 WHERE YOU CAN FIND MORE INFORMATION In connection with the units offered by this prospectus, we have filed a registration statement on Form SB-2 under the Securities Act with the SEC. This prospectus, filed as part of the registration statement, does not contain all of the information included in the registration statement and the accompanying exhibits and schedules. For further information with respect to us and our units, shares and unit warrants, you should refer to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract or any other document are not necessarily complete, and you should refer to the copy of the contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by the actual contents of the contract or other document referred to. You may inspect a copy of the registration statement and the accompanying exhibits and schedules without charge at the Securities and Exchange Commission's public reference facilities, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and you may obtain copies of all or any part of the registration statement from those offices for a fee. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically. The address of the site is http://www.sec.gov. We intend to furnish our shareholders with annual reports containing financial statements audited by our independent certified public accountants. 49 DATA CONVERSION LABORATORY, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditor's Report ............................................ F-2 Balance Sheet as of December 31, 2001 and March 31, 2002 (unaudited) and March 31, 2002 (unaudited pro forma)............................... F-3 Statement of Operations for the years ended December 31, 2001 and 2000 and the three month periods ended March 31, 2002 (unaudited) and 2001 (unaudited)............................................................ F-4 Statement of Shareholders' Equity for the years ended December 31, 2001 and 2000 and the three month period ended March 31, 2002 (unaudited)... F-5 Statement of Cash Flows for the years ended December 31, 2001 and 2000 and the three month periods ended March 31, 2002 (unaudited) and 2001 (unaudited)............................................................ F-6 Notes to Financial Statements .......................................... F-7
F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Data Conversion Laboratory, Inc. We have audited the accompanying balance sheet of Data Conversion Laboratory, Inc. as of December 31, 2001, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period 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 of America. 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 Data Conversion Laboratory, Inc. as of December 31, 2001 and the results of its operations and its cash flows for the each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America. Goldstein Golub Kessler LLP New York, New York May 8, 2002 F-2 DATA CONVERSION LABORATORY, INC. BALANCE SHEET
December 31, March 31, March 31, 2001 2002 2002 ------------ ----------- ---------- (Unaudited) (Unaudited pro forma) ASSETS Current Assets: Cash.................................................................................. $ 14,836 $ 16,271 $ 16,271 Accounts receivable................................................................... 1,042,823 998,603 998,603 ---------- ---------- ---------- Total current assets............................................................... 1,057,659 1,014,874 1,014,874 Property and Equipment--net............................................................ 1,262,532 1,288,417 1,288,417 Other Assets........................................................................... 13,982 13,982 13,982 ---------- ---------- ---------- Total Assets....................................................................... $2,334,173 $2,317,273 $2,317,273 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Revolving line of credit............................................................. $ 515,328 $ 385,410 $ 385,410 Accounts payable and accrued expenses................................................ 330,886 277,111 277,111 Income taxes payable................................................................. 44,102 65,244 65,244 Current portion of term loan payable................................................. 37,500 37,500 37,500 Current portion of capital lease obligation.......................................... 18,452 18,901 18,901 S corporation distributions payable.................................................. -- -- 450,000 Deferred revenue..................................................................... 60,455 11,751 11,751 Deferred tax liability............................................................... 44,037 40,837 40,837 ---------- ---------- ---------- Total current liabilities.......................................................... 1,050,760 836,754 1,286,754 Term Loan Payable--net of current portion.............................................. 56,250 43,750 43,750 Capital Lease Obligation--net of current portion....................................... 36,955 32,058 32,058 ---------- ---------- ---------- Total liabilities.................................................................. 1,143,965 912,562 1,362,562 ---------- ---------- ---------- Commitments Shareholders' Equity: Common stock--.01 par value; authorized 12,000,000 shares; issued and outstanding 1,000,000 shares.................................................... 10,000 10,000 10,000 Additional paid-in capital........................................................... 1,180,208 1,394,711 944,711 Retained earnings.................................................................... -- -- -- ---------- ---------- ---------- Shareholders' equity............................................................... 1,190,208 1,404,711 954,711 ---------- ---------- ---------- Total Liabilities and Shareholders' equity....................................... $2,334,173 $2,317,273 $2,317,273 ========== ========== ==========
See Notes to Financial Statements F-3 DATA CONVERSION LABORATORY, INC. STATEMENT OF OPERATIONS
Year Ended Three Month Period December 31, Ended March 31, ----------------------- ----------------------- 2000 2001 2001 2002 ---------- ---------- ---------- ---------- (Unaudited) Revenue ..................................................................... $3,252,735 $4,879,109 $1,071,310 $1,421,605 Cost of revenue ............................................................. 2,115,006 2,783,606 666,424 790,940 ---------- ---------- ---------- ---------- Gross margin ................................................................ 1,137,729 2,095,503 404,886 630,665 Selling expenses ............................................................ 551,794 455,474 100,608 138,850 General and administrative expenses ......................................... 572,357 561,772 222,855 187,050 Interest expense ............................................................ 47,231 60,784 21,032 8,771 Depreciation and amortization expense ....................................... 60,454 128,913 30,068 63,549 ---------- ---------- ---------- ---------- Income (loss) before provision for (benefit from) income taxes............................................................... (94,107) 888,560 30,323 232,445 Provision for (benefit from) income taxes ................................... (325) 88,251 -- 17,942 ---------- ---------- ---------- ---------- Net income (loss) ........................................................... $ (93,782) $ 800,309 $ 30,323 $ 214,503 ========== ========== ========== ========== Basic net income (loss) per common share .................................... $ (0.09) $ 0.80 $ 0.03 $ 0.21 ========== ========== ========== ========== Diluted net income (loss) per common share .................................. $ (0.09) $ 0.75 $ 0.03 $ 0.20 ========== ========== ========== ========== Weighted-average number of shares outstanding--basic ........................ 1,000,000 1,000,000 1,000,000 1,000,000 ========== ========== ========== ========== Weighted-average number of shares outstanding--diluted ...................... 1,000,000 1,063,521 1,047,608 1,062,896 ========== ========== ========== ========== Pro forma information (unaudited): Net income, as above....................................................... $ 800,309 $ 214,503 Pro forma adjustment to provision for income taxes......................... 349,000 69,000 ---------- ---------- Pro forma net income....................................................... $ 451,309 $ 145,503 ========== ========== Pro forma basic net income per common share ................................. $ 0.43 $ 0.14 ========== ========== Pro forma diluted net income per common share ............................... $ 0.40 $ 0.13 ========== ========== Weighted-average number of shares outstanding--basic ........................ 1,056,250 1,056,250 ========== ========== Weighted-average number of shares outstanding--diluted ...................... 1,119,771 1,119,146 ========== ==========
See Notes to Financial Statements F-4 DATA CONVERSION LABORATORY, INC. STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 ---------------------------------------------------------------- Common Stock --------------------- Number of Additional Total Shares Paid-in Retained Stockholders' Outstanding Amount Capital Earnings Equity ----------- ------- ---------- --------- ------------- Balance at January 1, 2000..................................... 1,000,000 $10,000 $ 45,000 $ 493,892 $ 548,892 Net loss....................................................... (93,782) (93,782) Distributions to shareholders.................................. (19,128) (19,128) Undistributed earnings of S Corporation....................... 380,982 (380,982) -- --------- ------- ---------- --------- ---------- Balance at December 31, 2000................................... 1,000,000 $10,000 $ 425,982 -- 435,982 Net income..................................................... 800,309 800,309 Distributions to shareholders.................................. (46,083) (46,083) Undistributed earnings of S Corporation....................... 754,226 (754,226) -- --------- ------- ---------- --------- ---------- Balance at December 31, 2001................................... 1,000,000 $10,000 $1,180,208 $ -- $1,190,208 Unaudited: Net income for three month period............................. 214,503 214,503 Undistributed earnings of S Corporation....................... 214,503 (214,503) -- --------- ------- ---------- --------- ---------- Balance at March 31, 2002...................................... 1,000,000 $10,000 $1,394,711 $ -- $1,404,711 ========= ======= ========== ========= ==========
See Notes to Financial Statements F-5 DATA CONVERSION LABORATORY, INC. STATEMENT OF CASH FLOWS
Year Ended Three Month Periods December 31, Ended March 31, --------------------- --------------------- 2000 2001 2001 2002 --------- --------- --------- --------- (Unaudited) Cash flows from operating activities: Net income (loss).............................................................. $ (93,782) $ 800,309 $ 30,323 $ 214,503 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............................................... 60,454 128,913 30,068 63,549 Bad debt expense ............................................................ 77,971 77,971 Deferred income taxes ....................................................... 44,037 (3,200) Changes in operating assets and liabilities: Increase in accounts receivable............................................ (228,486) (424,109) 45,423 44,220 Decrease in prepaid expenses............................................... 12,427 Increase in other assets................................................... (3,982) Increase in accounts payable and accrued expenses.......................... 234,080 55,301 44,410 (53,775) Increase in income taxes payable........................................... 44,102 (4,106) 21,142 Increase in deferred revenue............................................... 25,599 34,856 (7,888) (48,704) --------- --------- --------- --------- Net cash provided by operating activities.................................. 10,292 757,398 216,201 237,734 --------- --------- --------- --------- Cash flows used in investing activity--purchase of property and equipment and capitalized software costs.......................... (357,131) (656,879) (136,728) (89,434) Cash flows from financing activities: Net (repayments) proceeds on revolving line of credit.......................... 367,177 (10,050) (59,584) (129,918) Principal payments on term loan................................................ (31,250) (6,250) (12,500) Principal payments on capital lease obligations................................ (4,343) (4,448) Advance from shareholder....................................................... 6,000 Distributions to shareholders.................................................. (19,128) (46,083) --------- --------- --------- --------- Net cash provided by (used in) financing activities........................ 348,049 (91,726) (59,834) (146,866) Net increase in cash ............................................................ 1,210 8,793 19,639 1,435 Cash at beginning of period ..................................................... 4,833 6,043 6,043 14,836 --------- --------- --------- --------- Cash at end of period ........................................................... $ 6,043 $ 14,836 $ 25,682 $ 16,271 ========= ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest ....................................... $ 47,231 $ 61,299 $ 21,032 $ 8,798 ========= ========= ========= ========= Supplemental schedule of noncash investing and financing activity: Property and equipment acquired under capital lease ............................ $ 59,750 =========
See Notes to Financial Statements F-6 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization, Principal Business Activity and Summary of Significant Accounting Policies: Data Conversion Laboratory, Inc. (the "Company") is a leading independent provider of data conversion services. Revenue is recognized in the period in which the service is provided. Amounts billed at the beginning of a contract as a setup fee are deferred and amortized over the term of the project. Depreciation of property and equipment is provided for using the straight- line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the asset's useful life or the remaining term of the lease. The Company identifies and records impairment on long-lived assets when events and circumstances indicate that such assets have been impaired. The Company periodically evaluates the recoverability of its long-lived assets based on expected nondiscounted cash flows, and recognizes impairment, if any, based on expected discounted cash flows. The costs of software developed for internal use incurred during the preliminary project stage of software development are expensed as incurred. Direct costs incurred during the application stage are capitalized and amortized over the estimated useful life of the software. Costs incurred during the post-implementation/operation stage are expensed as incurred. The Company has elected to be treated as an S Corporation under Subchapter S of the Internal Revenue Code (the "Code") and New York State franchise tax law. Accordingly, there is no provision for federal income taxes as such earnings are taxed directly to the shareholders, and New York State income taxes are payable at reduced rates. The Company is subject to other state and local income taxes. The Company's S Corporation status will be terminated and will revert to C Corporation status immediately before its Initial Public Offering ("IPO"). (See note 12.) Pursuant to Staff Accounting Bulletin Topic 4B, the undistributed S Corporation earnings have been retroactively reclassified to additional paid in capital. Deferred income tax liability represents the tax effect of temporary differences between the basis of assets and liabilities for income tax and financial reporting purposes. The component of the deferral arises primarily from the tax base difference of capitalized software costs. The Company expenses advertising costs in the period incurred and these amounts are included in selling expenses. Advertising expenses approximated $54,000 and $24,000 for the years ended December 31, 2000 and 2001, respectively, and $11,000 and $9,000 for the three-month-periods ended March 31, 2001 and 2002, respectively. Basic earnings per common share is computed using weighted-average number of shares outstanding. Diluted earnings per common share is computed using weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common shares. Incremental shares of 62,584 were used in the calculation of diluted earnings per common share for the year ended December 31, 2001 and the quarter ended March 31, 2002. Incremental shares of 47,608 were used in the calculation of diluted earnings per common share for the quarter ended March 31, 2001. Options to purchase 58,500 shares of common stock at $.57 per share were outstanding at all times during 2000 but were not included in the computation of diluted EPS because the effect of these options would have been antidilutive. These options expire in 2011. For the year ended December 31, 2000, diluted loss per common share is not presented as the result is antidilutive. Pursuant to SAB No. 55, the weighted average number of common shares outstanding for the proforma net income in the accompanying statement of operations has been increased to reflect the number of shares whose proceeds would have been necessary to fund the estimated final S Corporation distribution of $450,000 to be paid to pre-offering shareholders from the proceeds upon successful completion of the IPO. F-7 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 1. Organization, Principal Business Activity and Summary of Significant Accounting Policies: -- (Continued) The accompanying pro forma balance sheet at March 31, 2002 reflects the Company's March 31, 2002 balance sheet adjusted for the accrual of an estimated final S Corporation distribution of $450,000. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates by management. Actual results could differ from these estimates. Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements. The results of operations for the three-month period ended March 31, 2002 are not necessarily indicative of the results of operations expected for the year ended December 31, 2002. Amounts related to March 31, 2002 and the periods ended March 31, 2001 and 2002 are unaudited. In the opinion of management, the accompanying unaudited interim financial statements include all adjustments (consisting only of those of a normal recurring nature) necessary for a fair statement of the results of the interim period. 2. Property and Equipment: Property and equipment, at cost, consists of the following:
December 31, March 31, Estimated 2001 2002 Useful Life ------------ ---------- ------------- Machinery and equipment........................................................ $ 649,447 $ 649,447 5 to 10 years Computer software.............................................................. 1,117,636 1,207,060 3 to 5 years Furniture and fixtures......................................................... 182,869 182,869 5 to 10 years Leasehold improvements......................................................... 231,225 231,225 Term of lease 2,181,177 2,270,601 ------------ ---------- Less accumulated depreciation and amortization................................. (918,645) (982,184) ---------- ---------- $1,262,532 $1,288,417 ========== ==========
Property and equipment includes amounts acquired under capital leases, of approximately $59,750 and $59,750, net of accumulated depreciation of approximately $4,979 and $9,958 at December 31, 2001 and March 31, 2002, respectively. 3. Accounts Payable and Accrued Expenses: Accounts payable and accrued expenses consist of the following at December 31, 2001:
Trade accounts payable.............................................. $266,691 Accrued vacation.................................................... 16,444 Accrued payroll taxes............................................... 25,030 Accrued pension..................................................... 22,721 -------- $330,886 ========
F-8 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 4. Revolving Line of Credit: The Company has a revolving line of credit with a financial institution with maximum borrowings not to exceed $575,000. Borrowings under this line bear interest at the bank's prime lending rate (4.75% at December 31, 2001) plus 1% and are payable on demand. Borrowings are collateralized by all of the assets of the Company. At December 31, 2001 and March 31, 2002, the Company had approximately $515,000 and $385,000, respectively, payable to the financial institution. Interest expense charged to operations amounted to approximately $47,000 and $54,000 for the years ended December 31, 2000 and 2001, respectively, and $21,000 and $7,000 for the three-month periods ended March 31, 2001 and 2002, respectively. The estimated fair value of the revolving line of credit approximates the carrying amount due to the short-term nature of the instrument. 5. Term Loan Payable: Term loan payable consists of a loan payable in monthly installments of $3,125, plus interest, at the bank's prime lending rate (4.75% at December 31, 2001 and March 31, 2002) plus 1% through June 2004. The term loan is secured by all of the assets of the Company. There is a balance due of $93,750 and $81,250 at December 31, 2001 and March 31, 2002, respectively, of which $37,500 is the current portion at both December 31, 2001 and March 31, 2002. Aggregate maturities on term loan payable at December 31, 2001 are as follows:
Year ending December 31, 2002................................................................. $37,500 2003................................................................. 37,500 2004................................................................. 18,750 ------- $93,750 =======
Because the interest rate adjusts with changes in the prime rate, the fair value of the long-term debt is equal to the carrying amount. 6. Capital Lease Obligations: The Company leases equipment under a capital lease which expires in 2004. The lease requires monthly payments of $1,916 including interest at 9.64% per annum. Aggregate future minimum payments under the capital lease at December 31, 2001 are as follows:
Year ending December 31, 2002................................................................. $22,992 2003................................................................. 22,992 2004................................................................. 17,322 ------- 63,306 Less amount representing interest.................................... 7,899 ------- 55,407 Less current portion................................................. 18,452 ------- Capital lease obligations, net of current portion................... $36,955 =======
F-9 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 7. Income Taxes: The provision for income taxes differs from the amount computed using the federal statutory rate of 34% as a result of the following:
December 31, ----------- 2001 2000 --- --- Tax at federal statutory rate ................................... 34% (34)% Flow through of S Corporation taxable income or loss to stockholders ............................................... (34) 34 State and local income taxes .................................... 10 -- --- --- Provision for income taxes ...................................... 10% 0% === ===
At December 31, 2001 and March 31, 2002, the recorded amount of computer software costs exceeded their tax basis by approximately $450,000 and $430,000, respectively. This temporary difference gave rise to a deferred tax liability of $44,037 and $40,837, respectively. Upon termination of its S Corporation status, the Company will record an additional deferred tax liability of approximately $153,000. The accompanying statement of operations for the year ended December 31, 2001 includes a pro forma adjustment to the provision for income taxes on a C Corporation basis as follows:
Current: Federal ..................................................... $137,000 State and local ............................................. 31,000 Deferred .................................................... 181,000 -------- Pro forma adjustment to the provision for incomes taxes.... $349,000 ========
8. Employee Benefit Plan: The Company has a noncontributory defined contribution plan under Section 401(k) of the Internal Revenue Code (the "Code") covering all qualified employees. An officer of the Company serves as trustee of the plan. 9. Stock Options: During 1999, an employee of the Company was granted options to purchase 58,500 shares of the Company's common stock at an exercise price of $.57 per share, which were fully vested at the date of issuance and are exercisable through 2011. During 2001, the Company adopted a stock option plan (the "Plan") which allows the board of directors to grant incentives to employees and directors in the form of incentive stock options and nonqualified stock options. At December 31, 2001, options to purchase 104,500 common shares at an exercise price of $3.50 per share, which vested 25% on the date of grant and 25% on each of the three subsequent anniversary dates, were outstanding and exerciseable at various dates through 2011. Also, an employee of the Company was granted options to purchase 475 shares of the Company's common stock at an exercise price of $3.50 per share, which were fully vested at the date of issuance and are exercisable through 2011. As of December 31, 2001, the Company has reserved 250,000 shares of common stock to be issued under the Plan. A summary of the status of the Company's options as of December 31, 2001 and 2000, and changes during the years then ended are presented below: F-10 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 9. Stock Options: -- (Continued)
2000 2001 ------------------- -------------------- Weighted- Weighted- Average Average Exercise Exercise Options Price Options Price ------ ----- ------- ----- Outstanding at beginning of year .............................................. 58,500 $0.57 58,500 $0.57 Granted ....................................................................... 111,975 $3.50 Canceled ...................................................................... (7,000) $3.50 ------ ----- ------- ----- Outstanding at end of year .................................................... 58,500 $0.57 163,475 $2.45 ====== ===== ======= =====
The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
Weighted- Average Remaining Number Number Contractual Exercise Price Outstanding Exercisable Life -------------- ----------- ----------- ---- $0.57............................................................................ 58,500 58,500 9 years $3.50............................................................................ 104,975 475 9 years ------- ------ ------- $2.45............................................................................ 163,475 58,975 9 years ======= ====== =======
The Company has elected to apply APB Opinion No. 25 and related interpretations in accounting for its stock options issued to employees and has adopted the disclosure-only provisions of SFAS No. 123. Had the Company elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, the Company's net income (loss) and income (loss) per common share would have been as follows:
