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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
VERMONT 03-0222230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 SHELBURNE ROAD
SOUTH BURLINGTON, VT 05403
(Address of principal executive offices)
Registrant's telephone number, including area code: (802-862-1022)
Indicate by check mark whether the registrant 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).
Yes X No
---- ----
Indicate by check mark whether the registrant has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the registrant's common stock
as of November 6, 1998 was 26,492,555.
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[Exhibit index begins on Page 21]
IDX SYSTEMS CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ----
ITEM 1. Interim Financial Statements:
a) Condensed consolidated balance sheets as of
September 30, 1998 and December 31, 1997 (unaudited)............3
b) Condensed consolidated statements of operations and
comprehensive income (loss) for the three and nine months ended
September 30, 1998 and 1997 (unaudited) ........................4
c) Condensed consolidated statements of cash flows for the
nine months ended September 30, 1998 and 1997 (unaudited)......5
d) Notes to condensed consolidated financial statements............6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations...............................8
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings.................................................23
ITEM 2. Changes in securities.............................................23
ITEM 3. Defaults upon senior securities...................................23
ITEM 4. Submission of matters to a vote of security holders...............23
ITEM 5. Other information.................................................23
ITEM 6. Exhibits and reports on Form 8-K..................................23
SIGNATURES.................................................................24
EXHIBIT INDEX..............................................................25
Page 2 of 25
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
1998 1997
---- ----
ASSETS
Cash and securities $ 128,463 $ 115,887
Accounts receivable, net 80,873 66,587
Other current assets 12,414 14,719
--------- ---------
Total current assets 221,750 197,193
Property and equipment, net 30,559 28,277
Capitalized software costs, net 738 368
Other assets 15,325 11,480
--------- ---------
46,622 40,125
--------- ---------
Total assets $ 268,372 $ 237,318
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 34,266 $ 34,749
Deferred revenue 17,884 21,538
--------- ---------
Total current liabilities 52,150 56,287
Long-term debt - 2,508
Minority interest 8,720 1,919
Stockholders' equity 207,502 176,604
--------- ---------
216,222 181,031
--------- ---------
Total liabilities and stockholders'
equity $ 268,372 $ 237,318
========= =========
See Notes to the Condensed Consolidated Financial Statements
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
Page 3 of 25
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Systems sales $46,678 $34,703 $129,363 $ 98,029
Maintenance and service fees 36,680 29,895 106,096 83,560
------- ------- -------- --------
Total revenues 83,358 64,598 235,459 181,589
OPERATING EXPENSES
Cost of sales 42,404 33,612 120,060 94,637
Selling, general and
administrative 16,038 12,541 44,737 37,847
Research and development 12,420 9,271 34,498 26,356
Merger and related charges - 20,030 3,201 22,320
------- ------- ------- --------
Total operating expenses 70,862 75,454 202,496 181,160
Operating income (loss) 12,496 (10,856) 32,963 429
Interest and other income, net (1,619) (1,480 (4,000) (4,154)
------- ------- ------- --------
Income (loss) before income taxes 14,115 (9,376) 36,963 4,583
Income tax provision (benefit) 5,650 (2,021) 15,990 3,566
------- ------- ------- --------
Net income (loss) $ 8,465 $(7,355) $20,973 $ 1,017
======= ======== ======= =======
Unrealized gain on securities
available-for-sale 4 45 46 68
------- ------- ------- -------
Comprehensive income (loss) $ 8,469 $(7,310) $21,019 $ 1,085
======= ======== ======= =======
Basic earnings (loss) per share $ 0.32 $ (0.29) $ 0.80 $ 0.04
======= ======== ======= =======
Basic weighted average shares
outstanding 26,427 25,735 26,292 25,607
======= ======= ======= =======
Diluted earnings (loss) per
share $ 0.31 $ (0.29) $ 0.77 $ 0.04
======= ======== ======= =======
Diluted weighted average shares
outstanding 27,279 25,735 27,155 26,407
======= ======= ======= =======
See Notes to the Condensed Consolidated Financial Statements
Page 4 of 25
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $20,045 $19,023
INVESTING ACTIVITIES
Purchase of property and equipment, net (10,239) (10,524)
Purchase of securities available-for-sale, net (83,216) (76,111)
Sale of securities available-for-sale 75,133 76,226
Purchase of certain net assets (7,545) (4,933)
-------- --------
Net cash used in investing activities (25,867) (15,342)
FINANCING ACTIVITIES
Proceeds from sale of common stock 9,879 4,073
Increase in minority interest 6,500
Principal repayments of long-term debt (6,109) (151)
-------- --------
Net cash provided by financing activities 10,270 3,922
-------- --------
Decrease in cash and cash equivalents 4,448 7,603
Cash and cash equivalents at beginning of period 14,061 12,326
-------- -------
Cash and cash equivalents at end of period $18,509 $19,929
======== =======
See Notes to the Condensed Consolidated Financial Statements
Page 5 of 25
PART I. FINANCIAL INFORMATION
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The interim unaudited consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and in accordance with generally accepted accounting principles.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed. In the opinion of
management, all necessary adjustments have been made to provide a fair
presentation. The operating results for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes included in the Company's
latest annual report on Form 10-K.
Note 2 - New Accounting Standards
In October, 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, Software Revenue Recognition, revising
certain aspects of SOP 91-1, which the Company adopted on January 1, 1998. SOP
97-2 did not materially affect the Company's revenue recognition policies with
respect to software license fees which are based upon vendor-specific objective
information and relate principally to its proprietary systems software which
generally requires no significant production, modification or customization.
License revenue, accordingly, is deferred and recognized as customer payments
become due based upon specified milestones and due dates including delivery,
installation and final systems acceptance.
Note 3 - Business Acquisitions
On February 23, 1998, the Company recorded charges of $3.2 million related to
the acquisition of contract management system technology from Trego Systems,
Inc. for cash of $4.0 million. The acquisition was accounted for under the
purchase method. The charges were expensed as in-process research and
development in connection with the Company's development of a healthcare
contract management system.
On September 11, 1998, the Company entered into an agreement to acquire EDiX
Corporation ("EDiX"), a provider of medical transcription outsourcing services
to hospitals and large physician group practices. The acquisition, which has
been approved by the Boards of Directors of each company, is subject to
regulatory and shareholder approval. The terms of the agreement provide for the
shareholders and optionholders of EDiX to receive between approximately 400,000
and 480,000 shares of IDX common stock, based on an average closing price per
share of IDX stock, subject to a downward adjustment under certain conditions.
Based on the closing price of the IDX common stock on September 10, 1998, the
transaction is valued at approximately $20.0 million, plus the assumption of
EDiX debt. In addition, IDX has agreed to loan EDiX up to $5.0 million, subject
to certain conditions, to provide working capital to EDiX prior to the closing.
The transaction is not expected to dilute earnings per share in 1999 compared to
1998. After the transaction is complete, it is anticipated that the EDiX
organization will operate as EDiX, a division of IDX Systems Corporation.
Page 6 of 25
PART I. FINANCIAL INFORMATION
Note 4 - Income Taxes
Income taxes for the quarter ended September 30, 1998 were provided at 40% which
approximates the Company's statutory tax rate. The provision for income taxes
for the nine months ended September 30, 1998 was provided at approximately 43%
which is more than the Company's historical statutory rate of 40%. This higher
rate is due to a portion of the charges incurred in the first quarter ended
March 31, 1998 related to the acquisition of Trego Systems, Inc. which are
non-deductible for income tax purposes.
Note 5 - Earnings Per Share Information
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which the Company adopted on December 31, 1997. At that
time, the Company changed the method used to compute earnings per share and
restated all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options is excluded. The
following sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income (loss) $8,465 $(7,355) $ 20,973 $1,017
------ -------- -------- ------
Numerator for basic and diluted
earnings (loss) per share $8,465 $(7,355) $ 20,973 $1,017
Denominator:
Denominator for basic earnings
(loss) per share--
weighted-average shares 26,427 25,735 26,292 25,607
Effect of employee stock options 852 - 863 800
------ ------- -------- -------
Denominator for diluted earnings
(loss) per sha 27,279 25,735 27,155 26,407
------ ------- ------- -------
Basic earnings (loss) per share $ 0.32 $ (0.29) $ 0.80 $ 0.04
====== ======== ======= =======
Diluted earnings (loss) per share $ 0.31 $ (0.29) $ 0.77 $ 0.04
====== ======== ======= =======
Note 6 - Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
Page 7 of 25
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company reported net income of $8.5 million, or $0.31 per share, for the
third quarter of 1998 as compared to net income, excluding nonrecurring expenses
for costs associated with the merger of PHAMIS, Inc., of $6.4 million or $0.24
per share, for the third quarter of 1997. Including the merger and related
charges, the net loss for the third quarter ended September 30, 1997 was $7.4
million, or $(0.29) per share. For the nine months ended September 30, 1998 the
Company reported net income of $21.0 million, or $0.77 per share, as compared to
net income of $1.0 million, or $0.04 per share, for the comparable period in
1997. Net income, excluding nonrecurring expenses, for the nine month period
ended September 30, 1998 was $24.1 million, or $0.89 per share as compared to
net income, exclusive of nonrecurring expenses, of $16.1 million, or $0.61 per
share, for the nine months ended September 30, 1997.
This Management's Discussion and Analysis of Financial Conditions and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. Words such as
"believes," "may," "plans," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. In addition, the disclosures in
the section on page 14 under the caption "Factors Affecting Future Results"
consists principally of a discussion of risks which may affect future results
and, are thus, in their entirety forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUES
The Company's total revenues increased to $83.4 million during the three months
ended September 30, 1998 from $64.6 million in the corresponding period in 1997,
an increase of $18.8 million or 29.0%. Revenues from systems sales increased to
$46.7 million during the three months ended September 30, 1998 (56.0% of total
revenues) from $34.7 million (53.7% of total revenues) in the corresponding
period in 1997, an increase of $12.0 million or 34.5%. The increase was
primarily due to an increase in installations of certain of the Company's
IDXtend, Radiology and GPMS/Zanzibar systems. Revenues from maintenance and
service fees increased to $36.7 million during the three months ended September
30, 1998 (44.0% of total revenues) from $29.9 million (46.3% of total revenues)
in the corresponding period in 1997, an increase of
Page 8 of 25
PART I. FINANCIAL INFORMATION
$6.8 million or 22.7%. The increase in revenues from maintenance and service
fees was due principally to additional maintenance revenues resulting from the
continued growth in the Company's installed client base.
COST OF SALES
The cost of sales and services increased to $42.4 million during the three
months ended September 30, 1998 from $33.6 million in the corresponding period
in 1997, an increase of $8.8 million or 26.2%. The gross profit margin on
systems sales and services increased to 49.1% during the three months ended
September 30, 1998 from 48.0% in the corresponding period in 1997. The increase
in gross profit was primarily due to increased installations of the Company's
IDXtend, Radiology and GPMS/Zanzibar systems which typically include a greater
percentage of software and less services than installations of the Company's
earlier systems sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $16.0 million during
the three months ended September 30, 1998 from $12.6 million in the
corresponding period in 1997, an increase of $3.4 million or 27.9%. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 19.2% during the three months ended September 30, 1998 from 19.4%
in 1997. The increase in total selling, general and administrative expenses
during the three months ended September 30, 1998 was principally due to an
increase in the Company's sales and marketing staff which management believes is
necessary to support the continued growth of the Company.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $12.5 million during the three
months ended September 30, 1998 from $9.3 million in the corresponding period in
1997, an increase of $3.2 million or 34.0%. The increase is attributed to an
increase in personnel expenses and outside consultants to support the
development of additional products for the Company. As a percentage of total
revenues, research and development expenses increased to 14.9% during the three
months ended September 30, 1998 from 14.4% for the three months ended September
30, 1997. Software development costs incurred subsequent to the establishment of
technological feasibility until general release of the related products are
capitalized. Historically costs incurred during beta site testing have not been
material. Although the Company presently expects costs to complete beta site
testing in the future to be insignificant, as the Company develops products to
operate using other technologies as well as more comprehensive clinical systems,
the time and effort required to complete beta site testing may be significantly
more extensive. Consequently, capitalized software development costs may become
material in future reporting periods.
MERGER AND RELATED COSTS
During the third quarter of 1997, the Company recorded charges of $20.0 million
related to the merger with PHAMIS. The charges were comprised of transaction
costs of $5.1 million, write-offs and adjustments of $7.4 million of long-lived
assets, principally capitalized software development costs and equipment,
attributable to the elimination of overlapping products and operations, employee
termination and related costs of $2.7 million, and other merger related costs of
$4.8 million, principally related to integration costs incurred during the year
and the termination of leases and other contractual obligations.
Page 9 of 25
PART I. FINANCIAL INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
The Company's total revenues increased to $235.5 million during the nine months
ended September 30, 1998 from $181.6 million in the corresponding period in
1997, an increase of $53.9 million or 29.7%. Revenues from systems sales
increased to $129.4 million during the nine months ended September 30, 1998
(54.9% of total revenues) from $98.0 million (54.0% of total revenues) in the
corresponding period in 1997, an increase of $31.4 million or 32.0%. The
increase was primarily due to an increase in installations of certain of the
Company's IDXtend, Radiology and GPMS/Zanzibar systems. Revenues from
maintenance and service fees increased to $106.1 million during the nine months
ended September 30, 1998 (45.1% of total revenues) from $83.6 million (46.0% of
total revenues) in the corresponding period in 1997, an increase of $22.5
million or 27.0%. The increase in revenues from maintenance and service fees was
due principally to additional maintenance revenues resulting from the continued
growth in the Company's installed client base.
COST OF SALES
The cost of sales and services increased to $120.1 million during the nine
months ended September 30, 1998 from $94.6 million in the corresponding period
in 1997, an increase of $25.5 million or 26.9%. The gross profit margin on
systems sales and services increased to 49.0% during the nine months ended
September 30, 1998 from 47.9% in the corresponding period in 1997. The increase
in gross profit was primarily due to increased installations of the Company's
IDXtend, Radiology and GPMS/Zanzibar systems which typically include a greater
percentage of software and less services than installations of the Company's
earlier systems sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $44.7 million during
the nine months ended September 30, 1998 from $37.8 million in the corresponding
period in 1997, an increase of $6.9 million or 18.2%. As a percentage of total
revenues, selling, general and administrative expenses decreased to 19.0% during
the nine months ended September 30, 1998 from 20.8% in the corresponding period
in 1997. The increase in total selling, general and administrative expenses
during the nine months ended September 30, 1998 was principally due to an
increase in the Company's sales and marketing staff which management believes is
necessary to support the continued growth of the Company.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $34.5 million during the nine
months ended September 30, 1998 from $26.4 million in the corresponding period
in 1997, an increase of $8.1 million or 30.9%. The increase is attributed to an
increase in personnel expenses and outside consultants to support the
development of additional products for the Company. As a percentage of total
revenues, research and development expenses increased to 14.7% during the nine
months ended September 30, 1998 from 14.5% in the corresponding period in 1997.
Software development costs incurred subsequent to the establishment of
technological feasibility until general release of the related products are
capitalized.
Page 10 of 25
PART I. FINANCIAL INFORMATION
MERGER AND RELATED COSTS
During the third quarter of 1997, the Company recorded charges of $20.0 million
related to the merger with PHAMIS. The charges were comprised of transaction
costs of $5.1 million, write-offs and adjustments of $7.4 million of long-lived
assets, principally capitalized software development costs and equipment,
attributable to the elimination of overlapping products and operations, employee
termination and related costs of $2.7 million, and other merger related costs of
$4.8 million, principally related to integration costs incurred during the year
and the termination of leases and other contractual obligations.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On February 23, 1998, the Company recorded charges of $3.2 million related to
the acquisition of contract management technology from Trego Systems, Inc. for
cash of $4.0 million. The acquisition was accounted for under the purchase
method. The charges were expensed as in-process research and development in
connection with the Company's development of a healthcare contract management
system.
On February 26, 1997, the Company recorded charges of $2.3 million related to
the acquisition of certain data model technology from Medaphis Healthcare
Information Technology Company for cash of $2.5 million. The acquisition was
accounted for under the purchase method. The charges were expensed as in-process
research and development in connection with the Company's development of a
healthcare data model.
SIGNIFICANT AGREEMENT
On September 11, 1998, the Company entered into an agreement to acquire EDiX
Corporation ("EDiX"), a provider of medical transcription outsourcing services
to hospitals and large physician group practices. The acquisition, which has
been approved by the Boards of Directors of each company, is subject to
regulatory and shareholder approval. The terms of the agreement provide for the
shareholders and optionholders of EDiX to receive between approximately 400,000
and 480,000 shares of IDX common stock, based on an average closing price per
share of IDX stock, subject to a downward adjustment under certain conditions.
Based on the closing price of the IDX common stock on September 10, 1998, the
transaction is valued at approximately $20.0 million, plus the assumption of
EDiX debt. In addition, IDX has agreed to loan EDiX up to $5.0 million, subject
to certain conditions, to provide working capital to EDiX prior to the closing.
The transaction is not expected to dilute earnings per share in 1999 compared to
1998. After the transaction is complete, it is anticipated that the EDiX
organization will operate as EDiX, a division of IDX Systems Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations, except for
real estate owned by certain partnerships and trusts financed through industrial
development bonds. The proceeds from its initial public offering in 1995 were
(i) distributed to stockholders of the Company in connection with the Company's
prior status as an S corporation under the Internal Revenue Code of 1986, as
amended, and (ii) used for general corporate purposes, including working capital
purposes, payment of current expenses and strategic transactions, including
acquisitions of businesses, products and technologies.
Page 11 of 25
PART I. FINANCIAL INFORMATION
Cash flows from operations are principally comprised of net income and
depreciation and are primarily affected by the net effect of the change in
accounts receivable, accounts payable and accrued expenses. Due to the nature of
the Company's business, accounts receivable, deferred revenue and accounts
payable fluctuate considerably due to, among other things, the length of the
sales cycle and installation efforts which are dependent upon the size of the
transaction, the changing business plans of the customer, the effectiveness of
customers' management and general economic conditions. In general accounts
receivable from customers have been collected consistently within 90 days.
Cash flows related to investing activities have principally been related to the
purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. The Company expects
these activities to continue. Investing activities may also include purchases of
interests in and acquisitions of complementary products, technologies and
businesses. There can be no assurance that the Company will be able to
successfully complete any such purchases or acquisitions in the future.
Cash flows from financing activities historically relate to purchases of common
stock through the exercise of employee stock options and in connection with the
employee stock purchase plan. During 1998 other financing activities related to
the recapitalization of the real estate affiliate from debt to equity.
Cash, cash equivalents and marketable securities at September 30, 1998 were
$128.5 million, an increase from the December 31, 1997 balance of $115.9
million. The Company has a revolving line of credit with a bank allowing the
Company to borrow up to $5.0 million bearing interest at the prime rate. There
were no borrowings as of September 30, 1998 or 1997.
The Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements dictate. The Company's operating
lease commitments consist primarily of office leasing for the Company's
operating facilities. The Company plans to continue increasing the number of its
professional staff during 1998 to meet anticipated sales volume and to support
research and development efforts. To the extent necessary to support increases
in staffing, the Company intends to obtain additional office space.
The Company believes that current operating funds will be sufficient to finance
its operating requirements at least through the next twelve months. To date,
inflation has not had a material impact on the Company's revenues or income.
INCOME TAXES
Income taxes for the quarter ended September 30, 1998 were provided at 40% which
approximates the Company's statutory tax rate. The provision for income taxes
for the nine months ended September 30, 1998 was provided at approximately 43%
which is more than the Company's historical statutory rate of 40%. This higher
rate is due to a portion of the charges incurred in the first quarter ended
March 31, 1998 related to the acquisition of Trego Systems, Inc. which are
non-deductible for income tax purposes. The Company anticipates an effective tax
rate of approximately 43% for the year ending December 31, 1998.
Page 12 of 25
PART I. FINANCIAL INFORMATION
NEW ACCOUNTING STANDARDS
In October, 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, Software Revenue Recognition, revising
certain aspects of SOP 91-1, which the Company adopted on January 1, 1998. SOP
97-2 did not materially affect the Company's revenue recognition policies with
respect to software license fees which are based upon vendor-specific objective
information and relate principally to its proprietary systems software which
generally requires no significant production, modification or customization.
License revenue, accordingly, is deferred and recognized as customer payments
become due based upon specified milestones and due dates including delivery,
installation and final systems acceptance.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and
No. 131, "Reporting Comprehensive Income" and "Disclosures About Segments of an
Enterprise and Related Information," which the Company adopted on January 1,
1998. The adoption of these new accounting standards did not have a material
impact on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, which the Company adopted on December 31, 1997. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is not materially different
from the previously reported fully diluted earnings per share.
YEAR 2000
Software applications that use only two digits to identify a year in the date
field may fail or create errors in the year 2000 ("Year 2000 Issues").
The Company believes that Year 2000 Issues will not pose significant operational
problems for the Company, and the Company has taken significant steps to
address Year 2000 Issues.
The Company's internally-used computer equipment, software and devices with
embedded technology--including both information systems and non-information
systems (together, "Internal Use Systems")--may fail to operate properly or as
expected due to Year 2000 Issues. This could result in a system failure or
miscalculations causing disruption of the Company's operations, including among
other things, a temporary inability to process transactions, send invoices,
conduct communications, or engage in similar normal business activities. In
addition, computer software products sold, marketed, and supported by the
Company ("Company Software Products") and the products of third parties that are
distributed by the Company or others and are necessary for operation of Company
Software Products ("Third Party Products"), may fail to operate properly or as
expected due to Year 2000 Issues. This could result in system failures or
miscalculations causing disruption of customers' operations, including among
other things, a temporary inability to process transactions, send invoices,
conduct communications, treat patients, or engage in similar normal business
activities. Further, products and services used by the Company's customers, but
not supplied by the Company, could fail to operate properly or as expected due
to Year 2000 Issues. Customers' efforts to plan for such events could result in
the deferral by customers of current installations of and plans to purchase
Company Software Products. The Company has undertaken various initiatives
intended to address Year 2000 Issues with respect to Internal Use Systems,
Company Software Products, and Third Party Products. The Company has established
working groups whose primary functions are to (i) develop and implement the
Company's definition of Year 2000 readiness, (ii) assess Internal Use Systems,
Page 13 of 25
PART I. FINANCIAL INFORMATION
Third Party Products and Company Software Products for Year 2000 Issues, (iii)
monitor development, testing and remediation efforts with respect to Company
Software Products, (iv) monitor testing of Company Software Products and Third
Party Products, (v) review customer preparations to implement Year 2000 releases
of Company Software Products, (vi) monitor and coordinate the Company's
deployment plans and results with respect to Year 2000 releases of Company
Software Products, (vii) monitor and coordinate contingency plans with respect
to Internal Use Systems, Company Software Products and Third Party Products, and
(viii) provide centralization, accuracy and consistency of the Company's
communications regarding Year 2000 Issues.
