-----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, HrYaGbPGYqQiDTWJgcRHeyOyrURfPqfIzqNh32foggwqlurvb24YZGnLHT56IfSy 7lhDGrHuzBCzo6U2z9er9Q== 0001047469-98-036623.txt : 19981008 0001047469-98-036623.hdr.sgml : 19981008 ACCESSION NUMBER: 0001047469-98-036623 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19981007 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JAVELIN SYSTEMS INC CENTRAL INDEX KEY: 0001021917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521945748 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-63993 FILM NUMBER: 98722085 BUSINESS ADDRESS: STREET 1: 1881 LANGLEY AVE CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 7142235130 MAIL ADDRESS: STREET 1: 1881 LANGLEY AVE STREET 2: 2882 C WALNUT AVENUE CITY: IRVINE STATE: CA ZIP: 92614 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998 REGISTRATION NO. 333-63993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ JAVELIN SYSTEMS, INC. (Name of Small Business Issuer in Its Charter) DELAWARE 3571 52-1945748 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification Organization) No.)
17891 CARTWRIGHT ROAD IRVINE, CA 92614 (949) 440-8000 (Address and Telephone Number of Principal Executive Offices) ------------------------ RICHARD P. STACK PRESIDENT AND CHIEF EXECUTIVE OFFICER JAVELIN SYSTEMS, INC. 17891 CARTWRIGHT ROAD IRVINE, CA 92614 (949) 440-8000 (Name, Address, Telephone Number of Agent for Service) ------------------------ COPIES TO: JEREMY D. GLASER, ESQ. CAMERON JAY RAINS, ESQ. MICHAEL A. NEWMAN, ESQ. SCOTT M. STANTON, ESQ. ADAM C. LENAIN, ESQ. CHRISTIAN WAAGE, ESQ. COOLEY GODWARD LLP GRAY CARY WARE & FREIDENRICH LLP 4365 EXECUTIVE DRIVE, SUITE 1100 4365 EXECUTIVE DRIVE, SUITE 1600 SAN DIEGO, CA 92121 SAN DIEGO, CA 92121 (619) 550-6000 (619) 677-1400 ------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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 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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 7, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 1,250,000 SHARES [LOGO] COMMON STOCK All 1,250,000 shares of common stock, par value $0.01 per share (the "Common Stock"), offered hereby are being sold by Javelin Systems, Inc. ("Javelin" or the "Company"). The Company's Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "JVLN." On October 5, 1998, the last reported sale price of the Common Stock was $8.625 per share. See "Price Range of Common Stock." The Company has applied to have the Common Stock approved for quotation, subject to official notice of issuance, on the Nasdaq National Market under the symbol "JVLN." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------------- Per Share......................................... $ $ $ - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Total(3).......................................... $ $ $ - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). (2) Before deducting expenses payable by the Company estimated at $425,000. (3) Certain stockholders of the Company (the "Selling Stockholders") have granted to the Underwriters a 45-day option to purchase up to 187,500 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public and Underwriting Discounts and Commissions will be $ and $ , respectively, and the Selling Stockholders will receive proceeds of $ . The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders if the Underwriters' over-allotment option is exercised. See "Selling Stockholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters, when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject any orders in whole or in part. It is expected that delivery of share certificates will be made against payment therefor at the offices of Van Kasper & Company in San Francisco, California, or through the facilities of Depository Trust Company, on or about , 1998. VAN KASPER & COMPANY L. H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC. MERIDIAN CAPITAL GROUP, INC. , 1998 [LOGO] [PHOTOGRAPHS OF PRODUCTS IN USE IN RETAIL AND RESTAURANT SETTINGS.] Javelin Systems designs, manufactures and markets open systems touchscreen point-of-sale ("POS") computers and provides system integration services primarily for the food service and retail industries. Javelin's POS computers assist restaurants, arenas and pubs to better serve their customers and capture and analyze information to manage their businesses. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." Javelin, Javelin-Wedge 5, Javelin-Wedge P, Javelin-LC, Javelin-LCP, Javelin-LP, Javelin-HHT 40, CCI and Posnet are trademarks of the Company. All other trademarks or service marks used in this Prospectus are the property of their respective holders. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF (I) THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) WARRANTS OUTSTANDING AS OF THE DATE OF THIS PROSPECTUS, OR (III) OPTIONS GRANTED OR RESERVED UNDER THE COMPANY'S STOCK OPTION PLANS. THE COMPANY Javelin Systems, Inc. ("Javelin" or the "Company") designs, manufactures and markets open system touchscreen point-of-sale ("POS") computers and provides POS systems integration services primarily for the food service and retail industries. POS systems incorporating the Company's products enable restaurants and retailers to capture, analyze, disseminate and use information throughout an enterprise from the point of sale to the in-store "back office" to the enterprise's headquarters. These POS systems provide transaction processing, in-store operating controls, and timely information used to manage inventory and costs, analyze sales data and customize products and services. The Company's product family of network-ready computers integrates substantially all of the functionality of standard desktop personal computers into durable, small footprint touchscreen workstations that run on industry standard open operating systems. Javelin also has a global POS systems integration business that assists large multi-site corporate customers in identifying the optimal multi-vendor open systems solution for a customer's particular business. The Company manages the full deployment and ongoing support of the POS solution. The Company has extensive experience resolving the integration, implementation and management issues faced by food service providers and retailers and substantial knowledge of advanced information technologies, POS systems and the numerous software applications developed by information system and software vendors for these markets. The ability to provide its customers with systems integration and POS system support service allows Javelin to capture a greater percentage of a customer's expenditures on any given POS system installation, provides Javelin with a direct marketing channel to end user customers for the sale of its POS hardware products and allows it to build a base of recurring help desk, maintenance and field service revenues. In addition, by providing these post-installation services, Javelin has the opportunity to keep its customers abreast of applications software, business enterprise integration application, networking and hardware developments and make recommended changes and upgrades to systems when appropriate. The Company estimates there are more than 450,000 restaurants and more than 1.6 million retail stores in the United States alone. These restaurants and retail stores are increasingly part of multi-location chains that need to capture, analyze and disseminate information throughout their entire enterprise. Food service providers and retailers require robust, integrated POS systems and services that can reliably manage large numbers of individual transactions. Additionally, through sales and service offices recently opened in England, Australia and Singapore, along with the pending acquisitions of European systems integration companies, Javelin is serving international markets. Javelin believes that Western Europe presents a particularly attractive market for its products and services. The Company utilizes its management team's and product development staff's experience and in-depth knowledge of computer technology to engineer products that are relatively low priced without sacrificing features and standards which are required by customers. Because of this experience, the Company believes it is able to introduce products with less lead time than that required by its competitors while competitively pricing its products. Key product requirements of the Company's customers include touchscreens, a small footprint, durability, networking capability, reliability and service. Javelin distributes its products through OEMs, VARs, and through direct sales. The Company's OEM and VAR relationships can play a critical role in getting the Company's products to market through their 3 direct knowledge of new business opportunities and changing customer requirements. End users of the Company's hardware products include Blimpies International, Greyhound Lines Inc., Madison Square Garden, Universal Studios, Chevron Corporation and others. Service customers include ARAMARK Corp., Popeye's Inc., Church's Fried Chicken Inc., Seattle's Best Coffee, Baskin-Robbins USA Co. and Dunkin' Donuts Incorporated. The Company's objective is to become a leading developer of POS hardware systems and to be the premier POS systems integrator for multi-site chain operators in the food service and retail industries. Principal elements of the Company's strategy include pursuing large customers directly and through the Company's OEM relationships, introducing new products on a timely basis, focusing on international business opportunities, minimizing production costs and growing the base of recurring service revenues. THE OFFERING Common Stock offered............................................ 1,250,000 shares Common Stock to be outstanding after the Offering............... 5,365,025 shares(1) Use of proceeds................................................. Repayment of debt, potential acquisitions, including RGB/Trinet Limited and Jade Communications Limited, product development, working capital and other general corporate purposes. Nasdaq symbol................................................... JVLN
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
INCEPTION TO FISCAL YEAR ENDED JUNE 30, JUNE 30, ------------ ------------------------- 1996 1997 1998 ------------ ---------- ----------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Product sales....................... $ 1,463,600 $7,014,600 $27,132,400 Service............................. -- -- 2,513,700 ------------ ---------- ----------- Total revenues.................... 1,463,600 7,014,600 29,646,100 Gross profit.......................... 359,400 1,515,100 7,910,100 Research and development expenses..... 46,700 396,400 874,000 Selling and marketing expenses........ 83,500 390,800 1,179,900 General and administrative expenses... 244,700 859,900 4,195,500 Income (loss) from operations......... (15,500) (132,000) 1,660,700 Net income (loss)..................... $ (54,300) $ (826,900)(3) $ 1,014,100 Net income (loss) per share(2): Basic............................... $ (0.03) $ (0.30)(3) $ 0.28 Diluted............................. $ (0.03) $ (0.30)(3) $ 0.27 Shares used in computing earnings (loss) per share(2): Basic............................... 2,086,260 2,782,535 3,622,604 Diluted............................. 2,086,260 2,782,535 3,750,611
JUNE 30, 1998 ---------------------------- ACTUAL AS ADJUSTED(4) ------------ -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................................................... $ -- $ 6,431,600 Working capital................................................................... 4,080,700 11,855,300 Total assets...................................................................... 22,531,300 28,962,900 Short-term debt................................................................... 1,643,000 300,000 Long-term debt, net of current portion............................................ 1,200,000 1,200,000 Total stockholders' equity........................................................ 11,398,900 20,973,500
4 (1) Excludes: (i) 833,700 shares of Common Stock reserved for issuance upon exercise of options outstanding at a weighted average exercise price of $5.16 per share as of August 15, 1998; (ii) 154,330 shares of Common Stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $9.27 per share as of August 15, 1998; and (iii) an aggregate of 519,000 shares of Common Stock reserved for future issuance under the Company's 1997 Equity Incentive Plan (the "1997 Plan"). See "Management--Stock Option Plans," and "Description of Capital Stock." (2) See Note 2 of Notes to Javelin Systems, Inc. Consolidated Financial Statements (the "Javelin Consolidated Financial Statements") for a description of the computation of the net income (loss) per share and the number of shares used in the per share calculations. (3) Net loss for the year ended June 30, 1997 includes interest expense of approximately $636,100 related to warrants issued in connection with certain promissory notes. This non-recurring interest expense is attributable to the imputation of interest based upon the fair value of the warrants and did not represent a cash expense to the Company. (4) As adjusted to give effect to the sale of 1,250,000 shares of Common Stock to be sold in the Offering by the Company hereby at an assumed public offering price of $8.625 per share after deducting estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds from the sale of such shares. Other than a reduction in cash and cash equivalents and working capital of $1.8 million, as adjusted information does not give effect to the pending acquisitions of RGB/ Trinet Limited or Jade Communications Limited. See "Use of Proceeds" and "Capitalization." ------------------------------ The following table presents certain operating and other data for each of the four quarters in the fiscal year ended June 30, 1998. The information for each of the quarterly periods is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that management considers necessary to fairly present such information. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations."
QUARTER ENDED --------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1997 1997 1998 1998 ------------- ------------ ------------- ------------- Revenues: Product sales........................................ $ 2,950,100 $ 4,452,200 $ 9,357,400 $ 10,372,700 Service.............................................. -- -- 1,286,000 1,227,700 ------------- ------------ ------------- ------------- Total revenues..................................... 2,950,100 4,452,200 10,643,400 11,600,400 Gross profit........................................... 681,300 1,024,700 2,887,600 3,316,500 Research and development expenses...................... 137,200 169,500 250,100 317,200 Selling and marketing expenses......................... 147,500 261,300 438,100 333,000 General and administrative expenses.................... 374,700 448,200 1,581,700 1,791,000 Income from operations................................. 21,900 145,700 617,700 875,300 Net income............................................. $ 21,100 $ 92,600 $ 353,400 $ 547,000 Units shipped.......................................... 1,638 2,351 2,535 4,083
------------------------ The Company was incorporated in the State of Delaware on September 19, 1995. The Company's executive offices are located at 17891 Cartwright Road, Irvine, California, 92614, and its telephone number is (949) 440-8000. The Company's World Wide Web address is http://www.jvln.com. Information contained in such World Wide Web site shall not be deemed to be part of this Prospectus. 5 RECENT ACQUISITIONS Since its inception, Javelin has designed, manufactured and marketed open system touchscreen POS computers. Through acquisitions of POS systems service providers, Javelin intends to also become a global provider of POS systems integration and support services. The ability to provide its customers with systems integration and POS system support service allows Javelin to capture a greater percentage of a customer's expenditures on any given POS system installation, provides Javelin with a direct marketing channel to its end user customers for the sale of its POS hardware products and allows it to build a base of recurring help desk, maintenance and field service revenues. In addition, by providing these post-installation services, Javelin has the opportunity to keep its customers abreast of applications software, business enterprise integration application, networking and hardware developments and make recommended changes and upgrades to systems when appropriate. In December 1997, Javelin acquired CCI Group, Inc. ("CCI") and POSNET Computers, Inc. ("Posnet"), two POS systems integrators. CCI and Posnet have been combined and now collectively operate as CCI. CCI enables the Company to offer turn-key systems integration services, including system design, staging, training, deployment and after-market product support and maintenance throughout the United States. CCI has also provided Javelin with a direct marketing channel to reach end users. With its recent and planned acquisitions, Javelin intends to replicate this marketing, distribution and service revenue strategy globally. In June 1998, Javelin acquired Aspact IT Services ("Aspact"), a consulting and systems integration business based in Singapore. In October 1998, Javelin entered into definitive agreements to acquire each of RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited ("Jade"), both based in the United Kingdom. RGB/Trinet provides networking systems integration services while Jade provides POS systems integration services similar to CCI. Through these acquisitions, Javelin will have the ability to provide POS systems hardware, systems integration and support services throughout what it believes to be a fundamentally untapped POS systems market in Western Europe. Pursuant to the terms of the definitive acquisition agreements, in consideration for all of the outstanding equity interests of RGB/Trinet and Jade, Javelin will pay an aggregate of approximately $1.8 million in cash and issue an aggregate of 25,000 shares of Javelin Common Stock, plus shares of Javelin Common Stock valued at approximately $1.5 million based on the average closing price of Javelin Common Stock over the ten (10) days immediately preceding to the business day immediately prior to the closing date of the acquisitions of RGB/Trinet and Jade. Javelin may issue additional shares valued at an aggregate of approximately $6.6 million pursuant to earnout provisions contained in the definitive agreements. Each of the acquisitions is conditioned upon Javelin having secured sufficient funds to finance the cash portion as previously described and, at Javelin's option, on the price per share of Javelin Common Stock being not less than $7.50 on the business day preceding the closing date. The agreements are each terminable if the acquisitions are not completed by November 15, 1998. 6 RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. LIMITED OPERATING HISTORY; RECENT OPERATING PROFITABILITY The Company was incorporated in September 1995 and has a limited operating history upon which to base an evaluation of its business and prospects. Although the Company had net income of approximately $1.0 million for its fiscal year ended June 30, 1998, the Company has experienced operating losses in the past. The Company's operating results for future periods are subject to all of the risks and uncertainties inherent in the development and maturation of the business. The Company anticipates that in the future it will make significant investments in its operations, particularly to support new product development and increased sales activities. The Company intends to make investments on an ongoing basis, primarily from cash generated from operations, and to the extent necessary, funds available from the Company's line of credit and from this Offering, as the Company develops and introduces new products and services and expands into new markets. There can be no assurance that recent revenue growth is indicative of future sales growth, if any. The Company has only recently achieved profitability on both a quarterly and annual basis, and there can be no assurance that the Company will be able to sustain profitability in any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGEMENT OF GROWTH The Company is currently experiencing rapid growth and expansion, which has placed, and will continue to place, a strain on its administrative, engineering and operating resources and increased demands on its systems and controls. The Company anticipates that continued growth will require it to recruit and hire a number of additional management personnel, particularly in operational management. There can be no assurance that the Company will be successful at hiring or retaining these personnel. The Company's ability to manage its growth successfully will also require the Company to continue to expand and improve its operational, management and financial systems and controls. If the Company's management is unable to manage growth effectively, the Company's business, financial condition and results of operations may be materially and adversely affected. In addition, the Company plans to increase its operating expenses in order to expand its product line, increase its sales and marketing operations, increase the volume of products manufactured, develop new distribution channels, broaden its customer support capabilities, grow its international sales force, and develop and fully integrate its international operations. There can be no assurance that this internal expansion will be successfully implemented, that the cost of this expansion will not exceed the revenues generated, or that the Company's sales and marketing organization will be able to successfully compete against the significantly more extensive and well-funded sales and marketing operations of many of the Company's current or potential competitors, both domestically and internationally. Moreover, the foregoing expenses may be incurred prior to any potential positive impact on revenues. If these expenses are not subsequently followed by sufficient increased revenues, the Company's operating results and financial condition would be materially adversely affected. If the Company is unable to effectively execute its expansion, the Company's results of operations and financial condition could be materially adversely affected. 7 SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS The Company has experienced in the past and may in the future experience significant fluctuations in its operating results. Such fluctuations may be caused by many factors, including, but not limited to: the size and timing of individual orders, some of which may be of significant size; seasonality of revenues; employee hiring and retention, particularly with respect to sales and consulting personnel; lengthy sales and implementation cycles; reduction in demand for existing products and services and shortening of product life cycles; the timing of the introduction of products, product enhancements or services by the Company or its competitors; competition and pricing in the POS systems industry; market acceptance of new products; service personnel utilization rates; the ability of the Company to expand its international and domestic sales, as well as the mix of such sales; foreign currency exchange rates; changes in the mix of products and services sold; general health of the restaurant industry, particularly the quick service restaurant ("QSR") segment; the ability of the Company to generate service agreements; product quality problems; the ability of the Company to control costs; the Company's success in establishing and expanding its direct and indirect distribution channels; the mix of distribution channels through which the Company's products are sold; and general economic conditions. The Company's products are typically shipped shortly after orders are received and, consequently, order backlog at the beginning of any quarter typically represents only a small portion of that quarter's expected revenues. As a result, product revenues in any quarter are substantially dependent on orders booked and shipped in that quarter, and revenues for any future quarter are not predictable with any significant degree of accuracy. Product revenues are also difficult to forecast because the market for the Company's products is rapidly evolving and the Company's sales and implementation cycles, from initial evaluation to multiple product purchases and the provision of support services, vary substantially from customer to customer. The Company has in the past experienced and expects to continue to experience quarters or periods with individual product or service orders which are significantly larger than its typical product or service orders, adding to the unpredictability of the Company's revenues. The Company's expense levels, however, are based in significant part on the Company's expectations of future revenues and therefore are relatively fixed in the near term. In addition, the Company expects expense levels to increase in the near term as the Company attempts to expand its operations. Net income may be disproportionately affected by an unanticipated decline in revenue for a particular quarter because a relatively small amount of the Company's expenses varies with its revenue in the near term. Moreover, the POS systems industry is generally dependent on system roll-outs with fixed time horizons. The Company's operating results, particularly with respect to its systems integration business, may vary significantly because of the Company's failure to obtain major projects, the cancellation or delays in the progress of major projects for any reason and the Company's failure to timely replace projects that have been completed or are nearing completion. Any of these factors could cause the Company's results of operations to fluctuate significantly from period to period, including on a quarterly basis. The Company may also experience relatively weaker demand for its products in August, particularly in international markets, and December as a result of reduced sales activities during those months. As a result of the above factors, revenues and earnings for any quarter are subject to significant variation and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Fluctuations in operating results may also result in volatility in the price of the Company's Common Stock. Accordingly, it is likely that in some future quarter the Company's total revenues or operating results will be below the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the price of the Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." RISKS ASSOCIATED WITH ACQUISITIONS The Company has recently acquired CCI Group, Inc. ("CCI"), POSNET Computers, Inc. ("Posnet") and Aspact IT Services Ltd. ("Aspact"). Acquisitions involve numerous risks, including difficulties in the 8 assimilation of the operations and personnel of the acquired business, the integration of management information and accounting systems of the acquired business, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no direct prior experience, and the potential loss of key employees of the acquired business. In particular, CCI, Posnet and Aspact have self-contained management information and accounting systems, and the Company has not yet implemented a management information and accounting system that fully integrates each acquired entity's system into the overall enterprise. Further, CCI, Posnet and Aspact are POS systems integrators and service providers and therefore operate in a market in which the Company has no direct prior experience. The Company currently intends as part of its business strategy to continue to pursue additional acquisitions of complementary businesses. The Company's management will be required to devote substantial time and attention to the integration of the recently acquired, or any future acquired, businesses and to any material operational or financial problems arising as a result of the acquisitions. There can be no assurance that operational or financial problems will not occur as a result of any acquisition. Failure to effectively integrate acquired businesses could have a material adverse effect on the Company's business, financial condition and results of operations. The Company intends to continue to evaluate potential acquisitions of, or investments in, companies which the Company believes will complement or enhance its existing business. In October 1998, the Company entered into definitive agreements to acquire each of RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited ("Jade") both of which are located in England. The consummation of these acquisitions is subject to a number of conditions, including Javelin having secured funds necessary to finance the cash portion of such acquisitions. There can be no assurance that the Company will consummate such acquisitions, or if consummated, that such acquisitions will ultimately be beneficial to the Company. The Company may face additional challenges in integrating such acquisitions if consummated due to RGB/Trinet's and Jade's potentially large size and overseas location and may need to divert significant management resources in order to accomplish such integration. The issuance of shares of the Company's Common Stock to the equity holders of RGB/Trinet and Jade pursuant to earnout and price protection provisions of the respective acquisition agreements may result in dilution to holders of the Company's Common Stock. Future acquisitions by the Company may also result in potentially dilutive issuances of equity securities, the incurrence of additional debt and amortization expenses related to goodwill and other tangible assets which could adversely affect the Company's business, results of operations and financial condition. Except for the letter of intent to acquire RGB/Trinet and Jade, the Company currently does not have any arrangements or understandings with respect to any specific future acquisitions. There can be no assurance that the Company will be able to identify or consummate any acquisition in the future or, if consummated, that any acquisition will ultimately be beneficial to the Company. RISKS OF INTERNATIONAL SALES AND INTERNATIONAL OPERATIONS The Company derived approximately 10% of its total revenues from sales outside North America, principally in Europe, in the year ended June 30, 1998. If the Company completes its acquisitions of RGB/ Trinet and Jade, the Company anticipates that the percentage of revenues attributable to sales in international markets will increase. The Company believes that its growth and profitability will require additional expansion of its sales in foreign markets. The Company has sales or support staff located in Singapore, Australia and England. The Company's expansion into foreign countries has required and will continue to require significant management attention and financial resources, particularly with respect to the expansion of the Company's sales force, the transferring of a significant portion of the Company's manufacturing operations to a third-party manufacturer in Singapore, and the Company's operation and management of its recently acquired service-based subsidiary in Singapore. To increase international sales in subsequent periods, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. To the extent the Company is unable to expand 9 international sales in a timely and cost-effective manner, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for the Company's products or services. Although the Company's product sales are currently denominated in U.S. dollars, the Company's international service contracts are currently denominated in local currency and, accordingly, gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international service revenues may contribute to fluctuations in the Company's operating results. The Company does not currently utilize foreign currency hedging instruments. There can be no assurance that fluctuations in currency rates will not materially adversely impact the Company's business, financial condition and results of operations in the future. Additional risks inherent in the Company's international business activities, including its relationship with the expected third-party manufacturer of the Company's products in Singapore, include various and changing regulatory requirements, costs and risks of relying upon local subcontractors, increased sales and marketing and research and development expenses, export restrictions and availability of export licenses, tariffs and other trade barriers, political and economic instability, difficulties in staffing and managing foreign operations, longer payment cycles, seasonal reduction in business activities, potentially adverse tax laws, complex foreign laws and treaties and the potential for difficulty in accounts receivable collection. Any of these factors could have a material adverse effect on the Company's business, financial condition or results of operations. Certain of the Company's customer purchase agreements are governed by foreign laws, which may differ significantly from U.S. laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect amounts owing to the Company should any customer refuse to pay such amounts. In addition, the Company is subject to the Foreign Corrupt Practices Act (the "FCPA") which may place the Company at a competitive disadvantage to foreign companies that are not subject to the FCPA. To date, the Company has not been negatively affected by the recent turmoil in Asian markets; however, certain of the Company's customers, suppliers and third-party manufacturers located in Asian markets may encounter financial difficulties resulting from foreign currency fluctuations or other economic, social or political instabilities which could restrict their ability to fulfill their contractual obligations to the Company. In particular, the Company operates a consulting and systems integration subsidiary in Singapore and plans to transfer a significant portion of its manufacturing operations to a third-party manufacturer in Singapore. There can be no assurance that a decline in the value of any relevant foreign currency relative to the U.S. dollar or an economic, social or political change in any relevant country, will not have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON SIGNIFICANT CUSTOMERS The Company has derived, and believes that it may continue to derive, a significant portion of its revenues from a limited number of large customers. For the fiscal year ended June 30, 1998, AFC Enterprises, Inc. accounted for 11% of the Company's revenues. For the fiscal year ended June 30, 1997, ScanSource, Inc. and CompUSA Inc. each accounted for 16% of the Company's revenues, respectively. Most customer product orders are placed within the quarter that delivery is expected; therefore, projections of future orders may be unreliable. In addition, the amount of the Company's products or services required by any of its customers can be adversely affected by a number of factors, including technological developments and the internal budget cycles of its customers. Moreover, the volume of work performed for specific customers is likely to vary from year to year, and a major customer in one year may not purchase the Company's products or services in a subsequent year. The completion, cancellation or significant reduction in the scope of a large customer product or service order, or the failure by the Company to obtain future orders from a significant customer, could have a material adverse effect on the Company's business, financial condition and results of operations. As a result of the Company's focus in specific vertical markets, economic and other conditions that affect these industries could lead to a reduction in 10 capital spending by its target customers, which would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's success is dependent, in part, upon the continued services of certain key executive officers, including Richard P. Stack, the Company's President and Chief Executive Officer, Robert D. Nichols, the Company's Executive Vice President and President of CCI Group, Inc., C. Norman Campbell, the Company's Vice President Engineering, and Horace M. Hertz, the Company's Chief Financial Officer and Secretary. The Company believes that its future success depends to a significant degree upon the continued contributions of its existing key management, sales, marketing, research and development and manufacturing personnel, many of whom would be difficult to replace. The Company has entered into employment agreements with Messrs. Stack, Nichols and Campbell, and the Company carries key-man life insurance on Messrs. Stack and Campbell. The Company also believes its future success will also depend largely upon its ability to attract and retain highly-skilled hardware engineers, managerial, and sales and marketing personnel. Competition for such personnel is intense, and the Company competes in the market for personnel against numerous companies, including larger, more established companies with significantly greater financial resources than the Company. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel. The loss of certain key employees or the Company's inability to attract and retain other qualified employees could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The market for the Company's products and services is highly competitive, subject to rapid change and sensitive to new product introductions or enhancements and marketing efforts by industry participants. The Company expects to continue to experience significant and increasing levels of competition in the future, in part as open systems architecture in its targeted industries becomes more common. The principal elements of competition related to the Company's products include price, product features and performance, compatibility with open systems, quality and reliability, brand awareness, level of customer service and quality of display. The POS systems integration industry is also highly competitive and undergoing continual change. The principal elements of competition related to the Company's systems integration services include reputation, scope of services provided, availability of resources and price. In many of the Company's markets, traditional computer hardware manufacturing, communications and consulting companies provide the most significant competition. The Company must also compete with smaller service providers that have been able to develop strong local or regional customer bases. Most of the Company's competitors for its products and services, as well as certain potential competitors, are more established, benefit from greater name recognition, have significantly greater financial, technological, production and marketing resources, and have more extensive distribution networks than the Company. The Company believes the use of open systems architecture in its targeted industries is an important competitive element. Several of the Company's competitors currently also offer open systems and the Company believes that the number of competitors offering open systems solutions will grow over the next several years. The Company anticipates that a significant source of future competition may be from existing competitors in the POS products and services market that the Company believes are currently attempting to develop POS systems and support services utilizing open systems architecture. Due to the greater sales, marketing, product development and financial resources of the Company's competitors, the Company anticipates that competition from these competitors will intensify in the future. In order to effectively compete against these competitors, the Company will need to continue its growth trend and attain sufficient revenues to have the resources to timely develop new products and services in response to evolving technology and customer demands and to sell products and services through a broad distribution channel in competition with these other existing and potential competitors. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively in this marketplace. 11 The Company's competitors include a substantial number of large well-established companies including International Business Machines (IBM), MICROS Systems, Inc., Par Technology Corporation, Radiant Systems, Inc., NCR Corp., Panasonic Communications and Systems Co., Fujitsu, Ltd. and ICL Retail Systems, each of which also offers open systems architecture products and services related thereto. There can be no assurance that the Company will be able to compete effectively or that these existing substantial competitors, or new competitors, will not develop competitive products and services with favorable pricing. Moreover, the Company has little or no proprietary barriers to entry that could keep its competitors from developing similar products or services and technology or selling competing products or services in the Company's markets. Increased competition from manufacturers or distributors of products similar to or competitive with the Company's products, or from service providers that provide services similar to the Company's services, could result in price reductions, reduced margins and loss of market share or could render the Company's technology obsolete, all of which could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to successfully compete in this marketplace or develop sufficient new products and services to remain competitive, and any failure to do so could have a material adverse effect on its results of operations and financial condition. DISTRIBUTION RISKS The Company presently markets its products primarily through OEMs, VARs and direct sales to end-users, and intends to continue to utilize these distribution channels in the future. Moreover, as part of the Company's strategy to increase international sales, the Company will need to more fully develop similar distribution channels in international markets. The Company also anticipates that its services business will increase in the future, resulting in a greater emphasis on marketing and distributing directly to end users. As the Company increasingly relies on direct sales to end users, the Company anticipates competing to a certain extent with its OEMs and VARs. This competition may harm the Company's relationship with certain of its OEMs and VARs, potentially resulting in the termination of some relationships with the Company. Failure by the Company to expand its distribution channels, develop its international distribution channels or manage any potential channel conflicts could have a material adverse effect on the Company's growth. Moreover, any factors, such as general adverse economic conditions, high inventory levels, financial condition, marketing considerations or governmental regulations and restrictions, that affect the ability of the Company's resellers to sell the Company's products will adversely affect the Company's sales and could have a material adverse impact on the Company's financial condition and results of operations. There can be no assurance that the Company will be able to attract resellers or OEMs that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service or that the Company will be able to manage conflicts among its resellers and/ or OEMs. In addition, the Company's agreements with resellers typically do not restrict resellers from distributing competing products, and in most cases may be terminated by either party without cause. The inability to recruit, manage or retain important resellers or OEMs, or their inability to penetrate their respective market segments, could materially adversely affect the Company's financial condition and results of operations. The Company's future success will also depend in part upon the ability of the Company to attract, integrate, train, motivate and retain sales and technical support personnel. The Company intends to rely more heavily in the future on direct sales to end users, and there can be no assurance that the Company's efforts to expand its direct sales force will be successful or that the cost of these efforts will not exceed the revenue generated. In addition, the Company expects to experience a significant time lag between the date sales personnel are hired and the date sales personnel become fully productive. The Company's inability to manage its sales force expansion effectively could have a material adverse effect on the Company's 12 business, financial condition and results of operations. Competition for sales and support personnel is intense, and the Company competes in the market for sales personnel against numerous companies, including larger, more established companies with significantly greater financial resources than the Company. There also can be no assurance that the Company will be successful in attracting and retaining sales personnel, and the loss of certain sales personnel or the Company's inability to attract and retain other qualified sales personnel could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF PRODUCT DEFECTS; PRODUCT AND OTHER LIABILITY. Computer products and systems as complex as those sold by the Company often contain undetected errors or performance problems, particularly during new and enhanced product launches. Despite product testing prior to introduction, the Company's products have in the past, on occasion, contained errors that were discovered after commercial introduction. Errors or performance problems may also be discovered in the future. In addition, the Company's computer products have a warranty that covers defective material and workmanship during the twelve-month warranty period commencing on the date of delivery of the products. Any future defects discovered after shipment of the Company's products could result in loss of sales, delays in or elimination of market acceptance, damage to its brand or to the Company's reputation, or product returns and warranty costs, particularly in the QSR market where certain product defects could cause a restaurant's POS systems and cash registers to be inoperable for periods of time. Any loss of sales, delays in market acceptance or product returns and warranty costs that result from defects discovered after shipment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company attempts to make adequate allowance in its new product release schedule for testing of product performance. Because of the complexity of the Company's products, however, the release of new products by the Company may be postponed should test results indicate the need for redesign and retesting, or should the Company elect to add product enhancements in response to customer feedback. In addition, third-party products, upon which the Company's products are dependent, may contain defects which could reduce or undermine entirely the performance of the Company's products. In addition, although the Company's sales agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims, there can be no assurance that these limitations of liability would be enforceable or would otherwise protect the Company from liability for damages to a customer resulting from a defect in one of the Company's products. Although the Company maintains product liability insurance covering certain damages arising from implementation and use of the Company's products, there can be no assurance that this insurance would cover or be sufficient to cover any claims sought against the Company. Any product liability or other claims against the Company, if successful and of sufficient magnitude, could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON THIRD-PARTY MANUFACTURERS AND SUPPLIERS Although the Company has capacity to manufacture limited volumes of its products, the Company currently relies upon, and intends in the future to rely more heavily upon, third-party manufacturers for the manufacture, assembly and subassembly of its products. In particular, the Company intends to transfer a significant portion of its manufacturing operations to a third-party manufacturer in Singapore. Any termination of, or significant disruption in, the Company's relationship with third-party manufacturers of its products may prevent the Company from filling customer orders in a timely manner, as the Company generally does not maintain large inventories of its products or components. The Company has occasionally experienced and may in the future experience delays in delivery of products and delivery of products of inferior quality from some of its third-party manufacturers. Although alternate manufacturers are available to produce the Company's products, the number of manufacturers of some products is limited, and qualifying a replacement manufacturer could take several months. In addition, the Company's use of third- party manufacturers reduces direct control over product quality, manufacturing timing, yields and costs 13 since the Company must rely on the third-party manufacturers' ability to identify the Company's requirements for products and components, the manufacturers' general competence and ability to progress along the learning curve relating to the manufacture of the Company's products, and the manufacturers' schedules and capacity. Disruption of the manufacture of the Company's products or failure of a third-party manufacturer to remain competitive in functionality or price could delay or interrupt the Company's ability to manufacture or deliver its products to customers on a timely basis and would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, although arrangements with the Company's manufacturers may contain provisions for warranty obligations on the part of the third-party manufacturers, the Company remains primarily responsible to its customers for warranty obligations. The Company also depends upon third-party suppliers to deliver components that are free from defects, competitive in functionality and cost and in compliance with the Company's specifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or more components or failure of a third-party supplier to comply with any of the Company's procurement needs could delay or interrupt the Company's ability to manufacture or deliver its products to customers on a timely basis and would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, any factors, such as general adverse economic conditions, financial condition or government regulations and restrictions, that affect the Company's third-party manufacturers or suppliers could have a material adverse impact on the Company's business, financial condition and results of operations. RISKS OF EXPANSION IN CERTAIN MARKET SECTORS Although the Company has historically sold most of its products and services to the food service industry, the Company is increasingly focusing on selling its products and services to retailers and the industrial market. To date, the Company has only recognized a limited amount of revenue in these markets. There can be no assurance that the Company's products and services will gain acceptance in or meet these sectors' expectations and needs. In addition, the Company may attempt to penetrate other markets. The inability of the Company, for any reason, to successfully sell its products and services into these markets could materially adversely affect the Company's growth. EVOLVING TECHNOLOGY AND MARKET The POS computer industry is characterized by evolving technology and industry standards. The Company's touchscreen computers presently consist of the Javelin-Wedge 5, the Javelin-Wedge P, the Javelin-LC and the Javelin-LCP, which are sold in various configurations to meet the needs of the Company's customers. The Company is in the process of developing additional touchscreen computers and intends to introduce new products during the fiscal year ending June 30, 1999, although no assurance can be given that the Company will be successful in developing or introducing any new products. The Company's success will depend, in part, on its ability to maintain and enhance its existing products and broaden its product offerings by developing and introducing new products that keep pace with technological developments in a cost effective manner, respond to evolving customer preferences and requirements and achieve market acceptance. Lack of market acceptance for the Company's existing or new products, the Company's failure to introduce new products in a timely or cost-effective manner or the Company's failure to achieve a technological advantage over its competition while also remaining price competitive, could materially adversely affect the Company's results of operations and financial condition. There can be no assurance that the Company will be successful in its product development efforts. In addition, there can be no assurance that the Company's products, even if successfully developed, will achieve timely market acceptance. Moreover, the introduction of products embodying new technology and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. 14 The Company's future success will depend on its ability to continue to develop and manufacture new competitive products and to enhance its existing products, both of which will require continued investment in engineering and product development. The success of product enhancements and new products depends on a variety of factors, including product selection and specification, timely and efficient completion of product design, cost-effective implementation of the manufacturing and assembly processes and effective sales and marketing efforts. There can be no assurance that the Company will be able to successfully manage all of the diverse aspects of successful new product development in order to develop and maintain competitive products. LACK OF PATENT PROTECTION The Company holds no patents and believes that its competitive position is not materially dependent upon patent protection. The Company believes that most of the technology used in the design and manufacture of most of the Company's products is generally known and available to others. Consequently, there can be no assurances that others will not develop, market and sell products substantially equivalent to the Company's products, or utilize technologies similar to those used by the Company. The Company is aware of at least one competitor that has attempted to copy the Company's products in the past, and there can be no assurance that similar attempts will not be made in the future. Although the Company believes that its products do not infringe on any third party's patents, there can be no assurance that the Company will not become involved in litigation involving patents or proprietary rights. Patent and proprietary rights litigation entails substantial legal and other costs, and there can be no assurance that the Company will have the necessary financial resources to defend or prosecute its rights in connection with any litigation. Responding to, defending or bringing claims related to the Company's rights to its intellectual property may require the Company's management to redirect its resources to address these claims, which could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS Upon completion of this Offering, the Company's principal stockholders, executive officers, directors and affiliated individuals and entities together will beneficially own approximately 41.4% of the outstanding shares of Common Stock (38.3% if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders, acting together, will be able to influence significantly and possibly control most matters requiring approval by the stockholders of the Company, including approvals of amendments to the Company's Certificate of Incorporation, mergers, sales of all or substantially all of the assets of the Company, going private transactions and other fundamental transactions. In addition, the Company's Certificate of Incorporation does not provide for cumulative voting with respect to the election of directors. Consequently, the present directors and executive officers of the Company, together with the Company's principal stockholders, may be able to control the election of the members of the Board of Directors of the Company. Such a concentration of ownership could have an adverse effect on the price of the Common Stock, and may have the effect of delaying or preventing a change in control of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. FUTURE CAPITAL REQUIREMENTS The Company has expended and will continue to expend substantial funds on expansion of its sales and marketing efforts, expansion of its services business, potential acquisitions and product development. The Company expects that the net proceeds of this Offering, together with current sources of financing available to the Company, will be sufficient to fund the Company's operations for the next eighteen months. Thereafter, the Company may require additional funds to finance its operations. The precise amount and timing of the Company's funding needs cannot be determined at this time, and will depend upon a number of factors, including the market demand for the Company's products and services, the progress of the Company's product development efforts, and the Company's management of its cash, 15 accounts payable, inventory and other working capital items. There can be no assurance that, if required by the Company in the future, funds will be available on terms satisfactory to the Company, if at all. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the existing stockholders of the Company will be reduced, the existing stockholders may experience additional dilution and such securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. Additionally, any debt financing that may be available to the Company may include restrictive covenants on the Company. Any inability to obtain needed funding on satisfactory terms may require the Company to reduce planned capital expenditures, to scale back its manufacturing or other operations or to enter into financing arrangements on terms which it would not otherwise accept, and could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON INDEPENDENT SOFTWARE PROVIDERS The Company produces PC-based open system hardware for the food service and retail industries; however, the Company does not develop software. Consequently, the Company is dependent upon third party software providers to develop the POS application software that operates on the Company's hardware platform. As in other sectors of the computer industry, hardware sales can often be driven by advances in software technology. Accordingly, if software providers do not, or are unable to, continue to provide state-of-the-art POS application software that runs on the Company's hardware, the Company's financial condition and results of operations could be materially adversely affected. IMPACT OF YEAR 2000 ISSUES The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to "00". The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is reviewing both its information technology and its non-information technology systems to determine whether they are year 2000 compliant, and to date the Company has not identified any material systems which are not year 2000 compliant. The Company has not made any material expenditure to address the year 2000 problem and at present does not anticipate that it will be required to make any such material expenditure in the future. The Company has initiated formal communications with all significant suppliers and service providers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate the year 2000 problem. Although the Company has received verbal assurances of year 2000 compliance from certain of such third parties, the Company has not yet received written assurances of year 2000 compliance from the third parties with whom it has relationships. The Company believes its operations will not be significantly disrupted even if third parties with whom the Company has relationships are not year 2000 compliant. In the event that the Company's suppliers are unable to provide sufficient quantities of materials or goods to the Company as a result of their failure to be year 2000 compliant, the Company believes that it can obtain adequate supplies of materials and goods at comparable prices from other sources. In the event that the Company's OEMs and VARs are adversely affected by any failure to become year 2000 compliant and are therefore unable to purchase anticipated quantities of the Company's products on a timely basis, the Company may seek to replace such OEMs and VARs. Nevertheless, the Company believes that any year 2000 compliance problems of its suppliers, OEMs or VARs could cause the Company's results of operations to fluctuate on a period to period basis. Uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance, and the Company intends to continue to make efforts to ensure that third parties with whom it has relationships are year 2000 compliant. Any year 2000 compliance problem of either the Company or third parties with whom the 16 Company has relationships could materially adversely affect the Company's business, financial condition or results of operations. The year 2000 problem could also have an effect on the Company's revenues. Demand for the Company's products and services may decline after January 1, 2000 as the Company may not be able to incorporate its products and services into a customer's year 2000 driven POS retrofit. Similarly, many companies may spend substantial resources to prevent or minimize problems associated with the year 2000 problem and therefore may choose not to, or not have the budget capacity to, upgrade their current POS systems for some period of time. Any lessening of demand for the Company's products and services could have a material adverse effect on the Company's business, financial condition and results of operations. BROAD DISCRETION IN APPLICATION OF NET PROCEEDS The Company intends to use approximately $3.2 million of the net proceeds from this Offering for the retirement of existing indebtedness and $1.8 million of the net proceeds from this Offering for the pending acquisitions of RGB/Trinet and Jade, with the remainder being used principally for working capital and general corporate purposes, including product development and potential acquisitions. The Company's management and Board of Directors have broad discretion with respect to the application of the proceeds other than the repayment of indebtedness, and the amounts actually expended by the Company for working capital purposes may vary significantly depending on a number of factors, including the amount of cash, if any, generated by the Company's operations. See "Use of Proceeds." POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock has been, and is likely to continue to be, volatile. Factors such as announcements of new customer orders or services by the Company or its competitors, changes in pricing policies by the Company or its competitors, quarterly fluctuations in the Company's operating results, announcements relating to strategic relationships or acquisitions, changes in earnings estimates by analysts, government regulatory actions, general conditions in the market for POS systems, overall stock market conditions and other factors may have a significant impact on the market price of Common Stock. In addition, in recent periods the stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. In addition, in the past the Company has not experienced significant trading volume in its Common Stock, has not been actively followed by stock market analysts and has had limited market-making support from broker-dealers. If greater market-making support is not generated, supported by broader analyst coverage, resulting in greater average trading volume in the Company's Common Stock, there can be no assurance that an adequate trading market will exist to sell large positions in the Company's Common Stock. See "Price Range of Common Stock" and "Dividend Policy." POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Company is authorized to issue up to 1,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by the Company's stockholders, and may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions as determined by the Board of Directors. Although the Company has no present plans to issue shares of Preferred Stock, the issuance of any additional shares of Preferred Stock in the future could affect the rights of the holders of Common Stock and thereby reduce the value of the Common Stock. In particular, specific rights granted to future holders of Preferred Stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, thereby preserving control of the Company by its present owners. The issuance of Preferred Stock, rights to purchase Preferred Stock or additional shares of Common Stock may have the effect of delaying or 17 preventing a change in control of the Company. In addition, the possible issuance of Preferred Stock or additional shares of Common Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors might be willing to pay for shares of the Company's Common Stock. Further, the Company's Restated Certificate of Incorporation (the "Restated Certificate") provides that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent. Special meetings of the stockholders of the Company may be called only by the Chairman of the Board of Directors, the Chief Executive Officer of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors or by the holders of 10% of the outstanding voting stock of the Company. The Restated Certificate and the Company's Bylaws also provide for staggered terms for the members of the Board of Directors. These and other provisions contained in the Restated Certificate and the Company's Bylaws, as well as certain provisions of Delaware law, could delay or make more difficult certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware Anti-Takeover Law and Certain Charter Provisions." SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE Upon completion of this Offering, the Company will have outstanding 5,365,025 shares of Common Stock. Of these shares, the 1,250,000 shares sold in the Offering and 873,900 shares previously registered by the Company for sale to the public will generally be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 3,241,125 shares of Common Stock may be sold in the public market as follows: (i) 855,817 shares will be eligible for immediate sale on the date of this Prospectus; and (ii) upon expiration of lock-up agreements 180 days after the date this Prospectus is declared effective (the "Effective Date"), 2,385,308 additional shares will be eligible for sale subject to the volume and other restrictions of Rule 144. The foregoing does not include any shares that may be issued in connection with the acquisitions of RGB/Trinet and Jade which may first become eligible for resale one year after the date of issuance. In addition, holders of vested options to purchase 125,300 shares of Common Stock as of the date of this Prospectus will be able to sell such shares without restriction pursuant to a Form S-8 registration statement filed with respect to such shares. Holders of additional vested options to purchase an aggregate of 92,583 shares of Common Stock as of the date of this Prospectus will be entitled to sell all of such shares upon expiration of lock-up agreements 180 days after the Effective Date. Future sales of shares by existing stockholders could have an adverse effect on the market price of the Common Stock or otherwise impair the Company's ability to raise additional capital. In addition, the holders of 36,362 shares of Common Stock and the holders of warrants to purchase an aggregate of 154,330 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public beginning at the end of the 180-day lock-up period. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See. "Management," "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,250,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $8.625 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, are estimated to be approximately $9.6 million. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders if the over-allotment option is exercised. The Company intends to use the net proceeds from this Offering to repay certain indebtedness incurred to fund operations under the Company's loan and security agreement with FINOVA Capital Corporation. Specifically, the Company has outstanding a revolving loan bearing interest at the prime rate publicly announced by Citibank, N.A., plus 1.75% annually, that matures in June 2001 (the "Loan"). As of June 30, 1998 and August 31, 1998, borrowings under the Loan were approximately $1.3 million and approximately $4.1 million, respectively. After the consummation of this Offering, the Company intends to repay approximately $3.2 million under the Loan. In addition, the Company intends to use $1.8 million of the net proceeds from the Offering to acquire RGB/Trinet and Jade, if such acquisitions are completed. The balance of the net proceeds will be used primarily for working capital needs and general corporate purposes, including product and market development, and selected acquisitions or investments in complementary businesses or products. While from time to time the Company evaluates potential acquisitions of businesses and products and anticipates continuing to make these evaluations, there are no present understandings, commitments or agreements with respect to any acquisition of businesses or products other than the definitive agreements entered into in connection with the pending acquisitions of RGB/Trinet and Jade. Pending such uses, the net proceeds of this Offering will be invested in short-term, interest-bearing securities, including money market funds. PRICE RANGE OF COMMON STOCK The Company effected its initial public offering on October 25, 1996, at a price to the public of $5.00 per share. Since that date, the Common Stock has traded on the Nasdaq SmallCap Market under the symbol "JVLN." Concurrent with the effectiveness of this Offering, the Common Stock will trade on the Nasdaq National Market under the symbol "JVLN." The following table sets forth the high and low sales prices for the Common Stock for the quarters indicated as reported on the Nasdaq SmallCap Market. Prices reflect inter-dealer prices without retail mark-up, mark-down or commissions, and may not necessarily reflect actual transactions.
HIGH LOW ------------ ---------- YEAR ENDED JUNE 30, 1997 Second Quarter (from October 25, 1996)...................................... 51/2 41/2 Third Quarter............................................................... 51/2 41/2 Fourth Quarter.............................................................. 63/8 45/8 YEAR ENDED JUNE 30, 1998 First Quarter............................................................... 111/4 41/2 Second Quarter.............................................................. 1013/16 81/2 Third Quarter............................................................... 103/4 71/2 Fourth Quarter.............................................................. 15 93/8 YEAR ENDED JUNE 30, 1999 First Quarter (to October 5, 1998).......................................... 131/8 73/8
On October 5, 1998, the last reported sale price of the Common Stock on the Nasdaq SmallCap Market was $8.625 per share. As of September 29, 1998, there were 62 holders of record of the Company's Common Stock. This number does not reflect the number of beneficial holders of the Company's Common Stock, which the Company believes to be in excess of 600 holders. DIVIDEND POLICY To date, the Company has not declared nor paid any cash dividends on its Common Stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, a loan agreement of the Company prohibits the payment of cash dividends on the Company's capital stock without the consent of the lender. 19 CAPITALIZATION The following table sets forth as of June 30, 1998 (i) the actual capitalization of the Company and (ii) the capitalization of the Company as adjusted to give effect to the sale of 1,250,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $8.625 per share (after deducting the estimated underwriting discounts and commissions and offering expenses) and the application of the net proceeds therefrom. This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1998 ---------------------------- ACTUAL AS ADJUSTED ------------- ------------- Short-term debt, including current portion of long-term debt... $ 1,643,000 $ 300,000 ------------- ------------- ------------- ------------- Long-term debt, net of current portion......................... $ 1,200,000 $ 1,200,000 ------------- ------------- Stockholders' equity: Preferred Stock, $0.01 par value: 1,000,000 shares authorized and no shares issued and outstanding, actual and as adjusted................................................... $ -- $ -- Common Stock, $0.01 par value: 10,000,000 shares authorized, actual and as adjusted; 4,111,962 shares issued and outstanding, actual; 5,361,962 shares issued and outstanding, as adjusted(1)(2)............................. 41,100 53,600 Additional paid-in capital..................................... 11,270,900 20,833,000 Deferred compensation.......................................... (39,200) (39,200) Retained earnings.............................................. 132,900 132,900 Cumulative translation adjustment.............................. (6,800) (6,800) ------------- ------------- Total stockholders' equity................................... 11,398,900 20,973,500 ------------- ------------- Total capitalization....................................... $ 12,598,900 $ 22,173,500 ------------- ------------- ------------- -------------
- ------------------------ (1) Excludes: (i) 833,700 shares of Common Stock reserved for issuance upon exercise of options outstanding at a weighted average exercise price of $5.16 per share as of August 15, 1998; (ii) 154,330 shares of Common Stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $9.27 per share as of August 15, 1998; and (iii) an aggregate of 519,000 shares of Common Stock reserved for future issuance under the 1997 Plan. See "Management-- Stock Option Plans," and "Description of Capital Stock." (2) As adjusted data excludes 3,063 shares issued after June 30, 1998 and shares issuable upon consummation of the acquisitions of RGB/Trinet and Jade. 20 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Javelin Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The Consolidated Statements of Operations Data for the period from inception to June 30, 1996 and for the years ended June 30, 1996, 1997 and 1998 and the Consolidated Balance Sheet Data as of June 30, 1997 and 1998 are derived from the Javelin Consolidated Financial Statements, which financial statements have been audited by Ernst & Young LLP, independent auditors for the period from inception to June 30, 1996 and the year ended June 30, 1997 and by PricewaterhouseCoopers LLP, independent accountants, for the year ended June 30, 1998.
INCEPTION TO FISCAL YEAR ENDED JUNE 30, JUNE 30, ------------ --------------------------------- 1996 1997 1998 ------------ -------------- ------------ CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Product sales............................................................ $1,463,600 $ 7,014,600 $ 27,132,400 Service.................................................................. -- -- 2,513,700 ------------ -------------- ------------ Total revenues......................................................... 1,463,600 7,014,600 29,646,100 ------------ -------------- ------------ Cost of revenues: Cost of product sales.................................................... 1,104,200 5,499,500 19,831,300 Cost of service.......................................................... -- -- 1,904,700 ------------ -------------- ------------ Total cost of revenues................................................. 1,104,200 5,499,500 21,736,000 ------------ -------------- ------------ Gross profit............................................................... 359,400 1,515,100 7,910,100 ------------ -------------- ------------ Operating expenses: Research and development................................................. 46,700 396,400 874,000 Selling and marketing.................................................... 83,500 390,800 1,179,900 General and administrative............................................... 244,700 859,900 4,195,500 ------------ -------------- ------------ Total operating expenses............................................... 374,900 1,647,100 6,249,400 ------------ -------------- ------------ Income (loss) from operations.............................................. (15,500) (132,000) 1,660,700 Interest expense........................................................... (38,800) (709,500) (115,000) Other income (expense)..................................................... -- -- 41,100 Interest income............................................................ -- 14,600 12,200 ------------ -------------- ------------ Income before income taxes................................................. (54,300) (826,900) 1,599,000 Provision for income taxes................................................. -- -- (584,900) ------------ -------------- ------------ Net income (loss).......................................................... $ (54,300) $ (826,900)(2) $ 1,014,100 ------------ -------------- ------------ ------------ -------------- ------------ Earnings per common share: Basic.................................................................... $ (0.03) $ (0.30)(2) $ 0.28 Diluted.................................................................. $ (0.03) $ (0.30)(2) $ 0.27 Shares used in computing earnings (loss) per share: Basic.................................................................... 2,086,260 2,782,535 3,622,604 Diluted.................................................................. 2,086,260 2,782,535 3,750,611
JUNE 30, -------------------------------------------------------- 1998 (AS 1996 1997 1998 ADJUSTED)(3) ---------- ---------- ---------- -------------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $ 6,400 $ 686,200 $ -- $ 6,431,600 Working capital.......................................... 232,200 3,028,900 4,080,700 11,855,300 Total assets............................................. 951,300 5,203,000 22,531,300 28,962,900 Short-term debt.......................................... 291,600 200,000 1,643,000 300,000 Long-term debt, net of current portion................... 75,000 -- 1,200,000 1,200,000 Total stockholders' equity............................... 195,000 3,354,500 11,398,900 20,973,500
- ------------------------------ (1) See Note 2 of Notes to Javelin Consolidated Financial Statements for a description of the computation of the net income (loss) per share and the number of shares used in the per share calculation. (2) Net loss for the year ended June 30, 1997 includes interest expense of approximately $636,100 related to warrants issued in connection with certain promissory notes. This non-recurring interest expense is attributable to the imputation of interest based upon the fair value of the warrants and did not represent a cash expense to the Company. (3) As adjusted to give effect to the sale of 1,250,000 shares of Common Stock to be sold in the Offering by the Company hereby at an assumed public offering price of $8.625 per share after deducting estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds from the sale of such shares. Other than a reduction in cash and cash equivalents and working capital of $1.8 million, as adjusted information does not give effect to the pending acquisitions of RGB/Trinet Limited or Jade Communications Limited. See "Use of Proceeds" and "Capitalization." 21 UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION On December 19, 1997, the Company acquired all of the outstanding capital stock of POSNET Computers, Inc. ("Posnet") pursuant to the terms of a Stock Purchase Agreement by and among the Company, Posnet and the selling shareholders of Posnet. Posnet sold, installed and maintained POS systems and turnkey retail automation systems. The purchase price for the Posnet stock consisted of 300,000 shares of the Common Stock of the Company. See Notes 3 and 9 to Javelin Consolidated Financial Statements. The acquisition has been accounted for using the purchase method, and accordingly, the results of operations of Posnet have been included with those of the Company beginning at the date of acquisition. The purchase price of $1,594,200 (including acquisition costs of $75,500) was based on the quoted market price of the Company's Common Stock at the date of acquisition discounted by 25% due to restrictions and liquidity. The purchase price resulted in an excess of the cost of acquisition over the net assets acquired of $2,036,000. Such excess (which will increase based on the portion of the stock issued after June 30, 1998 as payment for the acquisition) is being amortized on a straight-line basis over 25 years. The final allocation of the purchase price may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from that used in the Unaudited Pro Forma Condensed Financial Information. See Note 9 to Javelin Consolidated Financial Statements. On December 22, 1997, the Company acquired all of the outstanding capital stock of CCI Group, Inc. ("CCI") pursuant to the terms of a Plan of Reorganization and Stock Purchase Agreement by and among the Company, CCI and the selling shareholders of CCI. CCI sold, installed and maintained POS systems and turnkey retail automation systems. The purchase price for the CCI stock consisted of 670,000 shares of the Common Stock of the Company. The acquisition has been accounted for using the purchase method, and accordingly, the results of operations of CCI have been included with those of the Company beginning at the date of acquisition. The purchase price of $4,476,800 (including acquisition costs of $111,300) was based on the quoted market price of the Company's Common Stock at the date of acquisition discounted by 25% due to restrictions and liquidity. The purchase price resulted in an excess of the cost of acquisition over the net assets acquired of $4,097,500. The final allocation of the purchase price may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from that used in the Unaudited Pro Forma Condensed Financial Information. Such excess is being amortized on a straight-line basis over 25 years. The Unaudited Pro Forma Condensed Financial Information for the year ended June 30, 1998 presents the combined results of operations of Javelin for the year ended June 30, 1998 and the historical results of operations of CCI and Posnet from July 1, 1997 through the date of acquisition as if the acquisitions had occurred on July 1, 1997, after giving effect to certain adjustments described in the attached Notes to Unaudited Pro Forma Condensed Financial Information. The combined company expects to achieve merger benefits in the form of operating cost savings. The unaudited pro forma earnings, which do not reflect any direct costs or potential savings, are not indicative of the results of future operations. No assurances can be given with respect to the ultimate level of expense savings. 22 JAVELIN SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION FOR THE YEAR ENDED JUNE 30, 1998
JAVELIN CCI POSNET TOTAL ADJUSTMENTS PRO FORMA ----------- ---------- ---------- ----------- ---------- ----------- Revenues: Product sales......................... $27,132,400 $3,718,300 $1,949,800 $32,800,500 $(869,200)(1) $31,931,300 Service............................... 2,513,700 925,100 711,700 4,150,500 -- 4,150,500 ----------- ---------- ---------- ----------- ---------- ----------- Total revenues...................... 29,646,100 4,643,400 2,661,500 36,951,000 (869,200) 36,081,800 ----------- ---------- ---------- ----------- ---------- ----------- Cost of revenues: Cost of product sales................. 19,831,300 3,049,000 1,179,600 24,059,900 (869,200)(1) 23,190,700 Cost of service....................... 1,904,700 652,500 370,300 2,927,500 -- 2,927,500 ----------- ---------- ---------- ----------- ---------- ----------- Total cost of revenues.............. 21,736,000 3,701,500 1,549,900 26,987,400 (869,200) 26,118,200 ----------- ---------- ---------- ----------- ---------- ----------- Gross profit............................ 7,910,100 941,900 1,111,600 9,963,600 -- 9,963,600 ----------- ---------- ---------- ----------- ---------- ----------- Operating expenses: Research and development.............. 874,000 -- -- 874,000 -- 874,000 Selling, general and administrative... 5,375,400 862,500 1,058,400 7,296,300 122,700(2) 7,419,000 ----------- ---------- ---------- ----------- ---------- ----------- Total............................... 6,249,400 862,500 1,058,400 8,170,300 122,700 8,293,000 ----------- ---------- ---------- ----------- ---------- ----------- Income (loss) from operations........... 1,660,700 79,400 53,200 1,793,300 (122,700) 1,670,600 Other income (expense).................. (61,700) (6,200) 3,000 (64,900) -- (64,900) ----------- ---------- ---------- ----------- ---------- ----------- Income before income taxes.............. 1,599,000 73,200 56,200 1,728,400 (122,700) 1,605,700 Provision for income taxes.............. (584,900) (29,700) (800) (615,400) -- (615,400) ----------- ---------- ---------- ----------- ---------- ----------- Net income (loss)....................... $ 1,014,100 $ 43,500 $ 55,400 $ 1,113,000 $(122,700) $ 990,300 ----------- ---------- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ----------- ---------- ----------- Weighted average shares outstanding: Basic................................. 4,517,600 ----------- ----------- Diluted............................... 4,645,600 ----------- ----------- Earnings per share: Basic................................. $ 0.22 ----------- ----------- Diluted............................... $ 0.21 ----------- -----------
NOTE 1 The Unaudited Pro Forma Condensed Financial Information should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Prospectus. NOTE 2 The Unaudited Pro Forma Condensed Financial Information reflects the acquisition of Posnet and CCI using the purchase method of accounting. Purchase accounting adjustments related to the foregoing acquisitions reflected in the Unaudited Pro Forma Condensed Financial Information for the year ended June 30, 1998 are summarized as follows: (1) Elimination of intercompany sales and cost of sales.......... $ 869,200 No adjustments were necessary to eliminate intercompany profits from inventory as such amount was not significant. (2) Amortization of goodwill..................................... $ 122,700 No adjustments to the provision for income taxes were required since the amortization of goodwill is not deductible for income tax purposes.