Year ended December 31, ---------------------- 2000 2001 -------- -------- Net income (loss)--as reported .......................... $(93,782) $800,309 ======== ======== Net income (loss)--pro forma ............................ $(93,782) $763,678 ======== ======== Basic earnings (loss) per share--as reported ............ $ (0.09) $ .80 ======== ======== Basic earnings (loss) per share--pro forma .............. $ (0.11) $ .75 ======== ======== Diluted earnings (loss) per share--as reported .......... $ (0.09) $ .75 ======== ======== Diluted earnings (loss) per share--pro forma ............ $ (0.11) $ .72 ======== ========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected volatility of .1%, risk-free interest rates of 5.0%, expected option life of 5 years and no expected dividends. 10. Commitments: The Company is obligated under a noncancelable operating lease for office space expiring October 31, 2002. The lease provides for escalations for real estate taxes and operating costs. The minimum annual rental commitment in 2002 amounts to $54,490. Rent expense charged to operations, including escalation charges for real estate taxes and other expenses, amounted to approximately $78,000 and $80,000 for the years ended December 31, 2000 and 2001, respectively, and approximately $19,000 and $27,000 for the three-month periods ended March 31, 2001 and 2002, respectively. F-11 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 11. Major Customers: For the year ended December 31, 2001, one customer accounted for approximately 14% of total revenue and approximately 16% of the Company's accounts receivable at December 31, 2001. For the year ended December 31, 2000, three customers accounted for approximately 15%, 14%, and 11% of total revenue, respectively. 12. Subsequent Events: The Company has filed a Registration Statement on Form SB-2 under the Securities Act of 1933. The Registration Statement contemplates an offering of 1,250,000 units at an estimated offering price ranging from $7.50 to $8.50 per unit. Each unit will have one common share of the Company and a warrant which will entitle the holder to purchase one common share at an exercise price of 150% of the initial public offering price per unit. The stock and warrant will separate 30 days after the effective date of the registration statement. The Company will effect a stock dividend pursuant to which the existing shareholders of the Company will receive .345640833 common shares for each common share outstanding. The financial statements do not give retroactive effect to the dividend. If the Company's audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, the Company will promptly declare and pay a 10% stock dividend to common shareholders of record as of the record date for that dividend. There will be no increase in the number of, or decrease in the exercise price for, the common shares underlying the unit warrants and the representative's warrant as a result of this dividend. The Company's executive officers and one other shareholder have agreed to immediately return any dividend shares they may receive to the Company as a contribution to capital. F-12 INSIDE BACK COVER [GRAPHICS TO BE SUPPLIED] This graphic, titled "Conversion Capabilities," illustrates the hub and spoke concept of our proprietary data conversion software. The center of the graphic is a circle symbolizing our proprietary conversion software. The core of the circle is called "DCL Conversion Hub." Around the core are different segments representing various modules of the software. Above the software circle are other circles with the names of various popular formats in which content is prepared. These circles represent possible input formats. Arrows lead from these input circles through the software circle and exit to another group of circles. These circles have the names XML, SGML, HTML, PDF and Other and represent the most common output formats generated by our proprietary software. You may rely on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of common shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy our common shares in any circumstances under which the offer or solicitation is unlawful. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary ...................................................... 3 Risk Factors ............................................................ 7 Use of Proceeds ......................................................... 15 Dividend Policy ......................................................... 16 S Corporation Termination ............................................... 16 Capitalization .......................................................... 17 Dilution ................................................................ 18 Selected Financial Data ................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 20 Business ................................................................ 25 Management .............................................................. 34 Certain Transactions .................................................... 37 Principal Shareholders .................................................. 38 Description of Securities ............................................... 39 Shares Eligible for Future Sale ......................................... 42 United States Income Tax Consequences ................................... 44 Underwriting ............................................................ 46 Legal Matters ........................................................... 48 Experts ................................................................. 48 Where You Can Find More Information....................................................... 49 Index to Financial Statements ........................................... F-1
---------------- Until , 2002 (the 25th day after the date of this prospectus) all dealers effecting transactions in our units, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 1,250,000 Units [Data Conversion Laboratory LOGO] -------------------- PROSPECTUS -------------------- PAULSON INVESTMENT COMPANY, INC. , 2002 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Sections 722 and 723 of the New York Business Corporation Law grants us the power to indemnify our officers and directors as follows: (a) A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding other than one by or in the right of the corporation to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney's fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. (b) The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such director or officer did not act, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation or that he had reasonable cause to believe that his conduct was unlawful. (c) A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense or settlement of such action, or in connection with an appeal therein if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interest of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court on which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. (d) For the purpose of this section, a corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. II-1 Payment of indemnification other than by court award is as follows: (a) A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in section 722 shall be entitled to indemnification as authorized in such section. (b) Except as provided in paragraph (a), any indemnification under section 722 or otherwise permitted by section 721, unless ordered by a court under section 724 (Indemnification of directors and officers by a court), shall be made by the corporation, only if authorized in the specific case: (1) By the board acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in section 722 or established pursuant to section 721, as the case may be, or, (2) If a quorum under subparagraph (1) is not obtainable or, even if obtainable, a quorum of disinterested directors so directs: (A) By the board upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct set forth in such sections has been met by such director or officer, or (B) By the shareholders upon a finding that the director or officer has met the applicable standard of conduct set forth in such sections. (C) Expenses incurred in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amounts as, and to the extent, required by paragraph (a) of section 725. Our certificate of incorporation provides as follows: "SEVENTH: (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigation (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Business Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights that said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall incur to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Business Corporation Law requires, the payment of such expenses incurred by a director or officer (in his or her capacity as a director or officer and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. II-2 (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Business Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Business Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. (d) Insurance. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Business Corporation Law. EIGHTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty in such capacity, except for the liability of any director if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated Section 719 of the New York Business Corporation Law." The Underwriting Agreement provides for reciprocal indemnification between us and our controlling persons, on the one hand, and the underwriters and their respective controlling persons, on the other hand, against certain liabilities in connection with this offering, including liabilities under the Securities Act of 1933, as amended. Item 25. Other Expenses of Issuance and Distribution. The following are the expenses of the issuance and distribution of the securities being registered, other than underwriting commissions and expenses, all of which will be paid by the Company. Other than the SEC registration fee and the NASD filing fees all of such expenses are estimated.
Registration fee ................................................. $ 3,074.25 NASD fee ......................................................... 3,841.56 Nasdaq Smallcap Market listing fee ............................... 19,500.00 Printing expenses ................................................ 110,000.00** Accounting fees and expenses ..................................... 125,000.00** Legal fees and expenses .......................................... 250,000.00** Blue sky filing fees and related attorney fees and expenses ...... 60,000.00** Transfer agent and registrar fees and expenses ................... 1,000.00** "Roadshow" expenses and related consultant fees .................. 75,000.00** Miscellaneous .................................................... 2,584.19** ----------- Total ......................................................... $650,000.00** ===========
- --------------- ** Estimated. II-3 Item 26. Recent Sales of Unregistered Securities. On April 10, 2002 a former employee exercised options to purchase 673 common shares. The purchase price for these shares was $1,750.00. The transaction was exempt under Rule 701 of the Securities Act. Item 27. Exhibits
Exhibit Description No. ----------- - ---------- 1.1 Form of Underwriting Agreement 3.1 Form of Restated Certificate of Incorporation of Data Conversion Laboratory, Inc. 3.2 Restated Bylaws of Data Conversion Laboratory, Inc. 4.1 Specimen stock certificate* 4.2 Form of warrant agreement, including form of unit warrant 4.3 Form of unit certificate* 4.4 Form of representative's warrant 5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP 10.1 Data Conversion Laboratory, Inc. 2001 Stock Option Plan, as amended 10.2 Form of Employee's Confidentiality Agreement 10.3 WCMA Note, Loan and Security Agreement* 10.4 Term Loan and Security Agreement* 10.5 Lock-Up and Stock Dividend Return Agreement 23.1 Consent of Goldstein Golub Kessler LLP 23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1) 24 Power of Attorney (included in signature page) 99.1 Consent of director-nominee (Judy Gross) 99.2 Consent of director-nominee (Amy Finfer) 99.3 Consent of director-nominee (Andrew Weiss) 99.4 Consent of director-nominee (Donna Lynn) 99.5 Consent of director-nominee (Michael Gross) 99.6 Consent of director-nominee (David Skurnik)
- --------------- * To be filed by amendment. Item 28. Undertakings A. The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the Securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 (3) To remove from registration by means of a post-effective amendment any of the Securities being registered which remain unsold at the termination of the Offering. (4) To provide to the Underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (5) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (6) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the Securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. B. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of New York, State of New York on June 7, 2002. DATA CONVERSION LABORATORY, INC. By: /s/ MARK GROSS ------------------------------------ Mark Gross President ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark Gross his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all pre- or post-effective amendments to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities indicated on June 7, 2002.
Signature Title(s) --------- -------- /s/ MARK GROSS President, Chief Executive Officer and Director ----------------------------------------------- Mark Gross /s/ JUDY GROSS Principal Accounting Officer ----------------------------------------------- Judy Gross
II-6 EX-1.1 3 b318755ex_1-1.txt UNDERWRITING AGREEMENT EXHIBIT 1.1 1,250,000 UNITS DATA CONVERSION LABORATORY, INC. UNDERWRITING AGREEMENT _________________, 2002 Paulson Investment Company, Inc. 811 SW Naito Parkway, Suite 200 Portland, Oregon 97204 Gentlemen: Data Conversion Laboratory, Inc., a New York corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as the Representative (the "Representative"), an aggregate of 1,250,000 units (the "Firm Units"). Each unit will consist of one share of the Company's Common Stock ("Common Stock") and one Warrant, each such warrant substantially in the form filed as an exhibit to the Registration Statement (as hereinafter defined) (the "Warrants"). The respective number of the Firm Units to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to grant to Paulson Investment Company, Inc. an option to purchase in the aggregate up to 187,500 additional units, identical to the Firm Units (the "Option Units"), as set forth below. The Firm Units and the Option Units (to the extent the aforementioned option is exercised) are herein collectively called the "Units." As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement for yourself as Representative and on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Units set forth opposite their respective names in Schedule I. In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Underwriters as follows: (a) A registration statement on Form SB-2 (File No. ____-_______) with respect to the Units has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (i) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (ii) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Units, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Page 1 - Underwriting Agreement (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the state of New York, with corporate power and corporate authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company does not own and never has owned a controlling interest in any other material corporation or other business entity, except as disclosed in the Registration Statement. The Company is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification. (c) The outstanding shares of each class or series of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable and, except as disclosed in the Registration Statement, have been issued and sold by the Company in compliance in all material respects with applicable securities laws; the issuance and sale of the Units, and the Common Stock and Warrants included within the Units, have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, the Common Stock and Warrants included in the Units will be validly issued, fully paid and non-assessable; and no preemptive rights of shareholders exist with respect to any security of the Company or the issue and sale thereof. The Company does not own or have the right to acquire capital stock or other equity securities of any other person representing more than five percent of the equity of that person, or otherwise control any other person. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct in all material respects. The Common Stock conforms and the Warrants and the Representative's Warrants (as defined in Paragraph (d) of Section 2 hereof) will conform to the description thereof contained in the Registration Statement. The forms of certificates for the securities comprising the Units conform to the requirements of the corporate law of New York. Except as described in the Registration Statement, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible into or exchangeable for or evidencing the right to purchase or subscribe for any shares of such stock. Page 2 - Underwriting Agreement (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Units nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters, specifically for use in the preparation thereof; and further provided that, with respect to information included in the Registration Statement and the Prospectus in reliance on the opinion of experts identified as such in the Prospectus, such representation is given to the Company's best knowledge. (f) The financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position, results of operations, cash flows and shareholders equity of the Company at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data of the Company included in the Registration Statement present fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. (g) Goldstein Golub Kessler LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the applicable published Rules and Regulations. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company before any court or administrative agency or otherwise which if determined adversely to the Company might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company has good and marketable title to all properties and assets, tangible and intangible, reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those reflected in such financial statements (or as described in the Registration Statement), (ii) liens securing indebtedness for money borrowed under agreements described in the Prospectus or (iii) which are not material. The Company's ownership rights in its patents, patent licenses and other material technology is consistent with (i) the description thereof in the Registration Statement, and (ii) the business needs of the Company. All of the leases and subleases under which the Company holds properties, tangible or intangible, are in full force and effect conforming in all material respects to the description thereof set forth in the Registration Statement. The Company has not received notice of any claim that is materially adverse to the rights of the Company under any of such leases or subleases. Page 3 - Underwriting Agreement (j) The Company has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes shown as due thereon and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company, and the Company does not know of any actual or proposed additional material tax assessments relating to any of its historical periods. (k) Since the respective dates as of which information is given in the Registration Statement, as it may have been amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company has no material contingent obligations which are not disclosed in the Company's financial statements or elsewhere in the Prospectus which is included in the Registration Statement. (l) The Company is not, nor, with the giving of notice or lapse of time or both, will it be, in violation of or in default that has not been waived under its Articles of Incorporation or Bylaws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise, of the Company or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, material contract or other agreement or instrument to which the Company is a party or by which its assets may be bound, or of the Articles of Incorporation or Bylaws of the Company or any order, rule or regulation applicable to the Company of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the NASD Regulation, Inc. (the "NASDR") or such additional steps as may be necessary to qualify the Units for public offering by the Underwriter under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. Page 4 - Underwriting Agreement (n) The Company owns or possesses adequate rights to use or can acquire on reasonable terms, all patents, patent rights, trademarks, service marks, trade names, copyrights, trade secrets and licenses of any of the foregoing (collectively, "Intellectual Property Rights") that are described in the Prospectus or which are necessary to the conduct of its business; except as disclosed in the Registration Statement, there is no claim pending or, to the best knowledge of the Company, threatened against the Company, or any of its officers, directors, employees or consultants, in their capacities as such, alleging any infringement of Intellectual Property Rights, or any violation of the terms of any license relating to Intellectual Property Rights, nor does the Company know of any basis for any such claim. The Company knows of no infringement by others of Intellectual Property Rights owned by or licensed to the Company. Except as disclosed in the Registration Statement, and except in the case of rights that the Company reasonably believes will be renewed prior to their expiration, the expiration of any Intellectual Property Rights in accordance with their terms would not have a material adverse effect on the condition, or on the earnings, business or operations of the Company, taken as a whole. The Company has obtained, is in compliance in all material respects with and maintains in full force and effect all material licenses, certificates, permits, orders or other, similar authorizations granted or issued by any governmental agency (collectively "Government Permits") required to conduct its business as it is presently conducted. No proceeding to revoke, limit or otherwise materially change any Government Permit has been commenced or, to the knowledge of the Company, is threatened against the Company, and the Company has no reason to anticipate that any such proceeding will be commenced against the Company. Except as disclosed or contemplated in the Prospectus, the Company has no reason to believe that any pending application for a patent or Government Permit will be denied or limited in a manner inconsistent with the Company's business plan as described in the Prospectus. (o) The Company is in all material respects in compliance with all applicable Environmental Laws (as defined below). The Company has no knowledge of any past, present or, as anticipated by the Company, future events, conditions, activities, investigation, studies, plans or proposals that (i) would interfere with or prevent compliance with any Environmental Law by the Company or (ii) could reasonably be expected to give rise to any common law or other liability, or otherwise form the basis of a claim, action, suit, proceeding, hearing or investigation, involving the Company and related to Hazardous Substances (as defined below) or Environmental Laws. No Hazardous Substance is or has been used, treated, stored, generated, manufactured or otherwise handled on or at any Facility (as defined below) in quantities that violate applicable Environmental Laws or impose on the Company any reporting obligation under such laws, and to the knowledge of the Company, no Hazardous Substance has otherwise come to be located in, on or under any Facility. No Hazardous Substances are stored at any Facility except in quantities necessary to satisfy the reasonably anticipated use or consumption by the Company. No litigation, claim, proceeding or governmental investigation is pending regarding any environmental matter for which the Company has been served or otherwise notified or, to the knowledge of the Company, threatened or asserted against the Company or the officers or directors of the Company, in their capacities as such, or any Facility or the Company's business. There are no orders, judgments or decrees of any court or of any governmental agency or instrumentality under any Environmental Law which specifically apply to the Company, any Facility or any of the Company's operations. The Company has not received from a governmental authority or other person (i) any notice that it is a potentially responsible person for any Contaminated site (as defined below) or (ii) any request for information about a site alleged to be Contaminated or regarding the disposal of Hazardous Substances. There is no litigation or proceeding against any other person by the Company regarding any environmental matter. The Company has disclosed in the Prospectus or made available to the Underwriter and its counsel true, complete and correct copies of any reports, studies, investigations, audits, analyses, tests or monitoring, in the possession of or initiated by the Company, pertaining to any environmental matter relating to the Company and its past or present operations or any Facility. Page 5 - Underwriting Agreement For the purposes of the foregoing paragraph, "Environmental Laws" means any applicable federal, state or local statute, regulation, code, rule, ordinance, order, judgment, decree, injunction or common law pertaining in any way to the protection of human health or the environment, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any similar or comparable state or local law; "Hazardous Substance" means any hazardous, toxic, radioactive or infectious substance, material or waste as defined, listed or regulated under any Environmental Law; "Contaminated" means the actual existence on or under any real property of Hazardous Substances, if the existence of such Hazardous Substances triggers a requirement to perform any investigatory, remedial, removal or other response action under any Environmental Laws or if such response action legally could be required by any governmental authority; "Facility" means any property owned, leased or occupied by the Company. (p) Neither the Company, nor to the knowledge of the Company, any of its affiliates, has taken or intends to take, directly or indirectly, any action which is designed to cause or result in, or which constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Units. (q) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder and will not become an Investment Company as a result of its receipt and investment of the proceeds from the sale of the Units. (r) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar industries. Page 6 - Underwriting Agreement (t) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (u) The Company is in material compliance with all laws, rules, regulations, orders of any court or administrative agency, operating licenses or other requirements imposed by any governmental body applicable to it or to its business; and the conduct of the business of the Company, as described in the Prospectus, will not cause the Company to be in violation of any such requirements. (v) Each of the Warrants and the Representative's Warrants (as defined in Paragraph (d) of Section 2 hereof) have been authorized for issuance to the purchasers thereof or to the Representative or its designees, as the case may be, and will, when issued, entitle the holders thereof to the rights, privileges, and characteristics as represented in the most recent form of Warrants or Representative's Warrants, as the case may be, filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Warrants and the Representative's Warrants, when issued and delivered against payment therefor in accordance with the terms thereof, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Warrants and the Representative's Warrants, and the securities to be issued upon their exercise, have been validly and sufficiently taken. (w) Except as disclosed in the Prospectus, neither the Company nor any of its officers, directors or affiliates have caused any person, other than the Underwriters, to be entitled to reimbursement of any kind, including, without limitation, any compensation that would be includable as underwriter compensation under the NASDR's Corporate Financing Rule with respect to the offering of the Units, based on any activity of such person as a finder, agent, broker, investment adviser or other financial service provider, and there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or the Underwriters for a brokerage commission, finder's fee or other like payment in connection with this offering. (x) No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, customers or vendors, which, in any case, may reasonably be expected to result in a material adverse effect on the Company. (y) There are no contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto that have not been so described and filed as required. Page 7 - Underwriting Agreement (z) To the Company's best knowledge, there are no affiliations or associations, direct or indirect, between any member of the National Association of Securities Dealers, Inc. ("NASD") and any of the Company's officers, directors or 5% or greater shareholders and no beneficial owner (as that term is defined under Rule 2720(b)(2) of the NASD Conduct Rules) of the Company's unregistered securities, regardless of time acquired or the source from which derived, has any direct or indirect affiliation or association with any NASD member. (aa) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (bb) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of the Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date of the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Financing (the "Department"), whichever date is later, of if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changed in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (dd) The Units and the Common Stock and Warrants comprising the Units have been approved for listing on the Nasdaq SmallCap Market ("Nasdaq SmallCap") upon the effectiveness of the Registration Statement and the Company has satisfied all of the requirements of Nasdaq SmallCap for such listing and for the trading of its Units and the Common Stock and Warrants comprising the Units on Nasdaq SmallCap. 