UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
TCI Solutions, Inc.
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing proxy statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, par value $0.001 per share
Series A Preferred Stock
Series B Preferred Stock
(2) Aggregate number of securities to which transaction applies:
12,825,459 shares of common stock
31,703 shares of Series A Preferred Stock
1,124,154 shares of Series B Preferred Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
The transaction value is based on:
(i) $0.132 per share to be paid with respect to 12,825,459
shares of Common Stock;
(ii) $0.8409 per share to be paid with respect to 31,703 shares
of Series A Preferred Stock; and
(iii) $0.7573 per share to be paid with respect to 1,124,154
shares of Series B Preferred Stock.
(4) Proposed maximum aggregate value of transaction: $2,570,941.41
(5) Total fee paid: $514.19
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
(1) Amount Previously Paid: ________________________________________
(2) Form, Schedule or Registration Statement No.:____________________
(3) Filing Party: __________________________________________________
(4) Date Filed: ____________________________________________________
[GRAPHIC OMITTED]
TCI Solutions, Inc.
17752 Skypark Circle, Suite 160
Irvine, California 92614
____________________________
October 28, 2005
Dear Stockholder,
We cordially invite you to attend a special meeting of stockholders of
TCI Solutions, Inc., or TCI, to be held at 9:00 a.m., California time, on
November 21, 2005, at TCI's principal executive offices located at 17752 Skypark
Circle, Suite 160, Irvine, California 92614.
In a series of transactions, TCI is being acquired for aggregate
consideration of $34.5 million by Retalix Ltd., an Israeli corporation. Retalix
acquired substantially all of TCI's Series A and Series B Preferred Stock
pursuant to a stock purchase agreement with certain TCI stockholders on April 1,
2005 and thereby became an "affiliate" of TCI for purposes of the Securities
Exchange Act of 1934. At the special meeting, you will be asked to adopt an
agreement and plan of merger by and among TCI, Retalix and certain of Retalix's
subsidiaries under which Retalix will acquire all of the remaining TCI stock it
does not already own in a merger of TCI with certain subsidiaries of Retalix. We
refer to this transaction as the "merger" and the agreement and plan of merger
as the "merger agreement."
Upon completion of the merger, except for Retalix and its subsidiaries
and stockholders who properly perfect appraisal rights under Delaware law:
o each holder of TCI common stock will receive $0.132 in cash per
share;
o each holder of Series A Preferred Stock will receive $0.8409 in cash
per share (determined on an as-converted-to-common-stock basis); and
o each holder of Series B Preferred Stock will receive $0.7573 in cash
per share (determined on an as-converted-to-common-stock basis).
As a result of the merger, all equity interests of stockholders
unaffiliated with Retalix will be purchased for cash and Retalix will indirectly
own all of the outstanding stock of each class of TCI. TCI will then file with
the Securities and Exchange Commission to de-register the common stock under the
Securities Exchange Act of 1934.
On March 31, 2005 TCI's board of directors (then consisting of David R.
Butler, Lance C. Jacobs, Daniel Raynor, Mark T. Koulogeorge, James E. Houlihan
III and Todd Gardner) unanimously approved the merger agreement and the proposed
merger, and has determined that (i) the adoption of the merger agreement is
advisable and (ii) the proposed merger is fair to, and in the best interests of,
all stockholders of TCI. The board's conclusion as to fairness was made after
the board analyzed the fairness of the transaction to each class of stockholders
separately. Accordingly, the board of directors adopted a resolution on March
31, 2005 to unanimously recommend that stockholders vote FOR the adoption of the
merger agreement and to authorize the inclusion of this recommendation in the
proxy statement. On April 15, 2005 Messrs. Jacobs, Raynor, Koulogeorge, Houlihan
and Gardner resigned from the board of directors and Barry Shaked, Danny
Moshaioff and Eli Spirer were appointed as directors of TCI. Mr. Shaked is a
director, executive officer and holder of approximately 5.2% of the issued and
outstanding share capital of Retalix. Mr. Moshaioff is an executive officer of
Retalix and Mr. Spirer is an executive officer of Retalix Holdings, Inc., a
wholly-owned subsidiary of Retalix. For the reasons set forth in the
accompanying proxy statement, the current board, which consists of Messrs.
Butler, Shaked, Moshaioff and Spirer, believes that the proposed merger is fair
to all stockholders of TCI individually and collectively, including without
limitation to all holders of Series A Preferred Stock, Series B Preferred Stock
and common stock who are unaffiliated with the Company. Accordingly, the board
of directors unanimously recommends that you vote FOR the adoption of the merger
agreement.
In connection with the merger agreement on April 1, 2005 Retalix
acquired substantially all of our Series A and Series B Preferred Stock pursuant
to a stock purchase agreement among TCI, Retalix, Retalix's subsidiary Retalix
Holdings Inc., and certain TCI stockholders. The names of the selling
stockholders in the April 1, 2005 stock purchase agreement, their affiliations
with TCI and its officers and directors and the material terms of the stock
purchase agreement are described under "SPECIAL FACTORS -- Background of the
Merger" on pages 13 to 18 of the accompanying proxy statement and SUMMARY TERM
SHEET - Who were the selling stockholders?" on pages 3 and 4 of the accompanying
proxy statement. The stock purchase agreement is also attached as Appendix B to
the proxy statement.
We encourage you to read the accompanying proxy statement carefully
because it explains the proposed merger and other important information related
to the merger in detail.
The merger is conditioned on the adoption of the merger agreement by (i)
a majority of the outstanding TCI common stock and preferred stock voting as a
single class on an as-converted-to-common-stock basis, and (ii) by 58% of the
preferred stock, with both series thereof voting as a single class. Retalix
Holdings Inc., a wholly owned subsidiary of Retalix, owns 73.4% of TCI's stock
on an as-converted-to-common-stock basis and more than 97% of TCI's preferred
stock, and intends to vote in favor of the adoption of the merger agreement.
Therefore, the votes of Retalix Holdings Inc. will be sufficient to approve the
merger agreement. However, both TCI and Retalix believe it is important to hold
the special meeting and conduct a stockholder vote to: (i) maximize the publicly
available information about the transaction through the proxy solicitation
process, (ii) give unaffiliated stockholders a forum to express their views
about the merger, (iii) involve all stockholders in the approval process and
(iv) conduct one final meeting of stockholders before TCI ceases to be a
publicly-held company.
We hope that you will be able to attend the special meeting. However,
whether or not you plan to attend in person, please complete, sign, date and
return the accompanying proxy card in the enclosed postage prepaid envelope as
promptly as possible. Please do not send any stock certificates with your proxy
card. Please note that you will be able to vote in person at the meeting even if
you have previously returned your proxy.
Thank you for your attention to this important matter.
Sincerely,
/s/ Stephen P. DeSantis
Stephen P. DeSantis
Chief Financial Officer,
Executive Vice President and Secretary
This proxy statement is dated October 28, 2005, and is first being
mailed to stockholders of TCI on or about October 28, 2005.
- --------------------------------------------------------------------------------
This transaction has not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has any such
commission passed upon the fairness or merits of this transaction or upon the
accuracy or adequacy of the information contained in the attached proxy
statement. Any representation to the contrary is a criminal offense.
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[GRAPHIC OMITTED]
TCI Solutions, Inc.
17752 Skypark Circle, Suite 160
Irvine, California 92614
____________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
_______________________________
TO BE HELD NOVEMBER 21, 2005
We cordially invite you to attend a special meeting of stockholders of
TCI Solutions, Inc., or TCI, a Delaware corporation. This special meeting will
be held at 9:00 a.m., California time, on November 21, 2005, at the principal
executive offices of TCI located at 17752 Skypark Circle, Suite 160, Irvine,
California 92614.
The meeting is being held:
1. to adopt the agreement and plan of merger pursuant to which Retalix
Ltd. will complete the acquisition of all of the stock of TCI; and
2. to transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
As a result of the merger, all equity interests of stockholders of TCI,
other than those of Retalix and its subsidiaries and those TCI stockholders who
perfect appraisal rights under Delaware law, will be purchased for cash. Retalix
will indirectly own substantially all of the outstanding stock of each class of
TCI, and TCI will file with the Securities and Exchange Commission to
de-register its common stock under the Securities Exchange act of 1934.
TCI's board of directors has fixed the close of business on October 27,
2005 as the record date for the determination of stockholders entitled to
receive notice of, and to vote at, the special meeting or any adjournment or
postponement thereof.
On March 31, 2005, the board of directors (then consisting of David R.
Butler, Lance C. Jacobs, Daniel Raynor, Mark T. Koulogeorge, James E. Houlihan,
III and Todd G. Gardner) determined that the adoption of the agreement and plan
of merger is advisable and that the proposed merger is fair to, and in the best
interests of, all stockholders of TCI, including stockholders not affiliated
with TCI or Retalix, and unanimously approved the agreement and plan of merger
and the proposed merger. The board's conclusion as to fairness was made after
the board analyzed the fairness of the transaction to each class of stock
separately. Accordingly, the board of directors adopted a resolution on March
31, 2005 to recommend that stockholders vote FOR the adoption of the agreement
and plan of merger and to authorize the inclusion of this recommendation in the
proxy statement.
On April 15, 2005 Messrs. Jacobs, Raynor, Koulogeorge, Houlihan and
Gardner resigned from the board of directors and Barry Shaked, Danny Moshaioff
and Eli Spirer were appointed as directors of TCI. Mr. Shaked is a director,
executive officer and holder of approximately 5.2% of the issued and outstanding
share capital of Retalix. Mr. Moshaioff is an executive officer of Retalix and
Mr. Spirer is an executive officer of Retalix Holdings, Inc., a wholly-owned
subsidiary of Retalix. For the reasons set forth in the accompanying proxy
statement, the current board, which consists of Messrs. Butler, Shaked,
Moshaioff and Spirer, believes that the proposed merger is fair to all
stockholders of TCI individually and collectively, including without limitation
to all holders of Series A Preferred Stock, Series B Preferred Stock and common
stock who are unaffiliated with the Company. Accordingly, the board of directors
unanimously recommends that you vote FOR the adoption of the merger agreement.
In connection with the merger agreement, on April 1, 2005 Retalix
acquired substantially all of our Series A and Series B Preferred Stock pursuant
to a stock purchase agreement among TCI, Retalix, Retalix's subsidiary Retalix
Holdings,
Inc. and certain TCI stockholders. The names of the TCI stockholders party to
the April 1, 2005 stock purchase agreement, their affiliations with TCI and its
officers and directors and the material terms of the stock purchase agreement
are described under "SPECIAL FACTORS -- Background of the Merger" on pages 13 to
18 of the accompanying proxy statement and "SUMMARY TERM SHEET - Who were the
selling stockholders?" on pages 3 and 4 of the accompanying proxy statement. The
stock purchase agreement is also attached as Appendix B to the proxy statement.
The completion of the merger is conditioned on the adoption of the
agreement and plan of merger by (i) the affirmative vote of holders of a
majority of TCI's issued and outstanding shares of common stock and preferred
stock voting as a single class on an as-converted-to-common-stock basis and (ii)
by 58% of both series of the preferred stock, voting as a single class. Retalix
Holdings Inc., a wholly owned subsidiary of Retalix Ltd., owns 73.4% of TCI's
stock on an as-converted-to-common-stock basis and more than 97% of TCI's
preferred stock and intends to vote in favor of the adoption of the merger
agreement. Therefore, the votes of Retalix Holdings Inc. will be sufficient to
approve the merger agreement. However, both TCI and Retalix believe it is
important to hold the special meeting and conduct a stockholder vote to: (i)
maximize the publicly available information about the transaction, (ii) give
unaffiliated stockholders a forum to express their views about the merger, (iii)
involve all stockholders in the approval process and (iv) conduct one final
meeting of stockholders before TCI ceases to be a publicly-held company.
Even if you plan to attend the special meeting in person, please
complete, date, sign and return the enclosed proxy card to ensure that your
shares will be represented at the special meeting. A return envelope (which is
postage prepaid if mailed in the United States) is enclosed for that purpose.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.
The merger is described in the accompanying proxy statement, which we
urge you to read carefully. A copy of the agreement and plan of merger is
included as Appendix A to the accompanying proxy statement.
By order of the board of directors,
/s/ Stephen P. DeSantis
Stephen P. DeSantis
Chief Financial Officer,
Executive Vice President and Secretary
Irvine, California
October 28, 2005
TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION...................1
SUMMARY TERM SHEET............................................................2
The Special Meeting............................................2
The Proposed Merger............................................2
Questions About the Fairness of the Merger
and Conflicts of Interest......................................8
Voting and Proxy Procedures...................................11
Getting More Information......................................12
INTRODUCTION.................................................................13
SPECIAL FACTORS..............................................................14
Background of the Merger......................................14
Position of TCI as to the Fairness of the Merger..............20
Opinion of Financial Advisor to the Board of Directors........25
Position of TCI as to the Purposes, Alternatives,
Reasons and Effects of the Merger.............................31
Positions of Retalix, Retalix Holdings Inc., RTLX LLC
and Survivor RTLX LLC as to the Fairness of the Merger........32
Positions of Retalix, Retalix Holdings Inc., RTLX LLC
and Survivor RTLX LLC as to the Purposes, Alternatives,
Reasons and Effects of the Merger.............................34
The Retalix Entitie's Plans for TCI...........................34
THE MERGER...................................................................35
Proposal to be Considered at the Special Meeting..............35
Voting Rights; Quorum; Vote Required for Approval.............35
Voting and Revocation of Proxies..............................36
Proxy Solicitation............................................36
Structure of the Merger.......................................36
Effective Time of the Merger..................................37
Payment of Merger Consideration and Surrender of
Stock Certificates............................................37
Source of Merger Funding......................................37
Interests of Certain Persons in the Merger;
Potential Conflicts of Interest...............................37
Intent to Vote; Recommendations...............................41
Estimated Fees and Expenses of the Merger.....................41
Appraisal Rights..............................................42
Material U.S. Federal Income Tax Consequences.................44
Certain Legal Matters.........................................45
Regulatory Filings and Approvals..............................45
THE MERGER AGREEMENT.........................................................46
Representations and Warranties................................46
Conditions to the Merger......................................46
Amendments....................................................46
Waiver........................................................46
i
Options and Warrants..........................................47
Interim Operations............................................47
Access to Information.........................................47
Notices of Certain Events; Continuing Disclosure..............48
Compensation..................................................48
Consents......................................................48
Stockholder Approval; Other Covenants.........................48
Other Acquisition Proposals...................................48
Confidentiality...............................................50
Indemnification...............................................50
Vote..........................................................50
Termination...................................................50
Termination Fee...............................................51
Expenses......................................................51
INFORMATION ABOUT TCI........................................................52
Business......................................................52
Properties....................................................58
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Fiscal Year Ended December 31, 2004...................59
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Three and Six Months Ended June 30, 2005..............67
Financial Statements..........................................74
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.......................74
TCI SOLUTIONS, INC. SELECTED FINANCIAL AND OPERATING DATA....................75
TCI SOLUTIONS, INC. PROJECTED FINANCIAL INFORMATION..........................77
Price Range of TCI's Common Stock.............................79
Dividends and Dividend Policy.................................79
INFORMATION ABOUT RETALIX....................................................80
OTHER MATTERS................................................................82
Other Matters at the Special Meeting..........................82
Future Stockholder Proposals..................................82
Security Ownership of Certain Beneficial Owners
and Management................................................82
Purchases by TCI and its Directors and Executive
Officers and by Retalix, Retalix Holdings Inc.,
RTLX LLC and Survivor RTLX LLC and their Directors,
Managers and Executive Officers...............................84
Available Information.........................................84
ii
SCHEDULES AND APPENDICES
Schedule I - Information Concerning Directors and Executive Officers of
TCI Solutions, Inc. and Retalix Ltd.
Appendix A - Agreement and Plan of Merger dated as of April 1, 2005
among TCI Solutions, Inc., Retalix Ltd., Retalix Holdings
Inc., Survivor RTLX LLC and RTLX LLC
Appendix B - Stock Purchase Agreement dated April 1, 2005 among TCI
Solutions, Inc., Retalix Ltd., Retalix Holdings Inc. and
certain Stockholders of TCI Solutions, Inc. signatory
thereto
Appendix C(i) - Opinion of The Mentor Group, Inc. dated March 31, 2005
Appendix C(ii) - Letter dated March 31, 2005 from The Mentor Group, Inc. to
the board of directors of TCI Solutions, Inc.
Appendix C(iii) - Unsigned Draft Opinion of the Mentor Group Regarding
Proposed Going Private Transaction
Appendix D - Section 262 of the Delaware General Corporation Law
(Appraisal Rights)
Appendix E - Financial Statements of TCI Solutions, Inc. for the Year
Ended December 31, 2004
Appendix F - Financial Statements of TCI Solutions, Inc. for the Three
and Six Months Ended June 30, 2005
Appendix G - Presentation by management of Retalix Ltd. to the Board of
Directors of Retalix Ltd.
iii
This document may incorporate or refer to important business and financial
information about TCI Solutions, Inc. from documents filed with the Securities
and Exchange Commission that are not included in or delivered with this
document. This information is available without charge at the Securities and
Exchange Commission's website at www.sec.gov, as well as from other sources. See
"OTHER MATTERS - Available Information" below.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement and the documents attached to or incorporated by
reference herein contain or are based upon "forward-looking" information and
involve risks and uncertainties. Such forward-looking statements reflect, among
other things, management's current expectations and anticipated results of
operations, all of which are subject to known and unknown risks, uncertainties
and other factors that may cause TCI's actual results, performance or
achievements, or industry results, to differ materially from those expressed or
implied by such forward-looking statements. Therefore, any statements contained
herein or in the documents attached or incorporated by reference that are not
statements of historical fact may be forward-looking statements and should be
evaluated as such. Without limiting the foregoing, the words, "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates, "seeks"
and similar words and expressions are intended to identify forward-looking
statements. TCI assumes no obligation to update any such forward-looking
information to reflect actual results or changes in the factors affecting such
forward-looking information. The many factors that could cause actual results to
differ materially from those expressed in, or implied by, the forward-looking
statements include, without limitation:
o costs, charges and tax treatment related to the proposed merger;
o failure to obtain required stockholder or regulatory approvals
for the merger;
o the merger not closing for any other reason; and
o other factors disclosed in TCI's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004 filed with the Securities
and Exchange Commission on April 15, 2005, Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 2005 filed with
the Securities and Exchange Commission on August 19, 2005 and in
other reports filed by TCI from time to time with the Securities
and Exchange Commission.
1
SUMMARY TERM SHEET
This summary term sheet summarizes selected information contained
elsewhere in this proxy statement but may not contain all of the information
that is important to you. You are urged to read carefully the entire proxy
statement including the attached schedule and appendices. In this proxy
statement, the term "TCI" refers to TCI Solutions, Inc., the term "Retalix"
refers to Retalix Ltd., and where applicable, may also refer to Retalix Holdings
Inc., Survivor RTLX LLC and RTLX LLC, all of which are wholly-owned subsidiaries
of Retalix.
The Special Meeting
SUMMARY TERM SHEET
This summary term sheet summarizes selected information contained
elsewhere in this proxy statement but may not contain all of the information
that is important to you. You are urged to read carefully the entire proxy
statement including the attached schedule and appendices. In this proxy
statement, the term "TCI" refers to TCI Solutions, Inc., the term "Retalix"
refers to Retalix Ltd., and where applicable, may also refer to Retalix Holdings
Inc., Survivor RTLX LLC and RTLX LLC, all of which are wholly-owned subsidiaries
of Retalix. The term "Retalix entities" refers to Retalix, Retalix Holdings
Inc., RTLX LLC and Survivor RTLX LLC.
The Special Meeting
When and where is the special meeting? The special meeting of the stockholders of TCI will be held
on November 21, 2005, at 9:00 a.m. Pacific Standard Time,
at TCI's principal executive offices located at 17752
Skypark Circle, Suite 160, Irvine, California 92614. See
"THE MERGER."
What am I being asked to vote upon? A proposal to adopt the agreement and plan of merger
dated as of April 1, 2005 among Retalix, Retalix
Holdings Inc., Survivor RTLX LLC, RTLX LLC and TCI.
The agreement and plan of merger and the merger
transactions proposed therein are referred to in this
proxy statement as the "merger agreement" and the
"merger," respectively. See "THE MERGER--Proposal to be
Considered at the Special Meeting."
The Proposed Merger
What will happen if the merger is completed? All outstanding shares of stock of TCI, other than
shares held by (i) Retalix and its subsidiaries and
(ii) stockholders who properly perfect appraisal rights
under Delaware law, will be converted into the right to
receive $0.132 per share of common stock, $0.8409 per
share of Series A Preferred Stock and $0.7573 per share
of Series B Preferred Stock. Following the merger, TCI
will file with the Securities and Exchange Commission
to de-register the common stock under the Securities
Exchange Act of 1934 (which we refer to as the
"Exchange Act"). As a result, TCI will no longer have
an obligation to comply with the periodic and annual
reporting requirements of the Exchange Act. Also,
there will be no public market for its common stock.
In the merger, TCI will first become a wholly-owned
subsidiary of Retalix Holdings Inc. when RTLX LLC will
merge into TCI, with TCI surviving the merger. This
will be immediately followed by a merger of TCI with
and into Survivor RTLX LLC, which will be the surviving
company. After the merger, TCI will cease to exist and
the assets and liabilities of TCI will be held by
Survivor RTLX LLC. See "SPECIAL FACTORS-Position of TCI
as to the Purposes, Alternatives, Reasons and Effects
of the Merger" and "SPECIAL FACTORS-Position of Retalix
as to the Purposes, Alternatives, Reasons and Effects
of the Merger."
When will the merger be completed? If the other conditions to the closing of the merger
described are satisfied or waived, the merger is expected
to be completed promptly after approval of the merger
agreement at the special meeting. Retalix Holdings Inc.,
which owns 73.4% of TCI's common stock on an as-
converted-to-common-stock basis, intends to vote all of
its shares in favor of the merger agreement at the
special meeting unless the conditions to closing set
forth in the merger agreement are not met. Therefore the
votes of Retalix Holdings Inc. alone will be sufficient
to approve the merger agreement. The conditions require
(in addition to stockholder approval) that no law or
legal action prohibit the merger and TCI and Retalix
shall have performed all of their respective obligations
under the merger agreement. See "THE MERGER--Effective
Time of the Merger."
What will I receive if the merger is completed? o Each holder of TCI common stock will
receive $0.132 in cash per share, each
holder of Series A Preferred Stock will
receive $0.8409 in cash per share
(determined on an
as-converted-to-
2
common-stock basis) and each holder of
Series B Preferred Stock will receive
$0.7573 in cash per share (determined on an
as-converted-to-common-stock basis) (except
in each case shares owned by Retalix and
its subsidiaries and shares owned by
stockholders who properly exercise
appraisal rights.) See "THE MERGER--Payment
of Merger Consideration and Surrender of
Stock Certificates."
o Stockholders who properly exercise their
appraisal rights will receive cash in the
amount of the appraised value of their
shares of TCI stock instead of the merger
consideration described above. See "THE
MERGER--Appraisal Rights."
o Shares of common stock owned by Retalix and
its subsidiaries will be canceled and no
consideration will be paid for these
shares. See "THE MERGER--Payment of Merger
Consideration and Surrender of Stock
Certificates."
When will I receive the merger consideration? After the completion of the merger, when you send your
share certificates together with a completed letter of
transmittal to the disbursing agent, that agent will
promptly distribute the merger consideration to
stockholders. See "THE MERGER--Payment of Merger
Consideration and Surrender of Stock Certificates."
What effects will the merger have on TCI? As a result of the merger, each share of TCI stock will
be canceled. Accordingly, TCI will be eligible for
termination of, and will terminate, registration of its
common stock under the Exchange Act. In addition, TCI
and its directors, executive officers and major
stockholders will no longer be subject to certain
requirements of the Exchange Act, including reporting
requirements. We do not expect either the stock purchase
or the mergers to result in the recognition of taxable gain
or loss for TCI. See "SPECIAL FACTORS-Position of TCI as
to the Purposes, Alternatives, Reasons and Effects of
the Merger" and "SPECIAL FACTORS-Position of Retalix as
to the Purposes, Alternatives, Reasons and Effects of the
Merger."
What effects will the merger have on Retalix, As a result of the merger, RTLX LLC will merge with and
Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC? into TCI and cease to exist. TCI will then merge
with and into Survivor RTLX LLC and TCI will cease to
exist. Retalix Holdings Inc. will continue to own all
outstanding membership interests in Survivor RTLX LLC and
Retalix Ltd. will continue to own all of the outstanding
stock of Retalix Holdings Inc., in each case with no
change. These transactions are expected to be tax-free
under U.S. federal tax rules to each of the Retalix
entities.
How is the merger related to the prior acquisition by On April 1, 2005, the Retalix entities agreed to acquire
the Retalix entities of our preferred stock? all of our outstanding capital stock in a two step
transaction consisting of (i) a stock acquisition, under
which Retalix Holdngs Inc. acquired substantially all of
our outstanding Series A and Series B Preferred Stock
from institutional and private equity investors, and
(ii) a merger to occur as soon as possible after the
special meeting, after which Retalix would indirectly
own all of our outstanding capital stock. The total
purchase price to be paid by Retalix to acquire all of
our outstanding capital stock is $34.5 million. See
"SPECIAL FACTORS--Background of the Merger."
TCI and Retalix desired to structure the acquisition in
this manner so that Retalix could acquire control of TCI
quickly to minimize the risks posed by a one-step merger,
including the risk that TCI's financial condition or
business prospects would deteriorate and the merger would
not be completed.
Who were the selling stockholders? In the first step described in the previous answer, the
stockholders who sold shares of TCI's Series A
Preferred Stock and/or Series B Preferred Stock to
Retalix pursuant to the stock purchase agreement dated
April 1, 2005 were TCI's institutional venture capital
and private equity investors, which we refer to
collectively in this proxy statement as the "selling
stockholders." The selling stockholders consisted of
Argentum Capital Partners II, L.P., Argentum Capital
Partners, L.P., TCI ACPII Limited Partners, L.P.,
Guarantee & Trust Co., TTEE Daniel Raynor GTC IRA, Blue
Chip Capital Fund IV Limited Partnership, Environmental
& Information Technology Private Equity Fund III,
Infrastructure & Environmental Private Equity Fund III,
L.P., Mark Koulogeorge, Productivity Fund IV Advisors
Fund, L.P., Productivity Fund
3
IV, L.P. and Innocal II, L.P.
The selling stockholders were affiliated with TCI's
directors on April 1, 2005, as follows:
Selling Stockholder Affiliation with TCI Directors
------------------- ------------------------------
Argentum Capital Daniel Raynor, a director of TCI
Partners II, L.P. until April 15, 2005, is the
managing member of Argentum
Argentum Capital Investments, L.L.C., which is
Partners, L.P. general partner of TCI ACPII
Limited Partners, L.P. and the
TCI ACPII Limited managing member of Argentum
Partners, L.P. Partners II, L.L.C., which in turn
is general partner of Argentum
CGM IRA Custodian Capital Partners II, L.P. Mr.
FBO Daniel Raynor Raynor is also the chairman of B.R.
(holds shares Associates, Inc., which is the
received by Guarantee general partner of Argentum Capital
& Trust Co. TTEE Partners, L.P. Mr. Raynor had
Daniel Raynor GTC voting and investment control over
IRA under the stock Guarantee & Trust Co., TTEE Daniel
purchase agreement) Raynor, which was his individual
retirement account, and has voting
and investment control over CGM IRA
Custodian FBO Daniel Raynor, which
is his current individual
retirement account and which now
holds the consideration received by
TTEE Daniel Raynor GTC IRA under
the stock purchase agreement.
Blue Chip Capital Todd G. Gardner, a director of TCI
Fund IV Limited until April 15, 2005, is a director
Partnership of Blue Chip Venture Company, Ltd.,
which is the general partner of
Blue Chip Capital Fund IV Limited
Partnership.
Mark Koulogeorge Mr. Koulogeorge was a director of TCI
until April 15, 2005.
Environmental & Mr. Koulogeorge was the managing
Information director of First Analysis
Technology Corporation, the managing member of
Private Equity First Analysis IEPEF Management
Fund III Company, III, L.L.C., which is the
managing member of Infrastructure
Infrastructure & and Environmental Private Equity
Environmental Management, L.L.C., which in turn
Private Equity is the general partner of
Fund III, L.P. Environmental & Information
Technology Private Equity Fund III
and Infrastructure & Environmental
Private Equity Fund III, L.P.
Productivity Fund IV Mark Koulogeorge, a director of TCI
Advisors Fund, L.P. until April 15, 2005, is the
managing director of First Analysis
Productivity Fund IV, Venture Operations and Research
L.P. L.L.C., which is the managing
member of First Analysis Management
Company IV L.L.C., which in turn is
the general partner of Productivity
Fund IV Advisors Fund, L.P. and
Productivity Fund IV, L.P.
4
InnoCal II, L.P. James E. Houlihan III, a director
of TCI until April 15, 2005, is the
managing director of InnoCal
Management II, L.P., which is the
general partner of InnoCal II, L.P.
What amount of consideration did the selling Retalix, through its wholly owned subsidiary, Retalix
stockholders receive? Holdings, Inc., purchased substantially all of the
shares of Series A Preferred Stock and Series
B Preferred Stock from the selling stockholders for an
aggregate purchase price of $30,035,148, which represents
the amount payable to these Series A and Series B
Preferred Stockholders to satisfy their liquidation
preferences as required by TCI's certificate of
incorporation and their rights to participate in the
merger proceeds on an as-converted-to-common-stock basis.
This represents the amount the selling stockholders would
have been entitled to receive if they had tendered their
shares in accordance with the terms set forth in the
merger agreement. For information regarding the
calculation of the Series A Preferred Stock and Series B
Preferred Stock merger consideration, see "SUMMARY TERM
SHEET--The Proposed Merger--"How was the Series A
Preferred Stock merger consideration calculated?" and
"How was the Series B Preferred Stock merger
consideration calculated?".
The $30,035,148 consideration under the stock purchase
agreement was paid in (i) 715,730 Retalix ordinary shares
valued at $17,177,500 and (ii) $12,857,648 in cash. The
receipt of Retalix ordinary shares is expected to be
non-taxable for the selling stockholders, but the receipt
of cash is taxable. For information regarding the tax
consequences of this transaction to the selling
stockholders, see "SUMMARY TERM SHEET--The Proposed
Merger--" What are the tax consequences of the
transaction for the selling stockholders?"
As a result of the stock purchase agreement dated
April 1, 2005 with Retalix, the selling stockholders
received the following equity interests in Retalix:
Name Number of Retalix
---- Ordinary Shares
---------------
Argentum Capital Partners II, 139,545
L.P.
Argentum Capital Partners, 26,116
L.P.
TCI ACPII Limited Partners, 32,972
L.P.
CGM IRA Custodian FBO 2,355
Daniel Raynor (holds shares
received by Guarantee & Trust
Co. TTEE Daniel Raynor GTC
IRA under the stock purchase
agreement.)
Blue Chip Capital Fund IV 107,431
Limited Partnership
Environmental & Information 21,660
Technology Private Equity
Fund III
Infrastructure & Environmental 86,638
Private Equity Fund III, L.P.
Mark Koulogeorge 31,193
Productivity Fund IV Advisors 5,200
Fund, L.P
5
Productivity Fund IV, L.P. 135,272
Innocal II, L.P. 127,348
---------------- -------
Total 715,730
Each selling stockholder holds less than 1% of the
outstanding shares of Retalix.
How much of the total purchase price paid by Retalix The total aggregate purchase price to be paid by Retalix
will be distributed to the common stockholders? for the equity of TCI is $34.5 million less aggregate
transaction expenses (including, legal, accounting and
advisory fees) in excess of $150,000. Of the remaining
proceeds, $25.7 million of the purchase price was payable
to holders of Series A and Series B Preferred Stock
(including holders of preferred stock in addition to the
selling stockholders) computed based upon their
liquidation preferences as provided in our certificate of
incorporation and $5.2 million was payable to these
preferred stockholders computed based upon their rights
to participate in the proceeds on an
as-converted-to-common-stock basis. Of this $30.9
million, approximately $30 million was paid in cash and
Retalix shares to the selling stockholders pursuant to
the stock purchase agreement on April 1, 2005 and
approximately $0.9 million will be paid to the other
preferred stockholders pursuant to the merger agreement.
This left approximately $3.4 million for distribution to
holders of common stock and to participants in our
employee and director stock option and stock option
exchange programs. The participants under our employee
and director stock option and option exchange programs
were paid $1.7 million, leaving approximately $1.7
million for stock options which would have been vested as
of April 1, 2005, to be distributed to holders of common
stock in the merger.
How was the common stock merger consideration After the payments of $25.7 million in preferred equity
calculated? and accumulated dividends to Series A and Series B
Preferred Stockholders computed based upon TCI's
certificate of incorporation and transaction expenses,
$8.6 million in proceeds remained available for
distribution from the $34.5 million aggregate purchase
price. The common stock merger consideration of $0.132
per share was determined by dividing the remaining $8.6
million proceeds by 65.3 million shares, the total number
of shares of common stock outstanding plus the number of
shares of common stock issuable upon conversion of the
Series A and Series B Preferred Stock, which is entitled
to participate on an as-converted-to-common-stock basis,
including for purposes of the calculation shares sold by
the selling stockholders to Retalix, plus shares reserved
for participants in our employee and director stock
option and stock exchange programs.
How was the Series A Preferred Stock merger The Series A Preferred Stock merger consideration of
consideration calculated? $0.8409 per share was determined by dividing (i) the sum of
the Series A Preferred Stock liquidation preference payable
under our certificate of incorporation and the common stock
merger consideration payable to the Series A Preferred
Stock as a result of the participation of such stock on an
as-converted-to-common-stock basis, by (ii) the sum of the
number of shares of Series A Preferred Stock outstanding
(on an as-converted-to-common-stock basis) and the
additional shares of Series A Preferred Stock issuable as a
result of the PIK dividend provided for under our
certificate of incorporation. Each share of Series A
Preferred Stock is convertible into 2.12 shares of common
stock.
How was the Series B Preferred Stock The Series B Preferred Stock merger consideration of
calculated? $0.7573 per share was determined by dividing (i) the sum
of the Series B Preferred Stock liquidation preference
payable under our certificate of incorporation and the
common stock merger consideration payable to the Series B
Preferred Stock as a result of the participation of such
stock on an as-converted-to-common-stock basis,
6
by (ii) the number of shares of Series B Preferred Stock
outstanding. Each share of Series B Preferred Stock is
convertible into one share of common stock.
Why will the common stockholders and remaining preferred Although TCI and the selling stockholders would have
stockholders receive all cash while the selling preferred to sell the company for all cash instead of for a
stockholders received cash and stock? combination of cash and stock, Retalix did not wish to
proceed on such a basis. Also, TCI would have preferred to
pay all stockholders in equal portions of cash and stock,
but there was no securities exemption available to permit
payment of Retalix shares to all of TCI's stockholders and
Retalix was unwilling to undertake the time and expense to
file a registration statement prior to closing that it
believed would be necessary to permit its shares to be
lawfully distributed to all TCI stockholders. TCI also
believed that payment of cash to its holders of common
stock would in most cases benefit such holders because it
would likely generate capital losses which could be used to
offset capital gains, and that payment of cash to
unaffiliated holders of Series A and Series B Preferred
Stock exposed the unaffiliated holders to lower potential
risk than that faced by the selling stockholders who
received unregistered stock of Retalix.
be necessary to permit its shares to be lawfully
distributed to all TCI stockholders. In addition, TCI
believed that payment of cash to its holders of common
stock would likely generate capital losses which could be
used to offset capital gains.
Will I have any appraisal rights? Yes. Stockholders are entitled to assert appraisal
rights under Delaware law by following the requirements
specified in Section 262 of the Delaware General
Corporation Law, a copy of which is attached as Appendix
D. See "THE MERGER--Appraisal Rights" and Appendix D.
What are the tax consequences of the merger to me? Generally, the receipt of cash in exchange for shares
of TCI stock in the merger will be a taxable
transaction for U.S. federal income tax purposes and
may also be a taxable transaction under applicable
state, local, foreign or other tax laws. Tax matters
are very complex and the tax consequences of the merger
to you will depend on the facts of your own situation.
You should consult your tax advisor for a full
understanding of the tax consequences of the merger to
you. See "THE MERGER - Material U.S. Federal Income
Tax Consequences."
What are the tax consequences of the transaction to the Just as the receipt of cash in exchange for their
selling stockholders? shares in the merger generally will be a taxable
transaction (to the extent of the cash received) for the
public stockholders, the receipt of cash in exchange for
shares of TCI stock under the stock purchase agreement by
the selling stockholders generally will be taxable (to
the extent of the cash received) for U.S. federal income
tax purposes. However, the selling stockholders should
not recognize gain or loss on the exchange of their
shares of TCI stock for ordinary shares of Retalix under
the stock purchase agreement. The future sale of Retalix
ordinary shares received in the transaction should be a
taxable transaction for the selling stockholders. See
"THE MERGER--Material U.S. Federal Income Tax
Consequences."
How will Retalix finance the merger? The Retalix entities estimate that approximately $2.8
million will be required to complete the merger and
related transactions. Retalix will provide the funds
necessary to complete the merger from the cash on hand
and working capital of Retalix. See "THE MERGER-Source
of Merger Funds."
What are the conditions to the merger? If certain conditions are not satisfied or waived, the
merger will not be completed. These conditions
include, among others:
o the absence of any injunction or order of
any court or other governmental entity
prohibiting the merger;
o approval of the holders of a majority of
outstanding TCI common stock and preferred
stock (voting on an
as-converted-to-common-stock basis), voting
together, at the special meeting; and
o TCI and Retalix and its subsidiaries shall
have performed all of
7
their respective obligations under the
merger agreement as of the closing date of
the merger.
See "THE MERGER AGREEMENT - Conditions to the Merger."
Does the merger require any regulatory filings or TCI does not believe that any material federal or state
approvals? regulatory approvals, filings or notices are required by
it in connection with the merger, except for the filing
of this proxy statement and a Schedule 13E-3 with the
Securities and Exchange Commission and the filing of a
certificate of merger with the Secretary of State of
Delaware.
Questions About the Fairness of the Merger and Conflicts of Interest
What are the Retalix entities' current relationships The Retalix entities control 73.4% of TCI's voting
with TCI? stock and 3 of TCI's 4 directors are associated with
Retalix. On April 15, 2005, subsequent to signing the
merger agreement and the Retalix entities' acquisition
of 73.4% of TCI's voting stock, each TCI director
except David Butler resigned and Barry Shaked, Danny
Moshaioff and Eli Spirer were appointed directors of
TCI. Barry Shaked is the President, Chief Executive
Officer and Chairman of the board of directors of
Retalix. Mr. Shaked holds, as of August 31, 2005,
1,002,259 ordinary shares of Retalix, which equals
approximately 5.2% of Retalix's issued and outstanding
share capital. In addition, as of August 31, 2005, Mr.
Shaked holds options to purchase a total of up to
425,360 of Retalix's ordinary shares. Danny Moshaioff
is an Executive Vice President and the Chief Financial
Officer of Retalix, and Mr. Spirer is employed by a
subsidiary of Retalix. Including ordinary shares and
options to purchase ordinary shares held by Messrs.
Moshaioff and Spirer, neither Mr. Moshaioff nor Mr.
Spirer holds more than 1% of the issued and outstanding
share capital of Retalix. Prior to our entering into
the merger agreement, each of Retalix, Retalix Holdings
Inc., RTLX LLC or Survivor RTLX LLC was a third party
not in any way affiliated with TCI. The acquisition of
TCI by the Retalix entities has been structured as a
two -step process to acquire the entire company. In the
first step, Retalix Holdings Inc. acquired more than
97% of TCI's outstanding preferred stock from a group
of TCI's selling stockholders, as a result of which
Retalix Holdings Inc. now owns 73.4% of the outstanding
voting stock of TCI (calculated on an
as-converted-to-common-stock basis). As a result of
Retalix Holdings Inc.'s April 1, 2005 purchase of
substantially all of TCI's Series A and Series B
Preferred Stock, Retalix, Retalix Holdings Inc., RTLX
LLC and Survivor RTLX LLC each became an affiliate of
TCI for purposes of the Exchange Act. Retalix Holdings
Inc. intends to vote its shares in favor of the
adoption of the merger agreement, provided that the
other conditions to the merger are met on or before the
date of the special meeting. See "OTHER
MATTERS--Security Ownership of Certain Beneficial
Owners and Management" and "THE MERGER--Interests of
Certain Persons in the Merger; Potential Conflicts of
Interest."
Do TCI's directors and officers have interests in the Yes. These interests include the following:
merger that are different from, or in addition to, mine?
o TCI Chief Executive Officer David R. Butler
continued in his position until June 30,
2005 and served as Executive Vice
President, Sales of Retalix USA Inc. from
April 1, 2005 to June 30, 2005;
o Mr. Butler's unvested options were
accelerated pursuant to his employment
agreement;
o On June 7, 2005 Retalix announced that former
TCI Chief Executive Officer and director
Lance C. Jacobs had been appointed Executive
Vice President of Products and Strategy for
Retalix Ltd. Mr. Jacobs resigned from Retalix
on September 16, 2005; and
8
o Certain of TCI's executive officers will
receive severance payments of approximately
$609,000 in the aggregate as a result of
their employment agreements being
terminated. These costs will be assumed and
paid entirely by Retalix.
See "THE MERGER--Interests of Certain Persons in the
Merger; Potential Conflicts of Interest."
Why did TCI enter the merger agreement before allowing The board of directors carefully evaluated other options
stockholders to vote? for the approval of the merger agreement and concluded that
postponing the transactions until after a stockholder vote
could cause the loss of sales and employees during the
pre-closing period and thereby impede Retalix's desire to
proceed with the merger after acquiring control of 73.4% of
the Company's voting stock. The board was also concerned
that if TCI's financial performance or prospects were to
deteriorate prior to a stockholder vote in a one-step
merger, Retalix might not be willing to complete the
merger. In the two-step merger TCI and Retalix agreed to,
the initial acquisition gave Retalix immediate control of
TCI and sufficient certainty to enable TCI and Retalix to
complete the merger in a timely and efficient manner.
What did the board of directors do to make sure that the The board required that Retalix pay TCI's stockholders
merger consideration is fair to all TCI stockholders, according to the provisions set forth in TCI's certificate
including stockholders unaffiliated with TCI or Retalix? of incorporation, including paying all stockholders the
same amount on an as-converted-to-common-stock basis after
satisfying the preferred stockholders' liquidation
preferences. The board of directors retained The Mentor
Group, Inc. to evaluate the merger proposal and to examine
alternatives and render an opinion as to the fairness of
the merger consideration to all holders of TCI stock. TCI's
then -Chief Executive Officer David R. Butler, who was (and
still is) also a director, negotiated the merger agreement
and the merger consideration on behalf of TCI in
arm's-length negotiations with the assistance of other
long-standing members of TCI's management team including
Lance Jacobs, who at that time was a director and Chief
Industry Officer of TCI and had previously been TCI's Chief
Executive Officer. The directors affiliated with the
selling stockholders did not participate in the
negotiations; the proposed transaction was presented to the
full board for approval only after negotiations were
complete. TCI entered into the stock purchase agreement and
merger agreement with Retalix prior to Retalix becoming a
stockholder and prior to the appointment of certain Retalix
officers to the board. In addition, the board of directors
considered various alternatives to the merger, including an
alternative going-private transaction, and concluded that
the merger consideration was the highest price that could
be obtained for TCI's stockholders, including unaffiliated
preferred and common stockholders, and that the merger was
in the best interests of TCI and all of its stockholders,
including unaffiliated stockholders. The board made its
determination after analyzing the fairness to each class of
stockholders separately. The Mentor Group has also
delivered a letter to the board, attached as Appendix
C(ii), clarifying that its opinion addresses the fairness
of the transaction to all stockholders, individually and
collectively, including without limitation to the Series A
Preferred Stockholders, Series B Preferred Stockholders and
common stockholders who are unaffiliated with the Company.
The board of directors considered both the stock purchase
agreement and merger agreement together as integrated
steps in the sale of TCI to Retalix and unanimously
approved both. Further, the board determined that (1) the
contemplated merger constituted a liquidation event under
TCI's certificate of incorporation, and (2) the purchase
price of $34.5 million would be distributed to TCI's
stockholders in accordance with the priorities mandated
by TCI's certificate of incorporation. See "SPECIAL
FACTORS--Background of the
9
Merger."
What does TCI's board of directors recommend? On March 31, 2005 the TCI board (then consisting of David
R. Butler, Lance C. Jacobs, Daniel Raynor, Todd G. Gardner,
Mark T. Koulogeorge and James E. Houlihan III) unanimously
approved the merger agreement and the proposed merger. The
board also adopted resolutions expressing its belief that
the terms of the merger agreement and the proposed merger
are advisable and are fair to, and in the best interests
of, all TCI stockholders and authorized the company to
include in this proxy statement a statement that the board
recommends the approval and adoption of the merger
agreement and the proposed merger. On April 15, 2005
Messrs. Jacobs, Raynor, Koulogeorge, Houlihan and Gardner
resigned from the board of directors, and Barry Shaked,
Danny Moshaioff and Eli Spirer were appointed as directors
of TCI. Messrs. Shaked and Moshaioff are affiliates of
Retalix, and Mr. Spirer is employed by a subsidiary of
Retalix. The current board (which consists of Messrs.
Butler, Shaked, Moshaioff and Spirer) believes that the
proposed merger is fair to all stockholders of TCI
individually and collectively, including without limitation
to all holders of Series A Preferred Stock, Series B
Preferred Stock and common stock who are unaffiliated with
the Company. Accordingly, the board of directors
unanimously recommends that you vote FOR the adoption of
the merger agreement. See "SUMMARY TERM SHEET--What is
Retalix's current relationship with TCI"; "SPECIAL
FACTORS--Background of the Merger" and "SPECIAL
FACTORS--Position of TCI as to the Fairness of the Merger to
Disinterested Stockholders."
What do Retalix, Retalix Holdings Inc., RTLX LLC Retalix, Retalix Holdings Inc., RTLX LLC and Survivor
and Survivor RTLX LLC think of the merger? RTLX LLC each considered the acquisition of TCI,
including stock purchase and the merger, as a whole and
believes that the acquisition of TCI, including the
merger and the consideration to be paid to
stockholders, is fair to all TCI stockholders
individually and collectively. Each of Retalix, Retalix
Holdings Inc., RTLX LLC and Survivor RTLX LLC
determined that the terms and conditions of the merger
are substantively and procedurally fair to the TCI Series A
Preferred, Series B Preferred and common stockholders
who are unaffiliated with TCI or Retalix. See "SPECIAL
FACTORS - Position of Retalix as to the Fairness of the
Merger."
Voting and Proxy Procedures
Who may vote at the special meeting? You are entitled to vote at the special meeting in
person or by proxy if you owned shares of TCI stock at
the close of business on October 27, 2005, which is the
record date for the special meeting. As of the record
date, there were 12,825,459 shares of TCI common stock,
5,816,037 shares of Series A Preferred Stock and
26,653,094 shares of Series B Preferred Stock issued
and outstanding and entitled to be voted at the special
meeting. You will have one vote for each share of TCI
common stock you hold on the record date. Holders of
Series A and Series B Preferred Stock are entitled to
vote their shares on an as-converted-to-common-stock
basis, under which holders of Series A Preferred Stock
may cast an aggregate of 13,073,868 votes and holders
of Series B Preferred Stock may cast an aggregate of
26,653,094 votes. See "THE MERGER--Voting Rights;
Quorum; Vote Required for Approval."
What vote is required to approve the merger? The merger is conditioned on the adoption of the merger
agreement by a majority of the outstanding TCI common
stock and preferred stock voting on an
as-converted-to-common-stock basis as a single class,
and by 58% of the preferred stock, with both series
thereof voting together as a single class. Retalix
Holdings Inc. owns 73.4% of TCI's common stock on an
as-converted-to-common-stock basis, and more than 97%
of TCI's preferred stock, and intends to vote in favor
of the adoption of the merger agreement. Therefore the
votes of Retalix Holdings Inc. will be sufficient to
approve the merger. See "THE MERGER--Voting Rights;
Quorum; Vote Required for Approval."
10
Who is soliciting my proxy? TCI's board of directors is soliciting proxies to be
voted at the special meeting.
TCI has not hired a proxy solicitor to assist in the
solicitation of proxies. TCI's directors, officers and
employees may assist TCI in soliciting proxies, but
will not be specifically compensated for their
services. See "THE MERGER--Proxy Solicitation."
What do I need to do now? You should read this proxy statement carefully, including
its schedule and appendices, and consider how the merger
affects you. Then, mail your completed, dated and signed
proxy card in the enclosed return envelope as soon as
possible so that your shares can be voted at the special
meeting. See "THE MERGER--Voting Rights; Vote Required
for Approval."
May I change my vote after I have mailed my signed Yes. You may change your vote at any time before your
proxy card? proxy card is voted at the special meeting. You can do
this in one of three ways.
o First, you can send a written notice to
TCI's Secretary, Stephen P. DeSantis,
stating that you would like to revoke your
proxy.
o Second, you can complete and submit a new
proxy card.
o Third, you can attend the meeting and vote
in person. Your attendance at the special
meeting alone will not revoke your proxy -
you must also vote at the meeting.
If you have instructed a broker to vote your shares, you
must follow directions received from your broker to
change those instructions. See "THE MERGER--Voting and
Revocation of Proxies."
Should I send in my stock certificates now? No. After the merger is completed, you will receive
written instructions for exchanging your shares of TCI
stock for the merger consideration. See "THE
MERGER--Payment of Merger Consideration and Surrender of
Stock Certificates."
Getting More Information
Are there other documents relating to the merger that The Securities and Exchange Commission requires all
I should be aware of? affiliated parties involved in transactions such as the
merger to file with it a transaction statement on
Schedule 13E-3. TCI and Retalix have filed a transaction
statement on Schedule 13E-3 with the Securities and
Exchange Commission, copies of which are available
without charge at its website at www.sec.gov. See "OTHER
MATTERS--Available Information."
How can I learn more about the merger? The merger agreement, including the conditions to the
closing of the merger, is described under the caption
"THE MERGER AGREEMENT" and is attached as Appendix A to
this proxy statement. You should carefully read the
entire merger agreement because it is the legal
document that governs the merger. See "THE MERGER
AGREEMENT" and Appendix A to this proxy statement.
Who can help answer my questions? If you would like additional copies of this proxy
statement (which will be provided to you without
charge) or if you have questions about the merger,
including the procedures for voting your shares, you
should contact the Corporate Secretary at:
TCI Solutions, Inc.
Attn: Stephen P. DeSantis
17752 Skypark Circle, Suite 160
Irvine, California 92614
(949) 466-4618 (telephone)
(949) 476-1133 (fax)
11
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies by the board of directors of TCI Solutions, Inc., for a special meeting
of stockholders to be held on November 21, 2005, at 9:00 a.m. Pacific Standard
Time, at the principal executive offices of TCI located at 17752 Skypark Circle,
Suite 160, Irvine, California 92614. Shares of TCI stock represented by properly
executed proxies received by TCI will be voted at the special meeting or any
adjournment or postponement of the special meeting in accordance with the terms
of those proxies, unless revoked. This proxy statement is dated October 28,
2005 and is first being mailed to stockholders on or about October 28, 2005.
At the special meeting, you will be asked to adopt an agreement and plan
of merger dated as of April 1, 2005, which we refer to in this proxy statement
as the "merger agreement," by and among TCI, Retalix, Retalix Holdings Inc., a
Delaware corporation and a wholly-owned subsidiary of Retalix, Survivor RTLX
LLC, a Delaware limited liability company of which Retalix Holdings Inc. is the
sole member, and RTLX LLC, a Delaware limited liability company of which Retalix
Holdings Inc. is the sole member. The merger agreement provides for RTLX LLC to
merge with and into TCI (with TCI surviving), followed immediately by TCI
merging with and into Survivor RTLX LLC (with Survivor RTLX LLC surviving). In
this proxy statement will refer to these transactions collectively as the
"merger." When the merger is complete (except for (i) shares acquired by Retalix
Holdings Inc. pursuant to the stock purchase agreement and (ii) shares held by
stockholders who properly perfect appraisal rights under Delaware law):
o each holder of TCI common stock will receive $0.132 in cash per
share;
o each holder of Series A Preferred Stock will receive $0.8409 in
cash per share (determined on an as-converted-to-common-stock
basis); and
o each holder of Series B Preferred Stock will receive $0.7573 in
cash per share (determined on an as-converted-to-common-stock
basis).
Shares held by stockholders who properly assert and perfect their
appraisal rights under Delaware law will be purchased for their "fair value" as
determined under Delaware law. See "THE MERGER - Appraisal Rights."
Retalix has supplied all information in this proxy statement relating to
Retalix, its directors and executive officers and its wholly-owned subsidiaries
Retalix Holdings Inc., Survivor RTLX LLC and RTLX LLC. No persons have been
authorized to give any information or to make any representations other than
those contained in this proxy statement.
12
SPECIAL FACTORS
Background of the Merger
TCI Solutions, Inc., a Delaware corporation, was incorporated on June
21, 2001 and is the surviving corporation in the reincorporation merger with our
predecessor, TCI Management, Inc., a California corporation, on October 25,
2001. TCI Management was formed on September 16, 1992 to act as the Managing
General Partner of Total Control Information, a California limited partnership
formed on June 10, 1983 (formerly called Timesharing Consultants). The limited
partnership originally operated the business of providing accounting and data
processing services to clients on a timesharing basis. The business was later
changed to developing and selling software for the retail grocery industry.
Prior to the formation of TCI Management, Total Control Information raised all
of its equity financing through private placements of limited partnership
interests. These limited partnership interests were later converted into common
stock of TCI Management. TCI Management was the sole managing general partner of
the limited partnership.
In October 2001, we completed a reincorporation merger of TCI
Management, Inc. into TCI Solutions, Inc. In the reincorporation merger, all
outstanding shares of common stock of TCI Management were converted into an
identical number of shares of common stock of TCI and all outstanding shares of
preferred stock of TCI Management were converted into an identical number of
shares of Series A Preferred Stock of TCI. In December of 2001, we issued shares
of our Series B Preferred Stock in a private placement financing to venture
capital institutions. As a condition to this financing, all remaining limited
partnership interests of our limited partnership were converted into common
stock of TCI Solutions, Inc.
As a result of the prior financings and conversions into TCI common
stock, TCI had in excess of 500 holders of its common stock and, as a result of
the Series B Preferred Stock financing, in excess of $10 million in assets on
the last day of our fiscal year, December 31, 2001. This required us to file a
Form 10SB to register our common stock with the Securities and Exchange
Commission. On April 30, 2002 we became a public reporting company under Section
12(g) of the Exchange Act.
Given our history of operating losses, private placement equity
financings have been our main source of liquidity. Investors in TCI have been
motivated by the belief that TCI's development of a set of proprietary software
applications focused on the niche inventory and back-office management for the
retail grocery sector would result in high margins and significant earnings
growth and would position TCI for an initial public offering or acquisition by a
larger software developer. These expectations were fueled by the many successful
initial public offerings and acquisitions that occurred in the late 1990s within
the technology and software industries. Since that time, the downturn in
technology and software valuations and economic recession following the
terrorist attacks of September 11, 2001 eroded TCI's earlier projections for
growth. Recent increased competition from larger software developers and
lackluster performance among large grocery chains have stunted our revenue and
earnings growth. The recent bankruptcies of some of TCI's large customers such
as Flemings and Winn-Dixie have also harmed TCI's financial prospects. Price
pressures and consumers' increasing demands for value, convenience and service
have also decreased operating margins across TCI's lines of software
applications and services.
For the past several years the board of directors has evaluated various
alternatives that would result in a liquidity event for or otherwise maximize
value to TCI's stockholders, including a public offering of securities, a
going-private transaction and the sale of TCI to a strategic or institutional
buyer. The board considered a public offering an unlikely alternative given
TCI's financial performance and the current disfavor among public equity markets
for software companies with niche solutions within the small vertical market of
grocery retail.
Due to continued losses, the bankruptcies of large TCI customers such as
Flemings and Winn-Dixie, as well as Wal-Mart's aggressive penetration of the
grocery sector and the need to raise additional funds if TCI were to continue to
operate as a stand-alone entity, the TCI board decided in the last quarter of
fiscal 2004 to consider taking action to maximize value to stockholders. The
board and TCI's management believed TCI needed either to grow substantially in
size and seek new products and markets or undertake a strategic transaction that
would result in TCI's going private or being sold to another software company.
In December 2004, the TCI board and management had various discussions regarding
the going private process. With the passage of the Sarbanes-Oxley Act of 2002,
which became applicable to TCI commencing in July 2002, TCI experienced
increased costs and increased regulatory burden including but not limited to the
additional costs associated with the new internal control auditing procedures
that TCI's auditors would be required to conduct concerning TCI's annual report.
Due to the significant annual cost of being a public reporting company and the
increasing burden and cost anticipated in the future, management recommended
that the board consider the option of going private. Management suggested that
the common stockholders holding less than 15,000 shares be cashed out in a
going-private merger at a price equal to or greater than the then-estimated
per-share fair market value of the TCI common stock. This would have reduced the
number of stockholders below the maximum number which would make TCI subject to
reporting requirements of the Exchange Act. Although management had not yet made
a recommendation or proposal to the board of the price per share in the
going-private merger, the board noted that it had granted stock options to TCI
employees in August of 2004 at an exercise price of $0.05 per share, which was
the board's estimate
13
of the fair market value of TCI common stock at that time. At the conclusion of
the meeting, the board agreed to continue exploring a possible going private
transaction as well as other alternative transactions, such as a possible sale
to a strategic buyer.
Over the past several years, TCI has repeatedly explored the possibility
of a sale to a strategic buyer within the software industry. In that time,
management had identified five prospective strategic buyers that could be
interested in acquiring TCI: Retek Inc., JDA Software Group, Inc., Retalix,
Lawson Software Inc. and NCR Corporation. Management determined that Retalix was
the most logical buyer at a premium price because TCI's product line was a
particularly good fit with Retalix's product line. Also, Retalix could quickly
integrate TCI's software solutions with its other software offerings,
significantly reduce overhead, and had the financial resources to complete an
acquisition quickly with limited contingencies, thereby eliminating TCI's need
to raise additional equity capital that would be dilutive to TCI stockholders.
Other than Retalix, none of the prospective acquirors had shown any interest in
acquiring TCI. Retek Inc. was acquired by Oracle in March 2005. TCI's management
believed JDA Software Group, Inc. was focusing on integrating previous
acquisitions into its business. Lawson Software Inc. had eliminated its retail
software division. Finally, based on an analysis of NCR Corporation's previous
acquisitions, TCI's management did not believe NCR Corporation would pay more
than 1.0 times revenues to acquire a software company. However, Barry Shaked and
Danny Moshaioff, respectively the Chief Executive Officer and the Executive Vice
President and Chief Financial Officer of Retalix, had approached former TCI
Chief Executive Officer Lance C. Jacobs and former TCI director Mark Koulogeorge
within the past two years concerning the possibility of an acquisition of TCI by
Retalix. On December 9, 2003 Mr. Shaked and Mr. Moshaioff met Mr. Jacobs and Mr.
Koulogeorge in Dallas to state that Retalix would be interested in acquiring TCI
for a purchase price within the range of 0.8 to 1.0 times TCI's revenues, or
approximately $18 to $22 million. TCI rejected this offer because management did
not believe it provided adequate value for all of TCI's stockholders and because
it would have provided no value to TCI's common stockholders after payment of
liquidation preferences mandated by TCI's certificate of incorporation.
In October, 2004 Mr. Shaked contacted Mr. Koulogeorge to request TCI's
preliminary third quarter operating results and again expressed Retalix's
interest in acquiring TCI. In January 2005, Mr. Shaked and David Butler, Chief
Executive Officer of TCI, met in Dallas to discuss the potential of a
transaction between the two companies. Shortly thereafter, the companies
executed a mutual non-disclosure agreement and TCI provided Retalix with its
preliminary 2004 results and its internal projections for 2005 to enable Retalix
to provide an initial indication of interest. Retalix then provided TCI with a
non-binding letter of intent pursuant to which Retalix offered to acquire all of
the outstanding capital stock of TCI at a price of $32.8 million, plus a
proposed earn-out of up to an additional $6.0 million based on performance in
2005. At this time, TCI's board and management ceased considering a going
private transaction because (i) of Retalix's strong interest in pursuing an
acquisition of TCI and (ii) the proposed acquisition price would deliver greater
value to all stockholders of TCI, especially unaffiliated stockholders who would
have been cashed out at an estimated $0.05 per share or less in the previously
discussed going private transaction.
Discussions with Retalix executives continued through February 2005. On
February 22, 2005, TCI received a revised non-binding letter of intent from
Retalix under which Retalix proposed to acquire all of the outstanding capital
stock of TCI for $35.0 million, less aggregate expenses (including severance,
legal, accounting and advisory fees) in excess of $100,000, to be paid in a
combination of cash and Retalix ordinary shares. The offer was subject to
Retalix's completion of legal and financial due diligence. The letter contained
a provision which restricted TCI from engaging in any discussions or
negotiations with third parties with respect to any transaction involving the
acquisition of the TCI for a period of 60 days.
On February 25, 2005, the TCI board conducted a conference call to
discuss the revised Retalix letter of intent. The board authorized management to
continue with discussions with Retalix. The board also directed management to
engage The Mentor Group to evaluate the proposed transaction with a view to
providing an opinion as to the fairness of the purchase price offered by Retalix
to the preferred and common stockholders. TCI had previously engaged The Mentor
Group to evaluate the proposed going-private transaction with a view to
providing a fairness opinion for that transaction.
The board did not retain an unaffiliated representative to act solely on
behalf of unaffiliated security holders for any aspect of the transaction
because Retalix did not hold any shares of TCI and was not an affiliated party
at any point during the negotiation process. The TCI board did not form a
special committee of independent directors because TCI had no independent
directors with which to form a special committee and because the board had
carefully considered alternative transactions, including a going private
transaction and the sale of TCI to a buyer other than Retalix. Based on the
board's industry knowledge and belief that other bidders would be unlikely to
pay a higher price than Retalix, the board elected to move forward with Retalix
rather than pursue other sale options which it believed would be unlikely to be
as realistic or desirable. In the previously discussed going private
transaction, it was anticipated that the unaffiliated common stockholders would
have received approximately $0.05 per share, or approximately 38% of the $0.132
to be paid to the unaffiliated stockholders in the merger. In addition, the
stock purchase agreement and merger agreement were the product of arm's-length
negotiations between Retalix and
14
TCI, as represented by Mr. Butler and other members of TCI's management. The TCI
directors who were affiliates of the selling stockholders did not participate in
the negotiation or structuring of the transaction.
In March 2005, TCI and Retalix agreed on the final terms of the proposed
acquisition, which consisted of a $34.5 million purchase price, less aggregate
transaction expenses (including, legal, accounting and advisory fees) in excess
of $150,000. The costs of any severance payments due to TCI employees as a
result of terminations following the acquisition, estimated at up to $609,000,
would be paid by Retalix and would not be deducted from the purchase price or
consideration payable to stockholders. Although TCI would have preferred an
all-cash transaction, one-half of the purchase price would be paid in Retalix
ordinary shares valued at $17.25 million, with the balance to be paid in cash.
The transaction would occur in two steps. In the first step, the parties would
enter into a stock purchase agreement under which Retalix would purchase
substantially all of the outstanding shares of Series A and Series B Preferred
Stock held by the selling stockholders. The second step would be a double-merger
of two indirect, wholly-owned subsidiaries of Retalix with TCI in which all
outstanding shares of Series A Preferred Stock, Series B Preferred Stock and
common stock, other than shares acquired by Retalix in the first step and shares
for which appraisal rights had been properly asserted, would be cancelled in
exchange for cash. The stockholders receiving the merger consideration in the
second step are referred to in this proxy statement as the "public stockholders"
or the "unaffiliated stockholders." The first and second steps combined were to
be treated as a tax-free reorganization under the Internal Revenue Code of 1986,
as amended.
A total of 715,730 ordinary shares of Retalix were to be received by the
selling stockholders in the first step. The number of shares was determined by
agreeing on a price of Retalix stock at $24 per share (which approximated the
closing price of Retalix stock on the Nasdaq National Market at the time). The
Retalix stock delivered would be unregistered or "restricted stock" as such term
is defined in the Securities Act of 1933, as amended, subject, however, to
Retalix's agreeing to enter into a registration rights agreement which would
require Retalix to use best efforts to register such shares on a registration
statement on Form F-3 to be filed with the Securities and Exchange Commission
within 60 days of the closing of the first step of the acquisition.
Pursuant to an escrow agreement, the parties agreed that 10% of the
proceeds payable to the selling stockholders would be held in an escrow account
for one year for payment of any indemnification claims brought by Retalix for
breaches of representations and warranties in the stock purchase agreement by
TCI or the selling stockholders. It was also agreed that that all claims for
breaches of representations and warranties would be made exclusively against the
escrow and the selling stockholders directly, and no adjustment would be made to
the consideration to be received by the public stockholders in the second step.
It was intended that the amount of consideration paid to the selling
stockholders in the first step and the public stockholders in the second step
would be identical to the amounts such stockholders would have received had the
net purchase price been paid to the stockholders in a one-step merger in which
all outstanding shares of preferred stock and common stock were exchanged for
merger consideration simultaneously and after appropriately allocating the
liquidation preferences owed to the preferred stock under TCI's certificate of
incorporation. The proposed transaction contemplated that only the selling
stockholders would receive the Retalix ordinary shares consideration in the
first step and that all other stockholders would receive cash for their shares
in the second step. Although TCI would have preferred to sell the Company for
all cash instead of a combination of cash and Retalix stock, or for all
stockholders to be paid in equal portions of cash and Retalix stock, Retalix did
not wish to proceed on such a basis, in part because it believed that no
exemption was available under the Securities Act of 1933 pursuant to which
Retalix could issue stock to all TCI stockholders without undertaking the delay
and expense of filing a registration statement. TCI believed that by receiving
all cash, the public common stockholders could in most cases also realize
capital losses with which to offset capital gains and that receiving all cash
exposed the few unaffiliated preferred stockholders to less market risk than the
selling stockholders faced by receiving a combination of cash and unregistered
Retalix ordinary shares. The per-share amounts to be paid on the Series A
Preferred Stock and Series B Preferred Stock, each on an
as-converted-to-common-stock basis, and the common stock were $0.8409, $0.7573
and $0.132, respectively.