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE JAVELIN CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW The Company was incorporated in September 1995 and commenced shipping its initial products in December 1995. From its inception through the quarter ended March 31, 1997, the Company experienced operating losses primarily as a result of costs incurred in connection with product development and the establishment of distribution channels, partially offset by revenues from product sales. Javelin sells its hardware products through its direct sales force and indirectly through OEMs and VARs. In December 1997, the Company acquired all of the outstanding capital stock of CCI Group, Inc. ("CCI") and POSNET Computers, Inc. ("Posnet"). CCI and Posnet have been combined and now operate as CCI. CCI sells the Javelin product line as well as hardware from other manufacturers and provides POS systems integration and support services directly to end-users. These acquisitions were consummated to enable the Company, among other things, to sell products and services directly to large end-users and to capture a greater proportion of each customer's POS system expenditures, including system design, installation, maintenance and help desk. These acquisitions and increased product sales have resulted in substantial growth in revenues, operating profits and net income. Through March 31, 1998, substantially all of the Company's sales had been made to domestic customers. To implement its marketing strategy internationally, the Company established foreign subsidiaries in March and April 1998 in England, Singapore and Australia and in October 1998 entered into definitive agreements to acquire all of the outstanding capital stock of two companies based in England, RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited ("Jade"). In addition to the ongoing service revenues that Jade's existing operations may generate, the Company anticipates that these acquisitions will increase international sales of Javelin's product line through indirect distribution channels. Although the Company is not presently contemplating the acquisition of companies other than RGB/Trinet and Jade, the Company may pursue opportunities, if they arise, for strategic acquisitions both domestically and internationally. The acquisitions of CCI and Posnet were accounted for using the purchase method, and accordingly, the results of operations of these subsidiaries have been consolidated with those of the Company commencing on the respective dates of acquisition. The acquisitions of RGB/Trinet and Jade, if completed, will also be accounted for using the purchase method, and accordingly, their results of operations will be included with those of the Company from the date of any such acquisition. The Company amortizes goodwill resulting from its acquisitions over 25 years. The replacement cycle for hardware in the POS food service industry is generally long, and consequently, revenues for hardware products to a specific end-user tend to be non-recurring. Certain services, such as system design and installation, also tend to be non-recurring. Other services, such as maintenance and help desk, are of an ongoing nature, and the related revenues tend to be recurring. Through December 31, 1997, the Company's revenues consisted solely of product sales. Due to the acquisition of CCI, service revenues represented 11.3% of total revenues in the six months ended June 30, 1998 and 8.5% in fiscal 1998. The Company anticipates that service revenues in the future will increase and become a more significant percentage of total revenues. 24 If the Company's strategy to increase sales to large end-users who have volume purchasing power is successful, the Company believes its gross margins may decline over time. Notwithstanding such potential decline in gross margins, the Company believes that increased sales to large end-users may improve operating margins because (i) related sales and marketing costs as a percentage of revenues may be lower than the costs incurred to generate sales to indirect distribution channels, and (ii) increased related general and administrative costs necessary to support the additional revenues should not be significant. In addition, sales to large end-users may result in significant variations in revenues or profits from period to period due to, among other things, the timing and size of large orders, delays in system installations or the Company's inability to generate new sales on a timely basis to large end-users. Revenues from product sales are generated from the sale of hardware manufactured by Javelin and other independent manufacturers and are recorded as the products are shipped. Service revenues are generated by the installation of products and the provision of consulting and other services. Service revenues are recognized upon the completion of installation or ratably over the term of related contracts. Cost of revenues from product sales consists of the acquisition costs of non-Javelin product line hardware that is resold by the Company and the costs of components and payroll and related costs for assembly, manufacturing, purchasing, quality control and repairs of Javelin products. The cost of the components incorporated in the Javelin product line represents in excess of 85% of the total cost of such products. The cost of five components represents in excess of 75% of the cost of all components included in the Javelin product line. While the Company has in the past experienced reductions in the cost of components due to increased volume of purchases, it believes that these costs have now stabilized and that further material reductions may be difficult to achieve. The Company is in the process of qualifying two independent outside contract manufacturers to assist the Company in the manufacturing of new products and with increased capacity needs for existing products. The Company anticipates that the cost of manufacturing its products will not be materially affected by the shifting of production to outside contract manufacturers. Cost of service revenues consists primarily of payroll and related costs for the technical and support staff providing the services. 25 RESULTS OF OPERATIONS The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated:
YEARS ENDED JUNE 30, ------------------------------- 1996 1997 1998 --------- --------- --------- Revenues: Product sales................................................ 100.0% 100.0% 91.5% Service...................................................... -- -- 8.5 --------- --------- --------- Total revenues................................................. 100.0 100.0 100.0 --------- --------- --------- Cost of revenues: Cost of product sales(1)..................................... 75.4 78.4 73.1 Cost of services(1).......................................... -- -- 75.8 --------- --------- --------- Total cost of revenues......................................... 75.4 78.4 73.3 --------- --------- --------- Gross profit................................................... 24.6 21.6 26.7 --------- --------- --------- Operating expenses: Research and development..................................... 3.2 5.7 2.9 Selling and marketing........................................ 5.7 5.6 4.0 General and administrative................................... 16.7 12.2 14.2 --------- --------- --------- Total operating expenses....................................... 25.6 23.5 21.1 --------- --------- --------- Income (loss) from operations.................................. (1.0) (1.9) 5.6 Interest expense............................................... (2.7) (10.1) (0.4) Other income................................................... -- -- 0.2 Interest income................................................ -- 0.2 -- Provision for income taxes..................................... -- -- (2.0) --------- --------- --------- Net income (loss).............................................. (3.7)% (11.8)% 3.4% --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Expressed as a percentage of related revenues, not of total revenues. FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997 REVENUES. Revenues increased by 322.9% to $29.6 million in fiscal 1998 compared to revenues of $7.0 million in fiscal 1997. The change is due to a 154.2% increase in revenues relating to Javelin product sales of $10.8 million, product sales from CCI of $8.4 million, service revenues from CCI of $2.5 million and revenues derived primarily from the sale of products by the Company's newly established foreign subsidiaries of $900,000. The increase relating to Javelin is attributable primarily to increases in the number of units sold as the average sales price of Javelin products remained relatively constant in fiscal 1997 and 1998. GROSS PROFIT. Gross profit increased by 422.1% to $7.9 million in fiscal 1998 compared to a gross profit of $1.5 million in fiscal 1997. The change is due to a 224.0% increase in gross profit relating to Javelin of $3.4 million, gross profit relating to hardware sales by CCI of $2.2 million, gross profit relating to services provided by CCI of $500,000 and gross profit from the newly established foreign subsidiaries of $300,000. Gross margins on revenues from product sales increased to 26.9% in fiscal 1998 from 21.6% in fiscal 1997 primarily due to a reduction in the cost of its products and the realization of manufacturing efficiencies. The reduction in the cost of the Company's products was attributable to decreases in prices from the Company's suppliers resulting from increased volume of purchases by the Company. The increased gross margins on revenues from product sales were partially offset by lower gross margins on sales of non-Javelin products by CCI. Gross margin on service revenues were 24.2% in fiscal 1998. The Company anticipates that annual gross margins will not increase in fiscal 1999. 26 RESEARCH AND DEVELOPMENT EXPENSES. All research and development is performed by Javelin at its corporate headquarters. Research and development expenses consist primarily of payroll and related costs and the cost of tooling and prototypes. The Company expenses research and development costs as incurred. Research and development expenses increased by 120.5% to $900,000 in fiscal 1998 compared to research and development expenses of $400,000 in fiscal 1997. The increase is primarily attributable to increased payroll costs due to the hiring of additional engineers. The Company anticipates a continued increase in research and development expenses primarily due to the anticipated introduction of several new products and enhancements to existing products. SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of payroll and related costs, including commissions, of salespersons and of the customer service department, and of travel, entertainment and advertising costs. Selling and marketing expenses increased by 201.9% to $1.2 million in fiscal 1998 compared to selling and marketing expenses of $400,000 in fiscal 1997. The increase is primarily attributable to additional personnel and advertising costs associated with the growth of the business. The Company anticipates that selling and marketing costs will increase as the Company increases its sales force, both domestically and internationally, and attempts to enhance the recognition of its brand name; however, to the extent that revenues increase in future periods, the Company anticipates that such costs may decrease as a percentage of revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of payroll and related costs, facility costs, depreciation and amortization and costs associated with being a public company. General and administrative expenses increased by 387.9% to $4.2 million in fiscal 1998 compared to general and administrative of $900,000 in fiscal 1997. The change is due to an increase in general and administrative expenses relating to Javelin of $1.2 million (138.9%), general and administrative expenses from the acquired domestic subsidiaries of $1.9 million and general and administrative expenses from the newly established foreign subsidiaries of $300,000. As a percentage of revenues, general and administrative expenses increased from 12.2% to 14.2%. The increase at Javelin consisted primarily of increased payroll costs due primarily to an increase in the number of employees, increased facility costs due to relocations and costs associated with being a public company. The Company believes that general and administrative expenses will continue to increase as the Company invests additional resources to improve its operating systems, to expand its international presence and to sustain its anticipated continued growth; however, to the extent that revenues increase in future periods, the Company anticipates that general and administrative expenses may remain relatively constant as a percentage of revenues. INTEREST EXPENSE. Interest expense decreased by $600,000 to $100,000 in fiscal 1998 compared to interest expense of $700,000 in fiscal 1997. The decrease is due to the inclusion of $600,000 in interest expense in fiscal 1997 related to warrants issued in connection with certain promissory notes. This non-recurring interest expense incurred in fiscal 1997 is attributable to the imputation of interest based upon the fair value of the warrants and did not represent a cash expense to the Company. INCOME TAXES. A provision for federal, state and foreign income taxes of $600,000 was required in fiscal 1998 since the Company generated taxable income while no provision was required for fiscal 1997 as the Company incurred a net taxable loss for that period. The tax benefits of the Company's historical operating losses were realized during the year ended June 30, 1998 resulting in an effective tax rate lower than the U.S. statutory tax rate. The Company anticipates that in the future its tax rate on U.S. income will increase due to the lack of additional tax benefits and the non-deductibility of certain expenses, including the amortization of goodwill. This anticipated increase may be mitigated to the extent that increases from revenues result from the Company's foreign subsidiaries operating in jurisdictions with lower income tax rates than those in the United States. 27 FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996 REVENUES. Revenues increased by 379.3% to $7.0 million in fiscal 1997 compared to revenues of $1.5 million in fiscal 1996. The increase was attributable primarily to increases in the number of units sold. GROSS PROFIT. Gross profit increased by 321.6% to $1.5 million in fiscal 1997 compared to a gross profit of $359,000 in fiscal 1996. Gross margins decreased to 21.6% in fiscal 1997 from 24.6% in fiscal 1996 primarily due to component cost increases. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 747.5% to $396,000 in fiscal 1997 compared to research and development expenses of $47,000 in fiscal 1996, primarily due to increased payroll costs and the introduction of two new products. SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased by 368.1% to $391,000 in fiscal 1997 compared to selling and marketing expenses of $84,000 in fiscal 1996, primarily due to additional personnel necessary to manage the activities of an increased number of VAR and OEM customers and the introduction of new products. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by 251.3% to $860,000 in fiscal 1997 compared to general and administrative expenses of $245,000 in fiscal 1996, primarily due to an increased in payroll costs and consulting fees. INTEREST EXPENSE. Interest expense increased by $671,000 to $709,000 in fiscal 1997 compared to interest expense of $38,000 in fiscal 1996. The increase is due to the inclusion of $636,000 in interest expense in fiscal 1997 related to warrants issued in connection with certain promissory notes. This non- recurring interest expense in fiscal 1997 is attributable to the imputation of interest based upon the fair market value of the warrants and did not represent a cash expense to the Company. INCOME TAXES. A provision for income taxes was not required for fiscal 1997 as the Company incurred a net taxable loss for that period. QUARTERLY RESULTS OF OPERATIONS The following tables present quarterly operating results for fiscal 1998. This information has been derived from unaudited consolidated financial statements and has been prepared on the same basis as the Javelin Consolidated Financial Statements which appear elsewhere in this Prospectus. In the opinion of the Company's management, this information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The operating results for any quarter are not necessarily indicative of the results for any future period. 28
QUARTER ENDED ----------------------------------------------------------------------------- SEPTEMBER 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 --------------------- -------------------- ---------------- -------------- Revenues: Product sales................... $ 2,950,100 $ 4,452,200 $ 9,357,400 $ 10,372,700 Service......................... -- -- 1,286,000 1,227,700 ----------- ----------- ---------------- -------------- Total revenues................ 2,950,100 4,452,200 10,643,400 11,600,400 ----------- ----------- ---------------- -------------- Cost of revenues: Cost of product sales........... 2,268,800 3,427,500 6,864,100 7,270,900 Cost of service................. -- -- 891,700 1,013,000 ----------- ----------- ---------------- -------------- Total cost of revenues........ 2,268,800 3,427,500 7,755,800 8,283,900 ----------- ----------- ---------------- -------------- Gross profit...................... 681,300 1,024,700 2,887,600 3,316,500 ----------- ----------- ---------------- -------------- Operating expenses: Research and development........ 137,200 169,500 250,100 317,200 Selling and marketing........... 147,500 261,300 438,100 333,000 General and administrative...... 374,700 448,200 1,581,700 1,791,000 ----------- ----------- ---------------- -------------- Total operating expenses...... 659,400 879,000 2,269,900 2,441,200 ----------- ----------- ---------------- -------------- Income from operations............ 21,900 145,700 617,700 875,300 Interest expense.................. (1,900) (6,900) (26,800) (79,400) Other income (expense)............ (2,800) 8,900 23,200 11,900 Interest income................... 3,900 4,100 2,200 2,000 ----------- ----------- ---------------- -------------- Income before income taxes........ 21,100 151,800 616,300 809,800 Provision for income taxes........ -- (59,200) (262,900) (262,800) ----------- ----------- ---------------- -------------- Net income........................ $ 21,100 $ 92,600 $ 353,400 $ 547,000 ----------- ----------- ---------------- -------------- ----------- ----------- ---------------- -------------- Units shipped..................... 1,638 2,351 2,535 4,083
29
QUARTER ENDED ---------------------------------------------------------------------------------- SEPTEMBER 30, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 ----------------------- --------------------- ----------------- --------------- Revenues: Product sales................... 100.0% 100.0% 87.9% 89.4% Service......................... -- -- 12.1 10.6 ----- ----- ----- ----- Total revenues................ 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost of revenues: Cost of product sales(1)........ 76.9 77.0 73.4 70.1 Cost of service(1).............. -- -- 69.3 82.5 ----- ----- ----- ----- Total cost of revenues........ 76.9 77.0 72.9 71.4 ----- ----- ----- ----- Gross profit...................... 23.1 23.0 27.1 28.6 ----- ----- ----- ----- Operating expenses: Research and development........ 4.7 3.8 2.3 2.7 Selling and marketing........... 5.0 5.9 4.1 2.9 General and administrative...... 12.7 10.0 14.9 15.4 ----- ----- ----- ----- Total operating expenses...... 22.4 19.7 21.3 21.0 ----- ----- ----- ----- Income from operations............ 0.7 3.3 5.8 7.6 Interest expense.................. -- (0.2) (0.2) (0.7) Other income (expense)............ (0.1) 0.2 0.2 0.1 Interest income................... 0.1 0.1 -- -- ----- ----- ----- ----- Income before income taxes........ 0.7 3.4 5.8 7.0 Provision for income taxes........ -- (1.3) (2.5) (2.3) Net income........................ 0.7% 2.1% 3.3% 4.7%
- ------------------------ (1) Expressed as a percentage of related revenues, not of total revenues. Gross margins on revenues from product sales increased from 23.1% in the first quarter of 1998 to 29.9% in the fourth quarter of 1998 primarily due to decreases in prices from the Company's suppliers resulting from increased volume of purchases by the Company. The increase in the number of Javelin products sold has enabled the Company to obtain volume discounts from its suppliers and to procure certain products directly from the manufacturers rather than from distributors. Cost of service consists primarily of payroll and related costs for technical and support staff providing the services and are of a relatively fixed nature in the short term. Gross margins on service revenues decreased from 30.7% in the third quarter of 1998 to 17.5% in the fourth quarter of 1998 due primarily to the completion in the third quarter of a significant retrofit by CCI of 66 stores of one customer and increased costs in the fourth quarter incurred to support anticipated future projects. General and administrative expenses increased from $448,000 in the second quarter of 1998 to $1.8 million in the fourth quarter of 1998 primarily due to the acquisitions of CCI and Posnet in the third quarter and the establishment of three foreign subsidiaries in the fourth quarter. The Company has experienced in the past and may in the future experience significant fluctuations in its operating results. Such fluctuations may be caused by many factors, including, but not limited to: the size and timing of individual orders, some of which may be of significant size; seasonality of revenues; employee hiring and retention, particularly with respect to sales and consulting personnel; lengthy sales and implementation cycles; reduction in demand for existing products and services and shortening of product life cycles; the timing of the introduction of products, product enhancements or services by the Company or its competitors; competition and pricing in the POS systems industry; market acceptance of new products; service personnel utilization rates; the ability of the Company to expand its international 30 and domestic sales, as well as the mix of such sales; foreign currency exchange rates; changes in the mix of products and services sold; general health of the restaurant industry, particularly the QSR segment; the ability of the Company to generate service agreements; product quality problems; the ability of the Company to control costs; the Company's success in establishing and expanding its direct and indirect distribution channels; the mix of distribution channels through which the Company's products are sold; and general economic conditions. The Company's operating results, particularly with respect to its systems integration business, may vary significantly because of the Company's failure to obtain major projects, the cancellation or delays in the progress of major projects for any reason and the Company's failure to timely replace projects that have been completed or are nearing completion. Any of these factors could cause the Company's results of operations to fluctuate significantly from period to period, including on a quarterly basis. LIQUIDITY AND CAPITAL RESOURCES On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit facility of $7.5 million from a financial institution. The credit facility expires on June 8, 2001 and consists of a line of credit of up to $6.0 million and a term loan of $1.5 million. Under the line of credit, the Company may borrow up to 80% of eligible receivables (as defined) and 50% of eligible inventory (as defined) with monthly interest based upon the prime rate of a national financial institution plus 1.75% (10.25% as of June 30, 1998). As of June 30, 1998 borrowing outstanding under the line amounted to $1.3 million with approximately $2.8 million available for future borrowings. Borrowings under the term loan are collateralized by substantially all of the assets of the Company and bear interest at 13.65% per annum. The Company is required to repay $25,000 per month under the term loan with all unpaid principal and interest due on June 8, 2001. As of June 30, 1998, the Company had working capital of $4.1 million. Cash used in operating activities in fiscal 1998 totaled $1.8 million and consisted primarily of increases in trade receivables and inventories. Cash used in net investing activities in fiscal 1998 totaled $400,000 and resulted primarily from the acquisition of capital equipment offset by cash received from acquired businesses. The Company anticipates that expenditures for capital equipment will decrease in fiscal 1999. Cash provided by financing activities in fiscal 1998 totaled $1.6 million and consisted primarily of net borrowings under the line of credit and a term loan obtained in June 1998. The Company anticipates that its working capital needs will increase with the growth of the Company. The Company believes that the net proceeds from the Offering, together with the availability of its line of credit, will be sufficient to meet its capital requirements for the next eighteen months. Depending on the rate of growth and profitability, the Company may require additional equity or debt financing to meet its future working capital and capital expenditures needs. There can be no assurance that such additional financing will be available or, if available, that such financing can be obtained on terms satisfactory to the Company. YEAR 2000 The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to "00". The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is reviewing both its information technology and its non-information technology systems to determine whether they are year 2000 compliant, and to date the Company has not identified any material systems which are not year 2000 compliant. The Company has not made any material expenditure to address the year 2000 problem and at present does not anticipate that it will be required to make any such material expenditures in the future. 31 The Company has initiated formal communications with all significant suppliers and service providers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate the year 2000 problem. Although the Company has received verbal assurances of year 2000 compliance from certain of such third parties, the Company has not yet received written assurances of year 2000 compliance from the third parties with whom it has relationships. The Company believes its operations will not be significantly disrupted even if third parties with whom the Company has relationships are not year 2000 compliant. In the event that the Company's suppliers are unable to provide sufficient quantities of materials or goods to the Company as a result of their failure to be year 2000 compliant, the Company believes that it can obtain adequate supplies of materials and goods at comparable prices from other sources. In the event that the Company's OEMs and VARs are adversely affected by any failure to become year 2000 compliant and are therefore unable to purchase anticipated quantities of the Company's products on a timely basis, the Company may seek to replace such OEMs and VARs. Nevertheless, the Company believes that any year 2000 compliance problems of its suppliers, OEMs or VARs could cause the Company's results of operations to fluctuate on a period to period basis. Uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance, and the Company intends to continue to make efforts to ensure that third parties with whom it has relationships are year 2000 compliant. Any year 2000 compliance problem of either the Company or third parties with whom the Company has relationships could materially adversely affect the Company's business, financial condition or results of operations. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This standard will require that an enterprise display an amount representing total comprehensive income for the period. SFAS 130 will be effective for the Company's year ending June 30, 1999. Adoption of SFAS 130 is for presentation only and will not affect the Company's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which supersedes Statement of Financial Accounting Standards No. 14. This statement changes the way that publicly-held companies report information about operating segments as well as disclosures about products and services, geographic areas and major customers. Operating segments are defined as revenue-producing components of the enterprise, which are generally used internally for evaluating segment performance. SFAS 131 will be effective for the Company's year ending June 30, 1999 and will not affect the Company's financial position or results of operations. 32 BUSINESS GENERAL Javelin Systems, Inc. ("Javelin" or the "Company") designs, manufactures and markets open system touch screen point-of-sale ("POS") computers and provides POS systems integration services primarily for the food service and retail industries. POS systems incorporating the Company's products enable restaurants and retailers to capture, analyze, disseminate and use information throughout an enterprise on a real-time basis, from the point of sale to the in-store "back office" to the enterprise's headquarters. These POS systems provide transaction processing, in-store operating controls, and timely information used to manage inventory and costs, analyze sales data and customize products and services. The Company's product family of network-ready computers integrates substantially all of the functionality of standard desktop personal computers into durable, small footprint touchscreen workstations that run on industry standard open operating systems. The Company's products utilize off-the-shelf, industry-specific application software developed by third parties. The Company's products are currently being marketed by value added resellers ("VARs"), original equipment manufacturers ("OEMs") and directly to end users through the Company's sales force. The Company's systems integration services are generally sold directly to multi-site operators. In December 1997, Javelin made two strategic acquisitions, CCI Group, Inc. ("CCI") and POSNET Computers, Inc. ("Posnet") that have enabled the Company to offer full turn-key systems integration services, including system design, staging, training, deployment and after-market product support and maintenance. In addition to providing the Company with a significant new end user customer base, the Company believes these acquisitions provide it with the ability to become a national POS systems integrator in the food service and retail markets. In early 1998, Javelin established international sales and support subsidiaries in England, Australia and Singapore. The Company intends to replicate its domestic distribution and acquisition strategies in the growing international marketplace. In June 1998, the Company acquired Aspact IT Services ("Aspact"), a consulting and systems integration business based in Singapore. In October 1998, the Company entered into definitive agreements to acquire each of RGB/Trinet Limited ("RGB/Trinet") and Jade Communications Limited ("Jade"), both POS service provider companies based in England. The consummation of the acquisitions is subject to a number of conditions, including Javelin having secured funds to finance the cash portion of such acquisitions. In consideration for all of the outstanding equity interests of each of RGB/ Trinet and Jade, Javelin will pay to the shareholders of RGB/Trinet and Jade an aggregate of approximately $1.8 million in cash and issue to such shareholders an aggregate of 25,000 shares of Javelin Common Stock, plus shares of Javelin Common Stock having a value of approximately $1.5 million based on the average of the closing price of Javelin Common Stock over the ten (10) days immediately preceding the business day immediately prior to the closing of the acquisitions. Javelin also may be required to issue additional shares valued at approximately $6.6 million pursuant to the earnout provisions of the respective definitive agreements. Following the consummation of the acquisitions, RGB/Trinet and Jade will be consolidated into a single wholly-owned subsidiary of Javelin. INDUSTRY OVERVIEW The Company estimates that there are more than 450,000 restaurants and more than 1.6 million retail stores in the United States. These restaurants and retail stores are increasingly part of multi-location chains that have the need to capture, analyze and disseminate information throughout the entire enterprise in order to better manage inventory and costs, make pricing decisions, analyze sales data and provide customized products and services. Moreover, businesses that encounter local demographic changes or seek to expand globally face additional challenges, such as multilingual customer and employee bases, multiple currency transactions and local regulatory requirements. Consequently, food service providers and retailers now require robust, integrated POS systems and services that are able to reliably and efficiently capture and manage large numbers of individual transactions generated by diversified points of sale. 33 The critical front and back office roles of integrated POS systems are now being recognized by distinct market segments within the food service and retail industries. Quick service restaurants ("QSRs") and full service restaurants, the largest market segments within the food service industry, both are investing in advanced POS systems, with QSRs generally being the first to adopt the latest POS technology and full service restaurants being more price sensitive and therefore more likely to adopt POS technology later in the product life cycle. A typical QSR requires four to seven POS workstations to operate efficiently, while a full service restaurant generally requires at least seven POS workstations. The food service industry also encompasses hotel restaurants and restaurants located in other hospitality locations, such as stadiums and arenas, casinos, theme parks and cruise lines. Retail establishments, such as convenience stores, gas stations, record stores and clothing stores, are increasingly utilizing POS systems to expedite in-store transactions and more effectively monitor inventory on a current basis. Initial POS systems targeted for the food service and retail industries were generally designed to satisfy the individual operating requirements of a particular large chain of restaurants or stores. These initial POS systems were custom designed to meet the individual enterprise's needs and, as such, were generally proprietary with all hardware, software and service developed or provided by a single vendor. Because this focus on single company solutions resulted in no generic POS standard operating system or computer architecture, many large food service providers and retailers became captive to the relatively small companies that had designed their proprietary POS systems. In addition, the POS companies found it difficult to achieve significant economies of scale due to the highly customized nature of their products. Instead, early POS companies were forced to focus on establishing and maintaining long product life cycles in order to recoup their high costs from developing custom products for a limited customer base. There was little opportunity for these POS companies to leverage their niche success into market-wide success. The POS industry has begun evolving from proprietary, customized single platform systems to open-architecture systems in which a variety of hardware and software products from different manufacturers can be combined to obtain the mix of features desired by the customer. With the advent of hardware and software systems that use industry standard open-architecture, food service providers and retailers are no longer captive to single solution vendors that had initially created their POS systems. As in other markets for computer products and systems where open systems are replacing proprietary platforms, new entrants have been drawn to the growing POS market, increasing competition for POS software and hardware and enhancing competitive pressure through faster design cycles. In addition to relying on single solution vendors, large multi-unit food service and retail chains frequently implemented and maintained their proprietary POS systems utilizing internal resources. However, as a result of the competitive environment in which these businesses operate and the growing complexity and multiplicity of available POS systems, food service providers and retailers have found it increasingly difficult to design, implement and manage these systems on their own. For example, a typical multi-chain enterprise requires a POS system that is capable of supporting multiple applications and processing high volumes of data across geographically remote locations. In addition, the increasing variety of hardware and software applications utilized in the food service and retail industries has resulted in connectivity and compatibility problems for many POS systems. Multi-unit chains now generally require a total systems integration solution including design, consulting, system creation, acquisition of software applications and required hardware, system installation and configuration, product support services and ongoing system service and maintenance. The high demand for qualified network engineers and other technical personnel has also made it increasingly difficult for these types of businesses to recruit and train qualified POS technology professionals. Consequently, many food service providers and retailers now rely upon third parties for the technological expertise and personnel to meet their POS systems needs. Javelin believes that the increasing complexity and rapid evolution of POS system technologies have created a significant opportunity for companies specializing in providing POS system solutions to the food service and retail industries. 34 THE JAVELIN SOLUTION Javelin designs, manufactures and markets open system touch screen POS computers and provides POS systems integration services primarily for the food service and retail industries. The Company's product family of network-ready computers integrates substantially all of the functionality of standard desktop personal computers into durable, small footprint touchscreen workstations that run on industry standard open operating systems. The Company's products utilize off-the-shelf, industry specific application software developed by third parties. POS systems incorporating the Company's products enable restaurants and retailers to capture, analyze, disseminate and use information throughout an enterprise on a real-time basis, from the point of sale to the in-store "back office" to the enterprise's headquarters. These POS systems provide transaction processing, in-store operating controls, and timely information used to manage inventory and costs, analyze sales data and customize products and services. Javelin also has a global POS systems integration business that assists large multi-site corporate customers in identifying the best multi-vendor open systems solution for the customer's particular business, and then manages the full deployment and ongoing support of the POS solution. The Company has extensive experience resolving the integration, implementation and management issues faced by food service providers and retailers and substantial knowledge of advanced information technologies, POS systems and the numerous software applications developed by information system and software vendors for these markets. The Company serves as a single point of contact to objectively assess its customers' POS technology requirements, taking into account the products and applications of various hardware and software vendors. The Company then selects the optimal mix of applications and products of various hardware and software vendors to create tailored advanced POS systems. By acting as the project manager during the installation and implementation of the POS system, the Company frees its customers from much of the time and difficulties associated with large-scale systems installations, including managing the variety of other vendors involved in the systems' installation. The Company believes that its cumulative experience, food service and retail focus and technology expertise enable it to understand its customers' core business dynamics and deliver customized advanced POS systems and services to satisfy its customers' specialized needs. BUSINESS STRATEGY The Company's objective is to become a leading developer of POS hardware systems and to be the premier POS systems integrator for multi-site chain operators in the food service and retail industries. The Company plans to achieve these objectives through internal growth and development and, to the extent suitable acquisition candidates are identified, through the acquisition of complementary businesses. Key elements of Javelin's strategy include the following: - PURSUE LARGE CUSTOMERS. The Company intends to increase its sales of products to large chains with over 100 stores through direct sales efforts and by utilizing the Company's relationships with its OEMs. The evolution to open systems has also created an opportunity for full service systems integrators which have an in-depth knowledge of the industry standard POS software and hardware packages and the ability to integrate them into a successful POS solution for clients. The Company's acquisitions of CCI and Posnet have given Javelin an immediate entrance and client base in the POS systems integration business on a domestic basis. - INTRODUCE TIMELY NEW PRODUCTS. The Company intends to continue to develop new POS hardware systems incorporating advanced PC technology utilizing its engineering team composed of PC industry veterans. As part of its sales strategy, the Company consults with its OEMs and VARs in order to identify new product platforms and product refinements. The Company also obtains direct customer feedback through its systems integration business. Because a significant portion of the Company's management is experienced in the PC industry, the Company has been able to quickly launch new products in the POS system industry and respond quickly to its customers' specific needs. This experience has enabled Javelin to rapidly establish itself in the POS market by developing and introducing new products with advanced features in an average of six months 35 compared to the industry standard of twelve to eighteen months. The Company intends to leverage its history of timely new product introductions and successful customer engagements and expand its marketing programs to enhance its market presence and visibility with the goal of making Javelin a recognized leader in providing POS solutions. - FOCUS ON INTERNATIONAL BUSINESS OPPORTUNITIES. The Company has established sales and support branches in England, Australia and Singapore to capture identified sales opportunities. The Company also continues to pursue its acquisition strategy internationally, including its recent acquisition of Aspact and the pending acquisitions of RGB/Trinet and Jade, which provide the Company with additional systems integration services and complementary networking products and services. The Company believes that the international markets continue to be fundamentally under-served with respect to technologically advanced POS systems, and, in particular, the Company believes that Western Europe presents a particularly attractive market for its products and services. - MINIMIZE PRODUCTION COSTS. The Company plans to continue to outsource the manufacturing and assembly of its products in order to maintain low overhead and production costs. The Company also controls its costs by utilizing components that are generally available in the PC industry and anticipates streamlining its product line in order to further develop economies of scale. The Company believes that it will be able to maintain its cost advantage in the future through economies of scale and because the Company utilizes in-house design capabilities and integrates the design and manufacturing engineering of its products, which reduces engineering costs and costly design changes. In addition, the Company intends to utilize contract manufacturers based in Singapore commencing later in fiscal 1999, which the Company believes will provide many benefits, including high quality, components' cost reduction, and lower corporate income tax. - GROW RECURRING SERVICE REVENUE. The Company currently receives recurring revenue from its help desk, depot repair, managed network services and field services. The Company intends to expand certain of these services in the future because the Company believes that an increase in these revenues can lessen the Company's reliance on product sales, which tend to fluctuate over time, and provide the Company with stable, recurring billings and cash flow. The Company also plans to leverage CCI's name recognition in the field of systems integration to expand the service component of the Company's business. PRODUCTS AND SERVICES THE JAVELIN PRODUCT LINE Javelin's product line offers customers a fully functioning PC inside a small footprint touchscreen POS workstation. All of Javelin's systems are network ready and support industry standard operating systems, enabling the easy installation and setup of leading industry standard POS software programs. The Javelin system also virtually eliminates configuration conflicts due to the Javelin system's proprietary embedded firmware. In addition, its single motherboard design reduces costly trouble shooting and service calls, and Javelin's systems are sealed to protect against liquid and other foreign matter entering the interior electronic chamber. Javelin believes that its POS computer systems offer its clients more features and better reliability than its competitors' products at lower price points. The retail price of the Company's products to end users generally ranges from $2,500 to $3,700. The Javelin product line is currently comprised of the Javelin-Wedge 5, Javelin-Wedge P, Javelin-LC and Javelin-LCP series. JAVELIN-WEDGE 5. The Javelin-Wedge 5 is a small footprint, high performance color LCD touchscreen computer which is approximately 12.75"(W), 10.25"(D) and 6.0"(H). The Javelin-Wedge 5 features a 133mHz processor, system memory from 4 MB of RAM up to 64 MB of RAM, 1 MB of video memory, a 10.4 or 12.1 inch TFT active matrix screen, 4 serial ports, 1 enhanced parallel port, 2 electronic cash drawer ports, a 10 Base-T Ethernet port and an integrated customer display. As a result of the product's inherent flexibility and rugged design, it is being marketed and sold as a POS workstation and as an industrial operator interface. 36 JAVELIN-WEDGE P. The Javelin-Wedge P is a product line extension of the Javelin-Wedge 5 series and is believed by the Company to be the first fully integrated, Pentium-based touch screen computer designed specifically for the POS marketplace. The Wedge P features a 200 mHz Intel Pentium processor with additional features such as a 512K Pipeline Burst cache and up to 128 MB of RAM. The Wedge P approximately doubles the speed and performance of the Wedge 5 which provides end users the ability to dramatically increase speed and performance when using graphically intensive POS applications that operate in Windows 95 and Windows NT environments. JAVELIN-LC. The Javelin-LC product line offers customers what the Company believes is the smallest footprint of any POS computer in the industry with a footprint of less than eight inches square and has been designed to be more compact and elegant in appearance, making it suitable for both the food service market and the retail market. In addition, the system's reduced size and flat panel display allow it to be mounted in a variety of ways, including wall-mounted, fixed to an adjustable base or attached to an articulated arm. The Javelin-LC features a 133mHz processor, system memory from 4 MB of RAM up to 64 MB of RAM, 1 MB of video memory, a 10.4 or 12.1 inch TFT active matrix screen, 2 serial ports, 1 enhanced parallel port and a 10 Base-T Ethernet port. JAVELIN-LCP. The Javelin LCP is a product line extension of the Javelin-LC. This is a Pentium based LC product which, like the LC, is believed by the Company to have the smallest footprint of any POS computer in the industry. The speed of the Pentium-based CPU offers clients the ability to dramatically increase speed and performance when using graphically intensive POS applications. The LCP features a 200 mHz Intel Pentium processor with additional features such as an integrated sound card and full screen video, 3 serial ports and up to 128 MB of RAM. The food service industry, especially the QSR segment, is demanding the latest generation hardware to be based around the Pentium processor. The Javelin LCP is specifically designed to meet the industry's unique hardware requirements for speed, space, flexibility and multimedia features. NEW PRODUCTS JAVELIN-LP. The Company intends to release the Javelin LP in fiscal 1999. The Javelin LP is designed to be a compact, low profile PC for the high-traffic, POS environment. The LP is planned to be network-ready with an integrated 100/10BaseT Ethernet controller. With 4 serial ports, two of which can supply +5Volt power, the LP should accommodate a variety of peripheral equipment such as cash drawers, card readers, scanners and printers. The Javelin LP's rugged, aluminum die-cast, convection cooled case should provide the Javelin LP with a significant advantage over other POS systems. The LP is designed to be spill- resistant with a solid cover, and, because it has no fans, is expected to be noiseless and have no vents into which airborne debris can enter and collect inside the system. The LP's low profile design should require minimal counter space, and I/O connectors planned to be located at the bottom of the unit should allow easy routing of cables through a small opening in a counter or desk top. The Javelin LP is expected to come with an integrated touchscreen controller supporting both Elographics and Microtouch Bus Monitors, eliminating the need for an external controller. JAVELIN-HHT 40. The Javelin HHT-40 is being developed for the Company by a third party, and the Company anticipates that the HHT-40 will become available in fiscal 1999. The HHT-40 is designed to be a compact, lightweight, wireless handheld system that provides service people the ability to enter orders quickly and efficiently and offers the benefit of sending information remotely to the kitchen, bar, etc. With its built-in customer display and paging system, the HHT-40 would expedite customer transactions, reduce operator errors, and most significantly, increase table turns. The HHT-40 is planned to be based on a main module where a battery, magnetic card reader or end-piece can be connected to any side of the main module. 37 SYSTEMS INTEGRATION NETWORK DESIGN/PROJECT MANAGEMENT. The Company provides network services ranging from network design to large-scale network implementation, which would include a review and audit of a customer's existing POS technology infrastructure, an assessment of the functional requirements of the customer's POS system, the preparation of network specifications and technical design documentation and diagrams. The Company's network implementation services involve the purchase, delivery, testing and installation of enterprise-wide POS systems. The Company acts as the single project manager for all parties involved in a multi-unit installation, to effectively converge and integrate of all the client's business processes. The Company believes that the delivery of a combination of design, implementation and management services through a project manager enables the Company's personnel to fully understand the customer's computing and operating environments, install POS systems that meet the customer's specialized requirements and train the customer's users and internal POS system staff prior to the full migration to a new POS system. The Company's personnel have extensive experience resolving the integration, implementation and management issues faced by its customers, and the personnel involved in any particular project are carefully selected for their technical expertise to meet the requirements of the specific project. The Company assesses its customers' POS system requirements and selects the optimal mix of applications and products of various hardware and software vendors, and does not exclusively use Javelin products. The Company's expertise extends through each area of POS system networking to create a tailor-made infrastructure for the client, including structured cabling, power, local area network (LAN), wide area network (WAN) and internet technologies. BUSINESS PROCESS INTEGRATION. The Company offers total software integration solutions for POS clients who already have existing software platforms (e.g. accounting, inventory, payroll, and food costing) in place. Programs are provided and written in Visual Basic, C++ and Crystal Reports. The Company believes that the future of software systems integration is to develop and implement Intranet and Internet connections within multi-unit chains resulting in the localization of all critical operational data. SUPPORT SERVICES MANAGED NETWORK SERVICES. As POS systems become more complex, food service providers and retailers are experiencing difficulties in hiring, training and retaining technology professionals who can maintain the performance and functionality of their POS systems. Accordingly, these companies are increasingly outsourcing certain maintenance and management functions for their POS systems in order to minimize the potentially high costs associated with POS system outages. The Company provides a range of enterprise network support and management services that are designed to maintain the effective performance of a customer's POS system. The Company uses its technical expertise and staffing experience to package, price and deliver combinations of these services, and the customer benefits from the Company's experience in providing network management services in a broad range of operating environments. The Company's network management services include combinations of the following services, which are selected by the customer to meet its specific needs: network health checks, baseline documentation and management maintenance, break/fix remote network management and diagnostics help desk services network outsourcing. HELP DESK. The Company's emergency software hotline is available for questions customers may have with respect to specific application software and operating systems. The Help Desk is designed to provide service and support for issues that can be resolved without an on-site visit. If at any time during the Help Desk call it is determined that hardware service is required, the support personnel will expedite the call to the hardware service department. HARDWARE SERVICE/HARDWARE MAINTENANCE/PREVENTATIVE MAINTENANCE. A variety of hardware maintenance options are currently provided on a 24 hour, seven day a week basis. Calls placed to a central service center are greeted with assistance to determine the nature of the call. Once the failure is determined, the responding field technician will answer the call in accordance with services needed and contracted 38 coverage. Depot service supplies configured equipment directly to the location for uninterrupted operations while defective equipment is returned from the site to the service center for repair via courier. Full service maintenance offers on site technical maintenance from the Company's field service technician for both front and back of house equipment. TRAINING/INSTALLATION. Site-specific training is available through customer support personnel beginning with pre-install configuration and database building through installation and "live" date. Hardware preparation such as software load, equipment burn-in, cabling and performance testing of "pre-live" system is an essential component prior to staging and installation. PRODUCT DEVELOPMENT For the fiscal years ended June 30, 1998 and June 30, 1997, the Company spent approximately $874,000 and $396,000, respectively, on research and development. The Company maintains an engineering staff of nine people, with expertise in electronics, mechanical and software design, who are responsible for prototyping, tooling and testing the Company's products. The Company's engineering and manufacturing staff then coordinate with systems engineers and quality control personnel to progress from the final design stage to mass production. The Company intends to hire additional engineers and project managers to better coordinate the product development process as the Company expands its product development efforts. PRODUCT DISTRIBUTION The Company's products are primarily distributed through strategic relationships with OEMs and VARs that have a strong reputation in the food service and retail POS markets. By distributing its products through OEMs and VARs, the Company has been able to take advantage of the existing name recognition and market position of its OEMs and VARs and quickly establish a market for its products, while minimizing expenditures for direct sales, marketing, technical support and service. The Company intends to continue to expand these relationships to further penetrate its existing domestic and international markets, as well as to gain access to new market segments and international markets. To date, the Company's sales have been predominantly to small-to-mid size restaurant chains. Javelin believes a major opportunity exists for it to further penetrate large accounts (100 site or more chain organizations) with its existing systems and ability to provide a total solution to the client. Large accounts often require a "total solution" including initial consulting, hardware and software installation, ongoing support and maintenance, product support services and a super-regional or national presence. Consequently, in order to meet this need, the Company recently purchased three established and well-regarded systems integrators: CCI, Posnet and Aspact. CCI and Posnet, both based in the US, have been consolidated and operate as CCI Group, Inc. Aspact's activities have been primarily focused on the Singapore and Hong Kong markets. The Company believes that by targeting different markets through its different distribution channels, it can more effectively penetrate multiple markets while minimizing costs associated with channel conflicts. VARS. The Company sells its products to VARs who integrate industry-specific software with the Company's hardware product for resale into various vertical markets comprised of relatively small customers (less than 50 stores). The Company works closely with these VARs as well as the various software developers to stay abreast of the diversified needs of the Company's targeted markets. The Company's VAR network currently totals approximately 250 VARS. The Company believes that VAR distribution channels are advantageous to the Company as they generally have existing geographically diverse customers, focus their businesses on providing customized solutions to their customers and maintain their own sales and technical support staff. OEMS. The Company also sells its products to OEMs with significant market presence in the food service and specialty retail industries. The OEMs market the Company's products under their own names and sell either through dealers or directly to mid-sized customers (50 to 100 stores). Because of the high likelihood of the Company's product being offered by more than one OEM into an end user account, the 39 Company offers the OEM an opportunity to choose its own customized design. The OEM is charged for mechanical design, prototyping and tooling. One of the Company's principal strategies is to expand the OEM distribution channel both domestically and internationally. DIRECT SALES ORGANIZATION (CCI). The Company's acquisitions of CCI and Posnet allow it to sell directly to corporate accounts. Since the acquisitions, the Company has focused its efforts principally on large customers (100+ stores) because these customer opportunities are beyond the scope that can be effectively managed by the Company's regional VAR marketing partners. In this manner, the Company believes it can minimize any potential distribution channel conflict with its VARs. The Company typically provides a multi-vendor POS solution for its corporate accounts, and the hardware utilized in any particular account may not be Javelin hardware. The standardized nature of franchised operations enables the Company to design and rapidly deploy customized solutions for these large-scale customers. The Company intends to focus on growing its direct sales business in the near future to take advantage of a scarcity of POS service providers currently in the marketplace. CUSTOMERS Certain end users of the Company's products are:
BOTH JAVELIN JAVELIN HARDWARE SERVICES HARDWARE AND SERVICES - -------------------------------- ------------------------------- -------------------------- Blimpies International ARAMARK Corp. Universal Studios Red Robin International Madison Square Garden -Stadiums and Arenas Inc. Greyhound Lines Inc. -National Parks Direct Express Club Corporation of America AFC Enterprises, Inc. Chevron Corporation Greennall's Pubs and Restaurants -Popeye's Inc. Claim Jumper Restaurants Ogden Entertainment Services Inc. -Church's Fried Chicken Inc. Mitsubishi Silicon America -Seattle's Best Coffee Sonic Corp. Allied Domecq PLC -Baskin-Robbins USA Co. -Dunkin' Donuts Incorporated Jamba Juice Co.
CASE STUDIES VAR. Farris Point of Sale ("Farris") is an example of a well-established VAR focused on the food service and retail markets that was searching for an open systems solution to integrate with the software it was selling. Farris now integrates restaurant software with Javelin's touchscreen hardware, then deploys the open system POS solution in small chain operations throughout Texas. Farris' customers generally are chains with less than ten stores. Historically, Farris has purchased 30-40 Javelin systems per month and provides 24-hour technical support for its customers. OEM. Wang (Global) is a leading global network and desktop and integration services company that plans, deploys, manages and maintains worldwide network and desktop computing environments. Wang is also a long-term supplier for one of the world's largest QSR chains. To date, Wang has installed POS systems in a large number of locations for the customer. Recently, the customer delineated a new hardware specification for its POS systems requiring a Pentium-based solution. Since Wang did not have a product that satisfied this new specification, Wang sought Javelin's assistance to provide an integrated solution for the customer. In this collaboration, Javelin has provided the hardware design and manufacturing, while Wang distributes and supports the product. The companies together refined Javelin's Wedge-P to match the customer's requirements, and Wang guided it through the customer's extensive approvals process. 40 DIRECT SALES/CCI. ARAMARK Corp. ("ARAMARK") is an industry leader offering a variety of managed services to private and public sector clients, and generates $7 billion in revenues each year. ARAMARK is the largest provider of food services to major and minor league sports venues, including many high profile locations such as Camden Yards in Baltimore, Turner Field in Atlanta, Coors Field in Denver, CoreStates Center in Philadelphia and Fenway Park in Boston. ARAMARK also serves state and national park locations, including Denali in Alaska, Pikes Peak, Lake Powell, Hearst Castle as well as many major convention centers throughout the United States. CCI has worked closely with ARAMARK's sports and entertainment division for the past four years and offers a number of products and services to ARAMARK's clients. For example, CCI has provided systems integration services to Camden Yards and CoreStates Center to interconnect multiple providers of point of sale solutions, to Turner Field and Coors Field to implement wireless handheld order devices, and at several national park locations to interconnect several manufacturers' cash registers with PC-based inventory systems. CCI provides turn-key deployments of POS solutions for ARAMARK properties starting with the development of a complete network and equipment design and associated budget for the property. Once the design and budget is approved, CCI develops a detailed project plan in conjunction with ARAMARK and the property owners. CCI then procures all equipment and materials, builds all necessary computer and POS systems, performs the required network wiring and installation and deploys all systems at the property. Prior to releasing the property for use, CCI will conduct various tests and dry run activities to ensure correct functionality of all equipment and systems. On larger properties, such as stadiums, CCI also provides on-going on-site support as part of the deployment plan. All properties also receive hardware and software support via CCI's St. Louis-based help desk and repair center. All ARAMARK properties can receive seven-day support from CCI's help desk and repair center, including overnight and same day counter-to-counter equipment replacement. Larger facilities also have an on-site equipment spares pool maintained by CCI in support of major sporting events. Throughout the process, CCI provides weekly status and financial reports to ARAMARK for project control. SALES AND MARKETING The Company's sales and marketing efforts are dedicated to developing the Company's direct and indirect distribution channels on a worldwide basis. The Company's sales efforts in its indirect distribution channels are divided into four regional groups, United States, Europe, Australia and Asia, with international sales efforts directed from the Company's international subsidiaries. In its indirect distribution channel, the Company has a sales force of ten salespersons spread throughout the regions, all of whom are dedicated to developing the Company's OEM and VAR distribution channels. Three of these salespersons have also recently been dedicated to specific domestic channels linked to the application software that is integrated with the Javelin POS system with the intent of increasing sales from these channels. The Company's technically sophisticated OEMs and VARs are responsible for all end user interaction, including sales and warranty support, thereby reducing the need for the Company to maintain large in-house sales or technical support staff while increasing the Company's presence in the food service and retail markets. The Company also consults with its OEMs and VARs in order to identify new product opportunities and product refinements. The Company's direct sales and marketing efforts are staffed by 11 salespersons located in regional offices in the Unites States, England, Australia and Singapore. The Company's direct sales business has grown significantly through acquisitions of its POS systems integrators: CCI and Posnet in the United States and Aspact in Singapore. The Company expects its systems integration business to operate under labels other than "Javelin" in order to reinforce the independent role of the systems integrator in a multi- vendor marketplace. The Company eventually expects to adopt a single brand identity for all of its regional system integration subsidiaries. In the United States, for example, the Posnet sales force has been merged into CCI's sales force. The Company's primary direct selling efforts for its system integration services are through CCI. CCI is an expert in touchscreen POS technology focused in the food service and retail markets. This expertise 41 combined with a vendor independent, open systems commitment have positioned CCI as a client partner as opposed to a vendor. MANUFACTURING The Company designs all of the hardware and certain of the firmware components for all Javelin products. The Company's manufacturing operations consist of the procurement of components and the assembly, testing and quality assurance of finished goods for shipment to its customers. The fabrication of major sub-assemblies, such as circuit boards and sheet metal chassis, and the supply of other finished components, such as touchscreens, are provided by third-party manufacturers. Javelin monitors the quality of its purchased and manufactured components through source and incoming inspection. The Company evaluates and monitors suppliers based on quality, reputation, responsiveness and price. To date, the Company has undertaken substantially all of the final assembly for its products at its facility in Irvine, California. The principal components that make up the Company's products are standard electronics available from a wide variety of suppliers. A single supplier currently provides certain components utilized in the Company's products. The Company believes that, with respect to these components, there are a number of alternative suppliers that could supply components that could be easily integrated into the Company's products without any significant interruption in the Company's operations. The Company has no written long-term contracts with the manufacturers of its products or with any suppliers of the components used in the Company's products. The Company historically has placed orders for products and components based on its projected sales over the next approximately 90 days, and the Company currently maintains a 60-day supply of product components in inventory. The Company recently has begun to outsource some final assembly of its products to a U.S.-based contract manufacturer. The Company believes that outsourcing will reduce the likelihood of capacity constraints as production volumes for its products increase. In addition, the Company has contracted with a manufacturer based in Singapore to manufacture one of Javelin's proposed new products, the Javelin LP, on a turnkey basis. Under the turnkey program, the Singapore manufacturer will ship finished products to Javelin, with the manufacturer managing the day-to-day purchasing, manufacturing and quality control requirements. The Company initially plans to have all finished products inspected at its Irvine, California facility prior to shipment to customers. The Company ultimately plans to have the manufacturer ship products directly to the Company's subsidiaries and distributors for final integration of the products and shipment to customers. The Company expects to have all of its new products similarly manufactured and shipped by third parties in the future. Any termination of, or significant disruption in, the Company's relationship with the third-party manufacturers of its products may prevent the Company from filling customer orders in a timely manner, as the Company generally does not maintain large inventories of its products or components. The Company has occasionally experienced and may in the future experience delays in delivery of products and delivery of products of inferior quality from some of its third-party manufacturers. Although alternate manufacturers are available to produce the Company's products, the number of manufacturers of some products is limited, and qualifying a replacement manufacturer could take several months. In addition, the Company's use of third-party manufacturers reduces control over product quality, manufacturing timing, yields and costs since the Company must rely on the third-party manufacturers' ability to identify the Company's requirements for products and components, the manufacturers' general competence and ability to progress along the learning curve relating to the manufacture of the Company's products, and the manufacturers' schedules and capacity. Disruption of the manufacture of the Company's products or failure of a third-party manufacturer to remain competitive in functionality or price could delay or interrupt the Company's ability to manufacture or deliver its products to customers on a timely basis and would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, although arrangements with the Company's manufacturers may contain provisions for warranty obligations on the part of the third-party manufacturers, the Company remains primarily responsible to its customers for warranty obligations. 42 The Company also depends upon third-party suppliers to deliver components that are free from defects, competitive in functionality and cost and in compliance with the Company's specifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or more components or failure of a third-party supplier to comply with any of the Company's procurement needs could delay or interrupt the Company's ability to manufacture or deliver its products to customers on a timely basis and would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, any factors, such as general adverse economic conditions, financial condition or government regulations and restrictions, that affect the Company's third-party manufacturers or suppliers could have a material adverse impact on the Company's business, financial condition and results of operations. PRODUCT WARRANTY The Company's computer products have a warranty that covers defective material and workmanship during the twelve-month warranty period commencing on the date of delivery of the products. During the warranty period, the Company will, at its sole option, repair or replace parts found to be defective or refund the purchase price of products or parts. Certain of the Company's major distributors also provide warranty service for the Company's products. COMPETITION The Company believes that the open system architecture of its products and systems integration services makes it well positioned to take advantage of the current POS marketplace. The migration to open systems architecture in the POS industry has been disruptive to many POS companies that built their businesses on the proprietary operating model. While the Company focuses on large-scale solutions to multi-site customer POS problems, companies promoting proprietary systems have faced significant pressure on their operating margins due to high product costs and substantial overheads. Many of these proprietary vendors have now left the POS marketplace through acquisitions or financial failure, and the remaining proprietary vendors generally have undergone reorganizations that have resulted in rapid exits from significant market segments and/or distribution channels. With the largest multinational open systems computer companies not yet fully appreciating the potential of the open systems POS market, the Company is focused on providing food service providers and retailers with cost-effective POS solutions that satisfy their POS needs, including system design, hardware and software installation and implementation and ongoing support and maintenance. The market for the Company's products and services is highly competitive, subject to rapid change and sensitive to new product introductions or enhancements and marketing efforts by industry participants. The Company expects to continue to experience significant and increasing levels of competition in the future, in part as open systems architecture in its targeted industries becomes more common. The principal elements of competition related to the Company's products include price, product features and performance, compatibility with open systems, quality and reliability, brand awareness, level of customer service and quality of display. The POS systems integration industry is also highly competitive and undergoing continual change. The principal elements of competition related to the Company's systems integration services include reputation, scope of services provided, availability of resources and price. In many of the Company's markets, traditional computer hardware manufacturing, communications and consulting companies provide the most significant competition. The Company must also compete with smaller service providers that have been able to develop strong local or regional customer bases. Most of the Company's competitors for its products and services, as well as certain potential competitors, are more established, benefit from greater name recognition, have significantly greater financial, technological, production and marketing resources, and have more extensive distribution networks than the Company. The Company believes the use of open systems architecture in its targeted industries is an important competitive element. Several of the Company's competitors currently also offer open systems and the Company believes that the number of competitors offering open systems solutions will grow over the next several years. The Company anticipates that a significant source of future competition may be from 43 existing competitors in the POS products and services market that the Company believes are currently attempting to develop POS systems and support services utilizing open systems architecture. Due to the greater sales, marketing, product development and financial resources of the Company's competitors, the Company anticipates that competition from these competitors will intensify in the future. In order to effectively compete against these competitors, the Company will need to continue its growth trend and attain sufficient revenues to have the resources to timely develop new products and services in response to evolving technology and customer demands and to sell products and services through a broad distribution channel in competition with these other existing and potential competitors. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively in this marketplace. The Company's competitors include a substantial number of large well-established companies including International Business Machines (IBM), MICROS Systems, Inc., Par Technology Corporation, Radiant Systems, Inc., NCR Corp., Panasonic Communications and Systems Co., Fujitsu, Ltd. and ICL Retail Systems, each of which also offers open systems architecture products and services related thereto. There can be no assurance that the Company will be able to compete effectively or that these existing substantial competitors, or new competitors, will not develop competitive products and services with favorable pricing. Moreover, the Company has little or no proprietary barriers to entry that could keep its competitors from developing similar products or services and technology or selling competing products or services in the Company's markets. Increased competition from manufacturers or distributors of products similar to or competitive with the Company's products, or from service providers that provide services similar to the Company's services, could result in price reductions, reduced margins and loss of market share or could render the Company's technology obsolete, all of which could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to successfully compete in this marketplace or develop sufficient new products and services to remain competitive, and any failure to do so could have a material adverse effect on its results of operations and financial condition. EMPLOYEES As of August 31, 1998 the Company had approximately 165 full-time employees, including 16 employed in sales and marketing, 118 employed in research and development, engineering, technical support and production, and 31 employed as administrative and support staff. None of the Company's employees are represented by unions, and the Company considers its employee relations to be good. FACILITIES The Company's executive offices, research and product development, warehousing and distribution facilities are currently housed in a single leased industrial unit comprised of approximately 29,000 square feet located in Irvine, California. Under the terms of the lease, the Company presently pays rent of approximately $23,500 per month with predetermined monthly rent increases at annual intervals. The lease expires in July 2003. CCI leases a warehousing and distribution facility of approximately 11,700 square feet in Earth City, Missouri under a lease that expires on October 31, 1998 and provides for monthly rental of approximately $8,700. CCI is in the process of seeking larger facilities; however, no lease has been consummated. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages are as follows:
NAME AGE POSITION - --------------------------------- --- ----------------------------------------------------------------- Richard P. Stack................. 33 President, Chief Executive Officer and Director Robert D. Nichols................ 45 Vice President, Sales and Marketing, President, CCI Group, Inc. and Director C. Norman Campbell............... 44 Vice President, Engineering Horace M. Hertz.................. 49 Chief Financial Officer and Secretary Andrew F. Puzder(2).............. 48 Director Steven J. Goodman(1)............. 58 Director Jay L. Kear(1)(2)................ 61 Director
- ------------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. RICHARD P. STACK has been President, Chief Executive Officer and a director of the Company since the Company's inception in September 1995. Prior to that time, from 1991 through September 1995, Mr. Stack was Managing Director of Hi-Technology Supply, a manufacturer and distributor of personal computers and components located in South Africa. From 1988 through 1991, Mr. Stack was employed by Pan-American Airlines in technical management positions. Mr. Stack holds a B.A. degree from the University of California at Berkeley. ROBERT D. NICHOLS has been Vice President, Sales and Marketing, and a director of the Company since August 1998, and has been President of CCI Group, Inc. since its inception in 1992. Prior to that time, from 1991 to 1992, Mr. Nichols served as Director of Sales and Marketing for DP-Tek, Inc., an electronic components manufacturer and systems integrator. From 1985 through 1991, Mr. Nichols served in various sales and marketing positions, most recently as Sales Manager, Quick Service Restaurants, for Unisys Corporation, a publicly-traded computer and information systems provider. Mr. Nichols holds an Associates Degree from the State University of New York and B.S. and M.B.A. degrees from the University of Missouri. C. NORMAN CAMPBELL has been Vice President, Engineering, of the Company since its inception in September 1995. Mr. Campbell also served as a director of the Company from its inception through May 1998. Prior to that time, from 1991 through September 1995, Mr. Campbell served in various engineering management positions, including Director of Research and Development, Singapore, for Advanced Logic Research, a publicly-traded high-end file server manufacturing company. From 1984 to 1991, Mr. Campbell also acted as a consultant to the computer industry with such companies as Intel, ITT, Orange Micro Inc. and IBC (UK). HORACE M. HERTZ has been Chief Financial Officer of the Company since November 1997. Prior to that time, from 1996 to 1997, Mr. Hertz acted as a financial consultant for various companies. From October 1995 to December 1995, Mr. Hertz was the Chief Financial Officer of Access Healthnet, Inc., an entity that declared bankruptcy in December 1995. From 1991 to 1995, Mr. Hertz was a partner of Corbin & Wertz, a CPA firm specializing in publicly-held companies. From 1974 to 1991, Mr. Hertz was a partner of Deloitte & Touche LLP. Mr. Hertz holds a masters degree in mathematics from the University of California at Irvine. 45 ANDREW F. PUZDER was elected as a director of the Company in November 1996. Mr. Puzder is currently Executive Vice President of Irvine-based Fidelity National Financial, Inc., Executive Vice President and General Counsel of CKE Restaurants, Inc., Chief Executive Officer and a director of Green Burrito Foods Corporation, and a director of Rally's Hamburgers, Inc. He is also a partner on leave at the law firm of Stradling, Yocca, Carlson & Rauth. Mr. Puzder received his J. D. from the Washington University School of Law. STEVEN J. GOODMAN was elected as a director of the Company in January 1996. Mr. Goodman is currently a consultant for Tessa Financial Group, Inc., a regional investment banking firm. From November 1991 through March 1995, Mr. Goodman was West Coast Managing Director of Creative Business Strategies, Inc., a financial corporate consulting firm. JAY L. KEAR was elected as a director of the Company in August 1996. Since 1988, Mr. Kear has represented Kear Enterprises in working with and investing in high technology companies. From 1988 through 1993, Mr. Kear also engaged in similar work for the Noorda Family Trust. Prior to 1988, Mr. Kear held various sales, marketing, engineering, and general management positions with private and public companies in the high technology sector. Mr. Kear received a B.S. degree from the University of Southern California. BOARD COMPOSITION The Board of Directors is divided into three classes, with each class holding office for staggered three-year terms. The terms of Jay L. Kear and Andrew F. Puzder expire in 1998, the terms of Richard P. Stack and Robert Nichols expire in 1999 and the term of Steven J. Goodman expires in 2000. COMMITTEES OF THE BOARD OF DIRECTORS The Audit Committee consists of Messrs. Puzder and Kear. The Audit Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by the Company's independent auditors and reviews and evaluates the Company's audit and control functions. The Compensation Committee consists of Messrs. Goodman and Kear. The Compensation Committee makes recommendations regarding the Company's stock option plans as well as decisions concerning salaries and incentive compensation for employees and consultants of the Company. DIRECTOR COMPENSATION The members of the Board do not receive any cash compensation for their service as directors, but are eligible for reimbursement of their expenses incurred in connection with attendance at Board meetings in accordance with Company policy. Each non-employee director of the Company is also automatically granted options to purchase 30,000 shares of the Company's Common Stock pursuant to the terms of the Company's stock option plan for services rendered as a director of the Company. During the last fiscal year, the Company granted options covering an aggregate of 30,000 shares to Mr. Goodman at an exercise price of $9.00 per share, representing the fair market value of the Company's Common Stock on the date of grant. EXECUTIVE COMPENSATION The following table sets forth the compensation awarded or paid to, or earned by, the Company's Chief Executive Officer and the other executive officer of the Company who earned in excess of $100,000 46 in salary and bonus (collectively, the "Named Executive Officers") for services rendered to the Company during the year ended June 30, 1998: SUMMARY COMPENSATION TABLE (1)
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES ------------------------ UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS - --------------------------------- ---- ---------- --------- ------------ Richard P. Stack................. 1998 $ 105,508 -- 50,000 President, Chief Executive 1997 $ 87,958 -- -- Officer and Director 1996 $ 15,000 -- -- C. Norman Campbell............... 1998 $ 107,593 -- 30,000 Vice President, Engineering
- ------------------------ (1) In accordance with the rules of the Securities and Exchange Commission (the "SEC"), the compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits received by the Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options made during the fiscal year ended June 30, 1998 to each of the Named Executive Officers:
INDIVIDUAL GRANTS POTENTIAL ------------------------------------------------------- REALIZABLE VALUE % OF TOTAL AT ASSUMED ANNUAL NUMBER OF OPTIONS RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION UNDERLYING EMPLOYEES IN EXERCISE OR MARKET PRICE FOR OPTION TERM(3) OPTIONS FISCAL BASE PRICE ON DATE OF EXPIRATION ------------------ NAME GRANTED(1) YEAR(2) ($/SH) GRANT DATE 5% 10% - ----------------------- ----------- ------------ ----------- ------------ ---------- -------- -------- Richard Stack.......... 50,000 8.0% $ 8.625 $ 8.625 12/11/07 $271,200 $685,700 C. Norman Campbell..... 30,000 4.4% $ 8.625 $ 8.625 12/11/07 $162,700 $412,400
- ------------------------ (1) The options referenced above become exercisable over a 5-year period with 20% vesting one year from the date of grant and 20% of the remaining shares vesting yearly thereafter. The term of the options is ten years. (2) Based on options to purchase 650,300 shares granted to employees in fiscal 1998, including the Named Executive Officers. (3) The potential realizable value is calculated based on the term of the option at its time of grant (ten years). It is calculated assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These amounts represent certain assumed rates of appreciation only, in accordance with the rules of the SEC, and do not reflect the Company's estimate or projection of future stock price performance. Actual gains, if any, are dependent on the actual future performance of the Company's Common Stock and no gain to the 47 optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. AGGREGATED FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers the number and value of securities underlying unexercised options held by the Named Executive Officers at June 30, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT JUNE 30, 1998(1) AT JUNE 30, 1998(2) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------- ----------- ------------- ----------- ------------- Richard Stack.............. -- 50,000 -- $150,000 C. Norman Campbell......... -- 30,000 -- $ 90,000