2. PURCHASE, SALE AND DELIVERY OF THE UNITS. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and the Underwriters agree to purchase, at a price of $_____ per Unit (which price reflects an underwriting discount of __%), 1,250,000 Firm Units. (b) Payment for the Firm Units to be sold hereunder is to be made in New York Clearing House funds and, at the option of the Representative by bank wire to an account specified by the Company, or certified or bank cashier's checks drawn to the order of the Company, against either uncertificated delivery of Firm Units or of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Such payment is to be made at the offices of the Representative at the address set forth on the first page of this Agreement, at 7:00 a.m., Pacific time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) Except to the extent uncertificated Firm Units are delivered at closing, certificates for the Firm Units and for the Common Stock and Warrants comprising such Firm Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Closing Date. Page 8 - Underwriting Agreement (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Representative to purchase the Option Units at the price per Unit as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 45 days after the date of this Agreement, by the Representative to the Company setting forth the number of Option Units as to which the Representative is exercising the option, the names and denominations in which the Option Units are to be registered and the time and date at which certificates representing such Units are to be delivered. The time and date at which certificates for Option Units are to be delivered shall be determined by the Representative but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The option with respect to the Option Units granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Units by the Underwriters. The Representative may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Units shall be made on the Option Closing Date in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, or certified or bank cashier's check drawn to the order of the Company for the Option Units to be sold by the Company in consideration either of uncertificated delivery of Option Units or delivery of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative. Except to the extent uncertificated Option Units are delivered at closing, the certificates for the Option Units and for the common stock and warrants comprising such Option Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Option Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Option Closing Date. (d) In addition to the sums payable to the Representative as provided elsewhere herein, the Representative shall be entitled to receive at the closing, as compensation for its services, purchase warrants (the "Representative's Warrants") for the purchase of up to 125,000 Units at a price of $____ per Unit (120% of the Unit offering price), upon the terms and subject to adjustment and conversion as described in the form of Representative's Warrants filed as an exhibit to the Registration Statement. Page 9 - Underwriting Agreement 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Units as soon as the Representative deems it advisable to do so. The Firm Units are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Units are purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms. It is further understood that you will act as the Representative for the Underwriters in the offering and sale of the Units in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representative containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations, and (C) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Units by the Representative. (b) The Company will advise the Representative promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and (E) of the issuance of any order suspending trading of the Units, the Common Stock or the Warrants. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus or suspending trading and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representative in endeavoring to qualify the Units for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Units. Page 10 - Underwriting Agreement (d) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request. The Company will deliver to the Representative at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representative may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Units as contemplated in this Agreement and the Prospectus, and make all required filings thereunder to maintain compliance with such act with respect to the trading and issuance of the Common Stock, the Warrants and the Common Stock underlying the Warrants. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representative, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances existing at the time the Prospectus is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise the Representative in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representative copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representative similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. The Company will, for a period of five years from the Closing Date, deliver to the Representative notice of all meetings of its Board of Directors and any executive or similar committee thereof. Page 11 - Underwriting Agreement (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivatives of Common Stock (or agreement therefor) will be made for a period of one year after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder, or pursuant to contractual obligations existing on the date hereof or pursuant to employee benefit plans in effect on the date hereof, or with the prior written consent of the Representative, which consent will not be unreasonably withheld. (i) The Company has been advised that the Units, the Common Stock and the Warrants have been qualified for listing on the Nasdaq SmallCap, subject to notice of issuance. (j) The Company has caused all its officers and directors and all other holders of shares of Common Stock to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Representative ("Lock-up Agreements"), pursuant to which each such person shall agree not to offer, sell, contract to sell or grant any option to purchase or otherwise dispose of any shares of Common Stock or Preferred Stock or other capital stock of the Company, or any options or other securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition) for a period of one year after the date of this Agreement, directly or indirectly, except with the prior written consent of the Representative. (k) The Company shall apply the net proceeds of its sale of the Units as set forth in the Prospectus and shall properly disclose such information with respect to the sale of the Units and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Units, in such a manner as would require the Company to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Units and Common Stock and a Warrant Agent for the Warrants. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (o) The Company will furnish to the Representative, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus. Page 12 - Underwriting Agreement (p) The Company agrees to use its best efforts, upon receipt from the Representative of a request to do so, to assist the Representative in enforcing the terms of agreements executed by the Company's shareholders and holders of certain rights to purchase Common Stock that restrict such persons from selling, making any short sale of, grant any option for the purchase of, or otherwise transfer or dispose of, any of such Common Stock, or any such rights, for a period of one year after the date of the Prospectus without the prior written consent of the Representative. Such assistance, if requested, shall include, without limitation, the imposition of a stop-transfer instruction with the Company's transfer agent. (q) The Company will, between the date hereof and the date twenty-five days after the Closing Date, provide the Representative and its legal counsel, prior to their release, copies of all press releases, proposed communications with shareholders or other interested parties and other public announcements and will permit the Representative and its legal counsel to comment thereon prior to release. (r) If the Company's audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, it will declare and pay a 10% stock dividend to its shareholders on all shares of its Common Stock outstanding as of the date of record for the dividend, as declared by its board of directors. The issuance of the stock dividend, if payable, will occur no later than 30 days after the date of the issuance by the Company's independent auditors of the audited financial statements of the Company as of the year ending December 31, 2002. 5. COSTS AND EXPENSES. (a) The Representative shall be entitled to reimbursement from the Company, for itself alone and not as Representative of the Underwriters, to a non-accountable expense allowance equal to ___% of the aggregate initial public offering price of the Firm Units and any Option Units purchased by the Underwriters. The Representative shall be entitled to withhold this allowance on the Closing Date related to the purchase of the Firm Units or the Option Units, as the case may be. If the offering is not consummated, any portion of the $20,000 advanced to the Representative that is unaccounted for will be returned to the Company. (b) In addition to the payment described in Paragraph (a) of this Section 5, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Nasdaq SmallCap listing application, the costs of the due diligence investigation of the principals of the Company, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including any fees and disbursements) incident to securing the required review by the NASDR of the terms and conditions of the underwriting arrangements; the listing fee of the Nasdaq SmallCap; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Units under state securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Units to the Underwriters will be paid by the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASDR regulations and state securities or Blue Sky laws) except that, if this Agreement shall not be consummated, then the Company shall reimburse the several Underwriters for actual out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Units or in contemplation of performing their obligations hereunder, up to a maximum of $100,000; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Units. Page 13 - Underwriting Agreement 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase the Firm Units on the Closing Date and the Option Units, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to its reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Units. (b) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Morse, Zelnick, Rose & Lander, LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation under the laws of the state of New York, with corporate power and corporate authority to own or lease its properties and to conduct its business as described in the Registration Statement; the Company is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification. (ii) The Company has authorized any outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued, are non-assessable and, to such counsel's knowledge, fully paid, and, to such counsel's best knowledge, have been issued and sold by the Company in compliance in all material respects with applicable securities laws; all of the securities of the Company conform to the description thereof contained in the Prospectus; the certificates for the Common Stock, Units and Warrants are in due and proper form under New York law; the shares of Common Stock to be sold by the Company pursuant to this Agreement, including shares of Common Stock to be sold as a part of the Units, have been duly authorized and, upon issuance and delivery thereof as contemplated in this Agreement and the Registration Statement, will be validly issued, fully paid and non-assessable; no preemptive rights of shareholders exist with respect to any of the Common Stock or the issuance or sale thereof pursuant to any applicable statute or the provisions of the Company's Articles of Incorporation or Bylaws or, to the knowledge of such counsel, pursuant to any contractual obligation. The Warrants and the Representative's Warrants have been authorized for issuance to the purchasers of Units or the Representative, as the case may be, and will, when issued as contemplated in the Prospectus, possess rights, privileges, and characteristics as represented in the most recent form of Warrants or Representative's Warrants, as the case may be, filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Warrants and the Representative's Warrants, as the case may be, when issued and delivered against payment therefor in accordance with the terms of the Warrants or the Representative's Warrants, as the case may be, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Warrants, the Representative's Warrants, and the securities to be issued upon their exercise, has been validly and sufficiently taken. Page 14 - Underwriting Agreement (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Units or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The conditions for the use of Form SB-2 set forth in the general instructions thereto have been satisfied, and the Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Risk Factors," "Business-Intellectual Property," "Business-Facilities," "Management-Stock Option Plans," Management-Limitation of Directors' Liability and Indemnification," "Certain Transactions," "Description of Securities," and "Shares Eligible for Future Sale" in the Prospectus, and Item 24 of Part II of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. Page 15 - Underwriting Agreement (viii) Except as described in or contemplated by the Prospectus, such counsel knows of no material legal or governmental proceedings pending or threatened against the Company. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or Bylaws of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (x) Each of this Agreement and the Warrant Agreement by and among the Company, the Warrantholders (defined therein) and Continental Stock Transfer Trust Company, as Warrant Agent, has been duly authorized, executed and delivered by the Company and, assuming due and valid execution, authorization and delivery by the other parties thereto, is a valid and binding agreement of the Company enforceable in accordance with its terms. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASDR or as required by state securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. In rendering such opinion, such counsel may rely as to matters governed by the laws of states other than New York or Federal laws on local counsel in such jurisdictions, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, the opinion of Morse, Zelnick, Rose & Lander, LLP shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Morse, Zelnick, Rose & Lander, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. Page 16 - Underwriting Agreement (c) The Representative shall have received from Holland & Knight, LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In rendering such opinion Holland & Knight, LLP may rely as to all matters governed other than by the laws of the state of Oregon or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Holland & Knight, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representative, on behalf of the several Underwriters, shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of Goldstein Golub & Kessler LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (e) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the President and the Chief Operating Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; Page 17 - Underwriting Agreement (iii) All filings required to have been made pursuant to Rule 424 or 430A under the Act have been made; (iv) He or she has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct in all material respects, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business. (f) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representative may reasonably have requested. (i) The Units, Common Stock and Warrants have been approved for quotation upon notice of issuance on the Nasdaq SmallCap. (ii) The Lock-Up Agreements described in Section 4(j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representative and to Holland & Knight, LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the several Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Units required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. Page 18 - Underwriting Agreement 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto; or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending against any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Units, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending against any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. Page 19 - Underwriting Agreement (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and, the indemnifying party shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one additional separate firm for all such indemnified parties. Such firm shall be designated in writing by the Underwriter in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. Page 20 - Underwriting Agreement (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Units. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriter on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discount received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Units purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Units and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. Page 21 - Underwriting Agreement 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Unit that such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representative of the Underwriters, shall use reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Units or Option Units, as the case may be, that the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as the Representative, shall not have procured such other Underwriters, or any others, to purchase the Firm Units or Option Units, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Units with respect to which such default shall occur does not exceed 10% of the Firm Units or Option Units, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Units or Option Units, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Units or Option Units, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Firm Units or Option Units, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Units or Option Units, as the case may be, covered hereby, the Company or you as the Representative of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representative, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telecopied and confirmed as follows: if to the Underwriter, , Paulson Investment Company, Inc., 811 SW Naito Parkway, Portland, Oregon 97204, Attention: Chester L.F. Paulson; with a copy to Holland & Knight, LLP, U.S. Bancorp Tower, Suite 2300, 111 S.W. Fifth Avenue, Portland, Oregon 97204, Attention: Mark A. von Bergen, Esq.; if to the Company, to Data Conversion Laboratory, Inc., 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365, Attention: Mark Gross; with a copy to Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022-2605, Attention: Joel J. Goldschmidt, Esq. Page 22 - Underwriting Agreement 11. TERMINATION. This Agreement may be terminated by the Representative by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Firm Units are released by the Representative for sale by notice to the Underwriters, or (ii) 11:30 a.m., Pacific Time, on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company, the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect on the financial markets of the United States of such outbreak, escalation, declaration, emergency, calamity, crisis or change would, in the Underwriter's reasonable judgment, make it impracticable to market the Units or to enforce contracts for the sale of the Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission, (iv) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (v) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in the opinion of the Underwriter materially and adversely affects or may materially and adversely affect the business or operations of the Company, (vi) declaration of a banking moratorium by United States or New York State authorities, (vii) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (viii) the suspension or halt of trading of the Units, the Common Stock or the Warrants on the Nasdaq Stock Market or (ix) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in the Representative's reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Units from any Underwriter shall be deemed a successor or assign merely because of such purchase. Page 23 - Underwriting Agreement 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by the Underwriters to the Company for inclusion in the Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page of the Prospectus (insofar as such information relates to the Underwriters), the legends required by Item 502(d) of Regulation S-B under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Units under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the state of Oregon. All disputes relating to this Underwriting Agreement shall be adjudicated before a court located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Page 24 - Underwriting Agreement If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the Underwriter in accordance with its terms. Very truly yours, DATA CONVERSION LABORATORY, INC. By: ------------------------------------- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. PAULSON INVESTMENT COMPANY, INC. As Representative of the several Underwriters listed in Schedule I By: ------------------------------------- Page 25 - Underwriting Agreement SCHEDULE I Schedule of Underwriters Number of Firm Units Underwriter to be Purchased - ---------------------------------------------------------- --------------- Paulson Investment Company, Inc. Total: 1,250,000 ------ --------- Page 26 - Underwriting Agreement EX-3.1 4 b318755ex_3-1.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF DATA CONVERSION LABORATORY, INC. (Pursuant to Section 807 of the Business Corporation Law) FIRST: The name of the corporation is Data Conversion Laboratory, Inc. The name under which the corporation was formed is M.J. Gross & Company, Inc. SECOND: The certificate of incorporation of the corporation was filed by the Department of State on April 30, 1984. A Certificate of Amendment and Restatement was filed on December 28, 2000 and a Certificate of Amendment was filed on May _____, 2002. THIRD: The text of the certificate of incorporation of the corporation is hereby restated without further amendment or change to read as follows: "FIRST: The name of the corporation is Data Conversion Laboratory, Inc. (the "Corporation"). SECOND: The Corporation is formed for the following purpose or purposes: A. To engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law, provided that the Corporation is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. B. To have, in furtherance of the corporate purposes, all of the powers conferred upon corporations organized under the Business Corporation Law subject to any limitations thereof contained in this certificate of incorporation or in the laws of the State of New York. 1 THIRD: A. The aggregate number of shares which the Corporation shall have authority to issue is 30,000,000, of which 25,000,000 shall be common shares; par value $0.01 per share (the "Common Shares"), and 5,000,000 shall be preferred shares, par value $0.01 per share (the "Preferred Shares"). B. All Common Shares shall be of one class and shall be identical with each other in every respect. All authorized and outstanding Common Shares shall be fully paid and nonassessable. The holders of the Common Shares shall be entitled to vote on all matters upon which the shareholders have the right to vote and shall be entitled to one vote for each Common Share. Dividends may be declared and paid on the Common Shares from funds lawfully available therefor as and when declared by the Board of Directors. Upon dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Shares will be entitled to receive all assets of the Corporation available for distribution to its shareholders, subject to any preferential rights of any then outstanding Preferred Shares. The Common Shares are subject to all rights, preferences, designations, powers and priorities of any then outstanding Preferred Shares. C. The Board of Directors of the Corporation, in the exercise of its discretion, is authorized to issue Preferred Shares in one or more series, to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed on any wholly unissued series of undesignated Preferred Shares, and to fix the number of shares constituting any series and the designation of such series without any further vote or action by the shareholders." 