-----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, HvJkIED9Vb/vBjVxh5AjfTRKGlHKl2GoNAJYPCW2gAalMKTmJsvaYJZQSTTOWjBw SAYjZ8ZbR23NgaBdjjLwEQ== 0001125282-02-002253.txt : 20020722 0001125282-02-002253.hdr.sgml : 20020722 20020722172551 ACCESSION NUMBER: 0001125282-02-002253 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20020722 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA CONVERSION LABORATORY CENTRAL INDEX KEY: 0000902577 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-90090 FILM NUMBER: 02708029 BUSINESS ADDRESS: STREET 1: 184-13 HORACE HARDING EXPRESSWAY CITY: FRESH MEDOWS STATE: NY ZIP: 11365 BUSINESS PHONE: 7183578700 SB-2/A 1 b318755_sb2a.txt AMENDMENT TO REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on July 22, 2002 Registration No. 333-90090 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 2 TO 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 (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification No.) Organization)
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. |_| ---------------- 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 290,931(4) -- -- (5) Representative's warrants 125,000 -- -- --(6) 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(7)
(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) An additional 3,431 common shares over the original filing. (5) No registration fee required. (6) No registration fee required pursuant to Rule 457(g) of the Securities Act. (7) The entire filing fee was paid in connection with the initial filing on June 7, 2002. PROSPECTUS (Subject to Completion) Dated July 22, 2002 1,250,000 Units 253,431 Common Shares [graphic] DATA CONVERSION LABORATORY ---------------- This is our initial public offering. We are offering 1,250,000 units, each unit consisting of one common share and one warrant. We expect that the initial public offering price will be between $7.50 and $8.50 per unit. Each warrant will entitle its holder to purchase one common share at an exercise price equal to 150% of the unit offering price. The 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 warrants, beginning six months after the date of this prospectus, at a price of $0.25 per 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. In addition, if our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly pay a 10% stock dividend to shareholders of record as of the record date for that dividend. All of our executive officers and directors and one other shareholder have agreed in writing to return any dividend shares to which they would otherwise be entitled to us as a contribution to capital. Assuming the number of common shares actually issued and outstanding on the record date of the dividend is the same as the number of common shares actually issued and outstanding on the date of this offering, we would issue 267,131 shares of which 138,700 would be returned to us and 128,431 would remain outstanding. The common shares and the warrants will trade only as a unit for 30 days following this offering. After that date, the common shares and the warrants will trade separately. No public market currently exists for any of our securities. We applied to the Nasdaq SmallCap Market to list the units, common shares and 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. I-Bankers Securities Incorporated 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. 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, all information in this prospectus has been adjusted to reflect a 1.345641-for-1 stock split in the form of a dividend effected on May 24, 2002. Data Conversion Laboratory We provide electronic data conversion services on an out-sourced basis to organization such as large manufacturing companies, professional societies, publishers, defense contractors and the United States Department of Defense. 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. 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 a leading independent provider of data conversion services because of our competitive advantages and that we are well-positioned to capitalize on the anticipated growth of the data conversion industry because of these competitive advantages. Reputation and brand identity. We believe that we have developed a reputation as a high-quality, reliable and efficient provider of data conversion services. This belief is based on the fact that we have been in business for over 20 years, the recent growth in our revenues and margins, the fact that our clients include some of the largest and most prestigious organizations in their respective markets, our expanding relationship with our existing clients and our ability to attract new clients. 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 warrant to purchase one common share. The common shares and the warrants will trade as units for 30 days following the effective date of this prospectus. After that date, the common shares and the warrants will trade separately. Common shares to be outstanding immediately after the offering . . . 2,671,314 Warrants: Number to be outstanding after this offering . . . . . . . . . . . . . 1,250,000 Exercise terms . . . . . . . . . . The warrants are exercisable at any time after they become separately tradable. Each 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 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 warrants. However, we may only redeem the 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. Stock dividend. . . . . . . . . . . . In addition, if our audited pre-tax income for the year ending December 31, 2002 is less than $1.3 million, we will promptly pay a 10% stock dividend to shareholders. All of our executive officers and directors and one other shareholder have agreed in writing to return any dividend shares to which they would otherwise be entitled to us as a contribution to capital. Assuming the number of common shares actually issued and outstanding on the record date of the dividend is the same as the number of common shares actually issued and outstanding on the date of this offering, we would issue 267,131 common shares of which 138,700 would be returned to us and 128,431 would remain outstanding. As a result, the percentage of outstanding common shares held by these eight persons would decrease from 51.9% to 49.5%. If all of the warrants were exercised before the record date for this dividend, we would issue an additional 125,000 common shares. 4 Proposed Nasdaq SmallCap symbols. . . Units DCLXU Common shares DCLX Warrants DCLXW Risk factors. . . . . . . . . . . . . Please refer to "Risk Factors" for a description of the risk factors you should consider. Unless otherwise stated, all information contained in this prospectus assumes no exercise of: o the 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. In addition, unless otherwise stated, the information in the prospectus 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 .................................... $ (0.07) $ 0.59 $ 0.02 $ 0.16 Diluted net income (loss) per common share .................................. $ (0.07) $ 0.56 $ 0.02 $ 0.15 Weighted-average number of shares outstanding - basic ....................... 1,345,641 1,345,641 1,345,641 1,345,641 Weighted-average number of shares outstanding - diluted ..................... 1,345,641 1,431,118 1,409,704 1,430,277
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 ............ $ 0.32 $ 0.10 ---------- ---------- Pro forma diluted net income per share .......... $ 0.30 $ 0.10 ========== ========== Pro forma weighted-average number of shares - basic.......................................... 1,401,891 1,401,891 ========== ========== Pro forma weighted-average number of shares - diluted........................................ 1,487,368 1,486,527 ========== ==========
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 75,000 common shares to be issued to a nominee for 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
------------------------ 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. 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 We derive our revenue entirely from providing data conversion services, making an investment in us risky. Our only source of revenue is providing data conversion services and we expect this to be the case for the foreseeable future. As a result, our growth depends on continued and increasing demand for out-sourced data conversion services, of which there can be no assurance. For example, if the pace of technology advances slows, the demand for out-sourced data conversion services likely will drop. Alternatively, even if technology advances, content owners that have invested heavily in a particular distribution system may be reluctant or slow to adopt a new strategy that renders their existing structures obsolete. Finally, content owners may decide to execute their data conversion projects in-house rather than engage third parties. Any of these developments could adversely affect our business because it eliminates or substantially reduces our sole source of revenue. Our operating history may not be indicative of our future prospects because our business is constantly evolving in response to new products and services that periodically are introduced into the market and changing client preferences. These changes may require us to incur significant costs and expenditures that will reduce our profitability. The data conversion industry has been around in one form or another for many years. However, in the 20 years we have been in business it has changed dramatically in response to new technologies and changes in customer preferences. For example, recent significant developments that have had an impact on the data conversion industry are the development of markup languages and wireless communication devices. As a result, our operating history may not be a meaningful indicator of our future prospects. 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 these changes. 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 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 that may also contribute to fluctuations in our operating results include the timing of client projects; the 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 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 7 compensation, rent and equipment, is fixed. Consequently, a reduction in client demand for our services can adversely affect our operations and financial condition. We generate a large portion of our revenues from a small number of clients and we do not have long-term commitments from any of these clients. 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 because most of our conversion projects are large and complex. 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. 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. In 2001, 8.5% and, in the first quarter of 2002, 11% of our revenue was defense related. 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 as the demand for data conversion services increases. Remaining competitive requires that we reduce our costs and maintain our competitive advantages. The data conversion industry is highly competitive and fragmented and we expect it to remain so for the foreseeable future. Increased competition could result in price reductions and loss of market share, which could have an adverse impact on the price of our common shares. Our competitors include other independent data conversion service providers and other technology firms as well as the in-house data conversion departments of many of our existing and targeted clients. Some of our competitors have longer operating histories, larger client bases, stronger client relationships, greater brand or name recognition and greater financial, technical and marketing resources than we do. As a result, they may be in a better position to respond quickly to new or emerging technologies, address changes in client requirements, adopt more aggressive pricing policies, attract key employees and strategic partners and develop, promote and sell their products and services. Ultimately, we believe that in order to remain competitive we must continue to focus on reducing costs and further developing our competitive advantages. Particularly we must continue to develop our reputation as a leading provider of out-sourced data conversion services and increase the functionality of our proprietary data conversion software. We believe that the 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. Our data conversion software is generic and is designed to work across a wide range of complex material. However, every market is different and, in its current form, our software may not address the specific needs and requirements of a particular market. We cannot anticipate what the requirements of a new market might be until we investigate the particular market 8 and analyze it and the potential client base. Once we have identified the specific market requirements, we can develop new modules. Until that time we cannot estimate the costs of developing new software modules. 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. We believe that our future success and growth depends, in part, on our ability to successfully penetrate new markets. As part of our growth strategy, we are broadening our sales and marketing focus beyond our traditional base of customers. We estimate the cost of developing an entirely new market may be as high as $750,000. This estimate includes the cost of investigating the viability of the market and includes all other selling and marketing expenditures associated with developing the market until we begin to generate revenues from customers in that market. Absent the proceeds of this offering, it would be extremely difficult for us to develop 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. In addition, the cost of developing new markets will be treated as an expense, reducing our profitability, which could have an adverse effect on the price of our securities. As part of our growth strategy, we may pursue strategic acquisitions. Integrating an acquired business may not be successful and could be disruptive to the historical parts of our operations. Rather than develop new markets organically, we may pursue strategic acquisitions that allow us immediate access to these markets. The targets of these acquisitions may be other data conversion services 9 providers, consulting firms or marketing firms. Alternatively, we may look to hire key sales people or key marketing personnel. We may not be able to identify or complete strategic acquisitions and we cannot assure you that any acquisitions that we do complete will have the benefits that we anticipated at the outset. In addition, we cannot anticipate the cost of these acquisitions. Acquisitions involve a number of risks and challenges, including: 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. In addition, we plan to hire a chief financial officer. Our future success depends to a large extent on the continued services of our key executives, Mark Gross, Amy Finfer, David Skurnik, Michael Gross and Judy Gross. We have not entered into an employment agreement with any of these executives. In addition, we have not obtained any "key-man" life insurance policies on the lives of any of these executives. Also, we plan to hire a chief financial officer as soon as possible after this offering. Currently, Judy Gross is our acting chief financial officer. 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 or hire a chief financial officer in a timely fashion. We could be materially and adversely affected by the loss of any of these executives or our inability to hire a chief financial officer. 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. 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. We may need to raise additional capital if we experience unanticipated cash requirements, if cash flow is lower than anticipated, to take advantage of expansion or acquisition opportunities, to enhance or upgrade our software, develop new solutions, penetrate new markets or meet working capital requirements. We cannot assure you that we will be able to obtain financing on acceptable terms, if at all. Currently, all of our assets 10 are encumbered by a security interest in favor of Merrill Lynch Business Financial Services, Inc. to secure our working capital credit facility and term loan. Thus, we may not be able to incur additional debt. Alternatively, any capital raised through 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 outstanding capital stock. 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. Although our executive offices are located in Queens, New York, we are less than 12 miles from midtown Manhattan and 15 miles from downtown Manhattan. Since September 11, 2001 New York City has been identified as a likely target of terrorist activity. A major terrorist attack on New York City would have significant repercussions throughout the metropolitan New York area, disrupting communications, transportation and other essential services that are critical to the efficient operation of our business. As a result, a major terrorist attack in New York City could have a material adverse effect on 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 11 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. This does not take into account any shares issued if the overallotment option is exercised or if we are obligated to declare a 10% stock dividend. In any 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 warrants. There is currently no public market for the units, common shares or warrants. We cannot assure that an active public trading market for our common shares or 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 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 warrants and the representative's warrant as a result of this dividend. All of our executive officers and directors and one other shareholder have agreed in writing to return any dividend shares to which they would otherwise be entitled to us as a contribution to capital. As of the date of this offering, these eight persons will own an aggregate of 1,387,000 common shares and will have options to purchase 109,544 common shares. Although we will treat this dividend as a tax-free stock dividend, we have not sought a ruling from the Internal Revenue Service or an opinion of counsel to support that treatment. Counsel has advised us that the dividend may be taxable to the recipient on the theory that not all the shareholders will receive the dividend shares. If the dividend is 12 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 warrants if we do not maintain an effective registration statement covering the warrants or comply with applicable state securities laws. The warrants and the common shares underlying the warrants will be qualified for sale in approximately 25 states -- the same states in which the units are qualified for sale. However, we cannot assure that we will continue to maintain a current registration statement relating to the offer and sale of the warrants and the common shares underlying the warrants and to qualify the warrants for sale in jurisdictions in which the warrantholders reside or that an exemption from registration or qualification will be available throughout the term of the warrants. If we fail to maintain a current registration statement covering the warrants and/or fail to qualify them for sale and/or exercise under the securities laws of the state in which you reside, you may not be able to exercise or sell your warrants. This may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling the warrants. The warrants may be redeemed on short notice. Following a six-month period after the date of this prospectus, we may redeem the warrants for $.25 per 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 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 warrants. In addition, if at the time we issue the redemption notice a current prospectus does not exist or the warrants are not qualified for sale in the jurisdiction in which you live or an exemption does not exist, you may not be able to exercise the warrants. Future sales or the potential for sale of substantial number of our shares could cause the trading price of our common shares and 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 warrants are exercised and the dividend shares, 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 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 warrants; o up to 375,000 common shares underlying the representative's over- allotment option, including the shares underlying the warrants included in that option; 13 o up to 250,000 common shares underlying the representative's warrants, including the shares underlying the 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. Eight shareholders owning an aggregate of 1,387,000 common shares and options to purchase 109,544 common shares have agreed to return to us any dividend shares to which they would otherwise be entitled. 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 funds effectively, our business, results of operations and financial condition may be materially and adversely affected. We intend to distribute $450,000 to our existing shareholders. This amount represents the taxes payable by them on our taxable income for 2001 and 2002 through the date of this offering plus $150,000 of undistributed S corporation income. 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 the event we issue the dividend shares, the effective price per common share would be $7.27 and the dilution will be approximately $3.96 per share, or 54.5% of the initial offering price. 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. 14 This prospectus contains forward-looking statements. You should consider various factors that may cause actual results to differ materially from these 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 that are based, in part, on assumptions involving judgments about future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. 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. 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. You are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date on which they are made. We do not undertake to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 15 USE OF PROCEEDS Assuming an initial public offering price of $8.00 per unit and after deducting the estimated underwriting discount, a nonaccountable expense allowance of $____________, 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. The estimated offering expenses does not take into account the value of the 75,000 common shares to be issued to a nominee for Morse, Zelnick, Rose & Lander LLP, our attorneys, in connection with this offering. We expect to use these net proceeds substantially as follows:
Approximate Approximate Percentage Dollar Amount of Net Proceeds ------------- --------------- Sales and marketing expenses ................ $4,500,000 54.2% Capital expenditures ........................ 1,500,000 18.1% Repayment of debt ........................... 600,000 7.2% Final S corporation distribution ............ 450,000 5.4% Working capital and general corporate purposes................................... 1,250,000 15.1% ---------- ----- $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. Repayment of debt. This amount reflects the estimated balance due on our working capital credit facility and on our term loan on the date of this offering. At March 31, 2002 the balance due on the credit facility was $385,000 and the amount due on the term loan was $81,250. At the end of July 2002, the amount due on the credit facility was approximately $500,000. The actual amount of net proceeds used to repay indebtedness will depend on the actual balances due on those loans on the date of repayment. Final S corporation distribution. The actual amount of the final S corporation distribution to be made to our current shareholders 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 undistributed 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 are $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 16 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, cash flow from operations and amounts available to us under our $1 million working capital credit facility, 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. 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. On May 24, 2002, we recorded a stock dividend under which our shareholders recieved .345640833 common shares for each common share they owned on that date. 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 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 warrants and the representative's warrant as a result of this dividend. All of our executive officers and directors and one other shareholder have agreed in writing to return any dividend shares to which they would otherwise be entitled to us as a contribution to capital. As of the date of this offering, these eight persons will own an aggregate of 1,387,000 common shares and will have options to purchase 109,544 common shares. Assuming the number of common shares actually issued and outstanding on the record date of the dividend is the same as the number of common shares actually issued and outstanding on the date of this offering, we would issue 267,131 shares of which 138,700 would be returned to us and 128,431 would remain outstanding. As a result, the percentage of outstanding common shares held by these eight persons would decrease from 51.9% to 49.5%. If all the warrants were exercised before the record date for this dividend, we would issue an additional 125,000 shares. 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 undistributed 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. 17 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 75,000 common shares to be issued to a nominee for 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. In addition, our capitalization as adjusted with dividend takes into account the proposed 10% stock dividend to be issued in the event our audited net income for 2002 is less than $1.3 million.