- ------------------------ (1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money" options are options with exercise prices below the market price of the Company's Common Stock. (2) Based on the fair market value of the Common Stock as of June 30, 1998. Amounts reflected are based on the fair market value minus the exercise price and do not indicate that the optionee sold such stock. STOCK OPTION PLANS 1996 INCENTIVE STOCK AWARD PLAN In August 1996, the Company adopted, and the stockholders subsequently approved, the Company's 1996 Stock Incentive Award Plan (the "1996 Plan"). Under the 1996 Plan, 300,000 shares of the Company's Common Stock are reserved for issuance pursuant to the exercise of stock awards granted to employees, directors and consultants. As of August 15, 1998, options to purchase a total of 279,600 shares were outstanding under the 1996 Plan, 20,400 shares of Common Stock had been issued upon the exercise of options granted under the 1996 Plan, and no shares remained available for grant thereunder. The 1996 Plan will terminate in August 2006, unless sooner terminated by the Company's Board of Directors. The 1996 Plan provides for the grant of both incentive and nonstatutory stock options, restricted stock, stock appreciation rights, dividend equivalents, stock payments and/or performance awards. Incentive stock options granted under the 1996 Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory stock options granted under the 1996 Plan are intended not to qualify as incentive stock options under the Code. Options granted under the 1996 Plan generally have a term of ten years and vest over three years, with 40% vesting after one year and 30% vesting yearly thereafter. No incentive stock option may be granted under the 1996 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. For incentive stock option grants, the aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which such options are exercisable for the first time by an optionee during any calendar year (under all such plans of the Company and its affiliates) may not exceed $100,000. The Company did not grant any options to its executive officers under the 1996 Plan during the fiscal year ended June 30, 1998. 48 1997 EQUITY INCENTIVE PLAN In September 1997, the Company adopted, and the stockholders subsequently approved, the Company's 1997 Equity Incentive Plan (the "1997 Plan"). Under the 1997 Plan, 1,100,000 shares of the Company's Common Stock are reserved for issuance pursuant to the exercise of stock awards granted to employees, directors and consultants. As of August 15, 1998, options to purchase a total of 561,000 shares were outstanding under the 1997 Plan and options to purchase 539,000 shares remained available for grant thereunder. The 1997 Plan will terminate in September 2007, unless sooner terminated by the Company's Board of Directors. The 1997 Plan provides for the grant of both incentive and nonstatutory stock options and stock appreciation rights. Incentive stock options granted under the 1997 Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory stock options granted under the 1997 Plan are intended not to qualify as incentive stock options under the Code. Options granted under the 1997 Plan generally have a term of ten years and vest over a period of four to five years, with 25% to 20% vesting after one year and 25% to 20% vesting yearly thereafter. No incentive stock option may be granted under the 1997 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. For incentive stock option grants, the aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which such options are exercisable for the first time by an optionee during any calendar year (under all such plans of the Company and its affiliates) may not exceed $100,000. EMPLOYMENT AGREEMENTS The Company and Richard P. Stack entered into an Employment Agreement dated August 19, 1996 (the "Stack Employment Agreement"). The Stack Employment Agreement expires on August 19, 1999 (subject to annual renewals thereafter) and provides for payment to Mr. Stack of an annual salary of $95,000 from January 1, 1997 through December 31, 1997 and $105,000 from and after January 1, 1998. As of April 1, 1998, Mr. Stack's annual salary was increased to $150,000. In addition to his salary, Mr. Stack is reimbursed for all reasonable and necessary travel and other business expenses incurred in connection with the performance of his duties. The Company is also obligated to pay the premium for a life insurance policy insuring Mr. Stack's life providing for death benefits of up to $750,000 to the named beneficiary of the policy. If Mr. Stack's employment with the Company is terminated for cause (as defined in the Stack Employment Agreement), Mr. Stack will be entitled to receive his base salary through the date of termination. If Mr. Stack's employment with the Company is terminated without cause, he will be entitled to receive payment of his base salary for the greater of (i) the remaining term of the Stack Employment Agreement, or (ii) one (1) year from the date of termination. The Company and C. Norman Campbell entered into an Employment Agreement dated August 19, 1996 (the "Campbell Employment Agreement"). The Campbell Employment Agreement expires on August 19, 1999 (subject to annual renewals thereafter) and provides for payment to Mr. Campbell of an annual salary of $95,000 from January 1, 1997 through December 31, 1997 and $105,000 from and after January 1, 1998. As of April 1, 1998, Mr. Campbell's annual salary was increased to $130,000. In addition to his salary, Mr. Campbell is reimbursed for all reasonable and necessary travel and other business expenses incurred in connection with the performance of his duties. The Company is also obligated to pay the premium for a life insurance policy insuring Mr. Campbell's life providing for death benefits of up to $750,000 to the named beneficiary of the policy. If Mr. Campbell's employment with the Company is terminated for cause (as defined in the Campbell Employment Agreement), Mr. Campbell will be entitled 49 to receive his base salary through the date of termination. If Mr. Campbell's employment with the Company is terminated without cause, he will be entitled to receive payment of his base salary for the greater of (i) the remaining term of the Campbell Employment Agreement, or (ii) one year from the date of termination. CCI and Robert Nichols entered into an Employment Agreement dated January 1, 1998 (the "Nichols Employment Agreement"). The Nichols Employment Agreement expires on December 31, 2002 and provides for payment to Mr. Nichols of an annual base salary of $100,000. Mr. Nichols is also entitled to a quarterly bonus of $6,250 and a year-end bonus of approximately $31,750, subject to adjustment based on CCI's profitability for the applicable fiscal year. In addition to his base salary and bonuses, Mr. Nichols is also reimbursed for all reasonable and necessary travel and other business expenses incurred in connection with the performance of his duties. If Mr. Nichols' employment with CCI is terminated for cause (as defined in the Nichols Employment Agreement), Mr. Nichols will be entitled to his base salary through the date of termination. If Mr. Nichols is terminated without cause (as defined in the Nichols Employment Agreement), then Mr. Nichols will be entitled to a lump sum equal to Mr. Nichol's annual base salary. 50 CERTAIN TRANSACTIONS On December 22, 1997, the Company issued 557,500 shares of the Company's Common Stock to Robert Nichols, Executive Vice President, Sales and Marketing, and a Director of the Company, for his entire interest in CCI in connection with the purchase by the Company of all the outstanding capital stock of CCI. In connection with the acquisition of CCI, the Company also assumed a note payable to Mr. Nichols with a balance of approximately $185,000 (the "Nichols Note"). In February 1998, the Company repaid to Mr. Nichols the principal amount and all accrued interest outstanding under the Nichols Note. The Company has entered into employment agreements with Richard P. Stack and C. Norman Campbell. In addition, CCI entered into an employment agreement with Robert Nichols. See "Management--Employment Agreements." 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of August 15, 1998, and as adjusted to reflect the sale of shares in this Offering, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock, (ii) each Named Executive Officer, (iii) each of the Company's directors, and (iv) all current directors and executive officers as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
PERCENTAGE OF SHARES BENEFICIALLY SHARES OWNED(2) BENEFICIALLY ---------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) BEFORE OFFERING AFTER OFFERING - ---------------------------------------------------------------------- ----------- ----------------- --------------- Richard P. Stack(3)................................................... 857,008 20.8% 16.0% Robert D. Nichols(4).................................................. 557,500 13.6 10.4 C. Norman Campbell(5)................................................. 483,550 11.7 9.0 Steven S. Goodman(6).................................................. 287,200 7.0 5.3 Jay L. Kear(7)........................................................ 20,000 * * Andrew F. Puzder(8)................................................... 12,000 * * All Executive Officers and Directors as a group (7 persons)(9)........ 2,239,758 53.9% 41.4%
- ------------------------ * Less than one percent (1) All persons listed above have an address c/o the Company's principal executive offices at 17891 Cartwright Road, Irvine, CA 92614. (2) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 4,111,962 shares of Common Stock outstanding as of August 15, 1998 and assuming 5,365,025 shares of Common Stock outstanding after completion of this Offering. (3) Includes 5,000 shares owned by Mr. Stack's children and 62,000 shares owned by Mr. Stack's mother. (4) Includes 5,850 shares owned by Mr. Nichols' children. (5) Includes 9,450 shares subject to options exercisable within 60 days of August 15, 1998, held by Mr. Campbell's spouse. (6) Includes 203,200 shares owned by The Steven J. Goodman Revocable Living Trust of which Steven J. Goodman, a director of the Company, is the sole trustee and the sole beneficiary, and with respect to which Mr. Goodman has sole voting and investment power. Also includes 10,000 shares subject to options exercisable within 60 days of August 15, 1998. (7) Includes 5,000 shares held by the Jay Louis Kear Family Trust of which Mr. Kear is the trustee. Also includes 15,000 shares subject to options exercisable within 60 days of August 15, 1998. (8) Includes 12,000 shares subject to options exercisable within 60 days of August 15, 1998. (9) Includes 46,450 shares subject to options exercisable within 60 days of August 15, 1998. 52 SELLING STOCKHOLDERS The following table sets forth certain information as of August 15, 1998 with respect to each Selling Stockholder that will sell shares of the Company's Common Stock to the Underwriters if the Underwriters exercise the over-allotment option granted by the Selling Stockholders to the Underwriters. If the over- allotment option is exercised in full, the Underwriters will purchase an aggregate of 187,500 shares of Common Stock from the Selling Stockholders as set forth in the following table. If the over-allotment option is exercised only in part, the Underwriters have agreed that they will purchase from each Selling Stockholder a pro rata portion of the number of shares to be purchased in connection with the exercise of the over-allotment option, which pro rata portion shall be determined based upon the number of shares which each Selling Stockholder has requested to be sold in the Offering and which shall not exceed the number of shares specified in the following table as being offered by each such Selling Stockholder.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(2) NUMBER OF AFTER OFFERING(2) ---------------------- SHARES BEING ---------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT - ----------------------------------------------------------- --------- ----------- ------------- --------- ----------- Richard P. Stack(3)........................................ 857,008 20.8 57,500 799,508 14.9% Robert D. Nichols.......................................... 557,500 13.6 50,000 507,500 9.5 C. Norman Campbell(4)...................................... 483,550 11.7 50,000 433,550 8.1 Steven S. Goodman(5)....................................... 298,200 7.0 30,000 268,200 5.0
- ------------------------ (1) All persons listed above have an address c/o the Company's principal executive offices at 17891 Cartwright Road, Irvine, CA 92614. (2) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 4,111,962 shares of Common Stock outstanding as of August 15, 1998 and assuming 5,365,025 shares of Common Stock outstanding after completion of this Offering. (3) Includes 5,000 shares owned by Mr. Stack's children and 62,000 shares owned by Mr. Stack's mother. (4) Includes 9,450 shares subject to options exercisable within 60 days of August 15, 1998, held by Mr. Campbell's spouse. (5) Includes 203,200 shares owned by The Steven J. Goodman Revocable Living Trust of which Steven J. Goodman, a director of the Company, is the sole trustee and the sole beneficiary, and with respect to which Mr. Goodman has sole voting and investment power. Also includes 10,000 shares subject to options exercisable within 60 days of August 15, 1998. 53 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, $0.01 par value, and 1,000,000 shares of Preferred Stock, $0.01 par value. The following description of the Company's capital stock is qualified in all respects by reference to the Company's Amended and Restated Certificate of Incorporation ("Certificate of Incorporation"), which has been filed as an exhibit to the Registration Statement incorporating this Prospectus. COMMON STOCK At August 15, 1998, there were 4,111,962 shares of Common Stock outstanding, which were held of record by 73 stockholders. The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may, from time to time, determine, subject to any preferences which may be granted to the holders of Preferred Stock. Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote. The Common Stock is not entitled to preemptive rights and is not subject to redemption or conversion. Upon liquidation, dissolution or winding-up of the Company, the assets (if any) legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock after payment of all debt and liabilities of the Company and the liquidation preference of any outstanding class or series of Preferred Stock. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to this Offering will be, when issued and delivered, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to any series of Preferred Stock that the Company may issue in the future. Certain holders of Common Stock or securities convertible into Common Stock are entitled to the registration rights discussed below. PREFERRED STOCK Preferred Stock may be issued from time to time in one or more series, and the Board of Directors, without action by the holders of the Common Stock, may fix or alter the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of Preferred Stock. The Board of Directors, without stockholder approval, can issue shares of Preferred Stock with rights that could adversely affect the rights of holders of Common Stock. No shares of Preferred Stock presently are outstanding, and the Company has no present plans to issue any such shares. The issuance of shares of Preferred Stock could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. WARRANTS The Company issued warrants to Meridian Capital Group, Inc. ("Meridian"), one of the Underwriters in this Offering, and certain of Meridian's officers in connection with the Company's initial public offering in October 1996 (the "Meridian Warrants"). To date, warrants to purchase 65,670 shares of Common Stock have been exercised pursuant to the net-exercise provisions of the Meridian Warrants, and warrants to purchase 19,330 shares of Common Stock remain outstanding under the Meridian Warrants at an exercise price of $6.25 per share. In addition, the Company issued warrants to purchase 35,000 shares of Common Stock to L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend"), one of the Underwriters in this Offering, and certain of L.H. Friend's officers in connection with certain financial services provided to the Company at a weighted average exercise price per share of $11.61 (the "L.H. Friend Warrants"), and a warrant to 54 purchase 100,000 shares of Common Stock to FINOVA Capital Corporation ("Finova") at an exercise price per share of $9.00 (the "Finova Warrants," and together with the Meridian Warrants and the L.H. Friend Warrants, the "Warrants"). REGISTRATION RIGHTS The holders of the Warrants have certain rights of registration with respect to the 154,330 shares of Common Stock now issuable upon exercise thereof. The holders of the shares issuable upon exercise of the Meridian Warrants may require the Company to file one registration statement under the Securities Act with respect to such shares. In addition, if the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of the shares issuable upon exercise of the Warrants are entitled to include their shares of Common Stock in the registration, subject to certain limitations. The Company is required to bear substantially all costs incurred in connection with any such registrations, other than underwriting discounts and commissions. The foregoing registration rights could result in substantial future expense to the Company and adversely affect any future equity or debt offerings of the Company. The demand and piggy-back registration rights related to the Meridian Warrants expire November 1, 2001 and November 1, 2003, respectively. The registration rights related to the Finova Warrants and the L.H. Friend Warrants terminate on June 8, 2003 and June 9, 2003, respectively. CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER DOCUMENTS The Company is a Delaware corporation and subject to Section 203 of the Delaware General Corporation law (the "Delaware GCL"), an anti-takeover law. In general, Section 203 of the Delaware GCL prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined) with a Delaware corporation for three years following the date such person became an interested stockholder, subject to certain exceptions such as the approval of the board of directors and of the holders of at least two-thirds of the outstanding shares of voting stock not owned by the interested stockholder. The existence of this provision would be expected to have an anti-takeover effect, including attempts that might result in a premium over the market price of the shares of Common Stock held by stockholders. As permitted by the Delaware GCL, the Company has included in its Certificate of Incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors to the extent permitted by the Delaware GCL. In addition, the Amended and Restated Bylaws ("Bylaws") of the Company provide that the Company is required to indemnify its officers and directors under certain circumstances, including the circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware GCL. The indemnification agreements require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware law and to advance their expenses incurred as a result of any proceedings against them as to which they could be indemnified. The Company also carries directors' and officers' liability insurance. The foregoing provisions of the Company's Bylaws and indemnification agreements would be available for indemnification of, and advancing of expenses to, officers and directors of the Company in connection with liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the Company's Bylaws and/or indemnification agreement, or otherwise, the Company has been advised that in the opinion of the SEC, 55 such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or permitted. The Company believes that its charter provisions and indemnification agreement are necessary to attract and retain qualified persons as directors and officers. The Company's Certificate of Incorporation and Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. The provisions of the Certificate of Incorporation and Bylaws of the Company with respect to the foregoing may be amended, modified or rescinded by the holders of at least 66 2/3% of the Company's outstanding voting stock. These provisions could have the effect of delaying, deferring or preventing a change in control or other corporation action. TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for the Common Stock is U.S. Stock Transfer Corporation, Glendale, California. 56 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this Offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have outstanding 5,365,025 shares of Common Stock. Of these shares, the 1,250,000 shares sold in the Offering and 873,900 shares previously registered by the Company for sale to the public will generally be freely tradable without restriction or further registration under the Securities Act. The remaining 3,241,125 shares of Common Stock may be sold in the public market as follows: (i) 855,817 shares will be eligible for immediate sale on the date of this Prospectus; and (ii) upon expiration of lock-up agreements 180 days after the date this Prospectus is declared effective (the "Effective Date"), approximately 2,385,308 additional shares will be eligible for sale subject to the volume and other restrictions of Rule 144. The foregoing does not include any shares that may be issued in connection with the acquisitions of RGB/Trinet and Jade which may first become eligible for resale one year after the date of issuance. In addition, holders of vested options to purchase 125,300 shares of Common Stock as of the date of this Prospectus will be able to sell without restriction pursuant to a Form S-8 registration statement filed with respect to such shares. Holders of additional vested options to purchase an aggregate of 92,583 shares of Common Stock as of the date of this Prospectus will be entitled to sell all of such shares upon expiration of lock-up agreements 180 days after the Effective Date. Future sales of shares by existing stockholders could have an adverse effect on the market price of the Common Stock or otherwise impair the Company's ability to raise additional capital. See "Description of Capital Stock." In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice, and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned restricted shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. The Company has filed registration statements under the Securities Act covering shares of Common Stock reserved for issuance under the Company's stock option plans. Such registration statements cover approximately 1,400,000 shares. Shares registered under such registration statements will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless such shares are subject to the lock up agreements described above. See "Management." 57 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), through their representatives, Van Kasper & Company, L.H. Friend, Weinress, Frankson & Presson, Inc. and Meridian Capital Group, Inc. (the "Representatives"), have severally agreed to purchase from the Company the number of shares of Common Stock set forth opposite their names below:
NUMBER OF NAME SHARES - --------------------------------------------------------------------------------- ---------- Van Kasper & Company............................................................. L.H. Friend, Weinress, Frankson & Presson, Inc................................... Meridian Capital Group, Inc...................................................... Total........................................................................ 1,250,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the shares of Common Stock offered hereby (other than those subject to the Underwriters' Over-Allotment Option described below) if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the price to public set forth on the cover page of this Prospectus and to certain dealers at this price less a concession not in excess of $ per share. The Underwriters may allot and these dealers may reallot a concession not in excess of $ per share to certain other dealers. After the initial offering, the offering price and other selling terms may be changed by the Representatives. The Selling Stockholders have granted to the Underwriters an option (the "Over-Allotment Option"), exercisable no later than 45 days after the date of this Prospectus, to purchase up to 187,500 additional shares of Common Stock at the per share public offering price less the Underwriting Discounts and Commissions set forth on the cover page of this Prospectus, solely to cover over-allotments. To the extent that the Representatives act to exercise the Over-Allotment Option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof as the number of shares of Common Stock to be purchased by it shown in the above table bears to the total offering, and the Selling Stockholders will be obligated, pursuant to the option, to sell such shares of Common Stock to the Underwriters. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. In connection with the Offering, the Representatives may engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the Over-Allotment Option. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. 58 Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transaction or that such transactions, once commenced, will not be discontinued without notice. The Company, the Selling Stockholders, all of the Company's executive officers and directors, and certain beneficial owners of the Company's Common Stock have agreed not to, directly or indirectly, offer to sell, contract to sell, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for shares of Common Stock or any rights to purchase or acquire Common Stock for the 180-day period from the date of this Prospectus without the prior written consent of Van Kasper & Company. Van Kasper & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. See "Shares Eligible for Future Sale." As discussed above, Van Kasper & Company may, under certain circumstances, decide to release the Company, the Selling Stockholders and the Company's officers, directors, employees and certain other stockholders from the 180-day lock-up period on sales of Common Stock as set forth in the lock-up agreements. In making such a determination, Van Kasper & Company would consider prevailing market factors and conditions at the time of receipt of a request for release from the 180-day restriction period. The granting of any such release would be conditioned, in the judgment of the Van Kasper & Company on such sale not materially adversely impacting the prevailing trading market for the Common Stock on the Nasdaq National Market. Specifically, factors such as average trading volume, recent price trends, and the need for additional public float in the market for the Common Stock would be considered in evaluating such a request. In October 1996, the Company issued to Meridian Capital Group, Inc. ("Meridian") and certain of Meridian's officers warrants to purchase 85,000 shares of the Company's Common Stock at $6.25 per share in connection with the Company's initial public offering (the "Meridian Warrants"). To date, warrants to purchase 65,670 shares of the Company's Common Stock have been exercised for a total of 36,362 shares of Common Stock pursuant to the net exercise provisions contained in the Meridian Warrants, and warrants to purchase 19,330 shares of Common Stock at an exercise price of $6.25 per share remain outstanding under the Meridian Warrants. In December 1997, L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend") and certain of L.H. Friend's officers received warrants to purchase an aggregate of 10,000 shares of the Company's Common Stock with an exercise price of $9.36 per share. In June 1998 L.H. Friend and these same officers received additional warrants to purchase 25,000 shares of the Company's Common Stock at an exercise price of $12.65 per share (together with the warrants issued in December 1997, the "L.H. Friend Warrants"). The L.H. Friend Warrants were issued as partial consideration for financial advisory services rendered in connection with the establishment of the Company's credit facility with FINOVA Capital Corporation. Additional cash consideration of $165,000 was paid in connection with such financial advisory services. In addition, the terms of the Company's engagement of L.H. Friend provide that L.H. Friend has a right of first refusal with respect to placing or underwriting any financing, merger, stock or asset sale, business combination, reorganization or recapitalization of $3 million or more undertaken by the Company until December 1998. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by its counsel, Cooley Godward LLP, San Diego, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Gray Cary Ware & Freidenrich LLP, San Diego, California. 59 EXPERTS The Consolidated Financial Statements of Javelin Systems, Inc. at June 30, 1997, and for the period from inception to June 30, 1996 and the year ended June 30, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The Consolidated Financial Statements of Javelin Systems, Inc. as of June 30, 1998 and for the year then ended included in this Prospectus and Registration Statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The Financial Statements of POSNET Computers, Inc. as of October 31, 1997 and for the year then ended included in this Prospectus and Registration Statement have been so included in reliance on the report of Corbin & Wertz, independent auditors, given on the authority of said firm as experts in accounting and auditing. The Consolidated Financial Statements of CCI Group, Inc. as of December 31, 1997 and for the year then ended included in this Prospectus and Registration Statement have been so included in reliance on the report of Rubin, Brown, Gornstein & Co. LLP, independent auditors, given on the authority of said firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS On May 28, 1998, the Company elected to replace Ernst & Young LLP ("Ernst & Young") as its independent accountants. The reports of Ernst & Young on the Company's financial statements as of June 30, 1996 and 1997 and for the period from inception to June 30, 1996 and for the year ended June 30, 1997 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The Company's audit committee approved the Company's dismissal of Ernst & Young and the engagement of PricewaterhouseCoopers LLP as the Company's independent accountants. During the Company's two most recent fiscal years and through May 28, 1998, there were no disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Ernst & Young would have caused them to make reference thereto in their report. During the two most recent fiscal years and through May 28, 1998, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1) (v)). Ernst & Young has furnished the Company with a letter addressed to the SEC stating that it agrees with the above statements. The Company engaged PricewaterhouseCoopers LLP as its new independent accountants as of May 28, 1998. During the two most recent fiscal years and through May 28, 1998, the Company has not consulted with PricewaterhouseCoopers LLP on items which (i) are described in Regulation S-K Item 304(a)(2)(i) or (ii) concerned the subject matter of a disagreement or reportable event with the former accountants (as described in Regulation S-K Item 304(a)(2)(ii)). ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C., a Registration Statement on Form SB-2 under the Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as part thereof. 60 Statements contained in this Prospectus as to the contents of any contract or document filed as an exhibit to the Registration Statement are qualified by reference to such exhibit as filed. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports and other information with the SEC. A copy of the Registration Statement, and the exhibits and schedules thereto, as well as reports and other information filed by the Company with the SEC may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the SEC's World Wide Web site is http://www.sec.gov. 61 INDEX TO FINANCIAL STATEMENTS
PAGE --------- JAVELIN SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants: PricewaterhouseCoopers LLP............................................................................. F-2 Ernst & Young LLP...................................................................................... F-3 Consolidated Balance Sheets as of June 30, 1997 and 1998................................................. F-4 Consolidated Statements of Operations for the Years Ended June 30, 1997 and 1998......................... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997 and 1998......................... F-6 Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1997 and 1998................ F-7 Notes to Consolidated Financial Statements............................................................... F-8 POSNET COMPUTERS, INC. FINANCIAL STATEMENTS Independent Auditors' Report............................................................................. F-21 Balance Sheet as of October 31, 1997..................................................................... F-22 Statement of Operations for the Twelve-Month Period Ended October 31, 1997............................... F-23 Statement of Stockholders' Deficit for the Twelve-Month Period Ended October 31, 1997.................... F-24 Statement of Cash Flows for the Twelve-Month Period Ended October 31, 1997............................... F-25 Notes to Financial Statements............................................................................ F-26 CCI GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS Auditors' Report......................................................................................... F-32 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-33 Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996......................... F-34 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997 and 1996................................................................................................... F-35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996..................... F-36 Notes to Consolidated Financial Statements............................................................... F-37
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Javelin Systems, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Javelin Systems, Inc. and its subsidiaries at June 30, 1998, and the results of their operations and their cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Costa Mesa, California August 25, 1998 F-2 REPORT OF INDEPENDENT AUDITORS The Board of Directors Javelin Systems, Inc. We have audited the accompanying balance sheet of Javelin Systems, Inc. as of June 30, 1997, and the related statements of operations, stockholders' equity and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Javelin Systems, Inc. at June 30, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Orange County, California August 1, 1997 F-3 JAVELIN SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30, 1997 1998 ------------ ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 686,200 $ Accounts receivable--net of allowance for doubtful accounts of $41,000 as of June 30, 1997 and of $248,800 as of June 30, 1998................................... 2,470,600 7,449,700 Inventories...................................................................... 1,674,100 5,925,300 Deferred income taxes............................................................ 204,900 Other current assets............................................................. 46,500 426,900 ------------ ------------- Total current assets........................................................... 4,877,400 14,006,800 Property and equipment, net...................................................... 295,600 1,036,400 Excess of cost over net assets of purchased businesses........................... 6,457,500 Deferred financing costs......................................................... 889,000 Other assets, net................................................................ 30,000 141,600 ------------ ------------- Total assets................................................................... $ 5,203,000 $ 22,531,300 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 200,000 $ 1,343,000 Accounts payable................................................................. 1,503,800 5,636,900 Accrued expenses................................................................. 144,700 625,000 Current maturities of long-term debt............................................. 300,000 Customer deposits................................................................ 1,197,200 Deferred maintenance revenues.................................................... 385,300 Income taxes payable............................................................. 438,700 ------------ ------------- Total current liabilities...................................................... 1,848,500 9,926,100 ------------ ------------- Long-term debt, net of current portion............................................. 1,200,000 Deferred rent expense.............................................................. 6,300 Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock, $0.01 par value: authorized shares--1,000,000; issued and outstanding shares--none Common stock, $.01 par value: authorized shares--10,000,000; issued and outstanding shares--3,119,250 as of June 30, 1997 and 4,111,962 as of June 30, 1998........................................................................... 31,200 41,100 Additional paid in capital....................................................... 4,295,300 11,270,900 Deferred compensation............................................................ (90,800) (39,200) Retained earnings (accumulated deficit).......................................... (881,200) 132,900 Cumulative translation adjustment................................................ (6,800) ------------ ------------- Total stockholders' equity..................................................... 3,354,500 11,398,900 ------------ ------------- Total liabilities and stockholders' equity..................................... $ 5,203,000 $ 22,531,300 ------------ ------------- ------------ -------------
SEE ACCOMPANYING NOTES. F-4 JAVELIN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED JUNE 30, 1997 JUNE 30, 1998 ------------------ ------------------ Revenues: Product sales........................................................... $ 7,014,600 $ 27,132,400 Service................................................................. 2,513,700 ------------------ ------------------ Total revenues.......................................................... 7,014,600 29,646,100 ------------------ ------------------ Cost of revenues: Cost of product sales................................................... 5,499,500 19,831,300 Cost of service......................................................... 1,904,700 ------------------ ------------------ Total cost of revenues.................................................. 5,499,500 21,736,000 ------------------ ------------------ Gross profit............................................................ 1,515,100 7,910,100 ------------------ ------------------ Operating expenses: Research and development................................................ 396,400 874,000 Selling and marketing................................................... 390,800 1,179,900 General and administrative.............................................. 859,900 4,195,500 ------------------ ------------------ Total operating expenses.................................................. 1,647,100 6,249,400 ------------------ ------------------ Income (loss) from operations............................................. (132,000) 1,660,700 Interest expense.......................................................... (709,500) (115,000) Other income.............................................................. 41,100 Interest income........................................................... 14,600 12,200 ------------------ ------------------ Income (loss) before income taxes......................................... (826,900) 1,599,000 Provision for income taxes................................................ (584,900) ------------------ ------------------ Net income (loss)......................................................... $ (826,900) $ 1,014,100 ------------------ ------------------ ------------------ ------------------ Earnings (loss) per common share: Basic................................................................... $ (0.30) $ 0.28 ------------------ ------------------ ------------------ ------------------ Diluted................................................................. $ (0.30) $ 0.27 ------------------ ------------------ ------------------ ------------------ Shares used in computing Earnings (loss) per share: Basic................................................................... 2,782,535 3,622,604 ------------------ ------------------ ------------------ ------------------ Diluted................................................................. 2,782,535 3,750,611 ------------------ ------------------ ------------------ ------------------
SEE ACCOMPANYING NOTES. F-5 JAVELIN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED JUNE 30, 1997 JUNE 30, 1998 ------------------ ------------------ OPERATING ACTIVITIES Net income (loss)......................................................... $ (826,900) $ 1,014,100 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization........................................... 37,800 354,900 Amortization of deferred charge related to warrants..................... 636,100 Amortization of deferred compensation................................... 108,200 51,600 Loss on disposal of assets.............................................. 55,100 Deferred income taxes................................................... (204,900) Deferred rent expense................................................... 6,300 Income tax benefit from exercise of stock options....................... 59,200 Non-cash allowances: Inventories........................................................... 312,800 Accounts receivable................................................... 243,800 Other................................................................. 130,000 Changes in operating assets and liabilities, net of acquisitions:....... Accounts receivable................................................... (1,776,900) (3,403,500) Inventories........................................................... (1,464,800) (2,985,800) Other current assets.................................................. (42,500) (313,900) Accounts payable...................................................... 1,147,100 2,838,100 Accrued expenses...................................................... 111,800 35,100 Deferred maintenance revenues......................................... 129,200 Customer deposits..................................................... (408,500) Income taxes payable.................................................. 239,000 ------------------ ------------------ Net cash used in operating activities................................... (2,070,100) (1,847,400) ------------------ ------------------ INVESTING ACTIVITIES Purchase of equipment................................................... (305,300) (724,600) Cash received from purchased businesses................................. 392,400 Other assets............................................................ (20,300) (75,200) ------------------ ------------------ Net cash used in investing activities................................... (325,600) (407,400) ------------------ ------------------ FINANCING ACTIVITIES Net borrowings (repayments) under line of credit........................ (6,600) 774,200 Proceeds from issuance of long-term debt................................ 1,500,000 Payments of notes payable to related parties............................ (90,000) (515,500) Repayment of notes payable.............................................. (70,000) Deferred financing costs................................................ (278,900) Net proceeds from initial public offering............................... 3,238,700 Exercise of stock options and warrants.................................. 3,400 95,600 ------------------ ------------------ Net cash provided by financing activities............................. 3,075,500 1,575,400 ------------------ ------------------ CUMULATIVE TRANSLATION ADJUSTMENT......................................... (6,800) ------------------ ------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 679,800 (686,200) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 6,400 686,200 ------------------ ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 686,200 $ -- ------------------ ------------------ ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income tax paid......................................................... $ 800 $ 298,000 ------------------ ------------------ ------------------ ------------------ Interest paid........................................................... $ 71,400 $ 113,200 ------------------ ------------------ ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: See Note 3 for the acquisition of businesses in exchange for 910,300 shares of the Company's common stock See Note 5 for the warrants issued in connection with credit facility.
SEE ACCOMPANYING NOTES. F-6 JAVELIN SYSTEMS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
DEFERRED CHARGE RELATED TO RETAINED COMMON STOCK ADDITIONAL WARRANTS ISSUED EARNINGS CUMULATIVE ------------------ PAID-IN DEFERRED IN CONNECTION (ACCUMULATED TRANSLATION SHARES AMOUNT CAPITAL COMPENSATION WITH DEBT DEFICIT) ADJUSTMENT TOTAL --------- ------- ----------- ------------ --------------- ------------ ---------- ----------- Balance as of July 1, 1996.................. 2,104,250 $21,100 $ 348,100 $ -- $(119,800) $ (54,300) $ -- $ 195,100 Value assigned to warrants issued in connection with debt.................. 516,300 (516,300) -- Amortization of deferred charge................ 636,100 636,100 Exercise of warrants.... 165,000 1,600 1,700 3,300 Proceeds from initial public offering, net................... 850,000 8,500 3,230,200 3,238,700 Deferred stock compensation.......... 199,000 (199,000) -- Amortization of deferred stock compensation.... 108,200 108,200 Net loss................ (826,900) (826,900) --------- ------- ----------- ------------ --------------- ------------ ---------- ----------- Balance, June 30, 1997.................. 3,119,250 31,200 4,295,300 (90,800) -- (881,200) -- 3,354,500 Value assigned to warrants issued in connection with credit facility.............. 621,900 621,900 Issuances of shares for acquisitions.......... 929,050 9,300 6,199,500 6,208,800 Amortization of deferred stock compensation.... 51,600 51,600 Exercise of stock options and exchange of warrants for common stock................. 63,662 600 95,000 95,600 Income tax benefit from exercise of stock options............... 59,200 59,200 Cumulative translation adjustment............ (6,800) (6,800) Net income.............. 1,014,100 1,014,100 --------- ------- ----------- ------------ --------------- ------------ ---------- ----------- Balance, June 30, 1998.................. 4,111,962 $41,100 $11,270,900 $ (39,200) $ -- $ 132,900 $(6,800) $11,398,900 --------- ------- ----------- ------------ --------------- ------------ ---------- ----------- --------- ------- ----------- ------------ --------------- ------------ ---------- -----------
SEE ACCOMPANYING NOTES. F-7 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Javelin Systems, Inc. ("Javelin") was incorporated in the State of Delaware on September 19, 1995 under the name of Sunwood Research, Inc. Javelin designs, develops, markets and sells open systems touch screen point-of-sale ("POS") computers. On November 1, 1996, Javelin completed an initial public offering (the "IPO") of 850,000 shares of its common stock at $5.00 per share, netting proceeds of approximately $3.2 million. Proceeds were used to repay debt with an outstanding balance of approximately $745,000 and for working capital. In December 1997, Javelin acquired all of the outstanding common stock of POSNET Computers, Inc.("Posnet") and CCI Group, Inc. ("CCI") as described in Note 3. Posnet and CCI provide full turn-key systems integration services, including system consulting, staging, training, deployment, product support and maintenance. In March and April 1998, Javelin established three international subsidiaries to expand its sales and distribution channels in the international marketplace. The international subsidiaries are: Javelin Systems (Europe) Limited ("Javelin Europe") headquartered in England; Javelin Systems International Pte Ltd ("Javelin Asia") headquartered in Singapore; and Javelin Systems Australia Pty Limited ("Javelin Australia") headquartered in Australia. In May 1998, Javelin Asia acquired all of the outstanding common stock of Aspact IT Services (Singapore) Pte Ltd ("Aspact") as described in Note 3. Aspact is headquartered in Singapore and provides consulting and system integration services. In July 1998, Javelin entered into a letter of intent to acquire all of the outstanding capital stock of RGB/Trinet Ltd. ("RGB/Trinet") and Jade Communications Ltd ("Jade"). RGB/Trinet and Jade are headquartered in England and provided complementary Wide Area Networking (WAN) products and services primarily to large retail, hospitality, and telecommunications companies. See Note 9 for description of these planned acquisitions. Hereinafter, Javelin and its subsidiaries are referred to as the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Javelin and of its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of the financial instruments could be different than that recorded on a historical basis in the accompanying consolidated financial statements. The financial instruments consist of cash and F-8 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) cash equivalents, accounts receivable, accounts payable, accrued expenses and debt. The carrying amounts of the Company's financial instruments as of June 30, 1997 and 1998 approximate their respective fair values. CONCENTRATION OF BUSINESS AND CREDIT RISK Javelin operates within an industry that is subject to rapid technological advancement, intense competition and uncertain market acceptance. The introduction of new technologies, competitors' alternative products and ultimate market acceptance of the products sold by Javelin, could have a substantial impact on the future operations of the Company. Financial instruments which potentially subject the Company to a concentration of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers and collateral is generally not required. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for potential losses which, when realized, have been within the range of management's expectations. During the year ended June 30, 1997 two customers aggregated approximately 16% each of net sales. During the year ended June 30, 1998 one customer aggregated approximately 11% of net sales. Sales were not to the same major customers in 1997 and 1998. Export sales, principally to Europe, during the year ended June 30, 1998 aggregated approximately 10% of net sales. Export sales during the year ended June 30, 1997 were not significant. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories consist primarily of computer hardware and components and are stated at the lower of cost (first-in, first-out) or market as follows:
JUNE 30, JUNE 30, 1997 1998 ------------ ------------ Raw materials..................................................... $ 1,525,700 $ 3,572,500 Finished goods.................................................... 148,400 2,352,800 ------------ ------------ $ 1,674,100 $ 5,925,300 ------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred, and the costs of additions and betterments are capitalized. Depreciation is provided in amounts, which amortize costs over the useful lives of the related assets, generally three to five years, utilizing the straight-line method. Leasehold improvements are amortized over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Management of the Company assesses the recoverability of property and equipment when certain events are known to management which may affect the carrying value of such assets in relation to fair value. Management assesses fair value by determining whether the carrying value of such assets over their F-9 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which such impairment is determined by management. To date, management has not identified any impairment of property and equipment. Property and equipment consists of the following:
JUNE 30, JUNE 30, 1997 1998 ---------- ------------ Machinery and equipment............................................. $ 112,800 $ 603,000 Furniture and fixtures.............................................. 150,800 638,000 Leasehold improvements.............................................. 72,700 35,200 ---------- ------------ 336,300 1,276,200 Less accumulated depreciation and amortization...................... (40,700) (239,800) ---------- ------------ Property and equipment, net......................................... $ 295,600 $ 1,036,400 ---------- ------------ ---------- ------------
EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES Excess of cost over net assets of purchased businesses (goodwill) represents the excess of purchase price over the fair value of the net assets of acquired businesses. Goodwill is stated at cost and is amortized on a straight-line basis over 25 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted cash flows. The amount of goodwill impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which goodwill impairment is determined by management. To date, management has not identified any impairment of goodwill. DEFERRED FINANCING COSTS Deferred financing costs represent incremental costs to unrelated parties incurred in connection with the credit facility described in Note 5 and are deferred and amortized over the term of the related debt. CUSTOMER DEPOSITS Customer deposits as of June 30, 1998 consists principally of amounts received for contracts to be started in fiscal 1999. FOREIGN CURRENCY TRANSLATION The consolidated financial statements of the Company's non-U.S. operations are translated into U.S. dollars for financial reporting purposes. The assets and liabilities of non-U.S. operations whose functional currencies are other than the U.S. dollar are translated at rates of exchange at fiscal year-end, and revenues and expenses are translated at average exchange rates for the fiscal year. The cumulative translation effects are reflected in stockholders' equity. Foreign currency gains and losses on transactions denominated in other than the functional currency of an operation are reflected in other income (expense). F-10 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REVENUE RECOGNITION Revenues from sales of products are recognized upon shipment of the products. The Company does not have any significant remaining obligations upon shipment of the products. Product returns and sales allowances, which historically have not been significant, are provided for at the date of sale. Revenues from the installation of products are recognized upon the completion of the installation of the product as acknowledged by the customer. Service contract revenues are recognized ratably over the term of the related contract. WARRANTIES The Company's products are under warranty for defects in material and workmanship for one year. Certain components included in the Company's products are covered by manufacturers' warranties. The Company establishes an accrual for estimated warranty costs at the time of sale. ADVERTISING COSTS The Company expenses the costs of advertising as incurred. RESEARCH AND DEVELOPMENT The Company expenses the cost of research and development, principally comprised of payroll and related costs and the cost of prototypes. STOCK-BASED COMPENSATION During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities electing to use APB 25 for accounting for stock-based compensation to employees must make pro forma disclosures of net income or loss, as if the fair value method of accounting defined in SFAS 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB 25. INCOME TAXES The Company accounts for its income taxes using the asset and liability method whereby deferred tax assets and liabilities are determined based on temporary differences between bases used for financial reporting and income tax reporting purposes. Income taxes are provided based on the enacted tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize those tax assets through future operations. EARNINGS (LOSS) PER COMMON SHARE The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully F-11 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution and it is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock which are dilutive were exercised or converted into common stock. The Company has adopted SFAS 128 in the quarter ended December 31, 1997 and has restated all previously reported per share amounts to conform to the new presentation. Diluted loss per common share is computed using the weighted average number of common shares outstanding during the period. Common share equivalents were not included in the 1997 computation of diluted loss per common share since their effect would have been anti-dilutive. A reconciliation of basic and diluted EPS for the years ended June 30, 1997 and 1998 is as follows:
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1998 -------------------------- -------------------------- BASIC DILUTED BASIC DILUTED ------------ ------------ ------------ ------------ Net income (loss).................... $ (826,900) $ (826,900) $ 1,014,100 $ 1,014,100 Weighted average common shares outstanding........................ 2,782,535 2,782,535 3,622,604 3,622,604 Additional shares due to potential exercise of stock options.......... 128,007 Diluted weighted average common shares outstanding................. 2,782,535 2,782,535 3,622,604 3,750,611 Earnings (loss) per share............ $ (0.30) $ (0.30) $ 0.28 0.27
RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This standard will require that an enterprise display an amount representing total comprehensive income for the period. SFAS 130 will be effective for the Company's year ending June 30, 1999. Adoption of SFAS 130 is for presentation only and will not affect the Company's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which supersedes Statement of Financial Accounting Standards No. 14. This statement changes the way that publicly-held companies report information about operating segments as well as disclosures about products and services, geographic areas and major customers. Operating segments are defined as revenue-producing components of the enterprise, which are generally used internally for evaluating segment performance. SFAS 131 will be effective for the Company's year ending June 30, 1999 and will not affect the Company's financial position or results of operations. F-12 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS Cash received in connection with the Company's purchase acquisitions is as follows: Fair value of assets acquired, including goodwill.............. $10,422,000 Less liabilities assumed....................................... 4,561,200 Less stock and cash issued to sellers.......................... 6,253,200 ---------- Cash received.................................................. $ 392,400 ---------- ----------
In December 1997, the Company acquired all of the outstanding capital stock of Posnet. Posnet sells, installs and maintains POS systems and turnkey retail automation systems. The original purchase price for the Posnet capital stock consisted of 225,000 shares of the Company's common stock. The Company may be required to issue an additional 75,000 shares (the "Contingency Shares") of its common stock in 1998 and shares of its common stock with a market value of $500,000 in each of 1999 and 2000 (the "Additional Contingency Shares") based upon the cumulative net profits of Posnet during the three years ending December 31, 2000. The Contingency Shares and Additional Contingency Shares are collectively known as the "Earnout Shares." The acquisition has been accounted for by the purchase method, and accordingly, the results of operations of Posnet have been included with those of the Company commencing on the date of acquisition. The original purchase price of $1,594,200 (including acquisition costs of approximately $75,500) was determined by discounting the value of the common stock issued by 25% from the quoted price principally due to restrictions and liquidity factors and resulted in excess of acquisition costs over net assets of approximately $2,036,000. Such excess (which will increase for any contingent payments) is being amortized on a straight-line basis over 25 years. The final allocation of the purchase price may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from that used in accompanying consolidated financial statements. During the year ended June 30, 1998, the Company issued 18,750 Contingency Shares as additional consideration. See Note 9 for amendment to the additional contingent consideration. In December 1997, the Company acquired all of the outstanding capital stock of CCI. CCI sells, installs and maintains POS systems and turnkey retail automation systems. The purchase price for the CCI capital stock consisted of 670,000 shares of the Company's common stock. The acquisition has been accounted for by the purchase method, and accordingly, the results of operations of CCI have been included with those of the Company commencing on the date of acquisition. The purchase price of $4,476,800 (including costs of acquisition of approximately $111,300) was determined by discounting the value of the common stock issued by 25% from the quoted price principally due to restrictions and liquidity factors and resulted in excess of acquisition costs over net assets of approximately $4,097,500. Such excess is being amortized on a straight-line basis over 25 years. The final allocation of the purchase price may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from that used in accompanying consolidated financial statements. F-13 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited pro forma consolidated results of operations as if the acquisitions of Posnet and CCI had occurred as of July 1, 1996 and July 1, 1997, respectively, are as follows:
YEAR ENDED YEAR ENDED JUNE 30, 1997 JUNE 30, 1998 ------------- ------------- Revenues....................................................... $ 19,462,200 $ 36,951,000 Cost of revenues............................................... 14,750,000 26,987,300 ------------- ------------- Gross profit................................................... 4,712,200 9,963,700 Operating expenses............................................. 5,081,100 8,170,300 ------------- ------------- Income (loss) from operations.................................. (368,900) 1,793,400 Other income (expense)......................................... (733,600) (64,900) ------------- ------------- Income (loss) before income taxes.............................. (1,102,500) 1,728,500 Provision for income taxes..................................... (8,500) (615,400) ------------- ------------- Net income (loss).............................................. $ (1,111,000) $ 1,113,100 ------------- ------------- ------------- ------------- Income (loss) per share: Basic........................................................ $ (0.30) $ 0.25 ------------- ------------- ------------- ------------- Fully diluted................................................ $ (0.30) $ 0.24 ------------- ------------- ------------- -------------
The above unaudited pro forma amounts are not necessarily indicative of what the actual results might have been if the acquisitions had occurred as of July 1, 1996. On May 14, 1998, Javelin Asia acquired all of the outstanding common stock of Aspact for $170,000 in cash and 15,300 shares of the Company's common stock. The acquisition of Aspact has been accounted for as a purchase. Accordingly, the purchase price of $567,400 has been allocated to assets and liabilities based on their estimated fair value at the date of acquisition. Results of operations of Aspact have been included in the consolidated financial statements from the date of acquisition. The purchase price resulted in excess of acquisition costs over net assets of approximately $320,000. Such excess is being amortized on a straight-line basis over 25 years. The results of operations of Aspact prior to May 14, 1998 were not material. See Note 9 regarding planned future acquisitions. F-14 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES No provision for federal or state income taxes was required for the year ended June 30, 1997 since the Company incurred losses from inception to June 30, 1997. The components of income tax expense for the year ended June 30, 1998 are as follows: Current: Federal........................................................ $ 686,300 State.......................................................... 70,700 Foreign........................................................ 32,800 --------- 789,800 --------- Deferred: Federal........................................................ (157,400) State.......................................................... (47,500) Foreign........................................................ -- --------- (204,900) --------- Total............................................................ $ 584,900 --------- ---------
The Company's effective tax rate differs from the U.S. federal statutory tax rate, as follows:
1997 1998 --------- --------- Income tax provision at statutory tax rates.................................... 34.0% 34.0% State taxes, net of federal tax effect......................................... 2.5 Goodwill....................................................................... 2.7 Non-deductible items........................................................... 4.1 Net operating loss benefit..................................................... (34.0) (8.7) Other.......................................................................... -- 2.0 --------- --- Total.......................................................................... 0% 36.6% --------- --- --------- ---
Components of the deferred income tax balance are as follows:
1997 1998 ---------- ---------- Deferred tax assets: Net operating loss carryforwards.................................... $ 38,400 $ -- Accrued expenses.................................................... 15,700 195,000 Other................................................................. 35,600 9,900 ---------- ---------- Deferred tax assets................................................... $ 89,700 $ 204,900 ---------- ---------- ---------- ---------- Valuation allowance................................................... $ 89,700 $ 0 ---------- ---------- ---------- ---------- Net deferred tax asset................................................ $ 0 $ 204,900 ---------- ---------- ---------- ----------
Management believes it is more likely than not that the Company will realize its deferred tax asset based upon current year and expected results. F-15 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LINE OF CREDIT AND LONG-TERM DEBT On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit facility of $7,500,000 from an unrelated financial institution. The credit facility expires on June 8, 2001 and consists of a line of credit of up to $6,000,000 and a term loan of $1,500,000. The Company issued warrants to purchase 135,000 shares of common stock in connection with the credit facility. See Note 7 regarding warrants. Under the terms of the line of credit, the Company may borrow up to 80% of eligible accounts receivable (as defined) and 50% of eligible inventory (as defined) with monthly interest payments based upon the prime rate of a national financial institution plus 1.75% (10.25% as of June 30, 1998). Borrowings under the line of credit are collateralized by substantially all the assets of the Company. As of June 30, 1998, borrowings outstanding under the line amounted to $1,343,000 with approximately $2,800,000 available for future borrowings. Borrowings under the term loan are collateralized by substantially all of the assets of the Company, bear interest at 13.65% per annum and are repayable at $25,000 per month with all unpaid principal and interest due on June 8, 2001. 6. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its facilities and certain equipment under noncancelable operating leases subject to scheduled rent increases. The leases expire at various dates through August 2003. Future minimum annual lease payments as of June 30, 1998 are as follows:
YEAR ENDING JUNE 30, - -------------------------------------------------------------------------------- 1999............................................................................ $ 605,100 2000............................................................................ 670,900 2001............................................................................ 638,700 2002............................................................................ 572,200 2003............................................................................ 473,600 Thereafter...................................................................... 1,700 ------------ Total........................................................................... $ 2,962,200 ------------ ------------
Rent expense under operating lease agreements aggregated approximately $34,300 and $230,100 for the year ended June 30, 1997 and 1998, respectively, and is included in general and administrative expenses in the accompanying consolidated statement of operations. EMPLOYMENT AGREEMENTS The Company has employment agreements with eleven employees of the Company, which expire at various dates through December 2002. Some of the agreements provide for incentive bonuses which are payable if specified management goals are attained. F-16 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future annual minimum payments under the employment agreements as of June 30, 1998 are as follows:
YEAR ENDING JUNE 30, - -------------------------------------------------------------------------------- 1999............................................................................ $ 1,040,000 2000............................................................................ 320,000 2001............................................................................ 320,000 2002............................................................................ 320,000 2003............................................................................ 160,000 ------------ Total........................................................................... $ 2,160,000 ------------ ------------
7. STOCKHOLDERS' EQUITY COMMON STOCK On August 23, 1996, the Company effected a 4,300-for-1 stock split. All references in the accompanying consolidated financial statements and notes to shares outstanding and per share amounts have been adjusted to reflect the impact of the stock split. In November 1996, the Company completed its initial public offering by issuing 850,000 shares of common stock at an offering price of $5.00 per share. During the year ended June 30, 1998, the Company issued 929,050 shares of its common stock in connection with the acquisitions described in Note 3, 27,300 shares of common stock upon the exercise of stock options with a weighted average exercise price of $3.50 per share and 36,362 shares of its common stock upon the exercise of warrants issued to the underwriter in connection with the initial public offering. STOCK OPTION PLANS The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. Under APB 25, the Company recognizes as compensation expense the difference between the exercise price and the fair market value of the common stock on the date of grant. Stock based compensation expense is deferred and recognized over the vesting period of the stock option. During the years ended June 30, 1997 and 1998, the Company recognized $108,200 and $51,600, respectively, in stock based compensation expense. In August 1996, the Company adopted a stock incentive award plan (the "Plan") under which the Board of Directors (the "Board"), or a committee appointed for such purpose, may from time to time grant options, restricted stock or other stock-based compensation to the directors, officers, eligible employees or consultants of the Company to acquire up to an aggregate of 300,000 shares of common stock, in such numbers, under such terms and at such exercise prices as are determined by the Board or such committee. Options vest over a 3-year period based on the following schedule: 40% after year one, 30% after year two, and 30% at the end of year three. All options expire ten years from the date of grant. It is the Company's intention to grant options under the Plan principally to employees. In December 1997, the stockholders approved the Company's 1997 Equity Incentive Plan (the "1997 Plan") under which the Board, or a committee appointed for such purpose, may from time to time grant options, restricted stock or other stock-based compensation to the directors, officers, eligible employees or consultants of the Company to acquire up to an aggregate of 1,100,000 shares of common stock, in such numbers, under such terms and at such exercise prices as are determined by the Board or such committee. F-17 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options generally vest 20% per year over a 5-year period. All options expire ten years from the date of grant. It is the Company's intention to grant options under the Plan principally to employees. The following option activity occurred in the years ended June 30, 1997 and 1998:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ----------------- FOR OPTIONS GRANTED AT LESS THAN FAIR MARKET VALUE ON THE DATE OF GRANT: Outstanding as of July 1, 1996................................... Granted.......................................................... 191,000 $ 3.71 Exercised........................................................ Canceled......................................................... 13,500 $ 3.50 --------- Balance, June 30, 1997........................................... 177,500 $ 3.73 Granted.......................................................... Exercised........................................................ 27,300 $ 3.50 Canceled......................................................... --------- Balance, June 30, 1998........................................... 150,200 $ 3.77 --------- --------- Exercisable at June 30, 1998..................................... 112,536 $ 3.80 --------- ----- --------- ----- Outstanding as of July 1, 1996................................... Granted.......................................................... 68,000 $ 4.90 Exercised........................................................ Canceled......................................................... -- --------- Balance, June 30, 1997........................................... 68,000 $ 4.90 Granted.......................................................... 623,000 $ 9.42 Exercised........................................................ Canceled......................................................... 7,500 $ 9.50 --------- Balance, June 30, 1998........................................... 683,500 $ 8.96 --------- Exercisable at June 30, 1998..................................... 58,943 $ 5.47 --------- ----- --------- -----
The weighted average remaining contractual life of options outstanding as of June 30, 1998 was 9.3 years. The range of exercise prices for options outstanding as of June 30, 1998 was $2.50 to $12.50. The weighted-average fair value of options granted at less than fair market value in 1997 was $1.65. The weighted-average fair value of options granted at fair market value in 1997 and 1998 was $1.68 and $3.62, respectively. Income tax benefits from the exercise of the stock options during the fiscal year ended June 30, 1998 of approximately $59,000 has been credited to additional paid-in capital in the accompanying consolidated balance sheet. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company accounted for its employee stock options granted subsequent to June 30, 1996 under the fair value method of the statement. The fair value F-18 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED YEAR ENDED JUNE 30, 1997 JUNE 30, 1998 ------------- ------------- Risk free interest rate......................................... 6.0% 6.0% Dividend yield.................................................. None None Volatility factor of the expected market price of the Company's common stock.................................................. 0.41 0.57 Weighted-average expected life of each option................... 3 years 3 years
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of fair value of its employee stock options. For purpose of pro forma disclosures, the estimated fair value of the options is amortized to expenses over the options vesting period. The Company's pro forma information for the years ended June 30, 1997 and 1998 follows:
1997 1998 ----------- ------------ Net income (loss) as reported...................................... $ (826,900) $ 1,014,100 Net income (loss)--SFAS 123 adjusted............................... $ (886,000) $ 743,300 Earnings (loss) per share as reported: Basic............................................................ $ (0.30) $ 0.28 Diluted.......................................................... $ (0.30) $ 0.27 Earnings (loss) per share-SFAS 123 adjusted: Basic............................................................ $ (0.32) $ 0.21 Diluted.......................................................... $ (0.32) $ 0.20
WARRANTS In connection with the issuance of $725,000 of the Company's 10% promissory notes at various dates through August 1996 and the initial public offering, the Company granted warrants to purchase shares of the Company's common stock. The warrants entitled the holders to purchase a total of 165,000 shares of the Company's common stock at an aggregate price of approximately $3,300. The outstanding warrants became exercisable following the effectiveness of the public offering of the Company's common stock and had no expiration date. As of June 30, 1997, all warrants had been exercised. The Company assigned a value of approximately $646,300 to the warrants, which has been accounted for as additional paid in capital in the accompanying consolidated financial statements. The deferred charge related to the warrants was fully amortized after the exercise of all the warrants. In connection with its initial public offering, the Company sold the representatives of the underwriters a warrant to purchase 85,000 shares of the Company's common stock at $6.25 per share. During the year ended June 30, 1998, warrants to purchase 65,670 shares of the Company's common stock were exchanged into 36,362 shares of common stock. The fair value of the common stock issued approximated the fair value of the warrants received. F-19 JAVELIN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with the credit facility described in Note 5, the Company issued warrants to purchase 100,000 shares of its common stock at $9.00 per share to the financial institution and warrants to purchase 35,000 shares of its common stock at prices ranging from $9.36 to $12.65 to its independent financial advisors. The fair value of these warrants was estimated at $621,900 at the date of grant using a Black-Scholes pricing model with the assumptions described above. The fair value of the warrants has been reflected as deferred financing costs and additional paid in capital in the accompanying consolidated balance sheet. 8. RELATED PARTY TRANSACTIONS During the year ended June 30, 1997, the Company purchased electronic components from a company owned by a stockholder and founder of the Company totaling $1,234,328. Purchases from the related company during the year ended June 30, 1998 were not significant. Included in accounts payable at June 30, 1997 is $116,360 due to that company. In connection with the acquisitions of Posnet and CCI described in Note 3, the Company assumed certain debt payable to former shareholders of the acquired entities and current shareholders of the Company. All of such debt was repaid prior to June 30, 1998. 9. SUBSEQUENT EVENTS In August 1998, the Company agreed to issue 56,250 shares of its common stock to the former shareholders of Posnet in consideration for the elimination of any future Earnout Shares (see Note 3). The value of these shares will be recorded as additional goodwill. In July 1998, the Company entered into a letter of intent to acquire all of the outstanding capital stock of RGB/Trinet Limited ("RGB/Trinet") and 52.5% of the outstanding common stock of Jade Communications Limited ("Jade"). The remaining 47.5% of the outstanding common stock of Jade is owned by RGB/Trinet. RGB/Trinet and Jade are located in England and provide complementary wide area network products and services primarily to large retail, hospitality and telecommunications customers in Europe. The aggregate purchase price for the RGB/Trinet and Jade capital stock would consist of $1,510,100 in cash, $1,817,700 in shares of the Company's common stock and an additional 25,000 shares of the Company's common stock. The Company may be required to issue additional shares of its common stock with a market value of $3,290,000 in each of 1999 and 2000 based upon the cumulative net profits of RGB/Trinet and Jade during the twenty four months ending September 30, 2000. The acquisitions will be accounted for by the purchase method, and accordingly, the results of operations of RGB/Trinet and Jade will be included with those of the Company commencing on the date of acquisition. F-20 INDEPENDENT AUDITORS' REPORT Board of Directors Posnet Computers, Inc. We have audited the accompanying balance sheet of Posnet Computers, Inc. (the "Company") as of October 31, 1997, and the related statements of operations, stockholders' deficit and cash flows for the twelve-month 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Posnet Computers, Inc. as of October 31, 1997, and the results of its operations and its cash flows for the twelve-month period then ended in conformity with generally accepted accounting principles. CORBIN & WERTZ Irvine, California January 21, 1998 F-21 POSNET COMPUTERS, INC. BALANCE SHEET AS OF OCTOBER 31, 1997 ASSETS (NOTE 4) Current assets: Cash.......................................................................... $ -- Accounts receivable, net of allowance for doubtful accounts of $30,000........ 729,537 Inventories................................................................... 126,905 Prepaid expenses.............................................................. 7,951 --------- Total current assets........................................................ 864,393 Property and equipment, net (Note 2)............................................ 62,644 Other assets (Note 3)........................................................... 49,000 --------- $ 976,037 --------- --------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Bank overdraft................................................................ $ 120,751 Accounts payable and accrued expenses......................................... 716,355 Customer deposits............................................................. 60,618 Bank line-of-credit and equipment line-of-credit (Note 4)..................... 95,134 Notes payable--stockholders (Note 6).......................................... 49,200 --------- Total current liabilities................................................... 1,042,058 --------- Commitments and contingencies (Note 7) Stockholders' deficit (Note 8): Common stock, no par value; 100,000 shares authorized; 4,000 shares issued and outstanding................................................................. 121,622 Accumulated deficit........................................................... (187,643) --------- Total stockholders' deficit................................................. (66,021) --------- $ 976,037 --------- ---------
See accompanying notes to financial statements F-22 POSNET COMPUTERS, INC. STATEMENT OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 Net sales....................................................................... $4,813,501 Cost of sales................................................................... 2,804,806 --------- Gross profit.................................................................... 2,008,695 Salaries and related expenses................................................... 1,371,752 Selling, general and administrative expenses.................................... 648,503 --------- Loss from operations............................................................ (11,560) Interest expense................................................................ 15,602 --------- Loss before provision for income taxes.......................................... (27,162) Provision for income taxes (Note 5)............................................. 800 --------- Net loss........................................................................ $ (27,962) --------- ---------
See accompanying notes to financial statements F-23 POSNET COMPUTERS, INC. STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997
COMMON STOCK ----------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ----------- ---------- ------------ ---------- Balances, November 1, 1996......................................... 4,000 $ 121,622 $ (159,681) $ (38,059) Net loss........................................................... -- -- (27,962) (27,962) ----- ---------- ------------ ---------- Balances, October 31, 1997......................................... 4,000 $ 121,622 $ (187,643) $ (66,021) ----- ---------- ------------ ---------- ----- ---------- ------------ ----------
See accompanying notes to financial statements F-24 POSNET COMPUTERS, INC. STATEMENT OF CASH FLOWS FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 Cash flows from operating activities: Net loss........................................................................ $ (27,962) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt expense.............................................................. 50,000 Depreciation and amortization................................................. 26,425 Impairment loss on other asset................................................ 10,000 Changes in operating assets and liabilities: Accounts receivable......................................................... (208,133) Inventories................................................................. (65,035) Prepaid expenses............................................................ 7,864 Accounts payable and accrued expenses....................................... 243,827 Customer deposits........................................................... (78,860) --------- Net cash used in operating activities..................................... (41,874) --------- Cash flows from investing activities: Purchase of property and equipment.............................................. (11,007) Advances to stockholders........................................................ (18,213) --------- Net cash used in investing activities....................................... (29,220) --------- Cash flows from financing activities: Net payments on bank line-of-credit and equipment line-of-credit................ (56,878) Increases in notes payable--stockholders........................................ 25,000 Bank overdraft.................................................................. 102,972 --------- Net cash provided by financing activities................................... 71,094 Net change in cash................................................................ -- Cash at beginning of year......................................................... -- --------- Cash at end of year............................................................... $ -- --------- --------- Supplemental disclosure of cash flow information--Cash paid during year for: Interest........................................................................ $ 15,602 --------- --------- Income taxes.................................................................... $ 4,807 --------- ---------