2 FOURTH: The offices of the Corporation in the State of New York shall be located in the County of Queens, or at such other location as shall be determined by the Board of Directors. FIFTH: The Secretary of State is designated as agent of the Corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process against the Corporation served on him is: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10022. SIXTH: Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of any action by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. SEVENTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty in such capacity, except for the liability of any director if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated Section 719 of the New York Business Corporation Law. 3 EIGHTH: A. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigation (hereinafter a `proceeding'), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Business Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights that said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and any appeal therein and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall incur to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph B hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Article EIGHTH shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Business Corporation Law requires, the payment of such expenses incurred by a director or officer (in his or her capacity as a director or officer and not in any other capacity in which service was or is 4 rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article EIGHTH or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. B. Right of Claimant to Bring Suit. If a claim under paragraph A of this Article EIGHTH is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Business Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Business Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 5 C. Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article EIGHTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise. D. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Business Corporation Law. NINTH: The business and affairs of the Corporation shall be managed by, or under the direction of, a Board of Directors, the exact number of directors to be determined from time to time as set forth in the Bylaws. A director or the entire Board of Directors may be removed only for cause by the affirmative vote of holders of at least a majority of the authorized and issued shares of the capital stock of the Corporation. TENTH: No holder of any shares of any class of capital stock of the Corporation shall be entitled as of right to subscribe for, purchase, or otherwise acquire any shares of any class of capital stock of the Corporation which the Corporation proposes to issue or sell any rights or options which the Corporation proposes to grant for the purchase of any shares, bonds, securities, or obligations of the Corporation which are convertible into or exchangeable for, or which carry any rights to subscribe for, purchase, or otherwise acquire shares of any class of capital stock of the Corporation; and any and all of such shares, bonds, securities or obligations of the Corporation, whether now or hereafter authorized or created, may be 6 issued, or may be reissued or transferred if the same have been reacquired and have treasury status, and any and all of such rights and options may be granted by the Board of Directors to such persons, firms, corporations and associations, and for such lawful consideration, and on such terms, as the Board of Directors in its discretion may determine, without first offering the same, or any thereof, to any said holder. Without limiting the generality of the foregoing stated denial of any and all preemptive rights, no holder of shares of any class of capital stock of the Corporation shall have any preemptive rights in respect of the matters, proceedings, or transaction specified in subparagraphs (1) to (6), inclusive, of paragraph (e) of Section 622 of the Business Corporation Law. ELEVENTH: Subject always to the Bylaws adopted by the shareholders, the Board of Directors may amend or repeal any Bylaw or adopt any new Bylaw; but any Bylaw adopted by the Board of Directors may be amended or repealed by the shareholders at any annual meeting or at any special meeting, provided notice of the proposed amendment or repeal be included in the notice of any such meeting. TWELFTH: The duration of the Corporation is perpetual." FOURTH: The restatement of the certificate of incorporation herein certified was authorized by the Sole Director of the corporation. IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Executed on this 24th day of May, 2002. /s/ Mark Gross --------------------------------- Mark Gross, Sole Director 7 EX-3.2 5 b318755ex_3-2.txt AMENDED AND RESTATED BY-LAWS Exhibit 3.2 AMENDED AND RESTATED BYLAWS of DATA CONVERSION LABORATORY, INC. ARTICLE I OFFICES Section 1. Principal Office - The principal office of the Corporation shall be located in the County of Queens as set forth in Article Fourth of its Certificate of Incorporation or such other location, within or outside the State of New York, as the Board of Directors may from time to time determine. Section 2. Additional Offices - The Corporation may have such additional offices at such other place within or outside the State of New York as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II SHAREHOLDERS' MEETING Section 1. Annual Meeting - An annual meeting of shareholders shall be held each year on such date and at such time and place (either within or without the State of New York) as shall be fixed by the Board of Directors and specified in the notice of meeting for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 2. Special Meeting - A special meeting of shareholders may be called at any time by the President, the Chief Executive Officer, the Chairman, or by a majority of the Board of Directors then in office. Special meetings shall be held at such time and place (either within or without the State of New York) as shall be specified in the notice thereof. Business transacted at any special meeting of shareholders shall be confined to the purposes set forth in the notice thereof. Section 3. Notice of Meetings - Written notice of the time, place and purpose of every meeting of shareholders (and, if other than an annual meeting, indicating the person or persons at whose discretion the meeting is being convoked), shall be given by the President, a Vice President or by the Secretary to each shareholder of record entitled to vote at such meeting and to each shareholder who, by reason of any action proposed at such meeting, would be entitled to have his stock appraised if such action were taken, not less than ten nor more than sixty days prior to the date set for the meeting, by any means permitted under the New York Business Corporation Law. The record date for determining the shareholders entitled to such notice shall be determined by the Board of Directors in accordance with Section 6 of ARTICLE SIXTH of these Bylaws. If the directors shall adopt, amend or repeal a bylaw regulating an impending election of directors, the notice of the next meeting of shareholders for the election of directors shall set forth the bylaw so adopted, amended or repealed together with a concise statement of the changes made as required by Section 601(b) of the Business Corporation Law. If any action is proposed to be taken which would, if taken, entitle shareholders to receive payment for their shares, the notice of meeting shall include a statement to such effect. A written or electronic waiver of notice signed or, if electronic, authorized by the person or persons entitled to such notice, whether before or after the time of the meeting stated therein, shall be deemed equivalent to the giving of such notice. The attendance by a shareholder at a meeting either in person or by proxy without protesting the lack of notice thereof shall constitute a waiver of notice of such shareholder. All notice given with respect to an original meeting shall extend to any and all adjournments thereof and such business as might have been transacted at the original meeting may be transacted at any adjournment thereof; no notice of any adjourned meeting need be given if an announcement of the time and place of the adjourned meeting is made at the original meeting. Section 4. Quorum - Except as otherwise provided by statute or the Certificate of Incorporation, the holders of such number of shares of stock representing a majority of the votes represented by all shares of stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of shareholders for the transaction of business. If, however, a quorum shall not be present or represented at any meeting of shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. When a quorum is once present to organize a meeting, such quorum is not deemed broken by the subsequent withdrawal of any shareholders. Section 5. Voting - If a quorum is present, the affirmative vote of such number of shares of stock representing a majority of the votes of all shares of stock represented at the meeting shall be the act of the shareholders, unless the vote of a greater or lesser number of shares of stock is required by law or the Certificate of Incorporation. Section 6. Proxies - Every shareholder entitled to vote at any meeting on the date fixed as the record date for said meeting may vote in person or by proxy. Every proxy must be signed by the shareholder entitled to vote or by his duly authorized attorney-in-fact and shall be valid only if filed with the Secretary of the Corporation or with the Secretary of the meeting prior to the commencement of voting on the matter in regard to which said proxy is to be voted. No proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise expressly provided in the proxy. Every proxy shall be revocable at the pleasure of the person executing it except as otherwise provided by Section 609 of the Business Corporation Law. Unless the proxy by its terms provides for a specific revocation date and except as otherwise provided by statute, revocation of a proxy shall not be effective unless and until such revocation is executed in writing by the shareholder who executed such proxy and the revocation is filed with the Secretary of the Corporation or with the Secretary of the Meeting prior to the voting of the proxy. Section 7. List of Shareholders - A list of shareholders as of the record date, certified by the Secretary of the Corporation or by a transfer agent appointed by the Board of Directors shall be prepared for every meeting of shareholders and shall be produced by the Secretary or some other officer of the Corporation thereat. 2 Section 8. Inspectors at Meetings - In advance of any shareholders' meeting, the Board of Directors may appoint one or more inspectors to act at the meeting or at any adjournment thereof and if not so appointed the person presiding at any such meeting may, and at the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties as set forth in Section 611 of the Business Corporation Law, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. Section 9. Conduct of Meeting - All meetings of shareholders shall be presided over by the President, or if he is not present, by a Vice President, or if neither the President nor any Vice President is present, by a chairman thereby chosen by the shareholders at the meeting. The Secretary of the Corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting but if neither the Secretary nor the Assistant Secretary is present, the chairman of the meeting shall appoint any person present to act as secretary of the meeting. Section 10. Shareholders Action Without Meeting - Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of any action by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE III BOARD OF DIRECTORS Section 1. Function and Definition - The business and affairs of the Corporation shall be managed by, or under the direction of, its Board of Directors who may exercise all the powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 2. Number and Qualification - The number of directors constituting the entire Board shall be not less than one nor more than fifteen, as may be fixed by resolution of the Board of Directors or by the shareholders entitled to vote for the election of directors, provided that any such action of the Board shall require the vote of a majority of the entire Board then in effect. The phrase "entire Board" as used herein means the total number of directors that the Corporation would have if there were no vacancies. The term of any incumbent director shall not be shortened by any action by the Board of Directors or by the shareholders, fixing the number of directors. Each director shall be at least twenty-one years of age. A director need not be a shareholder, a citizen of the United States or a resident of the State of New York. Section 3. Election Term and Vacancies - Except as otherwise provided in this Section, all directors shall be elected at the annual meeting of shareholders and all directors who are so elected or who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of shareholders and until their respective successors have been elected and qualified. 3 In the interim between annual meetings of shareholders, newly-created directorships resulting from an increase in the number of directors or from vacancies occurring in the Board may be filled by the vote of a majority of the directors, then remaining in office, although less than a quorum may exist. Section 4. Removal - A director may be removed from office only for cause by the affirmative vote of holders of at least a majority of the authorized and issued shares of the capital stock of the Corporation. Section 5. Meetings - The annual meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before the meeting, shall be held, without notice, immediately following the annual meeting of shareholders, at the same place at which such shareholders' meeting is held. Regular meetings of the Board of Directors shall be held at such time and place, within or outside the State of New York, as may be fixed by resolution of the Board. Special meetings of the Board of Directors may be called by the President, by the Chairman of the Board or by the President upon the written request of a majority of the directors then in office. Section 6. Notice of Meetings - No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice including by fax or electronically, of the time and place, shall be given for special meetings no later than three (3) hours prior to the meeting. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. Section 7. Conduct of Meetings - The Chairman of the Board, if present, shall preside at all meetings of directors. At all meetings at which the Chairman of the Board is not present, the President, if a director, shall preside. At all meetings at which neither the Chairman of the Board nor the President are present, any other director chosen by the Board shall preside. Section 8. Quorum, Adjournment, Voting - Except as otherwise provided by the Certificate of Incorporation, a majority of the entire Board shall be requisite and shall constitute a quorum at all meetings of the Board of Directors for the transaction of business. Where a vacancy or vacancies prevents such majority, a majority of the directors then in office shall constitute a quorum. A majority of the directors present at any meeting, whether or not a quorum is present, may adjourn the meeting to another time and place without further notice other than an announcement at the meeting. 4 Except as otherwise provided by the Certificate of Incorporation, when a quorum is present at any meeting, a majority of the directors present shall decide any questions brought before such meeting and the act of such majority shall be the act of the Board. Section 9. Action Without Meeting - Any action required or permitted to be taken by the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of any committee thereof consent in writing to the adoption of a resolution authorizing the action. Any one or more members of the Board of Directors or of any committee thereof may participate in a meeting of said Board or of any such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at the meeting. Section 10. Compensation of Directors - Directors may receive a fixed sum and expenses of attendance for attendance at any meeting of the Board of Directors or of any committee thereof and/or such other compensation as the Board of Directors, from time to time, determines. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving reasonable compensation therefor. Section 11. Committees - The Board of Directors, by resolution of a majority of the entire Board, may designate from among its members one or more committees, each consisting of one or more directors, and each of which, to the extent provided in such resolution, shall have all the authority of the Board except that no such committee shall have authority as to any of the following matters: (a) the submission to shareholders of any action as to which shareholders' authorization or approval is required by statute, the Certificate of Incorporation or by these Bylaws; (b) the filing of vacancies in the Board of Directors or in any committee thereof; (c) the fixing of compensation of the directors for serving on the Board or on any committee thereof; (d) the amendment or repeal of these Bylaws or the adoption of new Bylaws; and (e) the amendment or repeal of any resolution of the Board of Directors which by its terms shall not be so amendable or repealable. The Board may designate one or more directors as alternate members of any such committee who may replace any absent member or members at any meeting of such committee. Each such committee shall serve at the pleasure of the Board. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. Committees shall keep minutes of their proceedings and shall report the same to the Board of Directors at the meeting of the Board next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Directors, provided that no rights of a third party shall be affected in any such revision or alteration. 5 ARTICLE IV OFFICERS Section 1. Executive Officers - The officers of the Corporation shall include a President, one or more Vice Presidents, a Treasurer and a Secretary and such Assistant Treasurers and Assistant Secretaries and other officers as the Board of Directors may determine. Any two or more offices may be held by the same person, except the offices of President and Secretary, unless all of the issued and outstanding shares of capital stock of the Corporation are owned by one person, in which event such person may hold all or any combination of offices. Section 2. Election - The Executive Officers shall be appointed by the Board of Directors and shall hold office until removed in accordance with Section 3 of this Article IV. Section 3. Removal - Any officer may be removed from office by the Board at any time with or without cause subject to his or her employment agreement with the Corporation, if such exists. Section 4. Delegation of Powers - The Board of Directors may from time to time delegate the power or duties of any officer of the Corporation, in the event of his absence or failure to act otherwise, to any other officer or director or person whom they may select. Section 5. Compensation - The compensation of each officer shall be such as the Board of Directors may from time to time determine. Section 6. Chief Executive Officer - The Board of Directors shall designate the President as the Chief Executive Officer of the Corporation who shall have general charge of the business and affairs of the Corporation, subject, however, to the right of the Board of Directors to confer specified powers on officers and subject generally to the direction of the Board. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, or in the event of his inability to act, any other officer designated by the Board, shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meetings of security holders of corporations in which the Corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which, as the owner thereof, the Corporation might have possessed and exercised, if present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. Section 7. President - The President, if not designated as Chief Executive Officer, shall have such duties as the Board may prescribe. Section 8. Vice President - A Vice President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. In the absence or inability of the President to perform his duties or exercise his powers, the Vice President or, if there be more than one, a Vice President designated by the Board, shall exercise the powers and perform the duties of the President subject to the direction of the Board of Directors. 6 Section 9. Secretary - The Secretary shall keep the minutes of all meetings and record all votes of shareholders, the Board of Directors and committees in a book to be kept for that purpose. He shall give or cause to be given any required notice of meetings of shareholders, the Board of Directors or any committee, and shall be responsible for preparing or obtaining from a transfer agent appointed by the Board, the list of shareholders required by Article II, Section 7 thereof. He shall be the custodian of the seal of the Corporation and shall affix or cause to be affixed the seal to any instrument requiring it and attest the same and exercise the powers and perform the duties incident to the office of Secretary subject to the direction of the Board of Directors. Section 10. Treasurer - Subject to the direction of the Board of Directors, the Treasurer shall have charge of the general supervision of the funds and securities of the Corporation and the books of account of the Corporation and shall exercise the powers and perform the duties incident to the office of the Treasurer. If required by the Board of Directors, he shall give to the Corporation a bond in such sum and with such sureties as may be satisfactory to the Board of Directors for the faithful discharge of his duties. Section 11. Other Officers - All other officers, if any, shall have such authority and shall perform such duties as may be specified from time to time by the Board of Directors. ARTICLE V RESIGNATIONS Any director or officer of the Corporation or any member of any committee of the Board of Directors of the Corporation, may resign at any time by giving written notice to the Board of Directors, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time is not specified therein, upon the receipt thereof, irrespective of whether any such resignation shall have been accepted. ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1. Form of Certificates - Each shareholder shall be entitled to a certificate or certificates in such form as prescribed by the Business Corporation Law and by any other applicable statutes, which Certificate shall represent and certify the number, kind and class of shares owned by him in the Corporation. The Certificates shall be numbered and registered in the order in which they are issued and upon issuance the name in which each Certificate has been issued together with the number of shares represented thereby and the date of issuance shall be entered in the stock book of the Corporation by the Secretary or by the transfer agent of the Corporation. Each certificate shall be signed by the President or a Vice President and countersigned by the Secretary or Assistant Secretary and shall be sealed with the Corporate Seal or a facsimile thereof. The signature of the officers upon a certificate may also be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or an employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before the certificate is issued, such certificate may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the time of its issue. 7 Section 2. Consideration - A certificate representing shares shall not be issued until the full amount of consideration therefor has been paid to the Corporation, except if otherwise permitted by Section 504 of the Business Corporation Law. Section 3. Lost Certificates - The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation, alleged to have been lost, mutilated, stolen or destroyed, upon the making of an affidavit of that fact by the person so claiming and upon delivery to the Corporation, if the Board of Directors shall so require, of a bond in such form and with such surety or sureties as the Board may direct, sufficient in amount to indemnify the Corporation and its transfer agent against any claim which may be made against it or them on account of the alleged loss, destruction, theft or mutilation of any such certificate or the issuance of any such new certificate. Section 4. Fractional Share Interests - The Corporation may issue certificates for fractions of a share where necessary to effect transactions authorized by the Business Corporation Law; or it may pay in cash the fair market value of fractions of a share as of the time when those entitled to receive such fractions are determined; or it may issue scrip in registered or bearer form over the manual or facsimile signature of an officer of the Corporation or of its agent, exchangeable as therein provided for full shares, but such scrip shall not entitle the holder to any rights of a shareholder except as therein provided. Section 5. Share Transfers - Upon compliance with provisions restricting the transferability of shares, if any, transfers of shares of the Corporation shall be made only on the share record of the Corporation by the registered holder thereof, or by his duly authorized attorney, upon the surrender of the certificate or certificates for such shares properly endorsed with payment of all taxes thereon. Section 6. Record Date for Shareholders - For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining the shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of any meeting nor more than sixty days prior to any action taken without a meeting, the payment of any dividend or the allotment of any rights, or any other action. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date under this Section for the adjourned meeting. Section 7. Shareholders of Record - The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of New York. 8 ARTICLE VII DIVIDENDS Section 1. General - Subject to the provisions of the Certificate of Incorporation relating thereto, if any, dividends may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in shares of the capital stock or in the Corporation's bonds or its property, including the shares or bonds of other corporations subject to any provisions of law and of the Certificate of Incorporation. Section 2. Reserves - Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE VIII NOTICES Section 1. Statutory Notices - The Board of Directors may appoint the Treasurer or any other officer of the Corporation to cause to be prepared and furnished to shareholders entitled thereto any special financial notice and/or statement which may be required by Sections 510, 511, 515, 516, 517, 519 and 520 of the Business Corporation Law or by any other applicable statute. Section 2. Waiver - Whenever any notice of a meeting is required to be given under the provisions of the statutes or under the provisions of the Certificate of Incorporation or these By Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, or electronically authorized by the person entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall be fixed, and shall be subject to change from time to time, by the Board of Directors. ARTICLE X CORPORATE SEAL The Corporate seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "New York" and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine. The Corporate seal may be used by printing, engraving, lithographing, stamping or otherwise making, placing or affixing, or causing to be printed, engraved, lithographed, stamped or otherwise made, placed or affixed, upon any paper or document, by any process whatsoever, an impression, facsimile or other reproduction of said Corporate seal. 9 ARTICLE XI BOOKS AND RECORDS Section 1. Books of Account - There shall be maintained at the principal office of the Corporation books of account of all the Corporation's business and transactions. Section 2. Checks - All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Stock Ledger - There shall be maintained at the principal office of the corporation or at the office of the Corporation's transfer agent a record containing the names and addresses of all shareholders, the number and class of shares held by such and the dates when they respectively became the owners of record thereof. ARTICLE XII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS Any person made or threatened to be made a party to an action or proceeding, whether civil or criminal, by reason of the fact that he, his testator or intestate, then is or was a director, officer, employee or agent of the Corporation, or then serves or has served any other corporation in any capacity at the request of the Corporation, shall be indemnified by the Corporation against reasonable expenses, judgments, fines and amounts actually and necessarily incurred in connection with the defense of such action or proceeding or in connection with an appeal therein, to the fullest extent permissible by the laws of the State of New York. Such right of indemnification shall not be deemed exclusive of any other rights to which such person may be entitled. ARTICLE XIII AMENDMENTS These bylaws may be amended or repealed or new bylaws may be adopted at any regular or special meeting of shareholders at which a quorum is present or represented, by the vote of the holders of shares entitled to vote in the election of any directors, provided notice of the proposed alteration, amendment or repeal be contained in the notice of such meeting. These bylaws may also be amended or repealed or new bylaws may be adopted by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board. If any bylaw regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the bylaw so adopted, amended or repealed, together with precise statement of the changes made. Bylaws adopted by the Board of Directors may be amended or repealed by the shareholders. 10 EX-4.2 6 b318755ex_4-2.txt WARRANT AGREEMENT EXHIBIT 4.2 WARRANT AGREEMENT between Data conversion laboratory, INC. and CONTINENTAL STOCK TRANSFER TRUST COMPANY Dated as of _____________, 2002 THIS AGREEMENT, DATED AS OF ______________, 2002, IS BETWEEN DATA CONVERSION LABORATORY, INC., A NEW YORK CORPORATION (THE "COMPANY"), AND CONTINENTAL STOCK TRANSFER TRUST COMPANY, A ___________ CORPORATION (THE "WARRANT AGENT"). WHEREAS, the Company, at or about the time that it is entering into this Agreement, proposes to issue and sell up to 1,250,000 units ("Units") to public investors (the "Offering"), which amount includes Units issuable upon the exercise of the option granted to the representative of the several underwriters of the Offering (the "Representative") to purchase up to 187,500 Units (solely to cover over-allotments in the sale of the Units). Each Unit consists of one share of the Company's common stock, $0.01 par value per share ("Common Stock"), and one warrant (a "Warrant" and collectively, the "Warrants"), with each Warrant being exercisable to purchase one share of Common Stock for $____ (150% public offering price of the Units), upon the terms and conditions and subject to adjustment in certain circumstances, all as set forth in this Agreement; WHEREAS, the Company proposes to issue to the Representative, in connection with the Offering, warrants to purchase up to 125,000 additional Units, with the terms of such warrants set forth in a separate agreement between the Company and the Representative entered into on the date hereof; WHEREAS, the Company wishes to retain the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, transfer, exchange and replacement of the certificates evidencing the Warrants to be issued under this Agreement (the "Warrant Certificates") and the exercise of the Warrants; and WHEREAS, the Company and the Warrant Agent wish to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights of the holders thereof ("Warrantholders") and to set forth the respective rights and obligations of the Company and the Warrant Agent, and whereas, each Warrantholder is an intended beneficiary of this Agreement with respect to the rights of Warrantholders herein. Page 1 - Warrant Agreement NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Appointment of Warrant Agent The Company appoints the Warrant Agent to act as agent for the Company in accordance with the instructions in this Agreement, and the Warrant Agent accepts such appointment. Section 2. Date, Denomination and Execution of Warrant Certificates The Warrant Certificates (and the Form of Election to Purchase and the Form of Assignment to be printed on the reverse thereof) shall be in registered form only and shall be substantially of the tenor and purport recited in Exhibit A hereto, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, or with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange on which the Common Stock or the Warrants may be listed or any automated quotation system, or to conform to usage. After [INSERT THE DATE WHICH IS 30 DAYS AFTER THE DATE OF THE FINAL PROSPECTUS], each Warrant Certificate shall entitle the registered holder thereof, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase, on or before the close of business on _______, 2007 (THE FIFTH ANNIVERSARY OF THE DATE OF THE FINAL PROSPECTUS) (the "Expiration Date"), one fully paid and nonassessable share of Common Stock for each Warrant evidenced by such Warrant Certificate, subject to adjustments as provided in Section 6 hereof, for $____ (150% public offering price of the Units) (the "Exercise Price"). Each Warrant Certificate issued as a part of a Unit offered to the public as described in the recitals, above, shall be dated _________, 2002; each other Warrant Certificate shall be dated the date on which the Warrant Agent receives valid issuance instructions from the Company or a transferring holder of a Warrant Certificate or, if such instructions specify another date, such other date. For purposes of this Agreement, the term "close of business" on any given date shall mean 5:00 p.m., Pacific time, on such date; provided, however, that if such date is not a business day, it shall mean 5:00 p.m., Pacific time, on the next succeeding business day. For purposes of this Agreement, the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in New York are authorized or obligated by law to be closed. Each Warrant Certificate shall be executed on behalf of the Company by the Chairman of the Board, or Chief Executive Officer, President or a Vice President of the Company, either manually or by facsimile signature printed thereon, and have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. Each Warrant Certificate shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any Warrant Certificate shall cease to be such officer of the Company before countersignature by the Warrant Agent and issue and delivery thereof by the Company, such Warrant Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company. Page 2 - Warrant Agreement Section 3. Subsequent Issue of Warrant Certificates Subsequent to their original issuance, no Warrant Certificates shall be reissued except (i) Warrant Certificates issued upon transfer thereof in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any combination, split-up or exchange of Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates issued in replacement of mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable thereunder pursuant to Section 6 hereof and (v) Warrant Certificates issued upon the partial exercise of Warrant Certificates pursuant to Section 7 hereof. The Warrant Agent is hereby irrevocably authorized to countersign and deliver, in accordance with the provisions of said Sections 4, 5, 6 and 7, the new Warrant Certificates required for purposes thereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purposes. Section 4. Transfers and Exchanges of Warrant Certificates The Warrant Agent will keep or cause to be kept books for registration of ownership and transfer of the Warrant Certificates issued hereunder. Such registers shall show the names and addresses of the respective holders of the Warrant Certificates and the number of Warrants evidenced by each such Warrant Certificate. The Warrant Agent shall, from time to time, register the transfer of any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Assignment duly filled in and executed with such signature guaranteed by a banking institution or NASD member and such supporting documentation as the Warrant Agent or the Company may reasonably require, to the Warrant Agent at its stock transfer office in Glendale, California at any time on or before the Expiration Date, and upon payment to the Warrant Agent for the account of the Company of an amount equal to any applicable transfer tax. Payment of the amount of such tax may be made in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Upon receipt of a Warrant Certificate, with the Form of Assignment duly filled in and executed, accompanied by payment of an amount equal to any applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered Warrant Certificate and countersign and deliver to the transferee a new Warrant Certificate for the number of full Warrants transferred to such transferee; provided, however, that in case the registered holder of any Warrant Certificate shall elect to transfer fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent in addition, shall promptly countersign and deliver to such registered holder a new Warrant Certificate or Certificates for the number of full Warrants not so transferred. Page 3 - Warrant Agreement Any Warrant Certificate or Certificates may be exchanged at the option of the holder thereof for another Warrant Certificate or Certificates of different denominations, of like tenor and representing in the aggregate the same number of Warrants, upon surrender of such Warrant Certificate or Certificates, with the Form of Assignment duly filled in and executed, to the Warrant Agent, at any time or from time to time after the close of business on the date hereof and prior to the close of business on the Expiration Date. The Warrant Agent shall promptly cancel the surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant to the provisions of this Section 4. Section 5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of any Warrant Certificate, and in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to them of all reasonable expenses incidental thereto, and, in the case of mutilation, upon surrender and cancellation of the Warrant Certificate, the Warrant Agent shall countersign and deliver a new Warrant Certificate of like tenor for the same number of Warrants. Section 6. Adjustments of Number and Kind of Shares Purchasable and Exercise Price Except as provided in Subsection I below, the number and kind of securities or other property purchasable upon exercise of a Warrant shall be subject to adjustment from time to time upon the occurrence, after the date hereof, of any of the following events: A. In case the Company shall (i) pay a dividend in, or make a distribution of, shares of capital stock on its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of such shares or (iii) combine its outstanding shares of Common Stock into a smaller number of such shares, the total number of shares of Common Stock purchasable upon the exercise of each Warrant outstanding immediately prior thereto shall be adjusted so that the holder of any Warrant Certificate thereafter surrendered for exercise shall be entitled to receive at the same aggregate Exercise Price the number of shares of capital stock (of one or more classes) which such holder would have owned or have been entitled to receive immediately following the happening of any of the events described above had such Warrant been exercised in full immediately prior to the record date with respect to such event. Any adjustment made pursuant to this Subsection shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant Certificate thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a Board resolution filed with the Warrant Agent) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. Page 4 - Warrant Agreement B. In the event of a capital reorganization or a reclassification of the Common Stock (except as provided in Subsection A above or Subsection E below), any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in substitution for the Common Stock to which such Warrantholder would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that such Warrantholder would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if such Warrants had been exercised immediately prior to the record date with respect to such event; and in any such case, appropriate provision (as determined by the Board of Directors of the Company, whose determination shall be conclusive and shall be evidenced by a certified Board resolution filed with the Warrant Agent) shall be made for the application of this Section 6 with respect to the rights and interests thereafter of the Warrantholders (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock), to the end that this Section 6 (including the adjustments of the number of shares of Common Stock or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of the Warrants for any shares or securities or other property (or cash) thereafter deliverable upon the exercise of the Warrants. C. Whenever the number of shares of Common Stock or other securities purchasable upon exercise of a Warrant is adjusted as provided in this Section 6, the Company will promptly file with the Warrant Agent a certificate signed by the Chairman of the Board, Chief Executive Officer, President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth the number and kind of securities or other property purchasable upon exercise of a Warrant, as so adjusted, stating that such adjustments in the number or kind of shares or other securities or property conform to the requirements of this Section 6, and setting forth a brief statement of the facts accounting for such adjustments. Promptly after receipt by the Warrant Agent of such certificate, the Company, or the Warrant Agent at the Company's request, will deliver, by first-class, postage prepaid mail, a brief summary of such certificate (to be supplied by the Company if delivered by the Warrant Agent at the Company's request) to the registered holders of the outstanding Warrant Certificates; provided, however, that failure to file or to give any notice required under this Subsection, or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 6; and provided, further, that, where appropriate, such notice may be given in advance and included as part of the notice required to be given pursuant to Section 12 hereof. D. In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the capital stock or assets of the Company as an entirety or substantially as an entirety, the surviving corporation formed by such consolidation or merger or the corporation which shall have acquired such capital stock or assets, as the case may be, shall execute and deliver to the Warrant Agent a supplemental warrant agreement providing that the holder of each Warrant then outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock for which such Warrant would have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section. The above provision of this Subsection shall similarly apply to successive consolidations, mergers, sales or transfers. Page 5 - Warrant Agreement The Warrant Agent shall not be under any responsibility to determine the correctness of any provision contained in any such supplemental warrant agreement relating to either the kind or amount of shares of stock or securities or property (or cash) purchasable by holders of Warrant Certificates upon the exercise of their Warrants after any such consolidation, merger, sale or transfer or of any adjustment to be made with respect thereto, but subject to the provisions of Section 20 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, a certificate of a firm of independent certified public accountants (who may be the accountants regularly employed by the Company) with respect thereto. E. Irrespective of any adjustments in the number or kind of shares issuable upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant Certificates initially issuable pursuant to this Warrant Agreement. F. The Company may retain a firm of independent public accountants of recognized standing, which may be the firm regularly retained by the Company, selected by the Board of Directors of the Company or the Executive Committee of said Board, and not disapproved by the Warrant Agent, to make any computation required under this Section, and a certificate signed by such firm shall, in the absence of fraud or gross negligence, be conclusive evidence of the correctness of any computation made under this Section. G. For the purpose of this Section, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company, or (ii) any other class of stock resulting from successive changes or reclassification of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time as a result of an adjustment made pursuant to this Section, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section, and all other provisions of this Agreement, with respect to the Common Stock, shall apply on like terms to any such other shares. H. The Company may, from time to time and to the extent permitted by law, reduce the exercise price of the Warrants by any amount for a period of not less than 20 days. If the Company so reduces the exercise price of the Warrants, it will give not less than 15 days' notice of such decrease, which notice may be in the form of a press release, and shall take such other steps as may be required under applicable law in connection with any offers or sales of securities at the reduced price. I. The Underwriting Agreement between the Company and the Representative relating to the sale of the Units provides that, if the Company's audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, it will issue a 10% stock dividend to all holders of Common Stock of record on the record date of the dividend (the "Stock Dividend"). None of the adjustments considered by this Section 6 will be made as a result of the issuance of the Stock Dividend. Page 6 - Warrant Agreement Section 7. Exercise and Redemption of Warrants Unless the Warrants have been redeemed as provided in this Section 7, the registered holder of any Warrant Certificate may exercise the Warrants evidenced thereby, in whole at any time or in part from time to time after [INSERT THE DATE WHICH IS 30 DAYS AFTER THE DATE OF THE FINAL PROSPECTUS] and at or prior to the close of business on the Expiration Date, subject to the provisions of Section 8, at which time the Warrant Certificates shall be and become wholly void and of no value. Warrants may be exercised by their holders or redeemed by the Company as follows: A. Exercise of Warrants shall be accomplished upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Election to Purchase on the reverse side thereof duly filled in and executed, to the Warrant Agent at its stock transfer office in Glendale, California, together with payment to the Company of the Exercise Price (as of the date of such surrender) of the Warrants then being exercised. Payment of the Exercise Price may be made by wire transfer of good funds, or by certified or bank cashier's check, payable in lawful money of the United States of America to the order of the Company. No adjustment shall be made for any cash dividends, whether paid or declared, on any securities issuable upon exercise of a Warrant. Subject to the terms and conditions of Section 11, the Company shall pay any and all transfer tax incurred as a result of any exercise of the Warrants. B. Upon receipt of a Warrant Certificate, with the Form of Election to Purchase duly filled in and executed, accompanied by payment of the Exercise Price of the Warrants being exercised, the Warrant Agent shall promptly request from the transfer agent with respect to the securities to be issued and deliver to or upon the order of the registered holder of such Warrant Certificate, in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of the securities to be purchased, together with cash made available by the Company pursuant to Section 8 hereof in respect of any fraction of a share of such securities otherwise issuable upon such exercise. If the Warrant is then exercisable to purchase property other than securities, the Warrant Agent shall take appropriate steps to cause such property to be delivered to or upon the order of the registered holder of such Warrant Certificate. In addition, if it is required by law and upon instruction by the Company, the Warrant Agent will deliver to each Warrantholder a prospectus which complies with the provisions of Section 10 of the Securities Act of 1933, as amended, and the Company agrees to supply the Warrant Agent with sufficient number of prospectuses to effectuate that purpose. C. In case the registered holder of any Warrant Certificate shall exercise fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent shall promptly countersign and deliver to the registered holder of such Warrant Certificate, or to his duly authorized assigns, a new Warrant Certificate or Certificates evidencing the number of Warrants that were not so exercised. D. Each person in whose name any certificate for securities is issued upon the exercise of Warrants shall for all purposes be deemed to have become the holder of record of the securities represented thereby as of, and such certificate shall be dated, the date upon which the Warrant Certificate was duly surrendered in proper form and payment of the Exercise Price was made; provided, however, that if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares as of, and the certificate for such shares shall be dated, the next succeeding business day on which the stock transfer books of the Company are open (whether before, on or after the Expiration Date) and the Warrant Agent shall be under no duty to deliver the certificate for such shares until such date. The Company covenants and agrees that it shall not cause its stock transfer books to be closed for a period of more than 20 consecutive business days except upon consolidation, merger, sale of all or substantially all of its assets, dissolution or liquidation or as otherwise provided by law. Page 7 - Warrant Agreement E. The Warrants outstanding at the time of a redemption may be redeemed at the option of the Company, in whole, at any time, or in part, from time to time, and on a pro rata basis (except as provided in Subsection J below), if at the time notice of such redemption is given by the Company as provided in Paragraph F below, the Daily Price has exceeded 150% of the initial public offering price of the Units for the 10 consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price or closing price, as the case may be, on that day as reported by the principal exchange, national market or quotation system on which prices for the Common Stock are reported. On the redemption date the holders of record of redeemed Warrants shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrants to the Company at the principal office of the Warrant Agent in New York, New York. Notwithstanding anything herein to the contrary, the Company shall not redeem any Warrants prior to [INSERT DATE WHICH IS THE DATE WHICH IS SIX MONTHS FROM THE DATE OF THE FINAL PROSPECTUS]. Holders of record may exercise the Warrants at any time prior to the close of business on the date of redemption. F. Notice of redemption of Warrants shall be given at least 30 days prior to the redemption date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Warrant Agent and to all of the holders of record of Warrants at their respective addresses appearing on the books or transfer records of the Company or such other address designated in writing by the holder of record to the Warrant Agent not less than 40 days prior to the redemption date. G. With respect to Warrants called for redemption by the Company, from and after such redemption date, all rights of the Warrantholders shall terminate (except the right to receive the Redemption Price), but only if (a) no later than one day prior to the redemption date the Company shall have irrevocably deposited with the Warrant Agent as paying agent a sufficient amount to pay on the redemption date the Redemption Price for all Warrants called for redemption and (b) the notice of redemption shall have stated the name and address of the Warrant Agent and the intention of the Company to deposit such amount with the Warrant Agent no later than one day prior to the redemption date. H. The Warrant Agent shall pay to the holders of record of redeemed Warrants all monies received by the Warrant Agent for the redemption of Warrants to which the holders of record of such redeemed Warrants who shall have surrendered their Warrants are entitled. Page 8 - Warrant Agreement I. Any amounts deposited with the Warrant Agent that are not required for redemption of Warrants may be withdrawn by the Company. Any amounts deposited with the Warrant Agent that shall be unclaimed after six months after the redemption date may be withdrawn by the Company, and thereafter the holders of the Warrants called for redemption for which such funds were deposited shall look solely to the Company for payment. The Company shall be entitled to the interest, if any, on funds deposited with the Warrant Agent and the holders of redeemed Warrants shall have no right to any such interest. J. If the Company fails to make a sufficient deposit with the Warrant Agent as provided above, the holder of any Warrants called for redemption may at the option of the holder (a) by notice to the Company declare the notice of redemption a nullity as to such holder, at which time the deposit made by the Company with the Warrant Agent shall be distributed, on a pro rata basis, to all other Warrantholders or (b) maintain an action against the Company for the Redemption Price. If the holder brings such an action, the Company