The Company has engaged independent experts to assist in all of its efforts with
respect to Year 2000 Issues. The Company has not employed such experts to
independently evaluate and validate such efforts as of this time.
Based upon the Company's assessment efforts to date, the Company believes that
certain Internal Use Systems will require replacement or modification. In
addition, in the ordinary course of replacing and upgrading Internal Use
Systems, the Company attempts to obtain replacements that it believes will not
fail or operate unexpectedly as a result of Year 2000 Issues or be Year 2000
compliant. The Company is currently engaged in but has not completed contingency
planning to address personnel, resource and technical Year 2000 Issues relating
to foreseeable scenarios that develop despite its current and planned
remediation efforts. The Company expects that its assessment, remediation,
testing, deployment, and contingency planning efforts with respect to Internal
Use Systems will be completed by December 31, 1998 and that actual testing,
remediation and deployment will be completed by September 30, 1999. The Company
estimates that as of September 30, 1998 it had completed 40% of its efforts in
connection with Year 2000 Issues relating to its Internal Use Systems. The
projects comprising the remaining 60% of such efforts are in process and are
expected to be substantially completed on or about September 30, 1999.
The Company has mailed letters or otherwise communicated with many of its
significant vendors of Internal Use Systems and related service providers to
determine the extent to which Year 2000 Issues affect products and services of
such vendors and providers. As of September 30, 1998, the Company had received
responses from approximately 30% of such third parties, and 75% of these
companies have provided written assurances that they expect to address all their
significant Year 2000 Issues on a timely basis. The Company is engaged in but
has not completed efforts to communicate with other vendors and service
providers involved in its Internal Use Systems to request more responses to its
communications and to verify the responses received. Due to uncertainties
associated with vendors and service providers, the Company is unable to predict
whether Year 2000 Issues involved in its Internal Use Systems will have a
material adverse effect on the Company's business, results of operations, or
financial condition, despite the Company's current assessment to the contrary.
Page 14 of 25
PART I. FINANCIAL INFORMATION
The Company works closely with vendors of Third Party Products and has
communicated with them to determine the extent to which their products and
services are or will be Year 2000 compliant. In addition, the Company is testing
or plans to test Year 2000 releases of certain Third Party Products. Based upon
its current assessment, the Company believes it has received adequate assurances
that Third Party Product vendors expect to address all their significant Year
2000 Issues on a timely basis. Due to uncertainties associated with Third Party
Product vendors, the Company is unable to predict whether a material adverse
effect on business, results of operations, or financial condition may result
from Year 2000 Issues related to Third Party Products, despite the Company's
current assessment to the contrary.
The Company began development of Year 2000 versions of some Company Software
Products in 1997 and continues to progress through development cycles with
respect to some Company Software Products. The Company began deploying Year 2000
releases of Company Software Products in 1998 and expects to complete deployment
of such releases during the second half of 1999. The Company continues to test
and monitor performance of Year 2000 releases of Company Software Products in
customer environments. The Company expects to deliver and deploy maintenance
releases of Company Software Products in the ordinary course of business to
remediate any Year 2000 Issues as identified during and after deployment of Year
2000 releases of Company Software Products. Based on the Company's assessment,
the Company believes continuing efforts will be required to assist customers in
deploying and testing Year 2000 releases of Company Software Products in their
unique environments. The Company expects an increase in service and support
effort levels as the Year 2000 approaches.
The Company develops, markets and supports many different products, and the
amount of effort applied with respect to individual products varies from product
to product. The Company estimates that as of October 31, 1998 it had completed
approximately 80% of the development efforts relating to Year 2000 versions of
all of the Company Software Products. The projects comprising the remaining 20%
of these efforts are in process and expected to be substantially completed in
the first half of 1999. The Company estimates that as of October 31, 1998 it had
completed approximately 26% of the deployment efforts relating to Year 2000
versions of all Company Software Products. The projects comprising the remaining
74% of these efforts are in process and are expected to be substantially
completed in the first half of 1999, but the Company expects to continue efforts
to remediate and maintain Year 2000 versions of Company Software Products in
customer environments and to support customers' efforts relating to Year 2000
Issues through the early part of 2000.
The Company is currently engaged in but has not completed contingency planning
to address personnel, resource, technical and communication issues relating to
its service and remediation efforts. The Company expects that its development,
remediation, testing, deployment and contingency planning efforts with respect
to Company Software Products will continue up to and beyond December 31, 1999,
but expects the level of development, testing and deployment will decrease in
the second half of 1999.
Page 15 of 25
PART I. FINANCIAL INFORMATION
The Company has begun, but not yet completed, a comprehensive analysis of the
operational, business and financial problems (including possible loss of
revenue), if any, that would be reasonably likely to result from the impact of
unresolved Year 2000 Issues, including possible (i) failure by the Company and
vendors of Third Party Products to complete efforts to avoid or minimize Year
2000 Issues on a timely basis, (ii) failure of Customers to be ready to or
cooperate in the deployment of Year 2000 versions of Company Software Products
and Third Party Products on a timely basis, and (iii) deferral by customers of
current installations and prospective purchase decisions with respect to Company
Software Products. The Company has not yet completed its contingency plans
relating to Year 2000 scenarios it deems sufficiently probable to merit
contingency planning. The Company currently plans to complete the initial phase
of such analysis and contingency planning by December 31, 1998, with more
detailed planning expected to be completed during the first half of 1999.
The Company believes that the cost of its Year 2000 Issue identification,
assessment, remediation, testing, and contingency planning efforts will be
approximately $19.6 million, of which approximately $6.1 million relates to
Internal Use Systems and $13.5 million relates to Company Software Products.
Because the Company develops, markets, and supports many different products, and
the amount of effort applied with respect to individual products varies from
product to product. All expenditures to fund Year 2000 Issue efforts have been
and will continue to be funded from operating expenditures for fiscal years1997
through early 2000, except for $.7 million, which is expected to be incurred and
capitalized in 1999. As of September 30, 1998, the Company had incurred
approximately $7 million related to its Year 2000 Issue assessment, remediation,
testing, and contingency planning efforts identification, which is approximately
36% of the total projected costs of such efforts. Of the amount of costs
incurred to date, approximately $.9 million relates to Internal Use Systems,
which is approximately 14% of the total of estimated costs for such efforts, and
$6.1 million relates to Company Software Products, which is approximately 45% of
the total of estimated costs for such efforts.
The Company presently believes that Year 2000 Issues will not pose significant
operational problems for the Company. However, unless all material Year 2000
Issues are timely and properly identified, assessed, and remediated, and unless
adequate contingency plans are properly formulated with respect to Year 2000
Issues, the Year 2000 Issue may materially adversely impact the Company's
business, financial condition and results of operations, or adversely affect the
Company's relationships with customers, vendors or others.
The costs, timing and scheduling of deployment and installation of Year 2000
versions of Company Software Products and Third Party Products, as well as the
ability of the Company to assist customers in the installation of Company
Software Products, will depend in part on the readiness, ability and cooperation
of customers and their suppliers. Due to uncertainties associated with
customers' readiness, cooperation and sources of products and services, there
can be no assurance that Year 2000 Issues will not materially adversely effect
the Company's business, results of operations, or financial condition, or
adversely affect the Company's relationships with customers, vendors or others.
Page 16 of 25
PART I. FINANCIAL INFORMATION
Some customers and prospects of the Company operate in complex computing
environments that include products and services not supplied by the Company. The
costs, timing and scheduling by customers of work related to Year 2000 Issues
involving such products and services may cause some customers and prospects to
defer current projects or prospective purchase decisions regarding Company
Software Products. If Year 2000 Issues cause customers and prospects to defer
current projects or prospective purchase decisions, the Company's financial,
business and operational goals may be deferred or may not be realized at all,
with the result that the Company's business, results of operations, or financial
condition could be materially adversely affected. Due to uncertainties
associated with customers and prospects, there can be no assurance that Year
2000 Issues will not materially adversely effect the Company's business, results
of operations, or financial condition or adversely affect the Company's
relationships with customers, vendors or others.
The costs of the Company's Year 2000 identification, assessment, remediation,
testing, deployment and contingency planning efforts, and the dates on which the
Company believes it will complete such efforts, are based upon management's
current best estimates, which were derived using numerous assumptions regarding
future events, including the continued availability of certain resources,
third-party remediation plans, and other factors. There can be no assurance that
these estimates will prove to be accurate, and actual results could differ
materially from those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the availability of
and cost of personnel trained in Year 2000 Issues, the ability to correctly and
effectively identify, assess, remediate, and test all relevant computer codes,
equipment, and embedded technology, and similar uncertainties, the ability of
the Company to timely install and deploy Year 2000 releases of Company Software
Products, a failure of the Company to provide, obtain or make available adequate
resources to assist customers in installing Year 2000 releases of Company
Software Products and Third Party Products. As a result of any of such factors
alone or in combination, the Company may experience an increase in warranty and
other claims. In addition, since there is no uniform definition of "compliance
with Year 2000," and since the Company sells a myriad of different combinations
of products and services under varying contractual terms, the Company is not
able to assess or estimate the possible impact of such possible claims. No
assurance can be given that the aggregate cost of defending and resolving such
claims, if any, will not materially adversely affect the Company's results of
operations. Although some of the Company's agreements with manufacturers and
others from whom it purchases products for resale contain provisions requiring
such parties to indemnify the Company under some circumstances, there can be no
assurance that such indemnification arrangements will cover all of the Company's
liabilities and costs relate to claims by third parties related to Year 2000
Issues.
Page 17 of 25
PART I. FINANCIAL INFORMATION
FACTORS AFFECTING FUTURE RESULTS
The Company's revenues and operating results can vary significantly from quarter
to quarter as a result of a number of factors, including the volume and timing
of systems sales and installations, and length of sales cycles and installation
efforts. The timing of revenues from systems sales is difficult to forecast
because the Company's sales cycle can vary depending upon factors such as the
size of the transaction, the changing business plans of the customer, the
effectiveness of customer's management and general economic conditions. In
addition, because revenue is recognized at various points during the
installation process, the timing of revenue recognition varies considerably
based on a number of factors, including availability of personnel, availability
of the customer's resources and complexity of the needs of the customer's
organization. The Company's initial contact with a potential customer depends in
significant part on the customer's decision to replace, expand, or substantially
modify its existing information systems, or modify or add business processes or
lines of business. How and when to implement, replace, expand or substantially
modify an information system or modify or add business processes or lines of
business, are major decisions for healthcare organizations. Accordingly, the
sales cycle for the Company's systems is typically three to eighteen months or
more from contract execution to completion of installation. During the sales
cycle and the installation cycle, the Company expends substantial time, effort
and funds preparing contract proposals, negotiating the contract and
implementing the system. Because a significant percentage of the Company's
expenses are relatively fixed, a variation in the timing of systems sales and
installation can cause significant variations in operating results from quarter
to quarter. The Company's future operating results may fluctuate as a result of
these and other factors, such as customer purchasing patterns, and the timing of
new product and service introductions and product upgrade releases. The Company
believes that quarterly results of operations will continue to be subject to
significant fluctuations and that its results of operations for any particular
quarter or fiscal year may not be indicative of results of operations for future
periods. There can be no assurance that future period to period fluctuations
will continue and will not have a material adverse effect on the Company's
results of operations, financial condition or business.
The Company is engaged in the business of developing, marketing and supporting
computer software to its customers ("Company Software Products"). The Company
also distributes products necessary for operation of Company Software Products
and such products are sometimes obtained by customers of the Company from other
sources ("Third Party Products"). Software that uses only two digits to identify
a year in the date field may fail or create errors in the year 2000 ("Year 2000
Issues"). The impact of unresolved Year 2000 Issues, including possible (i)
failure by the Company and vendors of Third Party Products to complete efforts
to avoid or minimize Year 2000 Issues on a timely basis, (ii) failure of
Customers to be ready to or cooperate in the deployment of Year 2000 versions of
Company Software Products and Third Party Products on a timely basis, and (iii)
deferral by customers of current installations and prospective purchase
decisions with respect to Company Software Products may materially adversely
impact the Company's business, financial condition and results of operations, or
adversely affect the Company's relationships with customers, vendors or others.
Unless all material Year 2000 Issues involving the company's computer software
products are timely and properly identified, assessed, and remediated, and
unless adequate contingency plans are properly formulated with respect to Year
2000 Issues, the Year 2000 Issue may materially adversely impact the Company's
business, financial condition and results of operations, or adversely affect the
Company's relationships with customers, vendors or others.
Page 18 of 25
PART I. FINANCIAL INFORMATION
The costs, timing and scheduling of deployment and installation of Year 2000
versions of Company Software Products and Third Party Products, as well as the
ability of the Company to assist customers in the installation of Company
Software Products, will depend in part on the readiness, ability and cooperation
of customers and their suppliers. Due to uncertainties associated with
customers' readiness, cooperation and sources of products and services, there
can be no assurance that Year 2000 Issues will not materially adversely effect
the Company's business, results of operations, or financial condition, or
adversely affect the Company's relationships with customers, vendors or others.
Some customers and prospects of the Company operate in complex computing
environments that include products and services not supplied by the Company. The
costs, timing and scheduling by customers of work related to Year 2000 Issues
involving such products and services may cause some customers and prospects to
defer current projects or prospective purchase decisions regarding Company
Software Products. If Year 2000 Issues cause customers and prospects to defer
current projects or prospective purchase decisions, the Company's financial,
business and operational goals may be deferred or may not be realized at all,
with the result that the Company's business, results of operations, or financial
condition could be materially adversely affected. Due to uncertainties
associated with customers and prospects, there can be no assurance that Year
2000 Issues will not materially adversely effect the Company's business, results
of operations, or financial condition or adversely affect the Company's
relationships with customers, vendors or others.
The costs of the Company's Year 2000 identification, assessment, remediation,
testing, deployment and contingency planning efforts, and the dates on which the
Company believes it will complete such efforts, are based upon management's
current best estimates, which were derived using numerous assumptions regarding
future events, including the continued availability of certain resources,
third-party remediation plans, and other factors. There can be no assurance that
these estimates will prove to be accurate, and actual results could differ
materially from those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the availability of
and cost of personnel trained in Year 2000 Issues, the ability to correctly and
effectively identify, assess, remediate, and test all relevant computer codes,
equipment, and embedded technology, and similar uncertainties, the ability of
the Company to timely install and deploy Year 2000 releases of Company Software
Products, a failure of the Company to provide, obtain or make available adequate
resources to assist customers in installing Year 2000 releases of Company
Software Products and Third Party Products. As a result of any of such factors
alone or in combination, the Company may experience an increase in warranty and
other claims. In addition, since there is no uniform definition of "compliance
with Year 2000," and since the Company sells a myriad of different combinations
of products and services under varying contractual terms, the Company is not
able to assess or estimate the possible impact of such possible claims. No
assurance can be given that the aggregate cost of defending and resolving such
claims, if any, will not materially adversely affect the Company's results of
operations. Although some of the Company's agreements with manufacturers and
others from whom it purchases products for resale contain provisions requiring
such parties to indemnify the Company under some circumstances, there can be no
assurance that such indemnification arrangements will cover all of the Company's
liabilities and costs relate to claims by third parties related to Year 2000
Issues.
Page 19 of 25
PART I. FINANCIAL INFORMATION
The Company intends to continue to grow in part through acquisitions of
complementary products, technologies and businesses or alliances with
complementary businesses. The Company's ability to expand successfully through
acquisitions or alliances depends on many factors, including the successful
identification and acquisition of products, technologies or businesses and
management's ability to effectively integrate and operate the acquired or
aligned products, technologies or businesses. There is significant competition
for acquisition and alliance opportunities in the healthcare information systems
industry, which may intensify due to consolidation in the industry, thereby
increasing the costs of capitalizing on such opportunities. The Company competes
for acquisition and alliance opportunities with other companies that have
significantly greater financial and management resources. There can be no
assurance that the Company will be successful in acquiring or aligning with any
complementary products, technologies or businesses; or, if acquired or aligned
with, that the Company will be able to successfully integrate any such products,
technologies or businesses into its current business and operations. The failure
to successfully integrate any significant products, technologies or businesses
could have a material adverse effect on the Company's results of operations,
financial condition or business.
Integrating the operations and management of the Company and PHAMIS has been a
time-consuming process, and will require the dedication of management resources,
which has and may continue to temporarily distract attention from the day-to-day
business of the combined Company. There can be no assurance that this
integration will be completed smoothly or successfully, and the inability of
management to successfully integrate the operations or management of the two
companies could have a material adverse effect on the business, results of
operations or financial condition of the combined Company. As previously
discussed in the section "Merger and Related Costs" the Company has incurred
significant merger and related costs. Additional unanticipated expenses may be
incurred in connection with the continued integration of the business of the
Company and PHAMIS.
The stock market has, from time to time, experienced extreme price and volume
fluctuations, particularly in the high technology and healthcare information
technology sectors, which have often been unrelated to the operating performance
of particular companies. The Company experiences fluctuations in its stock price
related to these general market swings as well as announcements of technological
innovations, new product introductions by the Company or its competitors, market
conditions in the computer software or hardware industries and healthcare reform
measures. These fluctuations could have a significant impact on the future
market price of the Company's Common Stock.
As a developer of information systems, the Company must anticipate and adapt to
evolving industry standards and new technological developments. The market for
the Company's products is characterized by continued and rapid technological
advances in both hardware and software development, requiring ongoing
expenditures for research and development and the timely introduction of new
products and enhancements to existing products. The establishment of standards
is largely a function of user acceptance. Therefore, such standards are subject
to change. The Company's future success will depend in part upon its ability to
enhance its existing products, to respond effectively to technology changes, to
migrate its clients to new technologies, to sell additional products to its
existing client base and to introduce new products and technologies to meet the
evolving needs of its clients in the healthcare information systems market. The
Page 20 of 25
PART I. FINANCIAL INFORMATION
Company is currently devoting significant resources toward the development of
enhancements to its existing products and the migration of existing products to
new hardware and software platforms. There can be no assurance that the Company
will successfully complete the development of these products or this migration
in a timely fashion or that the Company's current or future products will
satisfy the needs of the healthcare information systems market. Further, there
can be no assurance that products or technologies developed by others will not
adversely affect the Company's competitive position or render its products or
technologies noncompetitive or obsolete.
The Company currently derives a significant percentage of its revenues from
sales of financial and administrative healthcare information systems and related
services. As a result, any factor adversely affecting sales of these products
and services could have a material adverse effect on the Company's results of
operations, financial condition or business. Although the Company has
experienced increasing annual sales, revenues associated with existing products
may decline as a result of several factors, including price competition. There
can be no assurance that the Company will continue to be successful in marketing
its current products or any new or enhanced products or maintaining the current
pricing for its existing products.
Certain of the Company's products provide applications that relate to patient
medical histories and treatment plans. Any failure by the Company's products to
provide accurate, secure and timely information could result in product
liability claims against the Company by its clients or their affiliates or
patients. The Company maintains insurance that it believes is adequate to
protect against claims associated with the use of its products, but there can be
no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful claim brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's results of operations, financial condition or business. Even
unsuccessful claims could result in the expenditure of funds in litigation, as
well as diversion of management time and resources. There can be no assurance
that the Company will not be subject to product liability claims, that such
claims will not result in liability in excess of its insurance coverage or that
the Company's insurance will cover such claims or that appropriate insurance
will continue to be available to the Company in the future at commercially
reasonable rates.
The success of the Company is dependent to a significant degree on its key
management, sales and marketing, and technical personnel. The Company believes
that its continued future success will also depend upon its ability to attract,
motivate and retain highly skilled, managerial, sales and marketing, and
technical personnel, including software programmers and systems architects
skilled in the computer languages in which the Company's products operate.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on the
Company's results of operations, financial condition or business. Although the
Company has been successful to date in attracting and retaining skilled
personnel, there can be no assurance that the Company will continue to be
successful in attracting and retaining the personnel it requires to successfully
develop new and enhanced products and to continue to grow and operate
profitably.
Page 21 of 25
PART I. FINANCIAL INFORMATION
The healthcare industry in the United States is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of healthcare organizations. The Company's products are designed to
function within the structure of the healthcare financing and reimbursement
system currently being used in the United States. During the past several years,
the healthcare industry has been subject to increasing levels of governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. From time to time, certain proposals to reform the healthcare
system have been considered by Congress. These proposals, if enacted, may
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Healthcare
organizations may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's products and services. The Company cannot predict with any certainty
what impact, if any, such proposals or healthcare reforms might have on its
results of operations, financial condition or business.
