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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER: 0-19771
DATA SYSTEMS & SOFTWARE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2786081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 ROUTE 17, MAHWAH, NEW JERSEY 07430
(Address of principal executive offices) (Zip Code)
(201) 529-2026
Registrant`s telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant`s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes / / No /x /
The aggregate market value of the common stock held by non-affiliates of
the registrant at March 31, 2003 was approximately $19.1 million. The aggregate
market value was calculated by using the closing price of the stock on that date
on the Nasdaq National Market.
Number of shares outstanding of the registrant`s common stock, as of March
31, 2003: 7,391,363
DOCUMENTS INCORPORATED BY REFERENCE:
Certain sections of the registrant`s Proxy Statement to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of
the end of the registrant`s fiscal year are incorporated by reference into Part
III of this Form 10-K.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ............................................................ 1
Item 2. Properties .......................................................... 8
Item 3. Legal Proceedings ................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ................. 9
PART II
Item 5. Market for Registrant`s Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data ............................................. 10
Item 7. Management`s Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......... 22
Item 8. Financial Statements and Supplementary Data ......................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant .................. 23
Item 11. Executive Compensation .............................................. 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters .................... 23
Item 13. Certain Relationships and Related Transactions ...................... 23
Item 14. Controls and Procedures ............................................. 23
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .... 25
Certain statements contained in this report are forward-looking in nature.
These statements can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should" or "anticipates", or the
negatives thereof, or comparable terminology, or by discussions of strategy. You
are cautioned that our business and operations are subject to a variety of risks
and uncertainties and, consequently, our actual results may materially differ
from those projected by any forward-looking statements. Certain of such risks
and uncertainties are discussed below under the heading "Item 1.
Business-Factors That May Affect Future Results."
EasyBill(TM) and OncoPro(TM) are trademarks of our Endan IT Solutions Ltd
subsidiary. Maingate(R) is a registered trademark and PowerCamp(TM) and
Superstat(TM) are trademarks of our Comverge, Inc. subsidiary.
PART I
ITEM 1. BUSINESS
OVERVIEW
Through our subsidiaries in the United States and Israel, we are engaged in
the following businesses:
o Software Consulting and Development--Providing consulting and
development services for computer software and systems, primarily
through our dsIT subsidiary.
o Energy Intelligence Solutions--Developing and marketing load control,
data communications and other energy intelligence solutions for
electric utilities and their customers, through our Comverge
subsidiary.
o Computer Hardware Sales--Serving as an authorized dealer and a
value-added-reseller (VAR) of computer hardware, through our Databit
subsidiary.
SALES BY ACTIVITY
The following table shows, for the years indicated, the dollar amount and
the percentage of the sales attributable to each of the activities of our
operations.
2000 2001 2002
------------- ------------ -------------
Amount % Amount % Amount %
------- --- ------- --- ------- ---
Software consulting and development $18,977 33 $12,279 27 $14,202 25
Energy intelligence solutions ..... 17,105 30 13,793 30 19,023 34
Computer hardware sales ........... 21,515 37 19,794 43 22,605 41
Other ............................. 242 -- 58 -- 56 --
------- --- ------- --- ------- ---
Total Sales ............. $57,839 100 $45,924 100 $55,886 100
======= === ======= === ======= ===
SOFTWARE CONSULTING AND DEVELOPMENT
Services
Through dsIT Technologies Ltd. ("dsIT"), we provide computer software and
systems consulting, development and integration services. dsIT`s principal area
of technological expertise is state-of-the-art hardware with embedded real-time
software systems in a wide variety of applications, primarily
telecommunications, digital signal processing, image processing, software
testing and validation, electronic warfare, simulation and electro-optics. dsIT
combines the characteristics of a systems and software house with significant
hardware development capabilities, in a wide range of application areas,
spanning from military and aerospace applications, security and public safety
systems, telecom and datacom systems, and command and control. Through our
acquisition of Endan IT Solutions Ltd. ("Endan"), dsIT now offers expertise and
solutions products for billing, healthcare and other IT applications.
We provide our services either on a time-and-materials or fixed-price
basis. When working on a time-and-materials basis, our engineers are generally
sent to the customer`s premises to perform design and development activities
under the customer`s direction. In these engagements, our personnel typically
have no specific obligation for product delivery. During 2000, 2001 and 2002,
sales attributable to services provided on a time-and-materials basis were $14.2
million, $7.9 million and $9.8 million, respectively, accounting for
approximately 75%, 64% and 69% of segment sales for such years, respectively.
When working on a fixed-price basis, we undertake to deliver software or
hardware/software solutions to a customer`s specifications or requirements for a
particular project, accounting for these services on the
percentage-of-completion method. Since the profit margins on these projects are
primarily determined by our success in controlling project costs, margins on
these projects may vary substantially as a result of various factors, including
underestimating costs, difficulties associated with implementing new
technologies and economic and other changes that may occur during the term of
the contract. During 2000, 2001 and 2002, sales from fixed-price contracts were
$4.8 million, $4.4 million and $3.7 million respectively, accounting for
approximately 25%, 36% and 26% of segment sales for such years, respectively.
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Sales and maintenance of our billing and healthcare proprietary software
from our Endan subsidiary provided $0.7 million or 5% of segment sales during
2002.
Customers and Markets
Israel has historically been the primary area of this segment`s operations,
accounting for 82%, 88% and 95% of segment sales in 2000, 2001 and 2002,
respectively. This trend will continue as a result of our acquisition of Endan
and the decline in our consulting business in the United States. We have
developed a diverse customer base. In 2002, no customer accounted for more than
9% of segment revenues.
Competition
Our software consulting and development segment faces competition from
numerous competitors, both large and small, operating in the Israeli and United
States markets, some with substantially greater financial and marketing
resources. We believe that our wide range of experience and long-term
relationships with large corporations in Israel and the United States will
enable us to compete successfully and obtain future business.
Proprietary Rights
As a result of the Endan acquisition, we now own two proprietary software
packages: EasyBill(TM), a comprehensive customer service and billing system
aimed at the low to middle end application market; and OncoPro(TM), which
manages hospital medical files and has advanced applications for oncology
departments. The intellectual property rights resulting from our consulting and
development services are generally owned by the customer for whom the services
are performed. Other than EasyBill and OncoPro, we have no capitalized software
to be sold, leased or otherwise marketed.
ENERGY INTELLIGENCE SOLUTIONS
Overview
Through our Comverge subsidiary, we design, develop and market a full
spectrum of products, services and solutions to electric utilities and energy
service companies and their residential and business customers that provide
energy intelligence - the optimal transfer and usage of energy. Comverge
provides energy intelligence solutions to energy suppliers in the U.S. and
around the world. Comverge`s energy intelligence solutions brings to bear a
combination of hardware development and manufacturing capabilities and a suite
of software products which, together or separately, help investor-owned
utilities, energy service companies and other providers of electricity, as well
as their customers address energy usage issues through load control, data
communications and analysis, real-time pricing and integrated billing and
reporting. Our load control solutions allow our customers to reduce usage or
"shed load" during peak usage periods, such as the summer air conditioning
season, thereby reducing or eliminating the need to buy costly additional power
on the spot market, or invest in new peaking generation capacity. This solution
is both cost-effective and environmentally superior to building new generation
capabilities. Our two-way data communications solutions allow utilities to
gather, transmit, verify and analyze real-time usage information, and can be
used for automated meter reading, support time-of-use metering, theft detection,
remote connect/disconnect and other value-added services.
On April 7, 2003, Comverge announced the completion of its previously
announced Private equity financing in the amount of $13 million and the
finalization of terms for a new credit arrangement of $6.5 million with a
leading financial institution. See the discussion under "Recent Developments" in
"Item 7. Management`s Discussion and Analysis of Financial Condition and Results
of Operations. "
History
Since 1992, we have been designing, developing and marketing two-way
interactive communications solutions that provide real-time, remote automated
meter reading and data management capabilities to utilities internationally. We
developed state-of-the-art, high-speed, power line carrier technology and
deployed pilot systems in Thailand, Taiwan, Venezuela, Argentina, Israel and
Mexico.
In January 1998, Comverge acquired certain assets and licenses to
intellectual property from Lucent Technologies` Utilities Solution business
division. The licensed technology relates to a product which had been deployed
by Lucent using a two-way cable TV system and as well as an Internet-based
wireless network. Comverge employs a number of the employees who were involved
in developing this product.
In August 1999, Comverge purchased the assets and business of
Scientific-Atlanta`s Control Systems division, acquiring its load control and
gateway product lines and hiring a number of employees from this division.
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Comverge has offices in Florham Park, New Jersey from which its sales and
marketing and PowerCAMP(TM) software groups operate. Comverge`s
administrative and
engineering personnel and principal product manufacturing facility are located
in Atlanta, Georgia. Comverge also maintains a small research and development
center in Israel.
Products and Services
Comverge offers data communications and load control product solutions that
address the information and control needs of global energy market through our
power line technology and expertise we developed, combined with our strategic
acquisitions of technology, personnel, contracts and customer base from Lucent
and Scientific-Atlanta. Our technical expertise includes load control,
broadband, wireless and powerline communications, and Internet and home
networking and automation.
Comverge currently offers products and services in four product lines:
o Real-time usage information products; o Load control products; o
Gateway products, which combine real-time information and control; and
o PowerCAMP Software products that allow utilities to conserve, analyze,
monitor and price electric usage.
Real-Time Usage Information Products. We market the Comverge Distributed
Connection, also referred to as CDC, which is a meter-reading device for
gathering and transmitting real-time usage information and providing distributed
generation monitoring and control for commercial and industrial customers. The
CDC uses Internet-based cellular digital packet data (CDPD) communications to
transmit detailed information regarding patterns of energy consumption and is
targeted at industrial and commercial customers, an important segment of the
user market for energy companies. The use of CDPD for data communication makes
our product easier to install and less expensive to run than products that
require a dedicated telephone line. Our alliances with Verizon Wireless, AT&T
Wireless and GTE give us a national platform from which to market this product.
Load Control Products. Power distribution companies use load control
products to reduce peak electrical demand, avoiding the need to buy costly
electricity on the spot market or to build new generation facilities. Generators
and energy marketers can use load control products to free capacity during high
cost periods for resale to others. We offer our customers three major load
control products: digital control units, also known as DCUs, SuperStats and
Maingate. The DCU is a switch that can be connected to any appliance, such as
an air conditioner or water heater, and that permits the user to turn appliances
on and off from a remote location utilizing wireless communications. Our
SuperStat product combines a programmable thermostat with a wireless
communication module to provide cooling systems direct load control, allowing
customers to choose when and how much energy to use, while giving the utility
the ability to control air conditioning systems through the thermostat during
peak usage periods.
Gateway Products. Maingate, our gateway product, is a system designed
around a communications "gateway", or bridge, which permits two-way real-time
communications between a local area network (LAN), such as a "network" of
appliances and other devices within a home, or a network of meters at multiple
users, and a wide area network (WAN), such as cable, telephone or CDPD. Maingate
provides information and load control functionality to both the electricity
provider and its customers and can significantly reduce the customer`s
electricity bills. When fully integrated with our PowerCAMP software, Maingate
provides our customers with a comprehensive solution for their diverse energy
management requirements.
Maingate provides two-way real time metering, time-of-use pricing, load
control and whole house surge suppression for residential users. In the typical
configuration, the central air conditioning system, controlled by a SuperStat
thermostat, the water heater and up to one additional appliance within the home,
are fitted with power line communication ("PLC") based load control devices. The
load control devices and the SuperStat are networked, and linked via the
Maingate gateway to the WAN. Maingate allows the customer to automatically
respond to energy price variations to minimize their usage during high priced
periods. Rollout of Maingate Home is being deployed for a major Southeastern
utility under a contract that
-4-
provides for the installation of Maingate into 40,000 homes. As of December 31,
2002, we have provided approximately 14,000 units under this contract.
PowerCAMP Software Products. PowerCAMP is an extensive suite of software
developed by our engineers and deployed in several countries. The software used
in PowerCAMP has been subject to extensive field-testing and customer
interaction and has been the backbone for monitoring and analyzing utility meter
reading and load management programs using Comverge products. We have taken this
software and packaged and modularized it as a suite of stand-alone software
editions for utilities and their residential, commercial and industrial
customers. PowerCAMP can also serve those customers through a web-based
Application Service Provider, or ASP, model.
Customers and Markets
Our energy intelligence solutions business has over 500 customers in eight
countries and we have an installed base of approximately 5,000,000 end point
installations worldwide. The global market for energy intelligence solutions is
immature and still emerging. Reliable information as to the current size of the
market we serve or its rate of growth is not readily available. We anticipate
growth in our market will be driven by the following factors:
o Increasing worldwide demand for electricity and volatility of
electricity prices;
o Anticipated market and regulatory incentives to manage peak usage
periods in an economically efficient and environmentally friendly
manner; and
o Continued deregulation of the electric utility industry in the United
States and resulting increased competition among electric service
companies.
Although the effects of the current trend toward deregulation in the United
States and overseas are not certain, we anticipate that the new, more
competitive environment, combined with expected government incentives and
mandates, will result in continued growth in the demand for products designed to
gather information and manage electricity usage.
Comverge`s customers are generally domestic electric utilities, electric
service companies or prime contractors that serve electric utilities. Our
largest customer is Florida`s Gulf Power, which purchased over $4 million in
products and services in 2002. We have proven that our CDC and SuperStat
products work in small-scale deployments, and as our track record grows, we
expect to expand our sales to our existing customers to full-scale deployments.
In addition to expanding relationships with existing customers, our strategy is
to take advantage of the relationships with these customers to extend our sales
to their affiliates, many of whom are owned by large utility holding companies
with several owned utilities. We have also formed joint marketing partnerships
with Verizon Wireless, Schlumberger and Honeywell, and continue to plan to
expand on these relationships.
Competition
Within the emerging energy intelligence solutions market, we face
competition from a variety of companies and products, each of which is trying to
garner a share the market. Key competitors include Itron, ABB, Schlumberger and
Mainstreet Networks for our gateway products, CEPG for commercial and industrial
AMR products, and Cannon Technologies and Itron in the load control area. In
addition to these companies, there are many other competitors and potential
competitors vying for a piece of this as yet undefined market. We believe that
our products offer significant competitive advantages because they:
o have been proven in the field;
o offer significant technological advantages over competing products;
and/or o cost less than many of our competitors` products.
However, some of our competitors have more resources, better market
recognition, a larger sales force or can offer features not offered by our
products. In addition, certain of our competitors manufacture and sell electric
meters or back-end billing or other software systems to utilities, possibly
providing them an advantage in marketing their utility solution products. We
cannot be certain that our products will win market acceptance or that we will
be able to capture a significant segment of the market.
-5-
Proprietary Rights
Comverge holds 12 patents and has 13 patents pending. We try to take all
action necessary to protect our proprietary rights. Certain products that we
have developed and are developing incorporate or are derived from intellectual
property owned by third parties under license to us.
In our product development activities, we rely on a combination of
nondisclosure agreements and technical measures to establish and protect our
proprietary rights, if any, in our products. We believe that, as a result of the
rapid pace of technological change in the software and real-time system
industries, legal protection for our products, if any, will be less significant
to our prospects than the knowledge, ability and expertise of our management and
technical personnel.
COMPUTER HARDWARE SALES
Products and Services
Through our Databit subsidiary, we sell and service PC-based computer
hardware, software, data storage, client/server and networking solutions
principally in the greater New York City metropolitan area. Databit is an
authorized direct seller, value-added-reseller and an authorized service
provider for equipment and software from such well-known industry leaders as
Compaq, IBM, Microsoft, Oracle, 3Com, Compaq/Hewlett-Packard, NEC, Acer, Apple
and Dell. We offer our customers a full range of systems integration services,
including design, implementation, hardware and software selection, and
implementation of local and wide area networks. In addition, we provide
maintenance and service to customers under extended service agreements. Our
equipment and software sales and other services are offered under separately
negotiated and priced agreements.
Customers and Markets.
Computer hardware segment sales include sales to two major customers,
Montefiore Medical Center, which accounted for approximately 24%, 25% and 22% of
segment sales in 2000, 2001 and 2002, respectively, and a large law firm, which
accounted for approximately 21% in 2002. Another law firm customer accounted for
5% and 12% of segment sales in 2000 and 2001, respectively. No other customer
accounted for more than 10% of segment sales. We reduced our dependence on the
NY metro market which accounted for 70% of segment revenues in 2002, compared to
84% in 2001. This is partially attributable to the sales office we opened on the
West Coast, which we are enhancing in 2003.
Competition
The market for PCs and related peripheral hardware sales in which we
operate is characterized by severe competition in price-performance, breadth of
product line, financing capabilities, technical expertise, service and overall
reputation. Manufacturers have been increasing their direct sales efforts on the
Internet and otherwise, reducing prices to end-users, which reduces profit
margins for distributors and value-added-resellers such as Databit. Our
competitors include manufacturers, other VAR`s, large equipment aggregators
(some of whom sell to us) and systems integrators. Many of our competitors have
longer operating histories, greater financial resources and buying power and
larger, established customer bases. We compete by offering attractive prices and
flexible payment terms, and by helping our customers evaluate their needs and
tailoring solutions by offering other value-added services such as configuration
and on site service.
BACKLOG
As of January 1, 2003, our backlog of work to be completed was $24.4
million, $23.4 million of which related to our energy intelligence solutions
segment, primarily under our contract with Gulf Power. We estimate that we will
perform $9.5 million of our backlog in 2003.
EMPLOYEES
At December 31, 2002, we employed a total of 297 people, including 225
persons in engineering and technical support, 32 in marketing and sales, and 40
in management, administration and finance. A total of 206 of our employees are
based in Israel.
We consider our relationship with our employees to be satisfactory.
-6-
We have no collective bargaining agreements with any of our employees.
However, with regard to our Israeli activities, certain provisions of the
collective bargaining agreements between the Israeli Histadrut (General
Federation of Labor in Israel) and the Israeli Coordination Bureau of Economic
Organizations (including the Industrialists Association) are applicable by order
of the Israeli Ministry of Labor. These provisions concern mainly the length of
the workday, contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment. We generally provide our Israeli employees
with benefits and working conditions beyond the required minimums. Israeli law
generally requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Furthermore, Israeli employees and
employers are required to pay specified amounts to the National Insurance
Institute, which administers Israel`s social security programs. The payments to
the National Insurance Institute include health tax and are approximately 17% of
wages (up to a specified amount), of which the employee contributes
approximately 60% and the employer approximately 40%.
RESEARCH AND DEVELOPMENT (R&D)
For information on current product development and enhancement and their
costs, see "2002 Compared to 2001 - Research and development expenses ("R&D")"
in "Item 7. Management`s Discussion and Analysis of Financial Condition and
Results of Operations."
SEGMENT INFORMATION
For additional financial information regarding our operating segments,
foreign and domestic operations and sales, see "Item 7. Management`s Discussion
and Analysis of Financial Condition and Results of Operations" and Note 17 to
our Consolidated Financial Statements included in this Annual Report.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
We may from time to time make written or oral statements that contain
forward-looking information. However, our actual results may differ materially
from our expectations, statements or projections. The following risks and
uncertainties could cause actual results to differ from our expectations,
statements or projections.
GENERAL FACTORS
We have a history of operating losses and decreasing cash available for
operations.
We are experiencing and have in the past experienced operating losses. In
2000, 2001 and 2002, we had losses from continuing operations before provision
(benefit) for income taxes of $3.9 million, $10.4 million and $8.2 million,
respectively. Cash used in operations in 2000, 2001 and 2002 was $5.9 million,
$8.8 million and $6.0 million, respectively.
Our Comverge subsidiary incurred losses of approximately $3.2
million, $6.4 million and $2.2 million, in 2000, 2001, and 2002, respectively.
Of our net cash used in operating activities in 2002, approximately $5.0 million
was used in the energy intelligence solutions segment, $1.5 million was used by
our other U.S. operations, while $0.5 million was provided by our Israeli
software consulting and development segment operations. Although Comverge
achieved profitability in the fourth quarter of 2002, we are uncertain whether
Comverge will be able to maintain profitability in the coming periods. As
described under the caption "Recent Developments" in "Item 7. Management`s
Discussion and Analysis of Financial Condition and Results of Operations," in
April 2003, Comverge successfully completed a private equity financing and new
credit arrangements which should provide sufficient financing for Comverge to
independently fund its activities.
We believe that as a result of Comverge`s obtaining independent financing,
the release of previously restricted cash and anticipated improvement in
operating
results in 2003 in our other U.S. and Israeli operating activities we currently
have sufficient liquidity to fund all our activities for at least the next 12
months. For additional discussion of our liquidity position and factors which
may affect our future liquidity see the discussion under
-7-
the captions "Recent Developments" and "Liquidity and Capital resources" in
"Item 7. Management`s Discussion and Analysis of Financial Condition and Results
of Operations."
Loss of the services of a few key employees could harm our operations.
We depend on our key management and technical employees. The loss of
certain managers could diminish our ability to develop and maintain
relationships with customers and potential customers. The loss of certain
technical personnel could harm our ability to meet development and
implementation schedules. Most of our significant employees are bound by
confidentiality and non-competition agreements. We do not maintain a "key man"
life insurance policy on any of our executives or employees. Our future success
also depends on our continuing ability to identify, hire, train and retain other
highly qualified technical and managerial personnel. If we fail to attract or
retain highly qualified technical and managerial personnel in the future, our
business could be disrupted.
Our share price may decline due to the large number of shares of our common
shares eligible for future sale in the public market.
A substantial number of shares of our common stock are or will become
eligible for sale in the public market as described below. Sales of substantial
amounts of our shares of common stock in the public market, or the possibility
of these sales, may adversely affect our stock price.
Of our currently outstanding shares, 365,210 shares were issued in the
acquisition by our dsIT subsidiary of Endan are eligible for sale on the public
market under a registration statement filed by us with respect to these shares.
In connection with a secured revolving line of credit provided by Laurus
Master Fund, Ltd. ("Laurus") to Comverge in December 2002, we agreed to file and
make effective a registration statement which would allow the sale on the public
market of 400,000 shares of our common stock issuable in connection with a
convertible note. In April 2003, we sold 400,000 shares to Laurus in lieu of
Laurus` conversion of the note. In addition, we agreed to file and make
effective a registration statement, which would allow the sale on the public
market of such 400,000 shares and 190,000 shares of our common stock issuable
upon the exercise of a warrant. Prior to June 5, 2003, Laurus may sell shares
the 400,000 shares which it has already purchased, subject to a volume
limitation equal to 25% of the average daily trading volume for the 30 trading
days prior to the proposed sale, but may not sell any shares of our common stock
issuable upon the exercise of the warrant. After June 5, 2003, Laurus may sell
all 590,000 shares without any restrictions.
Pursuant to a registration statement filed by us in July 2002, Laurus may
also sell up to 125,000 additional shares of our common stock issuable upon the
exercise of a warrant and 171,920 shares that may be issued to Laurus upon
conversion by Laurus of the $600,000 balance of a convertible note issued to
Laurus in March 2002. The balance of the note is to be repaid in full in June
2003.
The recent transfer of our common stock to The Nasdaq SmallCap Market may
affect the market for our shares.
Effective March 3, 2003, our common stock was transferred from The Nasdaq
National Market to The Nasdaq SmallCap Market pursuant to a decision of a Nasdaq
Listing Panel. We have requested a review of the Panel`s decision by the Nasdaq
Listing Council which has the authority to reverse or modify the Panel`s
decision which request is pending. We do not know what affect the transfer
will have on the trading or market price of our shares.
RISKS RELATED TO THE SOFTWARE CONSULTING AND DEVELOPMENT SEGMENT
Failure to accurately forecast costs of fixed-priced contracts could reduce our
margins.
When working on a fixed-price basis, we undertake to deliver software or
integrated hardware/software solutions to a customer`s specifications or
requirements for a particular project. The profits from these projects are
primarily determined by our success in correctly estimating and thereafter
controlling project costs. Costs may in fact vary substantially as a result of
various factors, including underestimating costs, difficulties with new
technologies and economic and other changes that may occur
-8-
during the term of the contract. If, for any reason, our costs are substantially
higher than expected, we may incur losses on fixed-price contracts.
Increased hostilities in the Middle East region may further deepen the weakness
in the Israeli hi-tech market and may harm our Israeli operations; our Israeli
operations may be negatively affected by the obligations of our personnel to
perform military service.
A substantial part of our consulting and development services segment is
conducted in Israel. Accordingly, political, economic and military conditions in
Israel may directly affect this segment of our business. Over the past two
years, the Israeli hi-tech market has experienced a significant downturn,
particularly in the software consulting and development market. This weakness
has been prolonged by the increase in unrest, terrorist activity and military
action in and around Israel, which began in September 2000 and which has
continued with varying levels of intensity into 2003. Any increase in
hostilities in the Middle East involving Israel, including any involvement
related to the current conflict in Iraq could further weaken the Israeli hi-tech
market, which may result in a significant deterioration of the results of our
Israeli operations. In addition, an increase in hostilities in Israel could
cause serious disruption to our Israeli operations if acts associated with such
hostilities result in any serious damage to our offices or those of our
customers or harm to our personnel.
Many of our employees in Israel are obligated to perform military reserve
duty. In the event of severe unrest or other conflict, individuals could be
required to serve in the military for extended periods of time. Over the past
two years, there have been numerous call-ups of military reservists, and it is
possible that there will be additional call-ups in the future.
Our Israeli operations could be disrupted by the absence for a significant
period of time of one or more of our key employees or a significant number of
our other employees due to military service. Such disruption could harm our
Israeli operations.
Exchange rate fluctuations could increase the cost of our Israeli operations.
Most of the sales in this segment stem from our Israeli operations and a
significant portion of those sales are in New Israeli Shekels ("NIS") linked to
the dollar. Such transactions are negotiated in dollars; however, for the
convenience of the customer, they are settled in NIS. The dollar value of the
revenues of our operations in Israel will decrease if the dollar is devalued in
relation to the NIS during the period from the invoicing of a transaction to its
settlement. In addition, a significant portion of our expenses in those
operations are in NIS, so that if the dollar is devalued in relation to the NIS,
the dollar value of these expenses will increase.
RISKS RELATED TO THE ENERGY INTELLIGENCE SOLUTIONS SEGMENT
We have made a significant investment in our energy intelligence solutions
segment, which develops and markets load control products and systems offering
two-way automated meter reading and related data management capability to
utilities. Revenues have fluctuated significantly from quarter to quarter and
until the fourth quarter of 2002, this segment has operated at a loss. The
activities of this segment are subject to many risks, including the following:
The market for our energy intelligence solutions is subject to rapid
technological change; if we fail to keep pace, we will have difficulty
developing and maintaining a market for our products and services.
The market for our energy intelligence solutions segment is characterized
by rapid technological change. Communications and networking technologies are
continuously changing and we will need to invest in continued product
development, both hardware and software, in order to keep pace with these
changing technologies. Although as discussed under "Recent Developments" in
"Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations, " Comverge has recently been successful in raising significant
financing, over the long term Comverge may not have adequate resources to invest
in development and its development efforts may not be successful.
The pace of utility deregulation has been slow; the ultimate regulatory
structure of the utility industry may not provide mandates or incentives to
purchase our products.
The electric utility industry is undergoing significant deregulation. The
pace of deregulation appears to have slowed due to the uncertainty about
deregulation in the wake of the energy crisis in California in 2000 and the
recent Enron reorganization. Market observers expect deregulation to include
energy choice
-9-
and time-of-use pricing requirements, which will mandate, or favor
implementation by utilities of, load control programs and the use of automated
meter reading and data distribution. However, the pace of deregulation has not
been as rapid as expected and to date only a limited number of utilities have
made purchase commitments for automated meter reading and data distribution
systems. Many utilities have also deferred the purchase of load control systems,
pending resolution of broader industry and regulatory developments. The results
of deregulation are uncertain and may not result in the mandates or incentives
for the types of services, which require AMR systems. If the state and federal
regulation does not provide these requirements or incentives, the market for our
products may not develop as we expect.
We must compete with other utility solution providers for market acceptance and
customers.
While we believe that the systems offered by our energy intelligence
solutions segment offer advantages over competing load control and data
communications solutions, there are alternative solutions, and we cannot predict
what share of the market we will obtain. In addition, some of our competitors
have more sales and marketing resources, better brand recognition and/or
technologies that offer alternative advantages. If our potential customers do
not adopt our solutions or do so less rapidly than we expect, our future
financial results and our ability to achieve positive cash flow or
profitability, will be harmed.
We may encounter difficulties in implementing our technology, products and
services.
Problems may occur in the implementation of our technology, products or
services, and we may not successfully complete the commercial implementation of
our technology on a wide scale. Future advances may render our technology
obsolete or less cost effective than competitive systems. Consequently, we may
be unable to offer competitive services or offer appropriate new technologies on
a timely basis or on satisfactory terms.
Delays, quality control and price problems could arise due to our reliance on
third-party manufacturers of certain components.
We use a limited number of outside parties to manufacture components of
some of our products. Our reliance on third party manufacturers exposes us to
risks relating to timeliness, quality control and pricing. We have experienced
certain delays and quality control problems from third-party manufacturers in
the past and we may experience such problems with our current manufacturers. In
addition, to diversify our product offerings, in the third quarter of 2002 we
contracted with a third-party manufacturer to develop and manufacture new
products and new features to existing products. Implementing these new product
offerings could cause some transitional delays and the diversification could
have a negative impact on price and quality control. Such delays, price
increases and/or quality control problems at our third-party manufacturers could
harm our relationships with our customers, our operating results and cash flow.
RISKS RELATED TO THE COMPUTER HARDWARE SEGMENT
We face low margin, mass marketing competition.
The market for PCs and related peripheral hardware sales in which we
operate is characterized by severe competition in price-performance and
financing capabilities. Manufacturers and on-line Internet vendors have been
increasing their direct sales efforts on the Internet and otherwise, reducing
prices to end-users, which reduce profit margins for distributors and value
added resellers such as our Databit subsidiary. Should this trend continue, it
could make our method of sales uneconomical and bring into question the
long-term viability of the business model used by Databit.
A large portion of our sales are concentrated in the greater New York city area.
Computer hardware sales to the greater New York City metropolitan area
represented 78%, 84% and 70% of the total segment sales for the years ended
December 31, 2000, 2001 and 2002, respectively. Furthermore, most of the sales
force for the segment is based in Manhattan and northern New Jersey. The
decrease in percentage of sales centered in the New York City metropolitan area
is partially attributable to the sales office we opened on the West Coast, which
we are enhancing in 2003. There can be no assurance business will continue to
grow outside our main area, the New York City metropolitan area, and if the
region suffers from an economic downturn, similar to that of 2001, our operating
results could deteriorate.
-10-
ITEM 2. PROPERTIES
Our corporate headquarters and the principal offices for our U.S. software
consulting and development and hardware sales segments are located in Mahwah,
New Jersey in approximately 5,000 square feet of office space, under a lease
which expires in September 2003. The rent for these premises currently is
$85,000 per annum. We also rent offices in New York City of approximately 4,700
square feet, under a lease, which expires in October 2005, at a current rent of
$184,000 per annum. In addition, our Comverge subsidiary rents approximately
11,500 square feet in Florham Park, New Jersey, at an annual rent of $126,000
under a lease which expires January 2004, and approximately 31,600 square feet
of office and assembly space in Norcross, Georgia under a lease which expires in
May 2006, at a current rent of $277,000 per annum. Our West Coast sales office
for our hardware sales segment is located in Los Angeles at an annual rent of
$11,000 in approximately 500 square feet of office space under a lease that
expires in April 2004.
Our Israeli activities are conducted in approximately 18,000 square feet of
office space in the Tel Aviv metropolitan area under a lease that expires in
August 2009. The annual rent is approximately $290,000. These facilities are
used for the Israeli operations of the software consulting and development
segment and the energy intelligence solutions segment. In addition, as part of
our acquisition of Endan, we acquired their leased office space located in the
Tel Aviv metropolitan area under a lease that expires in July 2004. The annual
rent is approximately $103,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 3, 2002, we had conducted our annual meeting of stockholders.
At this meeting, the stockholders elected the following persons as our
directors: George Morgenstern, Robert Kuhn, Avi Kerbs, Susan Malley and Allen
Schiff. The stockholders did not vote on any other matters. Dr. Kuhn
subsequently resigned from the Board effective January 21, 2003.
-11-
PART II
ITEM 5. MARKET FOR REGISTRANT`S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock traded on the Nasdaq National Market System (NASDAQ/NNM)
under the symbol "DSSI" through February 28, 2003. Beginning March 3, 2003, our
Common Stock is traded on The Nasdaq SmallCap Market. The following table sets
forth, for the periods indicated, the high and low reported sales prices per
share of our Common Stock on the Nasdaq National Market System.
High Low
---- ---
2001:
First Quarter ........................ $5.31 $3.31
Second Quarter ....................... 8.80 3.75
Third Quarter ........................ 7.11 5.30
Fourth Quarter ....................... 7.45 4.71
2002:
First Quarter ........................ $5.62 $3.83
Second Quarter ....................... 3.96 2.74
Third Quarter ........................ 3.04 1.04
Fourth Quarter ....................... 1.93 0.84
As of March 31, 2003 there were 66 record holders of our Common Stock. We
estimate that there are approximately 1,600 beneficial owners of our
Common
Stock.
We paid no dividends in 2001 or 2002 and we do not intend to pay dividends
in 2003. We cannot declare or pay any dividends without the prior consent of
Laurus, pursuant to the convertible note issued by us to
Laurus in June 2002.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 2000, 2001 and 2002 and consolidated balance sheet data as of
December 31, 2001 and 2002, have been derived from our audited Consolidated
Financial Statements included in this Annual Report. The selected consolidated
statement of operations data for the years ended December 31, 1998 and 1999 and
the consolidated balance sheet data as of December 31, 1998, 1999 and 2000 have
been derived from our audited Consolidated Financial Statements not included
herein.
This data should be read in conjunction with our Consolidated Financial
Statements and related notes and "Item 7. Management`s Discussion and Analysis
of Financial Condition and Results of Operations."
-12-
Selected Consolidated Statement of Operations Data
For the Years Ended December 31,
----------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in thousands, except per share data)
Sales ...................................................... $ 36,710 $ 39,708 $ 57,839 $ 45,924 $ 55,886
Cost of sales .............................................. 28,814 31,615 45,606 37,558 42,906
-------- -------- -------- -------- --------
Gross profit ............................................ 7,896 8,093 12,233 8,366 12,980
Research and development expenses .......................... 1,605 1,269 928 2,284 1,526
Selling, general and administrative expenses ............... 12,549 12,471 16,340 16,671 16,754
Impairment of goodwill and investment ...................... -- -- -- 227 2,850
Gain on sale of division \ subsidiary ...................... -- -- 1,144 397 --
-------- -------- -------- -------- --------
Operating loss .......................................... (6,258) (5,647) (3,891) (10,419) (8,150)
Interest income ............................................ 147 61 1,758 1,104 253
Interest expense ........................................... (360) (910) (709) (459) (1,212)
Loss on early redemption of debt ........................... -- -- (943) -- --
Other income (loss), net ................................... (2,172) (306) (50) (32) 113
Minority interests ......................................... 878 (275) -- -- 880
-------- -------- -------- -------- --------
Loss from continuing operations before provision
(benefit) for income taxes ........................... (7,765) (7,077) (3,835) (9,806) (8,116)
Provision (benefit) for income taxes ....................... 35 62 171 (11) 28
-------- -------- -------- -------- --------
Loss from continuing operations ......................... (7,800) (7,139) (4,006) (9,795) (8,144)
Loss from discontinued operations, net of income taxes ..... (11,142) (8,728) (104) -- --
Gain on sale of discontinued operations, net of income taxes 5,998 -- 4,222 --
-------- -------- -------- -------- --------
Net income (loss) ....................................... $(12,944) $(15,867) $ 112 $ (9,795) $ (8,144)
======== ======== ======== ======== ========
Basic and diluted net income (loss) per share:
Loss from continuing operations ........................ $ (1.05) $ (0.96) $ (0.54) $ (1.41) $ (1.11)
Discontinued operations ................................ (0.70) (1.17) 0.56 -- --
-------- -------- -------- -------- --------
Net income (loss) per share - basic and diluted ..... $ (1.75) $ (2.13) $ 0.02 $ (1.41) $ (1.11)
======== ======== ======== ======== ========
Weighted average number of shares outstanding
- basic and diluted ....................................... 7,391 7,433 7,422 6,970 7,349
======== ======== ======== ======== ====
Selected Consolidated Balance Sheet Data:
As of December 31,
------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in thousands)
Working capital ............................................ $ 5,719 $ 20,030 $ 18,178 $ 6,809 $ 2,827
Total assets ............................................... 49,880 50,458 42,157 39,244 33,305
Short-term and long-term debt .............................. 1,661 9,007 6,606 8,681 10,033
Minority interests ......................................... 294 10 40 2,530 1,609
Total shareholders` equity ................................. 39,418 24,850 22,581 14,362 7,128
(1) Results for 1998 include the gain on the sale of our help desk segment. See
Notes 3 and 4 to the Consolidated Financial Statements included in this Annual
Report for a description of our various acquisitions and dispositions of
business operations and segments during the period from 2000 to 2002.
(2) Effective July 1, 2002, we adopted Statement of Financial Standards (SFAS)
No. 141, "Business Combinations" and effective January 1, 2002 adopted SFAS No.
142, "Goodwill and Other Intangibles". As a result, we have ceased amortization
of all goodwill beginning January 1, 2002. Had SFAS No. 142 been adopted by us
effective January 1, 2000, net income (loss) and net income (loss) per share,
basic and diluted, would been as follows (in thousands, except per share data):
-13-
Year ended December 31,
2000 2001
------- -------
Net income (loss), as reported ........................ $ 112 $(9,795)
Plus: Goodwill amortization, net of income taxes ...... 657 502
------- -------
Adjusted net income (loss) ............................ $ 769 $(9,293)
======= =======
Net income (loss) per share:
Basic and diluted - as reported .................... $ 0.02 $ (1.41)
======= =======
Basic and diluted - as adjusted .................... $ 0.10 $ (1.33)
======= =======
-14-
ITEM 7. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
Comverge Private Equity Financing
On April 7, 2003, our majority-owned subsidiary, Comverge, Inc. (formerly
Comverge Technologies, Inc.), completed of its previously announced private
equity financing in the amount of $13 million and the finalization of terms for
a new credit arrangement of $6.5 million with a leading financial institution.
Our Participation in the Financing. We purchased $3.25 million of the
Series A Convertible Preferred Stock issued by Comverge in the equity financing
announced in this Current Report. A syndicate of venture capital firms purchased
the remaining $7.75 million of the Series A Convertible Preferred Stock issued
by Comverge, and one member of the syndicate also purchased $2.0 million of a
Series A-1 Convertible Preferred Stock of Comverge. We still remain Comverge`s
largest shareholder, owning approximately 50.6% of the outstanding capital stock
of Comverge (42.6% on a fully diluted basis), treating all options and rights to
purchase Comverge stock as if they had been exercised. We hold approximately 26%
of all the preferred stock issued by Comverge in the private equity financing,
in addition to our continued ownership of approximately 8% of the outstanding
Comverge common stock.
Put-Call Option. The venture capital firm which purchased the Series A-1
Preferred Stock entered into an agreement with Comverge pursuant to which
Comverge granted to the venture capital firm an option to put its shares of
Series A-1 Preferred Stock to Comverge, which put is exercisable from April 8,
2004 to April 18, 2004. This agreement also grants to Comverge a right to call
from the venture capital firm its Series A-1 Preferred Stock, which call right
expires on April 18, 2004, and its Series A Preferred Stock, which call right
expires on July 8, 2003, at a call price equal to the purchase price of the
Preferred Stock plus an 8% annual dividend.
Agreements Related to the Series A Preferred Stock. We entered into various
agreements with Comverge, the syndicate of venture capital investors and certain
of Comverge`s common stockholders. These agreements provide for, among other
things, restrictions on the transfer of the Series A Preferred Stock and
Comverge common stock, the voting of our Series A Preferred Stock and Comverge
common stock, our right to receive quarterly and annual financial reports from
Comverge and registration rights for our Series A Preferred Stock and Comverge
common stock. Under Comverge`s Amended and Restated Certificate of
Incorporation, the holders of Comverge common stock have the right to elect two
of the five directors on Comverge`s Board. Pursuant to a voting agreement, one
of the directors elected by the holders of Comverge common stock must be the CEO
of Comverge. Our chairman, George Morgenstern, and the Chief Executive Officer
of Comverge, Robert Chiste, were elected as directors by the Comverge common
stockholders.
Rights and Preferences of Series A Preferred Stock. Under Comverge`s
Amended and Restated Certificate of Incorporation, the Series A Preferred Stock
will have priority over Comverge common stock and other preferred stock for
dividends and liquidations (which includes a sale of Comverge). Additionally,
the Series A Preferred Stock have anti-dilution protection for stock issuances
by Comverge below the per share purchase price of the Series A Preferred Stock
(subject to customary exceptions such as employee stock options) as well as
approval rights for major corporate transactions, stock issuances, declaration
or payment of dividends, changing corporate governance documents, liquidation or
dissolution of Comverge and other corporate matters. The Series A Preferred
Stock is also convertible into Comverge common stock at the holder`s option or
upon a initial public offering with gross proceeds of at least $30 million and
an offering price per share at least five times the original per share purchase
price of the Series A Preferred Stock.
New Comverge Credit Arrangements. In connection with its private equity
financing, Comverge secured a $6.5 million credit facility with a leading
financial institution. In connection with this new credit facility, Comverge
paid off in full its $5.5 million loan outstanding (as of March 31, 2003) with
Bank Leumi USA and its up to $2 million line of credit with Laurus Master Fund,
Ltd., which line was also terminated releasing us from the security we had
pledged to secure such debt. The new credit facility includes a $1.5 million
term loan secured by our pledge of $1.5 million, which is being held in an
account at Comverge`s new lender, and a $5 million revolving line of credit
secured by the assets of Comverge.
-15-
Release of our Long-term Deposit. Upon repayment of Comverge`s loan with
Bank Leumi USA, $1.0 million of the long-term deposit held at Bank Leumi as
security for Comverge`s loan became unrestricted and is part of our working
capital. We also agreed to pledge $1.5 million to secure Comverge`s term loan
with its new lender, which funds were deposited into an account in our name at
Comverge`s new lender. Comverge agreed to make certain prepayments on the term
loan and the new lender agreed to the release of amounts equal to such payments
from the pledge account, subject to certain conditions, as follows:
o Three payments of $500,000 on December 31, 2003, June 30, 2004 and
December 31, 2004 if (a) Comverge raises at least $2 million in
additional equity financing by July 6, 2003 or (b) the put option held
by the holder of the Series A-1 Preferred Stock has not been exercised
by April 18, 2004 (in which case the December 31, 2003 payment would
be made on April 28, 2004);
o Two payments of $750,000 on December 31, 2003 and June 30, 2004 if (a)
Comverge raises at least $5 million in additional equity financing by
July 6, 2003 or (b) the put option held by a member of the syndicate
has not been exercised by April 18, 2004 and Comverge raises at least
$3 million in additional equity financing by July 6, 2003 (in which
case the balance of the December 31, 2003 payment would be made on
April 28, 2004);
o If none of the other triggering events have occurred, then we are not
entitled to the release of the $1.5 million until April 1, 2006,
although Comverge will use commercially reasonable efforts to cause
the release of the money to us before that date.
Our Option to Purchase Series A-2 Preferred Stock. Until December 31, 2003,
we have the option to purchase from Comverge up to $1.5 million of Series A-2
Convertible Preferred Stock. The amount of Series A-2 Preferred Stock that we
may purchase from Comverge will be limited to the number of shares that could be
purchased by the principal balance of the $1.5 million term loan with Silicon
Valley Bank as of the date we give notice of our exercise of the Series A-2
option. The Series A-2 Preferred Stock has the same purchase price as the Series
A-1 Preferred Stock, but is junior in priority in liquidation (which includes
the sale of Comverge) to both the Series A and Series A-1 Preferred Stock. In
all other respects the Series A-2 Preferred Stock has the same rights as the
Series A Preferred Stock and the Series A-1 Preferred Stock.
We expect to record a non-cash gain of $4 million in the second quarter of
2003 in connection with the transaction.
Sale of Shares to Laurus. On April 10, 2003, we received 600,000 from
Laurus in connection with our sale of 400,000 shares of our Common Stock to
Laurus. Such sale was in lieu of the conversion by Laurus of $600,000 of the
credit line is afforded Comverge.
OVERVIEW AND TREND INFORMATION
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate, depends upon a
variety of factors that may affect our business and operations. Certain of these
factors are discussed at "Item 1. Description of Business-Factors That May
Influence Future Results."
During 2002, we operated in three reportable segments: software consulting
and development, energy intelligence solutions and computer hardware sales and
we are continuing our business activity in all three segments during 2003.
Software Consulting and Development
Revenues increased by approximately $1.9 million from $12.3 million for the
year ended December 31, 2001 to $14.2 million for the year ended December 31,
2002. This increase resulted from a $5.3 million increase in revenues due to the
acquisition of Endan in December 2001 and a decrease of $3.4 million in revenues
due to a slowing economy in general and in the hi-tech sector in particular. The
segment loss increased by approximately $2.4 million from $2.1 million for the
year ended December 31, 2001 to $4.5 million for the year ended December 31,
2002. The continuing downward pressure on revenues resulted in an impairment of
goodwill, acquired software and a cost investment of $2.8 million, $0.2 million
(included in cost of sales) and $0.1 million,respectively, for the year ended
December 31, 2002 ($2.4 million net of minority interests). Excluding the above
impairment charges (net of minority interests), the net loss decreased by
approximately
-16-
$0.5 million. The improvement in 2002 stemmed primarily from the cost cutting
measures taken during 2002, which resulted in a profitable fourth quarter in
2002. Should the market`s negative trend continue, we may not be able to sustain
significant profits in this segment, although we believe the improved cost
structure will cause this segment to be at least break even in the future.