will pay reasonable attorneys' fees of the holder. If the holder fails to bring an action against the Company for the Redemption Price within 60 days after the redemption date, the holder shall be deemed to have elected to declare the notice of redemption to be a nullity as to such holder and such notice shall be without any force or effect as to such holder. Except as otherwise specifically provided in this Subsection J, a notice of redemption, once mailed by the Company as provided in Subsection F, shall be irrevocable. Section 8. Fractional Interests The Company shall not be required to issue any Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of shares of securities on the exercise of the Warrants. If any fraction (calculated to the nearest one-hundredth) of a Warrant or a share of securities would, except for the provisions of this Section 8, be issuable upon the exercise of any Warrant, the Company shall, at its option, either purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the Daily Price on the trading day immediately preceding the day upon which such Warrant Certificate was surrendered for exercise in accordance with Section 7 hereof or issue the required fractional Warrant or share. By accepting a Warrant Certificate, the holder thereof expressly waives any right to receive a Warrant Certificate evidencing any fraction of a Warrant or to receive any fractional share of securities upon exercise of a Warrant, except as expressly provided in this Section 8. Section 9. Reservation of Equity Securities The Company covenants that it will at all times reserve and keep available, free from any preemptive rights, out of its authorized and unissued equity securities, solely for the purpose of issue upon exercise of the Warrants, such number of shares of equity securities of the Company as shall then be issuable upon the exercise of all outstanding Warrants ("Equity Securities"). The Company covenants that all Equity Securities which shall be so issuable shall, upon such issue, be duly authorized, validly issued, fully paid and nonassessable. Page 9 - Warrant Agreement The Company covenants that if any Equity Securities, required to be reserved for the purpose of issue upon exercise of the Warrants hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares may be issued upon exercise of Warrants, the Company will use all commercially reasonable efforts to cause such securities to be duly registered, or approved, as the case may be, and, to the extent practicable, take all such action in anticipation of and prior to the exercise of the Warrants, including, without limitation, filing any and all post-effective amendments to the Company's Registration Statement on Form SB-2 (Registration No. ___-_____) necessary to permit a public offering of the securities underlying the Warrants at any and all times during the term of this Agreement; provided, further, that in no event shall such securities be issued, and the Company is authorized to refuse to honor the exercise of any Warrant, if such exercise would result, in the opinion of the Company's Board of Directors, upon advice of counsel, in the violation of any law; and provided further that, in the case of a Warrant exercisable solely for securities listed on a securities exchange or for which there are at least two independent market makers, in lieu of obtaining such registration or approval, the Company may elect to redeem Warrants submitted to the Warrant Agent for exercise for a price equal to the difference between the aggregate low asked price, or closing price, as the case may be, of the securities for which such Warrant is exercisable on the date of such submission and the Exercise Price of such Warrants; in the event of such redemption, the Company will pay to the holder of such Warrants the above-described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise. Section 10. Reduction of Exercise Price Below Par Value Before taking any action that would cause an adjustment pursuant to Section 6 hereof reducing the portion of the Exercise Price required to purchase one share of capital stock below the then par value (if any) of a share of such capital stock, the Company will use its best efforts to take any corporate action which, in the opinion of its counsel, may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such capital stock. Section 11. Payment of Taxes The Company covenants and agrees that it will pay when due and payable any and all federal and state documentary stamp and other original issue taxes which may be payable in respect of the original issuance of the Warrant Certificates, or any shares of Common Stock or other securities upon the exercise of Warrants. The Company shall not, however, be required (i) to pay any tax which may be payable in respect of any transfer involved in the transfer and delivery of Warrant Certificates or the issuance or delivery of certificates for Common Stock or other securities in a name other than that of the registered holder of the Warrant Certificate surrendered for purchase or (ii) to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of any Warrant Certificate until any such tax shall have been paid, all such tax being payable by the holder of such Warrant Certificate at the time of surrender. Page 10 - Warrant Agreement Section 12. Notice of Certain Corporate Action In case the Company, after the date hereof, shall propose (i) to offer to the holders of Common Stock, generally, rights to subscribe to or purchase any additional shares of any class of its capital stock, any evidences of its indebtedness or assets, or any other rights or options or (ii) to effect any reclassification of Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization, or any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or any sale, transfer or other disposition of its property and assets substantially as an entirety, or the liquidation, voluntary or involuntary dissolution or winding-up of the Company, then, in each such case, the Company shall file with the Warrant Agent and the Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage prepaid mail) to all registered holders of the Warrant Certificates notice of such proposed action, which notice shall specify the date on which the books of the Company shall close or a record be taken for such offer of rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up shall take place or commence, as the case may be, and which shall also specify any record date for determination of holders of Common Stock entitled to vote thereon or participate therein and shall set forth such facts with respect thereto as shall be reasonably necessary to indicate any adjustments in the Exercise Price and the number or kind of shares or other securities purchasable upon exercise of Warrants which will be required as a result of such action. Such notice shall be filed and mailed in the case of any action covered by clause (i) above, at least ten days prior to the record date for determining holders of the Common Stock for purposes of such action or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record are to be entitled to such offering; and, in the case of any action covered by clause (ii) above, at least 20 days prior to the earlier of the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up is expected to become effective and the date on which it is expected that holders of shares of Common Stock of record on such date shall be entitled to exchange their shares for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up. Notwithstanding anything to the contrary in this Section, the Company shall not be required to deliver such notice if, in the reasonable opinion of the Company's Board of Directors, based on advice of counsel, such notification would violate any federal or state securities laws. Failure to give any such notice or any defect therein shall not affect the legality or validity of any transaction listed in this Section 12. Section 13. Disposition of Proceeds on Exercise of Warrant Certificates, etc. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of securities or other property through the exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement available for inspection by Warrantholders during normal business hours at its stock transfer office. Copies of this Agreement may be obtained upon written request addressed to the Warrant Agent at its stock transfer office in New York, New York. Page 11 - Warrant Agreement Section 14. Warrantholder Not Deemed a Shareholder No Warrantholder, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise of the Warrants represented thereby for any purpose whatsoever, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrantholder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 12 hereof), or to receive dividend or subscription rights, or otherwise, until such Warrant Certificate shall have been exercised in accordance with the provisions hereof and the receipt of the Exercise Price and any other amounts payable upon such exercise by the Warrant Agent. Section 15. Right of Action All rights of action with respect to this Agreement are vested in the respective registered holders of the Warrant Certificates; and any registered holder of any Warrant Certificate, without the consent of the Warrant Agent or of any other holder of a Warrant Certificate, may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, his right to exercise the Warrants evidenced by such Warrant Certificate, for the purchase of shares of the Common Stock in the manner provided in the Warrant Certificate and in this Agreement. Section 16. Agreement of Holders of Warrant Certificates Every holder of a Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent and with every other holder of a Warrant Certificate that: A. the Warrant Certificates are transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in this Agreement; and B. the Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the absolute owner of the Warrant (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Section 17. Cancellation of Warrant Certificates In the event that the Company shall purchase or otherwise acquire any Warrant Certificate or Certificates after the issuance thereof, such Warrant Certificate or Certificates shall thereupon be delivered to the Warrant Agent and be canceled by it and retired. The Warrant Agent shall also cancel any Warrant Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, split-up, combination or exchange. Warrant Certificates so canceled shall be delivered by the Warrant Agent to the Company from time to time, or disposed of in accordance with the instructions of the Company. Page 12 - Warrant Agreement Section 18. Concerning the Warrant Agent The Company agrees to pay to the Warrant Agent from time to time, on written demand of the Warrant Agent, reasonable compensation for all services rendered by it hereunder and also its reasonable expenses, including counsel fees, and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Warrant Agent agrees to use its best efforts to submit in advance a written estimate of any costs in excess of $_______ which it expects to incur in its exercise and performance of its duties hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Warrant Agent, arising out of or in connection with the acceptance and administration of this Agreement. Section 19. Merger or Consolidation or Change of Name of Warrant Agent Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of Section 21 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. Section 20. Duties of Warrant Agent The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant Certificates, by their acceptance thereof, shall be bound: Page 13 - Warrant Agreement A. The Warrant Agent may consult with counsel satisfactory to it (who may be counsel for the Company or the Warrant Agent's in-house counsel), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such opinion; provided, however, that the Warrant Agent shall have exercised reasonable care in the selection of such counsel. Fees and expenses of such counsel, to the extent reasonable, shall be paid by the Company, subject to the provisions of Section 18 hereof. B. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, President, Chief Executive Officer, a Vice President or Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. C. The Warrant Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. D. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. E. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any change in the number of shares of Common Stock for which a Warrant is exercisable required under the provisions of Section 6 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change (except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Exercise Price); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be validly issued, fully paid and nonassessable. F. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrant Certificates, as their respective rights or interests may appear. Page 14 - Warrant Agreement G. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. H. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman, President, a Vice President, Secretary or Controller of the Company, and to apply to such officers for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered or omitted by it in good faith in accordance with instructions of any such officer. I. The Warrant Agent will not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. J. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct; provided, however, that reasonable care shall have been exercised in the selection and continued employment of such attorneys, agents and employees. K. The Warrant Agent will not incur any liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. L. The Warrant Agent will act hereunder solely as agent of the Company in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence, bad faith or willful conduct. Page 15 - Warrant Agreement Section 21. Change of Warrant Agent The Warrant Agent may resign and be discharged from its duties under this Agreement upon 30 days' prior notice in writing mailed, by registered or certified mail, to the Company. The Company may remove the Warrant Agent or any successor warrant agent upon 30 days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent and shall, within 15 days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Company shall fail to make such appointment within a period of 15 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor Warrant Agent is appointed. After appointment and execution of a copy of this Agreement in effect at that time, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent, within a reasonable time, any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. Section 22. Issuance of New Warrant Certificates Notwithstanding any of the provisions of this Agreement or the several Warrant Certificates to the contrary, the Company may, at its option, issue new Warrant Certificates in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable under the several Warrant Certificates made in accordance with the provisions of this Agreement. Section 23. Notices Notice or demand pursuant to this Agreement to be given or made on the Company by the Warrant Agent or by the registered holder of any Warrant Certificate shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: Data Conversion Laboratory, Inc. 184-13 Horace Harding Expressway Fair Meadows, New York 11365 Attn: Mark Gross Page 16 - Warrant Agreement Subject to the provisions of Section 21, any notice pursuant to this Agreement to be given or made by the Company or by the holder of any Warrant Certificate to or on the Warrant Agent shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Continental Stock Transfer Trust Company 17 Battery Place New York, New York 10004 Any notice or demand authorized to be given or made to the registered holder of any Warrant Certificate under this Agreement shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, to the last address of such holder as it shall appear on the registers maintained by the Warrant Agent. Section 24. Modification of Agreement The Warrant Agent may, without the consent or concurrence of the Warrantholders, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in this Agreement that the Warrant Agent shall have been advised by counsel (who may be counsel for the Company) are necessary or desirable to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, or to make any other provisions in regard to matters or questions arising hereunder and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not adversely affect the interests of the Warrantholders. As of the date hereof, this Agreement contains the entire and only agreement, understanding, representation, condition, warranty or covenant between the parties hereto with respect to the matters herein, supersedes any and all other agreements between the parties hereto relating to such matters, and may be modified or amended only by a written agreement signed by both parties hereto pursuant to the authority granted by the first sentence of this Section. Section 25. Successors All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 26. Governing Law This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the state of New York and for all purposes shall be construed in accordance with the laws of said state. Page 17 - Warrant Agreement Section 27. Termination This Agreement shall terminate as of the close of business on the Expiration Date, or such earlier date upon which all Warrants shall have been exercised or redeemed, except that the Warrant Agent shall account to the Company as to all Warrants outstanding and all cash held by it as of the close of business on the Expiration Date. Section 28. Benefits of this Agreement Nothing in this Agreement or in the Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Warrant Agent, and their respective successors and assigns hereunder and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and assigns hereunder and the registered holders of the Warrant Certificates. Section 29: Descriptive Headings The descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 30. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. DATA CONVERSION LABORATORY, INC. By: ------------------------------------- Mark Gross President CONTINENTAL STOCK TRANSFER TRUST COMPANY By: ------------------------------------- Page 18 - Warrant Agreement VOID AFTER 5:00 P.M. PACIFIC TIME ON __________, 2007 WARRANTS TO PURCHASE COMMON STOCK W-_____ _________Warrants Data Conversion Laboratory, Inc. CUSIP ______________ THIS CERTIFIES THAT or registered assigns, is the registered holder of the number of Warrants (the "Warrants") set forth above. Each Warrant entitles the holder thereof to purchase from Data Conversion Laboratory, Inc., a corporation incorporated under the laws of the state of New York (the "Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement hereinafter more fully described (the "Warrant Agreement"), at any time on or before the close of business on __________, 2007 or, if such Warrant is redeemed as provided in the Warrant Agreement, at any time prior to the effective time of such redemption (the "Expiration Date"), one fully paid and non-assessable share of Common Stock of the Company (the "Common Stock") upon presentation and surrender of this Warrant Certificate, with the instructions for the registration and delivery of Common Stock filled in, at the stock transfer office in New York, New York, of Continental Stock Transfer Trust Company, Warrant Agent of the Company (the "Warrant Agent") or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of the Exercise Price (as defined in the Warrant Agreement) and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Each Warrant initially entitles the holder to purchase one share of Common Stock initially for $ [150% of the initial public offering price of the Units]. The number and kind of securities or other property for which the Warrants are exercisable are subject to further adjustment in certain events, such as mergers, splits, stock dividends, recapitalizations and the like, to prevent dilution. After six months following the closing of the Company's initial public offering, the Company may redeem any or all outstanding and unexercised Warrants at any time if the average Daily Price equals or exceeds 200% of the initial public offering price of the Units for ten consecutive trading days immediately preceding the date of notice of such redemption, or the Company has audited earnings per share of $____ for any four consecutive quarters, upon 30 days notice, at a price equal to $0.25 per Warrant. For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. All Warrants not theretofore exercised or redeemed will expire on _________, 2007. Page 19 - Warrant Agreement This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agreement, dated as of ____________, 2002 (the "Warrant Agreement"), between the Company and the Warrant Agent, to all of which terms, provisions and conditions the registered holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Company at 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365, Attention: Mark Gross. The Company shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractions of Warrants, Common Stock or other securities, but shall make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. In certain cases, the sale of securities by the Company upon exercise of Warrants would violate the securities laws of the United States, certain states thereof or other jurisdictions. The Company has agreed to use all commercially reasonable efforts to cause a registration statement to continue to be effective during the term of the Warrants with respect to such sales under the Securities Act of 1933, as amended, and to take such action under the laws of various states as may be required to cause the sale of securities upon exercise to be lawful. However, the Company will not be required to honor the exercise of Warrants if, in the opinion of the Board of Directors, upon advice of counsel, the sale of securities upon such exercise would be unlawful. In certain cases, the Company may, but is not required to, purchase Warrants submitted for exercise for a cash price equal to the difference between the market price of the securities obtainable upon such exercise and the exercise price of such Warrants. This Warrant Certificate, with or without other Warrant Certificates, upon surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate offices of the Company, may be exchanged for another Warrant Certificate or Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Certificates so surrendered. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. No holder of this Warrant Certificate, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose whatever, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof or give or withhold consent to any corporate action (whether upon any matter submitted to stockholders at any meeting thereof, or give or withhold consent to any merger, recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, conveyance or otherwise) or to receive notice of meetings or other actions affecting stockholders (except as provided in the Warrant Agreement) or to receive dividends or subscription rights or otherwise until the Warrants evidenced by this Warrant Certificate shall have been exercised and the Common Stock purchasable upon the exercise thereof shall have become deliverable as provided in the Warrant Agreement. Page 20 - Warrant Agreement If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Company's Common Stock or other class of stock purchasable upon the exercise of the Warrants evidenced by this Warrant Certificate are closed for any purpose, the Company shall not be required to make delivery of certificates for shares purchasable upon such transfer until the date of the reopening of said transfer books. Every holder of this Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent, and with every other holder of a Warrant Certificate that: (a) This Warrant Certificate is transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement; and (b) The Company and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be payable in respect thereof by the holder of this Warrant Certificate pursuant to the Warrant Agreement shall have been paid, such tax being payable by the holder of this Warrant Certificate at the time of surrender. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated: , 2002 Data Conversion Laboratory, Inc. ------------------- By: ------------------------------------- Mark Gross, President Attest: --------------------------------- Secretary Countersigned Continental Stock Transfer & Trust Company - ------------------------------------------ By: --------------------------------------- Authorized Officer Page 21 - Warrant Agreement FORM OF ELECTION TO PURCHASE (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE THE WARRANTS IN WHOLE OR IN PART) To: DATA CONVERSION LABORATORY, INC. The undersigned Registered Holder ( ) - ------------------------------------- (Please insert Social Security or other identification number of Registered Holder) hereby irrevocably elects to exercise the right of purchase represented by the within this Warrant Certificate for, and to purchase thereunder, _______________ shares of Common Stock provided for therein and tenders payment herewith to the order of DATA CONVERSION LABORATORY, INC. in the amount of $________________. The undersigned requests that certificates for such shares of Common Stock be issued as follows: Name: --------------------------------------------------------------------------- Address: ------------------------------------------------------------------------ Deliver to: --------------------------------------------------------------------- Address: ------------------------------------------------------------------------ and if said number of Warrants being exercised shall not be all the Warrants evidenced by this Warrant Certificate, that a new Certificate for the balance of such Warrants as well as the shares of Common Stock represented by this Warrant Certificate be registered in the name of, and delivered to, the Registered Holder at the address stated below: Address: ------------------------------------------------------------------------ Dated: , ----------------- ------ Signature - ------------------------------------------ (Signature must conform in all respects to the name of Registered Holder as specified in the case of this Warrant Certificate in every particular, without alteration or any change whatever.) Signature Guaranteed: - ------------------------------------------ The signature should be guaranteed by an eligible institution (Banks, Stockbrokers, Savings and Loan Association and Credit Union with membership in an approved signature Medallion Program), pursuant to S.E.C. Rule 17Ad-15. Page 22 - Warrant Agreement FORM OF ASSIGNMENT (TO BE SIGNED ONLY UPON ASSIGNMENT) FOR VALUE RECEIVED, the undersigned Registered Holder ( ) - ------------------------ (Please insert Social Security or other identification number of Registered Holder) hereby sells, assigns and transfers unto - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print Name and Address including Zip Code) Warrants evidenced by the within Warrant Certificate, and irrevocably constitutes and appoints ______________________________________________________________________ Attorney to transfer this Warrant Certificate on the books of Data Conversion Laboratory, Inc. with the full power of substitution in the premises. Dated: , ----------------- ------ Signature: - ---------------------------------- (Signature must conform in all respects to the name of Registered Holder as specified on the face of this Unit Certificate in every particular, without alteration or any change whatsoever, and the signature must be guaranteed in the usual manner.) Signature Guaranteed: - ---------------------------------- The signature should be guaranteed by an eligible institution (Banks, Stockbrokers, Savings and Loan Association and Credit Union with membership in an approved signature Medallion Program), pursuant to S.E.C. Rule 17Ad-15. Page 23 - Warrant Agreement EX-4.4 7 b318755ex_4-4.txt PURCHASE WARRANT EXHIBIT 4.4 DATA CONVERSION LABORATORY, INC. PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. Exercisable to Purchase 125,000 Units THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN Void after _______, 2007 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after __________, 2003 and on or before_________ , 2007, up to 125,000 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $.01 par value, of the Company. (e) "Company" means Data Conversion Laboratory, Inc., a New York corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $ ________ per Unit (120% of the initial public offering price of a Unit). If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such Unit Warrant or share of Common Stock by virtue of the application of Section 3 of this Warrant. (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. (j) "Registration Statement" means the Company's registration statement (File No. 333-_________), as amended on the Closing Date. (k) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. Page 1 - Purchase Warrant (l) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange or conversion of such securities. (m) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant, each Unit consisting of one share of Common Stock and one Unit Warrant, each Unit Warrant to purchase one share of Common Stock on the terms and conditions described in the Registration Statement. (n) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (o) "Warrant Certificate" means a certificate evidencing the Warrant. (p) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (q) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction, the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering on behalf of the Warrantholder and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholder that will be paid by the Company. (r) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. (Pacific Time) on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365, or at such other office or agency as the Company may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Act. Page 2 - Purchase Warrant If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. Except as provided in subsection 3(g) below, the number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. Page 3 - Purchase Warrant (d) No fractional shares of Common Stock or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock in the over-the-counter market or the last sale price of the Common Stock on the Nasdaq SmallCap Market or a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale by the Company of the Common Stock or other Securities purchasable upon exercise of the Warrant. (g) The Underwriting Agreement between the Company and Paulson Investment Company, Inc., as the representative of the underwriters, relating to the sale of the Units provides that, if the Company's audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, it will issue a 10% stock dividend to all holders of Common Stock of record on the record date of the dividend (the "Stock Dividend"). None of the adjustments considered by this Section 3 will be made as a result of the issuance of the Stock Dividend. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for issuance upon exercise of the Warrant. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. (Pacific Time) on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states designated by the Warrantholders among those in which the Units were qualified for sale in the Offering or in such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement in addition to the Registration Statement. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer and sale of the Securities. Page 4 - Purchase Warrant (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration statement, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the Registration Period. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) in the event of an underwritten offering, furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make such representations and warranties to the Warrantholders and any Participating Underwriter as are customarily given to underwriters of public offerings of equity securities in connection with such offerings. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subsection (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. Page 5 - Purchase Warrant (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing, or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subsection (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subsections (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned, pledged or hypothecated for a period of one year following the Effective Date of the Offering, except transfers to officers or partners (not directors) of the underwriters and members of the selling group and/or their officers or partners or by will or operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. Page 6 - Purchase Warrant 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Optional Conversion. (a) In addition to and without limiting the right of any Warrantholder under the terms of this Warrant, the Warrantholder shall have the right (the "Conversion Right") to convert this Warrant or any portion thereof into Securities as provided in this Section 10 at any time or from time-to-time after the first anniversary of the date hereof and prior to its expiration. Upon exercise of the Conversion Right with respect to a particular number of Units subject to this Warrant (the "Converted Securities"), the Company shall deliver to the holder of this Warrant, without payment by the holder of any exercise price or any cash or other consideration, that number of Units equal to the quotient obtained by dividing the Net Value (as hereinafter defined) of the Converted Securities by the sum of the fair market value (as defined in paragraph (c) below) of one share of Common Stock plus one Unit Warrant, determined in each case as of the close of business on the Conversion Date (as hereinafter defined). The "Net Value" of the Converted Securities shall be determined by subtracting the aggregate Exercise Price of the Converted Securities from the aggregate fair market value of the Converted Securities. Notwithstanding anything in this Section 10 to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Securities having a Net Value below $100. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of this Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of Securities subject to this Warrant which are being surrendered (referred to in paragraph (a) above as the Converted Securities) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock and Unit Warrants issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new Warrant evidencing the Securities remaining subject to this Warrant, shall be issued as of the Conversion Date, and shall be delivered to the holder of this Warrant within seven days following the Conversion Date. (c) For purposes of this Section 10, the "fair market value" of a share of Common Stock or Unit Warrant as of a particular date shall be the mean between the bid and asked price of the Common Stock or Unit Warrant, as the case may be, as quoted in the over the counter market, or, if applicable, the closing sale price of the Common Stock or Unit Warrant, as the case may be, on the Nasdaq Stock Market or a national exchange. Page 7 - Purchase Warrant 11. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail addressed as follows: If to the Company: 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Attn: Mark Gross If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. [Remainder of Page Intentionally Blank] Page 8 - Purchase Warrant 12. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the state of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon, to the exclusion of all other courts that might have jurisdiction. Dated as of , 2002. ---------------- Data conversion laboratory, INC. By: ----------------------------------- Mark Gross, President Agreed and Accepted as of , 2002: ---------------- PAULSON INVESTMENT COMPANY, INC. By: ----------------------------------- Page 9 - Purchase Warrant EX-5.1 8 b318755ex_5-1.txt OPINION OF MORSE, ZELNICK, ROSE & LANDER, LLP Exhibit 5.1 (212) 838-8269 June 5, 2002 Data Conversion Laboratory, Inc. 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Dear Sirs: We have acted as counsel to Data Conversion laboratory, Inc., a New York corporation (the "Company"), in connection with the preparation of a registration statement on Form SB-2 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), to register (a) the offering by the Company of 1,250,000 units (the "Units"), each consisting of one common share, par value $.01 per share (the "Common Shares") and one warrant to purchase one common share (the "Unit Warrants") and the offering of an additional 187,500 Units if the over-allotment option is exercised in full, (b) 287,500 Common Shares which will be issued if and when the Company's Board of Directors duly declares a 10% stock dividend as described in the Registration Statement (the "Dividend Shares") and (c) any additional shares of Common Stock issued pursuant to Rule 462(b) of the Act. In this regard, we have reviewed the Restated Certificate of Incorporation of the Company, resolutions adopted by the Company's Board of Directors, the Registration Statement, the other exhibits to the Registration Statement and such other records, documents, statutes and decisions as we have deemed relevant in rendering this opinion. Based upon the foregoing, we are of the opinion that each Unit, Common Share and Unit Warrant being offered has been duly and validly authorized for issuance and when issued as contemplated by the Registration Statement will be legally issued, fully paid and non-assessable, and the Dividend Shares, when the dividend has been duly declared by the Company's Board of Directors and are issued in accordance therewith, will be duly and validly authorized for issuance, legally issued, fully paid and non-assessable. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement. In giving such opinion, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act or the rules or regulations of the Securities and Exchange Commission thereunder. Very truly yours, /S/ MORSE, ZELNICK, ROSE & LANDER, LLP ---------------------------------------- MORSE, ZELNICK, ROSE & LANDER, LLP EX-10.1 9 b318755ex_10-1.txt 2001 STOCK OPTION PLAN Exhibit 10.1 DATA CONVERSION LABORATORY 2001 STOCK OPTION PLAN Effective as of January , 2001 SECTION 1 PURPOSES The purpose of the Plan is to provide incentives to selected individuals who render services to the Corporation, by granting them options to purchase shares of Common Stock. SECTION 2 DEFINITIONS For purposes of the Plan, the following terms shall be defined as follows unless the context clearly indicates otherwise: A. An "Affiliate" of the Corporation shall mean any corporation, partnership, or other business association that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Corporation. B. "Approved Transaction" shall mean: (a) any merger, consolidation or binding share exchange pursuant to which shares of Common Stock are changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the persons who hold Common Stock immediately prior to the transaction have immediately following the transaction the same proportionate ownership of the common stock of, and the same voting power with respect to, the surviving corporation; (b) any merger, consolidation or binding share exchange in which the persons who hold Common Stock immediately prior to the transaction have immediately following the transaction less than a majority of the combined voting power of the outstanding capital stock of the Corporation ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; (c) any liquidation or dissolution of the Corporation; and (d) any sale, lease, exchange or other transfer not in the ordinary course of business (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Corporation. C. "Board of Directors" shall mean the Board of Directors of the Corporation. D. "Cause" shall mean (i) an Optionee's willful and repeated failure to substantially perform his or her duties to the Corporation as an Employee or Consultant, as applicable, after prior written notice to the Optionee of such conduct, (ii) an Optionee's gross negligence with respect to the performance of his or her duties as an Employee or Consultant, as applicable, after prior written notice to the Optionee of such conduct, (iii) an Optionee's theft or misappropriation of funds, properties or assets of the Corporation, (iv) an Optionee's conviction or confession of, or plea of guilty or nolo contendere to, a crime constituting a felony under the laws of the United States or any state therefor or which involves the money or property of the Corporation, (v) where an Optionee knowingly causes the Corporation to commit a violation of local, state or federal laws, (vi) an Optionee's willful refusal to comply with the policy, directives or decisions of the Corporation, provided that, if an Optionee has entered into an employment or consulting agreement with the Corporation or an Affiliate, the definition of"cause" set forth in such agreement, if any, shall be substituted for the above. 2 E. A "Change in Control" shall occur in the event that, in any transaction or series of related transactions, any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Corporation, any employee benefit plan sponsored by the Corporation or any Affiliate) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than fifty percent (50%) of the combined voting power of the Corporation's then outstanding securities. F. "Common Stock" shall mean the Corporation's common stock, $.01 par value per share. G. "Code" shall mean the Internal Revenue Code of 1986, as amended. H. "Committee" shall mean the Board of Directors or a committee appointed by the Board of Directors for purposes of administration, operation and application of the Plan. I. "Consultant" shall mean any person, including an advisor, who is engaged by the Corporation or any of its Affiliates to render services to the Corporation and is compensated for such services, and any Director whether compensated for such services or not. J. "Corporation" shall mean M.J. Gross & Company, Inc., a New York corporation doing business as Data Conversion Laboratory. K. "Director" shall mean a member of the Board of Directors. L. "Disability" shall mean the Optionee's inability to engage in any substantial gainful activity by reason of medically determinable physical or mental impairment which constitutes a permanent and total disability, as defined in Section 22(e)(3) of the Code (or any successor section thereto). M. "Disqualified Shareholder" shall mean any individual or entity whose status or characteristics are such that his, her or its ownership of shares of Common Stock would result in the termination of the Company's status as a Subchapter S Corporation, as such term is defined in the Code. 3 N. "Effective Date" shall mean the date on which the Plan is approved by the Board of Directors, subject to the approval of the shareholders of the Corporation. O. "Employee" shall mean any employee of the Corporation or an Affiliate. P. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. Q. "Executive Officer" shall mean any Employee who is an "officer" within the meaning of Rule 16a-l(f) of the Exchange Act. R. "Fair Market Value" shall mean with respect to the Common Stock (i) in the event the Common Stock is not publicly traded, the fair market value of the Common Stock, as determined by the Committee in good faith and (ii) in the event the Common Stock is publicly traded and: (a) is listed on any established stock exchange or a national market system, including, without limitation, the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the Grant Date, as reported in The Wall Street Journal or such other source as the Committee deems reliable or (b) is regularly quoted by a recognized securities dealer but selling prices are not reported, Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the Grant Date. S. "Grant Date" shall mean the date an Option is granted to an Optionee by the Committee pursuant to the Plan. T. "Incentive Stock Option" shall mean a stock option intended to satisfy the requirements of Section 422 of the Code. U. "Initial Public Offering" shall mean the issue and sale of shares of Common Stock pursuant to the first firm commitment underwritten public offering of shares of the Common Stock pursuant to a registration statement on Form S-1 (or any successor form) filed with the Securities and Exchange Commission. V. "Nonqualified Stock Option" shall mean an Option that is not an Incentive Stock Option. 4 W. "Option" shall mean an Option granted pursuant to the Plan. X. "Optionee" shall mean an Employee or Consultant who is granted an Option under the terms of this Plan. Y. "Option Agreement" shall mean an Option Agreement to be entered into between the Corporation and an Optionee, which shall set forth the terms and conditions of the Option granted to such Optionee. Z. "Parent" means a parent corporation, whether now or hereafter existing, as defined in Section 424(e) of the Code. AA. "Plan" shall mean this Data Conversion Laboratory 2001 Stock Option Plan, as hereinafter amended from time to time. BB. "Repurchase Period" shall have the meaning set forth in Section 8(A). CC. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder. DD. "Subsidiary" means a subsidiary corporation, whether now or hereafter existing, as defined in Section 424(f) of the Code. EE. "10% Holder" shall mean an Employee who, at the time an Incentive Stock Option is granted to him, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of capital stock of the Corporation or its Subsidiary (or, if applicable, its Parent). SECTION 3 SHARES AVAILABLE Subject to adjustment as provided for in Section 7 of the Plan, the maximum aggregate number of shares of Common Stock for which Options may be granted under the Plan shall not exceed 250,000 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased shares of Common Stock that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Any shares of Common Stock which are retained by the Corporation upon exercise of an Option in order to satisfy the exercise price for such Option or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. Shares repurchased by the Corporation in accordance with Section 8 of the Plan shall not be available for future grant under the Plan. 5 SECTION 4 PARTICIPATION A. Recipients of Grants. Any Employee or Consultant selected by the Committee shall become participants in the Plan, provided that a Consultant may not be granted Incentive Stock Options. B. Type of Option. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonqualified Stock Option. SECTION 5 AUTHORITY OF COMMITTEE The Plan shall be administered by, or under the direction of, the Committee. Subject to the provisions of the Plan, the Committee shall have the authority to make all determinations specified in or permitted by the Plan or deemed necessary or desirable for its administration or for the conduct of the Committee's business, including the establishment from time to time of such regulations, provisions, procedures and conditions of awards which, in its opinion, may be advisable in the administration of the Plan. All actions, interpretations and determinations of the Committee may be made in its sole discretion and shall be final, conclusive and binding on all interested parties. The authority of the Committee shall include, without limitation, the right to select which Employees and Consultants shall be granted Options and the type and number of such Options; the exercise price for such Options; the period of time over which they will become exercisable and whether they will become exercisable over such time period or only if certain performance criteria are achieved; the manner in which an Option may be exercised; and the term of any Option. All such decisions shall be reflected in the Optionee's Option Agreement. A. Procedures for Exercise of Option. The Committee shall have the authority to establish procedures for an Optionee (i) to exercise an Option by payment of cash or any other property acceptable to the Committee, (ii) to have withheld from the total number of shares of Common Stock to be acquired upon the exercise of an Option that number of shares having a Fair Market Value, which, together with such cash as shall be paid in respect of fractional shares, shall equal the option exercise price of the total number of shares of Common Stock to be acquired, (iii) to exercise all or a portion of an Option by delivering that number of shares of Common Stock already owned by such Optionee having a Fair Market Value which shall equal the Option exercise price in the aggregate for the portion exercised and, in cases where an Option is not exercised in its entirety, to permit the Optionee to deliver the shares of Common Stock thus acquired by him in payment of shares of Common Stock to be received pursuant to the exercise of additional portions of such Option, the effect of which shall be that an Optionee can in sequence utilize such newly acquired shares of Common Stock in payment of the exercise price of the entire Option, together with such cash as shall be paid in respect of fractional shares, and (iv) to engage in any other form of "cashless" exercise; and 6 B. Delegation. The Committee may delegate to an Executive Officer the authority to determine from time to time: (a) the Optionees to whom Options are to be granted; (b) the number of shares of Common Stock for which the Options are exercisable and the exercise price of such shares; (c) the designation of Options as either Incentive Stock Options or Nonqualified Stock Options; and (d) all of the other terms and conditions (which need not be identical) of the Options, provided, that (i) the authority delegated to the Executive Officer under this Section 5(B) shall not exceed that of the Committee, (ii) the Executive Officer may not be delegated authority to grant any Option to any person who is an Executive Officer or a Director at the time of the grant, (iii) the exercise price of each share of Common Stock under an Option granted under this Section 5(B) shall not be less than the Fair Market Value of such share on the Grant Date and (iv) the Executive Officer shall promptly provide a report to the Committee of each person to whom an Option has been granted under this Section 5(B) and the material terms and conditions of the Option. SECTION 6 STOCK OPTIONS A. General Provisions. (a) Subject to the terms and conditions of this Section 6 and of Section 7, the exercise price of the shares of Common Stock covered by each Option shall be no less than the Fair Market Value of such shares on the date of the grant, provided, that the exercise price of an Incentive Stock Option shall be at least 110% of the Fair Market Value as of the Grant Date if the Incentive Stock Option is being granted to a 10% Holder. Subject to the limitations set forth in the preceding sentence, the Committee shall have the discretion to grant Options with an exercise price that is less than or greater than their then Fair Market Value, which discount or premium shall be stated in the Option Agreement. The Committee shall have the right to grant options that are subject to performance criteria selected by the Committee (which need not be uniform). Any such performance options shall be subject to the terms and conditions hereof. (b) Subject to Section 7, no Optionee may be granted Options during any calendar year with respect to more than ____ shares of Common Stock. 7 B. Term of Options. Unless otherwise provided by the Committee, each Option granted under the Plan by its terms shall expire ten (10) years from the date of its grant. C. Exercise of Option After Termination of Employment. (i) In the event of an Optionee's termination of employment or status as a Consultant for any reason other than death, Disability or Cause, such Optionee may, but only within ninety (90) days after the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optione, e was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (ii) If the Optionee incurs a Disability, he or she may exercise any Options that were exercisable as of the date of such Disability for a period of six (6) months from such date; (or the expiration date of the term of such Option, if earlier). Any portion of the Option that was not exercisable on the date of Disability and any Option not exercised within the time specified herein shall terminate. (iii) If the Optionee dies while an Employee or Consultant, the Optionee's beneficiary or personal representative may exercise any portion of the Option that was exercisable on the date of death no later than six (6) months following such date. (iv) If an Optionee's service with the Corporation is terminated for Cause,, all outstanding unexercised Options granted pursuant to the Plan shall be deemed forfeited or canceled, as the case may be, as of the day preceding his termination. D. Termination as to Disqualified Shareholders. An Optionee shall not be entitled to exercise any option at any time when such Optionee is a Disqualified Shareholder. SECTION 7 ADJUSTMENT OF SHARES; CORPORATE CHANGES A. Recapitalization, Etc. In the event there is any change in the Common Stock by reason of a reorganization, recapitalization, stock conversion, stock split, stock dividend or any other increase or decrease in the number of issued shares of Common Stock without receipt of consideration by the Corporation, there shall be (i) substituted for or added to each share of Common Stock thereafter subject, or which may become subject, to any Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, or to which each such share shall be entitled, as the case may be, and the per share exercise price thereof also shall be proportionately adjusted, 8 but only to the extent such adjustment is appropriate, and (ii) an appropriate and proportionate adjustment in the maximum aggregate number of shares for which Options may be granted pursuant to Section 3 of the Plan. The conversion of any convertible securities of the Corporation shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. Any adjustment in Incentive Stock Options under this Section 7 shall be made only to the extent it does not constitute a "modification" within the meaning of Section 424(h)(3) of the Code,, and any adjustments under this Section 7 shall be made in a manner which does not adversely affect any exemptions provided pursuant to Rule 16b-3 under the Exchange Act. If the Corporation has consummated an Initial Public Offering, such adjustments or substitutions with respect to Options intended to qualify as "performance-based compensation" under Section 162(m)of the Code shall be made only to the extent that the Committee determines that such adjustments or substitutions may be made without causing the Corporation to be denied a tax deduction on account of Section 162(m) of the Code. B. Certain Corporate Events. In the event of any Approved Transaction or Change in Control, each outstanding Option under the Plan shall become exercisable in full in respect of the aggregate number of shares covered thereby, notwithstanding any contrary vesting schedule in the Option Agreement, effective upon the Change in Control or immediately prior to consummation of the Approved Transaction. In the case of an Approved Transaction, the Corporation shall provide notice of the pendency of the Approved Transaction to Each Optionee at least fifteen (15) days prior to the expected date of consummation thereof. Each Optionee shall thereupon be entitled to exercise the Option at any time prior to consummation of the Approved Transaction. Any such exercise as to any portion of the Option that will only become vested as a result of and immediately prior to the consummation of the Approved Transaction in accordance with the foregoing acceleration provision, shall be contingent on such consummation. Any exercise as to any other portion of the Option will not be contingent on such consummation unless so elected by the Optionee in a notice delivered to the Corporation simultaneously with the exercise. Upon consummation of the Approved Transaction, all Options shall expire to the extent such exercise has not occurred. Notwithstanding the foregoing, the Committee may, in its discretion, determine that any or all outstanding Options will not vest or become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Committee or the surviving or acquiring corporation, as the case may be, shall take, or make effective provision for the taking of, such action as in the opinion of the Committee is equitable and appropriate in order to substitute new options for such Options, or to assume such Options (which assumption may be effected by any means determined by the Committee, in its discretion, including, but not limited to, by a cash payment to each Optionee, in cancellation of the Options held by him or her, of such amount as the Committee determines, in its sole discretion, represents the then value of the Options) and in order to make such new or assumed Options, as nearly as practicable, equivalent to the old Options (before giving effect to any acceleration of the vesting or Exercisability thereof), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. 