The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
for the regulation of certain computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act (the "FDC Act") and has recently indicated it may modify such draft policy
or create a new policy. To the extent that computer software is a medical device
under the policy, the manufacturers of such products could be required,
depending on the product, to (i) register and list their products with the FDA,
(ii) notify the FDA and demonstrate substantial equivalence to other products on
the market before marketing such products, or (iii) obtain FDA approval by
demonstrating safety and effectiveness before marketing a product. Depending
upon the intended use of a device, IDX could be required by the FDA to obtain
extensive data from clinical studies to demonstrate safety or effectiveness, or
substantial equivalence. If the FDA requires such data, IDX would be required to
obtain approval of an investigational device exemption before undertaking
clinical trials. Clinical trials can take extended periods of time to complete
and there can be no assurance that the FDA will approve or clear a device after
the completion of such trials. In addition, such products would be subject to
FDC Act's general controls, including those relating to good
manufacturing practices and adverse experience reporting. Although it is not
possible to anticipate the final form of the FDA's policy with regard to
computer software, the Company expects that, whether or not the draft is
finalized or changed, the FDA is likely to become increasingly active in
regulating computer software that is intended for use in healthcare settings.
The FDA can impose extensive requirements governing pre- and post-market
conditions such as service investigation, approval, labeling and manufacturing.
In addition, the FDA can impose extensive requirements governing development
controls and quality assurance processes. There can be no assurance that actions
taken by the FDA to regulate computer software products will not have a material
adverse effect on the Company's results of operations, financial condition or
business.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
Page 22 of 25
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit Index
immediately preceding such exhibits, which Exhibit Index is incorporated herein
by reference.
(b) On September 16, 1998, the Company filed a report on Form 8-K, reporting an
Agreement and Plan of Merger dated as of September 11, 1998 with EDiX
Corporation.
No financial statements were filed with such report.
Page 23 of 25
SIGNATURES
Pursuant to the requirements 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.
IDX SYSTEMS CORPORATION
Date: November 13, 1998 By: /s/ John A. Kane
-------------------------------
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 24 of 25
Exhibit Index
-------------
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit No. Description Page
- ----------- ----------- ----
10A Agreement and Plan of Merger among IDX Systems
Corporation, Underwood Acquisition Corporation
and EDiX Corporation dated September 11, 1998. 26
27 Financial Data Schedule 94
Page 25 of 25
EXHIBIT 10A
AGREEMENT AND PLAN OF MERGER
AMONG
IDX SYSTEMS CORPORATION,
UNDERWOOD ACQUISITION CORP.
AND
EDiX CORPORATION
September 11, 1998
TABLE OF CONTENTS
Page
----
ARTICLE I - THE MERGER....................................................... 1
1.1. The Merger........................................................... 1
1.2. The Closing.......................................................... 1
1.3. Actions at the Closing............................................... 2
1.4. Additional Action.................................................... 2
1.5. Conversion of Shares................................................. 2
1.6. Dissenting Shares.................................................... 5
1.7. Fractional Shares.................................................... 6
1.8. Escrow............................................................... 6
1.9. Post-Closing Balance Sheet........................................... 7
1.10. Options and Warrants................................................ 7
1.11. Indemnification Representative...................................... 8
1.12. Certificate of Incorporation........................................10
1.13. By-laws.............................................................10
1.14. Directors and Officers..............................................10
1.15. No Further Rights...................................................10
1.16. Closing of Transfer Books...........................................10
1.17. Tax-Free Reorganization.............................................10
1.18. Accounting Treatment................................................11
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................11
2.1. Organization, Qualification and Corporate Power......................11
2.2. Capitalization.......................................................11
2.3. Authorization of Transaction.........................................12
2.4. Noncontravention.....................................................12
2.5. Subsidiaries.........................................................13
2.6. Financial Statements.................................................15
2.7. Absence of Certain Changes...........................................15
2.8. Undisclosed Liabilities..............................................15
2.9. Tax Matters..........................................................16
2.10. Assets..............................................................18
2.11. Owned Real Property.................................................18
2.12. Intellectual Property...............................................18
2.13. Inventory...........................................................21
2.14. Real Property Leases................................................21
2.15. Contracts...........................................................22
2.16. Accounts Receivable.................................................25
2.17. Powers of Attorney..................................................25
-i-
Page
----
2.18. Insurance...........................................................25
2.19. Litigation..........................................................26
2.20. Warranty............................................................26
2.21. Employees...........................................................26
2.22. Employee Benefits...................................................27
2.23. Environmental Matters...............................................29
2.24. Legal Compliance....................................................31
2.25. Permits.............................................................31
2.26. Certain Business Relationships With Affiliates......................31
2.27. Brokers' Fees.......................................................31
2.28. Books and Records...................................................32
2.29. Customers and Suppliers.............................................32
2.30. Pooling.............................................................32
2.31. Company Action......................................................32
2.32. Prepayments, Prebilled Invoices and Deposits........................33
2.33. Banking Facilities. ................................................33
2.34. Year 2000...........................................................34
2.35. Disclosure..........................................................34
2.36. Information in Registration Statement...............................34
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSITORY
SUBSIDIARY....................................................35
3.1. Organization.........................................................35
3.2. Capitalization.......................................................35
3.3. Authorization of Transaction.........................................35
3.4. Noncontravention.....................................................36
3.5. Reports and Financial Statements.....................................36
3.6. Brokers' Fees........................................................37
3.7. Legality of Merger Shares............................................37
3.8. Disclosure...........................................................37
ARTICLE IV - COVENANTS.......................................................37
4.1. Best Efforts.........................................................37
4.2. Notices and Consents.................................................37
4.3. Registration; Special Meeting; Other Actions.........................38
4.4. Operation of Business................................................39
4.5. Full Access..........................................................41
4.6. Notice of Breaches...................................................41
4.7. Exclusivity..........................................................42
4.8. Agreements from Certain Affiliates of the Company....................42
4.9. Monthly Financial Statements.........................................42
4.10. Nasdaq National Market..............................................42
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4.11. Blue Sky Approvals..................................................43
4.12. Hart-Scott-Rodino Act...............................................43
4.13. Pooling Accounting..................................................43
4.14. Indemnification of Company Officers and Directors...................43
4.15. Resolution of Computer Issue........................................43
ARTICLE V - CONDITIONS TO CONSUMMATION OF MERGER.............................44
5.1. Conditions to Each Party's Obligations...............................44
5.2. Conditions to Obligations of the Buyer and the Transitory Subsidiary.45
5.3. Conditions to Obligations of the Company.............................47
ARTICLE VI - INDEMNIFICATION.................................................48
6.1. Indemnification......................................................48
6.2. Method of Asserting Claims...........................................49
6.3. Survival.............................................................50
6.4. Limitations..........................................................51
ARTICLE VII - TAX MATTERS....................................................52
7.1. Preparation and Filing of Tax Returns................................52
7.2. Tax Indemnification by the Company Stockholders......................52
7.3. Allocation of Certain Taxes..........................................53
7.4. [Intentionally omitted]..............................................53
7.5. Cooperation on Tax Matters...........................................53
7.6. Termination of Tax-Sharing Agreements................................53
ARTICLE VIII - TERMINATION...................................................54
8.1. Termination of Agreement.............................................54
8.2. Effect of Termination................................................55
8.3. Termination Fees.....................................................55
ARTICLE IX - DEFINITIONS.....................................................56
ARTICLE X - MISCELLANEOUS....................................................58
10.1. Press Releases and Announcements....................................59
10.2. No Third Party Beneficiaries........................................59
10.3. Entire Agreement....................................................59
10.4. Succession and Assignment...........................................59
10.5. Counterparts........................................................59
10.6. Headings............................................................60
10.7. Notices.............................................................60
10.8. Governing Law.......................................................61
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10.9. Amendments and Waivers..............................................61
10.10. Severability.......................................................61
10.11. Expenses...........................................................61
10.12. Specific Performance...............................................62
10.13. Submission to Jurisdiction.........................................62
10.14. Construction.......................................................62
10.15. Incorporation of Exhibits and Schedules............................62
Exhibits
Exhibit A - Escrow Agreement
Exhibit B - Affiliate's Agreement
Exhibit C - Form of Opinion of Counsel to the Company
Exhibit D - Form of Opinion of General Counsel to the Buyer
Exhibit E - Form of Closing Certificate of the Buyer and the Transitory
Subsidiary
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AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger entered into as of September 11, 1998 by
and among IDX Systems Corporation, a Vermont corporation (the "Buyer"),
Underwood Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Buyer (the "Transitory Subsidiary"), and EDiX Corporation, a
Delaware corporation (the "Company"). The Buyer, the Transitory Subsidiary and
the Company are referred to collectively herein as the "Parties."
This Agreement contemplates a merger of the Transitory Subsidiary into
the Company. In such merger, the stockholders of the Company will receive
capital stock of the Buyer in exchange for their capital stock of the Company.
This Agreement contemplates a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"). It is intended that
the merger shall be accounted for on a pooling of interests basis.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
Article I
THE MERGER
1.1. THE MERGER. Upon and subject to the terms and conditions of this Agreement,
the Transitory Subsidiary shall merge with and into the Company (with such
merger referred to herein as the "Merger") at the Effective Time (as defined
below). From and after the Effective Time, the separate corporate existence of
the Transitory Subsidiary shall cease and the Company shall continue as the
surviving corporation in the Merger (the "Surviving Corporation"). The
"Effective Time" shall be the time at which the Company and the Transitory
Subsidiary file the certificate of merger or other appropriate documents
prepared and executed in accordance with the relevant provisions of the Delaware
General Corporation Law (the "Certificate of Merger") with the Secretary of
State. The Merger shall have the effects set forth in Section 251 of the
Delaware General Corporation Law.
1.2. THE CLOSING. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts, commencing at 9:00 a.m. local time on January 30,
1999, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.3. ACTIONS AT THE CLOSING. At the Closing, (a) the Company shall deliver to
the Buyer and the Transitory Subsidiary the various certificates, instruments
and documents referred to in Section 5.2, (b) the Buyer and the Transitory
Subsidiary shall deliver to the Company the various certificates, instruments
and documents referred to in Section 5.3, (c) the Company and the Transitory
Subsidiary shall file with the Secretary of State of the State of Delaware the
Certificate of Merger, (d) each of the Company Stockholders (as defined below)
shall deliver to the Buyer the certificates ("Certificates") representing his,
her or its Company Shares (as defined below), (e) the Buyer shall deliver to the
Indemnification Representative (as defined below), for distribution to the
Company Stockholders, certificates for the Initial Shares (as defined below) in
accordance with Section 1.5 and (f) the Buyer, the Indemnification
Representative and the Escrow Agent (as defined therein) shall execute and
deliver the Escrow Agreement attached hereto as EXHIBIT A (the "Escrow
Agreement") and the Buyer shall deliver to the Escrow Agent a certificate for
the Escrow Shares (as defined below) being placed in escrow on the Closing Date
pursuant to Section 1.8.
1.4. ADDITIONAL ACTION. The Surviving Corporation may, at any time after the
Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5. CONVERSION OF SHARES.
(a) Immediately prior to the Effective Times each issued and outstanding share
of Series A-1 Preferred Stock of the Company shall be converted into one share
of Common Stock of the Company. The Common Stock and the Series A-1 Preferred
Stock are collectively referred to herein as the ("Company Shares").
(b) At the Effective Time, by virtue of the Merger and without any action on the
part of any Party or the holder of any of the following securities (each, a
"Company Stockholder"):
(i)Each share of Common Stock of the Company (other than Company Shares owned
beneficially by the Buyer or the Transitory Subsidiary, Dissenting Shares (as
defined below) and Company Shares held in the Company's treasury) shall be
converted into and represent the right to receive (subject to the provisions of
Section 1.8) such number of shares of common stock, $.01 par value per share, of
the Buyer ("Buyer Common Stock") as is equal to the Conversion Ratio. The
"Conversion Ratio" shall be the result obtained by (A) dividing $19,930,000 (as
such amount may be adjusted pursuant to subparagraph vii below, the "Purchase
Price"), by the average of the closing sale prices per share of Buyer Common
Stock on the five consecutive trading days ending three business days before the
Closing (the "Buyer Stock Price"), (B) then multiplying such quotient (the
"Clause A Quotient") by
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(i) the number of Company Shares issued and outstanding immediately prior to the
Closing divided by (ii) the sum of (x) the number of Company Shares issued and
outstanding immediately prior to the Closing, (y) the number of Company Shares
issuable upon the exercise of Options (as defined below), and (z) the number of
Company Shares issuable upon the exercise of Warrants (as defined below),
whether vested or unvested or subject to repurchase by the Company following
such exercise, and (C) then dividing such quotient (the "Clause B Quotient") by
the number of Company Shares issued and outstanding immediately prior to the
Closing. For example, if the Buyer Stock Price is $48.00, the number of
outstanding Company Shares is 150, the number of shares issuable upon exercise
of outstanding Options is 30, the number of shares issuable upon the exercise of
outstanding Warrants is 20, then the Conversion Ratio would be computed as
follows: (A) $19,930,000 / $48.00 = 415,208; (B) 415,208 x 150/[150 + 30 + 20] =
311,406; (C) 311,406 / 150 = 2,076 shares of Buyer Common Stock for each one
Company Share. The Conversion Ratio shall be subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split or similar
event (each, a "Recapitalization") affecting the Buyer Common Stock between the
date of this Agreement and the Effective Time.
(ii) Each outstanding grant of Options, whether vested or unvested, shall be
exchanged into and collectively represent the right to receive (subject to the
provisions of Section 1.8) such number of shares of Buyer Common Stock as is
equal to the number obtained by (A) subtracting the Clause B Quotient from the
Clause A Quotient, (B) multiplying the resulting number by (X) the total number
of Options divided by (Y) the total number of Options and Warrants, (C)
multiplying the resulting number by (X) the number of Options in such Option
grant divided by (Y) the total number of Options, and (D) multiplying the
resulting number by the number that is determined to represent the appropriate
adjustment to reflect the present fair market value of such Option grant, taking
into consideration the exercise price, vesting schedule and other appropriate
factors (it being understood that certain grants of Options may have a fair
market value of zero and accordingly shall not be entitled to receive any Merger
Shares (as defined below)) (such number of shares, the "Option Shares"). For
purposes of determining the pro rata allocation of the Option Shares to each
holder of a Option that is part of an Option grant, the numerator shall be the
number of Options held by such holder and the denominator shall be the total
number of Options in such Option grant as set forth on Section 1.10(a) of the
Disclosure Schedule. For example, if the Buyer Stock Price is $48.00, the number
of outstanding Company Shares is 150, the number of Company Shares issuable upon
outstanding Options is 30, the number of shares issuable upon the exercise of
outstanding Warrants is 20, and the appropriate present fair market value
adjustment discount for the Options to acquire two Company Shares granted on a
particular date is 60% (.6), then the number of shares of Buyer Common Stock
would be computed as follows: (A) 415,208 - 311,406 = 103,802; (B) 103,802 x
30/30 + 20 = 62,281; (C) 62,281 x 2/30 = 4,152; (D) 4,152 x .6 = 2,491 shares of
Buyer Common
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Stock would be given in exchange for all of the outstanding Options granted on
such date to acquire two Company Shares.
(iii) Holders of the Company Shares shall be entitled to receive immediately 90%
of the shares of Buyer Common Stock into which their Company Shares were
converted pursuant to Section 1.5(b)(i) (the "Stockholder Initial Shares"), and
the remaining 10% of the shares of Buyer Common Stock into which Company Shares
were converted pursuant to Section 1.5(b)(i) (the "Stockholder Escrow Shares")
shall be deposited in escrow pursuant to Section 1.8 hereof and shall be held
and disposed of in accordance with the terms of the Escrow Agreement. Holders of
Options shall be entitled to receive immediately 90% of the Option Shares (the
"Optionholder Initial Shares"), and the remaining 10% of the Option Shares (the
"Optionholder Escrow Shares") shall be deposited into escrow pursuant to Section
1.8 hereof and shall be held and disposed of in accordance with the terms of the
Escrow Agreement. The Stockholder Initial Shares and the Optionholder Initial
Shares shall together be referred to herein as the "Initial Shares." The
Stockholder Escrow Shares and the Optionholder Escrow Shares shall together be
referred to herein as the "Escrow Shares." The Initial Shares and the Escrow
Shares shall together be referred to as the "Merger Shares."
(iv) Notwithstanding the foregoing, if the Buyer Stock Price is greater than
$48.00 per share (subject to equitable adjustment in the event of any
Recapitalization) the Buyer shall issue such number of Merger Shares as is equal
to the Purchase Price divided by $48.00 (subject to adjustment in the event of a
Recapitalization) which amount of Merger Shares shall be used for calculating
the respective amounts due the holders of Company Shares and the holders of
Options for the purpose of determining the Clause A Quotient in Section
1.5(b)(i) and Section 1.5(b)(ii) above.
(v) Further notwithstanding the foregoing, to the extent that the Buyer Stock
Price is between $35.00 and $40.00 per share (subject to equitable adjustment in
the event of any Recapitalization) the Buyer shall issue a maximum of such
number of Merger Shares as is equal to the Purchase Price divided by $40.00
(subject to adjustment in the event of a Recapitalization) which amount of
Merger Shares shall be used for calculating the respective amounts due to the
holders of Company Shares and the holders of Options for the purpose of
determining the Clause A Quotient in Section 1.5(b)(i) and Section 1.5(b)(ii)
above.
(vi) Further notwithstanding the foregoing, the Buyer shall have the right to
terminate this Agreement pursuant to Section 8.1 if the Buyer Stock Price is
less than $35.00 per share (subject to equitable adjustment in the event of any
Recapitalization).
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(vii) Further notwithstanding the foregoing, the Purchase Price to be delivered
at the Closing shall be reduced dollar for dollar by the aggregate amount of any
and all expenses, liabilities or damages incurred by the Company or any
Subsidiary in connection with the resolution of, or in any way related to, the
Computer Issue (as such term is defined in Section 2.12 of the Disclosure
Schedule) on or prior to the Closing Date (such amount the "Computer Expenses")
as evidenced by the Computer Certificate (as defined below) to be delivered by
the Company to the Buyer at least three days before the Closing (the "Purchase
Price Adjustment Closing Certificate"). The Company and the Subsidiaries shall
not incur Computer Expenses in excess of the amount set forth in the Purchase
Price Adjustment Closing Certificate, and any Computer Expenses incurred by the
Company and the Subsidiaries in excess of such amounts shall be recovered by the
Buyer pursuant to the Escrow Agreement without regard to the provisions of the
first sentence of Section 6.4(a).
(c) Each Company Share held in the Company's treasury immediately prior to the
Effective Time and each Company Share owned beneficially by the Buyer or the
Transitory Subsidiary shall be cancelled and retired without payment of any
consideration therefor.
(d) Each share of common stock, $.01 par value per share, of the Transitory
Subsidiary issued and outstanding immediately prior to the Effective Time shall
be converted into and thereafter evidence one share of common stock, $.01 par
value per share, of the Surviving Corporation.
1.6. DISSENTING SHARES.
(a) For purposes of this Agreement, "Dissenting Shares" means Company Shares
held as of the Effective Time by a Company Stockholder who has not voted such
Company Shares in favor of the adoption of this Agreement and the Merger and
with respect to which appraisal shall have been duly demanded and perfected in
accordance with Section 262 of the Delaware General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time. Dissenting
Shares shall not be converted into or represent the right to receive Merger
Shares, unless such Company Stockholder shall have forfeited his or her right to
appraisal under the Delaware General Corporation Law or withdrawn, with the
consent of the Company, his or her demand for appraisal. If such Company
Stockholder has so forfeited or withdrawn his or her right to appraisal of
Dissenting Shares, then (i) as of the occurrence of such event, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the Merger Shares issuable in respect of
such Company Shares pursuant to Section 1.5(b), and (ii) promptly following the
occurrence of such event, the Buyer shall deliver to such Company Stockholder a
certificate representing 90% of the Merger Shares to which such holder is
entitled pursuant to Section 1.5(b) (which shares shall be
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considered Initial Shares for all purposes of this Agreement) and shall deliver
to the Escrow Agent a certificate representing 10% of the Merger Shares to which
such holder is entitled pursuant to Section 1.5(b) (which shares shall be
considered Escrow Shares for all purposes of this Agreement).
(b) The Company shall give the Buyer (i) prompt notice of any written demands
for appraisal of any Company Shares, withdrawals of such demands, and any other
instruments that relate to such demands received by the Company and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under the Delaware General Corporation Law. The Company shall not,
except with the prior written consent of the Buyer, make any payment with
respect to any demands for appraisal of Company Shares or offer to settle or
settle any such demands.
1.7. FRACTIONAL SHARES. No certificates or scrip representing fractional Initial
Shares shall be issued to former Company Stockholders upon the surrender for
exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Initial Shares that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Initial Shares that would otherwise be
issued, each former Company Stockholder that would have been entitled to receive
a fractional Initial Share shall, upon proper surrender of such person's
Certificates, receive such whole number of Initial Shares as is equal to the
precise number of Initial Shares to which such person would be entitled, rounded
down to the nearest whole number.
1.8. ESCROW.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent a
certificate (issued in the name of the Escrow Agent or its nominee) representing
the Escrow Shares, as described in Section 1.5(b), for the purpose of securing
the indemnification obligations of the Company Stockholders set forth in this
Agreement. The Escrow Shares shall be held by the Escrow Agent under the Escrow
Agreement pursuant to the terms thereof. The Escrow Shares shall be held as a
trust fund and shall not be subject to any lien, attachment, trustee process or
any other judicial process of any creditor of any party, and shall be held and
disbursed solely for the purposes and in accordance with the terms of the Escrow
Agreement.
(b) The adoption of this Agreement and the approval of the Merger by the Company
Stockholders shall constitute approval of the Escrow Agreement and of all of the
arrangements relating thereto, including without limitation the placement of the
Escrow Shares in escrow and the appointment of the Indemnification
Representative.
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1.9. POST-CLOSING BALANCE SHEET. Not later than 30 calendar days after the
Closing Date, the Indemnification Representative shall deliver to the Buyer a
balance sheet of the Company as of the Closing Date (the "Closing Balance
Sheet"). The Closing Balance Sheet shall be prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied consistently
with the Company's past practices (to the extent such past practices are
consistent with GAAP), as the case may be, subject to the adjustments set forth
in this Section 1.9 (which shall be in addition to and not in lieu of those
required by GAAP) and shall be certified by the Company's Chief Financial
Officer.