March 31, 2002 ------------------------------------- As adjusted Actual As adjusted with dividend ------ ----------- ------------- (in thousands) Long-term obligations..................................................................... $ 76 $ 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, 1,345,641 issued and outstanding actual; 25,000,000 authorized, 2,671,314 shares issued and outstanding, as adjusted and 2,799,655 as adjusted with dividend....................................... 13 27 28 Additional paid-in capital................................................................ 1,392 9,229 9,228 Retained earnings......................................................................... -- -- -- ------ ------ ------ Total shareholders' equity............................................................ 1,405 9,256 9,256 ------ ------ ------ Total capitalization.................................................................. $1,481 $9,332 $9,332 ====== ====== ======
18 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 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 24, 2002; o 75,000 common shares to be issued to a nominee for 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, or 56.8%, 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 we are required to pay a 10% stock dividend to our shareholders, the new investors will be purchasing 1,375,000 common shares, representing 49.1% of the total number of common shares outstanding. In such event, our net tangible book value would be $3.31 per common share. In this case, however, the cost per share would be approximately $7.27 rather than $8.00, so the dilution per share to new investors would be $3.96 per common share, or 54.5%. If the representative exercises the over-allotment option in full, the new investors will purchase 1,437,500 common shares, without taking into account any dividend 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, or 53.6%. To the extent any options or warrants outstanding on the date of this prospectus are exercised, you will experience further dilution. 19 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, exclusive of depreciation and amortization shown separately below...................................................................... 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 .................................... $ (0.07) $ 0.59 $ 0.02 $ 0.16 ========== ========== ========== ========== Diluted net income (loss) per common share .................................. $ (0.07) $ 0.56 $ 0.02 $ 0.15 ========== ========== ========== ========== Weighted-average number of common shares outstanding -- basic ............... 1,345,641 1,345,641 1,345,641 1,345,641 ========== ========== ========== ========== Weighted-average number of common shares outstanding -- diluted ............. 1,345,641 1,431,118 1,409,704 1,430,277 ========== ========== ========== ==========
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
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We provide electronic data conversion services on an out-sourced basis. 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. We believe that the data conversion industry is growing rapidly. This belief is based on our recent growth as well as an increasing reliance on electronic publishing in many industries. 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: scientific, medical and technical, or 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. Our revenue is generated on a project-by-project basis. We do not have any long-term agreements with any clients under which they are obligated to send us a continuous stream of data conversion projects. In fact, we have no agreements with clients that provide that we are the sole provider of their data conversion needs. Nevertheless, our clients, who, in general, have significant data conversion needs, have continued to send us conversion projects. We attribute this to our ability to deliver consistent and accurate results in a timely manner. In addition, as our relationships with our clients have developed, the conversion projects have gotten larger. We currently serve four principal markets: STM publishing, corporate technical documentation, defense and educational publishing. Customers in these four markets accounted for 80.6%, 85.4% and 79.0%, respectively, of our total revenue for 2000, 2001 and the first quarter of 2002. The balance of our revenue was derived principally from libraries, professional associations and civilian governmental agencies. The table below illustrates the amount of revenue we derived from each of the four markets in the relevant periods and the percentage of total revenue represented by this amount.
2000 2001 2002 (1st Quarter) ----------------------- ----------------------- ----------------------- Amount Percentage Amount Percentage Amount Percentage ---------- ---------- ---------- ---------- ---------- ---------- STM Publishing ................................... $1,850,000 56.9% $2,021,000 41.4% $ 683,000 48.0% Corporate Technical documentation ................ 335,000 10.3 1,145,000 23.5 202,000 14.2 Defense .......................................... 265,000 8.1 417,000 8.5 156,000 11.0 Educational Publishing ........................... 174,000 5.3 584,000 12.0 83,000 5.8 ---------- ---- ---------- ---- ---------- ---- Totals .......................................... $2,624,000 80.6% $4,167,000 85.4% $1,124,000 79.0% ========== ==== ========== ==== ========== ====
21 Historically, we have derived a significant amount of revenue from a limited number of clients. In 2000, three clients -- a wholly owned subsidiary of Reed Elsevier, a wholly owned subsidiary of Wolters Kluwer and Systems Integration Group, Inc. -- accounted for 15%, 14% and 11%, respectively, of total revenue. In 2001, the Wolters Kluwer subsidiary 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, the Wolters Kluwer subsidiary accounted for 20.3% of total revenue and our four largest clients accounted for 45.6% of total revenue. Based on projects we are currently executing and those we anticipate receiving during the remainder of the year, we expect that client concentration for 2002 will approximate client concentration in 2001. Over the long-term, we anticipate that client concentration will remain fairly constant principally because we focus on large, complex conversion projects. Critical accounting policies and estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared according to accounting principles generally accepted in the United States. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to revenue recognition, allowance for doubtful accounts and software development costs. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be the most important to the portrayal of our financial condition and that require the most subjective judgment. Revenue recognition We derive revenue from performing services. Revenue is recognized as the services are performed. We recognize revenue in the period in which the service is provided as long as there are no uncertainties regarding customer acceptance, persuasive evidence that an arrangement exists, the sales price is fixed and determinable and collectibility deemed probable. 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. Our pricing model has been static since 2000. Cost of revenue Cost of revenue consists primarily of non-capitalized software development costs, amounts payable to our vendors for data entry services and compensation and benefits payable to our employees who are directly involved in delivering services. 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. Software development costs We have invested a considerable amount of capital in our proprietary conversion software. Costs incurred to develop this software 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 and costs incurred for upgrades and enhancements are expensed as incurred. Long-lived assets We identify and record impairment on long-lived assets, including capitalized software development costs, when events and circumstances indicate that the assets have been impaired. We periodically evaluate the recoverability of our long-lived assets based on expected non-discounted cash flows, and recognize impairment, if any, based on expected discounted cash flows. 22 Allowance for doubtful accounts Based on our experience over the last 24 months, we have not taken a reserve for uncollectible accounts receivables. Deferred taxes 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 base difference of capitalized software costs. 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. Income taxes We elected to be treated as an S corporation under subchapter S of the Internal Revenue Code and for purposes of the New York State franchise tax on corporations. As a result, we have not provided for federal income taxes as our income is taxed directly to our shareholders. New York State corporate income taxes are payable at reduced rates. We pay New York City corporate income taxes as well as other state and local taxes. Our S corporation status will terminate and we will pay taxes at the regular federal and state corporate tax rates immediately before this offering. Our undistributed taxable income has been retroactively reclassified as additional paid-in capital. 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. The growth in total revenue is attributable to an increase in the size and number of conversion projects. Approximately 21.0% of total revenue for the 2002 period was derived from new customers. We expect that the trend towards larger conversion projects will continue. 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. For 2002 period, the amount paid to vendors for data entry services was $335,000, or 42.4% of cost of revenue and 23.9% of total revenue. For the comparable 2001 period, the amount paid to vendors for data entry services was $263,000, or 39.5% of cost of revenue and 23.9% of total revenue. We believe that as our projects get 23 larger and as the functionality of our data conversion software increases, payments for data entry services will constitute a greater portion of our cost of revenue. In addition, as our relationships with these vendors develop, we are shifting a greater portion of the manual labor functions to them. As a result, the amounts paid for data entry services have grown and will continue to grow. Non-capitalized software development costs for the 2002 and 2001 periods were $200,161 and $185,736, respectively. 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. We believe that the increase in gross margin is attributable to the benefits of an automated conversion process. As our software is upgraded, a greater portion of the conversion project is accomplished electronically. In addition, as projects get larger, which has been the trend lately, we become more efficient because of economies of scale. The continued growth in gross margin assumes that we can maintain our current pricing structure. In the event increased competition results in reductions in our pricing model, our gross margin will decrease. At this time, we do not sense any pressure to reduce prices. 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 and entertainment 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, primarily because of a bad debt expense of $78,000, which arose in the first quarter of 2000 and which we wrote-off in the 2001 period. This was partially offset by increases in compensation and benefits payable to office and research and development personnel of $27,000 and rent of $8,000 over 2001 period levels. In addition, insurance costs decreased by $3,000 in the 2002 period compared to the 2001 period. 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. In the 2002 period, capitalized software development costs were $89,000 compared to $49,714 in the comparable 2001 period. 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. The growth in total revenue is attributable to an increase in the size and number of conversion projects. Approximately 29.0% of total revenue for 2001 was derived from new customers. 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. For 2001, the amount paid to vendors for data entry services was $1.1 million, or 40.2% of cost of revenue and 22.9% of total revenue. For 2000, the amount paid to vendors for data entry services was $592,000, or 28.0% of cost of revenue and 18.2% of total revenue. The greater portion of cost of revenue attributable to payments for data entry services reflects the increase functionality of 24 our software and the fact that we have shifted virtually all of the data entry functions to outside vendors. Non-capitalized software development costs for 2001 and 2000 were $487,409 and $550,191, respectively. 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 in 2001 is due, in part, to 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. It also reflects the increasing functionality of our software and larger conversion projects that we are executing. 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. Selling expenses for 2001 was $455,000 compared to $552,000 in 2000. Most of the additional selling expenses in 2000 was attributable to consultants' fees and other expenses in the amount of $140,000, relating to our efforts to develop new markets, specifically defense and educational publishing. General and administrative expenses were slightly higher in 2000 than in 2001 principally because of legal fees relating to establishing our stock option plan. 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 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. At March 31, 2002 $190,000 was available under the line of credit. The credit line expires April 30, 2003. In July 2002, the line of credit was increased to $1,000,000. The new interest rate will be one-month-LIBOR plus 3.4%. Based on the July 16, 2002 one-month LIBOR, the interest rate on the credit line is currently 5.2375%. In addition, the revised credit facility now provides that the balance on the line of credit must be no more than $500,000 for at least one consecutive 20- day period within one year and that our net tangible worth must be at least $1,000,000 at the end of 2001 and $1,500,000 at the end of 2002. 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. 25 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 expect that our operating expenses and capital expenditures will increase in future periods as we continue to enhance and improve our proprietary conversion software and as we expand our presence in existing markets and develop new markets. The extent to which we can finance these activities will depend on cash generated from operations and our other sources of capital, including the proceeds of this offering. Cash flow from operations may be adversely affected if the demand for our services decreases as a result of competition, changes in technology or customer preferences or defects in our proprietary conversion software. 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. 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. 26 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. 27 BUSINESS We provide electronic data conversion services on an out-sourced basis. 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 Wolters Kluwer, Reed Elsevier, General Electric, Rolls Royce, Bombardier, Schlumberger and/or their respective subsidiaries, as well as 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. 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, a market that we currently serve, 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. 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 28 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 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., 29 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 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 30 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 out-sourcing 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 the large-scale, complex conversion projects that are our specialty. 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. The DCL Software We have developed proprietary conversion software that we use in all of our conversion projects. This software 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. We do not sell or license our software. 31 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. In order to facilitate the data entry portion of a conversion process, we provide our vendors, on a project-by-project basis, with a limited use compiled version of our software designed specifically for the task they are to perform. We believe this protects the proprietary aspects of our data conversion software while yielding the optimal results for our clients. Since we do not have any contractual obligations to any of our vendors, we are free to choose the vendor that is most suited to a 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 the automotive industry and heavy manufacturing industries. Our clients include affiliates of the 32 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. In 2000, each of a wholly owned subsidiary of Reed Elsevier, a wholly owned subsidiary of Wolters Kluwer and Systems Integration Group accounted for more than 10% of our revenue. In 2001 and the first quarter of 2002, the Wolters Kluwer subsidiary was the only client that accounted for more than 10% of our revenue. 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. This belief is based on the fact that we have been in business for over 20 years, our recent growth, the fact that our clients include some of the largest and most prestigious organizations in their respective markets, our expanding relationship with our clients and our ability to complete and deliver large, complex conversion projects in a timely and efficient manner. 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. 33 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. 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. We attract viewers to our Web site through our newsletter and other company materials and by making sure we are listed properly on all the major search engines. 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. 34 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. 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. Our competitors include other data conversion services providers, in-house data conversion departments of large corporations as well as Internet professional services firms and consultants and systems integrators. Some of our competitors are larger than we are and have significantly greater financial and human resources. In the STM publishing market, our main competitors include Innodata Corporation, SPI Technologies, Inc. Techbooks and Apex Data Services, Inc. In addition to providing data conversion services, Techbooks is also compositor, meaning they produce a printed book. In some instances this may give them a competitive advantage. Innodata, SPI and Apex are all offshore vendors that rely large labor pools for data entry. SPI and Apex are focused on the library market. In the corporate technical documentation market, our main competitors include AMCon, LLC, Jouve, SA, Thomas Technology Solutions, Inc. and Liquent, Inc. Based on quality of product, we consider AMCon our principal rival in this market even though it is smaller than we are and a relatively new entrant. Jouve's strength is in the aviation industry but it is stronger in foreign markets than it is in the United States. Thomas Technology is basically a systems integrator that provides data conversion services as well. Liquent is a small company that competes mainly on price. They are focused primarily on the medical device industry. In the defense market, our main competitors include Docucon Incorporated, HEBCO, Inc., TruLogic Inc. and Pentecom, LLC. Up until a few years ago Docucon was our main rival; today it is HEBCO, which is competitive on both price and quality. TruLogic and Pentecom are smaller companies. In the educational publishing market, our principal competitor is Texterity, Inc. Texterity's current focus is on ebooks but we expect that they will soon focus on educational textbooks as well. The most significant competitive factors are price, quality of product, reliability, scope and scale, and technical competence for complex conversion projects. While we are not the least expensive vendor, 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 35 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 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. 36 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. 37 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 has been our president and chief executive officer since founding the company in 1981. 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 has served as vice president-finance and administration since 2000. Before that she served the company in an untitled capacity. She is married to Mark Gross. Ms. 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 for seven years, 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, has been our chief technology officer since 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 as our director of sales and marketing. In January 2002 he was appointed to his current position. 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 since 1990 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. 38 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. 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. 39 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 2001 year-end option values in the second table are based on an assumed value of $8.00 per common share. The per share exercise price of all options was equal to the estimated fair market value of a share of common stock on the date of grant. No options granted to any named executives have been exercised. Option Grants in Fiscal Year Ended December 31, 2001