Mr. Butler and TCI's management team carefully evaluated the structure
of the proposed acquisition by Retalix, including the possibility of a
single-step transaction in which Retalix would not have any ownership in TCI
until the special meeting had occurred and the merger was completed. TCI instead
chose a two-step transaction in which Retalix acquired control of substantially
all of TCI's preferred stock (constituting 73.4% of the aggregate voting power
of TCI). TCI favored this structure because it minimized the risk to TCI and its
stockholders that the merger would not be completed. Among other concerns, TCI
and Retalix were concerned that if the merger were structured as a one-step
transaction, postponing the transaction until after the stockholder vote could
cause TCI to lose sales and employees during the pre-closing period and thereby
impede Retalix's desire to complete the transaction. TCI was also concerned that
in a one-step transaction Retalix might not complete the merger if TCI's
financial performance or prospects deteriorated prior to the closing. Instead,
the two-step acquisition gave Retalix immediate control of TCI to begin
integration and sufficient certainty that the merger would be completed in a
timely and efficient manner. TCI's management believed it was essential to
induce Retalix to enter into the merger agreement and commit to completing the
second step merger at the time the stock purchase agreement was executed because
TCI's management worried that if Retalix did not complete the second step
merger, the public stockholders would not realize the benefits of the
transaction due to holding
15
small, illiquid minority interests in the Company, which would then be a
majority-owned subsidiary of Retalix. In such case, the public stockholders
would have no foreseeable opportunity to sell their shares or influence the
Company's policies or direction.
In evaluating the stock purchase agreement and merger agreement, TCI's
board determined that (1) the contemplated transactions would constitute a
liquidation event under TCI's certificate of incorporation, and (2) the purchase
price of $34.5 million would be distributed to TCI's stockholders in accordance
with the priorities mandated by TCI's certificate of incorporation. For purposes
of this distribution, TCI included shares reserved for participants of its
employee and director stock option and stock exchange programs with the holders
of common stock. TCI's certificate of incorporation provides that in the event
of any liquidation event, the assets of TCI available for distribution to its
stockholders, whether from capital, surplus, earnings, or otherwise will be
distributed in the following order of priority:
o The holders of preferred stock are entitled to receive, prior
and in preference to any distribution to the holders of common
stock, for each share of the Series B Preferred Stock held by
such holder, $0.50 per share, and, for each share of the Series
A Preferred Stock held by such holder, $1.06 per share. This
represented $6,169,144 in respect of the 5,816,037 shares of
Series A Preferred Stock outstanding and $13,326,547 in respect
of the 26,653,094 shares of Series B Preferred Stock outstanding
as of April 1, 2005.
o After distribution of the amounts above, the holders of Series B
Preferred Stock are entitled to receive, prior to and in
preference to any further distribution to the holders of the
Series A Preferred Stock and common stock, for each share of
Series B Preferred Stock held by such holder, an amount equal to
all accrued but unpaid preferred dividends on such share of
Series B Preferred Stock (whether or not declared by the board)
as of the date such payment is made to the holders thereof,
which represented $3,394,232 as of April 1, 2005, computed based
on the dividend rate of 8% per annum from the date of the
issuance of the shares through April 1, 2005.
o After distribution of the amounts set forth above, the holders
of Series A Preferred Stock are entitled to receive, prior to
and in preference to any distribution to the holders of common
stock, for each share of Series A Preferred Stock held by such
holders, an amount equal to all accrued but unpaid preferred
dividends, which represented $2,820,023 as of April 1, 2005,
computed based on the dividend rate of 8% per annum from the
date of the issuance of the shares through April 1, 2005. An
additional Series A PIK Dividend was issuable (whether or not
declared by the board) to holders of Series A Preferred Stock
pursuant to the certificate of incorporation immediately prior
to any liquidation event, which represented an additional
350,882 shares of Series A Preferred Stock as of April 1, 2005.
o After distribution of the amounts set forth above, the remaining
assets of TCI, if any, available for distribution to the TCI
stockholders shall be distributed ratably to (A) the holders of
issued and outstanding shares of the common stock and (B) the
holders of preferred stock as if such holders had converted the
preferred stock into common stock immediately prior to the
liquidation, pro rata, based upon their respective holdings.
If the consideration received in connection with a liquidation event is
other than cash, its value is deemed its fair market value as determined in good
faith by the board of directors. The fair market value for any securities traded
on a national securities exchange or the Nasdaq National Market is deemed to be
the average of the closing prices of the securities on such quotation system
over the three day period ending three days prior to the closing.
On March 28, 2005, TCI's management presented TCI's board of directors
with drafts of the stock purchase agreement, an escrow agreement, a registration
rights agreement and an agreement and plan of merger reflecting the agreed-upon
terms discussed above, all of which had been extensively negotiated between TCI
and Retalix.
On March 30, 2005, Retalix's board of directors held a special meeting
to consider the adoption of the stock purchase agreement, the merger agreement
and the related documents. Retalix's management reviewed for the board the final
terms of the agreements and the Retalix board approved such agreements.
On March 31, 2005, TCI's board of directors held a special meeting to
consider the adoption of the stock purchase agreement, the merger agreement and
the related documents. TCI's management reviewed for the board the final terms
of the agreements. The board then heard the presentation of TCI's financial
advisors, The Mentor Group, which reviewed for the board its financial analysis
of the proposed transaction and rendered its opinion that the consideration to
be received by TCI's stockholders under the stock purchase agreement and the
merger agreement was fair, from a financial point of view, to TCI's preferred
stockholders and common stockholders and TCI.
After considering the foregoing factors and the other information
available to it, including the fairness opinion from The Mentor Group and
analyzing the fairness of the transaction to each class of stockholders
separately, the board unanimously:
16
o determined that a price of $34.5 million for the outstanding
capital stock of TCI was an acceptable purchase price and was
the highest value that could be obtained for the stockholders;
o determined that the terms of the stock purchase agreement and
merger agreement, and the transactions contemplated by the
agreements, are fair to, and in the best interests of, all of
TCI's stockholders, including unaffiliated stockholders;
o approved, adopted and declared advisable the stock purchase
agreement, the merger agreement and the transactions
contemplated thereby; and
o determined to recommend that the stockholders vote for the
adoption of the merger agreement at a special meeting of the
stockholders to be called, subject to the board's right to
withdraw the recommendation if the board determines that it must
do so to comply with its fiduciary obligations to TCI's
stockholders.
On April 1, 2005, TCI, Retalix, Retalix Holdings Inc. and the selling
stockholders executed the stock purchase agreement and completed the first step
of the acquisition. A copy of the stock purchase agreement is attached as
Appendix B to this proxy statement. TCI also executed the agreement and plan of
merger, a copy of which is attached as Appendix A to this proxy statement.
Pursuant to the stock purchase agreement, Retalix Holdings Inc. acquired control
of TCI by purchasing substantially all of TCI's outstanding Series A Preferred
Stock for $10,637,639, or $0.8409 per share, and Series B Preferred Stock for
$19,397,509, or $0.7573 per share. The aggregate purchase price of $30,035,148,
represents the same amount the selling stockholders would have been entitled to
receive in the merger based on the $34.5 million total purchase price for all of
TCI's outstanding capital stock. The consideration paid to the selling
stockholders consisted of $12,857,648 in cash and 715,730 ordinary shares of
Retalix valued at $17,177,520, or $24 per share. The source of the Retalix
ordinary shares paid as consideration was the authorized but unissued shares of
Retalix, and the source of the cash consideration was the cash reserves and
working capital of Retalix. As a result of the stock purchase agreement, as of
April 1, 2005, Retalix beneficially owned 73.4% of the common stock on an
as-converted-to-common-stock basis and 99.8% of the Series A Preferred Stock,
95.8% of the Series B Preferred Stock. Retalix purchased Series A Preferred
Stock and Series B Preferred Stock from the following selling stockholders or
their affiliates: InnoCal II, L.P.; Blue Chip Capital Fund IV Limited
Partnership; Environmental & Information Technology Private Equity Fund III;
Infrastructure & Environmental Private Equity Fund, III, L.P.; Productivity Fund
IV, L.P.; Productivity Fund IV Advisors Fund, L.P.; Argentum Capital Partners
II, L.P.; Argentum Capital Partners, L.P.; TCI ACPII Limited Partners L.P.; Mark
T. Koulogeorge and Guarantee & Trust Co. TTEE Daniel Raynor GTC IRA. TCI paid an
aggregate of $1,744,999 in cash to employees and directors who held vested stock
options valued at $0.0075 per share, under TCI's stock option plans, including
stock options which had been tendered under our stock option exchange offer
which TCI initiated in November 2004.
In the stock purchase agreement, each selling stockholder agreed to use
its reasonable efforts to ensure that the members of the board appointed by such
selling stockholder remain members of the board until the earliest of (i) the
earliest possible date in which Retalix's nominees could take control of the
board under Rule 14f-1 under the Exchange Act; or (ii) the termination of the
merger agreement. Each selling stockholder also agreed to cause the members of
the board appointed by such selling stockholder to resign from the board when
and if requested by Retalix. At the close of business on April 15, 2005, all of
the directors except David R. Butler resigned from the board, and Retalix
appointed Barry Shaked, Danny Moshaioff and Eli Spirer as directors of TCI.
Barry Shaked is the President, Chief Executive Officer and Chairman of the board
of directors of Retalix. Mr. Shaked holds, as of August 31, 2005, 1,002,259
ordinary shares of Retalix, which equals approximately 5.2% of Retalix's issued
and outstanding share capital. In addition, as of August 31, 2005, Mr. Shaked
holds options to purchase a total of up to 425,360 of Retalix's ordinary shares.
Danny Moshaioff is an Executive Vice President and Chief Financial Officer of
Retalix, and Mr. Spirer is employed by a subsidiary of Retalix. Including
ordinary shares and options to purchase ordinary shares held by Messrs.
Moshaioff and Spirer, neither Mr. Moshaioff nor Mr. Spirer holds more than 1% of
the issued and outstanding share capital of Retalix.
On October 27, 2004 TCI had commenced a tender offer pursuant to which
it offered to exchange all outstanding options granted to its employees and
directors under TCI's 1993 Equity Incentive Plan, 1993 Non-Employee Directors'
Stock Option Plan, 2001 Equity Incentive Plan and 2001 Non-Employee Directors'
Stock Option Plan for new options TCI planned to grant under its 2001 Equity
Incentive Plan and 2001 Non-Employee Directors' Stock Option Plan. New options
issued pursuant to the tender offer would have vested according to the same
schedule as the old options which were tendered by holders. Prior to the
negotiation of the merger, TCI had planned to issue the new options on or about
May 30, 2005.
In February 2005, TCI's board considered that a change of control of TCI
could occur before new options were to be issued pursuant to the exchange offer.
The board determined that, in lieu of the exchange, a bonus should be paid to
all employees and directors who surrendered their options. The bonus would be
payable upon the closing of the change of control
17
transaction in an amount equal to $0.132 per common share vested through the
date of the change of control, less a $0.0075 exercise price. Each director
abstained from voting on his own compensation.
During negotiations with Retalix, TCI's management ensured that payment
of the bonus in lieu of the option exchange would be part of the transaction.
Pursuant to the stock purchase agreement, options which had been tendered in the
tender offer and would have been vested as of April 1, 2005 were paid a cash
bonus equal to the number of option shares multiplied by the difference between
$0.132 per share and $0.0075 per share. Options which had been tendered in the
tender offer but would have been unvested as of April 1, 2005 were treated as
unvested and no consideration was paid for such options.
The stock purchase agreement affected TCI's outstanding stock options as
follows:
o All vested stock options were cancelled in return for a cash
payment equal to the number of vested option shares multiplied
by the difference between $0.132 per share (the price to be paid
per share of common stock) and the "deemed exercise price" of
$0.0075 per share. Pursuant to this cancellation and payment,
Mr. Jacobs received $293,499, Mr. Butler received $672,466, Mr.
Raynor received $3,871, Mr. Gardner received $3,122, Mr.
Koulogeorge received $6,119, Mr. Houlihan received $3,122 and
Stephen P. DeSantis, Chief Financial Officer and Secretary of
TCI, received $129,090. Because the transaction was a
liquidation event, Mr. Butler's employment contract stipulated
that all of his unvested options would immediately vest. These
vested options were included in the amount received by Mr.
Butler pursuant to the cancellation and payment. None of Mr.
Raynor, Mr. Houlihan, Mr. Koulogeorge or Mr. Gardner held any
unvested options. Mr. Jacobs held 246,793 unvested options which
were cancelled without payment of any consideration.
o All unvested stock options were cancelled without payment of any
consideration as a result of the stock purchase agreement.
TCI agreed to make these payments to the employees and directors of TCI in
exchange for their options and to pay severance to certain employees upon their
termination in order to recognize the efforts of TCI's employees and to ensure a
smooth transition upon the change of control of TCI. In an effort to treat
holders of options for shares of TCI's common stock the same as the other
holders of TCI's common stock, TCI made payments to these option holders in the
same amount as they would have been entitled to as holders of common stock under
the merger agreement.
In connection with the stock purchase agreement, several employees were
terminated and received severance payments pursuant to such employees' severance
agreements with TCI. In addition, Mr. Butler and Mr. DeSantis entered into
amended severance arrangements with TCI. TCI believed that the severance
payments agreed to were similar to severance payments provided in similar
transactions in the industry where positions were eliminated in connection with
a change of control.
David R. Butler. Under these arrangements, Mr. Butler was to be entitled to a
severance payment equal to twelve months' salary, as well as twelve months
continued benefits, beginning April 1, 2006, provided that Mr. Butler remained
employed by TCI through April 1, 2006 or was terminated without cause (as
defined in his employment agreement with TCI) prior to April 1, 2006 (in which
case he would receive such severance amounts upon his termination). If Mr.
Butler resigned prior to April 1, 2006 or was terminated for cause, then Mr.
Butler would not be entitled to the severance and benefits described above. Mr.
Butler was also entitled to a bonus of $75,000 if he remained employed through
June 30, 2005. Though still employed by TCI, Mr. Butler resigned as Chief
Executive Officer on June 30, 2005 and became eligible for the $75,000 bonus,
which is payable upon completion of the merger. Payments under the
above-described severance arrangement are intended to be in lieu of, and not in
addition to, payments and benefits Mr. Butler would otherwise be entitled to
under his employment agreement.
Stephen P. DeSantis. Under these arrangements, Mr. DeSantis was to be entitled
to a severance payment in the amount of twelve months' salary and twelve months
continued benefits, plus a pro-rated bonus beginning June 30, 2005, provided
that Mr. DeSantis remained employed by the Company through June 30, 2005. Mr.
DeSantis was entitled to a bonus of $39,000 if he remained employed through June
30, 2005. Mr. DeSantis resigned his full-time employment with TCI on June 30,
2005 and became eligible for the $39,000 bonus. He will remain employed part
time until the merger is completed. Payments under the above-described severance
arrangement are intended to be in lieu of, and not in addition to, payments and
benefits Mr. DeSantis would otherwise be entitled to under his employment
agreement.
Position of TCI as to the Fairness of the Merger
In evaluating the fairness and advisability of the merger agreement and
the merger with respect to all of the stockholders of TCI, including
unaffiliated stockholders, the TCI board of directors considered the following
factors:
18
o Enterprise Value. The board considered that the aggregate $34.5
million purchase price offered by Retalix represented
approximately 1.5 times TCI's current annual revenue of $22.5
million, which compared favorably with valuations of comparable
software companies. To ascertain an appropriate market value for
TCI as a multiple of its annual revenue, beginning in 2003 TCI's
management sought to compare TCI to its peers, which TCI's
management regarded as independent software companies of similar
size with similar products. TCI's management initially looked
for comparison to SofTecnics, Inc., Bass, Inc. and Armature
Holdings, Ltd., close competitors of TCI which had been sold in
2001 and 2002 in transactions which TCI's management believed
would offer meaningful qualitative and quantitative data to help
determine TCI's enterprise value. However, TCI's management
could not verify annual revenue or transaction data with respect
to these competitors. SofTechnics Inc. was not a public company
in 2002 when it was acquired by Mettler-Toledo International,
Inc. and did not publicly file its audited financial statements
with the SEC, so its annual revenues could not be determined.
Mettler-Toledo did not publicly disclose the financial terms of
its acquisition of SofTecnics, Inc., so the acquisition price
could not be determined. Armature Holdings Ltd. and Bass, Inc.
were not sold as going concerns; instead, certain of their
assets were sold to various acquirors, including Retalix, which
bought some assets of Bass, Inc., and Lawson Software, Inc.,
which bought certain assets of Armature Holdings, Ltd. Both
Armature Holdings Ltd. and Bass, Inc. were privately held at the
time of their respective asset sales and their annual revenues
could not be determined. Finally, because their assets were sold
piecemeal, enterprise values for Bass, Inc. and Armature
Holdings Ltd. could not be determined. Because enterprise values
for Bass, Armature and SofTechnics could not be established with
certainty, TCI's management then sought to compare TCI to all
other business or retail management software companies (i) which
had recently been acquired, optimally by Retalix, by one of
Retalix's competitors or by another identified potential TCI
acquiror such as JDA Software Group, Inc. or Lawson Software,
Inc. and (ii) whose acquisition price and annual revenues could
be determined with certainty. These were the only general
criteria that TCI's management considered in choosing comparable
companies for its ultimate enterprise value analysis. Although
each business and transaction is unique, TCI's management
believed that an analysis of transactions involving these
software companies would provide meaningful comparative data
because these companies are in the same industry as TCI,
produced products similar to TCI's and were acquired by
companies whose strategies and lines of business might cause
them to take a strategic interest in acquiring TCI. The
acquisitions of software companies that TCI's management
analyzed included Retail Technologies International, Inc., which
was acquired by Island Pacific, Inc. in March 2004 for 1.5 times
its annual revenue; Timera Retail Solutions, which was acquired
by JDA Software Group Inc. in January 2004 for 1.6 times its
annual revenue; OMI International Inc., which was acquired by
Retalix in January 2004 for 1.3 times its annual revenue;
Closedloop Solutions Inc., which was acquired by Lawson Software
Inc. in October 2003 for 1.7 times its annual revenue; Infinium
Software Inc., which was acquired by SSA Global Technologies
Inc. for 1.2 times its annual revenue in December 2002; and E3
Corp. which was acquired by JDA Software Group in September 2001
for 1.1 times its annual revenue. In total, TCI determined that
there were a total of eight comparable transactions for which
data were available, and found that such companies were acquired
for an average of 1.4 times annual revenues. In conducting its
analysis, TCI disregarded the transactions with the highest and
lowest multiples of annual revenues because such multiples
deviated significantly from the mean revenue multiples of other
comparable transactions. The disregarded transactions were: (i)
AD OPT Technologies, which was acquired in November, 2004 by
Kronos, Inc. for 2.5 times annual revenues and (ii) Frontstep,
Inc., which was acquired in February, 2003 by MAOICS, Inc. for
0.3 times annual revenues. However, it should be noted that even
if both disregarded transactions were included in the analysis,
the average acquisition multiple for all eight transactions
would have remained 1.4 times annual revenues.
o Adequacy of Per Share Price/Merger Consideration. The board
considered that the price being offered by Retalix on a
per-share basis exceeded TCI's estimates of the fair market
value of the common stock within the past year. TCI's common
stock is not listed or traded on any securities exchange, market
or globalization system. As a result, the value of the common
stock at any given time can only be estimated based upon TCI's
financial performance and prospects for growth. The board noted
that in August of 2004 it had estimated the fair market value of
TCI common stock for purposes of granting stock options to TCI
employees at $0.05 per share. In August 2004, the board noted
that the exercise price of stock options under the TCI stock
option plans was $0.25 per share. Because management believed
that this exceeded the fair market value of the common stock,
management recommended that the board reset the exercise price
at the current fair market value. To determine the fair market
value, management analyzed revenue multiples and trading prices
of Retek Inc., JDA Software Group, Inc. and Lawson Software
Inc., the nearest comparable public companies, which management
estimated had an average of approximately $280 million in annual
revenue. These companies were valued at approximately 0.8 to 1.0
times their annual revenues. TCI's annual revenues were
approximately $22 million. Management also calculated that
approximately $24.9 million in preferences would be owed to
holders of TCI's Series A Preferred Stock and Series B Preferred
Stock before the common stock was entitled to any proceeds from
a sale event under TCI's certificate of incorporation.
Management therefore determined that if TCI were valued at 1.0
times revenues, the common stock would have no value because
TCI's value did not exceed the preferences payable to the
preferred stockholders. Management believed that the options did
have some future value, and therefore recommended that the board
reset the exercise price at $0.05 per share of common stock,
which the board of directors did in August 2004.
The board also did not see any significant change in the
financial position or growth prospects of TCI that would have
warranted a higher price, other than the proposed offer by
Retalix. The $0.132 per share price for the common stock offered
by Retalix represents a premium of approximately 164% from the
estimated fair market value of the common stock in August of
2004. The board concluded, based on management's negotiations
with Retalix and the other information available to it, that the
$34.5 million offer represented the highest price that Retalix
would be willing to pay and, in light of the lack of other
interested acquirors, competing proposals or higher valuations,
the highest price reasonably attainable for the stockholders in
a merger or any other transaction. The board reviewed TCI's
certificate of incorporation, bylaws and other existing
agreements to determine the proper distribution of the $34.5
million of consideration among Series A Preferred, Series B
Preferred, common stockholders and participants in our employee
and director stock option and stock option exchange programs and
determined that the resulting allocation was procedurally fair
since it conformed with the mandated priority provisions of such
documents.
19
In evaluating the adequacy of the Retalix merger consideration,
the board did not consider TCI's net book value, which as of
December 31, 2004 was approximately $1.8 million, to be relevant
in light of Retalix's offer. The Retalix transaction valued TCI
at more than 19 times this amount. Furthermore, TCI's internal
calculations showed that the preferences and dividends payable
in respect of the Series A and Series B Preferred Stock were
approximately $24.9 million. Therefore, at any transaction
valued below $24.9 million, the common stockholders would
receive nothing. For the same reasons, the board did not
consider TCI's liquidation value, which is estimated to have
been approximately $0.95 million (after estimated liquidation
expenses of $0.45 million) to be relevant to its analysis of the
adequacy of the Retalix merger consideration.
o Form of Consideration and Tax Consequences. The stock purchase
and merger, viewed together, constitute a reorganization for
Federal income tax purposes. As a result, all TCI stockholders
(i) should not recognize gain or loss on the exchange of their
TCI shares for shares of Retalix; and (ii) should recognize
taxable gain or loss to the extent they receive cash in exchange
for their TCI shares. Pursuant to the stock purchase agreement,
the selling stockholders received cash and shares of Retalix in
exchange for their shares of Series A Preferred Stock and Series
B Preferred Stock of TCI. Pursuant to the merger agreement, the
public stockholders of the company will only receive cash in
exchange for their shares of TCI preferred and common stock. The
board and management considered whether the acquisition should
be structured in a way so that the public stockholders would
also receive ordinary shares of Retalix, rather than cash. The
board concluded that, unlike the selling stockholders who held
mostly preferred stock which would have been sold in the
acquisition for capital gains had the selling stockholders
received solely cash consideration, the public stockholders who
held mostly common stock would benefit from receiving cash
consideration in exchange for their stock because it would
likely generate substantial capital losses, which could be used
by such holders to offset capital gains for tax purposes. These
public stockholders would likely generate capital losses in
connection with the transaction because they purchased their
shares of TCI stock at prices well exceeding the $0.132 per
share being offered in the merger. Accordingly, unlike the
selling stockholders, the public stockholders should receive
cash in the merger without paying any taxes and should generally
be able to deduct their capital losses against capital gains
realized in the same year. The board also considered that the
unaffiliated holders of preferred stock could be subject to
taxation as a result of receiving all cash instead of the mix of
cash and Retalix ordinary shares, but concluded that this did
not materially affect the fairness of the transaction to the
unaffiliated holders of preferred stock because the selling
stockholders could also be subject to taxation upon the sale of
Retalix ordinary shares received in the transaction. In
addition, the selling stockholders may bear greater risk in
receiving unregistered Retalix shares, which cannot be freely
sold until Retalix registers them with the Securities and
Exchange Commission. If Retalix's share price declines in the
meantime, the selling stockholders may be subject to losses
which would not have been incurred had they received cash in the
transaction. To the extent the unaffiliated stockholders desire
to use their cash proceeds to reinvest in Retalix's ordinary
shares, they may do so through the public markets. (Retalix's
ordinary shares are traded on both the Nasdaq National Market
and the Tel Aviv Stock Exchange.)
o Lack of Alternative Acquisition Proposals. Based upon
management's analysis of recent acquisitions in the software
industry, TCI's competition and potential suitors, the board
concluded that there were very few likely buyers that could
offer a purchase price higher than that offered by Retalix.
Given TCI's financial performance and growth prospects, the
board and management believed that only a strategic buyer such
as Retalix would be interested in an acquisition of TCI because
of the synergies TCI had to offer a company with competing and
complementary products and distribution channels. Based upon the
board's and management's analysis of potential buyers within
this narrow category, the lack of interest in TCI from such
buyers other than Retalix, as well as the fact that Retalix's
offer represented 1.5 times TCI's annual revenues as compared to
an average of 1.4 times annual revenues for comparable
transactions, the board and management concluded that it is
unlikely that a competing offer for TCI could be obtained from
any other potential buyer at a price higher than $34.5 million.
o Historical and Projected Financial Performance and Related Risks
and Uncertainties. The board considered TCI's current and
anticipated business, financial condition, results of operations
and prospects, including the prospects of TCI if it were to
remain independent. The board noted that due to increased
competition from larger competitors, the recent bankruptcies of
some of TCI's largest customers and the increased pressure on
margins resulting from customer demands, TCI's prospects for
long-term growth appeared uncertain. The board also noted that
historically TCI had been unprofitable. The board also
considered that continued operating losses could require TCI to
obtain additional equity funding before June 30, 2005 and there
was no assurance that such funding could be obtained from
existing or new investors.
o Alternative Transactions. The board considered various
alternative transactions, including a going-private transaction
involving the cash-out of a portion of TCI's outstanding common
stock. This alternative would have resulted in less cash to the
stockholders being cashed out based upon the board's prior
discussions of the
20
fair market value of the common stock and would have required
holders of in excess of a certain number of shares to remain
invested in TCI. The board did not consider a liquidation since
this would have certainly resulted in the stockholders receiving
less per share than what they could receive as a result of the
acquisition by Retalix. None of these alternatives could provide
value comparable to or greater than the transaction with
Retalix.
o Arm's-Length Negotiations. The board considered the fact that
the stock purchase agreement and merger agreement were the
product of arm's-length negotiations between Retalix and TCI, as
represented by Mr. Butler and Mr. Jacobs, as well as Mr.
DeSantis.
o Opinion of The Mentor Group. The board considered the analysis
of The Mentor Group and in particular the opinion of The Mentor
Group that, as of March 31, 2005, and based upon and subject to
the factors and assumptions set forth in its opinion, the $34.5
million purchase price to be paid under the stock purchase
agreement and the merger agreement is fair from a financial
point of view to all of TCI's preferred and common stockholders.
The full text of the written opinion of The Mentor Group, dated
March 31, 2005, which sets forth assumptions made, procedures
followed, matters considered and limitations on the review
undertaken in connection with the opinion, is attached as
Appendix C(i) to this proxy statement and is incorporated herein
by reference. The full text of a letter dated March 31, 2005
from The Mentor Group to the board of directors clarifying that
the opinion's conclusion as to the fairness to the stockholders
speaks to all stockholders, individually and collectively,
including without limitation to those stockholders of each class
unaffiliated with the Company, is set forth as Appendix C(ii) to
this proxy statement and is incorporated herein by reference.
TCI's stockholders should read the opinion and letter carefully
and in their entirety. The Mentor Group provided its opinion for
the information and assistance of the board in connection with
its consideration of the acquisition. The Mentor Group opinion
is not a recommendation as to how any holder of TCI's preferred
stock or common stock should vote with respect to the merger.
o Terms of the Merger Agreement. The board also considered the
terms and conditions of the merger agreement, including the
ability to provide non-public information concerning TCI to any
third party who makes an unsolicited acquisition proposal, and
to engage in discussions or negotiations with any such party, if
the board determines that it must do so to comply with its
fiduciary obligations to the stockholders. Further, the board
considered that the merger agreement permits TCI to terminate
the agreement if TCI receives an alternative transaction
proposal and the board determines that they must do so to comply
with their fiduciary duties to TCI's stockholders. If the merger
agreement were terminated in such circumstances, the merger
agreement would require TCI to pay Retalix a $2,000,000
termination fee.
o Likelihood of Completion of Merger. The board and management
considered that the merger agreement did not include any due
diligence or financing contingencies or other significant
closing conditions for Retalix, which increased the likelihood
that the merger would be completed and that TCI and the
stockholders would not likely be subject to the risk that the
merger would fail. The board and management considered the
consequences that a public announcement of the proposed
acquisition would have on TCI's customer relationships and a
potential advantage such an announcement might have for
competitors. In particular, the board and management considered
that customer uncertainty regarding the acquisition could be
handled more effectively in a transaction in which Retalix
immediately gained control of TCI rather than one in which
Retalix's acquisition was delayed until after a stockholders
meeting. Thus, the board and management viewed a two step
transaction, in which Retalix gained immediate control of TCI in
the first step to be in the best interest of TCI and all
stockholders. Further, since after the first step Retalix would
have enough votes to cause the merger to occur, the board could
be confident that the second step would be completed and that
the public stockholders would receive the merger consideration.
o Availability of Appraisal Rights. The board considered the
availability of appraisal rights under the Delaware General
Corporation Law to holders of preferred and common stock who
dissent from the merger, which provides stockholders who dispute
the fairness of the merger consideration with an opportunity to
have a court determine the fair value of their shares.
In addition to the matters mentioned above, the board considered the
other terms and conditions of the stock purchase agreement and the merger
agreement, the present economic environment, the availability of stockholder
appraisal rights in the merger, the likelihood of completion of the merger and
other relevant facts and circumstances pertaining to the proposed transaction.
The board did not consider that it was practicable or useful to quantify or
otherwise assign relative weights to the various factors considered by it, and
therefore did not do so.
21
Although the merger is not subject to the approval of the majority of
the public stockholders, and neither an independent committee of the board of
directors nor an unaffiliated representative was appointed to act solely on
behalf of the public stockholders for purposes of negotiating the merger or
preparing a report concerning the fairness of the merger, the board of directors
believes that the merger is procedurally fair to all stockholders, including the
public stockholders. This belief is based on the following factors: (i) TCI,
acting through Mr. Butler and Mr. Jacobs, as well as Mr. DeSantis, vigorously
negotiated the terms of the merger in an arm's-length manner with Retalix with
the incentive to obtain the maximum purchase price attainable for the
outstanding capital stock of TCI; (ii) the structure of the two-step transaction
will ensure that the public stockholders receive in the merger the same dollar
amount of consideration they would have received had the transaction happened in
a one-step merger in which all capital stock was exchanged for the purchase
price simultaneously, in accordance with the distribution of proceeds priorities
mandated by TCI's certificate of incorporation; (iii) the distribution of
proceeds among the Series A Preferred Stock, the Series B Preferred Stock and
common stock follows the mandatory provisions of TCI's certificate of
incorporation; (iv) the board retained The Mentor Group, an independent
financial advisor experienced in making valuations of companies and in rendering
fairness options, to advise it in evaluating the fairness of the terms of the
proceeds to be received by the selling stockholders and public stockholders
under the stock purchase agreement and the merger agreement; (v) The Mentor
Group delivered its opinion to the board that the amounts received by the
selling stockholders and public stockholders under the stock purchase agreement
and the merger agreement respectively were fair, from a financial point of view,
to the selling stockholders and the public stockholders; (vi) although TCI does
not have any independent directors to appoint to a special committee of the
board the transaction was approved by all of the directors who were not
employees of TCI; (vii) in light of The Mentor Group's valuation of TCI, the
lack of any public market for the common stock and the perceived lack of
interest in TCI from other buyers, the board had no reasonable basis to believe
that a special committee or an unaffiliated representative of the public
stockholders would have favored any alternative transaction; (viii) none of
TCI's certificate of incorporation, its bylaws or Delaware law required the
approval of at least a majority of the unaffiliated stockholders; (ix)
stockholders may exercise appraisal rights under Delaware law and receive "fair
value" for their stock, as determined by a Delaware court; (x) although
stockholders receiving Retalix shares will not incur tax liabilities on the
receipt of such shares, the public stockholders holding common stock would
likely benefit from receiving cash consideration because it will likely generate
capital losses, which could be used by such holders to offset capital gains for
tax purposes; and (xi) under Delaware law, a merger with a controlling
stockholder such as Retalix is subject to the "entire fairness" standard of
review even when negotiated and approved by a special committee of independent
directors and approved by a majority of unaffiliated stockholders.
After considering the foregoing factors, the other information
available to it, and after numerous meetings and discussions, including a
consideration of the fairness of the transaction to each class of stockholders
separately, on March 31, 2005 the board unanimously determined that the terms of
the stock purchase agreement and the merger agreement were fair to, and in the
best interests of, TCI and all of its stockholders. Accordingly, the board of
directors adopted a resolution on March 31, 2005 to unanimously recommend that
stockholders vote FOR the adoption of the merger agreement and to authorize the
inclusion of this recommendation in the proxy statement. The current board,
which consists of Messrs. Butler, Shaked, Moshaioff and Spirer, also considered
the foregoing factors and, after considering the fairness of the transaction to
each class of stockholders separately, determined that the proposed merger is
fair to all stockholders individually and collectively, including without
limitation to all holders of Series A Preferred Stock, Series B Preferred Stock
and common stock who are unaffiliated with the Company. Accordingly, the board
of directors unanimously recommend that you vote FOR the adoption of the merger
agreement.
Opinion of Financial Advisor to the Board of Directors
General
TCI retained The Mentor Group to render an opinion to the board of
directors that the aggregate purchase price offered by Retalix of $34.5 million,
pursuant to the terms and conditions of the stock purchase agreement and merger
agreement is fair, from a financial point of view, to TCI and to all of its
preferred and common stockholders. This includes the public stockholders who
receive the same dollar value per share of Series A Preferred Stock, Series B
Preferred Stock or common stock, as applicable, as the selling stockholders
received pursuant to the April 1, 2005 stock purchase agreement.
The board retained The Mentor Group based upon The Mentor Group's
qualifications, expertise and reputation. The Mentor Group is a nationally
recognized valuation firm that is continually engaged in providing financial
advisory services in connection with mergers and acquisitions, leveraged
buyouts, business and securities valuations for a variety of regulatory and
planning purposes, recapitalizations, financial restructurings, and private
placements of debt and equity securities. TCI had originally retained The Mentor
Group in December 2004 to conduct a valuation of the Company and render a
fairness opinion in connection with the proposed going private transaction under
consideration by the board. The Mentor Group's fee for the going private
fairness opinion was to be $40,000, of which TCI paid $25,000 at the start of
the engagement. In late January, 2005 The Mentor Group delivered to the board a
draft opinion and valuation regarding the proposed going private transaction.
The draft opinion, which was never completed or signed, is attached as Appendix
C(iii).
22
When the Company entered into negotiations with Retalix, the Company
suspended work on the going private transaction and engaged The Mentor Group to
evaluate and render a fairness opinion regarding the consideration to be paid by
Retalix. As compensation to The Mentor Group for all of its services in
connection with the proposed going private transaction and later with the
acquisition, TCI agreed to pay The Mentor Group an aggregate fee of $65,000,
which includes the $40,000 to be paid in connection with the previous engagement
as well as The Mentor Group's expenses. No portion of The Mentor Group's fee is
contingent upon the successful completion of the acquisition, any other related
transaction, or the conclusions reached in The Mentor Group's opinion. No
limitations were imposed by the board on The Mentor Group with respect to the
investigations made or procedures followed by it in rendering its opinion. TCI
also agreed to indemnify The Mentor Group and related persons against certain
liabilities, including liabilities under federal securities laws that arise out
of the engagement of The Mentor Group.
The Mentor Group delivered its written opinion, dated as of March 31,
2005, to the board to the effect that, as of that date, based on and subject to
the assumptions, limitations and qualifications set forth in its written
opinion, the purchase price to be received by the stockholders pursuant to the
form of the stock purchase agreement and merger agreement was fair to the
stockholders and to TCI, from a financial point of view. The Mentor Group also
delivered a letter, attached as Appendix C(ii), clarifying that the opinion's
conclusion as to the fairness of the transaction to the stockholders speaks to
all stockholders of TCI, individually as well as collectively, including without
limitation to the stockholders who were unaffiliated with the Company.
THE FULL TEXT OF THE MENTOR GROUP'S WRITTEN OPINION DATED MARCH 31,
2005, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON REVIEW UNDERTAKEN, AND THE MENTOR GROUP'S CLARIFYING LETTER, ARE ATTACHED TO
THIS PROXY STATEMENT AS APPENDICES C(i) AND C(ii), RESPECTIVELY, AND ARE
INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE. ALL REFERENCES TO THE MENTOR
GROUP'S OPINION IN THIS PROXY STATEMENT REFER TO THE OPINION AND THE CLARIFYING
LETTER COLLECTIVELY. YOU ARE URGED TO READ THE MENTOR GROUP'S OPINION IN ITS
ENTIRETY.
THE MENTOR GROUP'S OPINION IS DIRECTED TO THE BOARD AND ADDRESSES THE
FAIRNESS OF THE TRANSACTION TO TCI AND ALL OF ITS STOCKHOLDERS FROM A FINANCIAL
POINT OF VIEW. THE MENTOR GROUP'S OPINION DOES NOT ADDRESS THE UNDERLYING
DECISION OF TCI TO ENGAGE IN THE TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO THE BOARD OF DIRECTORS OR TO ANY STOCKHOLDER OF TCI AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE OR AS TO ANY OTHER ACTON SUCH STOCKHOLDER SHOULD
TAKE IN CONNECTION WITH THE ACQUISITION.
The opinion of The Mentor Group and its presentation to the board
constituted only one of a number of factors taken into consideration by the
board members in making their respective determinations to approve the
acquisition. In connection with the delivery of its written opinion to the
board, on March 31, 2005 The Mentor Group made a detailed verbal presentation to
the board to describe the material points of the analysis it performed in
arriving at its fairness opinion. Other than the opinion, no written materials
were provided by The Mentor Group in connection with this presentation. The
substance of The Mentor Group's presentation to the board is summarized below.
Summary of Financial Analyses Performed by The Mentor Group with Respect
to the Acquisition
Generally, the presentation of a fairness opinion is a complex analytic
process. This process involves various determinations and judgments concerning
the financial and operating characteristics of a business and other factors,
including, but not limited to, the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances that could affect the acquisition, public trading or other values
of the companies or transactions being analyzed. Therefore, such opinions are
not readily susceptible to partial or summary description. No company or
transaction used in analyses as a comparison is identical to TCI or the
acquisition, nor is an evaluation of the results of analyses entirely
mathematical. The estimates contained in analyses resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by the analyses. In addition, analyses relating to the value of the
business or securities do not purport to be appraisals or to reflect the prices
at which businesses, companies or securities actually may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
In arriving at its opinion, The Mentor Group made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, The Mentor Group believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses and factors, could create an incomplete view of the processes
underlying the analyses and its opinion.
In arriving at its opinion with respect to the acquisition, The Mentor
Group made its determination as to the fairness, from a financial point of view,
of the purchase price to be paid to all of the stockholders of TCI under the
stock purchase agreement and the merger agreement on the basis of a variety of
financial and comparative analyses, including those described below. The Mentor
Group's opinion does not address the fairness of the acquisition to creditors or
any security holders of TCI,
23
either debt or equity, other than to the stockholders of TCI in the acquisition.
The summary of analyses performed by The Mentor Group, as set forth below, does
not purport to be a complete description of the analyses and procedures
underlying The Mentor Group's opinion, the judgments made or the conclusions
reached by The Mentor Group or a complete description of its presentation. The
Mentor Group believes, and has so advised the board, that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all factors and analyses, could
result in an incomplete and inaccurate view of the process underlying its
analyses and opinion.
In connection with the preparation of its opinion dated as of March 31,
2005, among other things, The Mentor Group did the following:
o met with certain members of the senior management of TCI to
discuss the operations, financial condition, future prospects
and projected operations and performance of TCI;
o visited certain facilities and business offices of TCI in
Irvine, California;
o reviewed: (i) TCI's Form 10-KSB for the fiscal year ended
December 31, 2003, including the audited consolidated balance
sheet of TCI and its subsidiaries, as of December 31, 2003, and
the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years ended December 31,
2002 and 2003; (ii) Form 10-QSB for the quarter ended September
30, 2004, including the unaudited consolidated balance sheet of
TCI and its subsidiaries as of September 30, 2004, and the
related consolidated statements of operations, stockholders'
equity and cash flows for the interim nine-month periods ended
September 30, 2003 and September 30, 2004; and (iii) certain
other publicly available business and financial information
related to TCI, which it deemed to be relevant;
o reviewed the unaudited financial information, internally
prepared by management of TCI, relating to the operations of
TCI, including: (i) the unaudited consolidated balance sheet of
TCI and its subsidiaries, as of December 31, 2004, and the
related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal year ended December 31,
2004, and (ii) the unaudited consolidated balance sheet of TCI
and its subsidiaries, as of February 29, 2004 and February 28,
2005, and the related consolidated statements of operations,
stockholders' equity and cash flows for the two months ended
February 29, 2004 and February 28, 2005, which TCI's management
represented and warranted as the most current financial
statements then available;
o reviewed audited financial statements for the fiscal years ended
December 31, 1999, 2000, 2001, 2002 and 2003;
o reviewed certain financial projections provided by TCI's
management relating to TCI for the fiscal years ending December
31, 2005, 2006 and 2007;
o reviewed copies of the following documents and agreements,
certified by management of TCI as true, correct and complete:
(i) the Amended and Restated Certificate of Incorporation and
Bylaws of TCI; (ii) the transaction documents for the Series B
Preferred Stock financings; and (iii) the transaction documents
for the Series A Preferred Stock financing;
o reviewed a draft of the following documents and agreements: (i)
the stock purchase agreement among TCI, Retalix, Retalix
Holdings Inc. and certain holders of Series A and Series B
Preferred Stock; (ii) the merger agreement among Retalix,
Retalix Holdings Inc., Survivor RTLX, LLC, RTLX, LLC and TCI;
(iii) the registration rights agreement between Retalix and the
selling stockholders; and (iv) the escrow agreement between
Retalix and the selling stockholders;
o analyzed the trading history, recent market prices, and
valuation multiples for Retalix's ordinary shares;
o reviewed certain other publicly available financial data for
certain companies that The Mentor Group deemed comparable to
TCI; and
o conducted such other studies, analyses and inquiries as The
Mentor Group deemed appropriate for purposes of its opinion.
24
The Mentor Group opinion does not address the underlying business
decision of the TCI to engage in the acquisition and does not constitute a
recommendation to the board of directors, or to any stockholder of TCI as to how
such stockholder should vote or as to any other action such stockholder should
take in connection with the acquisition. The Mentor Group did not, and was not
requested by TCI or any other person to, solicit third party proposals or
evaluate any specific third party proposals in acquiring all or any part of TCI
or to make any recommendations as to the form or amount of consideration in
connection with the acquisition. Further, The Mentor Group did not participate
in the negotiations with respect to the acquisition or advise TCI with respect
to alternatives to it.
The Mentor Group was not asked to opine and does not express any opinion
as to: (i) the tax consequences of the acquisition, including, but not limited
to, tax or legal consequences to TCI or the stockholders of TCI in the United
States or in any other jurisdiction; (ii) the realizable value of TCI's
preferred stock or common stock price or the prices at which TCI's preferred
stock or common stock may trade in the future following the acquisition; or
(iii) the fairness of any aspect of the acquisition not expressly addressed in
its fairness opinion.
In preparing its opinion, The Mentor Group assumed and relied on the
truth, accuracy and completeness of all information supplied or otherwise,
including, without limitation, any financial information, forecasts or
projections, made available to The Mentor Group, discussed with or reviewed by
or for The Mentor Group, or publicly available. In addition, where appropriate,
The Mentor Group relied upon publicly available information that The Mentor
Group believed to be reliable, accurate, and complete; however, The Mentor Group
did not guarantee the reliability, accuracy, or completeness of any such
publicly available information. The Mentor Group did not independently verify
the accuracy and completeness of the information provided to it and did not
assume and expressly disclaimed any responsibility for independently verifying
such information. The Mentor Group did not undertake any independent evaluation
or appraisal of any of the assets or liabilities of TCI nor was it furnished
with any such evaluation or appraisal. In addition, The Mentor Group did not
conduct, and did not assume any obligation to conduct, any physical inspection
of the properties or facilities of TCI. The Mentor Group expressed no opinion
regarding the liquidation value of any entity. Without limiting the generality
of the foregoing, The Mentor Group did not undertake any independent analysis of
any pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which TCI or any of its affiliates is a party or may
be subject and, at TCI's direction and with TCI's consent, The Mentor Group's
opinion made no assumption concerning, and therefore did not consider, the
possible assertions of claims, outcomes or damages arising out of any such
matters.
The Mentor Group assumed that the financial forecast information
furnished to or discussed with The Mentor Group, by TCI, was prepared in a
reasonable manner and reflected the best currently available estimates and
judgment of TCI's management as to the expected future financial performance of
TCI, and that there had been no material change in the assets, financial
condition, business or prospects of TCI since the date of the most recent
financial statements made available to The Mentor Group. The opinion expresses
no view with respect to how the projections were obtained, the reasonableness of
such projections, or the assumptions on which they were based. Further, The
Mentor Group relied upon the representations of management of TCI that
management was not aware of any facts or circumstances that would make any such
forecasts inaccurate or misleading. The Mentor Group's opinion was based upon
market, economic and other conditions as they existed and can be evaluated, and
on the information made available to it, as of the date of this opinion. Any
subsequent change in such conditions could materially affect the assumptions
used in the opinion and would require a reevaluation of such opinion. Although
subsequent developments may affect this opinion, The Mentor Group assumed no
obligation to update, revise or reaffirm such opinion, and The Mentor Group
expressly disclaimed any obligation to do so.
Analyses
The Mentor Group used several methodologies to assess the fairness, from
a financial point of view, of the purchase price to be received by the
stockholders in connection with the acquisition. These methodologies provided an
estimate as to the aggregate enterprise value of TCI. The following is a summary
of the material financial analyses used by The Mentor Group in connection with
providing its opinion. The full text of the opinion is attached as Appendix C(i)
to this proxy statement. You are urged to read the full text of The Mentor Group
opinion carefully and in its entirety.
The Mentor Group used the following valuation methodologies in order to
determine the estimated market value of TCI: (i) a public company market
multiple approach; (ii) an income approach; and (iii) a comparable transactions
approach. The analyses required studies of the overall market, economic and
industry conditions in which TCI operates and the historical operating results
of TCI.
Public Company Market Multiple Approach. The Mentor Group reviewed
certain financial information of publicly traded comparable companies, selected
solely by The Mentor Group, that (i) provide enterprise resource planning
software to the retail industry (the "Comparables"). The Comparables included
Island Pacific, Inc., JDA Software Group, Lawson Software, Inc., QAD, Inc., and
Retalix Ltd. The Mentor Group calculated certain financial ratios, including the
multiples of (i) Enterprise
25
Value ("EV") to Latest Twelve Months ("LTM") revenues; and (ii) EV to Next
Fiscal Year ("NFY") revenues and Equity Value to NFY net income, of the
Comparables based on the most recent publicly available information. "Enterprise
Value" is defined as the market value of a company's issued and outstanding
common stock and common stock equivalents (collectively, "Equity Value") plus
the market value of issued and outstanding indebtedness, preferred stock and
minority interests minus cash and cash equivalents.
No company utilized in the public company market multiple approach is
identical to TCI. In selecting and evaluating the comparable companies, The
Mentor Group made certain judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters. Mathematical analysis, such as determining the average or median,
of certain financial ratios of the comparable companies is not in itself a
meaningful method of using comparable company data.
The analysis showed that the multiples of EV to LTM revenues exhibited
by the Comparables ranged from 1.1x to 2.7x with a median multiple of 1.4x. In
addition, the analysis showed that the multiples of EV to NFY revenues exhibited
by the Comparables ranged from 1.1x to 2.2x with a median multiple of 1.3x, and
the multiples of equity value to NFY net income exhibited by the Comparables
ranged from 14.8x to 48.7x with a median multiple of 29.1x, respectively. After
reviewing these trading multiples of the Comparables and various other factors
including, but not limited to, size, growth and profitability, analyst coverage
and stock liquidity, The Mentor Group selected EV to LTM revenue multiples in
the range of 0.8x to 1.1x; EV to NFY revenue multiples in the range of 0.8x to
1.0x; and equity value to NFY net income multiples in the range of 11x to 22.5x.
The Mentor Group derived an indication of the EV of TCI by applying
selected revenue and net income multiples to TCI's representative levels of
revenue and net income for the LTM ended February 28, 2005 and certain projected
results of TCI for the fiscal year ending December 31, 2005. Based on the above,
the resulting indications of the EV of TCI ranged from approximately $17.8
million to $27.9 million.
Income Approach. The Mentor Group utilized certain financial projections
prepared by management for the fiscal years ending December 31, 2005, 2006, and
2007 to perform a discounted cash flow analysis of TCI. To determine TCI's
Enterprise Value, The Mentor Group used the projected unlevered cash flows of
TCI from December 31, 2005, 2006, and 2007, and applied assumed risk-adjusted
discount rates ranging from 17 percent to 19 percent and terminal multiples of
2007 revenues ranging from 1.1x to 1.2x. Based on management's estimates and
this analysis the resulting indications of the Enterprise Value of TCI ranged
from approximately $22.1 million to $27.4 million.
Comparable Transactions Approach. This analysis involves a review of the
valuations reflected in acquisition transactions when there is a change of
control, whether through merger, stock purchase or asset purchase, involving
companies operating in industries and with a business strategy similar to TCI's
operations and strategies. The comparable transaction approach may yield the
widest value range, due to the varying importance of an acquisition to a buyer,
differences in the transaction process and the qualitative differences among
target or acquired companies. Furthermore, information is typically not
disclosed for transactions involving a private seller, even when the buyer is a
public company, unless the acquisition is deemed to be significant to the
acquirer. As a result, the pool of transactions reviewed in connection with a
comparable transaction analysis is limited to transactions involving two public
companies or acquisitions by public companies of large private companies.
The Mentor Group identified and selected eight transactions (the
"Transaction Comparables") involving target companies in the software industry
that provide enterprise resource planning, and supply chain and logistics
software to the retail industry over the last five years. These transactions,
along with the date completed in parentheses, were the acquisition of: (i) AD
OPT Technologies by Kronos, Inc. (November 18, 2004); (ii) Retail Technologies
International Inc. by Island Pacific Inc. (March 17, 2004); (iii) Timera Retail
Solutions by JDA Software Group (January 29, 2004); (iv) OMI International Inc.
by Retalix Ltd. (January 5, 2004); (v) Closedloop Solutions Inc. by Lawson
Software Inc. (October 6, 2003); (vi) Frontstep Inc. by MAPICS Inc. (February
28, 2003); (vii) Infinium Software Inc. by SSA Global Technologies Inc.
(December 20, 2002); and (viii) E3 Corp. by JDA Software Group (September 10,
2001).
While some attributes of the acquired companies were similar to TCI,
none of the transactions identified were identical to the acquisition of TCI and
many may have occurred at times when the economic conditions were different than
at the time of The Mentor Group's analysis.
Based on the publicly available information with respect to these
transactions, The Mentor Group calculated and compared multiples for each
transaction based on LTM revenue. The analysis showed that the multiples of EV
to LTM revenues exhibited by the Transaction Comparables ranged from 0.3x to
2.5x with a median multiple of 1.4x.
26
The Mentor Group derived an indication of the EV of TCI by applying
selected revenue multiples to TCI's representative levels of revenue for the LTM
ended February 28, 2005. Based on the above, the resulting indications of the EV
of TCI ranged from approximately $21.2 million to $25.4 million.
The aforementioned Public Company Market Multiple, Income and Comparable
Transaction Approaches provided The Mentor Group with an indication of the EV of
TCI that ranged from approximately $19.9 million to $26.6 million.
Consideration to be Received. The purchase price to be received by TCI
is comprised, before expenses, of approximately $17.25 million in cash and an
amount of Retalix ordinary shares with a value of $17.25 million based on a $24
per share value of Retalix ordinary shares. The Mentor Group reviewed the stock
purchase agreement and the merger agreement, and analyzed the trading history,
recent market prices, and valuation multiples for Retalix's ordinary shares in
order to determine the estimated market value of the stock portion of the
purchase price to be received by the selling stockholders in connection with the
acquisition.
Based on the above analyses, the resulting indication of the market
value of Retalix's ordinary shares is approximately $24 per share; and the
resulting indication of the market value of the purchase price is approximately
$34.5 million before expenses.
Conclusion
In rendering this opinion, The Mentor Group assumed that the proposed
acquisition would be completed substantially on the terms discussed in the stock
purchase agreement and merger agreement, without any waiver of any material
terms or conditions by any party thereto. Without limiting the generality of the
foregoing, for the purpose of its opinion, The Mentor Group assumed that TCI is
not a party to any pending transaction, including external financings,
recapitalizations, asset sales, acquisitions or merger discussions, other than
the acquisition or in the ordinary course of business. The Mentor Group also
assumed that all the necessary regulatory approvals and consents required for
the acquisition will be obtained in a manner that will not change the purchase
price.
In connection with its review, The Mentor Group considered financial
projections for the TCI for the fiscal years ending December 31, 2005, 2006 and
2007. These financial projections were prepared by the management of TCI under
market conditions as they existed as of approximately February 7, 2005 and
management does not intend to provide The Mentor Group with any updated or
revised projections in connection with the acquisition. The projections do not
take into account any circumstances or events occurring after the date they were
prepared. In addition, factors such as industry performance, general business,
economic, regulatory, market and financial conditions, as well as changes to the
business, financial condition or results of operations of TCI, may cause the
projections or the underlying assumptions to be inaccurate.
In its analysis, The Mentor Group made numerous assumptions with respect
to TCI, the acquisition, industry performance, economic, market and financial
conditions and other matters, many of which are beyond the control of the
respective entities. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
In arriving at its fairness opinion, The Mentor Group reviewed key
economic and market indicators, including, but not limited to, growth in Gross
Domestic Product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. The Mentor Group's opinion is based on the market, economic and
other conditions as they existed as of March 31, 2005 and on the projected
financial information provided to The Mentor Group as of such date.
The summary set forth above describes the material points of more
detailed analyses performed by The Mentor Group in arriving at its fairness
opinion.
Position of TCI as to the Purposes, Alternatives, Reasons and Effects of the
Merger
Purposes. The purpose of the merger is for Retalix to indirectly acquire
all outstanding shares of common stock of TCI that it does not currently own in
exchange for cash, while providing liquidity for, and maximizing the value to be
received by, the public stockholders.
Alternatives. TCI's board considered various alternatives to Retalix's
proposal, including those described under "SPECIAL FACTORS--Background of the
Merger" and "--TCI's Position as to the Fairness of the Merger."
27
Reasons. The board's reasons for the merger are described under "SPECIAL
FACTORS--Background of the Merger" and "--TCI's Position as to the Fairness of
the Merger."
Effects. If the merger occurs, TCI stockholders will receive $0.132 in
cash for each share of common stock, $0.8409 in cash for each share of Series A
Preferred Stock (determined on an as-converted-to-common-stock basis), and
$0.7573 in cash for each share of Series B Preferred Stock (determined on an
as-converted-to-common-stock basis), except in respect of shares held by Retalix
and its subsidiaries and stockholders that properly assert and perfect appraisal
rights under Delaware law. The merger will therefore:
o provide a source of liquidity which might not otherwise be
available to TCI stockholders; and
o allow the stockholders to pursue other investment alternatives
with the cash proceeds from the merger.
As a result of the merger, Retalix will indirectly own the entire equity
interest in TCI through Retalix's subsidiaries. If the merger occurs,
stockholders other than Retalix and its affiliates will no longer have any
equity interest in TCI, and instead will have only the right to receive the cash
consideration pursuant to the merger agreement. See "THE MERGER--Payment of
Merger Consideration and Surrender of Stock Certificates." Therefore, former
stockholders of TCI will not receive any benefits from TCI's business after the
merger, nor will they bear the risk of any decrease in the value of TCI after
the merger, except that the delivery of the Retalix ordinary shares to the
selling investors in the first step stock purchase gives them an indirect
interest in the business of TCI. To the extent such selling investors continue
to hold Retalix shares, they will indirectly receive the benefits or bear the
risks of any change in TCI's business as managed by Retalix.
After the merger, TCI will deregister its common stock under the
Exchange Act. After this deregistration, TCI's officers, directors and the
owners of more than 10% of TCI's common stock will no longer be subject to the
reporting obligations or short-swing profit provisions of Section 16 of the
Exchange Act.
Positions of Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC as
to the Fairness of the Merger
Although Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC
were not affiliates of TCI during the negotiation of the stock purchase and
merger agreement, they may be deemed to be affiliates of TCI under the SEC rules
governing "going private" transactions and are required to express their belief
as to the fairness of the merger to the stockholders unaffiliated with TCI.
Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC are making the
statements included in this subsection solely for the purposes of complying with
the requirements of Rule 13e-3 and related rules under the Exchange Act.
While Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC
believed the merger to be fair to TCI and its unaffiliated Series A Preferred,
Series B Preferred and common stockholders, each of Retalix, Retalix Holdings
Inc., RTLX LLC and Survivor RTLX LLC attempted to negotiate the terms of a
transaction that would be most favorable to them, and not to the TCI
stockholders, and, accordingly, did not negotiate the stock purchase agreement
or merger agreement with a goal of obtaining terms that were fair to such
stockholders. The TCI stockholders, as described elsewhere herein, were
represented by TCI's management, on behalf of the board of directors, which
negotiated directly with Retalix, Retalix Holdings Inc., RTLX LLC and Survivor
RTLX LLC on their behalf, and obtained a fairness opinion from The Mentor Group.
No Retalix entity undertook any formal evaluation of the fairness of the merger
or engaged a financial advisor for such purpose, particularly since Retalix,
Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC were not affiliates of TCI
at the time of negotiations of the merger agreement. Moreover, Retalix, Retalix
Holdings Inc., RTLX LLC and Survivor RTLX LLC did not participate in the
deliberations of the TCI board of directors regarding, or receive advice from
TCI's legal or financial advisors as to, the fairness of the merger. Retalix,
Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC nonetheless each believes
that the terms and conditions of the merger are substantively and procedurally
fair to the TCI Series A Preferred, Series B Preferred and common stockholders
unaffiliated with Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC
or TCI, based on the following factors:
o The Merger is Procedural Step to Complete Acquisition. The
merger is the second step of a two-step, integrated process to
acquire TCI. In the first step, the acquisition of the preferred
stock held by the selling stockholders, Retalix Holdings Inc.
acquired a majority of the equity and a majority of the voting
control of TCI. The merger simply completes the acquisition of
TCI by Retalix Holdings Inc.
o Character of Negotiations. The Retalix entities negotiated the
acquisition price at arm's-length with TCI's management;
28
o Distribution of Acquisition Price. The total acquisition price
is to be distributed in accordance with the priorities mandated
by TCI's charter requirements. These documents were not subject
to negotiation by the Retalix entities and were already
established and governing TCI's stockholders;
o Cash Consideration. The merger consideration will be paid to
TCI's stockholders entirely in cash;
o Purchase Price. Each of Retalix, Retalix Holdings Inc., RTLX LLC
and Survivor RTLX LLC believes that the purchase price fairly
reflects TCI's revenue levels, future prospects as a standalone
company and strength of TCI's product suite;
o Obligations and Risks Assumed by Selling Stockholders. The stock
purchase agreement requires that the selling stockholders escrow
10% of the proceeds paid to them and indemnify Retalix for
violations of representations and warranties by TCI and for
other circumstances, including a portion of any increases in the
consideration paid to public stockholders above the merger
consideration. The selling stockholders are also subject to
market risk because they hold restricted ordinary shares of
Retalix until they are registered for resale, a risk not present
for the unaffiliated stockholders, who are receiving cash;
o Corporate Proceedings by TCI. The stock purchase agreement
required the TCI board of directors to approve both steps of the
acquisition of TCI by the Retalix entities as an integrated
transaction;
o Opinion of the Mentor Group. Before the TCI board approved the
merger, The Mentor Group, the financial advisor to the board,
delivered its opinion to the board to the effect that as of the
date of that opinion and based upon and subject to the factors
and assumptions set forth therein, the consideration in the
merger is fair, from a financial point of view, to all of TCI's
preferred and common stockholders, including unaffiliated
holders individually; and
o Availability of Appraisal Rights. Any stockholders who are not
satisfied with the merger consideration may assert their
appraisal rights under the Delaware General Corporation Law.
Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC evaluated
TCI as a whole enterprise, as Retalix Holdings Inc. intends to acquire all
outstanding equity interests in TCI. In arriving at aggregate consideration of
$34.5 million for all such equity interests, after negotiations on an
arm's-length basis with TCI and the selling stockholders, Retalix, Retalix
Holdings Inc., RTLX LLC and Survivor RTLX LLC did not separately evaluate TCI's
preferred stock and common stock. Rather, Retalix, Retalix Holdings Inc., RTLX
LLC and Survivor RTLX LLC relied on the TCI board and management to determine
the distribution of proceeds, subject to Retalix, Retalix Holdings Inc., RTLX
LLC and Survivor RTLX LLC confirming that the proposed distribution conformed to
the priorities mandated by TCI's charter documents and existing agreements
examined by the Retalix entities during the due diligence process. The Retalix
entities based the purchase price on their own evaluation of the value of TCI as
an enterprise, comparable company valuations, TCI's projections (as presented by
TCI management, which are included in this proxy statement, and as then
confidentially discounted 7% by Retalix as a conservative measure), anticipated
synergies to be achieved as a result of the acquisition and other internal
discussions. In connection with the transaction, Retalix, Retalix Holdings Inc.,
RTLX LLC and Survivor RTLX LLC retained service providers to assist in the
diligence and negotiation of the transaction, including Sullivan & Worcester LLP
to act as their legal counsel, and Citigroup Global Markets Inc. to provide
assistance to the Retalix entities relating to the financial due diligence of
TCI. Citigroup representatives participated in diligence sessions with TCI
management and assisted the Retalix entities' management in reviewing the
historical financials results and projections of TCI and evaluating the
potential effect the acquisition could have on the combined company's financial
results. Citigroup also contacted two TCI customers and assisted the Retalix
entities' management with the preparation of a presentation by management to the
Retalix board of directors regarding the acquisition. A copy of Retalix
management's presentation to the Retalix board of directors is attached as
Appendix G. However, Citigroup did not provide any report, opinion or appraisal
for Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC, and Retalix,
Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC negotiated the purchase
price for the transaction directly with TCI and did not utilize or rely upon the
advice of any of its service providers in determining the aggregate
consideration for the transaction.
Positions of Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC as
to the Purposes, Alternatives, Reasons and Effects of the Merger
Purposes. The purpose of the merger for the Retalix entities is to
acquire all outstanding shares of TCI stock that they do not already own. The
merger will allow the Retalix entities to complete their acquisition of all of
TCI's equity interests.
Reasons. Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC
believe that they can capitalize on synergies resulting from the combination of
TCI and the Retalix entities' operations that will enable TCI to operate as a
profitable unit. Additionally, the Retalix entities assign great value to TCI's
merchandising and inventory management software solutions and believes these
applications complement other applications currently offered by the Retalix
entities to their retail grocery and convenience store customers. The
acquisition of TCI provides the Retalix entities with additional sales
opportunities because it expands the Retalix entities' customer base to include
several additional large grocery chains.
29
Additionally, TCI will no longer be subject to the reporting
requirements of the Exchange Act. This will allow TCI to eliminate the time and
significant expense devoted by its management and certain other employees to
matters which relate exclusively to being a public reporting company. Although
Retalix is a public company, the separate costs previously incurred by TCI as a
public company will be reduced significantly, including the additional legal
costs, insurance costs, the costs of certain accounting and auditing activities
and internal controls, the cost of annual meetings, the cost of preparing,
printing and mailing corporate reports and proxy statements to TCI stockholders,
the expense of a transfer agent and the cost of investor relations activities.
These assessments are based upon publicly available information
regarding TCI, the Retalix entities' knowledge of TCI and Retalix's experience
in investing in or managing public and private companies generally.
Effects. As a result of the merger, RTLX LLC will merge with and into
TCI and cease to exist. TCI will then merge with and into Survivor RTLX LLC and
TCI will cease to exist. Retalix Holdings Inc. will continue to own all
outstanding membership interests in Survivor RTLX LLC and Retalix Ltd. will
continue to own all of the outstanding stock of Retalix Holdings Inc., in each
case with no change. These transactions are expected to be tax-free under U.S.
federal tax rules to each of the Retalix entities. After the merger, all of
assets and liabilities of TCI will be indirectly owned by Retalix through its
subsidiaries. If the merger is completed, stockholders other than the Retalix
entities will no longer have an equity interest in TCI, will not participate in
any of the future earnings growth of TCI and instead will have only the right to
receive cash consideration pursuant to the merger agreement. See "THE
MERGER--Payment of Merger Consideration and Surrender of Stock Certificates."
Similarly, after exchanging their shares in the merger, stockholders of TCI will
not bear the risk of any decrease in the value of TCI. If the merger is
completed, the Retalix entities, which are consolidated for tax and accounting
purposes, will have a 100% interest in the surviving company's net book value
and tax attributes after the merger (the use of such tax attributions is subject
to certain limitations).
As a result of the merger, the surviving company will be a privately
held corporation and the registration of TCI stock under the Exchange Act will
be terminated. This termination will make certain provisions of the Exchange
Act, such as the short-swing profit recovery provisions and the requirement of
furnishing a proxy or information statement in connection with stockholders'
meetings, no longer applicable.
If the merger becomes effective, all stockholders (other than Retalix
and its subsidiaries and stockholders who properly exercise appraisal rights)
will receive $0.132 per share in cash per share of common stock, $0.8409 in cash
for each share of Series A Preferred Stock (determined on an
as-converted-to-common-stock basis) and $0.7573 in cash for each share of Series
B Preferred Stock (determined on an as-converted-to-common-stock basis). This
will provide a source of liquidity not otherwise available, and will eliminate
the stockholders' exposure to fluctuations in market value of the shares. In
addition, it will allow stockholders to pursue other investment alternatives.