Energy Intelligence Solutions
In 2002, new management reorganized Comverge`s business to address the
evolving needs of the energy intelligence solutions market. This resulted in
increased revenues and improved productivity, including the first profitable
quarter for the segment. Comverge`s recent private equity financing and new
credit facility should give Comverge the capital it needs to finance and expand
its business.
Computer Hardware
The improved results in this segment are due to the record sales in the
fourth quarter of 2002. Although we do not expect sales in the coming quarters
to be at a similar level, we expect sales for the year to exceed the 2002 level.
Sales in 2002 were also characterized by a greater dependence on a few large
customers, with 52% coming from the three largest customers in 2002, as compared
to 46% in 2001.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management`s most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
The following discussion of critical accounting policies represents our
attempt to bring to the attention of readers of this report those accounting
policies which we believe are critical to our consolidated financial statements
and other financial disclosure. It is not intended to be a comprehensive list of
all of our significant accounting policies, which are more fully described in
Note 2 of the Notes to the Consolidated Financial Statements included in this
Annual Report. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management`s judgment in their application. There
are also areas in which the selection of an available alternative policy would
not produce a materially different result.
We have identified the following as critical accounting policies to our
Company: revenue recognition; foreign currency transactions; inventory; income
taxes; and goodwill and other long-lived assets.
Revenue recognition
Our revenue recognition policies are significant as our revenue is a key
component of our results of operations. Revenue from time-and-materials service
contracts, maintenance agreements and other services are recognized as services
are provided. Revenue on the sale of products and software are recognized when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred and there is reasonable assurance of
collection of the sales proceeds. Such revenues generally do not involve
difficult, subjective or complex judgments.
We derived $3.9 million of revenues from fixed-price contracts ($3.7
million from our software and consulting development segment and $0.2 million
from our energy intelligence segment), representing approximately 7% of
consolidated sales in 2002 ($4.4 million and 10% and $4.8 million and 8% in 2001
and 2000, respectively), which require the accurate estimation of the cost,
scope and duration of each engagement. Revenue and the related costs for these
projects are recognized using the percentage-of-completion method as costs
(primarily direct labor) are incurred, with revisions to estimates reflected in
the period in which changes become known. If we do not accurately estimate the
resources required or the scope of work to be performed, or do not manage our
projects properly within the planned periods of time or satisfy our obligations
under the contracts, then future revenue and consulting margins may be
significantly and negatively affected or losses on existing contracts may need
to be recognized. Any such resulting changes in revenues and reductions in
margins or contract losses could be material to our results of operations.
-17-
Foreign currency transactions
We have several foreign subsidiaries which together account for
approximately 24% of our net revenues for the year ended December 31, 2002, and
31% of our assets and 23% of our total liabilities as of December 31, 2002.
Under the relevant accounting guidance, the treatment of foreign currency
transactions is dependent upon our management`s determination regarding the
functional currency of each subsidiary. The functional currency is determined
based on management judgment and involves consideration of all relevant economic
facts and circumstances affecting the subsidiary. If any subsidiary`s functional
currency would be deemed to be the local currency, then any gain or loss
associated with the translation of that subsidiary`s financial statements would
be included in cumulative translation adjustments on our consolidated balance
sheets and as part of comprehensive income on our consolidated statements of
operations. If a subsidiary is disposed, any cumulative translation gains or
losses would be realized into our consolidated statement of operations. However,
because the functional currency of our subsidiaries is deemed to be the U.S.
dollar, then any gain or loss associated with transactions in the local currency
is included within our consolidated statement of operations.
Inventories
Inventories are stated at the lower of cost or market and have been reduced
by an allowance for excess and obsolete inventories to establish a new cost
basis. The estimated allowance is based on management`s review of inventories on
hand compared to estimated future usage and sales. We evaluate the adequacy of
these reserves quarterly.
Income taxes
We have a history of unprofitable operations from losses incurred in a
number of our operations. These losses generated sizeable state, federal and
foreign tax net operating loss ("NOL") carryforwards, of approximately $18.8,
$15.0 and $12.3 million as of December 31, 2002, respectively.
Generally accepted accounting principles require that we record a valuation
allowance against the deferred income tax asset associated with these NOL
carryforwards and other deferred tax assets if it is "more likely than not" that
we will not be able to utilize them to offset future income taxes. Due to our
history of unprofitable operations, we only recognize net deferred tax assets in
those subsidiaries that we believe are "more likely than not" able to utilize
them to offset future income taxes in the future. We currently provide for
income taxes only to the extent that we expect to pay cash taxes on current
income.
It is possible, however, that we could be profitable in the future at
levels which cause management to conclude that it is more likely than not that
we will realize all or a portion of the NOL carryforwards and other deferred tax
assets. Upon reaching such a conclusion, we would immediately record the
estimated net realizable value of the deferred tax assets at that time and would
then provide for income taxes at a rate equal to our combined federal and state
effective rates or foreign rates. Subsequent revisions to the estimated net
realizable value of the deferred tax assets could cause our provision for income
taxes to vary significantly from period to period.
Goodwill and other long-lived assets
We review the carrying value of our long-lived assets held for use whenever
circumstances indicate there may be an impairment. For all assets excluding
goodwill, the carrying value of a long-lived asset is considered impaired if the
sum of the undiscounted cash flows is less than the carrying value of the asset.
If this occurs, an impairment charge is recorded for the amount by which the
carrying value of the long-lived asset exceeds its fair value. Effective July 1,
2001 and January 1, 2002 we adopted SFAS No. 141 "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". Under these new accounting
standards, we no longer amortize our goodwill and are required to complete an
annual impairment test. For the purpose of implementing SFAS No. 142 we have
designated the fourth quarter as the period of the annual test and determined
that we have three reporting units, which are the same as our three reportable
segments. In the third quarter of this 2002, we came to the conclusion that due
to the slow down in the hi-tech markets, we would probably record an impairment
in the fourth quarter. As such, in the third quarter of 2002 we recognized
expenses for the impairment of goodwill and acquired software of $3.0 million
($2.4 million net of minority interests). In the fourth quarter of 2002, no
additional adjustment was recorded, when performing the annual evaluation.
As of December 31, 2002, we had an aggregate of $4.9 million of goodwill,
$4.4 million of which relates to our software consulting and development segment
and $0.5 million of which relates to our energy
-18-
intelligence solutions segment. Additionally, at December 31, 2002, we had $0.4
million net book value of other identifiable intangible assets.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statement of operations
data as a percentage of our total sales.
Year Ended December 31,
-----------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Sales 100% 100% 100% 100% 100%
Cost of sales 78 80 79 81 77
---- ---- ---- ---- ----
Gross profit 22 20 21 19 23
Research and development expenses 4 3 2 5 3
Selling, general and administrative expenses 34 31 28 37 30
Impairment of goodwill and investment -- -- -- -- 5
Gain on sale of division -- -- 2 1 --
---- ---- ---- ---- ----
Operating loss (16) (14) (7) (22) (15)
Interest income (expense), net (1) (2) 2 1 (2)
Other loss, net (6) (1) -- -- --
Loss on early redemption of debt -- -- (2) -- --
Minority interests 2 (1) -- -- 2
---- ---- ---- ---- ----
Loss from continuing operations before
provision (benefit) for income taxes (21) (18) (7) (21) (15)
Provision (benefit) for income taxes -- -- -- -- --
---- ---- ---- ---- ----
Loss from continuing operations (21) (18) (7) (21) (15)
Loss from discontinued operations, net of income taxes (30) (22) -- -- --
Gain on sale of discontinued operations,
net of income taxes 16 -- 7 -- --
---- ---- ---- ---- ----
Net income (loss) (35)% (40)% --% (21)% (15)%
==== ==== ==== ==== ====
-19-
The following table sets forth certain information with respect to revenues
and profits of our three reportable business segments for the years ended
December 31, 2000, 2001 and 2002, including the percentages of revenues
attributable to such segments. The column marked "Other" aggregates information
relating to miscellaneous operating segments, which may be combined for
reporting under applicable accounting principles.
Software Energy
Consulting and Intelligence Computer
Development Solutions Hardware Other Total(*)
----------- --------- -------- ----- --------
(dollars in thousands)
Year ended December 31, 2002:
Revenues from external customers $ 14,202 $ 19,023 $ 22,605 $ 56 $ 55,886
Percentage of total revenues
from external customers ...... 25% 34% 41% -- 100%
Gross profit ................... $ 2,673 $ 6,087 $ 4,164 $ 56 $ 12,980
Impairment of goodwill and
Investments ................. $ 2,850 -- -- -- $ 2,850
Segment income (loss) .......... $(4, 503 $ (2,161) $ 15 $ (2) $ (6,651)
Year ended December 31, 2001:
Revenues from external customers $ 12,279 $ 13,793 $ 19,794 $ 58 $ 45,924
Percentage of total revenues
from external customers ...... 27% 30% 43% -- 100%
Gross profit ................... $ 2,104 $ 2,652 $ 3,552 $ 58 $ 8,366
Impairment of goodwill, acquired
software and investments .... $ 227 -- -- -- $ 227
Segment income (loss) .......... $ (2,052) $ (6,447) $ 1,006 $ (217) $ (7,710)
Year ended December 31, 2000:
Revenues from external customers $ 18,977 $ 17,105 $ 21,515 $ 204 $ 57,801
Percentage of total revenues
from external customers ...... 33% 30% 37% -- 100%
Gross profit ................... $ 4,821 $ 3,926 $ 3,244 $ 204 $ 12,195
Segment income (loss) .......... $ 1,530 $ (3,216) $ 726 $ 41 $ (919)
(*) Our consolidated sales and gross profit for 2000 included $38 in management
fees received from Tower Semiconductor Ltd. See Note 17 to the Consolidated
Financial Statements included in this report for reconciliation to our
consolidated financial information.
2002 COMPARED TO 2001
Sales. Sales in 2002 were $55.9 million, increasing by $10.0 million, or
22%, from $45.9 million in 2001, due to sales increases in all segments.
Energy intelligence solution sales increased by $5.2 million, or 38%, from
$13.8 million in 2001, to $19.0 million in 2002. The increase in this segment`s
sales was primarily attributable to fulfillment of a large contract to sell our
Maingate C&I and PowerCAMP systems to a major utility and to a generally higher
level of business.
Sales in the computer hardware segment continued to improve, increasing by
$2.8 million, or 14%, from $19.8 million in 2001, to $22.6 million in 2002.
Although sales in this segment were improving through the year, the increase was
primarily attributable to the $9.2 million in sales in the fourth quarter of
2002. The increase in the fourth quarter of 2002 was primarily attributable to
sales of $4.5 million to a single customer.
Software consulting and development sales increased by $1.9 million, or
16%, from $12.3 million in 2001, to $14.2 million in 2002. This improvement in
sales was entirely attributable to the expanded revenue base achieved as a
result of the Endan acquisition by dsIT in December 2001, which more than offset
the general weakness in the global hi-tech markets and in the software
consulting and development market in particular.
-20-
Gross profit. Gross profit in 2002 was $12.9 million increasing by $4.6
million, or 55%, compared to 2001, with gross profit margins improving, from 19%
in 2001, to 23% in 2002. The increase in gross profits was attributable to
improvements in all segments, particularly in the energy intelligence solutions
segment.
Gross profit in the energy intelligence solution segment increased by $3.4
million, or 130%, from $2.7 million, or 19% of sales, in 2001 to $6.1 million,
or 32% of sales, in 2002. The increase in gross profit margin is primarily
attributable to a $0.7 million settlement with its former contract manufacturer
and approximately $2.7 million to increases in sales of products of higher
margin products.
In the computer hardware segment gross profit increased by $0.6 million, or
17%, primarily due to the increase in sales.
Gross profit in the software consulting and development segment also
increased by $0.6 million, or 27%, from $2.1 million, or 17% of sales, in 2001,
to $2.7 million, or 19% of sales, in 2002. The increase in gross profits was
primarily attributable to the increase in sales, as well as improved cost
structure.
Research and development expenses ("R&D"). R&D expenses decreased from $2.3
million in 2001, to $1.5 million in 2002. This decrease was due to a decrease in
R&D expenditures in the energy intelligence solution segment, as it shifted its
emphasis from R&D in 2001 to marketing and sales in 2002.
Selling, general and administrative expenses ("SG&A"). Despite the
significant increase in sales, SG&A remained relatively stable increasing by
$0.1 million, from $16.7 million in 2001, to $16.8 million in 2002.
Impairment of goodwill and investment. The entire expense recorded was due
to our software consulting and development segment. With the acquisition of
Endan by our dsIT subsidiary in December 2001, we recognized goodwill and
acquired software valued at a total of $6.4 million. This value was supported by
third party valuations prepared at the time of the acquisition, based on sales
and business projections made at that time. Since then, the hi-tech market in
general and that of software consulting in particular have continued to
deteriorate. As a result, in the third quarter of 2002, we recorded a goodwill
impairment charge of $2.8 million. We have made concerted efforts to offset this
negative trend with cost cutting measures already implemented. As we look
forward to the 2003, the impairment charge recorded reflects our reassessment of
the values then recorded with respect to the entire software consulting and
development segment to reflect our current sales projections, based on the same
valuation models employed at the time of the Endan acquisition. We are confident
that the expected revenue levels and the cost cutting measures already
implemented will provide for breakeven and even positive performance in the
coming periods, justifying the remaining goodwill and value attached to this
segment. In addition, in the fourth quarter of 2002, we recorded a write down of
$90,000 with respect to an investment in a start-up company.
Interest income (expense). To finance our operations we utilized our
investments and capital raised through issuing convertible debentures and
obtaining lines of credit. The utilization of our investments caused the
decrease in interest income and we expect interest income to further decrease in
coming periods. We incurred finance expenses in connection with the capital
raised including interest and amortization of costs associated with the
convertible debt and warrants issued. Although the interest associated with the
utilization of lines of credit is expected to continue at the current level, the
amortization expenses are expected to decrease over the coming quarters. Of the
$1.2 million of interest expense during the year ended December 31, 2002, $0.7
million was related to the accretion of discounts and the amortization of
related costs in connection with convertible debt and warrants.
Minority interests. Minority interests reflects primarily the minority
interests in losses generated by our dsIT subsidiary, primarily due to the
impairment of goodwill and acquired software in this segment as described above.
2001 COMPARED TO 2000
Sales. Sales decreased by 21% to $45.9 million in 2001 from $57.8 million
in 2000, due to a decrease in sales in all segments. Sales in the software
consulting and development segment decreased by $6.7 million, or 36%, as a
result of the continued downturn in the hi-tech economy generally and in the
demand for software consulting and development services in particular, as well
as a decrease in computer embedded software sales. Sales also decreased in the
energy intelligence solutions segment by $3.3 million, or 19%. This decrease was
primarily attributable to the inclusion in 2000 of non-recurring sales of
component inventory and order backlog purchased as part of the
Scientific-Atlanta control systems division ($1.2
-21-
million), and sales of a specialized load control product developed for a single
customer ($1.3 million). In our computer hardware segment, sales decreased by
$1.7 million, or 8%, resulting from the slowdown in the economy, especially
since September 11th, and particularly in the greater New York City metropolitan
area, which is the primary market for the segment. Our sales in the computer
hardware segment decreased by 39% in the second half of 2001 to $7.3 million,
from $12.0 million in the second half of 2000.
Gross profit. Gross profit decreased by 32% to $8.4 million, or 18% of
sales, in 2001, from $12.2 million, or 21% of sales, in 2000. This decrease was
due to a $2.7 million, or 56%, decrease in gross profit of our software
consulting and development segment and a $1.3 million, or 32%, decrease in gross
profit of our energy intelligence solutions segment, partially offset by a $0.3
million, or 9%, increase in gross profit in our computer hardware sales segment.
The decrease in the software consulting and development segment was due to the
decrease in sales, particularly the inclusion in 2000 of certain highly
profitable computer embedded software sales which contributed to the
deterioration in gross profit margins from 25% in 2000 to 17% in 2001. In our
energy intelligence solutions segment, the decrease in gross profit was due to a
combination of the decrease in sales and a decrease in gross profit margins from
23% in 2000 to 19% in 2001. In our computer hardware sales segment, the increase
in gross profit was entirely due to the improvement in gross margin from 15% of
sales in 2000 to 18% in 2001 as result of a change in our customer mix.
R&D. R&D expenses more than doubled to $2.3 million in 2001 as compared to
$0.9 million in 2000. This increase was due to a concentrated effort in the
energy intelligence solutions segment to complete the development of and make
available to customers a broader set of solutions, while refocusing our existing
products. Among the technologies developed are 900 MHz communication
capabilities to enhance our DCU load control product, latest generation CDPD
technology upgrade for our CDC product and upgrade and enhancement of the
control system software for our Maingate system currently being installed at
Gulf Power.
SG&A. SG&A increased by 2% to $16.7 million in 2001, from $16.3 million in
2000. The increase was attributable to a $0.9 million, or 15% increase in our
energy intelligence solutions segment. The increase in SG&A in Comverge was
attributable to the increased level of marketing and administrative costs,
including costs associated with hiring a new CEO, CFO, Executive Vice President
and other senior staff for Comverge. Salaries and related costs in Comverge
increased by $1.2 million in 2001 as compared to 2000, due in large part to
these hirings. This increase was partially offset by a decrease in corporate
expenses primarily due to a non-recurring bonus of $0.6 million paid to the CEO
in the first quarter of 2000.
Interest income. Interest income decreased to $1.1 million in 2001, from
$1.8 million in 2000. The decrease was primarily attributable to the decrease in
the amounts invested, as they were being utilized to finance our operations, as
well as the decrease in interest rates over the year.
Income taxes. We recorded a small tax benefit in 2001 as compared to a tax
expense of $0.2 million in 2000. We establish valuation allowances against
virtually all deferred tax assets, as we believe that it is more likely than not
that they will not be realized. For a detailed analysis of the income tax
provision, see Note 15 to the Consolidated Financial Statements included in this
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002 we had working capital of $2.8, including $1.2
million in non-restricted cash and cash equivalents. Net cash used in operating
activities in the fourth quarter of 2002 was $1 million in addition to the $5.0
million net cash used in the first three quarters of this year. The primary uses
of our net cash in 2002 were our loss, including the losses in comverge and all
corporate expenses, and $1.6 million investment in inventory over. These
expenditures were financed by the proceeds from sale and maturity of marketable
and debt securities and the proceeds from issuance of a convertible note.
In December 2003 Comverge acquired a $2.0 million line of credit, secured
by its inventory, Accounts receivables, Databit`s accounts receivables and a
corporate guarantee. As of December 31, 2002 Comverge had utilized $1.0 million
of this line of credit.
-22-
As described above under the caption "Recent Developments" on April 7, 2003
Comverge completed of its previously announced private equity financing in the
amount of $13 million, $3.25 million of which was invested by us and $9.75
million of which was invested by a group of leading energy venture capital
investors. At the same time, Comverge obtained a new credit arrangement of $6.5
million. In connection with this new credit facility, Comverge paid off in full
its $5.5 million (as at March 31, 2003) loan with Bank Leumi USA and the
outstanding balance its $2 million line of credit with Laurus, which line was
also terminated. The new credit facility includes a $1.5 million term loan
secured by our pledge of $1.5 million, which is being held in as a restricted
long-term deposit at Comverge`s new lender, and a $5.0 million revolving line of
credit secured by the assets of Comverge. As part of the new credit
arrangements, $1.0 million of the long-term deposit held at Bank Leumi as
security for Comverge`s loan became unrestricted and is now freely available to
us as working capital. Comverge has agreed to prepay the term loan and permit
release of our long-term deposit over the next 20 months, subject to certain
conditions.
We believe that the proceeds of the financing and new credit arrangements
should provide sufficient financing for Comverge to independently fund its
activities. Due to the significant interest in Comverge held by others and other
restrictions, working capital and cash flows of Comverge will not be available
to finance other U.S. activities.
Of the total working capital at December 31, 2002, $0.4 million was in our
majority-owned dsIT subsidiary. Due to Israeli tax and company law constraints
as well as the significant minority interest in dsIT, such working capital and
cash flows from dsIT`s operations, which amounted to $0.5 million for the year
ended December 31, 2002, are not available to finance U.S. activities. dsIT is
utilizing $1.5 million of its $2.0 million lines of credit. dsIT`s lines of
credit are denominated in NIS and bearing an average interest rate of the
Israeli prime rate plus 0.4% per annum. The Israeli prime rate fluctuates and as
of December 31, 2002 was 10.6%. We believe that dsIT will have sufficient
liquidity to finance its activities from cash flow from its own operations over
the next 12 months. This is based on continued utilization of its line of credit
and improved operating results stemming from continued cost reductions.
We believe that we have more than sufficient liquidity to finance our
US-based operating activities excluding Comverge and our corporate activities
for at least the 12 months following the date of this report. We expect Comverge
to fund its activities from the proceeds of its recent fund raising and its
credit lines. We intend to finance our other U.S. activities from cash on hand
as of April 10, 2002 of $1.9 million, including $1 million released as part of
Comverge`s bank arrangements and $0.60 million from the sale of shares of our
common stock to Laurus on April 10, 2003, and from operating cash flow from
expected profitable operations of the computer hardware segment.
Contractual Obligations and Commitments
Our contractual obligations and commitments at December 31, 2002,
excluding certain severance arrangements described below, principally include
obligations associated with our outstanding indebtedness, future minimum
operating lease obligations and contractual obligations to our CEO for payments
for his post-retirement consulting services to us are as set forth in the table
below.
Cash Payments Due During Year Ending December 31,
--------------------------------------------------------
(In Thousands)
Contractual Obligations Total 2003 2004 2005 After 2005
----------------------- ----- ---- ---- ---- ----------
Long-term debt related to US operations $ 6,751 $ 5,746 $ 1,005 $ -- $ --
Long-term debt related to Israeli operations 789 216 198 192 183
Guarantees 558 558 -- -- --
Operating leases 5,060 1,561 1,265 1,046 1,188
Consulting agreement with CEO 1,356 -- 271 271 814
------- ------- ------- ------- -------
Total contractual cash obligations $14,514 $ 3,381 $ 7,439 $ 1,509 $ 2,185
======= ======= ======= ======= =======
We expect to finance these contractual commitments from cash on hand and
cash generated from operations.
We also have obligations under various agreements and other arrangements
with officers and other employees with respect to severance arrangements and
multiyear employment agreements.
-23-
Previously, the Company accrued a loss for contingent performance of bank
guarantees. The Company`s remaining commitment under these guarantees is
$558,000 at December 31 2002. The Company has collateralized a portion of these
guarantees by means of a deposit $241,000 as of December 31, 2002. The
obligation is presented as being due in 2003, though we are uncertain as to when
actual payment may be made.
Under Israeli law and labor agreements, dsIT and Comverge`s subsidiary in
Israel are required to make severance payments to dismissed employees and to
employees leaving employment in certain other circumstances. The obligation for
severance pay benefits, as determined by the Israeli Severance Pay Law, is based
upon length of service and last salary. These obligations are substantially
covered by regular deposits with recognized severance pay and pension funds and
by the purchase of insurance policies. As of December 31, 2002, we had a total
of $3.4 million in potential severance obligations, of which approximately $2.4
million was funded with cash to insurance companies and approximately $1.0
million was unfunded. The entire $3.4 million was accrued for as of December 31,
2002.
Under the terms of his employment agreement with us, we have an obligation
to pay our Chief Executive Officer consulting fees over a seven year period upon
his retirement on December 31, 2003. Although we contemplate that those payments
will begin on January 1, 2004, our CEO has the option to terminate his
employment agreement and begin his consulting period on or prior to December 31,
2003. During the first four years of the consulting period, we would have to pay
our CEO 50% of his salary in effect at the time of termination and 25% of that
salary during the last three years of the consulting period, plus contributions
to a non-qualified defined contribution retirement plan equal to 25% of the
consulting fee. At the start of the consulting period, we are also required to
fund amounts payable for the term of the consulting period, by the purchase of
an annuity or similar investment product. The CEO`s salary for 2002 is $434,000.
We also have severance arrangements under an employment agreement with our
Chief Financial Officer to pay severance under certain circumstances. If our CFO
employment agreement is terminated by us or by him for reasons other than for
cause, we must pay him (i) an amount equal to 150% of his last month`s salary
multiplied by the number of years (including partial years) that the CFO worked
for us, plus (ii) an amount equal to five times his last month`s salary or two
times such salary if the CFO terminates the employment agreement other than
after a change in control or a breach by us of his employment agreement. Our
severance obligation would be reduced by the amount contributed by us to certain
Israeli pension and severance funds pursuant to the CFO`s employment agreement.
As of December 31, 2002, the unfunded portion of such severance obligation was
$35,000.
Our energy intelligence solutions subsidiary may in certain circumstances
be liable to make severance payments to its CEO and its Executive Vice
President. Under the employment agreement with the CEO of the subsidiary if his
employment is terminated without cause, the subsidiary would have to pay the
subsidiary CEO one year of base salary, or if there has been an IPO for the
subsidiary, three years of base salary plus up to 15% of any excess parachute
payment. The subsidiary CEO`s salary for 2002 is $250,000 per annum.
Under our employment agreement with the Executive Vice President of our
energy intelligence solutions segment, if such officer`s employment agreement
were terminated without cause, the subsidiary would have to pay to such officer
three months of base salary ($205,000 during 2002) for each year (or partial
year) of service to the subsidiary up to a maximum of one year of salary. The
Executive Vice President`s employment commenced in March 2001.
Our energy intelligence solutions subsidiary is not obligated to make any
severance payments under these agreements if the CEO or the Executive Vice
President voluntary terminates his employment agreement.
We also have severance arrangements under an employment agreement with the
Chief Executive Officer of dsIT to pay severance under certain circumstances. If
his employment agreement is terminated by us or by him for reasons other than
for cause, we must pay him (i) an amount equal to last month`s salary multiplied
by the number of years (including partial years) that he worked for Endan and
dsIT. Our severance obligation would be reduced by the amount contributed by us
to certain Israeli pension and severance funds pursuant to his employment
agreement. As of December 31, 2002, the unfunded portion of such severance
obligation was $34,000.
-24-
Impact of Inflation and Currency Fluctuations
A majority of our sales are denominated in dollars. The remaining portion
is primarily denominated in NIS, linked to the dollar. Such sales transactions
are negotiated in dollars; however, for the convenience of the customer they are
settled in NIS. These transaction amounts are linked to the dollar between the
date the transactions are entered into until the date they are effected and
billed. From the time these transactions are effected and billed, through the
date of settlement, amounts are primarily unlinked. The majority of our expenses
in Israel are in NIS, while a portion is in dollars or dollar-linked NIS.
The dollar cost of our operations in Israel may be adversely affected in
the future by a revaluation of the NIS in relation to the dollar, should it be
significantly different from the rate of inflation. In 2002 the devaluation of
the NIS against the dollar was 7.3%, whereas in 2001 the devaluation of the NIS
against the dollar was 9.3%. Inflation in Israel was 6.5% and 1.4% during these
same periods, respectively. During the first two months of 2003, the NIS was
further devalued against the dollar by 1.5% and inflation during this period was
0.6%.
As of December 31, 2002, virtually all of our monetary assets and
liabilities that were not denominated in dollars or dollar-linked NIS were
denominated in NIS, and the net amount of such monetary assets and liabilities
was not material. In the event that in the future we have material net monetary
assets or liabilities that are not denominated in dollar-linked NIS, such net
assets or liabilities would be subject to the risk of currency fluctuations.
Payments to Related Parties
We paid an individual as a director and vice president, who is the son of
our Chief Executive Officer, approximately $280,000, $197,000 and $230,000 for
the years ending December 31, 2000, 2001 and 2002, respectively. We also have
engaged certain of our directors and former directors to render professional
services to us. One of our former directors, who is also the son-in-law of our
Chief Executive Officer, is principal of a law firm that we engage to perform
legal services for us. We paid to this firm legal fees and out-of-pocket
disbursements (which includes fees and expenses of special counsel hired on our
behalf) of approximately $474,000, $575,000 and $630,000 for the years ended
December 31, 2000, 2001 and 2002, respectively. We also engaged an asset
management firm that is controlled by one of our directors. This firm provided
discretionary asset management services to us. In the year ended December 31,
2001 and 2002, we paid fees of $13,000 and $12,000 to this asset management
firm. The engagement with the asset management firm was terminated in September
2002. The chief executive officer of the Company`s Israeli subsidiary has a loan
from the subsidiary that was acquired in 2001. The loan balance and accrued
interest at December 31, 2001 and 2002 was $47,000 and $48,000, respectively.
The loan has no defined maturity date, is denominated in NIS, is linked to the
Index and bears interest at 4% per annum. The Company`s Comverge subsidiary has
made loans of $10,000 each to both our Chief Executive Office and Chief
Financial Officer. The loans had an initial maturity date of January 3, 2002 and
were extended at that time to mature on January 3, 2004. The loans bear interest
at 4.25% per annum. The balances of the loans and accrued interest at December
31, 2001 and 2002 were $23,000 and $25,000, respectively. The Comverge
subsidiary also extended a loan of $14,000 to Comverge`s Executive
Vice-President in 2001. This loan bears interest at 6.5% per annum and is to
mature in July 2004. The balance of the loan and accrued interest at December
31, 2001 and 2002 was $15,000 and $16,000, respectively.
-25-
SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain of our unaudited quarterly
consolidated financial information for the years ended December 31, 2001 and
2002. This information should be read in conjunction with our Consolidated
Financial Statements and the notes thereto.
2001
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
Sales $ 13,229 $ 12,569 $ 10,359 $ 9,767
Cost of sales 10,537 9,753 8,162 9,106
-------- -------- -------- --------
Gross profit 2,692 2,816 2,197 661
Research and development 482 871 863 68
Selling, general and administrative 4,184 4,203 4,242 4,042
Impairment of goodwill and investment . -- -- -- 227
Gain on sale of division/subsidiary -- -- -- 397
-------- -------- -------- --------
Operating income (loss) (1,974) (2,258) (2,908) (3,279)
Interest income (expense), net 195 184 177 89
Other income (loss), net (61) 56 31 (58)
Minority interests -- -- -- --
-------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes (1,840) (2,018) (2,700) (3,248)
Provision (benefit) for income taxes 27 85 (94) (29)
-------- -------- -------- --------
Net income (loss) $ (1,867) $ (2,103) $ (2,606) $ (3,219)
======== ======== ======== ========
Basic and diluted net income (loss) per share:
Net income (loss) per share $ (0.27) $ (0.30) $ (0.37) $ (0.46)
======== ======== ======== ========
Weighted average number of shares
outstanding - basic 6,964 6,910 6,950 7,009
======== ======== ======== ========
Weighted average number of shares
outstanding - diluted 6,964 6,910 6,950 7,009
======== ======== ======== ========
2002
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
Sales $ 12,808 $ 12,783 $ 11,269 $ 19,026
Cost of sales 9,830 10,191 8,906 13,979
-------- -------- -------- --------
Gross profit 2,978 2,592 2,363 5,047
Research and development 460 550 256 260
Selling, general and administrative 4,300 4,452 3,923 4,079
Impairment of goodwill and investment . -- -- 2,760 90
Gain on sale of division/subsidiary -- -- -- --
-------- -------- -------- --------
Operating income (loss) (1,782) (2,410) (4,576) 618
Interest income (expense), net (1) (146) (393) (419)
Other income (loss), net 27 66 56 (36)
Minority interests (4) 207 649 28
-------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes (1,760) (2,283) (4,264) 191
Provision (benefit) for income taxes 42 15 7 (36)
-------- -------- -------- --------
Net income (loss) $ (1,802) $ (2,298) $ (4,271) $ 227
======== ======== ======== ========
Basic and diluted net income (loss) per share:
Net income (loss) per share $ (0.25) $ (0.31) $ (0.58) $ 0.03
======== ======== ======== ========
Weighted average number of shares
outstanding - basic 7,353 7,353 7,353 7,335
======== ======== ======== ========
Weighted average number of shares
outstanding - diluted 7,353 7,353 7,353 7,336
======== ======== ======== ========
-26-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are required to make certain disclosures regarding our financial
instruments, including derivatives, if any.
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a contractual
obligation either to deliver or receive cash or another financial instrument to
or from a second entity. Examples of financial instruments include cash and cash
equivalents, trade accounts receivable, loans, investments, trade accounts
payable, accrued expenses, options and forward contracts. The disclosures below
include, among other matters, the nature and terms of derivative transactions,
information about significant concentrations of credit risk, and the fair value
of financial assets and liabilities.
In the normal course of business, we are exposed to fluctuations in
interest rates on the $5.7 million of debt incurred to finance our capital
expenditures as well as lines-of-credit and long-term debt incurred to finance
our operations in Israel, currently $1.5 million and $786,000, as well as the
Comverge line-of-credit of $1.0 million. Our convertible note, with a face value
of $1.4 million, has a fixed rate of interest of 10%; however, the conversion
feature of our convertible note is exposed to fluctuations in the price of our
common stock. Additionally, our monetary assets and liabilities (net liability
of approximately $764,000) in Israel are exposed to fluctuations in exchange
rates. We do not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate or exchange rate exposures.
Fair Value of Financial Instruments
Fair values of financial instruments included in current assets and current
liabilities are estimated to approximate their book values due to the short
maturity of such investments. Fair value for long-term debt and long-term
deposits are estimated based on the current rates offered to us for debt and
deposits with similar terms and remaining maturities. The fair value of our
long-term debt and long-term deposits are not materially different from their
carrying amounts.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of
credit risk, consist principally of cash and cash equivalents, short and
long-term bank deposits, and trade receivables. The counterparty to a majority
of our cash equivalent deposits as well as our short and long-term bank deposits
is a major financial institution of high credit standing. We do not believe
there is significant risk of non-performance by these counterparties.
Approximately 12% of the trade accounts receivable at December 31, 2002 was due
from a U.S. customer that pays its trade receivables over usual credit periods.
Credit risk with respect to the balance of trade receivables is generally
diversified due to the large number of entities comprising the our customer
base.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Furnished at the end of this report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to each of our directors and nominees for director and
the information relating to our executive officers, appearing under the captions
"Election of Directors - Certain Information Regarding Directors and Officers"
and "Compliance with Section 16(a) of the Securities and Exchange Act of 1934"
in our definitive proxy statement for the 2003 Annual Meeting of Stockholders to
be filed on or before April 30, 2003 (the "2003 Proxy Statement"), is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to compensation of directors and executive
officers, appearing under the captions "Executive and Director Compensation -
Compensation of Directors", "Executive and Director Compensation - Compensation
Committee Interlocks and Insider Participation", "Executive and Director
Compensation - Employment Arrangements", "Executive and Director Compensation -
Executive Compensation" and "Compensation Report of the Board of Directors" in
the 2003 Proxy Statement, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information relating to security ownership, appearing under the caption
"Stock Ownership of Certain Beneficial Owners and Management" in the 2003 Proxy
Statement which the Company intends to file with the SEC no later than 120 days
after the end of the fiscal year covered by this report. is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and transactions,
appearing under the caption "Executive and Director Compensation - Certain
Related Party Transactions" in the 2003 Proxy Statement, is hereby incorporated
by reference.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in the reports we file under the Securities Exchange Act of 1934, within the
time periods specified in the SEC`s rules and forms.
CHANGES IN CONTROLS AND PROCEDURES
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation.
-28-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.1 Certificate of Incorporation of the Registrant, with amendments
thereto (incorporated herein by reference to Exhibit 3.1 to the
Registrant`s Registration Statement on Form S-1 (File No. 33-70482)
(the "1993 Registration Statement")).
3.2 By-laws of the Registrant (incorporated herein by reference to
Exhibit 3.2 to the Registrant`s Registration Statement on Form S-1
(File No. 33-44027) (the "1992 Registration Statement")).
3.3 Amendments to the By-laws of the Registrant adopted December 27,
1994 (incorporated herein by reference to Exhibit 3.3 of the
Registrant`s Current Report on Form 8-K dated January 10, 1995).
4.1 Specimen certificate for the Common Stock (incorporated herein by
reference to Exhibit 4.2 to the 1992 Registration Statement).
4.2 Securities Purchase Agreement between the Registrant and Bounty
Investors LLC, dated as of October 12, 1999, including Form of
Warrant (incorporated herein by reference to Exhibit 1 to the
Registrant`s Current Report on Form 8-K dated October 12, 1999 (the
"October 1999 8-K")).
4.3 Form of Registration Rights Agreement between the Registrant and
Bounty Investors LLC, dated as of October 12, 1999 (incorporated
herein by reference to Exhibit 1 to October 1999 8-K).
4.4 Warrant to Purchase Common Stock of the Registrant, dated October
12, 1999 (incorporated herein by reference to Exhibit 4.4 to the
Registrant`s Annual Report on Form 10-K for the year ended December
31, 2000 (the "2000 10-K")).
4.5 Securities Purchase Agreement, dated as of June 11, 2002, by and
among the Registrant, Databit, Inc. and Laurus Master Fund, Ltd.
("Laurus") (including the forms of convertible note and warrant)
(incorporated herein by reference to Exhibit 10.1 to the
Registrant`s Current Report on Form 8-K dated June 11, 2002).
4.6 Purchase and Security Agreement, dated as of December 4, 2002, made
by and between Comverge ("Comverge") and Laurus (incorporated herein
by reference to Exhibit 10.1 to the Registrant`s Current Report on
Form 8-K dated December 5, 2002 (the "December 2002 8-K")).
4.7 Convertible Note, dated December 4, 2002, made by and among
Comverge, Laurus and, as to Articles III and V only, the Registrant
(incorporated herein by reference to Exhibit 10.2 to the December
2002 8-K).
4.8 Common Stock Purchase Warrant, dated December 5, 2002, issued by the
Registrant to Laurus (incorporated herein by reference to Exhibit
10.3 to the December 2002 8-K).
4.9 Registration Rights Agreement, dated as of December 4, 2002, by and
between the Registrant and Laurus (incorporated herein by reference
to Exhibit 10.4 to the December 2002 8-K).
*10.1 Employment Agreement between the Registrant and George Morgenstern,
dated as of January 1, 1997 (incorporated herein by reference to
Exhibit 10.1 to the Registrant`s Annual Report on Form 10-K for the
year ended December 31, 1997 (the "1997 10-K")).
*10.2 Employment Agreement between the Registrant and Yacov Kaufman, dated
as of January 1, 1999 (incorporated herein by reference to Exhibit
10.22 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 1999 (the "1999 10-K")).
*10.3 1991 Stock Option Plan (incorporated herein by reference to Exhibit
10.4 to the 1992 Registration Statement). *10.4 1994 Stock Incentive
Plan, as amended (incorporated herein by reference to Exhibit 10.4
to the Registrant`s Form 10-K for the year ended December 31, 1995
(the "1995 10-K")).
*10.5 1994 Stock Option Plan for Outside Directors, as amended
(incorporated herein by reference to Exhibit 10.5 to the 1995 10-K).
10.6 1995 Stock Option Plan for Non-management Employees (incorporated
herein by reference to Exhibit 10.6 to the 1995 10-K).
10.7 Asset Purchase Agreement, dated as of August 2, 2000, by and among
the Registrant, International Data Operations, Inc., and Eclipse
Networks, Inc. (incorporated herein by reference Exhibit 10.1 to the
Registrant`s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
10.8 Credit Agreement dated as of February 7, 2000 between Comverge and
Bank Leumi USA (incorporated herein by reference to Exhibit 10.12 of
the 1999 10-K).
10.9 License Agreement between the Registrant and Lucent Technologies
Inc. dated as of January 9, 1998 (incorporated herein by reference
to the Registrant`s Current Report on Form 8-K dated February 17,
1998).
10.10 Warrant Repurchase Agreement, dated September 25, 2000, among the
Registrant, Bank Leumi USA and Bank Leumi le-Israel (incorporated
herein by reference to Exhibit 10.11 to the 2000 10-K).
10.11 Agreement dated January 26, 2002, between the Registrant and Bounty
Investors LLC (incorporated herein by reference to Exhibit 10.12 to
the 2000 10-K).
10.12 Lease Agreement, dated February 5, 2002, between Duke-Weeks Realty
Limited Partnership and Comverge,
-29-
(incorporated herein by reference to Exhibit 10.13 to the 2000
10-K).
*10.13 Stock Option Agreements, dated as of October 1, 1999, between
Powercom Control Systems Ltd. and George Morgernstern, Yacov Kaufman
and Harvey E. Eisenberg (and related promissory notes) (incorporated
herein by reference to Exhibit 10.14 to the 2000 10-K).
10.14 Share Purchase Agreement, dated as of November 29, 2001, by and
among the Registrant, Decision Systems Israel Ltd., Endan IT
Solutions Ltd., Kardan Communications Ltd., Neuwirth Investments
Ltd., Jacob Neuwirth (Noy) and Adv. Yossi Avraham, as Trustee for
Meir Givon (incorporated herein by reference to Exhibit 10.1 to the
Registrant`s Current Report on Form 8-K dated December 13, 2001).
-30-
10.15 Registration Rights Agreement, dated as of December 13, 2002, by and
among the Registrant, Kardan Communications Ltd. and Adv. Yossi
Avraham, as Trustee for Meir Givon (incorporated herein by reference
to Exhibit 10.2 to the Registrant`s Current Report on Form 8-K dated
December 13, 2002).
*10.16 Employment Agreement, dated as of September 1, 2002, by and between
Comverge and Robert M. Chiste (incorporated herein by reference to
Exhibit 10.1 to the Registrant`s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002).
*10.17 Restricted Stock Purchase Agreement, dated as of September 1, 2002,
by and between the Registrant and Robert M. Chiste (incorporated
herein by reference to Exhibit 10.2 to the Registrant`s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).
*10.18 Option Agreement, dated as of September 1, 2002, by and between
Comverge and Robert M. Chiste (incorporated herein by reference to
Exhibit 10.3 to the Registrant`s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002).
10.19 Contract for Asset Management Services between the Registrant and
Malley Associates Capital Management, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Registrant`s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).
*10.20 Employment Agreement dated as of March 30, 2002 between Comverge and
Joseph D. Esteves (incorporated herein by reference to Exhibit 10.1
to the Registrant`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
10.21 Agreement, dated as of January 31, 2002, between Comverge and Bank
Leumi USA (incorporated herein by reference to Exhibit 10.21 to the
Registrant`s Annual Report on Form 10-K for the year ended December
31, 2001 (the "2001 10-K").
10.22 $6,000,000 Term Note of Comverge dated as of January 31, 2002,
payable to Bank Leumi USA (incorporated herein by reference to
Exhibit 10.22 to the 2001 10-K).
*10.23 First Amendment to Employment Agreement, dated as of May 17, 2002,
by and between the Registrant and George Morgenstern (incorporated
herein by reference to Exhibit 10.23 to the 2001 10-K).
#10.24 Agreement, dated as of January 31, 2003, between Comverge and Bank
Leumi USA (including form of $6,000,000 Term Note of Comverge dated
as of January 31, 2003, payable to Bank Leumi USA).
#10.25 Agreement, dated as of February 25, 2003, between the Registrant and
J.P. Turner & Company, L.L.C. *10.26 Second Amendment to Employment
Agreement, dated as of March 12, 2002, between the Registrant and
George Morgenstern (incorporated herein by reference to Exhibit 10.1
to the Registrant`s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
*10.27 Amendment to Employment Agreement, dated as of June 1, 2002, between
the Registrant and Yacov Kaufman (incorporated herein by reference
to Exhibit 10.1 to the Registrant`s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).
10.28 Guaranty, dated December 4, 2002, made by the Registrant in favor of
Laurus (incorporated herein by reference to Exhibit 10.5 to the
December 2002 8-K).
#10.29 Preferred Stock Purchase Agreement, dated as of April 7, 2003, by
and among Comverge, the Registrant and the other investors named
therein.
#10.30 Investors` Rights Agreement, dated as of April 7, 2003, by and among
Comverge, the Registrant and the investors and Comverge management
named therein.
#10.31 Co-Sale and First Refusal Agreement, dated as of April 7, 2003, by
and among Comverge, the Registrant and the investors and
stockholders named therein.
#10.32 Voting Agreement, dated as of April 7, 2003, by and among Comverge,
the Registrant and the other investors named therein.
#10.33 Letter Agreement, dated as of April 1, 2003, by and between the
Registrant and Laurus.
#21.1 List of subsidiaries.
#23.1 Consent of KPMG LLP.
#99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
#99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------
- -
* This exhibit includes a management contract, compensatory plan or
arrangement in which one or more directors or executive officers of the
Registrant participate.
# This Exhibit is filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
-31-
None.
(c) REPORTS ON FORM 8-K.
(i) Report on Form 8-K, dated December 5, 2002, filed on December 9,
2002, relating to the closing by our subsidiary, Comverge, of a
three-year $2 million secured revolving line of credit from Laurus
Master Fund, Ltd.
(ii) Amendment No. 1 to Report on Form 8-K/A, dated December 5, 2002,
filed on December 24, 2002, relating to the closing by our
subsidiary, Comverge, of a three-year $2 million secured revolving
line of credit from Laurus Master Fund, Ltd.
(iii) Report on Form 8-K, dated December 19, 2002, filed on December 24,
2002, relating to a Nasdaq Staff Determination for non-compliance
with the minimum stockholders` equity requirement for continued
listing on the Nasdaq National Market.
-32-
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Mahwah, State of New Jersey, on April 14, 2003.
DATA SYSTEMS & SOFTWARE INC.
