<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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-11(c) or Section 240.14a-12
</TABLE>
Lumisys Incorporated
- --------------------------------------------------------------------------------
(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.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[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:
- --------------------------------------------------------------------------------
<PAGE> 2
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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-11(c) or Section 240.14a-12
</TABLE>
CompuRAD, 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.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[X] 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:
$4,557.16
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Preliminary Schedule 14A
- --------------------------------------------------------------------------------
(3) Filing Party:
Lumisys Incorporated
- --------------------------------------------------------------------------------
(4) Date Filed:
October 20, 1997
- --------------------------------------------------------------------------------
<PAGE> 3
LUMISYS INCORPORATED
November 4, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting (the "Lumisys Special
Meeting") of the Stockholders of Lumisys Incorporated ("Lumisys"), which will be
held at 10:30 a.m. on November 25, 1997, at the corporate offices of Lumisys at
225 Humboldt Court, Sunnyvale, California 94089.
At the Lumisys Special Meeting, you will be asked to consider and vote upon
the issuance of shares of Lumisys common stock pursuant to an Agreement and Plan
of Merger and Reorganization dated as of September 28, 1997 (the "Reorganization
Agreement"), among Lumisys, SAC Acquisition Corporation, a wholly-owned
subsidiary of Lumisys ("Merger Sub"), and CompuRAD, Inc. ("CompuRAD"). Pursuant
to the Reorganization Agreement, Merger Sub will be merged with and into
CompuRAD, and CompuRAD will become a wholly-owned subsidiary of Lumisys (the
"Merger"). In the Merger, each outstanding share of CompuRAD common stock will
be converted into the right to receive 0.928 shares of Lumisys common stock, and
outstanding options to purchase CompuRAD common stock will be converted into
options to purchase Lumisys common stock on the same basis.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the Merger and has received the opinion of Hambrecht & Quist LLC,
its financial advisor, that, as of September 28, 1997, the consideration to be
paid by Lumisys in the Merger was fair to Lumisys from a financial point of
view. A copy of this opinion is attached as Annex C-1 to the accompanying Joint
Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS OF LUMISYS HAS DETERMINED THAT THE MERGER IS FAIR TO
LUMISYS AND IN THE BEST INTERESTS OF LUMISYS STOCKHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS OF LUMISYS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
THE ISSUANCE OF SHARES OF LUMISYS COMMON STOCK IN CONNECTION WITH THE MERGER.
Your vote is important regardless of how many shares you own. Please take a
few minutes now to review the proxy statement and to sign and date your proxy
and return it in the envelope provided. You may attend the meeting and vote in
person even if you have previously returned your proxy.
Sincerely,
/s/ STEPHEN J. WEISS
Stephen J. Weiss
President and Chief Executive Officer
<PAGE> 4
LUMISYS INCORPORATED
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Lumisys
Special Meeting") of Lumisys Incorporated, a Delaware corporation ("Lumisys"),
will be held at 10:30 a.m. on November 25, 1997, at the corporate offices of
Lumisys at 225 Humboldt Court, Sunnyvale, CA 94089.
The meeting is called for the purpose of considering and voting upon:
1. A proposal to approve the issuance of shares of Lumisys common stock,
$0.001 par value per share ("Lumisys Common Stock"), pursuant to an
Agreement and Plan of Merger and Reorganization, dated as of September
28, 1997 (the "Reorganization Agreement"), by and among Lumisys, SAC
Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Lumisys ("Merger Sub"), and CompuRAD, Inc., a Delaware
corporation ("CompuRAD"). Pursuant to the Reorganization Agreement,
Merger Sub will be merged with and into CompuRAD and CompuRAD will
become a wholly-owned subsidiary of Lumisys (the "Merger"). A copy of
the Reorganization Agreement is attached as Annex A to the Joint Proxy
Statement/Prospectus accompanying this Notice; and
2. Such other business as may properly come before the Lumisys Special
Meeting or any adjournments or postponements thereof.
The proposed Merger and other related matters are more fully described in
the attached Joint Proxy Statement/Prospectus and the Annexes thereto.
The Board of Directors has fixed the close of business on October 31, 1997
as the record date for the determination of the stockholders entitled to notice
of and to vote at the Lumisys Special Meeting and any adjournments or
postponements thereof. Only holders of record of Lumisys Common Stock on the
record date are entitled to vote at the Lumisys Special Meeting.
If you would like to attend the Lumisys Special Meeting and your shares are
held by a broker, bank or other nominee, you must bring to the meeting a recent
brokerage statement or a letter from the nominee confirming your beneficial
ownership of the shares. You must also bring a form of personal identification.
In order to vote your shares at the Lumisys Special Meeting, you must obtain
from the nominee a proxy issued in your name.
You can ensure that your shares are voted at the meeting by signing and
dating the enclosed proxy and returning it in the envelope provided. Sending in
a signed proxy will not affect your right to attend the meeting and vote in
person. You may revoke your proxy at any time before it is voted by giving
written notice to the Secretary of Lumisys at Lumisys' headquarters, 225
Humboldt Court, Sunnyvale, CA 94089 by signing and returning a later dated proxy
or by voting in person at the Lumisys Special Meeting.
Whether or not you expect to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Board of Directors,
/s/ Andrei M. Manoliu
Andrei M. Manoliu, Secretary
Sunnyvale, California
November 4, 1997
<PAGE> 5
LOGO
November 4, 1997
Dear Stockholder:
At our Special Meeting to be held on November 25, 1997, you will be asked
to vote upon the approval and adoption of the Agreement and Plan of Merger and
Reorganization dated as of September 28, 1997 (the "Reorganization Agreement"),
among Lumisys Incorporated ("Lumisys"), SAC Acquisition Corporation, a
wholly-owned subsidiary of Lumisys ("Merger Sub"), and CompuRAD, Inc.
("CompuRAD") providing for the merger of Merger Sub with and into CompuRAD upon
the terms and subject to the conditions of the Reorganization Agreement (the
"Merger"). The foregoing proposal is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
THE COMPURAD BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE TERMS
OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE
FAIR TO, AND IN THE BEST INTERESTS OF, COMPURAD STOCKHOLDERS. ACCORDINGLY, THE
COMPURAD BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
COMPURAD VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND
APPROVAL OF THE MERGER. The approval and adoption of the Reorganization
Agreement and approval of the Merger requires the affirmative vote of holders of
at least a majority of the outstanding shares of common stock of CompuRAD.
Pursuant to voting agreements with Lumisys, certain directors and executive
officers of CompuRAD, together holding approximately 41% of the outstanding
shares of CompuRAD common stock, have agreed to, among other things, vote (or
cause to be voted) their shares of CompuRAD common stock in favor of approval
and adoption of the Reorganization Agreement and approval of the Merger.
Stockholders are urged to review carefully the information contained in the
Joint Proxy Statement/Prospectus prior to deciding how to vote their shares at
the Special Meeting.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may revoke
your proxy at any time before it has been voted, and if you attend you may vote
in person, even if you previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely,
LOGO
Dr. Phillip Berman
Chairman, President and
Chief Executive Officer
<PAGE> 6
LOGO
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 25, 1997
November 4, 1997
TO THE STOCKHOLDERS OF COMPURAD, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"CompuRAD Special Meeting") of CompuRAD, Inc., a Delaware corporation
("CompuRAD"), will be held on November 25, 1997 at 10:00 a.m., local time, at
the principal executive offices of CompuRAD located at 1350 North Kolb Road,
Tucson, Arizona 85715.
At the CompuRAD Special Meeting you will be asked to consider and vote upon
the following matters:
(1) approval and adoption of the Agreement and Plan of Merger and
Reorganization dated as of September 28, 1997 (the "Reorganization
Agreement"), among Lumisys Incorporated ("Lumisys"), SAC Acquisition
Corporation, a wholly-owned subsidiary of Lumisys ("Merger Sub"), and
CompuRAD providing for the merger of Merger Sub with and into CompuRAD upon
the terms and subject to the conditions of the Reorganization Agreement
(the "Merger"); and
(2) such other business as may properly come before the CompuRAD
Special Meeting or any adjournment thereof.
Pursuant to the Reorganization Agreement, each share of common stock, par
value $.01 per share, of CompuRAD ("CompuRAD Common Stock") issued and
outstanding at the effective time of the Merger will be converted into 0.928
shares of Lumisys common stock, par value $.001 per share ("Lumisys Common
Stock").
THE COMPURAD BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND APPROVAL OF THE
MERGER.
Detailed information concerning the Reorganization Agreement and the Merger
is contained in the attached Joint Proxy Statement/Prospectus and the Annexes
thereto; please read it carefully.
ONLY STOCKHOLDERS WHO WERE HOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON
OCTOBER 31, 1997 WILL BE ENTITLED TO RECEIVE NOTICE OF AND TO VOTE AT THE
COMPURAD SPECIAL MEETING.
Whether or not you expect to attend the Special Meeting, WE URGE YOU TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY in the
enclosed postage-prepaid envelope. You may revoke your proxy at any time before
it is voted by giving written notice of revocation to CompuRAD, by subsequently
filing another proxy or by attending the CompuRAD Special Meeting and voting in
person.
By order of the Board of Directors,
/s/ Henky Wibowo
Henky Wibowo
Secretary
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN AND PROMPTLY RETURN YOUR PROXY CARD.
HOLDERS OF COMPURAD COMMON STOCK SHOULD NOT SEND STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE> 7
LUMISYS INCORPORATED
AND
COMPURAD, INC.
JOINT PROXY STATEMENT
------------------------
LUMISYS INCORPORATED
PROSPECTUS
------------------------
This Joint Proxy Statement and Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to the stockholders of Lumisys
Incorporated, a Delaware corporation ("Lumisys"), in connection with the
solicitation of proxies by the Board of Directors of Lumisys (the "Lumisys
Board") for approval of the issuance of Lumisys Common Stock in the Merger (as
defined below) at a Special Meeting of Stockholders of Lumisys to be held at the
corporate offices of Lumisys on November 25, 1997 at 10:30 a.m., local time, and
at any and all adjournments or postponements thereof (the "Lumisys Special
Meeting"). This Joint Proxy Statement/Prospectus also constitutes the Prospectus
of Lumisys with respect to the issuance of shares of common stock of Lumisys,
$0.001 par value per share ("Lumisys Common Stock"), to be issued to
stockholders of CompuRAD, Inc., a Delaware corporation, ("CompuRAD"), in
connection with the proposed merger (the "Merger") of SAC Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Lumisys
("Merger Sub"), with and into CompuRAD pursuant to the Agreement and Plan of
Merger and Reorganization, dated as of September 28, 1997 (the "Reorganization
Agreement") by and among Lumisys, Merger Sub and CompuRAD. Lumisys Common Stock
is traded on the Nasdaq National Market under the symbol "LUMI." On October 31,
1997, the last reported sale price per share of Lumisys Common Stock on the
Nasdaq National Market was $6.125.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of common stock, par value $0.01 per share ("CompuRAD Common Stock"), of
CompuRAD in connection with the solicitation of proxies by the Board of
Directors of CompuRAD (the "CompuRAD Board") for approval and adoption of the
Reorganization Agreement and approval of the Merger at a Special Meeting of
Stockholders of CompuRAD to be held at the corporate offices of CompuRAD at 1350
North Kolb Road, Tucson, Arizona 85715 on November 25, 1997 at 10:00 a.m., local
time, and at any and all adjournments or postponements thereof (the "CompuRAD
Special Meeting").
Upon consummation of the Merger (i) each issued and outstanding share of
CompuRAD Common Stock (other than shares owned by Lumisys, CompuRAD, Merger Sub
or any direct or indirect wholly owned subsidiary of Lumisys or CompuRAD) will
be converted into 0.928 shares of Lumisys Common Stock (the "Exchange Ratio"),
(ii) each outstanding option to purchase CompuRAD Common Stock under the
CompuRAD 1994 Stock Option Plan and CompuRAD 1996 Stock Option Plan
(collectively referred to as the "CompuRAD Stock Option Plans") and each
outstanding warrant to purchase CompuRAD Common Stock ("CompuRAD Warrants") will
become an equivalent right with respect to Lumisys Common Stock, on the same
terms of the original option or warrant, as adjusted by the Exchange Ratio,
(iii) all shares of CompuRAD Common Stock will cease to be outstanding and will
be canceled and retired and will cease to exist, and each holder of a
certificate formerly representing shares of CompuRAD Common Stock will
thereafter cease to have any rights with respect thereto, except the right to
receive certificates representing the shares of Lumisys Common Stock and (iv)
CompuRAD will become a wholly-owned subsidiary of Lumisys.
Consummation of the Merger is subject to various conditions, including the
approval and adoption of the Reorganization Agreement and approval of the Merger
by holders of a majority of the outstanding shares of CompuRAD Common Stock at
the CompuRAD Special Meeting and the approval of the issuance of shares
<PAGE> 8
of Lumisys Common Stock in connection with the Merger at the Lumisys Special
Meeting by the affirmative vote of a majority of the votes cast on this matter.
Certain directors and executive officers of CompuRAD, who together hold
approximately 41% of the CompuRAD Common Stock outstanding as of the CompuRAD
Record Date, have agreed to vote in favor of the approval and adoption of the
Reorganization Agreement and approval of the Merger and have granted Lumisys an
irrevocable proxy to vote their shares of CompuRAD Common Stock in favor of
adopting and approving the Reorganization Agreement and approving the Merger.
See "OTHER AGREEMENTS -- Voting Agreements."
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SEE "RISK
FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD
BE CONSIDERED BY STOCKHOLDERS OF LUMISYS AND COMPURAD IN CONNECTION WITH THEIR
CONSIDERATION OF THE MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
All information contained in this Joint Proxy Statement/Prospectus about
Lumisys and Merger Sub has been provided by Lumisys. All information contained
in this Joint Proxy Statement/Prospectus about CompuRAD has been provided by
CompuRAD.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise. See "LUMISYS SPECIAL MEETING -- Record Date," "-- Voting Rights;
Proxies," "COMPURAD SPECIAL MEETING -- Record Date," and "-- Voting Rights;
Proxies."
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY LUMISYS OR COMPURAD. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE
OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF.
THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORMS OF PROXIES
ARE FIRST BEING MAILED TO STOCKHOLDERS OF LUMISYS AND COMPURAD ON OR ABOUT
NOVEMBER 5, 1997.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOVEMBER 4, 1997.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
FORWARD LOOKING STATEMENTS........................................................ 1
AVAILABLE INFORMATION............................................................. 1
SUMMARY........................................................................... 2
The Companies................................................................... 2
Lumisys Incorporated......................................................... 2
CompuRAD, Inc................................................................ 2
SAC Acquisition Corporation.................................................. 3
The Meetings.................................................................... 3
Time, Place and Date......................................................... 3
Purpose of the Meetings...................................................... 3
Votes Required; Record Date.................................................. 4
Change Of Vote.................................................................. 4
The Merger...................................................................... 4
The Merger................................................................... 4
Merger Consideration......................................................... 4
Exchange of Certificates..................................................... 5
No Solicitation.............................................................. 5
Conduct of Business Prior to the Merger...................................... 5
Conditions to the Merger; Termination; Fees.................................. 5
Listing...................................................................... 6
Appraisal And Dissenters' Rights............................................. 6
Anticipated Accounting Treatment............................................. 6
Stock Options and Warrants................................................... 6
Employee Stock Purchase Plan................................................. 7
Stock Ownership Following the Merger......................................... 7
Risk Factors.................................................................... 7
Opinions of Financial Advisors.................................................. 7
Interests of Certain Persons in the Merger...................................... 7
Indemnification and Insurance; Board Representation.......................... 8
Voting Agreements............................................................ 8
Affiliate Agreements......................................................... 8
Employment Offer Letters..................................................... 8
Stock Options................................................................ 8
Governmental Approvals.......................................................... 8
Certain United States Federal Income Tax Consequences........................... 8
Comparative Rights of Stockholders.............................................. 9
MARKET PRICE INFORMATION.......................................................... 10
Lumisys Common Stock............................................................ 10
CompuRAD Common Stock........................................................... 10
DIVIDEND POLICY -- LUMISYS........................................................ 10
SELECTED FINANCIAL INFORMATION.................................................... 11
COMPARATIVE PER SHARE DATA AND DIVIDEND HISTORY................................... 14
RISK FACTORS...................................................................... 15
Risks Relating To The Merger.................................................... 15
Risks Related to Lumisys' Business.............................................. 17
Risks Related to CompuRAD's Business............................................ 20
</TABLE>
i
<PAGE> 10
<TABLE>
<CAPTION>
PAGE NO.
---
<S> <C>
INTRODUCTION...................................................................... 27
LUMISYS SPECIAL MEETING........................................................... 27
Record Date..................................................................... 27
Quorum.......................................................................... 27
Required Votes.................................................................. 27
Voting Rights; Proxies.......................................................... 27
Solicitation of Proxies......................................................... 28
COMPURAD SPECIAL MEETING.......................................................... 29
Purpose of the Special Meeting.................................................. 29
Record Date..................................................................... 29
Quorum.......................................................................... 29
Required Vote................................................................... 29
Voting Rights; Proxies.......................................................... 29
Solicitation of Proxies......................................................... 30
THE MERGER........................................................................ 31
General......................................................................... 31
Effective Time.................................................................. 31
Conversion of Shares; Procedures For Exchange of Certificates................... 31
Background of the Merger........................................................ 32
Recommendation of the Lumisys Board; Reasons for the Merger..................... 35
Recommendation of the CompuRAD Board; Reasons for the Merger.................... 36
Opinion of Lumisys' Financial Advisor........................................... 37
Opinion of CompuRAD's Financial Advisor......................................... 41
Interests of Certain Persons in the Merger...................................... 44
Certain Federal Income Tax Consequences......................................... 44
Anticipated Accounting Treatment................................................ 46
Effect on Employee Equity Plans................................................. 47
Regulatory Matters.............................................................. 48
Federal Securities Law Consequences............................................. 48
Stock Listing................................................................... 49
Appraisal Rights................................................................ 49
Merger Expenses and Fees and Other Costs........................................ 52
THE REORGANIZATION AGREEMENT...................................................... 52
Terms of the Merger............................................................. 52
Exchange of Certificates and Merger Consideration............................... 53
Representations and Warranties.................................................. 54
Conduct of Business Pending the Merger.......................................... 55
Additional Covenants............................................................ 56
No Solicitation................................................................. 57
Conditions to the Merger........................................................ 58
Termination of the Reorganization Agreement..................................... 60
Termination Fees................................................................ 61
Amendment; Waiver............................................................... 62
OTHER AGREEMENTS.................................................................. 63
Voting Agreements............................................................... 63
Affiliate Agreements............................................................ 63
Employment Offer Letters........................................................ 64
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS....................... 65
</TABLE>
ii
<PAGE> 11
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Unaudited Pro Forma Combined Condensed Statement of Operations.................. 65
Unaudited Pro Forma Combined Condensed Balance Sheet............................ 66
Notes to Unaudited Pro Forma Combined Financial Information..................... 67
LUMISYS BUSINESS.................................................................. 68
Introduction.................................................................... 68
Industry Background............................................................. 68
Strategy........................................................................ 69
Products and Applications....................................................... 70
Research and Development........................................................ 71
Sales and Marketing............................................................. 72
Manufacturing................................................................... 72
Competition..................................................................... 72
Patents and Intellectual Property............................................... 73
Government Regulation........................................................... 73
LUMISYS PROPERTIES................................................................ 74
LUMISYS LEGAL PROCEEDINGS......................................................... 74
LUMISYS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................... 75
Overview........................................................................ 75
Recent Operating Results and Developments....................................... 75
Results of Operations........................................................... 76
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996..... 76
Fiscal 1996 Compared with Fiscal 1995........................................... 77
Fiscal 1995 Compared with Fiscal 1994........................................... 78
Quarterly Results............................................................... 78
Liquidity and Capital Resources................................................. 80
New Accounting Standards........................................................ 80
LUMISYS MANAGEMENT................................................................ 82
Executive Officers and Directors -- Lumisys..................................... 82
Compensation of Directors....................................................... 83
Compensation of Executive Officers of Lumisys................................... 84
STOCK OPTION GRANTS AND EXERCISES................................................. 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF LUMISYS......................... 85
BENEFICIAL SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT OF LUMISYS......... 86
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(a)....................... 87
COMPURAD BUSINESS................................................................. 88
General......................................................................... 88
Products........................................................................ 88
Current Product Offerings....................................................... 89
Third Party Software Development and Licensing.................................. 90
Research and Development........................................................ 91
Service and Support............................................................. 91
Customers....................................................................... 91
Backlog......................................................................... 92
Sales and Marketing............................................................. 92
Competition..................................................................... 92
Proprietary Rights.............................................................. 93
</TABLE>
iii
<PAGE> 12
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Government Regulation........................................................... 93
COMPURAD PROPERTY................................................................. 94
COMPURAD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................... 95
General......................................................................... 95
Recent Financial Results........................................................ 95
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995......... 95
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994......... 96
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996..... 97
Liquidity and Capital Resources................................................. 98
New Accounting Standard......................................................... 98
COMPURAD MANAGEMENT AFTER THE MERGER.............................................. 99
Compensation of Executive Officers of CompuRAD.................................. 100
Stock Option Grants, Option Exercises and Option Values in Fiscal 1996.......... 100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF COMPURAD........................ 100
BENEFICIAL SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT OF COMPURAD........ 102
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(a)....................... 104
COMPARISON OF CAPITAL STOCK....................................................... 104
Description of Lumisys Capital Stock............................................ 104
Description of CompuRAD Capital Stock........................................... 105
COMPARISON OF RIGHTS OF HOLDERS OF LUMISYS COMMON STOCK AND HOLDERS OF COMPURAD
COMMON STOCK.................................................................... 106
Percentage of Voting Stock; Influence Over Affairs.............................. 106
Appraisal Rights................................................................ 106
Stockholders' Ability to Act by Written Consent without a Meeting............... 106
Nasdaq Rules.................................................................... 106
EXPERTS........................................................................... 106
LEGAL MATTERS..................................................................... 107
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS........................................ 107
STOCKHOLDER PROPOSALS............................................................. 107
INDEX TO FINANCIAL STATEMENTS..................................................... F-1
Annex A -- Agreement and Plan of Merger and Reorganization
Annex B -- Form of the Voting Agreement
Annex C-1 -- Opinion of Hambrecht & Quist LLC
Annex C-2 -- Opinion of CIBC Wood Gundy Securities Corp.
Annex D -- Section 262 of the Delaware General Corporation Law
</TABLE>
iv
<PAGE> 13
FORWARD LOOKING STATEMENTS
Certain statements in this Joint Proxy Statement/Prospectus constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21B of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this
purpose, the reasons for the Merger discussed under the caption "THE MERGER" and
statements about the expected impact of the Merger on Lumisys' business,
financial performance and condition, accounting and tax treatment and the extent
of the charges related to the Merger are forward-looking statements. Further,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "projects," "believes," "anticipates," "plans," "expects," "intends" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of Lumisys or
CompuRAD to differ materially from those indicated by such forward-looking
statements, including but not limited to, (i) those factors related to the
Merger, including: a fixed Exchange Ratio despite potential changes in stock
prices, the nonrealization of synergies, incurrence of significant transaction
charges and the potential dilutive effect to stockholders of Lumisys and
CompuRAD, the effect of the Merger on customers and partners of Lumisys and
CompuRAD, the volatility of stock prices of Lumisys and CompuRAD and the
potential unavailability of pooling of interests accounting treatment of the
Merger; (ii) those factors related to Lumisys' business including: litigation
and significant fluctuations in operating results, the dependence on the
teleradiology market and the uncertainty of market acceptance, significant risks
associated with future acquisitions, rapid technological change and product
development competition, customer concentration and reliance on OEMs, single
source suppliers, government regulation, third-party reimbursement and product
liability and insurance; and (iii) those factors related to CompuRAD's business
including: the history of operating losses and uncertain profitability,
reliability in quarterly operating results and seasonality, the possible need
for additional funds and the uncertainty of additional financing, the dependence
on emerging medical image management and teleradiology systems markets and the
uncertainty of market acceptance, the issues associated with products, new
product development and technological change, the integration of acquisitions,
the consolidation and uncertainty in the healthcare industry, long sales cycles,
the need to manage anticipated growth in operations and the dependence upon key
personnel, product liability, international sales, customer concentration,
competition, proprietary rights and government regulation; as well as those
additional factors set forth in this Joint Proxy Statement/Prospectus under the
caption "RISK FACTORS." Neither Lumisys nor CompuRAD undertakes any obligation
to update any forward-looking statements.