9 SECTION 8 REPURCHASE OF SHARES A. Right of Repurchase. (a) The Corporation shall have the right, but shall not be required, to repurchase from the Optionee all or part of(i) the shares of Common Stock that the Optionee acquires upon the exercise of an Option and (ii) any other shares of Common Stock or other securities issued or acquired with respect to the shares specified in the preceding clause (i) or this clause (ii) in connection with any stock dividend, stock split, reclassification, recapitalization, reorganization, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock, or other similar corporate event. Such right shall be exercisable at any time and from time to time during the period of six (6) months commencinF on the date of termination of the Optionee's employment or Consultant status (the "Repurchase Period"). (b) The Corporation shall repurchase from any Optionee who becomes a Disqualified Shareholder, all of (i) the Shares of Common Stock that such Optionee acquires or acquired upon exercise of an Option and (ii) any other shares of Common Stock or other securities. issued or acquired with respect to the shares specified in the preceding clause (i) or this clause (ii) in connection with any stock dividend, stock split, reclassification, recapitalization, reorganization, split-up, spin-off, combination exchange of shares, warrants or rights offering to purchase Common Stock, or other similar corporate event. Such repurchase shall occur and be effective immediately before the event that results in the Optionee becoming a Disqualified Shareholder and shall not require any notice, election or other action by the Corporation in order to be effective. B. Exercise of Repurchase Right. The Corporation's right of repurchase shall be exercised by delivery of written notice to the Optionee specifying the number of shares or other securities to be repurchased and the effective date of the repurchase, which date shall not be earlier than the date of the notice, nor later than the date of termination of the Corporation's right of repurchase. If an Optionee transfers shares or other securities that are subject to the Corporation's fight of repurchase, the shares or other securities shall remain subject to the Corporation's fight of repurchase during the Repurchase Period. C. Repurchase Price. With respect to each share or other security to be repurchased by the Corporation, the repurchase price shall be the Fair Market Value of the share or' security as of the effective date of the repurchase. The Corporation may elect to pay the amount: owed to the Optionee (or to the person or entity holding the share or other security to be repurchased) either (i) in cash, in which case the amount shall be paid, without interest, within thirty (30) days following the effective date of the repurchase or (ii) in three equal installments, with the first installment payable on the first anniversary of the effective date of the repurchase, and the remaining installments payable on the corresponding date in each of the next two years, with each installment to inelude interest on the unpaid principal computed at the prime rate published in the Wall Street Journal for the first business day of the month in which the effective date of the 10 repurchase occurs, for the period from the effective date of the repurchase or the date of the most recent installment, as the case may be, to the due date of the installment being paid. D. Termination of the Right of Repurchase. Any right of repurchase of the Corporation shall terminate upon the occurrence of a Change in Control or an Approved Transaction (other than an Approved Transaction in connection with respect to which the Committee determines, in accordance with the last sentence of Section 7(B), that Options otherwise subject to such right of repurchase will not vest or become exercisable on an accelerated basis and/or will not terminate if not exercised prior to consummation of the Approved Transaction). Any right of repurchase of the Corporation shall also terminate on the consummation of an Initial Public Offering or upon the effective date of the registration by the Corporation of any class of any equity security pursuant to Section 12 of the Exchange Act. SECTION 9 MISCELLANEOUS PROVISIONS A. Assignment or Transfer. No grant or award of any Option under the Plan or any rights or interests therein shall be assignable or transferable by an Optionee except by will or the laws of descent and distribution. During the lifetime of an Optionee, Options granted hereunder shall be exercisable only by the Optionee. B. Regulations and Other Approvals. (a) The obligation of the Corporation to sell or deliver shares of its Common Stock with respect to Options granted under the Plan shall be subject to all applicable laws,. rules and regulations, including all applicable federal, state and foreign securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. (b) Each Option is subject to the requirement that, if at any time the, Committee determines, in its sole discretion, that the listing, registration or qualification of the Common Stock issuable pursuant to the Plan is required by any securities exchange or under any state, federal or foreign law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of the Common Stock, no Options shall be granted or payment made or Common Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. 11 (c) In the event that the disposition of the Common Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act, and is not otherwise exempt from such registration, such Common Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require any individual receiving shares of Common Stock pursuant to the Plan, as a condition precedent to receipt of such shares, to represent to the Corporation in writing that the shares of Common Stock acquired by such individual are acquired for investment only and not with a view to distribution. The certificate for such shares shall include any legend that the Committee deems appropriate to reflect any restrictions on transfer. C. Withholding of Taxes. No later than the date as of which an amount first becomes includible in the gross income of an Optionee for federal income tax purposes with respect to Options granted under the Plan, the Optionee shall pay to the Corporation, or the Optionee (or his designated beneficiary) shall make arrangements satisfactory to the Corporation regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. The obligations of the Corporation under this Plan shall be conditioned on such payment or arrangements, and the Corporation shall, to the extent permitted by law, have the, right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. Shares of Common Stock may not, in any event, be withheld to satisfy tax withholding in excess of the minimum statutory withholding rates. D. Stockholders Agreement. Unless otherwise provided in the applicable Option Agreement, the Optionee shall be required, as a condition to the issuance of any shares of Common Stock that the Optionee acquires upon the exercise of the Option, to execute and deliver to the Corporation a stockholders agreement in such form as may be in use by the Corporation at the time of such exercise, or a counterpart thereof, together with, unless the Optionee is unmarried, a spousal consent in the form required thereby, unless the Optionee has previously executed and delivered such documents and they are in effect at the time the shares are to be issued. E. Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan. F. Plurals and Gender. Where appearing in the Plan, masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates a different meaning. G. Headings. The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof. H. Severability. In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein. 12 I. Cooperation of Parties. All parties of this Plan and any person claiming any interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary or desirable for carrying out this Plan or any of its provisions. J. Governing Law. All questions pertaining to the validity, construction and administration of the Plan shall be determined in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. K. Notices. Each notice relating of the Plan shall be in writing and delivered in person, by air courier or by certified mail to the proper address. All notices to the Corporation or the Committee shall be addressed to it at: M.J. Gross & Company, Inc., 184-13 Horace Harding Expressway, Fresh Meadows, New York 11365, Attn: President. All notices to Optionees, former Optionees, beneficiaries or other persons acting for or on behalf of such persons shall be addressed to such person at the last address for such person maintained on the Committee's records. L. Written Agreements. Each Option shall be evidenced, with respect to an Incentive Stock Option by a signed written Incentive Stock Option Agreement, and with respect to a Nonqualified Stock Option by a signed written Nonqualified Stock Option Agreement between the Corporation and the Optionee containing the terms and conditions of the award. M. Conflict. In the event of any conflict between the terms of this Plan and any employment agreement between the Corporation and an Optionee, the terms of such employment agreement shall control. In the event of any conflict between the terms of this PlaJa and any Option Agreement, the terms hereof shall control. SECTION 10 AMENDMENT OR TERMINATION OF PLAN The Board of Directors may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time, provided, that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement applicable to the Plan (including as necessary to prevent the Corporation from being denied a tax deduction on account of Section 162(m) of the Code), and provided further, that any such amendment, alteration, suspension, discontinuance or termination that would impair the rights of any Optionee or any holder or beneficiary of any Option theretofore granted shall not to that extent be effective without the consent of the affected Optionee, holder or beneficiary. Except as otherwise provided herein, no amendment, suspension or termination of the Plan shall alter or impair any Options previously granted under the Plan, without the consent of the holder thereof. 13 SECTION 11 EFFECTIVENESS; TERM OF PLAN The Plan is effective as of the Effective Date; provided, that the effectiveness of the Plan and the validity and exercisability of any and all Options granted pursuant to the Plan is contingent upon approval of the Plan by the shareholders of the Company in a manner intended to comply with the shareholder approval requirements of Sections 162(m) and 422(b)(i) of the Code. The expiration date of the Plan, on and after which no Options may be granted[ hereunder, shall be the day prior to the tenth anniversary of the Effective Date; provided however that the administration of the Plan shall continue in effect until all matters relating to Options previously granted have been settled. 14 Amendment of the 2001 Stock Option Plan RESOLVED, that the Corporation's 2001 Stock Option Plan (the "Plan") is hereby amended as follows: (i) The number of common shares reserved for issuance under the Plan is decreased from 336,410 to 250,000; and (ii) The Plan is amended to provide that options may be granted also to non-employee directors. To that end, the definition of "Optionee" in Section 2 of the Plan is amended as to read as follows: "Optionee" shall mean an Employee, Director or Consultant who is granted an Option under the terms of this Plan." EX-10.2 10 b318755ex_10-2.txt EMPLOYEE'S CONFIDENTIALITY AGREEMENT Exhibit 10.2 EMPLOYEE'S CONFIDENTIALITY AGREEMENT I understand and agree that the following terms are conditions of my employment at M.J. Gross & Company Inc. d/b/a Data Conversion Laboratory, its subsidiaries and/or its affiliates (the "company"): 1. DEVOTION OF TIME. During the Employment Period, I shall: (i) expend substantially all my working time for the Company; (ii) devote my best efforts, energy and skill to the services of the Company and the promotion of its interests; (iii) shall not work for other companies in related businesses without prior consent; and (iv) not take part in activities known by me to be detrimental to the best interests of the Company. 2. TRADE SECRETS. 2.1 I expressly agree and understand that the Company owns and/or controls numerous methods, products, processes, customer materials, customer lists, trade secrets and other information applicable to its business and that it may from time to time acquire, improve or produce additional methods, products, processes, customer materials, customer lists, trade secrets and other information (collectively, the "Confidential Information"). I hereby acknowledge that each element of the Confidential Information constitutes a unique and valuable asset of the Company or its customers and that certain items of the Confidential Information have been acquired from third parties upon the express condition that such items will not be disclosed other than to the Company in the ordinary course of its business. 2.2 I hereby acknowledge that disclosure of the Confidential Information to and/or use by anyone other than in the Company's ordinary course of business would result in irreparable and continuing damage to the Company and its customers. Accordingly, I agree to hold the Confidential Information in the strictest secrecy, and covenant that, during the Employment Period or any time thereafter, I will not, without the prior written consent of the Board of Directors, directly or indirectly, allow any element of the Confidential Information to be disclosed, published or used, nor permit the Confidential Information to be discussed, published or used, either by myself or any third parties, except in effecting my duties on behalf of the Company in the ordinary course of business. Notwithstanding anything to the contrary herein contained, my obligation to maintain the secrecy and confidentiality of the Confidential Information under this Section 2 shall not apply to any such Confidential information, which is in the public domain. 3. EMPLOYEE KNOWLEDGE 3.1 I hereby agree to communicate and make known to the Company all knowledge processed by me relating to any methods, developments, inventions and/or improvements, whether patented, patentable, or unpatentable, which relate to the business of the Company, acquired by me before or during the Employment period; provided however, that nothing herein shall be constructed as requiring any such communication where the method, development, invention, and/or improvement is lawfully protected from the disclosure as the trade secret of a third party or by any other lawful bar to such communication existing prior to the commencement of employment hereunder. 3.2 Any methods, developments, inventions, and/ or improvements, whether patentable or unpatentable, which I may conceive of or develop in connection with the Company's business (solely or jointly with another or others), while in its employ, shall be and remain the exclusive property of the Company to the extent permitted by law. I further agree on request to execute patent application, and any other records or memoranda requested by the Company, based on such methods, developments, inventions and/or improvements, including instruments deemed necessary by the Company for the prosecution of the patent application or the acquisition of Letters of Patent of this and any foreign country or otherwise. 3.3 I hereby agree to keep all such records in connection with my employment as the Company may, from time to time direct, and all such records shall be the sole exclusive property of the company. 4. RESTRICTIVE COVENANT 4.1 I agree that if my employment hereunder shall at any time be terminated for any reason whatsoever, I will not at any time within one (1) year after such termination, without the prior written approval of the Board of Directors, directly or indirectly, engage in any business activity anywhere in the world, competitive with the business of the Company. Furthermore, I agree that, during such one-year period, I shall not solicit, directly or indirectly, any prospective account of the company who at the time of such termination was, to my knowledge, then actively being solicited by the Company and I shall not in any manner, directly or indirectly, knowingly and purposefully affect to the Company's detriment any relationship of the Company with any customer, supplier or employee of the Company or cause any customer or supplier to refrain from entrusting additional business to the Company. In the event that any of the provision of this section shall be adjudicated to exceed the time, geographic or other limitations permitted by applicable law in any jurisdiction, then such provision shall be deemed reformed in such jurisdiction to the maximum time, geographic or other limitations permitted by applicable law. 5. INJUNCTIVE RELIEF. I hereby acknowledge and agree that, in the event I violate any provision of Sections 2, 3, or 4 hereof, the Company will be without an adequate remedy at law and, accordingly, will be entitled to enforce such restriction by temporary or permanent injunctive or mandatory relief obtained in any action or proceeding instituted in any court of competent jurisdiction without the necessity of proving damages and without prejudice to any other remedies which it may have at law or in equity. 6. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to principles of conflict of law. 7. WAIVER. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and not in any way affect or render invalid or unenforceable any other provisions of this Agreement, and this Agreement shall be carried out as if such invalid or unenforceable provision were not embodied therein. 8. ASSIGNMENT. Except as otherwise herein expressly provided, this Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, including, without limitation, any corporation or other entity into which the Company is merged or which acquires all of the outstanding shares of the Company's capital stock, or all or substantially all of the assets of the Company. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and there are no representations, warranties or commitments except as set forth herein. This Agreement supersedes all prior and contemporaneous agreements, understandings, negotiations and discussion, whether written or oral, of the parties hereto relating to the transactions contemplated by this Agreement. This Agreement may be amended only in writing executed by the parties hereto affected by such amendment. IN WITNESS WHEREOF, I execute this Agreement as of the day and year written below. By:________________________________ Date: _____________________________ EX-10.5 11 b318755ex_10-5.txt LOCK-UP AGREEMENT EXHIBIT 10.5 LOCK-UP AND STOCK DIVIDEND RETURN AGREEMENT Paulson Investment Company, Inc. 811 S.W. Naito Parkway, Suite 200 Portland, Oregon 97204 Ladies and Gentlemen: 1. The undersigned understands that you ("Paulson"), as representative of the several underwriters (the "Underwriters"), propose to enter into an underwriting agreement (the "Underwriting Agreement") with Data Conversion Laboratory, Inc. (the "Company") providing for the public offering (the "Public Offering") by the Underwriters of Units, each consisting of one share of common stock of the Company, $.01 par value (the "Common Stock"), and one redeemable warrant to purchase one share of Common Stock pursuant to a registration statement filed by the Company with the Securities and Exchange Commission (SEC Registration No. 333-__________). The Underwriting Agreement provides that if the Company's audited pre-tax income for the year ended December 31, 2002 is less tan $1.3 million it will issue a 10% stock dividend to all holders of Common Stock of record on the record date of the dividend (the "Stock Dividend"). 2. In consideration of the Underwriters' agreement to undertake the Public Offering and of other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned agrees that the undersigned will not, for a period of one (1) year after the effective date of the Public Offering (the "Effective Date"), without prior written consent of Paulson (which shall not be unreasonably withheld), sell, offer to sell, contract to sell, sell short or otherwise dispose of any shares of Common Stock, preferred stock or other capital stock of the Company or any securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock, or request the registration of the offer or sale of any of the foregoing, owned by the undersigned (or as to which the undersigned has the right to direct the disposition of), directly or indirectly, pursuant to Rule 144 under the Securities Act of 1933 ("Rule 144") or otherwise, other than pursuant to (i) transfers by the undersigned to the undersigned's ancestors, descendants, spouse or trust for the benefit of the undersigned or any such persons, so long as such persons or trusts agree in writing to be bound by this Agreement, or (ii) bona fide gifts to persons who agree in writing to be bound by this Agreement. 3. In addition, for a period of five (5) years from the Effective Date, the undersigned agrees to give Paulson prior notice if the undersigned offers to sell, sells, contracts to sell or otherwise disposes of any securities of the Company pursuant to Rule 144 or similar provisions enacted subsequent to the date of this Agreement. 4. The undersigned agrees that if the Company issues the Stock Dividend, the undersigned will immediately upon receipt of the shares of Common Stock issued as part of the Stock Dividend return the shares to the Company as a contribution to capital. 5. The undersigned hereby acknowledges that this Agreement is valid and binding notwithstanding any prior agreements relating to this matter and further agrees and consents to the entry of stop-transfer instructions with the Company's transfer agent against the transfer of shares of Common Stock held by the undersigned except in compliance with this Agreement. The undersigned also understands that the Company and the Underwriters will proceed with the Public Offering in reliance on this Agreement. Dated as of _____________, 2002 Signature: ------------------------------------ Print name: ----------------------------------- EX-23.1 12 b318755_ex23-1.txt INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT To the Board of Directors Data Conversion Laboratory, Inc. We hereby consent to the use in the Prospectus constituting part of the Registration Statement on Form SB-2 of our report dated May 8, 2002 on the financial statements of Data Conversion Laboratory, Inc. as of December 31, 2001 and 2000 which appear in such Prospectus. We also consent to the reference to our Firm under the captions "Experts" and "Selected Financial Data" in such Prospectus. GOLDSTEIN GOLUB KESSLER LLP New York, New York June 7, 2002 EX-99.1 13 b318755ex_99-1.txt DIRECTOR NOMINEE CONSENT Exhibit 99.1 DIRECTOR NOMINEE CONSENT The undersigned, being advised that she has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of her name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ Judy Gross ------------------------------- Judy Gross June 1, 2002 EX-99.2 14 b318755ex_99-2.txt DIRECTOR NOMINEE CONSENT DIRECTOR NOMINEE CONSENT The undersigned, being advised that she has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of her name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ Amy Finfer --------------------- Amy Finfer May 30, 2002 EX-99.3 15 b318755ex_99-3.txt DIRECTOR NOMINEE CONSENT DIRECTOR NOMINEE CONSENT The undersigned, being advised that he has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of his name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ Andrew Weiss ------------------------- Andrew Weiss May 30, 2002 EX-99.4 16 b318755ex_99-4.txt DIRECTOR NOMINEE CONSENT DIRECTOR NOMINEE CONSENT The undersigned, being advised that she has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of her name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ Donna Lynn ------------------------ Donna Lynn June 1, 2002 EX-99.5 17 b318755ex_99-5.txt DIRECTOR NOMINEE CONSENT Exhibit 99.5 DIRECTOR NOMINEE CONSENT The undersigned, being advised that he has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of his name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ Michael Gross ------------------------------ Michael Gross June 1, 2002 EX-99.6 18 b318755ex_99-6.txt DIRECTOR NOMINEE CONSENT Exhibit 99.6 DIRECTOR NOMINEE CONSENT The undersigned, being advised that he has been nominated as a Director-Nominee of Data Conversion Laboratory, Inc., a New York corporation (the "Company"), and is to take office upon completion of the initial public offering of the Company of 1,250,000 units, each consisting of one common share and one warrant to purchase one common share, hereby consents to the use of his name as a Director-Nominee in the Registration Statement pursuant to which such units will be offered or any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. /s/ David Skurnik ----------------------------------- David Skurnik June 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----