1.10. OPTIONS AND WARRANTS.
(a) (i) As of the Effective Time, all options to purchase Company Shares issued
by the Company pursuant to the stock option agreements set forth on Section
1.10(a) of the Disclosure Schedule (as defined below) ("Options"), whether
vested or unvested, shall be exchanged into and represent the right to receive
(subject to the provisions of Section 1.8) such number of shares of Buyer Common
Stock as is equal to the holder of such Option's pro rata share of the
consideration determined pursuant to Section 1.5(b)(ii). Section 1.10(a) of the
Disclosure Schedule shall indicate the date of grant of each Option, the vesting
schedule and the exercise price.
(ii) As of the Effective Time, each Warrant (as defined below) outstanding at
the Effective Time, shall be assumed by the Buyer. Immediately after the
Effective Time, each Warrant outstanding immediately prior to the Effective Time
shall be deemed to constitute a warrant to acquire, on the same terms and
conditions as were applicable under such Warrant at the Effective Time, such
number of shares of Buyer Common Stock as is equal to the number of Company
Shares subject to the unexercised portion of such Warrant multiplied by the
Conversion Ratio (with any fraction resulting from such multiplication to be
rounded down to the next lowest whole number). The exercise price per share of
each such assumed Warrant shall be equal to the exercise price of such Warrant
immediately prior to the Effective Time, divided by the Conversion Ratio (with
any fraction of a cent resulting from such division to be rounded up to the next
highest whole cent). The term, exercisability, vesting schedule, repurchase
provisions and all of the other terms of the Warrants shall otherwise remain
unchanged.
(b) The Company shall cause the exercise prior to the Closing Date or the
termination in accordance with the terms of the Agreement, as of the Effective
Time, of any warrants, contingent obligations, options or other rights to
purchase Company Shares other than the Options (collectively referred to as the
"Warrants") which remain unexercised, all of which are set forth in Section
1.10(b) of the Disclosure Schedule.
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(c) The Company has obtained a written consent from each of the following
holders of Options to the amendment to waive the accelerated vesting under such
Option:
Lisa Ayala; Gene Barduson; Vincent Estrada; Andrew
Putterbaugh, Joseph Grane; Armando Jackson; John Bonsee; David
Blue; Connie Symes; Laura Fackreli; Kathleen Johnson; Lynn
Runyan; Len Shaw; Michael Kimball; Doug Murray; and Bonnie
Sullivan.
(d) The Company shall use its best efforts to obtain, prior to the Closing, the
consent from each holder of an Option or a Warrant to the amendment or exercise
of such Option or Warrant pursuant to this Section 1.10, and in the case of
holders of Options, the consent to be bound by the provisions of this Agreement
and the Escrow Agreement.
1.11. INDEMNIFICATION REPRESENTATIVE.
(a) In order to efficiently administer the transactions contemplated hereby,
including (i) the waiver of any condition to the obligations of the Company
Stockholders to consummate the transactions contemplated hereby, (ii) the
preparation of the Closing Balance Sheet, (iii) the defense and/or settlement of
any claims for which the Company Stockholders may be required to indemnify the
Buyer and/or the Company pursuant to the Escrow Agreement, Article VI and
Article VII, below, the Company Stockholders hereby designate Joel D. Liffmann
as their representative (the "Indemnification Representative").
(b) The Company Stockholders hereby authorize the Indemnification Representative
(i) to take all action necessary in connection with the waiver of any condition
to the obligations of the Company Stockholders to consummate the transactions
contemplated hereby, or the defense and/or settlement of any claims for which
the Company Stockholders may be required to indemnify the Buyer and/or the
Company pursuant to the Escrow Agreement, Article VI and Article VII below, (ii)
to give and receive all notices required to be given under this Agreement and
the Escrow Agreement, and (iii) to take any and all additional action as is
contemplated to be taken by or on behalf of the Company Stockholders by the
terms of this Agreement or the Escrow Agreement.
(c) In the event that the Indemnification Representative dies, becomes unable to
perform his responsibilities hereunder or resigns from such position, the
Company Stockholders holding, prior to the Closing, a majority of the Company
Shares as set forth on ATTACHMENT A to the Escrow Agreement shall select another
representative to fill such vacancy and such substituted representative shall
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be deemed to be the Indemnification Representative for all purposes of this
Agreement and the documents delivered pursuant hereto.
(d) All decisions and actions by the Indemnification Representative, including
without limitation any agreement between the Indemnification Representative and
the Buyer relating to the defense or settlement of any claims for which the
Company Stockholders may be required to indemnify the Buyer and/or the Company
pursuant to the Escrow Agreement, Article VI and Article VII below, shall be
binding upon all of the Company Stockholders and no Company Stockholder shall
have the right to object, dissent, protest or otherwise contest the same.
(e) By his, her or its approval of this Agreement, each Company Stockholder
agrees that:
(i) the Buyer shall be able to rely conclusively on the instructions and
decisions of the Indemnification Representative as to the settlement of any
claims for indemnification by the Buyer and/or the Company pursuant to the
Escrow Agreement, Article VI and Article VII below or any other actions required
or permitted to be taken by the Indemnification Representative hereunder or
under the Escrow Agreement, and no party hereunder shall have any cause of
action against the Buyer to the extent the Buyer has relied upon the
instructions or decisions of the Indemnification Representative;
(ii) all actions, decisions and instructions of the Indemnification
Representative shall be conclusive and binding upon all of the Company
Stockholders and no Company Stockholder shall have any cause of action against
the Indemnification Representative for any action taken, decision made or
instruction given by the Indemnification Representative under this Agreement,
except for fraud or willful breach of this Agreement by the Indemnification
Representative;
(iii) the provisions of this Section 1.11 are independent and severable, are
irrevocable and coupled with an interest and shall be enforceable
notwithstanding any rights or remedies that any Company Stockholder may have in
connection with the transactions contemplated by this Agreement;
(iv) remedies available at law for any breach of the provisions of this Section
1.11 are inadequate; therefore, the Buyer and the Company shall be entitled to
temporary and permanent injunctive relief without the necessity of proving
damages if either the Buyer and/or the Company brings an action to enforce the
provisions of this Section 1.11; and
(v) the provisions of this Section 1.11 shall be binding upon the executors,
heirs, legal representatives, personal representatives, successor trustees, and
successors of each Company Stockholder, and any references in this Agreement
-9-
to a Company Stockholder or the Company Stockholders shall mean and include the
successors to the Company Stockholder's rights hereunder, whether pursuant to
testamentary disposition, the laws of descent and distribution or otherwise.
(f) All reasonable out-of-pocket expenses incurred by the Indemnification
Representative shall be paid by the Company Stockholders in proportion to their
ownership of Company Shares as set forth in ATTACHMENT A to the Escrow Agreement
attached hereto and shall be paid from the Escrow Property (as defined in the
Escrow Agreement) in accordance with the provisions of the Escrow Agreement.
1.12. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of the
Surviving Corporation shall be the same as the Certificate of Incorporation of
the Transitory Subsidiary immediately prior to the Effective Time, except that
the name of the corporation set forth therein shall be changed to the name of
the Company.
1.13. BY-LAWS. The By-laws of the Surviving Corporation shall be the same as the
By-laws of the Transitory Subsidiary immediately prior to the Effective Time,
except that the name of the corporation set forth therein shall be changed to
the name of the Company.
1.14. DIRECTORS AND OFFICERS. The directors of the Transitory Subsidiary shall
become the directors of the Surviving Corporation as of the Effective Time. The
officers of the Transitory Subsidiary shall became the officers of the Surviving
Corporation as of the Effective Time, in their respective positions with the
Transitory Subsidiary.
1.15. NO FURTHER RIGHTS. From and after the Effective Time, no Company Shares,
Options or Warrants shall be deemed to be outstanding, and holders of
Certificates, or agreements relating to Options or Warrants, as the case may be,
shall cease to have any rights with respect thereto, except as provided herein
or by law.
1.16. CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock transfer books
of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Surviving Corporation, they shall be cancelled and exchanged for Initial
Shares in accordance with Section 1.5(b), subject to Section 1.8 and Section 1.9
and to applicable law in the case of Dissenting Shares.
1.17. TAX-FREE REORGANIZATION. The Merger is intended to be a reorganization
within the meaning of Section 368(a) of the Code, and this Agreement is intended
to be a "plan of reorganization" within the meaning of the regulations
promulgated under Section 368 of the Code.
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1.18. ACCOUNTING TREATMENT. The business combination to be effected by the
Merger is intended to be treated for accounting purposes as a "pooling of
interests."
Article II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to the Buyer and the Transitory
Subsidiary that the statements contained in this Article II are true and
correct, except as set forth in the disclosure schedule attached hereto (the
"Disclosure Schedule"). The Disclosure Schedule shall be initialed by the
Parties and shall be arranged in section and paragraphs corresponding to the
numbered and lettered sections and paragraphs contained in this Article II, and
the disclosures in any paragraph of the Disclosure Schedule shall qualify only
the corresponding section or paragraph in this Article II.
2.1. ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the state of its incorporation. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, each of
which jurisdiction is set forth in Section 2.1 of the Disclosure Schedule and/or
the filing of Tax Returns (as defined below). The Company has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Company has
furnished to the Buyer true and complete copies of its Certificate of
Incorporation and By-laws, each as amended and as in effect on the date hereof.
The Company is not in default under or in violation of any provision of its
Certificate of Incorporation or By-laws.
2.2. CAPITALIZATION. The authorized capital stock of the Company consists of
16,100,000 Company Shares, of which 9,775,173 shares are issued and outstanding
and no shares are held in the treasury of the Company. Section 2.2 of the
Disclosure Schedule sets forth a complete and accurate list of (i) all
stockholders of the Company, indicating the number of Company Shares held by
each stockholder, and (ii) all holders of Options and Warrants, indicating the
number of Company Shares subject to each Option and Warrant and the exercise
price thereof. True and complete copies of all Options and Warrants have
previously been provided to the Buyer. All of the issued and outstanding Company
Shares are, and all Company Shares that may be issued upon exercise of Options
and Warrants, when issued in compliance with the terms of such Options or
Warrants, will be, duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights. There are no outstanding or authorized
options, warrants, rights, calls, convertible instruments, agreements or
commitments to which the Company is a party or which are binding
-11-
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock, other than the Options and Warrants listed in Section 2.2
of the Disclosure Schedule, which Warrants will expire or be exercised in full
prior to the Effective Time or be assumed by the Buyer at the Effective Time
pursuant to Section 1.10(a) and which Options will expire or be cancelled or
exercised prior to the Effective Time or be exchanged into a right to receive
shares of Buyer Common Stock pursuant to Section 1.10(a) at the Effective Time.
There are no outstanding or authorized stock appreciation, phantom stock or
similar rights with respect to the Company. There are no agreements, voting
trusts, proxies, or understandings with respect to the voting, or registration
under the Securities Act of 1933, as amended (the "Securities Act"), of any
Company Shares. All of the issued and outstanding Company Shares were issued in
compliance with applicable federal and state securities laws.
2.3. AUTHORIZATION OF TRANSACTION. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and, subject to the
adoption of this Agreement and the approval of the Merger by a majority of the
votes represented by the outstanding Company Shares entitled to vote on this
Agreement and the Merger (the "Requisite Stockholder Approval"), the performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of the Company. Without limiting the
generality of the foregoing, the Company has taken all necessary corporate
actions relating to its stock option plans, warrants and other securities to
effect the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, and as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies.
2.4. NONCONTRAVENTION. Subject to compliance with the applicable requirements of
the Securities Act, any applicable state securities laws and the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Hart-Scott-
Rodino Act"), and the filing of the Certificate of Merger as required by the
Delaware General Corporation Law, neither the execution and delivery of this
Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, will (a) conflict with or violate any
provision of the charter, By-laws or comparable agreement or document of the
Company or any corporation, partnership, limited liability company or other form
of business association (each, a "Business Entity") with respect to which the
Company, directly or indirectly, either (i) has the power to vote or direct the
voting of sufficient securities to elect a majority of
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the directors (or to control the operations and governance of the Business
Entity in a similar manner) or (ii) in the case of a partnership, serves as the
general partner or holds a majority of the partnership interests (each, a
"Subsidiary"), (b) require on the part of the Company or any Subsidiary any
filing with, or any permit, authorization, consent or approval of, any court,
arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"), (c)
conflict with, result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify or cancel, or require any
notice, consent or waiver under, any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for borrowed
money, instrument of indebtedness, Security Interest (as defined below) or other
arrangement to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound or to which any of their assets is subject,
(d) result in the imposition of any Security Interest upon any assets of the
Company or any Subsidiary or (e) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company, any Subsidiary or any of
their properties or assets. For purposes of this Agreement, "Security Interest"
means any mortgage, pledge, security interest, encumbrance, charge or other lien
(whether arising by contract or by operation of law), other than (i) mechanic's,
materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement and similar
legislation and (iii) liens on goods in transit incurred pursuant to documentary
letters of credit, capital lease arrangements, in each case arising in the
ordinary course of business consistent with past custom and practice (including
with respect to frequency and amount) of the Company (the "Ordinary Course of
Business") and not incurred in connection with the borrowing of money.
2.5. SUBSIDIARIES.
(a) Section 2.5(a) of the Disclosure Schedule sets forth for each Subsidiary
that is not a partnership (a "Corporate Subsidiary") (i) its name and
jurisdiction of incorporation, (ii) the number of shares of authorized capital
stock of each class of its capital stock, (iii) the number of issued and
outstanding shares of each class of its capital stock, the names of the holders
thereof and the number of shares held by each such holder, (iv) the number of
shares of its capital stock held in treasury, and (v) its directors and
officers. Each Corporate Subsidiary is a corporation duly organized, validly
existing and in corporate and tax good standing under the laws of the
jurisdiction of its incorporation. Each Corporate Subsidiary is duly qualified
to conduct business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification and/or the filing of Tax
Returns. Each Corporate Subsidiary has all requisite corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Company has delivered to the Buyer
correct and complete
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copies of the charter and By-laws of each Corporate Subsidiary, as amended to
date. No Corporate Subsidiary is in default under or in violation of any
provision of its charter or By-laws. All of the issued and outstanding shares of
capital stock of each Corporate Subsidiary are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. All shares of each
Subsidiary that are held of record or owned beneficially by either the Company
or any Corporate Subsidiary are held or owned free and clear of any restrictions
on transfer (other than restrictions under the Securities Act and state
securities laws), claims, Security Interests, options, warrants, rights,
contracts, calls, commitments, equities and demands. There are no outstanding or
authorized options, warrants, rights, agreements or commitments to which the
Company or any Corporate Subsidiary is a party or which are binding on any of
them providing for the issuance, disposition or acquisition of any capital stock
of any Corporate Subsidiary. There are no outstanding stock appreciation,
phantom stock or similar rights with respect to any Corporate Subsidiary. There
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Corporate Subsidiary.
(b) Section 2.5(b) of the Disclosure Schedule sets forth for each Subsidiary
that is a partnership (a "Partnership Subsidiary") (i) its name and jurisdiction
of formation and (ii) the name and address of each person or entity holding an
interest in the Partnership Subsidiary and the amount of the interest. Each
Partnership Subsidiary is duly organized, legally existing and in corporate and
tax good standing under the laws of the jurisdiction of its formation. Each
Partnership Subsidiary is duly qualified to conduct business and is in corporate
and tax good standing under the laws of each jurisdiction in which the nature of
its businesses or the ownership or leasing of its properties requires such
qualification and/or the filing of Tax Returns. Each Partnership Subsidiary has
all requisite partnership power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it. The
Company has delivered to the Buyer correct and complete copies of the
organizational documents of each Partnership Subsidiary, as amended to date,
including without limitation its partnership agreement and, if applicable, its
certificate of limited partnership. No Partnership Subsidiary is in default
under or in violation of any provision of its partnership agreement. The
partnership interests in each Partnership Subsidiary that are held of record or
owned beneficially by either the Company or any Subsidiary are held or owned
free and clear of any restrictions on transfer (other than restrictions under
the Securities Act and state securities laws), claims, Security Interests,
options, warrants, rights, contracts, calls, commitments, equities and demands.
There are no outstanding or authorized options, warrants, rights, agreements or
commitments to which the Company or any Partnership Subsidiary is a party or
which are binding on any of them providing for the issuance, disposition or
acquisition of any interest in any Partnership Subsidiary. No Partnership
Subsidiary has any employees.
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(c) The Company does not control directly or indirectly or have any direct or
indirect equity participation in any corporation, partnership, trust, or other
business association which is not a Subsidiary.
2.6. FINANCIAL STATEMENTS. The Company has previously furnished to the Buyer
complete and accurate copies of its (a) audited balance sheets and related
statements of income, retained earnings, stockholders' equity and cash flows for
the fiscal year ended December 31, 1996 and a draft of its audited balance
sheets and related statements of income, retained earnings, shareholders' equity
and cash flows for the fiscal year ended December 31, 1997, and (b) unaudited
balance sheet (the "Most Recent Balance Sheet") and related statements of
income, retained earnings, stockholders' equity and cash flows for the
seven-month period ended July 31, 1998 (the "Balance Sheet Date"). The foregoing
financial statements (the "Financial Statements") have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby (except as may be indicated therein or in the notes thereto and
except that the Most Recent Balance Sheet and related unaudited statements of
income do not include footnotes and are subject to normal and recurring year-end
audit adjustments, which will not individually or in the aggregate be material
in amount), fairly present the financial condition, results of operations and
cash flows of the Company and the Subsidiaries, on a consolidated basis, as of
the respective dates thereof and for the periods referred to therein, and are
consistent with the books and records of the Company and the Subsidiaries, as
the case may be. The accruals for vacation, sickness and disability expenses are
accounted for on the Most Recent Balance Sheet and are adequate and properly
reflect the expenses associated therewith in accordance with GAAP.
2.7. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, (a) there has not
been any material adverse change in the assets, business, financial condition,
results of operations or future prospects of the Company and its Subsidiaries,
taken as a whole, nor has there occurred any event or development which could
reasonably be foreseen to result in such a material adverse change in the
future, and (b) neither the Company nor any Subsidiary has taken any of the
actions set forth in paragraphs (a) through (p) of Section 4.4. The Company has
not been profitable as is disclosed in the Financial Statements, and does not
expect to be profitable prior to the Closing. The Company's continued lack of
profitability consistent with the results of operations in the Financial
Statements will not be considered a material adverse effect for purposes of this
Agreement.
2.8. UNDISCLOSED LIABILITIES. None of the Company and its Subsidiaries has any
liability (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated and whether due or to become due), except for (a)
liabilities shown on the Most Recent Balance Sheet, a copy of which is included
in Section 2.8 of the Disclosure Schedule (b) liabilities which have arisen
since the Balance Sheet Date in the Ordinary Course of Business of the Company
and which
-15-
are similar in nature and amount to the liabilities which arose during
the comparable period of time in the immediately preceding fiscal period and (c)
contractual liabilities incurred in the Ordinary Course of Business of the
Company that are not required by GAAP to be reflected on a balance sheet and
that are not in the aggregate material.
2.9. TAX MATTERS.
(a) Each of the Company and the Subsidiaries has timely filed all Tax Returns
(as defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. Each of the Company and the
Subsidiaries has paid on a timely basis all Taxes (as defined below) due on or
before the Closing Date whether or not shown on any such Tax Returns. The unpaid
Taxes of the Company and the Subsidiaries for tax periods through the date of
the Most Recent Balance Sheet do not exceed the accruals and reserves for Taxes
set forth on the Most Recent Balance Sheet. Neither the Company nor any
Subsidiary has any actual or potential liability for any Tax obligation of any
taxpayer (including without limitation any affiliated group of corporations or
other entities that included the Company or any Subsidiary during a prior
period) other than the Company and the Subsidiaries. All Taxes that the Company
or any Subsidiary is or was required by law to withhold or collect have been
duly withheld or collected and, to the extent required, have been timely paid to
the proper Governmental Entity. For purposes of this Agreement, "Taxes" means
all taxes, charges, fees, levies or other similar assessments or liabilities,
including without limitation income, gross receipts, ad valorem, premium,
value-added, excise, real property, personal property, sales, use, transfer,
withholding, employment, payroll, profits, license, leave service, service use,
severance, stamp, occupation, windfall profits, customs, franchise and other
taxes imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this Agreement,
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
(b) The Company has delivered to the Buyer correct and complete copies of all
federal income Tax Returns, examination reports and statements of deficiencies
assessed against or agreed to by the Company or any Subsidiary since 1994. No
examination or audit of any Tax Returns of the Company or any Subsidiary by any
Governmental Entity is currently in progress or, to the knowledge of the Company
and the Subsidiaries, threatened or contemplated. Neither the Company nor any
Subsidiary has waived any statute of limitations with respect to Taxes or agreed
to an extension of time with respect to a Tax assessment or deficiency.
-16-
(c) Neither the Company nor any Subsidiary is a "consenting corporation" within
the meaning of Section 341(f) of the Code and none of the assets of the Company
or the Subsidiaries are subject to an election under Section 341(f) of the Code.
(d) Neither the Company nor any Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(e) Neither the Company nor any Subsidiary is a party to any Tax allocation or
sharing agreement, and neither the Company nor any Subsidiary has any accrual or
potential liability for any Taxes of any person or entity other than the Company
and its Subsidiaries.
(f) To the knowledge of the Company and each of its Subsidiaries, no claim
exists by a taxing authority in any jurisdiction that the Company or any of its
Subsidiaries is, or may be, subject to Taxes assessed by such jurisdiction for
any period in which they did not file Tax Returns in such jurisdiction.
(g) Neither the Company nor any of its Subsidiaries has made any payments, or
is, or shall become, obligated (under any contract entered into on or before the
Closing Date) to make any payments, that shall be nondeductible under Section
280G of the Code (or any corresponding provision of state, local or foreign
income Tax law).
(h) Neither the Company nor any Subsidiary is or has ever been a member of a
group of corporations with which it has filed for (or been required to file for)
consolidated, combined, or unitary Tax Returns, other than a group of which only
the Company and the Subsidiaries are or were members.