BY /s/ GEORGE MORGENSTERN
----------------------------------
George Morgenstern
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant, in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ GEORGE MORGENSTERN Chairman of the Board; President; Chief Executive April 14, 2003
- ----------------------------- Officer; and Director
George Morgenstern
/s/ YACOV KAUFMAN Vice President, Chief Financial Officer April 14 , 2003
- ----------------------------- (Principal Financial Officer and Principal
Yacov Kaufman Accounting Officer)
/s/ ALLEN I. SCHIFF Director April 14, 2003
- -----------------------------
Allen I. Schiff
/s/ SUSAN MALLEY Director April 14, 2003
- -----------------------------
Susan Malley
/s/ AVI KERBS
- ----------------------------- Director
Avi Kerbs April 14, 2003
-33-
I, George Morgenstern, the Chief Executive Officer of Data Systems &
Software Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Data Systems & Software
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant`s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant`s disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant`s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant`s auditors and to the audit
committee of registrant`s board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant`s
ability to record, process, summarize and report financial data
and have identified for the registrant`s auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s
internal controls; and
6. The registrant`s other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 14, 2003 By: \S\ GEORGE MORGENSTERN
-----------------------------
George Morgenstern
Chief Executive Officer
-34-
I, Yacov Kaufman, the Chief Financial Officer of Data Systems & Software
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Data Systems & Software
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant`s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(e) evaluated the effectiveness of the registrant`s disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant`s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant`s auditors and to the audit
committee of registrant`s board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant`s
ability to record, process, summarize and report financial data
and have identified for the registrant`s auditors any material
weaknesses in internal controls; and
(c) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s
internal controls; and
6. The registrant`s other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 14, 2003 By: \S\ YACOV KAUFMAN
---------------------
Yacov Kaufman
Chief Financial Officer
-35-
DATA SYSTEMS & SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF DATA SYSTEMS & SOFTWARE INC.:
Report of KPMG LLP ............................................................... F-1
Consolidated Balance Sheets
as of December 31, 2001 and December 31, 2002 ................................ F-2
Consolidated Statements of Operations
for the years ended December 31, 2000, December 31, 2001 and December 31, 2002 F-3
Consolidated Statements of Changes in Shareholders` Equity
for the years ended December 31, 2000, December 31, 2001 and December 31, 2002 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, December 31, 2001 and December 31, 2002 F-5
Notes to Consolidated Financial Statements ....................................... F-8
F-1
Independent Auditors` Report
The Board of Directors and Shareholders of
Data Systems & Software Inc.:
We have audited the accompanying consolidated balance sheets of Data
Systems & Software Inc. and subsidiaries as of December 31, 2001 and 2002, and
the related consolidated statements of operations, changes in shareholders`
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company`s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Data Systems
& Software Inc. and subsidiaries as of December 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Notes 2 and 9 to the consolidated financial statements, the
Company adopted Statements of Financial Accounting Standards No. 141, "Business
Combinations", for purchase method business combinations completed after June
30, 2001, and No. 142, "Goodwill and Other Intangibles", effective January 1,
2002.
As discussed in Note 2, the Company adopted Statement of Financial
Accounting Standard No. 145 "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in 2002 and
reclassified the 2000 loss on early redemption of debt.
/s/ KPMG LLP
Short Hills, New Jersey
March 7, 2003, except as to Notes 1(b) and 19, which are as of April 10, 2003
F-2
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS As of December 31,
------------------
2001 2002
---- ----
Current assets:
Cash and cash equivalents ................................... $ 4,025 $ 1,150
Debt securities ............................................. 1,828 --
Restricted cash ............................................. 317 241
Trade accounts receivable, net .............................. 10,197 12,267
Inventory ................................................... 658 2,217
Other current assets ........................................ 1,858 1,401
-------- --------
Total current assets .................................. 18,883 17,276
Investments .................................................... 90 --
Property and equipment, net .................................... 2,296 1,972
Goodwill ....................................................... 7,737 4,929
Other intangible assets, net ................................... 909 404
Long-term deposits ............................................. 6,000 5,700
Other assets ................................................... 676 669
Prepaid employee termination benefits .......................... 2,653 2,355
-------- --------
Total assets .......................................... $ 39,244 $ 33,305
======== ========
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt, net $ 2,499 $ 3,755
Trade accounts payable ...................................... 4,010 5,185
Accrued payroll, payroll taxes and social benefits .......... 2,193 2,098
Other current liabilities ................................... 3,372 3,411
-------- --------
Total current liabilities ............................. 12,074 14,449
-------- --------
Long-term liabilities:
Long-term debt ......................................... 6,182 6,278
Other liabilities ...................................... 285 477
Liability for employee termination benefits ............ 3,811 3,364
-------- --------
Total long-term liabilities ........................ 10,278 10,119
Commitments and contingencies (Note 13)
Minority interests ............................................. 2,530 1,609
-------- --------
Shareholders` equity:
Common stock - $.01 par value per share:
Authorized - 20,000,000 shares; Issued - 8,161,867 shares 82 82
Additional paid-in capital ................................... 36,981 37,687
Warrants ..................................................... 114 364
Deferred compensation ........................................ (14) (7)
Accumulated deficit .......................................... (18,643) (26,787)
Treasury stock, at cost - 808,704 and 845,704 shares
for 2001 and 2002, respectively ..................... (3,860) (3,913)
Shareholder`s note ........................................... (298) (298)
-------- --------
Total shareholders` equity .................................... 14,362 7,128
-------- --------
Total liabilities and shareholders` equity ............ $ 39,244 $ 33,305
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
-------- -------- --------
Sales:
Products ................................................ $ 38,300 $ 32,717 $ 39,831
Services ........................................... 19,539 13,207 16,055
-------- -------- --------
57,839 45,924 55,886
-------- -------- --------
Cost of sales:
Products ........................................... 31,415 27,122 30,994
Services ........................................... 14,191 10,436 11,912
-------- -------- --------
45,606 37,558 42,906
-------- -------- --------
Gross profit .................................... 12,233 8,366 12,980
Research and development expenses .......................... 928 2,284 1,526
Selling, general and administrative expenses ............... 16,340 16,671 16,754
Impairment of goodwill and investment ...................... -- 227 2,850
Gain on sale of subsidiary/division ........................ 1,144 397 --
-------- -------- --------
Operating loss ........................................ (3,891) (10,419) (8,150)
Interest income ............................................ 1,758 1,104 253
Interest expense ........................................... (709) (459) (1,212)
Loss on early redemption of debt ........................... (943) -- --
Other income (loss), net ................................... (50) (32) 113
Minority interests ......................................... -- -- 880
-------- -------- --------
Loss before provision (benefit) for income taxes ...... (3,835) (9,806) (8,116)
Provision (benefit) for income taxes ....................... 171 (11) 28
-------- -------- --------
Loss from continuing operations ....................... (4,006) (9,795) (8,144)
Loss from discontinued operations, net of income taxes ..... (104) -- --
Gain on sale of discontinued operations, net of income taxes 4,222 -- --
-------- -------- --------
Net income (loss) .......................................... $ 112 $ (9,795) $ (8,144)
======== ======== ========
Basic and diluted net income (loss) per share:
Loss from continuing operations .................... $ (0.54) $ (1.41) $ (1.11)
Discontinued operations ................................. 0.56 -- --
-------- -------- --------
Net income (loss) per share ........................... $ 0.02 $ (1.41) $ (1.11)
======== ======== ========
Weighted average number of shares
outstanding - basic and diluted................... 7,422 6,970 7,349
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY
(IN THOUSANDS)
Treasury Shareholder`s Accumulated
Stock Note Deficit Total
----- ---- ------- -----
Balances as of December 31, 1999 ............................... $ (2,365) $ -- $ (8,925) $ 24,850
Conversion of convertible debentures ........................... -- -- -- 260
Exercise of options ............................................ -- -- -- 66
Amortization of restricted stock award compensation ............ -- -- -- 73
Repurchase of outstanding warrants ............................. -- -- -- (375)
Purchase of treasury shares .................................... (2,405) -- -- (2,405)
Net income ..................................................... -- -- 112 112
-------- ------ -------- --------
Balances as of December 31, 2000 ............................... $ (4,770) $ -- $ (8,813) $ 22,581
Exercise of options ............................................ 73 -- (35) 231
Issuance of shares ............................................. -- (298) -- --
Issuance of deferred compensation .............................. -- -- -- --
Amortization of deferred compensation .......................... -- -- -- 2
Treasury shares issued in respect of acquisition at average cost 1,744 -- -- 2,250
Purchase of treasury shares .................................... (907) -- -- (907)
Net loss ....................................................... -- -- (9,795) (9,795)
-------- ------ -------- --------
Balances as of December 31, 2001 ............................... $ (3,860) $ (298) $(18,643) $ 14,362
Grant and amortization of stock option compensation ............ -- -- -- 25
Expiration of warrants ......................................... -- -- -- --
Value of 10% convertible note allocated to beneficial conversion
feature and related warrants ................................ -- -- -- 692
Value of convertible portion of line of credit allocated to
beneficial conversion feature and related warrants .......... -- -- -- 246
Purchase of treasury shares .................................... (53) -- -- (53)
Net loss ....................................................... -- -- (8,144) (8,144)
-------- ------ -------- --------
Balances as of December 31, 2002 ............................... $ (3,913) $ (298) $(26,787) $ 7,128
======== ====== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
2000 2001 2002
---- ---- ----
Cash flows used in operating activities:
Net income (loss) ...................................................... $ 112 $ (9,795) $ (8,144)
Adjustments to reconcile net income (loss) to net cash used in operating
activities--see Schedule A .......................................... (5,973) 1,024 2,136
-------- -------- --------
Net cash used in operating activities .................................. (5,861) (8,771) (6,008)
-------- -------- --------
Cash flows provided by investing activities:
Short-term bank deposits, net ............................................. (4,985) 5,994 --
Proceeds from (investment in) long-term deposits .......................... (6,000) -- 300
Investment in debt securities ............................................. -- (3,215) (154)
Proceeds from sale and maturity of marketable and debt securities ......... -- 1,383 2,031
Proceeds from sale of investment held for sale ............................ 30,889 -- --
Net proceeds from sale of division ........................................ 1,838 -- --
Acquisitions of property and equipment and intangible assets .............. (759) (904) (492)
Proceeds from sale of property and equipment .............................. 132 23 28
Business acquisitions -see Schedule C ..................................... -- (500) --
-------- -------- --------
Net cash provided by investing activities .............................. 21,115 2,781 1,713
-------- -------- --------
Cash flows provided by (used in) financing activities:
Purchase of treasury stock ................................................ (2,405) (907) (53)
Proceeds from stock options exercises ..................................... 66 231 --
Proceeds from issuance of convertible note net of issuance costs .......... -- -- 1,749
Repurchase of outstanding warrants ........................................ (375) -- --
Redemption of convertible debentures ...................................... (2,001) -- --
Short-term debt borrowings (repayments), net .............................. (6,971) 836 (510)
Proceeds from long-term debt .............................................. 6,021 -- 679
Repayments of long-term debt and debt acquired in acquisition ............. (91) (1,022) (445)
-------- -------- --------
Net cash provided by (used in) financing activities .................... (5,756) (862) 1,420
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... 9,498 (6,852) (2,875)
Cash and cash equivalents at beginning of year ............................ 1,379 10,877 4,025
-------- -------- --------
Cash and cash equivalents at end of year .................................. $ 10,877 $ 4,025 $ 1,150
======== ======== ========
Supplemental cash flow information: Cash paid during the year for:
Interest ............................................................ $ 764 $ 372 $ 579
======== ======== ========
Income taxes ........................................................ $ 3,596 $ 459 $ 138
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
A. Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................... $ 1,628 $ 1,338 $ 1,155
Minority interests and write-off of minority interest balance .................... -- -- (921)
Impairment of goodwill and acquired software ..................................... -- -- 3,000
Issuance of subsidiary shares to minority interests .............................. 30 -- --
Gain on sale of investment held for sale ......................................... (4,989) -- --
Allowance for doubtful accounts .................................................. 254 (279) (46)
Deferred taxes ................................................................... (20) 14 (107)
Increase (decrease) in liability for employee termination benefits ............... (13) 332 (447)
Gain on sale of segment/subsidiary stock ......................................... (1,144) (397) --
Loss (gain) on sale of marketable securities and debt securities, net ............ -- 4 (49)
Loss from write-down of investment ............................................... -- 227 90
Write-down of inventory .......................................................... -- 391 --
Loss (gain) on sale of property, plant and equipment, net ........................ (4) 33 (4)
Amortization of restricted stock award and deferred compensation ................. 73 2 25
Loss on early redemption of debt ................................................. 943 -- --
Accretion of discount on convertible debt and amortization of related costs ...... 37 -- 679
Other ............................................................................ -- 7 (208)
Receipt of investments for services rendered ..................................... (153) (164) --
Changes in operating assets and liabilities, net of effect of acquisitions:
Restricted cash ................................................................ 234 (15) 76
Funding of termination benefits ................................................ 50 (36) 298
Decrease (increase) in accounts receivable and other assets .................... (304) 1,508 (1,181)
Decrease (increase) in inventory ............................................... 1,257 (601) (1,559)
Increase (decrease) in accounts payable and other liabilities .................. (3,852) (1,340) 1,335
------- ------- -------
$(5,973) $ 1,024 $ 2,136
======= ======= =======
B. Non-cash investing and financing activities:
Adjustment of goodwill ........................................................... $ 682 $ 48
======= =======
Issuance of shares for debt ...................................................... $ 260 $ 298
======= =======
Adjustment of fixed assets to other current liabilities .......................... $ 11
=======
Issuance of deferred compensation ................................................ $ 16
=======
Shares of subsidiary issued in respect of acquisition ............................ $ 2,938
=======
Issuance of treasury shares in respect of acquisition ............................ $ 2,250
=======
Reduction of goodwill from realization of acquired deferred tax asset ............ $ 180
=======
Write-off of retired and fully depreciated property and equipment ................ $ 1,842
=======
Accounts payable incurred in acquisition of fixed assets ......................... $ 50
=======
Value of beneficial conversion feature and related warrants
on issuance of convertible debt ............................................. $ 938
=======
Increase in deferred tax liability associated with adjustment of intangible assets $ 17
=======
C. Assets/liabilities acquired in acquisitions:
Current assets ................................................................... (2,124)
Property and equipment and other assets .......................................... (995)
Goodwill and intangibles ......................................................... (6,570)
Current liabilities .............................................................. 1,958
Long-term debt ................................................................... 1,319
Other liabilities, minority interests and deferred taxes ......................... 3,662
Shareholders` Equity ............................................................. 2,250
-------
$ (500)
=======
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--NATURE OF OPERATIONS
(a) Description of Business
Data Systems & Software Inc., a Delaware corporation ("DSSI"), through
its subsidiaries (collectively, the "Company"), (i) provides software consulting
and development services, (ii) is an authorized dealer and a
value-added-reseller of computer hardware, and (iii) provides energy
intelligence solutions for utilities and energy companies. The Company`s
operations are based in the United States and in Israel. DSSI`s shares were
transferred from the Nasdaq National Market effective March 3, 2003 and are
currently traded on the Nasdaq SmallCap Market.
(b) Financing of Operations
As of December 31, 2002 the Company had working capital of $2,827,
including $1,150 in non-restricted cash and cash equivalents. Net cash used in
operating activities in the fourth quarter of 2002 was $1,057 in addition to the
$4,951 net cash used in the first three quarters of 2002. The primary uses of
the Company`s net cash in 2002 were the Company`s loss, including the losses in
Comverge and corporate expenses, and a $1,563 investment in inventory over the
year. These expenditures were financed by the proceeds from the sale and
maturity of marketable debt securities and the proceeds from issuance of a
convertible note.
In December 2002, Comverge acquired a $2,000 line of credit, secured by its
inventory, accounts receivables, Databit`s accounts receivables and a corporate
guarantee. As of December 31, 2002, Comverge had utilized $1,000 of this line of
credit.
On April 7, 2003 the Company completed a private equity financing of Comverge
in the amount of $13,000, $3,250 of which was invested by the Company and $9,750
of which was invested by a group of leading energy venture capital investors. At
the same time, Comverge obtained a new credit arrangement of $6,500. In
connection with this new credit facility, Comverge paid off in full its $5,500
(as at March 31, 2003) bank loan and the outstanding balance of its $2,000 line
of credit, which line was also terminated. The new credit facility includes a
$1,500 term loan secured by the Company`s pledge of $1,500 which is being held
in a restricted long-term deposit at Comverge`s new lender, and a $5,000
revolving line of credit secured by the assets of Comverge. As part of the new
credit arrangements, $1,000 of the long-term deposit, held as security for
Comverge`s previous loan, became unrestricted and is now freely available to the
Company as working capital. Comverge has agreed to prepay the term loan and
permit release of the long-term deposit over the next 20 months, subject to
certain conditions.
The Company believes that the proceeds of the financing and new credit
arrangements should provide sufficient financing for Comverge to independently
fund its activities. Due to the significant interest in Comverge held by others
and other restrictions, working capital and cash flows of Comverge will not be
available to finance the Company`s other U.S. activities.
Of the total working capital at December 31, 2002, $400 was in the
Company`s majority-owned dsIT subsidiary. Due to Israeli tax and company law
constraints, as well as the significant minority interest in dsIT, such working
capital and cash flows from dsIT`s operations are not available to finance U.S.
activities. At December 31, 2002,dsIT was utilizing $1,500 of its $2,000 lines
of credit. dsIT`s lines of credit are denominated in NIS and bear an average
interest rate of the Israeli prime rate plus 0.9% per annum. The Israeli prime
rate fluctuates and as of December 31, 2002 was 10.6%. The Company believes that
dsIT will have sufficient liquidity to finance its activities from cash flow
from its own operations over the next 12 months. This is based on continued
utilization of its line of credit and improved operating results stemming from
cost reductions.
The Company believes that it has more than sufficient liquidity to finance
its U.S.-based operating activities, excluding,Comverge and corporate activities
for at least the 12 months following the date of this report. The Company
intends to finance its other U.S. activities from cash on hand and from
operating cash flow from expected profitable operations of the computer hardware
segement. As of April 10, 2002 cash on hand was $1,900 including $1,000 released
form the long-term deposit as part of Comverge`s bank arrangements and $600 from
the sale of shares to Laurus.
(c) Use of Estimates in Preparation of Financial Statements
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Some of the more
significant estimates being made involve percentage of completion for
fixed-price contracts and the evaluation of the recoverability of inventory,
goodwill and deferred tax assets. Actual results could differ from those
estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSACTIONS
The currency of the primary economic environment in which the
operations of the Company are conducted is the United States dollar ("dollar").
Accordingly, the Company and all of its subsidiaries use the dollar as their
functional currency. All exchange gains and losses denominated in non-dollar
currencies are reflected in other expense, net in the consolidated statement of
operations when they arise. Such foreign currency gains (losses), net amounted
to $3, $(3) and $154 for the years ended December 31, 2000, 2001 and 2002,
respectively.
F-8
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the
accounts of all majority-owned subsidiaries. The consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. All intercompany balances and
transactions have been eliminated. Minority interests in net income (loss) are
limited to the extent of their equity capital. Losses in excess of minority
interest equity capital are charged against the Company.
RECLASSIFICATIONS
In 2002, the Company early adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." As a result the loss on the early extinguishments of debt of $943
for the year ended December 31, 2000 has been reclassified from an extraordinary
item to the computation of loss from continuing operations. There is no effect
on net income as a result of this change in classification.
Certain other reclassifications have been made to the Company`s prior
years` consolidated financial statements to conform with the current year`s
consolidated financial statement presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and demand deposits in banks
and short-term investments (primarily time deposits and certificates of deposit)
with original maturities of three months or less.
INVESTMENT IN DEBT SECURITIES
The Company classifies its debt securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. All securities not
included in trading or held-to-maturity, are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in operations. Unrealized holding
gains and losses, net of the related tax effect on available-for-sale securities
are excluded from operations and are reported as a separate component of
accumulated other comprehensive income until realized. Realized gains and losses
from the sale of available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security, below cost that is deemed to be other than temporary,
results in a reduction in carrying amount to fair value. The impairment is
charged to operations and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned. All investments in debt securities are classified as trading or
held-to-maturity and are recorded in short-term interest bearing bank deposits
and debt securities in the consolidated balance sheet.
DERIVATIVE INSTRUMENTS
In June 1998 and June 2000, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of SFAS No. 133", respectively,
which establish accounting and reporting standards for all derivative
instruments and hedging activities. These statements require an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those investments at fair value. The Company has no derivatives or
embedded derivatives requiring separate accounting and disclosure nor does it
engage in hedging activities of foreign currency.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies on the average cost
method. For finished goods and merchandise inventories, cost is determined on
the first-in, first-out method.
F-9
INVESTMENTS
Investments in less than 20% of the voting control of companies or in
other entities, over whose operating and financial policies the Company does not
have the power to exercise significant influence, are accounted for by the cost
method. The carrying values of investments are periodically reviewed to
determine whether a decline in value is other than temporary. In the fourth
quarters of 2001 and 2002, the Company recorded writedowns of $227 and $90,
respectively, with regard to investments in start-up companies.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost or fair value at the date
of acquisition. Depreciation and amortization is calculated based on the
straight-line method over the estimated useful lives of the depreciable assets,
or in the case of leasehold improvements, the lease term. Improvements are
capitalized while repairs and maintenance are charged to operations as incurred.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net
assets of businesses acquired. The Company adopted the provisions of SFAS No.
141, "Business Combinations", as of July 1, 2001 and No. 142, "Goodwill and
Other Intangible Assets", as of January 1, 2002. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations and
specifies the criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. In accordance
with SFAS No. 142, goodwill and acquired intangible assets determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".
SFAS No. 142 requires the Company to assess annually whether there is
an indication that goodwill is impaired, or more frequently if events and
circumstances indicate that the asset might be impaired during the year. The
Company performs its annual impairment test at the conclusion of its annual
budget process, generally in the fourth quarter of each year (though in 2002,
the Company recorded an impairment in the third quarter based on its judgment
that an impairment had occurred with respect to its software consulting and
development segment). The Company has identified its operating segments as its
reporting units for purposes of the impairment test and assigned its goodwill
and intangible assets to its software consulting and development and energy
intelligence solutions segments. The Company determines the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units. The Company
then determines the fair value of each reporting unit and compares it to the
carrying amount of the reporting unit. Calculating the fair value of the
reporting units requires significant estimates and assumptions by management. To
the extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, there is an indication that the reporting unit goodwill may be
impaired and a second step of the impairment test is performed to determine the
amount of the impairment to be recognized, if any.
In accordance with SFAS No. 141, goodwill from the Company`s
acquisition of Endan IT Solutions Ltd. ("Endan") in December 2001 (see Note 3)
is not amortized. Goodwill from other acquisitions prior to the adoption of SFAS
No. 141 and No. 142 was amortized on a straight-line basis over the expected
periods to be benefited, ranging from five to seven years, and assessed for
recoverability using a methodology consistent with that of SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (see "Impairment of Long-Lived Assets" below).
Identifiable intangible assets deemed to have an indefinite life are
tested annually for impairment, or more frequently if events and circumstances
indicate that the asset might be impaired during the year. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset`s fair value
as determined based on discounted cash flows associated with the asset. The
Company has not identified any indefinite life intangible assets.
The costs of licensed technology and software are presented at
estimated fair value at acquisition date. These costs are amortized on a
straight-line basis over the term of the license or estimated useful life of the
software, generally five years.
F-10
The costs of registered patents and patents pending acquired from
third parties are presented at estimated fair value at acquisition date. In
addition, registration costs and fees for patents are capitalized. Registered
patent costs are amortized over the estimated remaining useful life of the
patents, from four to fourteen years. Costs for patents pending are not
amortized until they are issued.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 144. This
Statement requires that long-lived assets, except those addressed by SFAS No.
142, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the undiscounted future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future undiscounted cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires the Company to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The adoption of
SFAS No. 144 did not have any impact on the Company`s consolidated financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from the Company`s previous policy.
Through December 31, 2001, the carrying values of long-lived assets
and goodwill were reviewed for impairment whenever events or changes in
circumstances occurred that indicated that the net carrying amount would not be
recoverable. The review was based on comparing the carrying amount of the
long-lived assets to the undiscounted estimated cash flows over their remaining
useful lives. If the sum of the expected undiscounted future cash flows was less
than the carrying amount of the assets, the Company would recognize an
impairment loss. The impairment loss, if determined to be necessary, would be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of were reported at the lower of
the carrying amount or fair value, less cost to sell.
REVENUE RECOGNITION
Revenue from time-and-materials service contracts, maintenance
agreements and other services are recognized as services are provided.
Revenues from fixed-price service contracts to design develop
manufacture or modify complex load control or other equipment and software to
customer specifications are recognized as services are provided using the
percentage-of-completion method as costs (primarily direct labor) are incurred,
in the proportion that actual costs incurred bear to total estimated costs.
Percentage-of-completion estimates are reviewed periodically, and any
adjustments required are reflected in the period when such estimates are
revised. Losses on contracts, if any, are recognized in the period in which the
loss is determined. Fixed price projects in which the Company receives equity
shares as compensation for services rendered are recorded at the fair value of
the services provided, or equity received, whichever is more readily
determinable.
Revenues from the sale of software licenses are recognized when a
license agreement is in force, the product has been shipped, the license fee is
fixed or determinable, and collectibility is reasonably assured. Maintenance and
subscription revenue is recognized ratably over the contract period.
Revenues from the sale of software are recognized under the
percentage-of-completion method when the Company`s software requires significant
modification and customization.
Revenues on the sale of products, which are shipped from the Company`s
stock of inventory, are recognized when the products are shipped. In accordance
with Emerging Issues Task Force ("EITF") Issue No. 99-19 "Recording Revenue
Gross as a Principal Versus Net as an Agent", revenue from drop shipments of
third-party hardware and software sales are recognized upon delivery, and
recorded at the gross amount when the Company is responsible for fulfillment of
the customer order, has latitude in pricing, customizes the product to the
customer`s specifications and has discretion in the selection of the supplier.
Revenue from drop shipment third-party software sales is recognized upon
delivery, and recorded net of costs when the Company acts principally as an
agent or broker in the transaction.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are charged to operations as incurred.
Research and development
F-11
expenses consist primarily of labor and related costs.
WARRANTY PROVISION
The Company generally warrants its products against certain
manufacturing and other defects. These product warranties are provided for
specific periods of time and/or usage of the product depending on the nature of
the product, the geographic location of its sale and other factors. As of
December 31, 2001 and 2002, the Company has accrued $302 and $52, respectively,
for estimated product warranty claims, which is included in other current
liabilities. The accrued product warranty costs are based primarily on
historical experience of actual warranty claims as well as current information
on repair costs. Warranty claims expense for each of the years 2000, 2001, and
2002 were: $0, $302, and $(250), respectively.
The following table provides the changes in the Company`s product warranties for
the year ended December 31, 2002:
Warranty provision as of December 31, 2001 ........................ $302
Liabilities accrued for warranties issued during the period ....... 87
Warranty claims paid during the period ............................ (2)
Changes in liability for pre-existing warranties during the period, (335)
including expirations
Warrant provision as of December 31, 2002 ......................... $52
SALE OF STOCK OF SUBSIDIARY
The Company recognizes gains and losses from the sale of subsidiary
stock through the consolidated statement of operations.
STOCK-BASED COMPENSATION
At December 31, 2002, the Company has various stock-based employee
compensation plans, which are described more fully in Note 14. The Company
accounts for those plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations. Stock-based employee compensation cost
of $73, $2, and $25 is reflected in net income (loss) for 2000, 2001 and 2002,
respectively, as certain options granted had an exercise price less than the
market value of the underlying common stock on the date of grant. SFAS No. 123,
"Accounting for Stock-Based Compensation", established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to adopt the disclosure requirements of SFAS No. 123 and SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment to FASB Statement No. 123". Awards under the Company`s plans vest over
periods ranging from three to five years. Therefore, the cost related to
stock-based employee compensation included in the determination of net loss for
2000, 2001 and 2002 is less than that which would have been recognized if the
fair value based method had been applied to all awards since the original
effective date of Statement 123. The following table illustrates the effect on
net income (loss) and net income (loss) per share if the fair-value-based method
had been applied to all outstanding and unvested awards in each period using the
Black-Scholes option pricing model and the assumptions discussed in Note 14(a).
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Net income (loss) as reported .................................. $ 112 $ (9,795) $ (8,144)
Plus: Stock-based employee compensation expense included in .... 73 2
reported net income, net of related tax effects ......... 25
Less: Total stock-based employee compensation expense determined 1,112 718
under fair value based method for all awards, net of
related tax effects ..................................... 1,199
------- -------- ---------
Pro forma net loss ............................................. $ (927) $(10,511) $ (9,318)
======= ======== =========
F-12
Net income (loss) per share:
Basic and diluted - as reported .......................... $ 0.02 $ (1.41) $ (1.11)
======= ======== =========
Basic and diluted - pro forma ............................ $ (0.12) $ (1.51) $ (1.27)
======= ======== =========
The pro forma information in the above table also gives effect to the
application of SFAS No. 123 on the share option plans of the Company`s
subsidiaries.
The Company accounts for stock-based compensation issued to consultants on
a fair value basis in accordance with SFAS No. 123 and EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services".
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss, capital loss and tax credit carryforwards. Deferred tax assets and
liabilities are classified as current or noncurrent based on the classification
of the related assets or liabilities for financial reporting, or according to
the expected reversal dates of the specific temporary differences, if not
related to an asset or liability for financial reporting. Valuation allowances
are established against deferred tax assets if it is more likely than not that
they will not be realized. 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. The
effect on deferred tax assets and liabilities of a change in tax rates or laws
is recognized in operations in the period that includes the enactment date.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company presents basic net income (loss) per share and diluted net
income (loss) per share. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares outstanding
for each period presented. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares outstanding
plus the dilutive potential of common shares which would result from the
exercise of stock options and warrants or conversion of convertible securities.
However, the dilutive effects of stock options, warrants and convertible
securities are excluded from the computation of diluted net income (loss) per
share if doing so would be antidilutive.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company is
required to adopt SFAS No. 143, effective January 1, 2003. The Company does not
expect that the adoption of SFAS No. 143 will have a material effect on its
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. SFAS No. 146 will be applied prospectively and will depend on future
actions taken by the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor`s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
interpretation elaborates on the disclosures to be made by a guarantor in
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company`s
financial statements. The disclosure
F-13
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002 and such disclosures are included in the
notes to these consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities and Interpretation of ARB No. 51".
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not expect FIN
46 to have a material effect on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123 "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based compensation. In
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures to both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and are included in the notes to the
Company`s 2002 consolidated financial statements. The other provisions of SFAS
No. 148 are not expected to be applicable to the Company as we have not
expressed to change the Company`s accounting for stock-based compensation.
In October of 2002, the Emerging Issues Task Force (EITF) issued EITF
00-21, "Multiple Element Arrangements". The EITF will require the Company to
determine whether to divide a revenue arrangement with multiple deliverables
into separate units of accounting. We will be required to adopt this consensus
for arrangements entered into beginning July 1, 2003. The Company has not yet
determined the impact that this consensus will have on its consolidated
financial position and results of operations.
NOTE 3--ACQUISITIONS
In December 2001, a subsidiary of the Company acquired 100% of the shares
of Endan in a transaction accounted for as a purchase business combination and
partial sale of a subsidiary. Endan was a privately-held Israeli information
technology software and consulting firm and as a result of the acquisition
became an integral part of the Company`s software consulting and development
segment. The acquisition was consummated in order to broaden the Company`s
markets into information technology and to take advantage of economies of scale
and synergistic cost savings. Endan`s results of operations are included in the
Company`s consolidated statement of operations beginning January 1, 2002.
Results for the period from acquisition to December 31, 2001 were not included
in the Company`s consolidated statement of operations as they were immaterial.
The aggregate purchase price for Endan was $5,788, comprised of (i) $2,250
representing the issuance of 365,210 shares of DSSI common stock valued at $6.16
per share, (ii) $2,912 representing the estimated value of 32% of the
outstanding ordinary shares of dsIT, (iii) $500 of cash, (iv) $100 of estimated
closing costs and (v) $26 representing the fair value of options to purchase
dsIT ordinary shares in exchange for the cancellation of outstanding Endan stock
options. The Company recognized a gain of $397 on the issuance of ordinary
shares representing a 32% interest in dsIT connection with this transaction. In
addition to the purchase consideration mentioned above, in December 2001, the
Company also repaid a $1,000 loan previously made by Kardan Communications Ltd.
("Kardan"), Endan`s majority shareholder prior to the acquisition.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at December 31, 2001 adjusted for valuations of
intangible assets received in 2002, the effective date of acquisition before the
repayment of the Kardan debt.
Current assets $2,075
Property and equipment 609
Intangible assets 620
Goodwill 6,039
Other assets 314
------
Total assets acquired 9,657
------
F-14
Current liabilities 1,858
Long-term debt 1,319
Other liabilities 495
Deferred tax liability created in acquisition 197
------
Total liabilities assumed 3,869
------
Net assets acquired $5,788
======
The intangible assets represent the fair value of software licenses
acquired (five-year useful life). The goodwill resulting from the acquisition is
not deductible for income tax purposes and will not be amortized for financial
statement purposes in accordance with SFAS No. 142. The entire goodwill acquired
was assigned to the software consulting and development segment.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if this acquisition had
occurred at the beginning of each of the periods presented, with pro forma
adjustments to give effect to the amortization of acquired intangibles and a
reduction of interest expense resulting from Endan`s repayment of a $1,000 loan.
The unaudited pro forma information does not include the amortization of
goodwill acquired, as it is not required to be amortized pursuant to SFAS No.
142. The gain on the partial sale of 32% of dsIT is excluded from the unaudited
pro forma consolidated results of operations as it is non-recurring. The
unaudited pro forma consolidated results of operations are provided for
illustrative purposes only and do not purport to represent what the Company`s
results of operations would actually have been, nor do they purport to project
the Company`s results of operations for any future period.
Year Ended December 31,
2000 2001
-------- --------
Net sales ................................................... $ 63,408 $ 52,355
Net loss from continuing operations ......................... $ (3,894) $ (9,884)
Loss per share from continuing operations - basic and diluted $ (0.50) $ (1.35)
Upon receipt of third-party valuation information, it was determined that
the fair value of software licenses acquired (five-year useful life) was $500
and that the fair value of backlog acquired (one-year useful life) was $120. The
acquired goodwill resulting from the acquisition was $5,387. The entire goodwill
acquired was assigned to the software consulting and development segment. The
goodwill resulting from the acquisition is not deductible for income tax
purposes and will not be amortized for financial statement purposes in
accordance with SFAS No. 142.
NOTE 4--DISPOSITIONS
(a) In 1999, DSSI owned 60% of the shares of Tower Semiconductor Holdings
1993 Ltd. ("Holdings"). Holdings` only asset was its investment in 45.3% of
Tower Semiconductor Ltd. ("Tower"). In December 1999, Holdings entered into an
agreement to sell its interest in Tower to the minority owner of Holdings for
$30,889. Closing of the agreement was subject to third-party administrative
approvals, which were received in January 2000. As part of the agreement,
Holdings declared a dividend of $39,515 of which the Company received $23,709
(less withholding taxes of $2,964) in January 2000. The Company`s interest in
Holdings was treated as a discontinued operation in the consolidated statements
of operations and comprehensive income (loss) for all periods presented. In
addition, the Company accrued all taxes with respect to the anticipated
repatriation of Tower`s accumulated earnings.
Upon receipt of the administrative approvals, the Company received the
proceeds from the sale, net of the Israeli dividend withholding tax. In 2000,
the Company recorded a gain of $4,222 (net of applicable taxes of $767) with
respect to this transaction.
(b) In September 2000, the Company completed the sale of substantially all
the assets of its CinNetic division, included in the software development and
consulting segment, for a total of $1,838 resulting in a gain of $1,144. The
CinNetic division had an operating loss of approximately $315 for the year ended
December 31, 2000.
(c) In 2000, the Company recorded a provision of $104 for a loss from
discontinued operations with respect to additional expenses related to its
discontinued help desk software segment that was sold in 1998.
F-15
NOTE 5--ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists, of the following: As of December 31,
------------------
2001 2002
--------- --------
Trade accounts receivable ....................... $ 9,095 $ 11,341
Unbilled work-in-process ........................ 1,362 1,140
Allowance for doubtful accounts ................. (260) (214)
-------- --------
Accounts receivable, net ........................ $ 10,197 $ 12,267
======== ========
Unbilled work-in-process represents direct labor and expenses incurred on
consulting contracts that has not been invoiced to the customer as of the end of
the period. Such amounts are generally billed upon the completion of a project
milestone.
Bad debt expense related to trade accounts receivable was $262, $71 and
$194 for the years ended December 31, 2000, 2001 and 2002, respectively.
NOTE 6--INVENTORY
Inventory consists of the following: As of December 31,
2001 2002
------ ------
Raw materials, spare parts and supplies ........ $ 409 $1,396
Work-in-process ................................ -- 161
Finished goods and merchandise ................. 249 660
------ ------
$ 658 $2,217
====== ======
NOTE 7--OTHER CURRENT ASSETS
Other current assets consist of the following: As of December 31,
------------------
2001 2002
------ ------
Prepaid expenses ................................... $ 391 $ 355
Interest receivable ................................ 817 41
Income tax receivable and deferred income taxes .... 385 420
Other .............................................. 265 585
------ ------
$1,858 $1,401
====== ======
NOTE 8--PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
As of December 31,
Estimated Useful Life -------------------
(in years) 2001 2002
---------- ---- ----
Cost:
Computer hardware and software ...... 3 $2,568 $2,727
Office furniture and equipment ...... 4-10 2,276 2,530
Motor vehicles ...................... 4-7 561 592
Leasehold improvements .............. Term of Lease 279 316
------ ------
5,684 6,165
------ ------
Accumulated depreciation and amortization:
Computer hardware and software ........................ 2,052 2,573
Office furniture and equipment ........................ 1,099 1,288
Motor vehicles ........................................ 146 221
Leasehold improvements ................................ 91 111
------ ------
3,388 4,193
------ ------
Property and equipment, net .............................. $2,296 $1,972
====== ======
F-16
Depreciation and amortization in respect of property and equipment amounted
to $834, $687 and $831 for 2000, 2001 and 2002, respectively. In 2001,
approximately $1,842 of fully depreciated assets was written off the Company`s
books.
NOTE 9--GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001 and January 1, 2002 the Company adopted the
provisions of SFAS No. 141 and No. 142, respectively. In connection with the
initial adoption of SFAS No. 142, the Company performed a transitional
impairment evaluation of goodwill and concluded that there was no indication of
impairment as of January 1, 2002. Upon adoption of SFAS No. 142, the Company
evaluated its existing intangible assets and goodwill and determined that no
reclassifications were necessary in order to conform with the classification
criteria in SFAS No. 141 for recognition separate from goodwill. The Company
also assessed the useful lives and residual values of all amortizable intangible
assets and determined that no adjustments were necessary.
Amortization expense related to goodwill was $657 and $502 for the years
ended December 31, 2000 and 2001, respectively. In accordance with SFAS No. 142,
goodwill arising from the Company`s acquisition of Endan in December 2001 has
not been amortized. Net income (loss) and basic and diluted net income (loss)
per share, adjusted to exclude goodwill amortization, as if the provisions of
SFAS No. 142 had been adopted on January 1, 2000 are as follows:
Year ended December 31,
2000 2001
---- ----
Net income (loss), as reported .............. $ 112 $(9,795)
Plus: Goodwill amortization ................. 657 502
------- -------
Adjusted net income (loss) .................. $ 769 $(9,293)
======= =======
Net income (loss) per share:
Basic and diluted - as reported ......... $ 0.02 $ (1.41)
======= =======
Basic and diluted - as adjusted .......... $ 0.10 $ (1.33)
======= =======
At the end of the third quarter of 2002, management believed that there was
an other than temporary decline in the hi-tech market in general, and in the
software consulting market in Israel in particular. As required by SFAS No. 142,
the Company evaluated its goodwill for impairment as of September 30, 2002 which
indicated that its software consulting and development segment`s goodwill was
impaired. The fair value of the software consulting and development segment was
determined by applying a market-rate multiple to the estimated near-term future
revenue stream expected to be produced by the segment (the method used at the
time of the Endan acquisition). As a result, the Company recognized a provision
for goodwill impairment of $2,760 in 2002. In the fourth quarter, the Company
performed its annual impairment test and no additional indications of goodwill
impairment were noted.
The table below reconciles the changes in the carrying amount of goodwill, by
segment, for the period from December 31, 2001 to December 31, 2002:
Software
Consulting Energy
and Intelligence
Development Solutions
Segment Segment Total
------------------- ------------------- ------------------
Balance as of December 31, 2001 $ 7,238 $ 499 $ 7,737
Goodwill acquisition adjustment (48) - (48)
Impairment charge (2,760) - (2,760)
----------- ------------ ------------
Balance as of December 31, 2002
$ 4,430 $ 499 $ 4,929
=========== ============ ============
The following table presents certain information on the Company`s intangible
assets as of December 31, 2002 and 2001. All intangibles assets are being
amortized over their estimated useful lives, as indicated below, with no
estimated residual values.
F-17
AS OF DECEMBER 31, 2002
------------------------------------------------
WEIGHTED
AVERAGE GROSS NET
AMORTIZATION CARRYING ACCUMULATED CARRYING
PERIOD AMOUNT AMORTIZATION AMOUNT
----------------- ------------ ----------------- -------------
Amortizing intangible assets:
Licenses 5.0 yrs $568 $563 $ 5
Patents 15.0 yrs 288 70 218
Software licenses 4.6 yrs 260 79 181
------------ ----------------- -------------
Total $1,116 $499 $404
============ ================= =============
AS OF DECEMBER 31, 2001
------------------------------------------------
WEIGHTED
AVERAGE GROSS NET
AMORTIZATION CARRYING ACCUMULATED CARRYING
PERIOD AMOUNT AMORTIZATION AMOUNT
----------------- ------------ ----------------- -------------
Amortizing intangible assets:
Licenses 5.0 yrs $568 $457 $ 111
Patents 15.0 yrs 279 53 226
Software licenses 4.6 yrs 572 - 572
------------ ----------------- -------------
Total $1,416 $510 $909
============ ================= =============
Amortization in respect of license, patents and software licenses
intangible amounted to $137, $147 and $321 (of which $120 represents 12 months
of acquired backlog amortization recorded and amortized in 2002) for 2000, 2001
and 2002, respectively. In 2002, in connection with the Company`s evaluation of
the software consulting and development segment goodwill, the Company recognized
an impairment charge of $240 for software licenses, which is included in cost of
sales - services.
Amortization expense with respect to intangible assets for each of the
next five years and thereafter is estimated as follows:
Year ended December 31,
-----------------------
2003 $83
2004 49
2005 48
2006 48
2007 30
Thereafter 146
-----------
$404
===========
F-18
NOTE 10--DEBT
Debt consists of the following:
As of December 31,
-------------------
2001 2002
------------ -----------
Bank debt (a).................................................. $6,254 $6,486
Lines of credit, net of discount (b)........................... 2,416 2,315
Convertible note, net of discount (c).......................... - 1,224
Capital lease obligations (d).................................. 11 8
------------ -----------
8,681 10,033
Less current portion........................................... 2,499 3,755
------------ -----------
$6,182 $6,278
============ ===========
(a) Bank debt
Bank debt as of December 31, 2002 includes a $5,700 loan, which is
payable in a single installment upon maturity in February 2003 (in January 2003,
the lender agreed to extend the maturity to February 2004) and $786 with respect
to various loans from Israeli banks. The $5,700 loan bears interest at LIBOR
plus 0.75% (adjusted quarterly), payable quarterly (LIBOR at December 31, 2001
and 2002: 1.88% and 1.75%, respectively). In connection with this loan, the
Company is required to deposit $5,700 ($6,000 at December 31, 2001) with the
lender as collateral for the loan. The deposit is held in a one-month time
deposit bearing interest at 1.3%. The deposit will continue to be renewed at
market rates so long as the loan is outstanding. As the compensating balance is
required for the term of the loan, the deposit is shown as a non-current asset.
The loans from Israeli banks are in New Israeli Shekels (NIS) of which
$81 are linked to the U.S. dollar, $104 are linked to the Israeli Consumer Price
Index (the Index) and $601 are unlinked at December 31, 2002 ($158, $96 and
zero, respectively, at December 31, 2001). At December 31, 2002, the loans bear
a weighted average interest rate of 7.8% (6.3% at December 31, 2001). During the
year ended December 31, 2002, the Index increased by 6.5% (1.4% in 2001) and the
NIS was devalued against the U.S. dollar by 7.3% (9.3% in 2001). In connection
with these loans, a lien in favor of the Israeli banks was placed on some of
dsIT`s assets.
(b) Lines of credit
(i) At December 31, 2002, the Company had approximately $2,000 in
Israeli credit lines available to dsIT, of which approximately $1,500 was then
being used and $500 was available for future draws. These credit lines are
generally for a term of one year, denominated in NIS and bear interest at a
weighted average rate of the Israeli prime rate per annum plus 0.87% (at
December 31, 2001, the Israeli prime). The Israeli prime rate fluctuates and as
of December 31, 2002 was 10.56% (6.85% at December 31, 2001). The Company has
provided guarantees of up to $922 with respect to dsIT`s lines of credit.
(ii) In December 2002, the Company`s subsidiary Comverge , Inc.,
secured a three-year $2 million revolving line of credit from Laurus Master
Fund, Ltd. ("Laurus") of which $1 million was outstanding at December 31, 2002.
The available line of credit is based on Comverge`s accounts receivables and
inventory, and is secured by all of the assets of Comverge and by the accounts
receivables of the Company`s subsidiary Databit Inc., from the Company`s
computer hardware segment. At December 31, 2002, the carrying value of assets
securing the line of credit and convertible note (see (c) below) was $12.3
million. The Company has guaranteed the repayment of any advances and payment of
fees under the line of credit. On the first and second anniversary of the
closing date, Comverge will pay Laurus an annual fee of $20. In addition, during
the term of the line of credit, Comverge will pay Laurus (and/or its affiliates)
(i) a monthly unused line fee equal to 0.5% of the unused portion of the line of
credit and (ii) a monthly collateral management fee (paid in arrears) equal to
0.65% of any new accounts receivable of Comverge created during the month which
(A) qualify as "eligible accounts` for Comverge to borrow and (B) against which
there are outstanding advances (either previously outstanding or resulting from
a new borrowing during such month).