Number of Securities Percent of Total Underlying Options Granted to Exercise Price Expiration Name Options Employees in Fiscal Year ($/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 ....................................................... 79,359 -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. 40 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. All of the options have an exercise price of $2.60 per share. Options covering 129,584 shares have a ten-year term and vest ratably in four equal annual installments beginning January 2, 2002. Options covering 20,185 common shares have a ten-year term and vest as follows: 6,055, vested on the date of grant and the balance, 14,310, vest in three equal annual installments beginning on January 2, 2002. The remaining 639 options vested immediately on the date of grant and expire on August 1, 2007. 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 January 2, 2003. 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 August 1, 2007. 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. 41 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 material transactions with any officer, director or 5% shareholder must be approved by the audit committee and our independent directors who do not have an interest in the transaction and who have access, at our expense, to our independent legal counsel. All such transactions will be on terms no less favorable to us than those generally available from an unaffiliated third party. 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 ----------------------------------------------------- Common Shares After Offering Name and Address of Beneficial Owner (1) Beneficially Owned(2) Before Offering(3) After Offering With Dividend ---------------------------------------- --------------------- ------------------ -------------- -------------- Mark Gross ....................................... 1,232,910(4) 91.6% 46.2% 44.0% Judy Gross ....................................... 1,232,910(4) 91.6% 46.2% 44.0% Amy Finfer ....................................... 79,090 5.9% 3.0% 2.8% Michael Gross .................................... 79,359(5) 5.6% 2.9% 2.8% 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% 48.6%
- --------------- * 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. 42 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. 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. If we are required to declare the 10% dividend, we will issue 267,131 common shares, assuming the number of issued and outstanding on the recored date for the dividend is the number of common shares outstanding on the date of this offering. Of these shares, 137,800 will be returned to us. We will issue up to an additional 125,000 common shares if the warrants have been exercised. As of the date of this prospectus, we will 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 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 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. We will not offer preferred shares to any person who is an officer, director or a 5% percent shareholder except on the same terms as such preferred shares are offered to all other existing or new shareholders. 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. 43 Warrants General. The warrants issued in this offering may be exercised at any time beginning 30 days after this offering and ending on _____________ ___, 2007. Each 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 warrantholder will not be deemed a holder of the underlying common share for any purpose until the warrant is exercised. Redemption. Beginning six months after the effective date of this offering, we will have the right to redeem the warrants at a price of $0.25 per warrant, after providing 30 days' prior written notice to the 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 warrantholders at their last known addresses appearing on the registration records maintained by the transfer agent for our warrants. No other form of notice or publication or otherwise will be required. If we call the warrants for redemption, the warrantholders will then have to decide whether to sell the warrants, exercise the warrants before the close of business on the business day preceding the specified redemption date or hold them for redemption. If the warrants are not covered by a current registration statement or are not qualified for sale under the laws of the state in which you reside, you may not be able to exercise your warrants. Exercise. The warrantholders may exercise the warrants only if an appropriate registration statement is then in effect with the SEC and if the common shares underlying the warrants are qualified for sale under the securities laws of the state in which the holder resides. To exercise a warrant, the holder must deliver to our transfer agent the 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 warrants being exercised. Fractional shares of common stock will not be issued upon exercise of our redeemable warrants. Adjustments of exercise price. The exercise price of the 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 warrant or, if we elect, an adjustment of the number of 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. 44 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. 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 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 warrants will be Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004. 45 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 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, including any shares issued in connection with the dividend payable in the event our audited net income for 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 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. 46 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. 47 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 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 warrants and the representative's warrant as a result of this dividend. All of our executive officers and directors and one other shareholder have agreed in writing to return any dividend shares to which they would otherwise be entitled to us as a contribution to capital. As of the date of this offering, these eight persons will own an aggregate of 1,387,000 common shares and will have options to purchase 109,544 common shares. Assuming the number of common shares actually issued and outstanding on the record date of the dividend is the same as the number of common shares actually issued and outstanding on the date of this offering, we would issue 267,131 common shares, of which 138,700 would be returned to us. If all the warrants were exercised before the record date for this dividend, we would issue an additional 125,000 common shares. 48 We will treat the dividend as a tax-free stock dividend under section 305 of the Code. However, we have not requested a ruling from the Internal Revenue Service or obtained an opinion of counsel that the dividend is not taxable. In fact, the Internal Revenue Service could take the position that the dividend is taxable because it is "disproportionate" among the shareholders since some shareholders have agreed to return any dividend shares they may receive to us. 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. 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 is 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 30% unless applicable certification requirements are met. 49 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. 50 UNDERWRITING Paulson Investment Company, Inc. is acting as the representative of the underwriters of this offering. We and the underwriters 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. ............................ I-Bankers Securities Incorporated ............................ --------- 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 the representative 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. The representative 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 51 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 52 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. Expenses The following table sets forth the expenses, other than the underwriting discount and nonaccountable expense allowance described above, that we will pay in connection with this offering. Other than the SEC registration fee, the NASD filing fee and the Nasdaq SmallCap listing fee, the amounts below are estimated.
SEC registration fee ................................................ $ 3,074 NASD fee ............................................................ 3,842 Nasdaq Smallcap Market listing fee .................................. 19,500 Printing expenses ................................................... 110,000 Accounting fees and expenses ........................................ 125,000 Legal fees and expenses ............................................. 250,000 Blue sky filing fees and related attorney fees and expenses ......... 60,000 Transfer agent and registrar fees and expenses ...................... 1,000 "Roadshow" expenses and related consultant fees ..................... 75,000 Miscellaneous ....................................................... 2,584 -------- Total ............................................................ $650,000 ========
Legal fees and expenses do not include the value of 75,000 common shares to be issued to a nominee for Morse, Zelnick, Rose and Lander, LLP, counsel to the company, in connection with this offering. Determination of offering price Before this offering, there has been no public market for the units and the common stock and warrants contained in the units. Accordingly, the initial public offering price of the units offered by this prospectus and the exercise price of the 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 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 warrants contained in the units, can be resold at or above the initial public offering price. 53 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. 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 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. 54 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, except for the first three paragraphs of Note 12, as to which the date is May 24, 2002, and the last paragraph of Note 12, as to which the date is July 19, 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 40,837 193,837 ---------- ---------- ---------- Total current liabilities.......................................................... 1,050,760 836,754 1,439,754 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 1,515,562 ---------- ---------- ---------- Commitments Shareholders' Equity: Common stock--.01 par value; authorized 12,000,000 shares; issued and outstanding 1,345,641 shares.................................................... 13,456 13,456 13,456 Additional paid-in capital........................................................... 1,176,752 1,391,255 788,255 Retained earnings.................................................................... -- -- -- ---------- ---------- ---------- Shareholders' equity............................................................... 1,190,208 1,404,711 801,711 ---------- ---------- ---------- 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, exclusive of depreciation and amortization shown separately below........................................................... 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 .................................... $ (0.07) $ 0.59 $ 0.02 $ 0.16 ========== ========== ========== ========== Diluted net income (loss) per common share .................................. $ (0.07) $ 0.56 $ 0.02 $ 0.15 ========== ========== ========== ========== Weighted-average number of shares outstanding--basic ........................ 1,345,641 1,345,641 1,345,641 1,345,641 ========== ========== ========== ========== Weighted-average number of shares outstanding--diluted ...................... 1,345,641 1,431,118 1,409,704 1,430,277 ========== ========== ========== ========== 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 ................................. $ 0.32 $ 0.10 ========== ========== Pro forma diluted net income per common share ............................... $ 0.30 $ 0.10 ========== ========== Weighted-average number of shares outstanding--basic ........................ 1,401,891 1,401,891 ========== ========== Weighted-average number of shares outstanding--diluted ...................... 1,487,368 1,486,527 ========== ==========
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..................................... 1,345,641 $13,456 $ 41,544 $ 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................................... 1,345,641 $13,456 $ 422,526 $ -- $ 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................................... 1,345,641 $13,456 $1,176,752 $ -- $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...................................... 1,345,641 $13,456 $1,391,255 $ -- $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. In accordance with Staff Accounting Bulletin ("SAB") 101, revenue is recognized in the period in which the service is provided as long as there are no uncertainties regarding customer acceptance, persuasive evidence that an arrangement exists, the sales price is fixed and determinable and collectibility is deemed probable. If uncertainties exist, revenue is recognized when these uncertainties are resolved. 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 and costs incurred for upgrades and enhancement 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 85,477 were used in the calculation of diluted earnings per common share for the year ended December 31, 2001. Incremental shares of 84,636 and 64,063 were used in the calculation of diluted earnings per common share for the quarters ended March 31, 2002 and 2001, respectively. Options to purchase 78,720 shares of common stock at $.42 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 F-7 DATA CONVERSION LABORATORY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 1. Organization, Principal Business Activity and Summary of Significant Accounting Policies: -- (Continued) 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. 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, and an adjustment to deferred taxes to reflect deferred tax liabilities at C Corporation rates. 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, which is reflected in the Company's pro forma balance sheet as of March 31, 2002. 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 income 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 78,720 shares of the Company's common stock at an exercise price of $.42 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 140,619 common shares at an exercise price of $2.60 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 639 shares of the Company's common stock at an exercise price of $2.60 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 .............................................. 78,720 $0.42 78,720 $0.42 Granted ....................................................................... 150,678 $2.60 Canceled ...................................................................... (9,419) $2.60 ------ ----- ------- ----- Outstanding at end of year .................................................... 78,720 $0.42 219,979 $1.82 ====== ===== ======= =====
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 -------------- ----------- ----------- ---- $0.42............................................................................ 78,720 78,720 9 years $2.60............................................................................ 141,259 639 9 years ------- ------ ------- $1.82............................................................................ 219,979 79,359 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 ............ $ (0.07) $ .59 ======== ======== Basic earnings (loss) per share--pro forma .............. $ (0.07) $ .57 ======== ======== Diluted earnings (loss) per share--as reported .......... $ (0.07) $ .56 ======== ======== Diluted earnings (loss) per share--pro forma ............ $ (0.07) $ .53 ======== ========
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. On May 24, 2002, the Company recorded a stock dividend pursuant to which the existing shareholders of the Company received .345640833 common shares for each common share outstanding. The financial statements 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. In July 2002 an officer of the Company who owns options covering 79,359 shares agreed that, upon consummation of the IPO, his options would expire on August 1, 2007, rather than January 1, 2011. 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 ......................................................... 16 Dividend Policy ......................................................... 17 S Corporation Termination ............................................... 17 Capitalization .......................................................... 18 Dilution ................................................................ 19 Selected Financial Data ................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 21 Business ................................................................ 28 Management .............................................................. 38 Certain Transactions .................................................... 42 Principal Shareholders .................................................. 42 Description of Securities ............................................... 43 Shares Eligible for Future Sale ......................................... 46 United States Income Tax Consequences ................................... 48 Underwriting ............................................................ 51 Legal Matters ........................................................... 54 Experts ................................................................. 54 Where You Can Find More Information....................................................... 54 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 250,000 Common Shares [graphic] DATA CONVERSION LABORATORY -------------------- PROSPECTUS -------------------- Paulson Investment Company, Inc. I-Bankers Securities Incorporated , 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. II-3 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, the NASD filing fees and the Nasdaq Small Cap Market listing fee, 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. *** Estimated. Does not include the value of 75,000 common shares to be issued to a nominee for Morse, Zelnick, Rose & Lander LLP, counsel to the Company, in connection with this offering. + Approximately $20,000 of filing fees and $40,000 of related attorney fees and expenses. 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 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)*
- --------------- * Previously filed II-4 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. (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 July 22, 2002. DATA CONVERSION LABORATORY, INC. By: /s/ MARK GROSS ----------------------------------- Mark Gross President 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 July 22, 2002.