AVAILABLE INFORMATION
Lumisys and CompuRAD are each subject to the informational requirements of
the Exchange Act, and file reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). This
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and may be available at the following Regional
Offices of the Commission: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Each of Lumisys and CompuRAD makes filings pursuant to
the Exchange Act with the Commission electronically, and such materials may be
inspected and copied at the Commission's Web site (http://www.sec.gov). Material
filed by Lumisys and CompuRAD can also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
This Joint Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4 and exhibits relating
thereto, including any amendments (the "Registration Statement"), of which this
Joint Proxy Statement/Prospectus is a part, and which Lumisys has filed with the
Commission under the Securities Act. Reference is made to such Registration
Statement for further information with respect to Lumisys, CompuRAD and Lumisys
Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission or attached as an Annex hereto.
1
<PAGE> 14
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus and the Annexes hereto. This summary
does not contain a complete statement of all material information relating to
the Reorganization Agreement and the Merger and is subject to, and is qualified
in its entirety by, the more detailed information and financial statements
contained in this Joint Proxy Statement/Prospectus. Stockholders of Lumisys and
CompuRAD should read this Joint Proxy Statement/Prospectus carefully in its
entirety. Certain capitalized terms used in this summary are defined elsewhere
in this Joint Proxy Statement/Prospectus.
THE COMPANIES
LUMISYS INCORPORATED
Lumisys designs, manufactures and markets a family of precision digitizers
that convert medical images on film or video into digital format. Once in
digital form, the medical images can be stored, transmitted, viewed, enhanced,
manipulated and printed at any PC or workstation within a medical network.
Lumisys currently offers a comprehensive family of products for digitizing
medical film images under the Lumiscan label and video images under the Imagraph
name. These digitizers process images from all commercially available medical
imaging modalities, including x-ray, computed tomography ("CT"), magnetic
resonance imaging ("MRI"), ultrasound and nuclear medicine. Lumisys is the
leading supplier of laser-based film digitizers, with sales of over 3,000
Lumiscan units since its first product was introduced in 1990. In early 1996,
Lumisys introduced its charge-coupled device (CCD) based digitizer. Lumisys also
offers under the Imagraph label high quality board-level digitization and
compression products for the capture of video images, which have applications in
medical imaging as well as in scientific and industrial inspection and
multimedia imaging.
In 1996, Lumisys introduced a computed radiography ("CR") system for use in
the industrial inspection market. The CR system reads images from reusable
phosphor plates of pipes, valves, aircraft parts and other structural objects.
Lumisys intends to maintain and enhance its market leadership by leveraging
its reputation for high quality, reliable and cost-effective products,
broadening its product lines through internal product development, acquiring
complementary businesses or technologies and penetrating new geographic markets.
Lumisys sells its products primarily to OEMs and VARs, who then integrate
Lumisys' products into teleradiology and Picture Archiving and Communication
Systems ("PACS") networks. Lumisys has established close working relationships
with the leading suppliers of these systems including Agfa Gavaert N.V.
("Agfa"), CEMAX-ICON Imation ("CEMAX"), a subsidiary of Imation Corporation,
E-Med Systems ("E-Med") an E-System Medical Electronics Inc. company, which is a
subsidiary of Raytheon Corp., Eastman Kodak Company ("Kodak"), Olicon
Corporation ("Olicon"), CompuRAD and Sterling Diagnostics ("Sterling," formerly
the medical group of E.I. DuPont de Nemours and Company).
The principal executive offices of Lumisys are located at 225 Humboldt
Court, Sunnyvale, California 94089, and its telephone number is (408) 733-6565.
Lumisys was incorporated in California in 1987 and was reincorporated in
Delaware in 1995 prior to the completion of its initial public offering.
COMPURAD, INC.
CompuRAD is a leading provider of software that enables healthcare
clinicians to access medical images and clinical information at any point of
care. CompuRAD pioneered the use of personal computer software in the
point-to-point, on call teleradiology market, with the introduction of its PC
Teleradiology product. In response to the increasing acceptance of teleradiology
and increasing demand for multi-user and multi-access off-site teleradiology
systems, CompuRAD introduced its iNET product line in late 1994. In 1997,
CompuRAD introduced ClinicalWare, an Internet/Intranet software solution which
provides secure electronic access through a Web browser to clinical information
systems at any point of care.
CompuRAD sells its products both through a direct sales force and
indirectly through a network of VARs and large medical image equipment vendors.
CompuRAD's resellers include Konica Medical Corporation ("Konica Medical"),
Siemens Medical Corporation ("Siemens"), and National Imaging Resources, a
nationwide consortium of X-ray dealers. CompuRAD presently has licensed its
products to hospitals, clinics, other healthcare facilities and physician
groups. CompuRAD's customers include New York University
2
<PAGE> 15
Medical Center, Alliant Health Systems, Symphony Mobilex, a subsidiary of
Integrated Health Services, Inc. ("Symphony Mobilex") and The Nursing Home Group
plus many other leading healthcare facilities and organizations.
The executive offices of CompuRAD are located at 1350 North Kolb Road,
Tucson, Arizona 85715, and its telephone number is (520) 298-1000.
CompuRAD was incorporated in Arizona in January 1992 under the name
CompuMed, Inc. In January 1996, CompuMed, Inc. merged with and into CompuMed
Teleradiology, Inc., a Delaware corporation. It subsequently changed its name to
CompuRAD, Inc. in February 1996.
SAC ACQUISITION CORPORATION
Merger Sub is a corporation recently organized for the purpose of effecting
the Merger. Merger Sub has no material assets and has not engaged in any
activities except in connection with the Merger.
The principal executive offices of Merger Sub are located at 225 Humboldt
Court, Sunnyvale, California 94089, and its telephone number is (408) 733-6565.
THE MEETINGS
TIME, PLACE AND DATE
The Special Meeting of Stockholders of Lumisys will be held at the
corporate offices of Lumisys located at 225 Humboldt Court, Sunnyvale,
California 94089 on November 25, 1997, at 10:30 a.m., local time (including any
and all adjournments or postponements thereof, the "Lumisys Special Meeting").
The Special Meeting of Stockholders of CompuRAD will be held at the corporate
offices of CompuRAD located at 1350 North Kolb Road, Tucson, Arizona 85715 on
November 25, 1997, at 10:00 a.m., local time (including any and all adjournments
or postponements thereof, the "CompuRAD Special Meeting").
PURPOSE OF THE MEETINGS
LUMISYS SPECIAL MEETING. At the Lumisys Special Meeting, holders of Lumisys
Common Stock will consider and vote upon the issuance of Lumisys Common Stock in
connection with the Reorganization Agreement (the "Share Proposal"). Holders of
Lumisys Common Stock may also consider and vote upon such other matters as may
be properly brought before the Lumisys Special Meeting or any postponements or
adjournments thereof.
THE LUMISYS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE
REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF LUMISYS
VOTE FOR THE APPROVAL OF THE SHARE PROPOSAL. SEE "THE MERGER,"
"-- RECOMMENDATION OF THE LUMISYS BOARD; REASONS FOR THE MERGER."
COMPURAD SPECIAL MEETING. At the CompuRAD Special Meeting, holders of
CompuRAD Common Stock will consider and vote upon (i) a proposal to approve and
adopt the Reorganization Agreement and to approve the Merger (the "Merger
Proposal") and (ii) such other matters as may be properly brought before the
CompuRAD Special Meeting or any postponements or adjournments thereof.
THE COMPURAD BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE
REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE COMPURAD
STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. SEE "THE MERGER --,"
"-- RECOMMENDATION OF THE COMPURAD BOARD; REASONS FOR THE MERGER" AND
"-- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
3
<PAGE> 16
VOTES REQUIRED; RECORD DATE
LUMISYS. The Share Proposal will require approval by the affirmative vote
of the holders of a majority of the votes cast on the matter. Holders of Lumisys
Common Stock are entitled to one vote per share. Only holders of Lumisys Common
Stock at the close of business on October 31, 1997 (the "Lumisys Record Date")
will be entitled to notice of and to vote at the Lumisys Special Meeting. See
"LUMISYS SPECIAL MEETING." On the Lumisys Record Date, there were 6,474,314
outstanding shares of Lumisys Common Stock. As of the Lumisys Record Date, the
directors and executive officers of Lumisys as a group, beneficially owned
approximately 458,292 shares of Lumisys Common Stock. Such directors and
executive officers have indicated that they presently intend to vote all such
shares in favor of the Share Proposal.
COMPURAD. The Merger Proposal will require approval by the affirmative vote
of the holders of a majority of the outstanding shares of CompuRAD Common Stock.
Holders of CompuRAD Common Stock are entitled to one vote per share. Only
holders of CompuRAD Common Stock at the close of business on October 31, 1997
(the "CompuRAD Record Date") will be entitled to notice of and to vote at the
CompuRAD Special Meeting. On the CompuRAD Record Date, there were 3,973,880
outstanding shares of CompuRAD Common Stock. As of the CompuRAD Record Date, the
directors and officers of CompuRAD and their affiliates beneficially owned as a
group approximately 1,629,500 shares of the outstanding CompuRAD Common Stock.
See "COMPURAD SPECIAL MEETING."
Certain directors and executive officers of CompuRAD, who together hold
approximately 41% of the CompuRAD Common Stock outstanding as of the CompuRAD
Record Date, have entered into voting agreements with Lumisys (the "Voting
Agreements") pursuant to which such directors and executive officers have agreed
to vote in favor of the Merger Proposal and have granted Lumisys an irrevocable
proxy to vote their shares of CompuRAD Common Stock in favor of the Merger
Proposal. See "OTHER AGREEMENTS--Voting Agreements." A copy of a form of the
Voting Agreement is attached hereto as Annex B.
CHANGE OF VOTE
Lumisys Stockholders who have executed a proxy may revoke the proxy at any
time prior to its exercise at the Lumisys Special Meeting by giving written
notice to the Secretary of Lumisys at Lumisys' corporate offices, 225 Humboldt
Court, Sunnyvale, California 94089, by signing and returning a later dated proxy
or by voting in person at the Lumisys Special Meeting. ACCORDINGLY, LUMISYS
STOCKHOLDERS WHO HAVE EXECUTED AND RETURNED PROXY CARDS IN ADVANCE OF THE
LUMISYS SPECIAL MEETING MAY CHANGE THEIR VOTE AT ANY TIME PRIOR TO OR AT THE
LUMISYS SPECIAL MEETING.
CompuRAD Stockholders who have executed a proxy may revoke the proxy at any
time prior to its exercise at the CompuRAD Special Meeting by giving written
notice to the Secretary of CompuRAD at CompuRAD's corporate offices, 1350 North
Kolb Road, Tucson, Arizona 85715, by signing and returning a later dated proxy
or by voting in person at the CompuRAD Special Meeting. ACCORDINGLY, COMPURAD
STOCKHOLDERS WHO HAVE EXECUTED AND RETURNED PROXY CARDS IN ADVANCE OF THE
COMPURAD SPECIAL MEETING MAY CHANGE THEIR VOTE AT ANY TIME PRIOR TO OR AT THE
COMPURAD SPECIAL MEETING.
THE MERGER
THE MERGER
Pursuant to the Reorganization Agreement, Merger Sub will be merged with
and into CompuRAD and CompuRAD will become a wholly owned subsidiary of Lumisys.
See "THE MERGER."
MERGER CONSIDERATION
Pursuant to the Merger, each outstanding share of CompuRAD Common Stock
(other than shares owned by Lumisys, CompuRAD, Merger Sub or any direct or
indirect wholly-owned subsidiary of Lumisys or
4
<PAGE> 17
CompuRAD) will be converted into the right to receive 0.928 shares of Lumisys
Common Stock. The CompuRAD Stockholders will receive cash in lieu of any
fractional shares of Lumisys Common Stock to which such CompuRAD Stockholders
would otherwise have been entitled. See "THE REORGANIZATION AGREEMENT -- Terms
of the Merger."
EXCHANGE OF CERTIFICATES
As soon as practicable, and in any event no later than ten business days
after the filing of a certificate of merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware (the time of such filing being
the "Effective Time"), The Bank of Boston or another person designated by
Lumisys, in its capacity as exchange agent for the Merger (the "Exchange
Agent"), will send a transmittal letter to each CompuRAD Stockholder. The
transmittal letter will contain instructions with respect to the surrender of
certificates representing CompuRAD Common Stock to be exchanged for certificates
representing Lumisys Common Stock and a cash payment in lieu of fractional
shares, if any. See "THE REORGANIZATION AGREEMENT -- Exchange of Certificates
and Merger Consideration."
COMPURAD STOCKHOLDERS SHOULD NOT FORWARD CERTIFICATES FOR COMPURAD COMMON
STOCK TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS.
COMPURAD STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
NO SOLICITATION
Pursuant to the Reorganization Agreement, except under certain limited
circumstances, CompuRAD has agreed that it will not (i) solicit any alternate
acquisition proposal, (ii) participate in any discussions or negotiations with
any other parties with respect to an alternate acquisition proposal, or (iii)
provide any non-public information concerning CompuRAD to any other parties in
connection with any alternate acquisition proposal. See "THE REORGANIZATION
AGREEMENT -- No Solicitation."
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, CompuRAD has agreed that, from
the date of the execution of the Reorganization Agreement until the Effective
Time, it shall conduct its business and operations in the ordinary course and
consistent with past practices and in compliance with all applicable legal
requirements and the requirements of CompuRAD's material contracts and shall use
commercially reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and employees
and maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other persons having
business relationships with CompuRAD. In addition, subject to certain exceptions
CompuRAD has agreed that, without the prior written consent of Lumisys, it will
not perform or engage in certain activities in the conduct of its business. See
"THE REORGANIZATION AGREEMENT -- Conduct of Business Pending the
Merger -- Operation of CompuRAD's Business Prior to the Merger."
Pursuant to the Reorganization Agreement, subject to certain exceptions,
Lumisys has agreed that, without the prior written consent of CompuRAD, it will
not perform or engage in certain activities in the conduct of its business. See
"THE REORGANIZATION AGREEMENT -- Conduct of Business Pending the
Merger -- Operation of Lumisys' Business Prior to the Merger."
CONDITIONS TO THE MERGER; TERMINATION; FEES
The consummation of the Merger is subject to various conditions, including:
(i) approval by the stockholders of Lumisys and CompuRAD; (ii) the absence of
any legal restraints or prohibitions preventing the consummation of the Merger;
(iii) receipt of opinions of legal counsel as to the tax treatment of the
Merger; and (iv) receipt of letters from the independent accountants for both
Lumisys and CompuRAD with respect to the "pooling-of-interests" accounting
treatment for the Merger. See "THE REORGANIZATION AGREEMENT -- Conditions to the
Merger."
5
<PAGE> 18
The Reorganization Agreement may be terminated under certain circumstances.
Lumisys has agreed that, if the Reorganization Agreement is terminated under
certain circumstances, it will pay CompuRAD a sum of $1 million. CompuRAD has
agreed that, if the Reorganization Agreement is terminated under certain
circumstances and CompuRAD consummates an Acquisition Transaction (as defined in
the Reorganization Agreement) with another party within twelve months of such
termination, it shall pay Lumisys a sum of $1 million. See "THE REORGANIZATION
AGREEMENT -- Termination of the Reorganization Agreement and "-- Termination
Fees."
LISTING
It is a condition to the Merger that the shares of the Lumisys Common Stock
to be issued in the Merger be authorized for listing on the Nasdaq National
Market, subject to official notice of issuance. See "THE MERGER -- Stock
Listing."
APPRAISAL AND DISSENTERS' RIGHTS
Under the Delaware General Corporation Law (the "DGCL"), the holders of
CompuRAD Common Stock are entitled to appraisal rights with respect to the
Merger. The holders of Lumisys Common Stock are not entitled to appraisal rights
with respect to the Share Proposal under the DGCL. See "THE MERGER -- Appraisal
Rights."
ANTICIPATED ACCOUNTING TREATMENT
It is a condition of closing that the Merger qualify as a "pooling of
interests", which means that the two companies will be treated as if they had
always been combined for accounting and financial reporting purposes. See "THE
MERGER -- Anticipated Accounting Treatment."
STOCK OPTIONS AND WARRANTS
At the Effective Time, each outstanding option to purchase CompuRAD Common
Stock granted under the CompuRAD Stock Option Plans ("CompuRAD Stock Options")
will be assumed by Lumisys and each such CompuRAD Stock Option will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such CompuRAD Stock Option prior to the Effective Time, the
number (rounded down to the nearest whole number) of shares of Lumisys Common
Stock that the holder of such CompuRAD Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised the CompuRAD Stock
Option in full immediately prior to the Effective Time (not taking into account
whether or not such option was in fact exercisable), at a price per share equal
to the exercise price under such CompuRAD Stock Option divided by the Exchange
Ratio (rounded up to the nearest whole number). As of October 31, 1997, there
were outstanding options to acquire 318,100 shares of CompuRAD Common Stock
under the CompuRAD Stock Option Plans. See "THE MERGER -- Effect on Employee
Equity Plans -- Stock Options" and "THE REORGANIZATION AGREEMENT -- Terms of the
Merger -- Stock Options."
At the Effective Time, the CompuRAD Warrants shall be converted into and
become rights with respect to Lumisys Common Stock and Lumisys shall assume each
CompuRAD Warrant in accordance with the terms of such CompuRAD Warrant. The
number of shares of Lumisys Common Stock subject to each such CompuRAD Warrant
shall be equal to the number of shares of CompuRAD Common Stock subject to such
CompuRAD Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounded down to the nearest whole share. The per share exercise
price of each CompuRAD Warrant shall be adjusted by dividing the per share
exercise price under each such CompuRAD Warrant by the Exchange Ratio and
rounding up to the nearest cent. As of October 31, 1997, there were CompuRAD
Warrants to acquire 100,000 shares of CompuRAD Common Stock.
6
<PAGE> 19
EMPLOYEE STOCK PURCHASE PLAN
CompuRAD has agreed to terminate its 1996 Employee Stock Purchase Plan
("ESPP") immediately prior to the Effective Time by having the CompuRAD Board
amend the ESPP as necessary to provide that any shares of CompuRAD Common Stock
shall be purchased under the ESPP on a new "Exercise Date" (as such term is
defined in the ESPP) set by the CompuRAD Board, which new Exercise Date shall be
on the last trading day immediately prior to the Effective Time, or such earlier
time as the CompuRAD Board shall specify. Immediately following such purchase of
shares of CompuRAD Common Stock on the new Exercise Date, the ESPP shall
terminate. All shares of CompuRAD Common Stock purchased under the ESPP shall be
converted into Lumisys Common Stock pursuant to the Reorganization Agreement.
See "THE REORGANIZATION AGREEMENT -- Conversion of Shares."
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of CompuRAD as of the close of business on
the CompuRAD Record Date, an aggregate of approximately 3,687,761 shares of
Lumisys Common Stock will be issued to the CompuRAD Stockholders in the Merger
and Lumisys will assume options and warrants to acquire up to approximately
418,000 additional shares of CompuRAD Common Stock. Based upon the number of
shares of Lumisys Common Stock issued and outstanding as of the Lumisys Record
Date and after giving effect to the issuance of Lumisys Common Stock as
described in the previous sentence and the exercise of all options and warrants
to purchase CompuRAD Common Stock assumed by Lumisys, the former holders of
CompuRAD Common Stock and options and warrants to purchase CompuRAD Common Stock
would hold, and would have voting power with respect to, approximately 36.3% of
Lumisys' total issued and outstanding shares on a fully diluted basis. The
foregoing numbers of shares and percentages are subject to change to reflect any
changes in the capitalization of either Lumisys or CompuRAD subsequent to the
dates indicated and prior to the Effective Time, and there can be no assurance
as to the actual capitalization of Lumisys or CompuRAD at the Effective Time or
Lumisys at any time following the Effective Time.
RISK FACTORS
See "RISK FACTORS" for a discussion of certain factors pertaining to the
Merger and the business of Lumisys and CompuRAD.
OPINIONS OF FINANCIAL ADVISORS
Hambrecht & Quist LLC, financial advisor to Lumisys ("H&Q"), delivered its
written opinion dated September 28, 1997 to the Lumisys Board that, as of such
date, the consideration proposed to be paid by Lumisys pursuant to the Merger
was fair to Lumisys from a financial point of view.
CIBC Wood Gundy Securities Corp., financial advisor to CompuRAD ("CIBC"),
delivered its written opinion dated September 28, 1997 to the CompuRAD Board
that, as of such date, the consideration to be received in the Merger was fair
to the CompuRAD Stockholders from a financial point of view.
For information on the assumptions made, matters considered and limits of
the review undertaken by H&Q and CIBC, see "THE MERGER -- Opinion of Lumisys'
Financial Advisor" and "-- Opinion of CompuRAD's Financial Advisor."
COMPURAD STOCKHOLDERS AND LUMISYS STOCKHOLDERS ARE URGED TO READ IN THEIR
ENTIRETY THE OPINIONS OF H&Q AND CIBC ATTACHED AS ANNEXES C-1 AND C-2,
RESPECTIVELY, TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the CompuRAD Board with respect to the
Merger Proposal, the CompuRAD Stockholders should be aware that members of the
CompuRAD Board and the executive officers of CompuRAD have certain interests in
the Merger that are in addition to the interests of the CompuRAD Stockholders
generally. See "THE MERGER -- Interests of Certain Persons in the Merger."
7
<PAGE> 20
INDEMNIFICATION AND INSURANCE; BOARD REPRESENTATION
Pursuant to the Reorganization Agreement, Lumisys agreed that, after the
Effective Time, it will, and it will cause the Surviving Corporation (as defined
in the Reorganization Agreement) to, provide certain indemnification and
liability insurance benefits to certain indemnified parties, including directors
and executive officers of CompuRAD. See "THE MERGER -- Interests of Certain
Persons in the Merger."
VOTING AGREEMENTS
Phillip Berman, M.D., Cary Cole and Henky Wibowo, each an executive officer
and director of CompuRAD, and Kevin Donovan, an executive officer of CompuRAD,
have entered into Voting Agreements in which they have agreed to vote in favor
of the Merger Proposal and have granted Lumisys irrevocable proxies to vote
their shares of CompuRAD Common Stock in favor of the Merger Proposal. See
"OTHER AGREEMENTS -- Voting Agreements."
AFFILIATE AGREEMENTS
Each of the members of the CompuRAD Board and certain executive officers of
CompuRAD have entered into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of
CompuRAD Common Stock held by them prior to the Merger and the shares of Lumisys
Common Stock to be received by them in the Merger so as to comply with the
requirements of applicable federal securities laws and to help ensure that the
Merger will be treated as a "pooling of interests" for accounting and financial
reporting purposes. See "OTHER AGREEMENTS -- Affiliate Agreements."
EMPLOYMENT OFFER LETTERS
Lumisys has entered into employment offer letters (the "Employment Offer
Letters") which become effective upon (and are effective and contingent upon)
the consummation of the Merger and which provide for the employment of Dr.
Berman and Messrs. Cole and Wibowo (the "Executives") at their current salary
levels. In certain instances, the Employment Offer Letters provide for severance
payments for specified periods if an Executive's employment with Lumisys is
terminated. The amount of severance payment each Executive is entitled to
receive under his Employment Offer Letter is less than the amount of severance
payment such Executive is entitled to receive under his employment agreement
currently in effect with CompuRAD. See "OTHER AGREEMENTS -- Employment Offer
Letters."
STOCK OPTIONS
As of the CompuRAD Record Date, directors and executive officers of
CompuRAD held, as a group, options to purchase 45,500 shares of CompuRAD Common
Stock, all of which options have previously vested pursuant to their terms.
GOVERNMENTAL APPROVALS
The Federal Trade Commission of the United States ("FTC") and the Antitrust
Division of the Justice Department ("Antitrust Division") frequently scrutinize
the legality under the antitrust laws of transactions such as the Merger.
Lumisys and CompuRAD do not believe that any governmental filings with the FTC
are required with respect to the Merger. However, at any time before or after
consummation of the Merger, the FTC or the Antitrust Division could take such
action under the federal antitrust laws as it deems appropriate in the public
interest, including seeking to enjoin consummation of the Merger or seeking to
cause divestiture of significant assets of Lumisys or CompuRAD or their
subsidiaries. See "THE MERGER -- Regulatory Matters."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
It is expected that the Merger will constitute a reorganization for federal
income tax purposes and, accordingly, that no gain or loss will be recognized
for federal income tax purposes by the CompuRAD
8
<PAGE> 21
Stockholders upon the conversion of CompuRAD Common Stock into Lumisys Common
Stock in the Merger (except with respect to any cash received in lieu of a
fractional share interest in Lumisys Common Stock). The obligations of Lumisys
and CompuRAD to consummate the Merger are conditioned on the receipt by Lumisys
of an opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation
("Wilson Sonsini") or Cooley Godward LLP ("Cooley Godward"), and the receipt by
CompuRAD of an opinion from Cooley Godward or Wilson Sonsini, that the Merger
constitutes a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"). See "THE MERGER -- Certain Federal Income Tax
Consequences." COMPURAD STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
COMPARATIVE RIGHTS OF STOCKHOLDERS
For a discussion of various differences between the rights of the CompuRAD
Stockholders and the rights of the Lumisys Stockholders, see "COMPARISON OF
CAPITAL STOCK -- Description of Lumisys Capital Stock" and "-- Description of
CompuRAD Common Stock" and "COMPARISON OF RIGHTS OF HOLDERS OF LUMISYS COMMON
STOCK AND COMPURAD COMMON STOCK.