(i) Neither the Company nor any Subsidiary is or has been required to make a
basis reduction pursuant to Treasury Regulation Section 1.1502-20(b) or Treasury
Regulation Section 1.337(d)-2(b).
(j) None of the assets of the Company or any Subsidiary: (i) is property that is
required to be treated as being owned by any other person pursuant to the
provisions of former Section 168(f)(8) of the Code; (ii) is "tax-exempt use
property" within the meaning of Section 168(h) of the Code; or (iii) directly or
indirectly secures any debt the interest on which is tax exempt under Section
103(a) of the Code.
(k) Neither the Company nor any Subsidiary has undergone a change in its method
of accounting resulting in an adjustment to its taxable income pursuant to
Section 481(h) of the Code.
-17-
(l) No state or federal "net operating loss" of the Company or any Subsidiary
determined as of the Closing Date is subject to limitation on its use pursuant
to Section 382 of the Code or comparable provisions of state law as a result of
any "ownership change" within the meaning of Section 382(g) of the Code or
comparable provisions of state law occurring prior to the Closing Date.
2.10. ASSETS.
(a) Each of the Company and the Subsidiaries owns or leases all tangible assets
necessary for the conduct of its businesses as presently conducted and as
presently proposed to be conducted. Each such tangible asset is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear and
tear) and is suitable for the purposes for which it presently is used. No asset
of the Company (tangible or intangible) is subject to any Security Interest.
(b) Section 2.10(b) of the Disclosure Schedule sets forth (i) a true, correct
and complete list of all items of tangible personal property, including without
limitation computers, furniture and equipment and purchased and capitalized
software, owned by the Company or any Subsidiary, or not owned by the Company or
any Subsidiary but in the possession of or used in the business of the Company
or any Subsidiary (the "Personal Property"), other than individual assets with a
book value of less than $10,000, and (ii) a description of the owner of, and any
agreement relating to the use of, each item of Personal Property not owned by
the Company or any Subsidiary and the circumstances under which such Personal
Property is used. Each item of Personal Property not owned by the Company or any
Subsidiary is in such condition that upon the return of such property to its
owner in its present condition at the end of the relevant lease term or as
otherwise contemplated by the applicable agreement between the Company or any
Subsidiary and the owner or lessor thereof, the obligations of the Company or
such Subsidiary to such owner or lessor will be discharged.
2.11. OWNED REAL PROPERTY. Neither the Company nor any Subsidiary now owns,
or has ever owned, any real property.
2.12. INTELLECTUAL PROPERTY.
(a) Each of the Company and the Subsidiaries owns, or is licensed or otherwise
possesses legally enforceable right to use, all Intellectual Property (as
defined below in this Section 2.12) used in the operation of its business or
necessary for the operation of its businesses as presently proposed to be
conducted. Each item of Intellectual Property owned by or used in the operation
of the business of the Company or any Subsidiary at any time during the period
covered by the Financial Statements will be owned or available for use by the
Company on identical
-18-
terms and conditions immediately following the Closing. Each of the Company and
the Subsidiaries has taken reasonable measures to protect the proprietary nature
of each item of Intellectual Property and to maintain in confidence all trade
secrets and confidential information, that it owns or uses. To the knowledge of
the Company and the Subsidiaries, no other person or Business Entity has any
rights to any of the Intellectual Property owned or used by the Company or any
Subsidiary (other than in connection with Intellectual Property representing
commercially available software licensed to the Company on a non-exclusive
basis), and no other person or Business Entity is infringing, violating or
misappropriating any of the Intellectual Property that the Company or any
Subsidiary owns or uses. For purposes of this Agreement, "Intellectual Property"
means all (i) patents, patent applications, patent disclosures and all related
continuation, continuation-in-part, divisional, reissue, reexamination, utility
model, certificate of invention and design patents, patent applications,
registrations and applications for registrations, (ii) trademarks, service
marks, trade dress, logos, trade names and corporate names and registrations and
applications for registration thereof, (iii) copyrights and registrations and
applications for registration thereof, (iv) computer software, data and
documentation, (v) trade secrets and confidential business information, whether
patentable or unpatentable and whether or not reduced to practice, know-how,
manufacturing and production processes and techniques, research and development
information, copyrightable works, financial, marketing and business data,
pricing and cost information, business and marketing plans and customer and
supplier lists and information, (vi) other proprietary rights relating to any of
the foregoing, and (vii) copies and tangible embodiments thereof.
(b) None of the activities or business conducted by the Company or any of the
Subsidiaries infringes, violates or constitutes a misappropriation of (or in the
past infringed, violated or constituted a misappropriation of) any Intellectual
Property rights of any other person or Business Entity. Neither the Company nor
any Subsidiary has received any complaint, claim or notice alleging any such
infringement, violation or misappropriation, and to the knowledge of the Company
and the Subsidiaries, there is no basis for any such complaint, claim or notice.
(c) Section 2.12(c) of the Disclosure Schedule identifies each (i) patent or
registration that has been issued to the Company or any Subsidiary with respect
to any of its Intellectual Property, (ii) pending patent application or
application for registration that the Company or any Subsidiary has made with
respect to any of its Intellectual Property, and (iii) license or other
agreement pursuant to which the Company or any Subsidiary has granted any rights
to any third party with respect to any of its Intellectual Property. The Company
has delivered to the Buyer correct and complete copies of all such patents,
registrations, applications, licenses and agreements (as amended to date) and
has specifically identified and made available to the Buyer correct and complete
copies of all other written documentation evidencing ownership of, and any
claims or disputes relating to, each such item.
-19-
Except as set forth in Section 2.12(c) of the Disclosure Schedule, with respect
to each item of Intellectual Property that the Company or any Subsidiary owns:
(A) subject to such rights as have been granted by the Company or any Subsidiary
under license agreements entered into in the Ordinary Course of Business of the
Company and the Subsidiaries, the Company or a Subsidiary possesses all right,
title and interest in and to such item;
(B) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction; and
(C) Subject to any indemnity given in agreements entered into in the Ordinary
Course of Business of the Company and its Subsidiaries as set forth in Section
2.12(c) of the Disclosure Schedule, neither the Company nor any Subsidiary has
agreed to indemnify any person or Business Entity for or against any
infringement, misappropriation or other conflict with respect to such item.
(d) Section 2.12(d) of the Disclosure Schedule identifies each item of
Intellectual Property used in the operation of the business of the Company and
the Subsidiaries at any time during the period covered by the Financial
Statements, or that the Company or any Subsidiary plans to use in the future,
that is owned by a party other than the Company or a Subsidiary (other than
commercially available desktop software applications generally available to the
public, which are not listed in Section 2.12(d) of the Disclosure Schedule but
with respect to which the representations set forth below on this Section
2.12(d) are true). The Company has supplied the Buyer with correct and complete
copies of all licenses, sublicenses or other agreements (as amended to date)
pursuant to which the Company or any Subsidiary uses such Intellectual Property,
all of which are listed on Section 2.12(d) of the Disclosure Schedule (other
than commercially available desktop software applications generally available to
the public). Except as set forth in Section 2.12(d) of the Disclosure Schedule,
with respect to each such item of Intellectual Property:
(i) the license, sublicense or other agreement covering such item is legal,
valid, binding, enforceable and in full force and effect, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditor's rights generally;
(ii) such license, sublicense or other agreement will continue to be legal,
valid, binding, enforceable and in full force and effect immediately following
the Closing in accordance with the terms thereof as in effect prior to the
Closing, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditor's rights generally;
-20-
(iii) neither the Company or any Subsidiary nor, to the knowledge of the Company
and the Subsidiaries, any other party to such license, sublicense or other
agreement is in breach or default, and no event has occurred which with notice
or lapse of time would constitute a breach or default or permit termination,
modification or acceleration thereunder;
(iv) to the Company's and the Subsidiaries' knowledge, the underlying item of
Intellectual Property is not subject to any outstanding judgment, order, decree,
stipulation or injunction;
(v) subject to any indemnity given in agreements entered into in the Ordinary
Course of Business of the Company and its Subsidiaries as set forth in Section
2.12(c) of the Disclosure Schedule, neither the Company nor any Subsidiary has
agreed to indemnify any person or Business Entity for or against any
interference, infringement, misappropriation or other conflict with respect to
such item; and
(vi) no license or other fee is payable upon any transfer or assignment of such
license, sublicense or other agreement.
2.13. INVENTORY. All inventory of the Company and the Subsidiaries, whether or
not reflected on the Most Recent Balance Sheet, consists of a quality and
quantity usable and saleable in the Ordinary Course of Business, except for
obsolete items and items of below-standard quality, all of which have been
written-off or written-down to net realizable value on the Most Recent Balance
Sheet. The Company has no inventory recorded on its Most Recent Balance Sheet.
The quantities of each type of inventory, whether raw materials, work-in-process
or finished goods, are not excessive in the present circumstances of the Company
and the Subsidiaries.
2.14. REAL PROPERTY LEASES. Section 2.14 of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to the Company or any
Subsidiary and lists the term of such lease, any extension and expansion
options, and the rent payable thereunder. The Company has delivered to the Buyer
correct and complete copies of the leases and subleases (as amended to date)
listed in Section 2.14 of the Disclosure Schedule. With respect to each lease
and sublease listed in Section 2.14 of the Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in full
force and effect with respect to the Company, and, to the knowledge of the
Company, with respect to the other parties thereto, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditor's rights generally;
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(b) the lease or sublease will continue to be legal, valid, binding, enforceable
and in full force and effect with respect to the Company, and, to the knowledge
of the Company, with respect to the other parties thereto, immediately following
the Closing in accordance with the terms thereof as in effect prior to the
Closing, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditor's rights generally;
(c) neither the Company or any Subsidiary nor, to the Company's knowledge any
other party to the lease or sublease is in breach or default, and no event has
occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) there are no disputes, oral agreements or forbearance programs in effect as
to the lease or sublease;
(e) neither the Company nor any Subsidiary has assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
subleasehold;
(f) all facilities leased or subleased thereunder are supplied with utilities
and other services necessary for the operation of said facilities;
(g) to the knowledge of the Company, the owner of the facility leased or
subleased by the Company or any Subsidiary has good and clear record and
marketable title to the parcel of real property, free and clear of any Security
Interest, easement, covenant or other restriction, except for recorded
easements, covenants, and other restrictions which do not impair the Intended
Uses, occupancy or value of the property subject thereto; and
(h) no construction, alteration or other leasehold improvement work with respect
to the lease or sublease remains to be paid for or performed by the Company or
any Subsidiary.
2.15. CONTRACTS.
(a) Section 2.15 of the Disclosure Schedule lists the following written
arrangements (including without limitation written agreements) to which the
Company or any Subsidiary is a party:
(i) any written arrangement (or group of related written arrangements) for the
furnishing or receipt of services;
(ii) any written arrangement concerning confidentiality, non-competition or
non-solicitation (other than confidentiality agreements with customers or
employees of the Company or any Subsidiary set forth in the Company's standard
terms and conditions of sale or standard form of employment agreement, copies of
which have previously been delivered to the Buyer);
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(iii) any written arrangement under which the consequences of a default or
termination could have a material adverse effect on the assets, business,
financial condition, results of operations or future prospects of the Company or
any Subsidiary or on the ability of the Parties to consummate the transactions
contemplated by this Agreement;
(iv) any written arrangement (or group of related written arrangements) for the
lease of personal property from or to third parties providing (A) for lease
payments in excess of $10,000 per annum or (B) for a term of more than three
years;
(v) any written arrangement establishing a partnership or joint venture;
(vi) any written arrangement (or group of related written arrangements) under
which it has created, incurred, assumed, or guaranteed (or may create, incur,
assume, or guarantee) indebtedness (including capitalized lease obligations)
involving more than $10,000 or under which it has imposed (or may impose) a
Security Interest on any of its assets, tangible or intangible;
(vii) any written arrangement involving any of the Company Stockholders or their
Affiliates (for the purposes of this Agreement, "Affiliate" shall mean (A) in
the case of an individual, the members of the immediate family (including
parents, siblings and children) or (i) the individual and (ii) the individual's
spouse, and (iii) any Business Entity that directly or indirectly, through one
or more intermediaries controls, or is controlled by, or is under common control
with any of the foregoing individuals, or (B) in the case of a Business Entity,
another Business Entity or a person that directly or indirectly, through one or
more intermediaries controls, or is controlled by, or is under common control
with the Business Entity);
(viii) any written arrangement under which the consequences of a default or
termination could have a material adverse effect on the assets, business,
financial condition, results of operations or future prospects of the Company
and the Subsidiaries, taken as a whole;
(ix) any written arrangement which requires or contemplates the performance of
services or the delivery of products by the Company or any Subsidiary;
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(x) any written arrangement based in any manner upon the sales, purchases,
receipts, revenues, income or profits of the Company or any Subsidiary;
(xi) any written arrangement restricting the Company or any Subsidiary from
carrying on its business anywhere in the world;
(xii) any written arrangement for joint product development with any party,
other than Company Customer Contracts;
(xiii) any written arrangements with vendors of material equipment purchased by
the Company or any Subsidiary as reseller of equipment, other than purchase
orders in the ordinary course of business;
(xiv) any written franchise arrangement, marketing arrangement or royalty
arrangement that requires payments or results in recurring revenues and with
respect to each such arrangement, Section 2.14 of the Company Disclosure
Schedule sets forth or describes the aggregate royalties or similar payment paid
or payable thereunder by the Company or any Subsidiary as of the date hereof;
(xv) any written arrangement as of the date of this Agreement relating to the
evaluation of the Company by any other company, person or entity who was or is
considering acquiring all or a significant part of the Company's business by
acquisition, merger, joint venture or otherwise; and
(xvi) any other written arrangement (or group of related written arrangements)
involving more than $25,000 or not entered into in the Ordinary Course of
Business of the Company or any Subsidiary.
(b) Section 2.15 of the Disclosure Schedule accurately discloses with respect to
each arrangement or agreement disclosed therein (the "Contracts"), if
applicable, (i) the project name; (ii) the date of the Contract; (iii) the
customer name and address and customer contact person and phone number; (iv) the
contract amount or, if the contract amount is not fixed, a good faith,
reasonable estimate of the contract amount; (v) the estimated contract amount
most recently communicated to the customer; (vi) the total billings to date
under such Contract; (vii) the estimated completion dates therefor; (viii)
estimated costs to complete based on hours and rates; and (ix) whether or not
the Company has any reason to believe that its profit margin with respect to
such Contract might be less than it has customarily achieved in the past for
similar contracts.
(c) The Company has delivered to the Buyer a correct and complete copy of each
Contract (as amended to date). With respect to each Contract: (i) the Contract
is legal, valid, binding and enforceable against the Company and in full
-24-
force and effect; (ii) to the knowledge of the Company, the Contract is legal,
valid, binding and enforceable against the other party thereto; (iii) the
Contract will continue to be legal, valid, binding and enforceable and in full
force and effect immediately following the Closing in accordance with the terms
thereof as in effect prior to the Closing; and (iv) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification or
acceleration, under the Contract.
(d) Neither the Company nor any Subsidiary is a party to any oral contract,
agreement or other arrangement which, if reduced to written form, would be
required to be listed in Section 2.15 of the Disclosure Schedule under the terms
of this Section 2.15. Neither the Company nor any Subsidiary is a party to any
written or oral arrangement (i) to perform services or sell products which is
expected to be performed at, or to result in, a loss, (ii) which requires the
performance of services or the delivery of products by the Company or any
Subsidiary at a fixed price (which shall include, for purposes of this
Agreement, an agreement for the provision of services on a "time and materials
not to exceed" basis), or (iii) for which the customer has already been billed
or paid that have not been fully accounted for on the Most Recent Balance Sheet.
Neither the Company nor any Subsidiary is restricted by any Contract from
carrying on business anywhere in the world.
2.16. ACCOUNTS RECEIVABLE. All accounts receivable of the Company and the
Subsidiaries reflected on the Most Recent Balance Sheet are valid receivables
subject to no setoffs or counterclaims and, except to the extent collected since
the date of the Most Recent Balance Sheet, are current and collectible (within
90 days after the date on which it first became due and payable), net of the
applicable reserve for bad debts on the Most Recent Balance Sheet. All accounts
receivable reflected in the financial or accounting records of the Company that
have arisen since the Balance Sheet Date are valid receivables subject to no
setoffs or counterclaims and are collectible, net of a reserve for bad debts in
an amount proportionate to the reserve shown on the Most Recent Balance Sheet.
2.17. POWERS OF ATTORNEY. There are no outstanding powers of attorney executed
on behalf of the Company or any Subsidiary.
2.18. INSURANCE. Section 2.18 of the Disclosure Schedule lists each insurance
policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company or any Subsidiary has been a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past three years. Each such
insurance policy is enforceable and in full force and effect and will continue
to be enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing. Neither
the Company nor any Subsidiary is in breach or default
-25-
(including with respect to the payment of premiums or the giving of notices)
under any such policy, and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default or permit termination,
modification or acceleration, under such policy; and neither the Company nor any
Subsidiary has received any notice from the insurer disclaiming coverage or
reserving rights with respect to a particular claim or such policy in general.
Section 2.18 of the Disclosure Schedule identifies all claims asserted by the
Company or any Subsidiary pursuant to any insurance policy since January 1, 1995
and describes the nature and status of each such claim. Neither the Company nor
any Subsidiary has incurred any loss, damage, expense or liability covered by
any such insurance policy for which it has not properly asserted a claim under
such policy. Each of the Company and the Subsidiaries is covered by insurance in
scope and amount customary and reasonable for the businesses in which it is
engaged.
2.19. LITIGATION. Section 2.19 of the Disclosure Schedule identifies, and
contains a brief description of, (a) any unsatisfied judgement, order, decree,
stipulation or injunction and (b) any claim, complaint, action, suit,
proceeding, hearing or investigation of or in any Governmental Entity or before
any arbitrator to which the Company or any Subsidiary is a party or, to the
knowledge of the Company and the Subsidiaries, is threatened to be made a party.
None of the complaints, actions, suits, proceedings, hearings, and
investigations set forth in Section 2.19 of the Disclosure Schedule,
individually or collectively, could have a material adverse effect on the
assets, business, financial condition, results of operations or future prospects
of the Company and Subsidiaries, taken as a whole.
2.20. WARRANTY. No product or service manufactured, sold, leased, licensed,
delivered or otherwise provided by the Company or any Subsidiary is subject to
any guaranty, warranty, right of return or other indemnity.
2.21. EMPLOYEES.
(a) Section 2.21 of the Disclosure Schedule contains a list of all employees of
the Company and each Subsidiary, along with the position, date of hire, the
annual rate of compensation (or with respect to employees compensated on an
hourly or per diem basis, the hourly or per diem rate of compensation) and
estimated or target annual incentive compensation of each such person. None of
such employees is a party to an employment agreement or contract with the
Company. Each such Employee has entered into the Company's standard form of
confidentiality and assignment of inventions agreement with the Company or a
Subsidiary, a copy of which has previously been delivered to the Buyer. To the
knowledge of the Company and its Subsidiaries, no key employee or group of
employees has any plans to terminate employment with the Company or any
Subsidiary.
-26-
(b) Neither the Company nor any Subsidiary is a party to or bound by any
collective bargaining agreement, nor has any of them experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Company and the Subsidiaries have no knowledge of any
organizational effort made or threatened, either currently or within the past
two years, by or on behalf of any labor union with respect to employees of the
Company or any Subsidiary.
(c) Neither the Company or any Subsidiary nor any director, who is also an
employee of the Company or a Subsidiary, officer or other key employee of the
Company or any Subsidiary owns, directly or indirectly, individually or
collectively, any interest in any Business Entity (other than as the holder of
less than 20% of the stock of a public Business Entity) which is in a business
similar or competitive to the businesses of the Company and the Subsidiaries or
which has any existing undisclosed contractual relationship with the Company or
any of the Subsidiaries.
(d) For purposes of this Agreement, the term "employee" shall be construed to
include sales agents and other independent contractors who spend a majority of
their working time on the business of the Company or any Subsidiary (each of
whom shall be so identified in Section 2.21 of the Disclosure Schedule).
2.22. EMPLOYEE BENEFITS.
(a) Section 2.22(a) of the Disclosure Schedule contains a complete and accurate
list of all Employee Benefit Plans (as defined below) maintained, or contributed
to, by the Company, any Subsidiary, or any ERISA Affiliate (as defined below).
For purposes of this Agreement, "Employee Benefit Plan" means any "employee
pension benefit plan" (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), any "employee welfare
benefit plan" (as defined in Section 3(1) of ERISA), and any other written or
oral plan, agreement or arrangement involving direct or indirect compensation,
including without limitation insurance coverage, severance benefits, disability
benefits, deferred compensation, bonuses, stock options, stock purchase, phantom
stock, stock appreciation or other forms of incentive compensation or
post-retirement compensation. For purposes of this Agreement, "ERISA Affiliate"
means any entity which is a member of (i) a controlled group of corporations (as
defined in Section 414(b) of the Code), (ii) a group of trades or businesses
under common control (as defined in Section 414(c) of the Code), or (iii) an
affiliated service group (as defined under Section 414(m) of the Code or the
regulations under Section 414(o) of the Code), any of which includes the Company
or a Subsidiary. Complete and accurate copies of (i) all Employee Benefit Plans
which have been reduced to writing, (ii) written summaries of all unwritten
Employee Benefit Plans, (iii) all related trust agreements, insurance contracts
and summary plan descriptions, and (iv) all annual reports filed on IRS Form
5500, 5500C or 5500R for the last five plan years for each
-27-
Employee Benefit Plan, have been delivered to the Buyer. Each Employee Benefit
Plan has been administered in accordance with its terms and each of the Company,
the Subsidiaries and the ERISA Affiliates has met its obligations with respect
to such Employee Benefit Plan and has made all required contributions thereto.
The Company and all Employee Benefit Plans are in compliance with the currently
applicable provisions of ERISA and the Code and the regulations thereunder.