In addition, Laurus may convert up to an aggregate of $600 of the line
of credit into shares of the Company`s common stock at a fixed conversion price
of $1.50. The Company also issued a five-year warrant to purchase 190,000 shares
of the Company`s common stock, exercisable in three tranches at exercise prices
ranging from $2.00 to $3.34 per share, all of which are immediately exercisable.
Except in the event of default under the convertible note (see (c) below) or
upon 75 days prior notice, Laurus cannot own, in the aggregate, more the 4.99%
of the Company`s common stock as a result of shares issued upon the conversion
of the convertible note and the exercise of the warrant.
Under the terms of the warrant, Laurus may sell shares of the Company`s
common stock issuable upon exercise of the warrants only after June 5, 2003.
Additionally, prior to June 5, 2003, Laurus may sell shares of the Company`s
common stock issuable upon conversion of the line of credit subject to a volume
limitation equal to 25% of the average daily trading volume of the calendar
F-19
month in which the sale is to be made (as determined on a rolling basis).
The Company used the Black-Scholes valuation method to estimate the
fair value of the warrants to purchase 190,000 shares of common stock of the
Company, using a risk free interest rate of 3.1%, its contractual life of five
years, an annual volatility of 82% and no expected dividends. The Company
estimated the fair value of the beneficial conversion feature and related
warrants at the issuance of the convertible line of credit to be approximately
$246. Such amount was credited to additional paid-in capital and $63 was charged
to interest expense immediately with respect to the beneficial conversion
feature and the remaining $183 is being charged to interest expense over the
three-year life of the credit line on a straight-line basis with respect to the
warrants. The unamortized debt discount from the related warrants is included in
short-term debt and current maturities of long-term debt, net, at December 31,
2002. In addition, debt issuance costs of $86 with respect to the issuance of
the line of credit will be amortized over the credit line life of three years.
(c) Convertible note
(i) In June 2002, the Company completed a transaction with Laurus,
pursuant to which Laurus made a $2,000 investment in the Company in exchange for
a 10% convertible note and a three-year warrant to purchase 125,000 shares of
the Company`s common stock at an exercise price of $4.20 per share. Under the
10% convertible note, the Company made interest-only payments for the first
three months and thereafter ten payments of $200 plus accrued interest on the
outstanding balance.
Laurus may convert the unpaid balance of the convertible note at any
time into shares of the Company`s common stock at a fixed conversion price of
$3.49 per share, subject to certain restrictions in the agreement. The Company
may pay the principal and interest on the convertible note, which has a one-year
term, in cash, shares of common stock, or a combination of cash and stock, at
the Company`s option. Should the Company elect to make such payments in stock
(in whole or in part), the conversion price will be the lesser of (i) $3.49 per
share and (ii) 83% of the average of the 10 lowest closing prices during the 30
trading days prior to the date of notice of payment. The Company`s Databit
subsidiary granted Laurus a security interest in Databit`s accounts receivable.
The Company used the Black-Scholes valuation method to estimate the
fair value of the 125,000 warrants to purchase common stock of the Company,
using a risk free interest rate of 3.0%, its contractual life of three years, an
annual volatility of 73% and no expected dividends. The Company estimated the
fair value of the beneficial conversion feature and related warrant at the
issuance of the convertible note to be approximately $692. Such amount was
credited to additional paid-in capital and is being charged to interest expense
over the conversion period (with respect to the note) and the term of the note
(with respect to the warrants), using the effective interest method. During the
year ended December 31, 2002, the Company recorded $517 of the interest expense
with respect to the beneficial conversion feature and warrants. The face value
debt of $1,400, less $176 of unamortized debt discount, from the beneficial
conversion feature and the related warrants, was included in short-term debt and
current maturities of long-term debt, net, at December 31, 2002. In addition,
the Company incurred other debt issuance costs of $167 with respect to the
issuance of the convertible note. These costs are being amortized to interest
expense using the effective interest method over the life of the note.
(ii) In October 1999, the Company completed a $2,000 private placement
of a 0% Convertible Subordinated Debenture (the "Debenture"), payable in October
2001, and 100,000 warrants with an exercise price of $3.06625 to purchase common
stock of the Company. In addition, the Company issued 20,000 warrants with an
exercise price of $3.06625, as partial compensation to a finder in connection
with the private placement, which expired in October 2002.
The Company used the Black-Scholes valuation method to estimate the
fair value of the 120,000 warrants to purchase common stock of the Company,
using a risk free interest rate of 6%, an expected life of three years (which is
equal to its contractual life), expected annual volatility of 63% and no
expected dividends. The warrants` value of $114 reduced the carrying value of
the debt and was amortized as additional interest expense over the term of the
Debentures ($9 in 2000).
Imputed interest on the Debenture, totaling $377, based on a rate of
10%, was to be amortized over the life of the Debenture. For the year ending
December 31, 2000, $19 was amortized to interest expense. The effective interest
rate on the Debenture after consideration of the imputed interest and warrants
issued was approximately 12%.
F-20
In February 2000, the Company extinguished a portion of the Debentures
for an aggregate redemption price of $2,001. The Company recorded a loss in 2000
of $753 due to the early redemption (In 2000, the Company also recorded a loss
of $190 with respect to the refinancing of a loan whereby the Company wrote-off
of an unamortized premium associated with a warrant issued to a lender.) No
income tax benefit was recognized as the Company establishes valuation
allowances against its deferred tax assets as it is more likely than not that
they will not be realized. In 2000, the $260 unredeemed balance of the
convertible debenture was converted into 84,794 shares of common stock of the
Company in accordance with the terms of the Debenture.
(d) Capital lease obligations
The Company`s capital lease obligations are payable through 2004.
(e) The aggregate maturities of debt for each of the five years subsequent to
December 31, 2002 are as follows:
Year ending
December 31,
2003............................................... $3,755
2004............................................... 5,903
2005............................................... 192
2006............................................... 160
2007............................................... 23
-------------
$10,033
=============
NOTE 11--OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
As of December 31,
------------------
2001 2002
---------- ----------
Taxes payable......................................... $805 $827
Lien allowance........................................ 558 558
Deferred revenue...................................... 169 224
Warranty provision.................................... 302 52
Other................................................. 1,538 1,750
---------- ----------
$3,372 $3,411
========== ==========
NOTE 12--LIABILITY FOR EMPLOYEE TERMINATION BENEFITS
Under Israeli law and labor agreements, the Company`s subsidiaries in
Israel are required to make severance payments to dismissed employees and to
employees leaving employment in certain other circumstances. The obligation for
severance pay benefits, as determined by the Israeli Severance Pay Law, is based
upon length of service and last salary. These obligations are substantially
covered by regular deposits with recognized severance pay and pension funds and
by the purchase of insurance policies. The pension plans are multi-employer and
independent of the Company. Pension and severance pay costs for 2000, 2001 and
2002 of approximately $1,276, $1,394 and $1,280, respectively, are included in
cost of sales (services), research and development expenses and selling, general
and administrative expenses.
NOTE 13--COMMITMENTS AND CONTINGENCIES
(a) Leases of Property and Equipment
Office rental and automobile leasing expenses, for 2000, 2001 and 2002,
were $1,326, $1,521 and $2,171, respectively. Future minimum lease payments on
non-cancelable operating leases as of December 31, 2002 are as follows:
Year ending
December 31,
-------------
2003......................................................... $1,561
2004......................................................... 1,265
2005......................................................... 1,046
2006......................................................... 418
2007......................................................... 289
Thereafter................................................... 481
-------
$5,060
=======
F-21
(b) Employee Retirement Savings Plan
The Company sponsors a tax deferred retirement savings plan that
permits eligible U.S. employees to contribute varying percentages of their
compensation up to the limit allowed by the Internal Revenue Service. This plan
also provides for discretionary Company contributions, of which none were made
for the years ended December 31, 2000, 2001 and 2002.
(c) Guarantees
Previously, the Company accrued a loss for contingent performance of
bank guarantees. The Company`s remaining commitment under these guarantees
(included in other current liabilities) is $558 at December 31, 2001 and 2002.
The Company has collateralized a portion of these guarantees by means of a
deposit (classified as restricted cash) of $238 and $241 as of December 31, 2001
and 2002, respectively.
The Company`s subsidiaries have provided various performance, advance
and tender guarantees as required in the normal course of its operations. As at
December 31, 2002, such guarantees totaled approximately $410 and were due to
expire through April 2004.
See Notes 10(b) and 10(c) with respect to guarantees on the Company`s
lines of credit and convertible note.
(d) Royalties
The Company is committed to pay royalties to the Government of Israel
on proceeds from the sale of certain products in which the Government of Israel
participated in the research and development by way of grants. Royalties are
currently payable at a rate of 4% of the annual sales of the product, though
limited to $630, the amount of the original grant. The Company`s future net
royalty obligation in respect of these grants is not to exceed $433 at December
31, 2002.
(e) Litigation
In January 2003, an arbitrator ruled against a subsidiary of the
Company in an arbitration proceeding against a customer for payment. The
arbitrator ruled that the subsidiary must pay the customer damages, expenses and
interest of $210, which is included in selling, general and administrative
expense for the year ended December 31, 2002.
The Company is involved in various other legal actions and claims
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company`s consolidated financial position, results of operations or
liquidity.
NOTE 14--SHAREHOLDERS` EQUITY
(a) Stock Option Plans
The Company`s stock option plans provide for the granting to officers,
directors and other key employees of options to purchase shares of common stock
at not less than 85% of the market value of the Company`s common stock on the
date of grant. The purchase price must be paid in cash. To date, the Company has
issued options under the plans at exercise prices equal to the market value of
the Company`s common stock of the date of the grant. All options expire within
five to ten years from the date of the grant, and generally vest over a two to
three year period from the date of the grant. At December 31, 2002, the total
authorized number of options or other equity instruments available for grant
under the various plans was 2,920,225.
F-22
A summary status of the Company`s option plans as of December 31, 2000,
2001 and 2002, as well as changes during each of the years then ended, is
presented below:
2000 2001 2002
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
(in shares) (in shares) (in shares)
Outstanding at beginning of year......... 1,723,850 $5.32 1,554,775 $5.01 1,568,442 $5.11
Granted............................... 412,275 5.36 273,500 5.38 236,000 5.38
Exercised............................. (27,000) 2.46 (91,866) 2.51 --
Forfeited or expired.................. (554,350) 6.38 (167,967) 6.04 (65,675) 4.26
--------- --------- --------
Outstanding at end of year............... 1,554,775 5.01 1,568,442 5.11 1,738,767 5.18
========= ========= =========
Exercisable at end of year............... 1,121,406 4.95 1,102,404 4.85 1,557,395 5.21
========= ========= =========
Outstanding as of December 31, 2002 Exercisable as of December 31, 2002
----------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------ ----------- ---------------- -------------- ----------- --------------
(in shares) (in years) (in shares)
$1.15 - 2.00............... 231,000 3.81 $1.81 214,000 $1.82
$2.44 - 4.00............... 250,500 3.74 3.23 211,764 3.14
$4.50 - 6.00............... 528,967 3.57 5.37 444,997 5.40
$6.06 - 7.88............... 705,800 2.08 6.65 664,134 6.64
$11.13.................. 22,500 1.88 11.13 22,500 11.13
--------- ---------
1,738,767 1,557,395
========= =========
The weighted average grant-date fair value of the options granted during
2000, 2001 and 2002, amounted to $2.85, $3.27 and $2.46 per option,
respectively. The Company utilized the Black-Scholes option pricing model to
estimate fair value, utilizing the following assumptions for the respective
years (all in weighted averages):
2000 2001 2002
---- ---- ----
Risk-free interest rate.................................................... 5.0% 4.9% 4.2%
Expected life of options, in years......................................... 5.9 6.1 5.3
Expected annual volatility................................................. 82% 60% 78%
Expected dividend yield.................................................... None None None
(b) Warrants
The Company has issued warrants at exercise prices equal to or greater
than market value of the Company`s common stock at the date of issuance. A
summary of warrant activity follows:
2000 2001 2002
---- ---- ----
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Warrants Exercise Price Warrants Exercise Price Warrants Exercise Price
-------- -------------- --------- -------------- -------- --------------
(in shares) (in shares) (in shares)
Outstanding at beginning of year 370,000 $3.23 120,000 $3.07 120,000 $ 3.07
Granted......................... -- -- -- -- 315,000 3.36
Repurchased by Company.......... (250,000) 3.31 -- -- -- --
Forfeited....................... -- -- -- -- 120,000 3.07
-------- -------- --------
Outstanding at end of year...... 120,000 $3.07 120,000 $3.07 315,000 $3.36
======= ======== ========
In August 1999, the Company granted a lender 250,000 warrants to
purchase common stock with an exercise price of $3.31 per share, the fair market
value of the Company`s common stock at the date of the grant. The warrants were
to expire on August 31, 2002. In September 2000, the Company repurchased the
250,000 warrants outstanding from the lender for $1.50 per warrant.
(c) Stock Awards
In August 1998, the Company granted 155,000 shares of common stock to
its Chief Executive Officer. The shares generally vest over a two-year period,
except that the vesting of 20,000 of the shares may be delayed until certain
performance goals have been met. These performance goals have not been met since
the date of grant. Deferred compensation in the aggregate amount of $436, equal
to the shares` fair value on the date of the grant, was recorded against
additional paid-in capital at the date of grant, of which $254 and $73 was
amortized to compensation expense during 2000 and 2001, respectively.
F-23
In September 2001, the Company entered into a restricted stock purchase
agreement with the newly hired Chief Executive Officer (CEO) of the Company`s
energy intelligence solutions segment subsidiary. Pursuant to this agreement,
the Company issued to the segment CEO 50,000 shares of its common stock at a
purchase price of $5.95 per share. The common stock was paid for by assigning
and endorsing to the Company a 6% subordinated note, due April 15, 2010, in the
principal amount of $297,500. The subordinated note was issued by Philip
Services Corp. (NasdaqNM: PSCD) in favor of the segment CEO under a trust
indenture with Wilmington Trust Company. The subordinated note is assignable,
pays interest semi-annually, is subject to a sinking fund for the mandatory
redemption of the subordinated note by no more than four annual payments,
beginning in April 15, 2006 and is reflected as a reduction in shareholders`
equity until paid.
(d) Stock Repurchase Program
In September 2000, the Company`s Board of Directors authorized the
purchase of up to 500,000 shares of the Company`s common stock. In August 2002,
the Company`s Board of Directors authorized the purchase of up to 300,000 more
shares of the Company`s common stock. During 2001 and 2002, the Company
purchased 198,600 and 37,000 of its common stock, respectively, and at December
31, 2002 owned in the aggregate 845,704 of its own shares.
(e) Other
In March 1996, the Company`s Board of Directors adopted a stockholder
rights plan providing for the distribution of common stock purchase rights at
the rate of one right for each share of the Company`s common stock held by
shareholders of record as of the close of business on April 1, 1996. The rights
plan is designed to deter coercive takeover tactics, including the accumulation
of shares in the open market or through private transactions, and to prevent an
acquirer from gaining control of the Company without offering a fair price to
all of the Company`s shareholders. Each right initially entitles shareholders to
buy one-half of a share of common stock of the Company for $15. Generally, the
right will be exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company`s common stock or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company`s common stock.
If any person ("Acquiring Person") becomes the beneficial owner of 15%
or more of the Company`s common stock, other than pursuant to a tender or
exchange offer for all outstanding shares of the Company approved by a majority
of the Company`s independent directors, then, subject to certain exceptions set
forth in the rights plan, each right not owned by the Acquiring Person or
related parties will entitle its holder to purchase, at the right`s then current
exercise price, shares of the Company`s common stock (or in certain
circumstances, as determined by the Board of Directors, cash, other property or
other securities) having a value of twice the right`s then current exercise
price. The Company will generally be entitled to redeem the rights at one half
of one cent per right at any time until 10 days (subject to extension) following
a public announcement that a 15% position has been acquired. The rights plan
will expire in March 2006.
In September 2001, the Company granted the newly hired CEO of its
energy intelligence solutions segment subsidiary an option to purchase 357,200
shares of stock in the energy intelligence solutions segment subsidiary, which
is equal to 6% of the outstanding capital stock of the subsidiary on a fully
diluted basis, at the fair value of the subsidiary`s stock at the date of the
grant. The options vest in three equal tranches on January 1, 2002, 2003 and
2004 and terminate on December 31, 2006. The fair value of the subsidiary`s
stock at grant date was determined by an independent appraiser of $1.20 per
share.
NOTE 15--INCOME TAXES
(i) Composition of loss before income taxes is as follows:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Domestic ........................................................... $(4,181) $(6,767) $(3,925)
Foreign............................................................. 346 (3,039) (4,191)
----------- ----------- -----------
$(3,835) $(9,806) $(8,116)
=========== =========== ===========
F-24
Income tax expense (benefit) consists of the following:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Current:
Federal........................................................ $-- $(29) $--
State and local................................................ 46 (56) 24
Foreign........................................................ 145 60 80
----------- ----------- ---------
191 (25) 104
----------- ----------- ---------
Deferred:
Federal........................................................ $-- $-- $--
State and local................................................ (20) 14 (13)
Foreign........................................................ -- -- (63)
----------- ----------- ---------
(20) 14 (76)
----------- ----------- ---------
Income tax expense (benefit) from continuing operations..... 171 (11) 28
----------- ----------- ---------
Income tax expense from gain on sale of discontinued operations 767 -- --
----------- ----------- ---------
Total income tax expense (benefit)................................. $938 $(11) $28
=========== =========== =========
(c) Effective Income Tax Rates
Set forth below is a reconciliation between the federal tax rate and the
Company`s effective income tax rates:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Statutory Federal rates.................................................. 34% 34% 34%
Increase (decrease) in income tax rate resulting from:
Non-deductible expenses............................................... (7) (4) (12)
State and local income taxes, net..................................... 7 5 4
Net operating loss carryforward....................................... 16 -- --
Other................................................................. (6) (1) 1
Valuation allowance................................................... (48) (34) (27)
---- ---- ----
Effective income tax rates............................................ (4)% 0% 0%
==== ==== ====
(d) Analysis of Deferred Tax Assets (Liabilities)
Deferred tax assets consist of the following: As of December 31,
-------------------
2001 2002
---- ----
Accelerated depreciation for tax purposes................................. $ 35 $ 13
Intangible asset basis differences........................................ 23 77
Other temporary differences............................................... 1,012 1,434
Net operating and capital loss carryforwards.............................. 9,157 11,630
------ ------
10,227 13,154
Valuation allowance....................................................... (10,041) (12,634)
-------- -------
Net deferred tax assets................................................... $ 186 $ 520
======== =======
Deferred tax liabilities consist of the following: As of December 31,
-------------------
2001 2002
---- ----
Other temporary differences................................................... $ -- $210
Intangible asset basis differences............................................ 180 197
---- ----
Total deferred tax liabilities............................................ $180 $407
==== ====
F-25
Net deferred tax assets consist of the following: As of December 31,
-------------------
2001 2002
---- ----
Deferred tax assets - current............................................. $ 3 $205
Deferred tax assets - non-current......................................... 183 315
Deferred tax liabilities - non-current.................................... (180) (407)
------ -------
Net deferred tax assets................................................... $ 6 $113
====== =======
No valuation allowance is established for the Company`s operations which are
reasonably expected to utilize their deferred tax assets. Valuation allowances
relate principally to net operating loss and capital loss carryforwards and
foreign tax credit carryforwards. The change in the valuation allowance in 2001
and 2002 was an increase of $2,845 and $2,593, respectively.
(e) Summary of Tax Loss Carryforwards
As of December 31, 2002, the Company had various net operating loss
carryforwards, which expire as follows:
Expiration Federal State Foreign
---------- ------- ----- -------
2003-2004..................................................... $-- $47 $--
2005-2006..................................................... -- 4,076 --
2007-2008..................................................... -- 9,717 --
2009.......................................................... -- 4,929 --
2019-2022..................................................... 15,045 -- --
Unlimited..................................................... -- -- 12,284
--------- ------- -------
Total......................................................... $15,045 $18,769 $12,284
======= ======= =======
NOTE 16--RELATED PARTY BALANCES AND TRANSACTIONS
The Company paid consulting and other fees to directors of $5, $109 and
$98 for the years ended December 31, 2000, 2001 and 2002, respectively, which
are included in selling, general and administrative expenses. The Company paid
legal fees for services rendered and out-of-pocket disbursements to a firm in
which a principal is a former director and is the son-in-law of the Company`s
Chief Executive Officer, of approximately $474, $575 and $630 for the years
ended December 31, 2000, 2001 and 2002, respectively. Approximately $36 and $90,
owed to this firm as of December 31, 2001 and 2002, respectively, is included in
other current liabilities. The Company paid a director and vice president of the
Company, who is the son of the Company`s Chief Executive Officer, approximately
$280, $197 and $230 for the years ending December 31, 2000, 2001 and 2002,
respectively. An asset management firm that is controlled by a director of the
Company provided discretionary asset management services to the Company. The
Company paid $13 and $12 for these services for the years ended December 31,
2001 and 2002, respectively. The Company received $35 of rent from a company
controlled by the Chief Executive Officer for the year ended December 31, 2002.
The chief executive officer of the Company`s Israeli subsidiary has a loan from
the subsidiary that was acquired in 2001. The loan balance and accrued interest
at December 31, 2001 and 2002 was $47 and $48, respectively. The loan has no
defined maturity date, is denominated in NIS, is linked to the Index and bears
interest at 4%. The Company`s Comverge subsidiary has extended loans of $10 each
to both the Company`s Chief Executive Officer and Chief Financial Officer. The
loans had an initial maturity date of January 3, 2002 and were extended at that
time to mature on January 3, 2004. The loans bear interest at 4.25% per annum.
The balances of the loan and accrued interest at December 31, 2001 and 2002 were
$23 and $25, respectively. The Comverge subsidiary also extended a loan of $14
to Comverge`s Executive Vice-President in 2001. This loan bears interest at 6.5%
per annum and is to mature in July 2004. The balance of the loan and accrued
interest at December 31, 2001 and 2002 was $15 and $16, respectively.
NOTE 17--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
(a) General Information
The Company has three reportable segments: software consulting and
development, computer hardware sales and energy intelligence solutions.
(i) The software consulting and development segment provides computer
software and systems consulting and development services
F-26
(ii) The computer hardware segment is an authorized dealer and
value-added reseller of computer hardware.
(iii) The energy intelligence solutions segment develops load control and data
communication solutions for utilities.
The Company`s reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies. Similar
operating segments that operate in different countries are aggregated into one
reportable segment.
(b) Information about Profit or Loss and Assets
The accounting policies of all the segments are those described in the
summary of significant accounting policies. The Company evaluates performance
based on the profit or loss from operations before income taxes not including
nonrecurring gains and losses.
The Company accounts for intersegment sales and transfers as if the
sales or transfers were to third parties, that is, at current market prices. The
Company does not systematically allocate assets to the divisions of the
subsidiaries constituting its consolidated group, unless the division
constitutes a significant operation. Accordingly, where a division of a
subsidiary constitutes a segment that does not meet the quantitative thresholds
of SFAS No. 131, depreciation expense is recorded against the operations of such
segment, without allocating the related depreciable assets to that segment.
However, where a division of a subsidiary constitutes a segment that does meet
the quantitative thresholds of SFAS No. 131, related depreciable assets, along
with other identifiable assets, are allocated to such division.
F-27
The following tables represent segmented data for the years ended December 31,
2002, 2001 and 2000:
Software Energy
Consulting and Intelligence Computer
Development Solutions Hardware Other(*) Total
----------- --------- -------- -------- -----
Year ended December 31, 2002:
Revenues from external customers.......................... $14,202 $19,023 $22,605 $56 $55,886
Intersegment revenues..................................... 19 1,125 87 -- 1,231
Interest revenue.......................................... 8 5 -- -- 13
Interest expense.......................................... 323 201 464-- 988
Depreciation and amortization............................. 580 552 17 -- 1,149
Gross profit.............................................. 2,673 6,087 4,164 56 12,980
Segment income (loss)..................................... (4,503) (2,161) 15 (2) (6,651)
Minority interests........................................ 880 -- -- -- 880
Income tax expense (benefit).............................. 11 6 11 -- 28
Segment assets............................................ 12,614 7,872 5,651 -- 26,137
Expenditures for segment assets........................... 112 407 14 -- 533
Year ended December 31, 2001:
Revenues from external customers.......................... $12,279 $13,793 $19,794 $58 $45,924
Intersegment revenues..................................... 283 1,164 107 -- 1,554
Interest revenue.......................................... 18 3 -- -- 21
Interest expense.......................................... 154 311 -- -- 465
Depreciation and amortization............................. 281 706 22 -- 1,009
Gross profit.............................................. 2,104 2,652 3,552 58 8,366
Segment income (loss)..................................... (2,052) (6,447) 1,006 (217) (7,710)
Minority interests........................................ - - - - -
Income tax expense (benefit).............................. 57 10 21 -- 88
Segment assets............................................ 16,297 5,537 2,886 -- 24,720
Expenditures for segment assets........................... 361 512 20 -- 893
Year ended December 31, 2000:
Revenues from external customers** $18,977 $17,105 $21,515 $204 $57,801
Intersegment revenues..................................... 58 1,507 215 -- 1,780
Interest revenue.......................................... 59 3 -- -- 62
Interest expense.......................................... 136 412 -- -- 548
Depreciation and amortization............................. 362 833 38 6 1,239
Gross Profit**............................................ 4,821 3,926 3,244 204 12,195
Segment income (loss)..................................... 1,530 (3,216) 726 41 (919)
Minority interests........................................ - - - - -
Income tax expense (benefit).............................. 107 9 (13) -- 103
Segment assets............................................. 7,324 4,534 4,937 64 16,859
Expenditures for segment assets........................... 358 361 17 -- 736
* Represents segments below the quantitative thresholds of SFAS No. 131, as
follows: in 2002, a VAR software operation in Israel and a holding company;
in 2001, a VAR software operation in Israel, a holding company and residual
operations from the Company`s multimedia software segment; and in 2000, a VAR
software operation in Israel and residual operations from the multimedia
software segment.
**Revenues from external customers and gross profit in 2000 excludes $38 in
management fees received from Tower Semiconductor Ltd.
F-28
The following tables represent a reconciliation of the segment data to
consolidated statement of operations and balance sheet data for the years ended
December 31, 2000, 2001 and 2002:
For the years ending December 31,
----------------------------------
2000 2001 2002
---- ---- ----
Revenues:
Total revenues for reportable segments $57,597 $45,866 $55,830
Other operational segment revenues 204 58 56
-------- -------- -------
Total operating revenues 51,801 45,924 55,886
Revenue from management fee derived by
non-operating segment (corporate headquarters) 38 -- --
-------- -------- -------
Total consolidated revenues $57,839 $45,924 $55,886
======= ======= =======
Income (loss):
Total loss for reportable segments $(960) $(7,493) $(6,649)
Other operational segment operating income (loss) 41 (217) (2)
--------- -------- --------
Total operating loss (919) (7,710) (6,651)
Net loss of corporate headquarters (3,123) (2,085) (1,493)
Loss from discontinued operations included in reportable segments 104 -- --
Income tax expense (benefit) included in reportable segments 103 (11) 28
------- ------ ----
Consolidated loss from continuing operations
before provision for income taxes $(3,835) $(9,806) $(8,116)
======== ======== ========
As of December 31,
-------------------
2001 2002
---- ----
Assets:
Total assets for reportable segments $24,720 $26,137
Other operational segment assets -- --
------- -------
24,720 26,137
Unallocated amounts: Net assets of corporate headquarters * 14,524 7,168
------ ------
Total consolidated assets $39,244 $33,305
======= =======
* Unallocated assets in 2002 include cash and cash equivalents of $897 as well
as long-term bank deposits of $5,700. Unallocated assets in 2001 include cash
and cash equivalents of $3,745 as well as investments in debt securities and
long-term bank deposits of $7,828.
Segment Consolidated
Totals Adjustments Totals
------ ----------- ------
Other Significant Items
Year ended December 31, 2002
Depreciation and amortization................................................... $1,149 $6 $1,155
Expenditures for assets......................................................... 533 1 534
Interest expense................................................................ 988 224 1,212
Year ended December 31, 2001
Depreciation and amortization................................................... $1,009 $329 $1,338
Expenditures for assets......................................................... 893 4 897
Income tax expense.............................................................. 88 (99) (11)
The reconciling items are all corporate headquarters data, which are not
included in the segment information. None of the other adjustments are
significant.
F-29
Year Ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Revenues based on location of customer:
United States................................................................ $41,659 $33,800 $41,622
Israel....................................................................... 15,431 10,382 13,700
Far East..................................................................... 226 540 51
Other........................................................................ 523 1,202 513
--------- -------- -----------
$57,839 $45,924 $55,886
======= ======= =======
As of December 31,
2001 2002
---- ----
Long-lived assets located in the following countries:
Israel................................................................................... $1,373 $1,016
United States............................................................................ 923 956
(e) Major Customers
Revenues from Major Customers: Consolidated Sales
Year Ended December 31,
Customer Segment 2000 2001 2002
- -------- ------- ---- ---- ----
% of Total % of Total % of Total
Revenues Revenues Revenues Revenues Revenues Revenues
A Computer hardware $5,084 8.8 $4,894 10.7 $4,910 8.8
----- --- ----- ---- ----- ---
NOTE 18--FINANCIAL INSTRUMENTS
(a) Fair Value of Financial Instruments
Fair values of financial instruments included in current assets and
current liabilities are estimated to approximate their book values, due to the
short maturity of such instruments. Fair values for long-term debt and long-term
deposits are estimated based on the current rates offered to the Company for
debt and deposits with the similar terms and remaining maturities. The fair
value of the Company`s long-term debt and long-term deposits are not materially
different from their carrying amounts.
(b) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
short and long-term bank deposits and trade receivables. The counterparty to a
majority of the Company`s cash equivalent deposits as well as its short and
long-term bank deposits is a major financial institution of high credit
standing. The counterparties to the Company`s debt securities consist of various
major corporations of high credit standing. The Company does not believe there
is significant risk of non-performance by these counterparties. Approximately
12% of the trade accounts receivable at December 31, 2002 were due from a U.S.
customer that pays its trade receivables over usual credit periods. Credit risk
with respect to the balance of trade receivables is generally diversified due to
the large number of entities comprising the Company`s customer base.
NOTE 19--SUBSEQUENT EVENTS
(a) Comverge equity financing
On April 7, 2003, the Company and its Comverge subsidiary reached a
definitive agreement with a syndicate of venture capital firms raising an
aggregate of $13,000 in capital funding. The Company purchased $3,250 of the
Series A Convertible Preferred Stock issued by Comverge in the equity financing.
A syndicate of venture capital firms purchased the remaining $7,750 of the
Series A Convertible Preferred Stock issued by Comverge, and one member of the
syndicate also purchased $2,000 of a Series A-1 Convertible Preferred Stock of
Comverge. The Company remains Comverge`s largest shareholder, owning
approximately 50.6% of the outstanding capital stock of Comverge.
F-30
The Company holds approximately 26% of all the preferred stock issued by
Comverge in the private equity financing, in addition to owning approximately
80% of Comverge`s common stock. The Company`s investment was primarily financed
by $3,000 of cash previously restricted (classified as a long-term deposit at
December 31, 2002). Concurrent with the sale, Comverge has received a line of
credit of up to $6,500 to replace the Laurus line of credit and to provide
additional working capital.
The venture capital firm which purchased the Series A-1 Preferred Stock
entered into an agreement with Comverge pursuant to which Comverge granted to
the venture capital firm an option to put its shares of Series A-1 Preferred
Stock to Comverge for $2,000. The put is exercisable from April 8, 2004 to April
18, 2004. This agreement also grants to Comverge a right to call from the
venture capital firm its Series A-1 Preferred Stock for 2,000, which call right
expires on April 18, 2004, and its Series A Preferred Stock, which call right
expires on July 8, 2003 at a call price equal to the purchase price of the
Preferred Stock plus an 8% annual dividend.
The Series A Preferred Stock will have priority over Comverge common
stock and other preferred stock for dividends and liquidations (which includes a
sale of Comverge). Additionally, the Series A Preferred Stock have anti-dilution
protection for stock issuances by Comverge below the per share purchase price of
the Series A Preferred Stock (subject to customary exceptions such as employee
stock options) as well as approval rights for major corporate transactions,
stock issuances, declaration or payment of dividends, changing corporate
governance documents, liquidation or dissolution of Comverge and other corporate
matters. The Series A Preferred Stock is also convertible into Comverge common
stock at the holder`s option or upon a initial public offering with gross
proceeds of at least $30,000 and an offering price per share at least five times
the original purchase price per share of the Series A Preferred Stock.
The Company has entered into various agreements with Comverge, the
syndicate of venture capital investors and certain of Comverge`s common
stockholders. These agreements provide for, among other things, restrictions on
the transfer of the Series A Preferred Stock and Comverge common stock, the
voting of the Company`s Series A Preferred Stock and Comverge common stock, the
Company`s right to receive quarterly and annual financial reports from Comverge
and registration rights for the Company`s Series A Preferred Stock and Comverge
common stock. Under Comverge`s Amended and Restated Certificate of
Incorporation, the holders of Comverge common stock have the right to elect two
of the five directors on Comverge`s Board. Pursuant to a voting agreement, one
of the directors elected by the holders of the Comverge common stock must be the
CEO of Comverge. The Company`s chairman and CEO and Comverge`s CEO were elected
as directors by the Comverge common stockholders.
In connection with the agreement, Comverge secured a $6,500 credit
facility with a leading financial institution. In connection with this new
credit facility, Comverge paid off in full the $5,500 bank loan outstanding (as
of March 31, 2003) and the $2,000 line of credit with Laurus Master Fund, Ltd.,
which line was also terminated, thereby releasing the Company from the security
obligations related to them. The new credit facility includes a $1,500 term loan
secured by the Company`s pledge of $1,500, which is being held in an account at
Comverge`s new lender, and a $5,000 revolving line of credit secured by the
assets of Comverge.
Upon the Repayment of Comverge`s bank loan, $1.0 million of the long-
term deposit held as security for Comverge`s loan became unrestricted. Comverge
agreed to make certain prepayments on the term loan and the new lender agreed to
the release of amounts equal to such payments from the pledge account, subject
to certain conditions, as follows:
o Three payments of $500 on December 31, 2003, June 30, 2004 and
December 31, 2004 if (a) Comverge raises at least $2,000 in additional
equity financing by July 6, 2003 or (b) the put option held by the
holder of the Series A-1 Preferred Stock has not been exercised by
April 18, 2004 (in which case the December 31, 2003 payment would be
made on April 28, 2004);
o Two payments of $750 on December 31, 2003 and June 30, 2004 if (a)
Comverge raises at least $5,000 in additional equity financing by
July 6, 2003 or (b) the put option held by a member of the syndicate
has not been exercised by April 18, 2004 and Comverge raises at least
$3,000 in additional equity financing by July 6, 2003 (in which case
the balance of the December 31, 2003 payment would be made on April
28, 2004);
F-31
o If none of the other triggering events have occurred, then the Company
will not entitled to the release of the $1,500 until April 1, 2006,
although Comverge will use commercially reasonable efforts to cause the
release of the money to us before that date.
Until December 31, 2003, the Company has the option to purchase from
Comverge up to $1,500 of Series A-2 Convertible Preferred Stock. The amount of
Series A-2 Preferred Stock that the Company may purchase from Comverge will be
limited to the number of shares that could be purchased by the principal balance
of the $1,500 term loan as of the date the Company gives notice of exercising
the Series A-2 option. The Series A-2 Preferred Stock has the same purchase
price as the Series A-1 Preferred Stock, but is junior in priority in
liquidation (which includes the sale of Comverge) to both the Series A and
Series A-1 Preferred Stock. In all other respects the Series A-2 Preferred Stock
has the same rights as the Series A Preferred Stock and the Series A-1 Preferred
Stock.
The Company expects to record a gain the sale of a portion of its
Holdings in Comverge of approximately $4,000.
(b) Sale of shares to Laurus
On April 10, 2003, the Company received $600 from Laurus in connection
with the sale to them of 400,000 shares of the Company`s common stock. Such sale
was in lieu of the conversion by Laurus of $600 of the credit line it afforded
Comverge.
F-32
EXHIBIT 10.24
[LETTERHEAD OF BANK LEUMI USA]
As of January 31, 2003
Comverge Technologies, Inc.
23 Vreeland Road
Florham Park, New Jersey
Gentlemen:
Reference is made to that certain Credit Agreement, dated as of February 7,
2000, as amended by an amendment dated as of January 31, 2002 (as so amended,
the "Agreement") by and between Bank Leumi USA (the "Bank") and Comverge
Technologies, Inc, (the "Borrower"). Capitalized terms used in this letter
agreement (the "Amendment"), and not otherwise defined herein, shall have the
meanings defined in the Agreement.
Pursuant to the Agreement, the Bank agreed to make a Term Loan to the Borrower,
until the Maturity Date, in the aggregate amount of $6,000,000. The principal
balance of the Term Loan has been reduced to $5,500,000 by prepayments made by
the Borrower. The Bank and the Borrower have agreed to amend the Agreement to
extend the Maturity Date.
Accordingly, the Borrower and the Bank agree as follows:
A. AMENDMENTS TO FINANCING.
A.1 Section 2.1 of the Agreement is hereby amended and restated as follows:
"2.1 Term Loan. As of February 7, 2000 the Bank made a Term Loan to the Borrower
in the principal amount of $6,000,000. The principal balance of the Term Loan
has been reduced to $5,500,000 by prepayments made by the Borrower. The Term
Loan will mature on February 1, 2004 (the "Maturity Date"). The principal of the
Term Loan may be prepaid in whole or in part as provided in Section 2.3.
Concurrently with the execution and delivery of this Amendment, the Borrower is
evidencing its obligation to pay the principal of, and interest on, the Term
Loan by executing and delivery an amended and restated term note, in the form of
Exhibit A annexed (the "Note"), to the Bank in the principal sum of $5,500.000"
A.2 Section 2.5.3 of the Agreement is hereby amended and restated as follows:
"2.5.3 Cash Collateral. On February 7, 2000, as collateral under its Security
Agreement, DSSI pledged a Certificate of Deposit to the Bank (the "Cash
Collateral") in the aggregate principal amount of $6,000,000, as collateral
security for payments of the Term Loan and the other Obligations. Subsequently,
and upon the reduction of the principal amount of the Term Loan, the amount of
the Cash Collateral was reduced by a like amount. Until the Term Loan and the
other Obligations are fully satisfied, the Cash Collateral pledged to the Bank
shall not be less than the principal balance of the Term Loan, and the
Certificate of Deposit in which the Cash Collateral is held shall have a
maturity date which is not earlier than ten (10) days after the Maturity Date."
B. CONDITIONS PRECEDENT. The obligation of the Bank to execute and deliver this
Amendment is subject to the conditions precedent that:
B.1 REPRESENTATIONS AND WARRANTIES. All of the representations and warranties
contained in the Agreement, or otherwise made to the Bank pursuant to or in
connection with any of the Financing Agreement, shall be correct and complete in
all material respects.
B.2 NOTE. The Borrower shall have executed and delivered the Note
evidencing the Term Loan to the Bank.
B.3 SUPPORTING DOCUMENTS. Thee Bank shall have received the following: (a) a
certificate of the Secretary or an Assistant Secretary of the Borrower, dated as
of even date herewith, certifying as to (i) the Certification of Incorporation
and By-Laws of the Borrower as then in effect; (ii) the resolutions of the Board
of Directors of the Borrower authorizing the execution, delivery and performance
of this Amendment and the Note, and the Loan; (iii) the full force and effect of
such resolutions on the date hereof; and (iv) the incumbency and signature of
each of the officers of the Borrower signing this Amendment and the Note; (b)
such additional supporting documents as the Bank may reasonably request.
B.4 CONFIRMATION OF GUARANTOR. DSSI shall have executed and delivered a
confirmation of its Guarantee and Security Agreement, in the form of Exhibit B
annexed, and renewed the time deposit provided to the Bank pursuant thereto.
B.5 OPINION. The Bank shall have received a written opinion of legal counsel to
the Borrower and DSSI, in form and substance satisfactory to the Bank and its
counsel.
B.6 FEES. The Borrower shall have paid (i) the reasonable attomeys` fees of
counsel for the Bank, and (ii) all other charges and disbursements incurred in
connection with the tramactions contemplated by the Amendment.
C. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into the
Amendment, the Borrower represents and warrants to the Bank that:
C.1 AUTHORITY, ENFORCEABILITY. The Borrower has all requisite legal right, power
and authority to execute, deliver an perform this Amendment. The Agreement, this
Amendment and the Financing Agreement are legal, valid and binding obligations
of such of the Borrower as are parties thereto, and are enforceable in
accordance with their terms, except as such enforcement may be limited by
bankruptcy, insolvency, moratorium or other simillar laws presently or hereafter
in effect affecting the enforcement of creditors` rights generally or the
availability of equitable remedies.
C.2 EXECUTION. The execution, delivery and performance by the Borrower of this
Amendment and the Note (a) have been authorized by all requisite corporate
action, (b) will not violate (i) the Certificate of Incorporiation or By-laws of
the
2
Borrower, (ii) any agreement or contract to which the Borrower is a party, or by
which it or any of its property is bound, or any order, decree or judgment, or
the provisions of any statute, rule or regulation, domestic or foreign, or (c)
result in the creation of any lien, charge or encumbrance of any nature
whatsoever upon any property or assets of the Borrower.
D. MISCELLANEOUS.
D.1 EXTANT NOTE. As soon after execution and delivery by the Borrower of the
Note as is practical, the Bank will return to the Borrower the note evidencing
the Term Loan which was extant prior to the execution and delivery of the Note.
D.2 ENTIRE AGREEMENT. This Amendment is intended by the parties as the final
expression of their agreement, and therefore incorporates all negotiations of
the parties hereto, and together with the Agreement and other Financing
Agreements set forth in the entire agreement of the parties hereto.
D.3 COUNTERPARTS. This Amendment may be executed in one or more counterparts,
each of which shall constitute an original, but all of which taken together
shall constitute one and the same instrument.
If the foregoing correctly sets forth our understanding and agreement, kindly
indicate your acceptance thereof by signing below.
Very truly yours,
BANK LEUMI USA
By: /s/ Michaela Klein
--------------------------------
Michaela Klein
Senior Vice President
By: /s/ Shirly Yechilevich
--------------------------------
Shirly Yechilevich
Assistant Vice President
AGREED TO:
COMVERGE TECHNOLOGIES, INC.
By: /s/ Robert M. Chiste
- ------------------------------------
Robert M. Chiste
Chief Executive Officer
3
EXHIBIT A
TERM NOTE
$5,500,000
New York, New York
As of January 31, 2003
A. GENERAL; TERMS OF PAYMENT
1. COMVERGE TECHNOLOGIES, INC., a Delaware corporation (the"Borrower"), promises
to pay to the order of BANK LEUMI USA (the "Bank"), at its offices at 564 Fifth
Avenue, New York, New York 10036, or at such other place as may be desiguated by
the holder hereof in writing, in immediately available funds, the principal sum
of Five Million Five Hundred Thousand ($5,500,000) Dollars on February 1, 2004,
or sooner as provided in the Credit Agreement (as hereinafter defined).
This note is the Note referred to in that certain Credit Agreement between the
Borrower and the Bank, dated as of February 7, 2000, as amended by an amendment
dated as of January 31, 2002, and as further amended by a letter agreement dated
as of even date herewith, and as such agreement may be further amended from time
to time (the "Credit Agreement"), and is subject to prepayment and its maturity
is subject to acceleration upon the terms contained in the Credit Agreement.
Capitalized terms used herein shall be defined as in the Credit Agreement.
The Borrower will pay interest on the unpaid principal amount of the Term Loan
from time to time outstanding, computed on the basis of a 360-day year. The
charging of interest on the basis of a 360-day year results in the payment of
more interest than would be required if interest were charged on the actual
number of days in the year. Interest shall be at the rate determined in the
Credit Agreement and be payable as is therein provided. In no event shall
interest exceed the maximum legal rate permitted for the Borrower.
2. MANNER OF PAYMENT. All payments by the Borrower on account of principal,
interest or fees hereunder shall be made in lawful money of the United States of
America, in immediately available funds. The Borrower authorizes (but shall not
require) the Bank to debit any account maintained by the Borrower with the Bank,
at any date on which a payment is due under this Note, in an amount equal to any
unpaid portion of such payment. If any payment of principal or interest becomes
due on a day on which the Bank is closed (as required or permitted by law or
otherwise), such payment shall be made not later than the next succeeding
business day, and such extension shall be included in computing interest in
connection with such payment.
B. DEFAULT
Upon the occurrence of an Event of Default, as defined in the Credit Agreement,
the Bank may declare the entire unpaid principal amount of this Note and all
interest and fees accrued and unpaid hereon to be forthwith due and payable,
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived by the Borrower.
C. MISCELLANEOUS
1. NO WAVIER: RIGHTS AND REMEDIES CUMULATIVE. No failure on the part of the Bank
to exercise, and no delay in exercising any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Bank of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The rights and remedies herein provided are cumulative and
not exclusive of any remedies or rights provided by law or by any other
agreement between the Borrower and the Bank.
2. COSTS AND EXPENSES. The Borrower shall reimburse the Bank for all costs and
expenses incurred by it and shall pay the reasonable fees and disbursements of
counsel to the Bank in connection with the enforcement of the Bank`s rights
hereunder.