9
<PAGE> 22
MARKET PRICE INFORMATION
Lumisys Common Stock is listed on the Nasdaq National Market under the
symbol "LUMI." CompuRAD Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "COMD."
The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sales prices of Lumisys Common Stock on the Nasdaq National
Market and CompuRAD Common Stock on the Nasdaq SmallCap Market.
LUMISYS COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1995:
Fourth Quarter (from November 15, 1995).................... $11.25 $ 7.25
Fiscal Year Ended December 31, 1996:
First Quarter.............................................. $22.63 $10.00
Second Quarter............................................. 28.63 13.63
Third Quarter.............................................. 15.50 8.38
Fourth Quarter............................................. 12.25 9.38
Fiscal Year Ending December 31, 1997:
First Quarter.............................................. $10.13 $ 6.88
Second Quarter............................................. 7.88 5.88
Third Quarter.............................................. 8.25 6.50
Fourth Quarter (through October 31, 1997).................. 7.88 4.75
</TABLE>
COMPURAD COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1996:
Third Quarter (from August 28, 1996)....................... $ 7.00 $ 6.00
Fourth Quarter............................................. 7.00 6.00
Fiscal Year Ending December 31, 1997:
First Quarter.............................................. $ 9.00 $ 6.00
Second Quarter............................................. 6.25 5.00
Third Quarter.............................................. 6.625 5.375
Fourth Quarter (through October 31, 1997).................. 6.75 5.125
</TABLE>
On September 26, 1997, the last full trading day prior to the execution and
delivery of the Reorganization Agreement and the public announcement thereof,
the last reported sale prices of Lumisys Common Stock and CompuRAD Common Stock
were $6.6875 per share and $6.125 per share, respectively. Based on an Exchange
Ratio of 0.928 shares of Lumisys Common Stock for each share of CompuRAD Common
Stock, the pro forma equivalent per share value of CompuRAD Common Stock on
September 26, 1997 was $6.21 per share.
On October 31, 1997, the most recent practicable date prior to the printing
of this Joint Proxy Statement/Prospectus, the last reported sale prices of
Lumisys Common Stock and CompuRAD Common Stock on the Nasdaq National Market and
the Nasdaq SmallCap Market were $6.125 per share and $5.25 per share,
respectively. Based on an Exchange Ratio of 0.928 shares of Lumisys Common Stock
for each share of CompuRAD Common Stock, the pro forma equivalent per share
value of CompuRad Common Stock on October 31, 1997 was $5.68 per share.
Because the market price of Lumisys Common Stock is subject to fluctuation,
the market value of the shares of Lumisys Common Stock that holders of CompuRAD
Common Stock will receive in the Merger may increase or decrease prior to the
Merger.
LUMISYS AND COMPURAD STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET
QUOTATION FOR LUMISYS COMMON STOCK AND COMPURAD COMMON STOCK.
DIVIDEND POLICY -- LUMISYS
Lumisys has not paid any cash dividends in the past. Lumisys currently
intends to retain future earnings, if any, to fund the development and growth of
its business and does not anticipate paying any cash dividends on Lumisys Common
Stock in the foreseeable future.
10
<PAGE> 23
SELECTED FINANCIAL INFORMATION
LUMISYS AND COMPURAD SELECTED HISTORICAL FINANCIAL INFORMATION. The
following selected historical consolidated financial information of Lumisys and
CompuRAD has been derived from their respective historical consolidated
financial statements, and should be read in conjunction with such consolidated
financial statements and the notes thereto, which are included in this Joint
Proxy Statement/Prospectus. The selected historical financial information of
Lumisys as of and for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 has been derived from the consolidated financial statements audited by
Price Waterhouse LLP, independent accountants. The selected historical financial
information of Lumisys as of June 30, 1997 and for the six months ended June 30,
1997 and 1996 has been derived from the unaudited consolidated financial
statements included herein and has been prepared on the same basis as the
audited financial statements, and, in the opinion of management, includes all
normal recurring adjustments that Lumisys considers necessary for the fair
presentation of its financial condition as of the date and the results of
operations for the unaudited interim periods. The selected historical financial
information of CompuRAD as of and for the years ended December 31, 1996, 1995
and 1994 and for the six months ended June 30, 1996 has been derived from the
financial statements audited by Ernst & Young LLP, independent auditors,
included herein. The selected historical financial information of CompuRAD as of
and for the years ended December 31, 1993 and 1992 and for the six months ended
June 30, 1997 has been derived from unaudited financial statements included
herein and has been prepared on the same basis as the audited financial
statements, and, in the opinion of management, includes all normal recurring
adjustments that CompuRAD considers necessary for the fair presentation of its
financial condition as of the date and the results of operations for the
unaudited interim periods. CompuRAD's financial information is not presented
separately for 1992 as CompuRAD's operations from January 1992 (inception)
through December 1992 were immaterial.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION -- LUMISYS
(IN THOUSANDS, EXCEPT PER SHARE DATA)(4)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales............................ $11,129 $10,982 $23,022 $17,662 $8,807 $6,180 $6,436
Income from operations(1)........ 1,628 1,685 4,185 1,608 1,706 741 1,014
Net income(2).................... 1,300 1,617 3,439 2,593 1,706 776 1,040
Net income per share(2)(3)....... 0.19 0.24 0.50 0.49 0.34 0.16 0.22
Number of shares used to compute
net income per share(3)....... 6,710 6,841 6,829 5,305 4,998 4,888 4,793
</TABLE>
<TABLE>
<CAPTION>
JUNE DECEMBER 31,
30, -----------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $19,822 $18,438 $15,360 $ 3,633 $ 2,276 $ 1,636
Working capital........................ 25,283 24,145 $19,188 4,571 2,857 2,023
Total assets........................... 28,922 27,090 22,743 5,701 3,560 3,011
Mandatorily redeemable convertible
preferred stock..................... -- -- -- 9,730 9,634 9,529
Stockholders' equity (deficit)......... 25,683 24,663 19,750 (5,080) (6,695) (7,373)
</TABLE>
- ---------------
(1) In March 1995, Lumisys recorded a one-time charge of $1,442,000 related to
acquired in-process research and development. See Note 4 of Notes to
Consolidated Financial Statements.
(2) Excludes accretion of mandatorily redeemable convertible preferred stock.
(3) See Note 2 of Notes to Consolidated Financial Statements for a description
of the shares used in calculating net income per share and see also "LUMISYS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Recent Accounting Pronouncements".
(4) For information on Lumisys' operating results for the third quarter of 1997,
see "LUMISYS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Recent Operating Results and Developments."
11
<PAGE> 24
SELECTED HISTORICAL FINANCIAL INFORMATION -- COMPURAD(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------
1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ 4,682 $ 3,180 $ 6,914 $ 3,908 $ 1,522 $ 969
Loss from operations................... (849) (354) (687) (782) (419) (126)
Net loss............................... (787) (361) (625) (793) (428) (131)
Net loss per share..................... (0.20) (0.14) (0.21) (0.38) (0.25) (0.08)
Number of shares used to compute net
loss per share...................... 3,859 2,605 2,921 2,081 1,700 1,691
</TABLE>
<TABLE>
<CAPTION>
JUNE DECEMBER 31,
30, -------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 1,702 $ 4,052 $ 36 $ 8 $ 54
Working capital (deficit)...................... 3,730 4,623 (691) (224) 3
Total assets................................... 5,949 6,403 614 548 687
Long-term obligations.......................... 122 118 642 630 619
Stockholders' equity (deficit)................. 4,263 5,043 (1,232) (554) (126)
</TABLE>
- ---------------
(1) For information relating to CompuRAD's financial results for the nine months
ended September 30, 1997, see "COMPURAD MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent Financial
Results."
12
<PAGE> 25
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected unaudited pro forma combined condensed financial information
of Lumisys and CompuRAD gives effect to the Merger and is derived from the
unaudited pro forma combined condensed financial statements and should be read
in conjunction with such pro forma statements and the notes thereto, which are
included in this Joint Proxy Statement/Prospectus. The pro forma data does not
reflect any additional shares issued since June 30, 1997.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated, nor is it
necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------------------
1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Sales............................... $15,094 $13,785 $28,966 $21,337 $10,131 $ 7,083
Income from operations.............. 779 1,331 3,498 826 1,287 615
Net income.......................... 513 1,256 2,815 1,801 1,279 645
Net income per share................ 0.05 0.14 0.30 0.25 0.19 0.10
Number of shares used to compute net
income per share................. 10,291 9,258 9,540 7,236 6,576 6,457
</TABLE>
<TABLE>
<CAPTION>
JUNE DECEMBER 31,
30, ----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash, cash equivalents and short-term
investments............................... $20,024 $22,490 $15,396 $ 3,641 $ 2,330
Working capital.............................. 26,712 28,768 18,497 4,347 2,860
Total assets................................. 33,126 33,241 23,321 6,214 4,226
Long-term obligations........................ 122 118 642 630 619
Mandatorily redeemable convertible preferred
stock..................................... -- -- -- 9,730 9,634
Stockholders' equity (deficit)............... 27,645 29,706 18,518 (5,634) (6,821)
</TABLE>
- ---------------
(1) Lumisys and CompuRAD estimate that they will incur merger-related expenses,
consisting primarily of transaction costs for investment bankers fees,
attorneys, accountants, financial printing and other related charges, of
approximately $1.0 million for Lumisys and $500,000 for CompuRAD. This
estimate is preliminary and is therefore subject to change. These
nonrecurring expenses will be charged to operations in the fiscal quarter in
which the Merger is consummated. The Pro Forma Combined Condensed Balance
Sheet gives effect to such expenses as if they had been incurred as of June
30, 1997 but the Pro Forma Combined Condensed Statements of Operations do
not give effect to such expenses. See Unaudited Pro Forma Financial
Information and the notes thereto included elsewhere herein.
13
<PAGE> 26
COMPARATIVE PER SHARE DATA AND DIVIDEND HISTORY
The following tables set forth certain historical per share data of Lumisys
and CompuRAD and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a pooling of interests basis assuming that 0.928
shares of Lumisys Common Stock is issued in exchange for one share of CompuRAD
Common Stock. The following data should be read in conjunction with the
Unaudited Pro Forma Financial Information and the separate historical financial
statements of Lumisys and CompuRAD included elsewhere herein. The unaudited pro
forma combined per share data are not necessarily indicative of the operating
results that would have been achieved had the Merger been consummated as of the
beginning of the earliest period presented and should not be construed as
representative of future operations. Neither Lumisys nor CompuRAD has ever
declared or paid cash dividends on its respective shares of Common Stock.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------
1997 1996 1996 1995 1994
---------------- ---------------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- LUMISYS:
Net income per share................... $ 0.19 $ 0.24 $ 0.50 $ 0.49 $ 0.34
Book value per share(1)................ $ 3.99 $ 3.84
HISTORICAL -- COMPURAD:
Net loss per share..................... $(0.20) $(0.14) $(0.21) $(0.38) $(0.25)
Book value per share(1)................ $ 1.10 $ 1.31
PRO-FORMA AND EQUIVALENT PRO FORMA
COMBINED NET INCOME PER SHARE:
Proforma per Lumisys share............. $ 0.05 $ 0.14 $ 0.30 $ 0.25 $ 0.19
Equivalent pro forma per CompuRAD
share(2)............................ $ 0.05 $ 0.13 $ 0.27 $ 0.23 $ 0.18
PRO-FORMA COMBINED BOOK VALUE PER SHARE:
Pro forma book value per Lumisys
share(1)............................ $ 2.76 $ 2.97
Equivalent pro forma combined book
value per CompuRAD share(2)......... $ 2.56 $ 2.76
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing total
stockholders' equity by the number of shares of common stock outstanding at
the end of the period. Pro forma combined book value per share is computed
by dividing pro forma stockholders' equity by the pro forma number of shares
of Lumisys Common Stock outstanding.
(2) The equivalent pro forma combined net income per CompuRAD share and
equivalent pro forma combined book value per CompuRAD share are calculated
by dividing the respective pro forma combined Lumisys share amounts by the
exchange ratio of one share of CompuRAD Common Stock for each 0.928 shares
of Lumisys Common Stock.
14
<PAGE> 27
RISK FACTORS
LUMISYS STOCKHOLDERS, IN CONSIDERING WHETHER TO APPROVE THE SHARE PROPOSAL,
AND COMPURAD STOCKHOLDERS, IN CONSIDERING WHETHER TO APPROVE THE MERGER
PROPOSAL, SHOULD CONSIDER THE FOLLOWING MATTERS. THESE MATTERS SHOULD BE
CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION INCLUDED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS.
RISKS RELATING TO THE MERGER
FIXED EXCHANGE RATIO DESPITE POTENTIAL CHANGES IN STOCK PRICES. The
Exchange Ratio is fixed and will not be adjusted in the event of any increases
or decreases in the price of either Lumisys Common Stock or CompuRAD Common
Stock. The price of Lumisys Common Stock at the Effective Time may vary from its
price on the date of this Joint Proxy Statement/Prospectus and on the date of
the Special Meetings of Lumisys and CompuRAD. Such variations may be the result
of changes in the business, operations or prospects of Lumisys or CompuRAD,
market assessments of the likelihood that the Merger will be consummated, the
timing thereof and the prospects of the Merger and post-Merger operations,
regulatory considerations, general market and economic conditions and other
factors. In the event that the market price of Lumisys Common Stock decreases or
increases prior to the Effective Time, the market value at the Effective Time of
CompuRAD Common Stock would correspondingly increase or decrease. Because the
Effective Time may occur at a date later than the Special Meetings of Lumisys
and CompuRAD, there can be no assurance that the price of Lumisys Common Stock
on the date of the Special Meetings of Lumisys and CompuRAD will be indicative
of its price at the Effective Time. The Reorganization Agreement provides that
the Effective Time will occur as soon as practicable following, and in any event
not later than ten business days after, the later to occur of the date when
Lumisys Stockholder approval and CompuRAD Stockholder approval are obtained and
the satisfaction or waiver of the other conditions set forth in the
Reorganization Agreement. Stockholders of Lumisys and CompuRAD are urged to
obtain current market quotations for Lumisys Common Stock and CompuRAD Common
Stock. See "MARKET PRICE INFORMATION;" and "THE REORGANIZATION
AGREEMENT -- Terms of the Merger."
NONREALIZATION OF SYNERGIES. The Merger involves the integration of two
companies that have previously operated independently and will require
substantial effort from each company, including the coordination of their
research and development and sales and marketing efforts. There can be no
assurance that Lumisys will integrate the respective operations of Lumisys and
CompuRAD without encountering difficulties or experiencing the loss of key
CompuRAD personnel or that the benefits expected from such integration will be
realized. The diversion of the attention of management and any difficulties
encountered in the transition process (including the interruption of, or a loss
of momentum in, CompuRAD's activities, problems associated with integration of
management information and reporting systems, and delays in implementation of
consolidation plans) could also have an adverse impact on Lumisys' ability to
realize anticipated synergies from the Merger. See "THE MERGER -- Recommendation
of the Lumisys Board; Reasons for the Merger."
INCURRENCE OF SIGNIFICANT TRANSACTION CHARGES; POTENTIAL DILUTIVE EFFECT TO
STOCKHOLDERS. Lumisys expects to incur charges to operations currently estimated
to be approximately $1,500,000 (including $500,000 attributable to CompuRAD's
expenses in connection with the Merger) in the quarter ending December 31, 1997,
the quarter in which the Merger is expected to be consummated, to reflect direct
transaction costs, primarily for investment banking, legal and accounting fees,
and costs associated with combining the operations of the two companies. This
amount is a preliminary estimate and is therefore subject to change. Additional
unanticipated expenses may be incurred relating to the integration of the
businesses of Lumisys and CompuRAD. Although Lumisys expects that the
elimination of duplicative expenses as well as other efficiencies related to the
integration of the business of CompuRAD may offset additional expenses over
time, there can be no assurance that such net benefit will be achieved in the
near term, or at all. There can be no assurance that combining the business of
Lumisys with the businesses of CompuRAD, even if achieved in an efficient and
effective manner, will result in combined results of operations and financial
condition superior to what would have been achieved by Lumisys independently. In
addition, the issuance of Lumisys Common Stock in connection with the Merger is
likely to have a dilutive effect on Lumisys' earnings per share. The
15
<PAGE> 28
issuance of Lumisys Common Stock in connection with the Merger may have the
effect of reducing Lumisys net income per share from levels otherwise expected
and could reduce the market price of Lumisys Common Stock unless revenue growth
or cost savings and other business synergies sufficient to offset the effect of
such issuance can be achieved.
EFFECT OF MERGER ON CUSTOMERS AND PARTNERS. Certain of Lumisys' existing
customers or strategic partners may view themselves as competitors of CompuRAD.
As a consequence, Lumisys' relationship with these customers or strategic
partners could be adversely affected during the pendency of the Merger and after
its completion. In addition, CompuRAD's relationships with certain of its
customers that compete with Lumisys may be adversely affected by the Merger.
VOLATILITY OF STOCK PRICES. The market price of the Lumisys Common Stock
has been and may continue to be volatile. This volatility may result from a
number of factors, including fluctuations in Lumisys' quarterly revenues and net
income, announcements of technical innovations or new commercial products by
Lumisys or its competitors, and conditions in the market for medical image
digitizers and the teleradiology and health care industry. In addition, in the
event that the Merger is not consummated, Lumisys and CompuRAD stock prices may
be adversely affected. Also, the stock market has experienced and continues to
experience extreme price and volume fluctuations which have affected the market
prices of securities, particularly those of medical technology companies, and
which often have been unrelated to the operating performance of the companies.
These broad market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of Lumisys Common Stock in
future periods.
POTENTIAL UNAVAILABILITY OF "POOLING OF INTERESTS" ACCOUNTING TREATMENT OF
MERGER. The Merger is intended to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the assets and liabilities of Lumisys and CompuRAD will be carried forward to
the combined company at their recorded amounts, income from the combined company
will include income from Lumisys and CompuRAD for the entire fiscal period in
which the combination occurs and the reported income of the separate companies
for prior periods will be combined and restated as the results of operations of
the combined company. Availability of pooling of interests accounting treatment
is a condition to consummation of the Merger, although such condition may be
waived by Lumisys and CompuRAD. See "THE REORGANIZATION AGREEMENT -- Conditions
to the Merger" and "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS".
There can be no assurance that an officer, director or affiliate of either
company will not sell shares of Lumisys or CompuRAD stock or that all
requirements necessary to qualify for pooling of interests will be met. Under
the pooling of interest rules, none of the officers, directors or affiliates of
either of the combining companies may sell any shares of either Lumisys or
CompuRAD (except for certain de minimus sales) until the combined company
releases financial results covering at least 30 days of combined operations of
Lumisys and CompuRAD. Accordingly, pooling of interests accounting treatment for
the Merger as of such time may not be available because of sales by such
stockholders (except for certain de minimus sales) after the consummation of the
Merger and prior to the time the combined company releases such financial
results. If the requirements necessary to qualify for pooling of interests are
not met prior to consummation of the Merger, then neither company is required to
consummate the Merger. However, if both companies nevertheless elected to
consummate the Merger, the Merger would necessarily be accounted for under the
purchase method of accounting, which would have the effect of CompuRAD's assets
being recognized at their fair value and any excess of the purchase price over
such fair value being recognized as goodwill on Lumisys' balance sheet. The
goodwill would thereafter be amortized as an expense over its anticipated useful
life. The impact of such treatment would have a material adverse effect on the
combined company's results of operations throughout the amortization period,
anticipated to be between five and seven years. If any officer, director or
affiliate of either company sells shares in Lumisys subsequent to consummation
of the Merger and prior to the release of the financial results covering at
least 30 days of combined operations, the Merger would also be required to be
accounted for under the purchase method of accounting, which would have the
effect on the combined company's results of operations as described above. Each
of the current officers and directors of Lumisys and each of the current
officers and directors of CompuRAD has entered into an affiliate agreement
agreeing to comply with the above described restrictions on selling shares of
Lumisys or CompuRAD. See "OTHER AGREEMENTS -- Affiliate Agreements".
16
<PAGE> 29
RISKS RELATED TO LUMISYS' BUSINESS
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS. There can be no assurance
that Lumisys will be profitable on a quarterly or annual basis in the future.
Lumisys has experienced quarterly fluctuations in operating results caused by
various factors, including the timing of orders by major customers, customer
inventory levels, shifts in product mix, the incurrence of acquisition-related
costs and general conditions in the healthcare industry which have reduced
capital equipment budgets and delayed or reduced the adoption of teleradiology,
and expects that these fluctuations will continue.
Lumisys typically does not obtain long-term volume purchase contracts from
its customers, and a substantial portion of Lumisys' backlog is scheduled for
delivery within 90 days or less. Customers may cancel orders and change volume
levels or delivery times without penalty. Quarterly sales and operating results
therefore depend on the volume and timing of the backlog as well as bookings
received during the quarter. A significant portion of Lumisys' operating
expenses are fixed, and planned expenditures are based primarily on sales
forecasts and product development programs. If sales do not meet Lumisys'
expectations in any given period, the material adverse impact on operating
results may be magnified by Lumisys' inability to adjust operating expenses
sufficiently or quickly enough to compensate for such a shortfall. Furthermore,
Lumisys gross margins may decrease in the future due to increasing sales of
lower margin products and volume discounts. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period. Fluctuations in operating results may also result in fluctuations in the
price of Lumisys' Common Stock. See "LUMISYS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "LUMISYS
BUSINESS -- Manufacturing."
DEPENDENCE ON TELERADIOLOGY MARKET; UNCERTAINTY OF MARKET
ACCEPTANCE. Lumisys' success is dependent on market acceptance of its new and
existing products. Lumisys' revenues are derived from the sales of medical image
digitizers for the teleradiology and other medical markets. There can be no
assurance that sales of new products will achieve significant market acceptance
in the future. In addition, third party payers, such as governmental programs
and private insurance plans, can indirectly affect the pricing or the relative
attractiveness of Lumisys' products by regulating the maximum amount of
reimbursement that they will provide for the taking, storing and interpretation
of medical images. A decrease in the reimbursement amounts for radiological
procedures may decrease the amount which physicians, clinics and hospitals are
able to charge patients for such services. As a result, adoption of
teleradiology may slow as capital investment budgets are reduced, thereby
significantly reducing the demand for Lumisys' products. See "LUMISYS
BUSINESS -- Products and Applications" and "Third Party Reimbursement."
SIGNIFICANT RISKS ASSOCIATED WITH FUTURE ACQUISITIONS. Lumisys expects to
pursue acquisitions of complementary technologies, product lines or businesses
in the future. The integration of any future acquisitions will require special
attention from management, which may temporarily distract its attention from the
day-to-day business of Lumisys. Any future acquisitions will also require
integration of the companies' product offerings and coordination of research and
development and sales and marketing activities. Furthermore, as a result of
acquisitions, Lumisys may enter markets in which it has little or no direct
prior experience. There can also be no assurance that Lumisys will be able to
retain key technical personnel of an acquired company or recruit new management
personnel for the acquired businesses, or that Lumisys will, or may in the
future, realize any benefits as a result of such acquisitions. Future
acquisitions by Lumisys may result in potentially dilutive issuances of equity
securities, the incurrence of debt, one-time acquisition charges and
amortization expenses related to goodwill and intangible assets, each of which
could be significant and could materially adversely affect Lumisys' financial
condition and results of operations. In addition, Lumisys believes that it may
be required to expand and enhance its financial and management controls,
reporting systems and procedures as it integrates potential future acquisitions.
There can be no assurance that Lumisys will be able to do so effectively, and
failure to do so when necessary would have a material adverse effect upon
17
<PAGE> 30
Lumisys' business and results of operations. See "LUMISYS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT. The market for Lumisys'
products is characterized by rapid technological advances, changes in customer
requirements and frequent new product introductions and enhancements. Lumisys'
future success will depend upon its ability to enhance its current products, to
develop and introduce new products that keep pace with technological
developments and to respond to evolving customer requirements. Any failure by
Lumisys to anticipate or respond adequately to technological developments by its
competitors or to changes in customer requirements, or any significant delays in
product development or introduction, could result in a loss of competitiveness
or revenues. In the past, Lumisys has occasionally experienced delays in the
development and introduction of new products and product enhancements, and there
can be no assurance that Lumisys will not experience such delays in the future.