Supplemental disclosure of non-cash investing and financing activities--See notes to the financial statements for certain non-cash transactions entered into during the twelve-month period ended October 31, 1997. See accompanying notes to financial statements F-25 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES ORGANIZATION AND NATURE OF OPERATIONS Posnet Computers, Inc. (the "Company") was incorporated in the state of California in July 1992. The Company sells new and refurbished point-of-sales systems within the hospitality industry, primarily to restaurants. The Company recently expanded to include value-added services, including system integration and specialized reporting capabilities, for its customers located in the United States. These financial statements are presented as of October 31, 1997 and for the twelve-month period ended October 31, 1997 (the "Period"). RISKS, UNCERTAINTIES AND CONCENTRATIONS CASH Cash balances are maintained at one bank. Accounts at this institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. During fiscal 1997, the Company had cash balances in this bank which exceeded the FDIC limit. CUSTOMERS The majority of the Company's sales are to customers throughout the Western United States. Credit is extended based on an evaluation of each customer's financial condition and collateral is not required. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends and other information. During the Period, the Company received a significant portion of its business from one customer. During the Period, sales to this customer totaled 22%. As of October 31, 1997, amounts due from this customer totaled 22% of net accounts receivable. As of October 31, 1997, another customer accounted for 13% of net accounts receivable. If the relationship between the Company and these customers was altered, the future results of operations and financial condition could be affected. SUPPLIERS During the Period, the Company purchased a significant portion of its goods from three suppliers. During the Period, purchases from these suppliers totaled 24%, 21% and 11% of total purchases, respectively. As of October 31, 1997, amounts due to these suppliers totaled 42%, 18% and 12% of accounts payable. If the relationship between the Company and these suppliers was altered, the future results of operations and financial condition could be affected. FAIR VALUE OF FINANCIAL INSTRUMENTS The accompanying balance sheet includes financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash, accounts receivable, accounts payable, lines-of-credit and notes payable--stockholders. The carrying amounts of the Company's financial instruments generally approximate their fair values at October 31, 1997. The fair value of the notes payable--stockholders was not readily determinable as market comparables were not available for such an instruments. F-26 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management are, among others, provisions for losses on accounts receivable and provisions for slow moving and obsolete inventories. Actual results could materially differ from those estimates. INVENTORIES Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out ("FIFO") method. Costs include only materials; there are no direct labor or overhead components. The Company operates in an industry in which its products are subject to design changes and are manufactured based on customer specifications. Accordingly, should either design requirements change significantly or orders cancel or decline, the ultimate realizability of its inventories could be less than their carrying values. As of October 31, 1997, management believes that inventories are carried at their net realizable value. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to seven years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of property and equipment over its remaining life can be recovered through projected undiscounted future cash flows. The amount of property and equipment impairment, if any, is measured based on fair value and is charged to operations in the period in which property and equipment impairment is determined by management. As of October 31, 1997, management believes that there is no impairment of property and equipment. WARRANTY ACCRUAL The Company grants warranties on certain computer products for periods ranging from ninety days to one year, commencing from the time of sale. For most computer products sold, the Company receives a manufacturers warranty. As such, the repair costs or rework costs are ultimately borne by the manufacturer. Accordingly, no provision for warranties have been included in the accompanying financial statements. REVENUE RECOGNITION AND DEFERRED REVENUES Revenues are recognized upon shipment of products and as services are rendered to customers. Nonrefundable deposits received pursuant to certain contracts are deferred as unearned revenues until the products are shipped or until such time that the services are rendered to customers. F-27 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) ADVERTISING The Company reports the costs of all advertising as expense in the period in which those costs are incurred. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. NEW DISCLOSURE STANDARD In June 1997, SFAS No. 130, "Comprehensive Income," ("SFAS 130") was issued which becomes effective in fiscal 1998 and requires reclassification of earlier financial statements for comparative purposes. SFAS 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities, be shown in the financial statements. SFAS 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. The Company does not expect that the implementation of SFAS 130 will have a material effect upon the Company's financial statements. NOTE 2--PROPERTY AND EQUIPMENT Property and equipment (see Note 4) consists of the following as of October 31, 1997: Office and computer equipment..................................... $ 65,823 Trucks and automobiles............................................ 45,076 Furniture and fixtures............................................ 15,884 Tools and test equipment.......................................... 22,777 --------- 149,560 Less accumulated depreciation and amortization.................... (86,916) --------- $ 62,644 --------- ---------
During the Period, depreciation and amortization expense totaled $26,425 and has been reflected in selling, general and administrative expense in the accompanying statement of operations. F-28 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 3--OTHER ASSETS Other assets consist of the following as of October 31, 1997: Investment in restaurant........................................... $ 10,000 Shareholder advances............................................... 39,000 --------- $ 49,000 --------- ---------
As of October 31, 1997, the Company has a $10,000 (or a 0.75% ownership interest) investment in a restaurant located in Southern California. The investment in the restaurant is carried at cost. During the Period, the Company recorded an impairment loss on this asset totaling $10,000. Stockholder advances are due on demand and are non-interest bearing. NOTE 4--BANK LINE-OF-CREDIT AND EQUIPMENT LINE-OF-CREDIT BANK LINE-OF-CREDIT The Company has a $200,000 revolving line-of-credit (the "Line") with Wells Fargo Bank which expires on February 10, 1998. Borrowings pursuant to the Line ($90,079 as of October 31, 1997) accrue interest at Wells Fargo Bank's prime rate, as defined, plus 3.00% (11.50% as of October 31, 1997), and are personally guaranteed by all of the Company's stockholders. The Line is secured by substantially all of the assets of the Company. The Line provides for various warranties, covenants and restrictions requiring compliance on a continuing basis. Default on any warranty, covenant or restriction could effect the bank's commitment to lend, and if not waived or corrected, could accelerate the maturity of any borrowings outstanding under the Line. Subsequent to October 31, 1997, the Company was acquired (see Note 8). The Line has a provision which requires repayment upon such an event. The Line is currently due and has not yet been repaid. EQUIPMENT LINE-OF-CREDIT The Company has a $100,000 equipment line-of-credit (the "Equipment Line") with Wells Fargo Bank which expires on March 5, 1998. Equipment purchase advances, pursuant to the Equipment Line ($5,055 as of October 31, 1997), accrue interest at either of the following two options: (1) fixed on the date of a particular disbursement at 4.25% above the Treasury Rate, as defined, in effect at the close of business on the Thursday of the week preceding such disbursement; or, (2) prime rate, as defined, plus 2.00%. The principal of each equipment advance shall be amortized over a period of not less than 24 months nor more than 96 months (depending on the type of equipment purchased), as agreed by the Company and Wells Fargo Bank at the time of such equipment advance. In August 1996, the Company borrowed $10,200, pursuant to the Equipment Line. The Company elected option #1 (see above). The equipment purchase advance is due in equal monthly installments of $482 over a 24 month period. The equipment purchase advance bears interest at a fixed rate of 12.35% per annum The equipment purchase advance is secured by the related equipment purchased (see Note 2). F-29 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 5--INCOME TAXES The provision for taxes consists of the following for the Period:
FEDERAL STATE TOTAL ----------- --------- --------- Current.............................................................. $ -- $ 800 $ 800 Deferred............................................................. -- -- -- ----- --------- --------- $ -- $ 800 $ 800 ----- --------- --------- ----- --------- ---------
During the Period, the provision for taxes totaled $800, and differs from the amount computed by applying the U.S. Federal income tax rate of 34% to income attributable to continuing operations as a result of the following significant reconciling items: meals and entertainment, keyman life insurance and an increase in the valuation account. As of October 31, 1997, the significant components of the Company's net deferred tax assets are as follows: Deferred tax assets: Net operating losses............................................ $ 45,000 Allowance for bad debts......................................... 12,000 Other........................................................... 4,000 --------- 61,000 Valuation allowance............................................... (61,000) --------- Deferred tax assets............................................... $ -- --------- ---------
During the Period, the valuation allowance increased $5,000. As of October 31, 1997, the Company has net operating loss carryforwards ("NOLs") for Federal and state reporting purposes of approximately $112,000 and $111,000, respectively, which expire in various years through 2012. The Federal and state tax codes provide for restrictive limitations on the annual utilization of NOLs to offset taxable income when the stock ownership of a company significantly changes, as defined. In light of the Company's sale (see Note 8), certain NOLs may currently, or in the foreseeable future, be subject to such annual limitations. As such, an uncertainty exists as to the ultimate NOLs that the Company will have to offset future taxable income. The Company's management has recorded a valuation allowance to reflect for this uncertainty. NOTE 6--RELATED PARTY TRANSACTIONS NOTES PAYABLE--STOCKHOLDERS As of October 31, 1997, the Company had notes with two stockholders totaling $49,200. The notes are due on demand and bear interest at a rate of 10% per annum. Subsequent to year end all principal and accrued interest pursuant to these notes was repaid. OTHER MATTERS See discussion in Note 3 for other related party transactions. F-30 POSNET COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE TWELVE-MONTH PERIOD ENDED OCTOBER 31, 1997 NOTE 7--COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its facilities (located in Huntington Beach and the San Francisco Bay Area) under two operating leases. The operating leases are month-to-month. During the Period and pursuant to these operating leases, the Company incurred rent expense totaling $49,000. ROYALTY AGREEMENT In October 1994, the Company entered into a license agreement (the "License Agreement") with an individual (the "Licensor") whereby the Licensor performs repairs, maintenance and testing of RMS equipment on certain customers' equipment (on behalf of the Company). As consideration, the Company is required to pay the Licensor 7.5% of the total invoices billed to customers for theses services. During the Period, the Company incurred royalty expense totaling $9,900 pursuant to the License Agreement. NOTE 8--SUBSEQUENT EVENTS In December 19, 1997, all of the Company's shareholders (the "Selling Shareholders") entered into a stock purchase agreement (the "SPA") with Javelin Systems, Inc. (the "Purchaser"). Pursuant to the SPA and in exchange for 100% of the Company's outstanding common stock, the Selling Shareholders received 225,000 shares of the Purchaser's common stock (the "Initial Consideration"). In addition to the Initial Consideration and upon certain events, as defined, the Selling Shareholders may earn additional shares of the Purchaser's common stock. The Purchaser is a public company traded on the NASDAQ SmallCap market (NASDAQ:JVLN). OTHER MATTERS See discussion of other subsequent events in Notes 4 and 6. F-31 INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors CCI Group, Inc. We have audited the accompanying consolidated balance sheets of CCI Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CCI Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Rubin, Brown, Gornstein & Co. LLP February 6, 1998 St. Louis, Missouri F-32 CCI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash................................................................................ $ 793,509 $ 134,806 Accounts receivable................................................................. 1,197,299 563,899 Inventory........................................................................... 1,196,848 373,403 Prepaid expenses.................................................................... 14,179 15,526 Other assets........................................................................ 22,575 15,006 ------------ ------------ TOTAL CURRENT ASSETS.............................................................. 3,224,410 1,102,640 ------------ ------------ PROPERTY AND EQUIPMENT Property and equipment.............................................................. 330,080 90,886 Accumulated depreciation............................................................ (96,733) (27,951) ------------ ------------ TOTAL PROPERTY AND EQUIPMENT...................................................... 233,347 62,935 ------------ ------------ TOTAL ASSETS.......................................................................... $ 3,457,757 $ 1,165,575 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.................................................................... $ 651,296 $ 210,898 Billings in excess of costs and estimated earnings on uncompleted contracts......... 1,479,413 537,372 Line of credit...................................................................... 365,000 -- Note payable--officer............................................................... 185,478 99,990 Accrued expenses.................................................................... 189,220 275,505 Accrued income taxes................................................................ 199,666 1,822 ------------ ------------ TOTAL CURRENT LIABILITIES......................................................... 3,070,073 1,125,587 ------------ ------------ LONG-TERM LIABILITIES Deferred income taxes............................................................... 8,379 5,795 Minority interest in subsidiaries................................................... -- 35,452 ------------ ------------ TOTAL LONG-TERM LIABILITIES....................................................... 8,379 41,247 ------------ ------------ STOCKHOLDERS' EQUITY Common stock: $1 par value, 30,000 shares authorized, 1,000 shares issued and outstanding......... 1,000 1,000 Retained earnings................................................................... 378,305 126,008 Treasury stock...................................................................... -- (128,267) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY........................................................ 379,305 (1,259) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 3,457,757 $ 1,165,575 ------------ ------------ ------------ ------------
See the accompanying notes to consolidated financial statements. F-33 CCI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ REVENUES Product sales....................................................................... $ 7,575,558 $ 4,602,186 Sales of services................................................................... 1,939,380 367,926 ------------ ------------ TOTAL REVENUES........................................................................ 9,514,938 4,970,112 ------------ ------------ COST OF SALES Cost of products.................................................................... 6,335,727 3,773,499 Cost of services.................................................................... 1,487,700 64,116 ------------ ------------ TOTAL COST OF SALES................................................................... 7,823,427 3,837,615 ------------ ------------ GROSS PROFIT.......................................................................... 1,691,511 1,132,497 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................................... 1,177,209 1,055,116 ------------ ------------ INCOME FROM OPERATIONS................................................................ 514,302 77,381 ------------ ------------ OTHER INCOME (EXPENSE) Other income........................................................................ 6,500 1,890 Interest expense.................................................................... (22,554) -- Loss on sale of assets.............................................................. (2,156) -- Interest income..................................................................... 1,387 13,052 ------------ ------------ TOTAL OTHER INCOME (EXPENSE).......................................................... (16,823) 14,942 ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST............................................................................ 497,479 92,323 PROVISION FOR INCOME TAXES............................................................ 201,973 23,326 ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST............................ 295,506 68,997 MINORITY INTEREST..................................................................... -- 6,894 ------------ ------------ INCOME FROM CONTINUING OPERATIONS..................................................... 295,506 62,103 LOSS FROM DISCONTINUED AUTOMOTIVE OPERATIONS, NET OF APPLICABLE INCOME TAX CREDIT OF $4,211 AND $2,709................................................................... (6,160) (8,012) GAIN FROM DISPOSAL OF AUTOMOTIVE SEGMENT, NET OF APPLICABLE INCOME TAXES OF $29,643... 43,370 -- ------------ ------------ NET INCOME............................................................................ $ 332,716 $ 54,091 ------------ ------------ ------------ ------------ INCOME PER SHARE OF COMMON STOCK: Income from continuing operations................................................... 322 70 Discontinued operations............................................................. 41 (9) ------------ ------------ NET INCOME............................................................................ $ 363 $ 61 ------------ ------------ ------------ ------------
See the accompanying notes to consolidated financial statements. F-34 CCI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL COMMON STOCK RETAINED TREASURY STOCK STOCKHOLDERS' ---------------------- EARNINGS ----------------------- EQUITY SHARES AMOUNT (DEFICIT) SHARES AMOUNT (DEFICIT) ----------- --------- ---------- ----------- ---------- ------------ BALANCE--DECEMBER 31, 1995..................... 1,000 $ 1,000 $ 71,917 -- $ -- $ 72,917 PURCHASE OF TREASURY STOCK..................... -- -- -- 450 128,267 (128,267) NET INCOME..................................... -- -- 54,091 -- -- 54,091 ----- --------- ---------- ----- ---------- ------------ BALANCE--DECEMBER 31, 1996..................... 1,000 1,000 126,008 450 128,267 (1,259) TREASURY STOCK REISSUED TO EMPLOYEES........... -- -- (36,465) (168) (47,861) 11,396 TREASURY STOCK REISSUED TO STOCKHOLDER......... -- -- (43,954) (282) (80,406) 36,452 NET INCOME..................................... -- -- 332,716 -- -- 332,716 ----- --------- ---------- ----- ---------- ------------ BALANCE--DECEMBER 31, 1997..................... 1,000 $ 1,000 $ 378,305 -- $ -- $ 379,305 ----- --------- ---------- ----- ---------- ------------ ----- --------- ---------- ----- ---------- ------------
See the accompanying notes to consolidated financial statements. F-35 CCI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers........................................................ $ 10,004,350 $ 6,075,501 Cash paid to suppliers and employees................................................ (9,582,820) (5,906,488) Interest paid....................................................................... (16,839) -- Interest received................................................................... 1,417 -- Income taxes paid................................................................... (25,600) (16,500) Other receipts...................................................................... 6,500 4,167 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 387,008 156,680 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of treasury stock.......................................................... -- (128,267) Capital expenditures................................................................ (241,659) (62,126) Proceeds from sale of segment....................................................... 62,866 -- Proceeds from sale of assets........................................................ -- 74,927 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES................................................. (178,793) (115,466) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Advances from (payments to) officer................................................. 85,488 (48,593) Proceeds from line of credit........................................................ 365,000 -- ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... 450,488 (48,593) ------------ ------------ NET INCREASE (DECREASE) IN CASH....................................................... 658,703 (7,379) CASH--BEGINNING OF YEAR............................................................... 134,806 142,185 ------------ ------------ CASH--END OF YEAR..................................................................... $ 793,509 $ 134,806 ------------ ------------ ------------ ------------ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income.......................................................................... $ 332,716 $ 54,091 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities Depreciation...................................................................... 70,091 18,056 Minority interest in subsidiaries................................................. -- 6,894 Wages paid by company stock....................................................... 11,396 -- Loss (gain) on sale of property................................................... 2,156 (66,096) Gain on sale of segment........................................................... (73,013) -- Increase in accounts receivable................................................... (633,400) (388,816) Increase in interest receivable................................................... -- (5,387) Increase in inventory............................................................. (863,298) (248,003) Decrease (increase) in prepaid expenses........................................... 1,347 (12,409) Increase in other assets.......................................................... (7,569) (2,439) Increase in accounts payable...................................................... 490,398 165,622 Increase in billing in excess of costs and estimated earnings on uncompleted contracts....................................................................... 942,041 418,292 Increase (decrease) in income tax payable......................................... 197,844 (1,678) Increase in deferred taxes........................................................ 2,584 5,795 (Increase) decrease in accrued expenses........................................... (86,285) 212,758 ------------ ------------ TOTAL ADJUSTMENTS............................................................... 54,292 102,589 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. $ 387,008 $ 156,680 ------------ ------------ ------------ ------------ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Proceeds from sale of segment through reduction in accounts payable................. $ 50,000 $ -- ------------ ------------ ------------ ------------
See the accompanying notes to consolidated financial statements. F-36 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 BUSINESS DESCRIPTION CCI GROUP, INC. (the Company) is the parent company of CCI Technology, Inc., CCI Payment Systems, Inc., Sourcelink, Inc., and Custom Configurations, Inc. The parent company is a holding company. CCI Technology, Inc. is a general contractor for the design, configuration and deployment of retail point of sale, information management and data collection systems, primarily for the food service industry. CCI Technology's services include installation, training, support, and documentation. CCI Payment Systems, Inc. is the distributor of payment processing systems assembled and configured by CCI Technology. Custom Configurations, Inc. was the manufacturer of certain automotive parts. Sourcelink, Inc. was the distributor of those automotive parts. All CCI Group companies market throughout the United States. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all subsidiaries, which are all more than 50% owned. Intercompany accounts and transactions have been eliminated in the consolidated financial statements. REVENUE RECOGNITION The Company recognizes contract revenue principally on the percentage of completion method. The percent complete is measured independently for each contract based on the terms of that contract. The majority of contracts' percent complete is based on the completion of specific phases indicated within the contract. Other revenues are recognized on the basis of shipment of products or performance of services. Contract costs include all direct labor and benefits, materials unique to or installed in the project, subcontractor cost and indirect cost allocations, including employee benefits. As long-term contracts extend over one or more years, revisions in cost and earnings estimates during the course of the work are reflected in the accounting period in which the facts which require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. The Company generally does not have any significant remaining obligations upon shipment of its products. Product returns and sales allowances, which have not been significant historically, are provided for at the date of sale. Amounts billed to customers in excess of revenue earned is included as a current liability, "billings in excess of costs and estimated earnings on uncompleted contracts" on the balance sheet. At December 31, 1997 and 1996, this account balance consists principally of amounts billed on contracts to be started in 1998 and 1997, respectively. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly-liquid debt instruments to be cash equivalents. F-37 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company uses the allowance method to account for uncollectible accounts receivable. The allowance for doubtful accounts is based on prior years' experience and management analysis of possible bad debts. As of December 31, 1997 and 1996, management has determined no allowance is required. INVENTORY The Company uses the weighted average cost method of valuing inventory. At December 31, 1997 and 1996, inventory consists principally of purchased computer hardware and components. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation and amortization is computed using both straight line and accelerated methods. Asset lives range from 3 to 5 years. Repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful life of the assets are capitalized. DEFERRED INCOME ON SERVICE SALES The Company includes product service with some system contracts. Revenues billed specifically for the service portion of the contract are deferred and amortized on a straight-line basis over the life of the service contract. Service contract costs are charged to operations as incurred. INCOME TAXES The Company's operations are included in consolidated tax returns, which includes the operation of the four subsidiary companies, through the sale date of the Company, December 22, 1997. The consolidated tax return excluded CCI Payment Systems, Inc. which was an S Corporation from its inception May 5, 1997 through December 15, 1997. The Company accounts for income taxes using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates. CCI Payment Systems, Inc. elected S corporate status effective on its date of incorporation. Therefore, the income and losses through December 22, 1997 are included in the income tax returns of the shareholders. No provision or liability for income taxes is recorded for this subsidiary for that period. EARNINGS PER COMMON SHARE Earnings per common share are computed by dividing net income applicable to common shareholders by the weighted average number of shares outstanding during each year. The weighted average number of common shares outstanding used to compute income (loss) per common share for 1997 and 1996 was 918 and 888, respectively. F-38 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 USE OF ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. WARRANTIES The Company's products are under warranty for defects in material and workmanship for up to one year. Certain components included in the Company's products are covered by manufacturer's warranties. Costs related to after-sale service and repair have been considered insignificant. 2. PROPERTY AND EQUIPMENT Property and equipment at December 31 consist of:
1997 1996 ---------- ---------- Computer hardware..................................................... $ 119,306 $ 39,508 Computer software..................................................... 38,454 22,057 Computer hardware held for operating lease............................ 78,030 -- Office equipment...................................................... 60,167 19,469 Shop equipment........................................................ 23,009 7,102 Vehicles.............................................................. 11,114 2,750 ---------- ---------- 330,080 90,886 Less: Accumulated depreciation........................................ (96,733) (27,951) ---------- ---------- $ 233,347 $ 62,935 ---------- ---------- ---------- ----------
Depreciation and amortization expense charged against income amounted to $70,091 in 1997 and $18,056 in 1996. 3. LINE OF CREDIT AGREEMENT In 1997, the Company had a $1,000,000 line of credit from Magna Bank which matures August 5, 1998. Interest is payable monthly at a rate of one percent over the prime rate. The Company's inventory, accounts receivable, property, furniture and equipment are collateral for the line of credit. 4. INCOME TAXES Deferred income taxes are provided for the temporary differences between the tax and financial reporting basis of the Company's assets and liabilities at December 31, 1997 and 1996, utilizing the tax rates expected to be in effect when the temporary differences reverse. The principal temporary difference results from the use of accelerated tax depreciation methods for income tax reporting purposes. F-39 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 4. INCOME TAXES (CONTINUED) The income tax provision charged to continuing operations during the years ended December 31 was as follows:
1997 1996 ---------- --------- Current Tax Expense: Federal.............................................................. $ 172,258 $ 13,744 State................................................................ 27,131 3,787 ---------- --------- Total Current Tax Expense............................................ 199,389 17,531 Deferred Tax Expense................................................... 2,584 5,795 ---------- --------- PROVISION FOR INCOME TAX............................................... $ 201,973 $ 23,326 ---------- --------- ---------- ---------
Deferred tax liabilities at December 31 were comprised of the following:
1997 1996 --------- --------- Deferred Tax Liabilities: Tax over book depreciation............................................... $ 8,379 $ 5,795 --------- --------- --------- ---------
5. LEASE AGREEMENTS The Company leases its office and warehouse facility under a noncancellable agreement. The lease calls for monthly rental payments of $7,569 and expires October 31, 1998. Rent expense for the years ended December 31, 1997 and 1996 totaled $89,412 and $63,273, respectively. In 1997, CCI Technology, Inc. leased equipment to two customers under month-to-month operating lease agreements. The leases call for monthly lease payments of $33 to $50 per month per unit leased. Lease income for the year ended December 31, 1997 totaled $69,831. At December 31, 1997, the assets are carried on the books at $78,030 less $19,191 accumulated depreciation. 6. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk are cash investments and trade receivables. The Company places its cash investments with high-credit-quality financial institutions. Deposits in excess of the FDIC insurance limit amounted to $693,384 and $34,807 at December 31, 1997 and 1996, respectively. In the normal course of business, the Company provides credit terms to its customers and collateral is generally not required. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for potential losses, if necessary. F-40 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 6. CONCENTRATIONS OF CREDIT RISK (CONTINUED) The Company has a significant concentration of credit risk with respect to a receivable from a development stage customer engaged in payment processing services (a niche market of the point of sale industry). Repayment is dependent upon the customer's ability to continue to raise capital for operations and expansion. This receivable represents 57% of total accounts receivable at December 31, 1997. 7. LINES OF BUSINESS The Company operates in two major lines of business: point of sale systems and automotive parts. Information concerning operations in these segments at December 31, 1997 and 1996, and for the years then ended, is presented below:
AUTOMOTIVE POINT OF PARTS SALE (DISCONTINUED SYSTEMS OPERATIONS) CONSOLIDATED ----------- ------------- ------------ 1997 Net operating revenues (excluding intersegment transfers).............. $ 9,514,938 $ 170,624 $9,685,562 Operating income....................................................... 514,302 2,727 517,029 Identifiable operating assets.......................................... 3,450,593 7,164 3,457,757 Capital expenditures................................................... 241,659 -- 241,659 Depreciation and amortization.......................................... 70,091 -- 70,091 1996 Net operating revenues (excluding intersegment transfers).............. $ 4,970,112 $ 1,075,913 $6,046,025 Operating income (loss)................................................ 77,381 (53,914) 23,467 Identifiable operating assets.......................................... 932,392 233,183 1,165,575 Capital expenditures................................................... 62,126 -- 62,126 Depreciation and amortization.......................................... 16,991 1,065 18,056
8. MAJOR CUSTOMERS During the year ended December 31, 1997, three customers, each accounted for over 10% of the Company's revenues. Sales to these customers represented 20%, 39% and 11% of total Company sales. At December 31, 1997, accounts receivable from these customers were 11%, 13% and 57% of total accounts receivable, respectively. During the year ended December 31, 1996, three customers, each accounted for over 10% of the Company's revenues. Sales to these customers represented 26%, 21% and 11% of total Company sales. At December 31, 1996, accounts receivable from these customers were 18%, 22% and 25% of total accounts receivable, respectively. 9. EMPLOYEE RETIREMENT PLAN The Company has a defined contribution profit sharing plan which covered substantially all full-time employees. This Plan was amended and restated in 1997 to qualify as a salary reduction defined contribution profit sharing plan under Section 401(k) of the Internal Revenue code. The Company's contributions to the plan are made at the discretion of the Board of Directors. The Company's contribution for 1996 of $50,000 was accrued at December 31, 1996 and paid in 1997. No contribution is accrued at December 31, 1997. F-41 CCI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 10. TREASURY STOCK TRANSACTIONS In 1996, the Company and Custom Configurations purchased 450 shares and 320 shares, respectively, of treasury stock from an officer of the companies. The treasury stock was recorded at cost. In January 1997, 168 shares of treasury stock of the Company were reissued to employees. Compensation expense of $11,396 was recorded based on the estimated fair value of the Company's stock, with the difference between the fair value and cost recorded as an adjustment to retained earnings. In 1997, prior to the sale of the Company, the Company acquired 320 shares of CCI Technology stock, 200 shares of Sourcelink stock, and 1,000 shares of CCI Payment Systems stock in exchange for 282 shares of stock from its treasury stock. The difference between the estimated fair value of stock traded and the treasury stock cost was recorded as an adjustment to retained earnings. With these transactions, the Company owns one hundred percent of all of its subsidiaries. 11. SALE OF AUTOMOTIVE SEGMENT In 1996, Custom Configurations, Inc. sold its operating assets. The sale resulted in a gain on sale of assets of $66,096. In 1997, Sourcelink, Inc. sold its operating assets for a price not to exceed $200,000. $50,000 was paid immediately by a reduction in the accounts payable to the purchaser. The remaining purchase price is being paid on a per unit basis as units are sold and delivered by the purchaser. In 1997, Sourcelink has recognized $73,013 of gain from the sale. The remainder of the gain will be recognized when realized. Custom Configurations and Sourcelink made up the Company's automotive segment of its business. As such, the operations of these companies through the sale of Sourcelink have been recorded as discontinued operations in the accompanying statements. The gain on sale of Sourcelink has been recorded as income from disposal of a segment, net of income taxes. 12. SALE OF COMPANY On December 22, 1997, the Company's shareholders exchanged the Company's 1,000 shares of issued and outstanding stock for 380,000 shares of Javelin Systems, Inc. common stock. 290,000 shares have been put in escrow until certain sale provisions are met. Subsequent to this sale, the Company is owned one hundred percent by Javelin Systems, Inc. 13. RELATED PARTY TRANSACTIONS The Company has notes payable to a former corporate officer for $185,478 and $99,990 at December 31, 1997 and 1996, respectively. The notes are due on demand and carry interest at a rate of 10%. Interest expense on the notes payable for the years ended December 31, 1997 and 1996 was $22,168 and $23,279, respectively. Interest payable to the officer for the years ended December 31, 1997 and 1996 was $34,739 and $19,356, respectively. Subsequent to December 31, 1997, the Company paid its notes payable and interest due the officer in full. CCI Technology purchased $166,584 of equipment and repairs from Javelin Systems, Inc., prior to its acquisition. CCI Technology owed Javelin $15,394 at December 31, 1997. F-42 [LOGO] [PHOTOGRAPHS OF PRODUCT] The Javelin LP, expected to be released during fiscal 1999, is designed to be a compact, low profile PC for the high-traffic, POS environment. The LP is planned to be network ready with an integrated Ethernet controller. The LP should accommodate a variety of peripheral equipment such as cash drawers, card readers, scanners and printers. The LP is designed to be spill resistant with a solid cover, and, because it has no fans, is expected to be noiseless. INNOVATIVE The Javelin HHT-40 is being developed for the Company by a third party, and the Company anticipates that the HHT-40 will become available in fiscal 1999. The HHT-40 is designed to be a compact, lightweight, wireless handheld system that provides service people the ability to enter orders quickly and efficiently and offers the benefit of sending information remotely to the kitchen, bar, etc. The HHT-40 targets table service restaurants as well as the arena and stadium food service market. VARIETY The rugged, small-footprint Javelin Wedge, Javelin's first integrated touchscreen computer, was introduced in January 1996. The Javelin Wedge is now available with a Pentium processor to handle graphically-intense software applications. FLEXIBILITY The Javelin LC, introduced in June 1997, presents a profile and a footprint of less than eight inches square and has been designed to be more compact and elegant in appearance making it suitable for both the food service market and the retail market. In addition, the system's reduced size and flat panel display allows it to be mounted in a variety of ways, including wall-mounted, fixed to an adjustable base or attached to an articulated arm. PERFORMANCE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Recent Acquisitions....................................................... 6 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 19 Price Range of Common Stock............................................... 19 Dividend Policy........................................................... 19 Capitalization............................................................ 20 Selected Consolidated Financial Information............................... 21 Unaudited Pro Forma Condensed Financial Information....................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 24 Business.................................................................. 33 Management................................................................ 45 Certain Transactions...................................................... 51 Principal Stockholders.................................................... 52 Selling Stockholders...................................................... 53 Description of Capital Stock.............................................. 54 Shares Eligible for Future Sale........................................... 57 Underwriting.............................................................. 58 Legal Matters............................................................. 59 Experts................................................................... 60 Change in Accountants..................................................... 60 Additional Information.................................................... 60 Index to Financial Statements............................................. F-1
------------------------ 1,250,000 Shares [LOGO] Common Stock ------------------ PROSPECTUS ------------------ VAN KASPER & COMPANY L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC. MERIDIAN CAPITAL GROUP, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws require that directors and officers be indemnified to the maximum extent permitted by Delaware law. The Delaware GCL provides that a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of litigation or other legal proceedings when he is successful on the merits, (ii) may be indemnified by the corporation for the expenses, judgments, fines and amounts paid in settlement of such litigation (other than a derivative suit) even if he is not successful on the merits if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and, in the case of a criminal proceeding, had no reason to believe his conduct was unlawful), and (iii) may be indemnified by the corporation for expenses of a derivative suit (a suit by a stockholder alleging a breach by a director or officer of a duty owed to the corporation), even if he is not successful on the merits, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that no such indemnification may be made in accordance with this clause (iii) if the director or officer is adjudged liable to the corporation, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. The indemnification described in clauses (ii) and (iii) above shall be made upon order by a court or a determination by (i) a majority of disinterested directors, (ii) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion or (iii) the stockholders that indemnification is proper because the applicable standard of conduct is met. Expenses incurred by a director or officer in defending an action may be advanced by the corporation prior to the final disposition of such action upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified in connection with the proceeding to which the expenss relate. The Company's Certificate of Incorporation includes a provision eliminating, to the fullest extent permitted by Delaware law, director liability for monetary damages for breaches of fiduciary duty. The Company has entered into indemnity agreements (the "Indemnity Agreements") with each director or officer designated by the Board of Directors. The Indemnity Agreements require that the Company indemnify directors and officers who are parties thereto in all cases to the fullest extent permitted by Delaware law. Under the Delaware GCL, except in the case of litigation in which a director or officer is successful on the merits, indemnification of a director or officer is discretionary rather than mandatory. Consistent with the Company's Bylaw provision on the subject, the Indemnity Agreements require the Company to make prompt payment of litigation expenses at the request of the director or officer in advance of indemnification provided that he undertakes to repay the amounts if it is ultimately determined that he is not entitled to indemnification for such expenses. The advance of litigation expenses is mandatory; under the Delaware GCL such advance would be discretionary. Under the Indemnity Agreements, the director or officer is permitted to bring suit to seek recovery of amounts due under the Indemnity Agreements and is entitled to recover the expenses of seeking such recovery unless a court determines that the action was not made in good faith or was frivolous. Without the Indemnity Agreements, the Company would not be required to pay the director or officer for his expenses in seeking indemnification recovery against the Company. Under the Indemnity Agreements, directors and officers are not entitled to indemnity or advancing of expenses (i) if such director or officer has recovered payment under an insurance policy for the subject claim, or has otherwise been indemnified against the subject claim, (ii) for actions initiated or brought by the director or officer and not by way of defense (except for actions seeking indemnity or expenses from the Company), (iii) if the director or officer violated section 16(b) of the Exchange Act or similar provisions of law or (iv) if a court of competent jurisdiction determines that the director or officer failed to act in good faith and in a manner reasonably believed to be II-1 in or not opposed to the best interests of the Company or, with respect to any proceeding which is of a criminal nature, had reasonable cause to believe his conduct was unlawful. Absent the Indemnity Agreements, indemnification that might be made available to directors and officers could be changed by amendments to the Company's Certificate of Incorporation or Bylaws. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee and the NASD filing fee. Registration fee................................ $ 3,843 NASD filing fee................................. 1,803 Nasdaq Stock Market Listing Application fee..... 17,500 Printing and engraving expenses................. 110,000 Legal fees and expenses......................... 170,000 Accounting fees and expenses.................... 100,000 Transfer agent and registrar fees............... 5,000 Miscellaneous................................... 16,854 --------- Total......................................... $ 425,000 --------- ---------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The Company has sold and issued within the past three years the following securities which were not registered under the Securities Act of 1933, as amended (the "Act"): 1. On September 26, 1995, the Company issued 430,000 shares of Common Stock to Richard P. Stack, 288,100 shares of Common Stock to C. Norman Campbell and 77,400 shares of Common Stock to John R. Amos at a per share price of approximately $.006. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 2. On October 1, 1995, the Company issued a Promissory Note in the amount of $15,000 to Richard P. Stack. The issuance of the Promissory Note was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 3. On November 1, 1995, the Company issued 288,100 shares of Common Stock to C. Norman Campbell and 107,500 shares of Common stock to Alex Nelson at a per shares price of approximately $.006. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) the Act and Rule 504 of Regulation D promulgated thereunder. 4. On January 9, 1996, the Company issued 180,600 shares of Common stock the The Steven J. Goodman Revocable Living Trust ("Goodman") and 25,800 shares of Common Stock to GAK Limited, a Delaware limited partnership ("GAK"), of which Horace and Madeleine Hertz are the general partners, at a per shares price of approximately $.02. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the act and Rule 504 of Regulation D promulgated thereunder. 5. In February 1996, the Company issued two Promissory Notes, each in the original principal amount of $20,000, to each of Peter Aiello and Jim Cox. The Promissory Note issued to Mr. Cox is convertible at his option into shares of Common Stock at a per share price of $2.50 per share. Effective as of June 30, 1997, Mr. Cox converted his Promissory Note into 8,000 shares of Common Stock. The issuance of the Promissory Notes and the Common Stock issued upon conversion of Mr. Cox's Promissory II-2 Note was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 6. On April 1, 1996, the Company issued 430,000 shares of Common stock to Richard P. Stack at a price per share of approximately $.19 upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Act by virtue of section 4(2) of the Act and Rule of Regulation D promulgated thereunder. 7. On April 3, 1996, the Company issued 116,100 shares of Common Stock to Goodman at a per share price of approximately $.22. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 8. On May 1, 1996, the Company issued 86,000 shares of Common Stock to Teresa M. McRae at a per share price of approximately $.47 upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 9. On May 23, 1996, the Company issued 38,780 shares of Common Stock to GAK at a per share price of approximately $.65. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 10. On May 31, 1996, the Company issued 17,200 shares of Common Stock to Richard A. Stack at a per share price of approximately $.70 upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 11. On June 3, 1996, the Company issued 10,750 shares of Common Stock to Herbert R. and Janice N. Donica, as joint tenants by the entireties, at a per share price of approximately $2.33. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. 12. At various times commencing May 1996 through August 1996, the Company issued Promissory Notes to the following accredited investors in the following original principal amounts: (1) The Steven J. Goodman Charitable Remainder Trust (the "Goodman CRT"), $50,000; (2) John R. Amos, $25,000; (3) Kanayo Partabrai Gangwani, $25,000; (4) Jack S. Kompan, two Promissory Notes aggregating $50,000; (5) Universal Partners, L.P., a partnership that specializes in providing bridge financing of which Windy City Bridges, Inc. is a general partner, $25,000; (6) Scott Robinson, $25,000; (7) Rebecca L. Gregarek, $12,500; (8) David M. Munch, $25,000; (9) David J. Gregarek, $25,000; (10) Jay Louis Kear Family Trust, $25,000; (11) Mildred J. Geiss, $37,500; (12) Westerling Family Trust, $100,000; (13) Yu Family Revocable Trust, $25,000; (14) Kenneth and Linda Bloom, $25,000; (15) Christopher Neil, $25,000; (16) Izzy Rabinowitz, $50,000; (17) Don R. Thorne, $50,000; (18) Mark Ratto, $12,500; (19) B.C. Investments, $12,500; (20) Chris Brown, $50,000; (21) Victor A. Ince and Terry A. Ince, joint tenants, $25,000; (22) Caribou Bridge Fund, LLC, $25,000. Concurrent with the issuance of each of the foregoing Promissory Notes, the Company issued warrants to purchase shares of Common Stock (the "Warrants") in an amount equal to the number of shares that results from dividing $5.00 into the original principal amount of the Promissory Note, with the exception of the Promissory Notes issued to Mr. Amos, Mr. Gangwani and Mr. Kompan which provided for $2.50 being divided into the original principal amount of their respective Promissory Notes. The total purchase price for all of the shares of Common Stock issuable upon the exercise of such Warrants is an aggregate of $1.00 per Warrant, or $23.00 in the aggregate. The Warrants II-3 became exercisable October 25, 1996 and were all exercised between October and December 1996. In connection with the sales of certain of the Promissory Notes and Warrants, the Company paid a total of $15,000 in commissions to Spencer Edwards in its capacity as a selling agent and $27,500 to Meridian in its capacity as a selling agent. The issuance of the Promissory Notes and the Warrants was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder. The foregoing information has been adjusted to reflect a 4,300 for 1 stock split of the Common Stock effected in August 1996. 13. On December 19, 1997, the company issued an aggregate of 225,000 shares of the Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph E. Rudzik, Jr. in consideration for all of the outstanding capital stock of POSNET Computers, Inc., a California corporation ("Posnet"). The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 506 promulgated thereunder. 14. On December 22, 1997, the Company issued a warrant to purchase up to 10,000 shares of the Company's Common Stock to L.H. Friend, Weinress, Frankson & Presson, Inc. at an exercise price of $9.36 per share. The issuance of the warrant and the Common Stock underlying the warrant are deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act. 15. On December 22, 1997, the Company issued an aggregate of 670,000 shares of the Company's Common Stock to Robert Nichols, Robert Hess, Melissa Sobo and Renee Voirol in consideration for all of the outstanding capital stock of CCI Group, Inc., a Missouri corporation. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act and Rule 506 promulgated thereunder. 16. On March 31, 1998, the Company issued an aggregate of 18,752 shares of the Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph E. Rudzik, Jr. as further consideration for all of the outstanding capital stock of Posnet pursuant to the earnout provisions of the Stock Purchase Agreement dated December 19, 1997, among the Company, Posnet, Mark LeMay, Paul Amestoy, Greg Kosin and Ralph E. Rudzik, Jr. The issuance of the Common Stock was deemed to be exempt from registration under the Act pursuant to Section 4(2) of the Act and Rule 506 promulgated thereunder. 17. On April 23, 1998, the Company issued an aggregate of 36,362 shares of the Company's Common Stock to Meridian Capital group, Inc ("Meridian") and certain officers of Meridian upon exercise of warrants held by such entity and individuals pursuant to the net-exercise provision contained in such warrants. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) under the Act. 18. On May 10, 1998, the Company issued 15,300 shares of the Company's Common Stock to Aspact Enterprise, Ltd. in consideration for all of the outstanding capital stock of Aspact IT Services Pty Ltd., a corporation organized under the laws of Singapore. The issuance of the Common Stock was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act. 19. On June 9, 1998, the Company issued warrants to purchase an aggregate of 25,000 shares of the Company's Common Stock to L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend") and certain of L.H. Friend's officers at an exercise price of $12.65 per share. The issuance of such warrants and the Common stock underlying such warrants was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act. 20. On June 12, 1998, the Company issued a warrant to purchase 100,000 shares of the Company's Common Stock to FINOVA Capital Corporation at an exercise price per share of $9.00. The issuance of II-4 the warrant and the Common Stock underlying the warrant was deemed to be exempt from registration under the Act by virtue of Section 4(2) of the Act. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Registrant. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement. 3.1(1) -- Registrant's Amended and Restated Certificate of Incorporation. 3.2(1) -- Certificate of Amendment of Amended and Restated Certificate of Incorporation. 3.3(1) -- Registrant's Amended and Restated Bylaws. 4.1(1) -- Form of Common Stock Certificate of Registrant. 5.1* -- Opinion of Cooley Godward LLP. 10.1(1) -- Form of Indemnity Agreement entered into between the Company and its directors and executive officers. 10.2(1) -- 1996 Stock Incentive Award Plan (the "1996 Plan"). 10.3(1) -- Form of Director Non-Qualified Stock Option Agreement under the 1996 Plan. 10.4(1) -- Form of Employee Non-Qualified Stock Option Agreement under the 1996 Plan. 10.5(6) -- 1997 Equity Incentive Plan, as amended. 10.6(6) -- Form of Incentive Stock Option Agreement under the 1997 Plan. 10.7(6) -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan. 10.8(1) -- Employment Agreement dated August 19, 1996 by and between the Company and Richard P. Stack. 10.9(1) -- Employment Agreement dated August 19, 1996 by and between the Company and C. Norman Campbell. 10.10(6) -- Employment Agreement dated January 1, 1998 by and between CCI Group, Inc and Robert Nichols. 10.11(6) -- Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated January 27, 1998 by and between the Company and BRS-Campo Investment Company LP. 10.12(1) -- Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between the Company and Robert P. Peebles Trust, dated April 11, 1979. 10.13(2) -- Standard Sublease dated September 9, 1997 by and between the Company, D. Howard Lewis and William R. Miller. 10.14(6) -- The Business Center Office/Warehouse Lease dated April 4, 1997 by and between CCI Group, Inc and Nooney Krombech Company. 10.15(2) -- Distributor Agreement dated March 14, 1997 by and between the Company and ScanSource, Inc.
II-5
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------- 10.16(3) -- Stock Purchase Agreement dated December 19, 1997 by and among the Company, POSNET Computers, Inc., Paul R. Amestoy, Greg Kolin, Mark LeMay and Ralph E. Rudzik, Jr. 10.17(4) -- Amendment to Stock Purchase Agreement dated January 23, 1998 by and between the Company and Mark LeMay as agent for Paul R. Amestoy, Mark LeMay, Greg Kosin and Ralph E. Rudzik, Jr. 10.18(5) -- Plan of Reorganization and Stock Purchase Agreement dated December 22, 1997 by and among the Company and CCI Group, Inc., Robert Nichols, Robert Hess, Melissa Sobo and Renee Voirol. 10.19(6) -- Loan and Security Agreement dated June 8, 1998 by and among the Company, CCI Group, Inc., POSNET Computers, Inc. and FINOVA Capital Corporation and related Secured Promissory Note, Pledge Agreement and Secured Continuing Corporate Guaranty. 10.20(6) -- Form of Warrant issued by the Company in favor of FINOVA Capital Corporation. 10.21(6) -- Letter of Intent dated July 20, 1998 by and among the Company, RGB/Trinet Limited and Jade Communications Limited. 10.22 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Gary Green, Roger Scarlett, Louvre Trustees Limited, and the Company. 10.23 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Anthony Sampson, Gentech Consultants Limited, Bertram Badminton, and the Company. 16.1(6) -- Letter on change in Certifying Accountant dated May 29, 1998 from Ernst & Young LLP to the SEC. 21.1(6) -- Subsidiaries of the Registrant. 23.1 -- Consent of PricewaterhouseCoopers LLP, independent accountants. 23.2 -- Consent of Ernst & Young LLP, independent auditors. 23.3 -- Consent of Corbin & Wertz, independent auditors. 23.4 -- Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors. 23.5* -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1* -- Power of Attorney. 27.1(6) -- Financial Data Schedule.
- ------------------------ * Filed as an exhibit to Registration Statement on Form SB-2 (No. 333-63993), and incorporated herein by reference. (1) Filed as a exhibit to the Company's Registration Statement on Form SB-2, as amended (No. 333-11217), and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Current Report on Form 8-K dated December 30, 1997 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated March 4, 1998 and incorporated herein by reference. II-6 (5) Filed as an exhibit to the Company's Current Report on Form 8-K dated January 5, 1998 and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998 and incorporated herein by reference. (b) Schedules All schedules are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 24 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 Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That, for purposes of determining any liability under the Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement 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. (2) That, for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (3) For the purpose of determining any liability under the Securities Act of 1933, 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. II-7 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, in the City of Irvine, County of Orange, State of California, on the 6th day of October, 1998. By: /s/ RICHARD P. STACK ----------------------------------- Richard P. Stack President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - -------------------------------------------- -------------------------------------------- ---------------------- /s/ RICHARD P. STACK - ---------------------------------- President, Chief Executive Officer and October 6, 1998 Richard P. Stack Director (PRINCIPAL EXECUTIVE OFFICER) /s/ HORACE HERTZ - ---------------------------------- Chief Financial Officer and Secretary October 6, 1998 Horace Hertz (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ STEVEN J. GOODMAN* - ---------------------------------- Director October 6, 1998 Steven J. Goodman /s/ ROBERT NICHOLS* - ---------------------------------- Director October 6, 1998 Robert Nichols
*By: /s/ RICHARD P. STACK ------------------------- Richard P. Stack ATTORNEY-IN-FACT
II-8 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ------------------------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement. 3.1(1) -- Registrant's Amended and Restated Certificate of Incorporation. 3.2(1) -- Certificate of Amendment of Amended and Restated Certificate of Incorporation. 3.3(1) -- Registrant's Amended and Restated Bylaws. 4.1(1) -- Form of Common Stock Certificate of Registrant. 5.1* -- Opinion of Cooley Godward LLP. 10.1(1) -- Form of Indemnity Agreement entered into between the Company and its directors and executive officers. 10.2(1) -- 1996 Stock Incentive Award Plan (the "1996 Plan"). 10.3(1) -- Form of Director Non-Qualified Stock Option Agreement under the 1996 Plan. 10.4(1) -- Form of Employee Non-Qualified Stock Option Agreement under the 1996 Plan. 10.5(6) -- 1997 Equity Incentive Plan, as amended. 10.6(6) -- Form of Incentive Stock Option Agreement under the 1997 Plan. 10.7(6) -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan. 10.8(1) -- Employment Agreement dated August 19, 1996 by and between the Company and Richard P. Stack. 10.9(1) -- Employment Agreement dated August 19, 1996 by and between the Company and C. Norman Campbell. 10.10(6) -- Employment Agreement dated January 1, 1998 by and between CCI Group, Inc and Robert Nichols. 10.11(6) -- Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated January 27, 1998 by and between the Company and BRS-Campo Investment Company LP. 10.12(1) -- Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between the Company and Robert P. Peebles Trust, dated April 11, 1979. 10.13(2) -- Standard Sublease dated September 9, 1997 by and between the Company, D. Howard Lewis and William R. Miller. 10.14(6) -- The Business Center Office/Warehouse Lease dated April 4, 1997 by and between CCI Group, Inc and Nooney Krombech Company. 10.15(2) -- Distributor Agreement dated March 14, 1997 by and between the Company and ScanSource, Inc. 10.16(3) -- Stock Purchase Agreement dated December 19, 1997 by and among the Company, POSNET Computers, Inc., Paul R. Amestoy, Greg Kolin, Mark LeMay and Ralph E. Rudzik, Jr. 10.17(4) -- Amendment to Stock Purchase Agreement dated January 23, 1998 by and between the Company and Mark LeMay as agent for Paul R. Amestoy, Mark LeMay, Greg Kosin and Ralph E. Rudzik, Jr. 10.18(5) -- Plan of Reorganization and Stock Purchase Agreement dated December 22, 1997 by and among the Company and CCI Group, Inc., Robert Nichols, Robert Hess, Melissa Sobo and Renee Voirol. 10.19(6) -- Loan and Security Agreement dated June 8, 1998 by and among the Company, CCI Group, Inc., POSNET Computers, Inc. and FINOVA Capital Corporation and related Secured Promissory Note, Pledge Agreement and Secured Continuing Corporate Guaranty.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ------------------------------------------------------------------------------------------------ 10.20(6) -- Form of Warrant issued by the Company in favor of FINOVA Capital Corporation. 10.21(6) -- Letter of Intent dated July 20, 1998 by and among the Company, RGB/Trinet Limited and Jade Communications Limited. 10.22 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Gary Green, Roger Scarlett, Louvre Trustees Limited, and the Company. 10.23 -- Agreement for the Sale and Purchase of Shares dated October 5, 1998 by and among Anthony Sampson, Gentech Consultants Limited, Bertram Badminton, and the Company. 16.1(6) -- Letter on change in Certifying Accountant dated May 29, 1998 from Ernst & Young LLP to the SEC. 21.1(6) -- Subsidiaries of the Registrant. 23.1 -- Consent of PricewaterhouseCoopers LLP, independent accountants. 23.2 -- Consent of Ernst & Young LLP, independent auditors. 23.3 -- Consent of Corbin & Wertz, independent auditors. 23.4 -- Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors. 23.5* -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1* -- Power of Attorney. 27.1(6) -- Financial Data Schedule.
- ------------------------ * Filed as an exhibit to Registration Statement on Form SB-2 (No. 333-63993), and incorporated herein by reference (1) Filed as a exhibit to the Company's Registration Statement on Form SB-2, as amended (No. 333-11217), and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Current Report on Form 8-K dated December 30, 1997 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated March 4, 1998 and incorporated herein by reference. (5) Filed as an exhibit to the Company's Current Report on Form 8-K dated January 5, 1998 and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998 and incorporated herein by reference. EX-1.1 2 EXHIBIT 1.1 JAVELIN SYSTEMS, INC. UNDERWRITING AGREEMENT _________________, 1998 VAN KASPER & COMPANY L.H. FRIEND, WEINRESS, FRANKSON & PRESSON , INC. MERIDIAN CAPITAL GROUP, INC. As Representatives of the Several Underwriters c/o Van Kasper & Company 600 California Street, Suite 1700 San Francisco, California 94108 Ladies and Gentlemen: Javelin Systems, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several Underwriters named in Schedule I hereto (each, an "Underwriter" and collectively, the "Underwriters") an aggregate of 1,250,000 shares (the "Firm Shares") of its authorized but unissued Common Stock, par value $0.01 per share (the "Common Stock"). Certain stockholders of the Company listed on Schedule II hereto (the "Selling Stockholders") also propose to grant to the Underwriters an option to purchase up to 187,500 additional shares of Common Stock (the "Option Shares") for the sole purpose of covering over-allotments, if any, in connection with the sale of the Firm Shares. The Firm Shares and any Option Shares purchased pursuant to this Agreement are collectively referred to below as the "Shares." Van Kasper & Company ("Van Kasper"), L.H. Friend, Weinress, Frankson & Presson, Inc. and Meridian Capital Group, Inc. are acting as Representatives of the several Underwriters and in that capacity are referred to in this Agreement as the "Representatives." The Company hereby confirms its agreement with the several Underwriters as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to and agrees with each Underwriter as follows: (a) A registration statement (Registration No. 333-____________) on Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"), relating to the Shares, including such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under and in conformity with the provisions of the Securities Act and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Securities Act, either (A) if the Company 1 relies on Rule 434 under the Securities Act, a Term Sheet (defined below) relating to the Shares, that identifies the Preliminary Prospectus (defined below) that it supplements and contains such information as is required or permitted by Rules 434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not rely on Rule 434 under the Securities Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment has been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the Rules and Regulations, and in the case of either (i)(A) or (i)(B) of this sentence, as has been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Securities Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto, any information omitted therefrom pursuant to Rule 430A of the Rules and Regulations and included in the Prospectus (defined below) and further including all filings or other documents incorporated therein, as well as any additional registration statement filed in connection with the offering of the Shares pursuant to Rule 462(b) under the Securities Act; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective and further including all filings or documents incorporated therein); and the term "Prospectus" means the following, including any filings or documents incorporated therein: (A) if the Company relies on Rule 434 under the Securities Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Securities Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Securities Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Securities Act; or (C) if the Company does not rely on Rule 434 under the Securities Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Securities Act, the prospectus included in the Registration Statement; provided that if any revised prospectus that is provided to the Underwriters by the Company for use in connection with the offering of the Shares differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective, whether or not the revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such revised prospectus (including all filings and documents incorporated therein) from and after the time it is first provided to the Underwriters for such use. The term "Term Sheet" as used in this Agreement means any term sheet that satisfies the requirements of Rule 434 under the Securities 2 Act. Any reference in this Agreement to the "date" of a Prospectus that includes a Term Sheet means the date of such Term Sheet. (b) No order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated by the Commission; no stop order suspending the sale of the Shares in any jurisdiction has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated, and any request of the Commission for additional information (to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been complied with. (c) As used in this Agreement, the word "subsidiary" means any corporation, partnership, limited liability company or other entity of which the Company directly or indirectly owns 50% or more of the equity or that the Company directly or indirectly controls. The subsidiaries of the Company (the "Subsidiaries") and the jurisdiction of incorporation of each Subsidiary are listed on Exhibit A hereto. The Company has no subsidiaries other than the Subsidiaries listed on Exhibit A hereto; except as set forth on Exhibit A, the Company owns 100 percent of the issued and outstanding stock of each of the Subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest of any type, kind or nature. Exhibit B hereto lists each entity in which the Company or any Subsidiary holds an equity interest, whether as shareholder, partner, member, joint venturer or otherwise. Except as set forth on Exhibit B, neither the Company nor any Subsidiary has any equity interest in any person. The Company and each of its Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full power (corporate and other) and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as is currently being conducted by it and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries, taken as a whole (a "Consolidated Material Adverse Effect")). The Company and each of its Subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from federal, state, local and other governmental or regulatory authorities that are material to the conduct of its or their business, all of which are valid and in full force and effect. Each contractual joint venture in which the Company or any Subsidiary is involved and, to the Company's best knowledge, each participant therein is operating in compliance with the terms of its joint venture agreement. (d) When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder (the "Exchange Act Rules and Regulations") and (ii) did not include any untrue 3 statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective (the "Effective Date"), it (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date (defined below) and any date on which Option Shares are to be purchased, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (d) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has not been any material loss or interference with the business of the Company or any of its Subsidiaries from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any court or governmental action, order or decree, or any changes in the capital stock or, except in the ordinary course of its business, long-term debt of the Company or any of its Subsidiaries, or any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or any material change, or a development known to the Company that might cause or result in a Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, in each case other than as may be set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and since such dates, except in the ordinary course of business, neither the Company or any of its Subsidiaries has entered into any material transaction not described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (f) There is no agreement, contract, license, lease or other document required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All contracts described in the Prospectus 4 (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), if any, are in full force and effect on the date hereof, and neither the Company nor any of its direct or indirect subsidiaries nor, to the best knowledge of the Company, any other party, is in material breach of or default under any such contract. (g) The authorized and outstanding capital stock of the Company is set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the description of the capital stock therein conforms with and accurately describes the rights set forth in the instruments defining the same. The Shares are duly authorized and will, when issued in accordance with the terms of this Agreement and against payment therefor, be validly issued, fully paid and non-assessable, and the issuance of the Shares is not subject to any preemptive or similar rights. (h) All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. All of the issued shares of capital stock or other equity interests of each Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, have been issued in compliance with all applicable laws, including securities laws, were not issued in violation of or subject to any preemptive or other rights to subscribe for or purchase such securities and are directly or indirectly owned by the Company, except as otherwise set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) and on Exhibit A hereto. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), accurately and fairly present the information required to be shown with respect to such plans, arrangements, options and rights. Other than this Agreement and the options and warrants to purchase Common Stock described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the Company's capital stock. There are no preemptive rights applicable to any shares of capital stock of the Company. There are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the capital stock or registered capital of any Subsidiary and no Subsidiary is subject to any obligation, commitment, plan, arrangement or court or administrative orders with respect to the same. There are no preemptive rights applicable to any shares of capital stock or registered capital of the Subsidiaries. There are no restrictions upon the voting or transfer of any of the Firm Shares or Option Shares pursuant to the Company's certificate of incorporation, as amended to date ("Certificate of Incorporation"), bylaws or other governing documents or any agreement to which the Company is a party or by which it may be bound. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived, for or relating to the registration of any securities of the Company. 5 (i) The Company has full right, power and authority to enter into and perform its obligations under this Agreement and to issue, sell and deliver the Shares. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company, and each is enforceable against the Company in accordance with its terms except insofar as enforceability may be affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and except insofar as the indemnification and contribution provisions of Section 8 of this Agreement may be affected by public policy concerns. (j) Neither the Company nor any of its Subsidiaries is, nor with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement result in a violation of or constitute a breach of or a default (including without limitation with the giving of notice, the passage of time or otherwise) under the Certificate of Incorporation, bylaws or other governing documents of the Company or any of its Subsidiaries or any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, deed of trust, loan agreement, lease, license, joint venture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of its or their properties may be bound or affected. The Company has not incurred any liability, direct or indirect, for any finders' or similar fees payable on behalf of the Company or the Underwriters in connection with the transactions contemplated by this Agreement. The performance by the Company of its obligations under this Agreement will not violate any law, ordinance, Rule or regulation or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court having jurisdiction over the Company or any of its direct or indirect subsidiaries or any of its or their properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or any of its Subsidiaries. Except for permits and similar authorizations required under the Securities Act, the Exchange Act or under state securities or Blue Sky laws of certain jurisdictions and for such permits and authorizations that have been obtained, no consent, approval, authorization or order of any court, governmental agency or body, financial institution or any other person is required in connection with the consummation of the transactions contemplated by this Agreement. (k) Each of the Company and its Subsidiaries owns, or has valid rights to use, all items of real and personal property which are material to the business of the Company and its Subsidiaries, taken as a whole, free and clear, except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), of all liens, encumbrances and claims that might materially interfere with the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries, taken as a whole, and subject to such exceptions that do not adversely affect the present or prospective business of the Company or its Subsidiaries. (l) Each of the Company and its Subsidiaries, taken as a whole, owns or possesses adequate rights to use all material patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, tradenames and copyrights described or referred to in the 6 Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as owned by or used by any of them, or which are necessary for the conduct of its or their business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, tradenames or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Consolidated Material Adverse Effect. (m) There is no litigation or governmental proceeding to which the Company or any of its Subsidiaries is a party or to which any property of the Company or any of its Subsidiaries is subject which is pending or, to the best knowledge of the Company, is threatened or contemplated against the Company or any of its Subsidiaries that might have a Consolidated Material Adverse Effect, that might prevent consummation of the transactions contemplated by this Agreement or that is required to be disclosed in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and are that is so disclosed. (n) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), neither the Company nor any of its Subsidiaries is in violation of any law, order, ordinance, Rule or Regulation, or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court, to which it or its properties (whether owned or leased) may be subject, which violation might have a Consolidated Material Adverse Effect. (o) Neither the Company nor, to the Company's knowledge, any of the Selling Stockholders have taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. No bid or purchase by the Company and, to the best knowledge of the Company, no bid or purchase of any Selling Stockholder or any bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Regulation M under the Exchange Act) for or of the Common Stock, any securities of the same class or series as the Common Stock or any securities convertible into or exchangeable for or that represent any right to acquire the Common Stock is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Shares. (p) Each of PricewaterhouseCoopers LLP, Ernst & Young LLP, Corbin & Wertz and Rubin, Brown, Gornstein & Co. LLP, whose reports appear in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are, and during the periods covered by their reports in the Registration Statement were, independent accountants as required by the Securities Act and the Rules and Regulations. The historical and pro forma financial statements and schedules included in the Registration Statement, each Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the 7 financial condition, results of operations, cash flows and changes in stockholders' equity of the Company and its Subsidiaries at the dates and for the periods indicated, and the historical and pro forma financial statements and schedules included in the Registration Statement present fairly the information required to be stated therein in all material respects. Such financial statements and schedules have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods presented, except as may be stated therein. All accounts receivable (net of any allowance for doubtful accounts) shown on the Company's most recent financial statements included in the Registration Statement are good, and the Company expects to collect all such accounts receivable in the ordinary course of business. The selected and summary financial and statistical data included in the Registration Statement and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (q) The historical and any pro forma financial or other information and related notes included in the Registration Statement, each Preliminary Prospectus and the Prospectus comply (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will comply) in all material respects with the requirements of the Securities Act and the Rules and Regulations and present fairly the historical and pro forma information shown, as of the dates and for the periods covered by such information. Such pro forma information, including any related notes and schedules, has been prepared on a basis consistent with the historical financial statements and other historical information, as applicable, included in the Registration Statement, the Preliminary Prospectus and the Prospectus (if filed with the Commission), except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis to give effect to historical and, if applicable, proposed transactions described in the Registration Statement, each Preliminary Prospectus and the Prospectus (if filed with the Commission). (r) The books, records and accounts of the Company and its Subsidiaries accurately and fairly reflect, in reasonable detail, the transactions in and dispositions of the assets of the Company and its Subsidiaries. The systems of internal accounting controls maintained by the Company and its Subsidiaries are sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary (x) to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles and (y) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) The Company has delivered to Van Kasper the written agreement of each of its officers and directors and, to the knowledge of the Company at the date of this Agreement, the beneficial owners of one percent or more of the Common Stock (assuming for this purpose that all options and convertible securities held by each beneficial owner, but not by any other person, have been exercised or exchanged for or converted into Common Stock) (collectively, 8 the "Holders") to the effect that each of the Holders will not, for a period of 180 days following the date of this Agreement, without the prior written consent of Van Kasper, offer, sell, grant any option to purchase, contract to sell, or otherwise dispose of any Common Stock or options or convertible securities exercisable or exchangeable for, or convertible into, Common Stock or any rights to purchase or acquire Common Stock, or announce any offer to do so. (t) No labor disturbance by the employees of the Company or any of its Subsidiaries exists, or, to the knowledge of the Company, is imminent, contemplated or threatened; and the Company is not aware of an existing, imminent or threatened labor disturbance by the employees of any principal suppliers, manufacturers, contractors or others which such disturbance might be expected to result in any Consolidated Material Adverse Effect. Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), no collective bargaining agreement exists with any of the Company's employees or those of its Subsidiaries and, to the best knowledge of the Company, no such agreement is imminent. (u) Each of the Company and its Subsidiaries has filed all federal, state, local and foreign tax returns which are required to be filed or has requested extensions thereof and has paid all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges to the extent that the same have become due and payable. No tax assessment or deficiency has been made or proposed against the Company or any of its Subsidiaries nor has the Company or any of its Subsidiaries received any notice of any proposed tax assessment or deficiency. All tax liabilities of the Company and its Subsidiaries are adequately provided for on the books of the Company. (v) Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding loans, advances or guaranties of indebtedness by the Company or any of its Subsidiaries to or for the benefit of any of (i) its "affiliates," as such term is defined in the Rules and Regulations, (ii) except for immaterial advances in the ordinary course of business, any of the officers or directors of any of its direct or indirect subsidiaries, or (iii) any of the members of the families of any of them, in each case, required to be set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), under the Securities Act or Rules and Regulations. (w) Neither the Company nor any of its Subsidiaries has directly or indirectly, at any time within the last five years: (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution, in violation of applicable law; (ii) made any payment to any local, state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by all applicable laws; or (iii) violated any applicable provision of the Foreign Corrupt Practices Act of 1977, as amended. (x) Neither the Company nor any of its Subsidiaries has any liability, absolute or contingent, relating to: (i) public health or safety; (ii) worker health or safety; or (iii) product defect or warranty (all except as would not reasonably be expected to have a Consolidated 9 Material Adverse Effect or as are disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus)). (y) The Company has not distributed and will not distribute prior to the Closing Date or on or prior to any date on which the Option Shares are to be purchased, as the case may be, any prospectus or other offering material in connection with the offering and sale of the Shares other than the Preliminary Prospectus(es), the Prospectus, the Registration Statement and any other material which may be permitted by the Securities Act and the Rules and Regulations. (z) Subject to official notice of issuance, the Shares have been approved for inclusion for listing on the Nasdaq National Market. (aa) The Company is not now, and intends to conduct its affairs in the future in such a manner so that it will not become, an investment company within the meaning of the Investment Company Act of 1940, as amended. (bb) The Company and each of its Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) for which the Company or any of its Subsidiaries would have any liability has occurred; neither the Company nor any of its Subsidiaries has incurred or expects to incur liability under (1) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (2) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any of its Subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (cc) Except as set forth in the Prospectus (or if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has, to the best knowledge of the Company, been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, hazardous wastes or hazardous substances by the Company or any of its Subsidiaries (or any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its Subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit; there has to the best knowledge of the Company been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its Subsidiaries or with respect to which the Company or any of its direct or indirect subsidiaries have knowledge; and the terms "hazardous wastes," "toxic wastes" and "hazardous substances" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. 