The Retalix Entities' Plans for TCI
Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC presently
expect that, following the completion of the merger, the operations and business
of TCI will be conducted substantially as they are currently conducted as part
of a subsidiary of Retalix. The Retalix entities intend to integrate TCI's
business into their existing business and will seek to increase profitability
and achieve synergies from the acquisition. The Retalix entities also plan to
continue to develop and market TCI's products and services. The Retalix entities
have no current plans or proposals that relate to or would result in an
extraordinary corporate transaction involving TCI's business, such as a merger,
reorganization, liquidation, or sale or transfer of a material amount of assets.
However, the Retalix entities will continue to evaluate TCI's business,
operations and assets after the completion of the merger from time to time, and
may propose or develop new plans and proposals which they consider to be in the
best interests of the Retalix entities and their shareholders.
30
THE MERGER
The following is a summary of the material terms and conditions of the
merger. The merger agreement is attached as Appendix A and is incorporated
herein by this reference. Please read Appendix A in its entirety, since it is
the legal document that governs the merger. See also THE MERGER AGREEMENT.
Proposal to be Considered at the Special Meeting
At the special meeting, you will be asked to consider and vote upon a
proposal to adopt the merger agreement.
At the effective time of the merger, RTLX LLC, a subsidiary of Retalix
Holdings Inc., will merge with and into the TCI (with TCI surviving), followed
immediately by the merger of TCI with and into Survivor RTLX LLC, a subsidiary
of Retalix Holdings Inc. (with Survivor RTLX LLC surviving). Following the
merger, the separate corporate existence of TCI will cease and Survivor RTLX LLC
will survive as a wholly-owned subsidiary of Retalix.
As a result of the merger, each outstanding share of common stock of TCI
automatically will be converted into the right to receive $0.132 in cash, each
outstanding share of Series A Preferred Stock will be converted into the right
to receive $0.8409 in cash (determined on an as-converted-to-common-stock basis)
and each outstanding share of Series B Preferred Stock will be converted into
the right to receive $0.7573 in cash (determined on an
as-converted-to-common-stock basis), without interest, less any applicable
withholding taxes, except that:
o Shares held indirectly by Retalix through its subsidiaries will
be cancelled and cease to exist, and no consideration will be
paid therefor;
o Shares held by TCI will be cancelled without payment; and
o Shares held by stockholders who properly assert and perfect
their appraisal rights under Delaware law will be purchased for
their "fair value" as determined under Delaware law. See "THE
MERGER - Appraisal Rights."
Voting Rights; Quorum; Vote Required for Approval
Stockholders of record at the close of business on October 27, 2005, the
record date for the special meeting, are entitled to notice of, and to vote at,
the special meeting. On the record date, there were approximately 1,379 holders
of record of the common stock and 12,825,459 shares of common stock outstanding.
Each share of common stock entitles the holder to cast one vote at the special
meeting. Holders of Series A Preferred Stock and Series B Preferred Stock are
entitled to vote their shares at the special meeting on an
as-converted-to-common-stock basis. On the record date there were two holders of
record of Series A Preferred Stock with 5,816,037 shares outstanding,
representing a right to vote 13,073,868 common shares on an
as-converted-to-common-stock basis, and 44 holders of record of Series B
Preferred Stock with 26,653,094 shares outstanding, representing a right to vote
26,653,094 common shares on an as-converted-to-common-stock basis.
Stockholders may vote either in person at the special meeting or by
proxy. However, if your shares are held for you by a bank, broker or other
so-called "nominee" holder:
o you must instruct your broker to vote your shares by following
the procedures specified by the nominee for voting and
o if you want to vote in person at the meeting, you must request a
proxy in your name from your bank, broker or other nominee.
The presence in person or by proxy of the holders of a majority in
voting power of the common stock outstanding on the record date is necessary to
constitute a quorum at the special meeting. If there is no quorum, business
cannot be conducted at the special meeting and the proposal to adopt the merger
agreement cannot be voted on. Abstentions and so-called "broker non-votes" (when
a broker returns a proxy card but has not indicated the instructions of the
beneficial owner of the shares as to how to vote) will be counted for the
purpose of establishing a quorum at the special meeting.
Under Delaware law and TCI's certificate of incorporation, the merger
agreement must be adopted by the holders of a majority of the issued and
outstanding common stock as well as a majority of the Series A Preferred Stock
and Series B Preferred Stock voting on an as-converted-to-common-stock basis,
with the preferred stock and common stock voting together as a single
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class. In addition, the merger agreement must be adopted by 58% of the preferred
stock, voting as a single class. Retalix Holdings Inc. owns 73.4% of TCI's
common stock on an as-converted-to-common-stock basis and intends to vote in
favor of the adoption of the merger agreement unless the conditions to closing
set forth in the merger agreement are not met. Therefore, the approval by
Retalix Holdings Inc. will be sufficient to approve the merger agreement.
The merger agreement does not require the approval of a majority of
unaffiliated stockholders. Holders of shares of Series A and Series B Preferred
Stock are entitled to vote on all matters that are submitted to a vote of the
holders of common stock on an as-converted-to-common-stock basis. Abstentions
and broker non-votes will count as votes against the adoption of the merger
agreement.
Voting and Revocation of Proxies
All shares of TCI's stock represented by properly executed proxies
received by TCI and not revoked prior to or at the special meeting will be voted
in accordance with the instructions marked on the proxies. If no instructions
are given, the proxy will be voted FOR the proposal to adopt the merger
agreement.
A stockholder may revoke a proxy:
o By delivering to TCI's corporate secretary at 17752 Skypark
Circle, Suite 160, Irvine, California 92614 a later-dated,
signed proxy card or a written revocation of the previously
returned proxy, on or before the business day prior to the
special meeting; or
o By delivering to TCI a later-dated, signed proxy card or a
written revocation prior to the vote at the special meeting;
o By attending the special meeting and voting in person; or
o If a stockholder has instructed a bank, broker or other nominee
holder to vote his or her shares, by following the procedure to
change a vote specified by the nominee holder.
Merely attending the special meeting in person will not revoke a proxy
without further action. You must take one of the actions specified above to
validly revoke a proxy. Revoking a proxy after the vote is taken at the special
meeting will have no effect.
The board is not currently aware of any business to be brought before
the special meeting other than the proposal to adopt the merger agreement.
However, if other matters are properly presented, the persons named as proxies
in the card will have the discretionary authority to vote in accordance with
their judgment on any such matters.
Proxy Solicitation
TCI has not hired a proxy solicitor to solicit proxies or to distribute
proxy materials for the special meeting.
Proxies may be solicited by directors, officers, and employees of TCI
(none of whom will receive any additional compensation for such services) in
person, by mail, by telephone, telegraph, over the internet or by fax. TCI
anticipates that banks, brokers, nominees, custodians and fiduciaries will
forward proxy soliciting material to beneficial owners of the preferred stock
and common stock and that such persons will be reimbursed by TCI for expenses
incurred in doing so.
Structure of the Merger
The acquisition of TCI has been structured as a stock acquisition
followed by a double merger. In the proposed second step, RTLX LLC will merge
with and into TCI with TCI as the surviving company, and then TCI will merge
with and into Survivor RTLX LLC, with Survivor RTLX LLC surviving as a
wholly-owned subsidiary of Retalix Holdings Inc. The purpose of the double
merger is to support the tax-free treatment of the Retalix ordinary shares which
was paid to the selling stockholders under the stock purchase agreement. Under
IRS rules, Retalix and TCI believe that the first step under the stock purchase
agreement and second step mergers under the merger agreement are deemed a single
transaction for tax purposes. The first merger was structured as a cash merger
to provide the stockholders of TCI with a cash payment for all of the shares
they hold and to provide a prompt and orderly transfer of ownership to Retalix
with reduced transaction costs.
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Effective Time of the Merger
The merger will become effective at the time that articles of merger are
accepted for filing by the Secretary of State of the State of Delaware or at
such other time as may be agreed by TCI and Retalix. Assuming the stockholders
vote to adopt the merger agreement and all other conditions to the merger are
satisfied or, to the extent permitted, waived, TCI expects to complete the
merger as soon as practicable after the special meeting.
Payment of Merger Consideration and Surrender of Stock Certificates
Retalix or its designee will act as paying agent for the merger. In the
event a paying agent other than Retalix is appointed, immediately after the
merger, Retalix will provide such paying agent with the cash necessary to pay
the merger consideration to the Series A, Series B and common stockholders of
TCI. The paying agent will use these funds solely to pay the merger
consideration to those stockholders entitled to receive such payment pursuant to
the merger agreement. The paying agent will deliver the merger consideration
according to the procedures summarized below.
Promptly after the merger, the paying agent will mail to all
stockholders a letter of transmittal and instructions advising you how to
surrender your stock certificates in exchange for the merger consideration. Upon
surrender of your stock certificates, together with a properly completed letter
of transmittal and any other items specified by the letter of transmittal, the
paying agent will pay to you the applicable per share merger consideration and
your stock certificates will be canceled. No interest will accrue or be paid on
the merger consideration, regardless of any delay in payment. In addition, all
cash payments made in connection with the merger will be reduced by any
applicable withholding taxes.
If your stock certificates have been lost, mutilated or destroyed, you
may deliver to the paying agent an affidavit and indemnity bond (in form and
substance, and with surety, reasonably satisfactory to Retalix) instead of your
stock certificates.
If you want any part of the merger consideration to be paid to someone
else, your stock certificates must be properly endorsed, or otherwise in proper
form for transfer, and you must pay to the paying agent any transfer or other
taxes relating to the transfer, or establish to the satisfaction of TCI that the
taxes have been paid or are not required to be paid.
Please do not forward your stock certificates to the paying agent
without a letter of transmittal, and do not return your stock certificates with
the enclosed proxy card.
At and after the merger, you will cease to have any rights as a
stockholder of TCI, except for the right to surrender your stock certificates,
according to the procedures described in this section, in exchange for the
merger consideration or, if you properly assert and perfect your appraisal
rights, the right to receive the "fair value" of your shares as determined under
Delaware law. At the effective time of the merger, TCI's stock ledger with
respect to shares of TCI stock that were outstanding prior to the merger will be
closed and no further registration of transfers of these shares will be made.
Source of Merger Funding
Retalix intends to fund the merger, including fees, expenses and
transaction costs, from cash on hand and working capital.
Interests of Certain Persons in the Merger; Potential Conflicts of Interest
In considering the recommendations of the board of directors, you should
be aware that Retalix and certain of TCI's executive officers and directors may
have interests in the transaction that are different from, or are in addition
to, the interests of TCI's stockholders generally.
Retalix and its Affiliates. As of the date of this proxy statement,
Retalix and its affiliates hold the following interests in TCI:
o Retalix owns more than 97% of TCI's outstanding Series A and
Series B Preferred Stock, which constitutes 38,570,998 shares of
common stock of TCI on an as-converted-to-common-stock basis, or
approximately 73.4% of the outstanding shares of TCI.
o Barry Shaked, who was appointed as a director of TCI on April
15, 2005, is the founder, President, Chief Executive Officer and
Chairman of the Board and a 5.2% stockholder of Retalix. Mr.
Shaked also holds options to purchase a
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total of up to 425,000 additional Retalix ordinary shares.
Because of these relationships, Mr. Shaked may be deemed to have
an indirect material interest in the merger. Mr. Shaked does not
directly own any TCI stock.
o Danny Moshaioff, who was appointed to the TCI board on April 15,
2005, is an executive officer of Retalix. TCI does not believe
that Mr. Moshaioff, who does not directly own any TCI stock, may
be deemed to have an indirect material interest in the merger
because of these relationships.
o Eli Spirer, who was appointed to the TCI board on April 15,
2005, is an officer of Retalix Holdings Inc., a wholly-owned
subsidiary of Retalix. Retalix does not consider Mr. Spirer to
be an affiliate of Retalix, and TCI does not believe that Mr.
Spirer, who does not directly own any TCI stock, may be deemed
to have an indirect material interest in the merger because of
these relationships.
Changes in Compensatory Arrangements Resulting from the Retalix Transactions
On October 27, 2004 TCI had commenced a tender offer pursuant to which
it offered to exchange all outstanding options granted to its employees and
directors under TCI's 1993 Equity Incentive Plan, 1993 Non-Employee Directors'
Stock Option Plan, 2001 Equity Incentive Plan and 2001 Non-Employee Directors'
Stock Option Plan for new options TCI planned to grant under its 2001 Equity
Incentive Plan and 2001 Non-Employee Directors' Stock Option Plan. New options
issued pursuant to the tender offer would have vested according to the same
schedule as the old options which were tendered by holders. Prior to the
negotiation of the merger, TCI had planned to issue the new options on or about
May 30, 2005.
In February 2005, TCI's board considered that a change of control of TCI
could occur before new options were to be issued pursuant to the exchange offer.
The board determined that, in lieu of the exchange, a bonus be paid to all
employees and directors who surrendered their options. The bonus would be
payable upon the closing of the change of control transaction in an amount equal
to $0.132 per common share vested through the date of the change of control,
less a $0.0075 exercise price. Each director abstained from voting on his own
compensation.
Pursuant to the stock purchase agreement, options which had been
tendered in the tender offer and would have been vested as of April 1, 2005 were
paid a cash bonus equal to the number of option shares multiplied by the
difference between $0.132 per share and $0.0075 per share. Options which had
been tendered in the tender offer but would have been unvested as of April 1,
2005 were treated as unvested and no consideration was paid for such options.
In the acquisition, all outstanding stock options were treated as
follows:
o All vested stock options were cancelled in return for a cash
payment equal to the number of vested option shares multiplied
by the difference between $0.132 per share and the "deemed
exercise price" of $0.0075 per share. Pursuant to this
cancellation and payment, Mr. Jacobs, who served as TCI's Chief
Executive Officer until July 1, 2004 and as a director of TCI
until April 15, 2005, received $293,499, Mr. Butler received
$622,466, Mr. Raynor received $3,871, Mr. Gardner received
$3,122, Mr. Koulogeorge received $6,119 Mr. Houlihan received
$3,122, and Chief Financial Officer Stephen P. DeSantis received
$129,090. Because the transaction was deemed a liquidation
event, Mr. Butler's employment contract stipulated that all of
his unvested options would immediately vest. These vested
options were included in the amount received by Mr. Butler
pursuant to the cancellation and payment. None of Mr. Raynor,
Mr. Houlihan, Mr. Koulogeorge or Mr. Gardner held any unvested
options. Mr. Jacobs held 246,793 unvested options which were
cancelled without payment of any consideration.
o All unvested stock options were cancelled without payment of any
consideration.
o TCI agreed to make these payments to the employees and directors
of TCI in exchange for their options and to pay severance to
certain employees upon their termination in order to recognize
the efforts of TCI's employees and to ensure a smooth transition
upon the change of control of TCI. In an effort to treat holders
of options for shares of TCI's common stock the same as the
other holders of TCI's common stock, TCI made payments to these
option holders in the same amount as they would have been
entitled to as holders of common stock under the merger
agreement.
Employment and Severance Arrangements for Certain Executive Officers
Following the merger, Mr. Butler and Mr. DeSantis agreed to continue
serving TCI in their present positions pursuant to their existing employment
agreements. Mr. Butler's employment agreement took effect July 1, 2004 and
continues indefinitely
34
until terminated. Mr. DeSantis' employment agreement took effect January 1, 2003
and continues through June 30, 2005. Mr. Butler's employment agreement is
publicly available as Exhibit 10.13 to TCI's quarterly report on Form 10-QSB
filed with the Securities and Exchange Commission on August 13, 2004. Mr.
DeSantis' employment agreement is publicly available as Exhibit 10.7 to TCI's
annual report on Form 10-KSB filed with the Securities and Exchange Commission
on March 30, 2004. The agreements provide for:
o Annual base salaries in the amounts of $300,000 for Mr. Butler
and $175,000 for Mr. DeSantis which are reviewed annually by our
Compensation Committee. Mr. DeSantis' annual base salary was
increased to $195,000 on January 1, 2005.
o Participation in our bonus plan, established each year by our
Compensation Committee for management employees.
o Mr. DeSantis receives $500,000 in term life insurance.
o Fully paid health insurance for the employee and the employee's
immediate family.
o Director and officer insurance coverage.
o Customary provisions relating to confidentiality,
noncompetition, proprietary rights and dispute resolution.
In connection with the transactions with Retalix, Mr. Butler and Mr.
DeSantis entered into amended severance arrangements with TCI. Any severance
costs to be paid pursuant to these supplemental severance agreements will be
paid by Retalix or its subsidiaries. The terms of the severance agreements are
as follows:
o David R. Butler Mr. Butler was to be entitled to a severance
payment equal to twelve months' salary, as well as twelve months
continued benefits, beginning April 1, 2006, provided that Mr.
Butler remained employed by TCI through April 1, 2006 or was
terminated without cause (as defined in his employment agreement
with TCI) prior to April 1, 2006 (in which case he would receive
such severance amounts upon his termination). If Mr. Butler
resigned prior to April 1, 2006 or was terminated for cause,
then Mr. Butler would not be entitled to the severance and
benefits described above. Mr. Butler was also to be entitled to
a bonus of $75,000 if he remained employed through June 30,
2005. Though still employed by TCI, Mr. Butler resigned as Chief
Executive Officer on June 30, 2005 and became eligible for the
$75,000 bonus, which is payable upon completion of the merger.
Payments under the above-described severance arrangement are
intended to be in lieu of, and not in addition to, payments and
benefits Mr. Butler would otherwise be entitled to under his
employment agreement.
o Stephen P. DeSantis. Mr. DeSantis was to be entitled to a
severance payment in the amount of twelve months' salary and
twelve months continued benefits, plus a pro-rated bonus
beginning June 30, 2005, provided that Mr. DeSantis remained
employed by the Company through June 30, 2005. Mr. DeSantis was
to be entitled to a bonus of $39,000 if he remained employed
through June 30, 2005. Mr. DeSantis resigned his full-time
employment with TCI on June 30, 2005 and became eligible for the
$39,000 bonus. He will remain employed part time until the
merger is completed. Payments under the above-described
severance arrangement are intended to be in lieu of, and not in
addition to, payments and benefits Mr. DeSantis would otherwise
be entitled to under his employment agreement.
Sales of TCI Preferred Stock in the Acquisition by Affiliates of Former
Directors
The following former directors of TCI, all of whom resigned on April 15,
2005, were affiliated with certain selling stockholders in Retalix's April 1,
2005 acquisition of Series A and Series B Preferred Stock. The acquisition has
already been completed, is not part of the merger and will not be subject to a
stockholder vote at the special meeting.
Mr. Houlihan is the managing director of InnoCal Management II, L.P.,
the general partner of InnoCal II, L.P., a selling stockholder in the
acquisition. Because of these relationships Mr. Houlihan may be deemed to have
had an indirect material interest in the acquisition.
Mr. Raynor is the managing member of Argentum Investments, L.L.C., which
is general partner of TCI ACPII Limited Partners, L.P. and the managing member
of Argentum Partners II, L.L.C., which in turn is general partner of Argentum
Capital Partners II, L.P. Mr. Raynor is also the chairman of B.R. Associates,
Inc., which is the general partner of Argentum Capital
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Partners, L.P. Mr. Raynor had voting and investment control over Guarantee &
Trust Co., TTEE Daniel Raynor, which was his individual retirement account, and
has voting and investment control over CGM IRA Custodian FBO Daniel Raynor,
which is his current individual retirement account and which now holds the
consideration received by TTEE Daniel Raynor GTC IRA under the stock purchase
agreement. Because of these relationships Mr. Raynor may be deemed to have had
direct and indirect material interests in the acquisition.
Mr. Gardner is a director of Blue Chip Venture Company, Ltd., which is
the general partner of Blue Chip Capital Fund IV Limited Partnership, which was
a selling stockholder in the acquisition. Because of these relationships Mr.
Gardner may be deemed to have had an indirect material interest in the
acquisition.
Mr. Koulogeorge was a selling stockholder in the acquisition and is the
managing member of First Analysis Management Company IV L.L.C., which in turn is
the general partner of Productivity Fund IV Advisors Fund, L.P. and Productivity
Fund IV, L.P. Mr. Koulogeorge was also the managing director of First Analysis
Corporation, the managing member of First Analysis IEPEF Management Company,
III, L.L.C., which is the managing member of Infrastructure and Environmental
Private Equity Management, L.L.C., which in turn is the general partner of
Environmental & Information Technology Private Equity Fund III and
Infrastructure & Environmental Private Equity Fund III, L.P. Because of these
relationships, Mr. Koulogeorge may be deemed to have had direct and indirect
material interests in the acquisition.
Indemnification and Insurance. TCI's certificate of incorporation and
bylaws provide that it will indemnify its directors and executive officers to
the fullest extent permitted by Delaware law. TCI also maintains directors' and
officers' liability insurance for the benefit of such persons. Prior to the
acquisition, TCI entered into indemnification agreements with each of the
following directors and executive officers: Mark Koulogeorge, Daniel Raynor,
Todd G. Gardner, James E. Houlihan, III, David R. Butler, Stephen P. DeSantis
and Lance C. Jacobs. The purpose of these agreements was to provide an
additional layer of protection to the directors and certain executive officers
of TCI prior to the merger. Under the indemnification agreements, TCI has agreed
to indemnify the named director or executive officer to the fullest extent
permitted by law if such director or officer becomes a party to or witness or
other participant in any threatened, pending or completed action, suit,
proceeding or alternative dispute resolution mechanism, or any hearing, inquiry
or investigation that such director or officer believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other by reason of (or arising in part out of) any event or occurrence related
to the fact that such director or officer is or was or may be deemed a director,
officer, stockholder, employee, controlling person, agent or fiduciary of TCI.
See also "THE MERGER AGREEMENT-Indemnification."
Intent to Vote; Recommendations
Intent to Vote.
o To TCI's knowledge, Retalix and each of TCI's executive officers
and directors intend to vote all shares of TCI stock they
beneficially own, or have proxy authority to vote, in favor of
the merger agreement.
o The TCI board unanimously recommends that you vote FOR the
merger agreement.
Estimated Fees and Expenses of the Merger
Whether or not the merger is completed, all fees and expenses incurred
in connection with the merger will generally be paid by the party incurring
those fees and expenses, except that Retalix has agreed to cover the first
$150,000 of TCI's legal and other expenses incurred in connection with the
merger. All expenses incurred by TCI in connection with the merger above
$150,000 will be deducted from the funds held in escrow and thus will reduce the
funds payable to the selling stockholders under the first step stock purchase.
Any such expenses will not be deducted from the merger consideration payable to
the public stockholders. See "THE MERGER AGREEMENT--Expenses." The estimated
total fees and expenses to be incurred by TCI in connection with the merger are
as follows:
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Description Amount Responsible Party
- ----------- ------ -----------------
Legal fees and expenses.................. $225,000.00 TCI/Retalix
Depositary fees and expenses............. $26,500.00 TCI/Retalix
Securities and Exchange Commission
filing fee............................. $514.19 TCI/Retalix
Printing and mailing costs............... $17,000.00 TCI/Retalix
Miscellaneous expenses................... $2,500.00 TCI/Retalix
TOTAL.................................... $271,514.14
Except as set forth herein, neither TCI nor Retalix will pay any fees or
commission to any broker, dealer or other person for soliciting proxies pursuant
to the merger. TCI has retained American Stock Transfer and Trust Company to act
as depositary in connection with the merger. The depositary will receive
reasonable and customary compensation for its services in connection with the
merger, plus reimbursement for out-of-pocket expenses, and TCI will indemnify it
against certain liabilities and expenses in connection therewith, including
liabilities under the federal securities laws.
Legal fees and other expenses incurred by or on behalf of TCI and
Retalix and their affiliates in connection with the merger will be paid by the
party incurring the expense, subject to the agreement by Retalix to cover the
first $150,000 of expenses as noted above.
The expense of soliciting proxies from stockholders as well as preparing
and mailing the notice of special meeting, the proxy statement and the proxy
card will be paid by TCI.
Appraisal Rights
If the merger is completed, holders of the stock of TCI who follow the
procedures set forth below will be entitled to appraisal rights under Section
262 of the Delaware General Corporation Law.
Delaware law entitles the holders of record of shares of TCI stock who
follow the procedures specified in Section 262 of the Delaware General
Corporation Law to have their shares appraised by the Delaware Court of Chancery
and to receive the "fair value" of those shares, without taking into account the
merger, as determined by the court. The "fair value" could be greater than, less
than or the same as the merger consideration offered by Retalix.
In order to exercise these rights, a stockholder must demand and perfect
the rights in accordance with Section 262. The following is a summary of the
material provisions of Section 262, a copy of which is attached as Appendix D to
this proxy statement. Stockholders should carefully review Section 262 as well
as the information discussed below.
Any stockholder who wishes to exercise appraisal rights under Section
262 must do all of the following:
o The stockholder must deliver to TCI a written demand for
appraisal of shares of the TCI stock held, which demand must
reasonably inform TCI of the identity of the stockholder and the
demand appraisal, before the vote is taken on the merger
agreement at the special meeting. This written demand for
appraisal must be in addition to, and separate from, any proxy
or vote against the merger agreement. Voting against, abstaining
from voting or failing to vote on the merger agreement will not
constitute a valid demand for appraisal within the meaning of
Section 262.
o The stockholder must not vote in favor of adopting the merger
agreement. Failing to vote or abstaining from voting will
satisfy this requirement. However, a vote in favor of the merger
agreement, by proxy or in person, or the return of a signed
proxy that does not specify an abstention or a vote against
adoption of the merger agreement, will constitute a vote in
favor of the merger agreement and thereby waive the
stockholder's right of appraisal and nullify any previously
delivered written demand for appraisal.
o The stockholder must continuously hold the shares of record
until the completion of the merger.
All written demands for appraisal must be addressed to TCI Solutions,
Inc., 17752 Skypark Circle, Suite 160, Irvine, California 92614, Attention:
Investor Relations, and be received before the vote is taken on the merger
agreement at the special meeting. The demand must reasonably inform TCI of the
identity of the stockholder and that the stockholder is demanding appraisal of
his, her or its shares of TCI stock.
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The written demand for appraisal must be executed by or for the record
holder of shares of the TCI stock, fully and correctly, as the holder's name
appears on the certificate(s) for their shares. If the shares of TCI stock are
owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, execution of the demand must be made in that capacity, and if the
shares are owned of record by more than one person, such as in a joint tenancy
or tenancy in common, the demand must be executed by or for all joint owners. An
authorized agent, including one of two or more joint owners, may execute the
demand for appraisal for a holder of record; however, the agent must identify
the record owner(s) and expressly disclose the fact that, in executing the
demand, the agent is acting as agent for the record owner(s).
A beneficial owner of shares of the TCI stock held in "street name" who
desires appraisal should take such actions as may be necessary to ensure that a
timely and proper demand for appraisal is made by the record holder of the
shares. Shares of TCI stock held through brokerage firms, banks and other
nominee holders are frequently deposited with and held of record in the name of
a nominee of a central security depository such as Cede & Co. Any beneficial
owner desiring appraisal who holds shares of stock through a nominee holder is
responsible for ensuring that the demand for appraisal is timely made by the
record holder. The beneficial holder of the shares should instruct the nominee
holder that the demand for appraisal should be made by the record holder of the
shares which may be the nominee of a central security depository if the shares
have been so deposited.
A record holder, such as a bank broker, fiduciary, depository or other
nominee, who holds shares of the TCI stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of the shares as to which the person is the record owner. In
that case, the written demand must set forth the number of shares of TCI stock
covered by the demand. Where the number of shares is not expressly stated, the
demand will be presumed to cover all shares of TCI stock outstanding in the name
of the record owner.
Within ten days after the merger, TCI will give written notice of the
date of the completion of the merger to each stockholder of TCI who has properly
demanded appraisal and satisfied the requirements of Section 262, referred to as
a dissenting stockholder. Within 120 days after the completion of the merger,
TCI or any dissenting stockholder may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of TCI stock
that are held by all dissenting stockholders. TCI is under no obligation, and
has no present intention, to file such a petition. Accordingly, it is the
obligation of the stockholders of TCI seeking appraisal rights to initiate all
necessary actions to perfect appraisal rights within the time prescribed by
Section 262.
If a petition for appraisal is timely filed, the court will determine
which stockholders are entitled to appraisal rights and will determine the fair
value of the shares of TCI stock held by dissenting stockholders, exclusive of
any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, if any, to be paid on the amount
determined to be fair value. In determining fair value, the court shall take
into account all relevant factors. The Delaware Supreme Court has stated, among
other things, that "proof of value by any techniques or methods which are
generally acceptable in the financial community and otherwise admissible in
court" should be considered in an appraisal proceeding. In addition, Delaware
courts have decided that the statutory appraisal remedy may or may not be,
depending on the factual circumstances, the stockholder's exclusive remedy in
connection with transactions such as the merger. The court may determine fair
value to be more than, less than or equal to the consideration that the
dissenting stockholder would otherwise be entitled to receive pursuant to the
merger agreement. If a petition for appraisal is not timely filed, then the
right to an appraisal will cease. The costs of the appraisal proceeding shall be
determined by the court and taxed against the parties as the court determines to
be equitable under the circumstances. Upon application of a stockholder, the
court may order all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including reasonable attorneys' fees
and the fees and expenses of experts, to be charged pro rata against the value
of all shares of TCI stock entitled to appraisal.
From and after the completion of the merger, no dissenting stockholder
shall have any rights of a stockholder with respect to that holder's shares for
any purpose, except to receive payment of fair value and to receive payment of
dividends or other distributions, including the special distribution, on the
holder's shares of TCI stock, if any, payable to the stockholders of TCI of
record as of a time prior to the completion of the merger. If a dissenting
stockholder delivers to the surviving company a written withdrawal of the demand
for an appraisal within 60 days after the completion of the merger or
subsequently with the written approval of the surviving company, or, if no
petition for appraisal is filed within 120 days after the completion of the
merger, then the right of that dissenting stockholder to an appraisal will cease
and the dissenting stockholder will be entitled to receive only the merger
consideration. Once a petition for appraisal is filed with the Delaware court,
the appraisal proceeding may not be dismissed as to any stockholder without the
approval of the court.
There are no provisions made by TCI to grant unaffiliated security
holders access to the corporate files of TCI or to obtain counsel or appraisal
services at the expense of TCI or Retalix or its subsidiaries.
If you wish to exercise your appraisal rights, you must not vote in
favor of the merger agreement and you must strictly comply with the procedures
set forth in Section 262 of the Delaware General Corporation Law. If you fail to
take
38
any required step in connection with the exercise of appraisal rights, it will
result in the termination or waiver of these rights.
Material U.S. Federal Income Tax Consequences
TCI. The following is a summary of certain United States federal income
tax consequences of the acquisition relevant to beneficial holders of TCI stock
whose shares are converted into cash in the merger and who did not either
already own Retalix ordinary shares (directly or by attribution) or acquire
Retalix ordinary shares pursuant to the stock purchase agreement, in which case
special tax rules may apply. The discussion is for general information only and
does not purport to consider all aspects of federal income taxation that might
be relevant to beneficial holders of TCI stock. The discussion is based on
current provisions of the Internal Revenue Code of 1986 (the "Code"), existing,
proposed and temporary regulations promulgated thereunder, rulings,
administrative pronouncements and judicial decisions, changes to which could
materially affect the tax consequences described herein and could be made on a
retroactive basis. The discussion applies only to beneficial holders of TCI
stock in whose hands shares are capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986 and may not apply to beneficial
holders who acquired their shares pursuant to the exercise of employee stock
options or other compensation arrangements with TCI or who are subject to
special tax treatment under the Internal Revenue Code of 1986 (such as dealers
in securities, insurance companies, other financial institutions, regulated
investment companies and tax-exempt entities). In addition, this discussion does
not discuss the federal income tax consequences to a beneficial holder of TCI
stock who, for United States federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership or a foreign
estate or trust, nor does it consider the effect of any state, local or foreign
tax laws. We do not expect either the stock purchase or the mergers to result in
the recognition of taxable gain or loss for TCI.
The April 1, 2005 stock purchase and the merger, viewed together, should
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
This means that for tax purposes, all of the stockholders of TCI, both
institutional and public, will be treated equally, but the form of consideration
received (either stock or cash), will be treated differently for tax purposes.
The receipt of Retalix ordinary shares in exchange for TCI stock should not
result in the recognition of taxable gain or loss for the selling stockholders.
However, any cash payments received in exchange for TCI stock by any stockholder
of TCI, including selling stockholders and public stockholders, pursuant to the
merger and the stock purchase will result in the recognition of gain or loss
measured by the difference, if any, between the amount of cash received and the
beneficial holder's adjusted tax basis in the shares surrendered for cash
pursuant to the merger or the stock purchase agreement, as applicable. Gain or
loss will be determined separately for each block of shares (i.e., shares
acquired at the same cost in a single transaction) surrendered for cash pursuant
to the merger. Such gain or loss will be long-term capital gain or loss provided
that a beneficial holder's holding period for such shares is more than 12 months
at the time of completion of the merger, as the case may be. This difference in
tax treatment depending on whether the consideration received consisted of (i)
Retalix ordinary shares and cash (in the case of the selling stockholders) or
(ii) solely cash (in the case of public stockholders) was not the reason the
board undertook this transaction at this time. See "SPECIAL FACTORS - Background
of the Merger" and "SPECIAL FACTORS - Position of TCI as to the Fairness of the
Merger."
Because individual circumstances may differ, each beneficial holder of
shares is urged to consult such beneficial holder's own tax advisor as to the
particular tax consequences to such beneficial holder of the merger, including
the application and effect of state, local and other tax laws.
Retalix, Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC. We do
not expect either the stock purchase or the mergers to result in the recognition
of taxable gain or loss for Retalix, Retalix Holdings Inc., RTLX LLC or Survivor
RTLX LLC.
Certain Legal Matters
General. Except as described in this section, neither TCI nor Retalix is
aware of any license or regulatory permit that appears to be material to the
business of TCI that might be adversely affected by the merger, nor are they
aware of any approval or other action by a domestic or foreign governmental,
administrative or regulatory agency or authority required for the merger to
occur that is not described in this proxy statement. Should any such approval or
other action be required, Retalix and TCI presently contemplate that such
approval or other action will be sought, except as described below under State
Anti-Takeover Statutes. While Retalix does not presently intend to delay the
merger pending the outcome of any such matter (unless otherwise described in
this proxy statement), there can be no assurance:
o that any such approval or other action, if needed, would be
obtained or would be obtained without substantial conditions;
o that failure to obtain the approval or other action might not
result in consequences adverse to TCI's business; or
o that there might be conditions to obtaining a required approval
or action, including, without limitation, the divestiture of
certain parts of TCI's business.
See "THE MERGER AGREEMENT-Conditions to the Merger," below, for certain
conditions to the merger, including conditions with respect to governmental
actions.
39
State Anti-Takeover Statutes. A number of states have adopted laws and
regulations that purport to apply to attempts to acquire corporations that are
incorporated in those states, or whose business operations have substantial
economic effects in those states, or which have substantial assets, security
holders, employees, principal executive offices or principal places of business
in such states. In 1982, in Edgar v. MITE Corp., the Supreme Court of the United
States invalidated on constitutional grounds the Illinois Business Takeover
statute, which, as a matter of state securities law, made certain corporate
acquisitions more difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of
America, the Supreme Court held that the State of Indiana may, as a matter of
corporate law and in particular with respect to those aspects of corporate law
concerning corporate governance, constitutionally disqualify a potential
acquirer from voting on the affairs of a target corporation without the prior
approval of the remaining stockholders. The state law before the Supreme Court
was by its terms applicable only to corporations that had a substantial number
of stockholders in the state and were incorporated there.
Regulatory Filings and Approvals
TCI does not believe that any material federal or state regulatory
approvals, filings or notices are required by it in connection with the merger,
except for the filing of this proxy statement and a Schedule 13E-3 with the
Securities and Exchange Commission and a filing of a certificate of merger with
the Delaware Secretary of State.
40
THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement
not discussed elsewhere in this proxy statement. The merger agreement is
attached as Appendix A hereto and is incorporated herein by this reference. The
merger agreement may be examined and copies may be obtained in the manner and at
the places set forth in the sections entitled "OTHER MATTERS--Available
Information" and "OTHER MATTERS--Information Incorporated by Reference."
Representations and Warranties
In the merger agreement, TCI has made customary representations and
warranties with respect to, among other things:
o corporate existence and power;
o corporate authorizations;
o the accuracy of information supplied to the Securities and
Exchange Commission in connection with the merger; and
o receipt of the opinion of The Mentor Group to the effect that,
as of the date of such opinion, the consideration to be received
by the holders of TCI stock in the merger is fair from a
financial point of view to the holders of TCI common stock, and
delivery of such opinion to Retalix.
Each of Retalix, Retalix Holdings Inc., Survivor RTLX LLC and RTLX LLC
has made customary representations and warranties with respect to, among other
things:
o corporate or limited liability company existence and power; and
o corporate or limited liability company authorizations.
Conditions to the Merger
The respective obligations of Retalix and its subsidiaries and TCI to
effect the merger are subject to the satisfaction or valid waiver of each of the
following conditions:
o approval by holders of a majority of outstanding common stock
and preferred stock of TCI (voting on an
as-converted-to-common-stock basis);
o no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the
completion of the merger; and
o the parties shall have performed in all material respects all of
their obligations and shall have delivered to each other
certificates signed by appropriate officers confirming such
compliance.
Amendments
The merger agreement may be amended only by an instrument in writing
signed by Retalix and TCI stating that it constitutes an amendment to the merger
agreement.
Waiver
Retalix may, with respect to TCI or any stockholder of TCI, and TCI may,
with respect to Retalix, Retalix Holdings Inc., RTLX LLC or Survivor RTLX LLC
(a) extend the time for the performance of any of its obligations or other acts,
(b) waive any inaccuracies in its representations and warranties contained
herein or in any document delivered pursuant hereto or (c) waive compliance with
any of its agreements or conditions contained herein. Any such extension or
waiver shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.
41
Options and Warrants
Each TCI stock option was cancelled upon the closing of the stock
purchase agreement. Pursuant to the merger agreement, TCI shall cause each
warrant outstanding at the effective time of the merger to terminate without
liability to Retalix and its subsidiaries.
Interim Operations
Pursuant to the merger agreement, during the period from the date of the
merger agreement to the effective time of the merger, TCI has agreed that it
shall conduct its business in the ordinary course consistent with past practices
and shall use its best efforts to preserve intact its business organization and
relationships with third parties and to keep available the services of its
present officers and employees. During such period, TCI has agreed not to take
any of the following actions:
o adopt or propose any change in its corporate charter or bylaws;
o merge or consolidate with any other person or acquire a material
amount of assets of any other person;
o sell, lease, license, mortgage, encumber or otherwise dispose of
any material assets or property except (i) pursuant to existing
contracts or commitments and (ii) in the ordinary course
consistent with past practices;
o effect any direct or indirect redemption, purchase or other
acquisition of any securities of TCI, or declare, set aside or
pay any dividend or make any other distribution of assets of any
kind whatsoever with respect to any securities of TCI;
o issue any securities of TCI or amend any term of any TCI option
plan or any outstanding option;
o incur any indebtedness for money borrowed or guarantee any
indebtedness of any other person or release or cancel any
material indebtedness or claim;
o settle any claim, action or proceeding, except in the ordinary
course of business consistent with prior practice;
o agree or commit to do any of the foregoing; or
o during such time as Retalix's or Retalix Holdings Inc.'s
affiliates do not control the TCI board of directors, TCI will
not (i) take or agree or commit to take any action that would
make any representation and warranty made by TCI under the
merger agreement or by sellers under the stock purchase
agreement on the date of its execution and delivery inaccurate
in any respect at, or as of any time prior to, the effectiveness
of the merger or (ii) omit or agree or commit to omit to take
any action necessary to prevent any such representation or
warranty from being inaccurate in any respect at any such time.
Access to Information
From the date of the merger agreement until the effectiveness of the
merger, TCI shall:
o give Retalix, its counsel, financial advisors, financing
sources, auditors and other authorized representatives full
access to the offices, properties, books and records of TCI;
o furnish to Retalix, its counsel, financial advisors, auditors
and other authorized representatives such financial and
operating data and other information relating to TCI as such
persons may reasonably request; and
o instruct the employees, counsel and financial advisors of TCI to
cooperate with Retalix in its investigation of TCI.
Notices of Certain Events; Continuing Disclosure
TCI will promptly notify Retalix of:
42
o any notice or other communication from any person alleging that
the consent of such person is or may be required in connection
with the transactions contemplated by the merger agreement;
o any notice or other communication from any governmental or
regulatory agency or authority in connection with the
transactions contemplated by the merger agreement; and
o any actions, suits, claims, investigations or proceedings
commenced or, to TCI's knowledge, threatened against, or
relating to or involving or otherwise affecting TCI or that
relate to the completion of the transactions contemplated by the
merger agreement.
Until the effectiveness of the merger, TCI shall have the continuing
obligation promptly to advise Retalix with respect to any matter arising or
discovered after the execution of the merger agreement that, if existing or
known at the date of the merger agreement, would have been required to be set
forth or described in a schedule to the merger agreement, or that constitutes a
breach or prospective breach of the merger agreement by TCI.
Compensation
TCI agreed not to enter into or modify any consulting, employment or
severance contracts, increase the salaries, wage rates or fringe benefits of its
officers, directors or employees or pay bonuses or other remuneration except for
current salaries, severance and other remuneration for which TCI is obligated
under arrangements existing on the date hereof.
Consents
TCI will use commercially reasonable efforts to obtain all third party
consents required to complete the merger, and make all filings with governmental
entities, required with respect to the completion of the merger.
Stockholder Approval; Other Covenants
TCI agreed to take all action necessary in accordance with the Delaware
General Corporation Law and TCI's certificate of incorporation and bylaws to
convene the special meeting as promptly as possible to vote upon the merger
agreement. TCI also agreed to include in this proxy statement a statement that
TCI's board recommends approval and adoption of the merger agreement. TCI's
board will cause TCI to use its reasonable best efforts to solicit proxies in
favor of the adoption of the merger agreement and cause TCI to use its
reasonable best efforts to secure stockholder approval. We also agreed to
prepare and file this proxy statement at the earliest practicable date. Retalix
and TCI agreed to cooperate with each other in the preparation of this proxy
statement, and we agreed to notify Retalix of the receipt of any related
comments or requests of the Securities and Exchange Commission. We also agreed
with Retalix to promptly respond to the Securities and Exchange Commission and
give Retalix the opportunity to review our responses and to mail this proxy
statement as promptly as practicable after clearance by the Securities and
Exchange Commission.
Each of Retalix and TCI also agreed to obtain prior written agreement of
the other before disseminating any press release or other announcement
concerning the merger agreement to any third party. In addition, each of the
parties to the merger agreement agreed to use its reasonable best efforts to
cause the acquisition of preferred shares by Retalix Holdings Inc. in the first
step and the merger taken together to be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
Other Acquisition Proposals
Until the effectiveness of the merger or the merger agreement is
terminated, neither TCI nor any of its respective officers, directors,
employees, investment bankers, attorneys, accountants, consultants or other
agents or advisors may directly or indirectly, (i) solicit, initiate or
knowingly take any action to facilitate or encourage any Acquisition Proposal
(as defined below) or any inquiries or the making of any proposal that
constitutes or could reasonably be expected to lead to an acquisition proposal,
(ii) enter into, continue or participate in any discussions or negotiations
with, furnish any information relating to TCI or afford access to the business,
properties, assets, books or records of TCI to, otherwise cooperate in any way
with, or assist, participate in, facilitate or encourage any effort by any third
party to do or seek to make, or that has made an acquisition proposal, (iii)
approve, endorse or recommend any acquisition proposal or (iv) enter into any
letter of intent or similar document or any contract, agreement or commitment
contemplating or otherwise relating to any acquisition proposal.
Notwithstanding the foregoing, the TCI board, directly or indirectly
through advisors, agents or other intermediaries, may:
43
o engage in negotiations or discussions with any third party that
has made (and not withdrawn) a bona fide Acquisition Proposal
that the TCI board reasonably determines (after consultation
with TCI's financial advisor) constitutes a Superior Proposal
(as defined below);
o furnish to such third-party nonpublic information relating to
TCI or any of its subsidiaries pursuant to a confidentiality
agreement with terms no less favorable to TCI than those
contained in the existing confidentiality agreement with
Retalix;
o take and disclose to its stockholders a position contemplated by
Rules 14d-9 and 14e-2(a) under the Exchange Act or otherwise
make disclosure to them;
o following receipt of such an Acquisition Proposal, withdraw,
modify in a manner adverse to Retalix, or fail to make a
recommendation as to the advisability of the merger; and/or o
take any action ordered to be taken by TCI by any court of
competent jurisdiction if, in each case:
o neither TCI nor any representative of Company shall have
violated any of the restrictions described above under
"Stockholder Approval; Other Covenants";
o the board of TCI determines in good faith (after consultation
with its outside legal counsel) that the failure to take such
action would be reasonably likely to result in a breach of its
fiduciary obligations to TCI's stockholders under applicable
law;
o prior to furnishing any such nonpublic information to, or
entering into any such discussions with, such person or group,
TCI gives Retalix written notice of the identity of such person
or group and all of the material terms and conditions of such
Acquisition Proposal and of TCI's intention to furnish nonpublic
information to, or enter into discussions with, such person or
group, and TCI receives from such person or group an executed
confidentiality agreement containing terms at least as
restrictive with regard to TCI's confidential information as the
confidentiality agreement executed with Retalix;
o gives Retalix prompt advance notice of its intent to furnish
such nonpublic information or enter into such discussions (which
notice shall in no event be given less than one business day
prior to furnishing such information or entering into such
discussions); and
o contemporaneously with furnishing any such nonpublic information
to such person or group, TCI furnishes such nonpublic
information to Retalix (to the extent such nonpublic information
has not been previously furnished by TCI to Retalix).
TCI agreed to immediately cease any and all existing activities,
discussions or negotiations with any parties conducted before the execution of
the merger agreement with respect to any Acquisition Proposal, and to use its
reasonable best efforts to cause any such parties in possession of confidential
information about TCI that was furnished by or on behalf of TCI to return or
destroy all such information in the possession of any such party or in the
possession of any agent or advisor of any such party.
In addition to the obligations of TCI set forth above, TCI as promptly
as reasonably practicable agreed to advise Retalix orally and in writing of any
Acquisition Proposal, or any inquiry with respect to or which TCI reasonably
should believe would lead to any Acquisition Proposal, the material terms and
conditions of such Acquisition Proposal or inquiry, and the identity of the
person or group making any such Acquisition Proposal or inquiry. TCI agreed to
keep Retalix informed as promptly as reasonably practicable of any amendments of
any such Acquisition Proposal or inquiry.
An "Acquisition Proposal" means any written offer or proposal by a third
party, other than Retalix, Retalix Holdings Inc., Survivor RTLX LLC and RTLX LLC
or any affiliate thereof, relating to any of the following:
o any acquisition or purchase from TCI by any person or "group"
(as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) of more than a 15% interest in
the outstanding voting securities of TCI or any tender offer or
exchange offer that if completed would result in any person or
"group" (as defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) beneficially owning 15% or
more of the outstanding voting securities of TCI or any merger,
consolidation, business combination or similar transaction
44
involving TCI pursuant to which the stockholders of TCI
immediately preceding such transaction would hold less than 85%
of the equity interests in the surviving or resulting entity of
such transaction;
o any sale, lease, exchange, transfer, license, acquisition, or
disposition of more than 15% of the consolidated assets of TCI;
o any liquidation or dissolution of TCI; or
o any other transaction the completion of which would or could
reasonably be expected to impede, interfere with, prevent or
materially delay the completion of the transactions contemplated
by the merger agreement.
Confidentiality
Prior to the effectiveness of the merger and after any termination of
the merger agreement, TCI and Retalix and its subsidiaries agreed to hold, and
to use their best efforts to cause their respective affiliates, officers,
directors, employees, accountants, counsel, consultants, advisors and agents to
hold, in confidence, unless compelled to disclose by judicial or administrative
process or by other requirements of law, all confidential documents and
information concerning one party furnished to the other parties or their
affiliates (and their respective advisors) in connection with the transactions
contemplated by the merger agreement, subject to certain exceptions.
If the merger agreement is terminated, each party has agreed to and will
use their best efforts to cause their respective affiliates, officers,
directors, employees, accountants, counsel, consultants, advisors and agents to,
destroy or deliver to the other, upon request, all tangible documents and other
materials, and all copies thereof, obtained by such parties or their affiliates
or on their behalf concerning the other party in connection with the merger
agreement that are subject to such confidence.
Indemnification
The merger agreement provides that, at all times after the effectiveness
of the merger, the surviving entity shall fulfill and honor the obligations of
TCI pursuant to the indemnification provisions in TCI's certificate of
incorporation and bylaws existing as in effect on the date hereof with respect
to TCI's directors and officers.
Vote
At the stockholder meeting of TCI, Retalix Holdings Inc. has agreed to
vote all of its capital stock in favor of the merger.
Termination
The merger agreement may be terminated and the merger may be abandoned
at any time prior to the effective time of the merger, whether before or after
the stockholders have adopted the merger agreement:
o By mutual written consent of TCI, the Sellers' Committee (as
defined therein) and Retalix;
o By either Retalix or TCI, if any court of competent jurisdiction
or any state or federal governing body has issued a final and
non-appealable order, decree or ruling or taken any other action
restraining or otherwise prohibiting the merger; or
o By TCI, if, prior to the adoption of the merger agreement at the
stockholders' meeting of TCI, the board of TCI shall have
approved, and TCI shall enter into, a letter of intent, term
sheet or a definitive agreement providing for the implementation
of a Superior Proposal; but only if prior to termination by TCI:
o TCI is not then in breach of the provisions of the
merger agreement summarized under "Stockholder Approval;
Other Covenants;"
o TCI's board shall have authorized TCI, subject to
complying with the terms of the merger agreement, to
enter into a letter of intent, term sheet or definitive
agreement concerning a transaction that constitutes a
Superior Proposal and TCI shall have notified the
Retalix in writing that it intends to enter into such a
letter of intent, term sheet or definitive agreement;
45
o during the ten business day period after TCI's notice:
o TCI shall have offered to negotiate with, and,
if accepted, negotiated in good faith with,
Retalix to attempt to make such adjustments in
the terms and conditions of the merger agreement
as would enable TCI to proceed with the merger;
and
o the board of directors of TCI shall have
concluded, after considering the results of such
negotiations and the revised proposals made by
Retalix, if any, that any Superior Proposal
giving rise to TCI's notice continues to be a
Superior Proposal;
o such termination is within five business days following
the ten business day period referred to above; and
o no termination will be effective unless TCI shall
simultaneously make the payment of the termination fee
described below.
o By Retalix, if TCI's board:
o shall have withdrawn or modified in a manner adverse to
Retalix, Retalix Holdings Inc., RTLX LLC or Survivor
RTLX LLC its approval or recommendation of the merger
agreement or the transactions contemplated thereby;
o shall have recommended an Acquisition Proposal; or
o shall have adopted any resolution to effect any of the
foregoing.
A "Superior Proposal" means any bona fide, unsolicited written
Acquisition Proposal for at least a majority of the outstanding shares of TCI
stock on terms that the board of TCI determines in good faith by a majority
vote, after taking into account all the terms and conditions of the Acquisition
Proposal, are more favorable to TCI's stockholders than as provided hereunder.
Termination Fee
TCI must pay Retalix $2,000,000 if the merger agreement is terminated by
TCI or by Retalix other then in the first two situations described above under
"Termination." Any payment of this amount will be made concurrently with the
termination of the merger agreement.
Expenses
Except as disclosed in this proxy statement, each party will bear its
own costs and expenses (including legal, accounting and investment banking fees
and expenses) incurred in connection with the merger agreement and the
transactions contemplated hereby. None of the costs and expenses of TCI or
Retalix in completing the merger will reduce the merger consideration payable to
the public stockholders.
46
INFORMATION ABOUT TCI
Business
TCI is a Delaware corporation founded in 1982. We provide retailers with
enterprise solutions consisting of mission-critical software applications and
specialized professional services. Our software enables retailers to quickly and
accurately execute strategic business decisions in the areas of merchandise
planning and optimization, merchandise management and store operations. Our
architecture and enterprise data repository provide a powerful and flexible
foundation that can automate and support electronic data exchange throughout the
enterprise and retail supply chain.
Our principal corporate office is located at 17752 Skypark Circle, Suite
160, Irvine, California 92614 and our principal development and support facility
is located at 5210 E. Williams Circle, Suite 300, Tucson, Arizona 85711. Our
website address is www.tcisolutions.com, which website address is provided for
reference only and not a part of this proxy statement.
Our Evolution
From 1982 until 1995, we grew to become a leading provider of
store-level solutions to the grocery industry. In 1996, we expanded our strategy
and extended our solutions offering to include corporate headquarters. Our
strategy was to leverage our 15-year history and retail industry expertise to
develop TCI Retail(TM), a merchandising enterprise product line. TCI Retail
enables retailers to quickly and accurately execute strategic business decisions
in the areas of merchandise planning and optimization, merchandise management
and store operations.
We dedicated the next five years to creating an architecture and
enterprise data repository providing a powerful and flexible foundation that can
automate and support electronic data exchange throughout the enterprise and
supply chain. Our goal is to become the architectural hub and infrastructure
that retailers utilize to manage their enterprise technology.
For the past four years, we have continued to broaden and advance TCI
Retail with additional modules and functionality. These efforts were primarily
funded through $13.3 million of capital raised from both new and existing
investors from the sale of Series B Preferred Stock in late 2001 and early 2002.
Our historical presence has been in grocery retail. Over the next few
years, subject to the guidance and management of Retalix if the merger is
approved, we plan to continue to extend our presence in other retail segments
and solidify ourselves as one of the top retail solution providers. Our
investments will expand our core mission-critical applications in the areas of
execution, demand intelligence and collaboration.
On April 1, 2005, Retalix Ltd., through its wholly owned subsidiary
Retalix Holdings Inc., purchased substantially all of our outstanding Series A
Preferred Stock and Series B Preferred Stock for an aggregate purchase price of
$30,035,148, consisting of 715,730 ordinary shares of Retalix Ltd. valued at
$17,177,520 and $12,857,648 in cash which was paid to certain selling
stockholders pro rata. The acquisition resulted in Retalix Ltd. beneficially
owning, in excess of 73% of our outstanding voting stock (calculated on an
as-converted-to-Common-Stock basis), and specifically, 99.8% of the outstanding
Series A Preferred Stock and 95.8% of the outstanding Series B Preferred Stock.
Also on April 1, 2005, we entered into an agreement and plan of merger with
Retalix Ltd., Retalix Holdings Inc. and certain subsidiaries of Retalix Holdings
Inc. under which we would be merged with and into a subsidiary of Retalix
Holdings Inc. and all outstanding common stock and preferred stock of TCI (other
than shares held by Retalix Holdings and shares as to which appraisal rights
have been properly perfected under Delaware law) would be exchanged for cash.
Following the merger, we would cease to exist and all of our assets and
liabilities would be held by a subsidiary of Retalix Holdings Inc. The
acquisition by Retalix described above was disclosed in TCI's a current report
on Form 8-K filed with the Securities and Exchange Commission on April 5, 2005.
Principal Products and Services
We have gained recognition for providing strategic pricing and inventory
management solutions that enable grocers to increase top and bottom lines by
speeding decisions into action. Since 1998, we have developed TCI Retail(TM),
our flagship solution, which provides strategic pricing and inventory management
capabilities for headquarters (TCI HQ(TM) ) and stores (TCI Store(TM) ). TCI HQ
and TCI Store are comprehensive rules-based solutions built on TCI's Retail
Execution System(TM) (RES), a powerful and flexible foundation. Inventory
Management System (IMS), a Direct Store Delivery (DSD) software package,
originally introduced in 1983, is widely utilized by the grocery industry as the
standard in back-door-operations software. This application established us as a
leading supplier of retail management software.
By helping grocers to automate complex pricing strategies, streamline
inventory management processes, and execute consistently across the retail
enterprise - from Headquarters to the Store - we empower grocery retailers and
wholesalers to
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connect with their customers, respond rapidly to market changes and dramatically
improve customer image. Our customers gain a competitive advantage in their
markets using our strategic pricing and inventory management solutions, while
growing top-line revenues and improving chain and store profits.
TCI products are used by more than 400 chains and 15,000 installations
worldwide. TCI Retail is a market leader for strategic pricing and inventory
management solutions within grocery retail.
Retail Execution System
RES consists of an enterprise data repository on which all of our
applications reside. RES enables retailers to centrally manage a single source
of operational information, and also provides hosting, integration and
personalization tools. This infrastructure empowers retailers to rapidly respond
to changes in their competitive environments throughout their enterprise. RES
consists of:
o Foundation - Enterprise Data Repository for item, store and
vendor information, and set-up tools.
o Extensibility Package - extended feature set, Personalization
Workbench and Integration Workbench for enhancing and
personalizing the solution to meet business goals.
o Hosting Package - Store Interface Manager and Data Integration
Manager for internal and external connectivity with stores and
third-party applications.
This foundation gives grocers unprecedented business advantages and
control through a flexible development platform and powerful options for
integration and customization.
TCI Retail
TCI Retail(TM) consists of RES' powerful foundation and solution
packages that can be implemented at headquarters (TCI HQ) or store-level (TCI
Store). TCI Store and HQ both provide full-function solution modules that enable
retail chains to quickly execute strategic business decisions, from headquarters
to the store level. Solution sets can be implemented as packages, individually
or as complements to existing systems.
TCI HQ
TCI HQ(TM) is a merchandise management system that provides centralized
pricing, promotion and inventory management solution for retail chain
headquarters. It controls data through its single enterprise data repository,
automates business processes through its powerful pricing engine and executes
changes throughout the organization. The system centralizes item/vendor
maintenance for all stores and serves as the collection point for all inventory
and product movement details. It provides capabilities that help grocers to
improve their top and bottom lines through:
o Central control of item, vendor, and store information.
o Automated price generation to protect costs and improve focus on
sensitive items.
o Management of business processes.
o Execution of price changes throughout the organization.
o Lowering of overhead through automation.
TCI Store
TCI Store(TM) is a store operations and merchandising execution system
that provides complete direct store delivery (DSD), price management and
inventory control solution for grocery stores. Its capabilities help improve
profitability through:
o Improved price accuracy.
o Consistent price image.
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o Higher margins.
o Greater vendor and merchandise delivery control.
o Reduced labor needed to manage store-level inventory and
pricing.
Solution Packages
Pricing Package
Our Pricing Package is a complete solution for executing and managing
pricing strategies, designed specifically for the grocery retail industry. Its
capabilities help grocers control critical item, vendor and store information,
establish and maintain a consistent price image, automate processes and
execution of price changes to stores, reduce overhead, improve profit margins,
better serve customers and gain a competitive advantage. We offer the following
Pricing Modules:
o Price Generation module enables grocers to establish and manage
pricing rules and executes approved pricing changes throughout
the enterprise. Its powerful rules-based engine automates
process, eliminating paperwork and manual processes, reducing
data errors and lower staff time needed to maintain prices.
o Spread/Parity Pricing module enables grocers to create business
objective-based rules for aligning the retail prices of like
items, including generic (store) brands, national brands,
competitive brands and items available in various units of
measure.
o Competitive Pricing module automates and institutionalizes
competitive pricing philosophies, including the ability to
develop pricing objectives by store, region, zone and market.
The Competitive Pricing module utilizes offline handheld
PDA-style units for collecting and downloading a competitive
item set, including price, location, price levels, comments and
other data from the competitors' stores.
o Frequent Shopper module supports a wide variety of consumer
offers used by customer loyalty and promotional programs. It
supports multiple offer criteria and sophisticated offer
management capabilities.
o Inventory Sensitive Pricing (ISP) module positively impacts
item-level profitability and inventory control through lower
inventory costs, increased product movement and higher revenue
by managing product price point. This module supports
development of store-level item pricing strategies based on
pre-defined inventory levels (at each store). It automatically
adjusts item pricing, margins and promotional programs based on
the inventory quantity on hand. These capabilities remove the
barriers to getting timely information and reports so that new
programs can be evaluated and updated quickly.
Inventory Package
Our Inventory Package is a complete solution for managing inventory -
from back door receiving to front end ordering. Its capabilities help grocers
maintain optimal stock levels, reduce out-of-stocks, speed the replenishment
process, reduce overhead and maximize item-level profitability. We offer the
following Inventory modules:
o Receivers, POS, Transfers module allows retailers to create
orders, receive product to store inventory and transfer product
to/from store inventory.
o Perpetual Inventory module helps grocers gain a competitive
advantage with balanced inventory costs and movement. It is a
complete solution for managing inventory, including tracking
receipts, sales, and other factors that affect the on-hand
balance of a store's merchandise.
o Computer Assisted Ordering (CAO) module increases sales through
efficient and effective retail-level replenishment. CAO helps
keep inventory from falling below user-defined levels by
creating vendor- and store-specific purchase orders whenever
inventory reaches the established reorder point. It
automatically generates suggested orders based on safety stock
levels and expedites orders for very low stock levels.
o Store Ordering module provides item information and the ability
to generate vendor orders. It streamlines back door operations
and helps achieve total store automation through wireless access
to real-time inventory data.
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Promotions Package
Our Promotions Package is a comprehensive solution for managing,
executing and analyzing promotions. Its capabilities help grocers to develop
profitable promotional programs and quickly and accurately execute promotional
prices throughout the enterprise. We offer the following Promotions modules:
o Promotions Management module lets grocers plan and execute
promotions on a chain-wide basis, by store groups or individual
stores.
o Electronic Marketing module enables retailers to develop
targeted promotions for implementing conditional deals for
individual customers or groups. It supports very powerful,
complex promotions that can result in increased shopper loyalty.
Store Operations Support Package
Our Store Operations Support Package manages in-store peripheral systems
and departments. It ensures data consistency and integrity chainwide. Fully
integrated with the enterprise data repository, Store Operations modules allow
grocers to easily manage all item, vendor and store information throughout their
chains, regardless of the number and type of in-store systems in use. We offer
the following Store Operations Support modules:
o Scale Management module ensures product and pricing data
integrity by simplifying the management of scale item data and
execution of data directly to the scales. It supports a wide
variety of scale hardware and all data elements including
nutritional labeling and safe handling messages for weighed
items.
o Signs and Label Management module is a complete sign and label
solution. It provides a wide variety of label forms, support
custom templates, ad-hoc signs and labels.
o POS eXchange module delivers unmatched integration and data
management capabilities, interfacing with virtually any
point-of-sale (POS) system and application versions available in
the market today, as well as POS systems that have been around a
while. It enables grocers to manage POS system data quickly,
accurately and easily, ensuring price integrity and margin
protection.
TCI thinStore(TM)
TCI thinStore, a recently developed extension of TCI Retail(TM), is an
inventory and price management solution that uses web and wireless technologies
to streamline the execution of critical store-level business operations. It is a
browser-based solution designed to centralize store operations on a single,
integrated database and streamline the execution of mission-critical store
tasks, including: ordering, receiving, shelf price audits and exception-based
price changes.
By removing the burden of information and computer technology from
stores and by simplifying the ways in which tasks are executed, thinStore gives
grocery chains:
o greater control over pricing and inventory strategies by
centralizing data and business processes
o reduced overhead by reducing the IT support and training burden
at the stores
o improved focus of store personnel on customer service - a
chain's competitive advantage - by eliminating paper-work and
system operations
TCI Store(TM)
TCI Store is a packaged pricing and inventory management offering
designed to meet the needs of North America's more than 12,000 small grocery
chains and independents. Packaged versions of TCI Retail, these are scaled-down,
bundled solutions that enable small and medium food retailers to manage and
execute pricing and inventory management programs at headquarters and stores.
This solution is marketed through our reseller channel, and is designed as a
Global Trade Item Number (GTIN) compliant solution that allows retailers to
control operational costs so they can successfully compete with industry giants
without the high implementation, training and maintenance costs associated with
major system installations and integration efforts. We offer the following TCI
Store packages:
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o Store Pricing provides basic store-level pricing capabilities,
including POS connectivity, shelf price audit functionality.
o Store Standard offers store-level pricing, Direct Store Delivery
(DSD) receiving capabilities and wholesaler interface.
o Store Plus offers store-level pricing, DSD receiving, a
wholesaler interface, signs/labels and category analyzer for
sales and profitability reporting.
o Store HQ Standard offers centralized price management, hosting
item files to stores, reporting capabilities, a wholesaler
interface and personalization and integration tools.
Services
Our Professional Services organization deploys a methodology and
practice proven in grocery retail. Our expertise covers both functional needs
such as price strategy, price audit, inventory management and store receiving,
as well as technical needs, specifically the integration of our technology into
the customer's complex IT environment. Our professional services group consists
of business consultants, system analysts and technical personnel with extensive
retail industry, implementation and integration expertise. Our professional
services group assists our customers in all phases of systems implementation,
including assisting customers with business process change, project management,
system planning, design, data conversion, training, education, business
implementation and product support. This variety of implementation services is
designed to maximize our customer's return on software investment along with
educational and training programs for our clients, associates and business
partners. Professional services are billed on an hourly basis. From time to
time, we augment our services with third-party system integrator alliances. The
benefit of our wide-ranging skill sets is assisting our clients in completing a
quality installation within budget and on time.
Customer Support and Maintenance Services
Our customer support and maintenance services agreement includes
telephone support for problem identification and resolution assistance, email
support and the right to receive unspecified new product releases. The vast
majority of our clients have typically participated in our client support and
maintenance program.
Market Background
Retail is an industry where chains face constant pressure from
demographic, economic, competitive, regulatory and technology factors. It is a
highly competitive market, particularly for supermarkets, who face increasing
competition from non-traditional retailers, like drug stores, dollar stores,
convenience stores, restaurants, and of course, Wal-Mart. Price pressures and
consumers' heightened demand for value, convenience and services are key
factors.
As technology usage continues to become pervasive in society, new
capabilities and emerging technologies are creating expectations of efficiency
for retailers, and the role of information technology is shifting to that of a
differentiator and profit-enhancer instead of a general and administrative cost.
There has historically been no packaged merchandising solution that
meets the specific functional, volume and infrastructure needs of the grocery
industry. Grocers rely on technology infrastructures that consist of many legacy
solutions, silo applications and manual/duplicate processes which require
extensive support, resources and integration. They require applications that
interface not only with wholesalers/suppliers and other corporate systems, but
with a huge number of in-store devices such as POS, scales, labels and signs.
Grocers also process, store and communicate tremendous volumes of data, placing
a large burden on these aging and un-integrated systems.