In addition, new product introductions or enhancements by Lumisys' competitors
or the use of other technologies that do not depend on film digitization could
cause a decline in sales or loss of market acceptance of Lumisys' products. In
particular, computed radiography ("CR") systems are currently available and have
been sold for medical applications for over ten years with limited acceptance.
In addition, several companies have announced developments leveraging the
technology used in flat panel displays, digital radiography ("DR"), to produce
high-resolution, two dimensional image sensor arrays that make it possible for
x-ray images to be captured digitally without film or chemical processing. While
this emerging technology is extensive, there can be no assurance that future
advances in this technology or other technologies will not produce systems
better positioned for the marketplace that will therefore reduce the digitizer
market to the then installed base of imaging systems. There can be no assurance
that Lumisys will be successful in developing and marketing new products or
product enhancements on a timely or cost-effective basis, and such failure could
have a material adverse effect on Lumisys' business and results of operations.
See "LUMISYS BUSINESS -- Products and Applications" and "-- Research and
Development."
COMPETITION. Although to date competition in the United States laser-based
film digitizer market has not been significant, a new company, Clinical Laser
Systems ("CLS") entered the market in 1996 with a product similar to the
laser-based film digitizers offered by Lumisys. In additional, several Japanese
competitors, such as Konica Corporation ("Konica"), Nishimoto Sangyo Co., Ltd.
("Nishimoto Sangyo") and Abe Sekkei Inc. ("Abe Sekkei"), offer competitive
products on an international basis and may decide in the future to devote
additional resources to marketing competitive products in the United States. The
markets for medical film digitizers incorporating charge-coupled devices
("CCDs") are highly competitive. Lumisys faces competition from companies such
as Vidar Systems Inc., Canon Inc., Vision Ten Inc., Hell Linotype and Howtek in
the CCD-based film digitizer market. There can be no assurance that Lumisys'
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features that
render Lumisys' products less competitive or obsolete.
In addition, large domestic companies, such as Kodak, Imation Corporation
("Imation"), Sterling and General Electric Co. ("GE"), and European companies,
such as Siemens, Philips Electronics N.V. ("Philips") and Agfa Gavaert N.V.
("Agfa"), have the technical and financial ability to design and market
digitizer products competitive with Lumisys' products, and some of them have in
the past produced and marketed such products. While most of these companies
currently purchase products from Lumisys, Lumisys believes that it will be
required to continue to improve the price and performance characteristics of its
products to retain their business especially in view of the fact that these
customers are not contractually required to purchase their digitizers
exclusively or at all from Lumisys. All of these companies have significantly
greater financial, marketing and manufacturing resources than Lumisys and would
be significant competitors if they decided to enter this market.
The markets for medical video image digitizers are also highly competitive.
Competitors in the video digitizer market are Precision Digital Images Corp.,
Epix, Inc. and Matrox Electronic Systems Ltd. See "LUMISYS
BUSINESS -- Competition."
CUSTOMER CONCENTRATION; RELIANCE ON OEMS. A significant portion of
Lumisys' net sales is derived from a small number of customers. For the period
indicated, each of the following customers accounted for more
18
<PAGE> 31
than 10% of Lumisys' revenues: in 1994, E-Med, Kodak, CEMAX and Agfa; and in
1995, E-Med, Kodak and CEMAX. In 1996, Kodak, E-Med and CEMAX also accounted for
a significant portion of Lumisys' net sales although none accounted for more
than 10%. Large customers also accounted for a significant portion of Lumisys'
backlog at December 31, 1996. Lumisys expects to continue to depend upon its
principal customers for a significant portion of its sales, although there can
be no assurance that Lumisys' principal customers will continue to purchase
products and services from Lumisys at current levels, if at all. The loss of one
or more major customers or a change in their buying patterns could have a
material adverse effect on Lumisys' business and results of operations. See
"LUMISYS BUSINESS -- Sales and Marketing" and "-- Manufacturing."
SINGLE-SOURCE SUPPLIERS. Lumisys purchases industry-standard parts and
components for the assembly of its products, generally from multiple vendors.
Although Lumisys relies on single-source suppliers for certain components, such
as lasers, photomultiplier tubes and certain electronic components primarily to
control price and quality, Lumisys believes that alternate sources of supply are
available from other vendors for such components and has qualified second source
suppliers for some, but not all, single-sourced parts. Lumisys maintains good
relationships with its vendors and, to date, has not experienced any material
supply problems. While Lumisys seeks to maintain an adequate inventory of
single-sourced components there can be no assurance that such inventories will
be sufficient or that delays in part or component deliveries will not occur in
the future, which could result in delays or reductions in product shipments.
Furthermore, even if currently single-sourced components could be replaced by
other qualified parts, product redesign and testing could be costly and time
consuming. These factors could have a material adverse effect on Lumisys'
business, financial condition and results of operations.
GOVERNMENT REGULATION. The manufacturing and marketing of Lumisys'
digitizers are subject to extensive government regulation in the United States
and in other countries, and the process of obtaining and maintaining required
regulatory approvals is lengthy, expensive and uncertain. If a medical device
manufacturer can establish that a newly developed device is "substantially
equivalent" to a device that was legally marketed prior to May 1976, the date on
which the Medical Device Amendments of 1976 were enacted, or to a device the
Food and Drug Administration ("FDA") found to be substantially equivalent to a
legally marketed pre-1976 device, the manufacturer may seek marketing clearance
from the FDA to market the device by filing a 510(k) premarket notification. The
510(k) premarket notification must be supported by appropriate data establishing
the claim of substantial equivalence to the satisfaction of the FDA. Receipt of
510(k) clearance normally takes at least three months, but may take much longer
and may require the submission of clinical safety and efficacy data to the FDA.
All of Lumisys' laser-based film digitizers, the CCD based film digitizer and
the QR2000 software products that are commercially available have received
510(k) clearance. There can be no assurance that 510(k) clearance for any future
product or any modification of an existing product will be granted, or that the
process will not be unduly lengthy. In the future, the FDA may require
manufacturers of certain medical devices to engage in a more thorough and time
consuming approval process than the 510(k) process, which could have a material
adverse effect on Lumisys' business and results of operations.
International sales of Lumisys' products may be subject to regulation in
various countries. The regulatory review process varies from country to country
and there can be no assurance that Lumisys will be able to obtain foreign
approvals on a timely basis or at all.
Lumisys is also required to register as a Class II medical device
manufacturer with the FDA and state agencies, such as the California Department
of Health Services ("CDHS"). As such, Lumisys may be inspected on a routine
basis by both the FDA and the CDHS for compliance with the FDA's GMP and other
applicable regulations. These regulations require that Lumisys manufacture its
products and maintain its documents in a prescribed manner with respect to
manufacturing, reporting of product malfunctions and other matters. If the FDA
believes that a company is not in compliance with federal regulatory
requirements, it can institute proceedings to detain or seize products, issue a
recall, prohibit marketing and sales of the company's products and assess civil
and criminal penalties against the company, its officers or its employees.
Failure to comply with the regulatory requirements could have a material adverse
effect on Lumisys' business and results
19
<PAGE> 32
of operations. Lumisys was inspected by the FDA in 1996 and was found to be
compliant with the FDA's GMP regulations but has not been inspected by CDHS to
date.
LITIGATION. On July 9, 1997 and July 10, 1997, two class action complaints
were filed in the Superior Court of the State of California, County of Santa
Clara, and the U.S. District Court for the Northern District of California,
respectively, against Lumisys, several of its current and former officers and
directors, and its underwriters. The complaints are brought on behalf of all
persons who purchased Lumisys Common Stock during the putative class periods,
November 15, 1995 to July 11, 1996. The complaints allege that, during the class
period, defendants made material misstatements and omitted to disclose material
information concerning Lumisys' actual and expect performance and results,
causing the price of Lumisys Common Stock to be artificially inflated. The
federal complaint alleges claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder; the
state complaint alleges claims under California state law. Neither the federal
nor the state complaint specifies the amount of damages sought. Lumisys and the
other defendants vigorously deny all allegations of wrongdoing, and intend to
defend themselves aggressively. On September 19, 1997, defendants filed a motion
to dismiss the federal complaint. On October 10, 1997, defendants filed
demurrers to the state complaint. There can be no assurance that Lumisys will
prevail in this action or that the plaintiffs will not recover damages.
THIRD-PARTY REIMBURSEMENT. Third-party payers, such as governmental
programs and private insurance plans, can indirectly affect the pricing or the
relative attractiveness of Lumisys' products by regulating the maximum amount of
reimbursement that they will provide for the taking, storing and interpretation
of medical images. In recent years, healthcare costs have risen substantially,
and third-party payers have come under increasing pressure to reduce such costs.
In this regard, extensive studies undertaken by the Clinton Administration, even
though not successfully translated into regulatory action, have stimulated
widespread analysis and reaction in the private sector focused on healthcare
cost reductions, which may involve reductions in reimbursement rates in
radiology. A decrease in the reimbursement amounts for radiological procedures
may decrease the amount which physicians, clinics and hospitals are able to
charge patients for such services. As a result, adoption of teleradiology and
PACS may slow as capital investment budgets are reduced, and the demand for
Lumisys' products could be significantly reduced.
PRODUCT LIABILITY AND INSURANCE. The manufacture and sale of medical
products entails significant risk of product liability claims. While Lumisys
believes that its current insurance coverage is appropriate, there can be no
assurance that such coverage is adequate to protect Lumisys from any liabilities
it might incur in connection with the sale of Lumisys' products. In addition,
Lumisys may require increased product liability coverage as additional products
are commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability claim
or series of claims brought against Lumisys in excess of its insurance coverage
could have a material adverse effect on Lumisys' business and results of
operations.
RISKS RELATED TO COMPURAD'S BUSINESS.
CompuRAD's future operating results are subject to a number of risks and
uncertainties including those listed below.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. CompuRAD incurred
net losses of approximately $653,000 and $787,000 for the three months and six
months ended June 30, 1997 and $134,000 and $361,000 for the three months and
six months ended June 30, 1996, and, as of June 30, 1997, had an accumulated
deficit of $2,763,000. On October 31, 1997, CompuRAD announced its financial
results for the three months and nine months ended September 30, 1997, which
resulted in net losses of $420,000 and $1.2 million, respectively compared to
net losses of $73,000 and $288,000 for the three months and nine months ended
September 30, 1996, respectively. The development and marketing by CompuRAD of
new and existing products will continue to require substantial product
development and other expenditures. CompuRAD's prior operating history and
dependence upon emerging and developing markets and key personnel, as well as
competition, uncertainty in the consolidation of the healthcare industry, and
general economic and other factors make the prediction of future operating
results difficult. There can be no assurance that any of
20
<PAGE> 33
CompuRAD's business strategies will be successful or that CompuRAD will be able
to achieve consistent revenue growth or achieve profitability on a quarterly or
annual basis.
VARIABILITY IN QUARTERLY OPERATING RESULTS; SEASONALITY. CompuRAD's
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future.
Quarterly revenues and operating results may fluctuate as a result of a variety
of factors, including the following: demand for CompuRAD's software,
applications and services, including the relative mix of hardware and software
purchased by its customers; the number, timing and significance of announcements
and releases of software enhancements and new applications by CompuRAD and its
competitors; the number, timing and significance of announcements and releases
of hardware and other related peripherals by third party suppliers; the
termination of, or a reduction in, offerings of CompuRAD's software,
applications and services; the loss of customers due to consolidation in the
healthcare industry; delays in delivery requested by customers or caused by
other factors; customer budgeting cycles; marketing and sales promotional
activities; software defects and other system quality factors; and general
economic conditions. In addition, since purchases of CompuRAD's software
generally involve a significant commitment of capital, any downturn in a
potential customer's business or the economy in general, including changes in
the healthcare market, could have a material adverse effect on CompuRAD's
business, financial condition and results of operations. Moreover, CompuRAD's
operating expense levels are relatively fixed and, to a large degree, are based
on anticipated revenues. Therefore, if revenues are below expectations, net
income is likely to be disproportionately affected. Further, it is likely that
in some future quarter CompuRAD's operating results will be below the
expectations of public market analysts and investors. In such event, the trading
price of CompuRAD's Common Stock could be materially adversely affected.
CompuRAD has historically experienced some seasonality. CompuRAD believes a
number of its customers and potential customers defer making purchase
commitments in the fourth quarter and there can be no assurance that CompuRAD
will not experience seasonality in the future.
POSSIBLE NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF ADDITIONAL
FINANCING. CompuRAD expects its capital needs and operating expenditures to
increase in the next few years. There can be no assurance that CompuRAD will not
need additional capital. CompuRAD's need for additional financing will depend
upon numerous factors, including, but not limited to, the level of future
revenues and expenditures, market acceptance of new products, the results and
scope of ongoing research and development projects, competing technologies,
market and regulatory developments and increased working capital requirements.
There can be no assurance that additional financing will be available when
needed or, if available, that it will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders may result and debt financing, if available, may
involve restrictive covenants. If adequate funds are not available, CompuRAD's
business, financial condition and results of operations could be materially
adversely affected.
DEPENDENCE ON EMERGING MEDICAL IMAGE MANAGEMENT AND TELERADIOLOGY SYSTEMS
MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE. CompuRAD's success is dependent on
the development of the medical image management and teleradiology systems
markets and on market acceptance of its existing software, as well as software
it is currently developing. To date, substantially all of CompuRAD's revenues
have been derived from the sale of software and related hardware for the
teleradiology market. The markets for CompuRAD's software are still relatively
undeveloped and may not grow in the near future, if at all. In the event that
the medical image management and teleradiology systems markets do not develop as
anticipated by CompuRAD, CompuRAD's business, financial condition and results of
operations would be materially adversely affected.
RISKS ASSOCIATED WITH PRODUCTS. Software and systems as complex as those
offered by CompuRAD frequently contain undetected errors or failures when first
introduced or when new versions are released. CompuRAD has in the past
discovered bugs and system errors in certain of its software enhancements, both
before and after initial shipment. There can be no assurance that, despite
testing by CompuRAD, errors will not occur in CompuRAD's products resulting in
loss of, or delay in, market acceptance. Any such loss or delay could have a
material adverse effect on CompuRAD's business, financial condition and results
of operations.
21
<PAGE> 34
Peripherals and hardware from third party manufacturers also may contain defects
and incompatibilities which could adversely affect market acceptance of
CompuRAD's software products.
In addition, the markets for CompuRAD's software are characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements of products, operating systems and
environments. CompuRAD's future success will depend upon its ability to enhance
its current product line, to complete products currently under development, to
develop and introduce new products that keep pace with technological
developments and to respond to evolving customer requirements. Any failure by
CompuRAD to anticipate or respond adequately to technological developments by
its competitors or to changes in customer requirements, or any significant
delays in product development or introduction could have a material adverse
effect on CompuRAD's business, financial condition and results of operations. In
the past, CompuRAD has occasionally experienced delays in the development and
introduction of new software and software enhancements, and there can be no
assurance that CompuRAD will not experience such delays in the future.
Timeliness of delivery is of critical importance to certain customers, and
CompuRAD's failure to successfully develop and ship such products in a timely
manner could result in cancellation of customer orders which could have a
material adverse effect on CompuRAD's business, financial condition and results
of operations.
NEW PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. The market for
Internet/Intranet-related software designed for use in healthcare environments
is in the early stages of development. Since this market is new, and because
current and future competitors are likely to introduce competing
Internet/Intranet software, it is difficult to predict the rate at which the
market will grow, if at all, or the rate at which new or increased competition
will result in market saturation. CompuRAD's ClinicalWare product was only
recently introduced in 1997 and is highly dependent upon the market acceptance
of the Internet/Intranet technologies for healthcare environments. If the market
for such Internet/Intranet software fails to grow or grows more slowly than
anticipated, CompuRAD's business, financial condition and results of operations
would be materially adversely affected. CompuRAD has had only limited shipments
of ClinicalWare, and it expects that the sales cycle for ClinicalWare will be
longer than that for its other existing products and that the price for
ClinicalWare will be higher than that for many of CompuRAD's other current
products. Accordingly, CompuRAD's quarterly revenues and operating results may
be subject to greater fluctuation as CompuRAD begins to market and sell
ClinicalWare. Additionally, CompuRAD faces greater challenges in installing and
supporting ClinicalWare because of the complexity of Internet/Intranet related
software and systems. CompuRAD has limited experience in marketing, installing
and supporting Internet/Intranet clinical information systems, and there can be
no assurance that CompuRAD can obtain the necessary resources to market, install
and support ClinicalWare in an efficient, cost-effective and competitive manner.
The failure of ClinicalWare to achieve market acceptance for any reason could
have a material adverse effect on CompuRAD's business, financial condition and
results of operations.
INTEGRATION OF ACQUISITIONS. CompuRAD acquired the IMS archive and Film
Image Scan System and software products from Star in July 1997 in exchange for
100,000 shares of CompuRAD's Common Stock and future royalties on software
sales. CompuRAD also acquired certain assets of Medical Imaging Technology
Associates, Inc. ("MITA") related to nuclear medicine software in exchange for
17,500 shares of CompuRAD Common Stock. The MITA acquisition will close in April
1998.
CompuRAD intends to continue to evaluate potential acquisitions of, or
investments in, companies which CompuRAD believes will complement or enhance its
existing business. In connection with any future acquisitions or strategic
investments, CompuRAD may incur debt or issue debt or equity securities
depending on market conditions and other factors. There can be no assurances
that CompuRAD will consummate any acquisition in the future or, if consummated,
that any such acquisition will ultimately be beneficial to CompuRAD.
The integration of acquired companies is typically difficult, time
consuming and subject to a number of inherent risks. In particular, the success
of acquisitions is often dependent upon the integration and retention of
existing employees. There can be no assurance that employees of an acquired
enterprise will remain with CompuRAD after an acquisition. The success of
acquisitions will also be dependent upon CompuRAD's
22
<PAGE> 35
ability to fully integrate the management information and accounting systems and
procedures of acquired companies with those of CompuRAD. CompuRAD's management
will be required to devote substantial time and attention to the integration of
these businesses and to any material operational or financial problems which may
occur as a result of the acquisitions. Failure to effectively integrate acquired
businesses could have a material adverse effect on CompuRAD's business, results
of operations and financial condition.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY. Many healthcare
providers are consolidating to create larger healthcare networks with greater
market concentration. Such consolidation could erode CompuRAD's existing
customer base and reduce the size of CompuRAD's target markets. In addition, the
resulting enterprises could have greater bargaining power, which could lead to
price erosion of CompuRAD's software and services. The reduction in the size of
CompuRAD's target market or the failure of CompuRAD to maintain adequate price
levels could have a materially adverse effect on CompuRAD's business, financial
condition and results of operations. The healthcare industry also is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operation of healthcare industry participants. During
the past several years, the United States healthcare industry has been subject
to an increase in governmental regulation and reform proposals. These proposed
reforms, if adopted, may increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment for
CompuRAD's customers. Healthcare industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for CompuRAD's software and services.
This could have a material adverse effect on CompuRAD's business, financial
condition and results of operations.
LONG SALES CYCLES. The sales cycle for medical image management systems is
lengthy. The sales cycle of CompuRAD's products is subject to delays associated
with changes or the anticipation of changes in the regulatory environment
affecting healthcare enterprises, changes in the customer's strategic system
initiatives, competing information systems projects within the customer
organization, consolidation in the healthcare industry in general, the highly
sophisticated nature of CompuRAD's software and competition in the medical image
management and healthcare information systems markets in general. The time
required from initial contact to purchase order typically ranges from one to six
months, and the time from purchase order to delivery and recognition of revenue
typically ranges from one to six months. During the sales process, CompuRAD
expends substantial time, effort and funds preparing a contract proposal,
demonstrating the software and negotiating the purchase order. For these and
other reasons, CompuRAD cannot predict when or if the sales process with a
prospective customer will result in a purchase order.
NEED TO MANAGE ANTICIPATED GROWTH IN OPERATIONS; DEPENDENCE UPON KEY
PERSONNEL. CompuRAD intends to expand its operations which may place a strain on
its management systems and resources. In addition, planned increases in the
number of products sold by CompuRAD and an increased number of distributors
requiring training and support may place additional strains on CompuRAD's
installation and support services requiring CompuRAD to train and manage
additional customer service personnel. There can be no assurance that CompuRAD
will be able to effectively manage these tasks, and the failure to do so could
have a materially adverse effect on CompuRAD's business, financial condition and
results of operations.
CompuRAD's future success also depends to a significant part upon the
continued service of its executive officers and other key sales, marketing,
development and installation employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on CompuRAD's business, financial condition and results of operations.
PRODUCT LIABILITY. CompuRAD's software captures, stores, distributes and
displays clinical information used by clinicians in the diagnosis and treatment
of patients. Any failure by CompuRAD's software to provide accurate, reliable
and timely information, or to adequately protect the confidentiality of the
information, could result in claims against CompuRAD. CompuRAD maintains
insurance to protect against claims associated with the use of its software or
systems, but there can be no assurance that its insurance coverage would
adequately cover any claims asserted against CompuRAD. A successful claim
brought against CompuRAD in excess of its insurance coverage could have a
material adverse effect on CompuRAD's business, financial condition and results
of operations. Even unsuccessful claims could result in CompuRAD's expenditure
of
23
<PAGE> 36
funds in litigation and diversion of management time and resources. There can be
no assurance that CompuRAD's insurance will cover such claims, that CompuRAD
will not be subject to product liability claims that will result in liability in
excess of its insurance coverage or that appropriate insurance will continue to
be available to CompuRAD in the future at commercially reasonable rates.
INTERNATIONAL SALES. To date, CompuRAD's international sales have been
insignificant. CompuRAD intends to increase its marketing efforts in the
international markets. To the extent that international sales become
significant, CompuRAD's results of operations may be subject to the risks
inherent in international transactions, including difficulties in staffing and
managing foreign sales operations, changes in regulatory requirements, exchange
rates and tariffs or other barriers. CompuRAD has limited experience in business
operations outside the United States, and there can be no assurance that
CompuRAD's software will be accepted in international markets or that CompuRAD
can compete successfully in such markets.
CUSTOMER CONCENTRATION. CompuRAD presently has licensed its products to
hospitals, clinics, other healthcare facilities and physician groups. CompuRAD's
customers include New York University Medical Center, Alliant Health Systems,
Symphony Mobilex and the Nursing Home Group plus many other leading healthcare
facilities and organizations.
For the three months and six months ended June 30, 1997 and 1996, one
customer, Symphony Mobilex accounted for 18.5% and 24.4% and 21.9% and 22.4%,
respectively, of CompuRAD's revenues. CompuRAD has agreements with OEMs and some
of these agreements require OEMs to purchase a minimum amount of CompuRAD's
products each year. A significant reduction in sales volume attributable to the
loss of any of CompuRAD's customers, losses arising from customer disputes
regarding shipments or license, installation and service fees or CompuRAD's
inability to collect accounts receivable from any major customer could have a
material adverse effect on CompuRAD's business, financial condition and results
of operations.
To date, sales of CompuRAD's teleradiology products, including PC
Teleradiology and its successor iNET, accounted for a substantial majority of
its revenues. Sales of the iNET product line could decline for a number of
reasons including consolidation in the healthcare market and changes in
government regulation that reduce or eliminate reimbursement for teleradiology
services. If sales of CompuRAD's iNET product line decline for any reason,
CompuRAD's business, financial condition and results of operations would be
materially adversely affected.
COMPETITION. CompuRAD believes that the principal competitive factors for
selecting medical image management software and systems are the reputation and
market position of the vendor and the price, reliability, ease of use,
functionality and performance of the product or system. CompuRAD believes it
competes effectively with respect to these factors.
Competition in the markets for medical image management products and
healthcare information systems and services is intense and is expected to
increase. CompuRAD's competitors include other providers of medical image
management and healthcare information products. CompuRAD's principal competitors
in the medical image management industry are E-Med, CEMAX, Applicare Medical
Imaging B.V. and Access Radiology Corporation. Furthermore, other major
healthcare information and equipment companies not presently offering competing
products may enter CompuRAD's markets. In addition, the emerging market for
Internet/Intranet clinical information systems is expected to be highly
competitive, and CompuRAD's competitors in this market could include many of its
competitors in the medical image management systems market as well as other
providers of healthcare information systems and new entrants into the
marketplace. Increased competition could result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
affect CompuRAD's business, financial condition and results of operations. In
addition, many of CompuRAD's competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources and market recognition than CompuRAD. Many of CompuRAD's
competitors also currently have, or may develop or acquire, substantial
installed customer bases in the healthcare industry. As a result of these
factors, CompuRAD's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products than
CompuRAD. There can be no assurances that CompuRAD will be able to compete
successfully against current and future competitors or
24
<PAGE> 37
that competitive pressures faced by CompuRAD will not have a materially adverse
effect on its business, financial condition or results of operations.