10 (dd) The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not cause a Consolidated Material Adverse Effect. (ee) Each certificate signed by any officer of the Company or any of its Subsidiaries, as amended in writing from time to time, and delivered to the Representatives or Underwriters' counsel shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (ff) Except as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor any Subsidiary has entered into any transaction with any affiliate of the Company other than an arm's length transaction, and all such transactions required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been described therein. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Stockholder now has and on any date on which Option Shares are purchased will have valid marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing ___________ and ___________ as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with ______________________________, as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling 11 Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(f) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Option Shares to be sold by such Selling Stockholder under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Option Shares to be sold by such Selling Stockholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Certificates in negotiable form for all Option Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (e) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder, or any Option Shares to be sold by such Selling Stockholder hereunder, may be bound or, to the best of such Selling Stockholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or over the properties of such Selling Stockholder, or, 12 if such Selling Stockholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Stockholder. (f) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (g) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (h) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder and the Option Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Power of Attorney or set forth in the Registration Statement or the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on any date on which Option Shares are to be purchased, was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on any date on which Option Shares are to be purchased will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (i) Such Selling Stockholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to any date on which Option Shares are to be purchased, and will advise one of its Attorneys and Van Kasper & Company prior to the date on which Option Shares are to be purchased if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(f) would be inaccurate if made as of such date on which Option Shares are to be purchased. (j) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (k) Such Selling Stockholder is not aware (without having conducted any investigation or inquiry) that any of the representations and warranties of the Company set forth in Section 1 above is untrue or inaccurate in any material respect. 13 (l) To the best of such Selling Stockholder's knowledge, when any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. To the best of such Selling Stockholder's knowledge, on the Effective Date, the Registration Statement (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. To the best of such Selling Stockholder's knowledge, when the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on any date on which Option Shares are to be purchased, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (l) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. 3. PURCHASE, SALE AND DELIVERY OF SHARES (a) On the basis of the representations, warranties, covenants and agreements of the Company contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company agrees to sell to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of $______ per share, the respective number of Firm Shares set forth opposite the name of such Underwriter on Schedule I to this Agreement (subject to adjustment as provided in Section 9 of this Agreement). (b) On the basis of the several (and not joint) covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Selling Stockholders grant an option to the several Underwriters to purchase from the Selling Stockholders, severally and not jointly, all or any portion of the Option Shares at the same price per share as the Underwriters are to pay for the Firm Shares. This option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and 14 may be exercised in whole or in part at any time (but not more than once) on or before the 45th day after the date of the Prospectus upon written or telecopied notice by the Representatives to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option and the settlement date; notwithstanding the foregoing, if the 45th day after the date of the Prospectus is not a business day, then the time period for delivery of the notice of the exercise of the over-allotment option shall automatically be extended until the business day following the 45th day after the date of the Prospectus. The Option Shares shall be purchased severally, and not jointly, by each Underwriter, if purchased at all, in the same proportion that the number of Firm Shares set forth opposite the name of the Underwriter in Schedule I to this Agreement bears to the total number of Firm Shares to be purchased by the Underwriters under Section 3(a) above, subject to such adjustments as the Representatives in their absolute discretion shall make to eliminate any fractional shares. If the Underwriters elect to purchase less than all of the Option Shares, then the Underwriters shall purchase from each Selling Stockholder his pro rata portion of all the Option Shares. Delivery of certificates for the Option Shares, and payment therefor, shall be made as provided in Section 3(c) and Section 3(d) below. Nothing contained in this Section 3 shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. (c) Delivery of the Firm Shares and payment therefor, shall be made at the office of Van Kasper, 600 California Street, Suite 1700, San Francisco, California 94108 (or at such other location as is agreed by the parties), at 6:30 a.m., San Francisco time, on the third business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such third business day, as shall be agreed upon in writing by the Company and the Representatives, or as provided in Section 8(h) of this Agreement. The date and hour of delivery and payment for the Firm Shares are referred to in this Agreement as the "Closing Date." As used in this Agreement, "business day" means a day on which the Nasdaq National Market is open for trading and on which banks in New York and California are open for business and not permitted by law or executive order to be closed. (d) Delivery of the Option Shares and payment therefor, shall be made at the office of Van Kasper, 600 California Street, Suite 1700, San Francisco, California 94108 (or at such other location as is agreed by the parties), at 6:30 a.m., San Francisco time, on the date specified by the Representatives (which shall be three business days after the exercise of the option, but not in excess of the period of time specified in the Rules and Regulations). (e) Payment of the purchase price for the Firm Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Company, or (ii) wire transfer of immediately available funds to such account of the Company as the Company shall advise the Representatives in writing at least three business days prior to the Closing Date. Such payment shall be made upon delivery of certificates for the Firm Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Firm Shares to be delivered to the Representatives shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two business days before the Closing 15 Date. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of BT Alex Brown, New York, New York, not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Firm Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on the Closing Date for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (f) Payment of the purchase price for the Option Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Custodian, or (ii) wire transfer of immediately available funds to such account of the Custodian as the Custodian shall advise the Representatives in writing at least three business days prior to the date on which any Option Shares are purchased. Such payment shall be made upon delivery of certificates for the Option Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Option Shares to be delivered to the Representatives shall be registered in such name or names and shall be in such denominations as the Representatives may request at least one business day before the date on which any Option Shares are purchased. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of BT Alex Brown, New York, New York, not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Custodian for Option Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on any date on which Option Shares are purchased for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (g) It is understood that the several Underwriters propose to offer the Shares for sale to the public as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth (or to be set forth) in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. (h) The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), the legend respecting stabilization set forth on the inside front cover page and the statements set forth under the caption "Underwriting" in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitute the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement. 4. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. The Company and the Selling Stockholders covenant and agrees with the several Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement, and any amendment thereof, if not effective at the time of execution of this Agreement, to 16 become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed (and in form and substance reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will not file the Prospectus, any amended Prospectus, any amendment (including post-effective amendments) to the Registration Statement or any supplement to the Prospectus without (i) advising the Representatives of and, a reasonable time prior to the proposed filing of such amendment or supplement, furnishing the Representatives with copies thereof and (ii) obtaining the prior consent of the Representatives to such filing. The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the Underwriters and use its best efforts to cause the same to become effective as promptly as possible. (b) The Company will promptly advise the Representatives (i) when the Registration Statement becomes effective, (ii) when any post-effective amendment thereof becomes effective, (iii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Company of any notification with respect to the suspension of the registration, qualification or exemption from registration or qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if issued, to obtain as soon as possible the withdrawal thereof. (c) The Company will (i) on or before the Closing Date, deliver to the Representatives and to Underwriters' counsel a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless and to the extent previously furnished to the Representatives) and all documents filed by the Company with the Commission under the Exchange Act and deemed to be incorporated by reference into any Preliminary Prospectus or the Prospectus and will also deliver to the Representatives, for distribution to the several Underwriters, a sufficient number of additional conformed copies of each of the foregoing (excluding exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to each of the Representatives and send to the several Underwriters, at such office or offices as the Representatives may designate, as many copies of the Prospectus as the Representatives may reasonably request and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or a dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, 17 as the Representatives may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or a dealer any event shall occur as a result of which it is necessary to supplement or amend the Prospectus in order to make the Prospectus not misleading or so that the Prospectus will not omit to state a material fact necessary to be stated therein, in each case at the time the Prospectus is delivered to a purchaser of the Shares, or if it shall be necessary to amend or to supplement the Prospectus to comply with the Securities Act or the Rules and Regulations, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading and so that it then will otherwise comply with the Securities Act and the Rules and Regulations. If, after the public offering of the Shares by the Underwriters commences and during such period, the Underwriters propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, the Representatives will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use the Prospectus, as from time to time so amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Securities Act and the Rules and Regulations for such period. (e) The Company will cooperate with the Representatives and Underwriters' counsel in the qualification or registration of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and, if applicable, in connection with exemptions from such qualification or registration and, during the period in which a Prospectus is required by law to be delivered by an Underwriter or a dealer, in keeping such qualifications, registrations and exemptions in effect; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports and other documents as are or may be required to continue such qualifications, registrations and exemptions in effect for so long a period as the Representatives may reasonably request for the distribution of the Shares. (f) During a period of five years commencing with the date of this Agreement, the Company will promptly furnish to the Representatives and to each Underwriter who may so request in writing copies of (i) all periodic and special reports furnished by it to stockholders of the Company, (ii) all information, documents and reports filed by it with the Commission, Nasdaq National Market, any securities exchange or the NASD, (iii) all press releases and material news items or articles in respect of the Company, its products or affairs released or prepared by the Company (other than promotional and marketing materials 18 disseminated solely to customers and potential customers of the Company in the ordinary course of business) and (iv) any additional information concerning the Company or its business which the Representatives may reasonably request. (g) As soon as practicable, but not later than the 45th day following the end of the fiscal quarter first ending after the first anniversary of the Effective Date, the Company will make generally available to its securities holders and furnish to the Representatives an earnings statement or statements in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (h) The Company agrees that, without Van Kasper's prior written consent, the Company will not, and will not allow the Holders to, in each case directly or indirectly, issue, sell, offer, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock, or any securities convertible into, exchangeable for or exercisable for Common Stock or any rights to purchase or acquire Common Stock, for a period of 180 days following the date of this Agreement, excluding only (i) the sale of the Shares to be sold to the Underwriters pursuant to this Agreement and (ii) the grant of options to purchase Common Stock (provided that none of such options are or become exercisable during such 180-day period) or the issuance of shares of Common Stock upon the exercise in accordance with of options previously granted under the Company's presently authorized stock option plans as described in the Prospectus or in documents incorporated therein, or upon the exercise in accordance with their terms of previously granted warrants which are described in the Prospectus or in documents incorporated therein. (i) Each Selling Stockholder agrees that, without Van Kasper's prior written consent, such Selling Stockholder will not, directly or indirectly, sell, offer, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock, or any securities convertible into, exchangeable for or exercisable for Common Stock or any rights to purchase or acquire Common Stock, for a period of 180 days following the date of this Agreement, excluding only the sale of the Option Shares to be sold to the Underwriters pursuant to this Agreement. (j) The Company will establish and maintain all financial control and financial reporting systems customary for well-established public companies, including but not limited to adequate management information and reporting systems, and will employ and maintain, with adequate staffing levels at headquarters and at each significant Subsidiary or significant functional division, and at each level of responsibility, an employee staff of well trained and highly qualified financial professionals. As soon as practicable after the Closing Date, the Company will hire a full-time corporate controller with sufficient experience and authority to assist the Chief Financial Officer of the Company in managing and implementing adequate management information and reporting systems. (k) The Company will apply the net proceeds from the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus and for a period ending on the date which is five years after the date of this Agreement the Company agrees that any expenditure or authorization for any expenditure by the Company or any Subsidiary in 19 excess of $10,000 shall be in writing signed by the Chief Executive Officer and one additional officer who shall be the Chairman of the Board or the Chief Financial Officer of the Company. (l) The Company will, and at all times for a period of at least five years after the date of this Agreement, unless such securities are then listed on a national securities exchange, use its best efforts to cause the Common Stock (including the Shares) to be included for listing on the Nasdaq National Market, and the Company will comply with all registration, filing, reporting and other requirements of the Exchange Act and the Nasdaq National Market which may from time to time be applicable to the Company. (m) The Company will use commercially reasonable efforts to maintain insurance of the types and in the amounts which it deems adequate for its business consistent with insurance coverage maintained by companies of similar size and engaged in similar businesses including, but not limited to, general liability insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (n) The Company will issue no press release prior to or within 70 days after the Closing Date without prior consultation with the Representatives with respect to the contents thereof. (o) Within a reasonable time after the Closing Date, the Company shall supply to the Representatives and its counsel, at the Company's cost, up to six bound volumes as requested by such counsel each containing all material documents relating to the offering of the Shares. 5. FEES AND EXPENSES. (a) The Company and the Selling Stockholders agree with each Underwriter that: (i) The Company and the Selling Stockholders will pay and bear all costs and expenses in connection with: the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each of them and any amendments or supplements to any of them; the duplication or, if applicable, printing (including all drafts thereof) of this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreements, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and the Power of Attorney and the duplication and printing (including of drafts thereof) of any other underwriting documents and material (including but not limited to marketing memoranda and other marketing material) in connection with the offering, purchase, sale and delivery of the Shares; the issuance, transfer and delivery of the Shares under this Agreement to the several Underwriters, including all expenses, taxes, duties, fees and commissions on the purchase and sale of the Shares and Nasdaq National Market, brokerage and transaction levies with respect to the purchase and, if applicable, the sale of the Shares (x) incident to the sale and delivery of the Shares by the Company and the Selling Stockholders to the Underwriters and (y) incident to the 20 sale and delivery of the Shares by the Underwriters to the initial purchasers thereof; the cost of printing all stock certificates; the Transfer Agent's and Registrar's fees; the Custodian's fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent public accountants and any other experts named in the Prospectus; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus(es) and the Prospectus, the agreements and other documents and instruments referred to above and any amendments or supplements to any of the foregoing; NASD filing fees and fees and disbursements of Underwriters' counsel incurred in connection with the review by the NASD of the terms of the Offering of the Shares; the cost of qualifying or registering the Shares (or obtaining exemptions from qualification or registration) under the laws of such jurisdictions as the Representatives may designate (including filing fees in connection with such state securities or blue sky qualifications, registrations and exemptions) and preparing the preliminary and any final Blue Sky Memorandum (including fees and disbursements of Underwriters' counsel in connection therewith) and all such fees and costs shall be paid on or prior to the Closing Date; all fees and expenses in connection with qualification of the Shares for inclusion for listing on the Nasdaq National Market; the Company's share of roadshow expenses; and all other expenses incurred by the Company in connection with the performance of its obligations hereunder. Except as provided in this Section 5, the Underwriters, including the Representatives, shall bear all expenses incurred by it in connection with the offering, including (but not limited to) the expenses of its own counsel. The provisions of this Section 5(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. (ii) In addition to its obligations under Section 8(a) of this Agreement, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 8(a) of this Agreement, it will reimburse or advance to or for the benefit of the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse or advance for the benefit of the Underwriters for such expenses or the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to the Company together with interest, compounded daily, at the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America, NT&SA, San Francisco, California (the "Prime Rate"), but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to or for the Underwriters within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. 21 (iii) In addition to his obligations under Section 8(b) of this Agreement, each Selling Stockholder, severally and not jointly, agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 8(b) of this Agreement, he will reimburse or advance to or for the benefit of the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse or advance for the benefit of the Underwriters for such expenses or the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to such Selling Stockholder together with interest, compounded daily, at the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America, NT&SA, San Francisco, California (the "Prime Rate"), but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to or for the Underwriters within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (b) In addition to their obligations under Section 8(c) of this Agreement, the Underwriters severally and in proportion to their obligation to purchase Firm Shares as set forth on Schedule I hereto, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 8(c) of this Agreement, they will reimburse or advance to (for the benefit of the Company on a monthly basis (or more often, if requested) for all legal and other expenses incurred by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety or enforceability of the Underwriters' obligation to reimburse or advance for the benefit of the Company for such expenses and the possibility that such payments or advances might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Company shall promptly return such amounts to the Underwriters together with interest, compounded daily, at the Prime Rate, but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to the Company within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (c) Any controversy arising out of the operation of the interim reimbursement and advance arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) above, including the amounts of any requested reimbursement payments or advance, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted under the provisions of the Constitution and 22 Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to the demand or notice is authorized to do so. Any such arbitration will be limited to the interpretation and obligations of the parties under the interim reimbursement and advance provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) above and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for or contribute to expenses that is created by the provisions of Section 8 of this Agreement. (d) If the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 6 of this Agreement is not satisfied, or because of any termination pursuant to Section 9(b) of this Agreement, or because of any refusal, inability or failure on the part of the Company to perform any material covenant or agreement set forth in this Agreement or to comply with any provision of this Agreement other than by reason of a default by any of the Underwriters, the Company agrees to reimburse the Representatives upon demand for, or pay directly, all out-of-pocket expenses (including fees and disbursements of counsel) that shall have been incurred by the Representatives in connection with investigating, preparing to market or marketing the Shares or otherwise in connection with this Agreement or the offering of the Shares. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase and pay for the Shares shall be subject, to the reasonable satisfaction of the Representatives, to the accuracy as of the date of execution of this Agreement, the Closing Date and the date on which the Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and, with respect to any purchase of any Option Shares, of the Selling Stockholders set forth in this Agreement and the accuracy of the statements of the Company, its officers and the Selling Stockholders made in any certificate delivered pursuant to this Agreement, to the performance by the Company of all of their respective obligations to be performed under this Agreement at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, to the satisfaction of all conditions to be satisfied or performed by the Company and the Selling Stockholders at or prior to that date and to the following additional conditions: (a) The Registration Statement shall have become effective (or, if a post effective amendment is required to be filed pursuant to Rule 462(b) under the Act, such post effective amendment shall become effective and the Company shall have provided evidence satisfactory to the Representatives of such filing and effectiveness) not later than 5:00 p.m., New York time, on the date of this Agreement or at such later date and time as the Representatives may approve in writing and, at the Closing Date or, with respect to the Option Shares, the date on which such Option Shares are to be purchased; no stop order suspending the effectiveness of the Registration Statement or any qualification, registration or exemption from qualification or registration for the sale of the Shares in any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request for 23 additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives and Underwriters' counsel. (b) The Representatives shall have received from Gray Cary Ware & Freidenrich LLP, counsel for the Underwriters, an opinion, dated as of the Closing Date or, if applicable, the date on which the Option Shares are to be purchased, and the Company shall have furnished such counsel with all documents which they may reasonably request for the purpose of enabling them to pass upon such matters. (c) The Representatives shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the opinion of Cooley Godward LLP, counsel for the Company and the Selling Stockholders, addressed to the Underwriters and dated as of the Closing Date or such later date, with reproduced copies or signed counterparts thereof for each of the Underwriters, covering the matters set forth in Annex A to this Agreement and in form and substance reasonably satisfactory to the Representatives. (d) The Representatives shall be satisfied that there has not been any material change in the market for securities in general or in political, financial or economic conditions as to render it impracticable in the Representatives' sole judgment to make a public offering of the Shares, or a material adverse change in market levels for securities in general or financial or economic conditions which render it inadvisable to proceed. (e) The Representatives shall have received on or before the Closing Date and on any later date on which Option Shares are purchased a certificate, dated as of the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company stating that: (i) the representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as if expressly made at and as of the Closing Date or such later date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or such later date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or are threatened under the Securities Act; and (iii) (A) the respective signers of the certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus and any supplements or amendments to any of them and, as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, (B) since the Effective Date, no event has occurred that should have been set forth in an amendment to the Registration Statement or a supplement or amendment to the Prospectus 24 that has not been set forth in such an amendment or supplement, (C) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any Consolidated Material Adverse Effect or any development involving a prospective Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its direct or indirect subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (D) there are not any pending or known threatened legal proceedings to which the Company or any of its direct or indirect subsidiaries is a party or of which property of the Company or any of its direct or indirect subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus and (E) there are not any license agreements, contracts, leases or other documents that are required to be filed as exhibits to the Registration Statement that have not been filed as required. (f) You shall be satisfied that, and you shall have received a certificate, dated the date on which Option Shares are to be purchased from the Attorneys for each Selling Stockholder to the effect that, as of the date on which Option Shares are to be purchased, they have not been informed that: (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the date on which Option Shares are to be purchased; or (ii) Such Selling Stockholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the date on which Option Shares are to be purchased. (g) The Representatives shall have received from PricewaterhouseCoopers LLP a letter or letters, addressed to the Underwriters and dated as of the Closing Date and any later date on which Option Shares are purchased, confirming that they are independent accountants with respect to the Company within the meaning of the Securities Act and the applicable Rules and Regulations thereunder and, based upon the procedures described in their letter, referred to below, delivered to the Representatives concurrently with the execution of this Agreement (the "Original Letter"), but carried out to a date not more than five business days prior to the Closing Date or such later date on which Option Shares are purchased, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter that are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. Such letters shall not disclose any change, or any development involving a prospective change, in or affecting the business, properties or condition (financial or otherwise), results of operations or prospects of the Company or any of its direct or indirect subsidiaries which, in the Representatives' sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Shares or the purchase of the Option Shares as contemplated by the 25 Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). In addition, the Representatives shall have received from PricewaterhouseCoopers LLP, on or prior to the Closing Date, a letter addressed to the Company and made available to the Representatives for the use of the Underwriters stating that their review of the Company's system of internal controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of June 30, 1998, or in delivering their Original Letter, did not disclose any weaknesses in internal controls that they considered to be a material weaknesses. (h) Prior to the Closing Date, the Shares shall have been designated national market system securities, duly authorized for listing on the Nasdaq National Market upon official notice of issuance. (i) On or prior to the Closing Date, you shall have received from all Holders executed agreements covering the matters described in Section 1(s) of this Agreement. (j) The Company shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request (including certificates of officers of the Company), as to the accuracy of the representations and warranties of the Company set forth in this Agreement, the performance by the Company of its obligations under this Agreement and the other conditions concurrent and precedent to the obligations of the Underwriters under this Agreement. Counsel to the Representatives shall provide a written memorandum to the Company identifying closing documents which such counsel deems necessary for the Underwriters' review, not less than two business days before the Closing Date. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement will be in compliance with the provisions of this Agreement only if they are reasonably satisfactory to the Representatives. The Company will furnish the Representatives with such number of conformed copies of such opinions, certificates, letters and documents as the Representatives shall reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, time being of the essence, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and Underwriters' counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled by the Representatives at, or at any time prior to, the Closing Date or (with respect to the Option Shares) prior to the date upon which the Option Shares are to be purchased, as the case may be. Notice of such cancellation shall be given to the Company in writing or by telephone or telecopy confirmed in writing. Any such termination shall be without liability of the Company to the Underwriters (except as provided in Section 5 or Section 8 of this Agreement) and without liability of the Underwriters to the Company (except to the extent provided in Section 8 of this Agreement). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE SELLING STOCKHOLDERS. The respective obligations of the Company and the Selling 26 Stockholders to sell and deliver the Shares required to be delivered as and when specified in this Agreement shall be subject to the condition that, at the Closing Date or (with respect to the Option Shares) the date upon which the Option Shares are to be purchased, no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of the Company in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that (1) the indemnity agreements of the Company contained in this Section 8(a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter 27 through the Representatives specifically for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Company can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) (excluding the documents incorporated therein by reference) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement. The indemnity agreements of the Company contained in this Section 8(a) and the representations and warranties of the Company contained in Section 1 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and each Selling Stockholder, severally and not jointly, agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of such Selling Stockholder in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact 28 contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that (1) the indemnity agreements of the Selling Stockholders contained in this Section 8(b) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, (2) the indemnity agreement contained in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Selling Stockholder can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) (excluding the documents incorporated therein by reference) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement and (3) the indemnity agreements of the Selling Stockholders contained in this Section 8(b) shall apply in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Stockholder, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof. The indemnity agreements of the Selling Stockholders contained in this Section 8(b) and the representations and warranties of the Selling Stockholders contained in Section 2 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which the Selling Stockholders may otherwise have. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement, each of its directors, each other Underwriter, each Selling Stockholder and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or other federal or state statute, law or regulation or at common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with 29 defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any representation, warranty, covenant or agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case under clauses (ii) and (iii) above, as the case may be, only if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such indemnifying Underwriter through the Representatives specifically for use in the Registration Statement, in any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The Company and the Selling Stockholders acknowledge and agree that the matters described in Section 3(g) of this Agreement constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. The indemnity agreement of each Underwriter contained in this Section 8(c) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. Notwithstanding anything to the contrary in this Section 8, no Underwriter shall be required to make any payments in respect of any claim arising under this Section 8(b) in excess of the underwriting discount applicable to the Shares purchased by that Underwriter. (d) Each person or entity indemnified under the provisions of Sections 8(a), 8(b) and 8(c) above agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such Sections, it will, if a claim in respect thereunder is to be made against the indemnifying party or parties under this Section 8, and give written notice (the "Notice") of such service or notification to the party or parties from whom indemnification may be sought hereunder within ten (10) calendar days after receipt by them of written notice of the commencement of any actions against them. No indemnification provided for in Sections 8(a), 8(b) and 8(c) above shall be available to any person who fails to so give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related, but only to the extent such party was materially prejudiced by the failure to receive the Notice, and the omission so to notify such indemnifying party or parties shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified 30 party for contribution or otherwise than on account of Sections 8(a), 8(b) and 8(c). Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses or rights available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then separate counsel for and selected by the indemnified party or parties shall be entitled to conduct, at the expense of the indemnifying parties, the defense of the indemnified parties to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties, and (ii) provided, further, that the indemnifying party shall not be liable for the fees and expenses of more than one separate counsel, reasonably approved by the indemnifying party, for all of the indemnified parties, plus, if applicable, local counsel in each jurisdiction. In addition, in any event, the indemnified party or parties shall be entitled to have counsel selected by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and, unless separate counsel is to be chosen by the indemnified party or parties as provided above, the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under Sections 8(a), 8(b) and 8(c) for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear and pay the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear and pay such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 8(a), 8(b) and 8(c) above (i) in such proportion as is appropriate to reflect the relative 31 benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Shares, net of the underwriting discounts, received by the Company and the Selling Stockholders and the total underwriting discount retained by the Underwriters bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by a party and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 8(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this Section 8(e) and to the considerations referred to in the third sentence of the first paragraph of this Section 8(e). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this Section 8(e). Notwithstanding the provisions of this Section 8(e), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by that Underwriter. For purposes of this Section 8(e), each person who controls an Underwriter within the meaning of the Securities Act shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of the Securities Act, each officer of the Company who signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the immediately preceding and immediately following sentences. No person guilty of fraudulent misrepresentation (within the meaning of Section 1l(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute in this Section 8(e) are several in proportion to their respective underwriting obligations and not joint. Each party or other entity entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 8(d) above). This Section 8(e) shall not be operative as to any Underwriter to the extent that the Company is entitled to receive or has received indemnity under this Section 8. 32 (f) The Company shall not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (g) No Underwriter shall, without the consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Company is a party to such claim, action, suit or proceeding), which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of the Company, each of its officers who signed the Registration Statement, each of its directors, each Selling Stockholder and each person who controls the Company within the meaning of Section 15 of the Securities Act, from all liability arising out of such claim, action, suit or proceeding. (h) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions of this Agreement, including, without limitation, the provisions of Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c) and this Section 8 of this Agreement and that they are fully informed regarding all such provisions. They further acknowledge that the provisions of Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c) and this Section 8 of this Agreement fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement, each Preliminary Prospectus and the Prospectus as required by the Securities Act, the Rules and Regulations, the Exchange Act and the rules and regulations of the Commission under the Exchange Act. The parties are advised that federal or state policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain provisions of Sections 5(a)(ii), 5(a)(iii), 5(b) and 5(c) and this Section 8 of this Agreement and, to the extent permitted by law, the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under Sections 5(a)(ii), 5(a)(iii), 5(b) or 5(c) or this Section 8 of this Agreement and further agree not to attempt to assert any such defense. 9. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of the Underwriters fails or refuses (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 6 or Section 10 of this Agreement) to purchase and pay for the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to the Representatives and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representatives of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representatives and such purchasing Underwriter or Underwriters and upon the terms set forth herein, all or any part of the 33 Firm Shares that such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such Shares, the number of Firm Shares that each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining Shares that the defaulting Underwriter or Underwriters agreed to purchase, provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Shares that the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Firm Shares that all Underwriters agreed to purchase under this Agreement. If the total number of Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the first 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representatives for purchase of such Shares on the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date determined as provided in Section 3(c) of this Agreement for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 3(c) in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company makes arrangements within the time periods provided in the first three sentences of the first paragraph of this Section 9 for the purchase of all the Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter (except as provided in Section 5 or Section 8 of this Agreement) and without any liability on the part of any non-defaulting Underwriter to the Company (except to the extent provided in Section 8 of this Agreement). Nothing in this Section 9, and no action taken hereunder, shall relieve any defaulting Underwriter from liability, if any, to the Company or any non-defaulting Underwriter for damages occasioned by its default under this Agreement. The term "Underwriter" in this Agreement shall include any persons substituted for an Underwriter under this Section 9. 10. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. (a) If the Registration Statement has not been declared effective prior to the date of this Agreement, this Agreement shall become effective at such time, after notification of the effectiveness of the Registration Statement has been released by the Commission, as the Representatives and the Company shall agree upon the public offering price and the purchase price of the Shares. If the public offering price and the purchase price of the Shares shall not have been determined prior to 5:00 p.m., New York time, on the fifth full business day after the Registration Statement has become effective, this Agreement shall thereupon terminate without liability on the part of the Company to the Underwriters (except as provided in Section 5 or Section 8 of this Agreement) or the Underwriters to the Company (except as set forth in Section 8 of this Agreement). By giving notice before the time this Agreement becomes effective, the Representatives may prevent this Agreement from becoming effective without liability of any party to the other party, except that the Company shall remain obligated to pay 34 costs and expenses to the extent provided in Section 5 and Section 8 of this Agreement. If the Registration Statement has been declared effective prior to the date of this Agreement, this Agreement shall become effective upon execution and delivery by the Representatives, the Company and the Attorneys. (b) This Agreement may be terminated by the Representatives in their absolute discretion by giving written notice to the Company at any time on or prior to the Closing Date or, with respect to the purchase of the Option Shares, on or prior to any later date on which the Option Shares are to be purchased, as the case may be, if prior to such time any of the following has occurred or, in the Representatives' opinion, is likely to occur: (i) after the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or development involving a prospective adverse change in or affecting particularly the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its direct and indirect subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, occurs which would, in the Representatives' sole judgment, make the offering or the delivery of the Shares impracticable or inadvisable; or (ii) if there shall have been the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, or any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions, if the effect of such outbreak, calamity, crisis or change in economic or political conditions on the financial markets of the United States would, in the Representatives' sole judgment, make the offering or delivery of the Shares impracticable or inadvisable; or (iii) if there shall have been suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system; or (iv) if there shall have been the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Representatives' sole judgment has or may have a Consolidated Material Adverse Effect; or (v) if there shall have been the declaration of a banking moratorium by federal, New York or California state authorities; or (vi) if there shall have been the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Representatives' sole judgment has a material adverse effect on the securities markets in the United States; or (vii) existing international monetary conditions shall have undergone a material change which, in your sole judgment, makes the offering or delivery of the Shares impracticable or inadvisable. If this Agreement shall be terminated pursuant to this Section 10, there shall be no liability of the Company or the Selling Stockholders to the Underwriters (except pursuant to Section 5 and Section 8 of this Agreement) and no liability of the Underwriters to the Company or the Selling Stockholders (except to the extent provided in Section 8 of this Agreement). 11. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed, telecopied or delivered to Van Kasper & Company, 600 California Street, Suite 1700, San Francisco, California 90024, 35 Attention: Syndicate Manager (telecopier: (415) 397-2744); and if to the Company, shall be mailed, telecopied or delivered to it at 17891 Cartwright Road, Irvine, CA 92614 (telecopier: (714/223-5138) Attention: President. All notices given by telecopy shall be promptly confirmed by letter. 12. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 5 and Section 8 of this Agreement, the several parties (in addition to the Company, the Selling Stockholders and the several Underwriters) indemnified under the provisions of Section 5 and Section 8, and their respective personal Representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision contained herein. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from the several Underwriters. 13. GENERAL. Notwithstanding any provision of this Agreement to the contrary, the reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties, covenants and agreements in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof or by or on behalf of the Company or any Selling Stockholder or their respective directors or officers and (c) delivery and payment for the Shares under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of Sections 4(f)-4(n) of this Agreement shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument, and may be delivered by facsimile transmission. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA. 14. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, the Representatives will act for and on behalf of the several Underwriters, and any action taken under this Agreement by the Representatives, as Representatives of the several Underwriters, will be binding on all the Underwriters. 36 If the foregoing correctly sets forth your understanding, please so indicate by signing in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, JAVELIN SYSTEMS, INC. By: ----------------------------------- Richard P. Stack President and Chief Executive Officer SELLING STOCKHOLDERS By ------------------------------ Attorney-in-Fact for the Selling Stockholders named in Schedule II hereto The foregoing Agreement is hereby confirmed and accepted as of the date first above written. On their own behalf and on behalf of each of the several Underwriters named in Schedule I hereto. VAN KASPER & COMPANY L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC. MERIDIAN CAPITAL GROUP, INC. As Representatives of the Several Underwriters By: Van Kasper & Company By: ----------------------------- David H. Horwich Senior Vice President 37 SCHEDULE I UNDERWRITERS Underwriters Number of Firm Shares - ------------ to be Purchased: --------------- Van Kasper & Company . . . . . . . . . . . . . . . . . . . . . L.H. Friend, Weinress, Frankson & Presson, Inc. . . . . . . . Meridian Capital Group, Inc. . . . . . . . . . . . . . . . . . Total.. . . . . . . . . . . . . . . . . . . . . . . . . . I-1 SCHEDULE II SELLING STOCKHOLDERS Selling Stockholder Number of Option Shares - ------------------- to be Sold: ----------- Richard P. Stack Robert D. Nichols C. Norman Campbell Steven S. Goodman I-2 ANNEX A MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware; each of CCI Group, Inc. and POSNET Computers, Inc. (ogether, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of formation; (ii) The Company and each Subsidiary has the corporate power to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure so to qualify would not have a Consolidated Material Adverse Effect on such entity; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the captions "Capitalization" and "Description of Capital Stock" as of the dates stated therein; the issued and outstanding shares of capital stock (or other securities) of the Company and each Subsidiary have been duly and validly authorized and issued, are fully paid and nonassessable and have not been issued in violation of any statutory, or, to the best knowledge of such counsel, other preemptive right or other rights to subscribe for or purchase securities or in violation of any applicable federal or state securities laws; and except as reflected on Exhibit A to the Underwriting Agreement, the Company directly or indirectly owns all of the issued and outstanding equity securities of each of its Subsidiaries and, to such counsel's actual, current knowledge, there are no outstanding options, warrants or other rights to acquire any equity securities of any Subsidiary; (v) The Shares will, upon issuance and delivery against payment therefor in accordance with the terms of the Agreement, be duly authorized, validly issued, fully paid and nonassessable and will not have been issued in violation of any statutory, or, to the best knowledge of such counsel, other preemptive right or other rights to subscribe for or purchase securities and have been duly approved for listing on the Nasdaq National Market subject only to official notice of issuance thereof; (vi) The Company has corporate power to enter into the Agreement and to issue, sell and deliver the Shares to the Underwriters. (vii) The Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming its due authorization, execution and delivery by the Representatives, is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except insofar as the indemnification and contribution provisions of the Agreement may be limited by public policy concerns and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles; (viii) We have been informed by the staff of the Securities and Exchange Commission that the Registration Statement has become effective under the Securities Act and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements and supporting schedules included therein, as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations; (x) The terms and provisions of the capital stock of the Company conform in all material respects to the description thereof contained in the Registration Statement and Prospectus, and the forms of certificates evidencing the Common Stock comply with Delaware law; (xi) The information in the Prospectus under the captions "Description of Capital Stock" and "Shares Eligible for Future Sale," to the extent it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is correct in all material respects; (xii) The description in the Registration Statement and the Prospectus of the Certificate of Incorporation and Bylaws of the Company and of statutes and, to the best knowledge of such counsel, contracts are accurate in all material respects and fairly present in all material respects the information required to be presented by the Securities Act and the Rules and Regulations; (xiii) To the best knowledge of such counsel, there are no agreements, contracts, licenses, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that are not described or referred to therein or filed as required; (xiv) The execution and delivery of the Agreement do not, and the Company's performance of the Agreement and the consummation of the transactions contemplated thereby will not, conflict with, violate or result in the material breach of or a material default (including without limitation with the giving of notice, the passage of time or otherwise) under any of the terms and provisions of the Company's Certificate of Incorporation or Bylaws or, to such counsel's actual current knowledge, any contract, indenture, mortgage, deed of trust, loan agreement, lease, license, joint venture or, without limitation, other agreement or instrument to which the Company or any Subsidiary is a party or by which any of its or their properties are bound or any law, ordinance, rule or regulation or, to the best knowledge of such counsel, any order, writ, injunction, judgment or decree of any governmental agency or body or of any court or arbitration tribunal having jurisdiction over the Company or any Subsidiary or over any of its or their properties; provided, however, that no opinion need be rendered concerning state securities or Blue Sky laws; (xv) No authorization, approval or consent or other order of any governmental authority or agency is necessary in connection with the consummation of the transactions contemplated by the Agreement, except such as have been obtained under the Securities Act; (xvi) To the best knowledge of such counsel, there are no legal or governmental proceedings pending or threatened against the Company or any Subsidiary of a character which are required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the applicable Rules and Regulations, other than those described therein; (xvii) To the best knowledge of such counsel, neither the Company nor any Subsidiary is presently in breach of, or in default under, any bond, debenture, note or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan agreement, lease, license or, without limitation, other agreement or instrument to which the Company or any Subsidiary is a party or by which any of its or their properties are bound which breach or default, individually or in the aggregate, is reasonably likely to result in a Consolidated Material Adverse Effect. (xviii) To the best knowledge of such counsel, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have unexercised registration rights with respect to any securities of the Company; In addition, such counsel shall state that such counsel has participated in the preparation of the Registration Statement and Prospectus, including participating in conferences with officers and other representatives of the Company, the independent public accountants of the Company, the Representatives and counsel to the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although they have not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the Registration Statement (except as to financial statements and supporting schedules contained therein, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. EXHIBIT "A" LIST OF SUBSIDIARIES EXHIBIT "B" EX-10.22 3 EXHIBIT 10.22 DATED 1998 GARY GREEN and ROGER SCARLETT and LOUVRE TRUSTEES LIMITED and JAVELIN SYSTEMS, INC. --------------------------------------------- AGREEMENT for the sale and purchase of the entire issued share capital of RGB TRINET LIMITED --------------------------------------------- Paul, Hastings, Janofsky & Walker LLP The International Financial Centre Old Broad Street London EC2N 1HQ Tel: 0171 562 4000 Fax: 0171 628 4444 I N D E X
Page 1. Definitions and Interpretation 1 2. Agreement to Sell and Purchase 5 3. Consideration 5 4. Conditions Precedent 6 5. Pre-emption Rights 6 6. Warranties 6 7. Limitations to the Warranties 8 8. Vendors' obligations prior to Completion 8 9. Purchaser's Remedies 9 10. Release of Guarantees 9 11. Completion 10 12. Restrictive Covenants 10 13. Post-Completion Effect 11 14. Successors and Assigns 11 15. Information and Confidentiality 11 16. Announcements and Publicity 11 17. Costs 11 18. Notices 12 19. Further Assurance 13 20. Waivers 13 21. Entire Agreement 13 22. Variation 14 23. Joint and Several Liability 14 24. Counterparts 14 25. Applicable Law 14
Schedules - --------- 1. Particulars of the Vendors 2. Particulars of the Company and Subsidiary 3. Particulars of the Premises 4. Part A - General Warranties Part B - Taxation Warranties Part C - Property Warranties Part D - Intellectual Property Warranties Part E - Environmental and Health and Safety Warranties 5. Completion Requirements 6. Tax Deed 7. Regulation S certificate and undertaking 8. Additional Limitations to the Warranties and Tax Deed 9. Earnout Agreement i AGREEMENT FOR SALE AND PURCHASE OF SHARES DATE: 1998 PARTIES: (1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE 1 ("Individual Vendors"); (2) LOUVRE TRUSTEES LIMITED of Kings House, The Grange, St. Peter Port, Guernsey, Channel Islands ("Trustee Vendor"); and (3) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). OPERATIVE PROVISIONS: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement and (save as provided in Clause 1.6) in the Schedules:- "Accounting Date" means 30 June 1997 or, if the audited accounts of the Company for the period which commenced on 1 July 1997 and ended on 30 June 1998 are provided to the Purchaser on or prior to Completion, 30 June 1998; "Accounting Period" has the meaning ascribed thereto in section 12 of the Taxes Act; "Accounts" means the audited accounts of the Company comprising a balance sheet as at the Accounting Date, a profit and loss account for the period which commenced on 1 July 1996 or, if the audited accounts of the Company for the period which commenced on 1 July 1997 and ended on 30 June 1998 are provided to the Purchaser on or prior to Completion, 1 July 1997 and ended on the Accounting Date, the notes thereto and the Directors' and auditors' reports thereon; "agreed form" means in relation to any document such document in the form agreed between the parties and initialled by the Purchaser and the Vendors for the purposes of identification; "Business Day" means any day which is not a Saturday, a Sunday or a bank or public holiday in England and Wales; 1 "Change of Control" means, in relation to any company, where that company ceases to be under the control of the person or persons who control such company on the date of this Agreement and for the purpose of this definition "control" means a holding of securities in a company conferring a majority of the voting rights in it or the right to appoint or remove a majority of its board of directors or the right to participate in 50% or more of the assets of the company on its winding up; "Claim" means any claim for breach of or non-compliance with this Agreement (including any Warranty Claim or Tax Claim); "Companies Act" means the Companies Act 1985; "Company" means RGB TRINET LIMITED, particulars relating to which are set out in SCHEDULE 2, Part 1; "Completion" means the completion of the sale and purchase of the Shares in accordance with Clause 11 and SCHEDULE 5; "Completion Date" means the date fixed for Completion pursuant to Clause 11; "Connected Person" means a connected person as defined in section 839 of the Taxes Act; "Consideration Shares" means such number of Purchaser's Shares calculated in accordance with Clause 3.4 as are to be allotted and issued credited as fully paid in accordance with Clause 3.3; "Directors" means the persons listed as directors of the Company in SCHEDULE 2; "Disclosed" means fairly disclosed to the Purchaser expressly for the purposes of this Agreement in the Disclosure Letter; "Disclosure Letter" means a letter of even date from the Vendors to the Purchaser in the agreed form; "Earnout Agreement" means an agreement to be entered into at Completion between (inter alia) the Individual Vendors and the Purchaser in respect of the entitlement and issue of the Earnout Shares in the form contained in SCHEDULE 9; 2 "Earnout Shares" means such number of Purchaser's Shares (if any) calculated, allotted and issued credited as fully paid in accordance with the Earnout Agreement; "Employment Agreements" means the employment agreements in the agreed form to be entered into at Completion between the Company and each of the Individual Vendors; "Event" means an event as defined in the Tax Deed; "Intellectual Property Rights" means intellectual property rights as defined in Part D of SCHEDULE 4; "Jade Agreement" means the agreement of even date for the sale and purchase of the issued share capital of the Subsidiary not held by the Company entered into between (1) A. Sampson, (2) Contech Consultants Limited, (3) B. Badminton, and (4) the Purchaser; "Management Accounts" means the respective unaudited management accounts of the Company and the Subsidiary comprising in each case a balance sheet and a profit and loss account for, in respect of the Company, the period which commenced on 1 July 1998 and ended on 31 August 1998 and, in respect of the Subsidiary, the period which commenced on 18 March 1998 and ended on 31 August 1998, a copy of each of which is to be provided at Completion; "Premises" means the premises of the Company, short particulars of which are set out in SCHEDULE 3; "Purchaser's Group" means the Purchaser and its subsidiary undertakings or parent undertakings for the time being or a subsidiary undertaking for the time being of a parent undertaking of the Purchaser and includes, for the avoidance of doubt, the Company and the Subsidiary and references to a "member of the Purchaser's Group" shall be construed accordingly; "Purchaser's Shares" means shares of the common stock, $0.01 par value, of the Purchaser; "Relief" means a relief as defined in the Tax Deed; "Shares" means the 1,000 ordinary shares of L1 each in the capital of the Company; "Subsidiary" means JADE COMMUNICATIONS LIMITED, particulars relating to which are set out in SCHEDULE 2, Part 2; 3 "Supplemental Disclosure Letter" means the letter to be provided by the Vendors at Completion to the Purchaser in the agreed form disclosing matters (if any) which have arisen between the date hereof and the Completion Date and which are necessary to qualify the Warranties; "Tax" means tax as defined in the Tax Deed; "Tax Claim" means any claim under the Warranties in SCHEDULE 4, Part B or the Tax Deed; "Tax Deed" means a deed in the form set out in SCHEDULE 6; "Taxes Act" means the Income and Corporation Taxes Act 1988; "Vendors" means together the Individual Vendors and the Trustee Vendor; "Vendors' Solicitors" means Dibb Lupton Alsop, 101 Barbirolli Square, Manchester M2 3DL; "Warranties" means the warranties, representations and undertakings set out in SCHEDULE 4; "Warranty Claim" means any claim for breach of or non-compliance with any of the Warranties in Parts A, C or D of SCHEDULE 4. 1.2 The Schedules are deemed to be incorporated in this Agreement, and a reference to "this Agreement" includes a reference to the Schedules. 1.3 In this Agreement:- 1.3.1 the index and the clause headings are included for convenience only and shall not affect the construction of this Agreement; 1.3.2 words denoting the singular shall include the plural and vice versa; 1.3.3 words denoting any gender shall include a reference to each other gender; and 1.3.4 references to persons shall be deemed to include references to natural persons, firms, partnerships, companies, corporations, associations, organisations, foundations and trusts (in each case whether or not having separate legal personality). 1.4 References in this Agreement to statutory provisions shall (where the context so admits and unless otherwise expressly provided) be construed as references to those provisions as respectively amended, consolidated, extended or re-enacted as at the date of this Agreement and to the corresponding provisions of any earlier legislation (whether repealed or not) directly or indirectly amended, consolidated, extended, replaced or re-enacted thereby and to any orders, regulations, instruments or other subordinate legislation made under the relevant statute. 4 1.5 Any statement qualified by the expression "to the best of the knowledge, information and belief of the Vendors" or "so far as the Vendors are aware" or any similar expression shall be deemed to include an additional statement that it has been made after due, diligent and careful enquiry by each of the Vendors of each other, the Directors, the Company's auditors and the directors of the Subsidiary. 1.6 If any of the words or expressions defined in Clause 1.1 are also defined in any of the Schedules then for the purposes of interpreting that relevant Schedule such words and expressions shall have the meaning ascribed to them in that Schedule. 2. AGREEMENT TO SELL AND PURCHASE 2.1 Each of the Vendors sells such of the Shares as are set out opposite his name in column 2 of SCHEDULE 1 to the Purchaser and the Purchaser purchases the Shares. 2.2 Each of the Vendors covenants with the Purchaser that:- 2.2.1 he has the right to sell and transfer the full legal and beneficial interest in the Shares to the Purchaser on the terms set out in this Agreement; 2.2.2 the Shares are sold free from all claims, charges, liens, encumbrances, equities and adverse rights of any description and together with all rights attached or accruing thereto as at and from the date of this Agreement; and 2.2.3 he shall (and shall procure that any necessary third party shall), at his own expense, do, execute and perform all such further acts, deeds, documents and things as the Purchaser may reasonably request from time to time as being necessary to vest any of the Shares in the Purchaser. 2.3 Nothing in this Agreement shall oblige the Purchaser to purchase some only of the Shares unless the Vendors shall at the same time complete the sale to the Purchaser of all of the Shares. 3. CONSIDERATION 3.1 Subject to Clause 3.8, the initial consideration payable by the Purchaser to the Vendors in respect of the sale of the Shares shall be 11,875 Purchaser's Shares and US$2,878,750 which: 3.1.1 in respect of US$2,878,750 shall be satisfied as to the amount of US$1,492,812.50 in cash and as to US$1,385,937.50 shall be satisfied by the issue of the Consideration Shares in accordance with the remainder of this Clause 3; and 3.1.2 if and to the extent that the exchange rate of pounds sterling to US dollars has increased above the rate of L1 = $1.70 (i.e., an increase in value in pounds sterling) as at the Completion Date, the sum of US$2,878,750 shall be increased accordingly by applying the appropriate percentage thereto. If such exchange rate has decreased below L1 = $1.70 (i.e., a decrease in value in pounds sterling), no variation shall be made to the consideration under this Agreement. 5 3.2 By way of additional consideration of up to US$5,140,625 the Purchaser will issue to the Vendors the Earnout Shares (if any) calculated in accordance with the provisions of the Earnout Agreement in the percentages set out in Column 6 of SCHEDULE 1. 3.3 The consideration referred to in Clause 3.1 shall be satisfied at Completion by the payment of US$1,492,812.50 in cash to the Vendors' Solicitors which shall be apportioned between the Vendors as set out in Column 3 of SCHEDULE 1, by the issue of the 11,875 Purchaser's Shares which shall be apportioned between the Vendors as set out in Column 4 of SCHEDULE 1, and by the issue of Consideration Shares to the Vendors which shall be apportioned between the Vendors as set out in Column 5 of SCHEDULE 1. 3.4 The number of Consideration Shares to be allotted to the Vendors pursuant to Clause 3.3 shall be such number of Purchaser's Shares as have an aggregate value (determined in accordance with Clause 3.5) which is as near as possible to, but not less than, US$1,385,937.50. 3.5 For the purpose of determining the aggregate value referred to in Clause 3.4, the value of each Purchaser's Share shall be deemed to be an amount equal to the average of the closing prices of a Purchaser's Share, as reported on the NASDAQ SmallCap Market System in the ten (10) trading days immediately prior to the Business Day immediately prior to the Completion Date. 3.6 No fraction of a Consideration Share shall be issued to the Vendors and the number of Consideration Shares shall be adjusted accordingly to the nearest whole number. 3.7 The Consideration Shares, on issue, shall rank pari passu in all respects with the existing issued Purchaser's Shares. 3.8 By way of possible further consideration, if during November 1999 the price per Purchaser's Share as reported on the NASDAQ SmallCap Market shall remain below US$9.00 for five (5) consecutive trading days, then the number of Consideration Shares to which the Vendors are entitled shall be increased as follows:- 3.8.1 First, the number of Purchaser's Shares owned by the Vendors as of 1 November 1999 shall be subject to adjustment based on the following formula: S x (V1) - S = C ---- (V2) where S = Number of Purchaser's Shares held by the Vendors V1 = 9 V2 = US$9.00 or, if lower, the average closing price per Purchaser's Share during trading on the NASDAQ SmallCap Market in November 1999 C = the additional number of Consideration Shares to be issued to the Vendors; 3.8.2 Second, the Purchaser shall issue and allot to the Vendors such number of additional Consideration Shares as corresponds to the figure represented by "C" in the above formula in the same proportions as under Clause 3.3 no later 6 than 31 December 1999 (and otherwise in accordance with the foregoing provisions of this Clause 3). 3.9 Each of the Vendors agrees that he shall deliver to the Purchaser at Completion and, if appropriate, upon the issue of Consideration Shares pursuant to Clause 3.8 a certificate and undertaking substantially in the form of SCHEDULE 7 making or giving such representations, warranties and covenants as are necessary or advisable for the qualification of the issuance of Purchaser's Shares to the Vendors under Regulation S promulgated under the United States Securities Act of 1933, as amended. 3.10 If the Purchaser at any time proposes to register any of its equity securities (as defined in the United States Securities Act of 1933 (the "Act")), other than securities which are convertible into shares of its common stock, under the Act on Forms S-1, S-2 or S-3 (but not Form S-4 or S-8) or on any other form upon which may be registered securities similar to the Consideration Shares, it will at each such time give written notice at least fifteen (15) days prior to the filing of the registration statement to the Vendors holding Consideration Shares (each a "Holder") of its intention so to do. Such notice shall specify the proposed date of the filing of the registration statement and advise each Holder of its right to participate therein. Upon the written request of any Holder given not less than seven (7) days prior to the proposed date of filing set forth in such notice, the Purchaser will use all reasonable efforts to cause the Consideration Shares which the Purchaser has been requested to register by such Holder to be registered under the Act, all to the extent requisite to permit the sale or other disposition by such of the Consideration Shares so registered. If such registration statement is being filed in connection with an underwritten offering, the Consideration Shares held by the Holder may only be included in such registration if, in the written opinion of the underwriter or underwriters managing the offering, the total amount of all securities of the Purchaser to be so registered will not exceed the maximum amount of securities of the Purchaser which can then be successfully marketed (1) by the managing underwriter in its sole reasonable discretion, and (2) without otherwise materially and adversely affecting the entire offering. To the extent that the amount of securities to be registered must be reduced in order to obtain the opinion referred to in the preceding sentence, such reduction shall be achieved by first eliminating from the registration some or all of the securities to be offered by persons (including, but not limited to, any persons or entities that have any registration rights with respect to any securities) other than the Holder, PROVIDED, HOWEVER, that no such reduction shall reduce the securities being offered directly by the Purchaser through such underwriter or underwriters. The right of any Holder to have its Consideration Shares included in any registration statement being filed in connection with any underwritten offering shall be subject to such Holder participating in the underwriting to the extent required under the Act or any rule thereunder or to the extent reasonably required by the underwriters and agreeing to be bound by the terms imposed by the underwriters that such underwriters deem reasonably necessary to the success of the offering. 7 4. CONDITIONS PRECEDENT 4.1 This Agreement is conditional upon: 4.1.1 the Purchaser having secured sufficient funds to finance the cash portion of the consideration stated in Clause 3.1; and 4.1.2 the price per Purchaser's Share as reported on the NASDAQ SmallCap Market being not less than US$7.50 as at the close of business on the date preceding the Completion Date. 4.2 If any of the above-mentioned conditions is not satisfied or waived on or before 13 November 1998, this Agreement shall become null and void (save for Clauses 15 and 16 which shall continue to have effect) and no party shall have any claim against any other party arising from or in connection with this Agreement. 4.3 The Purchaser shall use all reasonable endeavours to ensure the satisfaction of the conditions set out in Clause 4.1 so far as lies within its powers so to do. 4.4 Any waiver of the conditions set out in Clause 4.1 shall require the consent of the Vendors and the Purchaser. 5. PRE-EMPTION RIGHTS The Vendors irrevocably waive and undertake to procure that any other person having such rights shall by Completion have irrevocably waived all and any rights of pre-emption or other restrictions on transfer over or in respect of the Shares existing by virtue of the articles of association of the Company or otherwise. 6. WARRANTIES 6.1 The Individual Vendors represent and warrant to the Purchaser for the benefit of the Purchaser, its successors and assigns in the terms set out in SCHEDULE 4 and acknowledge that the Purchaser is entering into this Agreement in reliance on the Warranties and that the Purchaser shall be entitled to treat them as conditions of this Agreement. It is acknowledged by the Purchaser that the only representation, warranty and covenant that the Trustee Vendor shall provide are those set out in Clause 2.2 and paragraph 1.2 of Part A of SCHEDULE 4. 6.2 The Vendors agree with the Purchaser (for itself and as trustee for the Company and the Subsidiary) that in making and giving the Warranties and that in compiling and preparing the Disclosure Letter the Vendors have not relied directly or indirectly on any information or opinions supplied to them (or any of them) by the Company or the Subsidiary or any of the officers, employees, servants or agents of the Company or the Subsidiary and the Vendors waive all and any claims which they (or any of them) have or may have against all or any of the foregoing in respect of any information or opinions so supplied or omitted to be so supplied in connection with any of the Warranties or the Disclosure Letter. 6.3 Each of the Warranties shall be separate and independent and shall not be limited by reference to any other of the Warranties or any other provision of this Agreement and no claim in respect or arising out of the same shall be limited or otherwise affected by 8 any knowledge (actual or constructive) which the Purchaser has or is deemed to have in relation to the Company or the Subsidiary save for matters set out in the Disclosure Letter or the Supplementary Disclosure Letter or the disclosure letter or the supplementary disclosure letter to the Jade Agreement. 6.4 Each of the Warranties shall be deemed to be given on the date of this Agreement and shall be deemed to be repeated and given by the Vendors on each day up to and including the Completion Date. 6.5 Save where any of the Warranties expressly or by clear implication relate only to the Company, each of the Warranties is given in relation not only to the Company, but also in relation to the Subsidiary as if the Warranties had been repeated in full with the substitution of the name of the Subsidiary for the Company. 6.6 The Purchaser represents and warrants to the Vendors that: 6.6.1 the existing issued ordinary share capital of the Purchaser is the subject of listing on the NASDAQ exchange; 6.6.2 the Purchaser has sufficient authorised but unissued ordinary share capital to enable it to issue the Consideration Shares and no shareholder or other consents are required by the Purchaser prior to issue of such shares; 6.6.3 the Consideration Shares shall rank pari passu in all respects with the shares of the common stock of the Purchaser in issue at the date hereof; and 6.6.4 this Agreement and all other documents to be entered into by the Purchaser pursuant to this Agreement will when executed constitute legal, valid and binding obligations of the Purchaser in accordance with their respective terms. 7. LIMITATIONS TO THE WARRANTIES 7.1 The aggregate liability of the Vendors in respect of all Claims under the Warranties and under the Tax Deed shall not exceed US$1,700,000. 7.2 The liability of the Vendors in respect of the Warranties and under the Tax Deed shall be further limited by the provisions of SCHEDULE 8. 8. VENDORS' OBLIGATIONS PRIOR TO COMPLETION 8.1 The Vendors shall not (save as may be necessary to give effect to this Agreement) and shall procure that neither the Company nor the Subsidiary shall (save as aforesaid) do or allow or omit to be done before Completion anything which is or might be a breach of any of the Warranties or which would or might make any of the Warranties inaccurate or misleading or which is or might be a breach of or which does or might otherwise give rise to a claim under any other provision of this Agreement or any provision of the Tax Deed and in particular (but without prejudice to the generality of the foregoing) the Vendors shall procure that no breach of Warranties 3.1 to 3.11 (both inclusive) of Part A of SCHEDULE 4 shall take place at any time from the date hereof down to the Completion Date (both dates inclusive). 8.2 The Vendors shall immediately disclose to the Purchaser in writing any matter or thing which arises or becomes known to them or any of them before Completion which is or might be a breach of the Warranties or which would or might make any of 9 the Warranties inaccurate or misleading or which is or might be a breach of or which does or might otherwise give rise to a claim under any other provision of this Agreement or any provision of the Tax Deed. 8.3 The Vendors shall procure that until Completion the Purchaser and its advisers shall be given promptly on request such facilities and information (including access to employees of the Company and the Subsidiary) regarding the business, assets, liabilities, contracts and affairs of the Company and the Subsidiary as they or any of them may reasonably require. 9. PURCHASER'S REMEDIES 9.1 If it becomes apparent prior to Completion that the Vendors are or will be in breach of any of the Warranties or any other term of this Agreement (including any obligation which is to be performed at Completion) or any provision of the Tax Deed, then the Purchaser, in addition to and without prejudice to all other rights and remedies available to the Purchaser in respect thereof, shall be entitled:- 9.1.1 to rescind this Agreement by notice in writing given to the Vendors at any time prior to Completion, whereupon the Vendors shall indemnify the Purchaser and keep the Purchaser indemnified in full for and against all losses, liabilities, damages, costs, claims, charges and expenses arising from such breach and the consequent rescission (including but not limited to all legal and other professional fees and expenses incurred by the Purchaser in connection with the negotiation and preparation of this Agreement); or 9.1.2 to complete this Agreement in accordance with Clause 11 and SCHEDULE 5, provided that the Purchaser shall not thereby be deemed to have waived or otherwise foregone or be estopped from exercising any right to compensation, damages or any other right or remedy available to the Purchaser by reason of such breach. 10. RELEASE OF GUARANTEES 10.1 The Purchaser shall use all reasonable endeavours (short of actual payment of any monies or the substitution of the guarantees of any person other than the Purchaser) to procure as soon as reasonably practicable after Completion the release of each of the Vendors from each of the guarantees which have been Disclosed and which have been given by them in respect of any obligations of the Company. Pending such release the Purchaser shall fully and effectually indemnify and keep indemnified each of the Vendors from and against any and all costs, claims, demands or liabilities incurred or arising from any such guarantees. 10.2 The Vendors shall on Completion procure the absolute and unconditional release of the Company from all guarantees, suretyships, indemnities and like undertakings given by the Company in respect of any obligations of any person and shall fully and effectually indemnify and keep indemnified the Purchaser (as trustee for the Company) from and against any and all costs, claims, demands or liabilities incurred or arising from any such guarantees, suretyships, indemnities and like undertakings. 10 11. COMPLETION Without prejudice to the provisions of Clause 4, Completion will take place in accordance with SCHEDULE 5 at the offices of Paul, Hastings, Janofsky & Walker LLP, 19th Floor, The International Financial Centre, Old Broad Street, London EC2N 1HQ at 12:00 noon on such date as the Vendors and the Purchaser may agree, but in any event no later than 16 November 1998, when the business described in SCHEDULE 5 will be transacted. 12. RESTRICTIVE COVENANTS 12.1 Each of the Vendors hereby undertakes to and covenants with the Purchaser (for itself and as trustee for all purchasers of the Shares and as trustee for the Company) that he will not either on his own account or jointly with or as manager, agent, officer, employee or otherwise on behalf of any other person, firm or corporation directly or indirectly (and so that each undertaking below shall be a further and separate obligation):- 12.1.1 for a period of three years from the date of this Agreement carry on or be engaged, concerned, or interested in or assist any business which competes with any business of the Company as carried on at the Completion Date; 12.1.2 for a period of three years from the date of this Agreement canvass or solicit business, orders or custom for goods or services supplied or provided by the Company from any person who at any time within the period of one year preceding the Completion Date has been a customer of or in the habit of dealing with the Company for such goods or services; 12.1.3 for a period of three years from the date of this Agreement solicit or entice away or endeavour to solicit or entice away from the Company or employ any person who on the Completion Date or within the six months prior to the Completion Date is or was a director, officer, employee or other servant of the Company; 12.1.4 for a period of three years from the date of this Agreement induce or attempt to induce any person (including without limitation any agent or independent distributor) who in the six months prior to the Completion Date has been a supplier of any goods or services to the Company to cease to supply, or to restrict or vary the terms of supply, to the Company; or 12.1.5 at any time after the Completion Date use or procure the use in connection with any business of any corporate or business name which is identical to or likely to be confused with the corporate name or any business name of the Company or which might suggest a connection with the business of the Company. 13. POST-COMPLETION EFFECT This Agreement shall remain in full force and effect after and notwithstanding Completion in respect of all obligations, agreements, covenants, undertakings, conditions, representations, warranties or indemnities which have not been done, observed or performed at or prior to Completion. 11 14. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and enure for the benefit of each party's successors and shall be assignable by the Purchaser to the extent that the rights and benefits under this Agreement shall enure for the benefit of the Purchaser's assigns. Save as aforesaid this Agreement shall not be assignable. 15. INFORMATION AND CONFIDENTIALITY Each of the Vendors hereby undertakes to the Purchaser:- 15.1 that he will at any time and from time to time after Completion give to the Purchaser on request all information in his possession concerning the business, dealings, transactions or affairs of the Company and in particular, but without prejudice to the generality of the foregoing, relating to claims made or threatened against the Company and the source from and consideration for which any assets of the Company were acquired or derived; and 15.2 that he will not, and will use all reasonable endeavours to ensure that no other person will, at any time after the date hereof, take away or (directly or indirectly) make use of, divulge or communicate to any person (except as may be necessary to comply with any statutory obligation or order of any court or statutory tribunal of competent jurisdiction) any confidential information or trade secrets of the Company or of any supplier, customer or other person who has or who has had dealings with the Company. 16. ANNOUNCEMENTS AND PUBLICITY Any announcement or circular or other publicity relating to this Agreement or any termination thereof shall prior to its publication be approved in writing by each of the parties as to its content, form and manner of publication (such approval not to be unreasonably withheld or delayed), save that any announcement, circular or other publicity required to be made or issued by the Purchaser pursuant to the regulations of rules governing the NASDAQ National Market System or other recognised investment exchange or by law may be made or issued by the Purchaser without such approval. 17. COSTS The parties shall pay their own costs and expenses in relation to the preparation, execution and carrying into effect of this Agreement. 18. NOTICES 18.1 Any notice required to be given under this Agreement shall be sufficiently given if delivered personally or if sent by first-class recorded delivery post (express air courier service if sent overseas) or if sent by facsimile transmission and a copy of such facsimile sent by post. 12 18.2 Any notice which is sent or despatched in accordance with this Clause 18 shall be deemed to have been received by the addressee:- 18.2.1 if delivered personally, at the time of delivery; 18.2.2 in the case of a notice sent by post (or express air courier), 4 Business Days after the envelope containing the notice was delivered to the postal authorities (or courier service); 18.2.3 in the case of a notice sent by facsimile transmission, if the notice was sent during the normal business hours of the addressee, on the day of transmission; otherwise on the next following Business Day. 18.3 In proving service by post or express air courier, it shall be necessary to prove only that the notice was sent or despatched and that the notice was contained in an envelope properly addressed, stamped and delivered to the postal authorities or courier service in the country from where despatched. In proving service by facsimile transmission, it shall be necessary to produce only a legible copy of the confirmation of the facsimile transmission. 18.4 Any notice required to be given under this Agreement shall be sent:- 18.4.1 to the Vendors c/o Gary Green at: "Trudos" Heath Ride Finchampstead Wokingham Berkshire RG40 3QJ With a copy to: Dibb Lupton Alsop 101 Barbirolli Square Manchester M2 3DL Facsimile No: +44 161 235 4118 For the attention of: Roger Gough 18.4.2 to the Purchaser at: Javelin Systems, Inc. 17891 Cartwright Road Irvine, CA 92614-6216 U.S.A. Facsimile No: +1 949 223 5138 For the attention of: Horace Hertz With a copy to: Paul, Hastings, Janofsky & Walker LLP The International Financial Centre 19th Floor Old Broad Street London EC2N 1HQ Facsimile No: +44 171 628 4444 For the attention of: Ian Burton 13 or to such other address or facsimile number as is notified in writing from time to time by the Vendors (or any one of them) or the Purchaser (as the case may be) to the other. 19. FURTHER ASSURANCE The Vendors shall do, execute and perform and shall procure to be done, executed and performed all such further acts, deeds, documents and things as the Purchaser may require from time to time effectively to vest the beneficial ownership of the Shares in the Purchaser or as it directs free from all liens, charges, options, encumbrances or adverse rights of interests of any kind and otherwise to give to the Purchaser the full benefit of this Agreement. 20. WAIVERS A failure by any party to exercise and any delay, forbearance or indulgence by any party in exercising any right, power or remedy under this Agreement shall not operate as a waiver of that right, power or remedy or preclude its exercise at any subsequent time or on any subsequent occasion. The single or partial exercise of any right, power or remedy shall not preclude any other or further exercise of that right, power or remedy or the exercise of any other right, power or remedy. No custom or practice of the parties at variance with the terms of this Agreement shall constitute a waiver of the rights of any party under this Agreement. 21. ENTIRE AGREEMENT 21.1 This Agreement and any documents in the agreed form and the Disclosure Letter (the "Acquisition Documents") constitute the entire agreement between the parties with respect to the subject matter of this Agreement. 21.2 Except for any misrepresentation or breach of warranty which constitutes fraud: 21.2.1 the Acquisition Documents supersede and extinguish all previous agreements between the parties relating to the subject matter thereof; and 21.2.2 each party hereby irrevocably and unconditionally waives any right it may have to rescind this Agreement or any of the other Acquisition Documents by reason of any misrepresentation and/or warranty not set forth in any such document. 22. VARIATION No variation of this Agreement shall be effective unless made in writing and signed by or on behalf of each of the parties. 23. JOINT AND SEVERAL LIABILITY 23.1 All representations, warranties, undertakings, agreements, covenants, indemnities and obligations made or given or entered into by the Vendors under or pursuant to this Agreement are made or given or entered into by the Vendors jointly and severally. 14 23.2 In relation to any two or more persons who are jointly and severally liable under this Agreement, the liability under this Agreement of any one or more of such persons shall not be prejudiced or affected in any way by the giving of time or any forebearance or indulgence granted by the Purchaser to any other or others of such persons or by the release or compromise by the Purchaser of any liability under this Agreement of any other or others of such persons. 24. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, and which together shall constitute one and the same Agreement. Unless otherwise provided in this Agreement, this Agreement shall become effective and be dated (and each counterpart shall be dated) on the date on which this Agreement (or a counterpart of this Agreement) is signed by the last of the parties to execute this Agreement or, as the case may be, a counterpart thereof. 25. APPLICABLE LAW This Agreement shall be governed by and construed in accordance with English law and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts. A S W I T N E S S the hands of the parties hereto or their duly authorised representatives the day and year first before written. 15 SCHEDULE 1 PARTICULARS OF THE VENDORS AND OF THE SHARES TO BE SOLD AND CONSIDERATION TO BE RECEIVED BY EACH OF THEM