Signature Title(s) --------- -------- /s/ MARK GROSS President, Chief Executive Officer and Director ----------------------------------------------- Mark Gross /s/ JUDY GROSS Principal Accounting Officer and Acting Chief Financial Officer ----------------------------------------------- Judy Gross
II-6 EX-4.1 3 b318755ex4_1.txt STOCK CERTIFICATE EXHIBIT 4.1 NUMBER [LOGO] DATA SHARES CONVERSION LABORATORY, INC. CS SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 237616 10 7 INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK THIS CERTIFIES THAT is the record holder of FULLY PAID AND NONASSESSABLE COMMON SHARES, $.01 PAR VALUE, OF DATA CONVERSION LABORATORY, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ Judy Gross /s/ Mark Gross [SEAL] SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE DATA CONVERSION LABORATORY, INC. A statement of the designation, relative rights, preferences and limitations of the shares of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights as established, from time to time, by the Restated Certificate of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class or series and the designations thereof, may be obtained by any shareholder of the Corporation upon written request and without charge from the Secretary of the Corporation at the principal office of the Corporation. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common COM PROP - as community property UNIF GIFT MIN ACT- ____________ Custodian ___________ (Cust) (Minor) under Uniform Gifts to Minors Act ________________________ (State) UNIF TRF MIN ACT- _____________ Custodian (until age__________) (Cust) _____________ under Uniform Transfers (Minor) to Minors Act__________________________________ (State) Additional abbreviations may also be used though not in the above list. For value received, ____________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------- ------------------------------------------- - ---------------------------------- ------------------------------------------- - -------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE - -------------------------------------------------------------------------------- Common Shares represented by the within certificate, and do hereby irrevocably constitute and appoint __________________________ Attorney, to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. Dated ___________________ , ______ X ______________________________ X ______________________________ Notice: The signature(s) to this assignment must correspond with the name(s) written upon the face of this certificate in every particular, without alteration or enlargement or any change whatever. Signature(s) Guaranteed By ________________________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-4.2 4 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 200% 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-4.3 5 b318755ex_4-3.txt EXHIBIT 4.3 UNIT CERTIFICATE _________Units DATA CONVERSION LABORATORY, INC. ORGANIZED UNDER THE LAWS OF THE STATE OF NEW YORK EACH UNIT CONSISTING OF ONE COMMON SHARE, $.01 PAR VALUE, AND ONE COMMON SHARE PURCHASE WARRANT CUSIP No. 237616206 THIS CERTIFIES THAT or registered assigns (the "Registered Holder") is the owner of the number of Units specified above, each of which consists of one common share, $.01 par value, of Data Conversion Laboratory, Inc. (the "Common Shares") and one Common Share Purchase Warrant to purchase one Common Share (the "Warrant"). On or prior to the Separation Time (as defined herein), the securities evidenced by this certificate cannot be traded separately. Each Unit will automatically separate into one Common Share and one Warrant as of the close of business on ______________________, 2002 [thirty days after the consummation of the initial public offering of Units] (the "Separation Time"). The Common Shares and Warrants comprising the Units shall be separately tradeable commencing on the first day after the Separation Time on which The Nasdaq SmallCap Market is open for trading. The Warrants comprising part of the Units are issued under and pursuant to a certain Warrant Agreement dated as of ______________, 2002 (the "Warrant Agreement"), between the Company and Continental Stock Transfer & Trust Company, as Transfer Agent (the "Transfer Agent"), and are subject to the terms and provisions contained therein and on the face of the certificates covered thereby, to all of which terms and provisions the holder of this Unit Certificate consents by acceptance hereof. The Warrant Agreement provides for adjustment in the number of Common Shares to be delivered upon the exercise of the Warrant evidenced hereby and to the exercise price of such Warrant in certain events therein set forth. Subject to the foregoing, the number of Warrants and the number of Common Shares comprising the Units are equal. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Transfer Agent and Registrar or may be obtained upon written request addressed to Data Conversion Laboratory, Inc. at 184-13 Horace Harding Expressway, Fair Meadows, New York 11365, Attention: Chief Financial Officer. This Unit Certificate is not valid unless countersigned by the Transfer Agent and Registrar of the Company. IN WITNESS WHEREOF, Data Conversion Laboratory, Inc. has caused this Unit Certificate to be duly executed manually or in facsimile by two of its officers thereunto duly authorized. Dated: DATA CONVERSION LABORATORY, INC. -------------------------------- By: ------------------------------ President Attest: -------------------------------- Secretary Countersigned Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004 By: -------------------------------- Authorized Signature DATA CONVERSION LABORATORY, INC. The Registered Holder hereby is entitled, at any time, to exchange the Units represented by this Unit Certificate for Common Share Certificate(s) representing one Common Share, for each Unit represented by this Unit Certificate and one Warrant Certificate representing one Warrant, for each unit represented by this Unit Certificate, upon surrender of this Unit Certificate to the Transfer Agent and Registrar together with any documentation required by such agent. REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FACE HEREOF, AND THE PROVISIONS OF SUCH WARRANT AGREEMENT SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FACE OF THIS CERTIFICATE. COPIES OF THE WARRANT AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE TRANSFER AGENT AND REGISTRAR, CONTINENTAL STOCK TRANSFER & TRUST COMPANY. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM as tenants in common TEN ENT as tenants by the entireties JT TEN as joint tenants with rights of survivorship and not as tenants in common COM PROP as community property UNIF GIFT MIN ACT Custodian ---------------------- --------------------- (Cust) (minor) under Uniform Gifts to Minors Act ------------------------------------------ (State) UNIF TRF MIN ACT Custodian ---------------------- --------------------- (Cust) (minor) under Uniform Gifts to Minors Act 3 ------------------------------------------ (State) 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) Units evidenced by the within Unit Certificate, and irrevocably constitutes and appoints ______________________________________________________________________ attorney to transfer this Unit 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.) Signatures Guaranteed: __________________________________ The signatures should be guaranteed by an eligible institution (banks, stockbrokers, savings and loan association and credit unions with membership in an approved signature medallion program), pursuant to S.E.C. Rule 17Ad-15. EX-4.4 6 b318755ex4_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 Share" 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 Common Share, or, in each case, to any securities obtainable in addition to or in lieu of such Unit Warrant or Common Share 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) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. Page 1 - Purchase Warrant (k) "Registration Statement" means the Company's registration statement (File No. 333-90090), as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "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. (n) "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 Common Share and one Unit Warrant, each Unit Warrant to purchase one Common Share on the terms and conditions described in the Registration Statement. (o) "Unit Warrant" means a Common Share purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (r) "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. (s) "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 Common Shares of the Company are divided into a greater number of shares or a dividend in stock is paid on the Common Shares, the number of Common Shares for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding Common Shares are combined into a smaller number of Common Shares, the number of Common Shares 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 (other than changes in par value), 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 Common Shares 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 Common Shares, 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 Common Shares 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 Shares in the over-the-counter market or the last sale price of the Common Shares 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 Shares 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 Shares 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 tan $1.3 million, it will issue a 10% stock dividend to all holders of Common Shares 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 Common Shares, 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 Warrantholder 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. Page 4 - Purchase Warrant (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. (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 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) except to the extent it was prejudiced by such failure to notify. (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. Page 6 - Purchase Warrant 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 who participated in the initial public offering of the Company's securities, 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. 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 Common Share 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 Common Shares 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. Page 7 - Purchase Warrant (c) For purposes of this Section 10, the "fair market value" of a Common Share or Unit Warrant as of a particular date shall be the mean between the bid and asked price of the Common Shares 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 Shares or Unit Warrant, as the case may be, on the Nasdaq Stock Market or a national exchange. 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: --------------------------------------------------------- POR1 #147027 v1 Page 9 - Purchase Warrant EX-10.3 7 b318755ex10_3.txt WGMA LINE OF CREDIT INCREASE EXHIBIT 10.3 Merrill Lynch NO. 862-07N67 - -------------------------------------------------------------------------------- WCMA* NOTE, LOAN AND SECURITY AGREEMENT WCMA NOTE, LOAN AND SECURITY AGREEMENT ("Loan Agreement") dated as of July 5, 1995, between M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation organized and existing under the laws of the State of New York having its principal office at 184-13 Horace Harding Expressway, Fresh Meadows, NY 11365 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 33 West Monroe Street, Chicago, IL 80603 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO. 862-07N67 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed to the WCMA Program described In the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof, In conjunction therewith and as part of the WCMA Program, Customer has requested that MLBFS provide, and subject to the terms and conditions herein set forth MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA Line of Credit"). Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: 1. DEFINITIONS (a) Specific Terms. In addition to terms defined elsewhere. In this Loan Agreement, when used herein the following terms shall have the following meanings; (i) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (ii) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA Line of Credit to be fully activated under MLBFS' computer system as part of the WCMA Program. (iii) "Additional Agreements" shad mean all agreements, Instruments, documents and opinions other than this Loan Agreement which are contemplated hereby or otherwise reasonably required by MLBFS, and relate to this Loan Agreement or evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of security interests upon the Collateral or any other collateral for the Obligations. (iv) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (v) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General intangibles, Deposit Accounts, Documents and instruments of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 9 (b) hereof. (vi) "Commitment Expiration Date" shall mean August 5,1995. (vii) "General Funding Conditions" shall mean each of the following conditions to any WCMA Loan by MLBFS hereunder, (A) no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing or would result from the making of any WCMA Loan hereunder by MLBFS; (B) there shall not have occurred any material adverse change In the business or financial condition of Customer or any Guarantor; (C) all representations and warranties of Customer or any Guarantor herein or in any Additional Agreements shall then be true and correct in all material respects; (D) no other event shall then have occurred and be continuing which shall have reasonably caused MLBFS to in good faith believe that the prospect of payment or performance) by Customer or any Guarantor has been materially impaired; (E) MLBFS shall have received this Loan Agreement and all Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (F) MLBFB shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS1 liens and security interests thereon, as wall as the ownership of and the perfection and priority of MLBFS' liens and security Interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (G) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (H) arty additional conditions specified in an Approval Letter or Commitment Letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (viii) "Guarantor" shall mean a person or entity who has either guaranteed or provided collateral for any or all of the Obligations. (ix) "Interest Rate" shall mean a fluctuating per annum rate of interest equal to the sum of 1.0% and the Prime Rate. "Prime Rate" shall mean, as of the date of any determination, the interest rate then most recently published in the "Money Rates" section of The Wall Street Journal as the Prime Rate (or if more than one rate Is published as the Prime Rate, then the highest of such rates). The Interest Rate will change as of the date of publication in The Wall Street Journal of a Prime Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fall or cease to publish the Prime Rate. MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (x) "Line Fee" shall mean a fee of $1,500.00 due to MLBFS in connection with the WCMA Line of Credit for the period prior to the current Maturity Date. (xi) "Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (xii) "Maturity Date" shall mean July 31, 1996, or such later date as may be consented to in writing by MLBFS. (xiii) "Maximum WCMA Line of Credit" shall mean an amount equal to $300.000.00. (xiv) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement. (xv) "Permitted Liens" shall mean (A) liens for current taxes not delinquent, other liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other sums arising In the ordinary course of business being contested in good faith by appropriate proceedings; (B) liens in favor of MLBFS; (C) liens which will be discharged with the proceeds of the initial WCMA Loan; and (D) any other liens expressly permitted in writing by MLBFS. (xvi) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as Account NO. 862-07N67. (xvii) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan Agreement. (b) Other Terms. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined In the Uniform commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meaning set forth In the WCMA Agreement. 2. WCMA PROMISSORY NOTE FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in this Loan Agreement or in such other manner and at such place as MLBFS may hereafter designate in writing, the following: (a) on the Maturity Date, the aggregate unpaid principal amount of all WCMA Loans (the "WCMA Loan Balance"); (b) interest at the Interest Rate on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full; and (o) on demand, all other sums payable pursuant to this Loan Agreement, including, but not limited to, the Line Fee and any late charges. Except as otherwise expressly set forth herein, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this WCMA Promissory Note and this Loan Agreement. 3. WCMA LOANS (a) Activation Date. Provided that: (i) the Commitment Expiration Date shall not then have occurred, and (ii) Customer shall have subscribed to the WCMA Program and its subscription to the WCMA Program snail then be in effect, the Activation Date shall occur on or promptly after the date, following the acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed evidence of the satisfaction of any of the conditions herein set forth, or a waiver of any of the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out of and charge to Customer's WCMA Account on the Activation Date all amounts necessary to fully pay off any bank or other financial institution having a lien upon any of the Collateral other than a Permitted Lien. (b) WCMA Loans. Subject to the terms and conditions hereof, during the period from and after the Activation Date to the Maturity Date: (i) MLBFS will make WCMA Loans to Customer in such amounts as Customer may from time to time request in accordance with the terms hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any time without premium or penalty, and request a re-borrowing of amounts repaid on a revolving basis. Customer may request WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result In an overdraft, shall be deemed a request by Customer for a WCMA Loan. (c) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: 0) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) an event shall have occurred and is continuing which shall have caused any of the General Funding Conditions to not then tie met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Event of Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (d) Force Majeure. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLBFS or any of their affiliates in connection with the WCMA Line of Credit or this Loan Agreement. (e) Interest. The WCMA Loan Balance shall bear interest at the Interest Rate. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Notwithstanding any other provision in this Loan Agreement or any Additional Agreements to the contrary, in no event shall the Interest Rate exceed the highest rate permissible under any applicable law. in the event that any court having jurisdiction determines that MLBFS has received excess interest hereunder, MLBFS will promptly refund such excess interest to Customer, without charge or penalty. Except as otherwise provided herein, accrued and unpaid Interest on the WCMA Loan Balance shall be payable monthly on the last Business Day of each calendar month, commencing with the last Business Day of the calendar month in which the Activation Date shall occur. Customer hereby irrevocably authorizes and directs MLPF&S to pay MLBFS such accrued interest from any available free credit balances In the WCMA Account and if such available free credit balances are insufficient to satisfy any interest payment due, to liquidate any investments in the Money Accounts (other than any investments constituting any Minimum Money Accounts Balance) in an amount up to the balance of such accrued Interest, and pay to MLBFS the available proceeds on account thereof. If available free credit balances in the WCMA Account and available proceeds of the Money Accounts are insufficient to pay the entire balance of accrued interest, and Customer otherwise fails to make such payment when due, MLBFS may, in its sole discretion, make a WCMA Loan in an amount equal to the balance of such accrued Interest and pay the proceeds of such WCMA Loan to itself on account of such Interest. The amount of any such WCMA Loan will be added to the WCMA Loan Balance, if MLBFS declines to extend a WCMA Loan to Customer under these circumstances. Customer hereby authorizes and directs MLPF&S to make all such interest payments to MLBFS from any Minimum Money Accounts Balance. If there is no Minimum Money Accounts Balance, or it is insufficient to pay all such Interest, MLBFS will invoice Customer for payment of the balance of the accrued Interest, and Customer shall pay such interest as directed by MLBFS within 5 Business Days of receipt of such invoice. (f) Payments. All payments required or permitted to be made pursuant to this Loan Agreement shall tie made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit 10 Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary. Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for Investment in the Money Accounts in accordance with the terms of the WCMA Agreement, All funds received by MLBFS from MLBFS pursuant to the aforesaid authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the WCMA Line of Credit are subject to final collection. (g) Exceeding the Maximum WCMA Line of Credit. In the event that the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit, Customer shall within 1 Business Day of the first to occur of (i) any request or demand of MLBFS, or (ii) receipt by Customer of a statement from MLPF&S showing a WCMA Loan Balance In excess of the Maximum WCMA Line of Credit, deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit. (h) Line Fee; Extensions. In consideration of the extension of the WCMA Line of Credit by MLBFS to Customer during the period prior to the current Maturity Date, Customer has paid or shall pay the Line Fee to MLBFS, If such fee has not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at Its option, to either cause said fee (and any renewal Line Fee) to be paid with a WCMA Loan which Is added to the WCMA Loan Balance, or Invoice Customer for said fee On which event Customer shall pay said fee within 5 Business Days after receipt of such invoice). No delay in the Activation Date, howsoever caused, shall entitle Customer to any rebate or reduction In the Line Fee or extension of the Maturity Date. In the event MLBFS and Customer, in their respective sole discretion, agree to renew the WCMA Line of Credit beyond the current Maturity Date, Customer agrees to pay a renewal Line Fee In the amount then set forth In the writing signed by MLBFS which extends the Maturity Date; it being understood that any request by Customer for a WCMA Loan or failure of Customer to pay any WCMA Loan Balance outstanding on the immediately prior Maturity Date, after the receipt by Customer of a writing signed by MLBFS extending the Maturity Date, shall be deemed a consent by Customer to both the renewal Line Fee and the new Maturity Date. If no renewal Line Fee is set forth In the writing signed by MLBFS extending the Maturity Data, the renewal Line Fee shall be deemed to be the same as the immediately preceding Line Fee. (I) Statements. MLBF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. (j) Use of Loan Proceeds; Securities Transactions. On the Activation Date, a WCMA Loan will be made to pay any Indebtedness of Customer to a third party secured by all or any part of the Collateral. The proceeds of each subsequent WCMA Loan shall be used by Customer solely for working capital in the ordinary course of its business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will funds borrowed from MLBFS through the WCMA Line of Credit be used: (i) for personal, family or household purposes of any person whatsoever, (ii) to purchase, carry or trade In securities, including shares of the Money Accounts, or (Hi) to repay debt incurred to purchase, carry or trade in securities; nor will any such funds be remitted, directly or indirectly, to MLPF&S or any other broker or dealer in securities, by WCMA Check, check, FTS, wire transfer, or otherwise. 4. REPRESENTATIONS AND WARRANTIES Customer represents and warrants to MLBFS that: (a) Due Organization, etc. Customer is a corporation, duly organized, validly existing and in good standing under the laws of the State of New York. (b) Execution, Delivery and Performance. The execution, delivery and performance by Customer of this Loan Agreement and by Customer and each Guarantor of such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (B) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer or any such Guarantor, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer or any such Guarantor under, any other agreement, instrument or document to which it is a party or by which it is bound. (c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer or any Guarantor of such of this Loan Agreement and the Additional Agreements to which it is a party. (d) Enforceability. This Loan Agreement and such of the Additional Agreements to which it Is a party are the legal, valid and binding obligations of Customer and each Guarantor, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Collateral. Subject to any Permitted Liens: (i) Customer has good and marketable title to the Collateral. (ii) none of the Collateral is subject to any lien, encumbrance or security interest other than the liens and security interests of MLBFS, and (iii) upon the filing of ail Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdictions) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security Interests upon all of the Collateral. (f) Financial Statements. Except as expressly set forth in Customer's financial statements, all financial statements of Customer furnished to MLBFS have been prepared In conformity with generally accepted accounting principles, consistently applied, are true and correct, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended: and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor are true and correct and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition. (g) Litigation. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer or any Guarantor, which would, if adversely determined, materially and adversely affect the financial condition of Customer or any such Guarantor or the continued operations of Customer. (h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by Customer and each Guarantor have been filed with the appropriate governmental agencies and all taxes due and payable by Customer and each Guarantor nave been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer). (i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral. Each of the foregoing representations and warranties are continuing and shall be deemed remade by Customer concurrently with each request for a WCMA Loan. 5. FINANCIAL AND OTHER INFORMATION Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (a) Annual Financial Statements. Within 120 days after the dose of each fiscal year of Customer. Customer shall furnish or cause to be furnished to MLBFS a copy of the annual reviewed financial statements of Customer consisting of at least a balance sheet as at the close of such fiscal year and related statements of income, retained earnings and cash flows, reviewed by Hs current independent accountants or other independent accountants reasonably acceptable to MLBFS and certified by Its chief financial officer. (b) Interim Financial Statements. Within 45 days after the dose of each fiscal quarter of Customer. Customer shall furnish or cause to be furnished to MLBFS: (i) a statement of profit and loss for the fiscal quarter then ended, and (ii) a balance sheet as at the close of such fiscal quarter; all in reasonable detail and certified by its chief financial officer. (c) Other Information. Customer shall furnish or cause to be furnished to MLBFS such other information as MLBFS may from time to time reasonably request relating to Customer, any Guarantor or the Collateral. Customer acknowledges that timely receipt of all such information is critical to the ability of MLBFS to prudently offer the WCMA Line of Credit, and that the failure to provide any such information within the time required will constitute a material breach by Customer of this Loan Agreement. 6.OTHER COVENANTS Customer further agrees during the term of this Loan Agreement that: (a) Financial Records; Inspection. Customer will: (i) maintain complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS, upon reasonable notice and at reasonable times, to inspect its properties (both real or personal), operations, books and records. (b) Taxes. Customer and each Guarantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and alt other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor or the continued operations of Customer. (c) Compliance With Laws and Agreements. Neither Customer nor any Guarantor wilt violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it Is bound, If any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer. (d) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) customer will not be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets or stock of, or any material partnership or joint venture interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets if any such action causes a material change in its control or principal business, or a material adverse change In its financial condition or operations; (ii) Customer will preserve its existence and good standing in the jurisdictions of establishment and operation, and will not operate in any material business other than a business substantially the same as its business as of the date of application by Customer for credit from MLBFS; and (iii) Customer win not cause or permit any material change in Its controlling ownership, controlling senior management or, except upon not less than 30 days prior written notice to MLBFS, its name or principal place of business. 7.COLLATERAL (a) Pledge of Collateral. To secure payment and performance of the Obligations, customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired, except for any Permitted Liens. Customer shall further perform any and all acts reasonably requested by MLBFS to establish, perfect, maintain and continue MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) Executing financing statements and any and all other instruments and documents when and as reasonably requested by MLBFS. and (ii) If in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgages of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. (d) Sales and Collections. So long as no Event of Default shall have occurred and is continuing. Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale. (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) Alterations and Maintenance. Except upon the prior written consent of MLBFS. Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to the premises where any Collateral is or may be located, except for any such obligations, being contested by Customer in good faith by appropriate proceedings. (g) Location. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or penult any material tangible collateral to be removed from the United States without the express prior written consent of MLBFS. (h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability Insurance naming MLBFS as an additional party insured. Customer shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS, All such Insurance shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25.000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (In which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or consent to a reduction In the WCMA Line of Credit in an amount equal to the actual cash value of such Collateral as determined by either the applicable insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or line reduction, as aforesaid, an Event of Default shall occur hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or, on its own volition and without the consent of Customer, reduce the WCMA Line of Credit, as aforesaid. (j) Notice of Certain Event. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. (k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 8. EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) Failure to Pay. Customer shall fail to pay to MLBFS or deposit Into the WCMA Account when due any amount owing or required to be deposited by Customer under this Loan Agreement, and such failure shall continue for more than 5 Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) Failure to Perform. Customer or any Guarantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement or any of the Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for 10 Business Days after written notice thereof shall have been given by MLBFS to Customer. (c) Breach of Warranty. Any representation or warranty made by Customer or any Guarantor contained in this Loan Agreement or any of the Additional Agreements shall at any time prove to have been incorrect iIn any material respect when made. (d) Default Under Other Agreement. A default or Event of Default by Customer or any Guarantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) Bankruptcy, Etc. A proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed by Customer or any Guarantor, or any such proceeding shall be filed against Customer or any Guarantor and shall not be dismissed or withdrawn within 60 days after filing, or Customer or any Guarantor shall make an assignment for the benefit of creditors, or Customer or any Guarantor shall become Insolvent or generally fail to pay, or admit in writing Its inability to pay, its debts as they become due. (f) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of payment or performance by Customer or any Guarantor has been materially Impaired. (g) Acceleration of Debt to Other Creditor. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer or any Guarantor to another creditor under any indenture, agreement, undertaking, or otherwise. (h) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within 10 Business Days. 9. REMEDIES (a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) Termination. MLBFS may without notice terminate the WCMA Line of Credit and all obligations to provide the WCMA Line of Credit or otherwise extend any credit to or for the benefit of Customer and upon any such termination MLBFS shall be relieved of all such obligations. (ii) Acceleration. MLBFS may declare the principal of and interest on the WCMA Loan Balance, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived. (iii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the remedies of a secured party under applicable law, Including, but not limited to, the UCC. and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and In the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and the Guarantors remaining jointly and severally liable for any amount remaining unpaid after such application. (vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (property endorsed, where required, so that such items may be collected by MLBFS} which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such Items which may be so received by Customer with any other of Its funds or property but instead hold them separate and apart and In trust for MLBFS until delivery Is made to MLBFS. (vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to males payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper, and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any Item of payment on or proceeds of the Collateral. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLBFS or any agent, bailey, or affiliate of MLBFS or MLPP&S. Including, without limitation, the WCMA Account and any Money Accounts, and all cash and securities therein or controlled thereby, and all proceeds thereof. Customer hereby collaterally assigns and grants to MLBFS a security interest in alt such property as additional Collateral. (c) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (d) Notices. To the fullest extent permitted by applicable law. Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 10. MISCELLANEOUS (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement or any of the Additional Agreements shad operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any amendment, modification, supplement, termination or waiver of any provision of this Loan Agreement or any of the Additional Agreements, nor any consent to any departure by Customer there from, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any of the Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement or any of the Additional Agreements shall be effective only In the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) Disclosure. Customer and each Guarantor hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLBFS, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer or any Guarantor. (c) Communications. All notices and other communications required or permitted hereunder shall be (n writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mall, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) Costs, Expanses and Taxes. Customer shall upon demand pay or reimburse MLBFS for (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS1 rights hereunder or In the Collateral or any other collateral for the Obligations: (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable In connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees end expenses of outside counsel) incurred by MLBFS in connection with the enforcement of this Loan Agreement or any of the Additional Agreements or the protection of MLBFS rights hereunder or thereafter, excluding, however, salaries and expenses of MLBFS' employees. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained In this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 days written notice Is sent to Customer, do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. (f) Late Charge. Any payment required to be made by Customer pursuant to this Loan Agreement not paid within 5 Business Days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand, or, without demand, may in the sole discretion of MLBFS be paid by a WCMA Loan and added to the WCMA Loan Balance in the same manner as provided herein for accrued interest. (g) Further Assurances. Customer shall do such further acts and things and execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement, or to confirm unto MLBFS its rights, powers and remedies under this Loan Agreement and the Additional Agreements. (h) Binding Effect; Assignment. This Loan Agreement and the Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement or any of the Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS. no such consent shall In any event relieve Customer of any of its obligations under this Loan Agreement or the Additional Agreements. (i) Headings. Captions and section and paragraph headings in this Loan Agreement and the Additional Agreements are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (j) Governing Law. This Loan Agreement, and, unless otherwise expressly provided therein, each of the Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (k) Severability of Provisions. Whenever possible, each provision of this Loan Agreement and the Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement or any of the Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without Invalidating the remaining provisions of this Loan Agreement and the Additional Agreements or affecting the validity or enforceabiltty of such provision in any other jurisdiction. (l) Term. This Loan Agreement shall become effective on the date accepted by MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as the WCMA Line of Credit shall be in effect or there shall be any Obligations outstanding. (m) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. Without limiting the foregoing, Customer acknowledges that: (i) no promise or commitment has been made to it by MLBFS, MLPF&S or any of their respective employees, agents or representatives to extend the availability of the WCMA Line of Credit or the due date of the WCMA Loan Balance beyond the current Maturity Date, or to increase the Maximum WCMA Line of Credit, or otherwise extend any other credit to Customer or any other party; (ii) no purported extension of the Maturity Date, increase in the Maximum WCMA Line of Credit or other extension or agreement to extend credit shall be valid or binding unless expressly set forth in a written instrument signed by MLBFS; and (iii) except as otherwise expressly provided herein, this Loan Agreement supercedes and replaces any and all proposals, letters of intent and approval and commitment letters from MLBFS to Customer, none of which shall be considered an Additional Agreement. (n) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OP MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA UNE OF CREDIT, THIS LOAN AGREEMENT. ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY By: /s/ Mark Gross /s/ Judy Gross ------------------------------------------------ Signature (1) Signature (2) By: /s/ Mark Gross /s/ Judy Gross ------------------------------------------------ Printed Name Printed Name By: President V.P. ------------------------------------------------ Title Title Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: /s/ B. Ferrsou, AVP ------------------------------ Private Client Group [MERRILL LYNCH LOGO] Merrill Lynch Business Financial Services Inc. 33 West Monroe Street 22nd Floor Chicago, Illinois 60603 312/845-1020 FAX 312/945-9093 April 10, 1997 M. J. Gross & Company, Inc. d/b/a Data Conversion Laboratory 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Re: WCMA Line of Credit Increase and Extension Ladies And Gentlemen: This Letter Agreement will serve to confirm certain agreements of Merrill Lynch Business Financial Services Inc. ("MLBFS") and M. J. Gross & Company, Inc. d/b/a Data Conversion Laboratory ("Customer") with respect to: (i) that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 862-07N67 between MLBFS and Customer (including any previous amendments and extensions thereof), and (ii) all other agreements between MLBFS and Customer or any party who has guaranteed or provided collateral for Customer's obligations to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan Documents"). Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Documents. Subject to the terms hereof, effective as of the "Effective Date" the Loan Documents are hereby amended as follows: 1. The term "Maturity Date" shall mean July 31,1998. 