PROPRIETARY RIGHTS. CompuRAD relies on a combination of trade secrets,
copyright and trademark laws, nondisclosure and other contractual provisions to
protect its proprietary rights. CompuRAD currently has no patents covering its
technology and it has not registered any of its trademarks. There can be no
assurance that measures taken by CompuRAD to protect its intellectual property
will be adequate or that CompuRAD's competitors will not independently develop
systems and services that are substantially equivalent or superior to those of
CompuRAD. Substantial litigation regarding intellectual property rights exists
in the software industry, and CompuRAD expects that software products may be
increasingly subject to third party infringement claims as the number of
competitors in CompuRAD's industry segment grows and the functionality of
systems overlap. Although CompuRAD believes that its systems and applications do
not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against
CompuRAD in the future, that CompuRAD would prevail in any such dispute or that
a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require CompuRAD to incur substantial litigation expenses or subject
CompuRAD to significant liabilities and could have a material adverse effect on
CompuRAD's business, financial condition and results of operations.
GOVERNMENT REGULATION. Medical image management software is subject to
extensive government regulation as a medical device in the United States by the
FDA and in other countries by corresponding foreign regulatory authorities. The
process of obtaining and maintaining required regulatory clearances and
approvals is lengthy, expensive and uncertain. Generally, before a new medical
device can be introduced into the market in the United States, the manufacturer
or distributor must obtain FDA clearance of a 510(k) premarket notification or
approval of a Premarket Approval ("PMA") application. If a medical device
manufacturer or distributor can establish, among other things, that a device is
"substantially equivalent" in intended use and technological characteristics to
certain legally marketed devices, for which the FDA has not required a PMA, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k). In recent years, the FDA has been requiring a more rigorous
demonstration of substantial equivalence. Material changes to legally marketed
medical devices are also subject to FDA review and clearance or approval prior
to commercialization in the United States.
CompuRAD relies on 510(k) pre-market notification for its current
internally developed products. Additionally, CompuRAD relies on 510(k) clearance
and the finding by the FDA of substantial equivalence for the Image Management
System (IMS) and the Film Image ScanSoftware (FISS) technologies acquired from
Star in July 1997. However, CompuRAD believes that its success depends upon
commercial sales of new versions of its medical image management software which
may be subject to clearance or approval from the FDA and its foreign
counterparts. There can be no assurance that a similar 510(k) clearance for any
future product or enhancement of an existing product will be granted or that the
process will not be lengthy. If CompuRAD cannot establish that a product is
"substantially equivalent" to certain legally marketed devices, the 510(k)
clearance procedure may be unavailable and CompuRAD may be required to utilize
the longer and more expensive PMA process. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for additional data
as a prerequisite to clearance or approval, could have a material adverse effect
on CompuRAD's business, operating results and financial condition.
The process of obtaining a 510(k) clearance generally requires supporting
data, which can be extensive and extend the regulatory review process for a
considerable length of time. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved
uses. CompuRAD has been inspected once and will continue to be inspected on a
routine basis by the FDA for compliance with the FDA's Quality System Regulation
("QSR") and other applicable regulations. CompuRAD will be required to adhere to
applicable FDA's QSR regulations and similar regulations in other countries,
which include testing, control, and documentation requirements. Failure to
comply with applicable regulatory requirements could result in the failure of
the government to grant market clearance or premarket approval, withdrawal of
approvals or criminal prosecution. CompuRAD is also subject to other federal,
state and local laws and regulations relating to safe working conditions and
manufacturing practices. The extent of
25
<PAGE> 38
government regulation that might result from any future legislation or
administrative action cannot be predicted. Failure to comply with regulatory
requirements could have a material adverse effect on CompuRAD's business,
financial condition and results of operations.
Sales of CompuRAD's software outside the United States are subject to
foreign regulatory requirements that vary from country to country. Additional
approvals from foreign regulatory authorities may be required, and there can be
no assurance that CompuRAD will be able to obtain foreign marketing approvals on
a timely basis or at all, or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. In Europe,
CompuRAD will be required to obtain certifications necessary to enable the "CE"
mark to be affixed to CompuRAD's products by mid 1998 to continue commercial
sales in member countries of the European Union. The CE mark is an international
symbol of quality and complies with applicable European medical device
directives. CompuRAD has not obtained such certifications, and there can be no
assurance it will be able to obtain such certifications or any other
international regulatory approvals in a timely manner, or at all. Failure to
comply with foreign regulatory requirements could have a material adverse effect
on CompuRAD's business, financial condition and results of operations.
26
<PAGE> 39
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished to the Lumisys
Stockholders in connection with the solicitation of proxies by the Lumisys Board
for use at the Lumisys Special Meeting to be held at the corporate offices of
Lumisys at 225 Humboldt Court, Sunnyvale, CA 94089 on November 25, 1997, at
10:30 a.m., local time, and at any and all adjournments or postponements
thereof. This Joint Proxy Statement/Prospectus also constitutes the Prospectus
of Lumisys with respect to the issuance of up to 3,687,761 shares of Lumisys
Common Stock to be issued to the CompuRAD Stockholders in connection with the
Merger, as described below.
This Joint Proxy Statement/Prospectus is also being furnished to the
CompuRAD Stockholders in connection with the solicitation of proxies by the
CompuRAD Board for use at the CompuRAD Special Meeting to be held at the
corporate offices of CompuRAD at 1350 North Kolb Road, Tucson, Arizona 85715 on
November 25, 1997, at 10:00 a.m., local time, and at any and all adjournments or
postponements thereof.
LUMISYS SPECIAL MEETING
At the Lumisys Special Meeting, the Lumisys Stockholders will consider and
vote upon the Share Proposal and such other matters as may properly come before
the Lumisys Special Meeting or any adjournments or postponements thereof.
Although the DGCL and the Certificate of Incorporation, as amended, of Lumisys
do not require Lumisys to obtain stockholder approval of the Merger, the rules
of the Nasdaq National Market require Lumisys to obtain stockholder approval for
the Share Proposal. Holders of Lumisys Common Stock may also consider such other
matters as may be properly brought before the Lumisys Special Meeting or any
postponements or adjournments thereof.
THE LUMISYS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE
REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT LUMISYS STOCKHOLDERS
VOTE FOR THE SHARE PROPOSAL. SEE "THE MERGER -- BACKGROUND OF THE MERGER" AND
"-- RECOMMENDATION OF THE LUMISYS BOARD; REASONS FOR THE MERGER."
RECORD DATE
The Lumisys Board has fixed the close of business on October 31, 1997 as
the Lumisys Record Date for determining holders entitled to notice of and to
vote at the Lumisys Special Meeting.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Lumisys Common Stock is
necessary to constitute a quorum at the Lumisys Special Meeting.
REQUIRED VOTES
The Share Proposal requires the approval of a majority of the votes cast on
the proposal. Accordingly, abstentions and broker non-votes will have no effect
on the outcome of the proposal. The directors and officers of Lumisys own as a
group approximately 9.33% of the outstanding shares of Lumisys Common Stock and
have indicated their intention to vote in favor of the Share Proposal.
VOTING RIGHTS; PROXIES
As of the Lumisys Record Date, there were 6,474,314 shares of Lumisys
Common Stock issued and outstanding, each of which entitles the holder thereof
to one vote. All shares of Lumisys Common Stock
27
<PAGE> 40
represented by properly executed proxies will, unless such proxies have been
previously revoked, be voted in accordance with the instructions indicated in
such proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF LUMISYS COMMON STOCK WILL
BE VOTED IN FAVOR OF APPROVAL OF THE SHARE PROPOSAL. Lumisys does not know of
any matters other than as described in the accompanying Notice of the Lumisys
Special Meeting that are to come before the Lumisys Special Meeting. If any
other matter or matters are properly presented for action at the Lumisys Special
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. A stockholder giving a proxy
pursuant to this proxy solicitation may revoke it at any time before it is
exercised by giving a subsequent proxy, delivering to the Secretary of Lumisys a
written notice of revocation prior to the voting of the proxy at the Lumisys
Special Meeting, or attending the Lumisys Special Meeting and informing the
Secretary of Lumisys in writing that such stockholder wishes to vote his or her
shares in person. However, mere attendance at the Lumisys Special Meeting will
not in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the Lumisys Special Meeting will be
tabulated by the election inspectors appointed for the meeting and will
determine whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. If a broker indicates on the proxy that it
does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
SOLICITATION OF PROXIES
The expenses of the respective solicitations for the Lumisys and CompuRAD
Special Meetings will be borne by Lumisys and CompuRAD, respectively; however,
Lumisys and CompuRAD have agreed to share equally the cost of filing, printing
and mailing this Joint Proxy Statement/Prospectus and the forms of proxy to the
Lumisys Stockholders and the CompuRAD Stockholders. In addition to solicitation
by mail, proxies may be solicited by directors, officers and employees of
Lumisys and CompuRAD in person or by telephone, telegram or other means of
communication. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Lumisys has retained Corporate
Investor Communications, Inc. at an estimated cost of $4,000, plus reimbursement
of expenses, to assist in its solicitation of proxies from brokers, nominees,
institutions and individuals. Arrangements will also be made by Lumisys and
CompuRAD with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and Lumisys and CompuRAD will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
THE MATTERS TO BE CONSIDERED AT THE LUMISYS SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE LUMISYS STOCKHOLDERS. ACCORDINGLY, THE LUMISYS STOCKHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
28
<PAGE> 41
COMPURAD SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
At the CompuRAD Special Meeting, holders of CompuRAD Common Stock will
consider and vote upon (i) the Merger Proposal and (ii) such other matters as
may properly come before the CompuRAD Special Meeting or any adjournments or
postponements thereof.
THE COMPURAD BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE
REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT COMPURAD STOCKHOLDERS
VOTE FOR APPROVAL OF THE MERGER PROPOSAL. SEE "THE MERGER -- BACKGROUND OF THE
MERGER," AND "RECOMMENDATION OF THE COMPURAD BOARD; REASONS FOR THE MERGER."
RECORD DATE
The CompuRAD Board has fixed the close of business on October 31, 1997 as
the CompuRAD Record Date for determining the holders entitled to notice of and
to vote at the CompuRAD Special Meeting.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of CompuRAD Common Stock is
necessary to constitute a quorum at the CompuRAD Special Meeting.
REQUIRED VOTE
The approval of the Merger Proposal requires the affirmative vote of a
majority of the outstanding shares of CompuRAD Common Stock. Abstentions and
broker non-votes will have the effect of votes against approval of the Merger
Proposal. Certain directors and executive officers of CompuRAD who, collectively
beneficially own approximately 41% of the outstanding shares of CompuRAD Common
Stock, have agreed to vote all such shares in favor of the Merger Proposal and
have given Lumisys irrevocable proxies to that effect. See "THE
MERGER -- Interests of Certain Persons in the Merger" and "OTHER AGREEMENTS --
The Voting Agreement." The holders of record on the Record Date of shares of
CompuRAD Common Stock are entitled to one vote per share of CompuRAD Common
Stock on each matter submitted to a vote at the CompuRAD Special Meeting. The
presence in person or by proxy of the holders of shares representing a majority
of CompuRAD Common Stock issued and outstanding and entitled to vote is
necessary to constitute a quorum for the transaction of business at the CompuRAD
Special Meeting.
VOTING RIGHTS; PROXIES
As of the CompuRAD Record Date, there were 3,973,880 shares of CompuRAD
Common Stock issued and outstanding, each of which entitles the holder thereof
to one vote. All shares of CompuRAD Common Stock represented by properly
executed proxies received at or prior to the CompuRAD Special Meeting that have
not been revoked will be voted at the CompuRAD Special Meeting in accordance
with the instructions contained therein. IF NO INSTRUCTIONS ARE INDICATED, SUCH
SHARES OF COMPURAD COMMON STOCK WILL BE VOTED IN FAVOR OF THE MERGER PROPOSAL.
CompuRAD does not know of any matters other than as described in the
accompanying Notice of the CompuRAD Special Meeting that are to come before the
CompuRAD Special Meeting. If any other matter or matters are properly presented
for action at the CompuRAD Special Meeting, including, among other things,
consideration of a motion to adjourn the CompuRAD Special Meeting to another
time and/or place (including without limitation for the purpose of soliciting
additional proxies), the persons named in the enclosed form of proxy and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment, unless such authorization is withheld. A stockholder
receiving a proxy pursuant to this proxy solicitation may revoke a proxy by
submitting at any time prior to the vote on the approval of the Merger Proposal
a later dated proxy with respect to the same shares, by delivering written
notice of revocation to the Secretary of
29
<PAGE> 42
CompuRAD at any time prior to such vote or by attending the CompuRAD Special
Meeting and voting in person. Mere attendance at the CompuRAD Special Meeting
will not in and of itself revoke a proxy. If a CompuRAD Stockholder is not the
registered direct holder of his or her shares, such stockholder must obtain
appropriate documentation from the registered holder in order to be able to vote
the shares in person.
Votes cast by proxy or in person at the CompuRAD Special Meeting will be
tabulated by the election inspectors appointed for the meeting and will
determine whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum and as voted against the approval of the
Merger Proposal. If a broker indicates that it does not have discretionary
authority as to certain shares to vote on a particular matter, those shares will
be considered as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but not be considered as present and
entitled to vote with respect to that matter.
SOLICITATION OF PROXIES
All expenses related to CompuRAD's solicitation of proxies, including the
cost of preparing and mailing this Joint Proxy Statement/Prospectus to the
CompuRAD Stockholders, will be borne by CompuRAD. In addition to solicitation by
mail, directors, officers and employees of CompuRAD may solicit proxies by
telephone, telegram or otherwise. Such directors, officers and employees of
CompuRAD will not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses incurred in connection therewith.
Brokerage firms, fiduciaries and other custodians who forward soliciting
material to the beneficial owners of shares of CompuRAD Common Stock held of
record by them will be reimbursed for their reasonable expenses incurred in
forwarding such material.
THE MATTERS TO BE CONSIDERED AT THE COMPURAD SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE COMPURAD STOCKHOLDERS. ACCORDINGLY, THE COMPURAD STOCKHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE. THE COMPURAD
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXIES.
30
<PAGE> 43
THE MERGER
This section of the Joint Proxy Statement/Prospectus, as well as the next
two sections of the Joint Proxy Statement/Prospectus entitled "The
Reorganization Agreement" and "Other Agreements," describe certain aspects of
the proposed Merger. To the extent that the following description relates to the
Reorganization Agreement, or the other agreements described under "Other
Agreements," it does not purport to be complete and is qualified in its entirety
by reference to the Reorganization Agreement, which is attached as Annex A to
this Joint Proxy Statement/Prospectus and is incorporated herein by reference,
and to the Voting Agreement, which is attached as Annex B to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference, and to such other
agreements, which are filed as exhibits to the Registration Statement and are
incorporated herein by reference. All stockholders are urged to read the
Reorganization Agreement, the Voting Agreement and such other agreements in
their entirety.
GENERAL
The Reorganization Agreement provides for the merger of Merger Sub with and
into CompuRAD. As a result of the Merger, Merger Sub will cease to exist,
CompuRAD will become a wholly-owned subsidiary of Lumisys, and the former
stockholders of CompuRAD will become stockholders of Lumisys. CompuRAD will
continue as the surviving corporation of the Merger (the "Surviving
Corporation") and will retain all of its separate corporate existence, with all
its purposes, objects, rights, privileges, powers and franchises unaffected by
the Merger.
The Reorganization Agreement provides that the Merger will be consummated
if the required approvals of the CompuRAD Stockholders and the Lumisys
Stockholders are obtained and all other conditions to the Merger are satisfied
or waived. As a result of the Merger, each outstanding share of CompuRAD Common
Stock (other than shares owned by Lumisys, CompuRAD, Merger Sub or any direct or
indirect wholly-owned subsidiary of Lumisys or CompuRAD), will be converted into
the right to receive 0.928 shares of Lumisys Common Stock.
Based upon the outstanding shares of Lumisys and CompuRAD as of the Lumisys
Record Date, the former stockholders of CompuRAD immediately prior to the
consummation of the Merger would own approximately 36.3% of the outstanding
Lumisys Common Stock following consummation of the Merger.
EFFECTIVE TIME
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware (the "Effective Time"). The
filing of the Certificate of Merger will occur as soon as practicable after, and
in any event no later than ten business days after, the latest to occur of the
approval of the Merger Proposal by the CompuRAD Stockholders or the approval of
the Share Proposal by the Lumisys Stockholders, subject to the satisfaction or
waiver of the other conditions to the consummation of the Merger.
The Reorganization Agreement may be terminated under certain circumstances
by any party if the Merger shall not have been consummated on or before January
31, 1998. The Reorganization Agreement may also be terminated under certain
other circumstances. See "THE REORGANIZATION AGREEMENT -- Conditions to the
Merger" and "-- Termination."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of CompuRAD Common Stock into the right to receive Lumisys
Common Stock will occur automatically at the Effective Time. As a result of the
Merger, each outstanding share of CompuRAD Common Stock (other than shares owned
by Lumisys, CompuRAD, Merger Sub or any direct or indirect wholly-owned
subsidiary of Lumisys or CompuRAD) will be converted into the right to receive
0.928 shares of Lumisys Common Stock.
As soon as practicable after the Effective Time, and in any event no later
than ten days after the Effective Time, the Exchange Agent will mail to the
holders of CompuRAD stock certificates a letter of transmittal in customary
form, together with instructions for effecting the surrender of CompuRAD stock
certificates in
31
<PAGE> 44
exchange for certificates representing Lumisys Common Stock. Upon surrender of a
CompuRAD stock certificate to the Exchange Agent and a duly executed letter of
transmittal, the holder of such CompuRAD stock certificate will be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Lumisys Common Stock that such holder has the right to receive and
cash in lieu of any fractional share of Lumisys Common Stock.
If any issuance of certificates representing shares of Lumisys Common Stock
in exchange for certificates representing shares of CompuRAD Common Stock is to
be made to a person other than the holder of CompuRAD stock certificates in
whose name such CompuRAD certificates are registered at the Effective Time, such
certificates must be properly endorsed or otherwise in proper form for transfer
and the CompuRAD Stockholder requesting such issuance must either pay any
required tax or establish to the satisfaction of Lumisys that such tax is not
payable.
After the Effective Time, there will be no further transfers of CompuRAD
Common Stock on the stock transfer books of CompuRAD. If a certificate
representing CompuRAD Common Stock is presented for transfer after the Effective
Time, it will be canceled and exchanged for a certificate representing the
appropriate number of full shares of Lumisys Common Stock and cash in lieu of
fractional shares and any dividends and distributions with respect to Lumisys
Common Stock with a record date after the Effective Time.
After the Effective Time and until surrendered, certificates representing
shares of CompuRAD Common Stock will be deemed for all corporate purposes, other
than the payment of dividends and distributions, to evidence ownership of the
number of full shares of Lumisys Common Stock into which such shares of CompuRAD
Common Stock were converted at the Effective Time. No dividends or other
distributions, if any, payable to holders of Lumisys Common Stock will be paid
to the holders of any certificates for shares of CompuRAD Common Stock until
such certificates are surrendered. Upon surrender of such certificates, all such
declared dividends and distributions which shall have become payable with
respect to Lumisys Common Stock in respect of a record date after the Effective
Time will be paid to the holder of record of the shares of Lumisys Common Stock
represented by the certificate issued in exchange therefor, without interest.
See "THE REORGANIZATION AGREEMENT -- Exchange of Certificates."
COMPURAD STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. COMPURAD STOCKHOLDERS SHOULD
NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
BACKGROUND OF THE MERGER
CompuRAD and Lumisys have had a commercial relationship since 1993 when
CompuRAD first started purchasing film digitizers and video digitizers from
Lumisys. Stephen J. Weiss, the Chief Executive Officer and President of Lumisys,
and Dr. Phillip Berman, the Chief Executive Officer, Chairman of the Board, and
President of CompuRAD, have known each other since December 1992 when they first
met at the Radiological Society of North America trade show and conference.
In February 1997, senior management of CompuRAD held several meetings with
senior management of Lumisys to discuss the possibility of entering into a
strategic relationship, either in the form of (i) a joint venture, (ii) a joint
product development arrangement or (iii) an agreement by CompuRAD to develop
software for incorporation into Lumisys' products. As a result of such
discussions, on March 18, 1997, CompuRAD entered into a confidentiality
agreement with Lumisys containing customary terms and conditions.
In late February 1997, certain members of the management of Lumisys
(including Mr. Weiss and Craig Klosterman, the Chief Financial Officer and Chief
Operating Officer of Lumisys), met with representatives of H&Q to discuss
possible acquisition opportunities. During those meetings, H&Q identified
CompuRAD to Lumisys as a potential business acquisition, although no discussions
were held between Lumisys and CompuRAD regarding a potential acquisition or
merger at that time.
32
<PAGE> 45
From March 18, 1997 through April 1997, representatives of CompuRAD and
representatives of Lumisys held numerous discussions concerning their business
philosophies, long term objectives, and the possibility of entering into one of
the strategic relationships referred to above. In particular, the companies
discussed the possibility that CompuRAD would develop software for Lumisys. In
light of the difficulties involved in such a product development effort,
including difficulties in maintaining components of unified products for many
different customers of Lumisys, in source code ownership, and in allocating
costs for continued engineering once initial products were brought to market,
software development appeared unlikely to be a sustainable and successful
strategy. The companies also discussed the possibility of creating a joint
venture for the joint development of products. Such a strategy, however, was not
pursued because of potential channel conflict issues as well as complex issues
regarding ownership of jointly developed products.
On April 29, 1997, Dr. Berman, Mr. Weiss and Mr. Klosterman assessed the
commonality of interests, synergy of business and roles of management of Lumisys
and CompuRAD, and first explored the possibility of a business combination of
the companies rather than a joint product development arrangement or other type
of strategic relationship.
On May 12, 1997, at a previously scheduled meeting of the Lumisys Board,
management of Lumisys reported on its preliminary discussions with CompuRAD
regarding a possible business combination. The Lumisys Board authorized and
instructed management to continue to explore the possibility of a business
combination with CompuRAD, including through discussions with representatives of
CompuRAD. In addition, the Lumisys Board agreed to engage H&Q to render certain
financial advisory services relating to the proposed business combination,
including providing an analysis of the financial terms of the proposed business
combination.
On May 20, 1997, Mr. Weiss and Mr. Klosterman visited CompuRAD's executive
offices to further discuss the operations of CompuRAD and the benefits and risks
of a proposed business combination.
On May 22, 1997, the CompuRAD Board reviewed the preliminary discussions
with Lumisys and authorized appropriate officers of CompuRAD to continue
discussions with Lumisys regarding a potential business combination. On June 2,
1997, Dr. Berman discussed with Mr. C. Richard Kramlich, a director of Lumisys,
the strategic fit of CompuRAD's business with Lumisys' business and the
opportunities for the companies as a combined entity.
On June 5, 1997, representatives of CompuRAD and representatives of Lumisys
discussed the terms and conditions of a potential merger transaction including,
among other things, the tax and accounting treatment of such a transaction and
the amount and nature of the consideration that might be paid to the CompuRAD
Stockholders. On June 6, 1997, the CompuRAD Board discussed such terms and
conditions. On June 11, 1997, the parties elected to cease negotiations due to
their inability to arrive at mutually agreeable terms.
In early August 1997, Lumisys management approached Dr. Berman to discuss
the possibility that the parties would recommence negotiations regarding a
possible business combination including Lumisys and CompuRAD. On August 15,
1997, at the invitation of the Lumisys Board, Dr. Berman met with
representatives of the Lumisys Board, Lumisys management and H&Q, and discussed
a merger proposal involving CompuRAD and Lumisys and a lock-up agreement
pursuant to which CompuRAD would agree that until September 30, 1997, it would
not consider or enter into discussions with other parties regarding an
acquisition proposal. Dr. Berman discussed such merger proposal and lock-up
agreement with the CompuRAD Board on August 20, 1997. The CompuRAD Board
authorized the CompuRAD management to continue to negotiate a potential business
combination with Lumisys pursuant to the general terms of the merger proposal
and approved the lock-up agreement that was subsequently executed by both
parties on August 27, 1997. The CompuRAD Board also authorized the CompuRAD
management to engage an investment banker to render an opinion as to the
fairness to the CompuRAD Stockholders of the consideration proposed to be paid
to such CompuRAD Stockholders in a business combination with Lumisys. On
September 3, 1997, CompuRAD engaged CIBC as financial advisor to CompuRAD with
respect to the proposed business combination with Lumisys.