(b) There are no investigations by any Governmental Entity, termination
proceedings or other claims (except claims for benefits payable in the normal
operation of the Employee Benefit Plans and proceedings with respect to
qualified domestic relations orders) suits or proceedings against or involving
any Employee Benefit Plan or asserting any rights or claims to benefits under
any Employee Benefit Plan that could give rise to any liability.
(c) All the Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the Internal
Revenue Service to the effect that such Employee Benefit Plans are qualified and
the plans and the trusts related thereto are exempt from federal income taxes
under Sections 401(a) and 501(a), respectively, of the Code, no such
determination letter has been revoked and revocation has not been threatened,
and no such Employee Benefit Plan has been amended since the date of its most
recent determination letter or application therefor in any respect, and no act
or omission has occurred, that would adversely affect its qualification or
increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA Affiliate has ever
maintained an Employee Benefit Plan subject to Section 412 of the Code or Title
IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA Affiliate been
obligated to contribute to any "multi-employer plan" (as defined in Section
4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan providing
benefits after termination of employment to any employee of the Company or any
Subsidiary (or to any beneficiary of any such employee), including but not
limited to retiree health coverage and deferred compensation, but excluding
continuation of health coverage required to be continued under Section 4980B of
the Code and insurance conversion privileges under state law.
(g) No act or omission has occurred and no condition exists with respect to any
Employee Benefit Plan maintained by the Company, any Subsidiary or any ERISA
Affiliate that would subject the Company, any Subsidiary or any ERISA Affiliate
to any material fine, penalty, tax or liability of any kind imposed under ERISA
or the Code.
-28-
(h) No Employee Benefit Plan is funded by, associated with, or related to a
"voluntary employee's beneficiary association" within the meaning of Section
501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees by
its terms prohibits the Company from amending or terminating any such Employee
Benefit Plan.
(j) Section 2.22(j) of the Disclosure Schedule discloses each: (i) agreement
with any director, executive officer or other key employee of the Company or any
Subsidiary (A) the benefits of which are contingent, or the terms of which are
altered, upon the occurrence of a transaction involving the Company or any
Subsidiary of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee or (C)
providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the Company
or any Subsidiary that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment" under
Section 280G of the Code; and (iii) agreement or plan binding the Company or any
Subsidiary, including without limitation any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan, severance
benefit plan, or any Employee Benefit Plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. The accruals for vacation,
sickness and disability expenses are accounted for on the Most Recent Balance
Sheet and are adequate and properly reflect the expenses associated therewith in
accordance with GAAP.
2.23. ENVIRONMENTAL MATTERS.
(a) Each of the Company and the Subsidiaries has complied with all applicable
Environmental Laws (as defined below). There is no pending or, to the knowledge
of the Company and the Subsidiaries, threatened civil or criminal litigation,
written notice of violation, formal administrative proceeding, or investigation,
inquiry or information request by any Governmental Entity, relating to any
Environmental Law involving the Company or any Subsidiary. For purposes of this
Agreement, "Environmental Law" means any federal, state or local law, statute,
rule or regulation or the common law relating to the environment or occupational
health and safety, including without limitation any statute, regulation or order
pertaining to (i) treatment, storage, disposal, generation and transportation of
industrial, toxic or hazardous substances or solid or hazardous waste; (ii) air,
water
-29-
and noise pollution; (iii) groundwater and soil contamination; (iv) the
release or threatened release into the environment of industrial, toxic or
hazardous substances, or solid or hazardous waste, including without limitation
emissions, discharges, injections, spills, escapes or dumping of pollutants,
contaminants or chemicals; (v) the protection of wild life, marine sanctuaries
and wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels and containers; (vii) underground and other
storage tanks or vessels, abandoned, disposed or discarded barrels, containers
and other closed receptacles; (viii) health and safety of employees and other
persons; and (ix) manufacture, processing, use, distribution, treatment,
storage, disposal, transportation or handling of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or oil or petroleum
products or solid or hazardous waste. As used above, the terms "release" and
"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980 ("CERCLA").
(b) There have been no releases of any Materials of Environmental Concern (as
defined below) into the environment at any parcel of real property or any
facility formerly or currently owned, operated or controlled by the Company or a
Subsidiary. With respect to any such releases of Materials of Environmental
Concern, the Company or such Subsidiary has given all required notices to
Governmental Entities (copies of which have been provided to the Buyer). Neither
the Company nor any Subsidiary is aware of any releases of Materials of
Environmental Concern at parcels of real property or facilities other than those
owned, operated or controlled by the Company or a Subsidiary that could
reasonably be expected to have an impact on the real property or facilities
owned, operated or controlled by the Company or a Subsidiary. For purposes of
this Agreement, "Materials of Environmental Concern" means any chemicals,
pollutants or contaminants, hazardous substances (as such term is defined under
CERCLA), solid wastes and hazardous wastes (as such terms are defined under the
federal Resources Conservation and Recovery Act), toxic materials, oil or
petroleum and petroleum products, or any other material subject to regulation
under any Environmental Law.
(c) Set forth in Section 2.23(c) of the Disclosure Schedule is a list of all
environmental reports, investigations and audits relating to premises currently
or previously owned or operated by the Company or a Subsidiary (whether
conducted by or on behalf of the Company or a Subsidiary or a third party, and
whether done at the initiative of the Company or a Subsidiary or directed by a
Governmental Entity or other third party) which the Company has possession of or
access to. Complete and accurate copies of each such report, or the results of
each such investigation or audit, have been provided to the Buyer.
(d) Set forth in Section 2.23(d) of the Disclosure Schedule is a list of all of
the solid and hazardous waste transporters and treatment, storage and disposal
facilities that have been utilized by the Company or a Subsidiary. Neither the
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Company nor any Subsidiary is aware of any material environmental liability of
any such transporter or facility.
2.24. LEGAL COMPLIANCE. Each of the Company and the Subsidiaries, and the
conduct and operations of their respective businesses, are and have been in full
compliance with each law (including rules and regulations thereunder) of any
federal, state, local or foreign government, or any Governmental Entity, which
(a) affects or relates to this Agreement or the transactions contemplated hereby
or (b) is applicable to the Company or such Subsidiary or business.
2.25. PERMITS. Section 2.25 of the Disclosure Schedule sets forth a list of all
permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity (including without limitation those issued or required under
Environmental Laws and those relating to the occupancy or use of owned or leased
real property) ("Permits") issued to or held by the Company or any Subsidiary.
Such listed Permits are the only Permits that are required for the Company and
the Subsidiaries to conduct their respective businesses as presently conducted.
Each such Permit is in full force and effect and, to the best of the knowledge
of the Company or any Subsidiary, no suspension or cancellation of such Permit
is threatened and there is no basis for believing that such Permit will not be
renewable upon expiration. Each such Permit will continue in full force and
effect immediately following the Closing.
2.26. CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES. No Company Stockholders,
Affiliate of any Company Stockholder or Affiliate of the Company or of any
Subsidiary (a) owns any property or right, tangible or intangible, which is used
in the business of the Company or any Subsidiary, (b) has any claim or cause of
action against the Company or any Subsidiary, (c) owes any money to the Company
or any Subsidiary or (d) is a party to any contract or other arrangement
(written or verbal) with the Company or any Subsidiary (the agreements,
arrangements and relationships described in this sentence are hereinafter
referred to as "Related Party Transactions"). Section 2.26 of the Disclosure
Schedule summarizes any Related Party Transactions.
2.27. BROKERS' FEES. Except for fees payable to Piper Jaffray Inc., which will
be reflected as a liability on the Closing Balance Sheet if not paid in full
prior to the Closing, neither the Company nor any Subsidiary has any liability
or obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
2.28. BOOKS AND RECORDS. The minute books and other similar records of the
Company and each Subsidiary contain true and complete records of all actions
taken at any meetings of the Company's or such Subsidiary's stockholders, Board
of Directors or any committee thereof and of all written consents executed in
lieu of the
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holding of any such meeting. The books and records of the Company
and each Subsidiary accurately reflect the assets, liabilities, business,
financial condition and results of operations of the Company or such Subsidiary
and have been maintained in accordance with good business and bookkeeping
practices.
2.29. CUSTOMERS AND SUPPLIERS. No customer of the Company or any Subsidiary has
indicated within the past year that it will stop, or decrease the rate of,
buying materials, products or services from the Company or such Subsidiary. The
Company has good customer relations with its customers, and none of such
customers has notified the Company that it intends to discontinue its
relationship with the Company. To the knowledge of the Company and the
Subsidiaries, no unfilled customer order or commitment obligating the Company or
any Subsidiary to process, manufacture or deliver products or perform services
will result in a loss to the Company or any Subsidiary upon completion of
performance. To the knowledge of the Company and the Subsidiaries, no purchase
order or commitment of the Company or any Subsidiary is in excess of normal
requirements, nor are prices provided therein in excess of current market prices
for the products or services to be provided thereunder. No material supplier of
the Company or any Subsidiary has indicated within the past year that it will
stop, or decrease the rate of, supplying materials, products or services to
them. Section 2.29 of the Disclosure Schedule sets forth a list of each customer
of the Company during the last full fiscal year and the interim period through
the Balance Sheet Date and the amount of revenues accounted for by such customer
during each such periods. No supplier is the sole supplier of any significant
product or component to the Company or a Subsidiary. The Company has not
received or submitted any invoices or requests for any prepayment or deposits
from customers for products to be shipped, or services to be performed, after
the Closing Date.
2.30. POOLING. To the knowledge of the Company and each Subsidiary, neither the
Company nor any of its Affiliates has through the date of this Agreement taken
or agreed to take any action that would prevent the Company and the Buyer from
accounting for the business combination to be effected by the Merger as a
"pooling of interests" in conformity with GAAP.
2.31. COMPANY ACTION.
(a) The Board of Directors of the Company, at a meeting duly called and held,
has by the unanimous vote of all directors present (i) determined that the
Merger is fair and in the best interests of the Company and its stockholders,
(ii) adopted this Agreement in accordance with the provisions of the Delaware
General Corporation Law, and (iii) directed that this Agreement and the Merger
be submitted to the Company Stockholders for their adoption and approval and
resolved to recommend that Company Stockholders vote in favor of the adoption of
this Agreement and the approval of the Merger.
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(b) The financial advisors to the Company have delivered to the Company an
opinion, dated the date hereof, to the effect that the terms of the Merger are
fair to the Company Stockholders from a financial point of view and will deliver
to the Buyer as soon as it is received a copy of such opinion in the form
reduced to writing and signed by the Company's financial advisor dated the date
of this Agreement.
2.32. PREPAYMENTS, PREBILLED INVOICES AND DEPOSITS.
(a) Section 2.32(a) of the Disclosure Schedule sets forth (i) all prepayments,
prebilled invoices and deposits that have been received by the Company or any
Subsidiary as of the date of this Agreement from customers for products to be
shipped, or services to be performed, after the Closing Date, and (ii) with
respect to each such prepayment, prebilled invoice or deposit, (A) the party and
contract credited, (B) the date received or invoiced, (C) the products and/or
services to be delivered, and (D) the conditions for the return of such
prepayment, prebilled invoice or deposit. All such prepayments, prebilled
invoices and deposits are properly accrued for on the Most Recent Balance Sheet
in accordance with GAAP applied on a consistent basis with the past practice of
the Company and the Subsidiaries.
(b) Section 2.32(b) of the Disclosure Schedule sets forth (i) all prepayments,
prebilled invoices and deposits that have been made or paid by the Company or
any Subsidiary as of the date of this Agreement for products to be purchased,
services to be performed or other benefits to be received after the Closing
Date, and (ii) with respect to each such prepayment, prebilled invoice or
deposit, (A) the party to whom such prepayment, prebilled invoice or deposit was
made or paid, (B) the date made or paid, (C) the products and/or services to be
delivered, and (D) the conditions for the return of such prepayment, prebilled
invoice or deposit. All such prepayments, prebilled invoices and deposits are
properly accrued for on the Most Recent Balance Sheet in accordance with GAAP
applied on a consistent basis with the past practices of the Company.
2.33. BANKING FACILITIES. Section 2.33 of the Disclosure Schedule identifies:
(a) Each bank, savings and loan or similar financial institution in which the
Company or any Subsidiary has an account or safety deposit box and the numbers
of the accounts or safety deposit boxes maintained by the Company or such
Subsidiary thereat; and
(b) The names of all persons authorized to draw on each such account or to have
access to any such safety deposit box facility, together with a description of
the authority (and conditions thereof, if any) or each such person with respect
thereto.
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2.34. YEAR 2000.
(a) Other than commercially available software licensed to the Company on a
non-exclusive basis and except as set forth in Section 2.34 of the Disclosure
Schedule attached hereto, all software used by the Company or any Subsidiary
that contains or calls on a calendar function, including without limitation any
function that is indexed to a computer processing unit clock, provides specific
dates or calculates spans of dates, is and will be able to record, store,
process and provide true and accurate dates and calculations for dates and spans
of dates including and following January 1, 2000.
(b) All software sold, licensed or otherwise made available to any third party
by the Company or any Subsidiary, that in each case, contains or calls on a
calendar function, including without limitation any function that is indexed to
a computer processing unit clock, provides specific dates or calculates spans of
dates, is and will be able to record, store, process and provide true and
accurate dates and calculations for dates and spans of dates including and
following January 1, 2000.
2.35. DISCLOSURE. No representation or warranty by the Company contained in this
Agreement, and no statement contained in the Disclosure Schedule or any other
document, certificate or other instrument delivered or to be delivered by or on
behalf of the Company pursuant to this Agreement, and no other statement made by
the Company or any of its representatives in connection with this Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading. The Company has disclosed to the Buyer all material
information relating to the business of the Company and any Subsidiary and the
transactions contemplated by this Agreement.
2.36. INFORMATION IN REGISTRATION STATEMENT. None of the information supplied or
to be supplied by the Company or any of its Subsidiaries for the purpose of
inclusion in the registration statement on Form S-4 to be filed with the
Securities and Exchange Commission (the "SEC") by the Buyer under the Securities
Act for the purpose of registering the Merger Shares to be issued (together with
any amendments or supplements thereto, whether prior to or after the effective
date thereof, the "Registration Statement") will, at the time the Registration
Statement is filed with the SEC, at the time the Registration Statement becomes
effective under the Securities Act and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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Article III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants
to the Company as follows:
3.1. ORGANIZATION. Each of the Buyer and the Transitory Subsidiary is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the state of its incorporation.
3.2. CAPITALIZATION. The authorized capital stock of the Transitory Subsidiary
consists of 1,000 shares of common stock, $.01 par value per share, of which
1,000 shares are issued and outstanding and held by the Buyer. The common stock
of the Transitory Subsidiary will represent the only class or series of capital
stock of the Transitory Subsidiary entitled to vote on the adoption of this
Agreement.
3.3. AUTHORIZATION OF TRANSACTION. Each of the Buyer and the Transitory
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and (in the case of the Buyer) the Escrow Agreement and to perform its
obligations hereunder and thereunder. The execution and delivery of this
Agreement and (in the case of the Buyer) the Escrow Agreement by the Buyer and
the Transitory Subsidiary and the performance of this Agreement and (in the case
of the Buyer) the Escrow Agreement the consummation of the transactions
contemplated hereby and thereby by the Buyer and the Transitory Subsidiary have
been duly and validly authorized by all necessary corporate action on the part
of the Buyer and Transitory Subsidiary. This Agreement has been duly and validly
executed and delivered by the Buyer and the Transitory Subsidiary and
constitutes a valid and binding obligation of the Buyer and the Transitory
Subsidiary, enforceable against them in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditor's rights generally.
3.4. NONCONTRAVENTION. Subject to compliance with the applicable requirements of
the Securities Act and any applicable state securities laws, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott- Rodino
Act, the rules and regulations of the Nasdaq National Market, and the filing of
the Certificate of Merger as required by the Delaware General Corporation Law,
neither the execution and delivery of this Agreement or (in the case of the
Buyer) the Escrow Agreement by the Buyer or the Transitory Subsidiary, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated hereby or thereby (including the issuance of the Merger Shares),
will (a) conflict or violate any provision of the charter or By-laws of the
Buyer or the Transitory Subsidiary, (b) require on the part of the Buyer or the
Transitory Subsidiary any filing with, or
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permit, authorization, consent or approval of, any Governmental Entity, (c)
conflict with, result in breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of, create in
any party any right to accelerate, terminate, modify or cancel, or require any
notice, consent or waiver under, any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for borrowed
money, instrument of indebtedness, Security Interest or other arrangement to
which the Buyer or Transitory Subsidiary is a party or by which either is bound
or to which any of their assets are subject, or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Buyer or the
Transitory Subsidiary or any of their properties or assets.
3.5. REPORTS AND FINANCIAL STATEMENTS. The Buyer has previously furnished to the
Company complete and accurate copies, as amended or supplemented, of its (a)
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed
with the SEC, and (b) all other reports filed by the Buyer under Section 13 of
the Exchange Act with the SEC since January 1, 1998 (such reports, together with
any amendments or supplements thereto are collectively referred to herein as the
"Buyer Reports"). As of their respective dates, the Buyer Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Buyer included in the Buyer Reports (i) comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, (ii) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby (except as may be indicated therein or in the notes thereto, and
in the case of quarterly financial statements, as permitted by Form 10-Q under
the Exchange Act), (iii) fairly present the consolidated financial condition,
results of operations and cash flows of the Buyer as of the respective dates
thereof and for the periods referred to therein, and (iv) are consistent with
the books and records of the Buyer.
3.6. BROKERS' FEES. Except for fees payable to Cowen & Co., neither the Buyer
nor the Transitory Subsidiary has any liability or obligation to pay any fees or
commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement.
3.7. LEGALITY OF MERGER SHARES. All of the Merger Shares have been duly
authorized and, when issued and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable, and free of pre-emptive
rights.
3.8. DISCLOSURE. No representation or warranty by the Buyer contained in this
Agreement, and no statement contained in any document, certificate or other
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instrument delivered to or to be delivered by or on behalf of the Buyer pursuant
to this Agreement, contains or will contain any untrue statement of a material
fact or omit or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading.
Article IV
COVENANTS
4.1. BEST EFFORTS. Each of the Parties shall use its best efforts, to the extent
commercially reasonable, to take all actions and to do all things necessary,
proper or advisable to consummate the transactions contemplated by this
Agreement; provided, however, that notwithstanding anything in this Agreement to
the contrary, the Buyer shall not be required to sell or dispose of or hold
separately (through a trust or otherwise) any assets or businesses of the Buyer
or its Affiliates. The Buyer and the Company shall each use all commercially
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368 of the Code.
4.2. NOTICES AND CONSENTS. The Company shall use its best efforts to obtain, at
its expense, all such waivers, permits, consents, approvals or other
authorizations from third parties and Governmental Entities, and to effect all
such registrations, filings and notices with or to third parties and
Governmental Entities, as may be required by or with respect to the Company in
connection with the transactions contemplated by this Agreement (including
without limitation those listed in Section 2.4, Section 2.12 or Section 2.25 of
the Disclosure Schedule). Each of the Buyer and the Transitory Subsidiary shall
use its best efforts to obtain, at its expense, all such waivers, permits,
consents, approvals or other authorizations from third parties and Governmental
Entities, and to effect all such registrations, filings and notices with or to
third parties and Governmental Entities, as may be required by or with respect
to the Buyer or the Transitory Subsidiary, as the case may be, in connection
with the transactions contemplated by this Agreement.
4.3. REGISTRATION; SPECIAL MEETING; OTHER ACTIONS
(a) Within 90 days of the date hereof, assuming receipt by the Buyer of the
initial Computer Certificate, the Buyer shall prepare and file the Registration
Statement with the SEC. The Buyer acknowledges that the Company and its counsel
may participate in the preparation of the Registration Statement, provided that
the final determination of any issues related thereto shall be made by the
Buyer. The Buyer shall also take actions (other than qualifying to do business
in any jurisdiction in which the Buyer is now not so qualified) as may be
required to be taken under any applicable state securities laws in connection
with the issuance of Buyer Common
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Stock in the Merger. The Company and its counsel and accountants shall furnish
all information concerning the Company and the holders of Company Shares as may
be reasonably requested in connection with the foregoing, including without
limitation all information concerning the Company and the holders of Company
Shares that is required by the SEC to be included in the Registration Statement.
(b) Each Party agrees, subject to applicable laws relating to the exchange of
information, promptly to furnish the other Parties with copies of written
communications (and memoranda setting forth the substance of all oral
communications) received by such Party, or any of its Subsidiaries, affiliates
or associates (as such terms are defined in Rule 12b-2 under the Exchange Act as
in effect on the date hereof), from, or delivered by any of the foregoing to,
any Governmental Entity relating to or in respect of the transactions
contemplated under this Agreement.
(c) The Company shall use its reasonable best efforts to cause to be delivered
to the Buyer a "comfort" letter of Ernst & Young LLP, the Company's independent
public accountants, dated the date on which the Registration Statement shall
become effective and as of the Effective Time, and addressed to the Buyer and
the Company, in form and substance reasonably satisfactory to the Buyer and
reasonably customary in scope and substance for letters delivered by independent
public accountants in connection with transactions such as those contemplated by
this Agreement.
(d) The Company (i) shall call a meeting of its stockholders to be held as
promptly as practicable after the date hereof for purposes of voting upon this
Agreement (the "Company Special Meeting") or (ii) shall solicit written consents
of its stockholders in lieu thereof. The Company and the Subsidiaries shall
comply with all applicable provisions of the Delaware General Corporation Law in
the calling and holding of the Company Special Meeting.
(e) The Company, acting through its Board of Directors, shall include in any
proxy statement or written action relating to the Company Special Meeting the
recommendation of its Board of Directors that the Company Stockholders vote in
favor of the adoption of this Agreement and the approval of the Merger, and
shall otherwise use its best efforts to obtain the Requisite Stockholder
Approval.