Our solutions are designed to provide a strong foundation and full
retail pricing and inventory management capabilities to the grocery industry. In
the current environment of multiple un-integrated point solutions, retailers are
trying to manage many silos and versions of information throughout their
organization. We utilize a phased approach to provide a single, centralized
database on which rules-based pricing and inventory management applications can
operate.
TCI Retail(TM) is a solution that addresses this opportunity and
delivers to the market, an enterprise-wide packaged solution that meets
infrastructure, pricing and inventory requirements. In equipping retailers with
quality solutions, we have spent $4.0 million during 2003 and $3.5 million
during 2004 on internally sponsored research and development activities. Since
the introduction of TCI Retail in 1996, we have invested approximately $29.3
million in developing our solutions.
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Markets
We market our solutions to retailers both domestically and
internationally. To date, the majority of our sales have occurred domestically
in the United States markets. In 2004, domestic sales accounted for 87.8% of
total revenue, with the remaining 12.2% from international sales. Our primary
domestic market is within the retail and wholesale grocery industry.
Internationally, we service customers in Canada and Latin America.
Distribution
TCI Retail(TM) is marketed to mid-size and large domestic and
international retail chains through our direct sales force. To address the
independent / smaller chains, we have introduced TCI Store(TM), a packaged
solution designed to meet the needs of these retailers. This solution will be
primarily distributed through our reseller network and point-of-sale dealers
nationwide.
Services are usually distributed in conjunction with the delivery of our
software solutions. These services often involve consultation, project
management, implementation and training. From time to time, we partner with
third-party integration firms to assist in the delivery of our services.
Competition
The retail technology market is highly competitive. We enjoy a
leadership position with TCI's solutions in use by more than 400 chains, with
more than 15,000 installations worldwide. We believe that our ability to compete
depends on many factors within and beyond our control including:
o Full-function capabilities that meet the specific pricing and
inventory management requirements of the grocery industry;
o Breadth of pricing and inventory management functionality as
compared to our competitors, many of whom are marketing general
merchandise solutions to the grocery industry;
o Industry knowledge, presence and reputation;
o The quality of our customer support and implementation services;
and
o The effectiveness of our sales and marketing efforts.
We experience competitive pressures from a different set of vendors for
headquarters and store applications. Additionally, there are several consulting
companies offering competing professional services.
Our headquarters applications compete with internally developed systems
and with other software companies such as JDA Software Group, SAP, Softechnics,
Retek and Lawson. Our store solutions compete with internally developed systems
and with software companies such as Softechnics, BR Data and S4.
In the market for consulting services, we compete with leading systems
integrators that consult with our customers such as Accenture, Cap Gemini S.A.,
Ernst & Young, Deloitte & Touche and IBM Global Services.
Significant Customers
In 2003, one customer accounted for 17.3% of total revenues. In 2004,
two customers accounted for 18.0% and 10.6%, respectively, of our total
revenues. No other single customer accounted for more than 10% of 2003 or 2004
total revenues.
Proprietary Rights and Licenses
Our success and competitive position is dependent in part upon our
ability to develop and maintain the proprietary aspect of our technology. The
reverse engineering, unauthorized copying, or other misappropriation of our
technology could enable third parties to benefit from our technology without
paying for it.
We market our products under the trade name TCI Solutions. We rely on a
combination of trademark, trade secret, copyright law and contractual
restrictions to protect the proprietary aspects of our technology. We seek to
protect the source code to our software, documentation and other written
materials under trade secret and copyright laws. We also employ a variety of
52
trademarks for our products which are not registered. We rely on common law
rights to such trademarks. We do not hold any patents and rely upon a
combination of copyright and trade secret laws to establish and maintain
proprietary rights in our products. We have entered into agreements with our
employees pursuant to which all rights to software created by those employees
are transferred to us. In addition, we limit access to sensitive information
regarding our business and products. As is customary in the software industry,
we do not sell or transfer title of our software products to customers or
end-users. We provide software products to end-users under non-exclusive license
agreements solely for use in an end-user's internal operations. We rely
primarily on the contractual terms of our license agreements and electronic
software license files for the protection of our intellectual property rights.
There has been a substantial amount of litigation in the software and
internet industries regarding intellectual property rights. Although to date we
have not had to litigate to protect our intellectual property, it is possible
that in the future third-parties may claim that we or our current or potential
future software solutions infringe on their intellectual property. We expect
that software product developers and providers of electronic commerce products
will increasingly be subject to infringement claims as the number of products
and competitors in our industry grows and the functionality of products in
different industry segments overlap and the number of software patents
increases. In addition, we may find it necessary to initiate claims or
litigation against third-parties for infringement of our proprietary rights or
to protect our trade secrets. Furthermore, since we resell both software and
hardware, we may become subject to claims from third-parties that the software
or hardware, or the combination of hardware and software, infringe their
intellectual property. Although we may disclaim certain intellectual property
representations to our customers, these disclaimers are limited and may not
fully protect us against such claims. We may be more vulnerable to patent claims
since we do not have any patents that we can assert defensively against a patent
infringement claim. Any claims, with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which could
seriously harm our business, operating results and financial condition.
Environmental Matters
We are in compliance with all known federal, state and local provisions
which have been enacted or adopted relating to the protection of the
environment. Compliance with these provisions does not have any material effect
upon our capital expenditures, earnings or competitive position.
Employees
As of December 31, 2004, we had a total of 133 full-time employees
primarily based in the United States. Of the total, 29 were engaged in sales and
marketing, 58 were in professional and support services, 29 were in product
development and 17 were in administrative functions. We believe that our
relations with our employees are good. We have never had a work stoppage and
none of our employees is subject to a collective bargaining agreement. We engage
consultants when needed for software development, integration, accountants and
attorneys on a fee basis.
Properties
Our principal administrative office is located in Irvine, California
where we lease approximately 9,500 square feet of office space. Our development
and support facility is located in Tucson, Arizona where we lease approximately
28,000 square feet of office space. Additionally, we lease small regional
offices in Irving, Texas and Edmond, Oklahoma to provide customer training and
field staffing, respectively.
Properties are leased on terms for durations that are reflective of
commercial standards in the communities where the properties are located. We
believe that our existing facilities are adequate and meet our current needs. In
the event of needed expansion space, we believe that reasonable amounts of space
would be available at favorable lease terms.
Legal Proceedings
We are involved in legal proceedings and actions arising in the normal
course of business. While the results of such proceedings and actions cannot be
predicted, management believes, based on facts known to management today, that
the ultimate outcome of such proceedings and actions will not have a material
adverse effect on our financial position or results of operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Year Ended December 31, 2004
We begin this Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) for the fiscal year ended December
31, 2004 with a discussion of our overall strategy to give stockholders an
overview of the goals of
53
our business and the direction in which our business and products are moving.
The strategy section is followed by a discussion of the Critical Accounting
Estimates that we believe are important to understanding the assumptions and
judgments incorporated in our 2004 and 2003 financial statements, beginning with
an Overview. We then provide an analysis of changes in our balance sheet, income
statements and cash flows, and discuss our financial commitments in the sections
entitled "Financial Condition," "Material Commitments" and "Off-Balance-Sheet
Arrangements." We conclude this MD&A with our "Business Outlook" section wherein
we discuss the outlook for 2005. This MD&A should be read in conjunction with
the discussion of TCI's business under the caption "INFORMATION ABOUT TCI"
starting on page 46 and our financial statements for the fiscal year ended
December 31, 2004 attached as Appendix E. An MD&A section for the three and six
months ended June 30, 2005 follows and supplements this MD&A section and should
also be read in conjunction with this MD&A section and with our financial
statements for the three and six months ended June 30, 2005 attached as Appendix
F.
Forward Looking Statements. This MD&A contains forward-looking
statements which are based on our current expectations and could be affected by
uncertainties and market risk factors described throughout our public filings
with the Securities and Exchange Commission. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we can not assure you that such expectations
will occur. Our actual results may differ materially, and you should not unduly
rely on these forward-looking statements, which speak only as of the date of
this proxy statement. These forward-looking statements do not reflect the
potential impact of any business activities not completed as of the date of this
proxy statement. For example, if the merger is completed, our outlook, expected
results, future strategies and other forward looking information will change
substantially.
Our Strategy. We intend to solidify our presence in the grocery retail
and wholesale segments, broaden our product offerings with new and complimentary
products developed internally and through partnerships, and focus on the
critical elements of operational execution. Our goal is to enhance retail
operations and execution with high quality solutions to add and retain valuable
customers. Key elements of our strategy to fulfill our vision are outlined in
the points that follow:
o Operational Efficiency. We have clearly defined our business
strategy and core business activities. As a result, we have
developed an operating structure designed to boost software
license revenues and shrink operating costs in order to improve
operational efficiency and enhance customer satisfaction. The
actions we have taken include:
o Focused Market Approach. We have aligned our operational
activities and resources with the delivery of solutions
and services for the following market definitions:
o Mainstream & Enterprise Marketplace. For this
marketplace, we focus on delivering high quality,
strategic pricing and inventory management solutions
that deliver rich and flexible functionality. This
marketplace also has the following attributes:
o Retailers with greater than or equal to 10
stores
o Sophisticated functional requirements
o Sales occur primarily through our direct sales
force
o Implementations range from simplistic to
sophisticated and may be supported through
strategic implementation partners
o Small to Medium Retail Marketplace. Within this
marketplace we offer a competitively priced solution
with the benefits of pre-defined functionality, rapid
implementation and minimal support requirements.
Additionally, this marketplace has the following
characteristics:
o Retailers with less than 10 stores
o Minimal functional requirements
o Dealers are our primary sale and delivery
mechanism for product sales
o Develop and Leverage Strategic Relationships. We will
continue to establish strategic business relationships
that enhance the development of our products, the
breadth of our product offering and the delivery of
services that empower us to deliver a complete customer
solution. We believe these relationships can provide
greater market presence, greater opportunity to increase
sales, improve operational efficiencies and provide
greater access to other retail sectors and international
markets. Additionally, within our small to medium retail
marketplace, software is now primarily sold and serviced
through our reseller and point-of-sale dealer networks.
o Client Satisfaction. Since 2003 we have renewed our focus to
continually improve by developing initiatives designed to focus
the organization on delivering value to both our new and
existing customer base. These initiatives
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have resulted in and will continue to improve quality,
satisfaction and the efficiency of our customers' experience.
The initiatives we are cultivating for the benefit of our
customers are as follows:
o Product Development Process. We continue to implement
new processes for operational improvement around product
development. Initially addressing the product management
process and market requirements definition, the Product
Development Process includes formality around functional
and technical specifications. These processes and
procedures insure that we remain in touch with
delivering high quality solutions and functionality for
our customers.
o Engagement Management. Engagement Management is a
services and support initiative complete with
governances and processes that have aided in the
creation of great customer experiences both during and
beyond our software implementations. Our goal is to
optimize the project, beginning with understanding our
customer's expectations. Engagement management
transcends the services implementation and improves the
depth of our win-win customer relationships.
o Fast Track Implementations. Fast-Track is a packaged
implementation program to lower the risks of replacing
legacy pricing and hosting systems. Fast-Track is a
phased implementation of TCI's core pricing and hosting
foundation offering predefined deliverables,
installation scope and timeframe. Fast-Track provides
grocers with price management, base price generation,
hosting and store system interfaces, to systems such as
POS, and signs and labels. It also includes development
of roles-based menu templates and personalized reports,
as well as training, and pilot and go live support.
o Quality and Customer Centricity. A critical component to
our success as a developer of technology solutions
begins with listening to user concerns and understanding
customer requirements from the beginning of a
relationship. We put the customer at the center of our
organizational structure and it is very important to us
that the customer always has a single integrated view of
our company. Our quality and customer centricity
initiatives are focused on continuously improving in
these areas.
Critical Accounting Policies. The methods, estimates and judgments we
use in applying our accounting policies have an impact on the results we report
in our financial statements. Our discussion and analysis of results of
operations and financial condition are based upon financial statements that we
prepared in accordance with generally accepted accounting principles of the
United States.
We have identified the following policies as critical to the
understanding of our financial statements and results of operations. The impact
and any associated risks related to these policies on our business operations is
discussed throughout this MD&A where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to our Financial
Statements attached as Appendix E to this proxy statement. The preparation of
our financial statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The significant accounting policies which we
believe are the most critical to aid in fully understanding and evaluating our
reported financial results include the following:
Revenue recognition. Our revenue recognition policy is significant
because our revenue is a key component to our results of operations. In
addition, our revenue recognition determines the timing of certain expenses such
as commissions and royalties. We follow specific detailed guidelines in
measuring revenue; however, certain judgments affect the application of our
revenue policy.
We license software products under non-cancelable perpetual license
agreements and provide related services, including consulting and customer
support. We recognize revenue in accordance with SOP 97-2, "Software Revenue
Recognition," as amended and interpreted by SOP 98-9, "Modification of SOP
97-2," "Software Revenue Recognition," with respect to certain transactions, as
well as Technical Practice Aids issued from time to time by the American
Institute of Certified Public Accountants and Staff Accounting Bulletin No. 104,
"Revenue Recognition in Financial Statements," which provides further
interpretive guidance for public reporting companies on the recognition,
presentation and disclosure of revenue in financial statements.
Software license revenue is generally recognized when a license
agreement has been signed, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable and collection is considered reasonably assured. If a software
license contains an undelivered element, the fair value of the undelivered
element is deferred and the revenue recognized once the element is delivered.
Revenues attributable to undelivered elements, including consulting services and
post-contract support, are based on the average sales price of those elements
when sold separately. In addition, if a software license contains customer
acceptance criteria or a cancellation right, the software revenue is recognized
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upon the earlier of customer acceptance or the expiration of the acceptance
period or cancellation right. We do not offer rights of return.
Services are separately priced, are generally available from a number of
suppliers and are not essential to the functionality of our software products.
Services, which include project management, system planning, design and
implementation, customer configurations and training, are billed on an hourly
basis. Services revenue billed on an hourly basis is recognized as the work is
performed.
Customer support services include post-contract support and the rights
to unspecified upgrades and enhancements, when and if available. Maintenance
revenues from ongoing customer support services are billed on an annual basis
with the revenue being deferred and recognized ratably over the maintenance
period.
Other revenue is recognized when the third-party products have been
delivered and title has passed.
Accounts Receivable. We typically extend credit to our customers.
Payments for software licenses generally include payment terms with installments
due within six months from the date of delivery. All significant customers are
reviewed for credit worthiness before we license our software and we do not sell
our software or recognize any license revenue unless we believe that collection
is probable. Billings for customer support and professional services performed
on a time and material basis are due on net 30-day terms. We review past due
accounts and provide specific reserves based upon the information we gather from
sources including customers, subsequent cash receipts, professional services and
credit rating services such as Dunn & Bradstreet. We estimate the probability of
collection of the receivable balances and provide an allowance for doubtful
accounts based upon an evaluation of our customers' ability to pay and general
economic conditions. While our losses have historically been within our
estimates, we cannot guarantee that we will continue to experience the same
collection experience. A loss of any significant customer could have a material
adverse effect on our operations. We expect that revenues from a limited number
of new customers will continue to account for a large percentage of total
revenues in future quarters. If actual bad debts are greater than the reserves
calculated based on historical trends and known customer issues, we may be
required to record additional bad debt expense which could have a material
adverse impact on our results of operations and financial position for the
periods in which such additional expense occurs.
Goodwill. Our business combinations have resulted in goodwill. We review
the recoverability of the carrying value of goodwill on an annual basis or more
frequently when an event occurs or circumstances change to indicate that an
impairment of goodwill has possibly occurred. We compare the estimated market
value of our segments to book value to determine whether or not any potential
impairment of goodwill exists. Our estimates of market value are based on
average multiples of our public competitors, which are subject to change based
on industry, economic and business conditions. While we have not experienced
impairment of goodwill assets in prior periods, we cannot guarantee that there
will not be impairment in the future.
Income Taxes. We recognize deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance based on historical taxable
income, projected future taxable income and the expected timing of the reversals
of existing temporary differences. If we operate at a profit in the future and
generate sufficient future taxable income, we could be required to reverse the
current valuation allowance against the deferred tax assets which would result
in a substantial income tax benefit.
Overview of Significant Trends and Developments in Our Business
The Majority of Our Stock has been Acquired. On April 1, 2005, we
entered into a Stock Purchase Agreement with Retalix Ltd., an Israeli
corporation, and certain holders of our outstanding Series A Preferred Stock and
Series B Preferred Stock, pursuant to which Retalix purchased substantially all
of the our outstanding Series A Preferred Stock and Series B Preferred Stock for
an aggregate purchase price of $30,035,148, consisting of 715,730 ordinary
shares of Retalix valued at $17,177,520 and $12,857,648 in cash which was paid
to the selling stockholders pro rata. We paid to employees and directors who
held vested stock options under our stock option plans and who had tendered
options under our option exchange offer which closed in 2004, an aggregate of
$1,744,999 in cash. The acquisition resulted in Retalix beneficially owning in
excess of 73% of our outstanding voting stock (calculated on an
as-converted-to-common-stock basis), and specifically, 99.8% of the outstanding
Series A Preferred Stock and 95.8% of the outstanding Series B Preferred Stock.
Also on April 1, 2005, we entered into an agreement and plan of merger with
Retalix Ltd., Retalix Holdings Inc. and certain subsidiaries of Retalix Holdings
Inc. under which we would be merged with and into a subsidiary of Retalix
Holdings Inc. and all of our outstanding common stock and preferred stock (other
than shares held by Retalix Holdings Inc. and shares as to which appraisal
rights have been properly perfected under Delaware law) would be exchanged for
cash. Following the merger, we would cease to exist and all of our assets and
liabilities would be held by a subsidiary of Retalix Holdings Inc.
56
Revenue Trends. In 2004, we experienced growth in Services revenue of
16.1% and Maintenance revenue of 25.5%. Our success in these areas is primarily
attributable to the overall growth in our licensed customer base and the size
and scope of existing services engagements. Software license revenue increased
9.5% from 2003. We believe the primary factor contributing to the increase in
software license revenue was due to the repositioning of our TCI Retail HQ
solutions and introduction of new merchandising analytic applications. Early in
2004, we expanded our product offerings by introducing new applications and
integrating other key strategic applications thereby enabling us to offer a more
complete solution. Additionally, our state-of-the-art TCI Retail Store product
was released in the second quarter of 2004 to specifically address the
replacement of our heritage product, IMS and has been gaining market acceptance.
Our strategy to organize TCI around our two primary market segments, Small to
Medium Retailers and Enterprise/Mainstream, and to provide market specific
products and services, is expected to increase software license revenue and
increase our overall growth rate for total revenue.
We Continue to Expand Our Product Offering. We have sought to expand the
breadth of our product offerings by partnering with solution providers to
enhance the value our solutions deliver to customers and enhance our competitive
positioning. We have recently announced software license and distribution
agreements with FRENDS Technology, Inc., JRS Innovative Software, Inc., and
JustEnough Software, Inc. These products extend TCI Retail(TM) by automating
workflow, easing integration, offering category management and bringing demand
forecasting, inventory optimization and planning capabilities to our customers.
Economic Conditions Continue to Impact Our Operating Results. Our
operating results continue to be impacted by uncertain economic conditions. The
grocery retail industry continues to exercise significant due diligence prior to
making large capital outlays, and the decision-making process for investments in
information technology remains highly susceptible to deferral. As a result, our
sales cycles remain elongated and we continue to experience uncertainty
predicting the size and timing of individual contracts. We believe that delays
in the decision-making process have been, and may continue to be, the most
significant issue affecting our software license revenue results. Delays in the
customer decision-making processes have resulted from a number of factors
including extended due diligence procedures and the appointment of new senior
management. Nonetheless, competitive losses remain very low.
Results of Operations
Comparison of the Year Ended December 31, 2004 to the Year Ended
December 31, 2003
Revenues
TCI's total revenues were $21.2 million in 2003 and $21.8 million in
2004, representing an increase of $614,000 or 2.9%. Overall, we experienced
growth in license revenue of 9.6%, maintenance revenue of 25.5% and services
revenue of 16.1% from 2003. These increases were partially offset by a 81.3%
decrease in other revenue. In 2003, one customer accounted for 17.3% of our
total revenues. In 2004, two customers respectively accounted for 18.0% and
10.6% of total revenues. No other single customer accounted for more than 10% of
our 2003 or 2004 total revenues.
Software license revenues were $5.6 million in 2003 and $6.1 million in
2004, an increase of $531,000 or 9.6%. We believe the primary factor
contributing to the increase in software license revenue was due to the
repositioning of our HQ solutions and the introduction of new merchandising
analytic applications.
Software License Revenue by Product Line
We classify our software licenses in two TCI Retail product categories:
TCI HQ(TM) and TCI Store(TM). TCI Retail consists of Solution Packages that can
be implemented at headquarters (TCI HQ) or store-level (TCI Store). TCI Store
and HQ both provide full-function solution modules that enable retail chains to
quickly execute strategic business decisions, from headquarters to the store
level. Solution sets can be implemented as packages, individually or as
complements to existing systems.
57
A summary of the software revenue attributable to these product
categories is as follows:
2004 % 2003 %
---- - ---- -
Revenues:
TCI HQ......... $4,015,112 65.9% $2,211,052 39.7%
TCI Store...... 2,077,632 34.1% 3,350,754 60.3%
---------- ----- --------- -----
Total.......... $6,092,744 100.0% $5,561,806 100.0%
========== ====== ========== ======
License revenues from TCI HQ were $2.2 million and $4.0 million in 2003
and 2004, respectively, representing an increase of $1.8 million or 52.0%.
Additionally, license revenue from TCI Store declined $1.2 million or 36%. Total
software license revenue increased by $530,938 or 9.5% from 2003. We believe the
primary factor contributing to the increase in software license revenue was due
to the repositioning of our HQ solutions and introduction of new merchandising
analytic applications. Early in 2004, we expanded our product offerings by
introducing new applications and integrating other key strategic applications
thereby enabling us to offer a more complete solution.
Maintenance revenues were $3.8 million in 2003 and $4.8 million in 2004,
an increase of $966,000 or 25.5%. The increase in software maintenance revenue
was attributable to renewals of annual support and maintenance agreements from
existing customers and to new sales of support and maintenance services
associated with software sales. We believe that our success with renewals is the
result of strong relationships with existing customers and increased software
license revenue from our TCI Retail product line. We expect future software
maintenance revenues to increase as a result of the quality of our support and
maintenance services and expected increases in software license revenue.
Services revenue increased from $9.0 million in 2003 to $10.4 million in
2004, an increase of $1.5 million, or 16.1%. The increase in services revenue is
directly attributed to increased implementation services associated with our TCI
Retail products. We expect future services revenue to increase as a result of
new software license sales and expansion of our services capabilities and
offerings.
Other revenues were $2.9 million in 2003 and $538,000 in 2004, a
decrease of $2.3 million, or 81.3%. The decrease in other revenues is attributed
to decreased sales of third party hardware components, a line of business TCI
terminated in early 2004.
Gross Profit
Our gross profit was $12.0 million in 2003 and $12.7 million in 2004, an
increase of 5.6%. Additionally, our gross margin was 56.7% for 2003 and 58.2%
for 2004; the increase of 1.5% was primarily due to increased maintenance
revenues of 25.5%, offset by increased costs associated with our newly
integrated software solutions.
Software license margins were $5.5 million in 2003 and $5.4 million in
2004. Software license margins as a percentage of software license revenue were
98.4% in 2003 and 89.2% in 2004. The decrease in software license margins as a
percentage of software license revenue in 2004 is primarily related to increased
sales of third-party software licenses.
Maintenance revenue margins were $2.6 million in 2003 and $3.8 million
in 2004, an increase of $1.3 million, or 48.4%. The increase in maintenance
revenue margins is primarily due to a 25.5% increase in maintenance revenue.
Maintenance revenue margins, as a percentage of maintenance revenues, were 69.1%
in 2003 and 81.7% in 2004. The 12.6% increase in maintenance revenue margins as
a percentage of maintenance revenue was the result of increased maintenance
revenue and reductions in operating expenses related to the delivery of
maintenance services for the 2004 fiscal year.
Services revenue margins were $3.2 million in 2003 and $3.3 million in
2004, an increase of $98,000 or 3.1%. This marginal increase from 2003 to 2004
was primarily due to increased demand for our professional services and a
reduction in the use of third party firms. These amounts represented 35.3% of
service revenues for 2003 and 31.8% of service revenues for 2004. The decrease
in services revenue margins as a percentage of services revenue from 2003 to
2004 is primarily due to investments in non-billable services activities
associated with the development of new service programs.
Other revenue margins were $787,000 in 2003 and $65,000 in 2004, a
decrease of $722,000 or 91.8%. Other revenue margins as a percentage of other
revenue were 27.4% for 2003 and 12.0% for 2004. The decrease in other revenue
margins as a percentage of other revenue for the year is primarily due to lower
margins earned on third party hardware sales in 2004 when compared to 2003.
58
Operating Expenses
Product development expenses were $4.0 million in 2003 and $3.5 million
in 2004, a decrease of $525,000 or 13.0%. The decrease in product development
expenses from 2003 to 2004 was attributable to efforts to improve development
efficiencies resulting from automation and process improvements that require
fewer development resources. In 2004, our development efforts were focused on
the development of new TCI Retail products such as TCI Store Host, Integration
Workbench and Promotion Planner. Product development expenses represented 19.1%
and 16.1% of total revenues in 2003 and 2004, respectively.
We expect product development expenses to decrease slightly or remain
constant as a percentage of total revenue in the future as we continue to
improve operational efficiencies and revenue. These capabilities will enable us
to develop more code at a lower marginal cost. This efficiency will allow us to
continue to invest in the development of additional TCI Retail modules, analytic
and collaborative applications on behalf of our customers.
Sales and marketing expenses were $7.4 million in 2003 and $7.1 million
in 2004, a decrease of $314,000 or 4.3%. The decrease was primarily due to
reduced selling resources and related expenses. Additional focus on more
efficiently and effectively marketing TCI Retail enabled us to decrease
marketing and advertising expenses for the year ended 2004. Sales and marketing
expenses represented 34.8% of total revenues in 2003 and 32.3% in 2004.
We expect that our sales and marketing expenses over this next year will
increase slightly or remain constant in absolute dollars. Management believes
that the planned investments in these organizations will be sufficient to expand
TCI Retail's penetration into grocery retail.
General and Administrative
General and administrative expenses were $6.5 million and $5.0 million
in 2003 and 2004 respectively, representing a decrease of $1.5 million or 23.3%.
The decrease in general and administrative expenses was primarily due to focused
efforts to decrease operating and overhead costs and a $212,000 reduction in bad
debt expense due to the allocation of receivables which had been reserved for in
the prior year. General and administrative expenses represented 30.6% and 22.8%
of total revenues in 2003 and 2004 respectively.
We expect total general and administrative expenses to decrease in
absolute dollars over the course of the next twelve months. We have reduced
operating expenses and facility requirements. Additionally, we are continuing
efforts to reduce overhead costs and improve operating efficiency within our
operations.
Net Loss
Net loss represents revenues less cost of revenues, operating expenses,
interest income/expense and income taxes. Net losses were $6.0 million for 2003
and $2.9 million for 2004, a decrease of 50.7%.
Liquidity and Capital Resources
We continue to finance our operations primarily through the private
sales of equity securities that occurred in late 2001 and early 2002. The total
Series B Preferred Stock offering resulted in us raising $13.3 million in new
capital. From this offering, we received $8.6 million prior to December 31, 2001
and the balance of $4.7 million in installments from January through April 2002.
On November 18, 2004 we renewed our Loan and Security Agreement with
Comerica Bank-California, which provides us with a revolving line of credit on
trade receivables of up to $3 million and a separate line of credit for
maintenance receivables that is not to exceed $1.5 million. We had borrowed
$2,250,791 against our credit facility as of December 31, 2004 and had $573,584
of credit available. Borrowings under our credit facility are secured by
substantially all of our assets and we are required to comply with certain
financial covenants and conditions, including quick ratio percentages. As of
December 31, 2004, we were in compliance with all covenants included in the
terms of the credit facility. At the maturity of our revolving line, Retalix
will pay down the line our of working capital.
We had working capital of $11,000 at December 31, 2004 compared with
$2.5 million at December 31, 2003. Cash and cash equivalents at December 31,
2004 were $3.3 million, a decrease of $334,000 from the $3.7 million reported at
December 31, 2003. Cash balances decreased for the year ended December 31, 2004
primarily as a result of decreased software sales and investments in product
development, sales and capital investments in computer equipment of $182,000.
59
Operating activities used cash of $963,000 and $999,000 for the years
ended December 31, 2004 and 2003, respectively. Cash used from operating
activities for the year ended December 31, 2004 results primarily from a net
loss of $2.9 million, a $1.4 million increase in deferred revenue and a $467,000
increase in accrued expenses. We had net receivables of $3.4 million at December
31, 2004 compared to $3.3 million at December 31, 2003. The increase of $159,000
relates to the timing of sales. The days sales outstanding metric, which is
calculated by dividing quarter-end accounts receivable by average daily sales
for the quarter, was 59 days as of December 31, 2004 and 60 days as of December
31, 2003.
Investing activities utilized cash of $182,000 and $713,000 for the
years ended December 31, 2004 and 2003, respectively. Cash utilized for
investing activities in both periods resulted primarily from capital
expenditures.
Financing activities provided cash of $811,000 and $268,000 during the
years ended December 31, 2004 and 2003 respectively. The activity for 2004
relates primarily to changes in our line of credit.
Material Commitments
We have planned for approximately $300,000 in capital expenditures for
2005. The significant capital items we intend to acquire include hardware and
software solutions necessary to execute our operational plans. We plan to draw
upon our line of credit with Comerica Bank-California for the acquisition of
these assets. In 2004 we had approximately $182,000 in asset additions.
In connection with our facility lease dated June 20, 2000 we have an
agreement for the issuance of letters of credit up to an aggregate amount not to
exceed $150,000. In connection with the financing agreement with a bank entered
into on June 30, 2000, we have an agreement for the issuance of letters of
credit up to an aggregate amount not to exceed $500,000. At December 31, 2004,
we had $150,000 of letters of credit outstanding. These amounts are not included
in our financial statements.
On February 27, 2004, we entered into a $3.5 million credit facility
with a financial institution composed of a $500,000 equipment line of credit and
a $3.0 million accounts receivable revolving line of credit. Each advance under
the equipment line of credit accrues interest at 0.75% above the prime rate and
is payable monthly. As of November 27, 2004, outstanding borrowings under the
equipment line of credit are payable in 30 equal monthly installments, plus
interest at 0.75% above the prime rate (6.0% at December 31, 2004) through the
maturity date. The equipment line of credit matures in June 2007. The accounts
receivable revolving line of credit bears interest at 0.50% above the prime rate
(5.75% at December 31, 2004).
On November 18, 2004, we amended the above facility. The amended credit
facility is composed of a $3.0 million accounts receivable revolving line of
credit and a $1.0 million maintenance receivable revolving line of credit. The
maintenance revolving line of credit is not to exceed (i) $1.5 million from
November 18, 2004 through February 28, 2005, (ii) $1.0 million from March 1,
2005 through March 31, 2005 and (iii) $500,000 from April 1, 2005 through May
31, 2005. The amended facility does not extend an equipment line of credit. The
revolving line of credit matures in May 2005 and bears interest at 0.50% above
the prime rate (5.75% at December 31, 2004). Borrowings are collateralized by
substantially all of our assets, including our intellectual property. At the
maturity of our revolving line, Retalix will pay down the line our of working
capital.
Borrowings under the accounts receivable and maintenance receivable
revolving lines of credit are limited to 80% and 50%, respectively, of eligible
accounts receivable, as defined. As of December 31, 2004, available borrowings
under the revolving line of credit were approximately $573,584. As of December
31, 2004, we have outstanding borrowings against our credit facility of
$2,437,046 consisting of $186,255 under the equipment line of credit and
$2,250,791 under the revolving line of credit.
Borrowings under the credit facility are secured by substantially all of
our assets, and we are required to comply with certain financial covenants and
conditions, including quick ratio percentages. As of December 31, 2004, we were
in compliance with all covenants included in the terms of the credit facility.
In connection with our credit facility, we granted warrants to purchase
115,000 shares of common stock at an exercise price of $0.25 per share to the
financial institution. If the merger is completed, these warrants will be
cancelled.
60
As of December 31, 2004, future payments related to contractual
obligations and commercial commitments are as follows:
Amounts Due by Period
----------------------------------------------------------
1 year
and less 2-3 years 4-5 years Thereafter Total
----------------------------------------------------------
Capital Lease Obligations........... $25,567 $13,550 - - $39,117
Operating Lease Obligations......... 689,943 1,319,332 48,930 - $2,058,205
Guarantees under Letters of Credit.. 150,000 - - - 150,000
Total Contractual Obligations and
Commercial Commitments............ $865,510 $1,332,882 $48,930 - $2,247,322
======== ========== ======= = ==========
We believe that our existing cash balances, annual support and
maintenance collections and available financing will be sufficient to satisfy
these contractual obligations and commercial commitments and to meet operating
and capital requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
Business Outlook
As we look ahead to the rest of 2005, our operating plan will attempt to
deliver higher profitability through both revenue growth and a reduced cost
structure. We expect improvement in the sales of our core product, TCI Retail
primarily from the recent addition to the product of Demand Forecasting and
Replenishment. Improvements in sales will only occur through the execution of
`Our Strategy' discussed earlier in this MD&A.
Our financial results are substantially dependent upon sales of TCI
Retail software. Revenue is partly a function of the mix of software, services,
maintenance and other sales. Our margins are highest for software and
maintenance and significantly lower for our services and other revenue
categories. Our margins are also affected by the product mix within the various
markets we serve. Margins are higher in the Enterprise/Mainstream market than in
the Small to Medium Retail market due to the fact that the overall sale in the
Enterprise/Mainstream market is weighted towards our higher margin offerings of
software and maintenance. Our gross margin as a result, varies with revenue
levels from the various markets and the revenue mix.
We believe that current improvements in the overall economic conditions
and the upswing in the economy are positive overall indicators. The retail
industry, a common technology laggard, remains cautiously optimistic with their
level of investment in information technology. Compelling events such as
Wal-Mart's growth in the superstore business model and regulatory and
technological changes combined with our ability to leverage the existing
customer base will be factors that contribute to our ability to grow revenues in
2005. We believe that if we remain an independent company we could achieve
revenue growth and profitability in 2005 as a result of our cost cutting that
occurred in January and February of 2004. Due to the timing of the cost cutting,
the related cost savings and our revenue plan, if we remain an independent
company, we would expect to improve bottom line performance in 2005.
We believe that our existing cash balances, annual support and
maintenance collections and available financing will be sufficient to satisfy
operating and capital requirements for at least the next twelve months.
We further believe that we have the product offerings, personnel,
competitive and financial resources for continued business success. Future
revenues, gross margins and profits however, are all influenced by a number of
factors, including those discussed above, all of which are inherently difficult
to forecast. As a result, there are no assurances that we will achieve these
objectives.
We believe that we should be able to withstand the impact of the
bankruptcies of some of our former customers, including Fleming Companies and
Winn-Dixie Stores, Inc. We believe we have valid defenses to any allegations of
preferential payments made prior to these bankruptcies and that our actual
liability from these actions will not materially adversely affect our financial
condition. Nonetheless, we cannot predict with any certainty the outcome of any
preference litigation against us or
61
whether the bankruptcy trustees in these cases will agree to settle for amounts
substantially less than the preference claim amounts.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board revised
Statement No. 123 (FAS 123R), "Share-Based Payment," which requires companies to
expense the estimated fair value of employee stock options and similar awards
based on the grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award, usually the vesting period. The accounting provisions of
FAS 123R will be effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. We will adopt the provisions
of FAS 123R on July 1, 2005 using a modified prospective application. Under the
modified prospective application, FAS 123R, will apply to new awards, unvested
awards that are outstanding on the effective date and any awards that are
subsequently modified or cancelled. Compensation expense for outstanding awards
for which the requisite service had not been rendered as of the effective date
will be recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under FAS 123, "Stock-Based
Compensation." We are in the process of determining how the new method of
valuing stock-based compensation as prescribed in FAS 123R will be applied to
valuing stock-based awards granted after the effective date and the impact the
recognition of compensation expense related to such awards will have on our
financial statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three and Six Months Ended June 30, 2005
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six months ended June 30, 2005 with our
overall strategy to give readers an overview of the goals of our business and
the direction in which our business and products are moving. The strategy
section is followed by a discussion of the Critical Accounting Estimates that we
believe are important to understanding the assumptions and judgments
incorporated in our financial statements for the periods ended June 30, 2005,
and an Overview of Significant Trends and Developments in Our Business. We then
provide an analysis of the financial results for the three and six months ended
June 30, 2005 compared to the three and six months ended June 30, 2004. We
conclude this MD&A with our Business Outlook section wherein we discuss the
outlook for the remainder of 2005.
This MD&A should be read in conjunction with the discussion of TCI's business
under the caption "INFORMATION ABOUT TCI" starting on page 46 and our financial
statements for the three and six months ended June 30, 2005 attached as Appendix
F. An MD&A section for the fiscal year ended December 31, 2004 precedes this
MD&A and supplements this MD&A section and should also be read in conjunction
with this MD&A section and with our financial statements for the fiscal year
ended December 31, 2004 attached as Appendix E.
Forward Looking Statements
The various sections of this MD&A contain a number of forward-looking
statements, all of which are based on our current expectations and could be
affected by uncertainties and risk factors described throughout this filing and
particularly in the "Business Outlook" section. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe". We believe that the expectations reflected in such forward-looking
statements are accurate. However, we can not assure you that such expectations
will occur. Our actual results may differ materially, and you should not unduly
rely on these forward-looking statements, which speak only as of the date of
this proxy statement. These forward-looking statements do not reflect the
potential impact of any business activities not completed as of the date of this
proxy statement. For example, if our merger with a subsidiary of Retalix Ltd. is
completed, our outlook, expected results, future strategy and other forward
looking information will change substantially.
Our Strategy
We intend to solidify our presence in grocery retail and wholesale,
broaden our product offering with new and complimentary products developed
internally and through partnerships, and focus on the critical elements of
operational execution. Our goal is to enhance retail operations and execution
with high quality solutions to add and retain valuable customers. Key elements
of our strategy to fulfill our vision are outlined in the points that follow:
o Operational Efficiency - We have clearly defined our business
strategy and core business activities. As a result, we have
developed an operating structure designed to boost software
license revenues and shrink operating costs in order to improve
operational efficiency and enhance customer satisfaction. The
actions we have taken include:
62
o Focused Market Approach - We have aligned our operational
activities and resources with the delivery of solutions and
services for the following market definitions:
Mainstream & Enterprise Marketplace- For this marketplace, we focus on
delivering a high quality, strategic pricing and inventory management solutions
that deliver rich and flexible functionality. This marketplace also has the
following attributes:
o Retailers with greater than or equal to 10 stores
o Sophisticated functional requirements
o Sales occur primarily through our direct sales force
o Implementations range from simplistic to sophisticated
and may be supported through strategic implementation
partners
Small to Medium Retail Marketplace - Within this marketplace we offer a
competitively priced solution with the benefits of pre-defined functionality,
rapid implementation and minimal support requirements. Additionally, this
marketplace has the following characteristics:
o Retailers with less than 10 stores
o Minimal functional requirements
o Dealers are our primary sale and delivery
mechanism for product sales
o Develop and Leverage Strategic Relationships - We will continue
to establish strategic business relationships that enhance the
development of our products, the breadth of our product offering
and the delivery of services that empower us to deliver a
complete customer solution. We believe these relationships can
provide greater market presence, greater opportunity to increase
sales, improve operational efficiencies and provide greater
access to other retail sectors and international markets.
Additionally, within our Small to Medium Retail marketplace,
software is now primarily sold and serviced through our reseller
and point-of-sale dealer networks.
o Client Satisfaction - Since 2003, we have renewed our focus to
continually improve by developing initiatives designed to focus the
organization on delivering value to both our new and existing customer
base. These initiatives have resulted in and will continue to improve
quality, satisfaction and the efficiency of our customers' experience.
The initiatives we are cultivating for the benefit of our customers are
as follows:
o Product Development Process- We continue to implement new
processes for operational improvement around product
development. Initially addressing the product management process
and market requirements definition, the Product Development
Process includes formality around functional and technical
specifications. These processes and procedures insure that we
remain in touch with delivering high quality solutions and
functionality for our customers.
o Engagement Management - Engagement Management is a services and
support initiative complete with governances and processes that
have aided in the creation of great customer experiences both
during and beyond our software implementations. Our goal is to
optimize the project and it begins with understanding our
customer's expectations. Engagement management transcends the
services implementation and improves the depth of our win-win
customer relationships.
o Fast Track Implementations - Fast-Track is a packaged
implementation program to lower the risks of replacing legacy
pricing and hosting systems. Fast-Track is a phased
implementation of TCI's core pricing and hosting foundation
offering predefined deliverables, installation scope and
timeframe. Fast-Track provides grocers with price management,
base price generation, hosting and store system interfaces, to
systems such as point-of-sale, and signs and labels. It also
includes development of roles-based menu templates and
personalized reports, as well as training, and pilot and go live
support.
o Quality and Customer Centricity - A critical component to our
success as a developer of technology solutions begins with
listening to user concerns and understanding their requirements
from the beginning. We put the customer at the center of our
organizational structure and it is very important to us that the
customer always has a single integrated view of our company. Our
quality and customer centricity initiatives are focused on
continuously improving in these areas.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting
policies have an impact on the results we report in our financial statements.
Our discussion and analysis of results of operations and financial condition are
based upon
63
financial statements that we prepared in accordance with generally accepted
accounting principles of the United States of America.
We have identified the following policies as critical to the
understanding of our financial statements and results of operations. The impact
and any associated risks related to these policies on our business operations is
discussed throughout our Management's Discussion and Analysis where such
policies affect our reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Note 1
in the Notes to our Financial Statements which are attached as Appendix F. The
preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
Revenue recognition - Our revenue recognition policy is significant
because our revenue is a key component to our results of operations. In
addition, our revenue recognition determines the timing of certain expenses such
as commissions and royalties. We follow specific detailed guidelines in
measuring revenue; however, certain judgments affect the application of our
revenue policy.
We license software products under non-cancelable perpetual license
agreements and provide related services, including consulting and customer
support. We recognize revenue in accordance with SOP 97-2, Software Revenue
Recognition, as amended and interpreted by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to certain transactions, as well as
Technical Practice Aids issued from time to time by the American Institute of
Certified Public Accountants and Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements, which provides further interpretive
guidance for public reporting companies on the recognition, presentation and
disclosure of revenue in financial statements.
Software license revenue is recognized when a license agreement has been
signed, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable and
collection is considered reasonably assured. If a software license contains an
undelivered element, the fair value of the undelivered element is deferred and
the revenue recognized once the element is delivered. Revenues attributable to
undelivered elements, including consulting services and post-contract support,
are based on the sales price of those elements when sold separately. In
addition, if a software license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon the earlier of
customer acceptance or the expiration of the acceptance period or cancellation
right. We do not offer rights of return.
Services are separately priced, are generally available from a number of
suppliers and are not essential to the functionality of our software products.
Services, which include project management, system planning, design and
implementation, customer configurations and training, are billed on an hourly
basis. Services revenue billed on an hourly basis is recognized as the work is
performed.
Customer support services include post-contract support and the rights
to unspecified upgrades and enhancements, when and if available. Maintenance
revenues from ongoing customer support services are billed on an annual basis
with the revenue being deferred and recognized ratably over the maintenance
period.
Other revenue is recognized when the third-party products have been
delivered and title has passed.
Accounts Receivable - We typically extend credit to our customers.
Payments for software licenses generally include payment terms with installments
due within six months from the date of delivery. All significant customers are
reviewed for credit worthiness before we license our software and we do not sell
our software or recognize any license revenue unless we believe that collection
is probable. Billings for customer support and professional services performed
on a time and material basis are due on net 30-day terms. We review past due
accounts and provide specific reserves based upon the information we gather from
sources including customers, subsequent cash receipts, professional services,
and credit rating services such as Dunn & Bradstreet. We estimate the
probability of collection of the receivable balances and provide an allowance
for doubtful accounts based upon an evaluation of our customers' ability to pay
and general economic conditions. While our losses have historically been within
our estimates, we cannot guarantee that we will continue to experience the same
collection experience. A loss of any significant customer could have a material
adverse effect on our operations. We expect that revenues from a limited number
of new customers will continue to account for a large percentage of total
revenues in future quarters. If actual bad debts are greater than the reserves
calculated based on historical trends and known customer issues, we may be
required to record additional bad debt expense which could have a material
adverse impact on our results of operations and financial position for the
periods in which such additional expense occurs.
64
Goodwill - Our business combinations have resulted in goodwill. We
review the recoverability of the carrying value of goodwill on an annual basis
or more frequently when an event occurs or circumstances change to indicate that
an impairment of goodwill has possibly occurred. We compare the estimated market
value of our segments to book value to determine whether or not any potential
impairment of goodwill exists. Our estimates of market value are based on
average multiples of our public competitors, which are subject to change based
on industry, economic and business conditions. While we have not experienced
impairment of goodwill assets in prior periods, we cannot guarantee that there
will not be impairment in the future.
Income Taxes - We recognize deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance based on historical taxable
income, projected future taxable income and the expected timing of the reversals
of existing temporary differences. If we operate at a profit in the future and
generate sufficient future taxable income, we could be required to reverse the
current valuation allowance against the deferred tax assets which would result
in a reduction in goodwill.
Revenue Trends - We see signs of domestic economic recovery and
currently have a strong software sales pipeline. We believe there are a
significant number of sales opportunities that will support a sustained level of
activity and we anticipate increases in software license revenues and related
services revenues throughout 2005. The preponderance of the business in the near
term continues to be for our TCI Retail solutions. Our acquisition by Retalix on
April 1, 2005 is very recent and although positively received by the market,
it's impact on our growth plans is not yet fully known.
Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended
June 30, 2004.
Revenues consist of software license revenues, maintenance, services and
other revenues, which represents 21.2%, 30.4%, 48.0% and .4%, respectively, of
total revenues for the three months ended June 30, 2005 compared to 18.0%,
23.0%, 53.7% and 5.3%, respectively, for the three months ended June 30, 2004.
Additionally, revenues from these sources represented 26.6%, 26.2%, 46.9% and
..3%, respectively, of total revenues for the six months ended June 30, 2004.
Total revenues for the three months ended June 30, 2005 were $4.5 million, a
decrease of $973,000, or 17.8%, from the $5.4 million reported for the three
months ended June 30, 2004. Additionally, total revenues for the six months
ended June 30, 2005 were $10.3 million, a decrease of $212,000 or 2.0% from the
$10.5 million reported for the six months ended June 30, 2004.
Revenues
Software Licenses. Software license revenue for the three months ended
June 30, 2005 decreased $29,700 or 3.0% to $954,000 from $984,000 for the three
months ended June 30, 2004. Software license revenue for the six months ended
June 30, 2005 increased $533,000 or 24.1% to $2.7 million from $2.2 million for
the six months ended June 30, 2004. The decrease resulted primarily from delayed
purchasing decisions due to customers' uncertainty regarding the long-term
direction of the TCI-Retalix product offering. Software license revenue
represented 21.2% of total revenue for the three months ended June 30, 2005
compared to 17.9% for the three months ended June 30, 2004. Our pipeline for
software licenses is strong and the buying cycles of customers appear to have
stabilized and thus, we are optimistic that we will see software license growth
throughout the year.
Maintenance. Maintenance revenue for the three months ended June 30,
2005 increased $109,500 or 8.7% to $1.4 million from $1.3 million for the three
months ended June 30, 2004. Maintenance revenue for the six months ended June
30, 2005 increased $184,000 or 7.3% to $2.7 million from $2.5 million for the
six months ended June 30, 2004. The increase in maintenance revenue primarily
results from $7.7 million in new software licenses sold for the eighteen-month
period ended June 30, 2005, resulting in an increase in the number of customers
under maintenance contracts. Maintenance revenue represented 30.4% of total
revenue for the three months ended June 30, 2005 compared to 22.9% for the three
months ended June 30, 2004.
Services. Services revenue for the three months ended June 30, 2005
decreased $784,000 or 26.7% to $2.2 million from $2.9 million for the three
months ended June 30, 2004. Services revenue for the six months ended June 30,
2005 decreased $592,000 or 10.9% to $4.8 million from $5.4 million for the six
months ended June 30, 2004. The decrease in services revenue is directly
attributed to the bankruptcy of our largest services customer that accounted for
nearly $3 million of 2004 annual services revenue. We anticipate stable demand
in services revenue for the year due to the acquisition of TCI by Retalix and
the operational efforts required to consolidate operations. Services revenue
represented 47.9% of total revenue, for the three months ended June 30, 2005
compared to 53.7% for the three months ended June 30, 2004.
Other. Other revenue for the three months ended June 30, 2005 decreased
$269,000 or 93.5% to $19,000 from $288,000 for the three months ended June 30,
2004. Other revenue for the six months ended June 30, 2005 decreased $337,000 or
90.0% to $35,000 from $372,000 for the six months ended June 30, 2004. The
decrease in other revenue results from delivering less hardware, a trend we
anticipate will continue into the foreseeable future. Other revenue represented
0.4% of total revenues for the three months ended June 30, 2005 compared to 5.3%
for the three months ended June 30, 2004.
65
Gross Profit
Gross profit dollars for the three months ended June 30, 2005 decreased
$333,000 or 10.6% to $2.8 million from $3.1 million for the three months ended
June 30, 2004. Gross profit dollars for the six months ended June 30, 2005
increased $695,000 or 12.0% to $6.5 million from $5.8 million for the six months
ended June 30, 2004. The decrease in gross profit dollars is primarily from the
decreases in software sales, maintenance and services revenues for the three
months ended June 30, 2005. Gross profit percent for the three months ended June
30, 2005 increased 5.1% to 62.6% from 57.6% for the three months ended June 30,
2004. Gross profit percent for the six months ended June 30, 2005 increased 7.9%
to 62.9% from 55.0% for the six months ended June 30, 2004. The increase in
gross profit percentage for the three months ended June 30, 2005 versus 2004 is
primarily due to increases in gross margin earned in software, maintenance and
services revenues.
Software License Margins. Software license margins for the three months
ended June 30, 2005 increased $61,000 or 7.6% to $869,000 from $808,000 for the
three months ended June 30, 2004. Software license margins for the six months
ended June 30, 2005 increased $531,000 or 28.3% to $2.4 million from $1.9
million for the six months ended June 30, 2004. The increase in software license
margins for the three and six months ended June 30, 2005 is primarily due to
lower sales of third party software products, which have a higher cost of sale.
Software license margins as a percentage of software license revenue were 91.1%
and 87.9% for the three and six months ended June30, 2005, compared to 82.1% and
85.1 for the three and six months ended June 30, 2004.
Maintenance Margins. Maintenance revenue margins for the three months
ended June 30 2005 increased $247,000 or 23.4% to $1.3 million from $1.1 million
for the three months ended June 30, 2004. Maintenance revenue margins for the
six months ended June 30, 2005 increased $497,000 or 25.4% to $2.4 million from
$1.9 million for the six months ended June 30, 2004. Maintenance revenue margins
as a percentage of maintenance revenue were 95.4% and 91.0% for the three and
six months ended June 30, 2005, compared to 84.0% and 77.9% for the three and
six months ended June 30, 2004. The increase in maintenance revenue margins as a
percentage of maintenance revenue for the three and six months ended June 30,
2005 is due to an increase in maintenance revenue and cost savings that resulted
from the closure of a regional office used for customer support that will now be
housed within our Tucson facility.
Services Margins. Services revenue margins for the three months ended
June 30, 2005 decreased $616,000 or 48.7% to $648,000 from $1.3 million for the
three months ended June 30, 2004. Services revenue margins for the six months
ended June 30, 2005 decreased $281,000 or 14.8% to $1.6 million from $1.9
million for the six months ended June 30, 2004. The decrease in services revenue
margins for the three and six months ended June 30, 2005 is primarily due to
bankruptcy of our largest services customer. Services revenue margins as a
percentage of services revenue were 30.0% and 33.5% for the three and six months
ended June 30, 2005, compared to 42.9% and 35.0% for the three and six months
ended June 30, 2004. The decrease in services revenues margins as a percentage
of services revenues is due to decreased utilization within our professional
services staff and stable total headcount.
Other Margins. Other revenue margins for the three months ended June 30,
2005 decreased $25,000 or 126.5% to a loss of $5,000 from $20,000 for the three
months ended June 30, 2004. Other revenue margins for the six months ended June
30, 2005 decreased $52,000 or 99.4% to $300 from $52,300 for the six months
ended June 30, 2004. Other revenue margins as a percentage of other revenue were
28.5% and 1.0% for the three and six months ended June 30, 2005, compared to
7.0% and 14.0% for the three and six months ended June 30, 2004. The decrease in
other revenue margins as a percentage of other revenue for the three and six
months ended June 30, 2005 was primarily related to variances in third party
vendor pricing over the same period in 2004. This decrease in other revenue
related to lower hardware sales within our packaged marketplace.
Operating Expenses
Operating expenses for the three months ended June 30, 2005 increased
$247,000 or 6.3% to $4.2 million from $3.9 million for the three months ended
June 30, 2004. Operating expenses for the six months ended June 30, 2005
increased $4.8 million or 58.1% to $13.0 million from $8.2 million for the six
months ended June 30, 2004. Operating expenses represented 93.1% and 126.3% of
total revenues for the three and six months ended June 30, 2005 compared to
72.0% and 78.2% for the three and six months ended June 30, 2004. The increase
in operating expenses is primarily attributable to acquisition related costs
associated with the Retalix purchase on April 1, 2005 and legal fees incurred in
connection with the acquisition.
Product Development. Product development expenses for the three months
ended June 30, 2005 decreased $9,000 or 1.1% to $808,000 from $818,000 for the
three months ended June 30, 2004. Product development expenses for the six
months ended June 30, 2005 decreased $251,000 or 13.7% to $1.6 million from $1.8
million for the six months ended June 30, 2004. The decrease in product
development expense primarily results from decreased headcount and efforts to
increase development efficiencies through process improvement and through the
reduction of expenses associated with lower development resources
66
needed to support our heritage product, IMS. Product development expenses
represented 18.0% and 15.3% of total revenues for the three and six months ended
June 30, 2005 compared to 15.0% and 17.4% for the six months ended June 30,
2004.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 2005 decreased $397,000 or 22.8% to $1.3 million from $1.7
million for the three months ended June 30, 2004. Sales and marketing expenses
for the six months ended June 30, 2005 decreased $601,000 or 16.4% to $3.1
million from $3.7 million for the six months ended June 30, 2004. The decrease
in sales and marketing expenses during the three and six months ended June 30,
2005 is primarily due to decreased headcount, decreases in marketing activities
and focused cost control efforts. Sales and marketing expenses represented 29.9%
and 29.8% of total revenues for the three and six months ended June 30, 2005
compared to 31.8% and 34.9% for the three and six months ended June 30, 2004.
General and Administrative. General and administrative expenses for the
three months ended June 30, 2005 increased $654,000 or 47.5% to $2.0 million
from $1.4 million for the three months ended June 30, 2004. General and
administrative expenses for the six months ended June 30, 2005 increased $5.6
million or 206.9% to $8.4 million from $2.7 million for the six months ended
June 30, 2004. The increase in general and administrative expenses during the
three and six months ended June 30, 2005 is due to acquisition related
transition costs and legal fees. General and administrative expenses represented
45.2% and 81.1% of total revenues for the three and six months ended June 30,
2005 compared to 25.2 % and 25.9% for the six months ended June 30, 2004.
Acquisition Related Costs. Acquisition related costs for the six months
ended June 30, 2005 resulted from our acquisition by Retalix on April 1, 2005.
In conjunction with this transaction, certain one-time termination costs were
incurred or became determinable. Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No.
146") has been applied to this transaction. Under SFAS No. 146, the liability
for costs associated with exit or disposal activities is recognized and measured
initially at fair value only when the liability is incurred, rather than at the
date the Company committed to the exit plan. Restructuring charges are not
directly identified with a particular business segment and as a result,
management does not consider these charges in the evaluation of the operating
loss from the business segments. The following table presents the one-time
termination costs incurred relating to this transaction:
-------------------------------------------------- --------------
Stock option termination costs $1,697,794
-------------------------------------------------- --------------
Facility & lease termination costs 586,645
-------------------------------------------------- --------------
Professional fees 542,167
-------------------------------------------------- --------------
Employee severance and benefit termination costs 1,120,073
-------------------------------------------------- --------------
Total transaction related costs $3,946,679
-------------------------------------------------- --------------
Liquidity and Capital Resources
Historically, we have financed our operations primarily through private
sales of equity securities. We expect to finance future operations through
existing cash, working capital and funding from our majority stockholder,
Retalix. We had working capital of ($4.4 million) at June 30, 2005 compared with
($11,000) at December 31, 2004. The decrease in working capital is primarily due
to accrued transaction related expenses of $4.0 million, a $431,000 increase in
deferred revenue and a $140,000 increase in allowance for bad debts. Cash and
cash equivalents at June 30, 2005 were $834,000, a decrease of $2.5 million from
the $3.3 million reported at December 31, 2004. Cash balances decreased in the
six months ended June 30, 2005 primarily as a result of a net loss, an increase
in transaction related accrued expenses and the increase in deferred revenue
attributed to our annual maintenance billing recorded in the six months ended
June 30, 2005. In June 30, 2005, we had approximately $2.0 million in payables
to Retalix Holdings, Inc. related to the payoff of our lines of credit and
payroll expenses they funded, and $55,000 to Retalix Ltd. related to management
fees.
Operating activities provided cash of $71,000 in the six months ended
June 30, 2005. Cash used by operating activities in the six months ended June
30, 2005 results primarily from a net loss of $6.6 million offset by an increase
of $3.5 million in accrued expenses related to our acquisition by Retalix, an
increase in deferred revenue of $.0.4 million relating to our annual maintenance
billing and a $140,000 increase in allowance for bad debts. We had net
receivables of $3.1 million at June 30, 2005 compared to $3.4 million at
December 31, 2004.
Investing activities used cash of $132,000 in the six months ended June
30, 2005. Cash used by investing activities in the six months ended June 30,
2005 results from the purchase of software and computer equipment. We expect
capital expenditures to be approximately $200,000 for the remainder of 2005,
which we expect to be paid by Retalix Holdings Inc. using existing cash and
working capital.
67
Financing activities used cash of $2.4 million during the six months
ended June 30, 2005. Cash used by financing activities for the six month period
ending June 30, 2005 results from the repayment of our line of credit and
capital lease obligations.
We believe that our cash, combined with that of Retalix's working
capital, will provide adequate liquidity to meet our anticipated operating
requirements for at least the next twelve months.
Business Outlook
As we look ahead to the rest of 2005, we are planning for growth. Our
acquisition by Retalix on April 1, 2005 is very recent and although positively
received by the market, its impact on our growth plans is not yet fully known.
Our financial results are substantially dependent upon sales of TCI
Retail software. Revenue is partly a function of the mix of software, services,
maintenance and other third party hardware and software sales. Our margins are
highest for software and maintenance and significantly lower for our services
and other revenue categories. Our margins are also affected by the product mix
within the various markets we serve. Margins are higher in the Mainstream &
Enterprise market than in the Small to Medium Retail marketplace due to the fact
that the overall sale in the Mainstream & Enterprice market is weighted towards
our higher margin offerings of software and maintenance. Our gross margin as a
result, varies with revenue levels from the various markets and the revenue mix.
We believe that we have the product offerings, personnel, competitive
and financial resources for continued business success. Future revenues, gross
margins and profits however, are all influenced by a number of factors,
including those discussed above, all of which are inherently difficult to
forecast. As a result, there are no assurances that we will achieve these
objectives.
We believe that we should be able to withstand the impact of the
bankruptcies of some of our former customers, including Fleming Companies and
Winn-Dixie Stores, Inc. We believe we have valid defenses to any allegations of
preferential payments made prior to these bankruptcies and that our actual
liability from these actions will not materially adversely affect our financial
condition. Nonetheless, we cannot predict with any certainty the outcome of any
preference litigation against us or whether the bankruptcy trustees in these
cases will agree to settle for amounts substantially less than the preference
claim amounts.
New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board revised
Statement of Financial Accounting Standards No. 123 ("FAS 123R"), "Share-Based
Payment," which requires companies to expense the estimated fair value of
employee stock options and similar awards based on the grant-date fair value of
the award. The cost will be recognized over the period during which an employee
is required to provide service in exchange for the award, usually the vesting
period. The accounting provisions of FAS 123R will be effective as of the
beginning of the first interim or annual reporting period that begins on or
after December 15, 2005. We will adopt the provisions of FAS 123R effective on
the first quarter of 2006 using a modified prospective application. Under the
modified prospective application, FAS 123R, will apply to new awards, unvested
awards that are outstanding on the effective date and any awards that are
subsequently modified or cancelled. Compensation expense for outstanding awards
for which the requisite service had not been rendered as of the effective date
will be recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under SFAS 123 (Note 2 Stock-Based
Compensation). We believe adoption of FAS 123R will not have a material impact
on our financial statements, as there are no stock options outstanding as of
June 30, 2005.
Financial Statements
Our financial statements for the fiscal year ended December 31, 2004 and
for the three and six months ended June 30, 2005 are set forth respectively as
Appendices E and F to this proxy statement and incorporated by reference herein.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
None.
68
TCI SOLUTIONS, INC.
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data for each of the years in the
two-year period ended December 31, 2004 are derived from TCI's audited financial
statements and notes thereto which are included as Appendix E to this proxy
statement and incorporated by reference herein. The following selected financial
data for the three months ended June 30, 2005 and 2004 are derived from TCI's
unaudited financial statements and notes thereto which are included as Appendix
F to this proxy statement and incorporated by reference herein. The information
presented below should be read in conjunction with such financial statements and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the Fiscal Year ended December 31, 2004
beginning on page 53 of this proxy statement and Managements' Discussion and
Analysis of Financial Condition and Results of Operations for the three months
ended June 30, 2005 beginning on page 61 of this proxy statement.
Additional financial information is included in TCI's audited and
unaudited financial statements attached as Appendices E and F and in the reports
and other documents filed by TCI with the Securities and Exchange Commission.
The following summary information is qualified in its entirety by reference to
such financial statements, reports and other documents and all of the financial
information (including any related notes) contained therein. Reports and other
documents filed with the Securities and Exchange Commission may be inspected and
copies may be obtained without charge as described in "OTHER MATTERS--Available
Information."
----------------------------- ----------------------------
Fiscal Year Ended
December 31
----------------------------- ----------------------------
----------------------------- ------------- -- -----------
2004 2003
----------------------------- ------------- -- -----------
----------------------------- ------------- -- -----------
Revenues $21,828,014 $21,213,750
----------------------------- ------------- -- -----------
Cost of Revenues 9,122,322 9,178,193
----------------------------- ------------- -- -----------
Operating (loss)/income (2,846,165) (5,861,478)
----------------------------- ------------- -- -----------
Net (loss)/income (2,936,241) (5,960,414)
----------------------------- ------------- -- -----------
Net (loss)/income per Share
----------------------------- ------------- -- -----------
-- Basic (0.23) (0.46)
----------------------------- ------------- -- -----------
-- Diluted (0.23) (0.46)
----------------------------- ------------- -- -----------
Total assets 8,739,362 9,450,566
----------------------------- ------------- -- -----------
Long-term debt (including
capital lease) 11,603 34,873
----------------------------- ------------- -- -----------
The book value per share for TCI as of the fiscal year ended December
31, 2004 is $0.14. This is calculated by dividing the net stockholders equity of
$1,804,329 as stated on the TCI balance sheet dated as of December 31, 2004,
included in Appendix E to this proxy statement, by the weighted-average common
shares outstanding of 12,822,521 as stated on the statement of operations as of
December 31, 2004, included in Appendix E to this proxy statement.
----------------------------- ----------------------------
Six Months Ended June 30
----------------------------- ----------------------------
----------------------------- ------------- -- -----------
2005 2004
----------------------------- ------------- -- -----------
----------------------------- ------------- -- -----------
Revenues $10,300,083 $10,511,880
----------------------------- ------------- -- -----------
Cost of Revenues 3,818,496 4,725,761
----------------------------- ------------- -- -----------
Operating (loss)/income(1) (6,523,206) (2,438,757)
----------------------------- ------------- -- -----------
Net (loss)/income (6,568,610) (2,477,002)
----------------------------- ------------- -- -----------
Net (loss)/income per Share
----------------------------- ------------- -- -----------
-- Basic and Diluted (0.51) (0.19)
----------------------------- ------------- -- -----------
Total assets 39,145,560 8,564,000
----------------------------- ------------- -- -----------
- -----------------------
(1) Includes $3,946,679 in costs incurred by TCI in connection with TCI's
acquisition by Retalix. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three Months Ended March 31,
2005--Operating Expenses--Acquisition Related Costs."
69
----------------------------- ------------- -- -----------
Long-term debt (including 0 23,400
capital lease)
----------------------------- ------------- -- -----------
The book value per share for TCI as of June 30, 2005 is $2.39. This is
calculated by dividing the net stockholders equity (deficit) of $30,702,854 as
stated on the TCI balance sheet dated as of June 30, 2005, included in Appendix
F to this proxy statement, by the weighted-average common shares outstanding of
12,825,459 as stated on the statement of operations as of June 30, 2005,
included in Appendix F to this proxy statement.
70
TCI SOLUTIONS, INC.
PROJECTED FINANCIAL INFORMATION
In November 2004, TCI's management prepared certain projections of
future operating results. These were provided to the TCI board and The Mentor
Group in February 2005 for use in determining whether Retalix's offer was fair
to TCI and its stockholders. The 2005 projections were also provided to Retalix
as part of its due diligence. The projections were not prepared with a view to
complying with published guidelines of the Securities and Exchange Commission or
the American Institute of Certified Public Accountants regarding projections or
generally accepted accounting principles regarding projections. While presented
with numerical specificity, the projections are based upon a variety of
assumptions relating to the business of TCI at the time they were prepared.
Subject to the discussion set forth below regarding the effect on such
projections of any future property acquisitions or dispositions, TCI considered
such assumptions reasonable as of the time they were made. Such assumptions are,
however, subject to significant economic and competitive uncertainties and
contingencies, some of which are beyond TCI's control. The variability and
unpredictability of these general economic conditions makes it difficult to
project results of operations with any degree of certainty. Accordingly, TCI
cannot predict whether the assumptions made in preparing such projections will
prove accurate. Such projections are inherently imprecise, and there can be no
assurances that the results presented in the actual results will not differ
materially from the results presented in the projections.