33
<PAGE> 46
From August 20 through early September 1997, Lumisys and CompuRAD
continued, in consultation with their respective representatives, including
legal and financial advisors, to negotiate the terms of a business combination
and Reorganization Agreement. In addition, representatives of CompuRAD and
representatives of Lumisys, including their respective legal counsel and
financial advisors, also negotiated the terms of the Voting Agreements and the
Employment Offer Letters with Dr. Berman, Cary Cole, Vice President Sales and
Marketing of CompuRAD, and Henky Wibowo, Vice President Engineering of CompuRAD.
From August 1997 through September 1997, representatives of Lumisys and
representatives of CompuRAD conducted a due diligence review of each other's
business, financial, market, technical and other information, material contracts
and other due diligence materials. In addition, numerous visits were made by the
senior management of each company to the other company's facilities.
On September 11, 1997, the CompuRAD Board held a special meeting to
consider the terms of the proposed merger and reviewed with its legal counsel
and its financial advisor the draft Reorganization Agreement and the draft
Voting Agreement. The CompuRAD Board discussed with management and legal counsel
the draft agreements and proposed changes thereto. Legal counsel and management
also updated the CompuRAD Board concerning the due diligence conducted to date.
On September 19, 1997, at a special meeting of the Lumisys Board, Lumisys
management reviewed the proposed merger with the Lumisys Board and reported to
the Lumisys Board regarding due diligence findings. In addition, H&Q made a
preliminary oral report to the Lumisys Board with respect to the financial
aspects of the proposed merger. The Lumisys Board then engaged in a detailed
discussion of the terms and conditions of the proposed merger.
On September 24, 1997, the Lumisys Board held a special telephonic meeting
to consider the proposed merger. Members of Lumisys' senior management, and
Lumisys' legal counsel and financial advisor discussed various aspects of the
proposed merger. In particular, H&Q made a financial presentation regarding the
financial terms of the proposed merger. H&Q's financial presentation included a
discussion of certain of the analyses described under "-- Opinion of Lumisys'
Financial Advisor." The terms of the Reorganization Agreement, Voting Agreements
and the Employment Offer Letters with Dr. Berman, Mr. Wibowo and Mr. Cole were
also discussed with the directors. After these discussions, H&Q rendered its
oral opinion, subsequently confirmed in writing, that the consideration to be
paid in the proposed merger by Lumisys was fair from a financial point of view
to Lumisys. The Lumisys Board then voted unanimously (i) to approve the Merger,
the Reorganization Agreement and the related documents for the transaction as
presented to them, and to direct the officers of Lumisys to finalize the terms
of the Reorganization Agreement and the Merger and (ii) to recommend that the
Lumisys Stockholders vote to approve the issuance of Lumisys Common Stock in the
Merger.
On September 26, 1997, the CompuRAD Board held a special meeting. At that
meeting, CompuRAD's legal counsel reviewed for the CompuRAD Board the proposed
Reorganization Agreement and proposed Voting Agreements, which incorporated many
of the changes that had been discussed during the preceding CompuRAD Board
meetings. CIBC gave a presentation regarding the financial terms of the proposed
merger. CIBC's presentation included a discussion of certain of the analyses
described under "-- Opinion of CompuRAD Financial Advisor." CIBC also rendered
its opinion that an Exchange Ratio of 0.928 was fair to the stockholders of
CompuRAD from a financial point of view. After further discussion, including
consideration of a number of the factors set forth below under
"-- Recommendation of the CompuRAD Board; Reasons for the Merger," the CompuRAD
Board voted unanimously: (i) to approve the Merger and the Reorganization
Agreement and the related documents for the transaction as presented to them and
(ii) to recommend that the CompuRAD Stockholders vote to approve and adopt the
Reorganization Agreement and to approve the Merger. See "Recommendation of the
CompuRAD Board; Reasons for the Merger."
On September 27 and 28, 1997, legal counsel and financial advisors for
Lumisys and CompuRAD, together with members of management of CompuRAD and
Lumisys, negotiated and finalized the terms of the Reorganization Agreement. On
September 28, 1997, the Lumisys Board was presented with the final terms of the
Merger (including the final Exchange Ratio) and, after discussions with H&Q,
voted unanimously to
34
<PAGE> 47
approve the final terms of the Merger (including the final Exchange Ratio) and
the Reorganization Agreement.
The Reorganization Agreement and the Voting Agreements were executed by all
parties on September 28, 1997, and a joint public announcement of the proposed
transaction was made on September 28, 1997.
RECOMMENDATION OF THE LUMISYS BOARD; REASONS FOR THE MERGER
The Lumisys Board has unanimously determined that the terms of the
Reorganization Agreement and the Merger are fair to, and in the best interests
of, the Lumisys Stockholders. Accordingly, the Lumisys Board has unanimously
approved the Reorganization Agreement and unanimously recommends that the
Lumisys Stockholders vote FOR approval of the Share Proposal. In reaching its
determination, the Lumisys Board consulted with Lumisys' management, as well as
its legal counsel, accountants and financial advisor, and gave significant
consideration to a number of factors bearing on its decision. The following are
the reasons the Lumisys Board believes the Merger will be beneficial to Lumisys
and its stockholders:
- CompuRAD's software products are synergistic and complementary to
Lumisys' hardware products, customer base and markets in general. Lumisys
develops, manufactures and sells a line of laser and CCD based medical
and industrial inspection film digitizers and board level video
digitizers. These imaging products are sold to OEMs, VARs and systems
integrators who then add application specific software and hardware and
sell a "turn key" system to end users which include medical clinics and
hospitals. CompuRAD develops and sells such application specific software
to such OEMs, VARs and systems integrators. Many of Lumisys' major
customers, who have in the past developed their own software
applications, have expressed interest in outsourcing software development
(particularly in the medical imaging and information management areas) in
order to focus their engineering resources on core businesses. The
integration of CompuRAD's software products into Lumisys' business will
allow Lumisys to provide such software development services to such
customers as well as to other systems integrators.
- The addition of a quality software component embedded in or along with
Lumisys' present and future hardware products is expected to further
establish Lumisys as a leading supplier of medical imaging appliances.
- The combined company will offer both stand alone software and hardware
products and a unique combination of medical imaging and digital
networking software embedded directly into Lumisys' digitizing and
imaging products. These products will be designed to address the market
demand for both cost effective and network efficient medical image and
information radiology productivity tools.
- The combination of the technologies and the product development resources
of Lumisys and CompuRAD should enable Lumisys to respond more effectively
to the rapid technological change and continuing emergence of medical
imaging appliances.
- The Lumisys Board believes that there is a significant potential
enhancement of the strategic and market position of the combined entity
beyond that achievable by Lumisys alone.
In addition to the reasons set forth above, in the course of its
deliberations concerning the Merger, the Lumisys Board consulted with Lumisys'
legal and financial advisors as well as Lumisys' management, and reviewed a
number of other factors relevant to the Merger, including:
- Information concerning the business, assets, operations, properties,
management, financial condition, operating results, competitive position
and prospects of Lumisys and CompuRAD;
- The historical market prices and trading information with respect to
Lumisys Common Stock and CompuRAD Common Stock;
- The expected tax and accounting treatment of the Merger;
- Reports from legal and financial advisors on specific terms of the
Reorganization Agreement and the Voting Agreements;
35
<PAGE> 48
- The opinion of H&Q that, as of September 28, 1997, subject to various
qualifications and assumptions, the consideration proposed to be paid by
Lumisys pursuant to the Merger was fair to Lumisys from a financial point
of view; and
- The Lumisys Board's belief that the management styles and corporate
cultures of the two companies would be complementary.
The Lumisys Board also considered a number of potentially negative factors
in its deliberations concerning the Merger, including:
- The possibility of management disruption associated with the Merger and
the risk that key technical and management personnel of CompuRAD or
Lumisys might not continue with CompuRAD or Lumisys;
- The short term negative impact on Lumisys' financial performance;
- The possibility that the Merger might adversely affect CompuRAD's or
Lumisys' relationship with certain of its customers both during the
pendency and following completion of the Merger and in the event the
Merger is not consummated;
- The risk that the potential benefits of the Merger might not be realized;
and
- The fixed nature of the Exchange Ratio and the resulting risk that it
will not adjust for subsequent price fluctuations.
The Lumisys Board concluded, however, that the benefits of the transaction
to Lumisys and its stockholders outweighed the risks associated with the
foregoing factors.
The foregoing discussion of the information and factors considered by the
Lumisys Board is not intended to be exhaustive but is believed to include all
material factors considered by the Lumisys Board. In view of the wide variety of
information and factors, both positive and negative, considered, the Lumisys
Board did not find it practical to, and did not, quantify or otherwise assign
any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
RECOMMENDATION OF THE COMPURAD BOARD; REASONS FOR THE MERGER
The CompuRAD Board has unanimously determined that the terms of the
Reorganization Agreement and the transactions contemplated thereby are fair to,
and in the best interests of, the CompuRAD Stockholders. Accordingly, the
CompuRAD Board has unanimously approved the Reorganization Agreement and the
Merger and unanimously recommends that the CompuRAD Stockholders vote FOR
approval of the Merger Proposal. In reaching its determination, the CompuRAD
Board consulted with CompuRAD's management, as well as its legal counsel,
accountants and financial advisors, and gave significant consideration to a
number of factors bearing on its decision.
The following list includes the material factors the CompuRAD Board
considered in its evaluation of the Merger:
- Analysis of the financial performance and condition, businesses and
prospects of Lumisys and CompuRAD, including, but not limited to,
information with respect to their respective recent and historic stock
prices and earnings performance. The CompuRAD Board also considered the
detailed financial analyses, pro forma and other information with respect
to Lumisys and CompuRAD presented by CIBC;
- Analysis of the financial condition and businesses of recent comparable
acquisition transactions and comparable companies;
- The CompuRAD Board believes that there is a significant potential
enhancement of the strategic and market position of the combined entity
beyond that achievable by CompuRAD alone. In particular, CompuRAD
management believes that major medical manufacturers will become
increasingly required to deliver PACS and teleradiology components with
modality sales. The combined entity will
36
<PAGE> 49
offer both stand alone software and hardware and a combination of medical
imaging and digital networking software embedded directly into hardware
digitizing and imaging products, creating one of the largest source for
PACS and teleradiology components for OEMs in the world. The CompuRAD
Board also considered the ability of CompuRAD to raise capital from other
sources;
- Lumisys' increased capital base relative to CompuRAD and the need for
additional capital to fund CompuRAD's continued growth both domestically
and internationally;
- The written opinion of CIBC that based upon and subject to the various
qualifications and assumptions described therein, the Exchange Ratio was
fair, from a financial point of view, to the CompuRAD Stockholders;
- The Exchange Ratio and the other terms of the Reorganization Agreement;
- The expectation that the Merger will be a tax-free transaction to
CompuRAD and its stockholders and will be accounted for as a pooling of
interests transaction; and
- Such other matters as the CompuRAD Board deemed necessary or appropriate
in considering the Merger.
The CompuRAD Board also considered a number of potentially negative factors
in its deliberation concerning the Merger, including:
- The possibility that the Merger might adversely affect CompuRAD's or
Lumisys' relationship with certain of its customers both during the
pendency of the Merger and in the event the Merger is not consummated;
- The possibility of management disruption associated with the Merger and
the risk that key technical and management personnel of CompuRAD or
Lumisys might not continue with CompuRAD or Lumisys;
- The possibility of customer and management disruption that would
adversely affect CompuRAD's ability to operate as a stand-alone entity if
the Merger is not consummated;
- The fixed nature of the Exchange Ratio and the resulting risk that it
will not adjust for subsequent price fluctuations; and
- The risk that the potential benefits of the Merger might not be realized.
The CompuRAD Board concluded, however, that the benefits of the transaction
to CompuRAD and its stockholders outweighed the risks associated with the
foregoing factors.
The foregoing discussion of the information and factors considered by the
CompuRAD Board is not intended to be exhaustive but is believed to include all
material factors considered by the CompuRAD Board. In view of the wide variety
of information and factors, both positive and negative considered, the CompuRAD
Board did not find it practical to, and did not, quantify or otherwise assign
any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
OPINION OF LUMISYS' FINANCIAL ADVISOR
Lumisys engaged H&Q to act as its financial advisor in connection with the
Merger and to render an opinion as to the fairness from a financial point of
view to Lumisys of the consideration to be paid by Lumisys in connection with
the Merger. H&Q rendered its oral opinion, subsequently confirmed in writing, on
September 24, 1997, to the Lumisys Board that, as of such date, the
consideration to be paid by Lumisys pursuant to the Reorganization Agreement is
fair to Lumisys from a financial point of view. A COPY OF H&Q'S OPINION DATED
SEPTEMBER 28, 1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED,
THE SCOPE AND LIMITATION OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY
H&Q IS ATTACHED AS ANNEX C-1 TO THE JOINT PROXY STATEMENT PROSPECTUS. LUMISYS
STOCKHOLDERS ARE ADVISED TO READ THE OPINION IN ITS ENTIRETY. The Lumisys
Stockholders should note that the opinion was
37
<PAGE> 50
written for the information of the Lumisys Board in connection with their
evaluation of the merger. No limitations were placed on H&Q by the Lumisys Board
with respect to the investigation made or the procedures followed in preparing
and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, H&Q, among
other things: (i) reviewed the publicly available consolidated financial
statements of Lumisys for recent years and interim periods to date and certain
other relevant financial and operating data of Lumisys made available to H&Q
from published sources and from the internal records of Lumisys; (ii) reviewed
certain internal financial and operating information, including projections,
relating to Lumisys provided by the management of Lumisys; (iii) discussed with
certain members of the management of Lumisys the business, financial condition
and prospects of Lumisys; (iv) reviewed the publicly available financial
statements of CompuRAD for recent years and interim periods to date and certain
other relevant financial and operating data of CompuRAD made available to H&Q
from published sources and from the internal records of CompuRAD; (v) reviewed
certain internal financial and operating information, including certain
projections, relating to CompuRAD prepared by the management of CompuRAD; (vi)
discussed with certain members of the management of CompuRAD the business,
financial condition and prospects of CompuRAD; (vii) reviewed the recent
reported prices and trading activity for Lumisys' and CompuRAD's Common Stock
and compared such information and certain financial information of Lumisys and
CompuRAD with similar information for certain other companies engaged in
businesses H&Q considered comparable to those of Lumisys and CompuRAD; (viii)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions; (ix) reviewed the Reorganization
Agreement; (x) discussed the tax and accounting treatment of the Merger with
Lumisys and Lumisys's accountants; and (xi) performed such other analyses and
examinations and considered such other information, financial studies, analyses
and investigations and financial, economic and market data H&Q deemed relevant.
H&Q did not independently verify any of the information concerning Lumisys
or CompuRAD considered in connection with their review of the Merger and, for
purposes of its opinion, H&Q assumed and relied upon the accuracy and
completeness of all such information. In connection with its opinion, H&Q did
not prepare or obtain any independent evaluation or appraisal of any of the
assets or liabilities of Lumisys or CompuRAD, nor did they conduct a physical
inspection of the properties and facilities of Lumisys or CompuRAD. H&Q also
assumed that neither Lumisys nor CompuRAD was a party to any pending
transactions, including external financings, recapitalizations or merger
discussions, other than the Merger and those in the ordinary course of
conducting their respective businesses. For purposes of their opinion, H&Q
assumed that the Merger will qualify as a tax-free reorganization under the Code
for the stockholders of Lumisys and that the Merger will be accounted for as a
pooling of interests. H&Q's opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the date
of the opinion and any subsequent change in such conditions would require a
reevaluation of such opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the H&Q analyses set forth below does not purport to be a complete
description of the presentation by H&Q to the Lumisys Board. In arriving at its
opinion, H&Q did not attribute any particular weight to any analyses or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, H&Q believes that its
analyses and the summary set forth below must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or of the
following summary, without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the H&Q
presentation to the Lumisys Board and its opinion. In performing its analyses,
H&Q made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of Lumisys and CompuRAD. The analyses performed by H&Q (and summarized
below) are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, analyses relating to the values of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be acquired.
38
<PAGE> 51
The following is a brief summary of certain financial analyses performed by
H&Q in connection with providing its written opinion to the Lumisys Board which
was dated as of September 28, 1997:
CONTRIBUTION ANALYSIS. H&Q analyzed the contribution of Lumisys and
CompuRAD to certain financial statement categories of the pro forma combined
company, including revenue, operating income and net income. This contribution
analysis was then compared to the pro forma ownership percentage of Lumisys and
CompuRAD Stockholders of the pro forma combined company. H&Q examined the
expected contributions to the combined company's pro forma revenues, pro forma
gross profit, pro forma operating income and pro forma net income by Lumisys for
fiscal 1998 and 1999 (i.e., the four quarters ending December 31), derived from
Lumisys projections as prepared by H&Q following discussions with Lumisys, and
by CompuRAD for the same period, derived from estimates prepared by H&Q
following discussions with CompuRAD and Lumisys management. H&Q observed that
the Lumisys Stockholders are expected to own approximately 64% of the combined
company equity at the close of the Merger, and the CompuRAD Stockholders are
expected to own approximately 36% of the combined company equity at the close of
the Merger. In fiscal 1998, it was estimated that Lumisys and CompuRAD would
have contributed approximately 71% and 29%, respectively, of the combined pro
forma revenues; and approximately 75% and 25%, respectively, of the combined pro
forma gross profit; contribution of the combined pro forma operating income and
net income was viewed as being not meaningful given the expectation of CompuRAD
operating losses and net losses for 1998. With respect to expected fiscal 1999
financial performance, it was estimated that Lumisys and CompuRAD would have
contributed approximately 69% and 31%, respectively, of the combined pro forma
revenues; approximately 72% and 28%, respectively, of the combined pro forma
gross profit; approximately 85% and 15%, respectively, of the combined pro forma
operating income; and approximately 86% and 14%, respectively, of the combined
pro forma net income.
PRO FORMA ANALYSIS. H&Q analyzed the pro forma impact of the proposed
merger on Lumisys' earnings per share ("EPS"), based on using estimates of EPS
for Lumisys in fiscal 1998 and fiscal 1999. The analysis indicated that EPS of
the pro forma combined company would be lower than for Lumisys as a stand-alone
company for each fiscal 1998 and fiscal 1999. The actual results and savings
achieved by the combined company resulting from the Merger may vary from the
projected results and such variations may be material.
PREMIUM ANALYSIS. H&Q compared the implied price per share of the offer as
of September 23, 1997 to the last sale price of CompuRAD Common Stock on both
September 22, 1997 and August 26, 1997 (the twentieth trading day preceding the
announcement of the proposed Merger) to similar premiums for certain medical
software and graphics software transactions announced since January 1, 1994. H&Q
analyzed eight such public company to public company medical software
transactions and observed that the average one-day premium and average four-week
premium paid in such transactions was 32% and 47%, respectively. H&Q also
analyzed six such public company to public company graphics software
transactions and observed that the average one-day premium and average four-week
premium paid in such transactions was 36% and 39%, respectively. This compared
with the proposed merger in which the one-day premium offered was 1% and the
four-week premium offered was (10%). Based on the analysis of premiums paid in
comparable transactions, CompuRAD's implied equity value ranged from
approximately $33 million to $40 million. This compared with an implied value of
$25 million of CompuRAD in the Merger, based on the closing price of Lumisys
Common Stock on September 23, 1997.
ANALYSIS OF PUBLICLY TRADED COMPARABLE COMPANIES. H&Q compared selected
historical and projected financial information of CompuRAD to publicly traded
companies that H&Q deemed to be comparable to CompuRAD. Such data and ratios
included market value, market value to historical revenue, and market value to
historical book value. Given CompuRAD's history of operating and net losses and
projected operating and net losses for 1998, analysis of ratios of operating and
net earnings was viewed as not being meaningful. All multiples were based on
closing stock prices on September 22, 1997. Companies viewed as comparable
included selected medical/scientific imaging companies including ADAC
Laboratories, BioImaging Technologies, Inc., Molecular Dynamics, Inc., Neopath,
Inc., Vital Images, Inc. and Voxel; and certain healthcare information services
companies including Dynamic Healthcare Technologies, Inc., HBO & Co, HCIA Inc.,
Imnet Systems, Inc., Lanvision Systems, Inc., Medic Computer Systems, Inc.,
Medicus Systems Corp., Oacis Healthcare Holdings Corp., Pace Health Management
Systems, Inc., Sunquest Information Systems, Inc.
39
<PAGE> 52
and Transition Systems, Inc. The foregoing multiples were applied to historical
financial results of CompuRAD for the twelve-month period ended June 30, 1997.
H&Q determined that the average multiple of the last-twelve-months revenues for
these companies was 3.8. H&Q determined that the average multiple of book value
for these companies was 4.3. Based on the analysis of publicly traded comparable
companies, CompuRAD's implied equity value ranged from approximately $18 million
to approximately $34 million. This compared with an implied value of $25 million
of CompuRAD in the Merger, based on the closing price of Lumisys Common Stock on
September 23, 1997.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. H&Q compared the
proposed merger with selected comparable merger and acquisition transactions.
This analysis included 16 comparable medical software transactions and 13
graphics software transactions. In examining these transactions, H&Q analyzed
certain income statement and balance sheet parameters of the acquired company
relative to the consideration offered. Multiples analyzed included consideration
offered to historical revenue and to historical book value. Given CompuRAD's
history of operating and net losses, analysis of multiples of operating and net
earnings were viewed as being not meaningful. Selected medical software
transactions analyzed include CEMAX-Icon, Inc./Imation Corp., Enterprise
Systems, Inc./HBO & Co, Computer Business Systems of Virginia, Inc./Medic
Computer Systems, Inc., Homecare Information Systems, Inc./Medic Computer
Systems, Inc., Amisys Managed Care Systems, Inc./HBO & Co, GMIS Inc./HBO & Co,
CyCare Systems, Inc./HBO & Co, CIS Technologies, Inc./National Data Corp.,
Health Data Sciences Corp./Medaphis Corp., National Electronic Information
Corp./Envoy Corp., Healthcare Recoveries, Inc./Medaphis Corp., Pyxis
Corp./Cardinal Health, Inc., Clinicom Incorporated/HBO & Co, Health Systems
Group/HBO & Co, Serving Software, Inc./HBO & Co and IBAX Healthcare Systems/HBO
& Co. The consideration offered in the forgoing transactions was an average
multiple of 3.7 times revenue and 5.0 times book value. Based on the analysis of
selected merger and acquisition transactions, CompuRAD's implied equity value
ranged from approximately $21 million to $33 million. This compared with an
implied value of $25 million of CompuRAD in the Merger.
Selected graphics software transactions analyzed include Fractal Design
Corp./MetaTools, Inc., SpeedSim, Inc./Quickturn Design Systems, Inc., Epic
Design Technology, Inc./Synopsis, Inc., Softdesk, Inc./Autodesk, Inc., Cooper &
Chyan Technology, Inc./Cadence Design Systems, Inc., Meta-Software Inc./Avant!
Corp., Anagram, Inc./Avant! Corp., Ray Dream Inc./Fractal Design Corp.,
Integrated Silicon Systems, Inc./ArcSys, Inc., Rasna Corp./Parametric Technology
Corporation and SoftImage, Inc./Microsoft Corporation. The consideration offered
in the forgoing transactions was an average multiple of 7.6 times revenue. Based
on the analysis of selected merger and acquisition transactions, CompuRAD's
implied equity value based on CompuRAD's historic software revenue as determined
from quarterly financial statements and schedules provided by CompuRAD was
approximately $31 million. This compared with an implied value of $25 million of
CompuRAD in the Merger.
No company or transaction used in the above analyses is identical to
Lumisys or CompuRAD or the Merger. Accordingly, an analysis of the results of
the foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the companies or company to which they are compared.
The foregoing description of H&Q's opinion is qualified in its entirety by
reference to the full text of such opinion which is attached as Annex C-1 to
this Joint Proxy Statement/ Prospectus.
H&Q, as part of its investment banking services, is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, corporate restructurings, strategic alliances, negotiated
underwriting, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. H&Q is familiar with
Lumisys, having acted as managing underwriter of its initial public offering in
1995. In the ordinary course of business, H&Q acts as a market maker and broker
in the publicly traded securities of Lumisys and receives customary compensation
in connection therewith, and also provides research coverage for Lumisys. In the
ordinary course of business,
40
<PAGE> 53
H&Q actively trades in the equity and derivative securities of Lumisys for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
Pursuant to an engagement letter dated February 4, 1997, Lumisys has agreed
to pay H&Q a fee in connection with its services as financial advisor to the
Board of Directors and the rendering of a fairness opinion. The fee with respect
to the delivery of a fairness opinion is owed upon the delivery of such opinion,
and the fee with respect to financial advisory services is owed upon the closing
of the Merger and is not dependent upon the value of the transaction. Lumisys
also has agreed to reimburse H&Q for its reasonable out-of-pocket expenses and
to indemnify H&Q against certain liabilities, including liabilities under the
federal securities laws or relating to or arising out of H&Q's engagement as
financial advisor.