(f) Gene Barduson and Vincent Estrada each agree to (i) vote all Company Shares
that are beneficially owned by him or it, or for which he or it has voting
authority, in favor of the adoption of this Agreement and the approval of the
Merger and (ii) otherwise use his or its best efforts to obtain the Requisite
Stockholder Approval.
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4.4. OPERATION OF BUSINESS. Except as contemplated by this Agreement, during the
period from the date of this Agreement to the Effective Time, the Company shall
(and shall cause each Subsidiary to) conduct its operations in the Ordinary
Course of Business and in compliance with all applicable laws and regulations
and, to the extent consistent therewith, use all reasonable efforts to preserve
intact its current business organization, keep its physical assets in good
working condition, keep available the services of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect. Without limiting the
generality of the foregoing, prior to the Effective Time, neither the Company
nor any Subsidiary shall, without the prior written consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) or authorize the issuance, sale
or delivery of, or redeem or repurchase, any stock of any class or any other
securities or any rights, warrants or options to acquire any such stock or other
securities (except pursuant to the conversion or exercise of convertible
securities, Options or Warrants outstanding on the date hereof), or amend any of
the terms of any such convertible securities, Options or Warrants;
(b) split, combine or reclassify any shares of its capital stock; or declare,
set aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any debt not currently outstanding (including
obligations in respect of capital leases) other than from the Buyer pursuant to
that certain loan agreement dated the date hereof; assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity; or make any loans,
advances or capital contributions to, or investments in, any other person or
entity;
(d) enter into, adopt or amend any Employee Benefit Plan or any employment or
severance agreement or arrangement of the type described in Section 2.22(j) or
(except for normal increases in the Ordinary Course of Business) increase in any
manner the compensation or fringe benefits of, or materially modify the
employment terms of, its directors, officers or employees, generally or
individually, or pay any benefit not required by the terms in effect on the date
hereof of any existing Employee Benefit Plan;
(e) acquire, sell, lease, encumber or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any Subsidiary or any corporation, partnership, association or
other
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business organization or division thereof), other than purchases and sales
of assets in the Ordinary Course of Business;
(f) Amend its Certificate of Incorporation or By-laws;
(g) change in any material respect its accounting methods, principles or
practices, except insofar as may be required by a generally applicable change in
GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets or subject any such assets
to any Security Interest;
(j) sell, assign, transfer or license any Intellectual Property, other than in
the Ordinary Course of Business;
(k) enter into, amend, terminate, take or omit to take any action that would
constitute a violation of or default under, or waive any rights under, any
material contract or agreement;
(l) make or commit to make any capital expenditure in excess of $10,000 per
expenditure or $50,000 in the aggregate;
(m) take any action or fail to take any action permitted by this Agreement with
the knowledge that such action or failure to take action would result in (i) any
of the representations and warranties of the Company set forth in this Agreement
becoming untrue in any material respect or (ii) any of the conditions to the
Merger set forth in Article V not being satisfied;
(n) take any action that would jeopardize the treatment of the Merger as a
"pooling of interests" for accounting purposes;
(o) agree in writing or otherwise to take any of the foregoing actions; or
(p) make any accrual or promise to pay any bonus or other form of compensation
or make any loan to any employee or entity outside the Ordinary Course of
Business.
The Parties acknowledge that as a condition to receiving the Buyer's prior
written consent in accordance with this Section 4.4, the Buyer and the Company
may mutually agree to reduce the Purchase Price.
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4.5. FULL ACCESS. The Company shall (and shall cause each Subsidiary to) permit
representatives of the Buyer to have full access (at all reasonable times, and
in a manner so as not to interfere with the normal business operations of the
Company and the Subsidiaries) to all premises, properties, financial and
accounting records, contracts, other records and documents, and personnel, of or
pertaining to the Company and each Subsidiary. The officers and management of
the Company and the Subsidiaries shall cooperate fully with the Buyer's
representatives and agents and shall make themselves available to the extent
necessary to complete the due diligence process and the Closing. The Company
shall, at the request of the Buyer, introduce the Buyer to the principal
customers and employees and the Company and the Subsidiaries to facilitate
discussions between such persons and the Buyer in regard to the conduct of the
business of the Company and the Subsidiaries following the Closing.
Notwithstanding the foregoing, the Buyer shall work with and consult with
officers of the Company with respect to contacting such employees and customers.
4.6. NOTICE OF BREACHES. The Company shall promptly deliver to the Buyer written
notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Disclosure Schedule) inaccurate or incomplete in any respect, or (b) constitute
or result in a breach by the Company of, or a failure by the Company to comply
with, any agreement or covenant in this Agreement applicable to such party. No
such disclosure shall be deemed to avoid or cure any such misrepresentation or
breach.
4.7. EXCLUSIVITY. The Company, Gene Barduson and Vincent Estrada shall not, and
the Company shall use its best efforts to cause its Affiliates and each of its
officers, directors, employees, representatives and agents not to, directly or
indirectly, (a) encourage, solicit, initiate, engage or participate in
discussions or negotiations with any person or entity (other than the Buyer)
concerning any merger, consolidation, sale of material assets, tender offer,
recapitalization, accumulation of Company Shares, proxy solicitation or other
business combination involving the Company, any Subsidiary or any division of
the Company or any Subsidiary or (b) provide any non-public information
concerning the business, properties or assets of the Company or any Subsidiary
to any person or entity (other than the Buyer) without the prior written consent
of the Buyer other than providing pricing information and information concerning
the Company's system architecture to customers and prospective customers in the
Ordinary Course of Business. The Company shall immediately notify the Buyer of,
and shall disclose to the Buyer all details of, any inquiries, discussions or
negotiations of the nature described in the first sentence of this Section 4.7.
4.8. AGREEMENTS FROM CERTAIN AFFILIATES OF THE COMPANY. Concurrently with the
execution of this Agreement, the Company shall deliver to the Buyer a list of
all persons or entities who are at such time Affiliates of the Company (the
"Company Affiliates"). In order to help ensure that the Merger will be accounted
for as a
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"pooling of interests," that the issuance of Merger Shares will comply
with the Securities Act, and that the Merger will be treated as a tax-free
reorganization, the Company shall cause each Company Affiliate to execute and
deliver to the Buyer, concurrently with the signing of this Agreement, a written
agreement substantially in the form attached hereto as EXHIBIT B (the "Affiliate
Agreement").
4.9. MONTHLY FINANCIAL STATEMENTS. Promptly as possible following the last day
of each month after the date of this Agreement until the Closing Date, and in
any event within 15 days after the end of each such month, the Company shall
deliver to the Buyer an unaudited consolidated balance sheet of the Company and
the Subsidiaries and the related statements of income, retained earnings,
stockholders' equity and cash flows for the one-month period then ended
(collectively, the "Interim Financial Statements"). The Interim Financial
Statements shall, from and after the delivery thereof, constitute part of the
"Financial Statements" for purposes of this Agreement.
4.10. NASDAQ NATIONAL MARKET. The Buyer will file all documents required to be
filed to list the Merger Shares on the Nasdaq National Market and use its best
efforts to effect said listing.
4.11. BLUE SKY APPROVALS. The Buyer will file all documents required to obtain
the Blue Sky permits and approvals, if any, required to carry out the
transactions contemplated by this Agreement (to the extent required prior to the
Effective Time), will pay all expenses incident thereto and will use its best
efforts to obtain such permits and approvals; PROVIDED, HOWEVER, that the Buyer
shall not be required in connection with this Section 4.11 to qualify as a
foreign corporation or execute a general consent to service of process in any
jurisdiction.
4.12. HART-SCOTT-RODINO ACT. Each of the Buyer, the Company and the Company
Stockholders shall promptly file any Notification and Report Forms and related
material that it, he or she may be required to file with the Federal Trade
Commission and the Antitrust Division of the United States Department of Justice
under the Hart-Scott-Rodino Act, shall use his, her or its best efforts to
obtain an early termination of the applicable waiting period, and shall make any
further filings or information submissions pursuant thereto that may be
necessary, proper or advisable.
4.13. POOLING ACCOUNTING. From and after the date hereof and until the Effective
Time, neither the Company nor the Buyer nor any of their respective subsidiaries
shall knowingly take any action that is reasonably likely to jeopardize the
treatment of the merger as a "pooling of interests" for accounting purposes.
4.14. INDEMNIFICATION OF COMPANY OFFICERS AND DIRECTORS. Buyer shall guarantee
and shall cause the Surviving Corporation to maintain and perform the
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Company's existing indemnification provisions with respect to present and former
directors and officers of the Company for all losses, claims, damages, expenses
or liabilities arising out of actions or omissions or alleged actions or
omissions in their capacities as directors and/or officers occurring at or prior
to the Effective Time to the extent required under the Company's Certificate of
Incorporation and Bylaws in effect as of the date hereof and permitted under and
consistent with applicable law, for a period of not less than three years after
the Effective Time. During the period commencing as of the Effective Time and
ending on the third anniversary of the Effective Time, Buyer shall cause to be
maintained in effect, for the benefit of present and former directors and
officers of the Company, a policy of directors' and officers' liability
insurance that is substantially identical in scope and coverage to the
directors' and officers' liability insurance policy currently maintained by
Company. Prior to the Effective Time, the Company shall obtain a three year tail
policy on the Company's directors' and officers' liability insurance policy.
4.15. RESOLUTION OF COMPUTER ISSUE. The Company shall use its best efforts to
resolve, to the satisfaction of the Buyer, the Computer Issue within eight weeks
of the date of this Agreement. No later than eight weeks after the date of this
Agreement, the Company shall provide to the Buyer a certificate (the "Computer
Certificate") signed by an officer of the Company setting forth in detail,
together with all supporting documentation, the following information: (i) the
results of the work to be performed by IKON Office Solutions on the status of
the Company's computer systems which shall include a full inventory of the
Company's computers and a description of the licenses that are necessary to
operate the computers using the Necessary Software (as defined in Section 2.12
of the Disclosure Schedule) for the Minimum Number of Computers (as defined in
Section 2.12 of the Disclosure Schedule); (ii) an itemization of all costs
incurred by the Company in connection with the Company's efforts to resolve the
Computer Issue; (iii) a description of all steps taken and to be taken by the
Company to resolve the Computer Issue; (iv) a description of any claims asserted
or threatened to be asserted against the Company in any way related to the
Computer Issue; and (v) if the Computer Issue has not been resolved as of the
date of delivery of the Computer Certificate, an estimate of the future costs
the Company expects to incur on or after the date of such Certificate in
connection with the resolution of the Computer Issue which future costs shall
include (x) any amounts estimated by IKON Office Solutions or any other mutually
agreeable third party plus any other amount equal the additional current retail
license fees necessary in order to obtain the Necessary Software for the Minimum
Number of Computers that had not been incurred by the Company on the date of the
Certificate (the "Compliance Costs") and, (y) if not included in the Compliance
Costs, the amount of any threatened or asserted claim in clause (iv) if
specified or, if not specified, a reasonable estimate of the maximum amount of
any such claim (the "Computer Claim Amount"). The Company shall provide to the
Buyer updated Computer Certificates pursuant to Sections 1.5(b)(iii) and 5.2(m)
of the Agreement. In the event that the Computer Issue is not fully resolved as
of the Closing Date, then
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such additional number of shares as is equal to sum of (x) 2.7 times the
Compliance Costs plus (y) 1.2 times the Computer Claim Amount divided by the
Buyer Stock Price shall be deemed to be Escrow Shares instead of Initial Shares
and shall be deposited in a special escrow account to be established at Closing
(the "Computer Escrow"). In such event, the percentages set forth in Section
1.5(b)(iii) of the Agreement shall automatically be adjusted to reflect that the
number of Initial Shares derived from the calculation set forth in the foregoing
sentence had become Escrow Shares such that the Escrow Shares shall be deducted
from the Initial Shares delivered to each Optionholder and Stockholder at the
Closing on a pro rata basis.
Article V
CONDITIONS TO CONSUMMATION OF MERGER
5.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each
Party to consummate the Merger are subject to the satisfaction of the following
conditions:
(a) all applicable waiting periods (and any extensions thereof) under the
Hart-Scott-Rodino Act shall have expired or otherwise been terminated;
(b) this Agreement and the Merger shall have received the Requisite Stockholder
Approval; and
(c) no action, suit or proceeding shall be pending or threatened by or before
any Governmental Entity wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation or (iii)
affect adversely the right of the Buyer to own, operate or control any of the
assets and operations of the Surviving Corporation and the Subsidiaries
following the Merger, and no such judgment, order, decree, stipulation or
injunction shall be in effect.
5.2. CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE TRANSITORY SUBSIDIARY. The
obligation of each of the Buyer and the Transitory Subsidiary to consummate the
Merger is subject to the satisfaction of the following additional conditions:
(a) the number of Dissenting Shares shall not exceed 5% of the number of
outstanding Company Shares as of the Effective Time;
(b) the Company and the Subsidiaries shall have obtained (i) all of the waivers,
permits, consents, approvals or other authorizations, and effected all of the
registrations, filings and notices, referred to in the first sentence of Section
4.2;
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(c) the representations and warranties of the Company set forth in Article II
shall be true and correct in all material respects when made on the date hereof
and shall be true and correct in all material respects as of the Effective Time
as if made as of the Effective Time, except for (i) representations and
warranties made as of a specific date, which shall be true and correct in all
material respects as of such date and (ii) any breach or noncompliance resulting
from occurrences or developments between the date of this Agreement and the
Effective Time which are (x) not material to the Company and the Subsidiaries,
taken as a whole, or (y) not material to that segment of the business of the
Company and the Subsidiaries serviced on the Company's proprietary network;
(d) the Company shall have performed or complied with its agreements and
covenants required to be performed or complied with under this Agreement as of
or prior to the Effective Time in all material respects;
(e) the Company shall have delivered to the Buyer and the Transitory Subsidiary
a certificate (without qualification as to knowledge or materiality or
otherwise) to the effect that each of the conditions specified in clauses (b)
and (c) of Section 5.1 and clauses (a) through (d) of this Section 5.2 is
satisfied in all respects;
(f) the Buyer and the Transitory Subsidiary shall have received from Pillsbury
Madison & Sutro LLP, counsel to the Company, an opinion substantially in the
form attached hereto as EXHIBIT C, addressed to the Buyer and the Transitory
Subsidiary and dated as of the Closing Date unless such opinion cannot be
delivered due to facts, circumstances or events or for a reason that is not
material and would not otherwise constitute a failure of a condition under
Section 5.1 or 5.2.
(g) [Intentionally omitted]
(h) the Buyer, the Indemnification Representative and the Escrow Agent shall
have entered into the Escrow Agreement in the form attached hereto as EXHIBIT A
and such Agreement shall be in full force and effect on the Closing Date in
accordance with its terms;
(i) the Buyer shall have received a letter from Ernst & Young LLP, auditors for
the Buyer, in a form reasonably satisfactory to the Buyer, dated the Closing
Date, to the effect that the Buyer shall be entitled to treat the Merger as a
"pooling of interests" for accounting purposes as provided for in Accounting
Principles Board Opinion No. 16;
(j) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Effective Time, of each director and officer
of the
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Company and the Subsidiaries specified by the Buyer in writing at least
five business days prior to the Closing;
(k) the Buyer shall have received, from all advisors, consultants, accountants,
lawyers, investment bankers, brokers, agents and other such professionals, final
invoices for fees, services, expenses and other amounts to be paid by the
Company or any Subsidiary in connection with the transactions contemplated
hereby (such final invoices, together with all invoices previously rendered in
connection with this transaction, the "Transaction Invoices");
(l) each holder of an Option shall have delivered to the Company a written
instrument providing for the exchange of such Option into a right to receive
shares of Buyer Common Stock (if any) prior to the Closing as contemplated by
Section 1.10 and each holder of an Option shall have agreed in writing to be
bound by the provisions of this Agreement and the Escrow Agreement prior to the
Closing PROVIDED HOWEVER that so long as the Company shall have received such
instruments and agreements from holders of an aggregate of 94% of the Options it
shall be deemed to have satisfied the condition specified in this Section
5.2(e);
(m) the Company shall have delivered a Computer Certificate dated as of the
Closing Date to the Buyer and, if the Computer Issue has not been resolved to
Buyer's satisfaction prior to Closing, the parties shall have created the
Computer Escrow; and
(n) all actions to be taken by the Company in connection with the consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments and other documents required to effect the transactions contemplated
hereby shall be reasonably satisfactory in form and substance to the Buyer and
the Transitory Subsidiary.
5.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the Company to
consummate the Merger is subject to the satisfaction of the following additional
conditions:
(a) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in Article III shall be true and correct in all material
respects when made on the date hereof and shall be true and correct in all
material respects as of the Effective Time as if made as of the Effective Time,
except for (i) representations and warranties made as of a specific date, which
shall be true and correct in all material respects as of such date and (ii) any
breach or noncompliance resulting from occurrences or developments between the
date of this Agreement and the Effective Date (other than those which have been
publicly disclosed pursuant to filings by the Buyer with the SEC) which are not
material to the Buyer;
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(b) the Buyer and the Transitory Subsidiary shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected all
of the registrations, filings and notices, referred in the second sentence of
Section 4.2 hereof;
(c) each of the Buyer and the Transitory Subsidiary shall have performed or
complied with its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time in all material
respects;
(d) there has not been any material adverse change in the business, financial
condition or results of operations of the Buyer and its subsidiaries, taken as a
whole, since the date of this Agreement;
(e) each of the Buyer and the Transitory Subsidiary shall have delivered to the
Company a certificate (without qualification as to knowledge or materiality or
otherwise) to the effect that each of the conditions specified in clause (c) of
Section 5.1 and clauses (a) through (d) of this Section 5.3 is satisfied in all
respects;
(f) the Company shall have received from the General Counsel to the Buyer and
the Transitory Subsidiary, an opinion substantially in the form attached hereto
as EXHIBIT D, addressed to the Company and dated as of the Closing Date unless
such opinion cannot be delivered due to facts, circumstances or events or for a
reason that would not otherwise constitute a failure of a condition under
Section 5.1 or 5.3;
(g) the Buyer, the Indemnification Representative and Escrow Agent shall have
entered into the Escrow Agreement in the form attached hereto as EXHIBIT A and
such Agreement shall be in full force and effect on the Closing Date in
accordance with its terms;
(h) the Buyer and Transitory Subsidiary shall have delivered to the Company a
certificate, dated the Closing Date and executed by an executive officer of the
Buyer, in substantially the form attached as EXHIBIT E hereto; and
(i) all actions to be taken by the Buyer and the Transitory Subsidiary in
connection with the consummation of the transactions contemplated hereby and all
certificates, opinions, instruments and other documents required to effect the
transactions contemplated hereby shall be reasonably satisfactory in form and
substance to the Company.
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Article VI
INDEMNIFICATION
6.1. INDEMNIFICATION. The Company Stockholders (including the holders of the
Options) shall indemnify the Surviving Corporation and the Buyer (the
"Indemnified Persons") in respect of, and hold the Indemnified Persons harmless
against, any and all claims, debts, obligations and other liabilities (whether
absolute, accrued, contingent, fixed or otherwise, or whether known or unknown,
or due or to become due or otherwise), monetary damages, fines, fees, Taxes,
penalties, interest obligations, deficiencies, losses and expenses (including
without limitation amounts paid in settlement, interest, court costs, costs of
investigators, reasonable fees and expenses of attorneys, accountants, financial
advisors and other experts, and other expenses of litigation) incurred or
suffered by the Indemnified Persons or any Affiliate thereof ("Damages"):
(a) resulting from, relating to or constituting any misrepresentation, breach of
warranty or failure to perform any covenant or agreement of the Company
contained in this Agreement or in the Certificates delivered pursuant to Section
5.2(e) or Section 5.2(m), PROVIDED, that any indemnity for Damages relating to
Taxes shall be determined in accordance with Article VII hereof;
(b) resulting from or relating to any failure of any Company Stockholders to
have good, valid and marketable title to the issued and outstanding Company
Shares held by such Company Stockholders, free and clear of all liens, claims,
pledges, options, adverse claims or charges of any nature whatsoever;
(c) resulting from or relating to any claim by a stockholder or former
stockholder of the Company, or any other person or Business Entity, seeking to
assert, or based upon: (i) ownership or rights to ownership of any shares of
stock of the Company; (ii) any rights of a stockholder (other than the right to
receive the Merger Shares pursuant to this Agreement or appraisal rights under
the applicable provisions of the Delaware General Corporation Law), including
any option, preemptive rights or rights to notice or to vote; (iii) any rights
under the Certificate of Incorporation or By-laws of the Company; or (iv) any
claim that his, her or its shares were wrongfully repurchased by the Company;
(d) resulting from or relating to the complaint filed by Michelle Stuckey
against the Company alleging damages from violation of the Family and Medical
Leave Act and the Fair Labor Standards Act or the alleged actions of the Company
set forth in such complaint;
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(e) resulting from or relating to any claim against the Company or any
Subsidiary relating to the alleged failure to pay employment related taxes for
any employee or independent contractor of the Company or any Subsidiary; or
(f) resulting from or relating to any claim against the Company or any
Subsidiary relating in any way to the Computer Issue (except that such claims
shall first be made against amounts to be held in the Computer Escrow if a
Computer Escrow is established).
6.2. METHOD OF ASSERTING CLAIMS.
(a) All claims for indemnification by an Indemnified Person pursuant to this
Article VI shall be made in accordance with the provisions of the Escrow
Agreement.
(b) The Indemnified Person shall give prompt written notification to the
Indemnification Representative of the commencement of any action, suit or
proceeding relating to a third party claim for which indemnification pursuant to
this Article VI may be sought; provided, however, that no delay on the part of
the Indemnified Person in notifying the Indemnification Representative shall
relieve the Company Stockholders of any liability or obligation hereunder except
to the extent of any damage or liability caused by or arising out of such delay.