2. The "Line Fee" for the period ending July 31,1998, shall be $2,125.00. In addition, Customer agrees to pay a $500.00 increase fee in connection herewith. Customer hereby authorizes and directs MLBFS to charge said amounts (aggregating 2,625.00) to WCMA Account No. 862-07N67 on or at any time after the Effective Date. 3. The term "Maximum WCMA Line of Credit" shall mean $425,000.00. Except as expressly modified hereby, the Loan Documents shall continue in full force and effect upon all of their terms and conditions. By their execution of this Letter Agreement, the below-named Guarantors hereby consent to the foregoing modifications to the Loan Documents, and hereby agree that the "Obligations" under their Unconditional Guaranty shall extend to and include the Obligations of Customer under the Loan Documents, as amended hereby. Customer and said Guarantors acknowledge, warrant and agree, as a primary inducement to MLBFS to enter into this Agreement, that: (i) no default or Event of Default has occurred and is continuing under the Loan Documents; (ii) each of the warranties of Customer in the Loan M. J. Gross & Company, inc. d/b/a Data Conversion Laboratory April 10, 1997 Page No. 2 Documents are true and correct as of the date hereof and shall be deemed remade as of the date hereof; (iii) neither Customer nor any of said Guarantors have any claim against MLBFS or any of its affiliates arising out of or in connection with the Loan Documents or any other matter whatsoever; and (iv) neither Customer nor any of said Guarantors have any defense to payment of any amounts owing, or any right of counterclaim for any reason under, the Loan Documents. The amendments and agreements in this Letter Agreement will become effective on the date {the "Effective Date") upon which: (i) Customer and the Guarantors shall have executed and returned the duplicate copy of this Letter Agreement enclosed herewith; (ii) an officer of MLBFS shall have reviewed and approved this Letter Agreement as being consistent in all respects with the original internal authorization hereof; and (ill) to the extent applicable, MLBFS shall have entered such amendments and agreements in its computer system (which MLBFS agrees to do promptly after the receipt of such executed duplicate copy). Notwithstanding the foregoing, if for any reason other than the sole fault of MLBFS the Effective Date shall not occur within 14 days from the date of this Letter Agreement then all of said amendments and agreements herein will, at the sole option of MLBFS, be void. Very truly yours, Merrill Lynch Business Financial Services Inc. By: /s/ Christopher Golon ------------------------------------- Christopher Golon Credit Analyst Accepted: M. J. Gross & Company, Inc. d/b/a/ Data Conversion Laboratory By: /s/ Judy Gross ------------------------------------- Printed Name: Judy Gross -------------------------- Title: Vice President --------------------------------- Approved: /s/ Judy Gross - ---------------------------------------- Judy Gross /s/ Mark Gross - ---------------------------------------- Mark Gross Private Client Group [MERRILL LYNCH LOGO] Merrill Lynch Business Financial Services Inc. 222 Norm LaSalle Street 17th Floor Chicago, Illinois 60601 (312)269-5437 FAX: (312) 489-3256 March 29.2000 M J. Gross & Company, Inc. d/b/a Data Conversion Laboratory 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Re: WCMA Line of Credit Increase Ladies & Gentlemen: This Letter Agreement will serve to confirm certain agreements of Merrill Lynch Business Financial Services Inc. ("MLBFS") and M.J. Gross & Company, Inc. d/b/a Data Conversion Laboratory ("Customer`) with respect to: (i) that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 862-07NB7 between MLBFS and Customer (including any previous amendments and extensions thereof), and (ii) all other agreements between MLBFS and Customer or any party who has guaranteed or provided collateral for Customer's obligations to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan Documents"). Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Documents. Subject to the terms hereof, effective as of the "Effective Date" (as defined below), the Loan Documents are hereby amended as follows: (a) The term "Maximum WCMA Line of Credit" shall mean $575,000.00. (b) The annual "Line Fee" is hereby increased to $2,875.00. In connection with the increase in the Maximum WCMA Line of Credit pursuant hereto, a portion of such new Line Fee in the amount of $250.00 (the "Increase Fee") is now due and owing. Customer hereby authorizes and directs MLBFS to charge the increase Fee to WCMA Account No. 862-07N67 on or at any time after the Effective Date. Once charged, the Increase Fee is non-refundable. Except as expressly amended hereby, the Loan Documents shall continue in full force and effect upon all of their terms and conditions. By their execution of this Letter Agreement, the below-named Guarantors hereby consent to the foregoing modifications to the Loan Documents, and hereby agree that the "Obligations" under their Unconditional Guaranty shall extend to and include the Obligations of Customer under the Loan Documents, as amended hereby. Customer and said Guarantors acknowledge, warrant and agree, as a primary inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event of Default has occurred and is continuing under the Loan Documents; (b) each of the warranties of Customer in the Loan Documents are true and correct as of the date hereof and shall be deemed remade as of the date hereof; (c) neither Customer nor any of said Guarantors have any claim against MLBFS or any of its affiliates arising out of or in connection with the Loan Documents or any other matter MERRILL LYNCH BUSINESS FUNANCIAL SERVICES INC. M J. Gross & Company, Inc. d/b/a Data Conversion Laboratory March 29, 2000 Page No. 2 whatsoever, and (d) neither Customer nor any of said Guarantors have any defense to payment of any amounts owing, or any right of counterclaim for any reason under, the Loan Documents. The obligations of MLBFS under this Letter Agreement are subject to Its receipt (where applicable) and satisfaction with the following: Current, signed and dated personal financial statement for Mark and Judy Gross. Provided that no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall then have occurred and be continuing under the terms of the Loan Documents, the amendments and agreements in this Letter Agreement will become effective on the date (the "Effective Date") upon which: (a) Customer and the Guarantors shall have executed and returned the duplicate copy of this Letter Agreement and the other documents enclosed herewith; and (b) an officer of MLBFS shall have reviewed and approved this Letter Agreement and such other documents as being consistent in all respects with the original internal authorization hereof. Notwithstanding the foregoing, if Customer and the Guarantors do not execute and return the duplicate copy of this Letter Agreement and said other documents within 14 days from the date hereof, or if for any other reason (other than the sole fault of MLBFS) the Effective Date shall not occur within said 14-day period, then all of said amendments and agreements will, at the sole option of MLBFS, be void. Very truly yours, Merrill Lynch Business Financial Services Inc. By: /s/ Jeremy T. Weiss ------------------------------------- Jeremy T. Weiss Relationship Manager Accepted: M.J. Gross & Company, Inc. d/b/a Data Conversion Laboratory By: /s/ Judy Gross ------------------------------------- Printed Name: Judy Gross --------------------------- Title: Vice President --------------------------------- MERRILL LYNCH BUSINESS FUNANCIAL SERVICES INC. M J. Gross & Company, Inc. d/b/a Data Conversion Laboratory March 29, 2000 Page No. 3 Approved: /s/ Judy Gross - ---------------------------------------- /s/ Mark Gross - ---------------------------------------- Private Client Group [MERRILL LYNCH LOGO] Merrill Lynch Business Financial Services Inc. 222 North LaSalle Street 17th Floor Chicago, Illinois 60601 (312)499.3334 FAX: (312) 499-3256 April 25, 2002 M.J. Gross & Company, Inc. 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Re: WCMA Line of Credit Increase and Extension Ladies & Gentlemen: This Letter Agreement will serve to confirm certain agreements of Merrill Lynch Business Financial Services Inc. ("MLBFS") and M.J. Gross & Company, Inc. ("Customer") with respect to: (I) that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 862-07N67 between MLBFS and Customer (including any previous amendments and extensions thereof), and (ii) all other agreements between MLBFS and Customer or any party who has guaranteed or provided collateral for Customer's obligations to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan Documents"). Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Documents. Subject to the terms hereof, effective as of the "Effective Date" (as defined below) the Loan Documents are hereby amended as follows: (a) The "Maturity Date" of the WCMA Line of Credit is hereby extended to April 30, 2003. (b) The "Maximum WCMA Line of Credit" is hereby increased to $675,000.00. (c) The "Line Fee" for the period ending April 30, 2003, shall be $3,375.00. Customer hereby authorizes and directs MLBFS to charge said amount to WCMA Account No. 862-07N67 on or at any time after the Effective Date. (d) Customer's "Tangible Net Worth", defined and calculated as set forth on Exhibit B attached hereto, shall at all times exceed $600,000.00. (e) "Quarterly Certificate of Compliance" shall mean a duly executed certificate, substantially the same form as Exhibit B attached hereto, of the president, chief financial officer or chief executive officer of Customer certifying as to the matters set forth in such Exhibit B. Exhibit B is by this reference incorporated as a part hereof. (f) Interim Financial Statements. Within 45 days after the close of each fiscal semi-annual period of Customer, a copy of the interim financial statements of Customer for such fiscal semi annual period (including in reasonable detail both a balance sheet as of the close of such fiscal period, and statement of profit and loss for the applicable fiscal period). M.J. GROSS & COMPANY, INC. April 25, 2002 Page No. 2 (g) In addition to existing requirements, Customer shall provide to MLBFS: (i) within 45 days after the close of each fiscal semi-annual period of Customer, a copy of the Accounts Receivable Aging of Customer as of the end of such fiscal semi-annual period; and (ii) within 45 days after the close of each fiscal quarter of Customer, a Quarterly Certificate of Compliance, duly executed by the president, chief financial officer or chief executive officer of the Customer. Except as expressly amended hereby, the Loan Documents shall continue in full force and effect upon all of their terms and conditions. By their execution of this Letter Agreement, the below-named Guarantors hereby consent to the foregoing modifications to the Loan Documents, and hereby agree that the "Obligations" under their respective Unconditional Guaranty and/or agreements providing collateral shall extend to and include the Obligations of Customer under the Loan Documents, as amended hereby. Customer and said Guarantors acknowledge, warrant and agree, as a primary inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event of Default has occurred and is continuing under the Loan Documents; (b) each of the warranties of Customer in the Loan Documents are true and correct as of the date hereof and shall be deemed remade as of the date hereof; (c) neither Customer nor any of said Guarantors have any claim against MLBFS or any of its affiliates arising out of or in connection with the Loan Documents or any other matter whatsoever; and (d) neither Customer nor any of said Guarantors have any defense to payment of any amounts owing, or any right of counterclaim for any reason under, the Loan Documents. The obligations of MLBFS under this Letter Agreement are subject to its receipt (where applicable) and satisfaction with the following: CPA reviewed FYE 2001 financial statements. Provided that no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall then have occurred and be continuing under the terms of the Loan Documents, and the condition specified above shall have been met to our satisfaction, the amendments and agreements in this Letter Agreement will become effective on the date (the "Effective Date") upon which: (a) Customer and the Guarantors shall have executed and returned the duplicate copy of this Letter Agreement enclosed herewith; and (b) an officer of MLBFS shall have reviewed and approved this Letter Agreement as being consistent in all respects with the original internal authorization hereof. Notwithstanding the foregoing, if Customer and the Guarantors do not execute and return the duplicate copy of this Letter Agreement within 14 days from the date hereof, or if for any other reason (other than the sole fault of MLBFS) the Effective Date shall not occur within said 14-day period, then all of said amendments and agreements will, at the sole option of MLBFS, be void. Private Client Group [LOGO] Merrill Lynch Business Financial Services Inc. 222 North LaSalle Street 17th Floor Chicago, Illinois 60601 (312) 499-3234 FAX: (312) 499-3256 June 27, 2002 Data Conversion Laboratory, Inc. 184-13 Horace Harding Expressway Fresh Meadows, NY 11365 Re: WCMA Line of Credit Increase ---------------------------- Ladies & Gentlemen: This Letter Agreement will serve to confirm certain agreements of Merrill Lynch Business Financial Services Inc. ("MLBFS") and M. J. Gross & Company, Inc. ("Customer") with respect to: (i) that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 862-07N67 between MLBFS and Customer (including any previous amendments and extensions thereof), and (ii) all other agreements between MLBFS and Customer or any party who has guaranteed or provided collateral for Customer's obligations to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan Documents"). Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Documents. Subject to the terms hereof, effective as of the "Effective Date" (as defined below), the Loan Documents are hereby amended as follows: (a) For all purposes of the Loan Documents, Customer shall now mean and refer to Data Conversion Laboratory, Inc.. (b) The term "Maximum WCMA Line of Credit" shall mean $1,000,000.00. (c) The annual "Line Fee" is hereby increased to $7,500.00. In connection with the increase in the Maximum WCMA Line of Credit pursuant hereto, a portion of such new Line Fee in the amount of $2,438.00 (the "Increase Fee") is now due and owing. Customer hereby authorizes and directs MLBFS to charge the Increase Fee to WCMA Account No. 862-07N67 on or at any time after the Effective Date. Once charged, the Increase Fee is non-refundable. (d) The term "Interest Rate" shall mean a variable per annum rate of interest equal to the sum of 3.40% and the One-Month LIBOR. "One-Month LIBOR" shall mean, as of the date of any determination, the interest rate then most recently published in the "Money Rates" section of The Wall Street Journal as the one-month London Interbank Offered Rate. The Interest Rate will change as of the date of publication in The Wall Street Journal of a One-Month LIBOR that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the One-Month LIBOR, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (e) Prior to each Maturity Date, Customer shall cause the WCMA Loan Balance to be $500,000.00 for at least one consecutive 20-day period within one year. MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. Data Conversion Laboratory, Inc. June 27, 2002 Page No. 2 (f) As of Customer's fiscal year end 2001, Customer's "tangible net worth" shall exceed $1,000,000.00. As of the close of Customer's fiscal year end 2002, the Customer's "tangible net worth" shall exceed $1,500,000.00. For the purposes hereof, the term "tangible net worth" shall mean Customer's net worth as shown on Customer's regular financial statements prepared in a manner consistent with the terms hereof, but excluding an amount equal to: (i) any assets which are ordinarily classified as "intangible" in accordance with getally accepted accounting priciples, and (ii) any amounts now or hereafter directly or indirectly owing to Customer and by officers, shareholders or affiliates of Customer. (g) Interim Financial Statements. Within 45 days after the close of each fiscal quarter of Customer, a copy of the interim financial statements of Customer for such fiscal quarter (including in reasonable detail both a balance sheet as of the close of such fiscal period, and statement of profit and loss for the applicable fiscal period). (h) A/R Agings. Within 45 days after the close of each fiscal quarter of Customer, a copy of the Accounts Receivable Aging of Customer as of the end of such fiscal quarter. Except as expressly amended hereby, the Loan Documents shall continue in full force and effect upon all of their terms and conditions. By their execution of this Letter Agreement, the below-named Guarantors hereby consent to the foregoing modifications to the Loan Documents, and hereby agree that the "Obligations" under their respective Unconditional Guaranty and/or agreements providing collateral shall extend to and include the Obligations of Customer under the Loan Documents, as amended hereby. Customer and said Guarantors acknowledge, warrant and agree, as a primary inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event of Default has occurred and is continuing under the Loan Documents; (b) each of the warranties of Customer in the Loan Documents are true and correct as of the date hereof and shall be deemed remade as of the date hereof; (c) neither Customer nor any of said Guarantors have any claim against MLBFS or any of its affiliates arising out of or in connection with the Loan Documents or any other matter whatsoever; and (d) neither Customer nor any of said Guarantors have any defense to payment of any amounts owing, or any right of counterclaim for any reason under, the Loan Documents. Provided that no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall then have occurred and be continuing under the terms of the Loan Documents, and the condition specified above shall have been met to our satisfaction, the amendments and agreements in this Letter Agreement will become effective on the date (the "Effective Date") upon which: (a) Customer and the Guarantors shall have executed and returned the duplicate copy of this Letter Agreement enclosed herewith; and (b) an officer of MLBFS shall have reviewed and approved this Letter Agreement as being consistent in all respects with the original internal authorization hereof. Notwithstanding the foregoing, if Customer and the Guarantors do not execute and return the duplicate copy of this Letter Agreement within 14 days from the date hereof, or if for any other reason (other than the sole fault of MLBFS) the Effective Date shall not occur within said 14-day period, then all of said amendments and agreements will, at the sole option of MLBFS, be void. MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. Data Conversion Laboratory, Inc. June 27, 2002 Page No. 3 Very truly yours, Merrill Lynch Business Financial Services Inc. By: /s/ Annalisa Avandano ----------------------------------------- Annalisa Avandano Credit Manager Accepted: Data Conversion Laboratory, Inc. By: /s/ Mark Gross -------------------------------------------- Printed Name: Mark Gross --------------------------------- Title: --------------------------------------- Approved: /s/ Judy Gross - ----------------------------------------------- Judy Gross Vice President - ----------------------------------------------- EX-10.4 8 b318755ex10_4.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.4 [LOGO] TERM LOAN AND SECURITY AGREEMENT TERM LOAN AND SECURITY AGREEMENT NO. 0003552001 ("Loan Agreement") dated as of March 29, 2000. between M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation organized and existing under the laws of the State of New York having its principal office at 184-13 Horace Harding Expressway, Fresh Meadows, NY 11365 ("Customer"). and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 222 North LaSalle Street, Chicago IL 60601 ("MLBFS"). In consideration of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: Article I. DEFINITIONS 1.1 Specific Terms. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (a) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (b) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon the Collateral or any other collateral for the Obligations, and shall include, without limitation, the Note. (c) "Bankruptcy Event" shall mean any of the following: (i) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed or consented to by Customer or any Guarantor; or (ii) any such proceeding shall be filed against Customer or any Guarantor and shall not be dismissed or withdrawn within sixty (60) days after filing; or (iii) Customer or any Guarantor shall make a general assignment for the benefit of creditors; or (iv) Customer or any Guarantor shall generally fail to pay or admit in writing its inability to pay its debts as they become due; or (v) Customer or any Guarantor shall be adjudicated a bankrupt or insolvent. (d)"Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (e)"Closing Date" shall mean the date upon which all conditions precedent to MLBFS' obligation to make the Loan shall have been met to the satisfaction of MLBFS. (f)"Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records, directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 3.6 (b) hereof. (g) "Commitment Expiration Date" shall mean April 28,2000. (h) "Commitment Fee" shall mean a fee of $1,500.00 due to MLBFS in connection with this Loan Agreement. (i) "Default" shall mean either an "Event of Default" as defined in Section 3.5 hereof, or an event which with the giving of notice, passage of time, or both, would constitute such an Event of Default. (j) "General Funding Conditions" shall mean each of the following conditions to each loan or advance by MLBFS hereunder: (i) no Default shall have occured and be continuing or would result from the making of any such loan or advance hereunder by MLBFS. (ii) there shall not have occurred and be continuing any material adverse change in the business or financial condition of Customer or any Guarantor: (iii) all representations and warranties of Customer or any Guarantor herein or in any Additional Agreements shall then be true and correct in all material respects; (iv) MLBFS shall have received this Loan Agreement and all Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (v) the Commitment Fee shall have been paid in full; (vi) MLBFS shall have received, as and to the extent applicable, copies of invoices, bills of sale, loan payoff letters and/or other evidence reasonably satisfactory to it that the proceeds of the Loan will satisfy the Loan Purpose (vii) MLBFS shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (viii) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (ix) any additional conditions specified in the "Term Loan Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (k) "Guarantor" shall mean a person or entity who has either guaranteed or provided collateral for any or all of the Obligations. (l) "Loan" shall mean a four-year term installment loan in an amount equal to the lesser of: (A) 100% of the amount required by Customer to satisfy or fulfill the Loan Purpose, (B) the aggregate amount which Customer shall request be advanced by MLBFS on account of the Loan Purpose or (C) $150,000.00. (m) "Loan Purpose* shall mean the purpose for which the proceeds of the Loan will be used; to wit: to refinance a portion of Customer's WCMA Line of Credit No. 862-07N67. (n) "Location of Tangible Collateral" shall mean the address of Customer set forth at the begging of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (o) "Obligations" shall mean ail liabilities, indebtedness and obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due. primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy and all present and future liabilities, indebtedness and obligations of Customer under the Note and this Loan Agreement. (p) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (ii) liens in favor of MLBFS; (iii) liens which will be discharged with the proceeds of the initial WCMA Loan; and (iv) any other liens expressly permitted in writing by MLBFS. 