The projections were not prepared with a view to public disclosure. The
information concerning the projections is included in this proxy statement
solely because such information was furnished to the TCI board, The Mentor Group
and Retalix. The inclusion of the projections herein should not be regarded as a
representation by TCI, Retalix or any other entity or person that the projected
results will be achieved, and TCI assumes no responsibility for the accuracy of
such information or any responsibility to update such projections in light of
changed circumstances or additional information. Readers are cautioned not to
place undue reliance on this data.
The projected financial data for fiscal years 2005 through 2007 is set
forth below. The projections should be read together with the information
contained in TCI's public filings with the Securities and Exchange Commission
and in Appendices E and F to this proxy statement and the information set forth
above.
December 31, December 31, December 31,
2005 2006 2007
REVENUE
Software $ 8,980,000 $ 9,752,000 $ 10,727,200
Services $ 9,951,225 $ 12,018,908 $ 13,821,745
Maintenance $ 5,960,000 $ 7,152,000 $ 8,224,800
Other $ 147,500 $ 162,250 $ 178,475
============= ============= ==============
TOTAL REVENUE $ 25,038,725 $ 29,085,158 $ 32,952,220
COST OF SALES
Software $ 530,000 $ 609,500 $ 670,450
Services $ 5,261,726 $ 5,974,773 $ 6,811,242
Maintenance $ 984,378 $ 1,033,597 $ 1,085,276
Other - - -
------------- ------------- --------------
TOTAL COST OF SALES $ 6,776,104 $ 7,617,870 $ 8,566,968
============= ============= ==============
GROSS PROFIT $ 18,262,621 $ 21,467,288 $ 24,385,252
OPERATING EXPENSES
Sales $ 4,018,495 $ 4,590,424 $ 5,141,275
Marketing $ 2,819,637 $ 3,212,676 $ 3,598,197
Product Development $ 3,232,356 $ 3,593,685 $ 4,024,928
General and Administrative $ 6,299,184 $ 7,112,614 $ 7,391,902
------------- ------------- --------------
TOTAL OPERATING EXPENSES $ 16,369,671 $ 18,509,399 $ 20,156,302
============= ============= ==============
DEPRECIATION & AMORTIZATION
Depreciation $ 639,333 $ 738,000 $ 885,600
Amortization
71
------------- ------------- --------------
TOTAL DEPRECIATION & AMORTIZATION $ 639,333 $ 738,000 $ 885,600
------------- ------------- --------------
OTHER INCOME & (EXPENSE)
Interest Income $ 20,000 $ 24,000 $ 30,000
Interest Expense $ (125,004) (62,502) $ (78,128)
------------- ------------- --------------
TOTAL OTHER INCOME/(EXPENSE) $ (105,004) $ (38,502) $ (48,128)
------------- ------------- --------------
------------- ------------- --------------
NET INCOME/(LOSS) $ 1,148,613 $ 2,181,387 $ 3,295,222
============= ============= ==============
Non-GAAP Financial Measures
The projections also included the following figures for EBITDA and EBIT. EBITDA
is earnings before interest and other income, taxes, depreciation and
amortization. EBIT is earnings before interest and other income and taxes.
EBITDA and EBIT are not a measurement of financial performance under accounting
principles generally accepted in the United States (commonly referred to as
"GAAP") and should not be considered as a substitute for operating or net income
or cash flows from operating activities.
December 31, December 31, December 31,
2005 2006 2007
------------- ------------- --------------
EBITDA $ 1,892,950 $ 2,957,889 $ 4,228,950
EBIT $ 1,253,617 $ 2,219,889 $ 3,343,350
------------- ------------- --------------
TCI believes that EBIT and EBITDA are relevant and useful information commonly
used by investors, analysts and other interested parties. Accordingly, TCI is
disclosing this information to permit a more comprehensive analysis of its
operating performance and liquidity, and as an additional measure of its ability
to meet future requirements for debt service, capital expenditures and working
capital if the merger is not completed.
Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable GAAP
Measures
When we use non-GAAP financial measures such as EBITDA and EBIT in a filing with
the Securities and Exchange Commission, applicable regulations require us to
present the most directly comparable financial measures calculated and presented
in accordance with GAAP. In the foregoing table of projected fiscal data in
accordance with GAAP for fiscal years 2005 through 2007, above, the Net Income
figure is most comparable to the EBITDA and EBIT figures.
Securities and Exchange Commission regulations also require us to present a
reconciliation of the differences between the non-GAAP financial measures with
the most directly comparable financial measures calculated and presented in
accordance with GAAP.
EBITDA Reconciliation
In the table below, the non-GAAP EBITDA figure is obtained by subtracting the
GAAP figure for Total Operating Expenses from the GAAP figure for Gross Profit.
The GAAP figure for Net Income is obtained by also subtracting the GAAP figure
for Depreciation & Amortization and Other Income (Expense) from EBITDA.
December 31, December 31, December 31,
2005 2006 2007
GROSS PROFIT $ 18,262,621 $ 21,467,288 $ 24,385,252
------------- ------------- --------------
TOTAL OPERATING EXPENSES $ 16,369,671 $ 18,509,399 $ 20,156,302
============= ============= ==============
EBITDA $ 1,892,950 $ 2,957,889 $ 4,228,950
DEPRECIATION & AMORTIZATION $ 639,333 $ 738,000 $ 885,600
OTHER INCOME (EXPENSE) $ (105,004)$ (38,502)$ (48,128)
NET INCOME $ 1,148,613 $ 2,181,387 $ 3,295,222
72
EBIT Reconciliation
The non-GAAP EBIT figure is obtained by subtracting the GAAP figures for Total
Operating Expenses and Depreciation and Amortization from the GAAP figure for
Gross Profit. The GAAP figure for Net Income is obtained by subtracting Other
Income (Expense) from EBIT.
December 31, December 31, December 31,
2005 2006 2007
GROSS PROFIT $ 18,262,621 $ 21,467,288 $ 24,385,252
------------- ------------- --------------
TOTAL OPERATING EXPENSES $ 16,369,671 $ 18,509,399 $ 20,156,302
============= ============= ==============
TOTAL DEPRECIATION & AMORTIZATION $ 639,333 $ 738,000 $ 885,600
============= ============= ==============
EBIT $ 1,253,617 $ 2,219,889 $ 3,343,350
OTHER INCOME (EXPENSE) $ (105,004) $ (38,502) $ (48,128)
------------- ------------- --------------
NET INCOME $ 1,148,613 $ 2,181,387 $ 3,295,222
------------- ------------- --------------
PRICE RANGE OF TCI'S COMMON STOCK
TCI's common stock is not traded on any securities exchange. To TCI's
knowledge, there have been no reported bids or sales of its common stock.
DIVIDENDS AND DIVIDEND POLICY
TCI has not paid a dividend on its common stock during the past two
years. The merger agreement provides that TCI will not declare, set aside or pay
any dividends on, or make any other distributions in respect of, any of its
capital stock. Also, TCI's loan agreement with Comerica Bank-California
prohibits the payment of dividends on TCI's capital stock. See "THE MERGER
AGREEMENT" above.
73
INFORMATION ABOUT RETALIX
Retalix is a corporation organized under the laws of Israel with its
principal executive offices at 10 Zarhin Street, Raanana, 43000 Israel.
Retalix's phone number is (972) 9-776-6677. Retalix is an independent provider
of integrated enterprise-wide software solutions for the global retail food and
fuel industries. Spanning the retail supply chain from the warehouse to the
point of sale, Retalix's suite of software solutions integrates retail
information flow across a retailer's entire operations, encompassing its stores,
headquarters and warehouses. Its comprehensive integrated solution suite enables
food and fuel retailers to manage their retail operations more efficiently,
reduce infrastructure costs and closely collaborate with suppliers. Retalix's
software solutions also enable retailers to capture and analyze consumer
behavior data, and to use that data to more effectively devise and implement
targeted promotions to stimulate demand. Retalix believes that its extensive
knowledge and accumulated experience in developing software solutions for the
retail food and fuel industries enables it to provide solutions to retailers
that are better integrated and more tailored for its target markets than
competing solutions. Through its January 2004 acquisition of OMI International,
Retalix further extended the scope of its software suite to include supply chain
execution and warehouse management. With this enhanced suite of software
solutions, Retalix now provides retailers with the ability to manage, track and
report the movement of goods throughout the entire scope of their operations,
from the order, through the initial receipt of goods at the warehouse to the
final sale at the checkout counter.
Retalix markets its software solutions primarily to large and mid-sized
supermarket and convenience store chains, major fuel retailers and independent
grocers. In the supermarket and grocery sector, Retalix markets its solutions to
four tiers of food retailers that are typically characterized primarily by
revenue levels:
Tier 1 - annual revenues of over $2 billion;
Tier 2 - annual revenues of between $500 million and $2 billion;
Tier 3 - annual revenues of between $50 million and $500 million; and
Tier 4 - independent retailers.
Retalix markets its solutions to Tier 1 and Tier 2 food retailers, large
convenience store chains and major fuel retailers through a direct sales force
in the United States, Europe, Australia, Asia and Israel, augmented by a
combination of channel partners and resellers. Sales to Tier 1 and Tier 2 food
retailers, large convenience store chains and major fuel retailers, have
historically represented a substantial majority of Retalix's revenues. Retalix
targets Tier 3 and Tier 4 food retailers through its StoreNext joint ventures in
the United States and Israel, which sell their solutions directly (in Israel) or
through regional dealers. For larger supermarket and convenience store chains
and major fuel retailers, Retalix's professional services personnel provide its
customers with project management, implementation, application training and
technical services. Retalix also provides development services to customize its
applications to meet specific requirements of its customers and ongoing support
and product maintenance services.
Retalix believes that it is unique within the retail food software
industry as it offers software solutions that can serve the needs of the entire
range of food retailers, from multi-national supermarket and major convenience
store chains to independent grocers. It is able to serve such a diverse customer
base because it has designed its applications to include multiple levels of
functionality that can be adapted to the various sizes and forms of retail
operations of its customers. To date, Retalix's software solutions have been
installed in more than 33,000 supermarkets and grocers, convenience stores and
major fuel retailers in 50 countries, serving more than 260,000 checkout lanes.
Retalix's customers include leading supermarket and grocery chains such as
Hy-Vee and Publix in the United States, Delhaize, Sainsbury's and Tesco in
Europe, and large convenience stores and major fuel retailers such as Alon Fina,
Casey's and Pilot Oil in the United States and Husky Oil in Canada. In addition,
Retalix estimates that its software is currently installed at approximately
11,000 independent grocers out of the total U.S. market of approximately 20,000
independent grocers. Retalix's sales have grown from $36.1 million in 2000 to
$124.4 million in 2004.
Retalix Holdings Inc. is a Delaware corporation and indirect wholly
owned subsidiary of Retalix. Each of RTLX LLC and Survivor RTLX LLC is a
Delaware limited liability company whose sole member is Retalix Holdings Inc.
The address for each of Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC is
6200 Tennyson Parkway, Suite 150, Plano, Texas 75024 and the telephone number
for each is (469) 241-8400.
Retalix is subject to the informational requirements of the Exchange Act
applicable to foreign private issuers and fulfills such obligations by filing
reports with the Securities and Exchange Commission. You may read and copy any
document Retalix files with the SEC without charge at the Securities and
Exchange Commission's public reference room at 100 F Street, N.E., Washington,
D.C. 20549. Copies of such material may be obtained by mail from the Public
Reference Branch of the Securities and Exchange Commission at such address, at
prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information
74
on the public reference room. Certain of Retalix's Securities and Exchange
Commission filings are also available to the public at the SEC's website at
www.sec.gov.
As a foreign private issuer, Retalix is exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and its
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, Retalix is not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.
75
OTHER MATTERS
Other Matters at the Special Meeting
If any other matters properly come before the special meeting, it is the
intention of the proxy holders identified in the proxy card to vote in their
discretion on such matters pursuant to the discretionary authority granted
pursuant to the proxy card and permitted under applicable law. TCI does not have
notice of any such matters.
Future Stockholder Proposals
If the merger is completed, there will be no further public stockholder
meetings. However, if the merger is not completed, TCI stockholders will
continue to be entitled to attend and participate in stockholders' meetings. If
the merger is not completed, TCI will inform its stockholders, by press release
or other means determined reasonable by TCI, of:
o the date by which stockholder proposals must be received by TCI
for inclusion in the proxy materials relating to the annual
meeting for the fiscal year ended December 31, 2004, which
proposals must comply with the rules and regulations of the
Securities and Exchange Commission then in effect; and
o the date by which notice must be received from stockholders who
intend to present a proposal at TCI's next annual meeting
without including such proposal in its proxy materials.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning beneficial
ownership of common stock as of the record date, by any person who is known by
TCI to be the beneficial owner of more than five (5%) percent of common stock,
by each director of TCI, each executive officer named in the TCI's Annual Report
on Form 10-KSB for the year ended December 31, 2004 and by all current directors
and officers as a group.
We know of no persons other than those identified below who beneficially
own more than 5% of the outstanding shares of common stock, Series A Preferred
Stock or Series B Preferred Stock as of the record date. Unless otherwise
indicated in the footnotes, each person or entity has sole voting and investment
power (or shares such powers with his or her spouse) with respect to the shares
shown as beneficially owned. No directors or executive officers of Retalix
directly own any outstanding shares of TCI common, Series A Preferred or Series
B Preferred Stock.
- ---------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial Ownership (1)
- ---------------------------------------------------------------------------------------------------
Series A Series B
Name and Address of Common Percentage Preferred Percentage Preferred Percentage
Beneficial Owner (2) Stock of Class Stock of Class Stock of Class
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
David R. Butler (3) - - - - - -
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Lance C. Jacobs (4) 204,000 - - - - -
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Stephen P. DeSantis (5) 500 - - - - -
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Retalix Ltd. (6) 38,570,998(7) 73.4% 6,151,914(8) 99.8% 25,528,940 95.8%
10 Zarhin Street
Raanana, 43000, Israel
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Barry Shaked - - -
6100 Tennyson Parkway
Suite 150
Plano, TX 75024
- ---------------------------------------------------------------------------------------------------
76
- ---------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial Ownership (1)
- ---------------------------------------------------------------------------------------------------
Series A Series B
Name and Address of Common Percentage Preferred Percentage Preferred Percentage
Beneficial Owner (2) Stock of Class Stock of Class Stock of Class
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Danny Moshaioff - - -
10 Zarhin Street
Raanana, 43000, Israel
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Eli Spirer - - -
6100 Tennyson Parkway,
Suite 150
Plano, TX 75024
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
David N. Berg (7) - - - - - -
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
All directors and 204,500 - - - - -
executive officers as a
group (6 people)
- ---------------------------------------------------------------------------------------------------
(1) Each beneficial owner's percentage ownership is determined by assuming that
options and other convertible securities that are held by such person and
that are exercisable and convertible within 60 days have been exercised or
converted.
(2) Unless otherwise indicated, the address for each of the indicated owners is
17752 Skypark Circle, Suite 160, Irvine, CA 92614.
(3) Mr. Butler resigned as Chief Executive Officer of TCI on June 30, 2005.
(4) Mr. Jacobs served as TCI's Chief Executive Officer from 1997 until July,
2004. Mr. Jacobs served as Chief Industry Officer and as Executive Vice
President, Products and Strategy of Retalix Ltd. from June, 2005 to
September, 2005.
(5) Mr. DeSantis resigned his full-time employment with TCI on June 30, 2005.
(6) All shares owned by wholly-owned subsidiaries of Retalix may be deemed to be
beneficially owned by Retalix.
(7) Represents 13,042,058 shares of common stock which may be acquired upon
conversion of shares of Series A Preferred Stock (including 742,060 shares
of common stock issuable upon conversion of 350,028 shares of Series A
Preferred Stock issuable under the PIK dividend as described in TCI's
certificate of incorporation) and 25,528,940 shares of common stock issuable
upon conversion of shares of Series B Preferred Stock.
(8) Includes 350,028 shares of Series A Preferred Stock issuable under the
Series A Preferred Stock PIK dividend as described in TCI's certificate of
incorporation.
(9) Mr. Berg terminated his duties as an officer and employee effective July 21,
2004.
Purchases by TCI and its Directors and Executive Officers and by Retalix,
Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC and their Directors,
Managers and Executive Officers
Except for shares acquired by Retalix Holdings Inc. from the selling
stockholders, no purchases of TCI stock were made by TCI, its directors and
executive officers, or by Retalix, Retalix Holdings Inc., RTLX LLC and Survivor
RTLX LLC or their respective directors, managers or executive officers during
2003 or 2004.
77
Except as disclosed in this proxy statement, none of TCI's current
executive officers or directors, nor any of the executive officers or directors
or managers of any Retalix entity, have purchased or sold shares of TCI stock
within 60 days of the date of this proxy statement.
Available Information
TCI is subject to the informational reporting requirements of the
Exchange Act, and in accordance with the Exchange Act, files reports, proxy
statements and other information with the Securities and Exchange Commission.
These reports, proxy statements and other information can be inspected and
copies made at the Public Reference Room of the Securities and Exchange
Commission at 100 F Street, N.E., Washington, D.C. 20549 and the Securities and
Exchange Commission's regional office at 175 W. Jackson Blvd., Suite 900,
Chicago, Illinois 60604. Copies of these materials can also be obtained from the
Public Reference Room of the Securities and Exchange Commission at its
Washington address at prescribed rates. Information regarding the operation of
the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. Copies of these materials also may be obtained
without charge at the Securities and Exchange Commission's website at
www.sec.gov.
TCI and the Retalix entities have filed a Schedule 13E-3 with the
Securities and Exchange Commission with respect to the merger. As permitted by
the Securities and Exchange Commission, this proxy statement may omit certain
information contained in the Schedule 13E-3. The Schedule 13E-3, including any
amendments and exhibits filed or incorporated by reference as a part of it, is
available for inspection or copying as set forth above. Statements contained in
this proxy statement or in any document incorporated in this proxy statement by
reference regarding the contents of any contract or other document are not
necessarily complete and we urge you to read each such document carefully.
If you would like to request documents from TCI, please do so at least
ten business days before the date of the special meeting in order to receive
timely delivery of those documents prior to the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement when considering how to vote your shares at
the special meeting. TCI has not authorized anyone to provide you with
information that is different from what is contained in this proxy statement.
This proxy statement is dated October 28, 2005. You should not assume
that the information contained in this proxy statement is accurate as of any
date other than that date, and the mailing of this proxy statement to
stockholders does not create any implication to the contrary. This proxy
statement does not constitute a solicitation of a proxy in any jurisdiction
where, or to or from any person to whom, it is unlawful to make a proxy
solicitation.
By Order of the Board of Directors,
Irvine, California
October 28, 2005
78
SCHEDULE I
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
OF TCI AND RETALIX
1. DIRECTORS AND EXECUTIVE OFFICERS OF TCI SOLUTIONS. Following are the names
and present principal occupations or employment, and material occupations,
positions, offices or employments for the past five years, of each director and
executive officer of TCI. The business address of Mr. Butler and Mr. DeSantis is
17752 Skypark Circle, Suite 160, Irvine, California 92614 and their telephone
number is (949) 476-1122. The business address of Mr. Moshaioff is 10 Zarhin
Street, Raanana 43000, Israel and his telephone number is (972) 9-776-6677. The
business address of Messrs. Shaked and Spirer is 6200 Tennyson Parkway, Suite
150, Plano, Texas 75024 and their telephone number is (469) 241-8400.
Name Age Position
- ---- --- --------
David R. Butler 49 Director
Stephen P. DeSantis 43 Executive Vice President, Chief Financial
Officer and Corporate Secretary
Barry Shaked 48 Director
Danny Moshaioff 59 Director
Eli Spirer 49 Director
Set forth below is a brief description of the background and business experience
for the past five years of our directors and executive officers. Neither TCI nor
Retalix, Retalix Holdings Inc., RTLX LLC or Survivor RTLX LLC, nor to the best
of TCI's knowledge, any of the directors and executive officers of TCI or any
Retalix entity mentioned on this Schedule I (i) has been convicted in a criminal
proceeding during the past five years (excluding traffic violations and similar
misdemeanors); or (ii) has been a party to any judicial or administrative
proceeding during the past five years that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or finding any
violation of federal or state securities laws. Mr. Butler and Mr. DeSantis are
citizens of the United States. Mr. Shaked, Mr. Moshaioff and Mr. Spirer are
citizens of Israel.
David R. Butler joined the board of directors in 2003 and served as President
and CEO from July, 2004 to June 30, 2005. Mr. Butler served as Executive Vice
President, Sales of Retalix USA Inc. from April 1, 2005 to June 30, 2005 Mr.
Butler has served as vice president of sales for Best Software since 1996, with
responsibility for all corporate sales and marketing programs. In 1998, he was
named Chief Operating Officer, and in 1999 assumed the additional position of
President. Mr. Butler brings 25 years of experience in providing business
solutions to small and mid-sized firms. He was previously director of sales for
Lawson Software, and also held leadership positions with Bachman Information
Services, MAI Basic Four, and Burroughs Corp. Mr. Butler received a BS in
Finance from California State University, Fullerton.
Stephen P. DeSantis has over 19 years of financial management experience in both
the private and public sectors. In his role as our Chief Financial Officer and
Corporate Secretary, positions he has held since 1996, he is responsible for
corporate governance issues, SEC compliance, business planning, corporate
strategic communications, and securing financing for TCI. Mr. DeSantis also
manages the investor relations, finance, accounting, IT and human resource
departments. He began his career in 1985 with Coopers & Lybrand, LLP, in Los
Angeles. From 1989 to 1993 he held the position of Corporate Controller at
Cassette Productions Unlimited, Inc. From 1993 to 1995 he held the position of
Controller for TCI.
Barry Shaked is a founder of Retalix and has served as its President, Chief
Executive Officer and Chairman of the Board since its inception in April 1982.
From August 1975 to February 1979, Mr. Shaked served as an officer in the
Israeli Defense Forces. He attended the Computer Science School of Bar-Ilan
University from 1980 to 1983. As of August 31, 2005, Mr. Shaked holds ordinary
shares of Retalix which equal approximately 5.2% of Retalix's issued
I-1
and outstanding share capital. In addition, Mr. Shaked holds options to purchase
a total of up to 425,360 ordinary shares of Retalix.
Danny Moshaioff has served as an Executive Vice President and Chief Financial
Officer of Retalix since December 1999. From July 1997 to December 1999, Mr.
Moshaioff served as Chief Financial Officer of Blue Square ISR and from
September 1995 to June 1997, he served as General Manager of Mashbir Mazon. Mr.
Moshaioff has served as a director of Neviot Ltd. since January 2004. Mr.
Moshaioff received a B.A. in Economics and Statistics from the Hebrew University
in 1970 and an M.B.A. from New York University in 1972. As of August 31, 2005,
Mr. Moshaioff holds less than 1% of the total issued and outstanding share
capital of Retalix.
Eli Spirer is Vice President for Customer Services of Retalix. He joined Retalix
as a programmer when the company was founded in 1982 and was made Manager of
Development for the Israeli market in 1987. In 1992 he was promoted to Vice
President for International Development. After transferring to the United States
in 1996 he served for four years as Vice President for Strategic Development,
during which he managed supermarket business and strategic alliances. In May
2000 he was made Vice President for Customer Services. Mr. Spirer graduated from
Technion, Israel Institute of Technology in 1981 with a degree in Hotel
Management after service in the Israeli Defense Forces from 1974 to 1977. As of
August 31, 2005, Mr. Spirer holds less than 1% of the total issued and
outstanding share capital of Retalix.
2. DIRECTORS AND EXECUTIVE OFFICERS OF RETALIX. Following are the names and
present principal occupations or employment, and material occupations,
positions, offices or employments for the past five years, of each director and
executive officer of Retalix. Each such person is a citizen of Israel, other
than Mr. Hamilton, who is a U.S. citizen, the business address of each such
person is 10 Zarhin Street, Raanana 43000, Israel and the telephone number of
each such person is (972) 9-776-6677, other than Messrs. Shaked and Hamilton,
whose business address is 6200 Tennyson Parkway, Suite 150, Plano, Texas 75024
and whose telephone number is (469) 241-8400.
Name Age Position
Barry Shaked 48 President, Chief Executive Officer and Chairman
of the Board
Danny Moshaioff 59 Executive Vice President, Chief Financial Officer
Avinoam Bloch 48 Executive Vice President, Chief Operations
Officer-International Business
Yoni Stutzen 53 Executive Vice President, International Sales
Saul Simon 52 Vice President, Business Development and CRM
Products
Victor Hamilton 52 President, Retalix SCM, Inc.
Elhanan (Elli) Streit 64 External Director
Ilan Horesh 53 External Director
Sigal Hoffman 48 Director
Brian Cooper 49 Director
Ian O'Reilly 56 Director
Amnon Lipkin-Shahak 61 Director
Barry Shaked is a founder of Retalix and has served as its President, Chief
Executive Officer and Chairman of the Board since its inception in April 1982.
From August 1975 to February 1979, Mr. Shaked served as an officer in the
Israeli Defense Forces. He attended the Computer Science School of Bar-Ilan
University from 1980 to 1983.
Danny Moshaioff has served as an Executive Vice President and Chief Financial
Officer of Retalix since December 1999. From July 1997 to December 1999, Mr.
Moshaioff served as Chief Financial Officer of Blue Square ISR and from
September 1995 to June 1997, he served as General Manager of Mashbir Mazon. Mr.
Moshaioff has served as a director in Neviot Ltd. since January 2004. Mr.
Moshaioff received a B.A. in Economics and Statistics from the Hebrew University
in 1970 and an M.B.A. from New York University in 1972.
Avinoam Bloch has served as Executive Vice President, Chief Operations Officer -
International Business of Retalix since January 2005. From January 2002 until
January 2005, Mr. Bloch served as Executive Vice President, Products. From
January 2000 until January 2002, Mr. Bloch served as Executive Vice President,
Operations. From February 1993 to January 2000, Mr. Bloch served as Vice
President, Engineering responsible for Israeli markets and new technology
software development. From December 1988 to January 1993, Mr. Bloch served as a
Product
I-2
Manager for Wincor-Nixdorf and Wincor-Nixdorf Italy. He served as a Programmer
and Product Manager from January 1986 to December 1998. Mr. Bloch served as an
officer in the Israeli Defense Forces from 1975 to 1979. Mr. Bloch received a
B.Sc. in Computer Science and Mathematics from the Hebrew University in 1993.
Yoni Stutzen has served as Executive Vice President, International Sales of
Retalix since January 2004, and served as its Vice President, International
Sales from December 1998 until December 2003. He served as Retalix's Vice
President, Marketing from August 1994 through December 1998. Mr. Stutzen served
as a Marketing Manager for Manof Communications from January 1985 to July 1994
and as international SWIFT systems manager for Bank Hapoalim from January 1980
until December 1984. Mr. Stutzen received a B.Sc. in Industrial and Management
Engineering from the Technion, Israel Institute of Technology in 1974.
Saul Simon has served as Vice President, Business Development and CRM Products
of Retalix since January 2004, and served as its Vice President, Business
Development from November 1997 until December 2003. Mr. Simon served as Vice
President, U.S. Activities for Adapt Technologies from March 1993 to June 1997.
Mr. Simon received a B.Sc. in Computer Science and Mathematics from Tel Aviv
University in 1982.
Victor Hamilton has served as President of Retalix SCM, Inc. since April 2005.
His career began in 1981 when he founded H&S Computer Systems. H&S provided
customized computer software for the food distribution industry, specializing in
ERP warehousing, and sales force automation applications. In January 2000, Mr.
Hamilton assumed the role of Chairman and Chief Executive Officer of a newly
formed company, Integrated Distribution Solutions, L.L.C. ("IDS"), and served in
such capacities until the acquisition of IDS by Retalix in April 2005. In
addition to his role as Chairman and Chief Executive Officer, Mr. Hamilton was
the majority shareholder in IDS.
Elhanan (Elli) Streit has served as an external director of Retalix since March
2000. Since January 1999, Mr. Streit has been a managing director of PFM
International Access Limited. Mr. Streit served as the Director of the Friends
Association at the Israel Museum from July 1996 through July 1998 and as a
managing director at Dizengoff West Africa from August 1991 through January
1996. Mr. Streit served as an independent director in Advantech Ltd. from April
2000 to December 2002 and as a director of Primode Ltd. from September 2000 to
December 2004. He received a B.A. in Economics and Political Science from the
Hebrew University in 1963 and an M.B.A. from the Wharton School at the
University of Pennsylvania in 1965.
Ilan Horesh has served as an external director of Retalix since March 2000.
Since November 1998, Mr. Horesh has been a director of system projects at
Pelephone Communications Ltd. From December 1997 to November 1998, Mr. Horesh
was Chief Executive Officer at Shefa - The Customers Club of Maccabi Health
Services and, from January 1994 to December 1997, Mr. Horesh was a planning and
development executive at PAZ Oil Corporation. He received a B.A. in History from
Tel Aviv University in 1984, an M.A. in Political Science from Haifa University
in 1990 and an M.A. in Business Management from Tel Aviv Management College in
1996.
Sigal Hoffman has served as a director of Retalix since May 2004. Ms. Hoffman
has worked as an attorney in private practice since 1995. Ms. Hoffman has a B.A.
degree in Social Work, an M.B.A. in Educational Consulting and an LL.B. in law
from Tel-Aviv University.
Brian Cooper has served as a director of Retalix since August 1984. From
December 1999 to June 2001, Mr. Cooper served as Retalix's Vice President,
Israeli operations. Mr. Cooper also served as its Chief Financial Officer from
August 1984 until December 1999. From 1979 to 1984, Mr. Cooper served as an
officer in the Israeli Defense Forces as an economist and programmer. Mr. Cooper
has been a director of YCD Multimedia Ltd. since June 2003. Mr. Cooper received
a B.A. in Economics from Haifa University in 1977.
Ian O'Reilly has served as a director of Retalix since November 2000. Mr.
O'Reilly serves as a director of e-Daily and the Cambridge Building Society and
served as a Group IT Manager at Tesco Stores Ltd. between 1991 and 2000. He
received a British Computer Society Qualification from the Cambridge College of
Arts and Technology in 1972.
Amnon Lipkin-Shahak has served as a director of Retalix since April 2002. Since
May 2001, Mr. Lipkin-Shahak has served as the chairman of the board in the TAHAL
Group, and as a director in the Kardan Group, Granit Hacarmel and NILIT, and as
the chairman of the Bountiful Israel Council. Between May 1999 and March 2001,
Mr. Lipkin-Shahak served as a member of the Israeli parliament (the Knesset).
During most of this period, Mr. Lipkin-Shahak served as a cabinet minister in
charge of transport (between July 2000 and March 2001) and in charge of tourism
I-3
(between July 1999 and July 2000). In December 1998, Mr. Lipkin-Shahak retired
from his position as the Chief of Staff of the Israeli Defense Forces after
thirty-six years of service in the Israeli army.
Messrs. Shaked, Moshaioff, Hamilton and Spirer are the directors of Retalix
Holdings Inc., and various employees of Retalix in Israel and the U.S. are
officers of Retalix Holdings Inc., RTLX LLC and Survivor RTLX LLC. Retalix
Holdings Inc. is the sole manager of RTLX LLC and Survivor RTLX LLC.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
ATTACHED
A-1
EXECUTION COPY
--------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RETALIX LTD.,
RETALIX HOLDINGS INC.,
RTLX LLC
SURVIVOR RTLX LLC
AND
TCI SOLUTIONS, INC.
DATED AS OF APRIL 1, 2005
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 1, 2005 (this
"Agreement"), by and among Retalix, Ltd., an Israeli corporation ("Parent"),
Retalix Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of
Parent ("Holdings"), Survivor RTLX LLC, a Delaware limited liability company of
which Holdings is the single member ("LLC Merger Sub"), RTXL LLC, a Delaware
limited liability company of which Holdings is the sole member ("Acquisition
Sub") and TCI Solutions, Inc., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, each of the boards of directors or equivalent bodies of
Parent, Holdings, LLC Merger Sub, Acquisition Sub and the Company has determined
that it is advisable and in the best interests of its stockholders or members,
as the case may be, for the parties to enter into a business combination upon
the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance of such combination, each of the boards of
directors or equivalent bodies of Parent, Holdings, LLC Merger Sub, Acquisition
Sub and the Company has approved the merger (the "Merger") of Acquisition Sub
with and into the Company (with the Company surviving) followed immediately by
the merger of the Company with and into LLC Merger Sub (with LLC Merger Sub
surviving) (the "Subsequent Merger," and together with the Merger, the
"Mergers"), all in accordance with the applicable provisions of the General
Corporation Law of the State of Delaware ("DGCL") and upon the terms and subject
to the conditions set forth herein;
WHEREAS, upon consummation of the Subsequent Merger the separate
existence of the Company will cease;
WHEREAS, the board of directors of the Company has unanimously
recommended that the stockholders of the Company approve and adopt this
Agreement and the Merger;
WHEREAS, for United States federal income tax purposes, this Agreement,
together with the Stock Purchase Agreement (as defined below), is intended to
constitute a "plan of reorganization" within the meaning of Section 1.368-2(g)
and 1.368-3(a) of the Treasury Regulations and the acquisition of Shares (as
defined in the Stock Purchase Agreement) and the Mergers taken together are
intended to be an integrated transaction for purposes of Rev. Rul. 2001-26,
2001-1 CB 1297, and Rev. Rul. 2001-46, 2001-2 CB 321, that will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition and inducement to Parent's, Holding's, Acquisition Sub's and
LLC Merger Sub's willingness to enter into this Agreement, certain stockholders
of the Company are entering into a Stock Purchase Agreement with Holdings and
Parent (the "Stock Purchase Agreement"), in the form attached as Exhibit A
hereto, pursuant to which, among other things, each of such stockholders are
selling all of their shares of capital stock in the Company to Holdings;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01. Common Definitions. Unless otherwise defined in this Agreement,
capitalized terms used in this Agreement that are defined in the Stock Purchase
Agreement shall have the meanings assigned to them in the Stock Purchase
Agreement, and the rules of construction and documentary conventions set forth
in the Stock Purchase Agreement shall apply to this Agreement.
1.02. Additional Definitions. The following terms, as used herein, have
the following meanings:
"Company Capital Stock" means the Company Common Stock and Company
Preferred Stock.
"Company Common Stock" means the common stock, par value $0.001 per
share, of the Company.
"Company Preferred Stock" means the Company's Series A Preferred Stock
and Series B Preferred Stock.
"Membership Interest" the limited liability membership interests of LLC
Merger Sub.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means the Series A Non-Redeemable
Convertible Participating Preferred Stock, par value $0.001 per share, of the
Company.
"Series B Preferred Stock" means the Series B Non-Redeemable
Convertible Participating Preferred Stock, par value $0.001 per share, of the
Company.
ARTICLE II
THE MERGERS
2.01. The Mergers. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with DGCL, at the Effective Time (as
defined below), Acquisition Sub shall be merged with and into the Company. As a
result of the Merger, the separate existence of Acquisition Sub shall cease and
the Company shall continue as the surviving corporation of the Merger (the
"Surviving Corporation") and shall succeed to and assume all the
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rights and obligations of Acquisition Sub in accordance with DGCL. Immediately
following the Effective Time of the Merger, upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with DGCL, the Company
shall be merged with and into LLC Merger Sub, and the separate corporate
existence of the Company shall cease. LLC Merger Sub shall continue as the
surviving entity in the Subsequent Merger (the "Surviving LLC") and shall
succeed to and assume all of the rights and obligations of the Company in
accordance with DGCL. Unless this Agreement has been terminated and the
transactions herein contemplated have been abandoned pursuant to Article VIII,
and subject to the satisfaction or waiver of the conditions set forth in Article
IX, the consummation of the Mergers (the "Closing") will take place as promptly
as practicable (and in any event within two business days) after satisfaction or
waiver of the conditions set forth in Article IX, at the offices of Sullivan &
Worcester LLP, One Post Office Square, Boston MA 02109, unless another date,
time or place is agreed to in writing by Parent and the Company (the "Closing
Date").
2.02. Effective Time. As promptly as practicable after the satisfaction
or waiver of the conditions set forth in Article IX, the parties hereto shall
file a certificate of merger for the Merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with the relevant provisions of, DGCL and shall make
all other filings or recordings required under DGCL. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with such
Secretary of State, or at such other time as Parent and the Company shall agree
and specify in the Certificate of Merger (the time the Merger becomes effective
being the "Effective Time"). Immediately following the Effective Time, the
parties shall file a certificate of merger for the Subsequent Merger with the
Secretary of State of the State of Delaware, in such form as required by, and
executed in accordance with the relevant provisions of, DGCL and shall make all
other filings or recordings required under DGCL. The Subsequent Merger shall
become effective at such time as such certificate of merger is filed with the
Secretary of State of the State of Delaware.
2.03. Effect of the Mergers. At and after the Effective Time, (a) the
effect of the Merger shall be as provided in this Agreement, the Certificate of
Merger and the applicable provisions of DGCL; (b) the certificate of
incorporation of the Surviving Corporation shall be the certificate of
incorporation of the Company immediately prior to the Effective Time (and the
Certificate of Merger shall so provide), (c) the by-laws of the Surviving
Corporation shall be the by-laws of the Company immediately prior to the
Effective Time, (d) the directors of the Surviving Corporation shall be the
directors of the Company immediately prior to the Effective Time, to hold office
in accordance with the by-laws of the Surviving Corporation, and (e) the
officers of the Surviving Corporation shall be the officers of the Company
immediately prior to the Effective Time, to hold office in accordance with the
by-laws of the Surviving Corporation. At and after the effective time of the
Subsequent Merger, (a) the effect of the Subsequent Merger shall be as provided
in this Agreement, the certificate of merger for the Subsequent Merger and the
applicable provisions of DGCL; (b) the certificate of formation of the Surviving
LLC shall be the certificate of formation of LLC Merger Sub immediately prior to
the effective time of the Subsequent Merger (and the Certificate of Merger shall
so provide), (c) the limited liability company operating agreement of the
Surviving LLC shall be the limited liability company operating agreement of LLC
Merger Sub immediately prior to the effective time of the
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Subsequent Merger, and (d) the manager of the Surviving LLC shall be the manager
of the LLC Merger Sub immediately prior to the effective time of the Subsequent
Merger.
2.04. Effect on Membership Interests of Acquisition Sub. At the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any limited liability membership interest of Acquisition Sub, each
outstanding limited liability membership interest of Acquisition Sub issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock, par value $.001 per share, of the Surviving Corporation.
2.05. Effect on Company Capital Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
the capital stock of the Company:
(a) Cancellation of Shares of Company Capital Stock. Each share
of Company Capital Stock owned by Parent, Holdings, LLC Merger Sub or
the Company immediately prior to the Effective Time shall automatically
be canceled and retired and cease to exist, and no consideration or
payment shall be delivered therefor or in respect thereof.
(b) Conversion of Shares of Company Capital Stock. Subject to
Section 2.07(d) hereof, or as provided in Section 2.08 with respect to
Company Capital Stock as to which appraisal rights have been exercised:
(i) each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than
shares referred to in Section 2.05(a)) shall be cancelled and
extinguished and thereafter shall represent the right to receive
$0.132 in cash per share;
(ii) each share of Series A Preferred Stock of the Company,
issued and outstanding immediately prior to the Effective Time
(other than shares referred to in Section 2.05(a)) shall be
cancelled and extinguished and thereafter shall represent the
right to receive $0.8409 (on an as converted basis including all
shares issuable under the PIK dividend) in cash per share;
(iii) each share of Series B Preferred Stock of the Company
issued and outstanding immediately prior to the Effective Time
(other than shares referred to in Section 2.05(a)) shall be
cancelled and extinguished and thereafter shall represent the
right to receive $0.7573 in cash per share;
(iv) Fractional shares of Company Capital Stock, issued and
outstanding immediately prior to the Effective Time (other than
shares referred to in Section 2.05(a)) shall be cancelled and
extinguished and, subject to Section 2.07(d), thereafter shall
represent the right to receive cash in lieu thereof.
(c) Stock Options and Warrants. At the Effective Time, none of
Parent, Holdings, Acquisition Sub or LLC Merger Sub shall assume the
Company's obligations
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under any of the stock options or warrants of the Company, which remain
unexercised and outstanding as of the Effective Time, and the Company
shall cause all such options and warrants to terminate at the Effective
Time, without liability to Parent, Holdings, Acquisition Sub or LLC
Merger Sub.
(d) Merger Consideration. The aggregate cash issuable or reserved
for issuance pursuant to Sections 2.05(b) are referred to collectively
as the "Merger Consideration."
2.06. Conversion of Capital Stock in Subsequent Merger. By virtue of
the Subsequent Merger and without any further action on the part of Parent,
Holdings, Surviving Corporation or Surviving LLC, (i) each Membership Interest
then outstanding shall remain outstanding and each certificate therefore, if
any, shall continue to evidence one limited liability company membership
interest of the Surviving LLC, and (ii) each share of common stock of the
Surviving Corporation then outstanding shall be converted into a limited
liability company membership interest of Surviving LLC.
2.07. Exchange of Certificates.
(a) Promptly after the Closing, each holder of Company Capital
Stock shall surrender to Parent, or a paying agent appointed by Parent,
the stock certificates evidencing their shares of Company Capital
Stock, together with such other documents as may reasonably be required
by Parent, the holder of such Certificate shall be entitled to receive
in exchange therefore such holder's pro rata share of the Merger
Consideration. In the event of a transfer of ownership of Company
Capital Stock which is not registered in the transfer records of the
Company, and cash issued in exchange therefor pursuant to Section
2.05(b) shall be paid to a person other than the person in whose name
the certificate so surrendered is registered, if such certificate is
presented to the Parent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable
stock transfer taxes have been paid. Until surrendered as contemplated
by this Section 2.07(a), each certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon
such surrender the cash as contemplated in Section 2.05(b).
(b) No Further Ownership Rights in Company Capital Stock. All the
cash issued upon the surrender for exchange of certificates in
accordance with the terms hereof shall be deemed to have been paid in
full satisfaction of all rights pertaining to such shares of Company
Capital Stock, and from and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Capital Stock that were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates are presented to the Surviving Corporation
or Parent for any reason, they shall be cancelled in exchange for the
Merger Consideration as provided in this Article II.
(c) No Liability. To the extent permitted by applicable law, none
of Parent, Holdings, Surviving LLC, or the Surviving Corporation shall
be liable to any holder of
5
shares of Company Capital Stock or shares of Parent Common Stock, as
the case may be, for any Merger Consideration (or dividends or
distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(d) Withholding Rights. Each of Parent, Holdings, Surviving LLC
and the Surviving Corporation shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this
Agreement to any holder of Company Capital Stock such amounts as it is
required to deduct and withhold with respect to the making of such
payment under the Code or any provision of state, local, provincial or
foreign tax law. To the extent that amounts are so withheld, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of Company Capital Stock in respect of
which such deduction and withholding was made.
(e) Lost, Stolen or Destroyed Certificates. If any certificate
shall have been lost, stolen or destroyed, Parent shall issue in
exchange for such lost, stolen or destroyed Certificate, upon the
making of an affidavit of that fact by the holder thereof, such Merger
Consideration as may be required pursuant to Section 2.05(b); provided,
however, that Parent may, in its sole discretion and as a condition
precedent to the issuance and delivery thereof, require the owner of
such lost, stolen or destroyed certificate to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may
be made against the Parent with respect to the certificate alleged to
have been lost, stolen or destroyed.
2.08. Dissenting Shares. Notwithstanding Section 2.05(b), shares of
Company Capital Stock outstanding immediately prior to the Effective Time and
held by a holder who has not voted in favor of the Merger or consented thereto
in writing and who has demanded appraisal for such shares in accordance with
Section 262 of DGCL ("Dissenting Shares") shall not be converted into a right to
receive the applicable portion of the Merger Consideration, unless such holder
fails to perfect or withdraws or otherwise loses its right to appraisal. If
after the Effective Time, any such holder fails to perfect or withdraws or loses
its right to appraisal, such Dissenting Shares shall be treated as if they had
been converted as of the Effective Time into the right to receive the Merger
Consideration to which such holder is entitled, without interest thereon. The
Company shall give Parent prompt notice of any demands received by the Company
for appraisal of Company Capital Stock, and, prior to the Effective Time, Parent
shall have the right to participate in all negotiations and proceedings with
respect to such demands. Prior to the Effective Time, the Company shall not,
except with the prior written consent of Parent, make any payment with respect
to, or settle or offer to settle, any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules dated as of the date
hereof and delivered herewith to Parent (which disclosure schedules identify the
section and subsection to which each
6
disclosure therein relates), the Company hereby represents and warrants to
Parent, Holdings, Acquisition Sub and LLC Merger Sub as of the date hereof and
as of the Closing Date that:
3.01. Corporate Existence and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not Adversly Affect the Company. The Company
has heretofore delivered to Parent true and complete copies of the corporate
charter and bylaws of the Company as currently in effect.
3.02. Corporate Authorization. The execution, delivery and performance
by the Company of this Agreement and each Ancillary Agreement to which the
Company is a party, and the consummation by the Company of the transactions
contemplated hereby and thereby, are within the Company's corporate powers and
except for the required approval by the Company's stockholders, have been duly
authorized by all necessary corporate action on the part of the Company. Each of
this Agreement and each Ancillary Agreement to which the Company is a party has
been duly executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms.
3.03. SEC Disclosure Documents. None of the information supplied or to
be supplied by the Company or representatives for inclusion or incorporation by
reference in (i) the proxy statement or information statement relating to the
Company Stockholders' Meeting (such proxy statement or information statement as
amended or supplemented from time to time being hereinafter referred to as the
"Proxy Statement") or (ii) any required Schedule 13E-3, will, at the respective
times filed with the SEC, stock exchange or any other regulatory agency, on the
date mailed to the holders of Company Capital Stock and at the time of the
Company Stockholders' Meeting (as defined in Section 5.05 contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event relating to the Company or any of its
subsidiaries, affiliates, officers or directors should be discovered by the
Company which is required to be set forth in a supplement to the Proxy Statement
or an amendment to Schedule 13E-3, the Company shall promptly inform Parent. The
Proxy Statement will comply as to form in all material respects with the
applicable provisions of the Exchange Act and the rules and regulations
thereunder. Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any statements made or to be made or to be
incorporated by reference in any of the foregoing documents based on information
supplied by Parent, Holdings, Acquisition Sub or LLC Merger Sub expressly for
inclusion or incorporation by reference thereof.
3.04. Fairness Opinion. The Company has received the opinion of The
Mentor Group to the effect that, as of the date thereof, the Merger
Consideration to be received by holders of Company Common Stock in the Merger is
fair from a financial point of view to the holders of
7
Company Common Stock, and signed, true and complete copies of which opinions
have been delivered to Parent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT, HOLDINGS, ACQUISITION
SUB AND LLC MERGER SUB
Parent, Holdings, Acquisition Sub and LLC Merger Sub hereby represent
and warrant to the Company that:
4.01. Organization and Existence. Parent is a corporation duly
incorporated, validly existing and in good standing under the laws of Israel and
has all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
Holdings is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, is recently organized and has
conducted no business activities, other than as contemplated by this Agreement.
Acquisition Sub and LLC Merger Sub are limited liability companies duly
organized, validly existing and in good standing under the laws of the State of
Delaware, are each recently organized and neither has conducted business
activities, other than as contemplated by this Agreement.
4.02. Corporate Authorization. The execution, delivery and performance
by Parent, Holdings, Acquisition Sub and LLC Merger Sub of this Agreement and
any other Ancillary Agreement to which they are parties, the issuance and
delivery of shares of the Parent Common Stock, and the consummation by Parent,
Holdings, Acquisition Sub and LLC Merger Sub of the transactions contemplated in
this Agreement and the Ancillary Agreements are within the corporate, limited
liability company or other powers of Parent, Holdings, Acquisition Sub and LLC
Merger Sub and have been duly authorized by all necessary corporate or limited
liability company action on the part of Parent, Holdings, Acquisition Sub and
LLC Merger Sub. Each of this Agreement and such Ancillary Agreements to which
Parent, Holdings, Acquisition Sub or LLC Merger Sub are parties have been duly
executed and delivered by Parent, Holdings, Acquisition Sub and LLC Merger Sub,
as applicable, and constitute a valid and binding agreement of Parent, Holdings,
Acquisition Sub and LLC Merger Sub, as applicable. The shares of Parent Common
Stock, when issued and delivered in accordance with the terms of this Agreement
will validly issued, fully paid and nonassessable.
ARTICLE V
COVENANTS OF THE COMPANY
5.01. Conduct of the Company. From the date hereof until the Closing
Date, the Company shall conduct its businesses in the ordinary course consistent
with past practices and shall use its best efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and employees. Without limiting
the generality of the foregoing, from the date hereof until the Closing Date,
the Company will not:
8
(i) adopt or propose any change in their corporate charter or
bylaws;
(ii) merge or consolidate with any other Person or acquire a
material amount of assets of any other Person;
(iii) sell, lease, license, mortgage, encumber or otherwise
dispose of any material assets or property except (A) pursuant to
existing contracts or commitments and (B) in the ordinary course
consistent with past practices;
(iv) effect any direct or indirect redemption, purchase or
other acquisition of any securities of the Company, or declare,
set aside or pay any dividend or make any other distribution of
assets of any kind whatsoever with respect to any securities of
the Company;
(v) issue any securities of the Company or amend any term of
any Company option plan or any outstanding Option;
(vi) incur any indebtedness for money borrowed or guarantee
any indebtedness of any other Person or release or cancel any
material indebtedness or claim;
(vii) settle any claim, action or proceeding, except in the
ordinary course of business consistent with prior practice; or
(viii) agree or commit to do any of the foregoing.
(b) During such time as Parent or Holdings Affiliates do not
control the Board of Directors, the Company will not (i) take or agree
or commit to take any action that would make any representation and
warranty made by the Company under this Agreement or by Sellers under
the Stock Purchase Agreement on the date of its execution and delivery
inaccurate in any respect at, or as of any time prior to, the Closing
Date or (ii) omit or agree or commit to omit to take any action
necessary to prevent any such representation or warranty from being
inaccurate in any respect at any such time.
5.02. Access to Information. From the date hereof until the Closing
Date, the Company shall (a) give Parent, its counsel, financial advisors,
financing sources, auditors and other authorized representatives full access to
the offices, properties, books and records of the Company, (b) furnish to
Parent, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information relating
to the Company as such Persons may reasonably request and (c) instruct the
employees, counsel and financial advisors of the Company to cooperate with
Parent in its investigation of the Company.
5.03. Notices of Certain Events; Continuing Disclosure. (a) The Company
will promptly notify Parent of:
9
(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental
or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or
proceedings commenced or, to the Company's knowledge, threatened
against, or relating to or involving or otherwise affecting the
Company or that relate to the consummation of the transactions
contemplated by this Agreement.
(b) Until the Closing Date, the Company shall have the continuing
obligation promptly to advise Parent with respect to any matter
hereafter arising or discovered that, if existing or known at the date
of this Agreement, would have been required to be set forth or
described in a schedule to this Agreement, or that constitutes a breach
or prospective breach of this Agreement by the Company.
5.04. Compensation. Except as set forth in Schedule 5.04, the Company
will not enter into or modify any consulting, employment or severance contracts,
increase the salaries, wage rates or fringe benefits of its officers, directors
or employees or pay bonuses or other remuneration except for current salaries,
severance and other remuneration for which the Company is obligated under
arrangements existing on the date hereof.
5.05. Consents. The Company will use commercially reasonable efforts to
obtain all third party consents required to consummate the Merger, and make all
filings with governmental entities, required with respect to the consummation of
the Merger.
5.06. Stockholder Approval. (a) The Company will take all action
necessary in accordance with DGCL, the Company's certificate of incorporation,
as amended, and its by-laws to convene a meeting of Stockholders of the Company
(the "Company Stockholders' Meeting") as promptly as possible following the date
hereof to consider and vote upon the Merger, this Agreement and the transactions
contemplated hereby.
(b) The Proxy Statement shall include a statement that the
Company's Board of Directors recommend approval and adoption of this
Agreement and the Merger by the holders of Company Common Stock.
(c) The Company's Board of Directors shall (i) cause the Company
to use its reasonable best efforts (through its agents or otherwise) to
solicit from the holders of the Company Common Stock proxies in favor
of the Merger, this Agreement and the transactions contemplated hereby
and (ii) cause the Company to use its reasonable best efforts to secure
stockholder approval of the Merger, this Agreement and the transactions
contemplated hereby.
10
(d) The Company shall prepare a preliminary Proxy Statement
relating to the Company Stockholders' Meeting and forms of proxy for
use at the Company Stockholders' Meeting relating to the vote of the
holders of the Company Capital Stock with respect to the Merger, this
Agreement and the transactions contemplated hereby. The Company shall
cause the preliminary Proxy Statement to be filed with the SEC at the
earliest practicable date following the date hereof. Parent and the
Company shall cooperate with each other in the preparation of the Proxy
Statement, and the Company shall notify Parent of the receipt of any
comments of the SEC with respect to the preliminary Proxy Statement and
of any requests by the SEC for any amendment or supplement thereto or
for additional information and shall promptly provide to Parent copies
of all correspondence between the Company or any representative of the
Company and the SEC. As promptly as practicable after comments are
received from the SEC with respect to the preliminary Proxy Statement,
the Company shall use its reasonable best efforts to respond to the
comments of the SEC and, to the extent comments of the SEC relate to
Parent, Holdings, Acquisition Sub or LLC Merger Sub, Parent, Holdings,
Acquisition Sub and LLC Merger Sub shall use their reasonable best
efforts to respond to the comments of the SEC. The Company shall give
Parent and its counsel the opportunity to review all amendments and
supplements to the Proxy Statement and all responses to requests for
additional information and replies to comments of the SEC prior to
their being filed with or sent to the SEC and Parent, Holdings,
Acquisition Sub and LLC Merger Sub shall provide the Company with such
information about them as may be required to be included in the Proxy
Statement or as may be reasonably required to respond to any comment of
the SEC. After all the comments received from the SEC have been cleared
by the SEC staff and all information required to be contained in the
Proxy Statement has been included therein by the Company, the Company
shall file with the SEC the definitive Proxy Statement and the Company
shall use its reasonable best efforts to have the Proxy Statement
cleared by the SEC as soon thereafter as practicable. The Company shall
cause the Proxy Statement to be mailed to record holders of Company
Capital Stock as promptly as practicable after clearance by the SEC.
5.07. Acquisition Proposals. (a) Subject to Section 5.06(b), from the
date hereof until the Effective Time or termination of this Agreement in
accordance with Article VIII hereof, whichever is earlier, Company shall not,
nor shall the Company authorize or permit any of its or their officers,
directors, employees, investment bankers, attorneys, accountants, consultants or
other agents or advisors to, directly or indirectly, (i) solicit, initiate or
knowingly take any action to facilitate or encourage any Acquisition Proposal
(as defined below) or any inquiries or the making of any proposal that
constitutes or could reasonably be expected to lead to an Acquisition Proposal,
(ii) enter into, continue or participate in any discussions or negotiations
with, furnish any information relating to the Company or afford access to the
business, properties, assets, books or records of the Company to, otherwise
cooperate in any way with, or assist, participate in, facilitate or encourage
any effort by any third party to do or seek to make, or that has made an
Acquisition Proposal, (iii) approve, endorse or recommend any Acquisition
Proposal or (iv) enter into any letter of intent or similar document or any
contract, agreement or commitment contemplating or otherwise relating to any
Acquisition Proposal.
11
(b) Notwithstanding the foregoing, the Board of Directors of the
Company, directly or indirectly through advisors, agents or other
intermediaries, may (i) engage in negotiations or discussions with any
third party that has made (and not withdrawn) a bona fide Acquisition
Proposal that the Board of Directors of the Company reasonably
determines (after consultation with the Company's financial advisor)
constitutes a Superior Proposal, (ii) furnish to such third party
nonpublic information relating to the Company or any of its
subsidiaries pursuant to a confidentiality agreement with terms no less
favorable to the Company than those contained in the existing
confidentiality agreement with Parent, (iii) take and disclose to its
stockholders a position contemplated by Rules 14d-9 and 14e-2(a) under
the Exchange Act or otherwise make disclosure to them, (iv) following
receipt of such an Acquisition Proposal, withdraw, modify in a manner
adverse to Parent, or fail to make a recommendation as to the
advisability of the Merger, and/or (v) take any action ordered to be
taken by the Company by any court of competent jurisdiction if, in each
case (1) neither the Company nor any representative of Company shall
have -- violated any of the restrictions set forth in this Section
5.06, (2) the Board of Directors of the Company determines in good
faith (after consultation with its outside legal counsel) that the
failure to take such action would be reasonably likely to result in a
breach of its fiduciary obligations to the Company's stockholders under
applicable law, (3) prior to furnishing any such nonpublic information
to, or entering into any such discussions with, such person or group,
the Company gives Parent written notice of the identity of such person
or group and all of the material terms and conditions of such
Acquisition Proposal and of the Company's intention to furnish
nonpublic information to, or enter into discussions with, such person
or group, and the Company receives from such person or group an
executed confidentiality agreement containing terms at least as
restrictive with regard to the Company's confidential information as
the confidentiality agreement executed with Parent, (4) gives Parent
prompt advance notice of its intent to furnish such nonpublic
information or enter into such discussions (which notice shall in no
event be given less than one (1) business day prior to furnishing such
information or entering into such discussions), and (5)
contemporaneously with furnishing any such nonpublic information to
such person or group, the Company furnishes such nonpublic information
to Parent (to the extent such nonpublic information has not been
previously furnished by the Company to Parent). The Company will
immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal, and shall use its reasonable best efforts to
cause any such parties in possession of confidential information about
the Company that was furnished by or on behalf of the Company to return
or destroy all such information in the possession of any such party or
in the possession of any agent or advisor of any such party. Without
limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding two sentences by any officer,
director or employee of the Company or any of its subsidiaries or any
investment banker, attorney or other advisor or representative of the
Company or any of its subsidiaries shall be deemed to be a breach of
this Section 5.06 by the Company.
(c) In addition to the obligations of the Company set forth in
paragraph (a) of this Section 5.06, the Company as promptly as
reasonably practicable shall advise Parent
12
orally and in writing of any Acquisition Proposal, or any inquiry with
respect to or which the Company reasonably should believe would lead to
any Acquisition Proposal, the material terms and conditions of such
Acquisition Proposal or inquiry, and the identity of the person or
group making any such Acquisition Proposal or inquiry. The Company will
keep Parent informed as promptly as reasonably practicable of any
amendments of any such Acquisition Proposal or inquiry.
For purposes of this Agreement, "Acquisition Proposal" shall mean any
written offer or proposal by a third party, other than Parent, Holdings,
Acquisition Sub, LLC Merger Sub or any affiliate thereof, relating to: (A) any
acquisition or purchase from the Company by any person or "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of more than a 15% interest in the outstanding voting securities of
the Company or any tender offer or exchange offer that if consummated would
result in any person or "group" (as defined under Section 13(d) of the Exchange
Act and the rules and regulations thereunder) beneficially owning 15% or more of
the outstanding voting securities of the Company or any merger, consolidation,
business combination or similar transaction involving the Company pursuant to
which the stockholders of the Company immediately preceding such transaction
would hold less than 85% of the equity interests in the surviving or resulting
entity of such transaction; (B) any sale, lease, exchange, transfer, license,
acquisition, or disposition of more than 15% of the consolidated assets of the
Company; (C) any liquidation or dissolution of the Company or (D) any other
transaction the consummation of which would or could reasonably be expected to
impede, interfere with, prevent or materially delay the consummation of the
transactions contemplated hereby.
For purpose of this Agreement, "Superior Proposal" means any bona fide,
unsolicited written Acquisition Proposal for at least a majority of the
outstanding shares of Company Common Stock on terms that the Board of Directors
of Company determines in good faith by a majority vote, after taking into
account all the terms and conditions of the Acquisition Proposal, are more
favorable to the Company's stockholders than as provided hereunder.
5.08. Confidentiality. The Company will hold, and will use its best
efforts to cause its Affiliates, officers, directors, employees, accountants,
counsel, consultants, advisors and agents to hold, in confidence, unless
compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning
Parent, Holdings, Acquisition Sub, LLC Merger Sub or their Affiliates furnished
to the Company or its Affiliates (or their respective advisors), in connection
with the transactions contemplated by this Agreement and the Ancillary
Agreements, except to the extent that such information can be shown to have been
(i) previously known on a nonconfidential basis by the Company, (ii) in the
public domain through no fault of the Company or (iii) later lawfully acquired
by the Company from sources other than Parent; provided that the Company may
disclose such information to its respective officers, directors, employees,
accountants, counsel, consultants, advisors and agents in connection with the
transactions contemplated by this Agreement so long as such persons are informed
by the Company of the confidential nature of such information and are directed
by the Company to treat such information confidentially in accordance with this
Agreement. The obligation of the Company and their Affiliates, to hold any such
information in confidence shall be satisfied if they exercise the same care with
respect to such information as they would take to
13
preserve the confidentiality of their own similar information. If this Agreement
is terminated, the Company and its Affiliates, will, and will use their best
efforts to cause their respective officers, directors, employees, accountants,
counsel, consultants, advisors and agents to, destroy or deliver to Parent, upon
request, all tangible documents and other materials, and all copies thereof,
obtained by the Company or its Affiliates, or on their behalf concerning Parent,
Holdings, Acquisition Sub, LLC Merger Sub or their Affiliates in connection with
this Agreement that are subject to such confidence.
ARTICLE VI
COVENANTS OF PARENT, HOLDINGS, ACQUISITION SUB AND LLC MERGER SUB
6.01. Continuing Director and Officer Indemnification. From and after
the Effective Time, the Surviving LLC (or its successors or assigns) shall
fulfill and honor the obligations of the Company pursuant to the indemnification
provisions in the Company's certificate of incorporation and by-laws existing as
in effect on the date hereof with respect to the Company's directors and
officers.
6.02. Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Parent, Holdings, Acquisition Sub and Merger Sub
will hold, and will use their best efforts to cause their respective Affiliates,
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning the Company and its Subsidiaries furnished
to Parent, Holdings, Acquisition Sub, LLC Merger Sub or their Affiliates (and
their respective advisors) in connection with the transactions contemplated by
this Agreement, except to the extent that such information can be shown to have
been (i) previously known on a nonconfidential basis by Parent , Holdings,
Acquisition Sub or LLC Merger Sub, (ii) in the public domain through no fault of
Parent, Holdings, Acquisition Sub or LLC Merger Sub or (iii) later lawfully
acquired by Parent, Holdings, Acquisition Sub or LLC Merger Sub from sources
other than the Company or its Subsidiaries; provided that Parent, Holdings,
Acquisition Sub and LLC Merger Sub may disclose such information to its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents in connection with the transactions contemplated by this Agreement so
long as such Persons are informed by Parent, Holdings, Acquisition Sub or LLC
Merger Sub of the confidential nature of such information and are directed by
Parent, Holdings, Acquisition Sub or LLC Merger Sub to treat such information
confidentially in accordance with this Agreement. The obligation of Parent,
Holdings, Acquisition Sub and LLC Merger Sub to hold any such information in
confidence shall be satisfied if they exercise the same care with respect to
such information as they would take to preserve the confidentiality of their own
similar information. If this Agreement is terminated, Parent, Holdings,
Acquisition Sub and LLC Merger Sub will, and will use their best efforts to
cause their respective Affiliates, officers, directors, employees, accountants,
counsel, consultants, advisors and agents to, destroy or deliver to the Company,
upon request, all tangible documents and other materials, and all copies
thereof, obtained by Parent, Holdings, Acquisition Sub, LLC Merger Sub or their
Affiliates or on their behalf
14
concerning the Company and its Subsidiaries in connection with this Agreement
that are subject to such confidence.
6.03. Vote. At the Company's Stockholder Meeting, Holdings shall vote
all of its shares of Company Capital Stock in favor of the Merger.
ARTICLE VII
COVENANTS OF ALL PARTIES
In addition to the foregoing, Parent, Holdings, Acquisition Sub, LLC
Merger Sub and the Company each covenant and agree as follows.
7.01. Cooperation. It shall cooperate fully with the other parties
hereto in furnishing any information or performing any action reasonably
requested by any such party, which information or action is necessary to the
successful consummation of the transactions contemplated by this Agreement.
Subject to its further rights under this Agreement, it shall use commercially
reasonable efforts to cause the Closing to occur at the earliest practicable
time.
7.02. Additional Agreements. In case at any time after the Effective
Time any further action is reasonably necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving LLC with full title to all
properties, assets, rights, approvals, immunities and franchises of the Company,
the proper officers and directors of each corporation which is a party to this
Agreement will take all such necessary action.
7.03. Public Announcements. Neither Parent nor the Company will
disseminate any press release or other announcement concerning this Agreement or
the transactions contemplated herein to any third party (except to the
directors, officers and employees of the parties to this Agreement whose direct
involvement is necessary for the consummation of the transactions contemplated
under this Agreement, to the attorneys, advisors and accountants of the parties
hereto, or except as Parent determines in good faith to be required by
applicable law after consultation with the Company) without the prior written
agreement of Parent and the Company.
7.04. Tax-Free Reorganization. Each of the parties shall use its
reasonable best efforts through the effective time of the Subsequent Merger to
cause the acquisition of Shares (as defined in the Stock Purchase Agreement) and
the Mergers taken together to be treated as a reorganization within the meaning
of Section 368(a) of the Code. No party will take any position on any federal,
state or local income or franchise Tax Return, or take any other tax reporting
position, that is inconsistent with the treatment of the acquisition of Shares
(as defined in the Stock Purchase Agreement) and the Mergers taken together as a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by applicable tax law (and then only to the extent required
by such applicable tax law).
15
ARTICLE VIII
TERMINATION
8.01. Grounds for Termination. This Agreement may be terminated at any
time prior to the Effective Time:
(a) by written agreement of the Company, the Sellers' Committee
and Parent;
(b) by either the Company or Parent if there shall be any law or
regulation that makes consummation of the transactions contemplated
hereby illegal or otherwise prohibited or if consummation of the
transactions contemplated hereby would violate any nonappealable final
order, decree or judgment of any court or governmental body having
competent jurisdiction.