Within 20 days after delivery of such notification, the Indemnification
Representative may, upon written notice thereof to the Indemnified Person,
assume control of the defense of such action, suit or proceeding with counsel
reasonably satisfactory to the Indemnified Person, provided (i) the
Indemnification Representative acknowledges in writing to the Indemnified
Person, on behalf of the Company Stockholders, that any damages, fines, costs or
other liabilities that may be assessed against the Indemnified Person in
connection with such action, suit or proceeding constitute Damages for which the
Indemnified Person shall be entitled to indemnification pursuant to this Article
VI, (ii) the third party seeks monetary damages only, and (iii) an adverse
resolution of the third party's claim would not have a material adverse effect
on the goodwill or the reputation of the Indemnified Person or the business,
operations or future conduct of the Indemnified Person. If the Indemnification
Representative does not so assume control of such defense, the Indemnified
Person shall control such defense. The party not controlling such defense may
participate therein at its own expense; provided that if the Indemnification
Representative assumes control of such defense and the Indemnified Person
reasonably concludes that the indemnifying parties and the Indemnified Person
have conflicting interests or different defenses available with respect to such
action, suit or proceeding, the reasonable fees and expenses of counsel to the
Indemnified Person shall be considered "Damages" for purposes of this Agreement.
The party controlling such defense shall keep the other party advised of the
status of such action, suit or proceeding and the defense thereof and shall
consider in good faith recommendations made by the other party with respect
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thereto. The Indemnified Person shall not agree to any settlement of such
action, suit or proceeding without the prior written consent of the
Indemnification Representative, which shall not be unreasonably withheld or
delayed. The Indemnification Representative shall not agree to any settlement of
or the entry of a judgment in any action, suit or proceeding without the prior
written consent of the Indemnified Person, which shall not be unreasonably
withheld (it being understood that it is reasonable to withhold such consent if,
among other things, the settlement or the entry of a judgment (A) lacks a
complete release of the Indemnified Person for all liability with respect
thereto or (B) imposes any liability or obligation on the Indemnified Person).
6.3. SURVIVAL.
(a) Unless otherwise specified in this Section 6.3 or elsewhere in this
Agreement, all provisions of this Agreement shall survive the Closing and the
consummation of the transactions contemplated hereby and shall continue forever
in full force and effect in accordance with their terms.
(b) The representations and warranties of the Company set forth in Article II
above or in any other location in this Agreement, including the certificate
delivered by the Company pursuant to Section 5.2(e) hereof, and the
indemnification obligations set forth in this Article VI:
(i) shall survive the Closing and the consummation of the transactions
contemplated hereby and continue until the first anniversary of the Closing
Date;
(ii) shall not be affected by any examination made for or on behalf of the Buyer
or the knowledge of any of the Buyer's officers, directors, stockholders,
employees or agents.
Notwithstanding the foregoing, the indemnification obligations set
forth in this Article VI specified in Sections 6.1(d) and (e) and, in the event
a Computer Escrow is established, Section 6.1(f) shall continue until the
expiration of the later of the applicable statute of limitations or the final
resolution by settlement, judicial resolution or other resolution of any claim
asserted pursuant to the foregoing Sections. For purposes of the indemnification
obligations set forth in this Article VI specified in Section 6.1(d), such
number of shares having a Fair Market Value (as defined in the Escrow Agreement)
of $150,000 shall remain in escrow under the Escrow Agreement until the final
resolution by settlement, judicial resolution or other resolution of any claim
asserted pursuant to the foregoing Section prior to the third anniversary of the
Closing Date. For purposes of the indemnification obligations set forth in this
Article VI specified in Section 6.1(e), such number of shares having a Fair
Market Value of $200,000 shall remain in escrow under the Escrow Agreement until
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the later of (i) the third anniversary of the Closing Date or (ii) the final
resolution by settlement, judicial resolution or other resolution of any claim
asserted pursuant to Section 6.1(e) prior to the third anniversary of the
Closing Date.
(c) The date on which any particular representation, warranty or indemnification
obligation of the Company and/or each of the Company Stockholders terminates
shall be referred to herein and in the Escrow Agreement as the "Termination
Date." If a notice of a claim is given in accordance with the notice provisions
of this Agreement or the Escrow Agreement before the Termination Date, then
(notwithstanding the occurrence of the Termination Date) the representation,
warranty or indemnification obligation applicable to such claim shall survive
until, but only for purposes of, the resolution of such claim.
6.4. LIMITATIONS.
(a) Notwithstanding anything to the contrary herein, except as provided in this
Section 6.4, (a) the aggregate liability of the Company Stockholders for Damages
under this Article VI shall not exceed the fair market value of the Escrow
Property (as defined in the Escrow Agreement), as determined in accordance with
the Escrow Agreement and (b) the Company Stockholders shall not be liable under
this Article VI unless and until the aggregate Damages exceed $100,000 (at which
point the Company Stockholders shall become liable for all Damages, in excess of
$20,000). No Company Stockholder shall have any right of contribution against
the Company with respect to any breach by the Company of any of its
representations, warranties, covenants or agreements.
(b) The Buyer's recourse for Damages under Article VII and Sections 1.5(b)(vii),
6.1(b), (c), (d) and (e) and 10.11 shall not be subject to the limitations set
forth in Section 6.4(a). In the event that a Computer Escrow is established, the
Buyer's recourse for Damages under Section 6.1(f) shall not be subject to the
limitations set forth in 6.4(a).
Article VII
TAX MATTERS
7.1. PREPARATION AND FILING OF TAX RETURNS.
(a) The Company at the direction of the Company Stockholders shall cause to be
accurately prepared and timely filed all Tax Returns required to be filed
(taking into account extensions) prior to the Closing Date with respect to the
Company and any Subsidiaries or in respect of their businesses, assets or
operations.
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(b) The Buyer shall prepare and timely file or shall cause to be prepared and
timely filed all other Tax Returns with respect to the Company and any
Subsidiaries or in respect of their businesses, assets or operations.
7.2. TAX INDEMNIFICATION BY THE COMPANY STOCKHOLDERS.
(a) The Company Stockholders shall indemnify the Buyer in respect of, and hold
the Buyer harmless, on an after-Tax basis, against the following Taxes with
respect to the Company and the Subsidiaries to the extent such Taxes exceed the
accruals or reserves for Taxes set forth on the Closing Balance Sheet and the
amount of any estimated Tax payments made on or before the Closing Date (to the
extent they had not been applied on or before the Closing Date):
(i) Any and all Taxes due and payable by the Company or any Subsidiaries for any
taxable period that ends (or is deemed pursuant to Section 7.3(b) to end) on or
before the Closing Date; and
(ii) Any sales, use, transfer, stamp, conveyance, value added, recording,
registration, documentary, filing or other Taxes and fees, whether levied on the
Buyer, the Company Stockholders, the Company, a Subsidiary or any of their
respective Affiliates, resulting from the Merger or otherwise on account of this
Agreement or the transactions contemplated hereby.
(b) Amounts payable pursuant to this Section 7.2 shall be computed after taking
into account all Tax consequences to the Buyer (or its Affiliates) of (i) the
receipt of (or the right to receive) the indemnification payment and (ii) the
incurrence of the liability that gave rise to the right to receive the
indemnification payment. Thus, it is the intention of the Parties that the Buyer
be held harmless with respect to the liability that gave rise to the right to
the indemnification payment on an after-Tax basis.
(c) All claims for indemnification pursuant to this Article VII shall be made
in accordance with Section 6.2 hereof.
7.3. ALLOCATION OF CERTAIN TAXES.
(a) The Buyer and the Company Stockholders agree that if the Company or any
Subsidiary is permitted but not required under applicable foreign, state or
local Tax laws to treat the Closing Date as the last day of a taxable period,
the Buyer and the Company Stockholders shall treat such day as the last day of a
taxable period.
(b) Any Taxes for a taxable period ending after the Closing Date with respect to
the Company and/or any Subsidiary shall be the obligation of the
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Buyer, the Company and/or any Subsidiary, and the Taxes for such period shall be
apportioned for the purpose of Section 7.2 based on the actual operations of the
Company and/or any Subsidiaries, as the case may be, during the portion of such
period ending on (and including) the Closing Date, if any, and the portion of
such period beginning on the day following the closing Date, and for purposes of
the provision of Section 7.2, each portion of such period shall be deemed to be
a taxable period (whether or not it is in fact a taxable period).
7.4. [Intentionally omitted]
7.5. COOPERATION ON TAX MATTERS. The Buyer and the Company Stockholders and
their respective Affiliates shall cooperate in the preparation of all Tax
Returns for any Tax periods for which one Party could reasonably require the
assistance of the other Party or Parties in obtaining any necessary information.
7.6. TERMINATION OF TAX-SHARING AGREEMENTS. All Tax sharing agreements or
similar arrangements with respect to or involving the Company and its
Subsidiaries shall be terminated prior to the Closing Date and, after the
Closing Date, the Company and its Subsidiaries shall not be bound thereby or
have any liability thereunder for amounts due in respect of periods ending on or
before the Closing Date.
Article VIII
TERMINATION
8.1. TERMINATION OF AGREEMENT. The Parties may terminate this Agreement prior to
the Effective Time (whether before or after Requisite Stockholder Approval) as
provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to the
Company in the event the Company is in breach, and the Company may terminate
this Agreement by giving written notice to the Buyer and the Transitory
Subsidiary in the event the Buyer or the Transitory Subsidiary is in breach, of
(i) any representation or warranty, such that the condition specified in Section
5.2(c), in the case of a breach by the Company or in Section 5.3(a), in the case
of a breach by the Buyer or the Transitory Subsidiary, would not be satisfied at
the Effective Time if the Effective Time were the date of the notice, or (ii)
any material covenant contained in this Agreement, and, in the event such breach
can be remedied, such breach is not remedied within 30 days of delivery of
written notice thereof;
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(c) any Party may terminate this Agreement by giving written notice to the other
Parties at any time after the Company Stockholders have voted on whether to
approve this Agreement and the Merger in the event this Agreement and the Merger
failed to receive the Requisite Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving written notice to the
Company if the Closing shall not have occurred on or before January 30, 1999 by
reason of the failure of any condition precedent under Section 5.1 or 5.2 hereof
(unless the failure results primarily from a breach by the Buyer or the
Transitory Subsidiary of any representation, warranty or covenant contained in
this Agreement); or
(e) the Company may terminate this Agreement by giving written notice to the
Buyer and the Transitory Subsidiary if the Closing shall not have occurred on or
before January 30, 1999 by reason of the failure of any condition precedent
under Section 5.1 or 5.3 hereof (unless the failure results primarily from a
breach by the Company, any Subsidiary or any Company Stockholder of any
representation, warranty or covenant contained in this Agreement).
(f) [Intentionally omitted]
(g) the Buyer may terminate this Agreement if the Buyer Stock Price is less than
$35.00 per share (subject to equitable adjustment in the event of any
Recapitalization).
8.2. EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant to
Section 8.1 or otherwise, all obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except as
expressly set forth in Section 8.3). Without limiting the foregoing, in the
event of termination of this Agreement, there shall be no liability or
obligation on the part of the Company, the Buyer or the Transitory Subsidiary or
their respective officers, directors, stockholders or affiliates, except as
expressly set forth in Section 8.3.
8.3. TERMINATION FEES.
(a) Except as set forth in Sections 8.3(b) and 8.3(c), all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the Party incurring such expenses, whether or not the
Merger is consummated; provided, however, that the Company and the Buyer shall
share equally all fees and expenses, other than attorneys' fees, incurred in
relation to the printing and filing of the Registration Statement (including
financial statements and exhibits) and any amendments or supplements.
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(b) Notwithstanding paragraph (a) above, the Company shall reimburse the Buyer
for all expenses of the Buyer and the Transitory Subsidiary actually incurred
relating to the transactions contemplated by this Agreement prior to termination
(including but not limited to, fees and expenses of the Buyer's accountants,
financial advisors and counsel) up to a maximum amount of $75,000 upon the
earlier to occur of the following events:
(i) the termination of this Agreement by the Buyer pursuant to Section 8.1(b)
after a breach by the Company; or
(ii) the termination of this Agreement by any Party pursuant to Section 8.1(c).
(c) Notwithstanding paragraph (a) above, the Buyer shall reimburse the Company
for all expenses actually incurred by the Company relating to the transactions
contemplated by this Agreement prior to termination (including but not limited
to, fees and expenses of the Company's accountants, financial advisors and
counsel) up to a maximum amount of $75,000 upon the earlier to occur of the
following events:
(i) the termination of this Agreement by the Company pursuant to Section 8.1(b)
after a breach by the Buyer or the Transitory Subsidiary; or
(ii) the termination of this Agreement by the Buyer pursuant to Section 8.1(g).
(d) Notwithstanding paragraph (a) above, the Buyer shall deliver to the Company
the sum of $1,500,000 and the Company shall deliver to the Buyer in exchange
therefor 750,000 shares of the Company's Series A-1 Preferred Stock and warrants
to purchase 508,500 shares of the Company's Common Stock at an exercise price of
$.20 per share, which warrants shall be exercisable at any time during the
period of seven years commencing on the Effective Date upon the earlier to occur
of the following events:
(i) the termination of this Agreement by the Company pursuant to Section 8.1(b)
after a breach by the Buyer or the Transitory Subsidiary; or
(ii) the termination of this Agreement by the Buyer pursuant to Section 8.1(g).
(e) This Section 8.3 shall be the exclusive remedy of the Parties in the event
of termination of this Agreement. In no event shall any Party be liable to the
other Party for any consequential or other damages arising from the termination,
for any reason, of this Agreement.
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Article IX
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
Defined Term Section
- ------------ -------
Affiliate 2.15(a)(vii)
Affiliate Agreement 4.8
Balance Sheet Date 2.6
Business Entity 2.4
Buyer Introduction
Buyer Common Stock 1.5(b)(i)
Buyer Reports 3.5
Buyer Stock Price 1.5(b)
CERCLA 2.23(a)
Certificate of Merger 1.1
Certificates 1.3
Clause A Quotient 1.5(b)(i)
Clause B Quotient 1.5(b)(i)
Closing 1.2
Closing Balance Sheet 1.9
Closing Date 1.2
Code Introduction
Company Introduction
Company Affiliates 4.8
Company Shares 1.5(a)
Company Special Meeting 4.3(d)
Company Stockholder 1.5(b)
Compliance Costs 4.15
Computer Claim Amount 4.15
Computer Escrow 4.15
Computer Expenses 1.5(b)(vii)
Computer Issue Section 2.12 of
Disclosure Statement
Computer Certificate 4.15
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Defined Term Section
- ------------ -------
Contracts 2.15(b)
Conversion Ratio 1.5(b)
Corporate Subsidiary 2.5(a)
Damages 6.2(b)
Disclosure Schedule Article II
Dissenting Shares 1.6(a)
Effective Time 1.1
Employee Benefit Plan 2.22(a)
Environmental Law 2.23(a)
ERISA 2.22(a)
ERISA Affiliate 2.22(a)
Escrow Agreement 1.3
Escrow Agent 1.3
Escrow Shares 1.5(b)(iii)
Exchange Act 3.4
Facility 4.11
Financial Statements 2.6
GAAP 1.9
Governmental Entity 2.4
Indemnification Representative 1.3
Indemnified Persons 6.1
Initial Shares 1.5(b)(iii)
Intellectual Property 2.12(a)
Intended Uses 2.11(a)
Interim Financial Statements 4.9
Materials of Environmental Concern 2.23(b)
Merger 1.1
Merger Shares 1.5(b)(iii)
Most Recent Balance Sheet 2.6
Optionholder Initial Shares 1.5(b)(iii)
Optionholder Escrow Shares 1.5(b)(iii)
Option Shares 1.5(b)(ii)
Options 1.10(a)
Ordinary Course of Business 2.4
Partnership Subsidiary 2.5(b)
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Defined Term Section
- ------------ -------
Party Introduction
Permit 2.25
Personal Property 2.10(b)
Purchase Price 1.5(b)
Purchase Price Adjustment Closing Certificate 1.5(b)(vii)
Recapitalization 1.5(b)(i)
Registration Statement 2.36
Related Party Transactions 2.26
Requisite Stockholder Approval 2.3
SEC 2.36
Securities Act 2.2
Security Interest 2.4
Stockholder Initial Shares 1.5(b)(iii)
Stockholder Escrow Shares 1.5(b)(iii)
Subsidiary 2.4
Surviving Corporation 1.1
Taxes 2.9(a)
Tax Returns 2.9(a)
Termination Date 6.3(c)
Transaction Invoices 10.12
Transitory Subsidiary Introduction
Warrants 1.10(b)
Article X
MISCELLANEOUS
10.1. PRESS RELEASES AND ANNOUNCEMENTS. No Party shall issue any press release
or public disclosure relating to the subject matter of this Agreement without
the prior written approval of the other Parties; PROVIDED, HOWEVER, that any
Party may make any public disclosure it believes in good faith is required by
law or regulation (in which case the disclosing Party shall advise the other
Parties and provide them with a copy of the proposed disclosure prior to making
the disclosure); PROVIDED; FURTHER, that following the Closing, the Buyer may
issue any press release or make public disclosure relating to the subject matter
of this Agreement without the consent of the other Parties.
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10.2. NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any rights
or remedies upon any person other than the Parties and their respective
successors and permitted assigns; PROVIDED, HOWEVER, that (a) the provisions in
Article I concerning issuance of the Merger Shares and the representations and
warranties of the Buyer and the Transitory Subsidiary set forth in Article III
hereof are intended for the benefit of the Company Stockholders.
10.3. ENTIRE AGREEMENT. This Agreement, including the Exhibits and Schedules
attached hereto and the documents referred to herein, (together with the loan
agreement and related documents dated the date hereof relating to certain
interim financing to be provided to the Company by the Buyer), constitute the
entire agreement among the Parties and supersede any prior understandings,
agreements, or representations by or among the Parties, written or oral, with
respect to the subject matter hereof.
10.4. SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the Parties named herein and their respective successors and
permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer and,
after the Closing, the Buyer may assign its rights, interests and obligations
hereunder to an Affiliate of the Buyer.
10.5. 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.
10.6. HEADINGS. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7. NOTICES. All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service, in each case to the intended recipient as set forth
below:
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If to the Company: Copy to:
- ------------------ --------
EDiX Corporation Thomas E. Sparks, Esq.
4250 Executive Square Pillsbury Madison & Sutro LLP
Suite 850 235 Montgomery Street
La Jolla, California 92037 San Francisco, California 94104
and
Joel D. Liffmann
Oracle Partners, L.P.
712 Fifth Avenue
New York, New York 10019
If to the Buyer: Copy to:
- ---------------- --------
IDX Systems Corporation Robert W. Baker, Jr., Esq.
1400 Shelburne Road IDX Systems Corporation
P.O. Box 1070 1400 Shelburne Road
Burlington, Vermont 05402-1070 P.O. Box 1070
Attn: President Burlington, Vermont 05402-1070
If to the Transitory Subsidiary: Copy to:
- -------------------------------- --------
IDX Systems Corporation Robert W. Baker, Jr., Esq.
1400 Shelburne Road IDX Systems Corporation
P.O. Box 1070 1400 Shelburne Road
Burlington, Vermont 05402-1070 P.O. Box 1070
Attn: President Burlington, Vermont 05402-1070
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
10.8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Delaware.
10.9. AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time; PROVIDED,
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HOWEVER, that any amendment effected subsequent to the Requisite Stockholder
Approval shall be subject to the restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
10.10. SEVERABILITY. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction. If the final judgment of a court of competent
jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
10.11. EXPENSES. Except as set forth in the Escrow Agreement and in Section 8.3,
each of the Parties shall bear its own costs and expenses (including fees and
expenses of their respective legal, accounting and financial advisors) incurred
in connection with this Agreement and the transactions contemplated hereby and
all fees and expenses incurred by the Company or its Subsidiaries in connection
with this Agreement and the transactions contemplated hereby, including without
limitation those set forth on the Transaction Invoices, shall be set forth as
liabilities on the Closing Balance Sheet. If the Acquisition is consummated, the
Company and the Subsidiaries shall not incur fees and expenses of legal,
accounting and financial advisors in connection with the Merger in excess of the
amounts set forth in Section 10.11 of the Disclosure Schedule, and any fees and
expenses incurred by the Company and the Subsidiaries in excess of such amounts
shall be recovered by the Buyer pursuant to the Escrow Agreement without regard
to the provisions of the first sentence of Section 6.4(a).
10.12. SPECIFIC PERFORMANCE. Each of the Parties (including without limitation
for purposes of this Section 10.12 the stockholders of the Company signing this
Agreement) acknowledges and agrees that one or more of the other Parties would
be damaged irreparably in the event any of the provisions of this Agreement are
not performed in accordance with their specific terms or otherwise are breached.
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Accordingly, each of the Parties agrees that the other Parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the Parties and the matter (subject
to the provisions of Section 10.13), in addition to any other remedy to which it
may be entitled, at law or in equity.
10.13. SUBMISSION TO JURISDICTION. Each of the Parties (a) submits to the
jurisdiction of any state or federal court sitting in Vermont in any action or
proceeding arising out of or relating to this Agreement, (b) agrees that all
claims in respect of the action or proceeding may be heard and determined in any
such court, and (c) agrees not to bring any action or proceeding arising out of
or relating to this Agreement in any other court. Each of the Parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety or other security that might be required of
any other Party with respect thereto. Any Party may make service on another
Party by sending or delivering a copy of the process to the Party to be served
at the address and in the manner provided for the giving of notices in Section
10.7. Nothing in this Section 10.13, however, shall affect the right of any
Party to serve legal process in any other manner permitted by law.
10.14. CONSTRUCTION. The language used in this Agreement shall be deemed to be
the language chosen by the Parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against any Party. Any reference to
any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
10.15. INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
IDX SYSTEMS CORPORATION
By:/S/ JOHN A.KANE
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Title: CFO
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UNDERWOOD ACQUISITION CORP.
By:/S/ JOHN A. KANE
--------------------------------
Title: PRESIDENT
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EDiX CORPORATION
By:/S/ Gene Barduson
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Title: CHIEF EXECUTIVE OFFICER
------------------------------