(2) (3) (4) (5) (6) (1) NUMBER OF SHARES CASH ISSUE OF 11,875 NUMBER OF CONSIDERATION PERCENTAGE OF NAME AND ADDRESS TO BE SOLD CONSIDERATION (US$) PURCHASER'S SHARES SHARES (AS PERCENTAGE) EARNOUT SHARES ---------------- ---------------- ------------------- ----------------- ---------------------- -------------- 1. Gary Nigel Alan GREEN 500 NIL 11,875 100% 50% "Trudos" Heath Ride Finchampstead Wokingham Berkshire RG40 3QJ 2. Roger Lionel SCARLETT 450 1,343,531.25 NIL NIL 50% "Glen d'Or" The Ridge Cold Ash Newbury Berkshire RG16 9HY 3. Louvre Trustees Limited 50 149,281.25 NIL NIL NIL Kings House The Grange St. Peter Port Guernsey Channel Islands ----------- ---------------- ---------- -------- -------- TOTALS 1,000 1,492,812.50 11,875 100% 100% ----------- ---------------- ---------- -------- --------
16 SCHEDULE 2 1. PARTICULARS CONCERNING THE COMPANY 1. Registered Office: Archway House, Bath Road, Padworth, Berkshire RG7 5HR 2. Date of Incorporation: 13 June 1990 3. Registered Number: 2511516 4. Directors: Gary Green, Roger Scarlett 5. Secretary: Gary Green 6. Mortgages and Charges: None. 7. Share Capital: L1,000 divided into 1,000 ordinary shares of L1 each, all of which have been issued and are fully paid up. 2. PARTICULARS CONCERNING THE SUBSIDIARY 1. Registered Office: Archway House, Bath Road, Padworth, Berkshire RG7 5HR 2. Date of Incorporation: 4 August 1993 3. Registered Number: 2842141 4. Directors: Gary Green, Roger Scarlett 5. Secretary: Gary Green 6. Mortgages and Charges: None, but note Isis Factoring Agreement in place. 7. Share Capital: L1,000 divided into 1,000 ordinary shares of L1 each, of which 200 have been issued and are fully paid up. 8. Shareholder No. of shares held ----------- ------------------ The Company 95 Contech Consultants Limited 95 Anthony Sampson 10 --- 200 17 SCHEDULE 3 THE PREMISES I. PART A: PREMISES OWNED AND OCCUPIED BY THE COMPANY 1. FREEHOLD (NONE) 2. LEASEHOLD/LEASE DETAILS Lease dated 26 June 1995 between (1) G. Green and R. Scarlett (landlord) and (2) the Company (tenant) of first floor and part ground floor of Archway House, Bath Road, Padworth, Berkshire RG7 5HR for a term of 10 years from 26 June 1995. 3. OTHER (NONE) 4. DESCRIPTION of all leases, underleases, tenancies, licences and other agreements subject to and/or with the benefit of which the Premises are held: Date Document Parties ---- -------- ------- (NONE) 18 I. PART B: PREMISES OCCUPIED BY THIRD PARTIES 1. FREEHOLD (NONE) 2. LEASEHOLD/LEASE DETAILS (NONE) 3. OTHER (NONE) 4. DESCRIPTION of all leases, underleases, tenancies, licences and other agreements subject to and/or with the benefit of which the Premises are held: Date Document Parties ---- -------- ------- (NONE) II. PART A: PREMISES OWNED AND OCCUPIED BY THE SUBSIDIARY The Subsidiary is holding over following the termination of its leases of Units 30, 35 and 36 at Stakehill Industrial Estate, Whitbrook Way, Middleton, Manchester. 19 SCHEDULE 4 PART A GENERAL WARRANTIES 1. INFORMATION SUPPLIED AND CAPACITY OF VENDORS 1.1 All information contained in this Agreement and all matters contained in the Disclosure Letter are true and accurate in every respect and there is no fact or matter which has not been Disclosed which renders any such matters or information untrue, incomplete or misleading in any material respect. 1.2 The Vendors have full power and authority to enter into and perform this Agreement and the Tax Deed, and this Agreement and the Tax Deed, when executed, will constitute valid and binding obligations on the Vendors in accordance with the respective terms thereof. 2. ACCOUNTS AND RECORDS 2.1 The Company has at all times properly and accurately maintained all books, accounts and records of whatever kind required by law to be maintained. 2.2 The books, accounts and records of the Company accurately record all matters required by law to be entered therein and fairly present and reflect in accordance with generally accepted accounting principles and practice the assets and liabilities (actual, prospective and contingent) of the Company and all transactions to which it is or has been a party. 2.3 The Accounts comply with the requirements of the Companies Act and other relevant statutes and generally accepted accounting principles, SSAPs and FRSs and give a true and fair view of and properly reflect the financial position of the Company as at the Accounting Date and are not affected by any unusual or non-recurring items. 2.4 The Company has made what the Directors believed when preparing the Accounts was adequate provision in the Accounts for all Tax liable to be assessed on the Company or for which it is accountable in respect of income, profits or gains earned, accrued or received on or before the Accounting Date including distributions made down to that date. 2.5 The Management Accounts have been properly prepared in accordance with good accounting practice and on a basis consistent with that previously adopted and so far as the Vendors are aware fairly reflect levels of turnover and expenses and provisions, assets and liabilities of the Company as at 31 August 1998 and the two-month period then ended. 3. BUSINESS SINCE THE ACCOUNTING DATE Since the Accounting Date:- 20 3.1 the Company has carried on its business in the ordinary and usual course both as regards the nature, scope and manner of conducting the same and so as to maintain the same as a going concern; 3.2 the Company has not borrowed, raised or taken any money or any financial facility; 3.3 the Company has paid its creditors within the times agreed with such creditors and there are no debts outstanding by the Company which have been due for more than ninety (90) days; 3.4 the Company has not entered into any capital commitments or any transaction or agreement for the disposal of any asset or under which it has incurred or will incur (otherwise than in the ordinary and usual course of carrying on its business) any liabilities (including contingent liabilities) not provided for in the Accounts; 3.5 the Company has not entered into any unusual, long-term (that is to say, incapable of performance in accordance with its terms within six months after the date on which it was entered into or undertaken) arrangements, commitments or contracts; 3.6 the business of the Company has not been adversely affected by the loss of or material reduction in orders from any customer or the loss of or material reduction in any source of supply or by any abnormal factor not affecting similar businesses to a like extent and none of the Vendors is aware of any facts which are likely to give rise to any such adverse effects; 3.7 no distribution of capital or income (including for the avoidance of doubt, any dividend) has been declared, made or paid or agreed or resolved to be declared, made or paid by the Company; 3.8 no loans have been made by the Company and no loan capital or loan has been or has become liable to be repaid by the Company in whole or in part; 3.9 no sum has been paid or voted to any director or employee (or ex-director or ex-employee) of the Company by way of remuneration or otherwise in excess of the rates paid to him by the Company at the Accounting Date and no new employment agreements have been made by the Company; 3.10 none of the fixed assets of the Company shown in the Accounts and none acquired by the Company since the Accounting Date has been lost, damaged or destroyed; and 3.11 there has been no material adverse change in the financial position or trading prospects or turnover of the Company nor is any such material change expected. 4. TRADING AND CONTRACTUAL ARRANGEMENTS 4.1 None of the contracts or obligations entered into by the Company is ultra vires the Company or exceeds the powers of the Directors to bind the Company and so far as the Vendors are aware the Company is not in default under any such contracts or obligations. 21 4.2 The Company is not a party to any contract, transaction, obligation, commitment or liability which, whether by reason of its nature, term, scope, price or otherwise is or may be material in relation to its business, profits or assets or which:- 4.2.1 is in any way otherwise than in the ordinary course of the Company's business; 4.2.2 is of an unusual or abnormal nature, or not fully on an arm's length basis; 4.2.3 is of a long-term nature (that is to say incapable of performance in accordance with its terms within six months after the date on which it was entered into or undertaken); 4.2.4 is incapable of termination in accordance with its terms by the Company on 60 days' notice or less; 4.2.5 cannot readily be fulfilled or performed by the Company on time without undue or unusual expenditure of money or effort; or 4.2.6 involves the supply of goods and/or services the aggregate value of which will represent in excess of five per cent of the budgeted turnover for the current financial year of the Company. 4.3 No sums of whatever nature are owing by the Company to any of the Vendors or any of the Directors or any person being a Connected Person of the Vendors or the Directors or any of them respectively. 4.4 The Company has not been a party to any transaction to which any of the provisions of sections 320 (substantial property transactions involving directors, etc.), 322 (liability arising from contravention of section 320), or 330 (general restrictions on loans, etc. to directors and persons connected with them) of the Companies Act may apply. 4.5 None of the Vendors nor any person being a Connected Person in relation to any Vendor has any direct or indirect interest with any business which has a close trading relationship with that of the Company or which is or is likely to become competitive with the business of the Company. 4.6 There are no outstanding arrangements or understandings (whether legally binding or not) between the Company and any person who is a shareholder (or the beneficial owner of any interest in the Company or in any company in which the Company is interested), or any person who is a Connected Person of any such person, relating to the management of the Company's business, or the appointment or removal of the Directors, or the ownership or transfer of ownership, or the letting of any of the assets of the Company, or the provision, supply, purchase or finance of goods, services or other facilities to, by or from the Company or otherwise howsoever in relation to the Company's affairs. 4.7 The Company is not and has not agreed to become bound by any debenture or guarantee or contract for indemnity or suretyship or any like undertaking and there is not now outstanding any guarantee or contract for indemnity or suretyship or like undertaking given for the accommodation of or in respect of any obligation on the part of the Company. 4.8 No person is entitled to receive from the Company any finders' fee, brokerage or commission in connection with the sale of the Shares to the Purchaser. 22 5. ASSETS (OTHER THAN THE PREMISES) 5.1 The Company was at the Accounting Date the owner with good and marketable title to all the assets (other than the Premises) included in the Accounts and now so owns and has in its possession and under its control all such assets (save for current assets subsequently disposed of in the ordinary course of its business) and all assets acquired by it after the Accounting Date and all such assets are the sole and absolute property of the Company free from any charge, lien, encumbrance or equity and no other person has or claims any rights in relation to such assets or any of them and in particular all such assets are free from any hire-purchase, leasing or rental agreement for payments on deferred terms or bill of sale. 5.2 In relation to any asset held by the Company which is the subject of any hire-purchase, conditional sale, chattel leasing or retention of title agreement or otherwise belonging to a third party, so far as the Vendors are aware, no event has occurred which entitles or which upon intervention or notice by any third party may entitle any such third party to repossess the asset concerned, or terminate the agreement, or any licence in respect of the same. 5.3 The stock in trade of the Company is in good condition and us capable of being sold by the Company in the ordinary course of business within a period of three months from the Completion Date in accordance with the Company's current price lists and without rebate or allowance to a purchaser. 5.4 The fixed and loose plant, machinery, furniture, fixtures, fittings, equipment, vehicles and other moveable assets used in connection with the business of the Company are not surplus to requirements and are in good repair and condition and satisfactory working order. 5.5 Save in respect of the Subsidiary, the Company is not and has never been the holder or beneficial owner of nor has it agreed to acquire any share or loan capital of any other body corporate (whether incorporated in the United Kingdom or elsewhere). 5.6 The Company is not entitled to the benefit of any debt otherwise than as the original creditor and is not and has not agreed to become a party to any factoring or discounting arrangement. 5.7 None of the debts due as at the Accounting Date remains unpaid at the date of this Agreement nor has any debt which has subsequently become due to the Company (or any part of any such debt) remained unpaid for more than three months after the due date for payment or been released or written off or proved to be irrevocable, nor is any such debt now regarded as irrevocable. 6. EMPLOYEES AND AGENTS 6.1 The names of all employees of the Company together with copies of all service contracts and contracts for services and full particulars of the current terms of employment of all officers, employees, consultants and agents of the Company have been Disclosed. 23 6.2 There is not now outstanding any contract of service or for services between the Company and any of its officers, employees, consultants or agents which is not determinable by the Company at any time on three months' notice or less without compensation (other than under the Employment Rights Act 1996) or any liability (other than for accrued salary, wages, commission or pension) on the part of the Company to or for the benefit of any person who is or has been an officer, employee, consultant or agent of the Company. 6.3 No present officer, employee, consultant or agent of the Company has given or received notice terminating his employment or appointment and no such officer, employee, consultant or agent is entitled nor (so far as any of the Vendors is aware) intends or is likely as a result of this Agreement or Completion or otherwise to terminate his employment or appointment with the Company. 6.4 Particulars have been Disclosed of all loans and other benefits enjoyed by any officer, employee, consultant or agent of the Company in relation to the affairs of the Company and of all contracts, transactions and arrangements made or entered into by the Company and to which any of sections 330 to 338 of the Companies Act applies. 6.5 The Company is not under any legal or moral liability or obligation to pay bonuses, pensions, gratuities, superannuation, allowances or the like to any of its past or present officers or employees or their dependants nor is it a party to any arrangement or promise to make or in the habit of making ex gratia or voluntary payments by way of bonus, pension, gratuity, superannuation, allowance or the like to any such persons and there are no schemes or arrangements for payment of retirement pension or death benefit or similar schemes or arrangements in operation or contemplated in relation to the Company. 6.6 Save to the extent (if any) to which provision or allowance has been made in the Accounts, no liability has been incurred by the Company to make any redundancy payments or any protective awards or to pay damages or compensation for wrongful or unfair dismissal or for failure to comply with any order for the reinstatement or re-engagement of any employee and no gratuitous payment has been made or promised by the Company in connection with the actual or proposed termination or suspension of employment or variation of any contract of employment of any present or former director or employee. 6.7 The Company has not recognised any trade union or association of trade unions or any other organisation of employees in respect of its employees or any of them. 6.8 The Company has not in existence nor is proposing to introduce any share incentive scheme, share option scheme or profit sharing scheme or any other scheme analogous to any of the foregoing schemes for all or any of its directors, officers or employees. 7. INSURANCE 7.1 The Company is covered by valid insurances against all risks normally insured against by persons carrying on the same or similar businesses as those carried on by the Company and in particular all assets are and have at all material times been insured to the replacement or reinstatement value advised by its insurers against fire and such other risks as aforesaid and the Company is, and has at all material times been, 24 covered against accident, damage, injury, third party loss (including product liability), loss of profits and other risks normally insured against by persons carrying on the same or similar businesses as those carried on by the Company as advised by its insurers. 7.2 Particulars of all the Company's insurances have been Disclosed and there are no outstanding claims or, so far as the Vendors are aware, circumstances likely to give rise to a claim thereunder and, so far as the Vendors are aware, nothing has been done or omitted to be done which has made or could make any policy of insurance void or voidable or whereby the premiums are likely to be increased. 7.3 None of the said policies is subject to any special or unusual terms or restrictions or to the payment of any premium in excess of the normal rate. 8. GRANTS Particulars have been Disclosed of all investment and other grants and allowances and of all loans or financial aid of any kind applied for or received or receivable by the Company from any governmental department, board, body or agency or any other supranational or national or local authority, body or agency. 9. BANKING FACILITIES Details of all overdrafts, loans or other financial facilities outstanding or available to the Company and of all its bank and deposit accounts and true and correct copies of all documents relating thereto have been Disclosed and, so far as the Vendors are aware, none of the Vendors or the Company has done or omitted to do anything whereby the continuance of any such facilities in full force and effect might be adversely affected or prejudiced. 10. DEFECTIVE AND UNSAFE PRODUCTS/SERVICES 10.1 There are no outstanding claims against the Company in respect of defects in quality or delays in delivery or completion of contracts or deficiencies of design or performance of equipment or otherwise relating to liability for goods or services supplied or to be supplied by the Company and no such claims are threatened or anticipated. 10.2 The Company has no knowledge that any goods or products for which the Company has responsibility under section 2 of the Consumer Protection Act 1987 ("CPA") or for which the Company assumes responsibility under any contract of indemnity or otherwise is defective within the meaning of section 3 of the CPA or that the Company supplies or possesses for supply any goods or products which are in breach of the general safety requirement provided by section 10 of the CPA. 11. LITIGATION Neither the Company nor, so far as the Vendors are aware, any person for whose acts or omissions it may be vicariously liable is engaged in or subject to any civil, criminal or arbitration proceedings and, as far as any of the Vendors are aware, there are no such proceedings pending or threatened by or against the Company or against any such person and, so far as the Vendors are aware, there are no facts or circumstances likely to give rise to any such proceedings. 25 12. INSOLVENCY 12.1 No order has been made, or petition presented, or resolution passed for the winding-up of the Company and there is not outstanding:- 12.1.1 any petition or order for the winding-up of the Company; 12.1.2 any appointment of a receiver over the whole or any part of the undertaking or assets of the Company; 12.1.3 any petition or order for the administration of the Company; 12.1.4 any voluntary arrangement between the Company and any of its creditors; 12.1.5 any distress or execution or other process levied in respect of the Company, which remains undischarged; or 12.1.6 any unfulfilled or unsatisfied judgment or court order against the Company. 12.2 The Company is not deemed unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986. 13. COMPLIANCE All necessary licences, consents, permits and authorities (public and private) have been obtained by the Company to enable the Company to carry on its business effectively in the places and in the manner in which such business is now carried on and all such licences, consents, permits and authorities are valid and subsisting and none of the Vendors knows of any reason why any of them should be suspended, cancelled or revoked or should not be renewed upon the expiry of their existing term. 14. CHARGES 14.1 No charge in favour of the Company is void or voidable for want of registration. 14.2 No event has occurred causing, or which upon intervention or notice by any third party may cause, any floating created by the Company to crystallise or any charge created by it to become enforceable nor has any such crystallisation occurred or is such enforcement in process. 15. DIRECTORS AND OFFICERS The Directors are the only directors of the Company and no person is a shadow director (within the meaning of section 741 of the Companies Act) of the Company. 16. CAPITAL OF THE COMPANY 16.1 The authorised and issued share capital of the Company is as set out in part 1 of SCHEDULE 2. 16.2 The Vendors are the legal and beneficial owners and registered holders of the Shares which have been issued in proper legal form and are fully paid or credited as fully paid, and each of the Vendors is entitled to sell such of the Shares as are set out opposite his name in Column 2 of SCHEDULE 1 free from all claims, charges, liens, encumbrances, equities and adverse rights of any description and together with all rights attached or accruing thereto as at and from the Completion Date. 16.3 There is not now outstanding any loan capital of the Company nor any agreement, arrangement or option under which any person may now or at any time hereafter call for the creation, allotment, issue, sale or transfer of any loan or share capital of the Company or require any loan or share capital of the Company to be put under option. 26 17. EFFECT OF AGREEMENT So far as the Vendors are aware, there are no contracts or arrangements (whether written or oral) to which the Company is a party which will by their terms be determinable as a result of the provisions of this Agreement or which will or may be terminated by completion of this Agreement. 18. SUBSIDIARY 18.1 The Subsidiary is a private company limited by shares incorporated in England and Wales and has the authorised and issued share capital set out in part 2 of SCHEDULE 1. 18.2 All the issued shares of the Subsidiary have been issued in proper legal form and are fully paid or credited as fully paid and the Company is the legal and beneficial owner of 47.5% of such shares free from any claims, charges, liens, encumbrances, equities and adverse rights of any description. 18.3 The Subsidiary does not have any subsidiary as defined in section 736 of the Companies Act. 18.4 The Subsidiary had not traded and had no assets or liabilities from the date of its incorporation until its acquisition of its current business on 18 March 1998. 27 SCHEDULE 4 PART B WARRANTIES RELATING TO TAX 1. ADMINISTRATION AND RETURNS 1.1 The Company has no liability for Tax (whether actual, deferred or contingent) in respect of any financial period down to and including the Accounting Date or referable to profits (including income and gains) made or deemed to have been made on or before the Accounting Date which has not been provided for or disclosed in the Accounts. 1.2 At the date hereof the Company has duly paid all Tax which it has become liable to pay. 1.3 The Company is under no liability to pay any interest, penalty, fine or default surcharge in connection with any Tax nor, so far as the Vendors are aware, is any such liability likely to arise. 1.4 The Company has properly and duly made all returns and supplied all notices, accounts and information for the purposes of Tax required to have been made or supplied to any Tax Authority. 1.5 None of the aforementioned returns, notices, accounts and information has been or, so far as the Vendors are aware, is likely to be disputed by any Tax Authority. 1.6 The Company's affairs have not been and, so far as the Vendors are aware, are not likely to be the subject of any dispute, investigation or discovery by or with any Tax Authority. 1.7 All claims, disclaimers, elections, appeals or applications which the Company has made in the last 6 years in respect of Tax have been Disclosed. 2. ANTI-AVOIDANCE The Company has not at any time entered into any transaction, series of transactions, schemes or arrangements of which the main purpose, or one of the main purposes, was the avoidance of, or a reduction in liability to Tax and the Company has not at any time entered into a transaction the main purpose of which was a commercial purpose but into which a step or series of steps have been inserted with a view to the avoidance of or a reduction in, or the mitigation of, or the deferral of a liability to Tax. 3. CLOSE COMPANIES 3.1 The Company has not made any distribution prior to Completion within the meaning of section 418 of the Taxes Act ("distribution" to include certain expenses of close companies). 3.2 The Company is not and has never been a close investment holding company within the meaning of section 13A of the Taxes Act. 28 3.3 The Company has not made any loans or advances within the meaning of section 419 (as extended by section 422) of the Taxes Act (loans to participators etc.) which are currently outstanding or in respect of which the Company has any potential liability. 3.4 No transfer of value (as defined in section 3 of the Inheritance Tax Act 1984) has ever been made by the Company so that the provisions of section 94 of the Inheritance Tax Act 1984 (charge on participators) could not apply. 4. DISTRIBUTIONS 4.1 The Company has not made any distributions within the meaning of sections 209 and 210 of the Taxes Act except for dividends shown in its audited accounts nor is the Company bound to make any such distributions. 4.2 The Company has not issued any security within the meaning of section 254 of the Taxes Act the interest or other consideration given in respect of which falls to be taxed under section 209 of the Taxes Act. 4.3 The Company has not redeemed, repaid or purchased any of its own shares or agreed to redeem, repay or repurchase any of its own shares or converted or agreed to convert its share capital or capitalised or agreed to capitalise in the form of redeemable shares or debentures any profits or reserves of any class or description. 4.4 The Company has not been a party to an exempt distribution within the meaning of sections 213 to 218 (inclusive) of the Taxes Act within the last six years (demergers - exempt distributions). 4.5 The Company has not issued any share capital to which the provisions of section 249 of the Taxes Act (stock dividends treated as income) could apply nor does it own any such share capital (shares carrying the right to bonus share capital). 5. EMPLOYMENT TAXES 5.1 At the date hereof the Company has duly paid and accounted for all sums payable to the Inland Revenue in respect of income assessable to income tax under Schedule E (including any sums payable in respect of benefits provided to the Company's employees or former employees) under section 203 of the Taxes Act and all regulations made thereunder. 5.2 At the date hereof the Company has duly paid and accounted for all National Insurance contributions required of it under the provisions of the Social Security Contributions and Benefits Act 1992 and regulations made thereunder. 6. FOREIGN MATTERS The Company is and has at all times been resident in the United Kingdom for Tax purposes. 7. INHERITANCE TAX 7.1 No circumstances exist whereby any power within section 212 of the Inheritance Tax Act 1984 (powers to raise tax) could be exercised in relation to any shares, securities or other assets of the Company. 29 7.2 There is no Inland Revenue charge outstanding for unpaid inheritance tax as provided by sections 237 and 238 of the Inheritance Tax Act 1984 (Inland Revenue charge for unpaid tax) over any asset of the Company or in relation to any shares in the capital of the Company. 8. LOSSES AND RELIEFS 8.1 There has been no change in the ownership of the Company or major change in the nature or conduct of a trade or business carried on by the Company and as at the date of this Agreement and so far as the Vendors are aware no event or series of events which might cause the disallowance of the carry-forward of losses or excess charges under the provisions of section 768 of the Taxes Act or the disallowance of the carry-forward, set-off or surrender of advance corporation tax under the provisions of section 245 of the Taxes Act (change of ownership of company; calculation and treatment of advance corporation tax). 8.2 In relation to all surrenders of group relief under the provisions of sections 402 to 413 (inclusive) of the Taxes Act (group relief) or under the provisions of section 240 of the Taxes Act (surrender of advance corporation tax) to which the Company has been a party, all surrenders have been validly made, no actions are required and no payments are outstanding. 9. MATTERS SINCE THE ACCOUNTING DATE Since the Accounting Date:- 9.1 no Event (as defined in the Tax Deed) has occurred which has given or may give rise to a Tax liability on the Company other than transactions entered into in the ordinary course of business; and 9.2 save in relation to entertainment and car leasing expenditure, the Company has not made any payment either alone or in aggregate with any other payments of a similar nature which exceed L5,000 which will not be deductible for the purposes of corporation tax in computing the taxable profits of the Company. 10. VALUE ADDED TAX 10.1 The Company is a taxable person for the purposes of VAT and has duly registered with its local Customs and Excise Office. 10.2 The Company has at all times issued correct tax invoices to all persons properly requiring the same in respect of its taxable supplies either by way of goods or of services and has likewise requested and received all appropriate tax invoices from its suppliers and others and has kept all necessary records and documents required to complete and verify its VAT returns. 10.3 The Company has in all other material respects complied with the VAT legislation and all regulations, notices, orders, provisions, directions and conditions relating to VAT. 10.4 In relation to VAT, the Company is not in arrears with any payments or returns under such legislation or liable to any abnormal or non-routine payment or any forfeiture, 30 penalty, interest or surcharge or to the operation of any penal, interest or surcharge provisions contained therein. 31 SCHEDULE 4 PART C PROPERTY WARRANTIES 1. APPLICATION In this Part C of SCHEDULE 4 these warranties apply to each and every one of the Premises as set out in SCHEDULE 3. 2. THE PREMISES 2.1 The particulars of the Premises (and of any leases, underleases, tenancies, licences and other agreements subject to and/or with the benefit of which the same are held) as set out in Part A and Part B of SCHEDULE 3 are true, complete and accurate. 2.2 The Company does not own, use or occupy any premises other than the Premises and has no liability (existing or contingent) in respect of any land or building previously owned, occupied or otherwise used by the Company or in which it had an interest. 3. TITLE 3.1 The Company is solely entitled at law and in equity to the Premises and has a good title to the Premises. 3.2 The Company is in physical possession and actual occupation of the whole of the Premises on an exclusive basis and no right of occupation or enjoyment has been acquired or is in the course of being acquired by any third party or has been granted or agreed to be granted to any third party, save for the rights of occupation of third parties set out in Part B of SCHEDULE 3. 3.3 All of the title deeds and documents necessary to prove title to the Premises are in the Company's possession and control, have been properly stamped and, where necessary, have been duly registered. On Completion the documents of title to be handed over to the Purchaser will consist of the original documents or, where appropriate, properly examined abstracts. 3.4 No right, easement, quasi easement, profit, licence or informal arrangement, public or private, is enjoyed or is in the course of being acquired by or against the Premises and none has been proposed or is necessary for the full use and continued beneficial occupation of the Premises. 4. LEASEHOLD PREMISES 4.1 Each of the leasehold Premises is held under the lease ("Lease") details of which are correctly set out in Part A of SCHEDULE 3. 4.2 The Lease is a headlease. 4.3 All monies due to the lessor under the Lease (whether or not reserved as rent) have been paid as and when they became due and none have been commuted, waived or paid in advance of the due date for payment. 32 4.4 No monies, collateral assurances, undertakings, waivers or concessions have been made paid or given by any party to the Lease. 4.5 The documents of title to the Premises include all necessary consents for the grant of the Lease, satisfactory evidence of the reversioner's title and of the current rent payable, all reversioner's consents required under the Lease and all assignments. 4.6 The Company has strictly observed and performed all covenants, restrictions, stipulations and other obligations contained in the Lease and any deeds or documents supplemental thereto and there has been no waiver (expressly or impliedly) of or acquiescence to any breach thereof. 5. UNDERLETTINGS There are no leases, tenancies, licences and agreements to which the Premises are subject. 6. PLANNING AND USER OF PREMISES 6.1 The current use of the Premises is the permitted use for the purposes of the Town & Country Planning Acts 1971 to 1990 (the "Planning Acts"). 6.2 All necessary consents have been obtained (copies of which have been Disclosed) for the purposes of the Planning Acts and building regulations for the current use of the Premises and any and all alterations and improvements to it. 7. ENCUMBRANCES 7.1 The Premises are free from any mortgage, debenture (whether legal or equitable and whether fixed or floating), charge, lien or other right in the nature of security or any option, right of pre-emption or right of first refusal, nor is there any agreement or commitment to give or create any of the foregoing. 7.2 There are no covenants, restrictions, stipulations or other encumbrances (whether of a private or public nature) affecting the Premises which are of an onerous or unusual nature or affect their value or which conflict with the current use of the Premises. 7.3 All covenants, restrictions, stipulations and other encumbrances affecting the Premises (including all covenants under any Lease, underlease, licence or other agreement or any consent or approval obtained thereunder) have been strictly observed and performed. 8. COMPLAINTS AND DISPUTES 8.1 No notices, complaints or requirements have been issued or made (whether formally or informally) by any competent authority or undertaking exercising statutory or delegated powers in respect of the Premises or the user thereof or any machinery, plant or equipment therein and the Vendors do not expect and are not aware of any matter which could lead to any such notice or complaint or requirement being issued or made. 8.2 No notices, orders or resolutions have been issued, made or passed by any local, county or other competent authority for the compulsory acquisition, closing, 33 demolition or clearance of the Premises or any part thereof and the Vendors do not expect and are not aware of any matter or circumstances which could lead to any such notice, order or resolution. 8.3 There exists no dispute between the Company and the owner or occupier of any other premises adjacent to or neighbouring the Premises or with any lessor, lessee, licensee or other occupier of the Premises and the Vendors do not expect and are not aware of any circumstances which may give rise to any such dispute hereafter. 9. VAT STATUS Where an election under paragraph 2 of Schedule 6A to the VAT Act 1983 (election to waive exemption) has been made in respect of the Premises such fact is correctly indicated in Part A and Part B of SCHEDULE 3. 34 SCHEDULE 4 PART D INTELLECTUAL PROPERTY WARRANTIES 1. DEFINITIONS In this Part D of SCHEDULE 4 and in SCHEDULE 5:- "Intellectual Property" means patents, registered and unregistered trade marks, registered and unregistered service marks, registered designs, utility models (in each case for the full period thereof and all extensions and renewals thereof), applications for any of the foregoing and the right to apply for any of the foregoing in any part of the world, inventions, confidential information, know-how, business names, trade names, brand names, copyright and rights in the nature of copyright and design rights and get-up and any similar rights situated in any country; and the benefit (subject to the burden) of any and all agreements, arrangements and licences in connection with any of the foregoing; "Intellectual Property Rights" means all Intellectual Property owned, used or enjoyed by the Company in connection with the business carried on by the Company at Completion and references to Intellectual Property Rights shall be construed as including references to each individual right and all of them; 2. WARRANTIES 2.1 Details of all of the Intellectual Property Rights have been Disclosed. 2.2 All of the Intellectual Property Rights are in full force and effect. 2.3 The Company is the sole beneficial owner of all the Intellectual Property which is required for the lawful carrying on of the Company's business as conducted at Completion. 2.4 To the extent to the Intellectual Property Rights are capable of registration, they have been registered in the name of the Company as sole proprietor. 2.5 Complete and accurate details of all licences and/or authorities from any third party under which any Intellectual Property is used by the Company have been Disclosed. 2.6 The Company is not a party to any confidentiality agreement or any agreement which restricts the free use or disclosure by the Company of any information, documentation or other materials used in the Company's business. 35 2.7 Details of all corporate, business and trading names owned or used by the Company have been Disclosed. 36 SCHEDULE 4 PART E ENVIRONMENTAL AND HEALTH AND SAFETY WARRANTIES PART 1 - ENVIRONMENTAL WARRANTIES 1. DEFINITIONS "Environment" means all or any of the air, water and land including air within buildings and other natural or man-made structures above or below ground; "Environmental Reports" means all surveys, audits, investigations and reports relating to the Premises and the extent to which the Premises and the Company comply with Environmental Law, the likelihood of Harm arising out of the condition of the Premises, noise, the Environment, or the impact on the Environment of any current, prior or proposed use of the Premises; "Environmental Authorisations" means any permits, licences, consents or other authorisations required under any Environmental Law for the carrying on the Company's operations or the occupation or use of the Premises by the Company; "Environmental Law" means all applicable statutes, statutory instruments, common law, treaties, regulations, directives, codes of practice, circulars, guidance notes and the like and other measures imposed by any relevant body to which the Company or the Premises is or has been subject which relate to the pollution or protection of the Environment or the protection of the health of humans, animals or plants; "Harm" means harm to the health of living organisms or other interference with the ecological systems of which they form part and, in the case of man, includes offence caused to any of his senses or harm to his property and "harmful" has a corresponding meaning. 2. WARRANTIES 2.1 The Company complies and has complied at all times in all material respects with all conditions, limitations, obligations, prohibitions and requirements contained in or imposed by any Environmental Law and there are no facts or circumstances which may give rise to any liability under Environmental Law. 37 2.2 All Environmental Authorisations have been obtained and maintained in full force and effect and there are no facts or circumstances which have led or so far as the Vendors are aware which may give rise to any breach, revocation, modification, amendment, variation or suspension of them or any of them or which have resulted or may result in any Environmental Authorisation not being extended, renewed, granted or (where necessary) transferred. 2.3 So far as the Vendors are aware, no work or expenditure is required under any Environmental Law or Environmental Authorisation or in order to carry on lawfully the business of the Company. 2.4 No claims, investigations or other proceedings have been brought or so far as the Vendors are aware threatened by or against the Company or any of its directors, officers or employees nor has the Company received any complaints from any third party in respect of Harm to the Environment or to human health caused by or as a result of occupation of the Premises or occupation by the Company of any property formerly owned or occupied by the Company whether under Environmental Law or otherwise and so far as the Vendors are aware there are no facts or circumstances which may lead to any such claims, investigations or proceedings or complaints. 2.5 Copies of all Environmental Authorisations and Environmental Reports together with all assessments required to be carried out pursuant to the Control of Substances Hazardous to Health Regulations 1994 have been supplied to the Purchaser. 2.6 All information provided by and on behalf of the Company to any statutory authority and all records and data required to be maintained by the Company under the provisions of any Environmental Legislation regarding the operation of the business of the Company including any processes carried on at or emissions and discharges from the Premises is complete and accurate. 38 PART 2 - HEALTH AND SAFETY WARRANTIES 1. DEFINITIONS "Health and Safety Legislation" means all applicable statutes, statutory instruments, common law, treaties, regulations, directives, codes of practice, guidance notes including (but without limitation) the Fire Precautions Act 1971, the Health and Safety at Work etc. Act 1974, the Management of Health and Safety at Work Regulations 1992 and the Workplace (Health Safety & Welfare) Regulations 1992 concerning the health and safety of those who work for the Company, whether as employees or otherwise, visit the Premises or are in any way affected by the undertaking of the Company or by persons working for the Company; "Health and Safety Studies" means all reports, audits, investigations or assessments required to be carried out by the Company to comply with Health and Safety Legislation. 2. WARRANTIES 2.1 The Company has complied and continues to comply in all material respects with all conditions, limitations, obligations, prohibitions and requirements contained in any Health and Safety Legislation and so far as the Vendors are aware there are no facts or circumstances which may lead to any breach of any Health and Safety Legislation. 2.2 The Company has carried out all Health and Safety Studies and they have been considered by the Vendors in giving these warranties. 2.3 There have been no claims, investigations or proceedings against or threatened against the Company or any of its directors, officers or employees in respect of accidents, injuries, illness, disease or any other harm to the health and safety of employees, contractors or any other persons caused by breaches of Health and Safety Legislation or otherwise and so far as the Vendors are aware there are no facts or circumstances which may lead to any such claims, investigations or proceedings. 2.4 The Company has and has maintained employers' liability and public liability insurance cover having regard to the activities carried out by the Company as recommended by its insurers. No claims in respect of health and safety have been made or so far as the Vendors are aware are contemplated under such insurance policies. 39 SCHEDULE 5 COMPLETION REQUIREMENTS 1. OBLIGATIONS OF THE VENDORS 1.1 At Completion the Vendors shall deliver to the Purchaser:- 1.1.1 the Tax Deed duly executed as a deed by the parties thereto (other than the Purchaser); 1.1.2 duly executed transfers of the Shares in favour of the Purchaser or its nominees and the share certificates in respect of the Shares, together with any power of attorney or other authority under which such transfers have been executed and an indemnity in the agreed form in relation to any missing certificates. 1.1.3 subject to paragraph 2.1.4 below, a release executed as a deed by each of the Vendors in the agreed form releasing the Company from all claims (actual or contingent) which he has or may have or might thereafter have on account of or in relation to any act, matter, cause or thing down to and inclusive of the Completion Date; 1.1.4 the statutory and other books duly written up to date, the Certificate of Incorporation, Certificate(s) of Incorporation on Change of Name and common seal of the Company; 1.1.5 the title deeds relating to the Premises and all insurance policies, premium receipts, maintenance contracts and other documents relating to the Premises; 1.1.6 all books of account and other books and records and copies of the memorandum and articles of association of the Company; 1.1.7 all documents of title, certificates, deeds, licenses, agreements and other documents relating to the Company's Intellectual Property Rights and all manuals, drawings, plans, documents and other materials and media on which the Company's know-how is recorded; 1.1.8 the Employment Agreements duly executed by each of the Individual Vendors; 1.1.9 the certificate and undertaking as to Regulation "S" in the form contained in SCHEDULE 7 duly executed by each of the Vendors; and 1.1.10 the Earnout Agreement in the form contained in SCHEDULE 9 duly executed by each of the Individual Vendors and the Vendors under the Jade Agreement. 1.2 At Completion the Vendors shall procure that:- 1.2.1 a board meeting of the Company be held at which:- (a) it shall be resolved that the said transfers in respect of the Shares be passed for registration subject only to their being re-presented duly stamped; (b) all existing bank mandates shall be revoked and new instructions to banks shall be given in such form as the Purchaser may require; (c) Richard Stack and Horace Hertz shall be appointed directors and Bertram Badminton shall be appointed chairman of the Company; and (d) the Employment Agreements shall be approved and executed on behalf of the Company; 40 1.2.2 all amounts owing to the Company by any of the Vendors or any of the Directors or any Connected Person in relation to the Vendors, the Directors or any of them shall be repaid in full; and 1.2.3 all the papers, books, records (in whatever medium) and all other assets of the Company which are within the possession or under the control of the Vendors, the Directors or any of them, or any Connected Person of the Vendors the Directors of any of them are delivered to the Company. 2. OBLIGATIONS OF THE PURCHASER 2.1 On Completion the Purchaser shall:- 2.1.1 deliver to the Vendors a counterpart of the Tax Deed duly executed by the Purchaser; 2.1.2 deliver to the Vendors a counterpart of the Earnout Agreement duly executed by the Purchaser; 2.1.3 satisfy the consideration for the Shares as provided in Clause 3 of this Agreement by the payment of the sum of US$1,492,812.50 by electronic funds transfer to the Vendors' Solicitors and by the delivery of stock certificates in the names of the Vendors in respect of the relevant 11,875 Purchaser's Shares and Consideration Shares; and 2.1.4 procure that the Company repays the loans outstanding to the Company from the Vendors as specified in the Disclosure Letter. 41 SCHEDULE 6 TAX DEED DATE: [ ] 1998 PARTIES: (1) THE PERSONS whose names and addresses are set out in the Schedule hereto ("Covenantors"); and (2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). RECITAL Pursuant to an agreement of today's date ("Agreement") the Purchaser has today completed the purchase of the whole of the issued share capital of RGB Trinet Limited in reliance (inter alia) upon the undertaking of the Covenantors to enter into this Deed and the undertakings and covenants by the Covenantors hereinafter contained. NOW THIS DEED WITNESSES as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Deed (including the Schedule):- "Accounts Relief" means any Relief arising prior to Completion which has been taken into account in computing, or in obviating the need for, any provision for deferred tax in the Accounts but which is not available to the Company; "Assessment" means any claim, assessment, notice, demand, letter, counterclaim or other document issued or made, or action taken, by or on behalf of any Tax Authority (or any other person, including the Company) by virtue of which the Company has, or is alleged to have, a Liability to Tax, or from which it appears that the Company has, or will or may have, a Liability to Tax, or from which it is sought to impose upon the Company a Liability to Tax; "Claim" means any claim by the Purchaser against the Covenantors pursuant to Clause 2; "Deemed Tax Liability" has the meaning ascribed to that expression in Clause 1.4; 42 "Event" means any transaction (including entry into the Agreement or the purchase or sale of an asset), act (including Completion, the migration of a company or the inclusion of a company within a group of companies for any purpose), omission, receipt, distribution and failure to make sufficient distributions to avoid an apportionment or deemed distribution of income and any combination of two or more such occurrences; "Liability to Tax" means (i) a liability to pay Tax and (ii) such sums treated as being a liability to tax by Clause 1.3; "Post Completion Relief" means any Relief which arises by reference to an Event occurring after Completion; "Relief" means any relief, loss, allowance, exemption, set-off, deduction or credit in respect of any Tax, or any set-off or deduction in computing income, profits or gains for the purpose of any Tax; "Tax" means all taxes, and all duties, levies, imposts, charges and withholdings of any nature whatsoever, whether created or imposed in the United Kingdom or elsewhere and at whatever time created or imposed which are collected and administered by any Tax Authority, in all cases together with all incidental or supplemental penalties, charges, interest, fines and default surcharges and costs; "Tax Authority" means any taxing or other authority (whether within or outside the United Kingdom) competent to impose, administer or collect any Tax. 1.2 In this Deed:- 1.2.1 references to the loss of a Relief or of a right to repayment of Tax include references to the loss, withdrawal, nullifying or cancellation of a Relief or of a right to repayment of Tax; 1.2.2 references to the utilisation of a Relief or of a right to repayment of Tax include references to the utilisation or setting off of a Relief or of a right to repayment of Tax; and 1.2.3 references to the loss or utilisation of a Relief shall be construed accordingly. 1.3 Subject to Clause 1.4 there shall be treated as an amount equal to a "Liability to Tax" which arises as a result of an Event occurring on or before Completion:- 1.3.1 any amount of any Accounts Relief which is not available to the Company; 1.3.2 the value of all or any part of a right to repayment of Tax which has been treated as an asset of the Company in the Accounts or which has been taken 43 into account in computing, or in obviating the need for, any provision for deferred tax in the Accounts which is not available to the Company; 1.3.3 the value of all or any part of a right to repayment of Tax arising after Completion which is used to set against any liability to make an actual payment of Tax in circumstances where the Purchaser would (but for such utilisation or set off) have been entitled to make a Claim by virtue of such liability to make an actual payment of Tax; 1.3.4 the amount of any Accounts Relief or Post Completion Relief which is used to relieve income, profits or gains in circumstances where (but for such utilisation) the Purchaser would have been entitled to make a Claim by virtue of such income, profits or gains; and 1.3.5 any amount the Company is obliged to pay by way of reimbursement, recharge, indemnity or damages in relation to Tax:- (a) in respect of or arising from any Event effected or demand made effected on or before Completion; or (b) by reference to any profits earned, accrued or received on or before Completion. 1.4 In any case falling within Clause 1.3 the amount that is to be treated for the purposes of this Deed as a Liability to Tax of the Company ("Deemed Tax Liability") shall be determined as follows:- 1.4.1 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the relevant Relief consisted of a deduction from or offset against Tax, the Deemed Tax Liability shall be the amount of that deduction or offset; 1.4.2 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the relevant Relief consisted of a deduction from or offset against income, profits or gains, the Deemed Tax Liability shall be:- (a) if the Relief is not available, the amount of Tax which would, on the basis of the rates of tax current at Completion, have been saved had such Relief been available (assuming sufficient income, profits or gains to be able fully to utilise the Relief and all other Reliefs available to the Company); or (b) if the Relief was the subject of such a utilisation, the amount of tax which has been saved in consequence of the utilisation; 1.4.3 in a case falling within Clause 1.3.2 or Clause 1.3.3 the Deemed Tax Liability shall be the amount of such repayment of Tax or part thereof; 1.4.4 in a case falling within Clause 1.3.5 the Deemed Tax Liability shall be the amount which the Company is required to pay. 1.5 In this Deed references to an Event occurring on or before any date or on or before other Events shall be deemed to include any combination of two or more Events the first of which has taken place or took place on or before that date or on or before that other Event. 1.6 Words and expressions (if any) which are defined in the Agreement and which are not expressly defined in this Deed, and rules of interpretation which are provided for in the Agreement and which are not otherwise expressly provided for in this Deed, shall have the same meaning in and shall apply to this Deed and shall be deemed to be incorporated in this Deed. 44 1.7 Words and expressions (if any) neither defined in this Deed nor in the Agreement but which are defined or used in any legislation relating to Tax which is relevant in the context shall have the same meaning in this Deed as they have in such legislation. 1.8 In this Deed:- 1.8.1 references to income, profits or gains accrued, or being earned or received, on or before a particular date or in respect of a particular period shall include any profits deemed for Tax purposes to have accrued, or to have been earned or received, on or before that date or in respect of that period; and 1.8.2 references to "income, profits or gains" shall include receipts, value and any other criterion used in establishing the incidence of any Tax or measure in establishing the amount of any Liability to Tax. 2. COVENANT 2.1 Subject as hereinafter provided the Covenantors hereby jointly and severally covenant with the Purchaser as follows:- 2.1.1 to pay to the Purchaser an amount equal to any Liability to Tax of the Company which arises as a consequence of or by reference to: (a) any Event occurring on or before Completion; or (b) any income, profits or gains which accrued, or which were earned or received, on or before Completion or in respect of a period ending on or before Completion, in each case whether or not such Liability to Tax is also chargeable against or attributable to any other person; and 2.1.2 to pay to the Purchaser from time to time amounts equal to any costs and expenses reasonably incurred by the Purchaser or the Company in connection with any Liability to Tax as is referred to in Clause 2.1.1 and in respect of which the Covenantors are liable to make payment under this Deed or in successfully (wholly or partly) taking or defending any action against the Covenantors pursuant to this Deed. 2.2 Each of the covenants contained in paragraphs (a) and (b) of Clause 2.1.1 shall be construed as giving rise to a separate and independent obligation and shall not be restricted by the other, save that (for the avoidance of doubt) any payment by the Covenantors in respect of a liability under one covenant shall pro tanto discharge any liability under the other so far as it arises from the same subject matter. 3. LIMITATIONS 3.1 The Covenantors shall not be liable under Clause 2 in relation to any Liability to Tax of the Company:- 3.1.1 if and to the extent that specific provision or reserve in respect of such Liability to Tax was made in the Accounts or discharged prior to Completion; 3.1.2 if and to the extent that provision or reserve made in the Accounts is insufficient only by reason of any increase in rates of Tax or change in the law introduced after the date of the Agreement with retrospective effect; 3.1.3 if that Liability to Tax arises as a result of an Event effected by the Company in the ordinary course of its business occurring between the Accounting Date and Completion; 3.1.4 if the Purchase or the Company have recovered an amount in respect of such Liability to Tax from a person or persons other than the Covenantors; 45 3.1.5 if any Relief (other than an Accounts Relief or Post-Completion Relief) is available to the Company (including by way of surrender from another company) to set against or otherwise mitigate the Liability to Tax; 3.1.6 if such Liability to Tax arises or is increased as a consequence of any reduced entitlement to the small companies' rate of corporation tax (section 13, Taxes Act) where such reduced entitlement results solely from the Company becoming associated with a company or companies at or following Completion; or 3.1.7 if such Liability to Tax would not have arisen but for the fact that the accounting treatment of any asset or liability in the future accounts of the Company is different from the treatment in the Accounts and such difference does not arise so as to procure that the said accounts comply with all relevant laws and generally accepted accounting principles. 3.2 For the avoidance of doubt the following shall not be regarded as Tax which arises in the ordinary course of business for the purposes of Clause 3.1.3:- 3.2.1 any Tax arising as a result of the application either of any anti-avoidance provisions contained in any Tax legislation or of any principles established in case law concerning anti-avoidance; 3.2.2 any Tax arising as a result of any dividend, distribution or deemed distribution; 3.2.3 any Tax arising in respect of the acquisition, disposal or supply or the deemed acquisition, disposal or supply of any assets, goods, services or business facility of any kind (including a loan of money or the letting, hiring or licensing of any tangible or intangible property) for a consideration deemed for Tax purposes to be different from that (if any) actually received, but only insofar as such Tax is attributable to the difference between the consideration actually received and the consideration deemed for Tax purposes to have been received; 3.2.4 any Tax arising as a result of a failure duly to deduct, charge, recover or account for Tax; or 3.2.5 any amount payable to HM Customs and Excise by the Subsidiary as a result of Part XV of the Value Added Tax Regulations 1995 or equivalent provisions in any other relevant jurisdiction. 4. CONDUCT OF CLAIMS 4.1 Upon the Purchaser becoming aware of any Assessment which does or may give rise to a Claim the Purchaser shall as soon as reasonably practicable give notice of such Assessment to the Covenantors PROVIDED THAT the giving of such notice shall not be a condition precedent to the liability of the Covenantors under this Deed. 4.2 If the Covenantors shall indemnify and secure the Company and the Purchaser to their reasonable satisfaction against any Tax, additional Tax, losses, fines, penalties, interest, charges, costs and expenses which arise as a consequence thereof, the Purchaser shall and shall procure that the Company shall take such action as the Covenantors may reasonably request to avoid, dispute, resist, appeal, compromise, or defend such Assessment ("the Covenantors' Action"). 4.3 Neither the Purchaser nor the Company shall be obliged to appeal against any Assessment if, having given the Covenantors notice of the receipt of that Assessment, 46 it has not within ten Business Days received instructions in writing from the Covenantors in accordance with the preceding provisions of this Clause to make that appeal. 4.4 Neither the Purchaser nor the Company shall be obliged to take any action or further action in respect of any Assessment if it appears to the Purchaser that either the Covenantors or the Company, prior to its being in the ownership of the Purchaser, have committed acts or omissions which may constitute fraud, misfeasance or negligence. 4.5 Neither the Purchaser nor the Company shall be required to take any action which either interferes with the normal course of its business or which in its opinion is likely to prejudice its business or its relationship with any Tax Authority or result in the Purchaser or any Company which forms part of the Purchaser's group incurring a Liability to Tax or an increased Liability to Tax. 4.6 Neither the Purchaser nor the Company shall be obliged to take any action pursuant to this Clause 4 which includes continuing the Covenantors' Action or contesting an Assessment beyond the first appellate body (excluding the Tax Authority demanding the Tax in question) in the jurisdiction concerned. 4.7 Neither the Purchaser nor the Company shall be obliged to take any action under this Clause 4 which involves continuing the Covenantors' Action or contesting any Assessment before any court or other appellate body (excluding the Tax Authority demanding the Tax in question) unless the Covenantors furnish the Purchaser with the written opinion of leading Tax counsel to the effect that an appeal against the Assessment in question will, on the balance of probabilities, be won. 4.8 The Purchaser and the Company shall be at liberty without reference to the Covenantors to admit, compromise, settle, discharge or otherwise deal with any Assessment after whichever is the earliest of:- 4.8.1 the Purchaser or the Company being notified by the Covenantors that they consider the Assessment should no longer be resisted; 4.8.2 the expiry of a period of seven Business Days following the service of a notice by the Purchaser or the Company on the Covenantors, requiring the Covenantors to clarify or explain the terms of any request made under Clause 4.2 during which period no such clarification or explanation has been received by the Purchaser or the Company; and 4.8.3 if appropriate, the expiration of any period prescribed by applicable legislation for the making of an appeal against either the Assessment or the decision of any court or tribunal in respect of any such Assessment, as the case may be. 4.9 The Covenantors shall be bound to accept for the purposes of this Deed any admission, compromise, settlement or discharge of any Assessment and the outcome of any proceedings relating thereto made or arrived at in accordance with the provisions of this Clause 4. 4.10 None of the Purchaser's or Company's obligations under this Clause 4 shall constitute a pre-condition to any payment due under Clause 2. 47 5. DUE DATE FOR PAYMENT 5.1 Where the Covenantors become liable to make any payment pursuant to Clause 2, the due date for the making of that payment shall be:- 5.1.1 in a case that involves an actual payment of Tax by the Company, the later of three Business Days after service of a notice on the Covenantors in relation thereto and the date that is three Business Days immediately before the last date on which the Company would have had to have paid to the relevant Tax Authority the Tax that has given rise to the Covenantors' liability under this Deed in order to avoid incurring a liability to interest or a charge or penalty in respect of that Liability to Tax; 5.1.2 in a case falling within Clause 1.3.1 the later of three Business Days following service by the Purchaser of a written demand therefor and the date on which the Accounts Relief would otherwise have been used but for such non-availability; 5.1.3 in a case falling within Clause 1.3.2 or Clause 1.3.3, the later of three Business Days after the Purchaser has served a written demand therefor and the date on which repayment of Tax would have actually been received or on which the liability to make an actual payment of Tax would have fallen due but for such setting-off (as appropriate); or 5.1.4 in a case falling within Clause 1.3.4, the later of three Business Days following the service by the Purchaser of a written demand therefor or the date on which an actual liability to make a payment of Tax by the Company would have fallen due but for such setting-off. 5.2 If any payment required to be made by the Covenantors under this Deed is not made by the due date then that payment shall carry interest from that due date until the date when the payment is actually made at the rate of 4 per cent above the base rate from time to time of National Westminster Bank PLC. 6. DEDUCTIONS FROM PAYMENTS 6.1 All sums payable by the Covenantors to the Purchaser under this Deed shall be paid free and clear of all deductions or withholdings whatsoever, save only as may be required by law. 6.2 If any deduction or withholding in respect of Tax or otherwise is required by law to be made from any of the sums payable as mentioned in Clause 5.1, the Covenantors shall be obliged to pay to the Purchaser such greater sum as will, after such deduction or withholding as is required to be made has been made, leave the Purchaser with the same amount as it would have been entitled to receive in the absence of any such requirement to make a deduction or withholding. 7. OVER PROVISIONS AND RELIEFS 7.1 If the auditors of the Company certify that any provision for Tax in the Accounts proves to be an over-provision, then the amount of such over-provision shall be dealt with in accordance with Clause 7.3. 7.2 If any Liability to Tax which has resulted in a payment having been made or becoming due from the Covenantors under this Deed will give rise to a Relief or right to repayment of Tax for the Company which would not otherwise have arisen, then as and when liability of the Company to make an actual payment of or in respect of Tax 48 is reduced by reason of that Relief or repayment of Tax is received the amount by which that liability is so reduced or the value of the repayment shall be dealt with in accordance with Clause 7.3. 7.3 Where it is provided under Clause 7.1 or 7.2 that any amount (the "Relevant Amount") is to be dealt with in accordance with this Clause 7.3:- 7.3.1 the Relevant Amount shall first be set off against any payment then due from the Covenantors under this Deed; and 7.3.2 to the extent that there is an excess, a refund shall forthwith be made to the Covenantors of any previous payment or payments made by the Covenantors under this Deed and not previously refunded under this clause up to the amount of such excess; and 7.3.3 to the extent that the excess referred to in Clause 7.3.2 is not exhausted under that paragraph, the remainder of that excess shall be carried forward and set off against any figure payment or payments which become due from the Covenantors under this Deed. 8. MITIGATION Where the Company is entitled to recover from any other person any sum in respect of any matter for which the Covenantors have or are liable to make payment under this Deed, the Purchaser shall, or shall procure that the Company shall (if requested by, and at the expense of the Covenantors and upon the Covenantors indemnifying the Purchaser to the reasonable satisfaction of the Purchaser, against all costs or expenses which may thereby be incurred) take such action as the Covenantors shall reasonably request to enforce such recovery against the person in question provided that the Purchaser and the Company shall not be obliged to take action which it is reasonable to consider prejudicial to the Purchaser's or the Company's Tax position or business PROVIDED THAT the taking of action hereunder shall not be a pre-condition to the obligation to make payment of any amount under Clause 2. The Purchaser shall forthwith account to the Covenantors for any sums so recovered (including any interest or repayment supplement (as defined in section 825 Taxes Act) paid by such a person) net of Tax (if any) on such sum up to an amount not exceeding the amount paid by the Covenantors under this Deed in relation thereto. 9. COVENANT BY THE PURCHASER 9.1 The Purchaser covenants with the Covenantors to pay forthwith to the Covenantors an amount equal to any Tax which is assessed on the Covenantors pursuant to section 767AA of the Taxes Act by reason of Tax assessed on the Company remaining unpaid, save that this clause shall not apply in respect of Tax for which the Covenantors are otherwise liable to the Purchaser under this Deed. 9.2 The covenant contained in Clause 9.1 will apply to (and hence give rise to a liability upon the Purchaser to pay to the Covenantors an amount equal to) any costs and expenses properly incurred by the Covenantors in connection with any Tax assessed on the Covenantors. 9.3 The Purchaser's covenant contained in Clause 9.1 shall not be a pre-condition to any obligation to make payment under Clause 2. 49 10. GOVERNING LAW This Deed shall be governed by and construed in all respects in accordance with the laws of England and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts for such purpose. 11. NOTICES The provisions as to service of notices contained in the Agreement shall apply for the purposes of this Deed. IN WITNESS whereof this Deed has been duly executed the day and year first before written. THE SCHEDULE Names and Addresses of the Covenantors (the Individual Vendors) 50 SCHEDULE 7 CERTIFICATE AS TO REGULATION S INVESTMENT INTENT LETTER This Investment Intent Letter (this "Agreement") dated as of _______________, 1998, is entered into by and among the persons whose names appear on the signature pages hereto as "Vendors" (collectively the "Vendors") and Javelin Systems, Inc., a Delaware corporation ("Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to them in the Purchase Agreement (as defined below). RECITALS A. Vendors own all of the issued and outstanding ordinary shares (the "Company Stock") of RGB Trinet Limited, a limited company organized under the laws of England and Wales (the "Company"). B. Pursuant to the terms and conditions of that certain Agreement for Sale and Purchase of Shares (the "Purchase Agreement") dated of even date herewith by and among Purchaser and Vendors, Purchaser is acquiring all the Company Stock. C. In connection with the Purchase Agreement, the Vendors will be issued shares of common stock, $.01 par value, of Purchaser (the "Purchaser's Shares") in partial exchange for their shares of Company Stock (and the Purchaser's Shares issued to the Vendors are herein referred to as the "Consideration Shares"). D. The Vendors desire to make certain representations and warranties to Purchaser to satisfy various United States federal and state securities laws. AGREEMENT NOW THEREFORE, in consideration of the respective covenants and promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. SHAREHOLDER REPRESENTATIONS AND WARRANTIES. As a condition to the receipt of the Consideration Shares, each of the Vendors represents and warrants to, and covenants with, Purchaser as follows: (a) Such Vendor is aware of Purchaser's business affairs and has acquired sufficient information about Purchaser to reach an informed and knowledgeable decision to acquire the Consideration Shares. Such Shareholder has been furnished by Purchaser with a copy of Purchaser's Form 10-KSB for its fiscal year ended June 30, 1998, Purchaser's Form 10-QSBs for its fiscal quarters ended September 30, 1997, December 31, 1997 and March 31, 1998, and such Vendor has read such reports and understands and has evaluated the risks of making an investment in the Purchaser's Shares. Such Vendor has been afforded access to 51 information concerning Purchaser and to its executive officers and has been afforded the opportunity to ask questions of, and receive answers from, Purchaser. (b) Such Vendor is generally familiar with the open system, touch-screen computer for point-of-sale applications industry since such Vendor has either been employed in such industry or has invested in business entities engaged in such industry. (c) Such Vendor is taking the Consideration Shares for investment for such Vendor's own account only and not with a view to, or for resale in connection with, any unregistered "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "ACT"). (d) Such Vendor understands that no United States federal or state agency has passed on, or made any recommendation or endorsement of, the Consideration Shares. (e) Such Vendor understands that the Consideration Shares are being offered and sold to it in reliance on specific exemptions from or non-application of the registration requirements of federal and state securities laws and that Purchaser is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of such Vendor set forth herein in order to determine the applicability of such exemptions and the suitability of such Vendor acquiring the Consideration Shares. (f) Vendor certifies that he, she or it is neither a citizen nor a resident of the United States and that his, her or its address set forth in the Purchase Agreement is correct. (g) No public offer or solicitation of the Consideration Shares was made to such Vendor and no offer of the Purchaser's Shares was made to such Vendor while such Vendor was present in the United States. (h) At the time any buy order for the Consideration Shares was originated, such Vendor was located outside the United States and is outside the United States on the date of the execution and delivery of this Agreement and will be outside the United States on the Completion Date. (i) Such Vendor is aware that the Consideration Shares have not been registered under the Act and may only be offered or sold pursuant to registration under the Act or an available exemption therefrom, and such Vendor has not, and will not, engage in any public offering or distribution of the Consideration Shares or engage in any hedging transaction with respect thereto, except in accordance with the registration or exemptive provisions of the Act. (j) Except to the extent the Consideration Shares have been registered under the Act, such Vendor (i) will not, during the period commencing on the Completion Date and ending one year after the Completion Date (the "Distribution Compliance Period"), offer or sell or agree to sell the Consideration Shares in the United States, to a U.S. Person or for the account or benefit of a U.S. Person other than in accordance with Regulation S and (ii) will, after the expiration of the Distribution Compliance Period, offer, sell, pledge or otherwise transfer the Consideration Shares only pursuant to registration under the Act or an available exemption therefrom and, in any case, in accordance with applicable United States federal and state securities laws. 52 (k) Such Vendor has been advised of, and is familiar with, has complied, and will comply, with the offering restrictions, and any other requirements, of Regulation S. (l) The transactions contemplated by this Agreement (i) have not been pre-arranged by such Vendor with a purchaser located in the United States which is a U.S. Person, and (ii) are not part of a plan or scheme by such Vendor to evade the registration provisions of the Act. (m) Neither such Vendor nor any of his, her or its affiliates has entered, has the intention of entering, or will during the Distribution Compliance Period enter into, with any U.S. Person, any put option, short position or other similar instrument or position with respect to the Purchaser's Shares or participate in any other attempt designed to lower the trading prices of Purchaser's Shares stock. (n) Such Vendor (individually or together with such Vendor's investor representative who is not affiliated with Purchaser) has such knowledge and experience in financial, tax and business matters that such Vendor is capable of evaluating the merits and risks of receiving the Consideration Shares and of making an informed investment decision with respect thereto. (o) Such Vendor has determined that the Consideration Shares are a suitable investment. (p) Such Vendor acknowledges receipt of Purchaser's Insider Trading Policy and agrees to abide by its terms, and further agrees to execute such Policy upon the request of Purchaser. (q) The certificates representing the Consideration Shares shall bear the following legend: "The securities represented hereby have been issued pursuant to Regulation S ("Regulation S") promulgated under the Securities Act of 1933, as amended (the "1933 Act"), and have not been registered under the 1933 Act. Unless so registered, such securities may not be transferred, offered, hedged or sold prior to the end of the one-year distribution compliance period prescribed by Regulation S unless such transfer, offer, hedge or sale is made in an "offshore transaction" and not to or for the account of or benefit of a "U.S. person" (as such terms are defined in Regulation S) and is otherwise in accordance with the requirements of Regulation S. Following expiration of any such one-year distribution compliance period, the securities represented hereby may not be offered, hedged, sold or otherwise transferred in the United States or to a U.S. person unless the securities are registered under the 1933 Act and applicable state securities laws, or such offers, sales and transfers are made pursuant to an available exemption from the registration requirements of those laws." (r) Such Vendor shall indemnify Purchaser against any loss, cost or damages (including reasonable attorneys' fees and expenses) directly incurred as a result of such Vendor's breach of any representation, warranty, covenant or agreement in this Agreement. 53 SECTION 2. MISCELLANEOUS. (a) AMENDMENTS, WAIVERS AND CONSENTS. No amendment or modification of this Agreement, nor any termination or waiver of any provision of this Agreement or consent to any departure by any party hereto therefrom, shall in any event be effective without the written concurrence of the parties hereto. (b) NOTICES. Notices and other communications under or in connection with this Agreement shall be in writing and shall be deemed given (i) if delivered personally, upon delivery, (ii) if delivered by courier, then upon receipt, or (iii) if given by telecopy, upon confirmation of transmission by telecopy (or, if such confirmation does not occur during normal business hours on a Business Day (as defined in the Purchase Agreement), then on the next Business Day), in each case to the parties at the address for notice set forth on Schedule 1 to the Purchase Agreement. (c) APPLICABLE LAW. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of California, United States of America and the United States federal securities laws without reference to any choice of law rules that would require the application of the laws of any other jurisdiction. (d) SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. (e) INTERPRETATION. Time is of the essence of each provision of this Agreement of which time is an element. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, heirs and assigns. (g) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. [SIGNATURES APPEAR ON FOLLOWING PAGES] 54 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VENDORS: --------------------------------- GARY GREEN --------------------------------- ROGER SCARLETT --------------------------------- LOUVRE TRUSTEES LIMITED JAVELIN SYSTEMS, INC. a Delaware corporation By: ----------------------------- An Authorized Representative 55 SCHEDULE 8 ADDITIONAL LIMITATIONS TO THE WARRANTIES AND TAX DEED 1. ACKNOWLEDGEMENT The Purchaser: 1.1 admits and acknowledges that it has not entered into this Agreement in reliance upon any warranties, representations, covenants, undertakings, indemnities or other statements whatsoever other than those expressly set out in this Agreement and the Tax Deed; and 1.2 subject and without prejudice to Clause 9 of this Agreement, agrees that rescission shall not be available as a remedy for any breach of this Agreement and agrees not to claim that remedy. 2. DISCLOSURE The Purchaser shall not be entitled to make a Claim if and to the extent that the facts or information upon which it is based have been Disclosed. 3. DURATION AND EXTENT 3.1 The aggregate liability of each Vendor in respect of all Claims under the Warranties and the Tax Deed shall not exceed the amount of the total consideration paid under this Agreement. 3.2 No amount shall be payable by the Vendors in respect of any Claim under the Warranties: 3.2.1 unless the amount of the liability in respect of each such Claim exceeds US$1,000; and 3.2.2 unless and until the aggregate cumulative liability of the Vendors in respect of all such Claims exceeds US$250,000 in which case the Vendors shall be liable for both the initial US$250,000 and the excess. 3.3 The Vendors shall not be liable for any Claim unless the Vendors are given notice in writing of that Claim stating in reasonable detail the nature of the Claim and, if practicable, the amount claimed on or before the first anniversary of Completion and unless legal proceedings shall have been served in respect of any such Claim within six months of the Vendors being notified of any such Claim. 3.4 Without prejudice to the parties' rights or obligations under the Jade Agreement, where any Claim relates to the Subsidiary: 3.4.1 save in respect of the warranty in paragraph 18.4 of Part A of SCHEDULE 4, for which the Vendors shall be 100% liable, the Vendors shall not be liable for more than 47.5% of such Claim; and 3.4.2 no Claim shall be made to the extent the matters giving rise to the Claim arise out of events or circumstances prior to 18 March 1998, save for breach of the warranty in paragraph 18.4 of Part A of SCHEDULE 4. 4. LIMITATIONS No Claim shall be admissible and the Vendors shall not be liable under any of the Warranties or under the Tax Deed: 56 4.1 to the extent that provision, reserve or allowance has been made in the Accounts or in the Management Accounts or was specifically referred to in the notes to the Accounts or the Management Accounts in respect thereof or to the extent that payment or discharge thereof has been taken into account therein or in accordance with generally accepted accounting principles has not been so taken account of, or referred to; or 4.2 to the extent that provision, reserve or allowance made in the Accounts or the Management Accounts for any Liability to Tax proves to be insufficient by reason only of any increase in the rates of taxation or variation in the method of applying, or calculating, the rate of taxation made after Completion whether or not with retrospective effect; or 4.3 to the extent that such liability arises or is increased as a result of any change or changes in legislation (primary or delegated) including without limitation any increase in rates of taxation or the introduction of any changes or new form of taxation or in the practice of the Inland Revenue or HM Customs and Excise or any other relevant authority (in the United Kingdom or elsewhere) occurring after Completion whether or not with retrospective effect; or 4.4 to the extent that the liability would not have arisen or would have been reduced but for the fact that the treatment of any assets or liabilities or of the taxation attributable to timing differences (including capital allowances and stock relief) in future accounts of the Company or any Subsidiary is different from the treatment in the Accounts or the Management Accounts; or 4.5 to the extent that the liability would not have arisen or would have been reduced or eliminated but for a failure or omission after Completion, on the part of the Company or the Subsidiary or the Purchaser or any of them to make any claim, election, surrender or disclaimer or to give any notice or consent or to do any other thing under any enactment or regulation relating to Tax, the making, giving or doing of which was taken into account in computing the provision for Tax in the Accounts or in the Management Accounts; or 4.6 to the extent that such liability would not have arisen but for any claim, disclaimer or election made (including, without limitation, a disclaimer of or a revision to a claim for capital allowances claimed before Completion or assumed to be claimed in preparing the Accounts) where such claim or disclaimer or election or revision is caused or made by the Purchaser or the Company or the Subsidiary after Completion; or 4.7 to the extent that such liability occurs or arises as a result of or is otherwise attributable wholly or partly to any voluntary act, transaction or omission of the Company or the Subsidiaries or the Purchaser or their respective directors, employees or agents on or after Completion otherwise than in the ordinary and proper course of business or pursuant to a legally binding commitment created on or before Completion by the Company or the Subsidiary. 57 5. SET-OFF 5.1 If the Vendors shall be liable in respect of any Claim, credit shall be given to the Vendors against such liability for the following amounts (each a "Relevant Amount") which shall be dealt with in accordance with paragraph 5.3: 5.1.1 the amount by which any Tax for which the Company or the Subsidiary is or may be liable is reduced or extinguished as a result of any such liability and/or Claim; 5.1.2 the amount by which any provision for Tax (including deferred taxation) or bad or doubtful debts contingent or other liabilities (including deferred liabilities) contained in the Accounts proves to be an over provision; or 5.1.3 the amount by which any repayment of Tax to the Company or to the Subsidiary by the Inland Revenue or any other Tax Authority contained in the Accounts proves to be an under-provision or no provision is made as a result of any overpayment of Tax made prior to Completion by any person. 5.2 If there shall be a dispute between any of the parties as to any Relevant Amount, the Vendors or the Purchaser shall be entitled to request that the Purchaser's Accountants are instructed to give a certificate as to the Relevant Amount and in so doing the Purchaser's Accountants shall act as experts and not as arbitrators and in the absence of manifest error and subject to paragraphs 5.4 and 5.5 their decision shall be final and binding on the parties hereto. 5.3 Where it is provided under paragraph 5.1 that any Relevant Amount is to be dealt with in accordance with this paragraph 5.3: 5.3.1 the Relevant Amount shall first be set off against any payment then due from the Vendors under the Warranties or the Tax Deed; and 5.3.2 to the extent there is an excess of the Relevant Amount after any amounts have been set off under paragraph 5.3.1 a refund shall be made to the Vendors of any previous payment or payments made by the Vendors under the Warranties or the Tax Deed and not previously refunded under this paragraph up to the amount of such excess; and 5.3.3 to the extent that the excess referred to in paragraph 5.3.2 is not exhausted under that paragraph, the remainder of that excess shall be carried forward and set off against any future payment or payments which become due from the Vendors under the Warranties or the Tax Deed. 5.4 In the event that the Purchaser's Accountants shall be unable or unwilling to provide any certification requested under this paragraph 5, any certification shall be effected by an independent firm of chartered accountants to be agreed between the Purchaser and the Vendors or failing agreement to be nominated by the President for the time being of the Institute of Chartered Accountants in England and Wales (the "Independent Accountants"). The proper and reasonable costs incurred by the Purchaser's Accountants or the Independent Accountants in respect of any certification required under this paragraph 5 shall be paid and borne as such accountants shall consider just and equitable. 6. THIRD PARTY CLAIMS 6.1 Where the Purchaser and/or the Company and/or the Subsidiary are entitled to recover from some other person (including any Tax Authority) any sum in respect of any matter giving rise to a Claim the Purchaser shall and shall procure that the Company 58 or the Subsidiary shall take all reasonable steps to enforce such recovery prior to taking any action against the Vendors (other than notifying the Vendors of the Claim) and in the event that the Purchaser or the Company or the Subsidiary shall recover any amount from such other person the amount of the Claim against the Vendors shall be reduced by the amount recovered (including any repayment supplement) less all costs, charges and expenses incurred by the Purchaser or the Company or the Subsidiary in recovering that sum from such other person. 6.2 If the Vendors pay to the Purchaser or to the Company or to the Subsidiary an amount pursuant to a Claim and the Purchaser or the Company or the Subsidiary within six months of such payment becomes entitled to recover from some other person any material sum in respect of such Claim the Purchaser shall and shall procure that the Company or the Subsidiary shall take all reasonable steps to enforce such recovery and upon such recovery shall forthwith repay to the Vendors so much of the amount paid by them to the Purchaser or the Company or the Subsidiary as does not exceed the sum recovered from such other person less all costs, charges and expenses incurred by the Purchaser or the Company or the Subsidiary in recovering that sum from such other person. 6.3 If any amount is repaid to the Vendors by the Purchaser or the Company or the Subsidiary pursuant to paragraph 6.2 above an amount equal to the amount so repaid shall be deemed never to have been paid by the Vendors for the purposes of paragraph 3.2 and accordingly shall not be treated as an amount in respect of which any liability has been incurred. 7. CONDUCT OF CLAIMS 7.1 The Vendors hereby appoint Mr. Gary Green as their representative for the purposes of this paragraph (the "Vendors' Representative") and any action taken or authorised by and any notice or document given to the Vendors' Representative shall be deemed to be taken or authorised by or given to each of the Vendors and shall be binding on each of them. 7.2 If the Purchaser becomes aware of a matter which might give rise to a Claim the Purchaser shall (or shall procure that the Company or the Subsidiary shall) as soon as reasonably practicable give written notice to the Vendors' Representative of the matter and shall consult with the Vendors' Representative with respect to such matter but such notice shall not be a condition precedent to the liability of the Vendors. 8. MISCELLANEOUS 8.1 Any payment to the Purchaser or the Company or the Subsidiary under the Warranties or under the Tax Deed shall be deemed to be a reduction of the total consideration payable hereunder for the Shares. 8.2 Payment of any Claim whether under the Warranties or under the Tax Deed shall pro tanto satisfy and discharge any other Claim which is capable of being made in respect of the same subject matter and the Purchaser shall at all times procure that there is no duplication of any Claim or Claims relating to the same subject matter. 59 SCHEDULE 9 EARNOUT AGREEMENT THIS AGREEMENT is made the _______ day of ___________________ 1998 BETWEEN: (1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE 1 ("Vendors"); and (2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). WHEREAS: (A) The Vendors and the Purchaser have on the date hereof entered into two agreements (the "Purchase Agreements") for the sale and purchase of, respectively, the entire issued share capital of RGB Trinet Limited (the "Company") and 47.5% of Jade Communications Limited, and of the remaining 52.5% of Jade Communications Limited (the "Subsidiary"). (B) Pursuant to the provisions of each of the Purchase Agreements, the Vendors and the Purchaser have agreed to enter into this Agreement for the purpose of agreeing the Vendors' entitlement to further shares of the common stock of the Purchaser as part of possible further consideration under the Purchase Agreements. IT IS AGREED AS FOLLOWS: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement and in the Schedules:- "Budget" the budget and business plan for the Company and the Subsidiary for the Earnout Period in the agreed form; "Change of Control" means, in relation to any company, where that company ceases to be under the control of the person or persons who control such company on the date of this Agreement and for the purpose of this definition "control" means a holding of securities in a company conferring a majority of the voting rights in it or the right to appoint or remove a majority of its board of directors or the right to participate in 50% or more of the assets of the company on its winding up; "Earnout Period" means the period of two years commencing on 1 October 1998; 60 "Pre-Tax Profits" means the pre-tax profits of the Company and the Subsidiary as calculated in accordance with SCHEDULE 2 for each three-month period during the period commencing on 1 October 1998 and ending on 30 September 2000 as shown in unaudited management accounts (comprising in each case a balance sheet and a profit and loss account) of the Company and the Subsidiary; "Quarterly Profit Estimate" means any of the estimates made in respect of anticipated Pre-Tax Profits for a particular financial quarter of the Company, particulars of which are continued in SCHEDULE 3. 1.2 The Schedules are deemed to be incorporated in this Agreement, and a reference to "this Agreement" includes a reference to the Schedules. 1.3 In this Agreement:- 1.3.1 the index and the clause headings are included for convenience only and shall not affect the construction of this Agreement; 1.3.2 words denoting the singular shall include the plural and vice versa; 1.3.3 words denoting any gender shall include a reference to each other gender; and 1.3.4 references to persons shall be deemed to include references to natural persons, firms, partnerships, companies, corporations, associations, organisations, foundations and trusts (in each case whether or not having separate legal personality). 1.4 Words and expressions (if any) which are defined in the Purchase Agreements and which are not expressly defined in this Agreement shall have the same meaning in and shall apply to this Agreement as if expressly defined herein. 2. CONSIDERATION 2.1 By way of additional consideration under the Purchase Agreements of up to US$8,225,000, the Purchaser will issue to the Vendors the Earnout Shares (if any) calculated in accordance with the following provisions of this Agreement. 2.2 The consideration referred to in Clause 2.1 shall be apportioned between the Vendors as set out in Column 2 of SCHEDULE 1. 3. EARNOUT PROVISIONS 3.1 The entitlement to Earnout Shares referred to in Clause 2.1 shall be calculated in accordance with the following provisions:- 3.1.1 if the Pre-Tax Profits shall equal 100% of the relevant Quarterly Profit Estimate, then the Purchaser shall in respect of that quarter issue to the Vendors the Earnout Shares that are equivalent in value to US$822,500 (the "Base Earnout Figure"); 3.1.2 if the Pre-Tax Profits shall be at or between 50% and 125% of the relevant Quarterly Profit Estimate, then the Purchaser shall issue to the Vendors a number of Earnout Shares equivalent in value to a percentage of the Base Earnout Figure, such percentage being the same percentage as the Pre-Tax 61 Profits are in relation to the relevant Quarterly Profit Estimate, subject in all cases to a minimum of 50% and maximum of 125% of the Base Earnout Figure. By way of illustration only, if the Pre-Tax Profits are 110% of the Quarterly Profit Estimate, then Earnout Shares equivalent in value to 110% of the Base Earnout Figure shall be issued; 3.1.3 if the Pre-Tax Profits shall be below 50% of the relevant Quarterly Profit Estimate, then (subject to Clause 3.1.4) no Earnout Shares shall be issued in respect of that quarter; 3.1.4 if the Pre-Tax Profits exceed 125% of the relevant Quarterly Profit Estimate, then after applying the provisions of Clause 3.1.2, the Pre-Tax Profit in excess (the "Excess Profit") may be carried forward or carried back to other financial quarters as follows: 3.1.4.1 the Excess Profit shall first be carried back and applied to each previous quarter(s) in which the Pre-Tax Profits were less than 125% of the relevant Quarterly Profit Estimate. The Excess Profit shall be applied in full to the earliest quarter first so as notionally to raise the Pre-Tax Profits in such quarter up to a maximum of 125%, and then any remaining Excess Profit shall be applied to subsequent quarters consecutively, in the same manner; 3.1.4.2 by applying the Excess Profit thereto, for each quarter in which the entitlement to Earnout Shares is created or increased by virtue of applying the provisions of Clause 3.1.2, Javelin shall issue further Earnout Shares to the Vendors in accordance with the provisions of Clause 3.1.2; 3.1.4.3 if, after applying the Excess Profit to all earlier quarters in accordance with Clauses 3.1.4.1, any of the Excess Profit remains to be applied, it may be carried forward to be applied in the same manner to each subsequent quarter (next quarter first) in which Pre-Tax Profits are below 125% of the relevant Quarterly Profit Estimate. 3.1.5 For the avoidance of doubt, the maximum number of Earnout Shares that can be issued in relation to any financial quarter of the Company pursuant to Clauses 3.1.1 to 3.1.4 is a number equivalent in value to 125% of the Base Earnout Figure (or US$1,028,125 in Purchaser's Shares by value for each quarter). 3.2 Pursuant to Clause 3.1, the number of Earnout Shares to be allotted and issued (if any) to the Vendors will be such number of Purchaser's Shares as have an aggregate value which is as near as possible to, but not less than, the Base Earnout Figure, as it may be adjusted in accordance with Clause 3.1. The Earnout Shares shall be issued in the proportions specified under Clause 2.2. 3.3 For the purpose of determining the aggregate value referred to in Clause 3.2: 3.3.1 the value of each Purchaser's Share shall be deemed to be an amount equal to the average of the closing prices of a Purchaser's Share, as reported on the NASDAQ SmallCap Market System, on the five (5) trading days immediately prior to the end of the financial quarter in question and on the first five (5) trading days after the end of such quarter; and 3.3.2 where there is any carry-back or carry-forward pursuant to Clause 3.1.4, the valuation under Clause 4.3.1 shall be made in respect of the relevant ten (10) 62 trading days in the most recent quarters instead of the quarter(s) to which the carry-back or carry-forward was made. 3.4 The verification and allotment of all Earnout Shares shall be completed no later than forty-five (45) days after the end of each financial quarter. A statement showing the Pre-Tax Profits and the number of Earnout Shares to be issued (if any) to the Vendors pursuant to Clause 3.3 shall be agreed by the Vendors and the Purchaser prior to the expiry of this 45-day period, PROVIDED THAT failing such agreement the relevant Pre-Tax Profits and the said number of Earnout Shares (if any) shall be ascertained and certified by an independent firm of chartered accountants appointed by agreement between the parties or in default of agreement on the application of either party by the President for the time being of the Institute of Chartered Accountants in England and Wales. The decision of such expert shall be final and binding on the parties. The expert shall be deemed to act as an expert and not as an arbitrator and the provisions of the Arbitration Act 1996 shall not apply. The cost of the reference to such expert shall be payable as determined by the expert. 3.5 No fraction of an Earnout Share shall be issued to the Vendors and the number of Earnout Shares shall be adjusted accordingly to the nearest whole number. 3.6 The Earnout Shares, on issue, shall rank pari passu in all respects with the existing issued Purchaser's Shares. 3.7 Each of the Vendors agrees that he shall deliver to the Purchaser upon issue of the Earnout Shares a certificate and undertaking substantially in the form of Schedule 7 to the Purchase Agreements making or giving such representations, warranties and covenants as are necessary or advisable for the qualification of the issuance of Purchaser's Shares to the Vendors under Regulation S promulgated under the United States Securities Act of 1933, as amended. 3.8 In the event of there being any Change of Control of the Purchaser prior to 30 October 2000, immediately prior to such Change of Control and in full and final satisfaction of the Purchaser's obligations pursuant to this Agreement, the Purchaser shall issue to the Vendors such Purchaser's Shares as are equal to US$822,500 in value (adopting the same valuation method as in Clause 3.4) multiplied by the number of financial quarters remaining in the Earnout Period including the period in which the Change of Control takes place. 3.9 During the Earnout Period until all sums (if any) due under this Agreement have been paid or satisfied the Purchaser shall and shall procure that the Company and the Subsidiary comply with the provisions of SCHEDULE 2. 4. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and enure for the benefit of each party's successors but shall not be assignable by either party. 5. VARIATION No variation of this Agreement shall be effective unless made in writing and signed by or on behalf of each of the parties. 63 6. COUNTERPARTS This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, and which together shall constitute one and the same agreement. 7. APPLICABLE LAW This Agreement shall be governed by and construed in accordance with English law and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts. AT WITNESS the hands of the parties hereto or their duly authorised representatives the day and year first before written. 64 SCHEDULE 1 PARTICULARS OF THE VENDORS AND OF THE EARNOUT SHARES TO BE RECEIVED BY EACH OF THEM
(1) NAME AND ADDRESS (2) EARNOUT SHARES EXPRESSED AS PERCENTAGE OF TOTAL NUMBER ISSUED 1. Gary GREEN 31.25 "Trudos" Heath Ride Finchampstead Wokingham Berkshire RG40 3QJ 2. Roger SCARLETT 31.25 "Glen d'Or" The Ridge Cold Ash Newbury Berkshire RG16 9HY 3. Anthony SAMPSON 3.75 31 Oakwood Lane Bowdon Cheshire WA14 3OL 4. Contech Consultants Limited 33.75 c/o 25 Turnbull's Lane Gibraltar ------ 100% ------
65 SCHEDULE 2 EARNOUT PROTECTIONS PART 1 CALCULATION OF PRE-TAX PROFITS ("ELIGIBLE PROFIT") 1. The Eligible Profit for any financial quarter is (to the nearest L1) the net pre-tax profit of the Company as shown in the Management Accounts for the relevant financial period prepared in accordance with generally accepted accounting principles, SSAPs and FRSs and adjusted as follows: 1.1 by adding back any payment or provision for Tax; 1.2 adding back any provision for or payment of any dividend or other distribution by the Company or the Subsidiary; 1.3 adding back any sum specified as or proposed to be transferred to reserves; 1.4 adding back any management (or similar) charges to the Purchaser paid or provided for work carried out for the benefit of the Company charged at the same rates as applied in respect of other members of the Purchaser's Group; 1.5 adding back a charge by way of interest on any sums lent by the Purchaser's Group to the Company or the Subsidiary in excess of that rate of 1.5 per cent above the base rate of National Westminster Bank plc; 1.6 adding a sum by way of interest on any sums lent by the Company or the Subsidiary to the Purchaser at the rate of 3 per cent above the base rate of National Westminster Bank plc; 1.7 adding in relation to any transactions entered into by the Company or the Subsidiary on less than arms-length terms (in terms of reward to the Company or the Subsidiary) a reasonable sum as profit which might reasonably have been expected to accrue to the Company or the Subsidiary had the transaction been on arms-length terms; 1.8 by adding back any amount written off in respect of goodwill or other intangible assets; 1.9 by adding back audit fees in excess of L12,000 per annum and any fees attributable to the tax affairs of the Purchaser; and 1.10 by adding back any sum deducted from gross profit in respect of the emoluments paid or payable to or for the benefit of any person appointed to the board of the Company by the Purchaser except as arms' length consideration for services rendered to the Company or the Subsidiary. 66 PART 2 ACCOUNTING POLICIES TO BE USED IN CALCULATING THE ELIGIBLE PROFIT TURNOVER Turnover represents the amount derived from the provision of goods and services to third party customers based on invoiced sales adjusted by an amount to reflect the stage of completion of major contracts, less any returns or allowances. DEPRECIATION Depreciation is provided to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their estimated usual economic lives as follows: Leasehold improvements - 3 years Computer and Test Equipment - 3 years Fixtures and fittings - 3 years Plant and Equipment - 3 years Motor Vehicles - 3 years STOCK AND WORK IN PROGRESS (a) Stocks and work in progress Stocks are stated at the lower of cost and net realisable value. In determining the cost of raw materials, consumables and goods purchased for resale, the FIFO method is used (cost is taken as production cost, which includes an appropriate proportion of attributable overheads). Work in progress is valued at the lower of cost and net realisable value and costs include material cost, direct labour cost and other direct costs. (b) Project work in progress Projects are valued as per the contract ledger as follows: Actual revenue recognised to date is compared with total budget revenue to calculate the "stage of completion rate". "Stage of completion rate" is applied to the total budget costs to calculate the cost of sales. Calculated cost of sales is then compared to actual costs incurred to date. Where actual costs incurred to date exceed calculated cost of sales a work in progress balance is recognised (subject to making provision for future losses on contracts). Where calculated cost of sales exceeds actual costs incurred to date, a cost of sales accrual is recognised. (c) Long term contracts The amount of profit attributable to the stage of completion of a long term contract is recognised when the outcome of the contract can be foreseen with reasonable certainty. Turnover for such contracts is stated at cost appropriate to their stage of completion plus 67 attributable profits, less amounts recognised in previous years. Provision is made for any losses as soon as they are foreseen. Contract work in progress is stated at costs incurred, less those transferred to the profit and loss account, after deducting foreseeable losses and payments on account not matched with turnover. Amounts recoverable on contracts are included in debtors and represents turnover recognised in excess of payments on account. RESEARCH AND DEVELOPMENT Research and development costs are charged to profits as incurred. TAXATION No charge for taxation will be made in the calculation of eligible profit. FINANCE LEASES Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. 68 PART 3 VENDOR PROTECTION The Purchaser acknowledges that (having regard to the manner in which the Consideration for the Shares has been calculated) the Vendors have a legitimate interest in ensuring that the Eligible Profit of the Company for the Earnout Period is as high as may fairly and reasonably be achieved by the Company and the Subsidiary (in this Part 3 jointly referred to as the "Company") in those years (having due regard to the Purchaser's legitimate interest in establishing a stable and secure business for the Company in the long term). Accordingly, but subject in all cases to Clause 15 of this Part 3 of this Schedule, the Purchaser undertakes with the Vendors that during the Earnout Period: 1. it will use its best endeavours to promote the business of the Company; 2. it will not do anything with the intention of adversely affecting the Eligible Profit; 3. it will not develop or seek to develop any business competitive with that of any material business of the Company carried on at Completion or at any time during the Earnout Period; 4. it will not transfer, divert or direct the custom of any or any potential customer or client of the Company elsewhere or seek to do so; 5. it will not seek to transfer or divert or direct elsewhere any orders or enquiries for products or services available from the Company; 6. it will use its best endeavours to maintain the operations of the Company in terms of fixed assets (including premises, plant and equipment) and financial facilities to a standard being not less suitable for the purposes of the business of the Company than that maintained by the Company prior to Completion; 7. it will provide the Company with access to the financial management and other facilities of the Purchaser's Group on a basis no less beneficial to the conduct of the Company's business than that provided to any other members of the Purchaser's Group. 8. it will not sell or procure the sale or otherwise dispose of the whole or any substantial part of the business, undertaking or assets (other than current assets disposed of in the normal course of business) of the Company; 9. to procure that the Company does not pass any resolution to go into voluntary liquidation (except if a relevant company is at that time insolvent and a registered insolvency practitioner advises liquidation by reason of insolvency); 10. to procure that the Company makes no material adverse alteration in the nature, scope or conduct of its business; 69 11. to procure that Eligible Profits are not adversely affected by any service, management or similar charge (save as provided for in Part 1 of this Schedule) or by any transaction or arrangement which is not a bona fide commercial transaction or arrangement on arms-length terms; 12. it will not materially alter the number of employees of the Company or make any increase in the emoluments of the employees of the Company (including without limitation any employers contribution to pensions or in benefits provided hours of work or holiday entitlement) which would have a material adverse effect on Eligible Profit; 13. not to procure or permit any capital expenditure in relation to the Company except; 13.1 in accordance with the Budget in agreed terms for the period covered by the Earnout Period; 13.2 as is required to comply with the provisions in the legal obligations (including the terms of any lease) of the Premises occupied by the Company; 13.3 as is required to replace plant and equipment as it comes to the end of its useful working life and in accordance with the policy adopted by the Company immediately prior to Completion. 13.4 to procure that any goods or services provided to or in respect of the Company whether by the Purchaser's Group or any third party are provided on terms no less beneficial to the recipient than any similar goods or services are provided to any other member of the Purchaser's Group; 13.5 to procure that the Company does not depart from the ordinary course of the conduct of its business as conducted in the financial year ending on the Accounting Date; 14. The Purchaser further undertakes with the Vendors that the Company will: 14.1 not enter into any material abnormal contract or commitment or any contract or commitment involving an aggregate expenditure by the Company (in accordance with its normal accounting policies at Completion) of more than L5,000 unless agreed by the Vendors; 14.2 not declare, make or pay any dividend or other distribution; 14.3 not create or agree to create any encumbrance or redeem or agree to redeem any encumbrance (other than trade guarantees or indemnities in the ordinary course of its business) of the type and scale given in the financial year ending on the Accounting Date; and 14.4 not permit any of its insurance policies to lapse, become void or voidable or do anything adversely to affect their renewal on the insurers standard (or, if different, the existing) terms. 15. The Purchaser shall be obliged to comply with its undertakings in Clauses 1 to 14 above only if and for so long as the Company's Pre-Tax Profits continue to meet the Quarterly Profit Estimates, such that if the Company's Pre-Tax Profits fail to meet two consecutive Quarterly Profit Estimates by 50% or more and the aggregate of any preceding Quarterly Profit Estimates is below 50% of estimate the Purchaser shall henceforth be released from all and any of its obligations under this Part 3 of this Schedule. 70 16. The Purchaser shall not give any direction to the trustee of the employee benefit trust established by the Company without the consent of the Vendors. 71 SCHEDULE 3 QUARTERLY PROFIT ESTIMATES
PERIOD PROFIT ESTIMATE L('000) ------ ----------------------- October - December 1998 112 January - March 1999 141 April - June 1999 205 July - September 1999 350 October - December 1999 313 January - March 2000 309 April - June 2000 213 July - September 2000 419
72 SIGNED BY GARY GREEN ) in the presence of: ) SIGNED BY ROGER SCARLETT ) in the presence of: ) SIGNED BY: _________________ ) duly authorised and on ) behalf of LOUVRE TRUSTEES ) LIMITED ) in the presence of: ) SIGNED BY: _________________ ) duly authorised and on ) behalf of JAVELIN SYSTEMS, INC. ) in the presence of: ) 73 EX-10.23 4 EXHIBIT 10.23 DATED 1998 ANTHONY SAMPSON and CONTECH CONSULTANTS LIMITED and BERTRAM BADMINTON and JAVELIN SYSTEMS, INC. -------------------------------------------- AGREEMENT for the sale and purchase of 105 ordinary shares of JADE COMMUNICATIONS LIMITED -------------------------------------------- Paul, Hastings, Janofsky & Walker LLP The International Financial Centre Old Broad Street London EC2N 1HQ Tel: 0171 562 4000 Fax: 0171 628 4444 I N D E X
Page 1. Definitions and Interpretation 1 2. Agreement to Sell and Purchase 4 3. Consideration 5 4. Conditions Precedent 6 5. Pre-emption Rights 7 6. Warranties 7 7. Limitations to the Warranties 8 8. Vendors' obligations prior to Completion 8 9. Purchaser's Remedies 8 10. Release of Guarantees 9 11. Completion 9 12. Restrictive Covenants 9 13. Post-Completion Effect 10 14. Successors and Assigns 10 15. Information and Confidentiality 10 16. Announcements and Publicity 11 17. Costs 11 18. Notices 11 19. Further Assurance 12 20. Waivers 12 21. Entire Agreement 13 21. Variation 13 22. Joint and Several Liability 13 23. Counterparts 13 24. Applicable Law 13
Schedules - --------- 1. Particulars of the Vendors 2. Particulars of the Company and Subsidiary 3. Particulars of the Premises 4. Part A - General Warranties Part B - Taxation Warranties Part C - Property Warranties Part D - Intellectual Property Warranties Part E - Environmental and Health and Safety Warranties 5. Completion Requirements 6. Tax Deed 7. Regulation S certificate and undertaking 8. Additional Limitations to the Warranties and Tax Deed 9. Earnout Agreement AGREEMENT FOR SALE AND PURCHASE OF SHARES DATE: 1998 PARTIES: (1) ANTHONY SAMPSON of 31 Oakwood Lane, Bowdon, Cheshire WA14 3OL ("Mr. Sampson"); (2) CONTECH CONSULTANTS LIMITED (registered in Gibraltar no. 58300) whose registered office is at 25 Turnbull's Lane, Gibraltar ("Contech"); (3) BERTRAM BADMINTON of 2 Totland Court, Victoria Road, Milford-on-Sea, Lymington, Hampshire SO41 0NR ("Mr. Badminton); and (4) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). OPERATIVE PROVISIONS: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement and (save as provided in Clause 1.6) in the Schedules:- "Accounts" means the respective unaudited management accounts of the Company comprising in each case a balance sheet and a profit and loss account for the period which commenced on the Acquisition Date and ended on 31 August 1998, a copy of each of which is annexed to the Disclosure Letter; "Acquisition Date" means 18 March 1998; "agreed form" means in relation to any document such document in the form agreed between the parties and initialled by the Purchaser and the Vendors for the purposes of identification; "Business Day" means any day which is not a Saturday, a Sunday or a bank or public holiday in England and Wales; "Change of Control" means, in relation to any company, where that company ceases to be under the control of the person or persons who control such company on the date of this Agreement and for the purpose of this definition "control" means a holding of securities in a company 1 conferring a majority of the voting rights in it or the right to appoint or remove a majority of its board of directors or the right to participate in 50% or more of the assets of the company on its winding up; "Claim" means any claim for breach of or non-compliance with this Agreement (including any Warranty Claim or Tax Claim); "Companies Act" means the Companies Act 1985; "Company" means JADE COMMUNICATIONS LIMITED, particulars relating to which are set out in SCHEDULE 2; "Completion" means the completion of the sale and purchase of the Shares in accordance with Clause 11 and SCHEDULE 5; "Completion Date" means the date fixed for Completion pursuant to Clause 11; "Connected Person" means a connected person as defined in section 839 of the Taxes Act; "Consideration Shares" means such number of Purchaser's Shares calculated in accordance with Clause 3.4 as are to be allotted and issued credited as fully paid in accordance with Clause 3.3; "Directors" means the persons listed as directors of the Company in SCHEDULE 2; "Disclosed" means fairly disclosed to the Purchaser expressly for the purposes of this Agreement in the Disclosure Letter; "Disclosure Letter" means a letter of even date from the Vendors to the Purchaser in the agreed form; "Earnout Agreement" means an agreement to be entered into at Completion between (inter alia) the Vendors and the Purchaser in respect of the entitlement and issue of the Earnout Shares in the form contained in SCHEDULE 9; "Earnout Shares" means such number of Purchaser's Shares (if any) calculated, allotted and issued credited as fully paid in accordance with the Earnout Agreement; "Employment Agreements" means the employment agreements in the agreed form to be entered into at Completion between the Company and Mr. Sampson and Mr. Badminton; 2 "Event" means an event as defined in the Tax Deed; "Intellectual Property Rights" means intellectual property rights as defined in Part D of SCHEDULE 4; "RGB Agreement" means the agreement of even date for the sale and purchase of the entire issued share capital of RGB Trinet entered into between (1) G. Green, (2) R. Scarlett, (3) Louvre Trustees Limited and (4) the Purchaser; "Premises" means the premises of the Company, short particulars of which are set out in SCHEDULE 3; "Purchaser's Group" means the Purchaser and its subsidiary undertakings or parent undertakings for the time being or a subsidiary undertaking for the time being of a parent undertaking of the Purchaser and includes, for the avoidance of doubt, the Company and the Subsidiary and references to a "member of the Purchaser's Group" shall be construed accordingly; "Purchaser's Shares" means shares of the common stock, $0.01 par value, of the Purchaser; "Relief" means a relief as defined in the Tax Deed; "RGB Trinet" means RGB TRINET LIMITED (registered in England no. 2511516) whose registered office is at Archway House, Bath Road, Padworth, Berkshire RG7 5HR; "Shares" means 105 ordinary shares of L1 each in the capital of the Company; "Supplemental Disclosure Letter" means the letter to be provided by the Vendors at Completion to the Purchaser in the agreed form disclosing matters (if any) which have arisen between the date hereof and the Completion Date and which are necessary to qualify the Warranties; "Tax" means tax as defined in the Tax Deed; "Tax Claim" means any claim under the Warranties in SCHEDULE 4, Part B or the Tax Deed; "Tax Deed" means a deed in the form set out in SCHEDULE 6; "Taxes Act" means the Income and Corporation Taxes Act 1988; 3 "Vendors" means together Mr. Sampson and Contech; "Vendors' Solicitors" means Dibb Lupton Alsop, 101 Barbirolli Square, Manchester M2 3DL; "Warranties" means the warranties, representations and undertakings set out in SCHEDULE 4; "Warranty Claim" means any claim for breach of or non-compliance with any of the Warranties in Parts A, C or D of SCHEDULE 4. 1.2 The Schedules are deemed to be incorporated in this Agreement, and a reference to "this Agreement" includes a reference to the Schedules. 1.3 In this Agreement:- 1.3.1 the index and the clause headings are included for convenience only and shall not affect the construction of this Agreement; 1.3.2 words denoting the singular shall include the plural and vice versa; 1.3.3 words denoting any gender shall include a reference to each other gender; and 1.3.4 references to persons shall be deemed to include references to natural persons, firms, partnerships, companies, corporations, associations, organisations, foundations and trusts (in each case whether or not having separate legal personality). 1.4 References in this Agreement to statutory provisions shall (where the context so admits and unless otherwise expressly provided) be construed as references to those provisions as respectively amended, consolidated, extended or re-enacted as at the date of this Agreement and to the corresponding provisions of any earlier legislation (whether repealed or not) directly or indirectly amended, consolidated, extended, replaced or re-enacted thereby and to any orders, regulations, instruments or other subordinate legislation made under the relevant statute. 1.5 Any statement qualified by the expression "to the best of the knowledge, information and belief of the Vendors" or "so far as the Vendors are aware" or any similar expression shall be deemed to include an additional statement that it has been made after due, diligent and careful enquiry by each of the Vendors of each other, the Directors, the Company's auditors and the directors of RGB Trinet. 1.6 If any of the words or expressions defined in Clause 1.1 are also defined in any of the Schedules then for the purposes of interpreting that relevant Schedule such words and expressions shall have the meaning ascribed to them in that Schedule. 2. AGREEMENT TO SELL AND PURCHASE 2.1 Each of the Vendors sells such of the Shares as are set out opposite his name in column 2 of SCHEDULE 1 to the Purchaser and the Purchaser purchases the Shares. 2.2 Each of the Vendors covenants with the Purchaser that:- 2.2.1 he has the right to sell and transfer the full legal and beneficial interest in the Shares to the Purchaser on the terms set out in this Agreement; 4 2.2.2 the Shares are sold free from all claims, charges, liens, encumbrances, equities and adverse rights of any description and together with all rights attached or accruing thereto as at and from the date of this Agreement; and 2.2.3 he shall (and shall procure that any necessary third party shall), at his own expense, do, execute and perform all such further acts, deeds, documents and things as the Purchaser may reasonably request from time to time as being necessary to vest any of the Shares in the Purchaser. 2.3 Nothing in this Agreement shall oblige the Purchaser to purchase some only of the Shares unless the Vendors shall at the same time complete the sale to the Purchaser of all of the Shares. 3. CONSIDERATION 3.1 Subject to Clause 3.8, the initial consideration payable by the Purchaser to the Vendors in respect of the sale of the Shares shall be 13,125 Purchaser's Shares and US$104,495 which: 3.1.1 in respect of US$104,495 shall be satisfied by the issue of the Consideration Shares in accordance with the remainder of this Clause 3; and 3.1.2 if and to the extent that the exchange rate of pounds sterling to US dollars has increased above the rate of L1 = $1.70 (i.e., an increase in value in pounds sterling) as at the Completion Date, the sum of US$104,495 shall be increased accordingly in line with such increase by applying the appropriate percentage. If such exchange rate has decreased below L1 = $1.70 (i.e., a decrease in value in pounds sterling), no variation shall be made to the consideration under this Agreement. 3.2 By way of additional consideration of up to US$3,084,375 the Purchaser will issue to the Vendors the Earnout Shares (if any) calculated in accordance with the provisions of the Earnout Agreement in the percentages set out in Column 4 of SCHEDULE 1. 3.3 The consideration referred to in Clause 3.1 shall be apportioned between the Vendors as set out in Column 3 of SCHEDULE 1 and shall be satisfied at Completion by the issue of the 13,125 Purchaser's Shares and the Consideration Shares to the Vendors. 3.4 The number of Consideration Shares to be allotted to the Vendors pursuant to Clause 3.3 shall be such number of Purchaser's Shares as have an aggregate value (determined in accordance with Clause 3.5) which is as near as possible to, but not less than, US$104,495. 3.5 For the purpose of determining the aggregate value referred to in Clause 3.4, the value of each Purchaser's Share shall be deemed to be an amount equal to the average of the closing prices of a Purchaser's Share, as reported on the NASDAQ SmallCap Market System in the ten (10) trading days immediately prior to the Business Day immediately prior to the Completion Date. 3.6 No fraction of a Consideration Share shall be issued to the Vendors and the number of Consideration Shares shall be adjusted accordingly to the nearest whole number. 5 3.7 The Consideration Shares, on issue, shall rank pari passu in all respects with the existing issued Purchaser's Shares. 3.8 By way of possible further consideration, if during November 1999 the price per Purchaser's Share as reported on the NASDAQ SmallCap Market shall remain below US$9.00 for five (5) consecutive trading days, then the number of Consideration Shares to which the Vendors are entitled shall be increased as follows:- 3.8.1 First, the number of Purchaser's Shares owned by the Vendors as of 1 November 1999 shall be subject to adjustment based on the following formula: S x (V1) - S = C ---- (V2) where S = Number of Purchaser's Shares held by the Vendors V1 = 9 V2 = US$9.00 or, if lower, the average closing price per Purchaser's Share during trading on the NASDAQ SmallCap Market in November 1999 C = the additional number of Consideration Shares to be issued to the Vendors; 3.8.2 Second, the Purchaser shall issue and allot to the Vendors such number of additional Consideration Shares as corresponds to the figure represented by "C" in the above formula in the same proportions as under Clause 3.3 no later than 31 December 1999 (and otherwise in accordance with the foregoing provisions of this Clause 3). 3.9 Each of the Vendors agrees that he shall deliver to the Purchaser at Completion and, if appropriate, upon the issue of Consideration Shares pursuant to Clause 3.8 a certificate and undertaking substantially in the form of SCHEDULE 7 making or giving such representations, warranties and covenants as are necessary or advisable for the qualification of the issuance of Purchaser's Shares to the Vendors under Regulation S promulgated under the United States Securities Act of 1933, as amended. 3.10 If the Purchaser at any time proposes to register any of its equity securities (as defined in the United States Securities Act of 1933 (the "Act")), other than securities which are convertible into shares of its common stock, under the Act on Forms S-1, S-2 or S-3 (but not Form S-4 or S-8) or on any other form upon which may be registered securities similar to the Consideration Shares, it will at each such time give written notice at least fifteen (15) days prior to the filing of the registration statement to the Vendors holding Consideration Shares (each a "Holder") of its intention so to do. Such notice shall specify the proposed date of the filing of the registration statement and advise each Holder of its right to participate therein. Upon the written request of any Holder given not less than seven (7) days prior to the proposed date of filing set forth in such notice, the Purchaser will use all reasonable efforts to cause the Consideration Shares which the Purchaser has been requested to register by such Holder to be registered under the Act, all to the extent requisite to permit the sale or other disposition by such of the Consideration Shares so registered. If such registration statement is being filed in connection with an underwritten offering, the 6 Consideration Shares held by the Holder may only be included in such registration if, in the written opinion of the underwriter or underwriters managing the offering, the total amount of all securities of the Purchaser to be so registered will not exceed the maximum amount of securities of the Purchaser which can then be successfully marketed (1) by the managing underwriter in its sole reasonable discretion, and (2) without otherwise materially and adversely affecting the entire offering. To the extent that the amount of securities to be registered must be reduced in order to obtain the opinion referred to in the preceding sentence, such reduction shall be achieved by first eliminating from the registration some or all of the securities to be offered by persons (including, but not limited to, any persons or entities that have any registration rights with respect to any securities) other than the Holder, PROVIDED, HOWEVER, that no such reduction shall reduce the securities being offered directly by the Purchaser through such underwriter or underwriters. The right of any Holder to have its Consideration Shares included in any registration statement being filed in connection with any underwritten offering shall be subject to such Holder participating in the underwriting to the extent required under the Act or any rule thereunder or to the extent reasonably required by the underwriters and agreeing to be bound by the terms imposed by the underwriters that such underwriters deem reasonably necessary to the success of the offering. 4. CONDITIONS PRECEDENT 4.1 This Agreement is conditional upon: 4.1.1 the Purchaser having secured sufficient funds to finance the cash portion of the consideration stated in Clause 3.1; and 4.1.2 the price per Purchaser's Share as reported on the NASDAQ SmallCap Market being not less than US$7.50 as at the close of business on the date preceding the Completion Date. 4.2 If any of the above-mentioned conditions is not satisfied or waived on or before 13 November 1998, this Agreement shall become null and void (save for Clauses 15 and 16 which shall continue to have effect) and no party shall have any claim against any other party arising from or in connection with this Agreement. 4.3 The Purchaser shall use all reasonable endeavours to ensure the satisfaction of the conditions set out in Clause 4.1 so far as lies within its powers so to do. 4.4 Any waiver of the conditions set out in Clause 4.1 shall require the consent of the Vendors and the Purchaser. 5. PRE-EMPTION RIGHTS The Vendors irrevocably waive and undertake to procure that any other person having such rights shall by Completion have irrevocably waived all and any rights of pre-emption or other restrictions on transfer over or in respect of the Shares existing by virtue of the articles of association of the Company or otherwise. 7 6. WARRANTIES 6.1 The Vendors and Mr. Badminton represent and warrant to the Purchaser for the benefit of the Purchaser, its successors and assigns in the terms set out in SCHEDULE 4 and acknowledge that the Purchaser is entering into this Agreement in reliance on the Warranties and that the Purchaser shall be entitled to treat them as conditions of this Agreement. 6.2 The Vendors agree with the Purchaser (for itself and as trustee for the Company) that in making and giving the Warranties and that in compiling and preparing the Disclosure Letter the Vendors and Mr. Badminton have not relied directly or indirectly on any information or opinions supplied to them (or any of them) by the Company or any of the officers, employees, servants or agents of the Company and the Vendors and Mr. Badminton waive all and any claims which they (or any of them) have or may have against all or any of the foregoing in respect of any information or opinions so supplied or omitted to be so supplied in connection with any of the Warranties or the Disclosure Letter. 6.3 Each of the Warranties shall be separate and independent and shall not be limited by reference to any other of the Warranties or any other provision of this Agreement and no claim in respect or arising out of the same shall be limited or otherwise affected by any knowledge (actual or constructive) which the Purchaser has or is deemed to have in relation to the Company save for matters set out in the Disclosure Letter or the Supplementary Disclosure Letter or the disclosure letter or the supplementary disclosure letter to the RGB Agreement. 6.4 Each of the Warranties shall be deemed to be given on the date of this Agreement and shall be deemed to be repeated and given by the Vendors and Mr. Badminton on each day up to and including the Completion Date. 6.5 The Purchaser represents and warrants to the Vendors and Mr. Badminton that: 6.5.1 the existing issued ordinary share capital of the Purchaser is the subject of listing on the NASDAQ exchange; 6.5.2 the Purchaser has sufficient authorised but unissued ordinary share capital to enable it to issue the Consideration Shares and no shareholder or other consents are required by the Purchaser prior to issue of such shares; 6.5.3 the Consideration Shares shall rank pari passu in all respects with the shares of the common stock of the Purchaser in issue at the date hereof; and 6.5.4 this Agreement and all other documents to be entered into by the Purchaser pursuant to this Agreement will when executed constitute legal, valid and binding obligations of the Purchaser in accordance with their respective terms. 7. LIMITATIONS TO THE WARRANTIES 7.1 The aggregate liability of the Vendors and Mr. Badminton in respect of all Claims under the Warranties and under the Tax Deed shall not exceed US$305,000. 7.2 The liability of the Vendors and Mr. Badminton in respect of the Warranties and under the Tax Deed shall be further limited by the provisions of SCHEDULE 8. 8 8. VENDORS' OBLIGATIONS PRIOR TO COMPLETION 8.1 The Vendors shall not (save as may be necessary to give effect to this Agreement) and shall procure that the Company shall not (save as aforesaid) do or allow or omit to be done before Completion anything which is or might be a breach of any of the Warranties or which would or might make any of the Warranties inaccurate or misleading or which is or might be a breach of or which does or might otherwise give rise to a claim under any other provision of this Agreement or any provision of the Tax Deed and in particular (but without prejudice to the generality of the foregoing) the Vendors shall procure that no breach of Warranties 3.1 to 3.11 (both inclusive) of Part A of SCHEDULE 4 shall take place at any time from the date hereof down to the Completion Date (both dates inclusive). 8.2 The Vendors shall immediately disclose to the Purchaser in writing any matter or thing which arises or becomes known to them or any of them before Completion which is or might be a breach of the Warranties or which would or might make any of the Warranties inaccurate or misleading or which is or might be a breach of or which does or might otherwise give rise to a claim under any other provision of this Agreement or any provision of the Tax Deed. 8.3 The Vendors shall procure that until Completion the Purchaser and its advisers shall be given promptly on request such facilities and information (including access to employees of the Company) regarding the business, assets, liabilities, contracts and affairs of the Company as they or any of them may reasonably require. 9. PURCHASER'S REMEDIES 9.1 If it becomes apparent prior to Completion that the Vendors are or will be in breach of any of the Warranties or any other term of this Agreement (including any obligation which is to be performed at Completion) or any provision of the Tax Deed, then the Purchaser, in addition to and without prejudice to all other rights and remedies available to the Purchaser in respect thereof, shall be entitled:- 9.1.1 to rescind this Agreement by notice in writing given to the Vendors at any time prior to Completion, whereupon the Vendors shall indemnify the Purchaser and keep the Purchaser indemnified in full for and against all losses, liabilities, damages, costs, claims, charges and expenses arising from such breach and the consequent rescission (including but not limited to all legal and other professional fees and expenses incurred by the Purchaser in connection with the negotiation and preparation of this Agreement); or 9.1.2 to complete this Agreement in accordance with Clause 11 and SCHEDULE 5, provided that the Purchaser shall not thereby be deemed to have waived or otherwise foregone or be estopped from exercising any right to compensation, damages or any other right or remedy available to the Purchaser by reason of such breach. 9 10. RELEASE OF GUARANTEES 10.1 The Purchaser shall use all reasonable endeavours (short of actual payment of any monies or the substitution of the guarantees of any person other than the Purchaser) to procure as soon as reasonably practicable after Completion the release of each of the Vendors from each of the guarantees which have been Disclosed and which have been given by them in respect of any obligations of the Company. Pending such release the Purchaser shall fully and effectually indemnify and keep indemnified each of the Vendors from and against any and all costs, claims, demands or liabilities incurred or arising from any such guarantees. 10.2 The Vendors shall on Completion procure the absolute and unconditional release of the Company from all guarantees, suretyships, indemnities and like undertakings given by the Company in respect of any obligations of any person and shall fully and effectually indemnify and keep indemnified the Purchaser (as trustee for the Company) from and against any and all costs, claims, demands or liabilities incurred or arising from any such guarantees, suretyships, indemnities and like undertakings. 11. COMPLETION Without prejudice to Clause 4 above, Completion will take place in accordance with SCHEDULE 5 at the offices of Paul, Hastings, Janofsky & Walker LLP, 19th Floor, The International Financial Centre, Old Broad Street, London EC2N 1HQ at 12:00 noon on such date as the Vendors and the Purchaser may agree, but in any event no later than 16 November 1998, when the business described in SCHEDULE 5 will be transacted. 12. RESTRICTIVE COVENANTS 12.1 Each of the Vendors and Mr. Badminton hereby undertakes to and covenants with the Purchaser (for itself and as trustee for all purchasers of the Shares and as trustee for the Company) that he will not either on his own account or jointly with or as manager, agent, officer, employee or otherwise on behalf of any other person, firm or corporation directly or indirectly (and so that each undertaking below shall be a further and separate obligation):- 12.1.1 for a period of three years from the date of this Agreement carry on or be engaged, concerned, or interested in or assist any business which competes with any business of the Company as carried on at the Completion Date; 12.1.2 for a period of three years from the date of this Agreement canvass or solicit business, orders or custom for goods or services supplied or provided by the Company from any person who at any time within the period of one year preceding the Completion Date has been a customer of or in the habit of dealing with the Company for such goods or services; 12.1.3 for a period of three years from the date of this Agreement solicit or entice away or endeavour to solicit or entice away from the Company or employ any person who on the Completion Date or within the six months prior to the Completion Date is or was a director, officer, employee or other servant of the Company; 12.1.4 for a period of three years from the date of this Agreement induce or attempt to induce any person (including without limitation any agent or independent 10 distributor) who in the six months prior to the Completion Date has been a supplier of any goods or services to the Company to cease to supply, or to restrict or vary the terms of supply, to the Company; or 12.1.5 at any time after the Completion Date use or procure the use in connection with any business of any corporate or business name which is identical to or likely to be confused with the corporate name or any business name of the Company or which might suggest a connection with the business of the Company. 13. POST-COMPLETION EFFECT This Agreement shall remain in full force and effect after and notwithstanding Completion in respect of all obligations, agreements, covenants, undertakings, conditions, representations, warranties or indemnities which have not been done, observed or performed at or prior to Completion. 14. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and enure for the benefit of each party's successors and shall be assignable by the Purchaser to the extent that the rights and benefits under this Agreement shall enure for the benefit of the Purchaser's assigns. Save as aforesaid this Agreement shall not be assignable. 15. INFORMATION AND CONFIDENTIALITY Each of the Vendors and Mr. Badminton hereby undertakes to the Purchaser:- 15.1 that he will at any time and from time to time after Completion give to the Purchaser on request all information in his possession concerning the business, dealings, transactions or affairs of the Company and in particular, but without prejudice to the generality of the foregoing, relating to claims made or threatened against the Company and the source from and consideration for which any assets of the Company were acquired or derived; and 15.2 that he will not, and will use all reasonable endeavours to ensure that no other person will, at any time after the date hereof, take away or (directly or indirectly) make use of, divulge or communicate to any person (except as may be necessary to comply with any statutory obligation or order of any court or statutory tribunal of competent jurisdiction) any confidential information or trade secrets of the Company or of any supplier, customer or other person who has or who has had dealings with the Company. 11 16. ANNOUNCEMENTS AND PUBLICITY Any announcement or circular or other publicity relating to this Agreement or any termination thereof shall prior to its publication be approved in writing by each of the parties as to its content, form and manner of publication (such approval not to be unreasonably withheld or delayed), save that any announcement, circular or other publicity required to be made or issued by the Purchaser pursuant to the regulations of rules governing the NASDAQ National Market System or other recognised investment exchange or by law may be made or issued by the Purchaser without such approval. 17. COSTS The parties shall pay their own costs and expenses in relation to the preparation, execution and carrying into effect of this Agreement. 18. NOTICES 18.1 Any notice required to be given under this Agreement shall be sufficiently given if delivered personally or if sent by first-class recorded delivery post (express air courier service if sent overseas) or if sent by facsimile transmission and a copy of such facsimile sent by post. 18.2 Any notice which is sent or despatched in accordance with this Clause 18 shall be deemed to have been received by the addressee:- 18.2.1 if delivered personally, at the time of delivery; 18.2.2 in the case of a notice sent by post (or express air courier), 4 Business Days after the envelope containing the notice was delivered to the postal authorities (or courier service); 18.2.3 in the case of a notice sent by facsimile transmission, if the notice was sent during the normal business hours of the addressee, on the day of transmission; otherwise on the next following Business Day. 18.3 In proving service by post or express air courier, it shall be necessary to prove only that the notice was sent or despatched and that the notice was contained in an envelope properly addressed, stamped and delivered to the postal authorities or courier service in the country from where despatched. In proving service by facsimile transmission, it shall be necessary to produce only a legible copy of the confirmation of the facsimile transmission. 18.4 Any notice required to be given under this Agreement shall be sent:- 18.4.1 to the Vendors c/o Anthony Sampson at: 31 Oakwood Lane Bowdon Cheshire WA14 3OL With a copy to: Dibb Lupton Alsop 101 Barbirolli Square Manchester M2 3DL 12 Facsimile No: +44 161 235 4118 For the attention of: Roger Gough 18.4.2 to the Purchaser at: Javelin Systems, Inc. 17891 Cartwright Road Irvine, CA 92614-6216 U.S.A. Facsimile No: +1 949 223 5138 For the attention of: Horace Hertz With a copy to: Paul, Hastings, Janofsky & Walker LLP The International Financial Centre 19th Floor Old Broad Street London EC2N 1HQ Facsimile No: +44 171 628 4444 For the attention of: Ian Burton or to such other address or facsimile number as is notified in writing from time to time by the Vendors (or any one of them) or the Purchaser (as the case may be) to the other. 19. FURTHER ASSURANCE The Vendors shall do, execute and perform and shall procure to be done, executed and performed all such further acts, deeds, documents and things as the Purchaser may require from time to time effectively to vest the beneficial ownership of the Shares in the Purchaser or as it directs free from all liens, charges, options, encumbrances or adverse rights of interests of any kind and otherwise to give to the Purchaser the full benefit of this Agreement. 20. WAIVERS A failure by any party to exercise and any delay, forbearance or indulgence by any party in exercising any right, power or remedy under this Agreement shall not operate as a waiver of that right, power or remedy or preclude its exercise at any subsequent time or on any subsequent occasion. The single or partial exercise of any right, power or remedy shall not preclude any other or further exercise of that right, power or remedy or the exercise of any other right, power or remedy. No custom or practice of the parties at variance with the terms of this Agreement shall constitute a waiver of the rights of any party under this Agreement. 21. ENTIRE AGREEMENT 21.1 This Agreement and any documents in the agreed form and the Disclosure Letter (the "Acquisition Documents") constitute the entire agreement between the parties with respect to the subject matter of this Agreement. 13 21.2 Except for any misrepresentation or breach of warranty which constitutes fraud: 21.2.1 the Acquisition Documents supersede and extinguish all previous agreements between the parties relating to the subject matter thereof; and 21.2.2 each party hereby irrevocably and unconditionally waives any right it may have to rescind this Agreement or any of the other Acquisition Documents by reason of any misrepresentation and/or warranty not set forth in any such document. 22. VARIATION No variation of this Agreement shall be effective unless made in writing and signed by or on behalf of each of the parties. 23. JOINT AND SEVERAL LIABILITY 23.1 All representations, warranties, undertakings, agreements, covenants, indemnities and obligations made or given or entered into by the Vendors and Mr. Badminton under or pursuant to this Agreement are made or given or entered into by the Vendors and Mr. Badminton jointly and severally. 23.2 In relation to any two or more persons who are jointly and severally liable under this Agreement, the liability under this Agreement of any one or more of such persons shall not be prejudiced or affected in any way by the giving of time or any forebearance or indulgence granted by the Purchaser to any other or others of such persons or by the release or compromise by the Purchaser of any liability under this Agreement of any other or others of such persons. 24. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, and which together shall constitute one and the same Agreement. Unless otherwise provided in this Agreement, this Agreement shall become effective and be dated (and each counterpart shall be dated) on the date on which this Agreement (or a counterpart of this Agreement) is signed by the last of the parties to execute this Agreement or, as the case may be, a counterpart thereof. 25. APPLICABLE LAW This Agreement shall be governed by and construed in accordance with English law and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts. A S W I T N E S S the hands of the parties hereto or their duly authorised representatives the day and year first before written. 14 SCHEDULE 1 Particulars of the Vendors and of the Shares to be sold and Consideration to be received by each of them
(1) (2) (3) (4) Share of 13,125 Purchaser's Shares and Consideration Number of Shares Shares (expressed as Percentage of Name and Address to be sold percentage of total) Earnout Shares - ---------------- ---------------- ---------------------------- -------------- 1. Anthony SAMPSON 10 9.52% 3.75% 31 Oakwood Lane Bowdon Cheshire WA14 3OL 2. Contech Consultants Limited 95 90.48% 33.75% c/o 25 Turnbull's Lane Gibraltar --------- ----------- ----------- TOTALS 105 100% 37.5% --------- ----------- -----------
15 SCHEDULE 2 PARTICULARS CONCERNING THE COMPANY
1. Registered Office: Archway House, Bath Road, Padworth, Berkshire RG7 5HR 2. Date of Incorporation: 4 August 1993 3. Registered Number: 2842141 4. Directors: Gary Green, Roger Scarlett 5. Secretary: Gary Green 6. Mortgages and Charges: None, but note Isis Factoring Agreement in place. 7. Share Capital: L1,000 divided into 1,000 ordinary shares of L1 each, of which 200 have been issued and are fully paid up. 8. Shareholder No. of shares held ----------- ------------------ RGB Trinet 95 Contech Consultants Limited 95 Anthony Sampson 10 --- 200
16 SCHEDULE 3 ---------- THE PREMISES ------------ I. PART A: PREMISES OWNED AND OCCUPIED BY THE COMPANY ------ ------------------------------------------
1. FREEHOLD (NONE) 2. LEASEHOLD/LEASE DETAILS The Company is holding over following the termination of its leases of Units 30, 35 and 36 at Stakehill Industrial Estate, Whitbrook Way, Middleton, Manchester. 3. OTHER (NONE) 4. DESCRIPTION of all leases, underleases, tenancies, licences and other agreements subject to and/or with the benefit of which the Premises are held: Date Document Parties ---- -------- ------- (NONE)
17 SCHEDULE 4 PART A GENERAL WARRANTIES 1. INFORMATION SUPPLIED AND CAPACITY OF VENDORS 1.1 All information contained in this Agreement and all matters contained in the Disclosure Letter are true and accurate in every respect and there is no fact or matter which has not been Disclosed which renders any such matters or information untrue, incomplete or misleading in any material respect. 1.2 The Vendors and Mr. Badminton have full power and authority to enter into and perform this Agreement and the Tax Deed, and this Agreement and the Tax Deed, when executed, will constitute valid and binding obligations on the Vendors and Mr. Badminton in accordance with the respective terms thereof. 2. ACCOUNTS AND RECORDS 2.1 The Company has at all times properly and accurately maintained all books, accounts and records of whatever kind required by law to be maintained. 2.2 The books, accounts and records of the Company accurately record all matters required by law to be entered therein and fairly present and reflect in accordance with generally accepted accounting principles and practice the assets and liabilities (actual, prospective and contingent) of the Company and all transactions to which it is or has been a party. 2.3 Prior to the Acquisition Date the Company had not carried on business or traded nor entered into any contracts or obligations since its date of incorporation, and was dormant within the meaning of section 250(3) of the Companies Act. 2.4 The Accounts have been properly prepared in accordance with good accounting practice and on a basis consistent with that previously adopted and so far as the Vendors are aware fairly reflect levels of turnover and expenses and provisions, assets and liabilities of the Company as at 31 August 1998. 3. BUSINESS SINCE 31 AUGUST 1998 Since 31 August 1998:- 3.1 the Company has carried on its business in the ordinary and usual course both as regards the nature, scope and manner of conducting the same and so as to maintain the same as a going concern; 3.2 the Company has not borrowed, raised or taken any money or any financial facility; 3.3 the Company has paid its creditors within the times agreed with such creditors and there are no debts outstanding by the Company which have been due for more than ninety (90) days; 18 3.4 the Company has not entered into any capital commitments or any transaction or agreement for the disposal of any asset or under which it has incurred or will incur (otherwise than in the ordinary and usual course of carrying on its business) any liabilities (including contingent liabilities) not provided for in the Accounts; 3.5 the Company has not entered into any unusual, long-term (that is to say, incapable of performance in accordance with its terms within six months after the date on which it was entered into or undertaken) arrangements, commitments or contracts; 3.6 the business of the Company has not been adversely affected by the loss of or material reduction in orders from any customer or the loss of or material reduction in any source of supply or by any abnormal factor not affecting similar businesses to a like extent and none of the Vendors is aware of any facts which are likely to give rise to any such adverse effects; 3.7 no distribution of capital or income (including for the avoidance of doubt, any dividend) has been declared, made or paid or agreed or resolved to be declared, made or paid by the Company; 3.8 no loans have been made by the Company and no loan capital or loan has been or has become liable to be repaid by the Company in whole or in part; 3.9 no sum has been paid or voted to any director or employee (or ex-director or ex-employee) of the Company by way of remuneration or otherwise in excess of the rates paid to him by the Company at 31 August 1998 and no new employment agreements have been made by the Company; 3.10 none of the fixed assets of the Company shown in the Accounts and none acquired by the Company since the Acquisition Date has been lost, damaged or destroyed; and 3.11 there has been no material adverse change in the financial position or trading prospects or turnover of the Company nor is any such material change expected. 4. TRADING AND CONTRACTUAL ARRANGEMENTS 4.1 None of the contracts or obligations entered into by the Company is ultra vires the Company or exceeds the powers of the Directors to bind the Company and so far as the Vendors are aware the Company is not in default under any such contracts or obligations. 4.2 The Company is not a party to any contract, transaction, obligation, commitment or liability which, whether by reason of its nature, term, scope, price or otherwise is or may be material in relation to its business, profits or assets or which:- 4.2.1 is in any way otherwise than in the ordinary course of the Company's business; 4.2.2 is of an unusual or abnormal nature, or not fully on an arm's length basis; 4.2.3 is of a long-term nature (that is to say incapable of performance in accordance with its terms within six months after the date on which it was entered into or undertaken); 4.2.4 is incapable of termination in accordance with its terms by the Company on 60 days' notice or less; 19 4.2.5 cannot readily be fulfilled or performed by the Company on time without undue or unusual expenditure of money or effort; or 4.2.6 involves the supply of goods and/or services the aggregate value of which will represent in excess of five per cent of the budgeted turnover for the current financial year of the Company. 4.3 No sums of whatever nature are owing by the Company to any of the Vendors or any of the Directors or any person being a Connected Person of the Vendors or the Directors or any of them respectively. 4.4 The Company has not been a party to any transaction to which any of the provisions of sections 320 (substantial property transactions involving directors, etc.), 322 (liability arising from contravention of section 320), or 330 (general restrictions on loans, etc. to directors and persons connected with them) of the Companies Act may apply. 4.5 None of the Vendors nor any person being a Connected Person in relation to any Vendor has any direct or indirect interest with any business which has a close trading relationship with that of the Company or which is or is likely to become competitive with the business of the Company. 4.6 There are no outstanding arrangements or understandings (whether legally binding or not) between the Company and any person who is a shareholder (or the beneficial owner of any interest in the Company or in any company in which the Company is interested), or any person who is a Connected Person of any such person, relating to the management of the Company's business, or the appointment or removal of the Directors, or the ownership or transfer of ownership, or the letting of any of the assets of the Company, or the provision, supply, purchase or finance of goods, services or other facilities to, by or from the Company or otherwise howsoever in relation to the Company's affairs. 4.7 The Company is not and has not agreed to become bound by any debenture or guarantee or contract for indemnity or suretyship or any like undertaking and there is not now outstanding any guarantee or contract for indemnity or suretyship or like undertaking given for the accommodation of or in respect of any obligation on the part of the Company. 4.8 No person is entitled to receive from the Company any finders' fee, brokerage or commission in connection with the sale of the Shares to the Purchaser. 20 5. ASSETS (OTHER THAN THE PREMISES) 5.1 The Company was at 31 August 1998 the owner with good and marketable title to all the assets (other than the Premises) included in the Accounts and now so owns and has in its possession and under its control all such assets (save for current assets subsequently disposed of in the ordinary course of its business) and all assets acquired by it after 31 August 1998 and all such assets are the sole and absolute property of the Company free from any charge, lien, encumbrance or equity and no other person has or claims any rights in relation to such assets or any of them and in particular all such assets are free from any hire-purchase, leasing or rental agreement for payments on deferred terms or bill of sale. 5.2 In relation to any asset held by the Company which is the subject of any hire-purchase, conditional sale, chattel leasing or retention of title agreement or otherwise belonging to a third party, so far as the Vendors are aware, no event has occurred which entitles or which upon intervention or notice by any third party may entitle any such third party to repossess the asset concerned, or terminate the agreement, or any licence in respect of the same. 5.3 The stock in trade of the Company is in good condition and us capable of being sold by the Company in the ordinary course of business within a period of three months from the Completion Date in accordance with the Company's current price lists and without rebate or allowance to a purchaser. 5.4 The fixed and loose plant, machinery, furniture, fixtures, fittings, equipment, vehicles and other moveable assets used in connection with the business of the Company are not surplus to requirements and are in good repair and condition and satisfactory working order. 5.5 The Company is not and has never been the holder or beneficial owner of nor has it agreed to acquire any share or loan capital of any other body corporate (whether incorporated in the United Kingdom or elsewhere). 5.6 The Company is not entitled to the benefit of any debt otherwise than as the original creditor and is not and has not agreed to become a party to any factoring or discounting arrangement. 5.7 None of the debts due as at 31 August 1998 remains unpaid at the date of this Agreement nor has any debt which has subsequently become due to the Company (or any part of any such debt) remained unpaid for more than three months after the due date for payment or been released or written off or proved to be irrevocable, nor is any such debt now regarded as irrevocable. 6. EMPLOYEES AND AGENTS 6.1 The names of all employees of the Company together with copies of all service contracts and contracts for services and full particulars of the current terms of employment of all officers, employees, consultants and agents of the Company have been Disclosed. 6.2 There is not now outstanding any contract of service or for services between the Company and any of its officers, employees, consultants or agents which is not 21 determinable by the Company at any time on three months' notice or less without compensation (other than under the Employment Rights Act 1996) or any liability (other than for accrued salary, wages, commission or pension) on the part of the Company to or for the benefit of any person who is or has been an officer, employee, consultant or agent of the Company. 6.3 No present officer, employee, consultant or agent of the Company has given or received notice terminating his employment or appointment and no such officer, employee, consultant or agent is entitled nor (so far as any of the Vendors is aware) intends or is likely as a result of this Agreement or Completion or otherwise to terminate his employment or appointment with the Company. 6.4 Particulars have been Disclosed of all loans and other benefits enjoyed by any officer, employee, consultant or agent of the Company in relation to the affairs of the Company and of all contracts, transactions and arrangements made or entered into by the Company and to which any of sections 330 to 338 of the Companies Act applies. 6.5 The Company is not under any legal or moral liability or obligation to pay bonuses, pensions, gratuities, superannuation, allowances or the like to any of its past or present officers or employees or their dependants nor is it a party to any arrangement or promise to make or in the habit of making ex gratia or voluntary payments by way of bonus, pension, gratuity, superannuation, allowance or the like to any such persons and there are no schemes or arrangements for payment of retirement pension or death benefit or similar schemes or arrangements in operation or contemplated in relation to the Company. 6.6 Save to the extent (if any) to which provision or allowance has been made in the Accounts, no liability has been incurred by the Company to make any redundancy payments or any protective awards or to pay damages or compensation for wrongful or unfair dismissal or for failure to comply with any order for the reinstatement or re-engagement of any employee and no gratuitous payment has been made or promised by the Company in connection with the actual or proposed termination or suspension of employment or variation of any contract of employment of any present or former director or employee. 6.7 The Company has not recognised any trade union or association of trade unions or any other organisation of employees in respect of its employees or any of them. 6.8 The Company has not in existence nor is proposing to introduce any share incentive scheme, share option scheme or profit sharing scheme or any other scheme analogous to any of the foregoing schemes for all or any of its directors, officers or employees. 7. INSURANCE 7.1 The Company is covered by valid insurances against all risks normally insured against by persons carrying on the same or similar businesses as those carried on by the Company and in particular all assets are and have at all material times been insured to the replacement or reinstatement value advised by its insurers against fire and such other risks as aforesaid and the Company is, and has at all material times been, covered against accident, damage, injury, third party loss (including product liability), loss of profits and other risks normally insured against by persons carrying on the 22 same or similar businesses as those carried on by the Company as advised by its insurers. 7.2 Particulars of all the Company's insurances have been Disclosed and there are no outstanding claims or, so far as the Vendors are aware, circumstances likely to give rise to a claim thereunder and, so far as the Vendors are aware, nothing has been done or omitted to be done which has made or could make any policy of insurance void or voidable or whereby the premiums are likely to be increased. 7.3 None of the said policies is subject to any special or unusual terms or restrictions or to the payment of any premium in excess of the normal rate. 8. GRANTS Particulars have been Disclosed of all investment and other grants and allowances and of all loans or financial aid of any kind applied for or received or receivable by the Company from any governmental department, board, body or agency or any other supranational or national or local authority, body or agency. 9. BANKING FACILITIES Details of all overdrafts, loans or other financial facilities outstanding or available to the Company and of all its bank and deposit accounts and true and correct copies of all documents relating thereto have been Disclosed and, so far as the Vendors are aware, none of the Vendors or the Company has done or omitted to do anything whereby the continuance of any such facilities in full force and effect might be adversely affected or prejudiced. 10. DEFECTIVE AND UNSAFE PRODUCTS/SERVICES 10.1 There are no outstanding claims against the Company in respect of defects in quality or delays in delivery or completion of contracts or deficiencies of design or performance of equipment or otherwise relating to liability for goods or services supplied or to be supplied by the Company and no such claims are threatened or anticipated. 10.2 The Company has no knowledge that any goods or products for which the Company has responsibility under section 2 of the Consumer Protection Act 1987 ("CPA") or for which the Company assumes responsibility under any contract of indemnity or otherwise is defective within the meaning of section 3 of the CPA or that the Company supplies or possesses for supply any goods or products which are in breach of the general safety requirement provided by section 10 of the CPA. 11. LITIGATION Neither the Company nor, so far as the Vendors are aware, any person for whose acts or omissions it may be vicariously liable is engaged in or subject to any civil, criminal or arbitration proceedings and, as far as any of the Vendors are aware, there are no such proceedings pending or threatened by or against the Company or against any such person and, so far as the Vendors are aware, there are no facts or circumstances likely to give rise to any such proceedings. 23 12. INSOLVENCY 12.1 No order has been made, or petition presented, or resolution passed for the winding-up of the Company and there is not outstanding:- 12.1.1 any petition or order for the winding-up of the Company; 12.1.2 any appointment of a receiver over the whole or any part of the undertaking or assets of the Company; 12.1.3 any petition or order for the administration of the Company; 12.1.4 any voluntary arrangement between the Company and any of its creditors; 12.1.5 any distress or execution or other process levied in respect of the Company, which remains undischarged; or 12.1.6 any unfulfilled or unsatisfied judgment or court order against the Company. 12.2 The Company is not deemed unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986. 13. COMPLIANCE All necessary licences, consents, permits and authorities (public and private) have been obtained by the Company to enable the Company to carry on its business effectively in the places and in the manner in which such business is now carried on and all such licences, consents, permits and authorities are valid and subsisting and none of the Vendors knows of any reason why any of them should be suspended, cancelled or revoked or should not be renewed upon the expiry of their existing term. 14. CHARGES 14.1 No charge in favour of the Company is void or voidable for want of registration. 14.2 No event has occurred causing, or which upon intervention or notice by any third party may cause, any floating created by the Company to crystallise or any charge created by it to become enforceable nor has any such crystallisation occurred or is such enforcement in process. 15. DIRECTORS AND OFFICERS The Directors are the only directors of the Company and no person is a shadow director (within the meaning of section 741 of the Companies Act) of the Company. 