OPINION OF COMPURAD'S FINANCIAL ADVISOR
CompuRAD retained CIBC to act as CompuRAD's financial advisor in connection
with the Merger and related matters based upon CIBC's qualifications,
reputation, experience and expertise with respect to transactions similar to
those contemplated by the Reorganization Agreement. At the request of the
CompuRAD Board, on September 26, 1997, CIBC delivered its oral opinion to the
CompuRAD Board to the effect that, as of such date, the consideration to be
received by the CompuRAD Stockholders pursuant to the Merger, which was
determined by arm's-length negotiation between CompuRAD and Lumisys, was fair to
such stockholders from a financial point of view. CIBC delivered a written
opinion to the CompuRAD Board on September 28, 1997 confirming its oral opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF CIBC DATED SEPTEMBER 28, 1997, AND
WHICH SETS FORTH CERTAIN PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY CIBC IN RENDERING ITS
OPINION, IS ATTACHED HERETO AS ANNEX C-2 AND SHOULD BE READ IN ITS ENTIRETY IN
CONNECTION WITH THIS JOINT PROXY STATEMENT/PROSPECTUS. The opinion of CIBC was
furnished for the information of the CompuRAD Board in connection with its
consideration of the Merger and is directed only to the fairness, from a
financial point of view, to the CompuRAD Stockholders of the Exchange Ratio. The
CIBC opinion does not address CompuRAD's underlying business decision to effect
the Merger or constitute a recommendation to any CompuRAD Stockholder as to how
such stockholder should vote on the Merger. The summary of the opinion of CIBC
set forth in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of the opinion attached hereto as Annex C-2.
In connection with rendering its opinion, CIBC reviewed, among other
things, the following: (i) the Reorganization Agreement; (ii) certain publicly
available information relating to CompuRAD and Lumisys for recent years and
interim periods to the date of the opinion; (iii) and certain internal financial
and operating information and summary projections for CompuRAD and Lumisys
prepared by their respective managements for purposes of its analysis; (iv)
certain financial and stock market data relating to CompuRAD and Lumisys; (v)
certain publicly available information with respect to certain other companies
that CIBC believed to be comparable to CompuRAD, Lumisys or one or more of their
businesses or assets; and (vi) certain publicly available information concerning
the nature and terms of certain other transactions that CIBC considered to be
reasonably comparable to the transactions contemplated by the Reorganization
Agreement or otherwise relevant to its inquiry. CIBC also met with certain
members of senior management of CompuRAD to review and discuss information
reviewed by CIBC and to discuss CompuRAD's operations, historical financial
statements and future prospects, and their views of the business, operational
and strategic benefits, potential synergies (including revenue enhancements and
cost savings) and other implications of the Merger. CIBC also met with certain
members of senior management of Lumisys to review and discuss information
reviewed by CIBC and to discuss Lumisys' operations, historical financial
statements and future prospects, as well as their views of the business,
operational and strategic benefits, potential synergies (including revenue
enhancements and cost savings) and other implications of the Merger. CIBC also
performed such other studies and analysis as it considered appropriate.
41
<PAGE> 54
In connection with its review, CIBC did not independently verify any of the
foregoing information and relied on its being complete and accurate in all
material respects. With respect to the financial forecasts, CIBC assumed that
such financial forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of CompuRAD and
Lumisys as to the future financial performance of CompuRAD and Lumisys,
respectively. CIBC did not conduct or obtain an independent evaluation or
appraisal of the assets or liabilities of Lumisys, nor did CIBC test or verify
the technical requirements for any contracts or products or evaluate the
probable costs and required time necessary to successfully implement new product
development plans. The CIBC opinion also assumes that the Merger will be
consummated in accordance with the terms of the Reorganization Agreement, that
the Merger will constitute a tax-free reorganization and that the Merger will be
accounted for as a pooling of interests under GAAP. The opinion of CIBC is
necessarily based upon financial, economic, market and other conditions as they
existed and could be evaluated on the date of its opinion.
The following is a summary of the analyses performed by CIBC in connection
with its oral September 26, 1997 and written September 28, 1997 opinion:
HISTORICAL STOCK PERFORMANCE. CIBC reviewed the daily closing per
share market prices and trading volume of CompuRAD Common Stock from August
28, 1996 to September 22, 1997. CIBC reviewed the daily closing per share
market prices of CompuRAD Common Stock and compared the movement of such
daily closing prices with the movement of the S&P 500 composite average
over the period from August 28, 1996 to September 22, 1997. CIBC noted
that, on a relative basis, CompuRAD generally under-performed the S&P 500
composite average. CIBC also reviewed the daily closing per share market
prices of CompuRAD Common Stock and compared the movement of such closing
prices over the period from September 20, 1996 to September 22, 1997 with
the movement over the same period of a software and systems industry
composite average consisting of the following companies deemed comparable
to CompuRAD ("Selected Companies"): ADAC Laboratories, Control Data
Systems, Inc., Broadway & Seymour, Inc., Data Systems Network Corporation,
Data Research Associates, Inc., Schick Technologies, Inc., Hauppauge
Digital, Inc., OEC Medical Systems, Inc., InVision Technologies, Inc. and
Liberty Technologies, Inc. CIBC noted that, on a relative basis this
composite average generally outperformed CompuRAD Common Stock.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. CIBC analyzed
CompuRAD's public market valuation as compared to the public market
valuation of the Selected Companies and compared certain financial
information (based on the valuation measurements described below) relating
to CompuRAD to certain corresponding information from the Selected
Companies. Such financial information included common equity market value
adjusted for debt and cash ("Enterprise Value") and ratios of Enterprise
Value to last twelve-month revenues ("LTM Revenues"), last twelve-month
operating income ("LTM OI"), last twelve-month operating cash flow ("LTM
OCF") and book value. The financial information used in connection with the
multiples provided below with respect to CompuRAD and the Selected
Companies was based on closing market prices of CompuRAD and the Selected
Companies as of September 22, 1997. Using publicly available information,
CIBC determined the relationship for the Selected Companies between
Enterprise Value and LTM Revenues, LTM OCF and LTM OI. CIBC then derived a
range of these multiples of LTM Revenues, (0.6x-8.0x), OCF (8.0x-84.5x) and
OI (10.7x-137.9x). The value of CompuRAD derived from the above analysis
ranged from $4.0 million to $120 million. This compared with an implied
value in the Merger of $25 million.
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS. CIBC reviewed the
financial terms, to the extent publicly available, of eight completed
mergers and acquisitions since July 1996 in the software and systems
industry (the "Selected Transactions"). CIBC assessed the equity offer
value adjusted for cash and debt at the time of the transaction as a
multiple of LTM Revenue, LTM OI and LTM net income. CIBC noted that the
median values of the Selected Transactions were 3.0x (LTM Revenue), 48.9x
(LTM OI) and 56.6x (LTM net income). CIBC further noted that the average
transaction value of the Selected Transactions was $171.73 million with a
range of $36.10 million to $250 million. All financial information for the
Selected Transactions was based on public information regarding such
transactions, without taking into account differing market and other
conditions during the period during in which the
42
<PAGE> 55
Selected Transactions occurred. The value of CompuRAD derived from the
review of comparable transactions ranged from $5.1 million to $92.3
million. This compared to an implied value in the Merger of $25 million.
DISCOUNTED CASH FLOW ANALYSIS. CIBC performed a discounted cash flow
analysis for CompuRAD. The discounted cash flow approach values a business
based on the current value of the future cash flow that the business will
generate. To establish a current value under this approach, future cash
flow must be estimated and an appropriate discount rate determined. CIBC
used estimates of projected financial performance for CompuRAD for the
years 1997 and 1998 prepared by CompuRAD management. CIBC aggregated the
present value of the cash flows through 2002 with the present value of a
range of terminal values. CIBC discounted these cash flows at discount
rates ranging from 13.15% to 17.65%. The terminal value was computed based
on projected revenue in 2002 and a range of final long term growth rates of
5% to 11%. CIBC arrived at such discount rates based on its judgment of the
weighted average cost of capital of the Selected Companies. This analysis
indicated a range of values for CompuRAD of $16 million to $25 million.
CIBC compared these values to a range of values for the Merger derived by
performing a discounted cash flow analysis for the combined companies. CIBC
discounted the cash flows generated by the Merger as set forth in
projections prepared by the management of CompuRAD and Lumisys. Using the
same method and discount rates as in the analysis of CompuRAD, CIBC arrived
at a range of values for the combined companies of $59 million to $91
million and a value range for CompuRAD of $21 million to $33 million
compared with an implied value of $25 million in the Merger.
The foregoing summary does not purport to be a complete description of the
analyses performed by CIBC or of its presentation to the CompuRAD Board. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant quantitative method of financial analyses and such an
opinion is not readily susceptible to summary description. Accordingly, in
arriving at its opinion, CIBC did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. No company or
transaction used in CIBC's analyses is identical to CompuRAD, Lumisys or the
Merger. Accordingly, the analyses performed by CIBC were not purely
mathematical; rather they involved complex considerations of the companies and
other factors that could affect the public trading values of the companies or
company to which they are compared. Accordingly, CIBC believes that its analyses
and the summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the summary,
without considering all factors and analyses, could create an incomplete view of
the processes underlying the analyses set forth in the CIBC presentation to the
CompuRAD Board and its opinion. In performing its analyses, CIBC made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of CompuRAD
and Lumisys. The analyses performed by CIBC (and summarized above) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
Pursuant to a letter agreement dated September 3, 1997, between CompuRAD
and CIBC, CompuRAD agreed to pay CIBC a fee upon delivery of its opinion,
without regard to the value or consummation of the transaction. CompuRAD has
also agreed to reimburse CIBC for its out-of-pocket expenses, including the fees
and expense of its legal counsel, incurred in connection with its engagement and
to indemnify CIBC and its affiliates against certain liabilities and expenses
relating to or arising out of its engagement, including certain liabilities
under federal securities laws.
CIBC is an internationally recognized investment banking firm and, as part
of its customary business, is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. In the ordinary course of business, CIBC and its affiliates may
actively trade the securities of CompuRAD and Lumisys and their respective
affiliates for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
43
<PAGE> 56
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the CompuRAD Board with respect to the
Reorganization Agreement and the transactions contemplated thereby, the CompuRAD
Stockholders should be aware that certain executive officers and directors of
CompuRAD have certain interests in the Merger that are in addition to the
interests of the CompuRAD Stockholders generally. The CompuRAD Board has
considered these interests, among other matters, in approving the Reorganization
Agreement and the Merger.
COMPURAD STOCK OPTIONS. Under the terms of the Reorganization Agreement,
each CompuRAD Stock Option, whether vested or unvested, pursuant to the CompuRAD
Stock Option Plans shall be converted into an option to acquire, on the same
terms and conditions as were applicable to such CompuRAD Stock Option on the
date of the Reorganization Agreement, the number of shares of Lumisys Common
Stock equal to the number of shares of CompuRAD Common Stock subject to such
CompuRAD Stock Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounding down to the nearest whole share (with cash, less the
applicable exercise price, being payable for any fraction of a share). The per
share exercise price under each such CompuRAD Stock Option shall be adjusted by
dividing the per share exercise price under such CompuRAD Stock Option by the
Exchange Ratio and rounding up to the nearest cent. As of the CompuRAD Record
Date, there were 318,100 CompuRAD Stock Options outstanding, and the executive
officers and directors of CompuRAD, as a group, held approximately 45,500
CompuRAD Stock Options.
BOARD OF DIRECTORS. Pursuant to the Reorganization Agreement, Dr. Phillip
Berman and Dr. David Lapan, a director of CompuRAD, will be nominated as
management nominees for election to the Lumisys Board at the next annual meeting
of stockholders of Lumisys.
EMPLOYMENT OFFER LETTERS. Dr. Berman, Cary Cole, and Henky Wibowo (each
referred to as an "Executive"), will execute Employment Offer Letters upon the
Closing (as defined in the Reorganization Agreement) which provide for the
employment of each Executive (subject to early termination) at their current
compensation. Such Executives will also be entitled to receive certain bonus
compensation under certain circumstances and will be entitled to participate in
certain other employee benefit plans that are generally made available to
Lumisys' employees.
Each of the Employment Offer Letters provides that if Lumisys terminates
such Executive's employment with Lumisys within two years after the Effective
Time without "cause," or if such Executive terminates his employment during such
two-year period for "good reason," then Lumisys will pay severance to such
Executive in an amount equivalent to such Executive's annual base salary for a
specified period of time. The payment such Executive is entitled to receive
under his Employment Offer Letter is less than the amount of severance payment
such Executive is entitled to receive under his employment agreement currently
in effect with CompuRAD. See "OTHER AGREEMENTS -- Employment Offer Letters."
INDEMNIFICATION AND INSURANCE. Pursuant to the Reorganization Agreement,
Lumisys agreed that, after the Effective Time, it will provide, and it will
cause the Surviving Corporation to provide, certain indemnification and
liability insurance benefits to certain indemnified parties, including directors
and executive officers of CompuRAD. See "THE REORGANIZATION AGREEMENT --
Indemnification and Insurance," and " -- Additional Covenants."
VOTING AGREEMENTS. Certain of the directors and executive officers, namely
Dr. Berman, and Messrs. Cole, Wibowo and Donovan (in their capacities as
stockholders of CompuRAD), have entered into Voting Agreements pursuant to which
each of the foregoing has agreed to vote his shares of CompuRAD Common Stock in
favor of the Merger Proposal and has granted Lumisys irrevocable proxies to that
effect. The general effect of the Voting Agreement is to increase the likelihood
that CompuRAD Stockholder approval for the Merger Proposal will be obtained. See
"OTHER AGREEMENTS -- Voting Agreements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
CompuRAD Common Stock, Lumisys, Merger Sub and CompuRAD.
44
<PAGE> 57
This discussion is based on currently existing provisions of the Code, existing
and proposed Treasury Regulations thereunder and current administrative rulings
and court decisions, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to Lumisys,
Merger Sub, CompuRAD or the CompuRAD Stockholders as described herein.
The CompuRAD Stockholders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular CompuRAD Stockholders in light of their particular circumstances,
such as stockholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the Code, who are foreign persons, who
acquired their shares in connection with stock option or stock purchase plans or
in other compensatory transactions or who hold their shares as part of a
hedging, straddle, conversion or other risk reduction transaction. In addition,
the following discussion does not address the tax consequences of the Merger
under foreign, state or local tax laws or the tax consequences of any other
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger). THE COMPURAD STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following federal
income tax consequences should result:
(a) No gain or loss will be recognized by the holders of CompuRAD Common
Stock upon the receipt of Lumisys Common Stock solely in exchange for
such CompuRAD Common Stock in the Merger (except to the extent of cash
received in lieu of fractional shares).
(b) The aggregate tax basis of the Lumisys Common Stock so received by the
CompuRAD Stockholders in the Merger (including any fractional share of
Lumisys Common Stock not actually received) will be the same as the
aggregate tax basis of the CompuRAD Common Stock surrendered in
exchange therefor.
(c) The holding period of the Lumisys Common Stock so received by each
CompuRAD Stockholder in the Merger will include the period for which
the CompuRAD Common Stock surrendered in exchange therefor was
considered to be held, provided that the CompuRAD Common Stock so
surrendered is held as a capital asset at the Effective Time of the
Merger.
(d) Cash payments received by holders of CompuRAD Common Stock in lieu of a
fractional share will be treated as if such fractional share of Lumisys
Common Stock had been issued in the Merger and then redeemed by
Lumisys. A CompuRAD Stockholder receiving such cash will recognize gain
or loss upon such payment, measured by the difference (if any) between
the amount of cash received and the basis in such fractional share. The
gain or loss should be capital gain or loss provided that such share of
CompuRAD Common Stock was held as a capital asset at the Effective Time
of the Merger.
(e) A stockholder of CompuRAD who exercises dissenters' rights under any
applicable law with respect to a share of CompuRAD Common Stock and
receives payments for such stock in cash will recognize capital gain or
loss (if such stock was held as a capital asset at the Effective Time
of the Merger) measured by the difference between the amount of cash
received and the stockholder's basis in such share, provided such
payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a distribution
of a dividend within the meaning of Section 356(a)(2) of the Code
(collectively, a "Dividend Equivalent Transaction"). A sale of CompuRAD
shares incident to an exercise of dissenters' rights will generally not
be a Dividend Equivalent Transaction if, as a result of such exercise,
the dissenting stockholder owns no shares of Lumisys Common Stock
(either actually or constructively within the meaning of Section 318 of
the Code).
(f) None of Lumisys, Merger Sub or CompuRAD will recognize gain solely as a
result of the Merger.
45
<PAGE> 58
Neither Lumisys nor CompuRAD has requested a ruling from the Internal
Revenue Service (the "IRS") with regard to any of the federal income tax
consequences of the Merger. The obligations of Lumisys and CompuRAD to
consummate the Merger are conditioned on the receipt by Lumisys of an opinion
from Wilson Sonsini or Cooley Godward, and the receipt by CompuRAD of an opinion
from Cooley Godward or Wilson Sonsini, that the Merger constitutes a
reorganization ("Reorganization") under Section 368 of the Code (collectively,
the "Tax Opinions"). The Tax Opinions are subject to certain assumptions and
qualifications and are based on the truth and accuracy of certain
representations of Lumisys, Merger Sub, CompuRAD and certain CompuRAD
Stockholders, including representations in certain certificates delivered to
counsel by the respective managements of Lumisys, Merger Sub, CompuRAD and
certain CompuRAD Stockholders. Of particular importance are the assumptions and
representations relating to the "continuity of interest" requirement.
To satisfy the "continuity of interest" requirement, the CompuRAD
Stockholders must not, pursuant to a plan or intent existing at or prior to the
Effective Time of the Merger, dispose of or transfer so much of either (i) their
CompuRAD Common Stock in anticipation of the Merger or (ii) the Lumisys Common
Stock to be received in the Merger (collectively, "Planned Dispositions"), such
that the CompuRAD Stockholders, as a group, would no longer have a significant
equity interest in the CompuRAD business being conducted by Lumisys after the
Merger. CompuRAD Stockholders will generally be regarded as having a significant
equity interest as long as the Lumisys Common Stock received in the Merger
(after taking into account Planned Dispositions), in the aggregate, represents a
substantial portion of the entire consideration received by the CompuRAD
Stockholders in the Merger. No assurance can be made that the "continuity of
interest" requirement will be satisfied, and if such requirement is not
satisfied, the Merger would not be treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in significant tax consequences. A CompuRAD Stockholder would
recognize gain or loss with respect to each share of CompuRAD Common Stock
surrendered equal to the difference between the CompuRAD Stockholder's basis in
such share and the fair market value, as of the Effective Time of the Merger, of
the Lumisys Common Stock received in exchange therefor. In such event, a
Stockholder's aggregate basis in the Lumisys Common Stock so received would
equal its fair market value, and the Stockholder's holding period for such stock
would begin the day after the Merger.
Certain noncorporate CompuRAD Stockholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Lumisys Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies that he or she is not subject to backup withholding on the
substitute Form W-9 included in the Transmittal Letter, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each CompuRAD Stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the assets and liabilities of Lumisys and CompuRAD will be carried forward to
the combined company at their recorded amounts and income from the combined
company will include income from Lumisys and CompuRAD for the entire fiscal
period in which the combination occurs and the reported income of the separate
companies for prior periods will be combined and restated as the results of
operations of the combined company.
Lumisys and CompuRAD each anticipates receiving a letter dated as of the
Effective Time from Price Waterhouse LLP, independent accountants for Lumisys,
and Ernst & Young LLP, independent auditors for CompuRAD, regarding the
appropriateness of pooling of interests accounting treatment for the Merger
under
46
<PAGE> 59
Accounting Principles Board Opinion No. 16, provided the Merger is consummated
in accordance with the Reorganization Agreement. See "THE REORGANIZATION
AGREEMENT -- Conditions to the Merger" and "Unaudited Pro Forma Combined
Condensed Financial Statements." Receipt of such letter and the availability of
pooling of interests accounting treatment are conditions to consummation of the
Merger, although such conditions may be waived by Lumisys and CompuRAD.
Under the pooling of interest accounting rules, none of the officers,
directors or affiliates of either of the combining companies may sell any shares
of either of the combining companies (except for certain de minimis sales) until
the combined company releases financial results covering at least 30 days of
combined operations of Lumisys and CompuRAD. Accordingly, if sales (except for
certain de minimus sales) by such stockholders occur subsequent to the Merger,
pooling of interests accounting treatment for the Merger may not be available in
spite of such treatment being appropriate as of the consummation of the Merger.
As a result of the unavailability of such accounting treatment, the Merger would
be accounted for under the purchase method of accounting, which would have the
effects discussed below. Each of the current officers and directors of Lumisys
and each of the current officers and directors of CompuRAD has entered into an
affiliate agreement agreeing to comply with this restriction. See "OTHER
AGREEMENTS -- Affiliate Agreements."
There can be no assurance that an officer, director or affiliate of either
company will not sell shares of Lumisys and CompuRAD Common Stock or that all
requirements necessary to qualify for pooling of interests will be met. If the
requirements necessary to qualify for pooling of interests is not met prior to
consummation of the Merger, then neither company is required to consummate the
Merger. However, if both companies nevertheless elect to consummate the Merger,
the Merger would necessarily be accounted for under the purchase method of
accounting, which would have the effect of CompuRAD's assets being recognized at
their fair value and any excess of the purchase price over such fair value being
recognized as goodwill on Lumisys' balance sheet. The goodwill would thereafter
be amortized as an expense over its anticipated useful life. The impact of such
treatment would have a material adverse effect on the combined company's results
of operations. If any officer, director or affiliate of either company sells
shares in Lumisys subsequent to consummation of the Merger and prior to the
release of the financial results covering at least 30 days of combined
operations, the Merger would also be required to be accounted for under the
purchase method of accounting, which would have the effect on the combined
company's results of operations as described above.
EFFECT ON EMPLOYEE EQUITY PLANS
STOCK OPTION PLANS. Under the terms of the Reorganization Agreement, each
CompuRAD Stock Option granted pursuant to the CompuRAD Stock Option Plans shall
be converted into an option to acquire, on the same terms and conditions as were
applicable to such CompuRAD Stock Option on the date of the Reorganization
Agreement, the number of shares of Lumisys Common Stock equal to the number of
shares of CompuRAD Common Stock subject to such CompuRAD Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounding down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share). The per share
exercise price under each such CompuRAD Stock Option shall be adjusted by
dividing the per share exercise price under such CompuRAD Stock Option by the
Exchange Ratio and rounding up to the nearest cent.
As of October 31, 1997, options to acquire 140,280 shares of CompuRAD
Common Stock were outstanding under the CompuRAD 1994 Stock Option Plan, and
options to acquire 177,820 shares of CompuRAD Common Stock were outstanding
under the 1996 Stock Option Plan. Immediately prior to the Effective Time, the
vesting period for each option granted under CompuRAD's 1994 Stock Option Plan
will become accelerated and each option will become fully exercisable and will
be converted into options to acquire Lumisys Common Stock as described above.
The vesting schedule of the options under the 1996 Stock Option Plan will not
become accelerated prior to the Effective Time, and each such option will be
converted into options to acquire Lumisys Common Stock as described above.
As soon as practicable after the Effective Time, Lumisys will deliver to
each holder of an outstanding CompuRAD Stock Option an appropriate notice
setting forth such holder's rights pursuant thereto, and such CompuRAD Stock
Option shall continue in effect on the same terms and conditions (including
antidilution
47
<PAGE> 60
provisions) as immediately prior to the Effective Time. Lumisys will comply with
the CompuRAD Stock Option Plans and take such actions within its control that
are reasonably necessary to ensure that the CompuRAD Stock Options that
qualified as incentive stock options under Section 422 of the Code prior to the
Effective Time will continue to so qualify thereafter.
No later than five days after the Effective Time, Lumisys will file a
Registration Statement on Form S-8 with respect to the shares of Lumisys Common
Stock subject to such options.
EMPLOYEE STOCK PURCHASE PLAN. CompuRAD has agreed to terminate its ESPP
immediately prior to the Effective Time by having the CompuRAD Board amend the
ESPP as necessary to provide that any shares of CompuRAD Common Stock shall be
purchased under the ESPP on a new "Exercise Date" (as such term is defined in
the ESPP) set by the CompuRAD Board, which new Exercise Date shall be on the
last trading day immediately prior to the Effective Time, or such earlier time
as the CompuRAD Board shall specify. Immediately following such purchase of
shares of CompuRAD Common Stock on the new Exercise Date, the ESPP shall
terminate.