3. AMENDMENTS. No amendment, modification or waiver of any provision of this
Note nor consent to any departure by the Borrower therefrom shall be effective
unless the same shall be in writing and signed by the Bank and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
4. CONSTRUCTION. This Note shall be governed by the laws of the State of New
York, without giving effect to its choice of law principles.
5. SUCCESSORS AND ASSIGNS This Note shall be binding upon the Borrower and its
successors and assigns, and the terms hereof shall inure to the benefit of the
Bank and its successors and assigns, including subsequent holders hereof.
6. SEVERABILITY. The provisions of this Note are severable, and if any provision
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
then such invalidity or unenforceability shall not in any manner affect such
provision in any other jurisdiction or any other provision of this Note in any
jurisdiction.
7. RESTATEMENT. This Note amends and restated the Term Note, dated as of January
31, 2002, heretofore made and delivered by the Borrower to the Bank.
8. WAIVER OF NOTICE; SET-OFF. The Borrower hereby waives presentment, demand for
payment, notice of protest and all other demands in connection with the
delivery, acceptance, performance, default or enforcement of this Note. The
balance of every account
of the Borrower with, and each claim of the Borrower against, the Bank existing
from time to time shall be subject to a lien and subject to be set-off against
any and all liabilities of the Borrower to the Bank, including those hereunder.
9. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY
LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY AGREEMENT, INSTRUMENT, DOCUMENT OR GUARANTEE DELIVERED PURSUANT
HERETO OR PURSUANT TO THE CREDIT AGREEMENT, OR THE VALIDITY, PROTECTION,
INTERPRETATION, ADMINISTRATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF OR
ANY OTHER CLAIM OR DISPUTE HEREUNDER OR THEREUNDER.
10. JURISDICTION, SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY CONSENTS
TO THE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK FOR THE COUNTY
OF NEW YORK AND THE UNITED STATE DISTRICT FOR THE SOUTHERN DISTRICT OF NEW YORK
IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
NOTE OR ANY DOCUMENT, INSTRUMENT OR GUARANTEE DELIVERED PURSUANT HERETO OR
PURSUANT TO THE AGREEMENT. IN ANY SUCH LITIGATION, THE BORROWER WAIVES PERSONAL
SERVICE OF A SUMMONS, COMPLAINT OR OTHER PROCESS AND AGREES THAT THE SERVICE
THEREOF MAY BE MADE IN ANY OTHER MANNER PERMITTED BY THE RULES OF EITHER OF SAID
COURTS.
COMVERGE TECHNOLOGIES, INC.
------------------------------
Robert M. Chiste
Chief Executive Officer
23 Vreeland Road
Florham Park, New York 07932
EXHIBIT B
CONFIRMATION OF GUARANTY
The undersigned hereby confirms (i) its Unlimited Guaranty, dated as of
February 7, 2000, of the liabilities of Comverge Technologies, Inc., to Bank
Leumi USA and (ii) that it has been advised that Bank Leumi USA has extended the
maturity of a Term Loan made by it to Comverge Technologies, Inc., in the
principal amount of $5,500,000 to February 1, 2004.
Dated: As of January 31, 2003
Mahwah, New Jersey
DATA SYSTEMS & SOFTWARE INC.
By:______________________________
George Morgenstern, President
EXHIBIT 10.25
[LOGO]
J.P. TURNER & COMPANY, L.L.C.
February 25, 2003
George Morgenstern
Chairman and CEO
Data Systems & Software, Inc.
200 Route 17
Mahwah, NJ 07430
Phone: (201) 529-2026
Facsimile: (201) 529-3163
RE: INVESTMENT BANKING AGREEMENT WITH J. P. TURNER & COMPANY, LLC
Dear Mr. Morgenstern,
This letter (the "AGREEMENT") shall confirm the engagement of J.P.
Turner & Company, LLC ("TURNER") by Data Systems & Software, Inc. [Nasdaq: DSSI]
(the "COMPANY") for purposes of providing, on a non-exclusive basis, investor
awareness and business advisory services as set forth below in consideration for
the fees and compensation described hereinafter:
1. The Agreement shall be effective as of the date set forth above.
2. The Company agrees to provide Turner such information, historical financial
data, projections, proformas, business plans, due diligence documentation, and
other information (collectively the "INFORMATION") in the possession of the
Company or its agents that Turner may reasonably request or require to perform
the Services (as hereinafter defined) set forth herein. The Information provided
by the Company to Turner shall be true, complete and accurate in all material
respects as of the date specified therein and shall not set forth any untrue
statements nor omit any fact required or necessary to make the Information
provided not misleading. The Company acknowledges that Turner may rely on the
accuracy and completeness of all Information provided by the Company without
independent verification. The Company authorizes Turner to use such Information
in connection with its performance of the Services. Turner shall use its
reasonable best efforts to preserve the confidentiality of Information expressly
designated as confidential by the Company.
3. Turner will use its best efforts to furnish ongoing investor awareness and
business advisory services (the "SERVICES") as the Company may from time to time
reasonably request. The Services may include without limitation the following:
preparation and assistance with investor presentations; introduction to capital
conferences; the identification and evaluation of financing transactions; and
introductions to broker dealers, research analysts, and investment companies
that Turner believes to be in the best interest of the Company.
4. The term of this Agreement shall be 12 months from the effective date (as set
forth in paragraph 1) of this Agreement (the "TERM"). In the event that the
Company desires to terminate this Agreement, it shall provide Turner written
notice of its intention to terminate this Agreement which shall be effective
upon the delivery thereof to Turner (the "TERMINATION DATE"), without any
further responsibility for either party; provided, however, that Turner shall be
entitled to receive all accrued but unpaid
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 2 of 7
compensation, including any unpaid cash compensation, all vested Warrants (as
set forth below), and un-reimbursed expenses, if any, outstanding as of the
Termination Date. Notwithstanding the foregoing, if the Termination Date occurs
during the 90-day period from the effective date of this Agreement (the "Trial
Period"), Turner shall be entitled to payment of the remaining Monthly Advisory
Fees that it would have received during such 90 day period (paid in accordance
with paragraph 5 below).
5. In consideration for the services described herein, the Company shall pay to
Turner a monthly advisory fee of seven thousand five hundred dollars ($7,500)
per month (the "MONTHLY ADVISORY FEE"). The first month advisory fee shall be
paid to Turner upon the execution of this Agreement and continuing each month
for the length of the Agreement. The Monthly Advisory Fee shall be earned and
payable each month and may not be deferred by the Company unless the Company
submits a written request to the Turner and Turner approves such request in
writing. Any fees that are deferred shall accumulate interest at a compound
interest rate of 12.0% per annum on the aggregate balance of deferred Monthly
Advisory Fees. The Monthly Advisory Fee shall be directed to Turner in
accordance with the following wiring instructions:
Bank: Wachovia Bank of Georgia
Phone: 404-995-8740
Fax: 404-995-8755
Address: 4465 Buckhead Loop, Atlanta, GA 30326
ABA Routing #: 061-000-010
Account Name: J.P. Turner & Company, L.L.C.
Account #: 186-834-16
6. (a) Simultaneously with the execution of this Agreement, the Company shall
issue and deliver to Turner a common stock purchase warrant (the "INVESTMENT
BANKING WARRANT") for the purchase of one hundred twenty thousand (120,000)
shares of the Company`s common stock. The Investment Banking Warrant shall have
60,000 warrants exercisable at $2.00 and 60,000 exercisable at $2.50 per share
and upon issuance, be fully paid, non-assessable, and free of any restrictions
on transfer, but for those restrictions that are the result of state or federal
securities law. The Warrant shall vest and become exercisable on the day after
the Trial Period unless this Agreement has been terminated prior to such date.
Notwithstanding the foregoing, during the Trial Period the Warrant shall
immediately and completely vest in favor of Turner, and shall become immediately
exercisable, in the event of the consummation of (i) sale of the Company (or all
or substantially all of the assets thereof) or (ii) the acquisition (or merger)
transaction of the Company by or into another entity. The Warrant shall be
issued to Turner in the form of a warrant agreement (the "WARRANT AGREEMENT"),
which shall be in form and content satisfactory to Turner and its counsel.
(b) The Warrant Agreement shall provide for, among other provisions, the
above terms and the following:
(i) The Warrant shall vest on the day after the Trial Period.
The Warrant shall expire two (2) years from the effective
date of this Agreement.
(ii) anti-dilution provisions for stock dividends, splits,
mergers, sale of
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 3 of 7
substantially all of the Company`s assets, except for sale
of stock pursuant to the Company`s Stock Option Plan(s) and
other customary exceptions.
(iii)in lieu of any cash payment required by Turner in
connection with the exercise of the Warrant, the holder(s)
of the Warrant shall have the right at any time and from
time to time, to exercise the Warrant in full or in part by
surrendering the Warrant Agreement as payment of the
aggregated Strike Price. The number of shares of Underlying
Common Stock to be issued upon exercise shall be determined
by multiplying the number of the shares of common stock
within the Warrant to be exercised by an amount equal to the
market price per share less the Strike Price, and then
dividing the product thereof by the market price per share.
Solely for the purposes of this paragraph, market price
shall be calculated as the average of the closing price of
the Company`s Common Stock for each of the five (5) trading
days preceding the date notice is given that the holder(s)
intend(s) to exercise the Warrant.
(iv) the Company shall reserve, and at all times have available,
a sufficient number of shares of its common stock to be
issued upon the exercise of the Warrant. Furthermore, the
Company shall accept, and shall so instruct its transfer
agent to accept, an appropriate Rule 144 opinion letter from
any qualified securities attorney (provided such opinion
provides that the Company`s counsel may rely thereon)
representing Turner or any of its employees or agents that
are holders of the Warrant.
(v) the Company shall, subject to the conditions listed below,
grant unlimited "piggy back" registration rights, at the
Company`s expense, to include the shares of the Underlying
Common Stock in any registration statement (except for Form
S-4 or S-8 filings, or any equivalent thereto) filed by the
Company under the Securities Act of 1933 relating to an
underwriting of the sale of shares of common stock or other
security of the Company, subject to customary and reasonable
underwriter imposed lock-up requirements and the Company`s
existing contractual limitations regarding "piggy back"
registration rights.
(vi) the Warrant shall be non-transferable except to affiliates
of Turner.
7. The Investment Banking Warrant shall be assigned to J.P. Turner & Company,
L.L.C. and mailed to the following address:
J.P. Turner & Company, L.L.C.
Attention: Patrick J. Power,
Managing Director or Investment Banking
3340 Peachtree Road
Suite 2300
Atlanta, GA 30326
Phone: 404-479-8300
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 4 of 7
Fax: 404-479-8345
8. The Company represents and warrants that it has provided Turner access to all
Information available to the Company concerning its condition, financial and
otherwise, its management, its business, and its prospects (the "DISCLOSURE
DOCUMENTS"). The Company represents that it will continue to provide Turner with
any Information or documentation necessary to verify and update the accuracy of
the Information contained in the Disclosure Documents and will promptly notify
Turner in writing upon the filing of any registration statement or other
periodic reporting documents filed pursuant to the rules and regulations of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.
9. The Company recognizes that Turner now renders and may continue to render
financial consulting, management, investment banking and other services to other
companies that may or may not conduct business and activities similar to those
of the Company. Turner shall be free to render such advice and other services
and the Company hereby consents thereto. Turner shall not be required to devote
its full time and attention to the performance of its duties under this
Agreement, but shall devote only so much of its time and attention as it deems
reasonable or necessary to fulfill its obligation hereunder.
10. During the Term of this Agreement the Company covenants, promises and agrees
that:
(a) Company shall immediately notify Turner if it is contacted by NASDAQ
for failing to maintain certain listing requirements or any other
reason.
(b) Company shall furnish Turner with copies of its annual, quarterly and
proxy filings with the SEC, within thirty (30) days of the Company`s
filing thereof.
(c) Company shall furnish Turner all press releases and any copies of any
communication to the general public and its shareholders.
(d) Company shall immediately notify Turner if it is the subject of any
investigation or material litigation.
(e) At least three (3) business days prior to the dissemination of any
public announcement regarding this Agreement, including the fact of
its existence, the Company shall submit to Turner, for its review and
comment, the proposed public announcement. Turner shall thereafter
have three (3) business days within which to submit its proposed
amendments to the public announcement for inclusion therein. The
proposed amendments shall be incorporated in the final version to be
disseminated by the Company, unless, in the reasonable judgment of
counsel to the Company, such amendments should not be incorporated.
11. This Agreement shall be governed by and construed under the laws of the
State of Georgia without regard to principals of conflicts of laws provisions.
In the event of any dispute between Borrower and Agent arising under or pursuant
to the terms of this Agreement, or any matters arising under the terms of this
Agreement, the same shall be settled only by arbitration through NASD Dispute
Resolution in Fulton
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 5 of 7
County, City of Atlanta, State of Georgia, in accordance with the Code of
Arbitration Procedure published by NASD Dispute Resolution. The determination of
the arbitrators shall be final and binding upon the Company and Turner and may
be enforced in any court of appropriate jurisdiction. This Agreement shall be
construed by and governed exclusively under the laws of the State of Georgia,
without regard to its conflicts of law provisions. The venue shall be in Fulton
County, GA.
12. The Company shall reimburse Turner for all reasonable out of pocket expenses
up to $500 per month, including without limitation acceptable travel and
lodging, printing, legal, and mailing cost that Turner may incur in performance
of the Services under this Agreement. Turner shall obtain the prior written
consent of the Company for any individual expense in excess of $500 or monthly
expenses, in the aggregate, in excess of $500. Turner shall submit expense
statements along with reasonable documentation of such expenses to the Company
from time to time and the Company shall reimburse such expenses promptly
thereafter.
13. (a) The Company shall indemnify and hold harmless Turner and its directors,
officers, employees, agents, attorneys and assigns from and against any and all
losses, claims, costs, damages or liabilities (including the reasonable fees and
expenses of legal counsel) to which any of them may become subject in connection
with the investigation, defense or settlement of any actions or claims: (i)
caused by any untrue statement or alleged untrue statement of any material fact
contained in any of the Company`s Disclosure Documents or the omission or
alleged omission to state a material fact required to be stated in any such
Disclosure Document or necessary to make the statements in any such Disclosure
Document not misleading, provided such Disclosure Document was used by Turner in
rendering any Service hereunder; (ii) arising in any manner out of or in
connection with the rendering of Services by Turner hereunder; or (iii)
otherwise in connection with this Agreement; provided, however, that the Company
will not be liable in any such case if and to the extent that any such loss,
claim, cost, damage or liability arises out of any breach of this Agreement by
Turner.
(b) Promptly after receipt of notice of the commencement of any action,
Turner shall, if a claim is also being made against the Company, notify the
Company in writing of such action. In case any such action shall be brought
against Turner it shall notify the Company of the commencement of such action,
and the Company shall be entitled to participate in and, to the extent it shall
wish, to assume and undertake the defense thereof with counsel reasonably
satisfactory to Turner, and, after notice from the Company to Turner of its
election so to assume and undertake the defense of such action, the Company
shall not be liable to Turner under this paragraph 13 for any legal expenses
subsequently incurred by Turner in connection with the defense of such action;
if Turner retains its own counsel, then Turner shall pay all fees, costs and
expenses of such counsel, provided, however, that, if the defendants in any such
action include both Turner and the Company and Turner shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the Company or if the
interests of Turner reasonably may be deemed to conflict with the interests of
the Company, the Company and Turner shall have the right to select one separate
counsel to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
Company as incurred.
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 6 of 7
14. The Company acknowledges that Turner has made no guarantees that its
performance hereunder will achieve any particular result with respect to the
Company`s business, stock price, trading volume, market capitalization or
otherwise.
15. All notices hereunder shall be in writing and shall be validly given, made
or served if in writing and delivered in person or when received by facsimile
transmission, or five days after being sent first class certified or registered
mail, postage prepaid, or one day after being sent by nationally recognized
overnight carrier to the party for whom intended at the address set forth after
each parties signatures.
16. If any clause or provision of this Agreement is illegal, invalid or
unenforceable under applicable present or future Laws effective during the Term,
the remainder of this Agreement shall not be affected. In lieu of each clause or
provision of this Agreement that is illegal, invalid or unenforceable, there
shall be added as a part of this Agreement a clause or provision as nearly
identical as may be possible and as may be legal, valid and enforceable. In the
event any clause or provision of this Agreement is illegal, invalid or
unenforceable as aforesaid and the effect of such illegality, invalidity or
unenforceability is that either party no longer has the substantial benefit of
its bargain under this Agreement and a clause or provision as nearly identical
as may be possible cannot be added, then, in such event, such party may in its
discretion cancel and terminate this entire Agreement provided such party
exercises such right within a reasonable time after such occurrence.
17. The parties agree and acknowledge that they have jointly participated in the
negotiation and drafting of this Agreement and that this Agreement has been
fully reviewed and negotiated by the parties and their respective counsel. In
the event of an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties and no
presumptions or burdens of proof shall arise favoring any party by virtue of the
authorship of any of the provisions of this Agreement.
18. This Agreement shall be governed by and construed under the laws of the
State of Georgia without regard to principals of conflicts of laws provisions.
19. This Agreement may not be modified, amended, supplemented, canceled or
discharged, except by written instrument executed by all parties. No failure to
exercise, and no delay in exercising, any right, power or privilege under this
Agreement shall operate as a waiver, nor shall any single or partial exercise of
any right, power or privilege hereunder preclude the exercise of any other
right, power or privilege. No waiver of any breach of any provision shall be
deemed to be a waiver of any preceding or succeeding breach of the same or any
other provision, nor shall any waiver be implied from any course of dealing
between the parties. To be effective, all waivers must be in writing, signed by
both parties. The rights and remedies of the parties under this Agreement are in
addition to all other rights and remedies, at law or equity, that they may have
against each other except as may be specifically limited herein.
20. This Agreement contains the entire understanding of the parties in respect
of its subject matter and supersedes all prior agreements and understandings
(oral or written) between or among the parties with respect to such subject
matter. The parties agree that prior drafts of this Agreement shall not be
deemed to provide any evidence as to the meaning of any provision hereof or the
intent of the parties with respect thereto. Any amendment or modification to the
Agreement shall be by written instrument only and must be executed by a
representative, with complete authority, from the Company and Turner.
Data Systems & Software, Inc.
Investment Banking Agreement
February 25, 2003
Page 7 of 7
21. This Agreement may be executed in any number of counterparts, each of which
shall be an original but all of which together shall constitute one and the same
instrument. A telecopy signature of any party shall be considered to have the
same binding legal effect as an original signature.
22. In the event that any dispute among the parties to this Agreement should
result in litigation, the substantially prevailing party in such dispute shall
be entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such substantially prevailing party under or with respect
to this Agreement, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals and collection.
If the foregoing is in accordance with your understanding, kindly
confirm your acceptance and agreement by signing and returning the enclosed
duplicate of this Agreement that will thereupon constitute an agreement between
us.
Yours very truly,
/s/ Patrick J. Power
Patrick J. Power
Managing Director, Investment Banking
J. P. Turner & Company, LLC
3340 Peachtree Road, Suite 2300
Atlanta, GA 30326
Phone: 404-479-8192 or 888-JPTURNER
Facsimile 404-479-8345
Accepted and approved this 25th day of February, 2003.
------ ---------
By: /s/Shlomie Morgenstern
NAME: SHLOMIE MORGENSTERN
TITLE: VICE PRESIDENT
COMPANY: DATA SYSTEMS & SOFTWARE, INC.
ADDRESS: 200 ROUTE 17
MAHWAH, NJ 07430
PHONE: (201) 529-2026
FACSIMILE: (201) 529-3163
EXHIBIT 10.29
EXECUTION COPY
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COMVERGE, INC.
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PREFERRED STOCK PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
------------------------------------
April 7, 2003
------------------------------------
TABLE OF CONTENTS
1. Purchase and Sale of Stock..................................................................................1
1.1 Sale and Issuance of Preferred Stock............................................................1
1.2 Closing ........................................................................................2
1.3 Subsequent Sale of Series A Preferred Stock.....................................................2
1.4 Delivery .......................................................................................2
1.5 Use of Proceeds.................................................................................3
2. Representations and Warranties of the Company...............................................................3
2.1 Organization, Good Standing and Qualification...................................................3
2.2 Capitalization and Voting Rights................................................................3
2.3 Subsidiaries....................................................................................4
2.4 Authorization...................................................................................4
2.5 Valid Issuance of Preferred and Common Stock....................................................4
2.6 Governmental Consents...........................................................................5
2.7 Offering .......................................................................................5
2.8 Litigation......................................................................................5
2.9 Proprietary Information and Inventions Agreements...............................................5
2.10 Patents and Trademarks..........................................................................6
2.11 Compliance with Other Instruments...............................................................7
2.12 Agreements; Action..............................................................................7
2.13 Related Party Transactions......................................................................8
2.14 Permits ........................................................................................9
2.15 Environmental and Safety Laws...................................................................9
2.16 Development and Marketing Rights................................................................9
2.17 Registration Rights.............................................................................9
i
2.18 Corporate Documents.............................................................................9
2.19 Title to Property and Assets....................................................................9
2.20 Financial Statements...........................................................................10
2.21 Changes .......................................................................................10
2.22 Employee Benefit Plans.........................................................................11
2.23 Tax Returns, Payments and Elections............................................................13
2.24 Minute Books...................................................................................13
2.25 Real Property Holding Company..................................................................13
2.26 Employees......................................................................................13
2.27 Obligations of Management......................................................................14
2.28 Executive Officers.............................................................................14
2.29 Insurance......................................................................................14
2.30 Outstanding Borrowing..........................................................................14
2.31 Small Business Concern.........................................................................14
2.32 Pacficorp Agreement............................................................................15
2.33 Disclosure.....................................................................................15
3. Representations and Warranties of the Investors............................................................15
3.1 Authorization..................................................................................15
3.2 Purchase Entirely for Own Account..............................................................15
3.3 Disclosure of Information......................................................................15
3.4 Investment Experience..........................................................................16
3.5 Accredited Investor............................................................................16
3.6 Foreign Purchasers.............................................................................16
3.7 English Construction...........................................................................16
3.8 Restricted Securities..........................................................................16
ii
3.9 Further Limitations on Disposition.............................................................17
3.10 Legends .......................................................................................17
4. Conditions to Obligations at the Closing...................................................................18
4.1 Conditions to Investor`s Obligations...........................................................18
4.2 Conditions to the Company`s Obligations........................................................19
5. Covenants of the Company...................................................................................20
5.1 Release of Funds...............................................................................20
5.2 Repayment and Termination of Credit Facility...................................................21
6. Miscellaneous..............................................................................................21
6.1 Survival of Warranties.........................................................................21
6.2 Successors and Assigns.........................................................................21
6.3 Governing Law..................................................................................21
6.4 Counterparts...................................................................................21
6.5 Titles and Subtitles...........................................................................21
6.6 Notices .......................................................................................21
6.7 Finder`s Fee...................................................................................22
6.8 Expenses ......................................................................................22
6.9 Attorneys` Fees................................................................................22
6.10 Amendments and Waivers.........................................................................23
6.11 Severability...................................................................................23
6.12 Aggregation of Stock...........................................................................23
6.13 Exculpation Among Investors....................................................................23
6.14 Like Treatment of Holders......................................................................23
6.15 Entire Agreement...............................................................................23
6.16 California Corporate Securities Law............................................................24
iii
ANNEX A Omnibus Signature Page
SCHEDULE A - Schedule of Investors
SCHEDULE B - Disclosure Schedule
EXHIBIT A - Amended and Restated Certificate of Incorporation
EXHIBIT B - Investors` Rights Agreement
EXHIBIT C - Co-Sale and First Refusal Agreement
EXHIBIT D - Voting Agreement
EXHIBIT E - Form of Opinion of Company Counsel
EXHIBIT F - Form of Asset Purchase Agreement
EXHIBIT G - Form of Put-Call Agreement
iv
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT") is
made as of April 7, 2003, by and among Comverge, Inc., a Delaware corporation
(the "COMPANY"), and the investors listed on Schedule A hereto (each, an
"INVESTOR," and collectively, the "INVESTORS").
R E C I T A L S:
WHEREAS, the Company desires to sell, and the Investors desire
to purchase, the number of shares and the series of the Company`s Preferred
Stock, par value $0.001 per share (the "PREFERRED STOCK"), as set forth on
Schedule A hereto;
WHEREAS, the Company`s Board of Directors has approved the
Company`s sale and issuance of up to 7,677,175 shares of Series A Convertible
Preferred Stock (the "SERIES A PREFERRED STOCK") and 721,527 shares of Series
A-1 Convertible Preferred Stock (the "SERIES A-1 PREFERRED STOCK" and, together
with the Series A Preferred Stock, the "SHARES"); and
WHEREAS, the Company and the Investors desire to set forth
certain agreements and certain terms and conditions regarding the sale and
purchase of the Preferred Stock and the relationship between the Company and the
Investors.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing premises,
the respective representations, warranties and covenants contained herein, and
certain other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. PURCHASE AND SALE OF STOCK
1.1 Sale and Issuance of Preferred Stock
(a) The Company shall adopt and file with the Delaware Secretary of
State, before the Initial Closing (as defined below), the Amended and Restated
Certificate of Incorporation of the Company in the form attached hereto as
Exhibit A (the "RESTATED CERTIFICATE").
(b) On or prior to the Initial Closing, the Company shall have
authorized (i) the sale and issuance to the Investors of the Shares and (ii) the
issuance of the shares of Common Stock (as defined below) to be issued upon
conversion of the Shares (the "CONVERSION SHARES" and together with the Shares,
the "SECURITIES"). The Securities shall have the rights, preferences, privileges
and restrictions set forth in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, at the
Closing (as defined below) each Investor severally agrees to purchase, severally
and not jointly, and the Company agrees to sell and issue to each Investor at
the Closing or pursuant to Section 1.3, that number of shares of the Company`s
Series A Preferred Stock or Series A-1 Preferred Stock, as
applicable, set forth opposite each Investor`s name on Schedule A hereto for the
aggregate purchase price set forth opposite such Investor`s name thereon.
1.2 Closing. The first closing of the purchase and sale of the
Preferred Stock (the "INITIAL CLOSING") and, subject to Section 1.3, one
subsequent closing of the purchase and sale of authorized but unissued shares of
Series A Preferred Stock (the "SUBSEQUENT CLOSING") shall take place at the
offices of Andrews & Kurth L.L.P., 111 Congress Avenue, Suite 1700, Austin,
Texas 78701. The Initial Closing will take place at 1:00 p.m. Central time on
April 7, 2003; provided that the Initial Closing and the Subsequent Closing
(each a "CLOSING") may be held at such other time and place as the Company and
Investors acquiring in the aggregate more than half the shares of Preferred
Stock sold at the Initial Closing pursuant hereto mutually agree upon orally or
in writing.
1.3 Subsequent Sale of Series A Preferred Stock. The Company may sell
up to the balance of the authorized number of shares of Series A Preferred Stock
to be sold hereunder and not sold at the Initial Closing to such purchasers
(each, an "ADDITIONAL INVESTOR") as it shall select, upon the terms and
conditions contained herein, at a price not less than $2.0841 per share,
provided the agreement for sale is executed at the Subsequent Closing not later
than 90 days from the date of the Initial Closing. Any such Additional Investor
shall, upon execution of an appropriate counterpart signature page, the form of
which is attached as Annex A hereto, become a party to this Agreement as an
Investor and the Company shall prepare and distribute to the Investors
(including the Additional Investors) a revised Schedule A, which shall include
the name and address of each Additional Investor, the number of shares of Series
A Preferred Stock to be purchased by each Additional Investor and the price per
share to be paid by each Additional Investor. Upon the Subsequent Closing, each
Additional Investor shall, as evidenced by the executed counterpart signature
page attached as Annex A hereto, become a party to (i) that certain Investors`
Rights Agreement dated as of the date hereof, by and among the Company and the
parties named therein, the form of which is attached hereto as Exhibit B (the
"INVESTORS` RIGHTS AGREEMENT"), (ii) that certain Co-Sale and First Refusal
Agreement dated as of the date hereof, by and among the Company and the parties
named therein, the form of which is attached hereto as Exhibit C (the "CO-SALE
AND FIRST REFUSAL AGREEMENT"), and (iii) that certain Voting Agreement dated as
of the date hereof, by and among the Company and the parties named therein, the
form of which is attached hereto as Exhibit D (the "VOTING AGREEMENT"), and
shall have the rights and obligations hereunder and thereunder. For purposes of
any sale of shares of Series A Preferred Stock pursuant to this Section 1.3,
references to the "date of Closing" shall mean the date of the Subsequent
Closing. Notwithstanding the foregoing, the Company may not, without the prior
written consent of the holders of a majority of the Shares issued at the Initial
Closing, issue or sell any additional securities at the Subsequent Closing to
any Investor that purchases any Shares at the Initial Closing.
1.4 Delivery. At the Closing, the Company shall deliver to each
Investor a certificate representing the shares of Series A Preferred Stock or
Series A-1 Preferred Stock, as applicable, that such Investor is purchasing
against payment of the purchase price therefor by wire transfer or other
transfer of same-day funds, or any combination thereof, as more specifically set
forth on Schedule A hereto.
2
1.5 Use of Proceeds. A portion of the proceeds to the Company from the
sale of Preferred Stock equal to $1,500,000 shall be used to secure indebtedness
of the Company pursuant to that certain Loan and Security Agreement (the "SVB
LOAN AGREEMENT") dated April 1, 2003, by and between the Company and Silicon
Valley Bank; provided that such $1,500,000 shall be released to the Company by
Silicon Valley Bank within 30 days following the Initial Closing. The Company
may use the remaining proceeds for general corporate purposes; provided further
that any proceeds used to release the Cash Collateral (as defined in Section
5.1(b) below) shall be paid only in accordance with the schedule set forth in
Section 5.1(b).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Investor that as of
the date hereof, except as set forth on the Disclosure Schedule (the "DISCLOSURE
SCHEDULE") attached hereto as Schedule B, which exceptions shall be deemed to be
representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own and operate its assets, carry on its business as now conducted and as
proposed to be conducted. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business or properties.
2.2 Capitalization and Voting Rights. The authorized capital stock of
the Company consists, or will consist immediately prior to the Initial Closing,
of:
(a) Preferred Stock. 8,939,847 shares of Preferred Stock, 7,677,175 of
which have been designated as "Series A Convertible Preferred Stock," some or
all of which may be purchased hereunder and none of which are outstanding prior
to the Initial Closing; 721,527 of which have been designated as "Series A-1
Convertible Preferred Stock," some or all of which may be purchased hereunder
and none of which are outstanding prior to the Initial Closing; and 541,145 of
which have been designated as "Series A-2 Convertible Preferred Stock" (the
"SERIES A-2 PREFERRED STOCK"), none of which are outstanding prior to the
Initial Closing.
(b) Common Stock. 18,014,060 shares of common stock, par value $0.001
per share ("COMMON STOCK"), of which (i) 4,937,743 shares are issued and
outstanding, which includes no shares issued upon the exercise of options
granted under the Company`s 2000 Stock Option Plan (the "PLAN"), (ii) 877,000
shares to be issued to Sixth Dimension, Inc. in connection with the purchase of
certain assets of Sixth Dimension, (iii) 1,621,750 shares have been reserved for
issuance pursuant to the exercise of options under the Plan, including 307,750
shares subject to outstanding option grants, (iv) 637,780 have been reserved for
issuance pursuant to the exercise of options granted outside the Plan, (v)
7,677,175 shares have been reserved for issuance pursuant to the conversion of
the Series A Preferred Stock, (vi) 721,527 shares have been reserved for
issuance pursuant to the conversion of the Series A-1 Preferred Stock and (vii)
541,145 have been reserved for issuance pursuant to the conversion of the Series
A-2 Preferred Stock.
3
(c) The outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the "SECURITIES ACT"), and any relevant state
securities laws or pursuant to valid exemptions therefrom.
(d) Except for (i) the conversion privileges of the Preferred Stock,
(ii) options to purchase 307,750 shares of Common Stock that have been issued
pursuant to the Plan and which have not been exercised and the remaining shares
reserved for issuance thereunder, (iii) options to purchase 637,780 shares of
Common Stock that have been issued outside of the Plan and have not been
exercised, (iv) the rights provided in the Investors` Rights Agreement, (v)
shares of Series A Preferred Stock that may be issued at a Subsequent Closing,
and (vi) the shares of Series A-2 Preferred Stock that may be issued to Data
Systems & Software Inc. ("DSSI") pursuant to Section 4.10 of Investors` Rights
Agreement there are no outstanding options, warrants, rights (including
conversion rights, preemptive rights, rights of first refusal or rights of first
offer) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock. Other than the Voting Agreement and the Co-Sale
Agreement, the Company is not a party or subject to any agreement or
understanding, and, to the Company`s knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security of the
Company.
2.3 Subsidiaries. Schedule 2.3 of the Disclosure Schedule lists each of
the Company`s subsidiaries. The Company owns all of the outstanding capital
stock of each such subsidiary. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association or
other business entity. The Company is not a participant in any joint venture,
partnership or similar arrangement.
2.4 Authorization. The Company has the requisite power and authority to
enter into the Transaction Agreements (as defined below). All corporate action
on the part of the Company and its officers, directors and stockholders
necessary for the authorization, execution and delivery of each of this
Agreement, the Investors` Rights Agreement, the Co-Sale and First Refusal
Agreement and the Voting Agreement (collectively, the "TRANSACTION AGREEMENTS"),
the performance of all obligations of the Company hereunder and thereunder and
the authorization, issuance (or reservation for issuance), sale and delivery of
the Shares being sold hereunder and the Conversion Shares pursuant to the
Restated Certificate have been taken or will be taken prior to the Initial
Closing, and this Agreement and the other Transaction Agreements constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors` rights generally, (b) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies, and (c) to the extent that the indemnification provisions
contained in the Investors` Rights Agreement may be limited by applicable
federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Preferred Stock
being purchased by the Investors hereunder when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and will
be free of restrictions on transfer other than
4
restrictions on transfer under this Agreement and the other Transaction
Agreements and under applicable state and federal securities laws. The
Conversion Shares have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate, will be duly
and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and the other Transaction Agreements and under applicable state and
federal securities laws.
2.6 Governmental Consents. Other than filings that are required or
permitted to be made pursuant to Section 1.1(a) hereof or pursuant to federal or
state securities laws after a Closing, which filings will be made in a timely
manner, no consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state or
local governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement and the other Transaction Agreements.
2.7 Offering. Subject in part to the truth and accuracy of each
Investor`s representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Preferred Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf has taken or will take any
action hereafter that would cause the loss of such exemption.
2.8 Litigation. There is no action, suit, proceeding or investigation
pending or, to the Company`s knowledge, currently threatened against the Company
that questions the validity of this Agreement or the other Transaction
Agreements, or the right of the Company to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions, suits, proceedings or investigations
pending or threatened (or any basis therefor known to the Company) involving the
prior employment of any of the employees of the Company, their use in connection
with the business of the Company of any information or techniques allegedly
proprietary to any of their former employers, or their obligations under any
agreements with prior employers. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company intends to
initiate.
2.9 Proprietary Information and Inventions Agreements. Each former and
current employee, officer and consultant of the Company has executed a
Proprietary Information and Inventions Agreement substantially in the form
provided to special counsel to the Investors. No former or current employee,
officer or consultant of the Company has excluded works or inventions made prior
to his or her employment with the Company from his or her assignment of
inventions pursuant to such current or former employee, officer or consultant`s
Proprietary Information and Inventions Agreement. The Company is not aware that
any of its employees, officers or consultants are in violation thereof.
5
2.10 Patents and Trademarks
(a) The Company has sufficient title and ownership of all patents,
trademarks, service marks, trade names, copyrights, all applications for any of
the foregoing, trade secrets, information and other proprietary rights and
processes necessary for its business as now conducted and as proposed to be
conducted. Except for licenses of "pre-packaged" software, there are no
outstanding options, licenses or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes of any other person or entity. To the best of
the Company`s knowledge, the Company has not violated, or by conducting its
business as proposed would not violate, any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the business of the Company as proposed to be conducted. Neither the
execution nor delivery of this Agreement or the other Transaction Agreements,
nor the carrying on of the business of the Company by the employees of the
Company, nor the conduct of the business of the Company as proposed, will, to
the Company`s knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people they currently intend to hire) made prior to
their employment by the Company.
(b) The Company owns and has the unrestricted right to use, sell,
license or dispose of all product rights, manufacturing rights, trade secrets,
including know-how, formulas, patterns, compilations, programs, devices,
methods, techniques, processes, inventions, designs, technical data, mask works,
computer software (in both source code and object code forms and all
documentation therefor) (all of the foregoing of which are collectively referred
to herein as "PROPRIETARY INFORMATION") required for the conduct of the
Company`s business, as it is currently conducted and as it is proposed to be
conducted, in each case free and clear of any right, lien or claim of others.
(c) The Company has taken commercially reasonable security measures to
protect the secrecy and confidentiality of all Proprietary Information and all
Inventions (as defined below). As used herein, "Inventions" means all
inventions, developments and discoveries that during the period of an employee`s
or other person`s service (which inventions, developments and discoveries are
made or conceived of in the scope of such employee`s or other person`s service
to the Company or are otherwise assigned to the Company) to the Company he or
she makes or conceives of, either solely or jointly with others, that relate to
any subject matter with which his or her work for the Company may be concerned,
or directly relate to or are directly connected with the business, products,
services or projects of the Company, or related to the actual or demonstrably
anticipated research or development of the Company or involve the use of the
Company`s time, material, facilities or trade secret information.
6
(d) The Company has not sold, transferred, assigned, licensed or
subjected to any lien, any Proprietary Information, trade secret, know-how,
invention, design, process, computer software or technical data, or any interest
therein, necessary for the development, manufacture, use, operation or sale of
any product or service presently under development or manufactured, sold or
rendered by the Company.
(e) No current or former director, officer, employee, agent or
stockholder of the Company owns or has any right in the Proprietary Information
of the Company, or any patents, trademarks, service marks, trade names,
copyrights, any applications for any of the foregoing, licenses or rights with
respect to the foregoing, or any inventions, developments or discoveries
necessary for the conduct of the Company`s business as it is currently conducted
or as it is proposed to be conducted.
(f) To the knowledge of the Company, no person or entity is infringing
upon or otherwise violating the Proprietary Information or other intellectual
property rights of the Company.
(g) The Company has avoided every condition, and has not performed any
act, the occurrence of which would result in the loss by the Company of any
patent, patent application, or right granted under any license, distribution or
other agreement that is material to its business.
2.11 Compliance with Other Instruments. The Company is not in violation
or default of any provision of the Restated Certificate or the Company`s Bylaws;
and the Company is not in violation or default, in any material respect, of any
provision of any instrument, judgment, consent, permit, order, writ, decree or
contract to which it is a party or by which it is bound or to which any of its
assets are subject, or of any federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of this
Agreement and the other Transaction Agreements, and the consummation of the
transactions contemplated hereby and thereby, including the issuance and sale of
the Shares and the issuance of the Conversion Shares, will not result in any
such violation or be in conflict with or constitute, with or without the passage
of time and giving of notice, either a default under any such provision,
instrument, judgment, consent, permit, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
of the assets of the Company or the suspension, revocation, impairment,
forfeiture or nonrenewal of any material permit, license, authorization or
approval applicable to the Company or its business or operations or any of its
assets or properties, except as would not have a material adverse effect on the
business, financial condition, prospects or results of operations of the Company
taken as a whole.
2.12 Agreements; Action
(a) Except for agreements explicitly contemplated hereby and by the
Transaction Agreements, there are no agreements, understandings or proposed
transactions between the Company, on the one hand, and any of the stockholders,
officers, directors or affiliates, or any affiliate thereof, of the Company, on
the other hand.
7
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound (each, a "MATERIAL AGREEMENT") that may
involve (i) obligations (contingent or otherwise) of, or payments to the Company
in excess of $50,000 and to the Company`s knowledge, there is not an uncured
breach or default continuing under the provisions of any Material Agreement,
(ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from the Company, (iii) provisions restricting or
affecting the development, manufacture or distribution of the Company`s products
or services, or (iv) indemnification by the Company with respect to
infringements of proprietary rights.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $10,000 or, in the case of
indebtedness and/or liabilities individually less than $10,000, in excess of
$50,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of inventory in the
ordinary course of business. To the best of the Company`s knowledge, the Company
has no material contingent liabilities, except current liabilities incurred in
the ordinary course of business which have not been, either in any individual
case or in the aggregate, materially adverse.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transaction involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to nor is it bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Certificate or Bylaws that adversely affects its ability to conduct its business
as now conducted or as proposed to be conducted.
(f) The Company has not engaged in the past three months in any
discussion (i) with any representative of any person or entity regarding the
consolidation or merger of the Company with or into any such person or entity,
(ii) with any corporation, partnership, association or other business entity or
any individual regarding the sale, conveyance, license or disposition of all or
substantially all of the assets of the Company or a transaction or series of
related transactions in which more than 50% of the voting power of the Company
is disposed of, or (iii) regarding any other form of acquisition, liquidation,
dissolution, reorganization or winding up of the Company.
2.13 Related Party Transactions. No employee, officer, director or
stockholder of the Company, or member of his or her immediate family, is
indebted to the Company, nor is the Company indebted (or committed to make loans
or extend or guarantee credit) to any of them. To the Company`s knowledge, none
of such persons has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
8
Company, except that employees, officers, directors or stockholders of the
Company and members of their immediate families may own less than 1% of the
outstanding capital stock in publicly traded companies that may compete with the
Company. No member of the immediate family of any officer or director of the
Company is directly or indirectly interested in any material contract with the
Company.
2.14 Permits. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its respective business as now
being conducted by it, the lack of which could materially and adversely affect
the business, properties, prospects or financial condition of the Company, and
the Company believes it can obtain, without material burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
The Company is not in default under any of such franchises, permits, licenses or
other similar authority.
2.15 Environmental and Safety Laws. To the Company`s knowledge, the
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety that could have a
material adverse effect on the Company, and, to the best of its knowledge, no
material expenditures are or will be required in order to comply with any such
existing statute, law or regulation.
2.16 Development and Marketing Rights. The Company has not granted
rights to develop, produce, assemble, license, market or sell its respective
products to any other person or entity and is not bound by any agreement that
affects the Company`s exclusive right to develop, produce, assemble, distribute,
market or sell its respective products.
2.17 Registration Rights. Except as provided in the Investors` Rights
Agreement, the Company has not granted nor agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.18 Corporate Documents. The Restated Certificate is in the form
attached hereto as Exhibit A and the Bylaws of the Company are in the form
previously provided to special counsel to the Investors.
2.19 Title to Property and Assets. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company`s ownership or use of such property or assets.
To the Company`s knowledge, all facilities, machinery, equipment, fixtures,
vehicles and other properties owned, leased or used in the ordinary course of
business by the Company are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used. With
respect to the property and assets leased by the Company, the Company is in
material compliance with such leases and, to the Company`s knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Company`s rights in or use of such property or assets.
With respect to property and assets licensed to the Company from third parties,
such licenses necessary to operate the Company`s business as it is currently
conducted are valid and binding and in full force and effect, and shall remain
in full force and effect for a period of twelve (12)
9
months from the date hereof (or, in the alternative, the Company reasonably
believes it can obtain substantially similar licenses under substantially
similar terms).
2.20 Financial Statements. The Company has delivered to each Investor
its unaudited financial statements (balance sheet, income statement and
statement of cash flows), for the year ended December 31, 2002 (the "FINANCIAL
STATEMENTS"). The Financial Statements have been prepared from the books and
records of accounts of the Company and in accordance with United States
Generally Accepted Accounting Principals ("GAAP") (except that the Financials
Statements do not have notes thereto) applied on a consistent basis throughout
the periods indicated and with each other and present fairly the financial
condition of the Company as of the date indicated. Except as set forth in the
Financial Statements, the Company has no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 2002, and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under GAAP to be reflected in the Financial Statements, which, in both cases,
individually or in the aggregate, are not material to the assets, properties,
financial condition or operating results of the Company.
2.21 Changes. Since December 1, 2002, other than as set forth in the
Transaction Agreements, there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company, except changes in the ordinary course of
business that have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material debt
owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder of the Company;
(g) any resignation or termination of any officer, key employee or
group of employees;
10
(h) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets of the Company, other than
pursuant to standard, non-exclusive licenses entered into in the ordinary course
of business consistent with past practices;
(i) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(j) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of business;
(k) any declaration, setting aside of payment or other distribution in
respect to any of the Company`s capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company;
(l) to the Company`s knowledge, any other event or condition of any
character that would reasonably be expected to materially and adversely affect
the assets, properties, financial condition, operating results or business of
the Company (as such business is presently conducted and as it is proposed to be
conducted);
(m) any labor organization activity related to the Company;
(n) any agreement or commitment by the Company to do any of the things
described in this Section 2.21;or
(o) receipt of notice that there has been a loss of, or material order
cancellation by, any material customer of the Company or, to the knowledge of
the Company, any threatened termination, cancellation or limitation of, or any
adverse modifications or change in the business relationship of the Company, or
the business of the Company, with any material customer or material supplier
and, to the knowledge of the Company, there exists no present condition or state
of fact or circumstances that would materially adversely affect the condition of
the Company or prevent the Company from conducting such business relationships
or such business with any such material customer or material supplier in the
same manner as heretofore conducted by the Company.