(c) by the Company, if, prior to the adoption of this Agreement
at the Company Stockholders' Meeting, the Board of Directors of the
Company shall have approved, and the Company shall enter into, a letter
of intent, term sheet or a definitive agreement providing for the
implementation of a Superior Proposal; but only if prior to termination
under this subsection (c) (i) the Company is not then in breach of
Section 5.06, (ii) the Company's Board of Directors shall have
authorized the Company, subject to complying with the terms of this
Agreement, to enter into a letter of intent, term sheet or definitive
agreement concerning a transaction that constitutes a Superior Proposal
and the Company shall have notified the Parent in writing that it
intends to enter into such a letter of intent, term sheet or definitive
agreement , (iii) during the ten (10) business day period after the
Company's notice: (A) the Company shall have offered to negotiate with,
and, if accepted, negotiated in good faith with, Parent to attempt to
make such adjustments in the terms and conditions of this Agreement as
would enable the Company to proceed with the Mergers and (B) the Board
of Directors of the Company shall have concluded, after considering the
results of such negotiations and the revised proposals made by the
Parent, if any, that any Superior Proposal giving rise to the Company's
notice continues to be a Superior Proposal; (iv) such termination is
within five (5) business days following the ten (10) business day
period referred to above, and (v) no termination pursuant to this
Section 8.01(c) shall be effective unless the Company shall
simultaneously make the payment of the termination fee required by
Section 8.04.
(d) by Parent, if the Company's Board of Directors (i) shall have
withdrawn or modified in a manner adverse to Parent, Holdings,
Acquisition Sub or LLC Merger Sub its approval or recommendation of the
Merger Agreement or the transactions contemplated thereby, (ii) shall
have recommended an Acquisition Proposal or (iii) shall have adopted
any resolution to effect any of the foregoing.
8.02. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.01, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant to
which such termination is made, and this Agreement, except as provided in
Section 10.01, shall forthwith become void and there shall be no liability
16
on the part of any party hereto or any of its affiliates, directors, officers or
stockholders except (i) as set forth in Section 8.03 and 8.04 hereof, and (ii)
nothing herein shall relieve any party from liability for any breach hereof. The
provisions of Sections 6.02 and 7.03 shall survive any termination hereof
pursuant to Section 8.01.
8.03. Fees and Expenses. Except as provided below, each party will bear
its own costs and expenses (including legal, accounting and investment banking
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby.
8.04. Termination Fee. The Company shall pay Parent $2,000,000 if this
Agreement is terminated by the Company pursuant to Section 8.01(c) or by Parent
pursuant to Section 8.01(d). Any payment due under Section 8.04 shall be made
concurrently with the termination of this Agreement pursuant to Section 8.01(c)
or 8.01(d), as the case may be, by wire transfer of immediately available funds
to an account designated by Parent or, if no wire transfer instructions have
been provided to the Company by Parent, by check.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER
The obligations of Company, Parent and Merger Sub to consummate the
Merger are subject to the satisfaction of the following conditions:
(a) approval of the holders of a majority of outstanding Company
Common Stock and Company Preferred Stock (voting on an as-converted to
Common Stock basis) at the Company Stockholders' Meeting shall have
been obtained in compliance with the Company's certificate of
incorporation and by-laws and the DGCL.
(b) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation
of the Mergers.
(c) The Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it on or prior
to the Closing Date and Parent shall have received a certificate signed
by the Chief Executive Officer of the Company to the foregoing effect.
(d) Parent, Holdings, Acquisition Sub and LLC Merger Sub shall
have performed in all material respects all of its obligations
hereunder required to be performed by it on or prior to the Closing
Date and the Company shall have received a certificate signed by the
Chief Executive Officer or Manager, as applicable, of each of Parent,
Holdings, Acquisition Sub and LLC Merger Sub to the foregoing effect.
17
ARTICLE X
MISCELLANEOUS
10.01. Effectiveness of Representations, Warranties and Agreements.
Except as otherwise provided in this Section 10.01, the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any other party hereto, any person controlling any such party or any of their
officers or directors, whether prior to or after the execution of this
Agreement. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time.
10.02. Notices. All notices, requests, demands or other communications
that are required or may be given pursuant to the terms of this Agreement shall
be in writing and shall be deemed to have been duly given: (i) on the date of
delivery, if personally delivered by hand, (ii) upon the third day after such
notice is deposited in the United States mail, if mailed by registered or
certified mail, postage prepaid, return receipt requested, (iii) upon the date
scheduled for delivery after such notice is sent by a nationally recognized
overnight express courier or (iv) by fax upon written confirmation (including
the automatic confirmation that is received from the recipient's fax machine) of
receipt by the recipient of such notice:
if to Parent, Holdings, Acquisition Sub with a copy to:
or LLC Merger Sub, to:
Harvey E. Bines, Esq.
Danny Moshaioff Sullivan & Worcester LLP
Retalix, Ltd. One Post Office Square
10 Zarhin Street, Corex House Boston, MA 02109
43000, Ra'anana, Israel Telecopy: (617) 338-2880
Telecopy: +972-9-744-4756
if to the Company, to: with a copy to:
David Butler William J. Simpson, Esq.
TCI Solutions, Inc. Paul, Hastings, Janofsky & Walker LLP
17752 Skypark Circle 695 Town Center Drive, 17th Floor
Suite 160 Costa Mesa, CA 92629
Irvine, CA 92614 Telecopy: (714) 979-1921
Telecopy: (949) 476-1133
Such information may be changed, from time to time, by means of a
notice given in the manner provided in this Section 10.02.
18
10.03. Waiver. Parent may, with respect to the Company or any
stockholder of the Company, and the Company may, with respect to Parent,
Holdings, Acquisition Sub or LLC Merger Sub, (a) extend the time for the
performance of any of its obligations or other acts, (b) waive any inaccuracies
in its representations and warranties contained herein or in any document
delivered pursuant hereto or (c) waive compliance with any of its agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
10.04. Entire Agreement; Amendment. This Agreement (including any
exhibits and schedules hereto), the Ancillary Agreements and the Confidentiality
Agreement between Company and Parent constitute the entire agreement among the
parties hereto and supersede all prior and contemporaneous agreements and
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof. This Agreement may be amended only by an
instrument in writing signed by Parent and the Company stating that it
constitutes an amendment to this Agreement.
10.05. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE.
10.06. Specific Performance and Injunctive Relief. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached or threatened to be breached. It is
accordingly agreed that the parties shall be entitled to a preliminary and
permanent injunction or injunctions to prevent breaches, or threatened breaches,
of this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction, without the
need to post bond or other security, this being in addition to any other remedy
to which they are entitled at law or in equity.
[Remainder of Intentionally Left Blank]
19
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
RETALIX, LTD.
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer
RETALIX HOLDINGS INC.
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer
RTLX LLC
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer:
SURVIVOR RTLX LLC
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer
TCI SOLUTIONS, INC.
By /s/ David R. Butler
-------------------
Name: David R. Butler
Title: President & CEO
TCI SOLUTIONS, INC.
By /s/ Stephen P. DeSantis
-----------------------
Name: Stephen P. DeSantis
Title: Chief Financial Officer
20
APPENDIX B
STOCK PURCHASE AGREEMENT
ATTACHED
B-1
EXECUTION COPY
STOCK PURCHASE AGREEMENT
Dated As Of
APRIL 1, 2005
Among
TCI SOLUTIONS, INC.,
RETALIX LTD.,
RETALIX HOLDINGS INC.
AND
THE STOCKHOLDERS LISTED ON THE SIGNATURE PAGES HERETO
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of April 1 2005 among Retalix Ltd., an Israeli
corporation ("Parent"), TCI Solutions, Inc, a Delaware corporation (the
"Company"), the stockholders of TCI Solutions, Inc. listed on the signature
pages hereto ("Sellers"), and Retalix Holdings, Inc., a Delaware corporation
("Buyer"), a wholly-owned subsidiary of Parent.
R E C I T A L S:
WHEREAS, Buyer desires to purchase from Sellers the shares of capital
stock of the Company owned by such Sellers (the "Shares");
WHEREAS, each Seller desires to sell to Buyer all of the Shares owned
by such Seller; and
WHEREAS, for United States federal income tax purposes, this Agreement,
together with the Merger Agreement, is intended to constitute a "plan of
reorganization" within the meaning of Section 1.368-2(g) and 1.368-3(a) of the
Treasury Regulations and the acquisition of Shares and the Mergers (as defined
in the Merger Agreement) taken together are intended to be an integrated
transaction for purposes of Rev. Rul. 2001-26, 2001-1 CB 1297, and Rev. Rul.
2001-46, 2001-2 CB 321, that will qualify as a reorganization within the meaning
of Section 368(a) of the Code;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. (a) The following terms, as used herein, have the
following meanings:
"Adverse" or "Adversely" when used in conjunction with "Affect,"
"Change" or "Effect" shall mean, with respect to the Parent, Buyer or the
Company, as the case may be, any related events, conditions or circumstances
which individually or in the aggregate could reasonably be expected to, in a
material respect or to a material degree (a) adversely affect the enforceability
of this Agreement and the Ancillary Agreements as to such party, (b) adversely
affect such party's assets, liabilities, properties, financial condition or
results of operation, (c) impair or delay such party's ability to fulfill its
obligations under the terms of this Agreement and the Ancillary Agreements or
(d) adversely affect the aggregate rights and remedies of the other parties
under this Agreement and the Ancillary Agreements . "Materiality" as used in
this definition, unless specifically stated to the contrary, shall be determined
without regard to the fact that various provisions of this Agreement and the
Ancillary Agreements set forth specific dollar amounts or the basis for
calculating such amounts.
1
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person specified.
"Ancillary Agreements" means the Escrow Agreement, the Registration
Rights Agreement and the Merger Agreement.
"Average Closing Price" means $24 per share.
"Balance Sheet" means the audited balance sheet of the Company as of
the Balance Sheet Date found in Schedule 3.6.
"Balance Sheet Date" means December 31, 2004.
"Closing Date" means the date of the Closing.
"Closing Date Net Working Capital" means the current assets less the
current liabilities of the Company determined in accordance with U.S. generally
accepted accounting principles and consistent with past practices as of the
close of business on the Closing Date, adjusted to: add back: (i) all accrued
employee termination and severance costs (including pro rated bonus) as of the
Closing Date resulting or triggered by the transactions contemplated by this
Agreement or any of the Ancillary Agreements, (ii) all fees and expenses
incurred as of the Closing Date by the Company in connection with the
transactions contemplated by this Agreement, (iii) all payments contemplated by
Sections 6.3 and 6.4, and (iv) the amount of deferred revenue as of the Closing
Date. An estimate of the Closing Date Net Working Capital, including the
adjustments described above, is set forth on Schedule 1.1 attached hereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means TCI Solutions, Inc., a Delaware corporation.
"Company Intellectual Property" means all Intellectual Property that is
owned or held by or on behalf of the Company or that is being, and/or has been,
used, or is currently under development for use, in the business of the Company
as it has been, is currently or is currently planned to be conducted.
"Company's Stock Option Plans" means the 1993 Non-Employee Directors
Stock Option Plan, the 1993 Equity Incentive Plan, the 2001 Non-Employee
Directors Stock Option Plan and the 2001 Equity Incentive Plan.
"Escrow Agent" means the escrow agent that is a signatory to the Escrow
Agreement.
"Escrow Agreement" means the Escrow Agreement among Sellers, Parent,
Buyer and the Escrow Agent substantially in the form of Exhibit A hereto.
2
"Estimated Expenses" means the expenses of the Company on or after the
date hereof in connection with the transactions contemplated by this Agreement
and the Ancillary Agreements, including the fees and expenses of its legal,
financial and accounting advisors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Intellectual Property" means all tangible or intangible proprietary
information and materials, including without limitation:
(a) (i) all inventions (whether patentable or unpatentable and whether or
not reduced to practice), all improvements thereon, and all patents, patent
applications and patent disclosures, together with all reissuances,
continuations, continuations-in-part, divisions, revisions, extensions and
re-examinations thereof, (ii) all trademarks, service marks, trade dress, logos,
trade names, domain names, and corporate names, together with all translations,
adaptations, derivations and combinations thereof and including all goodwill
associated therewith, and all applications, registrations and renewals in
connection therewith, (iii) all copyrights and all applications, registrations
and renewals in connection therewith, (iv) all mask works and all applications,
registrations and renewals in connection therewith, (v) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, methods, schematics, technology, technical data, designs, drawings,
flowcharts, block diagrams, specifications, customer and supplier lists,
customer data, pricing and cost information and business and marketing plans and
proposals), and (vi) all software (in both source and object code) and firmware
(including data, databases and related documentation);
(b) all documents, records, instructions and files relating to design, end
user documentation, manufacturing, quality control, sales, marketing or customer
support for, and tangible embodiments of, all intellectual property described
herein; and
(c) all licenses, agreements and other rights in any third party product or
any third party intellectual property described in (a) and (b) above other than
any "off the shelf" third party software or related intellectual property.
"To the Company's Knowledge", "Known to the Company" and words of
similar import means the knowledge of each of the senior officers (meaning any
Vice President and more senior officers) having responsibility for the subject
matter of a given representation, the Company's chief financial officer, the
directors of the Company and of each of Sellers (or the officers, directors or
general partners thereof in the case of Sellers who are corporations or
partnerships) ..
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, restriction or encumbrance of any kind in respect of
such asset.
"Merger Agreement" means the Agreement and Plan of Merger dated the
date hereof between the Company, Buyer and Parent in the form attached hereto as
Exhibit B.
3
"NIS" means the new Israeli shekel.
"Parent Common Stock" means ordinary shares of Parent, par value of NIS
1.0 per share.
"Person" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Registration Rights Agreement" means the Registration Rights Agreement
among the Sellers and Parent substantially in the form of Exhibit C hereto.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means the Series A Non-Redeemable
Convertible Participating Preferred Stock, par value $0.001 per share, of the
Company.
"Series B Preferred Stock" means the Series B Non-Redeemable
Convertible Participating Preferred Stock, par value $0.001 per share, of the
Company.
"Threshold Net Working Capital" means $2,292,759.
"Treasury Regulations" means the regulations, including proposed
regulations and temporary regulations, promulgated by the United States
Department of the Treasury under the Code, as amended.
Each of the following terms is defined in the Section set forth
opposite such term:
4
Applicable Jurisdiction 13.8 Parent Option 5.2(b)
Benefit Arrangement 10.1 Parent SEC filings 5.7
Closing 2.2 Parent Stock Plans 5.2(b)
Co-Employer 10.1 Permit 3.15(b)
Company SEC Reports 3.23 Permitted Liens 3.8(a)
Company Securities 3.4 Personal Property 3.8(a)
Damages 11.2 Publicly Available Software 3.13(h)
Employee 10.1 Purchase Price 2.1
Employee Plan 10.1 Real Property 3.9(a)
Environment 3.17(a) Release 3.17(a)
Environmental Law 3.17(a) Required Consent 3.3(b)
Environmental Liabilities 3.17(a) Securities Act 4.3(b)(i)
Environmental Permits 3.17(a) Sellers' Committee 12.1(a)
ERISA 10.1 Separate Counsel 11.4(b)
ERISA Affiliate 10.1 Shares Recitals
Financial Statements 3.6(a)(ii) Stock Value 9.3(d)
Hazardous Substance 3.17(a) Tax 9.1
Interested Person 3.20 Tax Authority 9.1
J.A.M.S. Rules 11.8(a) Tax Returns 9.1
Leased Real Property 3.9(a) Taxes 9.1
Leases 3.9(b) Third Party Claim 11.2(a)(i)(A)
Multiemployer Plan 10.1 Third Party Accounting Firm 2.3
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, each Seller, severally but not jointly, shall sell to Buyer, and
Buyer shall purchase from each such Seller, at the Closing, that number of
Shares at the price as is set forth opposite such Seller's name on Schedule 2.1.
The purchase price for the shares of Series A Preferred Stock and for the shares
of Series B Preferred Stock shall be referred to herein as the "Purchase Price".
2.2 Closing. The closing (the "Closing") of the purchase and sale of
the Shares hereunder shall take place at the offices of Sullivan & Worcester,
LLP, One Post Office Square, Boston, Massachusetts at such time or place as
Buyer and Sellers may agree. At the Closing:
(a) Buyer (or Parent on behalf of Buyer) shall pay to Sellers
$12,884,897 in cash by wire transfers in immediately available funds, such
accounts to be designated by written notice to Buyer not later than two business
days prior to the Closing Date.
(b) Buyer (or Parent on behalf of Buyer) shall deliver to the
Escrow Agent $1,717,750 in cash by wire transfer in immediately available funds,
to be held by the Escrow Agent in accordance with the Escrow Agreement.
5
(c) Buyer (or Parent on behalf of Buyer) shall deliver to Sellers
certificates for Parent Common Stock, registered in the names of Sellers for the
number of shares shown in Schedule 2.1; provided that if Buyer (or Parent on
behalf of Buyer) is unable to deliver the stock certificates for Parent Common
Stock to Sellers at the Closing, Buyer or Parent shall have 10 days after the
Closing to deliver such certificates to Sellers as provided herein.
(d) Buyer (or Parent on behalf of Buyer) shall deliver to the
Escrow Agent certificates for Parent Common Stock, registered in the names of
Sellers for the number of shares shown in Schedule 2.1; provided that if Buyer
(or Parent on behalf of Buyer) is unable to deliver the stock certificates for
Parent Common Stock to the Escrow Agent at the Closing, Buyer or Parent shall
have 10 days after the Closing to deliver such certificates to the Escrow Agent
as provided herein.
(e) Sellers shall deliver to Buyer certificates for the Shares
duly endorsed or accompanied by stock powers duly endorsed in blank.
(f) Each of the parties to this Agreement shall execute and
deliver to the other parties thereto each of the Ancillary Agreements to be
entered into by it at Closing, in each case substantially in the form attached
as an exhibit to this Agreement.
(g) The parties shall execute and deliver to the appropriate
parties any other instruments, documents and certificates that are required to
be delivered pursuant to this Agreement or as may be reasonably requested by any
party in order to consummate the transactions contemplated by this Agreement.
(h) Sellers shall receive an opinion of Buyer's counsel Sullivan &
Worcester LLP dated the Closing Date reasonably acceptable to Sellers.
(i) Parent and Buyer shall receive an opinion of Sellers' counsel
Paul, Hastings, Janofsky & Walker LLP dated the Closing Date reasonably
acceptable to Parent and Buyer.
(j) Sellers shall deliver a certified copy of the resolutions
adopted by the Board of Directors of the Company approving this Agreement, the
Merger Agreement and the other Ancillary Agreements, declaring the advisability
and recommendation of the Merger, and all such other actions as shall be
required consistent with the approval of a transaction covered by Rule 13e-3 of
the Exchange Act.
(k) Sellers shall deliver to Buyer a certificate of good standing,
tax clearance certificate or similar document(s) which is required by any Tax
Authority to relieve Buyer of (x) any obligation to withhold Taxes in connection
with the transactions contemplated by this Agreement and (y) any Lien or
liability for Taxes (determined without regard to provisions of this Agreement
assigning responsibility therefor) for which relief is available by reason of
the filing of an appropriate certificate or other document.
6
(l) Sellers shall deliver to Buyer a properly executed statement
satisfying the requirements of Treasury Regulation Sections 1.897-2(h) and
1.1445-2(c)(3) in a form reasonably acceptable to Buyer.
2.3 Net Working Capital Adjustment.
(a) Within 60 days after the Closing Date, Parent shall prepare
and deliver to the Sellers' Committee its determination of the Closing Date Net
Working Capital. If the Closing Date Net Working Capital is less than the
Threshold Net Working Capital, the Sellers shall owe to the Buyer the amount by
which the Closing Date Net Working Capital is less than the Threshold Net
Working Capital, which amount shall be paid from the funds deposited with the
Escrow Agent pursuant to Section 2.4 below.
(b) Subject to this Section 2.3(b), the calculation of the Closing
Date Net Working Capital delivered by Parent to Sellers' Committee shall be
final, binding and conclusive on the parties hereto. If Sellers' Committee
desires in good faith to dispute any amount reflected on the calculation of the
Closing Date Net Working Capital delivered by Parent, Sellers' Committee shall
notify Parent of its objections in writing within 20 days after its receipt of
the calculation of the Closing Date Net Working Capital, setting forth the basis
for its objection and its proposal for any adjustments to the calculation of the
Closing Date Net Working Capital. Following such notification, Parent and
Seller's Committee shall each negotiate in good faith to reach agreement as to
any such proposed adjustment within 30 days of receipt of Sellers' Committee
notice of objection. If agreement is reached in writing within such 30-day
period as to all proposed further adjustments (or Parent and Seller's Committee
agree that no adjustments are necessary), the parties shall make such
agreed-upon adjustments, if any, and the Closing Date Net Working Capital shall
be based thereon for all purposes of this Agreement. If Parent and Seller are
unable to reach agreement within such 30-day period, Parent and Sellers'
Committee shall select a mutually acceptable accounting firm (the "Third Party
Accounting Firm") to review the proposed Seller's Committee calculation of
Closing Date Net Working Capital and such firm shall make such adjustments, if
any, as are necessary to cause the calculation of the Closing Date Net Working
Capital, if any, to have been properly prepared in accordance with this
Agreement. All such determinations shall relate only to such matters as are in
dispute and shall represent either agreement with the position taken by Parent
or Seller's Committee or a compromise between such positions. The determination
of the Third Party Accounting Firm shall be delivered in writing as soon as
practicable following engagement of the Third Party Accounting Firm, shall state
the amount due by either party as a result and shall be final, conclusive and
binding upon Buyer and Sellers. Not later than 10 days following the
determination by the Third Party Accounting Firm, the amount, if any, required
to be paid as a result of the determination of the Closing Date Net Working
Capital, as determined by the Third Party Accounting Firm, shall be paid from
the funds deposited with the Escrow Agent pursuant to Section 2.4 below. The
fees and expenses of the Third Party Accounting Firm incurred in resolving all
disputed matters shall be equitably apportioned by such accountants based on the
extent to which Parent or Seller's Committee are determined by such accountants
to be the prevailing party; provided, however, that if the Third Party
Accounting Firm cannot determine the prevailing party, the fees shall be paid
one-half by Parent and one-half by Sellers. To the extent any fees are allocated
to the
7
Sellers, such fees shall be paid out of the funds deposited with the Escrow
Agent pursuant to Section 2.4 below.
2.4 Escrow Account. The Sellers agree that in accordance with Section
2.2, at the Closing a portion of the Purchase Price shall be delivered by Buyer
to the Escrow Agent for deposit in accordance with the terms of the Escrow
Agreement. All funds and shares of Parent Common Stock deposited with the Escrow
Agent shall be applied by the Escrow Agent in accordance with the terms of the
Escrow Agreement to make any payments due to Parent or Buyer under Section 2.3
and Article 11.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY
Except as set forth in the disclosure schedules dated as of the date
hereof and delivered herewith to Buyer (which disclosure schedules identify the
section and subsection to which each disclosure therein relates), the Company
hereby represents and warrants to Parent and Buyer:
3.1 Corporate Existence and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have an
Adverse Effect on the Company. The Company has heretofore delivered to Buyer
true and complete copies of the corporate charter and bylaws of the Company as
currently in effect.
3.2 Corporate Authorization. The execution, delivery and performance by
the Company of each Ancillary Agreement to which the Company is a party, and the
consummation by the Company of the transactions contemplated thereby, are within
the Company's corporate powers and, except for any required approval by the
Company's stockholders, have been duly authorized by all necessary corporate
action on the part of the Company. Each Ancillary Agreement to which the Company
is a party has been duly executed and delivered by the Company and constitutes a
valid and binding agreement of the Company, enforceable in accordance with its
terms.
3.3 Governmental Authorization; Consents. (a) The execution, delivery
and performance by the Company of this Agreement and the Ancillary Agreements,
as the case may be, require no action by or in respect of, or filing with, any
governmental body, agency, official or authority.
(b) Except as set forth in Schedule 3.3, no consent, approval,
waiver or other action (a "Required Consent") by any Person (other than any
governmental body, agency,
8
official or authority referred to in (a) above) under any contract, agreement,
indenture, lease, instrument or other document to which the Company is a party
or by which any of them is bound is required or necessary for the execution,
delivery and performance by the Company of this Agreement and each Ancillary
Agreement to which they are a party, as the case may be, or for the consummation
of the transactions contemplated hereby or thereby.
(c) Non-Contravention. The execution, delivery and performance by
the Company of this Agreement and each Ancillary Agreement to which it is a
party, as the case may be, and the consummation of the transactions contemplated
hereby and thereby, do not and will not (i) contravene or conflict with the
corporate charter or bylaws of the Company (and will not constitute a
"Liquidation Event" as defined in such corporate charter), (ii) assuming
compliance with the matters referred to in Section 3.3(a), contravene or
conflict with any provision of any law, regulation, judgment, injunction, order,
Permit or decree binding upon or applicable to the Company; (iii) assuming the
receipt of all Required Consents, constitute a default (with or without notice
or lapse of time, or both) under or give rise to any right of termination,
cancellation or acceleration of any right or obligation of the Company or to a
loss of any benefit to which the Company is entitled under any provision of any
agreement, contract or other instrument binding upon the Company or by which any
of their assets may be bound or (iv) result in the creation or imposition of any
Lien on any asset of the Company.
3.4 Capitalization. Schedule 3.4 sets forth (i) the designation, number
of authorized shares and number of outstanding shares of each class of capital
stock of the Company, (ii) the designation of each stock option plan, the number
of shares of stock that may be issued pursuant to such plan, the number of
outstanding options and the number of outstanding options that are currently
exercisable, (iii) all relevant information regarding any outstanding
convertible securities and any other outstanding options, warrants or other
rights to acquire capital stock of, or other equity interests in, the Company
and (iv) a list of all holders of capital stock or rights to acquire capital
stock of the Company. All outstanding shares of capital stock of the Company
have been duly authorized and validly issued, are fully paid and nonassessable
and are owned as shown on Schedule 3.4. Except as set forth on Schedule 3.4,
there are no outstanding (i) shares of capital stock, other securities or
phantom or other equity interests of the Company, (ii) securities of the Company
convertible into or exchangeable for shares of capital stock or other securities
of the Company or (iii) options or other rights to acquire from the Company any
capital stock, other securities or phantom or other equity interests of the
Company (the items in clauses (i), (ii) and (iii) being referred to collectively
as the "Company Securities"). There are no outstanding obligations of the
Company, actual or contingent, to issue or deliver or to repurchase, redeem or
otherwise acquire any Company Securities.
3.5 Subsidiaries. The Company does not have and has never had any
subsidiaries or any ownership or equity interest in or control of (direct or
indirect) any other Person.
3.6 Financial Statements. (a) Attached as Schedule 3.6 are true and
complete copies of:
9
(i) a preliminary, unissued draft of the Balance Sheet and the
related audited statements of operations and cash flows for the 12
months ended December 31, 2004 and the audited balance sheet of the
Company as of December 31, 2003 and the related audited statements of
operations and cash flows of the Company for the 12 months then ended;
and
(ii) the unaudited balance sheet of the Company as of February
28, 2005 and the related unaudited statements of income and cash flows
of the Company for the two months ended February 28, 2005 ((i) and
(ii) collectively referred to as the "Financial Statements").
(b) Each of the balance sheets included in the Financial
Statements fairly presents the financial position of the Company as of its date,
and the other statements included in the Financial Statements fairly present the
results of operations and cash flows, as the case may be, of the Company for the
periods therein set forth, in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved and, with
respect to the unaudited interim financial statements, for the omission of
footnote disclosure and, to the extent consistent with generally accepted
accounting principles, normally recurring year-end audit adjustments.
(c) All accounts, notes receivable and other receivables reflected
on the February 28, 2005 balance sheet are valid, genuine and fully collectible
in the aggregate amount thereof less any reserves for doubtful accounts recorded
on such balance sheet.
(d) The Company maintains adequate internal controls in accordance
with GAAP. Since January 1, 2002, the Company has not received any written
communications regarding weaknesses in its internal controls. To Company's
Knowledge, there have been no instances of fraud, whether or not material, that
occurred during any period covered by the Financial Statements involving the
management of Company or other employees of Company who have a role in Company's
internal control over financial reporting.
(e) Neither the Company nor any officer, employee, contractor,
subcontractor or agent of Company has discharged, demoted, suspended,
threatened, harassed or in any other manner discriminated against an employee of
Company in the terms and conditions of employment because of any act of such
employee described in 18 U.S.C. Section 1514A(a).
(f) During the periods covered by Financial Statements, to the
Company's Knowledge, the Company's external auditor was independent of Company
and its management. For purposes of this Section 3.6(f), "independent of Company
and its management" shall mean that Company and its external auditor complied at
all times with the auditor independence requirements of Title II of the
Sarbanes-Oxley Act of 2002, the SEC and any regulatory body claiming
jurisdiction over the accounting profession as if Company were an issuer with a
class of securities registered pursuant to the Exchange Act during the periods
covered by the Financial Statement.
10
(g) The Company has not, since July 30, 2002, extended or
maintained credit, arranged for the extension of credit, or renewed an extension
of credit, in the form of a personal loan to or for any director or executive
officer (or equivalent thereof) of the Company.
(h) Schedule 3.6(h) sets forth any and all reports by Company's
external auditors to Company's Board of Directors, or any committee thereof, or
Company's management concerning any of the following and pertaining to any
period covered by the Financial Statements: critical accounting policies,
internal control over financial reporting, significant accounting estimates or
judgments, alternative accounting treatments and any required communications
with Company's Board of Directors, or any committee thereof, or management of
the Company.
(i) The Company maintains disclosure controls and procedures
required by Rule 13a-15 or 15d-15 under the Exchange Act; such controls and
procedures are effective to ensure that all material information concerning the
Company is made known on a timely basis to the individuals responsible for the
preparation of the Company's filings with the SEC and other public disclosure
documents. Schedule 3.6(i) lists, and the Company has delivered to Parent copies
of, all written descriptions of, and all policies, manuals and other documents
promulgating, such disclosure controls and procedures.
(j) Attached as Schedule 3.6(j), is a copy of the Company's
expected ranges of financial performance for the quarter ended March 31, 2005.
Each of the Company's revenue, EBITDA and net income for such quarter will not
be materially different than the revenue, EBITDA and net income provided under
the column entitled "Forecast-Low".
3.7 Absence of Certain Changes. Since the Balance Sheet Date, except as
reflected in the unaudited Financial Statements or in Schedule 3.7, the Company
has conducted its businesses in the ordinary course consistent with past
practices and there has not been any:
(a) Adverse Change;
(b) declaration, setting aside or payment of any dividend or other
distribution with respect to any Company Securities or any repurchase,
redemption or other acquisition by the Company of any outstanding shares of
capital stock or other securities of, or other ownership interests in, the
Company;
(c) payment or grant of any right by the Company to any Interested
Person, or any charge by any Interested Person to the Company, or other
transaction between the Company and any Interested Person, except in any such
case for employee compensation payments in the ordinary course of business of
the Company consistent with past practice.
(d) amendment of any outstanding security of the Company;
11
(e) incurrence, assumption or guarantee by the Company of any
indebtedness for borrowed money other than in the ordinary course of business
and in amounts and on terms consistent with past practices;
(f) creation or assumption by the Company of any Lien on any asset
other than Permitted Liens;
(g) making of any loan, advance or capital contributions to or
investment in any Person;
(h) damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company in an
amount greater than $75,000;
(i) transaction or commitment made, or any contract or agreement
entered into, by the Company relating to its assets or business (including the
acquisition or disposition of any assets) or any relinquishment by the Company
of any contract or other right, in either case, material to the Company, other
than transactions and commitments in the ordinary course of business consistent
with past practices and those contemplated by this Agreement;
(j) settlement of any claim, action, suit, audit, charge,
investigation or proceeding;
(k) change in any method of financial accounting or accounting
practice by the Company;
(l) (i) grant of any severance or termination pay to any director,
officer or employee of the Company, (ii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of the Company, (iii)
change in benefits payable under existing severance or termination pay policies
of the Company or employment agreements to which the Company is a party or (iv)
change in compensation, bonus or other benefits payable to directors, officers
or employees of the Company, other than in the ordinary course of business
consistent with past practice;
(m) labor dispute, other than routine individual grievances, or
any activity or proceeding by a labor union or representation thereof to
organize any employees of the Company;
(n) employee terminations by the Company (other than for poor
performance or for cause) and/or layoffs, and the Company has preserved intact
and kept available the services of present employees, in each case in accordance
with past practice;
(o) capital expenditure, or commitment for a capital expenditure,
for additions or improvements to property, plant and equipment in an amount
greater than $10,000.
(p) agreement, undertaking or commitment to do any of the
foregoing.
12
3.8 Personal Property. (a) The Company has good and marketable title
to, or in the case of leased personal property have valid leasehold interests
in, all personal property described in Schedule 3.8 (including machinery and
equipment, inventory, receivables and furniture) (whether tangible or
intangible), reflected on the Balance Sheet or acquired after the Balance Sheet
Date (the "Personal Property"). None of such Personal Property is subject to any
Liens, other than the following ("Permitted Liens"):
(i) Liens disclosed on the Balance Sheet;
(ii) Liens for Taxes not yet due and payable (and for which
adequate accruals or reserves have been established on the Balance
Sheet); or
(iii) Liens that do not materially detract from the value of the
Personal Property as now used, or materially interfere with any
present or intended use of the Personal Property.
(b) The Personal Property is in good operating condition and
repair (ordinary wear and tear excepted).
(c) The Personal Property owned or leased by the Company, or which
it otherwise has the right to use, constitute all of the Personal Property held
for use or used in connection with the business of the Company.
3.9 Real Property. (a) None of the real property, and leases and
subleases of, and other interests in, real property, used, or occupied by the
Company, in each case, together with all buildup, fixtures and improvements
created thereon ("Real Property") is owned by the Company. All of the Real
Property is leased or subleased by the Company, or the Company has an interest
in such Real Property pursuant to a warehousing, license or occupancy agreement
("Leased Real Property").
(b) Schedule 3.9 completely and accurately describes all leases,
subleases and other agreements pursuant to which the Company derives its rights
in the Leased Real Property (the "Leases").
(c) The Leases are in good standing and are valid, binding and
enforceable in accordance with their respective terms, and there does not exist
under any such Lease any material default by the Company or, to the Sellers'
Knowledge, by any other Person, or any event that, with notice or lapse of time
or both, would constitute a material default by the Company or, to the Sellers'
Knowledge, by any other Person. The Company has delivered to Buyer complete and
accurate copies of all Leases, including all amendments and agreements related
thereto and the Leases constitute the entire agreement between the Company and
each landlord with respect to the Leased Real Property. All rent and other
charges currently due and payable under the Leases have been paid.
13
(d) The Company is the holder of the lessee's interest under the
Leases and neither has assigned the Leases nor subleased all or any portion of
the premises leased thereunder. The Company has not made any alterations,
additions or improvements to the premises leased under the Leases that are
required to be removed (or of which lessor could require removal) at the
termination of the respective Lease terms. The Company owns all trade fixtures,
equipment and personal property located in the premises leased under the Leases.
3.10 No Undisclosed Liabilities. Except as disclosed in the Financial
Statements or set forth in Schedule 3.10, there are no liabilities of the
Company of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, other than liabilities incurred in the
ordinary course of business consistent with past practice since the Balance
Sheet Date, which in the aggregate will not have an Adverse Effect on the
Company.
3.11 Litigation. Except as disclosed in Schedule 3.11, there is no
claim, action, suit, audit, charge, proceeding (or any basis therefor) pending
against or, to the Company's Knowledge, threatened against, being investigated
or affecting, the Company or any of their respective properties or any Employee
Plan or the transactions contemplated hereby before any court or arbitrator or
any governmental body, agency, official or authority.
3.12 Material Contracts. (a) Except for agreements, contracts, plans,
leases, arrangements or commitments disclosed in Schedule 3.12, as of the date
of this Agreement the Company is not a party to or subject to any:
(i) lease providing for annual rentals by the Company of $75,000
or more;
(ii) contract for the purchase of materials, supplies, goods,
services, equipment or other assets providing for annual payments by
the Company of, or pursuant to which in the last 12 months the Company
has paid, $75,000 or more;
(iii) sales, distribution or other similar agreement providing
for the sale by the Company of, or pursuant to which in the last 12
months the Company sold, materials, supplies, goods, services,
equipment or other assets for an aggregate purchase price of $75,000
or more;
(iv) partnership, joint venture or other similar contract,
arrangement or agreement;
(v) contract relating to indebtedness for borrowed money or the
deferred purchase price of property (whether incurred, assumed,
guaranteed or secured by any asset), except contracts relating to
indebtedness incurred in the ordinary course of business in an amount
not exceeding $10,000;
(vi) written employment or consulting agreement;
14
(vii) license, technology transfer, franchise or other agreement
in respect of any Intellectual Property or other property owned or
used by the Company;
(viii) agency, dealer, sales representative or other similar
agreement;
(ix) contract or other document that limits the freedom of the
Company to compete in any line of business or with any Person or in
any area or which would so limit the freedom of the Company after the
Closing Date;
(x) contract or commitment with or for the benefit of any
Interested Person; or
(xi) other contract or commitment not made in the ordinary course
of business that is material to the Company.
(b) Each agreement, contract, plan, lease, arrangement and
commitment disclosed in any schedule to this Agreement or required to be
disclosed pursuant to Section 3.12 is a valid and binding agreement of the
Company and is in full force and effect, and to the Company's Knowledge, no
other party thereto is in default in any material respect under the terms of any
such agreement, contract, plan, lease, arrangement or commitment, nor, to the
Knowledge of the Company, has any event or circumstance occurred that, with
notice or lapse of time or both, would constitute an event of default thereunder
by the Company.
3.13 Technology and Intellectual Property. (a) Schedule 3.13(a) lists:
(i) all patents and all registered trademarks, service marks, copyrights and
mask works, and any applications and renewals for any of the foregoing owned by
or on behalf of the Company; (ii) all material software products and tools and
services that are currently sold, published, offered, or under development by
the Company; and (iii) all material licenses (in and out), sublicenses and other
agreements to which the Company is a party and pursuant to which the Company or
any other person is authorized to use any of the Company's Intellectual Property
or exercise any other right with regard thereto. The disclosures described in
clause (iii) of the preceding sentence include the identities of the parties to
the relevant agreements, a brief description of the nature and subject matter
thereof, the term thereof and the applicable payment terms (or summary of any
formula or procedure for determining such payment terms).
(b) Each item of the Company's Intellectual Property is either:
(i) owned solely by the Company free and clear of any Liens other than Permitted
Liens; or (ii) rightfully used and authorized for use by the Company and its
successors pursuant to a valid and enforceable written license. All of the
Company's Intellectual Property that is used by the Company pursuant to a
license or other grant of a right by a third party to use its proprietary
information is separately identified as such under Schedule 3.13(b). The Company
has all rights in the Company's Intellectual Property necessary to carry out the
Company's former and current activities, including to the extent consistent with
the Company's current and past practices (except as noted on Schedule 3.13(b))
rights to make, use, exclude others from using, reproduce, modify, adapt, create
derivative works based on, translate, distribute (directly and indirectly),
transmit, display and perform publicly, license, rent, lease, assign and sell
the Company's
15
Intellectual Property in all geographic locations and fields of use, and to
sublicense any or all such rights to third parties, including the right to
grant further sublicenses.
(c) The Company is not in material violation of any license,
sublicense or other agreement to which the Company is a party or otherwise bound
relating to any of the Company's Intellectual Property. Except as noted in
Schedule 3.13(c), the Company is not obligated to provide any consideration
(whether financial or otherwise) to any third party, nor is any third party
otherwise entitled to any consideration, with respect to any exercise of rights
by the Company or Buyer, as successor to the Company, in Company's Intellectual
Property.
(d) The use of the Company's Intellectual Property by the Company
as currently used and as currently proposed to be used does not infringe any
other Person's copyright, trade secret rights, right of privacy, moral right or
other intellectual property right. The use by the Company of the Company's
Intellectual Property as currently used and as currently proposed to be used
does not infringe any other Person's, patent, trademark, service mark, trade
name, firm name, logo, trade dress or mask work. No claims (i) challenging the
validity, enforceability, effectiveness or ownership by the Company of any of
the Company's Intellectual Property or (ii) to the effect that the use,
reproduction, modification, manufacture, distribution, licensing, sublicensing,
sale, or any other exercise of rights in any of the Company's Intellectual
Property by the Company, infringes or will infringe on any intellectual property
or other proprietary or personal right of any Person are being or, since April
1, 2001, have been asserted against the Company or, to the Company's Knowledge,
(1) are threatened by any Person nor (2) does there exists any valid basis for
such a claim . There are no legal or governmental proceedings, including
interference, re-examination, reissue, opposition, nullity, or cancellation
proceedings pending that relate to any of the Company's Intellectual Property,
other than review of pending patent applications, and the Company is not aware
of any information indicating that such proceedings are threatened or
contemplated by any governmental entity or any other Person. All granted or
issued patents and mask works, all registered trademarks and service marks, and
all copyright registrations owned by the Company are valid, and subsisting. To
the Company's Knowledge, there is no unauthorized use, infringement, or
misappropriation of any of the Company's Intellectual Property by any third
party, employee or former employee.
(e) Schedule 3.13(e) separately lists all parties (other than
existing or prior employees) who have created any portion of, or otherwise have
any rights in or to, the Company's Intellectual Property. The Company has
secured from all parties (including employees) who have created any portion of,
or otherwise have any rights in or to, the Company's Intellectual Property valid
and enforceable written assignments of any such work, invention, improvement or
other rights to the Company and has provided true and complete copies of such
assignments to Buyer.
(f) The transactions contemplated under this Agreement shall not
alter, impair or otherwise affect any rights of the Company or any Affiliate in
any of the Company's Intellectual Property.
16
(g) The Company has taken commercially reasonable measures to
protect the proprietary nature of the Company's Intellectual Property and to
maintain in confidence all trade secrets and confidential information owned or
used by the Company.
(h) Except as described on Schedule 3.13(h), the Company's
Intellectual Property does not include any Publicly Available Software and the
Company has not used Publicly Available Software in whole or in part in the
development of any part of the Company's Intellectual Property in a manner that
may subject the Company's Intellectual Property in whole or in part, to all or
part of the license obligations of any Publicly Available Software. "Publicly
Available Software" means each of (i) any software that contains, or is derived
in any manner (in whole or in part) from, any software that is distributed as
free software, open source software (e.g. Linux), or similar licensing and
distribution models; and (ii) any software that requires as a condition of use,
modification, and/or distribution of such software that such software or other
software incorporated into, derived from, or distributed with such software (a)
be disclosed or distributed in source code form; (b) be licensed for the purpose
of making derivative works; or (c) be redistributable at no or minimal charge.
Publicly Available Software includes software licensed or distributed under any
of the following licenses or distribution models similar to any of the
following: (a) GNU General Public License (GPL) or Lesser/Library GPL (LGPL),
(b) the Artistic License (e.g. PERL), (c) the Mozilla Public License, (d) the
Netscape Public License, (e) the Sun Community Source License (SCSL), the Sun
Industry Source License (SISL), and the Apache Server License.
3.14 Insurance Coverage. Schedule 3.14 lists all of the insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company.
Sellers' have furnished to Buyer true and complete copies of all insurance
policies and fidelity bonds listed in Schedule 3.14. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums payable under all such policies and bonds have been paid and
the Company are otherwise in full compliance with the terms and conditions of
all such policies and bonds. Such policies of insurance and bonds (or other
policies and bonds providing substantially similar insurance coverage) have been
in effect since January 1, 2001 and remain in full force and effect. Sellers do
not know of any threatened termination of, or premium increase with respect to,
any of such policies or bonds.
3.15 Compliance with Laws; Permits; No Defaults. (a) The Company is not
in violation of, or has since January 1, 2001 violated, any applicable
provisions of any federal, state, foreign or local laws, statutes, ordinances or
regulations, except for violations that have not had and would not reasonably be
expected to have an Adverse Effect on the Company.
(b) Schedule 3.15 correctly describes each governmental license,
permit, concession or franchise (a "Permit") material to the business of the
Company, together with the name of the governmental agency or entity issuing
such Permit. Such Permits are valid and in full force and effect, and none of
such Permits will be terminated or impaired or become terminable as a result of
the transactions contemplated hereby or by the Merger Agreement.
17
(c) The Company is not in default under, and no condition exists
that with notice or lapse of time or both would constitute a default under, any
judgment, order or injunction of any court, arbitrator or governmental body,
agency, official or authority.
3.16 Employees and Labor Matters. (a) Schedule 3.16(a) sets forth, with
respect to each employee of the Company (including any employee of the Company
who is on a leave of absence or on layoff status subject to recall) as of March
15, 2005 (i) the name of such employee and the date as of which such employee
was originally hired by the Company, and whether the employee is on an active or
inactive status; (ii) such employee's title; (iii) such employee's annualized
compensation as of the date of this Agreement, including base salary, vacation
and/or paid time off accrual amounts, bonus and/or commission potential, equity
vesting schedule, severance pay potential (including the maximum severance
payable to such employee and the circumstances under which such severance
payment is triggered), and any other compensation forms; (iv) each current
benefit plan in which such employee participates or is eligible to participate;
and (v) any governmental authorization that is held by such employee and that is
used in connection with the Company's business. Except as disclosed in Schedule
3.16(a), the employment of each of the employees of the Company is terminable by
the Company at will.
(b) Schedule 3.16(b) lists all Persons who are currently
performing services for the Company who are classified as "consultants" or
"independent contractors," the compensation of each such Person and whether the
Company is party to an agreement with such Person (whether or not in writing).
Any such agreements are listed on Schedule 3.12(a) and have been delivered (or,
in the case of agreements that are not in writing, a summary thereof has been
delivered) to Buyer. All such Persons have executed the Company's form
Proprietary Information and Inventions Agreement . All Persons engaged by the
Company as independent contractors, rather than employees, have been properly
classified as such and have been engaged in accordance with all applicable
foreign, federal, state and/or local laws.
(c) The Company is not and have never been a party to or bound by
any union contract, collective bargaining agreement or similar contract. There
has never been any lockout, strike, slowdown, work stoppage, labor dispute or,
union organizing activity, or any similar activity or dispute, affecting the
Company or any of its employees.
(d) Schedule 3.16(d) lists all current employee manuals and
handbooks, employment policy statements, employment agreements, and other
materials relating to the employment of the current employees of the Company.
Sellers have delivered to Buyer complete copies of all such documents.
(e) Except as disclosed in Schedule 3.16(e), except for clerical,
administrative or hourly employees (i) none of the employees of the Company has
notified or otherwise indicated to the Company that he or she intends to
terminate his or her employment with the Company, or not to accept employment
with Buyer; (ii) the Company does not have a present intention to terminate the
employment of any employee; (iii) to the Company's Knowledge, no employee of the
Company has since January 1, 2005 received an offer of an employment from any
other Person; (iv) all employees of the Company have executed the Company's form
18
Proprietary Information and Inventions Agreement (v) to the Company's Knowledge
no employee of the Company is a party to or is bound by any employment contract,
patent disclosure agreement, noncompetition agreement or other restrictive
covenant or other contract with any third party that would be likely to affect
in any way (A) the performance by such employee of any of his or her duties or
responsibilities as an employee, or (B) the business or operations of the
Company; (vi) to the Knowledge of the Company, no employee of the Company is in
violation of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, or any other restrictive covenant to a former employer
relating to the right of any such employee to be employed by the Company; and
(vii) the Company is not and never has been engaged in any dispute or litigation
with an employee or former employee regarding Intellectual Property matters.
(f) Except as disclosed in Schedule 3.16(f), (i) the Company does
not have an established severance pay practice or policy; (ii) no employee of
the Company is entitled to any severance pay, bonus compensation, acceleration
of payment or vesting of any equity interest, or other payment from the Company
or Buyer (other than accrued salary, vacation, or other paid time off in
accordance with the policies of the Company) as a result of or in connection
with the transactions contemplated by this Agreement or any of the Ancillary
Agreements or as a result of any termination by the Company on or after the
Closing of any Person employed by the Company on or prior to the Closing Date.
Schedule 3.16(f) identifies each employee entitled to any non-discretionary
bonus or severance from the Company or any successor of the Company. .
(g) The Company is and has at all times been in compliance with
all currently applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours, except for violations
that have not had and would not reasonably be expected to have an Adverse Effect
on the Company. The Company is not engaged, and to the Company's Knowledge have
never engaged, in any unfair labor practice of any nature. The Company has not
failed to pay any of its employees, consultants or contractors for any wages
(including overtime), salaries, commissions, bonuses, benefits or other direct
compensation for any services performed by them to the date hereof or amounts
required to be reimbursed to such individuals.
(h) The Company, and each employee of the Company, is in
compliance in all material respects with all applicable visa and work permit
requirements, and no visa or work permit held by an employee of the Company will
expire during the six month period following the date of this Agreement.
3.17 Environmental Compliance.
(a) Environmental Definitions. The following terms, as used
herein, have the following meanings:
19
"Environment" means any and all environmental media, including without
limitation ambient air, surface water, ground water, drinking water supply, land
surface or subsurface, soil or strata, and also means any indoor location.
"Environmental Law" means any and all federal, state, local and foreign
statutes, laws (including common or case law), regulations, ordinances, rules,
judgments, judicial decisions, orders, decrees, codes, plans, injunctions,
Environmental Permits or governmental restrictions relating to the Environment
or to emissions, discharges or Releases of any Hazardous Substance into the
Environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of any Hazardous
Substance or the containment, removal or remediation thereof.
"Environmental Liabilities" means any and all liabilities arising in
connection with or in any way relating to the past or present business of the
Company, whether contingent or fixed, actual or potential, known or unknown,
which (i) arise under or relate to matters governed by Environmental Law or
arise in connection with or relate to any matter disclosed or required to be
disclosed in Schedule 3.17 and (ii) arise from or relate in any way to actions
occurring or conditions existing before the Closing Date.
"Environmental Permits" means any and all governmental permits,
licenses, concessions, grants, franchises, agreements, authorizations,
registrations or other governmental approvals or filings issued or required
under any Environmental Law.
"Hazardous Substance" means any and all pollutants and contaminants,
and any and all toxic, caustic, radioactive or otherwise hazardous materials,
substances or wastes that are regulated under any Environmental Law, and
includes, without limitation, petroleum and its derivatives and by-products, and
any other hydrocarbons.
"Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing into
the Environment (including, without limitation, the abandonment or discarding of
barrels, containers, and other closed receptacles containing any Hazardous
Substance).
(b) Environmental Representations and Warranties. Except as
disclosed in Schedule 3.17(b):
(i) The Company has complied in all material respects with all
Environmental Laws and Environmental Permits. The Company has no
material Environmental Liabilities.
(ii) The Company has applied for and received all Environmental
Permits required in connection with its business. Schedule 3.17(b)
sets forth a list of all such Environmental Permits, each of which is
in full force and effect. No suspension or cancellation is threatened
and there is no basis for believing that any such Environmental Permit
will not be renewable upon expiration. Except as set forth in Schedule
3.17(b),
20
each such Environmental Permit will continue to be in full
force and effect immediately following the Closing in accordance with
the terms thereof as in effect immediately prior to the Closing and
the consummation of the transactions contemplated herein and in the
Merger Agreement will not conflict with, result in a violation or
breach of or constitute a default under any such Environmental Permit.
The consummation of the transactions contemplated herein and in the
Merger Agreement will not require any filing, notice or compliance
under any environmental property transfer laws and no transfer of any
Environmental Permits will be required.
(iii) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been
filed, no penalty has been assessed and no investigation or review is
pending or, to the Sellers' Knowledge, threatened, by any governmental
or other entity with respect to any (A) alleged violation by the
Company of any Environmental Law or any liability thereunder, (B)
alleged failure by the Company to have any Environmental Permit, or
(C) use, generation, treatment, storage, handling, recycling,
transportation or disposal of any Hazardous Substance by the Company.
(iv) The Company has not stored, handled, transported (or
arranged for transport, directly or indirectly) or Released any
Hazardous Substance on, at or from any property now or previously
owned, leased or operated by the Company. No Hazardous Substance is
present, in a reportable or threshold planning quantity, where such a
quantity has been established by any Environmental Law or
Environmental Permit, at, on or under any property now or previously
owned, leased or operated by the Company.
(v) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or for the
Company, or of which the Sellers' Knowledge, relating to any property
or facility now or previously owned or leased by the Company that have
not been delivered to Buyer.
(vi) The Leased Real Property does not contain any (a)
underground storage tanks or (b) asbestos.
3.18 Customers and Suppliers. Company has not received notice from and
is not otherwise aware that (a) any customer (or group of customers under common
ownership or control) that accounted for more that 10% of Company's revenue
during the past 18 months has stopped or intends to stop purchasing the products
or services (including maintenance and support services in connection with the
products sold) of the Company or (b) any supplier (or group of suppliers under
common ownership or control) that accounted for more that 10% of the Company's
revenue during the past 18 months has stopped or intends to stop supplying
products or services to the Company.
3.19 Products.
21
(a) Each of the products produced or sold by Company is, and at
all relevant times have, conformed in all material respects to any affirmation
of fact made in documentation for such products or in connection with its sale.
(b) Except as set forth in Schedule 3.19, there are no forms of
warranties, guaranties or assurances of Company's software products and services
that are in effect other than as set forth in Company's standard terms and
conditions, copies of which are attached to Schedule 3.19. There is no pending
or, to the Company's Knowledge , threatened action under any warranty or
guaranty against the Company. The Company has adequate insurance or has reserved
adequate amounts for any liability, damage, loss, cost or expense as a result of
any defect or other deficiency (whether of design, materials, workmanship,
labeling instructions or otherwise) with respect to any product sold or services
rendered by or on behalf of the Company (including any licensee thereof) prior
to the Closing.
3.20 Transactions with Affiliates; Intercompany Arrangements. Except as
set forth on Schedule 3.20, there are no agreements, loans, leases, royalty
agreements or other continuing transactions between the Company and (i) any
officer, director or stockholder of the Company or any of their Affiliates or
(ii) any member of any officer, director or stockholder of the Company's family
or any of their Affiliates ("Interested Person"). To the Knowledge of the
Sellers, no Interested Person (x) has any material direct or indirect interest
in any entity that does business with the Company or (y) has any direct or
indirect interest in any property, asset or right that is used by the Company in
the conduct of their business. No Interested Person has any contractual
relationship (including that of creditor or debtor) with the Company other than
such relationships as result solely from being an officer, director or
stockholder of the Company.
3.21 Finders' Fees. There is no investment banker, broker, finder or
other intermediary that has been retained by or is authorized to act on behalf
of Sellers or the Company who might be entitled to any fee or commission from
Buyer, the Company or any of their respective Affiliates upon consummation of
the transactions contemplated by this Agreement and the Merger Agreement.
3.22 Other Information. None of this Agreement, the Ancillary
Agreements and the schedules and exhibits, when read together as a whole,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained therein not misleading.
The Company makes no representation with respect to any financial projections it
may have provided to Buyer or Parent.
3.23 SEC Reports. The Company has filed all forms, reports and
documents required to be filed by the Company with the SEC since January 1, 2002
under Section 13(a) or Section 15(d) of the Exchange Act. All such required
forms, reports and documents (including those that the Company may file
subsequent to the date hereof) are referred to herein as the "Company SEC
Reports." As of their respective dates, the Company SEC Reports (i) were
prepared in all material respects in accordance with the requirements of the
Exchange Act, and the rules and regulations of the SEC thereunder applicable to
such Company SEC Reports and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this
22
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except to the extent
corrected prior to the date of this Agreement by a subsequently filed Company
SEC Report.
3.24 Consideration Received. Schedule 3.24 lists the amount of
consideration to be received by each stockholder of the Company pursuant to this
Agreement and the Merger Agreement. With respect to each stockholder, such
amounts are equal to the amount such stockholder is entitled to receive under
the Company's certificate of incorporation, as amended to date.
3.25 Trading in Parent Common Stock. To the actual knowledge of the CEO
of the Company, (i) no executive officer or director of the Company has
purchased, sold or otherwise traded shares of Parent Common Stock or in any
derivative securities that base their value on the trading price of Parent
Common Stock during the 30 days preceding the date of this Agreement and (ii)
the Company has not purchased, or induced others to purchase, its shares of
Common Stock or any derivative securities that base their value of the trading
price of Parent Common Stock during the 30 days preceding the date of this
Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES RELATING TO SELLERS
Each Seller as to itself only, severally but not jointly, represents
and warrants to, and agrees with, Buyer and Parent as follows:
4.1 Title to and Validity of Shares. Seller now has, and on the Closing
Date will have, good and marketable title to and unrestricted power to vote and
sell the Shares designated as owned by such Seller opposite such Seller's name
on Schedule 2.1, free and clear of any Lien and, upon purchase and payment
therefor and delivery to Buyer thereof in accordance with the terms of this
Agreement, Buyer will obtain good and marketable title to such Shares free and
clear of any Lien. All Shares owned by such Seller have been duly authorized and
validly issued and are fully paid and non-assessable. All Shares to be sold by
such Seller are registered in the name of such Seller.
4.2 Authority. Such Seller has the legal power, right and authority to
enter into and perform this Agreement and each Ancillary Agreement to which it
is a party, and to perform each of his obligations hereunder. This Agreement has
been duly executed and delivered by such Seller and constitutes a valid and
binding obligation of such Seller, enforceable in accordance with its terms. The
execution, delivery and performance of this Agreement and such Ancillary
Agreements by such Seller (a) require no action by or in respect of, or filing
with, or consent of, any governmental body, agency or official or any other
Person and (b) do not
23
contravene, or constitute a default under, any provision of applicable law or
regulation or of any agreement, judgment, injunction, order, decree or any other
instrument binding upon such Seller.
4.3 Investment Representation. (a) Such Seller represents and warrants
that:
(i) it is acquiring Parent Common Stock solely for its account
and not with a view to or for resale in connection with a distribution
thereof;
(ii) it has had the opportunity to ask questions of and receive
complete answers from representatives of Buyer concerning the
business, management and financial condition of Buyer and the terms
and conditions of Parent Common Stock;
(iii) it is able to bear the economic risk of its investment in
Parent Common Stock for an indefinite period of time;
(iv) it can afford a complete loss of its investment in Parent
Common Stock; and
(v) such Seller has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and
risks of the investment in Parent Common Stock; and
(vi) such Seller is an "accredited investor" within the meaning
of Rule 501 under the Securities Act.
(b) Such Seller acknowledges and agrees that:
(i) the shares of Parent Common Stock to be issued to such Seller
hereunder have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), or under the securities laws of any
state or other jurisdiction, and are being issued in reliance upon
certain exemptions under such statutes;
(ii) the shares of Parent Common Stock to be issued to such
Seller hereunder may not be resold, transferred, pledged or otherwise
disposed of except pursuant to an effective registration statement
under the Securities Act and any applicable state securities laws, or
pursuant to a valid exemption from such registration requirements;
(iii) except as contemplated by the Registration Rights
Agreement, Buyer shall have no obligation to register Parent Common
Stock pursuant to the Securities Act or the securities laws of any
state or to supply the information which may be necessary to sell such
securities; and
(iv) each certificate representing Parent Common Stock will bear
an the following restrictive legend:
24
"The securities represented hereby have not been registered
under the Securities Act of 1933, as amended, and may not be
sold, transferred or otherwise disposed of except in
accordance with the terms thereof and unless registered with
the Securities and Exchange Commission of the United States
and the securities regulatory authorities of certain states or
unless an exception from such registration is available."
Buyer shall have no obligation to remove such legend unless
(i) the shares of Parent Common Stock have been registered pursuant to
the Securities Act, or (ii) in the opinion of counsel satisfactory to
Buyer no such legend is required.
4.4 Trading in Parent Common Stock. Since January 1, 2005, such Seller
has not purchased, sold or otherwise traded shares of Parent Common Stock or in
any derivative securities that base their value on the trading price of Parent
Common Stock.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER
Parent and Buyer hereby jointly and severally represent and warrant to
each Seller that:
5.1 Organization, Standing and Corporate Power. Each of Parent and
Buyer is a corporation or other legal entity duly organized, validly existing
and in good standing, or local law equivalent, under the laws of the
jurisdiction in which it is organized and has the requisite corporate or other
power, as the case may be, and authority to carry on its business as now being
conducted. Each of Parent and Buyer is duly qualified or licensed to do business
and is in good standing, or local law equivalent, in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties or
operations makes such qualification or licensing necessary, other than in such
jurisdictions where the failure to be so qualified or licensed or to be in good
standing, or local law equivalent, would not reasonably be expected to have an
Adverse Effect on Parent or Buyer, as the case may be. Parent has delivered or
made available to Seller, prior to the execution of this Agreement, complete and
correct copies of its Articles of Association and Memorandum of Association, in
each case as amended through the date hereof. Buyer has delivered or made
available to Seller, prior to the execution of this Agreement, complete and
correct copies of its certificate of incorporation and by-laws, in each case as
amended through the date hereof.
25
5.2 Capital Structure.
(a) The authorized capital stock of Parent consists of 25,000,000
ordinary shares, par value NIS 1.00 per share. As of February 28, 2005, (i)
17,655,584 shares of Parent Common Stock are issued and outstanding, and (ii) no
shares of treasury stock are outstanding.
(b) As of the date of this Agreement and regarding options to
purchase shares of Parent Common Stock (each a "Parent Option") under Parent's
First 1998 Share Option Plan ("First Parent 1998 Plan"), Parent's Second 1998
Share Option Plan, as amended ("Second Parent 1998 Plan"), and the Parent 2004
Share Option Plan ("2004 Share Option Plan") and, collectively with the First
Parent 1998 Plan, and Second Parent 1998 Plan, the "Parent Stock Plans"):
(i) Parent has reserved 300,000 shares of Parent Common Stock
for issuance pursuant to outstanding options granted under
the First Parent 1998 Plan (which has been terminated with
respect to any future issuance), all of which have been
exercised, and no other shares remain available for issuance
thereunder;
(ii) Parent has reserved 5,000,000 shares of Parent Common Stock
for issuance to employees, consultants and directors
pursuant to the Second Parent 1998 Plan, of which 609,600
were available for future grants as of February 28, 2005;
and
(iii) Parent has reserved 2,000,000 shares of Parent Common Stock
for issuance to employees, directors and consultants
pursuant to 2004 Share Option Plan, of which, 1,400,000 were
available for future grants as of February 28, 2005.
(c) All outstanding shares of Parent's capital stock were duly
authorized, validly issued, and are fully paid and nonassessable and not subject
to or issued in violation of any purchase option, call option, right of first
refusal, pre-emptive right, subscription right or any similar right under any
provision of Israeli Companies Law - 1999, Parent's Articles of Association,
Memorandum of Association or any Contract to which Parent is a party or
otherwise bound. None of the outstanding shares of Parent's capital stock has
been issued in violation of any federal, state or Israeli securities laws.
5.3 Authority; Noncontravention.
(a) Parent and Buyer have the requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Parent and Buyer and the consummation by Parent and Buyer of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Parent and Buyer and no other
corporate authorizations or corporate approvals on the part of Parent or Buyer
are
26
necessary to approve this Agreement or to consummate the transactions
contemplated by this Agreement. This Agreement has been duly executed and
delivered by Parent and Buyer and constitutes a legal, valid and binding
obligation of Parent and Buyer, enforceable against Parent and Buyer in
accordance with its terms.
(b) The execution and delivery of this Agreement by Parent and
Buyer and the consummation of the transactions contemplated hereby and
compliance by Parent and Buyer with the provisions hereof, do not and will not
conflict with, or result in any violation or breach of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of, or
result in, termination, cancellation or acceleration of any obligation, or
result in the creation of any Lien in or upon any of the properties or assets of
Parent or any of its subsidiaries under, any provision of (i) the Articles of
Association or Memorandum of Association of Parent or Certificate of
Incorporation or Bylaws of Buyer, (ii) constitute a default (with or without
notice or lapse of time, or both) under or give rise to any right of
termination, cancellation or acceleration of any right or obligation of Parent
or Buyer, or to a loss of any benefit under any provision of any material
agreement, contract, license or other instrument binding upon Parent or Buyer,
or (iii) subject to the governmental filings, approvals and other matters
referred to in the following paragraph, any statute, law, ordinance, rule,
regulation, judgment, order or decree, in each case, applicable to Parent or any
of its subsidiaries or their respective properties or assets; other than, in the
case of clauses (ii) and (iii), any such conflicts, terminations, cancellations,
violations, breaches, defaults, rights, results, losses, Liens or entitlements
that would not reasonably be expected to have an Adverse Effect on Parent.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any governmental body,
agency, official or authority is required to be made or obtained by Parent or
Buyer in connection with the execution and delivery of this Agreement by Parent
and Buyer or the consummation by Parent and Buyer of the transactions
contemplated hereby or compliance with the provisions hereof, provided that the
representations made by Seller under this Agreement are true and correct, except
(i) for the filing with the SEC of such filings, notices or reports under the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (ii) for any filings or notifications required
under the rules and regulations of the Nasdaq Stock Market, Inc. of the
transactions contemplated hereby, (iii) for any filings or notifications
required under the Israeli Currency Oversight Law -1998 and the rules and
regulations promulgated thereunder, (iv) for any filings or notifications to the
Israeli Securities Authority, (v) as may be required under the Israeli law for
Encouragement of Research and Development in the Industry - 1984 and the rules
and regulations promulgated thereunder, (vi) as may be required under the
Israeli law for Encouragement of Capital Investments - 1959 and the rules and
regulations promulgated thereunder and (vii) as required under the rules and
regulations of the Tel Aviv Stock Exchange.
5.4 Litigation. There is no action, suit, investigation or proceeding
pending against, or to the knowledge of Parent or Buyer threatened against or
affecting, Parent or Buyer before any court or arbitrator or any governmental
body, agency or official which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay the transactions contemplated hereby.
27
5.5 Finders' Fees. Except for Citigroup Global Markets, Inc., whose
fees will be paid by Buyer, there is no investment banker, broker, finder or
other intermediary that has been retained by or is authorized to act on behalf
of Buyer who might be entitled to any fee or commission from Seller or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement.
5.6 Sufficient Funds and Stock. Buyer has, or shall have, at the
Closing Date sufficient cash funds to consummate the transactions contemplated
by this Agreement, and Parent has, or shall have, at the Closing Date,
sufficient capital stock to consummate the transactions contemplated by this
Agreement.