16. CAPITAL OF THE COMPANY 16.1 The authorised and issued share capital of the Company is as set out in part 1 of SCHEDULE 2. 16.2 The Vendors are the legal and beneficial owners and registered holders of the Shares which have been issued in proper legal form and are fully paid or credited as fully paid, and each of the Vendors is entitled to sell such of the Shares as are set out opposite his name in Column 2 of SCHEDULE 1 free from all claims, charges, liens, encumbrances, equities and adverse rights of any description and together with all rights attached or accruing thereto as at and from the Completion Date. 16.3 There is not now outstanding any loan capital of the Company nor any agreement, arrangement or option under which any person may now or at any time hereafter call for the creation, allotment, issue, sale or transfer of any loan or share capital of the Company or require any loan or share capital of the Company to be put under option. 24 17. EFFECT OF AGREEMENT So far as the Vendors are aware, there are no contracts or arrangements (whether written or oral) to which the Company is a party which will by their terms be determinable as a result of the provisions of this Agreement or which will or may be terminated by completion of this Agreement. 25 SCHEDULE 4 PART B WARRANTIES RELATING TO TAX 1. ADMINISTRATION AND RETURNS 1.1 The Company has no liability for Tax (whether actual, deferred or contingent) in respect of any financial period down to and including the Acquisition Date or referable to profits (including income and gains) made or deemed to have been made on or before the Acquisition Date which has not been provided for or disclosed in the Accounts. 1.2 At the date hereof the Company has duly paid all Tax which it has become liable to pay. 1.3 The Company is under no liability to pay any interest, penalty, fine or default surcharge in connection with any Tax nor, so far as the Vendors are aware, is any such liability likely to arise. 1.4 The Company has properly and duly made all returns and supplied all notices, accounts and information for the purposes of Tax required to have been made or supplied to any Tax Authority. 1.5 None of the aforementioned returns, notices, accounts and information has been or, so far as the Vendors are aware, is likely to be disputed by any Tax Authority. 1.6 The Company's affairs have not been and, so far as the Vendors are aware, are not likely to be the subject of any dispute, investigation or discovery by or with any Tax Authority. 1.7 All claims, disclaimers, elections, appeals or applications which the Company has made in respect of Tax have been Disclosed. 2. EMPLOYMENT TAXES 2.1 At the date hereof the Company has duly paid and accounted for all sums payable to the Inland Revenue in respect of income assessable to income tax under Schedule E (including any sums payable in respect of benefits provided to the Company's employees or former employees) under section 203 of the Taxes Act and all regulations made thereunder. 2.2 At the date hereof the Company has duly paid and accounted for all National Insurance contributions required of it under the provisions of the Social Security Contributions and Benefits Act 1992 and regulations made thereunder. 3. FOREIGN MATTERS The Company is and has at all times been resident in the United Kingdom for Tax purposes. 26 4. MATTERS SINCE THE ACQUISITION DATE Since the Acquisition Date:- 4.1 no Event (as defined in the Tax Deed) has occurred which has given or may give rise to a Tax liability on the Company other than transactions entered into in the ordinary course of business; and 4.2 save in relation to entertainment and car leasing expenditure, the Company has not made any payment either alone or in aggregate with any other payments of a similar nature which exceed L5,000 which will not be deductible for the purposes of corporation tax in computing the taxable profits of the Company. 5. VALUE ADDED TAX 5.1 The Company is a taxable person for the purposes of VAT and has duly registered with its local Customs and Excise Office. 5.2 The Company has at all times issued correct tax invoices to all persons properly requiring the same in respect of its taxable supplies either by way of goods or of services and has likewise requested and received all appropriate tax invoices from its suppliers and others and has kept all necessary records and documents required to complete and verify its VAT returns. 5.3 The Company has in all other material respects complied with the VAT legislation and all regulations, notices, orders, provisions, directions and conditions relating to VAT. 5.4 In relation to VAT, the Company is not in arrears with any payments or returns under such legislation or liable to any abnormal or non-routine payment or any forfeiture, penalty, interest or surcharge or to the operation of any penal, interest or surcharge provisions contained therein. 27 SCHEDULE 4 PART C PROPERTY WARRANTIES 1. APPLICATION In this Part C of SCHEDULE 4 these warranties apply to each and every one of the Premises as set out in SCHEDULE 3. 2. THE PREMISES 2.1 The particulars of the Premises (and of any leases, underleases, tenancies, licences and other agreements subject to and/or with the benefit of which the same are held) as set out in Part A of SCHEDULE 3 are true, complete and accurate. 2.2 The Company does not own, use or occupy any premises other than the Premises and has no liability (existing or contingent) in respect of any land or building previously owned, occupied or otherwise used by the Company or in which it had an interest. 3. TITLE 3.1 The Company is solely entitled at law and in equity to the Premises and has a good title to the Premises. 3.2 The Company is in physical possession and actual occupation of the whole of the Premises on an exclusive basis and no right of occupation or enjoyment has been acquired or is in the course of being acquired by any third party or has been granted or agreed to be granted to any third party. 3.3 All of the title deeds and documents necessary to prove title to the Premises are in the Company's possession and control, have been properly stamped and, where necessary, have been duly registered. On Completion the documents of title to be handed over to the Purchaser will consist of the original documents or, where appropriate, properly examined abstracts. 3.4 No right, easement, quasi easement, profit, licence or informal arrangement, public or private, is enjoyed or is in the course of being acquired by or against the Premises and none has been proposed or is necessary for the full use and continued beneficial occupation of the Premises. 4. LEASEHOLD PREMISES 4.1 Each of the leasehold Premises is held under the lease ("Lease") details of which are correctly set out in Part A of SCHEDULE 3. 4.2 Each Lease is a headlease. 4.3 All monies due to the lessor under the Lease (whether or not reserved as rent) have been paid as and when they became due and none have been commuted, waived or paid in advance of the due date for payment. 28 4.4 No monies, collateral assurances, undertakings, waivers or concessions have been made paid or given by any party to the Lease. 4.5 The documents of title to the Premises include all necessary consents for the grant of the Lease, satisfactory evidence of the reversioner's title and of the current rent payable, all reversioner's consents required under the Lease and all assignments. 4.6 The Company has strictly observed and performed all covenants, restrictions, stipulations and other obligations contained in the Lease and any deeds or documents supplemental thereto and there has been no waiver (expressly or impliedly) of or acquiescence to any breach thereof. 5. UNDERLETTINGS There are no leases, tenancies, licences and agreements to which the Premises are subject. 6. PLANNING AND USER OF PREMISES 6.1 The current use of the Premises is the permitted use for the purposes of the Town & Country Planning Acts 1971 to 1990 (the "Planning Acts"). 6.2 All necessary consents have been obtained (copies of which have been Disclosed) for the purposes of the Planning Acts and building regulations for the current use of the Premises and any and all alterations and improvements to it. 7. ENCUMBRANCES 7.1 The Premises are free from any mortgage, debenture (whether legal or equitable and whether fixed or floating), charge, lien or other right in the nature of security or any option, right of pre-emption or right of first refusal, nor is there any agreement or commitment to give or create any of the foregoing. 7.2 There are no covenants, restrictions, stipulations or other encumbrances (whether of a private or public nature) affecting the Premises which are of an onerous or unusual nature or affect their value or which conflict with the current use of the Premises. 7.3 All covenants, restrictions, stipulations and other encumbrances affecting the Premises (including all covenants under any Lease, underlease, licence or other agreement or any consent or approval obtained thereunder) have been strictly observed and performed. 8. COMPLAINTS AND DISPUTES 8.1 No notices, complaints or requirements have been issued or made (whether formally or informally) by any competent authority or undertaking exercising statutory or delegated powers in respect of the Premises or the user thereof or any machinery, plant or equipment therein and the Vendors do not expect and are not aware of any matter which could lead to any such notice or complaint or requirement being issued or made. 8.2 No notices, orders or resolutions have been issued, made or passed by any local, county or other competent authority for the compulsory acquisition, closing, demolition or clearance of the Premises or any part thereof and the Vendors do not 29 expect and are not aware of any matter or circumstances which could lead to any such notice, order or resolution. 8.3 There exists no dispute between the Company and the owner or occupier of any other premises adjacent to or neighbouring the Premises or with any lessor, lessee, licensee or other occupier of the Premises and the Vendors do not expect and are not aware of any circumstances which may give rise to any such dispute hereafter. 9. VAT STATUS Where an election under paragraph 2 of Schedule 6A to the VAT Act 1983 (election to waive exemption) has been made in respect of the Premises such fact is correctly indicated in Part A and Part B of SCHEDULE 3. 30 SCHEDULE 4 PART D INTELLECTUAL PROPERTY WARRANTIES 1. DEFINITIONS In this Part D of SCHEDULE 4 and in SCHEDULE 5:- "Intellectual Property" means patents, registered and unregistered trade marks, registered and unregistered service marks, registered designs, utility models (in each case for the full period thereof and all extensions and renewals thereof), applications for any of the foregoing and the right to apply for any of the foregoing in any part of the world, inventions, confidential information, know-how, business names, trade names, brand names, copyright and rights in the nature of copyright and design rights and get-up and any similar rights situated in any country; and the benefit (subject to the burden) of any and all agreements, arrangements and licences in connection with any of the foregoing; "Intellectual Property Rights" means all Intellectual Property owned, used or enjoyed by the Company in connection with the business carried on by the Company at Completion and references to Intellectual Property Rights shall be construed as including references to each individual right and all of them; 2. WARRANTIES 2.1 Details of all of the Intellectual Property Rights have been Disclosed. 2.2 All of the Intellectual Property Rights are in full force and effect. 2.3 The Company is the sole beneficial owner of all the Intellectual Property which is required for the lawful carrying on of the Company's business as conducted at Completion. 2.4 To the extent to the Intellectual Property Rights are capable of registration, they have been registered in the name of the Company as sole proprietor. 2.5 Complete and accurate details of all licences and/or authorities from any third party under which any Intellectual Property is used by the Company have been Disclosed. 2.6 The Company is not a party to any confidentiality agreement or any agreement which restricts the free use or disclosure by the Company of any information, documentation or other materials used in the Company's business. 31 2.7 Details of all corporate, business and trading names owned or used by the Company have been Disclosed. 32 SCHEDULE 4 PART E ENVIRONMENTAL AND HEALTH AND SAFETY WARRANTIES PART 1 - ENVIRONMENTAL WARRANTIES 1. DEFINITIONS "Environment" means all or any of the air, water and land including air within buildings and other natural or man-made structures above or below ground; "Environmental Reports" means all surveys, audits, investigations and reports relating to the Premises and the extent to which the Premises and the Company comply with Environmental Law, the likelihood of Harm arising out of the condition of the Premises, noise, the Environment, or the impact on the Environment of any current, prior or proposed use of the Premises; "Environmental Authorisations" means any permits, licences, consents or other authorisations required under any Environmental Law for the carrying on the Company's operations or the occupation or use of the Premises by the Company; "Environmental Law" means all applicable statutes, statutory instruments, common law, treaties, regulations, directives, codes of practice, circulars, guidance notes and the like and other measures imposed by any relevant body to which the Company or the Premises is or has been subject which relate to the pollution or protection of the Environment or the protection of the health of humans, animals or plants; "Harm" means harm to the health of living organisms or other interference with the ecological systems of which they form part and, in the case of man, includes offence caused to any of his senses or harm to his property and "harmful" has a corresponding meaning. 2. WARRANTIES 2.1 The Company complies and has complied at all times in all material respects with all conditions, limitations, obligations, prohibitions and requirements contained in or imposed by any Environmental Law and there are no facts or circumstances which may give rise to any liability under Environmental Law. 33 2.2 All Environmental Authorisations have been obtained and maintained in full force and effect and there are no facts or circumstances which have led or so far as the Vendors are aware which may give rise to any breach, revocation, modification, amendment, variation or suspension of them or any of them or which have resulted or may result in any Environmental Authorisation not being extended, renewed, granted or (where necessary) transferred. 2.3 So far as the Vendors are aware, no work or expenditure is required under any Environmental Law or Environmental Authorisation or in order to carry on lawfully the business of the Company. 2.4 No claims, investigations or other proceedings have been brought or so far as the Vendors are aware threatened by or against the Company or any of its directors, officers or employees nor has the Company received any complaints from any third party in respect of Harm to the Environment or to human health caused by or as a result of occupation of the Premises or occupation by the Company of any property formerly owned or occupied by the Company whether under Environmental Law or otherwise and so far as the Vendors are aware there are no facts or circumstances which may lead to any such claims, investigations or proceedings or complaints. 2.5 Copies of all Environmental Authorisations and Environmental Reports together with all assessments required to be carried out pursuant to the Control of Substances Hazardous to Health Regulations 1994 have been supplied to the Purchaser. 2.6 All information provided by and on behalf of the Company to any statutory authority and all records and data required to be maintained by the Company under the provisions of any Environmental Legislation regarding the operation of the business of the Company including any processes carried on at or emissions and discharges from the Premises is complete and accurate. 34 PART 2 - HEALTH AND SAFETY WARRANTIES 1. DEFINITIONS "Health and Safety Legislation" means all applicable statutes, statutory instruments, common law, treaties, regulations, directives, codes of practice, guidance notes including (but without limitation) the Fire Precautions Act 1971, the Health and Safety at Work etc. Act 1974, the Management of Health and Safety at Work Regulations 1992 and the Workplace (Health Safety & Welfare) Regulations 1992 concerning the health and safety of those who work for the Company, whether as employees or otherwise, visit the Premises or are in any way affected by the undertaking of the Company or by persons working for the Company; "Health and Safety Studies" means all reports, audits, investigations or assessments required to be carried out by the Company to comply with Health and Safety Legislation. 2. WARRANTIES 2.1 The Company has complied and continues to comply in all material respects with all conditions, limitations, obligations, prohibitions and requirements contained in any Health and Safety Legislation and so far as the Vendors are aware there are no facts or circumstances which may lead to any breach of any Health and Safety Legislation. 2.2 The Company has carried out all Health and Safety Studies and they have been considered by the Vendors in giving these warranties. 2.3 There have been no claims, investigations or proceedings against or threatened against the Company or any of its directors, officers or employees in respect of accidents, injuries, illness, disease or any other harm to the health and safety of employees, contractors or any other persons caused by breaches of Health and Safety Legislation or otherwise and so far as the Vendors are aware there are no facts or circumstances which may lead to any such claims, investigations or proceedings. 2.4 The Company has and has maintained employers' liability and public liability insurance cover having regard to the activities carried out by the Company as recommended by its insurers. No claims in respect of health and safety have been made or so far as the Vendors are aware are contemplated under such insurance policies. 35 SCHEDULE 5 COMPLETION REQUIREMENTS 1. OBLIGATIONS OF THE VENDORS 1.1 At Completion the Vendors shall deliver to the Purchaser:- 1.1.1 the Tax Deed duly executed as a deed by the parties thereto (other than the Purchaser); 1.1.2 duly executed transfers of the Shares in favour of the Purchaser or its nominees and the share certificates in respect of the Shares, together with any power of attorney or other authority under which such transfers have been executed and an indemnity in the agreed form in relation to any missing certificates. 1.1.3 subject to paragraph 2.1.4 below, a release executed as a deed by each of the Vendors in the agreed form releasing the Company from all claims (actual or contingent) which he has or may have or might thereafter have on account of or in relation to any act, matter, cause or thing down to and inclusive of the Completion Date; 1.1.4 the statutory and other books duly written up to date, the Certificate of Incorporation, Certificate(s) of Incorporation on Change of Name and common seal of the Company; 1.1.5 the title deeds relating to the Premises and all insurance policies, premium receipts, maintenance contracts and other documents relating to the Premises; 1.1.6 all books of account and other books and records and copies of the memorandum and articles of association of the Company; 1.1.7 all documents of title, certificates, deeds, licenses, agreements and other documents relating to the Company's Intellectual Property Rights and all manuals, drawings, plans, documents and other materials and media on which the Company's know-how is recorded; 1.1.8 the Employment Agreements duly executed by each of Mr. Sampson and Mr. Badminton; 1.1.9 the certificate and undertaking as to Regulation "S" in the form contained in SCHEDULE 7 duly executed by each of the Vendors; and 1.1.10 the Earnout Agreement in the form contained in SCHEDULE 9 duly executed by each of the Vendors and the Individual Vendors under the RGB Agreement. 1.2 At Completion the Vendors shall procure that:- 1.2.1 a board meeting of the Company be held at which:- (a) it shall be resolved that the said transfers in respect of the Shares be passed for registration subject only to their being re-presented duly stamped; (b) all existing bank mandates shall be revoked and new instructions to banks shall be given in such form as the Purchaser may require; (c) Richard Stack and Horace Hertz shall be appointed directors and Bertram Badminton shall be appointed chairman of the Company; (d) the Employment Agreements shall be approved and executed on behalf of the Company; 36 1.2.2 all amounts owing to the Company by any of the Vendors or any of the Directors or any Connected Person in relation to the Vendors, the Directors or any of them shall be repaid in full; and 1.2.3 all the papers, books, records (in whatever medium) and all other assets of the Company which are within the possession or under the control of the Vendors, the Directors or any of them, or any Connected Person of the Vendors the Directors of any of them are delivered to the Company. 2. OBLIGATIONS OF THE PURCHASER 2.1 On Completion the Purchaser shall:- 2.1.1 deliver to the Vendors a counterpart of the Tax Deed duly executed by the Purchaser; 2.1.2 deliver to the Vendors a counterpart of the Earnout Agreement duly executed by the Purchaser; 2.1.3 satisfy the consideration for the Shares as provided in Clause 3 of this Agreement by the delivery of stock certificates in the names of the Vendors in respect of the relevant 13,125 Purchaser's Shares and Consideration Shares; and 2.1.4 procure that the Company repays the loans outstanding to the Company from the Vendors as specified in the Disclosure Letter. 37 SCHEDULE 6 TAX DEED DATE: 1998 PARTIES: (1) THE PERSONS whose names and addresses are set out in the Schedule hereto ("Covenantors"); and (2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). RECITAL Pursuant to an agreement of today's date ("Agreement") the Purchaser has today completed the purchase of the whole of the issued share capital of Jade Communications Limited in reliance (inter alia) upon the undertaking of the Covenantors to enter into this Deed and the undertakings and covenants by the Covenantors hereinafter contained. NOW THIS DEED WITNESSES as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Deed (including the Schedule):- "Accounts Relief" means any Relief arising prior to Completion which has been taken into account in computing, or in obviating the need for, any provision for deferred tax in the Accounts but which is not available to the Company; "Assessment" means any claim, assessment, notice, demand, letter, counterclaim or other document issued or made, or action taken, by or on behalf of any Tax Authority (or any other person, including the Company) by virtue of which the Company has, or is alleged to have, a Liability to Tax, or from which it appears that the Company has, or will or may have, a Liability to Tax, or from which it is sought to impose upon the Company a Liability to Tax; "Claim" means any claim by the Purchaser against the Covenantors pursuant to Clause 2; "Deemed Tax Liability" has the meaning ascribed to that expression in Clause 1.4; 38 "Event" means any transaction (including entry into the Agreement or the purchase or sale of an asset), act (including Completion, the migration of a company or the inclusion of a company within a group of companies for any purpose), omission, receipt, distribution and failure to make sufficient distributions to avoid an apportionment or deemed distribution of income and any combination of two or more such occurrences; "Liability to Tax" means (i) a liability to pay Tax and (ii) such sums treated as being a liability to tax by Clause 1.3; "Post Completion Relief" means any Relief which arises by reference to an Event occurring after Completion; "Relief" means any relief, loss, allowance, exemption, set-off, deduction or credit in respect of any Tax, or any set-off or deduction in computing income, profits or gains for the purpose of any Tax; "Tax" means all taxes, and all duties, levies, imposts, charges and withholdings of any nature whatsoever, whether created or imposed in the United Kingdom or elsewhere and at whatever time created or imposed which are collected and administered by any Tax Authority, in all cases together with all incidental or supplemental penalties, charges, interest, fines and default surcharges and costs; "Tax Authority" means any taxing or other authority (whether within or outside the United Kingdom) competent to impose, administer or collect any Tax. 1.2 In this Deed:- 1.2.1 references to the loss of a Relief or of a right to repayment of Tax include references to the loss, withdrawal, nullifying or cancellation of a Relief or of a right to repayment of Tax; 1.2.2 references to the utilisation of a Relief or of a right to repayment of Tax include references to the utilisation or setting off of a Relief or of a right to repayment of Tax; and 1.2.3 references to the loss or utilisation of a Relief shall be construed accordingly. 1.3 Subject to Clause 1.4 there shall be treated as an amount equal to a "Liability to Tax" which arises as a result of an Event occurring on or before Completion:- 1.3.1 any amount of any Accounts Relief which is not available to the Company; 1.3.2 the value of all or any part of a right to repayment of Tax which has been treated as an asset of the Company in the Accounts or which has been taken 39 into account in computing, or in obviating the need for, any provision for deferred tax in the Accounts which is not available to the Company; 1.3.3 the value of all or any part of a right to repayment of Tax arising after Completion which is used to set against any liability to make an actual payment of Tax in circumstances where the Purchaser would (but for such utilisation or set off) have been entitled to make a Claim by virtue of such liability to make an actual payment of Tax; 1.3.4 the amount of any Accounts Relief or Post Completion Relief which is used to relieve income, profits or gains in circumstances where (but for such utilisation) the Purchaser would have been entitled to make a Claim by virtue of such income, profits or gains; and 1.3.5 any amount the Company is obliged to pay by way of reimbursement, recharge, indemnity or damages in relation to Tax:- (a) in respect of or arising from any Event effected or demand made effected on or before Completion; or (b) by reference to any profits earned, accrued or received on or before Completion. 1.4 In any case falling within Clause 1.3 the amount that is to be treated for the purposes of this Deed as a Liability to Tax of the Company ("Deemed Tax Liability") shall be determined as follows:- 1.4.1 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the relevant Relief consisted of a deduction from or offset against Tax, the Deemed Tax Liability shall be the amount of that deduction or offset; 1.4.2 in a case which falls within Clause 1.3.1 or Clause 1.3.4 where the relevant Relief consisted of a deduction from or offset against income, profits or gains, the Deemed Tax Liability shall be:- (a) if the Relief is not available, the amount of Tax which would, on the basis of the rates of tax current at Completion, have been saved had such Relief been available (assuming sufficient income, profits or gains to be able fully to utilise the Relief and all other Reliefs available to the Company); or (b) if the Relief was the subject of such a utilisation, the amount of tax which has been saved in consequence of the utilisation; 1.4.3 in a case falling within Clause 1.3.2 or Clause 1.3.3 the Deemed Tax Liability shall be the amount of such repayment of Tax or part thereof; 1.4.4 in a case falling within Clause 1.3.5 the Deemed Tax Liability shall be the amount which the Company is required to pay. 1.5 In this Deed references to an Event occurring on or before any date or on or before other Events shall be deemed to include any combination of two or more Events the first of which has taken place or took place on or before that date or on or before that other Event. 1.6 Words and expressions (if any) which are defined in the Agreement and which are not expressly defined in this Deed, and rules of interpretation which are provided for in the Agreement and which are not otherwise expressly provided for in this Deed, shall have the same meaning in and shall apply to this Deed and shall be deemed to be incorporated in this Deed. 40 1.7 Words and expressions (if any) neither defined in this Deed nor in the Agreement but which are defined or used in any legislation relating to Tax which is relevant in the context shall have the same meaning in this Deed as they have in such legislation. 1.8 In this Deed:- 1.8.1 references to income, profits or gains accrued, or being earned or received, on or before a particular date or in respect of a particular period shall include any profits deemed for Tax purposes to have accrued, or to have been earned or received, on or before that date or in respect of that period; and 1.8.2 references to "income, profits or gains" shall include receipts, value and any other criterion used in establishing the incidence of any Tax or measure in establishing the amount of any Liability to Tax. 2. COVENANT 2.1 Subject as hereinafter provided the Covenantors hereby jointly and severally covenant with the Purchaser as follows:- 2.1.1 to pay to the Purchaser an amount equal to any Liability to Tax of the Company which arises as a consequence of or by reference to: (a) any Event occurring on or before Completion; or (b) any income, profits or gains which accrued, or which were earned or received, on or before Completion or in respect of a period ending on or before Completion, in each case whether or not such Liability to Tax is also chargeable against or attributable to any other person; and 2.1.2 to pay to the Purchaser from time to time amounts equal to any costs and expenses reasonably incurred by the Purchaser or the Company in connection with any Liability to Tax as is referred to in Clause 2.1.1 and in respect of which the Covenantors are liable to make payment under this Deed or in successfully (wholly or partly) taking or defending any action against the Covenantors pursuant to this Deed. 2.2 Each of the covenants contained in paragraphs (a) and (b) of Clause 2.1.1 shall be construed as giving rise to a separate and independent obligation and shall not be restricted by the other, save that (for the avoidance of doubt) any payment by the Covenantors in respect of a liability under one covenant shall pro tanto discharge any liability under the other so far as it arises from the same subject matter. 3. LIMITATIONS 3.1 The Covenantors shall not be liable under Clause 2 in relation to any Liability to Tax of the Company:- 3.1.1 if and to the extent that specific provision or reserve in respect of such Liability to Tax was made in the Accounts or discharged prior to Completion; 3.1.2 if and to the extent that provision or reserve made in the Accounts is insufficient only by reason of any increase in rates of Tax or change in the law introduced after the date of the Agreement with retrospective effect; 3.1.3 if that Liability to Tax arises as a result of an Event effected by the Company in the ordinary course of its business occurring between the Acquisition Date and Completion; 3.1.4 if the Purchase or the Company have recovered an amount in respect of such Liability to Tax from a person or persons other than the Covenantors; 41 3.1.5 if any Relief (other than an Accounts Relief or Post-Completion Relief) is available to the Company (including by way of surrender from another company) to set against or otherwise mitigate the Liability to Tax; 3.1.6 if such Liability to Tax arises or is increased as a consequence of any reduced entitlement to the small companies' rate of corporation tax (section 13, Taxes Act) where such reduced entitlement results solely from the Company becoming associated with a company or companies at or following Completion; or 3.1.7 if such Liability to Tax would not have arisen but for the fact that the accounting treatment of any asset or liability in the future accounts of the Company is different from the treatment in the Accounts and such difference does not arise so as to procure that the said accounts comply with all relevant laws and generally accepted accounting principles. 3.2 For the avoidance of doubt the following shall not be regarded as Tax which arises in the ordinary course of business for the purposes of Clause 3.1.3:- 3.2.1 any Tax arising as a result of the application either of any anti-avoidance provisions contained in any Tax legislation or of any principles established in case law concerning anti-avoidance; 3.2.2 any Tax arising as a result of any dividend, distribution or deemed distribution; 3.2.3 any Tax arising in respect of the acquisition, disposal or supply or the deemed acquisition, disposal or supply of any assets, goods, services or business facility of any kind (including a loan of money or the letting, hiring or licensing of any tangible or intangible property) for a consideration deemed for Tax purposes to be different from that (if any) actually received, but only insofar as such Tax is attributable to the difference between the consideration actually received and the consideration deemed for Tax purposes to have been received; 3.2.4 any Tax arising as a result of a failure duly to deduct, charge, recover or account for Tax; or 3.2.5 any amount payable to HM Customs and Excise by the Subsidiary as a result of Part XV of the Value Added Tax Regulations 1995 or equivalent provisions in any other relevant jurisdiction. 4. CONDUCT OF CLAIMS 4.1 Upon the Purchaser becoming aware of any Assessment which does or may give rise to a Claim the Purchaser shall as soon as reasonably practicable give notice of such Assessment to the Covenantors PROVIDED THAT the giving of such notice shall not be a condition precedent to the liability of the Covenantors under this Deed. 4.2 If the Covenantors shall indemnify and secure the Company and the Purchaser to their reasonable satisfaction against any Tax, additional Tax, losses, fines, penalties, interest, charges, costs and expenses which arise as a consequence thereof, the Purchaser shall and shall procure that the Company shall take such action as the Covenantors may reasonably request to avoid, dispute, resist, appeal, compromise, or defend such Assessment ("the Covenantors' Action"). 4.3 Neither the Purchaser nor the Company shall be obliged to appeal against any Assessment if, having given the Covenantors notice of the receipt of that Assessment, 42 it has not within ten Business Days received instructions in writing from the Covenantors in accordance with the preceding provisions of this Clause to make that appeal. 4.4 Neither the Purchaser nor the Company shall be obliged to take any action or further action in respect of any Assessment if it appears to the Purchaser that either the Covenantors or the Company, prior to its being in the ownership of the Purchaser, have committed acts or omissions which may constitute fraud, misfeasance or negligence. 4.5 Neither the Purchaser nor the Company shall be required to take any action which either interferes with the normal course of its business or which in its opinion is likely to prejudice its business or its relationship with any Tax Authority or result in the Purchaser or any Company which forms part of the Purchaser's group incurring a Liability to Tax or an increased Liability to Tax. 4.6 Neither the Purchaser nor the Company shall be obliged to take any action pursuant to this Clause 4 which includes continuing the Covenantors' Action or contesting an Assessment beyond the first appellate body (excluding the Tax Authority demanding the Tax in question) in the jurisdiction concerned. 4.7 Neither the Purchaser nor the Company shall be obliged to take any action under this Clause 4 which involves continuing the Covenantors' Action or contesting any Assessment before any court or other appellate body (excluding the Tax Authority demanding the Tax in question) unless the Covenantors furnish the Purchaser with the written opinion of leading Tax counsel to the effect that an appeal against the Assessment in question will, on the balance of probabilities, be won. 4.8 The Purchaser and the Company shall be at liberty without reference to the Covenantors to admit, compromise, settle, discharge or otherwise deal with any Assessment after whichever is the earliest of:- 4.8.1 the Purchaser or the Company being notified by the Covenantors that they consider the Assessment should no longer be resisted; 4.8.2 the expiry of a period of seven Business Days following the service of a notice by the Purchaser or the Company on the Covenantors, requiring the Covenantors to clarify or explain the terms of any request made under Clause 4.2 during which period no such clarification or explanation has been received by the Purchaser or the Company; and 4.8.3 if appropriate, the expiration of any period prescribed by applicable legislation for the making of an appeal against either the Assessment or the decision of any court or tribunal in respect of any such Assessment, as the case may be. 4.9 The Covenantors shall be bound to accept for the purposes of this Deed any admission, compromise, settlement or discharge of any Assessment and the outcome of any proceedings relating thereto made or arrived at in accordance with the provisions of this Clause 4. 4.10 None of the Purchaser's or Company's obligations under this Clause 4 shall constitute a pre-condition to any payment due under Clause 2. 43 5. DUE DATE FOR PAYMENT 5.1 Where the Covenantors become liable to make any payment pursuant to Clause 2, the due date for the making of that payment shall be:- 5.1.1 in a case that involves an actual payment of Tax by the Company, the later of three Business Days after service of a notice on the Covenantors in relation thereto and the date that is three Business Days immediately before the last date on which the Company would have had to have paid to the relevant Tax Authority the Tax that has given rise to the Covenantors' liability under this Deed in order to avoid incurring a liability to interest or a charge or penalty in respect of that Liability to Tax; 5.1.2 in a case falling within Clause 1.3.1 the later of three Business Days following service by the Purchaser of a written demand therefor and the date on which the Accounts Relief would otherwise have been used but for such non-availability; 5.1.3 in a case falling within Clause 1.3.2 or Clause 1.3.3, the later of three Business Days after the Purchaser has served a written demand therefor and the date on which repayment of Tax would have actually been received or on which the liability to make an actual payment of Tax would have fallen due but for such setting-off (as appropriate); or 5.1.4 in a case falling within Clause 1.3.4, the later of three Business Days following the service by the Purchaser of a written demand therefor or the date on which an actual liability to make a payment of Tax by the Company would have fallen due but for such setting-off. 5.2 If any payment required to be made by the Covenantors under this Deed is not made by the due date then that payment shall carry interest from that due date until the date when the payment is actually made at the rate of 4 per cent above the base rate from time to time of National Westminster Bank PLC. 6. DEDUCTIONS FROM PAYMENTS 6.1 All sums payable by the Covenantors to the Purchaser under this Deed shall be paid free and clear of all deductions or withholdings whatsoever, save only as may be required by law. 6.2 If any deduction or withholding in respect of Tax or otherwise is required by law to be made from any of the sums payable as mentioned in Clause 5.1, the Covenantors shall be obliged to pay to the Purchaser such greater sum as will, after such deduction or withholding as is required to be made has been made, leave the Purchaser with the same amount as it would have been entitled to receive in the absence of any such requirement to make a deduction or withholding. 7. OVER PROVISIONS AND RELIEFS 7.1 If the auditors of the Company certify that any provision for Tax in the Accounts proves to be an over-provision, then the amount of such over-provision shall be dealt with in accordance with Clause 7.3. 7.2 If any Liability to Tax which has resulted in a payment having been made or becoming due from the Covenantors under this Deed will give rise to a Relief or right to repayment of Tax for the Company which would not otherwise have arisen, then as and when liability of the Company to make an actual payment of or in respect of Tax 44 is reduced by reason of that Relief or repayment of Tax is received the amount by which that liability is so reduced or the value of the repayment shall be dealt with in accordance with Clause 7.3. 7.3 Where it is provided under Clause 7.1 or 7.2 that any amount (the "Relevant Amount") is to be dealt with in accordance with this Clause 7.3:- 7.3.1 the Relevant Amount shall first be set off against any payment then due from the Covenantors under this Deed; and 7.3.2 to the extent that there is an excess, a refund shall forthwith be made to the Covenantors of any previous payment or payments made by the Covenantors under this Deed and not previously refunded under this clause up to the amount of such excess; and 7.3.3 to the extent that the excess referred to in Clause 7.3.2 is not exhausted under that paragraph, the remainder of that excess shall be carried forward and set off against any figure payment or payments which become due from the Covenantors under this Deed. 8. MITIGATION Where the Company is entitled to recover from any other person any sum in respect of any matter for which the Covenantors have or are liable to make payment under this Deed, the Purchaser shall, or shall procure that the Company shall (if requested by, and at the expense of the Covenantors and upon the Covenantors indemnifying the Purchaser to the reasonable satisfaction of the Purchaser, against all costs or expenses which may thereby be incurred) take such action as the Covenantors shall reasonably request to enforce such recovery against the person in question provided that the Purchaser and the Company shall not be obliged to take action which it is reasonable to consider prejudicial to the Purchaser's or the Company's Tax position or business PROVIDED THAT the taking of action hereunder shall not be a pre-condition to the obligation to make payment of any amount under Clause 2. The Purchaser shall forthwith account to the Covenantors for any sums so recovered (including any interest or repayment supplement (as defined in section 825 Taxes Act) paid by such a person) net of Tax (if any) on such sum up to an amount not exceeding the amount paid by the Covenantors under this Deed in relation thereto. 9. COVENANT BY THE PURCHASER 9.1 The Purchaser covenants with the Covenantors to pay forthwith to the Covenantors an amount equal to any Tax which is assessed on the Covenantors pursuant to section 767AA of the Taxes Act by reason of Tax assessed on the Company remaining unpaid, save that this clause shall not apply in respect of Tax for which the Covenantors are otherwise liable to the Purchaser under this Deed. 9.2 The covenant contained in Clause 9.1 will apply to (and hence give rise to a liability upon the Purchaser to pay to the Covenantors an amount equal to) any costs and expenses properly incurred by the Covenantors in connection with any Tax assessed on the Covenantors. 9.3 The Purchaser's covenant contained in Clause 9.1 shall not be a pre-condition to any obligation to make payment under Clause 2. 45 10. GOVERNING LAW This Deed shall be governed by and construed in all respects in accordance with the laws of England and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts for such purpose. 11. NOTICES The provisions as to service of notices contained in the Agreement shall apply for the purposes of this Deed. IN WITNESS whereof this Deed has been duly executed the day and year first before written. THE SCHEDULE Names and Addresses of the Covenantors (the Vendors and Mr. Badminton) 46 SCHEDULE 7 CERTIFICATE AS TO REGULATION S INVESTMENT INTENT LETTER This Investment Intent Letter (this "Agreement") dated as of ______________, 1998, is entered into by and among the persons whose names appear on the signature pages hereto as "Vendors" (collectively the "Vendors") and Javelin Systems, Inc., a Delaware corporation ("Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to them in the Purchase Agreement (as defined below). RECITALS A. Vendors own 105 of the issued and outstanding ordinary shares (the "Company Stock") of Jade Communications Limited, a limited company organized under the laws of England and Wales (the "Company"). B. Pursuant to the terms and conditions of that certain Agreement for Sale and Purchase of Shares (the "Purchase Agreement") dated of even date herewith by and among Purchaser and Vendors, Purchaser is acquiring all the Company Stock. C. In connection with the Purchase Agreement, the Vendors will be issued shares of common stock, $.01 par value, of Purchaser (the "Purchaser's Shares") in partial exchange for their shares of Company Stock (and the Purchaser's Shares issued to the Vendors are herein referred to as the "Consideration Shares"). D. The Vendors desire to make certain representations and warranties to Purchaser to satisfy various United States federal and state securities laws. AGREEMENT NOW THEREFORE, in consideration of the respective covenants and promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. SHAREHOLDER REPRESENTATIONS AND WARRANTIES. As a condition to the receipt of the Consideration Shares, each of the Vendors represents and warrants to, and covenants with, Purchaser as follows: (a) Such Vendor is aware of Purchaser's business affairs and has acquired sufficient information about Purchaser to reach an informed and knowledgeable decision to acquire the Consideration Shares. Such Shareholder has been furnished by Purchaser with a copy of Purchaser's Form 10-KSB for its fiscal year ended June 30, 1998, Purchaser's Form 10-QSBs for its fiscal quarters ended September 30, 1997, December 31, 1997 and March 31, 1998, and such Vendor has read such reports and understands and has evaluated the risks of making an investment in the Purchaser's Shares. Such Vendor has been afforded access to 47 information concerning Purchaser and to its executive officers and has been afforded the opportunity to ask questions of, and receive answers from, Purchaser. (b) Such Vendor is generally familiar with the open system, touch-screen computer for point-of-sale applications industry since such Vendor has either been employed in such industry or has invested in business entities engaged in such industry. (c) Such Vendor is taking the Consideration Shares for investment for such Vendor's own account only and not with a view to, or for resale in connection with, any unregistered "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "ACT"). (d) Such Vendor understands that no United States federal or state agency has passed on, or made any recommendation or endorsement of, the Consideration Shares. (e) Such Vendor understands that the Consideration Shares are being offered and sold to it in reliance on specific exemptions from or non-application of the registration requirements of federal and state securities laws and that Purchaser is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of such Vendor set forth herein in order to determine the applicability of such exemptions and the suitability of such Vendor acquiring the Consideration Shares. (f) Vendor certifies that he, she or it is neither a citizen nor a resident of the United States and that his, her or its address set forth in the Purchase Agreement is correct. (g) No public offer or solicitation of the Consideration Shares was made to such Vendor and no offer of the Purchaser's Shares was made to such Vendor while such Vendor was present in the United States. (h) At the time any buy order for the Consideration Shares was originated, such Vendor was located outside the United States and is outside the United States on the date of the execution and delivery of this Agreement and will be outside the United States on the Completion Date. (i) Such Vendor is aware that the Consideration Shares have not been registered under the Act and may only be offered or sold pursuant to registration under the Act or an available exemption therefrom, and such Vendor has not, and will not, engage in any public offering or distribution of the Consideration Shares or engage in any hedging transaction with respect thereto, except in accordance with the registration or exemptive provisions of the Act. (j) Except to the extent the Consideration Shares have been registered under the Act, such Vendor (i) will not, during the period commencing on the Completion Date and ending one year after the Completion Date (the "Distribution Compliance Period"), offer or sell or agree to sell the Consideration Shares in the United States, to a U.S. Person or for the account or benefit of a U.S. Person other than in accordance with Regulation S and (ii) will, after the expiration of the Distribution Compliance Period, offer, sell, pledge or otherwise transfer the Consideration Shares only pursuant to registration under the Act or an available exemption therefrom and, in any case, in accordance with applicable United States federal and state securities laws. 48 (k) Such Vendor has been advised of, and is familiar with, has complied, and will comply, with the offering restrictions, and any other requirements, of Regulation S. (l) The transactions contemplated by this Agreement (i) have not been pre-arranged by such Vendor with a purchaser located in the United States which is a U.S. Person, and (ii) are not part of a plan or scheme by such Vendor to evade the registration provisions of the Act. (m) Neither such Vendor nor any of his, her or its affiliates has entered, has the intention of entering, or will during the Distribution Compliance Period enter into, with any U.S. Person, any put option, short position or other similar instrument or position with respect to the Purchaser's Shares or participate in any other attempt designed to lower the trading prices of Purchaser's Shares stock. (n) Such Vendor (individually or together with such Vendor's investor representative who is not affiliated with Purchaser) has such knowledge and experience in financial, tax and business matters that such Vendor is capable of evaluating the merits and risks of receiving the Consideration Shares and of making an informed investment decision with respect thereto. (o) Such Vendor has determined that the Consideration Shares are a suitable investment. (p) Such Vendor acknowledges receipt of Purchaser's Insider Trading Policy and agrees to abide by its terms, and further agrees to execute such Policy upon the request of Purchaser. (q) The certificates representing the Consideration Shares shall bear the following legend: "The securities represented hereby have been issued pursuant to Regulation S ("Regulation S") promulgated under the Securities Act of 1933, as amended (the "1933 Act"), and have not been registered under the 1933 Act. Unless so registered, such securities may not be transferred, offered, hedged or sold prior to the end of the one-year distribution compliance period prescribed by Regulation S unless such transfer, offer, hedge or sale is made in an "offshore transaction" and not to or for the account of or benefit of a "U.S. person" (as such terms are defined in Regulation S) and is otherwise in accordance with the requirements of Regulation S. Following expiration of any such one-year distribution compliance period, the securities represented hereby may not be offered, hedged, sold or otherwise transferred in the United States or to a U.S. person unless the securities are registered under the 1933 Act and applicable state securities laws, or such offers, sales and transfers are made pursuant to an available exemption from the registration requirements of those laws." (r) Such Vendor shall indemnify Purchaser against any loss, cost or damages (including reasonable attorneys' fees and expenses) directly incurred as a result of such Vendor's breach of any representation, warranty, covenant or agreement in this Agreement. 49 SECTION 2. MISCELLANEOUS. (a) AMENDMENTS, WAIVERS AND CONSENTS. No amendment or modification of this Agreement, nor any termination or waiver of any provision of this Agreement or consent to any departure by any party hereto therefrom, shall in any event be effective without the written concurrence of the parties hereto. (b) NOTICES. Notices and other communications under or in connection with this Agreement shall be in writing and shall be deemed given (i) if delivered personally, upon delivery, (ii) if delivered by courier, then upon receipt, or (iii) if given by telecopy, upon confirmation of transmission by telecopy (or, if such confirmation does not occur during normal business hours on a Business Day (as defined in the Purchase Agreement), then on the next Business Day), in each case to the parties at the address for notice set forth on Schedule 1 to the Purchase Agreement. (c) APPLICABLE LAW. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of California, United States of America and the United States federal securities laws without reference to any choice of law rules that would require the application of the laws of any other jurisdiction. (d) SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. (e) INTERPRETATION. Time is of the essence of each provision of this Agreement of which time is an element. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, heirs and assigns. (g) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. [SIGNATURES APPEAR ON FOLLOWING PAGES] 50 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VENDORS: ------------------------------------ ANTHONY SAMPSON ------------------------------------ CONTECH CONSULTANTS LIMITED JAVELIN SYSTEMS, INC. a Delaware corporation By: --------------------------------- An Authorized Representative 51 SCHEDULE 8 ADDITIONAL LIMITATIONS TO THE WARRANTIES AND TAX DEED 1. ACKNOWLEDGEMENT The Purchaser: 1.1 admits and acknowledges that it has not entered into this Agreement in reliance upon any warranties, representations, covenants, undertakings, indemnities or other statements whatsoever other than those expressly set out in this Agreement and the Tax Deed; and 1.2 subject and without prejudice to Clause 9 of this Agreement, agrees that rescission shall not be available as a remedy for any breach of this Agreement and agrees not to claim that remedy. 2. DISCLOSURE The Purchaser shall not be entitled to make a Claim if and to the extent that the facts or information upon which it is based have been Disclosed. 3. DURATION AND EXTENT 3.1 The aggregate liability of each Vendor and Mr. Badminton in respect of all Claims under the Warranties and the Tax Deed shall not exceed the amount of the total consideration paid under this Agreement. 3.2 No amount shall be payable by the Vendors and Mr. Badminton in respect of any Claim under the Warranties: 3.2.1 unless the amount of the liability in respect of each such Claim exceeds US$1,000; and 3.2.2 unless and until the aggregate cumulative liability of the Vendors and Mr. Badminton in respect of all such Claims exceeds US$20,000 in which case the Vendors and Mr. Badminton shall be liable for both the initial US$20,000 and the excess. 3.3 The Vendors and Mr. Badminton shall not be liable for any Claim unless the Vendors and Mr. Badminton are given notice in writing of that Claim stating in reasonable detail the nature of the Claim and, if practicable, the amount claimed on or before the first anniversary of Completion and unless legal proceedings shall have been served in respect of any such Claim within six months of the Vendors and Mr. Badminton being notified of any such Claim. 3.4 No Claim shall be made to the extent the matters giving rise to the Claim arise out of events or circumstances prior to 18 March 1998, save for breach of the warranty in paragraph 2.3 of Part A of SCHEDULE 4. 4. LIMITATIONS No Claim shall be admissible and the Vendors and Mr. Badminton shall not be liable under any of the Warranties or under the Tax Deed: 4.1 to the extent that provision, reserve or allowance has been made in the Accounts or to the extent that payment or discharge thereof has been taken into account therein or in 52 accordance with generally accepted accounting principles has not been so taken account of, or referred to; or 4.2 to the extent that provision, reserve or allowance made in the Accounts for any Liability to Tax proves to be insufficient by reason only of any increase in the rates of taxation or variation in the method of applying, or calculating, the rate of taxation made after Completion whether or not with retrospective effect; or 4.3 to the extent that such liability arises or is increased as a result of any change or changes in legislation (primary or delegated) including without limitation any increase in rates of taxation or the introduction of any changes or new form of taxation or in the practice of the Inland Revenue or HM Customs and Excise or any other relevant authority (in the United Kingdom or elsewhere) occurring after Completion whether or not with retrospective effect; or 4.4 to the extent that the liability would not have arisen or would have been reduced but for the fact that the treatment of any assets or liabilities or of the taxation attributable to timing differences (including capital allowances and stock relief) in future accounts of the Company is different from the treatment in the Accounts; or 4.5 to the extent that the liability would not have arisen or would have been reduced or eliminated but for a failure or omission after Completion, on the part of the Company or the Purchaser or either of them to make any claim, election, surrender or disclaimer or to give any notice or consent or to do any other thing under any enactment or regulation relating to Tax, the making, giving or doing of which was taken into account in computing the provision for Tax in the Accounts; or 4.6 to the extent that such liability would not have arisen but for any claim, disclaimer or election made (including, without limitation, a disclaimer of or a revision to a claim for capital allowances claimed before Completion or assumed to be claimed in preparing the Accounts) where such claim or disclaimer or election or revision is caused or made by the Purchaser or the Company after Completion; or 4.7 to the extent that such liability occurs or arises as a result of or is otherwise attributable wholly or partly to any voluntary act, transaction or omission of the Company or the Purchaser or their respective directors, employees or agents on or after Completion otherwise than in the ordinary and proper course of business or pursuant to a legally binding commitment created on or before Completion by the Company. 5. SET-OFF 5.1 If the Vendors and Mr. Badminton shall be liable in respect of any Claim, credit shall be given to them against such liability for the following amounts (each a "Relevant Amount") which shall be dealt with in accordance with paragraph 5.3: 5.1.1 the amount by which any Tax for which the Company is or may be liable is reduced or extinguished as a result of any such liability and/or Claim; 5.1.2 the amount by which any provision for Tax (including deferred taxation) or bad or doubtful debts contingent or other liabilities (including deferred liabilities) contained in the Accounts proves to be an over provision; or 53 5.1.3 the amount by which any repayment of Tax to the Company by the Inland Revenue or any other Tax Authority contained in the Accounts proves to be an under-provision or no provision is made as a result of any overpayment of Tax made prior to Completion by any person. 5.2 If there shall be a dispute between any of the parties as to any Relevant Amount, the Vendors or the Purchaser shall be entitled to request that the Purchaser's Accountants are instructed to give a certificate as to the Relevant Amount and in so doing the Purchaser's Accountants shall act as experts and not as arbitrators and in the absence of manifest error and subject to paragraphs 5.4 and 5.5 their decision shall be final and binding on the parties hereto. 5.3 Where it is provided under paragraph 5.1 that any Relevant Amount is to be dealt with in accordance with this paragraph 5.3: 5.3.1 the Relevant Amount shall first be set off against any payment then due from the Vendors and Mr. Badminton under the Warranties or the Tax Deed; and 5.3.2 to the extent there is an excess of the Relevant Amount after any amounts have been set off under paragraph 5.3.1 a refund shall be made to the Vendors and Mr. Badminton of any previous payment or payments made by the Vendors and Mr. Badminton under the Warranties or the Tax Deed and not previously refunded under this paragraph up to the amount of such excess; and 5.3.3 to the extent that the excess referred to in paragraph 5.3.2 is not exhausted under that paragraph, the remainder of that excess shall be carried forward and set off against any future payment or payments which become due from the Vendors and Mr. Badminton under the Warranties or the Tax Deed. 5.4 In the event that the Purchaser's Accountants shall be unable or unwilling to provide any certification requested under this paragraph 5, any certification shall be effected by an independent firm of chartered accountants to be agreed between the Purchaser and the Vendors or failing agreement to be nominated by the President for the time being of the Institute of Chartered Accountants in England and Wales (the "Independent Accountants"). The proper and reasonable costs incurred by the Purchaser's Accountants or the Independent Accountants in respect of any certification required under this paragraph 5 shall be paid and borne as such accountants shall consider just and equitable. 6. THIRD PARTY CLAIMS 6.1 Where the Purchaser and/or the Company are entitled to recover from some other person (including any Tax Authority) any sum in respect of any matter giving rise to a Claim the Purchaser shall and shall procure that the Company shall take all reasonable steps to enforce such recovery prior to taking any action against the Vendors and Mr. Badminton (other than notifying the Vendors of the Claim) and in the event that the Purchaser or the Company shall recover any amount from such other person the amount of the Claim against the Vendors and Mr. Badminton shall be reduced by the amount recovered (including any repayment supplement) less all costs, charges and expenses incurred by the Purchaser or the Company in recovering that sum from such other person. 6.2 If the Vendors and Mr. Badminton pay to the Purchaser or to the Company an amount pursuant to a Claim and the Purchaser or the Company within six months of such 54 payment becomes entitled to recover from some other person any material sum in respect of such Claim the Purchaser shall and shall procure that the Company shall take all reasonable steps to enforce such recovery and upon such recovery shall forthwith repay to the Vendors so much of the amount paid by them to the Purchaser or the Company as does not exceed the sum recovered from such other person less all costs, charges and expenses incurred by the Purchaser or the Company in recovering that sum from such other person. 6.3 If any amount is repaid to the Vendors and Mr. Badminton by the Purchaser or the Company pursuant to paragraph 6.2 above an amount equal to the amount so repaid shall be deemed never to have been paid by the Vendors and Mr. Badminton for the purposes of paragraph 3.2 and accordingly shall not be treated as an amount in respect of which any liability has been incurred. 7. CONDUCT OF CLAIMS 7.1 The Vendors and Mr. Badminton hereby appoint Anthony Sampson as their representative for the purposes of this paragraph (the "Vendors' Representative") and any action taken or authorised by and any notice or document given to the Vendors' Representative shall be deemed to be taken or authorised by or given to each of the Vendors and Mr. Badminton and shall be binding on each of them. 7.2 If the Purchaser becomes aware of a matter which might give rise to a Claim the Purchaser shall (or shall procure that the Company shall) as soon as reasonably practicable give written notice to the Vendors' Representative of the matter and shall consult with the Vendors' Representative with respect to such matter but such notice shall not be a condition precedent to the liability of the Vendors and Mr. Badminton. 8. MISCELLANEOUS 8.1 Any payment to the Purchaser or the Company under the Warranties or under the Tax Deed shall be deemed to be a reduction of the total consideration payable hereunder for the Shares. 8.2 Payment of any Claim whether under the Warranties or under the Tax Deed shall pro tanto satisfy and discharge any other Claim which is capable of being made in respect of the same subject matter and the Purchaser shall at all times procure that there is no duplication of any Claim or Claims relating to the same subject matter. 55 SCHEDULE 9 EARNOUT AGREEMENT THIS AGREEMENT is made the day of 1998 BETWEEN: (1) THE PERSONS whose names and addresses are set out in Column 1 of SCHEDULE 1 ("Vendors"); and (2) JAVELIN SYSTEMS, INC. (a Delaware corporation) whose principal place of business is at 17891 Cartwright Road, Irvine, CA 92614-6216, U.S.A. ("Purchaser"). WHEREAS: (A) The Vendors and the Purchaser have on the date hereof entered into two agreements (the "Purchase Agreements") for the sale and purchase of, respectively, the entire issued share capital of RGB Trinet Limited (the "Company") and 47.5% of Jade Communications Limited, and of the remaining 52.5% of Jade Communications Limited (the "Subsidiary"). (B) Pursuant to the provisions of each of the Purchase Agreements, the Vendors and the Purchaser have agreed to enter into this Agreement for the purpose of agreeing the Vendors' entitlement to further shares of the common stock of the Purchaser as part of possible further consideration under the Purchase Agreements. IT IS AGREED AS FOLLOWS: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement and in the Schedules:- "Budget" the budget and business plan for the Company and the Subsidiary for the Earnout Period in the agreed form; "Change of Control" means, in relation to any company, where that company ceases to be under the control of the person or persons who control such company on the date of this Agreement and for the purpose of this definition "control" means a holding of securities in a company conferring a majority of the voting rights in it or the right to appoint or remove a majority of its board of directors or the right to participate in 50% or more of the assets of the company on its winding up; "Earnout Period" means the period of two years commencing on 1 October 1998; 56 "Pre-Tax Profits" means the pre-tax profits of the Company and the Subsidiary as calculated in accordance with SCHEDULE 2 for each three-month period during the period commencing on 1 October 1998 and ending on 30 September 2000 as shown in unaudited management accounts (comprising in each case a balance sheet and a profit and loss account) of the Company and the Subsidiary; "Quarterly Profit Estimate" means any of the estimates made in respect of anticipated Pre-Tax Profits for a particular financial quarter of the Company, particulars of which are continued in SCHEDULE 3. 1.2 The Schedules are deemed to be incorporated in this Agreement, and a reference to "this Agreement" includes a reference to the Schedules. 1.3 In this Agreement:- 1.3.1 the index and the clause headings are included for convenience only and shall not affect the construction of this Agreement; 1.3.2 words denoting the singular shall include the plural and vice versa; 1.3.3 words denoting any gender shall include a reference to each other gender; and 1.3.4 references to persons shall be deemed to include references to natural persons, firms, partnerships, companies, corporations, associations, organisations, foundations and trusts (in each case whether or not having separate legal personality). 1.4 Words and expressions (if any) which are defined in the Purchase Agreements and which are not expressly defined in this Agreement shall have the same meaning in and shall apply to this Agreement as if expressly defined herein. 2. CONSIDERATION 2.1 By way of additional consideration under the Purchase Agreements of up to US$8,225,000, the Purchaser will issue to the Vendors the Earnout Shares (if any) calculated in accordance with the following provisions of this Agreement. 2.2 The consideration referred to in Clause 2.1 shall be apportioned between the Vendors as set out in Column 2 of SCHEDULE 1. 3. EARNOUT PROVISIONS 3.1 The entitlement to Earnout Shares referred to in Clause 2.1 shall be calculated in accordance with the following provisions:- 3.1.1 if the Pre-Tax Profits shall equal 100% of the relevant Quarterly Profit Estimate, then the Purchaser shall in respect of that quarter issue to the Vendors the Earnout Shares that are equivalent in value to US$822,500 (the "Base Earnout Figure"); 3.1.2 if the Pre-Tax Profits shall be at or between 50% and 125% of the relevant Quarterly Profit Estimate, then the Purchaser shall issue to the Vendors a number of Earnout Shares equivalent in value to a percentage of the Base Earnout Figure, such percentage being the same percentage as the Pre-Tax 57 Profits are in relation to the relevant Quarterly Profit Estimate, subject in all cases to a minimum of 50% and maximum of 125% of the Base Earnout Figure. By way of illustration only, if the Pre-Tax Profits are 110% of the Quarterly Profit Estimate, then Earnout Shares equivalent in value to 110% of the Base Earnout Figure shall be issued; 3.1.3 if the Pre-Tax Profits shall be below 50% of the relevant Quarterly Profit Estimate, then (subject to Clause 3.1.4) no Earnout Shares shall be issued in respect of that quarter; 3.1.4 if the Pre-Tax Profits exceed 125% of the relevant Quarterly Profit Estimate, then after applying the provisions of Clause 3.1.2, the Pre-Tax Profit in excess (the "Excess Profit") may be carried forward or carried back to other financial quarters as follows: 3.1.4.1 the Excess Profit shall first be carried back and applied to each previous quarter(s) in which the Pre-Tax Profits were less than 125% of the relevant Quarterly Profit Estimate. The Excess Profit shall be applied in full to the earliest quarter first so as notionally to raise the Pre-Tax Profits in such quarter up to a maximum of 125%, and then any remaining Excess Profit shall be applied to subsequent quarters consecutively, in the same manner; 3.1.4.2 by applying the Excess Profit thereto, for each quarter in which the entitlement to Earnout Shares is created or increased by virtue of applying the provisions of Clause 3.1.2, Javelin shall issue further Earnout Shares to the Vendors in accordance with the provisions of Clause 3.1.2; 3.1.4.3 if, after applying the Excess Profit to all earlier quarters in accordance with Clauses 3.1.4.1, any of the Excess Profit remains to be applied, it may be carried forward to be applied in the same manner to each subsequent quarter (next quarter first) in which Pre-Tax Profits are below 125% of the relevant Quarterly Profit Estimate. 3.1.5 For the avoidance of doubt, the maximum number of Earnout Shares that can be issued in relation to any financial quarter of the Company pursuant to Clauses 3.1.1 to 3.1.4 is a number equivalent in value to 125% of the Base Earnout Figure (or US$1,028,125 in Purchaser's Shares by value for each quarter). 3.2 Pursuant to Clause 3.1, the number of Earnout Shares to be allotted and issued (if any) to the Vendors will be such number of Purchaser's Shares as have an aggregate value which is as near as possible to, but not less than, the Base Earnout Figure, as it may be adjusted in accordance with Clause 3.1. The Earnout Shares shall be issued in the proportions specified under Clause 2.2. 3.3 For the purpose of determining the aggregate value referred to in Clause 3.2: 3.3.1 the value of each Purchaser's Share shall be deemed to be an amount equal to the average of the closing prices of a Purchaser's Share, as reported on the NASDAQ SmallCap Market System, on the five (5) trading days immediately prior to the end of the financial quarter in question and on the first five (5) trading days after the end of such quarter; and 3.3.2 where there is any carry-back or carry-forward pursuant to Clause 3.1.4, the valuation under Clause 4.3.1 shall be made in respect of the relevant ten (10) 58 trading days in the most recent quarters instead of the quarter(s) to which the carry-back or carry-forward was made. 3.4 The verification and allotment of all Earnout Shares shall be completed no later than forty-five (45) days after the end of each financial quarter. A statement showing the Pre-Tax Profits and the number of Earnout Shares to be issued (if any) to the Vendors pursuant to Clause 3.3 shall be agreed by the Vendors and the Purchaser prior to the expiry of this 45-day period, PROVIDED THAT failing such agreement the relevant Pre-Tax Profits and the said number of Earnout Shares (if any) shall be ascertained and certified by an independent firm of chartered accountants appointed by agreement between the parties or in default of agreement on the application of either party by the President for the time being of the Institute of Chartered Accountants in England and Wales. The decision of such expert shall be final and binding on the parties. The expert shall be deemed to act as an expert and not as an arbitrator and the provisions of the Arbitration Act 1996 shall not apply. The cost of the reference to such expert shall be payable as determined by the expert. 3.5 No fraction of an Earnout Share shall be issued to the Vendors and the number of Earnout Shares shall be adjusted accordingly to the nearest whole number. 3.6 The Earnout Shares, on issue, shall rank pari passu in all respects with the existing issued Purchaser's Shares. 3.7 Each of the Vendors agrees that he shall deliver to the Purchaser upon issue of the Earnout Shares a certificate and undertaking substantially in the form of Schedule 7 to the Purchase Agreements making or giving such representations, warranties and covenants as are necessary or advisable for the qualification of the issuance of Purchaser's Shares to the Vendors under Regulation S promulgated under the United States Securities Act of 1933, as amended. 3.8 In the event of there being any Change of Control of the Purchaser prior to 30 October 2000, immediately prior to such Change of Control and in full and final satisfaction of the Purchaser's obligations pursuant to this Agreement, the Purchaser shall issue to the Vendors such Purchaser's Shares as are equal to US$822,500 in value (adopting the same valuation method as in Clause 3.4) multiplied by the number of financial quarters remaining in the Earnout Period including the period in which the Change of Control takes place. 3.9 During the Earnout Period until all sums (if any) due under this Agreement have been paid or satisfied the Purchaser shall and shall procure that the Company and the Subsidiary comply with the provisions of SCHEDULE 2. 4. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and enure for the benefit of each party's successors but shall not be assignable by either party. 5. VARIATION No variation of this Agreement shall be effective unless made in writing and signed by or on behalf of each of the parties. 59 6. COUNTERPARTS This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, and which together shall constitute one and the same agreement. 7. APPLICABLE LAW This Agreement shall be governed by and construed in accordance with English law and the parties hereby submit themselves to the non-exclusive jurisdiction of the English courts. AT WITNESS the hands of the parties hereto or their duly authorised representatives the day and year first before written. 60 SCHEDULE 1 PARTICULARS OF THE VENDORS AND OF THE EARNOUT SHARES TO BE RECEIVED BY EACH OF THEM
(1) NAME AND ADDRESS (2) EARNOUT SHARES AS PERCENTAGE OF TOTAL NUMBER ISSUED 1. Gary GREEN 31.25 "Trudos" Heath Ride Finchampstead Wokingham Berkshire RG40 3QJ 2. Roger SCARLETT 31.25 "Glen d'Or" The Ridge Cold Ash Newbury Berkshire RG16 9HY 3. Anthony SAMPSON 3.75 31 Oakwood Lane Bowdon Cheshire WA14 3OL 4. Contech Consultants Limited 33.75 c/o 25 Turnbull's Lane Gibraltar --------- 100% ---------
61 SCHEDULE 2 EARNOUT PROTECTIONS PART 1 CALCULATION OF PRE-TAX PROFITS ("ELIGIBLE PROFIT") 1. The Eligible Profit for any financial quarter is (to the nearest L1) the net pre-tax profit of the Company as shown in the Management Accounts for the relevant financial period prepared in accordance with generally accepted accounting principles, SSAPs and FRSs and adjusted as follows: 1.1 by adding back any payment or provision for Tax; 1.2 adding back any provision for or payment of any dividend or other distribution by the Company or the Subsidiary; 1.3 adding back any sum specified as or proposed to be transferred to reserves; 1.4 adding back any management (or similar) charges to the Purchaser paid or provided for work carried out for the benefit of the Company charged at the same rates as applied in respect of other members of the Purchaser's Group; 1.5 adding back a charge by way of interest on any sums lent by the Purchaser's Group to the Company or the Subsidiary in excess of that rate of 1.5 per cent above the base rate of National Westminster Bank plc; 1.6 adding a sum by way of interest on any sums lent by the Company or the Subsidiary to the Purchaser at the rate of 3 per cent above the base rate of National Westminster Bank plc; 1.7 adding in relation to any transactions entered into by the Company or the Subsidiary on less than arms-length terms (in terms of reward to the Company or the Subsidiary) a reasonable sum as profit which might reasonably have been expected to accrue to the Company or the Subsidiary had the transaction been on arms-length terms; 1.8 by adding back any amount written off in respect of goodwill or other intangible assets; 1.9 by adding back audit fees in excess of L12,000 per annum and any fees attributable to the tax affairs of the Purchaser; and 1.10 by adding back any sum deducted from gross profit in respect of the emoluments paid or payable to or for the benefit of any person appointed to the board of the Company by the Purchaser except as arms' length consideration for services rendered to the Company or the Subsidiary. 62 PART 2 ACCOUNTING POLICIES TO BE USED IN CALCULATING THE ELIGIBLE PROFIT TURNOVER Turnover represents the amount derived from the provision of goods and services to third party customers based on invoiced sales adjusted by an amount to reflect the stage of completion of major contracts, less any returns or allowances. DEPRECIATION Depreciation is provided to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their estimated usual economic lives as follows: Leasehold improvements - 3 years Computer and Test Equipment - 3 years Fixtures and fittings - 3 years Plant and Equipment - 3 years Motor Vehicles - 3 years STOCK AND WORK IN PROGRESS (a) Stocks and work in progress Stocks are stated at the lower of cost and net realisable value. In determining the cost of raw materials, consumables and goods purchased for resale, the FIFO method is used (cost is taken as production cost, which includes an appropriate proportion of attributable overheads). Work in progress is valued at the lower of cost and net realisable value and costs include material cost, direct labour cost and other direct costs. (b) Project work in progress Projects are valued as per the contract ledger as follows: Actual revenue recognised to date is compared with total budget revenue to calculate the "stage of completion rate". "Stage of completion rate" is applied to the total budget costs to calculate the cost of sales. Calculated cost of sales is then compared to actual costs incurred to date. Where actual costs incurred to date exceed calculated cost of sales a work in progress balance is recognised (subject to making provision for future losses on contracts). Where calculated cost of sales exceeds actual costs incurred to date, a cost of sales accrual is recognised. (c) Long term contracts The amount of profit attributable to the stage of completion of a long term contract is recognised when the outcome of the contract can be foreseen with reasonable certainty. Turnover for such contracts is stated at cost appropriate to their stage of completion plus 63 attributable profits, less amounts recognised in previous years. Provision is made for any losses as soon as they are foreseen. Contract work in progress is stated at costs incurred, less those transferred to the profit and loss account, after deducting foreseeable losses and payments on account not matched with turnover. Amounts recoverable on contracts are included in debtors and represents turnover recognised in excess of payments on account. RESEARCH AND DEVELOPMENT Research and development costs are charged to profits as incurred. TAXATION No charge for taxation will be made in the calculation of eligible profit. FINANCE LEASES Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. 64 PART 3 VENDOR PROTECTION The Purchaser acknowledges that (having regard to the manner in which the Consideration for the Shares has been calculated) the Vendors have a legitimate interest in ensuring that the Eligible Profit of the Company for the Earnout Period is as high as may fairly and reasonably be achieved by the Company and the Subsidiary (in this Part 3 jointly referred to as the "Company") in those years (having due regard to the Purchaser's legitimate interest in establishing a stable and secure business for the Company in the long term). Accordingly, but subject in all cases to Clause 15 of this Part 3 of this Schedule, the Purchaser undertakes with the Vendors that during the Earnout Period: 1. it will use its best endeavours to promote the business of the Company; 2. it will not do anything with the intention of adversely affecting the Eligible Profit; 3. it will not develop or seek to develop any business competitive with that of any material business of the Company carried on at Completion or at any time during the Earnout Period; 4. it will not transfer, divert or direct the custom of any or any potential customer or client of the Company elsewhere or seek to do so; 5. it will not seek to transfer or divert or direct elsewhere any orders or enquiries for products or services available from the Company; 6. it will use its best endeavours to maintain the operations of the Company in terms of fixed assets (including premises, plant and equipment) and financial facilities to a standard being not less suitable for the purposes of the business of the Company than that maintained by the Company prior to Completion; 7. it will provide the Company with access to the financial management and other facilities of the Purchaser's Group on a basis no less beneficial to the conduct of the Company's business than that provided to any other members of the Purchaser's Group. 8. it will not sell or procure the sale or otherwise dispose of the whole or any substantial part of the business, undertaking or assets (other than current assets disposed of in the normal course of business) of the Company; 9. to procure that the Company does not pass any resolution to go into voluntary liquidation (except if a relevant company is at that time insolvent and a registered insolvency practitioner advises liquidation by reason of insolvency); 10. to procure that the Company makes no material adverse alteration in the nature, scope or conduct of its business; 65 11. to procure that Eligible Profits are not adversely affected by any service, management or similar charge (save as provided for in Part 1 of this Schedule) or by any transaction or arrangement which is not a bona fide commercial transaction or arrangement on arms-length terms; 12. it will not materially alter the number of employees of the Company or make any increase in the emoluments of the employees of the Company (including without limitation any employers contribution to pensions or in benefits provided hours of work or holiday entitlement) which would have a material adverse effect on Eligible Profit; 13. not to procure or permit any capital expenditure in relation to the Company except; 13.1 in accordance with the Budget in agreed terms for the period covered by the Earnout Period; 13.2 as is required to comply with the provisions in the legal obligations (including the terms of any lease) of the Premises occupied by the Company; 13.3 as is required to replace plant and equipment as it comes to the end of its useful working life and in accordance with the policy adopted by the Company immediately prior to Completion. 13.4 to procure that any goods or services provided to or in respect of the Company whether by the Purchaser's Group or any third party are provided on terms no less beneficial to the recipient than any similar goods or services are provided to any other member of the Purchaser's Group; 13.5 to procure that the Company does not depart from the ordinary course of the conduct of its business as conducted in the financial year ending on the Acquisition Date; 14. The Purchaser further undertakes with the Vendors that the Company will: 14.1 not enter into any material abnormal contract or commitment or any contract or commitment involving an aggregate expenditure by the Company (in accordance with its normal accounting policies at Completion) of more than L5,000 without the consent of the Vendors; 14.2 not declare, make or pay any dividend or other distribution; 14.3 not create or agree to create any encumbrance or redeem or agree to redeem any encumbrance (other than trade guarantees or indemnities in the ordinary course of its business) of the type and scale given in the financial year ending on the Acquisition Date; and 14.4 not permit any of its insurance policies to lapse, become void or voidable or do anything adversely to affect their renewal on the insurers standard (or, if different, the existing) terms. 15. The Purchaser shall be obliged to comply with its undertakings in Clauses 1 to 14 above only if and for so long as the Company's Pre-Tax Profits continue to meet the Quarterly Profit Estimates, such that if the Company's Pre-Tax Profits fail to meet two consecutive Quarterly Profit Estimates by 50% or more and the aggregate of any preceding Quarterly Profit Estimates is below 50% of estimate the Purchaser shall henceforth be released from all and any of its obligations under this Part 3 of this Schedule. 66 16. The Purchaser shall not give any direction to the trustee of the employee benefit trust established by the Company without the consent of the Vendors. 67 SCHEDULE 3 QUARTERLY PROFIT ESTIMATES
PERIOD PROFIT ESTIMATE L('000) ------ ----------------------- October - December 1998 112 January - March 1999 141 April - June 1999 205 July - September 1999 350 October - December 1999 313 January - March 2000 309 April - June 2000 213 July - September 2000 419
68 SIGNED BY ANTHONY SAMPSON ) in the presence of: ) SIGNED BY BERTRAM BADMINTON ) in the presence of: ) SIGNED BY: ) -------------------- duly authorised and on ) behalf of CONTECH CONSULTANTS ) LIMITED ) in the presence of: ) SIGNED BY: ) -------------------- duly authorised and on ) behalf of JAVELIN SYSTEMS, INC. ) in the presence of: ) 69 EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated August 25, 1998, relating to the consolidated financial statements of Javelin Systems, Inc., which appears in such Prospectus. We also consent to the references to us under the heading "Experts" and "Selected Consolidated Financial Information" in such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not prepared or certified such "Selected Consolidated Financial Information." PricewaterhouseCoopers LLP Costa Mesa, California October 6, 1998 EX-23.2 6 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the caption "Experts" and "Selected Consolidated Financial Information" and to the use of our report dated August 1, 1997, in Amendment No. 1 to the Registration Statement (Form SB-2) and related Prospectus of Javelin Systems, Inc. for the registration of 1,437,500 shares of its common stock. Ernst & Young LLP Orange County, California October 6, 1998 EX-23.3 7 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the use in Javelin Systems, Inc.'s Registration Statement on Form SB-2 of our report dated January 21, 1998 relating to the financial statements of Posnet Computers, Inc. as of and for the twelve month period ended October 31, 1997, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ CORBIN & WERTZ CORBIN & WERTZ Irvine, California October 1, 1998 EX-23.4 8 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Javelin Systems, Inc. We hereby consent to the use of our report dated February 6, 1998 on the consolidated financial statements of CCI Group, Inc. and subsidiaries included in the Javelin Systems, Inc. Registration Statement on Form SB-2 as filed with the Securities & Exchange Commission on September 22, 1998 and to the reference to our Firm under the caption "Experts" in the related Prospectus. /s/ RUBIN, BROWN, GORNSTEIN & CO. LLP RUBIN, BROWN, GORNSTEIN & CO. LLP St. Louis, Missouri September 29, 1998 -----END PRIVACY-ENHANCED MESSAGE-----