1.2 Other Terms. Except as otherwise defined herein, all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC. Article II. THE LOAN 2.1 Commitment. Subject to the terms and conditions hereof, MLBFS hereby agrees to make the Loan to Customer for the Loan Purpose, and Customer agrees to borrow all amounts borrowed to satisfy the Loan Purpose from MLBFS. The entire proceeds of the Loan shall be disbursed on the Closing Date either directly to the applicable third party or parties on account of the Loan Purpose or to reimburse Customer for amounts directly expended by it; all as directed by Customer in a Closing Certificate to be executed by Customer and delivered to MLBFS prior to the Closing Date. 2.2 Note. The Loan will be evidenced by and repayable in accordance with that certain Collateral Installment Note made by Customer payable to the order of MLBFS and issued pursuant to this Loan Agreement (the 'Note'). The Note is hereby incorporated as a part hereof as if fully set forth herein. 2.3 Conditions of MLBFS' Obligation. The Closing Date and MLBFS' obligation to make the Loan on the Closing Date are subject to the prior fulfillment of each of the following conditions: (a) MLBFS shall have received a written request from Customer that the Loan be funded in accordance with the terms hereof, together with a written direction from Customer as to the method of payment and payee(s) of the proceeds of the Loan, which request and direction shall have been received by MLBFS not less than two Business Days prior to any requested funding date; (b) MLBFS shall have received a copy of invoices, bills of sale, payoff letters or other applicable evidence reasonably satisfactory to it that the proceeds of the Loan will satisfy or fulfill the Loan Purpose; (c) the Commitment Expiration Date shall not then have occurred; and (d) each of the General Funding Conditions shall then have been met or satisfied to the reasonable satisfaction of MLBFS. 2.4 Use of Loan Proceeds. The proceeds of the Loan shall be used by Customer solely for Loan Purpose, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will the proceeds of the Loan be used: (a) for personal, family or household purposes of any person whatsoever, or (b) to purchase, carry or trade in securities, or repay debt incurred to purchase, carry or trade in securities, or (c) unless otherwise consented to in writing by MLBFS, to pay any amount to Merrill Lynch and Co., Inc. or any of its subsidiaries, other than Merrill Lynch Bank USA, Merrill Lynch Bank & Trust Co. or any subsidiary of either of them (including MLBFS and Merrill Lynch Credit Corporation). 2.5 Commitment Fee. In consideration of the agreement by MLBFS to extend the Loan to Customer in accordance with and subject to the terms hereof. Customer has paid or shall, on or before the Closing Date pay, the Commitment Fee to MLBFS. Customer acknowledges and agrees that the Commitment Fee has been fully earned by MLBFS and that it will not under any circumstances be refundable. Article III. GENERAL PROVISIONS 3.1 REPRESENTATIONS AND WARRANTIES Customer represents and warrants to MLBFS that: (a) Organization and Existence. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of New York and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) Execution, Delivery and Performance. The execution, delivery and performance by Customer of this Loan Agreement and by Customer and each Guarantor of such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer or any such Guarantor, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer or any such Guarantor under any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer or any Guarantor of such of this Loan Agreement, the Note and the other Additional Agreements to which it is a party. (d) Enforceability. This Loan Agreement, the Note and such of the other Additional Agreements to which Customer or any Guarantor is a party are the respective legal, valid and binding obligations of Customer and such Guarantor, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights a creditors generally or by general principles of equity. (e) Collateral. Except for any Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. (f) Financial Statements. Except as expressly set forth in Customer's financial statements, all financial statements of Customer furnished to MLBFS have beer prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct in all material respects, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended (subject, in the case of interim unaudited financial statements, to normal year-end adjustments); and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor are true and correct in all material respects and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition. (g) Litigation. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer or any Guarantor, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any such Guarantor or the continued operations of Customer. (h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by Customer and each Guarantor have been filed with the appropriate governmental agencies and all taxes due and payable by Customer and each Guarantor have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer). (i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral. (j) No Outside Broker. Except for employees of MLBFS, MLPF&S or one of their affiliates, Customer has not in connection with the transactions contemplated hereby directly or indirectly engaged or dealt with, and was not introduced or referred to MLBFS by, any broker or other loan arranger. Each of the foregoing representations and warranties: (i) has been and will be relied upon as an inducement to MLBFS to make the Loan, and (ii) is continuing and shall be deemed remade by Customer on the Closing Date. 3.2 FINANCIAL AND OTHER INFORMATION (a) Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (i) Annual Financial Statements. Within 120 days after the dose of each fiscal year of Customer, a copy of the annual reviewed financial statements of Customer, including in reasonable detail, a balance sheet and statement of retained earnings as at the close of such fiscal year and statements of profit and loss and cash flow for such fiscal year; (ii) Interim Financial Statements. Within 45 days after the close of each fiscal quarter of Customer, a copy of the interim financial statements of Customer for such fiscal quarter (including in reasonable detail both a balance sheet as of the close of such fiscal period, and statement of profit and loss for the applicable fiscal period); and (iii) Other Information. Such other information as MLBFS may from time to time reasonably request relating to Customer any Guarantor or the Collateral. (b) General Agreements With Respect to Financial Information. Customer agrees that except as otherwise specified herein or otherwise agreed to in writing by MLBFS: (i) all annual financial statements required to be furnished by Customer to MLBFS hereunder will be prepared by either the current independent accountants for Customer or other independent accountants reasonably acceptable to MLBFS, and (ii) all other financial information required to be furnished by Customer to MLBFS hereunder will be certified as correct in all material respects by the party who has prepared such information, and, in the case of internally prepared information with respect to Customer, certified as correct by its chief financial officer. 3.3 OTHER COVENANTS Customer further agrees during the term of this Loan Agreement that: (a) Financial Records; Inspection. Customer will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records. (b) Taxes. Customer and each Guarantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor or the continued operations of Customer. (c) Compliance With Laws and Agreements. Neither Customer nor any Guarantor will violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer. (d) No Use of Merrill Lynch Name. Except upon the prior written consent of MLBFS, neither Customer nor any Guarantor will directly or indirectly publish, disclose or otherwise use in any advertising or promotional material, or press release or interview, the name, logo or any trademark of MLBFS, MLPF&S, Merrill Lynch and Co., Incorporated or any of their affiliates. (e) Notification By Customer. Customer shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any materially adverse change in the business, financial condition or operations of Customer; (iii) any information which indicates that any financial statements of Customer or any Guarantor fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements; and (iv) any change in Customer's outside accountants. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (f) Notice of Change. Customer shall give MLBFS not less than 30 days prior written notice of any change in the name (including any fictitious name) or principal place of business or residence of Customer or any Guarantor. (g) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) Customer shall not be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets, if any such action would result in either: (A) a material change in the principal business, ownership or control of Customer, or (B) a material adverse change in the financial condition or operations of Customer; (i) Customer shall preserve its existence and good standing in the jurisdiction(s) of establishment and operation; (iii) Customer shall not engage in any material business substantially different from its business in effect as of the date of application by Customer for credit from MLBFS, or cease operating any such material business; (iv) Customer shall not cause or permit any other person or entity to assume or succeed to any material business or operations of Customer; and (v) Customer shall not cause or permit any material change in its controlling ownership. 3.4 COLLATERAL (a) Pledge of Collateral. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. (d) Sales and Collections. So long as no Event of Default shall have occurred and be continuing, Customer may in the ordinary course of its business (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interest hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair, reasonable wear and tear excepted, and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to any Location of Tangible Collateral, except for any such obligations being contested by Customer in good faith by appropriate proceedings. (g) Location. Except for movements required in the ordinary course of Customer's business. Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability insurance naming MLBFS as an additional party insured. Customer shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance policies shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation each renewal or replacement thereof. (i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or prepay the Loan by an amount equal to the actual cash value of such Collateral as determined by either the insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or prepayment, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or make a prepayment on account of the Loan, as aforesaid. Any partial prepayment of the Loans shall be applied to installments due in inverse order of maturity. (j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or invoking $25,000.00 or more of the Collateral. (k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 3.5 EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) Failure to Pay. Customer shall fail to pay when due any amount owing by Customer to MLBFS under the Note or this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) Failure to Perform. Customer or any Guarantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement, the Note or any of the other Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for ten (10) Business Days after written notice thereof shall have been given by MLBFS to Customer. (c) Breach of Warranty. Any representation or warranty made by Customer or any Guarantor contained in this Loan Agreement, the Note or any of the other Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (d) Default Under Other Agreement A default or Event of Default by Customer or any Guarantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) Bankruptcy Event. Any Bankruptcy Event shall occur. (f) Material Impairment Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of full payment or performance by Customer or any Guarantor of any of their respective liabilities or obligations under this Loan Agreement, the Note or any of the other Additional Agreements to which Customer or such Guarantor is a party has been materially impaired. The existence of such a material impairment shall be determined in a manner consistent with the intent of Section 1-208 of the UCC. (g) Acceleration of Debt to Other Creditors. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer or any Guarantor to another creditor under any indenture, agreement, undertaking, or otherwise. (h) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within ten (10) Business Days. 3.6 REMEDIES (a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) Termination. MLBFS may without notice terminate its obligation to make the Loan (if the loan has not then been funded) or otherwise extend any credit to or for the benefit of Customer (it being understood, however, that upon the occurrence of any Bankruptcy Event all such obligations shall automatically terminate without any action on the part of MLBFS); and upon any such termination MLBFS shall be relieved of all such obligations. (ii) Acceleration. MLBFS may declare the principal of and interest and any premium on the Note, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all such principal, interest, premium and other Obligations shall automatically become due and payable without any action on the part of MLBFS. (iii) Exercise Other Rights. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and each Guarantor remaining jointly and severally liable for any amount remaining unpaid after such application. (vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, financial assets, investment property, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional Collateral. (c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer included in the Collateral. (d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Note, the other Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (e) Notices. To the fullest extent permitted by applicable law, Customer hereby irrevocably waves and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 3.7 MISCELLANEOUS (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement, the Note or any of the other Additional Agreements shall operate as a waiver thereof, at no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement, the Note or any of the other Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement, the Note or any of the other Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement, the Note or any of the other Additional Agreements shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. (c) Communications. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) Costs, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS for (i) all Uniform Commercial Code and other filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the collection of any sum payable hereunder or under any of the Additional Agreements not paid when due, the enforcement of this Loan Agreement or any of the Additional Agreements and the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and normal overhead attributable to MLBFS' employees. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 Business Days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the "Interest Rate" (as that item is defined in the Note) during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default. (f) Late Charge. Any payment required to be made by Customer pursuant to this Loan Agreement or any of the Additional Agreements not paid within ten (10) days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand. (g) Further Assurances. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement, the Note or any of the other Additional Agreements, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (h) Binding Effect. This Loan Agreement, the Note and the other Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement, the Note or any of the other Additional Agreements without the prior written consent of MLBFS, Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement, the Note or any of the other Additional Agreements. (i) Headings. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof (j) Governing Law. This Loan Agreement, the Note and, unless otherwise expressly provided therein, each of the other Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (k) Severabllity of Provisions. Whenever possible, each provision of this Loan Agreement, the Note and the other Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement, the Note or any of the other Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement, the Note and the other Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. (l) Term. This Loan Agreement shall become effective when accepted by MLBFS at its office in Chicago Illinois, and subject to the terms hereof, shall continue in effect so long thereafter as there shall be any moneys owing hereunder or under the Note, or there shall be any other Obligations outstanding. (m) Counterparts. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement. (n) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT, THE TERM NOTE AND THE OTHER ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER IRREVOCABLY SUBMITS ITSELF TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH FORUM, AND ANY AND ALL RIGHTS TO REMOVE SUCH ACTION FROM STATE TO FEDERAL COURT. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE TERM LOAN, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. CUSTOMER FURTHER WAIVES THE RIGHT TO BRING ANY NON-COMPULSORY COUNTERCLAIMS. (o) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE NOTE AND THE OTHER ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING, CUSTOMER ACKNOWLEDGES THAT: (I) NO PROMISE OR COMMITMENT HAS BEEN MADE TO fT BY MLBFS, MLPF&S OR ANY OF THEIR RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO MAKE THE LOAN ON ANY TERMS OTHER THAN AS EXPRESSLY SET FORTH HEREIN AND IN THE NOTE, OR TO MAKE ANY OTHER LOAN OR OTHERWISE EXTEND ANY OTHER CREDIT TO CUSTOMER OR ANY OTHER PARTY; AND (II) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THIS LOAN AGREEMENT SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL AND COMMITMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER. IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY By: /s/ Judy Gross /s/ Mark Gross ------------------------------ ----------------------------- Signature(1) Signature(2) Judy Gross Mark Gross ------------------------------ ----------------------------- Printed Name Printed Name Vice President President ------------------------------ ----------------------------- Title Title Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: /s/ illegible ------------------------------------------ EXHIBIT A ATTACHED TO AND HEREBY MADE A PART OF TERM LOAN AMD SECURITY AGREEMENT NO. 0003552001 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY Additional Locations of Tangible Collateral: [LOGO] NO. 0003552001 - -------------------------------------------------------------------------------- $150,000.00 March 29. 2000 COLLATERAL INSTALLMENT NOTE FOR VALUE RECEIVED, M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation organized and existing under the laws of the State of New York ('Customer") hereby promises to pay to the order of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing unoer the laws of the State of Delaware ('MLBFS'), in lawful money of the United States, the principal sum of One Hundred Fifty Thousand And 00/100 Dollars ($150,000.00), or if more or less, the aggregate amount advanced by MLBFS to Customer pursuant to the Loan Agreement (the "Loan Amount1); together with interest on the unpaid balance of the Loan Amount, from the Closing Date until payment, at the Interest Rate as follows: 1. DEFINITIONS. (a) In addition to terms defined elsewhere in this Note, as used herein, the following terms shall have the following meanings: (i) "Closing Date" shall mean the date of advancement of funds hereunder. (ii) "Excess Interest" shall mean any amount of interest in excess of the maximum amount of interest permitted to be charged by law. (iii) "Interest Rate" shall mean a variable per annum rate equal to the sum of (i) 1.00% per annum, and (ii) the rate from time to time published in the "Money Rates" section of The Wall Street Journal as being the "Prime Rate" (or, if more than one rate is published as the Prime Rate, then the highest of such rates). The Interest Rate will change as of the date of publication in The Wall Street Journal of a Prime Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the Prime Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (iv) "Loan Agreement" shall mean that certain TERM LOAN AND SECURITY AGREEMENT NO. 0003552001 between Customer and MLBFS, as the same may have been or may hereafter be amended or supplemented. (v) "Note" shall mean this COLLATERAL INSTALLMENT NOTE. (b) Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Agreement. Without limiting the foregoing, the terms "Additional Agreements", "Bankruptcy Event" and "Event of Default" shall have the respective meanings set forth in the Loan Agreement. 