5.7 SEC Filings. Parent has filed all required reports, forms and other
documents with the SEC (the "Parent SEC Documents"). As of their respective
dates (giving effect to any amendment contained in a subsequently-filed Parent
SEC Document intended to supplement or replace information given at any such
date), (i) the Parent SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such Parent SEC Documents, and (ii) none of
the Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of Parent included in
the Parent SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except as otherwise permitted in the case of
unaudited statements) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present in all
material respects the financial position of SEC and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
5.8 Adverse Change. Parent has conducted its business in the ordinary
course consistent with past practices since the date of the financial statements
of Parent included in the most recently filed SEC Documents. Without limiting
the generality of the foregoing, since such date, there has not been any
Material Adverse Change to Buyer or Parent not disclosed in the Parent SEC
Documents.
ARTICLE 6
COVENANTS OF SELLERS AND COMPANY
6.1 Confidentiality. Each Seller for itself and on behalf of its
Affiliates, will hold, and will use their best efforts to cause their respective
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning Buyer furnished to the Company, or to such
Sellers or its
28
Affiliates, in connection with the transactions contemplated by this Agreement,
and after the Closing Date all confidential documents and information concerning
the Company, except to the extent that such information can be shown to have
been (i) previously known on a nonconfidential basis by such Sellers from a
source other than the Company or its Affiliates, (ii) in the public domain
through no fault of such Sellers or (iii) later lawfully acquired by such Seller
from sources other than the Company, Parent or Buyer; provided that such Seller
may disclose such information to their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents in connection
with the transactions contemplated by this Agreement so long as such persons are
informed by Sellers of the confidential nature of such information and are
directed by such Seller to treat such information confidentially in accordance
with this Agreement. The obligation of such Seller and such Seller's Affiliates,
to hold any such information in confidence shall be satisfied if they exercise
the same care with respect to such information as they would take to preserve
the confidentiality of their own similar information. If this Agreement is
terminated, each Seller and its Affiliates, will, and will use their best
efforts to cause their respective officers, directors, employees, accountants,
counsel, consultants, advisors and agents to, destroy or deliver to Buyer, upon
request, all documents and other materials, and all copies thereof, obtained by
the Company, or by such Seller or its Affiliates, or on their behalf concerning
Buyer in connection with this Agreement that are subject to such confidence.
6.2 Directors and Officers. Each Seller shall use its or his reasonable
efforts to (a) ensure that those members of the Board of Directors of the
Company who are appointed by such Seller as Seller's designated representatives
on the Board of Directors, remain members of the Board of Directors through the
earlier of (1) the earliest possible date in which Parent's nominees may take
control of the Board under Rule 14f-1 of the Securities Exchange Act of 1934 or
(2) the termination of the Merger Agreement, and (b) cause such directors not to
remove any officers of the Company up to the Effective Time all current officers
of the Company. Each Seller shall cause those members of the Board of Directors
of the Company who are appointed by such Seller as Seller's designated
representatives on the Board of Directors to resign from the Board when and if
requested by Buyer.
6.3 Payment of Outstanding Options and Related Bonuses. No later than
immediately prior to the Closing , the Company shall have paid to each holder of
outstanding options for Company Common Stock issued under the Company's Stock
Option Plans to the extent such options are vested (or become vested) and
unexercised at the Closing: (a) a cash amount equal to what such holder would
have received had the holder exercised such options and received shares of
Company Common Stock prior to the Closing, reduced by the sum of (i) the
aggregate exercise price payable to the Company by such holder pursuant to such
options (each such reduction to be deemed to constitute full and complete
satisfaction and payment of each such exercise price), and (ii) the amount of
federal, state or other taxes the Company is required to withhold due to the
deemed exercise of the options and simultaneous disposition of the Company
Common Stock obtained upon such deemed exercise; plus (b) an additional cash
bonus equal to $0.0425 for each vested option (subject to required
withholdings). Details regarding the payments referred to in the previous
sentence, including the identity of each holder, the options
29
held by such holder, the exercise price of such holder's option and the net cash
amount paid to each such holder, are set forth in Schedule 6.3 hereto. The
Company shall take all steps and actions necessary to terminate, effective as of
the Effective Time, all unvested options. No payments shall be made to any
holder of outstanding options until and unless such person agrees to terminate
his unvested options.
6.4 Payment of Certain Bonuses Related to Option Exchange Offer. No
later than immediately prior to the Closing, the Company shall have paid a cash
amount to each person who formerly held options for the Company Common Stock
which were tendered for exchange under the Company's Offer to Exchange dated
October 27, 2004. The identity of each person to receive the bonus described in
the previous sentence and the amounts to be paid are set forth on Schedule 6.4
hereto.
6.5 Payment of Severance and Pro-Rated Performance Bonuses. The Company
shall pay the employees listed on Schedule 6.5 their contractual severance
amounts and a pro-rated performance bonus in one lump sum (less all required
withholdings) under the circumstances described on such Schedule. The identity
of each person to receive the payments described in the previous sentence and
the amounts of contractual severance to be paid are set forth on Schedule 6.5
hereto.
6.6 Payments Received by Sellers. Each Seller acknowledges and agrees
that the amounts set forth on Schedule 6.6 opposite to its name, constitute the
only payments to be received by such Seller under this Agreement and such
payments constitute the only payments that such Seller is entitled to receive
from the Company or any other Person under the Company's certificate of
incorporation, as amended to date, or otherwise.
6.7 Termination of Stockholders Agreement. Each Seller and the Company
agrees that the Amended and Restated Stockholders Agreement dated as of December
21, 2001, as amended, among the Sellers and the Company is terminated effective
as of the Closing Date with no further obligations or liabilities owed by any
party thereto. To the extent such termination is not effective due to additional
consents being required, each Seller and the Company shall use reasonable
efforts to cause the termination of such Amended and Restated Stockholders
Agreement promptly after the date hereof.
ARTICLE 7
COVENANTS OF PARENT AND BUYER
Parent and Buyer agree that:
7.1 Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Parent, Buyer and its Affiliates will hold, and
will use their best efforts to cause their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents to hold, in
confidence, unless compelled to disclose by judicial or administrative process
or by other requirements of law, all confidential documents and information
concerning the Company
30
furnished to Parent, Buyer or their Affiliates in connection with the
transactions contemplated by this Agreement, except to the extent that such
information can be shown to have been (i) previously known on a nonconfidential
basis by Parent or Buyer, (ii) in the public domain through no fault of Parent
or Buyer or (iii) later lawfully acquired by Parent or Buyer from sources other
than the Company or Sellers; provided that Parent or Buyer may disclose such
information to its officers, directors, employees, accountants, counsel,
consultants, advisors and agents in connection with the transactions
contemplated by this Agreement and to its financing sources in connection with
obtaining the financing for the transactions contemplated by this Agreement so
long as such Persons are informed by Buyer of the confidential nature of such
information and are directed by Parent or Buyer to treat such information
confidentially in accordance with this Agreement. The obligation of Parent or
Buyer and their Affiliates to hold any such information in confidence shall be
satisfied if they exercise the same care with respect to such information as
they would take to preserve the confidentiality of their own similar
information. If this Agreement is terminated, Parent, Buyer and their Affiliates
will, and will use their best efforts to cause their respective officers,
directors, employees, accountants, counsel, consultants, advisors and agents to,
destroy or deliver to Seller, upon request, all documents and other materials,
and all copies thereof, obtained by Parent, Buyer or its Affiliates or on their
behalf concerning Sellers and the Company in connection with this Agreement that
are subject to such confidence.
7.2 Access. The Company, on and after the Closing Date, will afford
Sellers and their agents reasonable access to their properties, books, records,
employees and auditors to the extent necessary to permit Sellers to determine
any matter relating to their rights and obligations hereunder or with respect to
any period ending on or before the Closing Date.
7.3 Indemnification of Directors and Officers. The Buyer and Parent
shall ensure that the organizational documents of the Company and any
successor-in-interest to the Company contain provisions which eliminate to the
fullest extent permitted by law the liability of the Company's officers and
directors and which provide for the indemnification by the Company of directors
and officers of the Company to the fullest extent permitted by law. The Company
has purchased a "tail" policy with respect to its director and officer insurance
policy prior to the date hereof, with the costs of such "tail" policy being paid
by the Company.
ARTICLE 8
COVENANTS OF ALL PARTIES
The parties hereto agree that:
8.1 Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary or desirable
under applicable laws and regulations to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. Sellers and Buyer
each agree, and Sellers, prior to the Closing, and Buyer, after the Closing,
agree to cause the Company, to execute and deliver such other documents,
certificates, agreements and other
31
writings and to take such other actions as may be necessary or desirable in
order to consummate or implement expeditiously the transactions contemplated by
this Agreement.
8.2 Certain Filings. Sellers, Parent and Buyer shall cooperate with
each other (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements and (b)
in taking such actions or making any such filings, furnishing information
required in connection therewith and seeking timely to obtain any such actions,
consents, approvals or waivers.
8.3 Public Announcements. The parties agree to consult with each other
before issuing any press release or making any public statement with respect to
this Agreement or the transactions contemplated hereby and, except as may be
required by applicable law or stock exchange regulation, will not issue any such
press release or make any such public statement prior to such consultation.
8.4 Expenses. Except as otherwise specifically provided in this
Agreement or the Ancillary Agreements, all costs and expenses incurred in
connection with this Agreement and the Ancillary Agreements and with the
consummation of the transactions contemplated herein and therein shall be paid
by the party incurring such costs and expenses.
ARTICLE 9
TAX MATTERS
9.1 Definitions.
"Tax" and "Taxes" means all taxes, assessments or impositions imposed
of any nature including: (i) federal, state, local or foreign net income tax,
alternative or add-on minimum tax, profits or excess profits tax, franchise tax,
gross income, adjusted gross income or gross receipts tax, employment related
tax (including employee withholding or employer payroll tax, FICA or FUTA), real
or personal property tax or ad valorem tax, sales or use tax, excise tax, stamp
tax or duty, any withholding or back up withholding tax, estimated taxes,
environmental tax, value added tax, severance tax, prohibited transaction tax,
premiums tax, occupation tax, together with any interest or any penalty,
addition to tax or additional amount imposed by any governmental authority
(domestic or foreign) responsible for the imposition of any such tax; and (ii)
any liability with respect to the foregoing as a result of being or formerly
having been a member of any affiliated, consolidated, combined, unitary, or
similar group, as a result of any transferee liability in respect of the
foregoing, whether arising as a result of any agreement or otherwise by
operation of law.
32
"Tax Returns" means all returns, declarations, reports, claims for
refund, information statements and other documents relating to Taxes, including
all schedules and attachments thereto, and including all amendments thereof.
"Tax Authority" means any governmental authority responsible for the
imposition or collection of any Tax.
9.2 Tax Representations. Sellers hereby represent and warrant to Parent
and Buyer as of the date hereof and as of the Closing Date that:
(a) The Company has timely filed all Tax Returns required to be
filed on or before the date hereof (determined without regard to extensions).
The Company has paid all Taxes owed (whether or not shown, or required to be
shown, on Tax Returns) on or before the date hereof. The Company has withheld
and paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party. All Tax Returns filed by the Company were
complete and correct in all respects, and such Tax Returns correctly reflected
the facts regarding the income, business, assets, operations, activities, status
and other matters of the Company and any other information required to be shown
thereon. The Company has not participated in or otherwise engaged in any
transaction described in Treasury Regulation Section 301.6111-2(b)(2) or any
"Reportable Transaction" within the meaning of Treasury Regulation Section
1.6011-4(b). The Company has disclosed on its Tax Returns all positions taken
therein that could give rise to a substantial understatement of Tax within the
meaning of Section 6662 of the Code (or any similar provision of state, local or
foreign Tax law). There are no Liens for Taxes upon any of the Company's assets,
other than Liens for ad valorem Taxes not yet due and payable.
(b) None of the Tax Returns filed by the Company or Taxes payable
by the Company have been the subject of an audit, action, suit, proceeding,
claim, examination, deficiency or assessment by any governmental authority, and
no such audit, action, suit, proceeding, claim, examination, deficiency or
assessment is currently pending or expected by the Company or any director or
officer (or employee responsible for Tax matters) of the Company.
(c) The Company is not currently the beneficiary of any extension
of time within which to file any Tax Return, and the Company has not waived any
statute of limitation with respect to any Tax or agreed to any extension of time
with respect to the assessment or collection of any deficiency. All material
elections with respect to Taxes affecting the Company, as of the date hereof,
are set forth in the Financial Statements or in Schedule 9.2.
(d) The Company is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately or in the
aggregate, in the payment of (i) any "excess parachute payments" within the
meaning of Section 280G of the Code (without regard to the exceptions set forth
in Sections 280G(b)(4) and 280G(b)(5) of the Code) or (ii) any amount for which
a deduction would be disallowed or deferred under Section 162 or Section 404 of
the Code. . None of the shares of outstanding capital stock of the Company or
any Subsidiary is subject to a "substantial risk of forfeiture" within the
meaning of Section 83 of the Code. Except
33
as set forth in Schedule 9.2, no portion of the Purchase Price is subject to the
Tax withholding provisions of Section 3406 of the Code, or of Subchapter A of
Chapter 3 of the Code or of any other provision of law.
(e) The Company is not a party to or member of any joint venture,
partnership, limited liability company or other arrangement or contract which
could be treated as a partnership for federal income tax purposes. The Company
is not, nor has it ever been, a "United States real property holding
corporation" (as defined in Section 897(c)(2) of the Code) during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. The Company does not
own an interest in real property or personal property in any jurisdiction in
which a Tax is imposed, or the value of such interest reassessed, on the
transfer of an interest in real property or personal property or which treats
the transfer of an interest in an entity that owns an interest in real property
or personal property as a transfer of such interest in real property or personal
property. The Company has never been either a "controlled corporation" or a
"distributing corporation" (within the meaning of Section 355(a)(1)(A) of the
Code) with respect to a transaction that was described in, or intended to
qualify as a tax-free transaction pursuant to, Section 355 of the Code. Except
as set forth in Schedule 9.2, the Company does not have net operating losses.
The Company has not made or agreed to make any adjustment under Section 481(a)
of the Code (or any corresponding provision of state, local or foreign Tax law)
by reason of a change in accounting method or otherwise or entered into a
"closing agreement" as described in Section 7121 of the Code (or any
corresponding or similar provision of state, local or foreign income Tax law),
nor will the Company be required to make such an adjustment as a result of the
transactions contemplated by this Agreement. The Company has not participated in
an international boycott as defined in Section 999 of the Code. Except as set
forth in Section 9.2, the Company has never (i) made an election under Section
1362 of the Code to be treated as an S corporation or made an election under
Section 1361 of the Code to be treated as a "qualified subchapter S subsidiary"
for federal income tax purposes or (ii) made any similar election under any
comparable provision of any state, local or foreign Tax law. The Company does
not own, directly or indirectly, any interests in an entity that is or has been
treated as a "passive foreign investment company" within the meaning of Section
1297 of the Code, a "foreign personal holding company" within the meaning of
former Section 552 of the Code or a "controlled foreign corporation" within the
meaning of Section 957 of the Code. None of the assets of the Company directly
or indirectly secures any debt the interest on which is tax exempt under Section
103(a) of the Code. None of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code. None of the assets
of the Company is property which is required to be treated as being owned by any
other Person pursuant to the so-called "safe harbor lease" provisions of Section
168(f)(8) of the Internal Revenue Code of 1954. The Company has complied with
all withholding obligations under Section 1445 of the Code and under any
comparable applicable provisions of state or local law.
(f) The Company is not a party to any Tax sharing agreement or
similar arrangement (including, but not limited to, an indemnification agreement
or arrangement). The Company has never been a member of a group filing a
consolidated federal income Tax Return or a combined, consolidated, unitary or
other affiliated group Tax Return for state, local or
34
foreign Tax purposes (other than a group the common parent of which is the
Company), and the Company does not have any liability for the Taxes of any
Person (other than the Company) under Treasury Regulation Section 1.1502-6 (or
any corresponding provision of state, local or foreign Tax law), or as a
transferee or successor, or by contract, or otherwise.
(g) The unpaid Taxes of the Company did not, as of the Balance
Sheet Date exceed the reserve for actual Taxes (as opposed to any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) as shown on the Balance Sheet, and will not exceed such reserve as
adjusted for the passage of time through the Closing Date in accordance with the
reasonable past custom and practice of the Company and its Subsidiaries in
filing Tax Returns. The Company will not incur any liability for Taxes from the
Balance Sheet Date through the Closing Date other than in the ordinary course of
business and consistent with reasonable past practice.
(h) Schedule 9.2 hereto contains a list of all jurisdictions
(whether foreign or domestic) to which any Tax is properly payable by the
Company. No claim has ever been made by a Tax Authority in a jurisdiction where
the Company does not file Tax Returns that the Company is or may be subject to
Tax in that jurisdiction. The Company does not have, and has never had, a
permanent establishment or other taxable presence in any foreign country, as
determined pursuant to applicable foreign law and any applicable Tax treaty or
convention between the United States and such foreign country.
(i) Schedule 9.2 hereto lists all Tax Returns filed with respect
to the Company for taxable periods ended on or after December 31, 1999 and lists
the Company's IRS employment identification number. The Company has delivered to
Buyer correct and complete copies of all income Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by the
Company since December 31, 1999. Schedule 9.2 sets forth as of the most recent
practicable date which is set forth on Schedule 9.2 the basis of the Company in
its assets.
(j) There has not been any change in any method of Tax accounting
or any making of a Tax election or change of an existing election by the
Company.
(k) At all times during the Company's existence, each record or
beneficial holder of an equity interest in the Company has been a "United States
person" (as defined in Section 7701(a)(30) of the Code) for purposes of the
provisions of Sections 897 and 1445 of the Code.
(l) For purposes of this Section 9.2, any reference to the Company
shall be deemed to include any Person which merged with or was liquidated into
the Company.
9.3 Tax Covenants. The following provisions shall govern the allocation
of responsibility as between Buyer and Sellers for certain tax matters following
the Closing Date:
35
(a) Cooperation on Tax Matters.
(i) Buyer and Sellers shall cooperate fully, as and to the extent
reasonably requested by any other party, in connection with the filing
of Tax Returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include
the retention and (upon the other party's request) the provision of
records and information which are reasonably relevant to any such
audit, litigation or other proceeding and making employees available
on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. Buyer agrees (A) to
retain all books and records with respect to Tax matters pertinent to
the Company relating to any Tax period beginning before the Closing
Date until the expiration of the statute of limitations (and, to the
extent notified by Buyer or Seller's Committee, any extensions
thereof) of the respective Tax periods, and to abide by all record
retention agreements entered into with any Tax Authority, and (B) to,
in the case of Buyer give Seller's Committee reasonable written notice
prior to transferring, destroying or discarding any such books and
records and, if another such party so requests.
(ii) Buyer and Sellers further agree, upon request, to provide
any other party with all information that such party may be required
to report pursuant to Sections 6043 and 6043A of the Code and all
Treasury Regulations promulgated thereunder.
(b) Certain Taxes. Any transfer, documentary, sales, use, stamp or
other similar Taxes and recording and filing fees incurred in connection with
the transactions contemplated by this Agreement or any Ancillary Agreement with
respect to shares owned by each Seller shall be borne and paid by each Seller,
respectively, and such Seller shall promptly reimburse Buyer for any such
amounts paid by Buyer.
(c) Tax Free Reorganization. Each of the parties shall use its
reasonable best efforts through the effective time of the Subsequent Merger (as
defined in the Merger Agreement) to cause the acquisition of Shares and the
Mergers (as defined in the Merger Agreement) taken together to be treated as a
reorganization within the meaning of Section 368(a) of the Code. No party will
take any position on any federal, state or local income or franchise Tax Return,
or take any other tax reporting position, that is inconsistent with the
treatment of the acquisition of Shares and the Mergers (as defined in the Merger
Agreement) taken together as a reorganization within the meaning of Section
368(a) of the Code, unless otherwise required by applicable tax law (and then
only to the extent required by such applicable tax law)..
ARTICLE 10
EMPLOYEE BENEFITS
10.1 Employee Benefits Definitions. The following terms, as used
herein, have the following meanings:
36
"Benefit Arrangement" means an employment, severance or similar
contract, arrangement or policy (written or oral) and each plan or arrangement
providing for severance, insurance coverage (including any self-insured
arrangements), workers' compensation, vacation benefits, disability benefits, or
salary continuation for other leaves of absence, supplemental unemployment
benefits, pension or retirement benefits or for deferred compensation,
profit-sharing, bonuses, phantom stock, stock options, stock appreciation rights
or other forms of incentive or equity compensation, educational assistance
arrangements or policies, any plan governed by Section 125 of the Code, any
fringe benefit (including company cars), any change of control arrangements or
policies or post-retirement insurance, compensation or benefits or any
Co-employment agreement that (i) is not an Employee Plan, (ii) is entered into,
maintained or contributed to, as the case may be, by the Company or any of its
ERISA Affiliates or any Co-Employer and (iii) covers any Employee or former
Employee of the Company.
"Co-Employer" means any entity that is or was considered to be a
co-employer with the Company.
"Employee" for purposes of this Article 10 means any employee of the
Company or an ERISA Affiliate of the Company, including any employee co-employed
by the Company and Co-Employer.
"Employee Plan" means each "employee benefit plan," as such term is
defined in Section 3(3) of ERISA, that (i) is subject to any provision of ERISA
and (ii) is maintained or contributed to by the Company or any of its ERISA
Affiliates or any Co-Employer, as the case may be.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder, all as from time to time in
effect, and any successor laws thereto.
"ERISA Affiliate" of any entity means any other entity that, together
with such entity, would be treated as a single employer under Section 414 of the
Code or Section 4001 of ERISA.
"Multiemployer Plan" means each Employee Plan that is a multiemployer
plan, as defined in Section 4001(a)(3) of ERISA.
10.2 ERISA Representations. The Company hereby represents and warrants
to Parent and Buyer as of the date hereof that:
(a) Schedule 10.2 lists each Employee Plan and Benefit Arrangement
that covers any Employee. The Company has made available to Buyer correct and
complete copies of all Employee Plans and Benefit Arrangements and, where
applicable, each of the following documents with respect to such Employee Plans
or Benefit Arrangements: (i) any amendments; (ii) any related trust documents;
(iii) any documents governing the investment and management of the Employee Plan
or the Benefit Arrangement, or the assets thereof, including any documents
relating to fees incurred by the sponsor or participants and beneficiaries; (iv)
the most recent
37
summary plan descriptions and summaries of material modifications; (v) written
communications to employees to the extent the substance of the Employee Plans
and Benefit Arrangements described therein differ materially from the other
documentation furnished under this clause and (vi) copies of the Federal Form
5500 series and accountant's opinion, if applicable, for each Employee, for the
three plan years preceding the Closing Date.
(b) None of the Employee Plans or Benefit Arrangements listed on
Schedule 10.2(a) is subject to the laws of any jurisdiction outside the United
States.
(c) No non-exempt "prohibited transaction," as defined in Section
406 of ERISA or Section 4975 of the Code, has occurred with respect to any
Employee Plan.
(d) Neither the Company nor any ERISA Affiliate maintains or has
ever maintained or contributed to or expects to incur liability with respect to
any Multiemployer Plan or Employee Plan subject to Title IV of ERISA or Section
412 of the Code. Neither the Company nor any ERISA Affiliate has incurred any
liability with respect to any transaction described in Section 4069 of ERISA.
(e) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to the Closing Date, and each trust forming a part
thereof is exempt from tax pursuant to Section 501(a) of the Code. No event has
occurred that will or could reasonably be expected to give rise to
disqualification of any such Employee Plan or to a tax under Section 511 of the
Code. The Company has furnished to Buyer copies of the most recent Internal
Revenue Service determination or opinion letter with respect to each such
Employee Plan. Each Employee Plan and Benefit Arrangement has been maintained in
compliance with its terms and with the applicable requirements prescribed by any
and all statutes, orders, rules and regulations and neither the Company nor any
ERISA Affiliate has received any outstanding written notice from any
governmental or quasi-governmental authority questioning or challenging such
compliance.
(f) With respect to the Employees and former Employees, there are
no employee post-retirement health or welfare plans in effect, except as
required by Section 4980B of the Code or applicable state law. No tax under
Section 4980B or 4980D of the Code has been incurred in respect of any Employee
Plan that is a group health plan, as defined in Section 5000(b)(1) of the Code.
(g) All contributions and payments accrued under each Employee
Plan and Benefit Arrangement, determined in accordance with prior funding and
accrual practices, as adjusted to include proportional accruals for the period
ending on the Closing Date, will be discharged and paid on or prior to the
Closing Date except to the extent reflected on the Financial Statements and on
Schedule 10.2(g). There has been no amendment to, written interpretation of or
announcement (whether or not written) by the Company or any of their respective
ERISA Affiliates relating to, or change in employee participation or coverage
under, any Employee Plan or Benefit Arrangement that would increase materially
the expense of
38
maintaining such Employee Plan or Benefit Arrangement above the
level of the expense incurred in respect thereof for the fiscal year ended prior
to the date hereof.
(h) Except as set forth in Schedules 6.3, 6.4 and 6.5, no Employee
will become entitled to any material bonus, retirement, severance or similar
benefit or enhanced benefit solely as a result of the transactions contemplated
hereby.
(i) Neither the Company nor any ERISA Affiliate nor any of their
respective directors, officers, employees or any other fiduciary has committed
any breach of fiduciary responsibility imposed by ERISA that would subject the
Company or any ERISA Affiliate or any of their respective directors, officers or
employees to liability under ERISA.
(j) There have been no acts or omissions by the Company or any
ERISA Affiliate that have given rise to or could reasonably be expected to give
rise to material fines, penalties, taxes or related charges under Sections
502(c) or 502(i) of ERISA or Chapter 43 of the Code for which the Company or any
ERISA Affiliate may be liable.
(k) The provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, or any equivalent state statute, and the
Health Insurance Portability and Accountability Act of 1996, or any equivalent
state statute, have been complied with in all material respects.
(l) Except as disclosed in Schedule 10.2(k), neither the Company
nor any ERISA Affiliate maintains a "nonqualified deferred compensation plan"
within the meaning of Section 409A of the Code.
10.3 Employee Benefits Covenants. Provided that it complies in all
material respects with applicable law and the terms of any employment
arrangements identified in Section 3.16, Buyer may, in its sole discretion,
substitute employee compensation, benefit and severance programs for those of
the Company as are comparable with the programs provided from time to time to
Buyer's employees and the employees of Buyer's Affiliates. Subject to the
preceding sentence, the Buyer shall have no obligation to continue the existence
of any Employee Plan or Benefit Arrangement maintained by the Company or any
ERISA Affiliate.
10.4 No Third Party Beneficiaries. No provision of this Article 10 or
any other provision in this Agreement shall create any third party beneficiary
or other rights in any employee or former employee (including any beneficiary or
dependent thereof) of the Company in respect of continued employment (or resumed
employment) with the Company and no provision of this Article 10 shall create
any such rights in any such Persons in respect of any benefits that may be
provided, directly or indirectly, under any Employee Plan or Benefit Arrangement
or any plan or arrangement that may be established by Buyer or any of its
Affiliates. No provision of this Agreement shall constitute a limitation on
rights to amend, modify or terminate after the Closing Date any Employee Plan or
Benefit Arrangement.
39
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 Survival. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or the Ancillary
Agreements or in any certificate or other writing delivered pursuant hereto or
in connection herewith shall survive the Closing until the first anniversary of
the Closing Date, except in the case of Article 4 and 6.1, which shall survive
indefinitely.
Notwithstanding the preceding sentence, any covenant, agreement,
representation or warranty in respect of which indemnity may be sought under
Section 11.2 shall survive the time at which it would otherwise terminate
pursuant to the preceding paragraph, if written notice of the inaccuracy or
breach thereof giving rise to such right to indemnity shall have been given to
the party against whom such indemnity may be sought prior to such time.
11.2 Indemnification. (a) Each Seller severally and not jointly hereby
indemnifies Parent, Buyer and, effective at the Closing, without duplication,
the Company, against and agrees to hold them harmless from any and all damage,
loss, liability and expense (including without limitation reasonable expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
action, suit or proceeding) ("Damages") incurred or suffered by Parent, Buyer or
the Company arising out of:
(i) (A) any misrepresentation or breach of warranty (determined
without regard to any materiality qualification contained in any
representation or warranty giving rise to claim for indemnity
hereunder) made by the Company pursuant to this Agreement or pursuant
to the Merger Agreement (if such breach occurs prior to the Board
resignation contemplated pursuant to Section 6.2 hereof) and any
certificate or other agreement delivered pursuant hereto or thereto
and (B) any claim, action, suit or proceeding by any Person (a "Third
Party Claim") alleging facts that if proven true would constitute a
breach of such representations and warranties;
(ii) (A) any misrepresentation or breach of warranty (determined
without regard to any materiality qualification contained in any
representation or warranty giving rise to claim for indemnity
hereunder) made by such Seller (but not other Sellers) pursuant to the
provisions of Article 4 or any Ancillary Agreement and (B) a Third
Party Claim alleging facts that if proven true would constitute a
misrepresentation or breach of such representations and warranties;
(iii) any breach of any covenant or agreement made or to be
performed by such Seller (but not other Sellers) pursuant to this
Agreement or the Ancillary Agreements;
(iv) the amount by which Closing Date Net Working Capital,
calculated in compliance with Section 2.3, is less than Threshold Net
Working Capital;
40
(v) the amount by which the total consideration ultimately paid
by Parent or Buyer to any holder or former holder of Company
Securities (other than Sellers) under the Merger Agreement, as amended
from time to time, or otherwise in connection with the acquisition by
Parent or Buyer of the Company, exceeds $2,574,966; .
(vi) The amount by which (1) any transaction related expenses
(including any Estimated Expenses) plus (2) the costs of the director
and officer tail insurance policy, exceed $295,000.
(vii) The amount by which severance payments, contractual
bonuses, retention bonuses and benefits paid by the Company exceed the
amounts set forth in Schedule 11.2(a)(vii).
(viii) Any Adverse change in the audited financial statements of
the Company with respect to the fiscal year ended December 31, 2004 as
compared to the draft audited financial statements delivered under
Section 3.6.
(b) Buyer hereby indemnifies each Seller against and agrees to
hold it harmless from any and all Damages incurred or suffered by such Seller
arising out of:
(i) (A) any misrepresentation or breach of warranty made by Buyer
pursuant this Agreement, the Ancillary Agreements and any certificate
or other writing delivered pursuant hereto or thereto and (B) a Third
Party Claim alleging facts that if proven true would constitute a
misrepresentation or breach of such representations and warranties;
and
(ii) any breach of any covenant or agreement made or to be
performed by Buyer pursuant to this Agreement or the Ancillary
Agreements.
(c) All indemnification payments made under this Agreement shall be
treated as adjustments to the Purchase Price.
11.3 Limitation of Indemnification. (a) Notwithstanding the provisions
of Section 11.2, (i) Sellers shall not be liable for Damages under Section
11.2(a)(i), (iii) and (viii) unless the aggregate amount of Damages with respect
to all such misrepresentations or breaches of warranty (determined without
regard to any materiality qualification contained in any representations or
warranty giving rise to claim for indemnity hereunder) exceeds $250,000 and then
only to the extent of such excess and (ii) each Seller's maximum liability, as
the case may be, under (1) Section 11.2(a)(i), (iii), (iv), (v), (vi), (vii) and
(viii) shall not exceed the amount deposited in escrow with the Escrow Agent on
behalf of such Seller; and (2) Section 11.2(a)(v) shall not exceed 50% of such
Damages, in any event the total Damages to be borne Sellers under this
subsection (2) not to exceed $900,000. Notwithstanding anything to the contrary
herein, for purposes of Section 11.2(a)(i), a claim shall not be deemed to
constitute indemnifiable Damages for purposes of such section unless the amount
of Damages with respect to such claim is equal to or greater than $15,000.
41
(b) Notwithstanding the provisions of Section 11.2, (i) Parent's
and Buyer's maximum liability under Section 11.2(b) shall not exceed
$17,177,500.
(c) In the event that Parent, Buyer or the Company are indemnified
under this Agreement and thereafter receive insurance proceeds for such Damage,
then Parent, Buyer or the Company, as the case may be, shall remit such funds to
Sellers' Committee for distribution to the Sellers. The Company agrees to use
its commercially reasonable efforts to recover any such available insurance
proceeds.
(d) Notwithstanding anything in this Agreement to the contrary,
except for breaches of Section 6.1, there shall not be included in the
definition of Damages, and Buyer and Parent shall not be entitled to recover
under any action for breach of contract or tort hereunder, any indirect,
punitive, special, exemplary or consequential damages (other than indirect,
punitive, special, exemplary or consequential damages which are paid to third
parties), damages for lost profits of the Company, damages for diminution in
value of the Company or damages computed on a multiple of earnings or similar
basis.
11.4 Procedures. (a) If any indemnified party receives notice of the
assertion of any Third-Party Claim with respect to which an indemnifying party
is obligated under this Agreement to provide indemnification, such indemnified
party shall give such indemnifying party written notice thereof (together with a
copy of such Third-Party Claim, process or other legal pleading) promptly after
becoming aware of such Third-Party Claim; provided, however, that the failure of
any indemnified party to give notice as provided in this Section 11.4 shall not
relieve any indemnifying party of its obligations under this Section 11.4,
except to the extent that such indemnifying party is actually prejudiced by such
failure to give notice or except as provided in Section 11.1 hereof. Such notice
shall describe such Third-Party Claim in reasonable detail.
(b) An indemnifying party, at such indemnifying party's own
expense and through counsel chosen by such indemnifying party (which counsel
shall be reasonably acceptable to the indemnified party), may elect to defend,
compromise and settle any Third-Party Claim on reasonable terms. If an
indemnifying party elects to defend a Third-Party Claim, then, within ten (10)
business days after receiving notice of such Third-Party Claim (or sooner, if
the nature of such Third-Party claim so requires), such indemnifying party shall
notify the indemnified party of its intent to do so, and such indemnified party
shall cooperate in the defense of such Third-Party Claim (and pending such
notice and assumption of defense, an indemnified party may take such steps to
defend against such Third-Party Claim as, in such indemnified party's good-faith
judgment, are appropriate to protect its interests). Such indemnifying party
shall pay such indemnified party's reasonable out-of-pocket expenses incurred in
connection with such cooperation. Such indemnifying party shall keep the
indemnified party reasonably informed as to the status of the defense of such
Third-Party Claim. After notice from an indemnifying party to an indemnified
party of its election to assume the defense of a Third-Party Claim, such
indemnifying party shall not be liable to such indemnified party under this
Section 11.4 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof; provided, however,
that such indemnified party shall have
42
the right to employ one law firm as counsel("Separate Counsel"), to represent
such indemnified party in any action or group of related actions (which firm or
firms shall be reasonably acceptable to the indemnifying party) if, in such
indemnified party's reasonable judgment at any time, either a conflict of
interest between such indemnified party and such indemnifying party exists in
respect of such claim that precludes the indemnifying party's counsel from
adequately representing the indemnified party, or there may be defenses
available to such indemnified party which are different from or in addition to
those available to such indemnifying party and the representation of both
parties by the same counsel would be inappropriate, and in that event (i) the
reasonable fees and expenses of such Separate Counsel shall be paid by such
indemnifying party (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one Separate Counsel with
respect to any Third-Party Claim (even if against multiple indemnified
parties)), and (ii) each of such indemnifying party and such indemnified party
shall have the right to conduct its own defense in respect of such claim. If an
indemnified party is conducting its own defense of a Third-Party Claim, whether
because of a conflict of interest (as contemplated by the previous sentence) or
because an indemnifying party elects not to defend against a Third-Party Claim,
or fails to notify an indemnified party of its election as provided in this
Section 11.4 within the period of ten (10) business days described above, or
having elected to defend the claim, then fails to defend the claim, the
indemnified party may defend, compromise, and settle such Third-Party Claim on
reasonable terms and shall be entitled to indemnification hereunder (to the
extent permitted hereunder). Notwithstanding the foregoing, the indemnifying
party shall not, without the prior written consent of the indemnified party, (i)
settle or compromise any Third-Party Claim or consent to the entry of any
judgment which does not include as an unconditional term thereof the delivery by
the claimant or plaintiff to the indemnified party of a written release in a
form reasonably satisfactory to the indemnified party from all liability in
respect of such Third-Party Claim, or (ii) settle or compromise any Third-Party
Claim in any manner that would include injunctive relief or reasonably be
expected to have a material adverse effect on the indemnified party.
11.5 No Subrogation. Following the Closing, Sellers shall have no right
of indemnification, contribution or subrogation against the Company with respect
to any indemnification payments made by any Seller or Sellers under Section 11.2
if the transactions contemplated by this Agreement are consummated.
11.6 Escrow. Parent's and Buyer's claims for indemnification pursuant
to Section 11.2(a)(i), (iii), (iv), (v), (vi), (vii) and (viii) shall be
satisfied solely from funds withheld or deposited and held in escrow pursuant to
Section 2.2. Parent's and Buyer's claims for indemnification pursuant Section
11.2(a)(ii) shall be satisfied, at the sole and exclusive option of Parent and
Buyer, either (1) from the amounts then held in escrow or (2) directly from the
Seller causing such Damage (even if amounts remain withheld or deposited under
the terms of the Escrow Agreement). The procedure for payments from the escrow
as well as releases from escrow shall be governed by the Escrow Agreement.
11.7 Exclusive Remedy. Section 11.2 shall provide the exclusive remedy
for any misrepresentation or breach of warranty, covenant or other agreement or
other claim arising out of this Agreement, the Ancillary Agreements or the
transactions contemplated hereby and
43
thereby (whether such claim is for breach of contract, tort or otherwise),
except with respect to claims for injunctive relief and/or against a party who
commits fraud.
11.8 Dispute Resolution. (a) Subject to the other subsections of this
Section 11.8, any dispute arising out of or relating to indemnification pursuant
to this Article 11 shall be finally settled by binding arbitration conducted
expeditiously by a single arbitrator in accordance with the J.A.M.S./Endispute
Comprehensive Arbitration Rules and Procedures then in effect (the "J.A.M.S.
Rules"). The arbitration shall occur under the auspices of the United States
Arbitration Act, 9 U.S.C. ss.ss. 1-6, and judgment upon the award rendered by
the arbitrators may be entered by any court having jurisdiction thereunder. The
place of arbitration shall be Orange County, California until the Company's
records have been moved from the Company's facility in Orange County, and
thereafter shall be Dallas, Texas.
(b) The arbitration proceedings shall be administered by the
arbitrators in accordance with the J.A.M.S. Rules as the arbitrators deem
appropriate. The discovery period related to the arbitration proceedings shall
terminate ninety (90) days after the arbitrators have been finally appointed,
and Parent and Buyer, on the one hand, and the Seller, on the other hand, shall
each be permitted to depose up to six (6) witnesses. The parties and the
arbitrators shall use their best efforts to see that the arbitration proceedings
taking place pursuant to this Section 11.8 shall conclude within one hundred
fifty (150) days after the arbitrators have been finally appointed. The
arbitrators shall render a reasoned opinion in writing in support of their
decision, and shall award reimbursement of attorneys' and other experts' fees
and disbursements and other costs of arbitration to the prevailing party, in
such manner as the arbitrator shall deem appropriate.
(c) All expenses and fees of the arbitrators and expenses for
hearing facilities and other expenses of the arbitration shall be borne equally
by Buyer, on one hand, and the Seller, on the other hand, unless they agree
otherwise or unless the arbitrators in the award assess such expenses against
one of the parties or allocates such expenses other than equally between the
parties. Each party shall bear its own counsel fees and the expenses of its
witnesses except to the extent otherwise provided in this Agreement or by law or
by the arbitrator's award. While there are escrow funds deposited (and not
subject to claims) with the Escrow Agent, the Sellers' portion of any such fees
and expenses shall be paid from the escrow funds.
(d) Notwithstanding the other provisions of this Section 11.8,
either party may seek from any court having jurisdiction hereof any interim,
provisional or injunctive relief that may be necessary to protect the rights or
property of any party or to maintain the status quo before, during or after the
pendency of the arbitration proceeding. The institution and maintenance of any
judicial action or proceeding for any such interim, provisional or injunctive
relief shall not constitute a waiver of the right or obligation of either party
to submit the dispute to arbitration, including any claims or disputes arising
from the exercise of any such interim, provisional or injunctive relief. Nothing
herein, however, shall be construed to mean that any decision of the arbitrators
is subject to judicial review or appeal, and the parties hereto hereby waive any
and all rights of judicial appeal or review, on any ground whatsoever.
44
11.9 Seller's Mutual Reimbursement Obligation. In the event that a
Seller causes a claim to be paid against the Escrow Account due to such Seller's
breach of Section11.2(a)(ii) and (iii) hereof, such Seller shall reimburse the
other Sellers for any losses sustained due to such Seller's breach.
11.10 Exception. The parties acknowledge that, without obligation to do
so, they may mutually agree to additional accruals with respect to the Company's
financial statements for the period ending March 31, 2005 (the "Agreed
Accruals") and that the Agreed Accruals shall not (i) give raise to a claim of a
breach of the representations and warranties set forth in Article III hereof or
(ii) cause an adjustment to the calculation of Closing Date Net Working Capital.
ARTICLE 12
SELLERS' COMMITTEE
12.1 Appointment of Sellers' Committee.
(a) Each Seller hereby irrevocably constitutes and appoints,
Innocal II, L.P., Argentum Capital Partners, L.P. and Mark Koulogeorge (the
"Sellers' Committee"), or a majority of them acting separately, as such Seller's
attorneys-in-fact and agents in connection with the transactions contemplated by
this Agreement and the Ancillary Agreements. This power is irrevocable and
coupled with an interest, and shall not be affected by the death, incapacity,
illness or other inability to act of any Seller.
(b) Each Seller hereby irrevocably grants Sellers' Committee, or a
majority of the members thereof acting separately, full power and authority on
behalf of such Seller:
(i) to deliver certificates representing the Shares to be sold by
such Seller at the Closing.
(ii) to (A) dispute or refrain from disputing any claim made by
Buyer under this Agreement; (B) negotiate and compromise any dispute
that may arise under, and to exercise or refrain from exercising any
remedies available under, this Agreement and the Escrow Agreement, and
(C) execute any settlement agreement, release or other document with
respect to such dispute or remedy;
(iii) to give or agree to any and all consents, waivers,
amendments or modifications deemed by Sellers' Committee, in its sole
discretion, to be necessary or appropriate under this Agreement or the
Escrow Agreement, and, in each case, to execute and deliver any
documents that may be necessary or appropriate in connection
therewith;
(iv) to enforce any claim against Buyer arising under this
Agreement or the Escrow Agreement.
45
(v) to engage attorneys, accountants and agents at the expense of
Sellers and to cause the release from the Escrow Account of amounts
necessary to pay such expenses; and
(vi) to give such instructions and to take such action or refrain
from taking such action as Sellers' Committee deems, in its sole
discretion, necessary or appropriate to carry out the provisions of,
and to consummate the transactions contemplated by, this Agreement or
the Escrow Agreement.
(c) Each Seller hereby agrees that:
(i) the Company, Parent and Buyer shall be entitled to rely on
any and all action taken by Sellers' Committee, or a majority of the
members thereof acting separately, under this Agreement and the
Ancillary Agreements notwithstanding any dispute or disagreement among
Sellers or among the members of Sellers' Committee without any
liability to, or obligation to inquire of, any Seller or the other
members of Sellers' Committee, notwithstanding any knowledge on the
part of the Company, Parent or Buyer of any such dispute or
disagreement;
(ii) notice to Sellers' Committee, delivered in the manner
provided herein, shall be deemed to be notice to such Seller for the
purposes of this Agreement and the Escrow Agreement;
(iii) the authority of Sellers' Committee, as described in this
Agreement, shall be effective until the rights and obligations of
Sellers' Committee under this Agreement and the Escrow Agreement shall
terminate by virtue of the termination of any and all rights and
obligations of such Seller to Buyer under this Agreement and the
Escrow Agreement;
(iv) if any member of Sellers' Committee resigns or is removed or
otherwise ceases to function in his capacity as such for any reason
whatsoever, and no successor acceptable to Buyer is appointed by a
majority-in-interest of Sellers within thirty 30 days, Sellers'
Committee shall consist solely of the remaining members of Sellers'
Committee and, under such circumstances, Parent, Buyer and the Company
shall be entitled to rely on any and all actions taken by the
remaining members or member of Sellers' Committee. If, as a result of
such resignation or removal, there are no remaining members of
Sellers' Committee and no successor is appointed by a
majority-in-interest of Sellers within 30 days, then Parent or Buyer
shall have the right to appoint a member of Sellers' Committee to
serve as described in this Agreement (who shall be a Seller) and,
under such circumstances, Buyer and the Company shall be entitled to
rely on any and all actions taken by such member of Sellers'
Committee;
(v) there shall at no time be more than three members of Sellers'
Committee; and
46
(vi) no member of the Seller's Committee shall be liable to any
Seller for Damages with respect to any action taken or any omission by
Sellers' Committee pursuant to this Article 12, except to the extent
such Damages are caused by such member's willful misconduct.
(d) Each Seller agrees that, notwithstanding the foregoing, at the
request of Parent or Buyer, he shall take all actions necessary or appropriate
to consummate the transactions contemplated by this Agreement or the Ancillary
Agreements (including, without limitation, delivery of his Shares and acceptance
of the purchase price therefor) individually on his own behalf.
12.2 Limitation on Actions. Any claim, action, suit or other
proceeding, whether at law or in equity, to enforce any right, benefit or remedy
granted to Sellers under this Agreement shall be asserted, brought, prosecuted,
or maintained only by Sellers' Committee on behalf of Sellers. Any claim,
action, suit or other proceeding, whether at law or in equity, to enforce any
right, benefit or remedy granted under this Agreement, including without
limitation any right of indemnification provided in this Agreement, may be
asserted, brought, prosecuted or maintained by Buyer against Sellers by service
of process on each member of Sellers' Committee and without the necessity of
serving process on, or otherwise joining or naming any other Seller as a
defendant in such claim, action, suit or other proceeding. With respect to any
matter contemplated by this Section, a Seller shall be bound by any
determination in favor of or against Sellers' Committee or the terms of any
settlement or release to which Sellers' Committee shall become a party.
12.3 Indemnification. Each Seller shall indemnify each member of
Sellers' Committee against any Damages (except such as result from such member's
willful misconduct) that such member may suffer or incur in connection with any
action taken or any omission by such member as a member of Sellers' Committee
except to the extent such Damages were caused by such member's willful
misconduct.
ARTICLE 13
MISCELLANEOUS
13.1 Notices. All notices, requests, demands or other communications
that are required or may be given pursuant to the terms of this Agreement shall
be in writing and shall be deemed to have been duly given: (i) on the date of
delivery, if personally delivered by hand, (ii) upon the third day after such
notice is deposited in the United States mail, if mailed by registered or
certified mail, postage prepaid, return receipt requested, (iii) upon the date
scheduled for delivery after such notice is sent by a nationally recognized
overnight express courier or (iv) by fax upon written confirmation (including
the automatic confirmation that is received from the recipient's fax machine) of
receipt by the recipient of such notice:
47
if to Buyer, to: with a copy to:
Danny Moshaioff Harvey E. Bines, Esq.
Retalix, Ltd. Sullivan & Worcester LLP
10 Zarhin Street, Corex House One Post Office Square
43000, Ra'anana, Israel Boston, MA 02109
Telecopy: +972-9-744-4756 Telecopy: (617) 338-2800
if to the Company, to: with a copy to:
Mr. David Butler William J. Simpson, Esq.
TCI Solutions, Inc. Paul, Hastings, Janofsky & Walker LLP
17752 Skypark Circle 695 Town Center Drive
Suite 160 17th Floor
Irvine, CA 92614 Costa Mesa, CA 92626
Telecopy: (949) 476-1133 Telecopy: (714) 668-6305
if to a Seller:
at his address shown in
Schedule 2.1, or to the
Sellers' Committee
Such information may be changed, from time to time, by means of a
notice given in the manner provided in this Section 13.1.
13.2 Amendments; No Waivers. (a) Any provision of this Agreement may be
amended prior to the Closing Date if, and only if, such amendment is in writing
and signed by Buyer, the Company and the Sellers. Any provision of this
Agreement may be waived if the waiver is in writing and signed by the party to
be bound, which in the case of the Seller may be taken by Sellers' Committee.
(b) No failure or delay by either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and shall not be exclusive of any
equitable rights or remedies.
13.3 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
13.4 Further Assurances. From time to time after the Closing, at the
request of Buyer and without further consideration, Sellers will execute and
deliver to Buyer such other documents, and take such other action, as Parent or
Buyer may reasonably request in order to
48
consummate more effectively the transactions contemplated hereby and to vest in
Buyer good, valid and marketable title to the Shares.
13.5 Governing Law. This Agreement and the Ancillary Agreements shall
be construed in accordance with and governed by the law of the State of New
York, without regard to the conflicts of law rules of such state.
13.6 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other parties hereto.
13.7 Entire Agreement. This Agreement and the Ancillary Agreements and
specify other agreements constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all prior agreements,
understandings and negotiations, both written and oral, between the parties with
respect to the subject matter hereof. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has been made or
relied upon by either party hereto. None of the provisions of this Agreement and
the Ancillary Agreements is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder.
13.8 Jurisdiction. Subject to the provisions of Section 11.8, any
action or proceeding seeking to enforce any provision of, or based on any right
arising out of, this Agreement may be brought against any of the parties in the
state or federal courts located in Applicable Jurisdiction, and each of the
parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any such action or proceeding may be
served on any party anywhere in the world, whether within or without the
Applicable Jurisdiction. "Applicable Jurisdiction" means Orange County,
California until the Company's records have been moved from the Company's
facility in Orange County, and thereafter shall be Dallas, Texas.
13.9 Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
13.10 Interpretation; Absence of Presumption.
(a) For the purposes hereof, (i) words in the singular shall be
held to include the plural and vice versa and words of one gender shall be held
to include the other gender as the context requires, (ii) the terms "hereof"
"herein," and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole (including all of the
Schedules hereto) and not to any particular provision of this Agreement, and
Article, Section, paragraph and Schedule references are to the Articles,
Sections, paragraphs and Schedules to this Agreement unless otherwise specified,
(iii) the word "including" and words of similar import when used in this
Agreement means "including, without limitation," unless the context otherwise
requires or unless otherwise specified, (iv) the word "or" shall not be
exclusive, (v) provisions
49
shall apply, when appropriate, to successive events
and transactions, and (vi) all references to any period of days shall be deemed
to be to the relevant number of calendar days.
(b) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party
drafting or causing any instrument to be drafted
13.11 Conflict Waiver. The Company and Sellers acknowledge that (i) the
law firm of Paul, Hastings, Janofsky & Walker LLP ("Paul, Hastings") represented
the interests of both the Company and Sellers with respect to this Agreement and
all related matters, and (ii) such representations give rise to a potential
conflict of interest. The Company and Sellers hereby consent to Paul, Hastings'
representations under the circumstances and waive any actual or potential
conflict of interest which may arise as a result of Paul, Hastings'
representations of such persons and entities. The Company and Sellers represent
that they have had the opportunity to consult with independent counsel
concerning the giving of this waiver.
[Signature page follows].
50
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
RETALIX, LTD.
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer
RETALIX HOLDINGS INC.
By /s/ Barry Shaked
-------------------
Name: Barry Shaked
Title: President and Chief Executive Officer
TCI SOLUTIONS, INC.
By /s/ David R. Butler
-------------------
Name: David R. Butler
Title: President & CEO
TCI SOLUTIONS, INC.
By /s/ Stephen P. DeSantis
-----------------------
Name: Stephen P. DeSantis
Title: Chief Financial Officer
51
ENVIRONMENTAL & INFORMATION
TECHNOLOGY PRIVATE EQUITY FUND
III, a civil partnership with
limitation of liability
established under the laws of
the Federal Republic of Germany
By: Infrastructure and Environmental Private Equity
Management, L.L.C., Its General Partner
By: First Analysis IEPEF Management Company, III,
L.L.C., A Member
By: /s/ Mark Koulogeorge
------------------------
Name: Mark Koulogeorge
Title: Member
Address: The Sears Tower
Suite 9500
233 South Wacker Drive
Chicago, Illinois 60606
Attn:
-------------------
Facsimile No.: (312) 258-0334
52
INFRASTRUCTURE AND ENVIRONMENTAL PRIVATE EQUITY FUND
III, L.P.
By: Infrastructure and Environmental Private Equity
Management, L.L.C., Its General Partner
By: First Analysis IEPEF Management Company, III,
L.L.C., A Member
By: /s/ Mark Koulogeorge
---------------------
Name: Mark Koulogeorge
Title: Member
Address: The Sears Tower
Suite 9500
233 South Wacker Drive
Chicago, Illinois 60606
Attn:
Facsimile No.: (312) 258-0334
53
ARGENTUM CAPITAL PARTNERS, L.P.
By: B.R. Associates, Inc,
its General Partner
By: /s/ Daniel Raynor
-------------------
Name: Daniel Raynor
Title: Chairman
Address: 60 Madison Avenue
Suite 701
New York, New York 10010
Attn: Daniel Raynor
Facsimile No.: (212) 949-8294
ARGENTUM CAPITAL PARTNERS II, L.P.
By: Argentum Partners II, L.L.C.,
its General Partner
By: Argentum Investments, L.L.C.,
its Managing Member
By: /s/ Daniel Raynor
-------------------
Daniel Raynor, Managing Member
Address: 60 Madison Avenue
Suite 701
New York, New York 10010
Attn: Daniel Raynor
Facsimile No.: (212) 949-8294
54
TCI ACPII LIMITED PARTNERS, L.P.
By: Argentum Investments, L.L.C.,
its Managing Member
By: /s/ Daniel Raynor
-------------------
Daniel Raynor, Managing Member
Address: 60 Madison Avenue
Suite 701
New York, New York 10010
Attn: Daniel Raynor
Facsimile No.: (212) 949-8294
GUARANTEE & TRUST CO., TTEE DANIEL RAYNOR GTC IRA
By: /s/ Daniel Raynor
-------------------
Name: Daniel Raynor,
Title:
---------------
Address: 60 Madison Avenue
Suite 701
New York, New York 10010
Attn: Daniel Raynor
Facsimile No.: (212) 949-8294
55
/s/ Mark Kouogeorge
-------------------
MARK KOULOGEORGE
Address:
-------------------
-------------------
-------------------
Facsimile No.: ( )
---- ---------
56
INNOCAL II, L.P.
By: InnoCal Management II, L.P.
Its: General Partner
By: /s/ James E. Houlihan III
-------------------------
Name: James E. Houlihan III
Its: Managing Director
Address: 600 Anton Blvd., Suite 1270
Costa Mesa, CA 92626
Facsimile No.: (208) 726-1191
57
PRODUCTIVITY FUND IV, L.P.
By: First Analysis Management Company IV L.L.C.,
its General Partner
By: First Analysis Venture Operations and Research,
L.L.C., Managing Member
By: /s/ Mark Koulogeorge
--------------------
Name: Mark Koulogeorge
Title: Member
Address: The Sears Tower
Suite 9500
233 South Wacker Drive
Chicago, Illinois 60606
Attn:
Facsimile No.: (312) 258-0334
PRODUCTIVITY FUND IV ADVISORS FUND, L.P.
By: First Analysis Management Company IV, L.L.C.
Its: General Partner
By: First Analysis Venture Operations &
Research, L.L.C.
Its: Management Member
By: /s/ Mark Koulogeorge
------------------------
Name: Mark Koulogeorge
Its: Member
Address: The Sears Tower
Suite 9500
233 South Wacker Drive
Chicago, Illinois 60606
Attn:
Facsimile No.: (312) 258-0334
58
BLUE CHIP CAPITAL FUND IV LIMITED PARTNERSHIP
By: Blue Chip Venture Company, Ltd.
By: /s/ Todd G. Gardner
-------------------
Todd G. Gardner, Director
Address: c/o Blue Chip Venture Company, Ltd.
1100 Chiquita Center
250 East Fifth Street
Cincinnati, Ohio 45202
Facsimile No.: (513) 723-2615
59
SELLERS' COMMITTEE
(in their capacity as such)
INNOCAL II, L.P.
By: InnoCal Management II, L.P.
Its: General Partner
By: /s/ James E. Houlihan III
-------------------------
Name: James E. Houlihan III
Its: Managing Director
Address: 600 Anton Blvd., Suite 1270
Costa Mesa, CA 92626
Facsimile No.: (208) 726-1191
/s/ Mark Kouogeorge
-------------------
MARK KOULOGEORGE
Address:
-------------------
-------------------
-------------------
Facsimile No.: ( )
---- ---------
ARGENTUM CAPITAL PARTNERS, L.P.
By: B.R. Associates, Inc,
its General Partner
By: /s/ Daniel Raynor
-------------------------
Name: Daniel Raynor
Title: Chairman
Address: 60 Madison Avenue
Suite 701
New York, New York 10010
Attn: Daniel Raynor
Facsimile No.: (212) 949-8294
60
APPENDIX C(i)
OPINION OF THE MENTOR GROUP, INC.
ATTACHED
C(i)-1
[Letterhead of The Mentor Group, Inc.]
March 31, 2005
Board of Directors
TCI Solutions, Inc.
17752 Skypark Circle
Suite 160
Irvine, CA 92108
Members of the Board:
You have advised that us TCI Solutions, Inc., a Delaware corporation (the
"Company"), proposes to enter into a series of transactions with Retalix, Ltd.,
an Israeli corporation ("Retalix") whereby Retalix will acquire all of the
capital stock of the Company for an aggregate purchase price of approximately
$34.5 million (the "Consideration"). The Consideration is divided equally
between cash and Retalix common stock, and comprises of approximately $17.25
million in cash and an amount of Retalix common stock with a value of $17.25
million based on a $24 per share value of Retalix common stock (the "Stock
Consideration").
The material terms of the transactions contemplated by the acquisition provide,
among others, that pursuant to the Stock Purchase Agreement ("Purchase
Agreement"), Retalix through Retalix Holdings, Inc., a Delaware corporation and
a wholly-owned subsidiary of Retalix ("Holdings"), proposes to purchase all of
the outstanding shares of the Company's Series A and Series B Preferred Stock
(the "Acquisition") from certain shareholders (the "First Closing Selling
Stockholders"). The Acquisition will result in Holdings holding approximately 73
percent of the outstanding voting shares of the Company, and the First Closing
Selling Stockholders will receive consideration of approximately $12.9 million
in cash and the Stock Consideration. Concurrently with the closing of the
Acquisition, the Company, Retalix and Holdings will execute an Agreement and
Plan of Merger (the "Merger Agreement") under which the Company would be merged
into a subsidiary of Holdings ("Merger Sub"), with the Company surviving (the
"Merger"). The Merger Agreement provides for the payment of consideration of
approximately $0.9 million in cash and $1.7 million in cash to certain preferred
stockholders and the Company's common stockholders, respectively, at the closing
of the Merger. All preferred and common stockholders of the Company are referred
to herein as the "Public Stockholders." The transactions described above and all
related transactions are referred to collectively herein as the "Transaction."
C(i)-2
Board of Directors
TCI Solutions, Inc.
March 31, 2005
You have requested us to render an opinion (the "Opinion") as to the fairness,
from a financial point of view, to the Public Stockholders, of the Consideration
to be received by the Public Stockholders pursuant to the terms and conditions
of the Purchase Agreement and Merger Agreement relating to the Transaction. We
will receive a fee for providing this Opinion. The opinion fee is not contingent
upon the consummation of the Transaction. The Company has also agreed to
indemnify us against certain liabilities in connection with our services.
This Opinion does not, with your express approval, address the fairness of the
Transaction to creditors or any security holders of the Company, either debt or
equity, other than the Public Stockholders, and we expressly disclaim any
obligation to do so.
Further, this Opinion does not address the Company's underlying business
decision to effect the Transaction. You did not request us to, nor did we,
either solicit third party indications of interest or evaluate any specific
third party proposals relating to the acquisition of all or a part of the
Company. We did not participate in the negotiations with respect to the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
2. visited certain facilities and business offices of the Company in
Irvine, California;
3. reviewed: (i) the Company's Form 10-KSB for the fiscal year ended
December 31, 2003, including the audited consolidated balance sheet of
the Company and its subsidiaries, as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the fiscal years ended December 31, 2002 and 2003; (ii)
Form 10-QSB for the quarter ended September 30, 2004, including the
unaudited consolidated balance sheets of the Company and its
subsidiaries, as of December 31, 2003 and September 30, 2004, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the interim nine-month periods ended September 30, 2003
and September 30, 2004; and (iii) certain other publicly available
business and financial information related to the Company, which we
deemed to be relevant;
4. reviewed the unaudited financial information, internally prepared by
management of the Company, relating to the operations of the Company,
including: (i) the unaudited consolidated balance sheet of the Company
and its subsidiaries, as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity and cash
flows for the fiscal year ended December 31, 2004, and (ii) the
unaudited consolidated balance sheet of the Company and its
subsidiaries, as of February 29, 2004 and February 28, 2005, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the two months ended February 29, 2004 and February 28,
2005, which the Company's management has represented and warranted as
the most current financial statements available;
5. reviewed audited financial statements for the fiscal years ended
December 31, 1999, 2000, 2001, 2002 and 2003;
C(i)-3
Board of Directors
TCI Solutions, Inc.
March 31, 2005
6. reviewed certain financial projections provided by the Company's
management relating to the Company for the fiscal years ending December
31, 2005, 2006 and 2007;
7. reviewed copies of the following documents and agreements, certified by
management of the Company as true, correct and complete: (i) the Amended
and Restated Certificate of Incorporation and Bylaws of the Company;
(ii) the Transaction Documents for the Series B Preferred Stock
Financings; and (iii) the Transaction Documents for the Series D
Preferred Stock Financing;
8. reviewed a draft of the following documents and agreements: (i) the
Purchase Agreement among the Company, Retalix and Holdings; (ii) the
Merger Agreement among Retalix, Holdings, Merger Sub and the Company;
(iii) the Registration Rights Agreement between Retalix and certain
selling shareholders; and (iv) the Escrow Agreement between Retalix and
certain selling shareholders;
9. Analyzed the trading history, recent market prices, and valuation
multiples for Retalix's common stock;
10. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company; and
11. conducted such other studies, analyses and inquiries as we have deemed
appropriate for purposes of this Opinion.
In preparing this Opinion, we assumed and relied on, with your express
permission, the truth, accuracy and completeness of all information supplied or
otherwise, including, without limitation, any financial information, forecasts
or projections, made available to us, discussed with or reviewed by or for us,
or publicly available. In addition, where appropriate, we relied upon publicly
available information that we believed to be reliable, accurate, and complete;
however, we cannot guarantee the reliability, accuracy, or completeness of any
such publicly available information. We did not independently verify the
accuracy and completeness of the information provided to us and have not assumed
and expressly disclaim any responsibility for independently verifying such
information or undertaken any independent evaluation or appraisal of any of the
assets or liabilities of the Company or been furnished with any such evaluation
or appraisal. In addition, we did not conduct, and have not assumed any
obligation to conduct, any physical inspection of the properties or facilities
of the Company. We express no opinion regarding the liquidation value of any
entity. Without limiting the generality of the foregoing, we have undertaken no
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which the Company or any
of its affiliates is a party or may be subject and, at the Company's direction
and with its consent, our Opinion makes no assumption concerning, and therefore
does not consider, the possible assertions of claims, outcomes or damages
arising out of any such matters.
We assumed, with your express permission, that the financial forecast
information furnished to or discussed with us by the Company, was prepared in a
reasonable manner and reflected the best currently available estimates and
judgment of the Company's management as to the expected future financial
performance of the Company, and that there had been no material change in the
assets, financial condition, business or prospects of the Company since the date
of the most recent financial statements made available to us. This Opinion
expresses no view with respect to how the projections were obtained, the
reasonableness of such projections, or the assumptions on which they were based.
Further, we have relied, with your express permission, upon the certifications,
representations and warranties of
C(i)-4
Board of Directors
TCI Solutions, Inc.
March 31, 2005
management of the Company that management is not aware of any facts or
circumstances that would make any such forecasts inaccurate or misleading. This
Opinion is necessarily based upon market, economic and other conditions as they
exist and can be evaluated, and on the information made available to us, as of
the date of this Opinion. Any subsequent change in such conditions could
materially affect the assumptions used in the Opinion and would require a
reevaluation of such Opinion. Although subsequent developments may affect this
Opinion, we have assumed no obligation to update, revise or reaffirm such
opinion, and we expressly disclaim any obligation to do so. In rendering this
Opinion, we assumed, with your permission, that the proposed Transaction would
be consummated substantially on the terms discussed in the Purchase Agreement
and Merger Agreement, without any waiver of any material terms or conditions by
any party thereto. Without limiting the generality of the foregoing, for the
purpose of this Opinion, we have assumed that the Company is not a party to any
pending transaction, including external financings, recapitalizations, asset
sales, acquisitions or merger discussions, other than the Transaction or in the
ordinary course of business. We have also assumed that all the necessary
regulatory approvals and consents required for the Transaction will be obtained
in a manner that will not change the Consideration. This Opinion expresses no
opinion as to the price at which the Company's Common Stock will trade in the
future. This Opinion does not give consideration to the tax effect of the
proposed Transaction on the Company or the shareholders of the Company in the
United States or in any other jurisdiction.
This Opinion does not address the underlying decision of the Company to engage
in the Transaction and does not constitute a recommendation to the Board of
Directors, or to any shareholder of the Company as to how such shareholder
should vote or as to any other action such shareholder should take in connection
with the Transaction.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Consideration to be received in the Transaction by the Public Stockholders,
pursuant to the terms and conditions of the Purchase Agreement and Merger
Agreement, is fair, from a financial point of view, to the Public Stockholders
and to the Company.
This Opinion is for the use and benefit of the Board of Directors in its
evaluation of the Transaction and shall not be used by any other person without
our prior written consent. This Opinion is delivered to the Company's Board of
Directors subject to the conditions, scope of engagement, limitations and
understandings set forth in this Opinion and our engagement letter, and subject
to the understanding that the obligations of The Mentor Group, Inc. ("TMG") in
the Transaction are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of TMG shall be subjected to
any personal liability whatsoever to any person, nor will any such claim be
asserted by or on behalf of you or your affiliates. Except with respect to the
use of this Opinion in connection with the Proxy Statement relating to the
Transaction, this Opinion shall not be published or otherwise used, nor shall
any public references to us be made, without our prior written approval.
THE MENTOR GROUP, INC.
/s/ The Mentor Group, Inc.
C(i)-5
APPENDIX C(ii)
LETTER DATED MARCH 31, 2005
FROM THE MENTOR GROUP, INC.
TO THE BOARD OF DIRECTORS
OF TCI SOLUTIONS, INC.
ATTACHED
C(ii)-1
[Letterhead of The Mentor Group, Inc.]