2.22 Employee Benefit Plans.
(a) As used herein, the term "COMPANY EMPLOYEE PLAN" includes any
domestic or foreign pension, retirement, savings, disability, medical, dental,
health, life, death benefit, group insurance, profit sharing, deferred
compensation, stock option, stock purchase, bonus, incentive, vacation pay,
tuition reimbursement, severance pay, supplemental unemployment, or other
employee benefit plan, trust, agreement, contract, policy or commitment
(including, without limitation, any pension plan, as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended and the rules
and regulations promulgated thereunder ("ERISA") ("PENSION PLAN"), any welfare
plan as defined in Section 3(1) of ERISA ("WELFARE PLAN") and any cafeteria plan
or flexible spending arrangement established pursuant to Section 125 of the
Internal Revenue Code of 1986, as amended (the "CODE") whether any of the
11
foregoing is funded, insured or self-funded, written or oral, (i) sponsored or
maintained by the Company, or any of its affiliates, to the extent such
affiliate is described in Section 414 (b), (c) or (m) of the Code and
corresponding Treasury Regulations (each a "COMPANY CONTROLLED GROUP MEMBER")
and covering any Company Controlled Group Member`s active or former employees
(or their beneficiaries), (ii) to which any Company Controlled Group Member is a
party or by which any Company Controlled Group Member (or any of the rights,
properties or assets thereof) is bound, or (iii) with respect to which any
Company Controlled Group Member has made any payments, contributions or
commitments or may otherwise have any liability (whether or not such Company
Controlled Group Member still maintains such Company Employee Plan). Each
Company Employee Plan is listed on Schedule 2.22 to the Disclosure Schedule.
(b) The Company has performed in all material respects all obligations
required to be performed by it under each Company Employee Plan including
without limitation the requirements of ERISA, the Code, COBRA, the FMLA, and the
Health Insurance Portability and Accountability Act. Each Company Employee Plan
has been established and maintained in all material respects in accordance with
applicable law.
(c) Each Company Employee Plan intended to qualify under Section 401(a)
of the Code and each trust intended to qualify under Section 501(a) of the Code
either (i) has received a favorable determination or opinion letter from the IRS
or (ii) a request for favorable determination or opinion letter has been timely
filed, and the Company will cause to be made any amendments to the plan that are
necessary to cause such favorable determination or opinion letter to be issued.
(d) No Company Controlled Group Member sponsors, maintains or otherwise
contributes to or has any liability with respect to (i) any Company Employee
Plan or (ii) any "employee pension benefit plan" (as defined in Section 3(2) of
ERISA) which is or was subject to Title IV of ERISA, including any
"multi-employer plan" (as defined in Section 4001(a)(3) of ERISA), or subject to
Section 412 of the Code.
(e) No Company Controlled Group Member sponsors, maintains or has
established any Welfare Plan which provides for continuing benefits or coverage
for any participant or any beneficiary of a participant after such participant`s
termination of employment, except as may be required by Section 4980B of the
Code or Section 601 (et seq.) of ERISA, or under any applicable state law, and
at the expense of the participant or the beneficiary of the participant.
(f) No assets of, and no assets managed by, the Company constitute
"plan assets" as defined in 29 C.F.R. Section 2510.3-101, and none of the
transactions contemplated by this Agreement will constitute a "prohibited
transaction" within the meaning of Section 4975(c) of the Code or Section 406 of
ERISA, which transaction is not exempt under Section 4975(d) of the Code or
Section 408 of ERISA.
(g) Neither the Company, any Company Controlled Group Member, any of
the Employee Benefit Plans, any trust created thereunder nor any trustee or
administrator thereof has engaged in a transaction or has taken or failed to
take any action in connection with which the Company, any Company Controlled
Group Member, any of the Employee Benefit
12
Plans, any such trust, any trustee or administrator thereof, or any party
dealing with the Employee Benefit Plans or any such trust that could be subject
to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or
a tax imposed pursuant to Section 4975, 4976 or 4980B of the Code.
(h) Neither the execution and delivery of this Agreement, nor the
performance by the Company of its obligations hereunder, will constitute an
event under any Company Employee Plan which will or may result in any payment
(severance or otherwise), acceleration, forgiveness of debt, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee of the Company Controlled Group Members.
2.23 Tax Returns, Payments and Elections. The Company has either (i)
filed its tax returns and reports as required by law as and when due or (ii) has
timely filed for an extension to file its tax returns and reports as required by
law and has subsequently filed such tax returns and reports that were the
subject of any such extension. These returns and reports are true and correct in
all material respects. The Company has paid all taxes and other assessments due,
except for those contested in good faith. The provision for taxes of the Company
as shown in the Financial Statements is adequate for taxes due or accrued as of
the date thereof. The Company has not elected pursuant to the Code, to be
treated as a Subchapter S corporation or a collapsible corporation pursuant to
Section 1362(a) or Section 341(f) of the Code, nor has it made any other
elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a material
adverse effect on the Company, its business, properties, material assets,
financial condition or results of operations. No audit by the Internal Revenue
Service is in progress with respect to any tax return of the Company. The
Company has no knowledge of any tax to be imposed upon its properties or assets
as of the date of this Agreement that is not adequately provided for.
2.24 Minute Books. The copy of the minute book of the Company provided
to the Investors contains a complete and accurate summary of all meetings of
directors and all committees of the Board of Directors and of the stockholders
since the time of its incorporation, as well as complete and accurate copies of
all actions by written consent taken by the Board of Directors, all committees
of the Board of Directors or by the stockholders.
2.25 Real Property Holding Company. The Company is not a "real property
holding company" within the meaning of Section 897 of the Code.
2.26 Employees. To the Company`s knowledge, no employee of the Company,
nor any consultant with whom the Company has contracted, is in violation of any
term of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company; and to the Company`s knowledge the continued
employment by the Company of its present employees, and the performance of the
Company`s contracts with its contractors, will not result in any such violation.
The Company has received no notice that such a violation has occurred. The
Company is not aware that any officer or key employee, or that any group of key
employees, intends to terminate his, her or their employment with the Company.
Each former employee of the Company whose employment terminated on or after
January 1, 2002, has entered into an agreement with the Company that provides
for the full release of claims against the Company or
13
any related party arising out of such employment. There are no actions pending
or threatened by any former or current employee concerning such person`s
employment by the Company.
2.27 Obligations of Management. To the Company`s knowledge, each
officer of the Company is currently devoting substantially all of his or her
business time to the conduct of the business of the Company. The Company is not
aware that any officer or key employee of the Company is planning to work less
than full time at the Company in the future. To the Company`s knowledge, no
officer is currently working or plans to work for a competitive enterprise,
whether or not such officer or key employee is or will be compensated by such
enterprise.
2.28 Executive Officers. To the Company`s knowledge, no executive
officer or person nominated to become an executive officer of the Company (i)
has been convicted in a criminal proceeding or is a named subject of a pending
criminal proceeding (excluding minor traffic violations) or (ii) is or has been
subject to any judgment or order of, the subject of any pending civil or
administrative action by the Securities and Exchange Commission (the "SEC") or
any self-regulatory organization.
2.29 Insurance. The Company is 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; the
Company has not been refused any insurance coverage sought or applied for and
the Company has no 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 to
conduct its business substantially as it is currently being conducted at a
reasonable cost.
2.30 Outstanding Borrowing. Schedule 2.30 of the Disclosure Schedule
sets forth as of January 31, 2003, (a) the amount of all indebtedness (which
shall be defined as any obligation, contingent or otherwise, including declared
but unpaid dividends, that would, in accordance with generally accepted
accounting principles consistently applied, be classified on the Company`s
balance sheet as either short-term or long-term indebtedness, but, without
limiting the generality of the foregoing, shall exclude accrued expenses, trade
payables and other obligations incurred in the ordinary course of business in
exchange for goods or services) with respect to the Company as of the date
hereof, (b) the liens that relate to such indebtedness and that encumber the
Company`s assets and (c) the name of each lender thereof.
2.31 Small Business Concern. The Company together with its "affiliates"
(as that term is defined in Section 121.103 of Title 13 of the Code of Federal
Regulations (the "FEDERAL REGULATIONS")), is a "small business concern" or a
"smaller business" within the meaning of the Small Business Investment Act of
1958, as amended (the "SMALL BUSINESS ACT"), and the regulations promulgated
thereunder, including Section 121.301 of Title 13 of the Federal Regulations or
including Section 107.710 of Title 13 of the Federal Regulations. The
information delivered to each Purchaser that is a licensed Small Business
Investment Company (an "SBIC PURCHASER") on SBA Forms 480, 652 and 1031
delivered in connection herewith is true and correct. The Company is not
ineligible for financing by any SBIC Purchaser pursuant to Section 107.720 of
Title 13 of the Federal Regulations. The Company acknowledges that each SBIC
Purchaser is a Federal licensee under the Small Business Act.
14
2.32 Pacficorp Agreement. Conditioned on the Investors` execution and
delivery to the Company, and the Company`s delivery to Pacificorp, of a letter
regarding the consummation of the Initial Closing, the condition relating to the
Company`s closing of its Series A Preferred financing in Section 4.1 of that
certain Contract Between Pacificorp and the Company shall be satisfied.
2.33 Disclosure. The Company has provided each Investor with all the
information reasonably available to it without undue expense that such Investor
has requested for deciding whether to purchase the Preferred Stock. To the best
of the Company`s knowledge after reasonable investigation, neither this
Agreement, the other Transaction Agreements nor any other agreements, schedules,
written statements or certificates made or delivered by the Company, any of its
employees or agents in connection herewith or therewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading. Notwithstanding the foregoing,
the Business Plan provided to each Investor was prepared in a good faith effort
to describe the Company`s presently proposed business and products and the
markets therefor. The assumptions applied to the Business Plan appeared
reasonable as of the date thereof and as of the date hereof; however, there is
no assurance that these assumptions will prove to be valid or that the
objectives set forth in the Business Plan will be achieved.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each Investor severally represents and warrants to the Company that:
3.1 Authorization. Such Investor has full power and authority to enter
into this Agreement and the other Transaction Agreements, and each such
agreement constitutes its valid and legally binding obligation, enforceable in
accordance with its terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors` rights generally, (b) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies and (c) to the extent the indemnification provisions
contained in the Investors` Rights Agreement may be limited by applicable
federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with such
Investor in reliance upon such Investor`s representation to the Company, which
by such Investor`s execution of this Agreement such Investor hereby confirms,
that the Securities will be acquired for investment for such Investor`s own
account, not as a nominee or agent and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in or otherwise distributing
the same. By executing this Agreement, such Investor further represents that
such Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of the Securities.
3.3 Disclosure of Information. Such Investor represents that it has had
an opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Securities and the business,
properties, prospects and financial condition of the Company. Such Investor
further represents that it has received all the
15
information it considers necessary or appropriate for deciding whether to
purchase the Securities. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 of this Agreement or
the right of the Investors to rely thereon.
3.4 Investment Experience. Such Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Securities. If other than an
individual, Investor also represents it has not been organized for the purpose
of acquiring the Securities; provided that if such Investor has been organized
for such purpose, each interest holder in such Investor is an Accredited
Investor (as defined below).
3.5 Accredited Investor. Such Investor is an "Accredited Investor"
within the meaning of SEC Rule 501 of Regulation D promulgated under the
Securities Act, as presently in effect.
3.6 Foreign Purchasers. If an Investor is not a United States person,
such Investor hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any invitation to
subscribe for the Securities or any use of this Agreement, including (i) the
legal requirements within its jurisdiction for the purchase of the Securities,
(ii) any foreign exchange restrictions applicable to such purchase, (iii) any
governmental or other consents that may need to be obtained, and (iv) the income
tax and other tax consequences, if any, that may be relevant to the purchase,
holding, redemption, sale, or transfer of the Securities. Such Investor`s
subscription and payment for, and continued beneficial ownership of, the
Securities will not violate any applicable securities or other laws of its
jurisdiction.
3.7 English Construction. Each Investor whose native or primary
language is not English hereby represents that it has sufficient command and
fluency of the English language when used in the legal, commercial and financial
context or, if not, has relied on its own advisors with respect to the
interpretation and/or translation of this Agreement and any other documents or
instruments delivered in connection herewith into such Investor`s native or
primary language. Each such Investor acknowledges and agrees that the Company
has no duty to translate these documents, and if there exists a discrepancy in
the interpretation of any term of any of this Agreement or any other Transaction
Agreements due to the translation of such agreement(s), or the explanation
thereof provided by Investor`s advisors, then the English construction of such
agreement(s) shall control.
3.8 Restricted Securities. Such Investor understands that immediately
following its purchase of the Securities hereunder, such Securities will be
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such Securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, such Investor
represents that it is familiar with Rule 144 as promulgated by the SEC under the
Securities Act, as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
16
3.9 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, such Investor further agrees not to make any
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3 and the other Transaction Agreements provided and to the extent
this Section and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition and (ii) if reasonably
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Securities Act. It is
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
either (a) by an Investor to an affiliate (as such term is defined under Rule
405 of the Securities Act, (an "AFFILIATE") of such Investor or (b) by an
Investor that is a partnership or limited liability company to a partner or
member of such partnership or limited liability company or a retired partner or
member of such partnership or limited liability company who retires after the
date hereof, or to the estate of any such partner or member or retired partner
or member or the transfer by gift, will or intestate succession of any partner
or member to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or member or his or her spouse, if the transferee
agrees in writing to be subject to the terms hereof to the same extent as if he
or she were an original Investor hereunder.
3.10 Legends. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) "The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or any state securities
laws (collectively, the "ACTS"). The securities have been acquired for
investment and may not be sold, offered for sale, pledged or hypothecated in the
absence of a registration statement in effect with respect to the securities
under such Acts or an exemption therefrom."
(b) Any legend required by state securities laws or any other
applicable jurisdiction.
(c) Any legend required by the Transaction Agreements.
17
4. CONDITIONS TO OBLIGATIONS AT THE CLOSING
4.1 Conditions to Investor`s Obligations. The obligations of each
Investor under Section 1.1(c) of this Agreement are subject to the fulfillment
on or before each Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent in
writing thereto:
(a) Representations and Warranties. The representations and warranties
of the Company contained in Section 2 shall be true in all material respects on
and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
(b) Performance. The Company shall have performed and complied in all
material respects with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before the Closing. The Company shall have obtained all consents and waivers
necessary to complete the transactions contemplated by this Agreement.
(c) Certificate of Incorporation. The Company shall have filed the
Restated Certificate with the Delaware Secretary of State, and such Restated
Certificate shall be in full force and effect.
(d) Reservation of Conversion Shares. The Conversion Shares issuable
upon conversion of the Shares shall have been duly authorized and reserved for
issuance upon such conversion.
(e) Secretary`s Certificate. The Company shall have delivered to each
Investor at the Closing a certificate executed by the Secretary of the Company
certifying (i) the names and true signatures of the officer executing this
Agreement, (ii) the resolutions of the Company`s Board of Directors and
stockholders approving the transactions contemplated by this Agreement, (iii)
the Company`s Bylaws and (iv) the Restated Certificate.
(f) Compliance Certificate. The Chief Financial Officer of the Company
shall deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1(a) and (b) have been fulfilled.
(g) Qualifications. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
(h) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to
Investors` special counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request executed by the Company.
18
(i) Investors` Rights Agreement. The Company and the Investors shall
have entered into the Investors` Rights Agreement.
(j) Co-Sale and First Refusal Agreement. The Company and the Investors
shall have entered into the Co-Sale and First Refusal Agreement.
(k) Voting Agreement. The Company and the Investors shall have entered
into the Voting Agreement.
(l) Opinion of Company Counsel. Each Investor shall have received from
Andrews & Kurth L.L.P., counsel for the Company, an opinion addressed to them,
dated as of the Closing, in the form attached hereto as Exhibit E. ---------
(m) Board of Directors. The directors of the Company shall be (i)
Robert M. Chiste, the Company`s Chief Executive Officer, (ii) George
Morgenstern, (iii) effective as of, but in any event conditioned upon, the
Initial Closing, Tim Woodward, (iv) effective as of, but in any event
conditioned upon, the Initial Closing, Ramin Mokhtari, and (v) effective as of,
but in any event conditioned upon, the Initial Closing, Richard Schneider.
(n) Compensation Committee. The Board of Directors shall have formed a
Compensation Committee of three members, which members shall be, upon the
Initial Closing, Tim Woodward, Richard Schneider and George Morgenstern.
(o) Sixth Dimension Asset Purchase. The Company, 6D Acquisition Sub,
Inc., a wholly owned subsidiary of the Company, and Sixth Dimension, Inc. shall
have entered into an Asset Purchase Agreement substantially in the form attached
hereto as Exhibit F; provided; however, for purposes of Section 2 of this
Agreement, the Asset Purchase Agreement shall be deemed to be effective after
the Initial Closing.
(p) Put-Call Agreement. The Company and Easton Hunt Capital Partners,
L.P. ("EASTON HUNT") shall have entered into that certain Put-Call Agreement
(the "PUT-CALL AGREEMENT") in substantially the form attached hereto as Exhibit
G.
(q) SBA Letter Agreement. The Company and Easton Hunt shall have
entered into a letter agreement relating to Small Business Investment Company
matters.
4.2 Conditions to the Company`s Obligations. The obligations of the
Company to each Investor under this Agreement are subject to the fulfillment or
waiver in writing on or before the Initial Closing or each Subsequent Closing,
as the case may be, of each of the following conditions by that Investor:
(a) Representations and Warranties. The representations and warranties
of the Investor contained in Section 3 shall be true in all material respects on
and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
(b) Payment of Purchase Price. The Investor shall have delivered the
purchase price specified for such Investor on Schedule A.
19
(c) Qualifications. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
(d) Put-Call Agreement. The Company and Easton Hunt shall have entered
into the Put-Call Agreement in substantially the form attached hereto as Exhibit
G.
(e) Pacificorp Letter. Each Investor shall have executed and delivered
to the Company a letter regarding the consummation of the Initial Closing.
5. COVENANTS OF THE COMPANY
5.1 Release of Funds.
(a) Promptly following the Initial Closing, the Company shall cause the
release to DSSI from Bank Leumi USA of $1,000,000 of the funds securing the
obligations of the Company under the Credit Agreement.
(b) The Company shall cause the release to DSSI from Silicon Valley
Bank of $1,500,000 (the "CASH Collateral") securing the obligations of the
Company under the SVB Loan Agreement, in the following manner:
(i) In the event (1) the Company receives gross cash proceeds of
at least $2,000,000 in a sale of Series A Preferred Stock in
the Subsequent Closing or (2) the put option held by Easton
Hunt pursuant to the Put-Call Agreement (the "PUT OPTION") has
not been exercised by April 18, 2004, then the Company shall
cause the release of the Cash Collateral according to the
following schedule: (A) $500,000 on or before December 31,
2003 (or, April 28, 2004, in the event payment is triggered
pursuant to clause (2) of this subsection), (B) $500,000 on or
before June 30, 2004 and (C) $500,000 on or before December
31, 2004.
(ii) In the event (1) the Company receives gross cash proceeds of
more than $5,000,000 in a sale of Series A Preferred Stock in
the Subsequent Closing or (2) (x) the Put Option has not been
exercised by April 18, 2004 and (y) the Company received gross
cash proceeds of at least $3,000,000 in a sale of Series A
Preferred Stock in the Subsequent Closing, then the Company
shall cause the release of the Cash Collateral according to
the following schedule: (A) $750,000 on or before December 31,
2003 (or, $250,000 on April 28, 2004 in addition to the
$500,000 released on or before December 31, 2003, pursuant to
subsection (i)(A) above) and (B) $750,000 on or before June
30, 2004.
(iii) In the event the Company does not sell at least $2,000,000 in
Series A Preferred Stock in the Subsequent Closing and the Put
Option is exercised by Easton Hunt, the Company will not have
an absolute obligation to cause the release of the Cash
Collateral prior to April 1, 2006, although
20
the Company will use commercially reasonable efforts to cause
the release of the Cash Collateral prior to that date.
5.2 Repayment and Termination of Credit Facility. Within 30 days after
the Initial Closing, the Company shall (i) pay the principal amount, accrued and
unpaid interest, any and all unpaid fees and penalties, and any early
termination fee owed to Laurus Master Fund, Ltd. pursuant to that certain
Purchase and Security Agreement (the "LAURUS AGREEMENT") dated as of December 4,
2002, by and between the Company and Laurus Master Fund, Ltd., (ii) terminate
the Laurus Agreement and (iii) cause the termination of DSSI`s guaranty of the
Company`s obligations under the Laurus Agreement or related thereto.
6. MISCELLANEOUS
6.1 Survival of Warranties. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive for one year following the Closing except for the
covenant in Section 5.1, which shall survive until January 1, 2005, and shall in
no way be affected by any investigation of the subject matter thereof made by or
on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware, without regard to conflicts of law
principles.
6.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given (i) if delivered personally, (ii) one business
day after deposit with a nationally recognized overnight commercial delivery
service, (iii) five business days after having been mailed by registered or
certified mail (return receipt requested) to U.S addressees; (iv) seven business
days after having been mailed by registered or certified mail (return receipt
requested) to non-U.S. addressees; or (v) one day after having been sent via
facsimile (with confirmation of receipt) to the parties at the address for such
party set forth beneath such party`s name on Schedule A hereto (or at such other
address for a party as shall be specified by like notice) and, in the case of
the Company:
21
Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ 07932
Fax: (973) 360-2220
Attn: Chief Executive Officer
with a copy to
Andrews & Kurth L.L.P.
111 Congress Avenue, Suite 1700
Austin, Texas 78701
Fax: (512) 320-9292
Attn: Carmelo M. Gordian
Notice given by facsimile shall be confirmed by appropriate answer back
and shall be effective upon actual receipt if received during the recipient`s
normal business hours, or at the beginning of the recipient`s next business day
after receipt if not received during the recipient`s normal business hours. All
notices by facsimile shall be confirmed promptly after transmission in writing
by certified mail or personal delivery. Any party may change any address to
which notice is to be given to it by giving notice as provided above of such
change of address.
6.7 Finder`s Fee. Other than as set forth on Schedule 6.7 of the
Disclosure Schedule, each party represents that it neither is nor will be
obligated for any finders` fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders` fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders` fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investors will each bear their own respective legal and other
expenses with respect to the negotiation, execution, delivery and performance of
this Agreement and the other Transaction Agreements. If the Closing is effected,
the Company shall reimburse: (i) the reasonable fees and expenses of Cooley
Godward, LLP, special counsel to the Investors (not to exceed $45,000), (ii) the
reasonable expenses incurred by the Investors to a single independent accounting
firm in connection with the Investors` financial due diligence of the Company,
and (iii) up to $7,000 in legal expenses incurred by each Investor that
purchases at least $2,000,000 of Series A Preferred Stock and/or Series A-1
Preferred Stock, excluding Nth Power.
6.9 Attorneys` Fees. In the event that any suit or action is instituted
under or in relation to this Agreement, including without limitation to enforce
any provision in this Agreement, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect
22
to this Agreement, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
6.10 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of at least a majority
of the Common Stock that is issued or issuable upon conversion of the Preferred
Stock purchased hereunder, voting or acting, as the case may be, as a single
class. Any amendment or waiver effected in accordance with this paragraph shall
be binding upon each holder of any securities purchased under this Agreement at
the time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
6.11 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
6.12 Aggregation of Stock. All shares of the Preferred Stock held or
acquired by Affiliate entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
6.13 Exculpation Among Investors. Each Investor acknowledges that it is
not relying upon any person, firm or corporation (including without limitation
any other Investor), other than the Company and its officers and directors
(acting in their capacity as representatives of the Company), in deciding to
invest and in making its investment in the Company. Each Investor agrees that no
other Investor nor the respective controlling persons, officers, directors,
partners, agents or employees of any other Investor shall be liable to such
Investor for any losses incurred by such Investor in connection with its
investment in the Company.
6.14 Like Treatment of Holders. Neither the Company nor any of its
affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, payment for the redemptions or
exchange of Preferred Stock, or otherwise, to any holder of Preferred Stock for
or as an inducement to, or in connection with solicitation of, any consent,
waiver or amendment of any terms or provisions of the Preferred Stock or this
Agreement, the Investors` Rights Agreement or the Co-Sale and First Refusal
Agreement, unless such consideration is paid to all holders of Preferred Stock
bound by such consent, waiver or amendment.
6.15 Entire Agreement. This Agreement and the other Transaction
Agreements referred to herein, and the exhibits and schedules attached hereto
and thereto and the other documents delivered pursuant to the Transaction
Agreements, constitute the entire agreement among the parties with respect to
the subject matter hereof or thereof and no party shall be liable or bound to
any other party in any manner with respect thereto by any warranties,
representations or covenants except as specifically set forth herein or therein.
23
6.16 California Corporate Securities Law. THE SALE OF THE SECURITIES
THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE
COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.
[Signature Pages Follow]
24
IN WITNESS WHEREOF, the parties have executed this Preferred Stock
Purchase Agreement as of the date first above written.
COMPANY:
COMVERGE, INC.
By:
---------------------------------------
Robert M. Chiste
Chief Executive Officer
[Signature Page to Comverge, Inc. Preferred Stock Purchase Agreement]
INVESTORS:
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
EASTON HUNT CAPITAL PARTNERS, L.P.
By: EHC GP, L.P.
Its: General Partner
By: EHC, Inc.
Its: General Partner
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
ENERTECH CAPITAL PARTNERS II L.P.
By: ECP II Management L.P.,
Its General Partner
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
ECP II INTERFUND L.P.
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
[Signature Page to Comverge, Inc. Preferred Stock Purchase Agreement]
E.ON VENTURE PARTNERS
By:
---------------------------------------
Peter Bachsleitner
Managing Director
By:
---------------------------------------
Steffen Hasselwander
Managing Director
NTH POWER TECHNOLOGIES FUND II, L.P.,
NTH POWER TECHNOLOGIES FUND II-A, L.P.
BY: NTH POWER MANAGEMENT II, L.P.
AND
NTH POWER MANAGEMENT II-A, L.L.C.
BY: NTH POWER L.L.C.
THEIR MANAGEMENT AGENT
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SHELL INTERNET VENTURES B.V.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[Signature Page to Comverge, Inc. Preferred Stock Purchase Agreement]
ANNEX A
OMNIBUS SIGNATURE PAGE
TO
COMVERGE, INC.
PREFERRED STOCK PURCHASE AGREEMENT
INVESTORS` RIGHTS AGREEMENT
CO-SALE AND FIRST REFUSAL AGREEMENT
VOTING AGREEMENT
In connection with the sale by Comverge, Inc., a Delaware corporation
(the "COMPANY"), of the number of shares of its Series A Preferred Stock, par
value $0.001 per share (the "SERIES A PREFERRED STOCK"), set forth beneath the
undersigned`s signature below pursuant to Section 1.3 of the Purchase Agreement
(as defined below), the undersigned hereby executes and delivers, and agrees to
become a party in the following capacities, with all of the attendant rights and
obligations and making all applicable representations, warranties and agreements
in such capacities: (i) as an "Investor" under the Preferred Stock Purchase
Agreement dated April 7, 2003 (the "PURCHASE AGREEMENT") by and among the
Company and the Investors named on Schedule A thereto as of the Initial Closing;
(ii) as an "Investor" under the Investors` Rights Agreement dated April 7, 2003,
by and among the Company and certain of the its stockholders; (iii) as an
"Investor" under the Co-Sale and First Refusal Agreement dated April 7, 2003, by
and among the Company and certain of its stockholders; and (iv) as a "Series A
Preferred Stockholder" under the Voting Agreement dated April 7, 2003, by and
among the Company and certain of its stockholders. Schedule A to the Purchase
Agreement is hereby amended to read as Schedule A attached hereto in order to
reflect the sale made hereby.
---------------------------------------
[Name]
By:
-----------------------------------------
Name:
Title:
Dated: ________________, 2003
Number of shares of Series A Preferred
Stock being purchased: _____________________
Acknowledged and accepted:
COMVERGE, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
Dated: ________________, 2003
EXHIBIT 10.30
EXECUTION COPY
COMVERGE, INC.
INVESTORS` RIGHTS AGREEMENT
APRIL 7, 2003
TABLE OF CONTENTS
Page
ARTICLE I Definitions.............................................................................................1
ARTICLE II Transfers..............................................................................................2
Section 2.1 Restrictive Legend.......................................................................2
Section 2.2 Notice of Proposed Transfer..............................................................3
ARTICLE III Registration..........................................................................................3
Section 3.1 Required Registration....................................................................3
Section 3.2 Company Registration.....................................................................5
Section 3.3 Registration on Form S-3.................................................................5
Section 3.4 Registration Procedures..................................................................6
Section 3.5 Expenses.................................................................................7
Section 3.6 Indemnification and Contribution.........................................................8
Section 3.7 Changes in Common Stock or Preferred Stock..............................................11
Section 3.8 Rule 144 Reporting......................................................................11
Section 3.9 Future Registration Rights..............................................................11
Section 3.10 Market Stand-Off......................................................................11
Section 3.11 Termination of Registration Rights....................................................12
ARTICLE IV Additional Covenants..................................................................................12
Section 4.1 Financial Statements, Reports, Etc......................................................12
Section 4.2 Reservation of Conversion Shares........................................................13
Section 4.3 Inspection, Consultation and Advice.....................................................13
Section 4.4 Director and Officer Insurance..........................................................13
Section 4.5 Proprietary Information Agreement.......................................................14
Section 4.6 Bank Leumi Payment......................................................................14
Section 4.7 First Refusal Right.....................................................................14
Section 4.8 Expenses of Directors...................................................................14
Section 4.9 Indemnification and Advancement.........................................................14
Section 4.10 DSSI Option...........................................................................15
Section 4.11 Termination or Waiver of Covenants....................................................15
ARTICLE V Right of First Offer...................................................................................15
Section 5.1 Right of First Offer....................................................................15
Section 5.2 Procedure for Exercise..................................................................16
Section 5.3 Excluded Issuances......................................................................16
Section 5.4 Sales to Third Parties..................................................................16
Section 5.5 Assignment of Rights of First Offer.....................................................16
Section 5.6 Termination of Rights of First Offer....................................................17
ARTICLE VI Miscellaneous.........................................................................................17
Section 6.1 Assigns.................................................................................17
Section 6.2 Notices.................................................................................17
Section 6.3 Governing Law...........................................................................17
Section 6.4 Amendments..............................................................................17
Section 6.5 Counterparts; Facsimile Signatures......................................................18
Section 6.6 Severability............................................................................18
Section 6.7 Aggregation.............................................................................18
Schedule A Investors
Schedule B Principal Stockholders
Schedule C Key Management
ii
INVESTORS` RIGHTS AGREEMENT
THIS INVESTORS` RIGHTS AGREEMENT (the "AGREEMENT") is made as of the
7th day of April, 2003, by and among Comverge, Inc., a Delaware corporation (the
"COMPANY") and the holders of shares of the Company`s Preferred Stock (the
"PREFERRED STOCK") listed on Schedule A (the "INVESTORS"), the stockholders of
the Company listed on Schedule B (the "PRINCIPAL STOCKHOLDERS"), and certain
members of the Company`s management listed on Schedule C, as the same may be
amended from time to time (the "KEY MANAGEMENT").
RECITALS
WHEREAS, the Company and the Investors are parties to a Preferred Stock
Purchase Agreement (the "PURCHASE AGREEMENT") pursuant to which the Company has
agreed to sell, and the Investors have agreed to purchase, shares of the
Company`s Preferred Stock (the "SHARES");
WHEREAS, the parties hereto desire to enter into this Agreement in
order to induce the Investors to invest in the Company pursuant to the Purchase
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
promises and covenants set forth herein and certain other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"AFFILIATE", as applied to any person or entity, shall mean a
person or entity directly or indirectly (through one or more
intermediaries) controlling, controlled by or under common control with
the first person or entity, including affiliated venture capital funds.
"COMMISSION" shall mean the Securities and Exchange
Commission, or any other federal agency at the time charged with
primary responsibility for administering the Securities Act (or any
successor legislation).
"COMMON STOCK" shall mean the Common Stock, $0.001 par value,
of the Company, as constituted as of the date of this Agreement.
"CONVERSION SHARES" shall mean shares of Common Stock issued
or issuable upon conversion of the Preferred Stock.
1
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in
effect at the time.
"REGISTRATION EXPENSES" shall mean the expenses so described
in Section 3.5.
"REGISTRABLE SECURITIES" shall mean (i) shares of the Common
Stock issued or issuable upon conversion of the Shares; (ii) shares of
Common Stock now held or hereafter acquired by the Principal
Stockholders; provided, however, that such shares of Common Stock held
by the Principal Stockholders shall not be deemed Registrable
Securities for the purposes of Sections 3.1, 3.3 and 3.9 and Section
5.4 (subject to the first proviso of the first sentence thereof); (iii)
shares of Common Stock now held or hereafter acquired by Key
Management; provided, however, that such shares of Common Stock held by
Key Management shall not be deemed Registrable Securities for the
purposes of Sections 3.1, 3.3 and 3.9 and Section 5.4 (subject to the
first proviso of the first sentence thereof); and (iv) any Common Stock
issued as a dividend or other distribution with respect to or in
exchange for or in replacement of the shares referenced in (i), (ii)
and (iii) above, in each case with the same limitation thereon;
provided further that Registrable Securities shall not include any
shares of Common Stock (a) that have been registered under the
Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with the registration
statement covering them or (b) that have otherwise been sold to the
public.
"SECURITIES" shall mean the Preferred Stock and the Conversion
Shares.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
"SELLING EXPENSES" shall mean the expenses so described in
Section 3.5.
ARTICLE II
TRANSFERS
SECTION 2.1 RESTRICTIVE LEGEND. Each certificate representing
Securities shall, except as otherwise provided in this Section 2.1 or in Section
2.2, be stamped or otherwise imprinted with a legend substantially in the
following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN
REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE LAWS OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE."
2
"THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE
PROVISIONS OF AN INVESTORS` RIGHTS AGREEMENT DATED AS OF APRIL
7, 2003, WHICH INCLUDES CERTAIN RESTRICTIONS ON TRANSFER.
COMPLETE AND CORRECT COPIES OF THE AGREEMENT ARE AVAILABLE FOR
INSPECTION AT THE PRINCIPAL OFFICES OF THE COMPANY AND WILL BE
FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company the securities represented thereby may be publicly
sold without registration under the Securities Act and any applicable state
securities laws.
SECTION 2.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer
of any Registrable Securities (other than under the circumstances described in
Sections 3.1, 3.2 or 3.3), (a) the holder thereof must give written notice to
the Company of its intention to effect such transfer and (b) the transferee must
agree in writing to be bound by the terms of this Agreement. Each such notice
shall describe the manner of the proposed transfer and, if requested by the
Company, shall be accompanied by an opinion of counsel satisfactory to the
Company to the effect that the proposed transfer may be effected without
registration under the Securities Act and any applicable state securities laws
pursuant to an exemption from the registration requirements thereof, whereupon
the holder of such stock shall be entitled to transfer such Securities in
accordance with the terms of its notice; provided, however, that no such opinion
of counsel shall be required for a transfer to one or more partners, members or
shareholders of the transferor (in the case of a transferor that is a
partnership, limited liability company or a corporation, respectively) or to an
Affiliate of the transferor or for routine sales pursuant to Rule 144. Each
certificate for Securities transferred as above provided shall bear the legends
set forth in Section 2.1, except that such certificate shall not bear such
legends if (i) such transfer is in accordance with the provisions of Rule 144
(or any other rule permitting public sale without registration under the
Securities Act) or (ii) the opinion of counsel referred to above is to the
further effect that the transferee and any subsequent transferee (other than an
Affiliate of the Company) would be entitled to transfer such securities in a
public sale without registration under the Securities Act pursuant to an
exemption from the registration requirements thereof. The restrictions provided
for in this Section 2.2 shall not apply to securities which are not required to
bear the legends prescribed by Section 2.1 in accordance with the provisions of
that Section.
ARTICLE III
REGISTRATION
SECTION 3.1 REQUIRED REGISTRATION
(a) At any time after April 7, 2006, the holders of a majority of the
Shares, including the Common Stock issued on conversion of the Shares (the
"PREFERRED REGISTRABLE SECURITIES"), calculated on an as-converted basis, may
request the Company to register some or all of their Preferred Registrable
Securities under the Securities Act if the anticipated aggregate price to the
public is not less than $8,000,000. Any request for registration ("REGISTRATION
3
REQUEST") shall specify (A) the approximate number of shares of Preferred
Registrable Securities requested to be registered and (B) the intended method of
distribution of such shares.
(b) Within 10 days after the receipt of a Registration Request, the
Company shall immediately notify all holders of Registrable Securities from whom
notice has not been received and shall, subject to the limitations of this
Section 3.1, effect, as expeditiously as is reasonably possible the registration
under the Securities Act, for public sale in accordance with the method of
disposition specified in such notice from requesting holders, the number of
shares of Preferred Registrable Securities specified in such notice (and in all
notices received by the Company from other holders within fifteen days after the
giving of such notice by the Company); provided, that in the case of an
underwritten public offering, if the managing underwriter determines that,
because of marketing factors all of the Registrable Securities requested to be
registered may not be included in the offering, the Company shall include in
such registration (i) first, the Preferred Registrable Securities requested to
included in such registration by the Investors, pro rata among the holders
thereof on the basis of the number of shares of Preferred Registrable Securities
such Investors requested to be included in such registration, and (ii) second,
the Registrable Securities requested to be included in such registration by the
Principal Stockholders and Key Management pursuant to the incidental
registration provisions of Section 3.2 hereof, pro rata among the Principal
Stockholders and such members of Key Management on the basis of the number of
shares of Registrable Securities the Principal Stockholders and such members of
Key Management requested to be included in such registration.
(c) The Company will have the right to select one or more underwriters
to manage the offering, subject to the reasonable satisfaction of a majority in
interest of the Investors initially requesting registration, which approval, if
any be required, shall not be unreasonably withheld or delayed; provided, that
if the managing underwriter or underwriters shall be the firm or firms that
managed the Company`s most recently completed underwritten public offering of
Common Stock, such firms shall be deemed acceptable unless a majority in
interest of the Investors initially requesting such registration shall object to
such firm or firms for reasons related to the ability of such firm or firms to
effectively manage the offering.
(d) The Company shall be obligated to effect a registration pursuant to
this Section 3.1 on two occasions only, and shall not be required to effect a
registration (i) during the 180-day period following the effective date of the
registration statement pertaining to the Company`s initial public offering or
(ii) if the Company delivers notice in writing to the holders of Registrable
Securities within 30 days of any Registration Request of the Company`s intent to
file a registration statement within 90 days.
(e) The Company shall be entitled to include in any registration
statement referred to in this Section 3.1, for sale in accordance with the
method of disposition specified by requesting holders, shares of Common Stock to
be sold by the Company for its own account but only to the extent that such
inclusion will not adversely affect the offering for the account of the holders
of Registrable Securities. Except for registration statements on Form S-4, S-8
or any successors thereto, the Company will not file with the Commission any
other registration statement with respect to its Common Stock, whether for its
own account or that of other stockholders, from the date of receipt of a notice
from requesting holders pursuant to this Section 3.1 until the completion of the
period of distribution of the registration contemplated thereby.
4
SECTION 3.2 COMPANY REGISTRATION. If the Company at any time (other
than pursuant to the Company`s initial public offering) proposes to register any
of its securities under the Securities Act for sale to the public, whether for
its own account or for the account of other security holders or both (except
with respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public),
each such time it will give written notice to all holders of outstanding
Registrable Securities of its intention so to do. Upon the written request of
any such holder, received by the Company within 15 days after the giving of any
such notice by the Company, to register any of its Registrable Securities, the
Company will use reasonable best efforts to cause such Registrable Securities to
be included in the registration statement proposed to be filed by the Company.
In the event that any registration pursuant to this Section 3.2 shall be, in
whole or in part, an underwritten public offering of Common Stock, and the
managing underwriters advise the Company in their opinion that the number of
securities to be included in such registration exceeds the number that can be
sold in an orderly manner in such offering within the price range acceptable to
the parties initially requesting such registration, the Company will include in
such registration (i) first, the securities proposed to be included therein by
the Company if the Company has initiated the registration, (ii) second, the
Registrable Securities requested to included in such registration by the
Investors, pro rata among the holders thereof on the basis of the number of
shares of Registrable Securities requested to be included in such registration,
and (iii) third, the Registrable Securities requested to be included in such
registration by the Principal Stockholders and Key Management, pro rata among
the Principal Stockholders and such members of Key Management on the basis of
the number of shares of Registrable Securities the Principal Stockholders and
such members of Key Management requested to be included in such registration;
provided, however, that in the case of any underwritten public offering, the
number of shares of Preferred Registrable Securities included in such offering
shall not be reduced below an amount equal to 25% of the total number of shares
to be included unless such offering is the initial public offering and such
registration does not include shares of any other selling stockholders, in which
event any or all of the Preferred Registrable Securities may be excluded in
accordance with the immediately preceding clause. Notwithstanding the foregoing
provisions, the Company may withdraw any registration statement referred to in
this Section 3.2 without thereby incurring any liability to the holders of
Registrable Securities.
SECTION 3.3 REGISTRATION ON FORM S-3. If at any time (i) a holder or
holders of Preferred Registrable Securities request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of their Preferred Registrable Securities, the
reasonably anticipated aggregate price to the public of which would exceed
$2,000,000, and (ii) the Company is a registrant entitled to use Form S-3 or any
successor thereto to register such shares, then the Company shall, as soon as
practicable, use reasonable best efforts to effect such registration under the
Securities Act on Form S-3 or any successor thereto, for public sale in
accordance with the method of disposition specified in such notice, the
Preferred Registrable Securities specified in such notice. Whenever the Company
is required by this Section 3.3 to use reasonable best efforts to effect the
registration on behalf of a holder or holders of Preferred Registrable
Securities, the Company shall notify all other holders of Registrable Securities
and provide them with the opportunity to participate in the offering in
accordance with Section 3.2 hereof (with any exclusion by underwriters to be pro
rata on the basis of the number of shares of Registrable Securities requested to
be included), and the provisions of paragraphs (c) and (e) of Section 3.1 shall
apply to such registration. The
5
Company shall not be required to effect more than two such registration pursuant
to this Section 3.3 in any 12-month period. Registrations effected pursuant to
this Section 3.3 shall not be counted as demand registrations effected pursuant
to Section 3.1.
SECTION 3.4 REGISTRATION PROCEDURES If and whenever the Company is
required by the provisions of Section 3.1, 3.2 or 3.3 to use reasonable best
efforts to effect the registration of any Registrable Securities under the
Securities Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 3.1,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use reasonable best efforts to cause such registration statement
to become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided); provided, however, that that
Company`s obligation to file a registration statement, or cause such
registration statement to become and remain effective, shall be suspended for a
period not to exceed ninety (90) days in any 12-month period if in the
reasonable good faith judgment of the Company`s Board of Directors it would be
seriously detrimental to the Company to effect a registration at such time;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the related prospectus as may be
necessary to keep such registration statement effective for the period specified
in paragraph (a) above and comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement in accordance with the sellers` intended method of
disposition set forth in such registration statement for such period;
(c) furnish to each seller of Registrable Securities and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Registrable Securities covered by such registration
statement;
(d) use reasonable best efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or "blue
sky" laws of such jurisdictions as the sellers of Registrable Securities or, in
the case of an underwritten public offering, the managing underwriter reasonably
shall request; provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such registration
statement with any securities exchange (or quotation system) on which the Common
Stock of the Company is then listed (or qualified for inclusion);
(f) immediately (i) notify each seller of Registrable Securities and
each underwriter under such registration statement, at any time when a
prospectus relating thereto
6
is required to be delivered under the Securities Act, of the happening of any
event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing and (ii) use commercially reasonable
efforts to amend or supplement such prospectus in order to cause such prospectus
not to include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
(g) if the offering is underwritten and at the request of any seller of
Registrable Securities, use reasonable best efforts to furnish on the date that
Registrable Securities is delivered to the underwriters for sale pursuant to
such registration: (i) an opinion dated such date of counsel representing the
Company for the purposes of such registration, addressed to the underwriters and
to such seller, in form and substance as is customarily given in an underwritten
public offering; and (ii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters and to such
seller, in form and substance as is customarily given in an underwritten public
offering; and
(h) make available for inspection by each seller of Registrable
Securities, any underwriter participating in any distribution pursuant to such
registration statement, and any attorney or accountant retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company`s officers, directors and
employees to supply all information reasonably requested by any such seller,
underwriter, attorney or accountant in connection with such registration
statement.
(i) For purposes of Section 3.4(a) and 3.4(b), the period of
distribution of Registrable Securities in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Registrable Securities in any other registration shall be deemed to extend
until the earlier of the sale of all Registrable Securities covered thereby and
one hundred twenty (120) days after the effective date thereof.
(j) It shall be a condition precedent to the obligations of the Company
to take any action in connection with each registration pursuant to Sections
3.1, 3.2 or 3.3 hereof, that the sellers of Registrable Securities furnish to
the Company in writing such information with respect to themselves and the
proposed distribution by them as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws.
(k) In connection with each registration pursuant to Sections 3.1, 3.2
or 3.3 covering an underwritten public offering, the Company shall not be
required to include any Registrable Securities in such underwriting unless the
holders of such Registrable Securities accept the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it (or by other
persons entitled to select the underwriters).
SECTION 3.5 EXPENSES. All expenses incurred by the Company in complying
with Sections 3.1, 3.2 and 3.3, including, without limitation, all registration
and filing fees, printing
7
expenses, fees and disbursements of counsel and independent public accountants
for the Company, fees and expenses (including counsel fees) incurred in
connection with complying with state securities or "blue sky" laws, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars and the reasonable fees and disbursements of one
counsel for the sellers of Registrable Securities not to exceed $25,000, but
excluding any Selling Expenses, are called "REGISTRATION EXPENSES". All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called "SELLING EXPENSES."