2. PAYMENT AND OTHER TERMS. Customer shall pay the indebtedness under this Note in 48 consecutive monthly installments commencing on the first day of the second calendar month following the Closing Date and continuing on the first day of each calendar month thereafter until this Note shall be paid in full. Each such installment in an amount equal to the sum of (i) accrued interest, and (ii) 1/48th of the Loan Amount (with the first such installment including interest accrued from the date of funding). Each payment received hereunder shall be applied first to any fees and expenses of MLBFS payable by Customer under the terms of the Loan Agreement (including, without limitation, late charges), next to accrued interest at the Interest Rate, with the balance applied on account of the unpaid principal hereof. Any part of the principal hereof or interest hereon or other sums payable hereunder or under the Loan Agreement not paid within ten (10) days of the applicable due date shall be subject to rate charge equal to the lesser of (i) 5% of the overdue amount, or (ii) the maximum amount permitted by law. All interest shall be computed on the basis of actual days elapsed over a 360-day year. All sums payable hereunder shall be payable at 2356 Collections Center Drive. Chicago. Illinois 60693, or at such other place or places as the holder hereof may from time to time appoint in writing. Customer may prepay this Note at any time in whole or in part: provided, however, that any prepayment prior to the end of the first "year" after the Closing Date shall be accompanied by a premium equal to 3% of the amount prepaid; any prepayment during the second year following the Closing Date shall be accompanied by a premium equal to 2% of the amount prepaid; and any prepayment thereafter shall be accompanied by a premium equal to 1% of the amount prepaid. A "year" for the purposes of this clause is a 365-366 day period commencing on the Closing Date or any anniversary of the Closing Date Upon any acceleration of this Note, as hereinafter provided, there shall become due from Customer the same prepayment premium that would have been payable if Customer had then voluntarily prepaid the then outstanding balance of this Note in full. Any partial prepayment shall be applied to installments of the Loan Amount in inverse order of maturity. This Note is the Collateral Installment Note referred to in, and is entitled to all of the benefits of the Loan Agreement and any Additional Agreements. If Customer shall fail to pay when due any installment or other sum due hereunder, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by the holder hereof to Customer, or if any other Event of Default shall have occurred and be continuing, then at the option of the holder hereof (or upon the occurrence of any Bankruptcy Event, automatically, without any action on the part of the holder hereof), and in addition to all other rights and remedies available to such holder under the Loan Agreement, any Additional Agreements, and otherwise, the entire Loan Amount at such time remaining unpaid, together with accrued interest thereon, any prepayment premium due upon acceleration and all other sums then owing by Customer under the Loan Agreement, may be declared to be and thereby become immediately due and payable. It is expressly understood, however, that nothing contained in the Loan Agreement, any other agreement, instrument or document executed by Customer, or otherwise, shall affect or impair the right, which is unconditional and absolute, of the holder hereof to enforce payment of all sums due under this Note at or after maturity, whether by acceleration or otherwise, or shall affect the obligation of Customer, which is also unconditional and absolute, to pay the sums payable under this Note in accordance with its terms. Except as otherwise expressly set forth herein or in the Loan Agreement, Customer hereby waives presentment demand for payment, protest and notice of protest notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this Note. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Note Notwithstanding any provision to the contrary in this Note, the Loan Agreement or any of the Additional Agreements, no provision of this Note, the Loan Agreement or any of the Additional Agreements shall require the payment or permit the collection of any Excess Interest. If any Excess Interest is provided for, or is adjudicated as being provided for, in this Note, the Loan Agreement or any of the Additional Agreements, then: (a) Customer shall not be obligated to pay any Excess Interest; and (b) any Excess Interest that MLBFS may have received under this Note, the Loan Agreement or any of the Additional Agreements shall, at the option of MLBFS, be: (i) applied as a credit against the then unpaid principal balance of this Note, or accrued interest hereon not to exceed the maximum amount permitted by law, or both, (ii) refunded to the payor thereof, or (iii) any combination of the foregoing. This Note shall be construed in accordance with the laws of the State of Illinois and may be enforced by the holder hereof in any jurisdiction in which the Loan Agreement may be enforced. IN WITNESS WHEREOF, this Note has been executed by Customer as of the day and year first above written. M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY By: /s/ Judy Gross /s/ Mark Gross ------------------------------ ----------------------------- Signature(1) Signature(2) Judy Gross Mark Gross ------------------------------ ----------------------------- Printed Name Printed Name Vice President President ------------------------------ ----------------------------- Title Title [LOGO] SECRETARY'S CERTIFICATE - -------------------------------------------------------------------------------- The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of MJ. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation duly organized, validly existing and in good standing under the laws of the State of New York, and that the following is a true, accurate and compared transcript of resolutions duly validly and lawfully adopted on the 30 day of March, 2000 by the Board of Directors of said Corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said Corporation: "RESOLVED, that this Corporation is authorized and empowered, now and from time to time hereafter, to borrow and/or obtain credit from, and/or enter into other finance arrangements with, MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS'), and in connection therewith to grant to MLBFS liens and security interests on any or all property belonging to this Corporation; al such transactions to be on such terms and conditions as may be mutually agreed from time to time between this Corporation and MLBFS; and "FURTHER RESOLVED, that the President any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered to: (a) execute and deliver to MLBFS on behalf of this Corporation any and all loan agreements, promissory notes, security agreements pledge agreements, financing statements, mortgages, deeds of trust, leases and/or all other agreements, instruments and documents required by MLBFS in connection therewith, and any present or future extensions, amendments, supplements, modifications and restatements (hereof; al in such form as any such officer shall approve, as conclusively evidenced by his or her signature thereon, and (b) do and perform all such ads and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation in connection therewith; and any and al prior acts of each of said officers in these premises are hereby ratified and confirmed in all respects; and "FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation from an authorized officer of (his Corporation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction conditionally agreed or committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFS." The undersigned further certifies that: (a) the foregoing resolutions have not been rescinded, modified or repealed in any manner, are not in conflict with any agreement of said Corporation and are in full force and effect as of the date of this Certificate, and (b) the following individuals are now the duly elected and acting officers of said Corporation and the signatures set forth below are the true signatures of said officers. President: /s/ Mark Gross ---------------------------------- Vice President: /s/ Judy Gross ---------------------------------- Treasurer: /s/ Judy Gross ---------------------------------- Secretary: /s/ Judy Gross ---------------------------------- ------------------------------------------------- Additional Title IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said Corporation hereto, pursuant to due authorization all as of this 30th day of March, 2000. ---- ----------- (Corporate Seal) /s/ Judy Gross --------------------------------- Secretary Printed Name: Judy Gross --------------------------------- [LOGO] UNCONDITIONAL GUARANTY - ------------------------------------------------------------------------------- FOR VALUE RECEIVED, and in order to induce MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to advance moneys or extend or continue to extend credit or lease property to or for the benefit of, or modify its credit relationship with, or enter into any other financial accommodations with M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation organized and existing under the laws of me State of New York (with any successor in interest, including, without limitation, any successor by merger or by operation of law, herein collectively referred to as "Customer") under: (a) that certain TERM LOAN AND SECURITY AGREEMENT NO. 0003552001 between MLBFS and Customer (the "Loan Agreement"), (b) any "Additional Agreements", as that term is defined in the Loan Agreement, including, without limitation, the NOTE incorporated by reference in the Loan Agreement, and (c) all present and future amendments, restatements, supplements and other evidences of any extensions, increases, renewals, modifications and other changes of or to the Loan Agreement or any Additional Agreements) (collectively, the "Guaranteed Documents"), the undersigned (individually. "Guarantor", and collectively "Guarantors") hereby jointly and severally unconditionally guarantee to MLBFS (subject, however, to the limitation of liability hereinafter set forth): (i) the prompt and full payment when due, by acceleration or otherwise, of all sums now or any time hereafter due from Customer to MLBFS under the Guaranteed Documents, (ii) the prompt, full and faithful performance and discharge by Customer of each and every other covenant and warranty of Customer set forth in the Guaranteed Documents, and (iii) the prompt and full payment and performance of all other indebtedness, liabilities and obligations of Customer to MLBFS, howsoever created or evidenced, and whether now existing or hereafter arising (collectively, the "Obligations"). Guarantors further agree to pay all reasonable costs and expenses (including, but not limited to, court costs and reasonable attorneys' fees) paid or incurred by MLBFS in endeavoring to collect or enforce performance of any of the Obligations, or in enforcing this Guaranty. Guarantors acknowledge that MLBFS is relying on the execution and delivery of this Guaranty in advancing moneys to or extending or continuing to extend credit to or for the benefit of Customer. This Guaranty is absolute, unconditional and continuing and shall remain in effect until all of the Obligations shall have been fully and indefeasibly paid, performed and discharged. Upon the occurrence and during the continuance of any default or Event of Default under any of the Guaranteed Documents, any or all of the indebtedness hereby guaranteed then existing shall, at the option of MLBFS, become immediately due and payable from Guarantors (it being understood, however, that upon the occurrence of any "Bankruptcy Event", as defined in the Loan Agreement, all such indebtedness shall automatically become due and payable without action on the part of MLBFS). Notwithstanding the occurrence of any such event, this Guaranty shall continue and remain in full force and effect. To the extent MLBFS receives payment with respect to the Obligations, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside, required to be repaid by MLBFS or is repaid by MLBFS pursuant to a settlement agreement, to a trustee, receiver or any other person or entity, whether under any Bankruptcy law or otherwise (a "Returned Payment"), this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of such payment or repayment by MLBFS, and the indebtedness or part thereof intended to be satisfied by such Returned Payment shall be revived and continued in full force and effect as if said Returned Payment had not been made. The liability of Guarantors hereunder shall in no event be affected or impaired by any of the following, any of which may be done or omitted by MLBFS from time to time, without notice to or the consent of any Guarantor: (a) any renewals, amendments, modifications or supplements of or to any of the Guaranteed Documents, or any extensions, forbearances, compromises or releases of any of the Obligations or any of MLBFS' rights under any of the Guaranteed Documents; (b) any acceptance by MLBFS of any collateral or security for. or other guarantees of, any of the Obligations; (c) any failure, neglect or omission on the part of MLBFS to realize upon or protect any of the Obligations, or any collateral or security therefor, or to exercise any lien upon or right of appropriation of any moneys, credits or property of Customer or any other guarantor, possessed by or under the control of MLBFS or any of its affiliates, toward the liquidation or reduction of the Obligations; (d) any invalidity irregularity or unenforceability of all or any part of the Obligations, of any collateral security for she Obligations, or the Guaranteed Documents; (e) any application of payments or credits by MLBFS; (f) the granting of credit from time to time by WLBFS to Customer in excess of the amount set forth in the Guaranteed Documents; or (g) any other act of commission or omission of any kind or at any time upon the part of MLBFS or any of its affiliates or any of their respective employees or agents with respect to any matter whatsoever MLBFS shall not be required at any time, as a condition of Guarantors' obligations hereunder to resort to payment from Customer or other persons or entities whatsoever, or any of their properties or estates or resort to any collateral or pursue y exhaust any other rights or remedies whatsoever. No release or discharge in whole or in part of any one or more of the Guarantors or any other guarantor of the Obligations shall release or discharge any of the other Guarantors or any other guarantor, unless and until all of the Obligations shall have been indefeasibly fully paid and discharged. Guarantors expressly waive presentment, protest, demand, notice of dishonor or default, notice of acceptance of this Guaranty, notice of advancement of funds under the Guaranteed Documents and all other notices and formalities to which Customer or Guarantors might be entitled, by statute or otherwise, and, so long as there are any Obligations or MLBFS is committed to extend credit to Customer, Guarantors waive any right to revoke or terminate this Guaranty without the express written consent of MLBFS. So long as there are any Obligations, Guarantors shall not have any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right, or remedy of MLBFS against Customer or any security which MLBFS now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. MLBFS is hereby irrevocably authorized by Guarantors at any time during the continuance of an Event of Default under the Loan Agreement or any other of the Guaranteed Documents or in respect of any of the Obligations, in its sole discretion and without demand or notice of any kind, to appropriate, hold, set off and apply toward the payment of any amount due hereunder, in such order of application as MLBFS may elect, all cash, credits, deposits, accounts, financial assets, investment property, securities and any other property of any Guarantor which is in transit to or in the possession, custody or control of MLBFS or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), or any of their respective agents, bailees or affiliates. Guarantors hereby collaterally assign and grant to MLBFS a continuing security interest in all such property as additional security for the Obligations. Upon the occurrence and during the continuance of an Event of Default, MLBFS shall have all rights in such property available to collateral assignees and secured parties under all applicable laws, including, without limitation, the Uniform Commercial Code. Each Guarantor agrees to furnish to MLBFS such financial information concerning Guarantor as may be required by any of the Guaranteed Documents or as MLBFS may otherwise from time to time reasonably request. Guarantors further hereby irrevocably authorize MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about any Guarantors. Each Guarantor severally warrants and agrees that: (a) unless clearly stated or noted, no material assets shown on any financial statements of such Guarantor heretofore or hereafter furnished to MLBFS are or will be held in an irrevocable trust, pension trust, retirement trust, IRA or other trust or form of ownership exempt from execution by creditors of such Guarantor; and, (b) except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld, such Guarantor will not hereafter transfer any material assets of such Guarantor to any trust or third party if the effect thereof will be to cause such assets to be exempt from execution by creditors of such Guarantor (excluding, however, normal and reasonable contributions to pension plans, retirement plans, etc., and IRA rollovers). No delay on the part of MLBFS in the exercise of any right or remedy under any of the Guaranteed Documents, this Guaranty or any other agreement shall operate as a waiver thereof, and, without limiting the foregoing, no delay in the enforcement of any security interest, and no single or partial exercise by MLBFS of any right or remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. This Guaranty may be executed in any number of counterparts, each of which counterparts, once they are executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Guaranty. This Guaranty shall be binding upon Guarantors and their respective heirs and personal representatives, and shall inure to the benefit of MLBFS and its successors and assigns. All obligations of the Guarantors hereunder are joint and several. This Guaranty shall be governed by the laws of the State of Illonois. WITHOUT LIMITING THE RIGHT OF MLBFS TO ENFORCE THIS GUARANTY IN ANY JURISDICTION AND VENUE PERMITTED BY APPLICABLE LAW: (I) GUARANTORS AGREE THAT THIS GUARANTY MAY AT THE OPTION OF MLBFS BE ENFORCED BY MLBFS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE ANY GUARANTOR, CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS OF CUSTOMER MAY BE LOCATED, (II) GUARANTORS IRREVOCABLY SUBMIT TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND (III) GUARANTORS WAIVE ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH FORUM AND ANY AND ALL RIGHTS TO REMOVE SUCH ACTION FROM STATE TO FEDERAL COURT. GUARANTORS FURTHER WAIVE ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND GUARANTORS HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS GUARANTY. GUARANTORS FURTHER WAIVE THE RIGHT TO BRING ANY NON-COMPULSORY COUNTERCLAIMS. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. No modification or waiver of any of the provisions of this Guaranty shall be effective unless in writing and signed by Guarantors and an officer of MLBFS. Dated as of March 29, 2000. Guarantor. Address: /s/ Judy Gross 67-27 168th Street - ------------------------------------ Fresh Meadows, NY 11365 JUDY GROSS /s/ Mark Gross 67-27 168th Street - ------------------------------------ Fresh Meadows, NY 11365 MARK GROSS Witness: /s/ Michael Gross ------------------------------------- Printed Name: MICHAEL GROSS --------------------------------- [LOGO] CLOSING CERTIFICATE - -------------------------------------------------------------------------------- The undersigned, M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY, a corporation organized and existing under the laws of the State of New York ("Customer"), as a primary inducement to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to make a loan to Customer (the "Loan") pursuant to that certain TERM LOAN AND SECURITY AGREEMENT No. 0003552001 between Customer and MLBFS dated as of March 29, 2000 (the "Loan Agreement") DOES HEREBY REPRESENT, WARRANT AND AGREE AS FOLLOWS: 1. All of Customer's representations and warranties in the Loan Agreement are true and correct and remade as of the date hereof, and, without limiting the foregoing: (i) subject only to "Permitted Liens" (as defined in the Loan Agreement), MLBFS has a first lien and security interest upon all of the "Collateral" under the Loan Agreement (including any Collateral financed or refinanced with the proceeds of the Loan), and (ii) the Loan is being applied on account of and will satisfy the "Loan Purpose" under the Loan Agreement. 2. There has not occurred any event which constitutes an "Default" under the Loan Agreement. 3. There has not occurred any material adverse change in the business or financial condition of Customer or any Guarantor of Customer's obligations to MLBFS since the date of the last financial statements submitted to MLBFS. 4. MLBFS is hereby authorized and directed to disburse the proceeds of the Loan in the amount of $150,000.00 as follows: Wire transfer into Customer's WCMA No. 862-07N67. Dated this 30th day of March, 2000 ---- ----- M.J. GROSS & COMPANY, INC. D/B/A DATA CONVERSION LABORATORY By: /s/ Judy Gross /s/ Mark Gross ------------------------------ ----------------------------- Signature(1) Signature(2) Judy Gross Mark Gross ------------------------------ ----------------------------- Printed Name Printed Name Vice President President ------------------------------ ----------------------------- Title Tile EX-23.1 9 b318755_ex23-1.txt INDEPENDENT AUDITOR'S CONSNET 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/A of our report dated May 8, 2002, except for the first three paragraphs of Note 12, as to which the date is May 24, 2002 and the last paragraph of Note 12, as to which the date is July 19, 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 July 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----