March 31, 2005
Board of Directors
TCI Solutions, Inc.
17752 Skypark Circle
Suite 160
Irvine, CA 92108
Re: Fairness Opinion Regarding the Proposed Acquisition of TCI Solutions, Inc.
by Retalix, Ltd.
Members of the Board:
We issued a fairness opinion dated March 31, 2005 (the "Opinion") in connection
with the proposed acquisition of all of the capital stock of TCI solutions, Inc.
(the "Company") by Retalix, Ltd. (the "Transaction"). The Opinion states that,
based on the factors set out therein, and in reliance thereon, it is our opinion
that the Consideration to be received in the Transaction by the Public
Stockholders is fair, from a financial point of view, to the Public Stockholders
and to the Company. The Opinion defines Consideration as the aggregate purchase
price of $34.5 million to be paid by Retalix in the Transaction, and defines
Public Stockholders as "all preferred and common stockholders of the Company."
We wish to clarify that the Opinion's conclusion as to the fairness of the
Consideration to the Public Stockholders speaks to all stockholders of the
Company, individually as well as collectively, including without limitation to
the stockholders who were unaffiliated with the Company.
THE MENTOR GROUP, INC.
/s/ The Mentor Group, Inc.
C(ii)-2
APPENDIX C(iii)
UNSIGNED DRAFT OPINION OF
THE MENTOR GROUP, INC.
REGARDING PROPOSED GOING PRIVATE
TRANSACTION
[Attached]
C(iii)-1
Board of Directors
TCI Solutions, Inc.
February __, 2005 -2-
[Letterhead of The Mentor Group, Inc.]
[February __, 2005]
Board of Directors
TCI Solutions, Inc.
17752 Skypark Circle
Suite 160
Irvine, CA 92108
Members of the Board:
You have advised us TCI Solutions Merger Corp., a Delaware corporation ("Merger
Corp.") will be merged with and into TCI Solutions, Inc., a Delaware corporation
(the "Company") with the Company surviving the merger. The material terms of the
transactions contemplated by the merger provide, among others, that: (i) holders
of the Company's common stock holding 15,000 or more shares of the Company's
common stock ("Continuing Common Stockholders") as of the effective date of the
merger will continue to hold such common shares of the Company; (ii) holders of
the Company's preferred stock as of the effective date of the merger will
continue to hold such preferred shares of the Company; (iii) holders of the
options and warrants on the Company's common stock as of the effective date of
the merger will continue to hold such options and warrants; and (iv) holders of
the Company's common stock holding less than 15,000 shares of the Company's
common stock as of the effective date of the merger will receive a cash payment
of $0.045 per share (the "Merger Consideration"). All common stockholders of the
Company, except the Continuing Common Stockholders, are referred to herein as
the "Public Stockholders." The transactions described above and all related
transactions are referred to collectively herein as the "Transaction."
You have requested us to render an opinion (the "Opinion") as to the fairness,
from a financial point of view, to the Public Stockholders, of the Merger
Consideration to be received by the Public Stockholders pursuant to the terms
and conditions of the Agreement and Plan of Merger, dated as of February __,
2005 (the "Merger Agreement") relating to the Transaction. We will receive a fee
for providing this Opinion. The opinion fee is not contingent upon the
consummation of the Transaction. The Company has also agreed to indemnify us
against certain liabilities in connection with our services.
This Opinion does not, with your express approval, address the fairness of the
Transaction to creditors or any security holders of the Company, either debt or
equity, other than the Public Stockholders, and we expressly disclaim any
obligation to do so.
Further, this Opinion does not address the Company's underlying business
decision to effect the Transaction. You did not request us to, nor did we,
either solicit third party indications of interest or evaluate any specific
third party proposals relating to the acquisition of all or a part of the
Company. We did not participate in the negotiations with respect to the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with certain members of the senior management of the Company
to discuss the operations, financial condition, future prospects
and projected operations and performance of the Company;
2. visited certain facilities and business offices of the Company
in Irvine, California;
3. reviewed: (i) the Company's Form 10-KSB for the fiscal year
ended December 31, 2003, including the audited consolidated
balance sheet of the Company and its subsidiaries, as of
December 31, 2003, and the related consolidated statements of
operations, stockholders' equity and cash flows for the fiscal
years ended December 31, 2002 and 2003; (ii) Form 10-QSB for the
quarter ended September 30, 2004, including the unaudited
consolidated balance sheets of the Company and its subsidiaries,
as of December 31, 2003 and September 30, 2004, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the interim nine-month periods ended September
30, 2003 and September 30, 2004; (iii) certain other publicly
available business and financial information related to the
Company, which we deemed to be relevant; and (iv) unaudited
financial information, internally prepared by management of the
Company, relating to the operations
C(iii)-2
Board of Directors
TCI Solutions, Inc.
February __, 2005 -3-
of the Company, for the fiscal year ended December 31, 2004,
which the Company's management has represented and warranted as
the most current financial statements available;
4. reviewed audited financial statements for the fiscal years ended
December 31, 1999, 2000, 2001, 2002 and 2003;
5. reviewed certain financial projections provided by the Company's
management relating to the Company for the fiscal years ending
December 31, 2005, 2006 and 2007;
6. reviewed copies of the following documents and agreements,
certified by management of the Company as true, correct and
complete: (i) Amended and Restated Certificate of Incorporation
and Bylaws of the Company; (ii) Transaction Documents for the
Series B Preferred Stock Financings; (iii) Transaction Documents
for the Series D Preferred Stock Financing; (iv) Agreement and
Plan of Merger, dated as of February __, 2005; and (v) Minutes
of the Board of Directors, dated February __, 2005, approving,
among other things, the Merger Agreement;
6. reviewed a draft of the Company's proxy statement ("Proxy
Statement") prepared in connection with the Transaction;
7. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Company; and
8. conducted such other studies, analyses and inquiries as we have
deemed appropriate for purposes of this Opinion.
In preparing this Opinion, we assumed and relied on, with your express
permission, the truth, accuracy and completeness of all information supplied or
otherwise, including, without limitation, any financial information, forecasts
or projections, made available to us, discussed with or reviewed by or for us,
or publicly available. In addition, where appropriate, we relied upon publicly
available information that we believed to be reliable, accurate, and complete;
however, we cannot guarantee the reliability, accuracy, or completeness of any
such publicly available information. We did not independently verify the
accuracy and completeness of the information provided to us and have not assumed
and expressly disclaim any responsibility for independently verifying such
information or undertaken any independent evaluation or appraisal of any of the
assets or liabilities of the Company or been furnished with any such evaluation
or appraisal. In addition, we did not conduct, and have not assumed any
obligation to conduct, any physical inspection of the properties or facilities
of the Company. We express no opinion regarding the liquidation value of any
entity. Without limiting the generality of the foregoing, we have undertaken no
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which the Company or any
of its affiliates is a party or may be subject and, at the Company's direction
and with its consent, our Opinion makes no assumption concerning, and therefore
does not consider, the possible assertions of claims, outcomes or damages
arising out of any such matters.
We assumed, with your express permission, that the financial forecast
information furnished to or discussed with us by the Company, was prepared in a
reasonable manner and reflected the best currently available estimates and
judgment of the Company's management as to the expected future financial
performance of the Company, and that there had been no material change in the
assets, financial condition, business or prospects of the Company since the date
of the most recent financial statements made available to us. This Opinion
expresses no view with respect to how the projections were obtained, the
reasonableness of such projections, or the assumptions on which they were based.
Further, we have relied, with your express permission, upon the certifications,
representations and warranties of management of the Company that management is
not aware of any facts or circumstances that would make any such forecasts
inaccurate or misleading. This Opinion is necessarily based upon market,
economic and other conditions as they exist and can be evaluated, and on the
information made available to us, as of the date of this Opinion. Any subsequent
change in such conditions could materially affect the assumptions used in the
Opinion and would require a reevaluation of such Opinion. Although subsequent
developments may affect this Opinion, we have assumed no obligation to update,
revise or reaffirm such opinion, and we expressly disclaim any obligation to do
so. In rendering this Opinion, we assumed, with your permission, that the
proposed Transaction would be consummated substantially on the terms discussed
in the Merger Agreement, without any waiver of any material terms or conditions
by any party thereto. Without limiting the generality of the foregoing, for the
purpose of this Opinion, we have assumed that the Company is not a party to any
pending transaction, including external financings, recapitalizations, asset
sales, acquisitions or merger discussions, other than the
C(iii)-3
Board of Directors
TCI Solutions, Inc.
February __, 2005 -4-
Transaction or in the ordinary course of business. We have also assumed that all
the necessary regulatory approvals and consents required for the Transaction
will be obtained in a manner that will not change the Merger Consideration. This
Opinion expresses no opinion as to the price at which the Company's Common Stock
will trade in the future. This Opinion does not give consideration to the tax
effect of the proposed Transaction on the Company or the shareholders of the
Company in the United States or in any other jurisdiction.
This Opinion does not address the underlying decision of the Company to engage
in the Transaction and does not constitute a recommendation to the Board of
Directors, or to any shareholder of the Company as to how such shareholder
should vote or as to any other action such shareholder should take in connection
with the Transaction.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Merger Consideration to be received in the Transaction by the Public
Stockholders, pursuant to the terms and conditions of the Merger Agreement, is
fair, from a financial point of view, to the Public Stockholders.
This Opinion is for the use and benefit of the Board of Directors in its
evaluation of the Transaction and shall not be used by any other person without
our prior written consent. This Opinion is delivered to the Company's Board of
Directors subject to the conditions, scope of engagement, limitations and
understandings set forth in this Opinion and our engagement letter, and subject
to the understanding that the obligations of The Mentor Group, Inc. ("TMG") in
the Transaction are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of TMG shall be subjected to
any personal liability whatsoever to any person, nor will any such claim be
asserted by or on behalf of you or your affiliates. Except with respect to the
use of this Opinion in connection with the Proxy Statement relating to the
Transaction, this Opinion shall not be published or otherwise used, nor shall
any public references to us be made, without our prior written approval.
THE MENTOR GROUP, INC.
C(iii)-4
APPENDIX D
APPRAISAL RIGHTS STATUTE
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
D-1
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, then, either a constituent corporation before the
effective date of the merger or consolidation, or the surviving or resulting
corporation within ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court
D-2
deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-3
APPENDIX E
FINANCIAL STATEMENTS OF TCI SOLUTIONS, INC. FOR
THE YEAR ENDED DECEMBER 31, 2004
ATTACHED
E-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TCI Solutions, Inc.
Irvine, CA
We have audited the accompanying balance sheet of TCI Solutions, Inc. (the
"Company") as of December 31, 2004, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of TCI Solutions, Inc. at December 31, 2004,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------
Costa Mesa, CA
April 15, 2005
E-2
TCI SOLUTIONS, INC.
BALANCE SHEET
DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,344,919
Accounts receivable, net of allowance for doubtful accounts of $127,798 3,355,635
Prepaid expenses and other current assets 212,217
-----------
Total current assets 6,912,771
-----------
PROPERTY AND EQUIPMENT:
Computer equipment 4,536,282
Furniture and fixtures 796,011
Leasehold improvements 190,227
-----------
5,522,520
Less accumulated depreciation and amortization (4,248,192)
-----------
Property and equipment--net 1,274,328
GOODWILL 529,031
OTHER ASSETS 23,232
------
TOTAL $ 8,739,362
===========
See notes to financial statements. (Continued)
E-3
TCI SOLUTIONS, INC.
BALANCE SHEET
DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 825,873
Accrued expenses 1,504,869
Line of credit 2,437,046
Current portion of capital lease obligation 24,270
Deferred revenue 2,131,372
-----------
Total current liabilities 6,923,430
-----------
CAPITAL LEASE OBLIGATION--Net of current portion 11,603
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value--6,146,227 5,509,993
shares authorized; 5,816,037 shares issued and outstanding;
liquidation preference of $6,165,000
Series B convertible preferred stock, no par value--26,653,094 12,340,746
shares authorized; 26,653,094 shares issued and outstanding;
liquidation preference of $13,327,000
Common stock, $0.001 par value--72,000,000 shares authorized; 37,481,222
12,825,459 shares issued and outstanding
Warrants to purchase common stock 178,129
Accumulated deficit (53,705,761)
-----------
Net stockholders' equity 1,804,329
-----------
TOTAL $ 8,739,362
============
See notes to financial statements. (Concluded)
E-4
TCI SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
- ---------------------------------------------------------------------------------------------------
2004 2003
REVENUES:
Software licenses $ 6,092,744 $ 5,561,806
Maintenance 4,754,043 3,787,985
Services 10,443,718 8,993,278
Other 537,509 2,870,681
----------- -----------
Total revenues 21,828,014 21,213,750
----------- -----------
COST OF REVENUES:
Software licenses 657,541 102,646
Maintenance 868,622 1,220,271
Services 7,123,382 5,771,337
Other 472,777 2,083,939
----------- -----------
Total cost of revenues 9,122,322 9,178,193
----------- -----------
GROSS PROFIT 12,705,692 12,035,557
----------- -----------
OPERATING EXPENSES:
Product development 3,519,073 4,044,544
Sales and marketing 7,061,998 7,376,018
General and administrative 4,970,786 6,476,473
----------- -----------
Total operating expenses 15,551,857 17,897,035
----------- -----------
OPERATING LOSS (2,846,165) (5,861,478)
OTHER EXPENSE (85,076) (88,936)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,931,241) (5,950,414)
PROVISION FOR INCOME TAXES 5,000 9,600
----------- -----------
NET LOSS $(2,936,241) $(5,960,014)
=========== ===========
Net loss per share--basic and diluted $ (0.23) $ (0.46)
Weighted-average common shares outstanding--basic and diluted 12,822,521 12,819,263
See notes to financial statements.
E-5
TCI SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Series B
Convertible Convertible Warrants
Preferred Stock Preferred Stock Common Stock to Purchase
---------------------- ------------------------ ------------------------ Common Accumulated
Shares Amount Shares Amount Shares Amount Stock Deficit Net
BALANCE--
January 1, 2003 5,816,037 $ 5,509,993 26,653,094 $ 12,340,746 12,819,263 $37,479,292 $178,129 $(44,809,506) $ 10,698,654
Net loss (5,960,014) (5,960,014)
--------- ----------- --------- ------------ ---------- ----------- -------- ------------ ------------
BALANCE--
December 31, 2003 5,816,037 5,509,993 26,653,094 12,340,746 12,819,263 37,479,292 178,129 (50,769,520) 4,738,640
Exercise of
stock options 6,196 1,930 1,930
Net loss (2,936,241) (2,936,241)
--------- ----------- --------- ------------ ---------- ----------- -------- ------------ ------------
BALANCE--
December 31, 2004 5,816,037 $ 5,509,993 26,653,094 $ 12,340,746 12,825,459 $37,481,222 $178,129 $(53,705,761) $ 1,804,329
========= =========== ========== ============ ========== =========== ======== ============ ============
E-6
TCI SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
- ------------------------------------------------------------------------------------------------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,936,241) $(5,960,014)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 630,750 609,017
Provision for doubtful accounts (212,000) 750,000
Changes in operating assets and liabilities:
Accounts receivable--net 110,520 4,378,259
Prepaid expenses and other current assets 33,367 398,902
Other assets (3,467) (1,740)
Accounts payable (418,975) (16,547)
Accrued expenses 467,285 (1,287,239)
Deferred revenue 1,365,932 130,740
----------- -----------
Net cash used in operating activities (962,829) (998,622)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES--Acquisition of
property, plant and equipment (182,378) (712,894)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligation (23,270) (22,848)
Proceeds from line of credit 1,000,000 500,000
Repayments on line of credit (167,865) (209,218)
Proceeds from exercise of stock options 1,930
Net cash provided by financing activities 810,795 267,934
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (334,412) (1,443,582)
CASH AND CASH EQUIVALENTS--Beginning of year 3,679,331 5,122,913
----------- -----------
CASH AND CASH EQUIVALENTS--End of year $ 3,344,919 $ 3,679,331
=========== ===========
(Continued)
E-7
YEARS ENDED DECEMBER 31, 2004 AND 2003
- ------------------------------------------------------------------------------------------------------------------------
2004 2003
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid during the
period for:
Interest $ 95,693 $ 132,303
======== =========
Income taxes $ 7,238 $ 9,600
======== =========
- ------------------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2003, we entered into the following noncash investing and financing
activities: Acquired $46,284 of equipment under capital lease arrangements.
See notes to financial statements. (Concluded)
E-8
TCI SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business--We provide retailers with enterprise solutions consisting of
mission-critical software applications and specialized professional services.
Our software enables retailers to quickly and accurately execute strategic
business decisions in the areas of merchandise planning and optimization,
merchandise management and store operations. Our architecture and enterprise
data repository provide a powerful and flexible foundation that can automate and
support electronic data exchange throughout the enterprise and retail supply
chain.
Basis of Presentation--The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America.
Use of Estimates--The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires the management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Estimates are used for, but not limited to, the allowance
for doubtful accounts, contingencies and income taxes.
Cash and Cash Equivalents--We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents. We maintain
our cash balances with one financial institution. These balances are insured by
the Federal Deposit Insurance Corporation for up to $100,000. At December 31,
2004, uninsured amounts held at this financial institution total $3,244,919. We
have not experienced any losses in such accounts and believe we are not exposed
to any significant credit risk on cash.
Accounts Receivable--We perform ongoing credit evaluations of our customers and
generally do not require collateral. We maintain allowances for estimated credit
losses, and such losses have been within management's expectations.
Inventory--Inventory consists primarily of computer hardware and software,
manual inserts and binders and is stated at the lower of first-in, first-out
cost or market. Inventory of approximately $64,000 has been included in prepaid
expenses and other current assets in the accompanying balance sheet.
Property and Equipment--Property and equipment are stated at cost and
depreciated on a straight-line basis over their estimated useful life of five
years. Leasehold improvements are amortized over the shorter of the remaining
life of the respective leases or the useful life of the improvements.
Depreciation and amortization expense was $630,750 and $609,017 for the years
ended December 31, 2004 and 2003, respectively.
Goodwill--SFAS No. 142, Goodwill and Other Intangible Assets, requires that
goodwill and other intangible assets with indefinite useful lives be tested for
impairment annually or when events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. In accordance with SFAS
No. 142, we do not amortize goodwill, but perform the required two-step
impairment review each year. Step one of this review determines whether the fair
value of each reporting unit is less than its carrying amount as of the
measurement date. In the event that the fair value of each reporting unit was
less than the carrying amount, step two of the test would be required to
determine if the carrying value of goodwill exceeded the implied fair value. We
performed an impairment analysis as of June 30, 2004 in accordance with SFAS No.
142. The analysis indicated there was no impairment of goodwill in software, the
only segment to which goodwill is allocated. As of December 31, 2004, no
impairment of goodwill has been recognized. If estimates change, a materially
different impairment conclusion could result.
Long-Lived Assets--SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets requires long-lived assets to be reviewed for events or
changes in circumstances which indicate that their carrying value may not be
recoverable from future cash flows. Based on our analysis, there is no
impairment of long-lived assets at December 31, 2004.
Revenue Recognition--We license software products under noncancelable perpetual
license agreements and provide related services, including consulting and
customer support. We recognize revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition, as amended and interpreted by SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition, with
E-9
respect to certain transactions, as well as Technical Practice Aids issued from
time to time by the American Institute of Certified Public Accountants and Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, which
provides further interpretive guidance for public reporting companies on the
recognition, presentation and disclosure of revenue in financial statements.
Software license revenue is recognized when a license agreement has been signed,
the software product has been delivered, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable, and collection is
reasonably ensured. If a software license contains an undelivered element, the
fair value of the undelivered element is deferred and the related revenue
recognized once the element is delivered. Revenues attributable to undelivered
elements, including consulting services and post-contract support, are based on
the sales price of those elements when sold separately. If vendor specific
objective evidence of the fair value of an undelivered element is not available,
all revenue is deferred. In addition, if a software license contains customer
acceptance criteria or a cancellation right, the software revenue is recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period or cancellation right. We do not offer rights of return.
Services are separately priced, are generally available from a number of
suppliers, and are not essential to the functionality of our software products.
Services, which include project management, system planning, design and
implementation, customer configurations and training, are billed on an hourly
basis. Services revenue billed on an hourly basis is recognized as the work is
performed. Customer support services include post-contract support and the
rights to unspecified upgrades and enhancements, when and if available.
Maintenance revenues from ongoing customer support services are typically billed
on an annual basis, with the revenue being deferred and recognized ratably over
the maintenance period.
Other revenue is recognized when the third-party hardware and software products
have been delivered and title has passed.
Basic and Diluted Net Loss per Share--Net loss per share is calculated in
accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS
No. 128, basic net loss per share is computed by dividing the net loss for the
period by the weighted-average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing net loss for the
period by the weighted-average number of common and common equivalent shares
outstanding during the period if their effect is dilutive. Common equivalent
shares include the conversion of preferred stock and the impact of stock option
plans calculated using the treasury stock method. Common equivalent shares for
the years ended December 31, 2004 and 2003, totaling 49,647,081 and 45,343,474,
respectively, have been excluded from diluted weighted-average common shares, as
the effect would be antidilutive.
Income Taxes--We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the use of the liability method in
accounting for income taxes. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. A valuation allowance is
provided when it is more likely than not that deferred tax assets will not be
realized.
Stock-Based Compensation--We account for employee stock-based compensation using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and have adopted the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 requires the disclosure of pro forma net income (loss) had we
adopted the fair value method. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option-pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from our stock option awards. These models also require subjective
assumptions, including expected life, which greatly affect the calculated
values. Our calculations were made using the Black-Scholes option-pricing model
with the following weighted-average assumptions: expected life of six years;
stock volatility of 1%; risk-free interest rates of 4.0% in the years ended
December 31, 2004 and 2003; and no dividends during the expected term. Our
calculations are based on an option valuation approach, and forfeitures are
recognized as they occur. The effects of applying SFAS No. 123 in this pro forma
disclosure are not necessarily indicative of future amounts.
Had compensation costs for the plan been determined based on the fair value of
the options and warrants at the grant dates consistent with the method of SFAS
No. 123, our net loss would have been the following in the years ended December
31, 2004 and 2003:
E-10
2004 2003
Net loss:
As reported $(2,936,241) $(5,960,014)
Add: Total stock-based employee compensation expense
determined under fair-value-based method for all
awards--net of tax (188,913) (68,939)
----------- -----------
Pro forma $(3,125,154) $(6,028,953)
=========== ===========
Net loss per share--basic and diluted:
As reported $ (0.23) $ (0.46)
Pro forma $ (0.24) $ (0.47)
Comprehensive Income--SFAS No. 130, Reporting Comprehensive Income, established
standards for the reporting of comprehensive income (loss) and its components.
Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from transactions and other events and circumstances
from nonowner sources. There is no difference between net loss and comprehensive
loss in our financial statements for the years ended December 31, 2004 and 2003.
New Accounting Pronouncements--In December 2004, the Financial Accounting
Standards Board revised Statement No. 123 ("FAS 123R"), "Share-Based Payment,"
which requires companies to expense the estimated fair value of employee stock
options and similar awards based on the grant-date fair value of the award. The
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award, usually the vesting period. The
accounting provisions of FAS 123R will be effective as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005. We
will adopt the provisions of FAS 123R on July 1, 2005 using a modified
prospective application. Under the modified prospective application, FAS 123R,
will apply to new awards, unvested awards that are outstanding on the effective
date and any awards that are subsequently modified or cancelled. Compensation
expense for outstanding awards for which the requisite service had not been
rendered as of the effective date will be recognized over the remaining service
period using the compensation cost calculated for pro forma disclosure purposes
under FAS 123 (Note 2 Stock-Based Compensation). We are in the process of
determining how the new method of valuing stock-based compensation as prescribed
in FAS 123R will be applied to valuing stock-based awards granted after the
effective date and the impact the recognition of compensation expense related to
such awards will have on our financial statements.
Research & Development--We expense research and development costs as incurred.
We do not consider new products or new versions to be technologically feasible
until all design specifications for functionality, features and technical
performance are completed and all uncertainties related to identified high-risk
development issues are resolved. Once all high-risk development issues are
resolved and the program design is finalized, the products have historically
been considered ready for general release. As a result, no amounts are required
to be capitalized in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," because no
significant costs are incurred subsequent to the establishment of technological
feasibility.
Customer Concentrations--We provide credit in the normal course of business to
customers throughout the United States. All of our customers are in the retail
industry. Two customers accounted for 18% and 11% of revenue for the year ended
December 31, 2004 and one customer accounted for 17% of revenue for the year
ended December 31, 2003. Approximately 57% of accounts receivable was due from
three customers as of December 31, 2004. A significant decrease in sales to, or
inability to collect accounts receivable from, any significant customer could
have a material adverse impact on us.
E-11
2. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2004:
Accrued vacation $ 529,050
Accrued commissions 356,474
Customer deposits 334,653
Accrued sales and use tax 111,881
Accrued Severance 95,988
Accrued other 76,823
----------
Total accrued expenses $1,504,869
==========
3. INCOME TAXES
Our provision for income taxes consists of the following at December 31:
2004 2003
Current:
Federal $ - $ -
State 5,000 9,600
Deferred:
Federal (935,222) (1,840,757)
State (66,618) (473,329)
Change in valuation allowance 1,001,840 2,314,086
---------- -----------
$ 5,000 $ 9,600
========== ===========
Our reconciliation of income tax expense computed at the federal statutory rate
of 34% to income tax expense is as follows:
2004 2003
Tax at federal statutory rates $ (996,622) $(2,026,404)
State income taxes--net (35,793) (309,534)
Other 35,575 31,452
Change in valuation allowance 1,001,840 2,314,086
---------- -----------
$ 5,000 $ 9,600
========== ===========
E-12
Deferred income taxes arise from the impact of temporary differences between the
amounts of assets and liabilities recorded for tax and financial reporting
purposes. The primary differences giving rise to our deferred tax assets and
liabilities are as follows at December 31:
2004 2003
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 54,749 $ 270,065
Accrued compensation 283,870 247,588
State taxes 1,700 3,264
Net operating loss carryforwards 11,426,405 10,283,017
Depreciation and amortization (121,011) (160,061)
Software development costs 19,375 19,375
------------ ------------
11,665,088 10,663,248
Valuation allowance (11,665,088) (10,663,248)
------------ ------------
Total deferred tax assets $ -- $ --
============ ============
At December 31, 2004, we had federal and state net operating loss carryforwards
of approximately $30,758,000 and $16,650,000, respectively, which begin to
expire in 2007 and 2005, respectively. We may have experienced a greater than
50% change in ownership as defined under Internal Revenue Code Section 382, in
which case our ability to utilize the net operating loss carryforwards may be
limited.
4. LINE OF CREDIT
On February 27, 2004, we entered into a $3,500,000 credit facility with a
financial institution composed of a $500,000 equipment line of credit and a
$3,000,000 accounts receivable revolving line of credit. Each advance under the
equipment line of credit shall accrue interest at 0.75% above the prime rate is
payable monthly. Beginning November 27, 2004, outstanding borrowings under the
equipment line of credit shall be payable in 30 equal monthly installments, plus
interest at 0.75% above the prime rate (6.0% at December 31, 2004) through the
maturity date. The equipment line of credit matures in June 2007. The accounts
receivable revolving line of credit bears interest at 0.50% above the prime rate
(5.75% at December 31, 2004).
On November 18, 2004, we amended the above facility. The amended credit facility
is comprised of a $3,000,000 accounts receivable revolving line of credit and a
$1,000,000 maintenance receivable revolving line of credit. The maintenance
revolving line of credit is not to exceed (i) $1.5 million from November 18,
2004 through February 28, 2005, (ii) $1 million from March 1, 2005 through March
31, 2005 and (iii) $500,000 from April 1, 2005 through May 31, 2005. The amended
facility does not extend an equipment line of credit. The revolving line of
credit bears interest at 0.50% above the prime rate (5.75% at December 31, 2004)
and matures in May 2005. Borrowings are collateralized by substantially all of
our assets, including our intellectual property. At the maturity of revolving
line, Retalix, who purchased substantially all of our outstanding Series A
Preferred Stock and Series B Preferred Stock on April 1, 2005, will pay down the
line out of working capital.
Borrowings under the accounts receivable and maintenance receivable revolving
lines of credit are limited to 80% and 50%, respectively, of eligible accounts
receivable, as defined. As of December 31, 2004, available borrowings under the
revolving line of credit were approximately $574,000. As of December 31, 2004,
we have outstanding borrowings against our credit facility of $2,437,046
consisting of $186,255 under the equipment line of credit and $2,250,791 under
the revolving line of credit.
We are required to comply with certain financial covenants and conditions,
including quick ratio percentages. As of December 31, 2004, we were in
compliance with all covenants included in the terms of the credit facility.
In connection with our credit facility, we granted warrants to purchase 115,000
shares of common stock at an exercise price of $0.25 per share to the financial
institution (see Note 5). As the warrants were substantially out of the money,
the fair value of the warrants, which was estimated using the Black-Scholes
model, was nominal.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock--The significant terms of our preferred stock are
described below:
E-13
Voting Rights--Holders of the preferred stock have the same voting
rights as the common stockholders and are entitled to vote on an
as-converted-to-common-stock basis. Both Series A and B preferred
stockholders have the right to elect two directors.
Dividends--The Series B, together with the Series A, are entitled to
receive cumulative cash dividends at a rate of 8% of the original
issuance price per year, prior to the declaration of any dividend of the
common stock or upon a Liquidation Event (the "Preferred Dividend"). In
addition to the cumulative dividends, holders of the Series A are
entitled to receive an additional dividend of $0.06033 per share,
payable in authorized but unissued shares of Series A valued at the
original issuance price (the "Series A PIK Dividend"). As a result, we
have reserved a total of 330,189 shares of Series A to be issued upon
payment of the Series A PIK Dividend. The Preferred Dividend and the
Series A PIK Dividend shall be payable, whether or not declared by the
Board of Directors, upon the effective date of a Liquidation Event. The
Series A PIK Dividend is also payable on the mandatory or voluntary
conversion of all outstanding shares of Series A and Series B to common
stock.
Conversion Rights--The conversion price of Series A and B is $0.50 per
share. This conversion price is subject to adjustment for certain
events, as defined. Series A and B are convertible automatically at the
time of a qualified public offering, as defined, or any time at the
option of the holder. Conversion is automatic in the event of a public
offering of our common stock, meeting certain specified criteria.
Liquidation Rights--Holders of the preferred stock are entitled to a
preferential distribution of assets in the event of liquidation. Upon
the occurrence of any Liquidation Event, as defined below, our assets
available for distribution to stockholders, whether from capital,
surplus, earnings or otherwise, shall be distributed in the following
order of priority:
The holders of the Series A and B are currently entitled to receive,
prior to and in preference to any distribution of any of our assets
or surplus funds to the holders of the common stock, an amount equal
to the stated value of $1.06 per share and $0.50 per share,
respectively. The holders of Series B are entitled to receive, in
preference to holders of Series A and the common stock, all accrued
but unpaid dividends on Series B. The holders of Series A are
entitled to receive, prior and in preference to any distribution to
the holders of common stock, an amount equal to all accrued but
unpaid preferred dividends and the Series A PIK Dividend on each
share of Series A preferred stock. Our remaining assets available for
distribution shall be distributed ratably to the holders of the
outstanding shares of our common stock and of our convertible
preferred stock as if converted to common stock immediately prior to
liquidation.
A Liquidation Event is defined as (i) our voluntary or involuntary
liquidation, dissolution or winding-up; (ii) a merger, consolidation
or sale of voting control in which our stockholders, immediately prior
to the merger, consolidation or sale, do not own a majority of the
outstanding shares of the surviving corporation, or (iii) the sale or
lease of substantially all of our assets, technology or intellectual
property.
Antidilution Rights--Both holders of designated preferred stock are
entitled to "full-ratchet" antidilution rights. Under full-ratchet
antidilution, the conversion price of the preferred stock is reduced to
the price at which the dilutive securities are issued. A reduction in
the conversion price will result in an increase in the number of shares
of common stock that can be issued upon conversion. The issuance of
Series B, at $0.50 per share, triggered the full-ratchet antidilution
rights afforded to Series A. As a result, the number of shares of common
stock into which Series A are convertible increased from 5,816,037 to
12,330,000 shares.
Warrants--In February and November 2004, we granted warrants to purchase 35,000
and 80,000 shares of common stock, respectively, at an exercise price of $0.25
per share to a financial institution. These warrants are immediately exercisable
and expire on February 27, 2011 and November 18, 2011, respectively. The
estimated fair value of these warrants using the Black-Scholes model was
nominal. All warrants remain outstanding and exercisable as of December 31,
2004.
As of December 31, 2004, a total of 930,757 warrants to purchase shares of
common stock are outstanding, which are fully exercisable at $0.25 per warrant
through 2011.
6. COMMITMENTS AND CONTINGENCIES
We are involved in a dispute related to alleged preference payments to TCI from
a customer who subsequently declared bankruptcy. We have provided a written
response to the claimant regarding the our defenses to the claims made. As it is
not possible to estimate the outcome of this issue, no accrual has been recorded
in the financial statements. We believe that the possible liability could
reasonably range in amount from zero to approximately $364,000.
E-14
Additionally, we lease certain facilities and equipment under agreements that
expire at various times through 2008, which are accounted for as operating
leases. Total rental expense for noncancelable operating leases was
approximately $722,000 and $1,124,000 for the years ended December 31, 2004 and
2003, respectively. For those noncancelable leases with scheduled rental
increases, rent expense is recorded on a straight-line basis over the lease
term. Included in accrued liabilities is $28,377 of deferred rent at December
31, 2004.
We leased equipment with a net book value of $54,670, net of related accumulated
depreciation and amortization of $680,290 at December 31, 2004, under capital
lease agreements.
At December 31, 2004, future minimum lease payments, under operating and capital
leases, consist of the following:
Year Ending Capital Operating
December 31 Leases Leases
2005 $ 25,567 $ 689,943
2006 11,614 662,539
2007 1,936 656,793
2008 48,930
---------- -------------
Future minimum lease payments 39,117 $ 2,058,205
-------------
Less amount representing interest (3,244)
----------
Present value of future minimum lease payments 35,873
Less current portion (24,270)
----------
$ 11,603
==========
We have an agreement with a financial institution for the issuance of letters of
credit up to an aggregate amount not to exceed $500,000. At December 31, 2004,
we had $150,000 of letters of credit outstanding for our facility lease. These
amounts are not included in our financial statements.
During the normal course of business, we have made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions. These indemnities include intellectual
property indemnities to our customers in connection with the sales of our
products, indemnities to various lessors in connection with facility leases for
certain claims arising from such facility or lease, and indemnities to our
directors and officers. The duration of these indemnities, commitments and
guarantees varies and, in certain cases, is indefinite. The majority of these
indemnities, commitments and guarantees do not provide for any limitation of the
maximum potential future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and guarantees in the
accompanying balance sheets as the fair value is insignificant. We have never
had to make any payments in the past and do not expect to in the future.
Litigation--In the normal course of business, we are subject to various legal
matters. In the opinion of management, the resolution of these matters will not
likely have a material adverse effect on our operations, cash flows and
financial position.
7. STOCK OPTIONS
We maintain two stock option plans for our employees, directors and consultants.
The purpose of the plans is to provide employees, directors and consultants an
opportunity to participate in our ownership.
Our 1993 stock option plan consists of: (1) the 1993 Equity Incentive Plan and
(2) the 1993 Nonemployee/Directors Stock Option Plan (together, "1993 Option
Plan"). The 1993 Option Plan provides for the issuance of up to 571,688 shares
of common stock to employees, directors and consultants under incentive and
nonstatutory stock option grants. Options granted under the 1993 Equity
Incentive Plan have a term of 10 years when issued and vest over a five-year
period. Options granted under the 1993 Nonemployee/Directors Stock Option Plan
have a term of 10 years and vest immediately. Incentive and nonstatutory stock
options may be granted at an exercise price equal to the fair market value of
our common stock at the date of the grant. At December 31, 2004, there were
14,100 options outstanding and 557,588 options available for future grant under
the 1993 Option Plan.
Our 2001 stock option plan consists of: (1) the 2001 Equity Incentive Plan and
(2) the 2001 Nonemployee/Directors Stock Option Plan (together, "2001 Option
Plan"). The 2001 Option Plan provides for the issuance of up to 17,733,763
shares of common stock to employees, directors and consultants under incentive
and nonstatutory stock option grants. Options granted under the 2001 Equity
Incentive Plan have a term of 10 years when issued and vest over a five-year
period. Options granted under the 2001
E-15
Nonemployee/Directors Stock Option Plan have a term of 10 years and vest
immediately. Incentive and nonstatutory stock options may be granted at an
exercise price equal to the fair market value of our common stock at the date of
the grant. At December 31, 2004, there were 7,489,465 options outstanding and
10,244,298 options available for future grant under the 2001 Option Plan.
On October 27, 2004, we presented an offer to exchange outstanding options (the
"Exchange Offer") under our 1993 and 2001 Option Plans to our employees and
directors. On November 25, 2004, we canceled an aggregate of 9,278,200 shares of
our common stock pursuant to the Exchange Offer. We planned on issuing to our
employees and directors which tendered their options and still remain with us,
replacement options under our 2001 Option Plan, with an exercise price that
would reflect the then-current estimated fair value of our common stock
determined by our Board of Directors and based on an independent valuation on or
about May 27, 2005. None of the employees or directors participating in the
Exchange Offer were granted any options during the six month period prior to the
exchange, or during the period from the exchange date to year end. See Note 11,
`Subsequent Events'.
On June 25, 1995, we issued an employee an option to purchase 51,156 shares of
common stock at $0.20 a share. This issuance was not under the 1993 Option Plan.
All options vested on the issuance date and shall expire on June 21, 2005.
Option activity for the 1993 and 2001 Option Plans is as follows:
Weighted- Number Weighted-
Number Average of Average
of Exercise Options Exercise
Options Price Exercisable Price
Outstanding-January 1, 2003 3,656,668 $ 0.33 3,221,918 $ 0.31
Granted (weighted-average fair
value of $0.05 per share) 5,219,608 $ 0.25
Canceled (198,200) $ 0.29
-----------
Outstanding-December 31, 2003 8,678,076 $ 0.27 4,692,595 $ 0.29
Granted (weighted-average fair 9,989,801 $ 0.13
value of $0.05 per share)
Exercised (6,196) $ 0.31
Canceled (11,158,116) $ 0.27
-----------
Outstanding-December 31, 2004 7,503,565 $ 0.08 1,650,485 $ 0.21
===========
Additional information regarding options outstanding is as follows as of
December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$0.05 6,170,191 9.69 $0.05 351,171 $0.05
$0.25 1,319,274 5.10 $0.25 1,286,854 $0.25
$0.53 11,100 6.65 $0.53 9,460 $0.53
$1.06 1,500 4.91 $1.06 1,500 $1.06
$1.50 1,500 2.28 $1.50 1,500 $1.50
--------- ---------
7,503,565 1,650,485
========= =========
As discussed in Note 1, we continue to account for our stock-based awards using
the intrinsic value method in accordance with APB Opinion No. 25 and related
interpretations. No compensation expense has been recognized in the financial
statements for employee stock arrangements.
E-16
8. 401(k) RETIREMENT PLAN
We provide a 401(k) retirement plan (the "401(k) Plan") for our employees. Under
the terms of the 401(k) Plan, we match dollar for dollar up to the first $250
contributed. For every dollar contributed over $250, we match $0.25 for each
dollar contributed up to 6% of employee's compensation, not to exceed a maximum
contribution of $2,500 per year. For the years ended December 31, 2004 and 2003,
our total contributions were $119,427 and $169,782, respectively.
9. OPERATING SEGMENTS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by our
chief operating decision-maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our operating segments are
managed separately because each segment represents a strategic business unit
that offers different products or services.
Our reportable operating segments include software licenses, maintenance,
services and other. The software licenses operating segment develops and markets
our software products. The maintenance segment provides after-sales support for
software products. The services segment provides fee-based training and
implementation services related to our products. The other segment represents
third-party hardware and software products.
We do not separately allocate operating expenses to these segments, nor do we
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross profit, as this
information is the only segment information provided to the chief operating
decision-maker.
Operating segment data is as follows for the years ended December 31, 2004 and
2003:
Software
Licenses Maintenance Services Other Total
Year ended
December 31, 2003:
Revenues $5,561,806 $3,787,985 $8,993,278 $2,870,681 $21,213,750
Cost of revenues 102,646 1,220,271 5,771,337 2,083,939 9,178,193
---------- ---------- ---------- ---------- -----------
Gross profit $5,459,160 $2,567,714 $3,221,941 $ 786,742 $12,035,557
========== ========== ========== ========== ===========
Year ended
December 31, 2004:
Revenues $6,092,744 $4,754,043 $10,443,718 $ 537,509 $21,828,014
Cost of revenues 657,541 868,622 7,123,382 472,777 9,122,322
---------- ---------- ---------- ---------- -----------
Gross profit $5,435,203 $3,885,421 $3,320,336 $ 64,732 $12,705,692
========== ========== ========== ========== ===========
10. SUBSEQUENT EVENTS
The majority of our stock has been acquired. On April 1, 2005, we entered into a
Stock Purchase Agreement with Retalix Ltd., an Israeli corporation, and certain
holders of our outstanding Series A Preferred Stock and Series B Preferred Stock
(the "Selling Stockholders"), pursuant to which Retalix purchased substantially
all of our outstanding Series A Preferred Stock and Series B Preferred Stock
(the "Acquisition") for an aggregate purchase price of $30,035,148, consisting
of 715,730 ordinary shares of Retalix valued at $17,177,500 and $12,857,648 in
cash which was paid to the Selling Stockholders pro rata. As part of the
transaction, we paid a bonus to certain employees and directors of an aggregate
of $1,744,999 in cash. The acquisition resulted in Retalix beneficially owning,
in excess of 73% of our outstanding voting stock (calculated on an
as-converted-to-common-stock basis), and specifically, 99.8% of the outstanding
Series A Preferred Stock and 95.8% of the outstanding Series B Preferred Stock.
In connection with the Acquisition, on April 1, 2005, we entered into an
agreement and plan of merger with Retalix Ltd., Retalix Holdings, Inc. ("Retalix
Holdings") and certain subsidiaries of Retalix Holdings under which we would be
merged with and into a subsidiary of Retalix Holdings and all of our outstanding
common stock and preferred stock, other than shares held by Retalix Holdings and
shares as to which appraisal rights have been properly asserted under Delaware
law, would be exchanged for cash (the "Merger"). As a result of the Merger,
other than shares held by Retalix Holdings and shares as to which appraisal
rights have been properly asserted under Delaware law, each outstanding share of
our common stock will be converted into the right to receive $0.132 in cash;
each outstanding share of Series A Preferred Stock (on an
as-converted-to-common-stock basis) will be converted into the right to receive
$0.8409 in cash; and each outstanding share of Series B Preferred Stock (on an
as-converted-to-common-stock basis) will be
E-17
converted into the right to receive $0.7573 in cash. Following the Merger, we
would cease to exist and all of our assets and liabilities would be held by a
subsidiary of Retalix Holdings. The Merger would constitute a Liquidation Event
as defined in Note 5, above.
******
E-18
APPENDIX F
FINANCIAL STATEMENTS OF TCI SOLUTIONS, INC. FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 2005
ATTACHED
F-1
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TCI Solutions, Inc.
CONDENSED BALANCE SHEETS
June 30, 2005 December 31, 2004
------------------------------------ -----------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 833,966 $ 3,344,919
Accounts receivable, net
of allowances of
$267,860 at 6/30/05 and
$127,798 at 12/31/04 3,133,104 3,355,635
Prepaid expenses and other
current assets 116,085 212,217
-------------------------------------- -----------------------------------
Total current assets 4,083,155 6,912,771
Property and equipment, net 1,107,065 1,274,328
Goodwill and intangibles 33,932,108 529,031
Other assets 23,232 23,232
-------------------------------------- -----------------------------------
Total assets $ 39,145,560 $ 8,739,362
-------------------------------------- -----------------------------------
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Accounts payable $ 509,571 $ 825,873
Related party payable 2,036,280 0
Accrued expenses 3,310,978 1,504,868
Line of credit 0 2,437,046
Current portion of captial
lease obligations 23,307 24,270
Deferred revenue 2,562,570 2,131,372
-------------------------------------- -----------------------------------
Total current liabilities 8,442,706 6,923,429
-------------------------------------- -----------------------------------
Captial lease obligation, net
of current portion 0 11,603
F-2
Commitments and
contingencies (Note 4)
Stockholders' equity:
Convertible preferred stock 17,850,740 17,850,740
Common stock 37,481,222 37,481,222
Paid in capital 35,467,134 0
Warrants to purchase
common stock 178,129 178,129
Accumulated deficit (60,274,371) (53,705,761)
------------------------------------- -----------------------------------
Stockholders' equity 30,702,854 1,804,330
------------------------------------- -----------------------------------
Total liabilities and
stockholders' equity $ 39,145,560 $ 8,739,362
===================================== ===================================
See accompanying notes to condensed financial statements
F-3
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TCI Solutions, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
For the 90 Day For the 91 Day
Three Months Three Months Period From Period From Six Months
Ended June 30, Ended June 30, January 1 to April 1 to June Ended June
2005 2004 March 31, 2005 30, 2005 30, 2004
----------------------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor) (Successor) (Predecessor)
Revenues:
Software licenses $ 953,872 $ 983,566 $ 1,788,273 $ 953,872 $ 2,209,422
Maintenance 1,365,824 1,256,296 1,331,007 1,365,824 2,512,592
Services 2,155,992 2,940,277 2,669,679 2,155,992 5,417,903
Other 18,706 287,620 16,730 18,706 371,963
------------------------------- ----------------------------------------------
Total revenues 4,494,394 5,467,759 5,805,689 4,494,394 10,511,880
Cost of revenues:
Software licenses 84,901 175,876 245,465 84,901 329,116
Maintenance 63,452 201,062 179,523 63,452 555,864
Services 1,508,317 1,676,687 1,701,740 1,508,317 3,520,795
Other 24,037 267,509 11,061 24,037 319,986
------------------------------- ----------------------------------------------
Total cost of revenues 1,680,707 2,321,134 2,137,789 1,680,707 4,725,761
Gross profit 2,813,687 3,146,625 3,667,900 2,813,687 5,786,119
Operating expenses:
Product development 808,548 817,880 771,732 808,548 1,831,160
Sales and marketing 1,343,425 1,740,739 1,726,672 1,343,425 3,671,191
General and administrative 2,029,916 1,376,076 2,377,821 2,029,916 2,722,525
Acquisition related costs 0 0 3,946,679 0 0
------------------------------- ----------------------------------------------
Total operating expenses 4,181,889 3,934,695 8,822,904 4,181,889 8,224,876
------------------------------- ----------------------------------------------
Loss from operations (1,368,202) (788,070) (5,155,004) (1,368,202) (2,438,757)
Other expense, net (11,546) (19,636) (33,858) (11,546) (38,245)
------------------------------- ----------------------------------------------
Loss before income taxes (1,379,748) (807,706) (5,188,862) (1,379,748) (2,477,002)
Provision for income taxes -- -- -- -- --
------------------------------- ----------------------------------------------
Net loss ($1,379,748) ($807,706) ($5,188,862) ($1,379,748) ($2,477,002)
=============================== ==============================================
Net loss per share - basic
and diluted ($0.11) ($0.06) ($0.40) ($0.11) ($0.19)
Weighted average common
shares outstanding - basic and
diluted 12,825,459 12,822,146 12,825,459 12,825,459 12,821,655
See accompanying notes to condensed financial statements.
F-4
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TCI Solutions, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For the 91
For the 90 Day Day Period
Period From From April 1 For the Six
January 1 to to June 30, Months Ended
March 31, 2005 2005 June 30, 2004
--------------------------------------------------
(Predecessor) (Successor) (Predecessor)
------------------------------- ------------------
Operating activities
Net loss $ (5,188,862) $ (1,379,748) $ (2,477,002)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 153,407 465,575 324,439
Provision for doubtful accounts 706,667 90,000 99,000
Changes in operating assets
and liabilities:
Accounts receivable (1,996,723) 2,248,789 (272,358)
Prepaid expenses and other
current assets 14,144 81,988 24,326
Accounts payable 347,240 (663,539) 195,529
Related party payable 0 1,210,078 0
Accrued expenses 4,324,711 (773,605) (103,520)
Deferred revenue 1,605,631 (1,174,433) 1,414,080
------------------------------- ------------------
Net cash provided by (used in)
operating activities (33,785) 105,105 (795,506)
Investing activities
Purchases of property and
equipment (132,392) (269) (154,769)
Financing activities
Proceeds from line of credit 0 0 130,918
Repayments on line of credit (212,144) (2,224,902) (35,820)
Principal payments on
capital lease obligations (6,317) (6,249) (11,473)
Proceeds from issuance of
common stock 0 0 722
------------------------------- ------------------
Net cash provided by (used in)
financing activities (218,461) (2,231,151) 84,347
------------------------------- ------------------
Net decrease in
cash and cash equivalents (384,638) (2,126,315) (865,928)
Cash and cash equivalents at
beginning of period 3,344,919 2,960,281 3,679,331
------------------------------- ------------------
Cash and cash equivalents at
end of period $ 2,960,281 $ 833,966 $ 2,813,403
=============================== ==================
See accompanying notes to condensed financial statements.
F-5
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TCI Solutions, Inc.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Accounting Policies
The accompanying unaudited condensed financial statements included herein have
been prepared by us in conformity with accounting principles generally accepted
in the United States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial information
for reporting on Form 10-QSB. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Our unaudited
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in our Form 10-KSB for the year ended
December 31, 2004.
In our opinion, the accompanying unaudited condensed financial statements
contain all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of our financial position, results of operations and
cash flows.
The results of operations for the three and six months ended June 30, 2005, are
not necessarily indicative of the results of operations that may be reported for
any other interim period or for the entire year ending December 31, 2005. The
balance sheet at December 31, 2004 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements, as permitted by SEC rules
and regulations for interim reporting.
On April 1, 2005, we entered into a Stock Purchase Agreement with Retalix Ltd.,
an Israeli corporation, Retalix Holdings Inc. and certain holders of our
outstanding Series A Preferred Stock and Series B Preferred Stock (the "Selling
Stockholders"), pursuant to which Retalix Holdings Inc. purchased substantially
all of our outstanding Series A Preferred Stock and Series B Preferred Stock
(the "Acquisition") for an aggregate purchase price of $30.3 million, consisting
of 715,730 ordinary shares of Retalix Ltd. valued at $16.8 million and $13
million in cash which was paid to the Selling Stockholders pro rata. As part of
the transaction, we paid a bonus to certain employees and directors for the
cancellation of their vested stock options under our 1993 and 2001 Option Plans
and for stock options that had been tendered under our stock option exchange
offer initiated in November 2004, of an aggregate of $1.7 million in cash. The
Acquisition resulted in Retalix Holdings Inc. beneficially owning in excess of
73% of our outstanding voting stock (calculated on an
as-converted-to-common-stock basis), and specifically, 99.8% of the outstanding
Series A Preferred Stock and 95.8% of the outstanding Series B Preferred Stock.
Also on April 1, 2005, we entered into an agreement and plan of merger with
Retalix Ltd., Retalix Holdings Inc. and certain subsidiaries of Retalix Holdings
Inc. under which we would be merged with and into a subsidiary of Retalix
Holdings Inc. and all outstanding common stock and preferred stock of TCI (other
than shares held by Retalix Holdings Inc. and shares as to which appraisal
rights have been properly perfected under Delaware law) would be exchanged for
cash. Following the merger, we would cease to exist and all of our assets and
liabilities would be held by a subsidiary of Retalix Holdings Inc.
On April 1, 2005, Retalix acquired approximately 73% of TCI common stock for
cash of $13 million and 715,730 (fair value of $16.8 million) ordinary shares of
Retalix Ltd. The following table summarizes the estimated fair value of the net
assets acquired:
- ---------------------------------- -----------------
Working capital $(5,161,000)
- ---------------------------------- -----------------
Fixed assets 1,253,000
- ---------------------------------- -----------------
Identified intangible assets 9,596,000
- ---------------------------------- -----------------
Goodwill 24,655,000
- ---------------------------------- -----------------
Other assets 24,000
- ---------------------------------- -----------------
Debt assumed (24,000)
- ---------------------------------- =================
Consideration paid $30,343,000
- ---------------------------------- -----------------
As a result of the change in control, generally accepted accounting principles
("GAAP") requires the acquisition by Retalix Holdings Inc. to be accounted for
as a purchase transaction in accordance with Statement of Financial Accounting
Standards No. 141, ("SFAS") Business Combinations. GAAP requires the application
of "push down accounting" in situations where the ownership of an entity has
changed, meaning that the post-transaction financial statements of the acquired
entity (i.e. TCI Solutions, Inc.) reflect the new basis of accounting in
accordance with the SEC Staff Accounting Bulletin ("SAB") No. 54. Accordingly,
the financial statements as of June 30, 2005 and for the first 91 day period
then ended reflect Retalix Holdings Inc.'s stepped up basis resulting from the
acquisition that has been pushed down to us. The aggregate purchase price has
been allocated to the underlying assets and liabilities based upon the
respective estimated fair value at April 1, 2005 (date of acquisition).
Carryover basis accounting applies for tax purposes. All financial information
presented prior to April 1, 2005 represents predecessor basis of accounting.
F-6
Goodwill and Intangibles:
Goodwill $ 24,655
Identified intangibles assets $ 9,596
Amortization $ (319)
Goodwill and Intangibles $ 33,932
Original Estimated
Intangible asset: Amount Life
Software Technology $ 2,810 4
Customer base $ 6,506 15
Other identified intangible assets $ 280 2
$ 9,596
Estimated amortization is as follows:
2005 $ 957
2006 $ 1,276
2007 $ 1,171
2008 $ 1,136
2009 $ 609
Thereafter $ 4,447
The purchase price allocation resulted in $24.7 million of goodwill. None of the
goodwill is deductible for income tax purposes. Furthermore, in accordance with
SFAS No. 142, Goodwill and Intangible Assets, goodwill is not amortized, but is
tested for impairment on an annual basis, or more frequently as impairment
indicators arise. Impairment tests, which involve the use of estimates related
to the fair market value of the business operations with which goodwill is
associated, are performed annually at the end of our fourth quarter. Losses, if
any, resulting from impairment test will be reflected in operating income in the
statement of operations.
On April 1, 2005, the majority of our stock was acquired by Retalix Holdings
Inc. In conjunction with this transaction, certain one-time termination costs
were incurred or became determinable. SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No. 146") has been applied to
this transaction. Under SFAS No. 146, the liability for costs associated with
exit or disposal activities is recognized and measured initially at fair value
only when the liability is incurred, rather than the effective date of the exit
plan. Restructuring charges are not directly identified with a particular
business segment and as a result, management does not consider these charges in
the evaluation of the operating loss from the business segments. The following
table presents the one-time termination costs incurred relating to this
transaction:
- ----------------------------------------------------- --------------
Stock option termination costs $1,697,794
- ----------------------------------------------------- --------------
Facility & lease termination costs 586,645
- ----------------------------------------------------- --------------
Professional fees 542,167
- ----------------------------------------------------- --------------
Employee severance and benefit termination costs 1,120,073
- ----------------------------------------------------- --------------
Total transaction related costs $3,946,679
- ----------------------------------------------------- --------------
F-7
Reclassifications--Certain amounts previously reported have been reclassified to
conform with the presentation for the three and six months ended June 30, 2005.
Revenue Recognition
We license software products under non-cancelable perpetual license agreements
and provide related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended and interpreted by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with respect to certain
transactions, as well as Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants and SAB No. 104, Revenue
Recognition in Financial Statements, which provides further interpretive
guidance for public reporting companies on the recognition, presentation and
disclosure of revenue in financial statements.
Software license revenue is recognized when a license agreement has been signed,
the software product has been delivered, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable and collection is
considered reasonably assured. If a software license contains an undelivered
element, the fair value of the undelivered element is deferred and the revenue
recognized once the element is delivered. Revenues attributable to undelivered
elements, including consulting services and post-contract support, are based on
the sales price of those elements when sold separately. If vendor specific
objective evidence of the fair value of an undelivered element is not available,
all revenue is deferred. In addition, if a software license contains customer
acceptance criteria or a cancellation right, the software revenue is recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period or cancellation right. We do not offer rights of return.
Services are separately priced, are generally available from a number of
suppliers and are not essential to the functionality of our software products.
Services, which include project management, system planning, design and
implementation, customer configurations and training, are billed on an hourly
basis. Services revenue billed on an hourly basis is recognized as the work is
performed. Customer support services include post-contract support and the
rights to unspecified upgrades and enhancements, when and if available.
Maintenance revenues from ongoing customer support services are billed on an
annual basis with the revenue being deferred and recognized ratably over the
maintenance period.
Other revenue consists of the sales of third-party hardware and software
products and is recognized upon delivery and passage of title.
Basic and Diluted Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per
Share. Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. There were no common equivalent
shares for the three and six months ended June 30, 2005. Common equivalent
shares of 55,080 for the three and six months ended June 30, 2004 have been
excluded from diluted weighted average common shares as the effect would be
anti-dilutive.
Stock-Based Compensation
We account for employee stock-based compensation using the fair value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations and have
adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income (loss) had we adopted the fair value method. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated through
the use of option-pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from our stock option awards.
These models also require subjective assumptions, including expected life, which
greatly affect the calculated values. Our calculations were made using the
Black-Scholes option-pricing model (fair value method) with the following
weighted-average assumptions: expected life of six years; stock volatility, 1%;
risk-free interest rates, 4.0% for the three and six months ended June 30, 2005
and 2004, respectively; and no dividends during the expected term. Our
calculations are based on an option valuation approach, and forfeitures are
recognized as they occur. The effects of applying SFAS No. 123 in this pro forma
disclosure are not necessarily indicative of future amounts. We had no
outstanding stock option awards as of June 30, 2005.
F-8
New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board revised SFAS No.
123 ("FAS 123R"), Share-Based Payment, which requires companies to expense the
estimated fair value of employee stock options and similar awards based on the
grant-date fair value of the award. The cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award, usually the vesting period. The accounting provisions of FAS 123R will be
effective as of the beginning of the first interim or annual reporting period
that begins on or after December 15, 2005. We will adopt the provisions of FAS
123R effective on the first quarter of 2006 using a modified prospective
application. Under the modified prospective application, FAS 123R, will apply to
new awards, unvested awards that are outstanding on the effective date and any
awards that are subsequently modified or cancelled. Compensation expense for
outstanding awards for which the requisite service had not been rendered as of
the effective date will be recognized over the remaining service period using
the compensation cost calculated for pro forma disclosure purposes under SFAS
123 (Note 2 Stock-Based Compensation). We believe adoption of FAS 123R will not
have a material impact on our financial statements as there are no stock options
outstanding as of June 30, 2005.
2. Segment Information and Customer Concentration
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by our
chief operating decision-maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our operating segments are
managed separately because each segment represents a strategic business unit
that offers different products or services.
Our reportable operating segments include software licenses, maintenance,
services, and other. The software licenses operating segment develops and
markets our software products. The maintenance operating segment includes
post-sale support for software products. The services segment provides fee-based
implementation and training services related to our products. The other segment
represents third party hardware and software products.
We do not separately allocate operating expenses to these segments, nor do we
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of sales, and gross profit, as this
information is the only information provided to the chief operating
decision-maker.
Operating segment data for the three and six months ended June 30, 2005 and 2004
is as follows:
F-9
Software
Licenses Maintenance Services Other Total
Three months-ended June 30, 2005:
Revenues $ 953,872 $ 1,365,824 $ 2,155,992 $ 18,706 $ 4,494,394
Cost of revenues 84,901 63,452 1,508,317 24,037 $ 1,680,707
----------- ------------ ------------ ----------- --------------
Gross profit $ 868,971 $ 1,302,372 $ 647,675 $ (5,331) $ 2,813,687
=========== ============ ============ =========== ==============
Three months-ended June 30, 2004:
Revenues $ 983,566 $ 1,256,296 $ 2,940,277 $ 287,620 $ 5,467,759
Cost of revenues 175,876 201,062 1,676,687 267,509 2,321,134
----------- ------------ ------------ ----------- --------------
Gross profit $ 807,690 $ 1,055,234 $ 1,263,590 $ 20,111 $ 3,146,625
=========== ============ ============ =========== ==============
Six months-ended June 30, 2005:
Revenues $ 2,742,146 $ 2,696,830 $ 4,825,671 $ 35,436 $ 10,300,083
Cost of revenues 330,365 242,975 3,210,057 35,097 $ 3,818,494
----------- ------------ ------------ ----------- --------------
Gross profit $ 2,411,781 $ 2,453,855 $ 1,615,614 $ 339 $ 6,481,589
=========== ============ ============ =========== ==============
Six months-ended June 30, 2004:
Revenues $ 2,209,422 $ 2,512,592 $ 5,417,903 $ 371,963 $ 10,511,880
Cost of revenues 329,116 555,864 3,520,795 319,986 4,725,761
----------- ------------ ------------ ----------- --------------
Gross profit $ 1,880,306 $ 1,956,728 $ 1,897,108 $ 51,977 $ 5,786,119
=========== ============ ============ =========== ==============
One customer accounted for 22.0% of revenues for the three months ended June 30,
2005 and two customers accounted for 26.9% and 11.9% of revenues for the three
months ended June 30, 2004. One customer accounted for 16.2% of revenues for the
six months ended June 30, 2005 and two customers accounted for 24.7% and 15.0%
of revenues for the six months ended June 30, 2004. Approximately 51% of
accounts receivable was due from three customers as of June 30, 2005. All of our
customers are in the retail industry.
3. Credit Facility
On February 27, 2004, we entered into a $3,500,000 credit facility with a
financial institution composed of a $500,000 equipment line of credit and a
$3,000,000 accounts receivable revolving line of credit. Each advance under the
equipment line of credit shall accrue interest at 0.75% above the prime rate is
payable monthly. Beginning November 27, 2004, outstanding borrowings under the
equipment line of credit shall be payable in 30 equal monthly installments, plus
interest at 0.75% above the prime rate (6.0% at June 30, 2005) through the
maturity date. The equipment line of credit matures in June 2007. The accounts
receivable revolving line of credit bears interest at 0.50% above the prime rate
(5.75% at June 30, 2005).
On November 18, 2004, we amended the above facility. The amended credit facility
is comprised of a $3,000,000 accounts receivable revolving line of credit and a
$1,000,000 maintenance receivable revolving line of credit. The maintenance
revolving line of credit is not to exceed (i) $1.5 million from November 18,
2004 through February 28, 2005, (ii) $1 million from March 1, 2005 through March
31, 2005 and (iii) $500,000 from April 1, 2005 through May 31, 2005. The amended
facility does not extend an equipment line of credit. The revolving line of
credit bears interest at 0.50% above the prime rate (5.75% at June 30, 2005) and
matures in May 2005. Borrowings are collateralized by substantially all of our
assets, including our intellectual property.
Retalix Ltd., who indirectly purchased substantially all of our outstanding
Series A Preferred Stock and Series B Preferred Stock on April 1, 2005, paid
down the entire accounts receivable revolving line of credit out of working
capital on April 28, 2005. Additionally, Retalix paid down the entire equipment
line of credit out of working capital on June 7, 2005. Upon full payment of the
lines of credit, these agreements were cancelled.
In connection with our credit facility, we granted warrants to purchase 115,000
shares of common stock at an exercise price of $0.25 per share to the financial
institution. As the warrants were substantially out of the money, the fair value
of the warrants, which was estimated using the Black-Scholes model, was nominal.
4. Commitments and Contingencies
F-10
We are involved in a dispute related to alleged preference payments to TCI from
a customer who subsequently declared bankruptcy. We have provided a written
response to the claimant regarding our defenses to the claims made. In addition,
a former significant customer filed bankruptcy in February 2005. It is not
possible to estimate the outcome of these issues; however, we believe that the
possible minimum liability could reasonably be $617,000. As such, we have
recorded a $617,000 accrual in the financial statements as of June 30, 2005.
Additionally, we lease certain facilities and equipment under agreements that
expire at various times through 2008, which are accounted for as operating
leases. Total rental expense for non-cancelable operating leases was
approximately $140,100 and $197,900 and $831,700 and $403,800 for the three and
six month periods ended June 30, 2005 and 2004, respectively. For those
non-cancelable leases with scheduled rental increases, rent expense is recorded
on a straight-line basis over the lease term. Included in accrued liabilities is
$28,377 of deferred rent at June 30, 2005.
We leased equipment with a net book value of $45,988, net of related accumulated
depreciation and amortization of $688,972 at June 30, 2005, under capital lease
agreements.
At June 30, 2005, future minimum lease payments under non-cancelable operating
leases consist of the following:
Year ending December 31:
2005 (July 1 through December 31) $350,607
2006 662,539
2007 656,793
2008 48,930
-----------
Future minimum lease payments $1,718,869
===========
Guarantees and Indemnifications - During our normal course of business, we have
made certain indemnities, commitments and guarantees under which it may be
required to make payments in relation to certain transactions. These indemnities
include intellectual property indemnities to our customers in connection with
the sales of our products, indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease, and
indemnities to our directors and officers. The duration of these indemnities,
commitments and guarantees varies and, in certain cases, is indefinite. The
majority of these indemnities, commitments and guarantees do not provide for any
limitation of the maximum potential future payments we could be obligated to
make. Generally, a maximum obligation arising out of these types of agreements
is not explicitly stated, and therefore, the overall maximum amount of these
obligations cannot be reasonably estimated. Historically, we have not been
obligated to make significant payments for these obligations and thus no
liabilities have been recorded for these obligations on our balance sheet at
June 30, 2005.
Litigation - In the normal course of business, we are subject to various
legal matters. In the opinion of management, the resolution of these matters
will not have a material adverse effect on our operations, cash flows and
financial position.
5. Related Party Payables
As of June 30, 2005, we have approximately $2.0 million in payables to Retalix
Holdings and $55,000 to Retalix Ltd. Subsequent to the acquisition by Retalix
Holdings Inc., we received advances of $1.7 million to payoff the lines of
credit from Retalix Holdings Inc. In addition, our June 2005 payroll of
approximately $1.1 million was processed and funded by Retalix Holdings and is
recorded as a related party payable. We also incurred a $55,000 management fee
with Retalix Ltd. for management services performed subsequent to the
acquisition. These balance are off set by approximately $826,000 of trade
receivables transferred to Retalix Ltd. at face value.
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F-11