The Company will pay all Registration Expenses in connection
with each registration statement under Section 3.1, 3.2 or 3.3; provided,
however, that the Company shall not be required to pay for any Registration
Expenses of any registration proceeding begun pursuant to Section 3.1 if the
registration request is subsequently withdrawn on the written request of the
holders of a majority of the Preferred Registrable Securities to be registered
(in which case all participating holders of Preferred Registrable Securities
shall bear such expenses pro rata), unless the holders of a majority of the
Preferred Registrable Securities agree to forfeit their right to one (1) demand
registration pursuant to Section 3.1; provided, further that if at the time of
such withdrawal, such holders of Preferred Registrable Securities have learned
of a material adverse change in the Company from that known to such holders at
the time of the request and have withdrawn the request with reasonable
promptness following disclosure by the Company of or such holders` otherwise
having learned of such material adverse change, then the Company shall pay the
Registration Expenses of such holders, and such holders shall not be required to
pay any of such expenses and shall not forfeit their right to a demand
registration pursuant to Section 3.1. All Selling Expenses in connection with
each such registration statement shall be borne by the participating sellers.
SECTION 3.6 INDEMNIFICATION AND CONTRIBUTION
(a) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to Section 3.1, 3.2 or 3.3, the Company will
indemnify and hold harmless each seller of such Registrable Securities
thereunder, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such seller or underwriter within the meaning
of the Securities Act, against any losses, claims, damages or liabilities, joint
or several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, any state securities laws or
any rule or regulation promulgated under the Securities Act, Exchange Act or any
state securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) (i) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such Registrable Securities was
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, (ii) arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (iii) arise out of or are based on any violation or
alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities laws or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities laws, and will reimburse each such
seller, each such underwriter and each such controlling person for any legal or
other expenses reasonably incurred by them in connection
8
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable to any such
indemnitee (i) for any amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld, conditioned or
delayed), (ii) if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by such indemnitee in writing specifically for use in such
registration statement or prospectus, or (iii) if and to the extent that, in the
case of a sale directly by such holder of Registrable Securities (including a
sale of such Registrable Securities through any underwriter retained by such
holder of Registrable Securities to engage in a distribution solely on behalf of
such holder of Registrable Securities), such untrue statement or alleged untrue
statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus, and such holder of
Registrable Securities failed to deliver a copy of the final or amended
prospectus at or prior to the confirmation of the sale of the Registrable
Securities to the Person asserting any such loss, claim, damage or liability in
any case where such delivery is required by the Securities Act or any state
securities laws.
(b) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to Section 3.1, 3.2 or 3.3, each seller of
such Registrable Securities thereunder, severally and not jointly, will
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act, the Exchange
Act, any state securities laws or any rule or regulation promulgated under the
Securities Act or any state securities laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Registrable Securities was registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company and each
such officer, director, underwriter and controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that such seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such seller, as such, furnished in writing to the Company by such seller
specifically for use in such registration statement or prospectus; and provided,
further, however, that the liability of each seller hereunder shall be limited
to the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the shares sold by
such seller under such registration statement bears to the total public offering
price of all securities sold thereunder, but not in any event to exceed the net
proceeds (after deduction of underwriting
9
discounts and other Selling Expenses) to such seller from the sale of
Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 3.6 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 3.6 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel mutually
satisfactory to the parties, and, after notice from the indemnifying party to
such indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 3.6 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Securities exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 3.6 but it 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 of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 3.6 provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such selling holder
or any such controlling person in circumstances for which indemnification is
provided under this Section 3.6; then, and in each such case, the Company and
such holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other, as
well as any other relevant equitable considerations. The relative fault of the
parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties` relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission;
provided, however, that, in any such case, (A) no such holder will be required
to contribute, when added to any amounts paid pursuant to Section 3.6(c), an
amount in excess of the net proceeds (after deduction of
10
underwriting discounts and other selling expenses) to such seller from the sale
of Registrable Securities covered by such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) will be entitled to contribution from any
person or entity who was not guilty of such fraudulent misrepresentation.
SECTION 3.7 CHANGES IN COMMON STOCK OR PREFERRED STOCK. If, and as
often as, there is any change in the Common Stock or the Preferred Stock by way
of a stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or the Preferred Stock as so changed.
SECTION 3.8 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, at all times after any registration statement covering a public
offering of securities of the Company under the Securities Act shall have become
effective, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each holder of Registrable Securities forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Registrable Securities without
registration.
SECTION 3.9 FUTURE REGISTRATION RIGHTS. In addition to any other
restrictions imposed hereby, the Company shall not, except with the consent of
the Investors holding a majority of the Preferred Registrable Securities held by
the Investors, enter into any agreement with any holder or prospective holder
(each, an "OTHER HOLDER") of any securities of the Company that would grant such
Other Holder registration rights that would (i) reduce the amount of Preferred
Registrable Securities that may be registered pursuant to Section 3.1, 3.2 or
3.3 hereof, or (ii) otherwise provide any Other Holder the right to register any
securities.
SECTION 3.10 MARKET STAND-OFF. If requested in writing by the
underwriters for the Company`s first firm commitment underwritten public
offering of securities of the Company, each holder of Registrable Securities
shall agree not to directly or indirectly sell, offer to sell, contract to sell,
make any short sale of, grant any option for the purchase of, or enter into any
hedging or similar transaction with the same economic effect as a sale, any
Common Stock (or other securities) of the Company held by such holder (other
than those included in the registration statement), without the consent of such
underwriters, for a period of not more than 180 days following the effective
date of the registration statement relating to such offering;
11
provided, however, that all other persons selling shares of Common Stock in such
offering and all executive officers, and directors of the Company, and all
holders of at least 1% of the Company`s outstanding Common Stock (on an
as-converted basis), agree to be similarly restricted and that any early release
of such restrictions applicable to securities held by any officer, director or
holder of at least 1% of the Company`s outstanding Common Stock (on an
as-converted basis) will apply to a corresponding proportion of the Registrable
Securities. In order to enforce the foregoing covenant, the Company may impose
stop transfer instructions with respect to holders of the Registrable Securities
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
SECTION 3.11 TERMINATION OF REGISTRATION RIGHTS. The obligations of the
Company to register Registrable Securities under Section 3.1, 3.2 or 3.3 for a
holder of Registrable Securities shall terminate on the earliest to occur of (i)
the fifth anniversary of the consummation of the Company`s first firm commitment
underwritten public offering of its securities and (ii) the date on which such
holder can, in the reasonable opinion of counsel to the Company, sell all shares
of his Registrable Securities in a three-month period without registration under
the Securities Act pursuant to Rule 144 under the Securities Act; provided,
however, that the provisions of this Section 3.11 shall not apply to any holder
while such holder owns more than 1% of the Company`s outstanding Common Stock
(as calculated for purposes of paragraph (e) of Rule 144).
ARTICLE IV
ADDITIONAL COVENANTS
The Company covenants and agrees with each of the Investors that:
SECTION 4.1 FINANCIAL STATEMENTS, REPORTS, ETC. The Company will
maintain true books and records of account in which full and correct entries
will be made of all its business transactions pursuant to a system of accounting
established and administered in accordance with generally accepted accounting
principles consistently applied (except as noted therein), and will set aside on
its books all such proper accruals and reserves as shall be required under
generally accepted accounting principles consistently applied. The Company shall
furnish to each Investor who (alone or together with its Affiliates) holds at
least 250,000 shares of Common Stock and/or Preferred Stock (as adjusted for
stock splits, stock dividends, recapitalizations or the like):
(a) within ninety (90) days after the end of each fiscal year of the
Company, a consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of such fiscal year and the related consolidated statements
of income and cash flows for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles and certified by a firm of
independent public accountants selected by the Board of Directors of the Company
and acceptable to the directors designated by the holders of Preferred Stock;
(b) within forty-five (45) days after the end of each quarter in each
fiscal year, a consolidated balance sheet of the Company and its subsidiaries,
if any, and the related consolidated statements of income and cash flows,
unaudited but prepared in accordance with generally accepted accounting
principles (subject to year-end adjustments and excluding
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footnotes) and certified by an officer of the Company, such consolidated balance
sheet to be as of the end of such quarter and such consolidated statements of
income and cash flows to be for such quarter and for the period from the
beginning of the fiscal year to the end of such month, in each case with
comparative statements for the prior fiscal year and comparing the information
presented to the Company`s plan, and accompanied by an updated capitalization
table; and
(c) no later than thirty (30) days prior to the start of each fiscal
year, consolidated capital and operating expense budgets, cash flow projections
and income and loss projections for the Company and its subsidiaries in respect
of such fiscal year, all itemized in reasonable detail and prepared on a monthly
basis, and, promptly after preparation, any revisions to any of the foregoing.
SECTION 4.2 RESERVATION OF CONVERSION SHARES. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred Stock
and otherwise complying with the terms of this Agreement, such number of its
duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Stock from time to time outstanding. If at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the Preferred Stock or otherwise to
comply with the terms of this Agreement, the Company will forthwith take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes. The Company will obtain any authorization, consent, approval or other
action by or make any filing with any court or administrative body that may be
required under applicable state securities laws in connection with the issuance
of the Conversion Shares.
SECTION 4.3 INSPECTION, CONSULTATION AND ADVICE. The Company shall
permit and cause each of its subsidiaries (if any) to permit each Investor and
such persons as it may designate (provided that such Investor provides
satisfactory assurances (as determined by the Company in good faith) to the
Company with respect to the confidentiality of all information received from the
Company), at such Investor`s expense, to visit and inspect any of the properties
of the Company and its subsidiaries, examine their books and take copies and
extracts therefrom, discuss the affairs, finances and accounts of the Company
and its subsidiaries with their officers, employees and public accountants (and
the Company hereby authorizes said accountants to discuss with such Investor and
such designees such affairs, finances and accounts), and consult with and advise
the management of the Company and its subsidiaries as to the Company`s affairs,
finances and accounts, all at reasonable times and upon reasonable notice;
provided, however, that the Company shall not be obligated pursuant to this
Section 4.4 to provide access to any information that they reasonably consider
to be a trade secret or similar confidential information, or if, upon advice of
counsel, the Company believes in good faith that such disclosure would destroy
the attorney-client privilege with regard to such information.
SECTION 4.4 DIRECTOR AND OFFICER INSURANCE. The Company shall obtain
and keep in effect a director and officer insurance policy in the aggregate
amount of $2,000,000; provided, however, that any reduction in coverage under,
or termination of, such insurance policy that is unanimously approved by the
Company`s board of directors shall not be a breach of this Section 4.4.
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SECTION 4.5 PROPRIETARY INFORMATION AGREEMENT. The Company shall
require all employees and consultants to execute and deliver a Proprietary
Information and Inventions Agreement substantially in the form attached to the
Purchase Agreement, as such form may be amended hereafter from time to time by
the Board of Directors.
SECTION 4.6 BANK LEUMI PAYMENT. As soon as practicable after the
Initial Closing (as defined in the Purchase Agreement), the Company shall cause
(i) the repayment of the Company`s indebtedness to Bank Leumi USA under that
certain Credit Agreement dated February 7, 2000, by and between the Company and
Bank Leumi USA and (ii) the release of Data Systems & Software Inc. ("DSSI") as
a guarantor of such indebtedness.
SECTION 4.7 FIRST REFUSAL RIGHT. The Company shall require, as a
condition to the issuance of equity securities of the Company as compensation
for services rendered to the Company, that each future officer of the Company
become a party to the Company`s Co-Sale and First Refusal Agreement of even date
herewith.
SECTION 4.8 EXPENSES OF DIRECTORS. The Company shall promptly reimburse
in full, upon presentation of reasonably satisfactory supporting documentation,
each director of the Company who is not an employee of the Company for all of
his or her reasonable out-of-pocket expenses incurred in attending each meeting
of the Board of Directors of the Company or any committee thereof or undertaking
any activities at the behest of the Company.
SECTION 4.9 INDEMNIFICATION AND ADVANCEMENT.
(a) The Company hereby agrees to hold harmless and indemnify the
Investors, the Investors` direct and indirect subsidiaries, affiliated entities
and corporations, and each of their partners, members, officers, directors,
employees, stockholders, agents, and representatives (collectively, referred to
as the "INVESTOR INDEMNITEES") against any and all expenses (including
attorneys` fees), damages, judgments, fines, amounts paid in settlements, or any
other amounts that an Investor Indemnitee incurs as a result of any claim or
claims made against it in connection with any threatened, pending or completed
action, suit, arbitration, investigation or other proceeding arising out of, or
relating to the Investors` actions in connection with the purchase by the
Investors of the Company`s Preferred Stock (a "FINANCING-BASED CLAIM");
provided, however, that no Investor Indemnitee shall be entitled to be held
harmless or indemnified by the Company for acts, conduct or omissions as to
which there has been a final adjudication that such Investor Indemnitee engaged
in intentional misconduct or in knowing and culpable violation of the law.
(b) The Company shall reimburse, promptly following request therefor,
all reasonable expenses incurred by an Investor Indemnitee in connection with
any threatened, pending or completed action, suit, arbitration, investigation or
other proceeding arising out of, or relating to, a Financing-Based Claim,
provided, however, that no Investor Indemnitee shall be entitled to
reimbursement in connection with acts, conduct or omissions as to which there
has been a final adjudication that such Investor Indemnitee engaged in
intentional misconduct, in knowing and culpable violation of the law.
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(c) The Company`s indemnity obligations set forth above are subject to
the Investors providing prompt written notice of a claim. The Company shall
control the defense of any such action and, at its discretion, may enter into a
stipulation of discontinuance or settlement thereof; provided that the Company
may not discontinue any action or settle any claim in a manner that does not
unconditionally release the Investors without the Investors` prior written
approval. The Investors shall, at the Company`s expense and reasonable request,
cooperate with the Company in any such defense and shall make available to the
Company at the Company`s expense all those persons, documents (excluding
attorney/client or attorney work product materials) reasonably required by the
Company in the defense of any such action. The Investors may, at their expense,
assist in such defense.
SECTION 4.10 DSSI OPTION. (a) DSSI shall have the right to purchase at
a purchase price per share of $2.7719, up to the number of shares of Series A-2
Convertible Preferred Stock of the Company that is equal to the quotient of (x)
the lesser of (A) $1,500,000 or (B) the then-current amount of indebtedness of
the Company outstanding to Silicon Valley Bank under the Term Loan (as defined
in that certain Loan and Security Agreement dated April 7, 2003, by and between
the Company and Silicon Valley Bank (the "SVB TERM LOAN")) divided by (y)
$2.7719; provided that it shall be a condition to such transaction that all of
the proceeds from such transaction be used by the Company to repay amounts
outstanding under the SVB Term Loan. The foregoing right to purchase Series A-2
Preferred Stock of the Company shall be exercisable from time to time only by
written notice to the Company actually received by the Company on or before
December 31, 2003.
SECTION 4.11 TERMINATION OR WAIVER OF COVENANTS. All of the covenants
set forth in this Article IV shall terminate and be of no further force or
effect upon the earlier to occur of (i) the sale of securities pursuant to a
registration statement filed by the Company under the Securities Act in
connection with the firm commitment underwritten offering of its securities to
the general public is consummated or when the Company first becomes subject to
the periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act
and (ii) upon the closing of any merger, recapitalization, reorganization or
sale of all or substantially all of the assets of the Company which will result
in the stockholders of the Company as constituted immediately prior to such
transaction not holding, directly or indirectly, immediately following such
transaction, at least 50% of the voting power of the surviving, continuing or
purchasing entity (a "CHANGE OF CONTROL"). Compliance with any of such covenants
(excluding Section 4.10) can be waived by the holders of a majority of the
Preferred Registrable Securities held by the Investors.
ARTICLE V
RIGHT OF FIRST OFFER
SECTION 5.1 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this section, the Company hereby grants to each Investor who holds
at least 350,000 shares of Preferred Stock (adjusted for stock splits, stock
dividends, recapitalizations or the like) (each a "MAJOR INVESTOR" and,
collectively, the "MAJOR INVESTORS") a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined); provided
that such right shall apply only to the extent that such Major Investor is an
"accredited investor" within the meaning of Rule 501 of Regulation D of the
Securities Act. For purposes of this Article V, "Major
15
Investor" includes any general partners and Affiliates of a Major Investor. A
Major Investor shall be entitled to apportion the rights of first offer hereby
granted it among itself and its partners and Affiliates in such proportions as
it deems appropriate. Subject to Section 5.3 below, each time the Company
proposes to offer any shares of, or securities convertible into or exercisable
for any shares of, any class of its capital stock ("SHARES"), the Company shall
first make an offering to each Major Investor to purchase such Major Investor`s
pro-rata share of such offering in accordance with the following provisions:
SECTION 5.2 PROCEDURE FOR EXERCISE. The Company shall deliver notice
(the "OFFER NOTICE") to the Major Investor stating (i) the number of Shares
offered in the applicable offering and (ii) the price and terms, if any, upon
which it proposes to offer such Shares. Within 45 days after giving of the Offer
Notice, each Major Investor may elect to purchase or obtain, at the price and on
the terms specified in the Notice, up to that portion of such Shares which
equals the proportion that the number of Preferred Registrable Securities then
held by such Major Investor bears to the total number of shares of Common Stock
of the Company then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities then outstanding) by paying the purchase
price therefor at the principal office of the Company. Each Major Investor shall
have an over-allotment option with respect to any shares that other Major
Investors elect not to purchase and may exercise such option in the same manner
provided above within 15 days after receipt of notice from the Company of such
over-allotment shares, which notice shall be delivered within five days of the
expiration of the initial 45-day period.
SECTION 5.3 EXCLUDED ISSUANCES. The rights of first offer set forth in
this section shall not be applicable to (i) shares of Common Stock issued or
issuable solely for compensatory purposes, to directors, officers, employees or
consultants of the Company, whether directly (as Common Stock or options) or
pursuant to a stock option plan or a restricted stock plan, in each case
approved by the Board of Directors; (ii) shares of Common Stock issued upon the
conversion of shares of the Company`s Preferred Stock; (iii) securities issued
in connection with a bona fide business acquisition or license of technology of
or by the Company, whether by license, merger, consolidation, sale of assets,
sale or exchange of stock or otherwise that are not issued primarily for equity
financing purposes, in each case as approved by the Board of Directors; (iv)
securities issued in connection with bona fide commercial borrowing, real estate
leases, capital equipment leases, licensing, distribution, development,
corporate partnering or similar transactions, in each case approved by the Board
of Directors of the Company that are not issued primarily for equity financing
purposes; and (v) securities issued as dividends or distributions on the
Preferred Stock.
SECTION 5.4 SALES TO THIRD PARTIES. The Company shall, after complying
with its obligations under Sections 5.1 and 5.2, be free at any time prior to 90
days after the date of the Offer Notice, to offer and sell to any third party or
parties the remainder of such securities proposed to be issued by the Company at
a price and on payment terms no less favorable to the Company than those
specified in the Offer Notice. However, if such third party sale or sales are
not consummated within such 90 day period, the Company shall not sell such
securities as shall not have been purchased within such period without again
complying with this Article V.
SECTION 5.5 ASSIGNMENT OF RIGHTS OF FIRST OFFER. Except as set forth in
Section 5.1, the rights of first offer set forth in this section may not be
assigned or transferred.
16
SECTION 5.6 TERMINATION OF RIGHTS OF FIRST OFFER. The rights provided
in this Article V shall terminate upon the earlier to occur of (i) a Qualified
Public Offering (as defined in the Company`s Certificate of Incorporation, as
the same may be amended and restated from time to time), and these rights shall
not be applicable to a Qualified Public Offering or (ii) a Change of Control.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 ASSIGNS. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto,
including, without limitation, transferees of any Securities, whether so
expressed or not, each of whom as a condition to such transfer shall execute an
Adoption Agreement in the form attached hereto as Exhibit A; provided, however,
that rights to register Registrable Securities pursuant to Article III may be
transferred only to (i) any then-current holder of Registrable Securities, (ii)
any partner, member or Affiliate of a holder of Registrable Securities, (iii)
any family member or trust of any individual holder of Registrable Securities or
(iv) a transferee who acquires at least 250,000 shares of Registrable
Securities.
SECTION 6.2 NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed effectively given: (1) upon actual
delivery, when delivered personally; (b) upon receipt when sent by confirmed
telegram or fax if sent during normal business hours, and if not, then on the
next business day; (c) one day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt; (d) five business days after being deposited in the U.S. mail, as
certified or registered mail, return receipt requested, postage prepaid if
addressed to U.S. addressees or (e) seven business days after being deposited in
the U.S. mail, as certified or registered mail, return receipt requested,
postage prepaid if addressed to non-U.S. addressees. All communications shall be
sent to the Company and to the Investors at the addresses as set forth on
Schedule A or at such other addresses as the Company or Investors may designate
by ten (10) days` advance written notice to the other parties hereto; and if to
the Company, with a copy to Carmelo M. Gordian, Andrews & Kurth L.L.P., 111
Congress Avenue, Suite 1700, Austin, TX 78701, facsimile: (512) 320-9292.
(i) if to the Company, at its principal place of business;
(ii) if to any holder of Securities, at such address as may
have been furnished to the Company in writing by such holder.
SECTION 6.3 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to principles of conflicts of laws.
SECTION 6.4 AMENDMENTS. This Agreement may not be amended or modified,
and no provision hereof may be waived, without the written consent of the
Company and the holders of
17
a majority of the Preferred Registrable Securities held by the Investors;
provided, however, that in the event such amendment or waiver adversely affects
the rights and/or obligations of the Principal Stockholders or Key Management in
a different manner than the Investors, such amendment or waiver shall also
require the written consent of the holders of a majority of the Common Stock
then held by the Principal Stockholders or the holders of a majority of the
Common Stock then held by Key Management who are then providing services to the
Company as an employee, officer or director, as the case may be; and provided
further that the Board of Directors shall have the right to amend or modify the
list of Key Management on Schedule C hereto from time to time to remove certain
individuals who are no longer employees, officers or directors of the Company.
In the event of any addition of a member of Key Management who shall have been
approved by the Board of Directors, such member of Key Management shall become a
party to this Agreement upon receipt from such new member of Key Management of a
fully executed signature page hereto. Any amendment or waiver effected in
accordance with this Section shall be binding upon each holder of Registrable
Securities then outstanding, each future holder of all such Registrable
Securities and the Company.
SECTION 6.5 COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. This
Agreement may be executed by facsimile signatures.
SECTION 6.6 SEVERABILITY. If any provision of this Agreement shall be
held to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
SECTION 6.7 AGGREGATION. All shares held or acquired by an Investor and
its Affiliates and the partners, members and shareholders of the Investor or its
Affiliates shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.
[Signature pages follow]
18
IN WITNESS WHEREOF, the undersigned party has executed this counterpart
signature page to the Investors` Rights Agreement as of the date first written
above.
COMPANY:
COMVERGE, INC.
By:
---------------------------------------
Robert M. Chiste
Chief Executive Officer
[SIGNATURE PAGE TO COMVERGE, INC. INVESTORS` RIGHTS AGREEMENT]
INVESTORS:
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
EASTON HUNT CAPITAL PARTNERS, L.P.
By: EHC GP, L.P.
Its: General Partner
By: EHC, Inc.
Its: General Partner
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
ENERTECH CAPITAL PARTNERS II L.P.
By: ECP II Management L.P.,
Its General Partner
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
ECP II INTERFUND L.P.
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
[SIGNATURE PAGE TO COMVERGE, INC. INVESTORS` RIGHTS AGREEMENT]
E.ON VENTURE PARTNERS
By:
---------------------------------------
Peter Bachsleitner
Managing Director
By:
---------------------------------------
Steffen Hasselwander
Managing Director
NTH POWER TECHNOLOGIES FUND II, L.P.,
NTH POWER TECHNOLOGIES FUND II-A, L.P.
BY: NTH POWER MANAGEMENT II, L.P.
AND
NTH POWER MANAGEMENT II-A, L.L.C.
BY: NTH POWER L.L.C.
THEIR MANAGEMENT AGENT
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SHELL INTERNET VENTURES B.V.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[SIGNATURE PAGE TO COMVERGE, INC. INVESTORS` RIGHTS AGREEMENT]
PRINCIPAL STOCKHOLDERS
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[SIGNATURE PAGE TO COMVERGE, INC. INVESTORS` RIGHTS AGREEMENT]
KEY MANAGEMENT:
---------------------------------------
Robert Chiste
---------------------------------------
T. Wayne Wren
---------------------------------------
Joseph Esteves
---------------------------------------
John Rossi
---------------------------------------
Richard Preston
---------------------------------------
Frank Magnotti
---------------------------------------
Coral Almog
EXHIBIT 10.31
EXECUTION COPY
CO-SALE AND FIRST REFUSAL AGREEMENT
THIS CO-SALE AND FIRST REFUSAL AGREEMENT (this "AGREEMENT"), is made as
of April 7, 2003, by and among Comverge, Inc., a Delaware corporation (the
"COMPANY"), each of the individuals and entities listed on Schedule A attached
hereto (the "INVESTORS") and each of the individuals and entities listed on
Schedule B attached hereto (the "STOCKHOLDERS"). This Agreement shall become
effective as of the Closing as defined in that certain Preferred Stock Purchase
Agreement (the "PURCHASE AGREEMENT") of even date herewith by and among the
Company and the Investors named therein. Capitalized terms not defined herein
shall have the meanings given such terms in the Purchase Agreement.
R E C I T A L S
WHEREAS, the Company is a party to the Purchase Agreement pursuant to
which certain of the Investors are purchasing shares of the Company`s Preferred
Stock; and
WHEREAS, the parties hereto desire to restrict the sale, assignment,
transfer, encumbrance or other disposition of the shares of Common Stock of the
Company that the Stockholders own as of the date hereof, or any other shares of
Common Stock of the Company the Stockholders may hereafter acquire
(collectively, the "STOCK"), and to provide for certain rights and obligations
in respect thereto as hereinafter provided.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises, and the mutual
promises and agreements contained herein, the parties hereby agree as follows:
1. RESTRICTIONS ON TRANSFERS
1.1 General Prohibition on Transfers; Permitted Transfers
(a) Except as otherwise permitted hereby, no Stockholder shall directly
or indirectly sell, assign, pledge or encumber or otherwise transfer to any
person or entity (a "TRANSFEREE") any shares of Stock unless such Stockholder
has complied with all of the terms of this Agreement. Any purported sale,
assignment, pledge, encumbrance or other transfer in violation of any provision
of this Agreement shall be void and ineffectual and shall not operate to
transfer any interest or title to the purported Transferee.
(b) The restrictions contained in this Agreement with respect to
transfers by each Stockholder of shares of Stock shall not apply to: (i) any
transfer of Stock by the Stockholder to any spouse, parents, siblings (by blood,
marriage or adoption) or lineal descendants (by blood, marriage or adoption);
(ii) any transfer of Stock by the Stockholder to a trust, partnership,
corporation, limited liability company or other similar entity for the benefit
of the Stockholder or the Stockholder`s spouse, parents, siblings or lineal
descendants; (iii) any transfer of Stock by the Stockholder, upon the
Stockholder`s death, to the executors, administrators, testamentary trustees,
legatees or beneficiaries of the Stockholder; (iv) any
1
transfer of Stock by the Stockholder to any person who controls, is controlled
by or is under common control with the Stockholder (within the meaning of the
Securities Act of 1933, as amended) (an "AFFILIATE"); (v) any transfer of stock
by the Stockholder (A) pursuant to a merger or consolidation of the Company with
or into another corporation or corporations, (B) pursuant to the liquidation,
dissolution or winding up of the Company, (C) at, and pursuant to, a Qualified
Public Offering as defined in the Company`s then-current Certificate of
Incorporation, or (D) in connection with a transaction in which stock of the
Company having more than 50% of the voting power of all the then outstanding
stock of the Company is transferred; provided, that in each of the cases
referred to in clauses (i) through (iv) above, each transferee, donee, heir or
distributee shall, as a condition precedent to such transfer, become a party to
this Agreement by executing an Adoption Agreement substantially in the form
attached as Annex A and shall have all of the rights and obligations of the
Stockholder hereunder; and provided further, that in each of the cases referred
to in subclauses (A), (B) and (D) of clause (v) above, the Company`s
stockholders of record as constituted immediately prior to such event will,
immediately after such event, hold less than a majority of the voting power of
the surviving or acquiring entity.
1.2 Right of First Refusal
(a) Except as otherwise permitted in Section 1.1(b) of this Agreement
or as required by Section 1.5 of this Agreement, transfers of shares of the
Stock by each Stockholder shall not be permitted unless the Stockholder has
complied with this Section 1.2. If the Stockholder intends to sell any of its
shares of Stock (the "PROPOSED SELLER"), it shall give written notice (the
"SELLER`S NOTICE") to the Company and each of the Investors stating that the
Proposed Seller intends to make such a sale or transfer, identifying the party
who made the offer (the "PROPOSED TRANSFEREE"), specifying the number of shares
of Stock proposed to be purchased or acquired pursuant to the offer (the "FIRST
REFUSAL SHARES"), the nature of such sale or transfer, all material terms of the
proposed sale, including the per share purchase price which the Proposed
Transferee has offered to pay for the First Refusal Shares (the "SALE PRICE")
and the name and address of each Proposed Transferee. A copy of the offer, if
available, and a statement of the number of shares held by each of the Investors
shall be attached to the Seller`s Notice.
(b) (i) Upon receipt of the Seller`s Notice, the Company shall have the
irrevocable and exclusive option to purchase, upon delivery to the Proposed
Seller within fifteen (15) days of its receipt of the Seller`s Notice, all or
any portion of the First Refusal Shares. The Company shall deliver a notice (the
"COMPANY NOTICE") to the Proposed Seller and each of the Investors of its
election to purchase or not to purchase such First Refusal Shares within such
fifteen (15) day period, together with payment to the Proposed Seller of the
Sale Price therefor. To the extent that the Company does not elect to purchase
all of the First Refusal Shares, each Investor shall have the irrevocable and
exclusive option to purchase up to that number of the remaining First Refusal
Shares at the Sale Price as equals the product of (A) the number of remaining
First Refusal Shares multiplied by (B) a fraction, the numerator of which shall
be the number of shares of Common Stock issued or issuable upon conversion of
the Preferred Stock held by such Investor and any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of such Common Stock (collectively, the "INVESTOR SHARES") and the
denominator of which shall be the number of Investor Shares owned by all of the
Investors (the "PROPORTIONATE SHARE"). Within twenty (20) calendar days after
delivery of the Company Notice, each Investor shall deliver to the Company
2
and the Proposed Seller a written notice stating whether it elects to exercise
its option under this Section 1.2(b) and the maximum number of shares (not to
exceed all of such Investor`s Proportionate Share) that it is willing to
purchase, and such notice shall constitute an irrevocable commitment by such
Investor to purchase such shares.
(ii) If an Investor does not elect to purchase its full Proportionate
Share, the Proposed Seller shall deliver another written notice to the Company
and each Investor that has elected to purchase its full Proportionate Share (a
"FULLY EXERCISING INVESTOR") stating the number of unpurchased shares. Each
Fully Exercising Investor shall be entitled, by delivering written notice to the
Company and the Proposed Seller within five calendar days following such
Investor`s receipt of such notice, to purchase up to all of the remaining shares
at the Sale Price. In the event of an oversubscription, the oversubscribed
amount shall be allocated among such Fully Exercising Investors pro rata based
on the number of Investor Shares owned by each of them. The delivery of the
notice of election under this paragraph shall constitute an irrevocable
commitment to purchase such shares.
(iii) Each Investor shall be entitled to assign its rights pursuant to
Section 1.2 to any of its Affiliates.
(iv) If any of the First Refusal Shares are not elected to be purchased
pursuant to this Section 1.2, then, subject to Section 1.3 hereof, the Proposed
Seller shall be free, for a period of sixty (60) calendar days from the date of
the Seller`s Notice, to sell the remaining First Refusal Shares to the Proposed
Transferee, at a price equal to or greater than the Sale Price and upon terms no
more favorable to the Proposed Transferee than those specified in the Notice.
Any transfer of the remaining First Refusal Shares by the Proposed Seller after
the end of such sixty (60) day period or any change in the terms of the sale as
set forth in the Seller`s Notice which are more favorable to the Proposed
Transferee shall require a new notice of intent to transfer to be delivered to
the Investors and shall give rise anew to the rights provided in this Section
1.2.
(c) If the Company and/or the Investors elect to purchase any or all of
the First Refusal Shares mentioned in the Seller`s Notice, the Company and/or
such Investor(s) shall have the right to purchase the First Refusal Shares for
cash consideration whether or not part or all of the consideration specified in
the Seller`s Notice is other than cash. If part or all of the consideration to
be paid for the First Refusal Shares as stated in the Seller`s Notice is other
than cash, the price stated in such Seller`s Notice shall be deemed to be the
sum of the cash consideration, if any, specified in such Seller`s Notice, plus
the fair market value of the non-cash consideration. The fair market value of
the non-cash consideration shall be determined by the Board of Directors of the
Company (without the participation of any member who has any interest in the
Proposed Transferee or the Proposed Seller), and its judgment as to the fair
market value of such non-cash consideration shall be binding upon the Proposed
Seller and the other Investors.
1.3 Right of Co-Sale. In the event that all of the First Refusal Shares
are not purchased by the Company or the Investors as provided in Section 1.2
hereof, the Proposed Seller shall deliver a notice to each of the Investors who
did not purchase shares pursuant to Section 1.2(b) above (a "NON-PARTICIPATING
INVESTOR") informing it of the number of shares not
3
elected to be purchased by the other Investors and the number of First Refusal
Shares it still holds (the "CO-SALE SHARES") and intends to sell to the Proposed
Transferee. Each such Non-Participating Investor shall have the right,
exercisable upon written notice to the Company and the Proposed Seller within
five (5) calendar days after the giving of such notice by the Proposed Seller,
to participate in the Proposed Seller`s sale of Co-Sale Shares at the Sale Price
and upon the terms specified in the Notice. The delivery of the notice of
election under Section 1.3 shall constitute an irrevocable commitment by such
Non-Participating Investor to sell the number of shares specified in such notice
pursuant to this Section 1.3. To the extent one or more of the Non-Participating
Investors exercise such right of participation in accordance with the terms and
conditions set forth below, the number of shares of Stock which the Proposed
Seller may sell to the Proposed Transferee shall be correspondingly reduced. The
right of participation of each of the Non-Participating Investors shall be
subject to the following terms and conditions:
(a) Each Non-Participating Investor may elect to sell all or any part
of that number of shares of Common Stock of the Company held by such
Non-Participating Investor equal to the product obtained by multiplying (i) the
aggregate number of Co-Sale Shares by (ii) a fraction, the numerator of which is
the number of Investor Shares at the time owned by such Non-Participating
Investor and the denominator of which is the sum of the number of shares of
Common Stock of the Company (assuming full conversion and exercise of all
convertible and exercisable securities into Common Stock) at the time owned by
the Proposed Seller and the number of Investor Shares owned by all of the
Non-Participating Investors (the "CO-SALE PROPORTIONATE SHARE").
(b) If a Non-Participating Investor does not elect to sell his full
Co-Sale Proportionate Share, the Proposed Seller shall deliver another written
notice to the Company and each Non-Participating Investor who has elected to
sell its full Co-Sale Proportionate Share (a "FULLY-EXERCISING CO-SALE
INVESTOR") stating the number of unsold shares. Each Fully-Exercising Co-Sale
Investor shall be entitled, by delivering written notice to the Company and the
Proposed Seller within five calendar days following such notice, to sell up to
all of the shares not sold by the Non-Participating Investors above and beyond
its Co-Sale Proportionate Share. Such election shall constitute an irrevocable
commitment by such Fully-Exercising Co-Sale Investor to sell the number of
shares specified in such notice pursuant to this Section 1.3. In the event the
number of shares requested to be sold by all Fully-Exercising Co-Sale Investors
exceeds the aggregate Co-Sale Shares available for sale by all of the
Fully-Exercising Co-Sale Investors, the remaining shares to be sold shall be
allocated pro rata among such Fully-Exercising Co-Sale Investors (including the
Proposed Seller) based on the number of Investor Shares owned by each.
(c) Each of the exercising Non-Participating Investors shall effectuate
the sale by promptly delivering to the Proposed Seller for transfer to the
Proposed Transferee one or more certificates, properly endorsed for transfer (or
accompanied by duly executed stock powers), which represent the number of shares
of Common Stock which the Non-Participating Investor elects to sell.
(d) The stock certificates which the exercising Non-Participating
Investors deliver to the Proposed Seller shall be transferred by the Proposed
Seller to the Proposed Transferee in consummation of the sale of the Stock
pursuant to the terms and
4
conditions specified in the Seller`s Notice, and the Proposed Seller shall
promptly thereafter remit to each exercising Non-Participating Investor that
portion of the sale proceeds to which the exercising Non-Participating Investor
is entitled by reason of its participation in such sale. To the extent that any
prospective purchaser or purchasers prohibits such assignment or otherwise
refuses to purchase shares or other securities from any Non-Participating
Investor exercising its rights of co-sale hereunder, the Proposed Seller shall
not sell to such prospective purchaser or purchasers any Stock unless and until,
simultaneously with such sale, the Proposed Seller shall purchase such shares or
other securities from such Non-Participating Investor for the same consideration
and on the same terms and conditions as the proposed transfer described in the
Seller`s Notice.
1.4 Additional Transactions. The exercise or non-exercise of the rights
of an Investor hereunder to participate in one or more sales of Stock made by
the Proposed Seller shall not adversely affect their rights to participate in
subsequent sales by the Stockholder.
1.5 Ownership. The Stockholders represent and warrant that each is the
sole legal and beneficial owner of those shares of Stock such Stockholder
currently holds subject to this Agreement and that no other person has any
interest (other than community property interest) in such shares.
1.6 Drag-Along Rights.
(a) Applicability. In the event the holders of a majority of the then
outstanding Preferred Stock of the Company (the "PROPOSING STOCKHOLDERS")
approve a sale of the Company or a sale of all or substantially all of the
Company`s assets, in a bona fide transaction, whether by means of a merger,
consolidation, sale of stock or assets or otherwise, in a single, simultaneous
or related series of transactions (an "APPROVED SALE"), then the Investors and
the Stockholders (collectively, the "REMAINING HOLDERS") shall each consent to,
vote for and raise no objections to the Approved Sale. If the proposed acquiror
is an affiliate of any stockholder of then-outstanding Preferred Stock, then
this Section 1.6(a) shall only apply to the Approved Sale if the Approved Sale
is approved by the holders of a majority of the then-outstanding Preferred Stock
held of record by holders that are not affiliates of such proposed acquiror. If
the Approved Sale will take the form of an asset sale, merger or consolidation,
the Remaining Holders shall vote in favor of such transaction and shall waive
any appraisal rights or dissenters` rights in connection with such transaction.
If the Approved Sale is structured as a sale of the stock of the Company, each
Remaining Holder shall agree to sell all capital stock in the Company then held
by such Remaining Holder on the terms and conditions approved by the Proposing
Stockholders. A Remaining Holder shall have no obligations under this Section
1.6 to the extent that the terms of the Approved Sale provide that such
Remaining Holder would receive less than the amount that would be distributed to
such Remaining Holder in the event that the proceeds were distributed in
accordance with the Company`s then-current Certificate of Incorporation. All
capital stock transferred by the Remaining Holders pursuant to this Section 1.6
shall be sold at the same price and otherwise treated identically with the
capital stock of the same class and series being sold by the Proposing
Stockholders in all respects. The Remaining Holders shall each take such actions
as may be reasonably required and otherwise cooperate in good faith with the
Proposing Stockholders in connection with consummating the Approved Sale,
including the execution of such agreements and such instruments and other
5
actions reasonably necessary to (i) provide reasonable representations and
warranties and other provisions and agreements relating to such Approved Sale
and (ii) effectuate the allocation and distribution of the aggregate
consideration upon the Approved Sale.
(b) Notice of Sale. The Proposing Stockholders shall give the Remaining
Holders at least ten (10) days prior written notice of any Approved Sale as to
which the Proposing Stockholders intend to exercise their rights under this
Section 1.6.
(c) Notwithstanding any other provision of this Agreement, no Investor
or group of Investors (the "OFFERING STOCKHOLDERS") shall be a party to any
transaction or series of transactions that involves a transfer to any person,
persons acting in concert or entity (a "PROSPECTIVE ACQUIROR") of shares of the
Company if such sale would result in the Prospective Acquiror, together with its
Affiliates, holding 50% or more by voting power of all outstanding capital stock
of the Company, unless the Prospective Acquiror offers to purchase all of the
capital stock of the Company for the same consideration per share (with
appropriate adjustment to reflect the conversion of convertible securities and
the preference and priorities of any preferred stock) and upon the same terms
and conditions for securities of the same type, class and series as are offered
to the Offering Stockholder(s).
2. LEGENDED CERTIFICATES
2.1 Legend on the Stockholders` Stock. Each certificate representing
shares of the Stock now or hereafter owned by each Stockholder or its permitted
Transferees pursuant to clauses (i) through (iv) of Section 1.1(b) shall be
endorsed with the following legend:
"THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED, ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN
CONFORMITY WITH THE TERMS AND CONDITIONS OF A CO-SALE AND FIRST REFUSAL
AGREEMENT AMONG THE HOLDER (OR THE PREDECESSOR IN INTEREST TO THE SHARES), THE
CORPORATION AND CERTAIN OTHER STOCKHOLDERS OF THE CORPORATION. ADDITIONALLY,
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO CERTAIN
DRAG-ALONG PROVISIONS SET FORTH IN THE CO-SALE AND FIRST REFUSAL AGREEMENT. THE
CORPORATION WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE
HOLDER HEREOF WITHOUT CHARGE. THE CORPORATION WILL NOT REGISTER THE TRANSFER OF
SUCH SECURITIES ON THE BOOKS OF THE CORPORATION UNLESS AND UNTIL THE TRANSFER
HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT."
2.2 The legend required under Section 2.1 hereof shall be removed upon
termination of this Agreement in accordance with the provisions of Section 4.1.
3. PROHIBITED TRANSFERS
3.1 Grant. In the event that any Stockholder should sell any Stock in
contravention of the participation rights of the Non-Participating Investors
under Section 1.3 of
6
this Agreement (a "PROHIBITED TRANSFER"), the Non-Participating Investors shall
have the put option provided in Section 3.2.
3.2 Put Option. In the event of a Prohibited Transfer, the
Non-Participating Investors shall have the option to sell to the Proposed Seller
a number of shares of Common Stock of the Company (either directly or through
conversion and delivery of Series A Preferred Stock) equal to the number of
shares that the Non-Participating Investors would have been entitled to sell had
such Prohibited Transfer been effected in accordance with Section 1.3 hereof, on
the following terms and conditions:
(a) The price per share at which the shares are to be sold to the
Proposed Seller shall be equal to the price per share paid to the Proposed
Seller by the third party purchaser or purchasers of the Proposed Seller`s
Stock. The Proposed Seller shall also reimburse the Non-Participating Investors
exercising the put option for any and all fees and expenses, including
reasonable out-of-pocket legal fees and expenses incurred pursuant to the
exercise or attempted exercise of rights under this Section 3.
(b) The Non-Participating Investors shall deliver to the Proposed
Seller, within thirty (30) days after they have received notice from the
Proposed Seller or otherwise become aware of the Prohibited Transfer, the
certificate or certificates representing shares to be sold, each certificate to
be properly endorsed for transfer (or accompanied by duly executed stock
powers).
(c) The Proposed Seller shall, upon receipt of the certificates for the
repurchased shares, pay the aggregate purchase price therefor provided for in
this Article 3, by delivery of consideration in the same form such Proposed
Seller received for the Stock sold in the Prohibited Transfer and shall
reimburse the Non-Participating Investors for any additional expenses, including
legal fees and expenses, incurred in effecting such purchase and resale.
3.3 Company Expenses. In the event of a Prohibited Transfer, the
Proposed Seller in the Prohibited Transfer shall reimburse the Company for any
and all fees and expenses, including reasonable out-of-pocket legal fees and
expenses, incurred by the Company in connection with such Prohibited Transfer.
4. GENERAL
4.1 Termination. The rights and obligations of an Investor under this
Agreement shall terminate at such time as that Investor shall no longer be the
owner of at least 1,000 shares, or rights to acquire shares, (as appropriately
adjusted for any stock splits, stock dividends, combinations and
recapitalizations) of Common Stock (as determined on an as-converted basis).
Unless sooner terminated with respect to a particular Investor in accordance
with the preceding sentence, this Agreement shall terminate upon the occurrence
of any of the following events:
(a) the liquidation, dissolution or indefinite cessation of the
business operations of the Company, or the acquisition of the Company by another
entity (or group of affiliated entities or entities operating as a group) by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) unless
7
the Company`s stockholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale (by virtue
of securities issued as consideration for the Company`s acquisition or sale or
otherwise) hold at least 50% of the voting power of the surviving or acquiring
entity (except that the sale by the Company of shares of its capital stock to
investors in bona fide financing transactions shall not be deemed to be an
acquisition for this purpose);
(b) the consummation of a Qualified Public Offering (as defined in the
Company`s Certificate of Incorporation, as the same may be amended and restated
from time to time); or
(c) upon the execution and delivery of a written agreement signed by
the holders of a majority of the Series A Preferred Stock, voting or acting as a
separate class.
Notwithstanding this Section 4.1, Section 1.6 shall survive any
termination of this Agreement pursuant to Section 4.1(a) until such transaction
has closed and all proceeds of such transaction (including without limitation
any earn-out or escrowed proceeds) have been fully distributed to all
stockholders of the Company in accordance with the terms of such transaction.
4.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the address for such party set forth beneath such party`s name on Schedule A
hereto (or at such other address for a party as shall be specified by like
notice) and, in the case of the Company:
Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ 07932
Fax: (973) 360-2220
Attn: Chief Executive Officer
with a copy to
Andrews & Kurth L.L.P.
111 Congress Ave., Suite 1700
Austin, Texas 78701
Fax: (512) 320-9292
Attn: Carmelo M. Gordian
Notice given by facsimile shall be confirmed by appropriate answer back
and shall be effective upon actual receipt if received during the recipient`s
normal business hours, or at the beginning of the recipient`s next business day
after receipt if not received during the recipient`s normal business hours. All
notices by facsimile shall be confirmed promptly after transmission in writing
by certified mail or personal delivery. Any party may change any address to
which notice is to be given to it by giving notice as provided above of such
change of address.
8
4.3 Assignments and Transfers. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives;
provided, however, and other than as set forth in Section 1.1(b) hereunder, the
first refusal and co-sale rights hereunder may be assigned only by an Investor
to a transferee or assignee of such Investor`s shares of Preferred Stock of the
Company who, after such assignment or transfer, holds such number of shares of
Preferred Stock that is convertible into at least 250,000 shares of the Common
Stock of the Company (subject to appropriate adjustments for stock splits, stock
dividends, combinations and other recapitalizations) and who executes an
Adoption Agreement in the form attached as Annex A. By their execution hereof or
of an Adoption Agreement, each party hereto hereby appoints the Company as its
attorney-in-fact for the sole purpose of executing Adoption Agreements with any
subsequent permitted transferees.
4.4 Optional Escrow. At the request of any Investor, an escrow shall be
set up to effect the transfer of any certificates or funds hereunder. Costs of
such escrow shall be borne by all of the parties participating therein based on
the aggregate value of the shares held by them which are to be purchased or sold
thereunder.
4.5 Severability. In the event one or more of the provisions of this
Agreement should, for any reason be held to be invalid, illegal or
unenforceable, such provisions shall be excluded from this Agreement and the
balance of this Agreement shall be interpreted as if such provision had never
been contained herein.
4.6 Amendments and Waivers. Other than with respect to amendments to
Schedule A or Schedule B hereto, which may be amended by the Company to reflect
additional Investors or Stockholders or their permitted transferees, any
amendment or modification of this Agreement shall be effective only if evidenced
by a written instrument executed by the holders of a majority of the shares of
Common Stock (determined on an as-converted basis) held by all the Investors
hereunder. Any waiver hereunder shall be effective only if evidenced by a
written instrument executed by the holders of a majority of the shares of Common
Stock held by all the Investors (determined on an as-converted basis) or by the
Stockholders (determined on an as-converted basis), as the case may be, whose
rights are being waived.
4.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to conflicts
of law principles.
4.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which, when
taken together, shall constitute one and the same instrument.
4.9 Remedies. The parties hereto shall have all remedies for breach of
this Agreement available to them as provided by law or equity. Without limiting
the generality of the foregoing, the parties agree that in addition to any other
rights and remedies available at law or in equity, the parties shall be entitled
to obtain specific performance of the obligations of each party to this
Agreement and immediate injunctive relief and that, in the event any action or
proceeding is brought in equity or to enforce the same, no party will urge, as a
defense, that there is an adequate remedy at law.
9
4.10 Conflict with Other Rights of First Refusal. Certain of the
Stockholders have entered into a stock purchase agreement with the Company,
which agreement contains a right of first refusal provision in favor of the
Company. The right of first refusal provision contained in this Agreement shall
supersede and replace the right of first refusal provision contained in the
Stockholder`s stock purchase agreement; provided, however, that the other
provisions contained in the Stockholder`s stock purchase agreement shall remain
in full force and effect and, provided further, that this Agreement is subject
to, and shall in no manner limit the right that the Company may have to
repurchase securities from any Stockholder pursuant to any stock restriction
agreement or other agreement between the Company and the Stockholder.
4.11 Aggregation of Stock. All shares of Common Stock owned or acquired
by an Investor or its Affiliates (assuming full conversion and exercise of all
convertible and exercisable securities into Common Stock) shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
4.12 Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof.
[Signature Pages Follow]
10
IN WITNESS WHEREOF, the parties have executed this Co-Sale and First
Refusal Agreement on the day and year indicated above.
COMPANY:
COMVERGE, INC.
By:
---------------------------------------
Robert M. Chiste
Chief Executive Officer
INVESTORS:
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
EASTON HUNT CAPITAL PARTNERS, L.P.
By: EHC GP, L.P.
Its: General Partner
By: EHC, Inc.
Its: General Partner
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
ENERTECH CAPITAL PARTNERS II L.P.
By: ECP II Management L.P.,
Its General Partner
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
ECP II INTERFUND L.P.
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
E.ON VENTURE PARTNERS
By:
---------------------------------------
Peter Bachsleitner
Managing Director
By:
---------------------------------------
Steffen Hasselwander
Managing Director
NTH POWER TECHNOLOGIES FUND II, L.P.,
NTH POWER TECHNOLOGIES FUND II-A, L.P.
BY: NTH POWER MANAGEMENT II, L.P.
AND
NTH POWER MANAGEMENT II-A, L.L.C.
BY: NTH POWER L.L.C.
THEIR MANAGEMENT AGENT
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SHELL INTERNET VENTURES B.V.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
STOCKHOLDERS:
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
---------------------------------------
Robert Chiste
---------------------------------------
T. Wayne Wren
---------------------------------------
Joseph Esteves
---------------------------------------
Frank Magnotti
---------------------------------------
Coral Almog
---------------------------------------
Dick Preston
---------------------------------------
John Rossi
EXHIBIT 10.32
EXECUTION COPY
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "AGREEMENT") is made as of April 7, 2003,
by and among Comverge, Inc., a Delaware corporation (the "COMPANY"), the holders
of Series A Preferred Stock listed on Schedule A hereto (the "SERIES A PREFERRED
STOCKHOLDERS"), the holders of Series A-1 Preferred Stock listed on Schedule B
hereto (the "SERIES A-1 PREFERRED STOCKHOLDERS") and the holders of Common Stock
of the Company listed on Schedule C hereto (the "COMMON STOCKHOLDERS" and,
together with the Series A Preferred Stockholders, Series A-1 Preferred
Stockholders and their respective permitted transferees, the "STOCKHOLDERS").
Capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to them in the Preferred Stock Purchase Agreement of even date herewith
(the "PURCHASE AGREEMENT") by and among the Company and the Investors named
therein.
R E C I T A L S
WHEREAS, on the date hereof the Series A Preferred Stockholders and
Series A-1 Preferred Stockholders (together, the "PREFERRED STOCKHOLDERS") are
purchasing from the Company shares of its Preferred Stock pursuant to the terms
of the Purchase Agreement; and
WHEREAS, the execution and delivery of this Agreement by the Company
and certain of the Stockholders is a condition to the closing of the issuance,
sale and purchase of the Preferred Stock pursuant to the Purchase Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing premises and certain
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Stock" shall mean any and all shares of the capital stock
of the Company which a Stockholder currently holds as a "beneficial
owner" (determined in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended) or may hereafter acquire
or beneficially own, including any and all shares of Common Stock, any
and all Preferred Shares (as defined in Section 1(b) below), and any
and all other shares of the capital stock of the Company issued as a
distribution with respect to or in replacement of any of the foregoing.
(b) "Preferred Shares" shall mean the shares of Preferred
Stock and any hereafter acquired shares of the Company`s Preferred
Stock, regardless of series, and any shares of Stock issued upon
conversion of any such series of Preferred Stock.
2. Size and Composition of Board of Directors. The Stockholders agree
that, in any election of directors of the Company, they shall vote all shares
owned or controlled by them, including all shares that they are entitled to vote
under any voting trust, voting agreement
or proxy, or to consent pursuant to an action by written consent of the holders
of capital stock of the Company, to elect, members of the Company`s Board of
Directors initially comprised of five directors, designated as follows:
(a) At each election of directors in which the holders of
Series A Preferred Stock, voting as a separate class, are entitled to
elect directors of the Company, the Series A Preferred Stockholders
shall vote all of their respective shares of Series A Preferred Stock
so as to elect: (i) one representative designated by Nth Power
Technologies Fund II, L.P. so long as it, together with its affiliates,
holds not less than 250,000 Preferred Shares (as adjusted for stock
splits, dividends and the like), which individual shall initially be
Tim Woodward and (ii) one representative designated by E.ON Venture
Partners so long as it, together with its affiliates, holds not less
than 250,000 Preferred Shares (as adjusted for stock splits, dividends
and the like), which individual shall initially be Steffen
Hasselwander. Any vote taken to remove any director elected pursuant to
this Section 2(a), or to fill any vacancy created by the resignation,
removal or death of a director elected pursuant to this Section 2(a),
shall also be subject to the provisions of this Section 2(a).
(b) At each election of directors in which the holders of
Series A-1 Preferred Stock, voting as a separate class, are entitled to
elect directors of the Company, the Series A-1 Preferred Stockholders
shall vote all of their respective shares of Series A-1 Preferred Stock
so as to elect one representative designated by Easton Hunt Capital
Partners, L.P. so long as it, together with its affiliates, holds not
less than 250,000 Preferred Shares (as adjusted for stock splits,
dividends and the like), which individual shall initially be Richard
Schneider. In the event that no shares of Series A-1 Preferred Stock
shall be outstanding and shares of Series A Preferred Stock remain
outstanding, the director to be elected pursuant to this Section 2(b)
shall be elected by the holders of a majority of the Series A Preferred
Stock. Any vote taken to remove any director elected pursuant to this
Section 2(b), or to fill any vacancy created by the resignation,
removal or death of a director elected pursuant to this Section 2(b),
shall also be subject to the provisions of this Section 2(b).
(c) At each election of directors in which the holders of
Common Stock, voting as a separate class, are entitled to elect
directors of the Company, the Common Stockholders shall vote all of
their respective Stock so as to elect: (i) the person serving as Chief
Executive Officer of the Company, which individual shall initially be
Robert M. Chiste, and (ii) one (1) individual nominated by the holders
of a majority in interest of the Common Stock, which individual shall
initially be George Morgenstern. Any vote taken to remove any director
elected pursuant to this Section 2(c), or to fill any vacancy created
by the resignation, removal or death of a director elected pursuant to
this Section 2(c), shall also be subject to the provisions of this
Section 2(c).
(d) After December 31, 2003, the authorized number of
directors may be increased to seven members by the vote of a majority
of the directors then in office. The vacancies created by such increase
shall be filled by two independent directors (the "INDEPENDENT
DIRECTORS") unanimously elected by the directors then in office. At
each
2
election of directors in which the Stockholders are entitled to elect
any directors of the Company in addition to those set forth in Sections
2(a), (b) and (c) above, the Stockholders shall vote all of their
respective Stock so as to elect the Independent Directors.
3. Vacancies: Removal. In the event of any vacancy in the Board of
Directors, the Stockholders agree to vote all outstanding shares of Stock owned
or controlled by them and to otherwise use their best efforts to fill such
vacancy so that the Board of Directors of the Company will be comprised of
directors designated as provided in Section 2. The Stockholders agree to vote
all outstanding shares of Stock owned or controlled by them for the removal of a
director whenever (but only whenever) there shall be presented to the Board of
Directors the written direction that such director be removed, signed by (a) Nth
Power, in the case of the director designated by Nth Power pursuant to Section
2(a)(i) of this Agreement, (b) Easton Hunt, in the case of the director
designated by Easton Hunt pursuant to Section 2(b) of this Agreement; provided
that if no shares of Series A-1 Preferred Stock remain outstanding, then by the
holders of a majority of the Series A Preferred Stock, (c) E.ON Venture
Partners, in the case of the director designated by E.On Venture Partners
pursuant to Section 2(a)(ii) of this Agreement, (d) by the holders of a majority
of the capital stock of the Company (on an as-converted basis) in the case of
the Independent Directors or (e) the holders of a majority of the Common Stock
held by Common Stockholders, in the case of any of the directors designated
pursuant to Section 2(c) of this Agreement.
4. No Liability for Election of Recommended Director. None of the
parties hereto and no officer, director, stockholder, partner, employee or agent
of any party makes any representation or warranty as to the fitness or
competence of the nominee of any party hereunder to serve on the Board of
Directors by virtue of such party`s execution of this Agreement or by the act of
such party in voting for such nominee pursuant to this Agreement.
5. Legend. During the term of this Agreement, each certificate
representing shares of capital stock held by parties hereto will bear a legend
in substantially the following form:
"THE SHARES REPRESENTED HEREBY AND THE VOTING THEREOF ARE SUBJECT TO
CERTAIN RESTRICTIONS AND AGREEMENTS CONTAINED IN A VOTING AGREEMENT AMONG THE
HOLDER (OR THE PREDECESSOR IN INTEREST TO THE SHARES), THE COMPANY AND CERTAIN
OTHER STOCKHOLDERS OF THE COMPANY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH
SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS
OF SUCH AGREEMENT. THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF THE
VOTING AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
The Company shall make a notation on its record and give instructions
to any transfer agent of such capital stock in order to implement the
restrictions and agreements contained in this Agreement.
3
6. Termination. This Agreement shall terminate upon the earlier of (i)
the consummation of a Qualified Public Offering (as defined in the Company`s
Certificate of Incorporation, as the same may be amended and restated from time
to time), (ii) upon the closing of any merger, recapitalization, reorganization
or sale of all or substantially all of the assets of the Company which will
result in the stockholders of the Company not holding, directly or indirectly,
at least 50% of the voting power of the surviving, continuing or purchasing
entity, or (iii) the execution and delivery of a written agreement signed by (a)
the holders of a majority of the shares of Common Stock subject to this
Agreement and (b) the holders of a majority of the Preferred Stock, voting or
acting as a separate class.
7. Representations and Warranties of Each Stockholder. Each Stockholder
represents and warrants that such Stockholder (i) is the beneficial owner of the
Stock free and clear of any liens, claims, options, charges or other
encumbrances, and (ii) has full authority to vote and direct the voting of the
Stock with respect to matters contemplated hereby and has full power and
authority to make, enter into and carry out the terms of this Agreement.
8. Miscellaneous.
(a) Equitable Relief. The parties recognize that the
enforcement of this Agreement is necessary to ensure continuity in the
management of the Company, and that the ascertainment of damages in the
event of its breach would be difficult. The parties therefore agree
that, in addition to any other available remedies, the parties shall be
entitled to injunctive relief in the event of a breach hereof.
(b) Binding Effect. In addition to any restriction or transfer
that may be imposed by any other agreement by which any party hereto
may be bound, this Agreement shall be binding upon, and shall inure to
the benefit of, the Stockholders and their respective heirs, successors
and assigns. As a condition precedent to any sale, assignment, pledge,
encumbrance or other transfer of any shares of Stock subject to this
Agreement, such heir, successor or assignee shall execute and deliver
an Adoption Agreement substantially in the form attached hereto as
Annex A. Upon the execution and delivery of an Adoption -------
Agreement by any transferee, such transferee shall be deemed to be a
party hereto as if such transferee`s signature appeared on the
signature pages hereto. By their execution hereof or any Adoption
Agreement, each of the parties hereto appoints the Company as its
attorney-in-fact for the purpose of executing any Adoption Agreement
which may be required to be delivered hereunder.
(c) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
regard to conflicts of law principles thereof.
(d) Severability. If any provision of this Agreement should be
held to be invalid, illegal or unenforceable, the parties intend the
remaining provisions of this Agreement to be constructed as if such
invalid, illegal or unenforceable provision had never been contained
herein.
4
(e) Amendments. Other than with respect to amendments to
Schedule A, Schedule B and Schedule C hereto, which may be amended by
the Company to reflect additional Series A Preferred Stockholders,
Series A-1 Preferred Stockholders or Common Stockholders or their
permitted transferees, this Agreement may be altered, amended or
modified at any time only upon approval of such alteration, amendment
or modification (each, an "AMENDMENT") by written consent of (i) the
holders of a majority of the shares of Common Stock subject to this
Agreement and (ii) the holders of at least a majority of the Preferred
Shares. The Company shall promptly notify the holders of each class of
the Company`s voting stock that an Amendment has been approved in
accordance with the terms of this paragraph.
(f) Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally
or by commercial delivery service, or mailed by registered or certified
mail (return receipt requested) or sent via facsimile (with
confirmation of receipt) to the parties at the address for such party
set forth beneath such party`s name on Schedule A, Schedule B or
Schedule C hereto (or at such other address for a party as shall be
specified by like notice) and, in the case of the Company:
Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ 07932
Fax: (973) 360-2220
Attn: Chief Executive Officer
with a copy to
Andrews & Kurth L.L.P.
111 Congress Ave., Suite 1700
Austin, Texas 78701
Fax: (512) 320-9292
Attn: Carmelo M. Gordian
Notice given by facsimile shall be confirmed by appropriate
answer back and shall be effective upon actual receipt if received
during the recipient`s normal business hours, or at the beginning of
the recipient`s next business day after receipt if not received during
the recipient`s normal business hours. All notices by facsimile shall
be confirmed promptly after transmission in writing by certified mail
or personal delivery. Any party may change any address to which notice
is to be given to it by giving notice as provided above of such change
of address.
(g) Board Expenses. The Company will bear all reasonable and
documented travel expenses incurred by directors in connection with
their attendance at board and board committee meetings and other
expenses as may be authorized from time to time by the board of
directors.
5
(h) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which shall be one and the same document.
(i) Headings. The headings of this Agreement are for
convenience only and do not constitute a part of this Agreement.
(j) Share Numbers. All share numbers set forth in this
Agreement shall be determined on an as-adjusted basis to reflect any
stock dividends, stock splits, combinations, recapitalizations or the
like after the date hereof.
(k) Entire Agreement. This Agreement and the schedules
attached hereto is intended to be the sole agreement of the parties as
it relates to the subject matter hereof and does hereby supersede all
other agreements of the parties relating to the subject matter hereof,
including, but not limited to the Prior Agreement.
[Signature Pages Follow]
6
IN WITNESS WHEREOF, the parties execute this Voting Agreement as of the
date first set forth above.
COMPANY:
COMVERGE, INC.
By:
---------------------------------------
Robert M. Chiste
Chief Executive Officer
[Signature Page to Comverge, Inc. Voting Agreement]
SERIES A PREFERRED STOCKHOLDERS:
DATA SYSTEMS & SOFTWARE INC.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
EASTON HUNT CAPITAL PARTNERS, L.P.
By: EHC GP, L.P.
Its: General Partner
By: EHC, Inc.
Its: General Partner
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
ENERTECH CAPITAL PARTNERS II L.P.
By: ECP II Management L.P.,
Its General Partner
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
ECP II INTERFUND L.P.
By: ECP II Management L.L.C.,
Its General Partner
By:
---------------------------------------
David F. Lincoln
Managing Director
[Signature Page to Comverge, Inc. Voting Agreement]
E.ON VENTURE PARTNERS
By:
---------------------------------------
Peter Bachsleitner
Managing Director
By:
---------------------------------------
Steffen Hasselwander
Managing Director
NTH POWER TECHNOLOGIES FUND II, L.P.,
NTH POWER TECHNOLOGIES FUND II-A, L.P.
BY: NTH POWER MANAGEMENT II, L.P.
AND
NTH POWER MANAGEMENT II-A, L.L.C.
BY: NTH POWER L.L.C.
THEIR MANAGEMENT AGENT
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SHELL INTERNET VENTURES B.V.
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[Signature Page to Comverge, Inc. Voting Agreement]
SERIES A-1 PREFERRED STOCKHOLDERS:
EASTON HUNT CAPITAL PARTNERS, L.P.
By: EHC GP, L.P.
Its: General Partner
By: EHC, Inc.
Its: General Partner
By:
---------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
COMMON STOCKHOLDERS:
DATA SYSTEMS & SOFTWARE INC.
By:
----------------------------------------
Name:
----------------------------------------
Title:
--------------------------------------
EXHIBIT 10.33
LAURUS MASTER FUND, LTD.
C/O LAURUS CAPITAL MANAGEMENT, LLC
152 WEST 57TH STREET, 4TH FLOOR
NEW YORK, NEW YORK 10019
As of April 1, 2003
Data Systems & Software Inc.
200 Route 17 South
Mahwah, New Jersey 07430
Gentlemen:
Reference is made to that certain Registration Rights Agreement ("Registration
Rights Agreement"), dated as of December 5, 2002, by and between Laurus Master
Fund, Ltd. ("Laurus") and Data Systems & Software Inc. ("DSSI"), and that
certain Convertible Note (the "Note"), dated December 4, 2002, made by and among
DSSI, Comverge Technologies, Inc. ("Comverge") and Laurus. Capitalized terms
used in this letter agreement (this "Agreement"), and not otherwise defined
herein, shall have the meanings defined in the Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, DSSI agreed to register by April
4, 2003 the shares of DSSI common stock, $.01 par value (the "Common Stock"),
issuable upon the conversion of up to $600,000 of the outstanding principal of
the Note (the "Note Shares") and the shares of Common Stock issuable upon the
exercise of a warrant purchased by Laurus from DSSI in connection with the
purchase of the Note (the "Warrant Shares").
On January 3, 2003, DSSI filed a registration statement covering the Note Shares
and the Warrant Shares. On January 28, 2003, the Securities and Exchange
Commission (the "SEC") informed DSSI that because the Note Shares are issuable
upon the conversion of a revolving credit facility, such shares could not be
registered until issued.
To address the SEC`s comments on the registration statement and the pending pay
off and termination of the Note by Comverge, Laurus has agreed to purchase from
DSSI, and DSSI has agreed to sell to Laurus, 400,000 shares of Common Stock (the
"Shares"), at a purchase of $1.50 per share, for an aggregate purchase price of
$600,000 (the "Purchase Price"). DSSI has also agreed to register the Shares as
promptly as possible.
In consideration of the foregoing premises and certain other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Purchase of Stock. Subject to the terms and conditions set forth
herein, Laurus hereby subscribes for and agrees to purchase, and DSSI hereby
agrees to sell to Laurus, the Shares in consideration of the payment by Laurus
of the Purchase Price.
2. Delivery. At the Closing (as defined below), Laurus shall deliver to
DSSI the Purchase Price in immediately available funds wired to an account
designated in writing by DSSI, and a duly and validly executed registration
rights agreement, substantially in the form annexed hereto on Schedule A (the
"Registration Rights Agreement"), and DSSI shall deliver to Laurus a certificate
representing the Shares and a duly and validly executed Registration Rights
Agreement.
3 Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place on such date and time as shall be mutually agreed to
by the parties hereto, but no later than two (2) business days after the
outstanding principal of the Note has been paid in full and terminated by
Comverge, and at such place as shall be mutually agreed to by the parties
hereto. The date and time of the Closing is referred to as the "Closing Date."
4. Representations of Laurus. Laurus makes the following representations
and warranties to DSSI, each and all of which shall survive the execution and
delivery of this Agreement and the Closing hereunder:
(a) Requisite Power and Authority. Laurus has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the related registration rights agreement, and to carry out their
provisions. All corporate action on Laurus`s part required for the lawful
execution and delivery of this Agreement and the Registration Rights Agreements
have been or will be effectively taken prior to the Closing. Upon their
execution and delivery, this Agreement and the Registration Rights Agreement
will be valid and binding obligations of Laurus, enforceable in accordance with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors` rights, and (b) as limited by general principles of
equity that restrict the availability of equitable and legal remedies.
(b) Investment Representations. Laurus understands that the Shares are
being offered and sold pursuant to an exemption from registration contained in
the Securities Act of 1933, as amended (the "Securities Act") based in part upon
Laurus`s representations contained in the Agreement, including, without
limitation, that Laurus is an "accredited investor" within the meaning of
Regulation D under the Securities Act. Laurus has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Shares to be purchased by it
under this Agreement. Laurus further has had an opportunity to ask questions and
receive answers from DSSI regarding DSSI`s business, management and financial
affairs and the terms and conditions of the offer and sale of the Shares and to
obtain additional information (to the extent DSSI possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished to Laurus or to which Laurus had access.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to DSSI so that it is capable of evaluating the merits and
risks of its investment in DSSI and has the capacity to protect its own
interests. Laurus must bear the economic risk of this investment until the
Shares are sold pursuant to (i) an effective registration statement under the
Securities Act, or (ii) an exemption from registration is available.
(d) Acquisition for Own Account. Laurus is acquiring the Shares for its
own account for investment only, and not as a nominee or agent and not with a
view towards or for resale in connection with their distribution.
2
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of
its, or of its management`s, business and financial experience, Laurus has the
capacity to evaluate the merits and risks of its investment in the Shares and to
protect its own interests in connection with the transactions contemplated in
this Agreement and the Registration Rights Agreement. Further, Laurus is aware
of no publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Registration Rights Agreement.
(f) Accredited Investor. Laurus represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
(g) Legends. The Shares shall bear a legend that shall be in substantially
the following form until such shares are covered by an effective registration
statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO DATA
SYSTEMS & SOFTWARE INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
5. DSSI`s Representations and Warranties. DSSI makes the following
representations and warranties to Laurus:
(a) Organization and Corporate Power. DSSI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. DSSI has all required corporate power and authority to carry on its
business as presently conducted, to enter into and perform this Agreement and
the Registration Rights Agreement, and to carry out the transactions
contemplated hereby and thereby, including the issuance and sale of the Shares.
(b) Authorization. DSSI has all requisite power and authority to issue,
sell and deliver the Shares in accordance with and upon the terms and conditions
set forth in this Agreement and to register the Shares pursuant to the
Registration Rights Agreement, and all corporate action required to be taken by
DSSI for the due and proper authorization, issuance and delivery of the Shares
will, upon delivery thereof, have been taken. The Shares, when sold and paid for
as contemplated in this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable and, except as otherwise provided by applicable
law, free of all liens, claims and encumbrances.
(c) Binding Obligation; No Violation; No Consent. This Agreement and the
Registration Rights Agreement each constitutes a valid and binding obligation of
DSSI, enforceable against DSSI in accordance with its terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors` rights,
and (b) as limited by general principles of equity that restrict the
availability of equitable and legal remedies. The execution and delivery by DSSI
of this Agreement and the Registration Rights Agreement and the performance by
DSSI of the transactions contemplated hereby and thereby, including the issuance
and delivery of the Shares,
3
do not and will not: (A) violate, conflict with or result in a default (whether
after the giving of notice, lapse of time or both) under any material contract
or obligation to which DSSI is a party or by which it or its assets are bound
and which have not been waived, or any provision of the articles of
incorporation or bylaws of DSSI; (B) to DSSI`s knowledge, violate or result in a
violation of, or constitute a default under, any provision of any material law,
regulation or rule, or any order of, or any restriction imposed by, any court or
governmental agency applicable to DSSI; (C) require from DSSI any notice to,
declaration or filing with, or consent or approval of any governmental authority
or third party other than as may be required to secure an exemption from
registration or qualification of the offer and sale of the Shares under the
Securities Act and applicable state or foreign securities and blue sky laws; or
(D) accelerate any obligation under, or give rise to a right of termination of,
any material agreement, permit, license or authorization to which DSSI is a
party or by which DSSI is bound.
(d) Securities Laws. In reliance on the investment representations of
Laurus contained in Section 4 hereof, the offer, issuance, sale and delivery of
the Shares, as provided in this Agreement, are exempt from the registration
requirements of the Securities Act and all applicable state securities laws, and
are otherwise in compliance with such laws in all material respects. Neither
DSSI nor any person acting on its behalf has taken or will take any action which
might subject the offering, issuance or sale of the Shares to the registration
requirements of Section 5 of the Securities Act.
6. Registration of the Shares; Restrictions on Transfer of Shares. The
Shares will be registered in accordance with the Registration Rights Agreement.
Commencing on the date hereof and ending on June 5, 2003, Laurus shall not sell
or otherwise dispose of, on a monthly basis, the number of Shares that exceeds
25% of the average daily trading volume of the shares of Common Stock on the
Nasdaq SmallCap Market (or any successor exchange) for such month (as determined
on a rolling basis).
7. Miscellaneous.
(a) Notices. All notices and other communications provided herein shall be
in writing and delivered to each party`s address set forth above. Notice shall
be deemed delivered (i) three (3) days after the deposit in the U.S. mail of a
writing addressed as above and sent first class mail, certified, return receipt
requested, (ii) upon hand delivery, (iii) one business day after deposit with
Federal Express or other recognized over-night courier service, or (iv) when
actually received. Either party may change the address for notice by notifying
the other party of such change in accordance with this Section 7(a).
(b) Counterparts; Entire Agreement. This Agreement may be executed in
counterparts. This Agreement constitutes the entire agreement between the
parties hereto with respect tot he subject matter hereof.
(c) Binding Effect. The provisions of this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns.
(d) Amendment; Waiver. This Agreement may be amended only by a written
instrument signed by the parties hereto which specifically states that it is
amending this Agreement, and no term of this Agreement may be waived except in
writing signed by the party waiving such term. No waiver by the parties hereto
of any default or breach of any term,
4
condition or covenant of this Agreement shall be deemed to be a waiver of any
subsequent default or breach of the same or any other term, condition or
covenant contained herein.
(e) Applicable Governing Law; Jurisdiction. This Agreement and the rights
and obligations of the parties hereto shall be governed by and constructed and
enforced in accordance with, the laws of the State of New York. Each party
hereby irrevocably consents and agrees that any legal or equitable action or
proceeding based upon, arising under or relating to this Agreement shall be
brought exclusively in any Federal or state court in the County of New York,
State of New York. Each party hereby irrevocably consents to the personal
jurisdiction of each such court.
(f) Headings. The headings herein are for convenience of reference only,
do not constitute a part of this Agreement, and shall not be deemed to limit,
expand or otherwise affect any of the provisions hereof.
[SIGNATURES APPEAR ON NEXT PAGE]
5
If the foregoing accurately reflects your understanding, please sign a
copy of this letter and return it to the undersigned.
Very truly yours,
LAURUS MASTER FUND, LTD.
By: /s/David Grin
-----------------------------
Name: David Grin
Title: Partner
AGREED AND ACCEPTED:
DATA SYSTEMS & SOFTWARE INC.
By: /s/ George Morgenstern
--------------------------------
Name: George Morgenstern
Title: Chief Executive Officer
and President
6
SCHEDULE A - REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of April 1, 2003, by and between Data Systems & Software Inc., a
Delaware corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman
Islands company (the "Purchaser").
This Agreement is made pursuant to that certain letter agreement, dated as
of the date hereof, between the Purchaser and the Company (the "Letter
Agreement"), and pursuant to the Note. The Company and the Purchaser hereby
agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the following meanings:
"Closing Date" means the Closing Date under the Letter Agreement.
"Effectiveness Date" means the 30th day following the Filing Date.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Filing Date" means, with respect to the Registration Statement
required to be filed hereunder, the seventh day following the date on which the
Company filed its annual report on Form 10-K for the fiscal year ended December
31, 2002.
"Holder" or "Holders" means the Purchaser or any of its affiliates to
the extent any of them hold Registerable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock issued
pursuant to the Letter Agreement.
"Registration Statement" means the registration statement required to
be filed hereunder, including the Prospectus, amendments and supplements to such
registration statement or Prospectus,
7
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
2. Registration.
(a) On or prior to the Filing Date, the Company shall prepare and file
with the Commission a Registration Statement covering the Registrable Securities
for an offering to be made on a continuous basis pursuant to Rule 415. The
Registration Statement shall be on Form S-3 (except if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3, in which
case such registration shall be on another appropriate form in accordance
herewith) and shall contain (except if otherwise required by the Commission) the
"Plan of Distribution" attached hereto as Annex A. The Holders acknowledge that
the Registerable Securities are subject to a six-month restriction on
transferability as set forth in the Note and the Warrant. The Company shall
cause the Registration Statement to become effective and remain effective as
provided herein. The Company shall use its reasonable commercial efforts to
cause the Registration Statement to be declared effective under the Securities
Act as promptly as possible after the filing thereof, but in any event no later
than the Effectiveness Date, and shall keep the Registration Statement
continuously effective under the Securities Act until the date which is the
earlier date of when (i) all Registrable Securities have been sold or (ii) all
Registrable Securities may be sold immediately without registration under the
Securities Act and without volume restrictions pursuant to Rule 144(k), as
determined by the counsel to the Company pursuant to a written opinion letter to
such effect, addressed and acceptable to the Company`s transfer agent and the
affected Holders (the "Effectiveness Period").
(b) If: (i) any Registration Statement is not filed on or prior to the
Filing Date; (ii) a Registration Statement filed hereunder is not declared
effective by the Commission by the Effectiveness Date; (iii) after a
Registration Statement is filed with and declared effective by the Commission,
such Registration Statement ceases to be effective (by suspension or otherwise)
as to all Registrable Securities to which it is required to relate at any time
prior to the expiration of the Effectiveness Period (without being succeeded
immediately by an additional registration statement filed and declared
effective) for a period of time which shall exceed 30 days in the aggregate per
year but not more than 20 consecutive calendar days (defined as a period of 365
days commencing on the date the Registration Statement is declared effective);
or (iv) the Common Stock is not listed or quoted, or is suspended from trading
on any Trading Market for a period of three (3) consecutive Trading Days
(provided the Company shall not have been able to cure such trading suspension
within 60 days of the notice thereof or list the Common Stock on any of the Pink
Sheets, the NASD OTC Bulletin Board, NASDAQ SmallCap Market, the Nasdaq National
Market, American Stock Exchange or New York Stock Exchange (the "Trading
Market"))(any such failure or breach being referred to as an "Event," and for
purposes of clause (i), (ii) or (v) the date on which such Event occurs, or for
purposes of clause (iii) the date which such 30 day or 20 consecutive day period
(as the case may be) is exceeded, or for purposes of clause (iv) the date on
which such 60 day period is exceeded, being referred to as "Event Date"), then
8
until the applicable Event is cured, the Company shall pay to each Holder an
amount in cash, as liquidated damages and not as a penalty, of $2,500 for the
first two thirty (30) day periods and $5,000 for each thirty (30) day period
thereafter (prorated for partial periods). Such liquidation damages shall be
paid not less than each thirty (30) days during an Event and within three (3)
days following the date on which such Event has been cured by the Company
3. Registration Procedures If and whenever the Company is required by
the provisions hereof to effect the registration of the Registrable Securities
under the Act, the Company will, as expeditiously as possible:
(a) prepare and file with the SEC a registration statement with respect
to such securities and use its best efforts to cause such registration statement
to become and remain effective for the period of the distribution contemplated
thereby (determined as herein provided), and promptly provide to the Purchaser
copies of all filings and SEC letters of comment;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective until the earlier
of: (i) six months after the latest exercise period of the Warrant; (ii) four
years after the Closing Date, or (iii) the date on which the Purchaser has
disposed of all of the Registrable Securities covered by such registration
statement in accordance with the Purchaser`s intended method of disposition set
forth in such registration statement for such period;
(c) furnish to the Purchaser such number of copies of the registration
statement and the prospectus included therein (including each preliminary
prospectus) as the Purchaser reasonably may request to facilitate the public
sale or disposition of the securities covered by such registration statement;
(d) use its commercially reasonable efforts to register or qualify the
Purchaser`s Registrable Securities covered by such registration statement under
the securities or "blue sky" laws of such jurisdictions as the Purchaser,
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) list the Registrable Securities covered by such registration
statement with any securities exchange on which the Common Stock of the Company
is then listed;
(f) immediately notify the Purchaser at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing; and
(g) make available for inspection by the Purchaser and any attorney,
accountant or other agent retained by the Purchaser, all publicly available,
non-confidential financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company`s officers, directors and
employees to supply all publicly available, non-confidential information
reasonably requested by the attorney, accountant or agent of the Purchaser.
9
4. Registration Expenses. All expenses incurred by the Company in
complying with Sections 2 and 3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees and expenses
(including reasonable counsel fees) incurred in connection with complying with
state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of
transfer agents and registrars, fees of, and disbursements incurred by, one
counsel for the Holders, whose fees shall not exceed $1,000, and costs of
insurance are called "REGISTRATION EXPENSES". All underwriting discounts and
selling commissions applicable to the sale of Registrable Securities, including
any fees and disbursements of any special counsel to the Holders beyond those
included in Registration Expenses, are called "SELLING EXPENSES."
5. Indemnification. (a) In the event of a registration of any
Registrable Securities under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless the Purchaser, and its officers,
directors and each other person, if any, who controls the Purchaser within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which the Purchaser, or such persons may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such Registrable
Securities were registered under the Securities Act pursuant to this Agreement,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Purchaser, and each such person for any reasonable legal or other
expenses incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case if and to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by the Purchaser or any such person in writing
specifically for use in any such document.
(b) In the event of a registration of the Registrable Securities under
the Securities Act pursuant to this Agreement, the Purchaser will indemnify and
hold harmless the Company, and its officers, directors and each other person, if
any, who controls the Company within the meaning of the Securities Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
under which such Registrable Securities were registered under the Securities Act
pursuant to this Agreement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such person for any
reasonable legal or other expenses incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that the Purchaser will be liable in any such case if and
only to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished in writing to
the Company by the Purchaser specifically for use in any such document.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 5(c) and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 5(c) if and to the extent the
10
indemnifying party is prejudiced by such omission. In case any such action shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its election so
to assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 5(c) for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof; if the indemnified party retains its own counsel, then the indemnified
party shall pay all fees, costs and expenses of such counsel, provided, however,
that, if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified parties shall have the
right to select one separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the reasonable
expenses and fees of such separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the Securities Act in any case in which either
(i) the Purchaser, or any controlling person of the Purchaser, makes a claim for
indemnification pursuant to this Section 5(c) but it 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 of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 5(c) provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Purchaser or controlling person of the Purchaser in circumstances for which
indemnification is provided under this Section 5(c); then, and in each such
case, the Company and the Purchaser will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Purchaser is responsible only for
the portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Purchaser will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 10(f) of the Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
6. Representations and Warranties
The Common Stock of the Company is registered pursuant to Section 12(b)
or 12(g) of the Exchange Act and the Company has timely filed all proxy
statements, reports, schedules, forms, statements and other documents required
to be filed by it under the Exchange Act. The Company has filed (i) its Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 and (ii) its
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2002,
June 30, 2002 and September 30, 2002 (collectively, the "SEC Reports"). The
Company is eligible to file with the Commission a registration statement on Form
S-3 pursuant to Instruction I.B.3 thereof. Each SEC Report was, at the time of
its filing, in substantial compliance with the requirements of its respective
form and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
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. The
financial statements of the Company included in the SEC Reports comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with
11
generally accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and the cash flows of the Company and its
subsidiaries, on a consolidated basis, as of, and for, the periods presented in
each such SEC Report.
The Company Common Stock is listed for trading on the Nasdaq SmallCap
Market and satisfies all requirements for the continuation of such listing. The
Company has not received any notice that its Common Stock will be delisted from
the Nasdaq SmallCap Market or that the Common Stock does not meet all
requirements for the continuation of such listing. Neither the Company, nor any
of its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the Shares
pursuant to this Agreement to be integrated with prior offerings by the Company
for purposes of the Securities Act which would prevent the Company from selling
the Common Stock pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions. Nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings.
The Registrable Securities are restricted securities under the
Securities Act as of the date of this Agreement. The Company will not issue any
stop transfer order or other order impeding the sale and delivery of any of the
Registrable Securities at such time as the Registrable Securities are registered
for public sale or an exemption from registration is available, except as
required by federal or state securities laws or except for restrictions agreed
upon in writing by the Company and the Purchaser.
The Company understands the nature of the Registrable Securities issued
to the Purchaser and recognizes that the Registerable Securities may have a
potential dilutive effect. The Company specifically acknowledges that its
obligation to issue the Registrable Securities is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company. Except for agreements made in
the ordinary course of business, there is no agreement that has not been filed
with the SEC as an exhibit to a registration statement or to a form required to
be filed by the Company under the Securities Exchange Act the breach of which
could have a material and adverse effect on the Company and its subsidiaries, or
would prohibit or otherwise interfere with the ability of the Company to enter
into and perform any of its obligations under this Agreement in any material
respect.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement.
(b) No Piggyback on Registrations. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right for inclusion of shares in the
Registration Statement to any of its security holders. The Company has not
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person (other than to the Purchaser)
which has not been fully satisfied.
12
(c) Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.
(d) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of a Discontinuation Event, such Holder will forthwith
discontinue disposition of such Registrable Securities under the Registration
Statement until such Holder`s receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement or until it is advised in
writing (the "Advice") by the Company that the use of the applicable Prospectus
may be resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph. For
purposes of this Section 7(d), a "Discontinuation Event" shall mean (i) when a
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (ii) when the Commission
notifies the Company whether there will be a "review" of such Registration
Statement and whenever the Commission comments in writing on such Registration
Statement (the Company shall provide true and complete copies thereof and all
written responses thereto to each of the Holders); (iii) any request by the
Commission or any other Federal or state governmental authority for amendments
or supplements to the Registration Statement or Prospectus or for additional
information; (iv) the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement covering any or all of the
Registrable Securities or the initiation of any Proceedings for that purpose;
(v) the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; and (vi) the occurrence of any
event or passage of time that makes the financial statements included in the
Registration Statement ineligible for inclusion therein or any statement made in
the Registration Statement or Prospectus or any document incorporated or deemed
to be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any 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.
(e) Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered, subject to customary underwriter cutbacks
applicable to all holders of registration rights and subject to the consent of
any selling stockholder(s) under such registration statement.
(f) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and the
Holders of the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of certain Holders and that
does not directly or indirectly affect the rights of other Holders
13
may be given by Holders of at least a majority of the Registrable Securities to
which such waiver or consent relates; provided, however, that the provisions of
this sentence may not be amended, modified, or supplemented except in accordance
with the provisions of the immediately preceding sentence.
(G) NOTICES. ANY NOTICE OR REQUEST HEREUNDER MAY BE GIVEN TO THE
COMPANY OR PURCHASER AT THE RESPECTIVE ADDRESSES SET FORTH BELOW OR AS MAY
HEREAFTER BE SPECIFIED IN A NOTICE DESIGNATED AS A CHANGE OF ADDRESS UNDER THIS
SECTION 7(G). ANY NOTICE OR REQUEST HEREUNDER SHALL BE GIVEN BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, HAND DELIVERY, OVERNIGHT MAIL OR
TELECOPY (CONFIRMED BY MAIL). NOTICES AND REQUESTS SHALL BE, IN THE CASE OF
THOSE BY HAND DELIVERY, DEEMED TO HAVE BEEN GIVEN WHEN DELIVERED TO ANY OFFICER
OF THE PARTY TO WHOM IT IS ADDRESSED, IN THE CASE OF THOSE BY MAIL OR OVERNIGHT
MAIL, DEEMED TO HAVE BEEN GIVEN WHEN DEPOSITED IN THE MAIL OR WITH THE OVERNIGHT
MAIL CARRIER, AND, IN THE CASE OF A TELECOPY, WHEN CONFIRMED. THE ADDRESS FOR
SUCH NOTICES AND COMMUNICATIONS SHALL BE AS FOLLOWS:
If to the Company: Data Systems & Software Inc.
200 Route 17 South
Mahwah, New Jersey 07430
Attention: Mr. George Morgenstern
Facsimile: 201-529-3163
With a copy to:
Sheldon Krause, Esq.
Ehrenreich Eilenberg & Krause LLP
11 East 44th Street
New York, New York 10017
Facsimile: 212-986-2399
If to a Purchaser: To the address set forth under such
Purchaser name on the signature pages hereto.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the stock transfer books
of the Company or such other address as may be designated in writing hereafter,
in the same manner, by such Person.
(h) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Note.
(i) Execution and Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or
14
on whose behalf such signature is executed) the same with the same force and
effect as if such facsimile signature were the original thereof.
(j) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement shall be commenced
exclusively in the state and federal courts sitting in the City of New York,
Borough of Manhattan. Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, Borough of Manhattan for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such Proceeding is improper. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
for its reasonable attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
(k) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
15
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
DATA SYSTEMS & SOFTWARE INC.
By:
----------------------------------------
Name: George Morgenstern
Title: President and Chief Executive Officer
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES OF PURCHASER TO FOLLOW]
16
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
LAURUS MASTER FUND, LTD.
By:
----------------------------------------
Name:
Title:
Address for Notice:
c/o Laurus Capital Management, LLC
152 West 57th Street, 4th Floor
New York, New York 10019
Attention: David Grin
17
Annex A
Plan of Distribution
On and after June 5, 2003, the selling stockholder may, from time to
time, sell any or all of its shares of common stock on any stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. The selling
stockholder may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits Purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholder may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholder may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholder hase
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
18
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY JURISDICTION
- ---------- ------------
Comverge, Inc. (formerly known as Comverge Technologies, Inc.) ................. Delaware
Cornell Design Company Inc. .................................................... New Jersey
Databit Inc. ................................................................... Delaware
dsIT Technologies Ltd. (formally known as Decision Systems Israel Ltd.) ........ Israel
International Data Operations, Inc. (d/b/a Databit Solutions) .................. Delaware
Comverge Ltd. .................................................................. Israel
StarTech Ltd. ................................................................. Delaware
EXHIBITS 23.1
Independent Auditors` Consent
The Board of Directors and Shareholders of
Data Systems & Software Inc.:
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 33-88442, 33-99196, 33-94974, 333-65799, 333-36159, 333-82418 and
333-82416) and on Form S-3 (File Nos. 333-90017, 333-76614, 333-92174 and
333-102334) of Data Systems & Software Inc. of our report dated March 7, 2003,
except as to Notes 1(b) and 19, which are as of April 10, 2003, with respect to
the consolidated balance sheets of Data Systems & Software Inc. and subsidiaries
as of December 31, 2001 and 2002, and the related consolidated statements of
operations, changes in shareholders` equity and cash flows for each of the years
in the three-year period ended December 31, 2002, which report appears in the
December 31, 2002 annual report on Form 10-K of Data Systems & Software Inc. and
Subsidiaries. Our report refers to changes in accounting for purchase method
business combinations completed after June 30, 2001 and for goodwill and
intangible assets beginning January 1, 2002, and for reclassification of
extraordinary loss on early redemption of debt.
/s/KPMG LLP
Short Hills, New Jersey
April 14, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Data Systems & Software Inc. (the
"Company") on Form 10-K for the year ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, George
Morgenstern, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/George Morgenstern
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George Morgenstern
Chief Executive Officer
April 14, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Data Systems & Software Inc. (the
"Company") on Form 10-K for the year ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Yacov
Kaufman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/Yacov Kaufman
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Yacov Kaufman
Chief Financial Officer
April 14, 2002