WARRANTS. At the Effective Time, all rights with respect to the CompuRAD
Warrants shall be converted into and become rights with respect to Lumisys
Common Stock, and Lumisys shall assume each CompuRAD Warrant in accordance with
the terms (as in effect as of the date of the Reorganization Agreement) of such
CompuRAD Warrants. From and after the Effective Time, (i) each CompuRAD Warrant
assumed by Lumisys may be exercised solely for shares of Lumisys Common Stock,
(ii) the number of shares of Lumisys Common Stock subject to each such CompuRAD
Warrant shall be equal to the number of shares of CompuRAD Common Stock subject
to such CompuRAD Warrant immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounding down to the nearest whole share (with cash, less
the applicable exercise price, being payable for any fraction of a share), (iii)
the per share exercise price under each such CompuRAD Warrant shall be adjusted
by dividing the per share exercise price under such CompuRAD Warrant by the
Exchange Ratio and rounding up to the nearest cent and (iv) any restriction on
the exercise of any such CompuRAD Warrant shall continue in full force and
effect and the term, exercisability, vesting schedule and other provisions of
such CompuRAD Warrant shall otherwise remain unchanged. As of October 31, 1997,
there were CompuRAD Warrants to acquire 100,000 shares of CompuRAD Common Stock.
REGULATORY MATTERS
ANTITRUST. Lumisys and CompuRAD do not believe that any governmental
filings with the FTC are required with respect to the Merger. However, the FTC
or the Antitrust Division could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
consummation of the Merger or seeking to cause divestiture of significant assets
of Lumisys or CompuRAD or their subsidiaries. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made, or, if such
challenge is made, of what the result would be. Consummation of the Merger is
conditioned upon, among other things, the absence of any temporary restraining
order, preliminary or permanent injunction, or other order issued by any federal
or state court in the United States which prevents the consummation of the
Merger.
FILING WITH THE DELAWARE SECRETARY OF STATE. A Certificate of Merger must
be filed with the Secretary of State of the State of Delaware to consummate the
Merger.
SECURITIES LAWS. Lumisys and CompuRAD must comply with the federal
securities laws and applicable securities laws of various states.
FEDERAL SECURITIES LAW CONSEQUENCES
All of the Lumisys Common Stock issued in connection with the Merger will
be freely transferable, except that any Lumisys Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of CompuRAD or Lumisys prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act with respect to affiliates of CompuRAD, or Rule 144 under the Securities Act
with respect to persons who are or become affiliates of Lumisys, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of
48
<PAGE> 61
CompuRAD or Lumisys generally include individuals or entities that control, are
controlled by, or are under common control with, such corporation and may
include certain officers and directors of such corporation as well as principal
stockholders of such corporation.
Affiliates of CompuRAD or Lumisys may not sell their shares of Lumisys
Common Stock acquired in connection with the Merger, except pursuant to an
effective registration under the Securities Act covering such shares or in
compliance with Rule 145 (or Rule 144 under the Securities Act in the case of
persons who are or become affiliates of Lumisys) or another applicable exemption
from the registration requirements of the Securities Act. In general, under Rule
145, for one year following the Effective Time an affiliate (together with
certain related persons) would be entitled to sell shares of Lumisys Common
Stock acquired in connection with the Merger only through unsolicited "brokers'
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 145. Additionally, the number of shares to be sold by an
affiliate (together with certain related persons and certain persons acting in
concert) within any three-month period for purposes of Rule 145 may not exceed
the greater of 1% of the outstanding shares of Lumisys Common Stock or the
average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would only remain available, however, to
affiliates if Lumisys remained current with its informational filings under the
Exchange Act. One year after the Effective Time, an affiliate would be able to
sell such Lumisys Common Stock without such manner of sale or volume limitations
provided that Lumisys was current with its Exchange Act informational filings
and such affiliate was not then an affiliate of Lumisys. Two years after the
Effective Time, an affiliate would be able to sell such shares of Lumisys Common
Stock without any restrictions so long as such affiliate had not been an
affiliate of Lumisys for at least three months prior thereto.
STOCK LISTING
It is a condition to Lumisys' and CompuRAD's obligation to consummate the
Merger that the shares of Lumisys Common Stock to be issued pursuant to the
Reorganization Agreement be approved for listing on the Nasdaq National Market.
An application shall be filed for listing such shares of Lumisys Common Stock on
the Nasdaq National Market prior to consummation of the Merger.
APPRAISAL RIGHTS
Under the DGCL, the holders of CompuRAD Common Stock are entitled to
appraisal rights with respect to the Merger. The holders of Lumisys Common Stock
are not entitled to any appraisal rights with respect to the Merger because
Lumisys is not a constituent corporation in the Merger.
In the event the Merger is consummated, record holders of CompuRAD Common
Stock who meet and comply with the requirements of Section 262 of the DGCL will
be entitled to dissenters' appraisal rights in respect of their shares of
CompuRAD Common Stock. CompuRAD Stockholders will have the right to obtain a
cash payment for the "fair value" of their shares (excluding any element of
value arising from the accomplishment or expectation of the Merger). Such "fair
value" would be determined in judicial proceedings, the result of which cannot
be predicted. In order to exercise dissenters' appraisal rights, dissenting
stockholders must comply with the procedural requirements of Section 262 of the
DGCL, a description of which is provided immediately below and the full text of
which is attached to this Joint Proxy Statement/Prospectus as Annex D and is
incorporated herein by reference. Failure to take any of the steps required
under Section 262 of the DGCL on a timely basis may result in the loss of
dissenters' appraisal rights. Except as set forth above, CompuRAD Stockholders
will have no appraisal rights in connection with the Merger.
The dissenters' appraisal rights described below are available to holders
of record of CompuRAD Common Stock. A person having a beneficial interest in
shares of CompuRAD Common Stock held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner to perfect
whatever dissenters' appraisal rights the beneficial owner may have.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALI-
49
<PAGE> 62
FIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS
ENTIRETY AS ANNEX D TO THIS JOINT PROXY STATEMENT/PROSPECTUS. ALL REFERENCES IN
SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" ARE TO THE RECORD HOLDER OF
THE SHARES OF COMPURAD COMMON STOCK AS TO WHICH DISSENTERS' APPRAISAL RIGHTS ARE
ASSERTED.
Under the DGCL, holders of shares of CompuRAD Common Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
CompuRAD Common Stock appraised by the Delaware Court of Chancery and to receive
payment of the "fair value" of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, as determined by such court.
Under Section 262, a corporation, not less than 20 days prior to the
meeting at which a proposed merger is to be voted on, must notify each of its
stockholders entitled to dissenters' appraisal rights as of the record date of
the meeting that such appraisal rights are available and include in such notice
a copy of Section 262. This Joint Proxy Statement/Prospectus shall constitute
such notice to the holders of shares of CompuRAD Common Stock and a copy of
Section 262 is attached to this Joint Proxy Statement/Prospectus as Annex D. Any
stockholder who wishes to exercise such appraisal rights or who wishes to
preserve his right to do so, should review the following discussion and Annex D
carefully because failure to comply timely and properly with the procedures
specified will result in the loss of dissenters' appraisal rights under the
DGCL. Moreover, because of the complexity of the procedures for exercising the
right to seek appraisal of the CompuRAD Common Stock, CompuRAD Stockholders who
consider exercising such rights should seek the advice of legal counsel.
A CompuRAD Stockholder wishing to exercise his dissenters' appraisal rights
must deliver to CompuRAD, as the Surviving Corporation in the Merger, prior to
the vote on the Merger Proposal at the CompuRAD Special Meeting, a written
demand for appraisal of his shares of CompuRAD Common Stock. A proxy or vote
against the Merger will not constitute such a demand. In addition, a holder of
shares of CompuRAD Common Stock wishing to exercise his dissenters' appraisal
rights must hold of record such shares on the date the written demand for
appraisal is made, must continue to hold such shares until the date of
consummation of the Merger and must not vote in favor of the Merger Proposal or
consent thereto in writing pursuant to Section 228 of the DGCL.
Only a holder of record of shares of CompuRAD Common Stock is entitled to
assert appraisal rights for the shares of CompuRAD Common Stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf of
the holder of record, fully and correctly, as his name appears on his stock
certificates. If the shares of CompuRAD Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of CompuRAD Common
Stock are owned of record by more than one person, as in a joint tenancy and
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including one or more joint owners, may execute a
demand for appraisal on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is agent for such owner or owners. A record
holder, such as a broker, who holds shares of CompuRAD Common Stock as nominee
for several beneficial owners may exercise appraisal rights with respect to the
shares of CompuRAD Common Stock held for one or more beneficial owners while not
exercising such rights with respect to the shares of CompuRAD Common Stock held
for other beneficial owners; in such case, the written demand should set forth
the number of shares of CompuRAD Common Stock as to which appraisal is sought
and where no number of shares of CompuRAD Common Stock is expressly mentioned
the demand will be presumed to cover all shares of CompuRAD Common Stock held in
the name of the record owner. Stockholders who hold their shares of CompuRAD
Common Stock in brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their brokers to determine
the appropriate procedures for the making of a demand for appraisal by such a
nominee.
50
<PAGE> 63
All written demands for appraisal should be sent or delivered to CompuRAD,
c/o CompuRAD, Inc. at 1350 North Kolb Road, Tucson, Arizona 85715, Attention:
Secretary.
Within 120 days after the consummation of the Merger, but not thereafter,
CompuRAD or any stockholder entitled to dissenters' appraisal rights under
Section 262 may file a petition in the Delaware Court of Chancery demanding a
determination of the "fair value" of the shares of CompuRAD Common Stock held by
any such stockholders. CompuRAD is under no obligation to and has no present
intention to file a petition with respect to the appraisal of the fair value of
the shares of CompuRAD Common Stock. Accordingly, it is the obligation of the
CompuRAD Stockholders to initiate all necessary action to perfect their
dissenters' appraisal rights within the time prescribed in Section 262.
Within 120 days after the consummation of the Merger, any CompuRAD
Stockholder who has complied with the requirements for exercise of dissenters'
appraisal rights will be entitled, upon written request, to receive from
CompuRAD a statement setting forth the aggregate number of shares of CompuRAD
Common Stock with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. Such statement must be mailed to
such holders of the CompuRAD Common Stock within ten days after a written
request therefor has been received by CompuRAD or within ten days after the
expiration of the 20-day period for delivery of demands for appraisal by holders
of the CompuRAD Common Stock outlined above, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the CompuRAD
Stockholders entitled to appraisal rights and will appraise the "fair value" of
their shares of CompuRAD Common Stock, 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 upon the amount determined to be the "fair
value." Stockholders considering seeking appraisal should be aware that the
"fair value" of their shares of CompuRAD Common Stock as determined under
Section 262 could be more than, the same as or less than the consideration they
would receive pursuant to the Reorganization Agreement if they did not seek
appraisal of their shares of CompuRAD Common Stock. In determining fair value,
the Delaware Court of Chancery is to take into account all relevant factors. In
Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that, in making this determination of fair value,
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which could be
ascertained as of the date of the merger that throw any light on future
prospects of the merged corporation. In Weinberger, the Delaware Supreme Court
stated that "elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenter's exclusive remedy. The costs of the action may be
determined by the court and taxed upon the parties as the court deems equitable.
The court may also order that all or a portion of the expenses incurred by any
stockholder in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all of the shares
of CompuRAD Common Stock entitled to appraisal.
Any holder of shares of CompuRAD Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the consummation of the
Merger, be entitled to vote the shares of CompuRAD Common Stock subject to such
demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares of CompuRAD Common Stock as of a date on or prior
to the date of consummation of the Merger).
If any CompuRAD Stockholder who demands appraisal of his or its shares of
CompuRAD Common Stock under Section 262 fails to perfect, or effectively
withdraws or loses, his or its right to appraisal, as provided in the DGCL, each
share of CompuRAD Common Stock of such stockholder will be converted into
51
<PAGE> 64
the right to receive 0.928 shares of Lumisys Common Stock (with cash in lieu of
fractional shares) in accordance with the Reorganization Agreement. A
stockholder will fail to perfect, or effectively lose or withdraw, his right to
appraisal if no petition for appraisal is filed within 120 days after the
consummation of the Merger, or if the CompuRAD stockholder delivers to CompuRAD
a written withdrawal of his demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 days after the
consummation of the Merger will require the written approval of CompuRAD.
ANY HOLDER OF COMPURAD COMMON STOCK WISHING TO EXERCISE APPRAISAL RIGHTS IS
URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
MERGER EXPENSES AND FEES AND OTHER COSTS
Each of Lumisys and CompuRAD will pay its own expenses in connection with
the Merger. Lumisys and CompuRAD will, however, share equally all fees and
expenses, other than accountants' and attorneys' fees, incurred in connection
with the filing, printing and mailing of this Joint Proxy Statement/Prospectus
(including any preliminary materials related thereto) and the Registration
Statement (including financial statements and exhibits) and any amendments or
supplements thereto. The Exchange Ratio will be adjusted pursuant to the
Reorganization Agreement to the extent that the aggregate fees and expenses paid
by CompuRAD to its accountants, brokers, financial advisors, legal counsel and
other persons retained by CompuRAD in connection with the negotiation and
effectuation of the Reorganization Agreement and the transactions contemplated
thereby exceeds $500,000.
THE REORGANIZATION AGREEMENT
The description of the Reorganization Agreement set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Annex A and incorporated herein by reference. All
stockholders are urged to read the Reorganization Agreement in its entirety.
TERMS OF THE MERGER
THE MERGER. At the Effective Time and subject to and upon the terms and
conditions of the Reorganization Agreement and the DGCL, Merger Sub will be
merged with and into CompuRAD, the separate corporate existence of Merger Sub
will cease, and CompuRAD will continue as the Surviving Corporation and a
wholly-owned subsidiary of Lumisys.
EFFECTIVE TIME. As promptly as practicable after, and in any event no later
than ten business days after the latest to occur of, the approval of the Merger
Proposal by the CompuRAD Stockholders and the approval of the Share Proposal by
the Lumisys Stockholders, subject to the satisfaction or waiver of the other
conditions to the Merger, the Merger will be consummated by filing a Certificate
of Merger, together with any required related certificates, with the Secretary
of State of the State of Delaware in accordance with the provisions of the DGCL.
CERTIFICATE OF INCORPORATION AND BYLAWS. The Reorganization Agreement
provides that the Certificate of Incorporation and Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, will be the Certificate of
Incorporation and Bylaws of the Surviving Corporation until thereafter amended,
except that the name of the Surviving Corporation will be CompuRAD, Inc.
DIRECTORS AND OFFICERS. The directors of Merger Sub immediately prior to
the Effective Time shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation, and the officers of the Merger Sub
immediately prior to the Effective Time and the persons specified in the
Reorganization Agreement shall be the initial officers of the Surviving
Corporation, in each case until their respective successors are duly elected or
appointed and qualified.
52
<PAGE> 65
CONVERSION OF COMPURAD COMMON STOCK IN THE MERGER. At the Effective Time,
each share of CompuRAD Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares owned by Lumisys, CompuRAD, Merger Sub or
any direct or indirect wholly-owned subsidiary of Lumisys or CompuRAD) will be
converted into the right to receive 0.928 shares of Lumisys Common Stock. Cash
will be paid to the CompuRAD stockholders in lieu of fractional shares of
Lumisys Common Stock. See "-- Fractional Shares" and "THE REORGANIZATION
AGREEMENT -- Exchange of Certificates."
STOCK OPTIONS. Under the terms of the Reorganization Agreement, each
CompuRAD Stock Option granted pursuant to the CompuRAD Stock Option Plans shall
be converted into an option to acquire, on the same terms and conditions as were
applicable to such CompuRAD Stock Option on the date of the Reorganization
Agreement, the number of shares of Lumisys Common Stock equal to the number of
shares of CompuRAD Common Stock subject to such CompuRAD Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounding down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share). The per share
exercise price under each such CompuRAD Stock Option shall be adjusted by
dividing the per share exercise price under such CompuRAD Stock Option by the
Exchange Ratio and rounding up to the nearest cent. See "THE MERGER -- Effect on
Employee Equity Plans."
EMPLOYEE STOCK PURCHASE PLAN. CompuRAD has agreed to terminate its ESPP
immediately prior to the Effective Time by having the CompuRAD Board amend the
ESPP as necessary to provide that any shares of CompuRAD Common Stock shall be
purchased under the ESPP on a new "Exercise Date" (as such term is defined in
the ESPP) set by the CompuRAD Board, which new Exercise Date shall be on the
last trading day immediately prior to the Effective Time, or such earlier time
as the CompuRAD Board shall specify. Immediately following such purchase of
shares of CompuRAD Common Stock on the new Exercise Date, the ESPP shall
terminate.
FRACTIONAL SHARES. No certificates or scrip representing less than one
share of Lumisys Common Stock shall be issued in connection with the Merger. In
lieu of any such fractional share, each holder of a certificate or certificates
for CompuRAD Shares who would otherwise have been entitled to a fraction of a
share of Lumisys Common Stock upon surrender of such certificates for exchange
shall be paid upon such surrender cash equal to the product of (i) such
fraction, multiplied by (ii) the closing price per share of Lumisys Common Stock
as reported on the Nasdaq National Market on the Effective Date.
EXCHANGE OF CERTIFICATES AND MERGER CONSIDERATION
EXCHANGE AGENT. Lumisys shall supply, or shall cause to be supplied, to or
for the account of the Exchange Agent, in trust for the benefit of the CompuRAD
Stockholders, for exchange in accordance with the Reorganization Agreement,
through the Exchange Agent, certificates evidencing shares of Lumisys Common
Stock issuable in exchange for outstanding CompuRAD Common Stock.
EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective
Time (but in any event within ten business days thereafter), Lumisys will
instruct the Exchange Agent to mail to each holder of record of CompuRAD Common
Stock a letter of transmittal and instructions to effect the surrender of the
certificates representing CompuRAD Common Stock in exchange for certificates
evidencing Lumisys Common Stock.
MERGER CONSIDERATION. Upon surrender of a certificate representing CompuRAD
Common Stock for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such certificate will be
entitled to receive in exchange therefor (i) certificates evidencing that number
of whole shares of Lumisys Common Stock which such holder has the right to
receive in the Merger, (ii) any dividends or other distributions on the shares
of Lumisys Common Stock which such holder is entitled to receive, and (iii) cash
in respect of fractional shares of Lumisys Common Stock (the Lumisys Common
Stock, distributions and cash described in clauses (i), (ii) and (iii) being,
collectively, the "Merger Consideration"), and the certificate representing
CompuRAD Common Stock so surrendered shall forthwith be canceled. In the event
of a transfer of ownership of shares of CompuRAD Common Stock which is not
registered in the transfer
53
<PAGE> 66
records of CompuRAD as of the Effective Time, the Merger Consideration may be
issued and paid to a transferee if the certificate evidencing such shares of
CompuRAD Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until so surrendered, each
outstanding certificate that, prior to the Effective Time, represented shares of
CompuRAD Common Stock will be deemed from and after the Effective Time, for all
corporate purposes (other than payment of dividends or as described below under
"Withholding Rights"), to evidence the ownership of the number of full shares of
Lumisys Common Stock into which such shares of CompuRAD Common Stock shall have
been so converted.
WITHHOLDING RIGHTS. Lumisys or the Exchange Agent will be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
the Reorganization Agreement to any CompuRAD Stockholder such amounts as Lumisys
or the Exchange Agent is required to deduct and withhold with respect to the
making of such payment under any provision of federal, state, local or foreign
tax law. To the extent that amounts are so withheld by Lumisys or the Exchange
Agent, such withheld amounts shall be treated for purposes of the Reorganization
Agreement as having been paid to the holder of the shares of CompuRAD Common
Stock in respect of which such deduction and withholding was made by Lumisys or
the Exchange Agent.
LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any certificates
representing shares of CompuRAD Common Stock have been lost, stolen or
destroyed, the Exchange Agent will issue shares of Lumisys Common Stock in
exchange for such lost, stolen or destroyed certificates upon the making of an
affidavit of that fact by the owner of such certificates and, at the request of
Lumisys, upon delivery of a bond in such a sum as Lumisys may reasonably direct
as indemnity against any claim that may be made against Lumisys or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
THE COMPURAD STOCKHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME AS TO THE METHOD
OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF COMPURAD COMMON
STOCK. COMPURAD STOCKHOLDERS SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR
SHARES TO THE EXCHANGE AGENT PRIOR TO RECEIPT OF THE TRANSMITTAL LETTER.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains various customary representations and
warranties made by CompuRAD, in respect of itself, in favor of Lumisys and
Merger Sub, and made by Lumisys and Merger Sub, in respect of Lumisys and Merger
Sub, in favor of CompuRAD, relating, among other things, to the following
matters: (i) corporate organization, standing, qualification, approvals and
similar matters; (ii) force and effect of charter and bylaws; (iii) the capital
structure of each company; (iv) the authorization, execution, delivery and
enforceability of the Reorganization Agreement; (v) no breach or default of
certain material agreements; (vi) the absence of conflict of the Reorganization
Agreement with charter documents, laws or agreements for the execution, delivery
and performance of the Reorganization Agreement; (vii) the absence of conflict
with, default under or violation of agreements and laws, and the holding of
permits necessary for the conduct of business; (viii) reports and other
documents filed with the Commission and the fair presentation of the financial
statements contained therein in accordance with generally accepted accounting
principles; (ix) conduct of business in the ordinary course and the absence of
certain changes; (x) the absence of undisclosed liabilities; (xi) the absence of
pending or threatened litigation; (xii) employee benefit matters; (xiii) labor
matters and claims or threatened claims; (xiv) payment of taxes and certain
other tax matters; (xv) compliance with environmental laws; (xvi) ownership,
rights to use and absence of violations or claims or restrictions with respect
to intellectual property; (xvii) the absence of actions that could affect the
ability of Lumisys to account for the Merger as a pooling-of-interests; (xviii)
the opinions of CompuRAD's and Lumisys' respective financial advisors as to
fairness of the Merger from a financial point of view; and (xix) absence of
brokers', finders' and investment bankers' fees (other than the fees and
expenses owed to H&Q and CIBC).
54
<PAGE> 67
CONDUCT OF BUSINESS PENDING THE MERGER
OPERATION OF COMPURAD'S BUSINESS PRIOR TO THE MERGER. Pursuant to the
Reorganization Agreement, CompuRAD has agreed that from the date of the
execution of the Reorganization Agreement until the Effective Time (the
"Pre-Closing Period") it shall conduct its business and operations in the
ordinary course and consistent with past practices and in compliance with all
applicable legal requirements, and it shall use commercially reasonable efforts
to preserve intact its current business organization, keep available the
services of its current officers and employees and maintain its relations and
goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and other persons having business relationships with
CompuRAD; CompuRAD shall keep in full force all its insurance policies; CompuRAD
shall provide all notices, assurances and support required by any CompuRAD
contract relating to any proprietary asset in order to ensure that no condition
of default or breach under such CompuRAD Contract occurs which could result in,
or could increase the likelihood of, (1) any transfer or disclosure by CompuRAD
of any source code materials or other proprietary asset, or (2) a release from
any escrow of any source code material or other proprietary asset which has been
deposited or is required to be deposited in escrow under the terms of such
contract; and CompuRAD shall (to the extent requested by Lumisys) cause its
officers to report regularly to Lumisys concerning the status of CompuRAD's
business; CompuRAD has also agreed that it shall not, among other things,
(without the consent of Lumisys): (a) declare, accrue, set aside or pay any
dividend or make any other distribution in respect of any shares of capital
stock, or repurchase, redeem or otherwise reacquire any shares of capital stock
or other securities except for repurchases from employees following their
termination pursuant to the terms of their existing stock option or stock
purchase agreements; (b) sell, issue, or grant any capital stock or other
security, any option, call, warrant or right to acquire any capital stock or
other security, or any instrument convertible into or exchangeable for any
capital stock or other security (except (1) pursuant to the 1996 Employee Stock
Purchase Plan, (2) CompuRAD may issue CompuRAD Common Stock upon the valid
exercise of 1996 Stock Options outstanding as of the date of the Reorganization
Agreement and (3) CompuRAD may grant 1996 Stock Options under the 1996 Stock
Option Plan to purchase up to an additional 120,000 shares of CompuRAD Common
Stock after the date hereof and may issue CompuRAD Common Stock upon the
exercise thereof, which shall have at least exercise prices equal to the fair
market value on the date of the grant, (consistent with past practice); (c)
amend or waive any of its rights under, or accelerate the vesting under, any
provision of any of CompuRAD's stock option plans, or any stock option or
warrant agreements; (d) amend its certificate of incorporation or bylaws or
other charter documents, or become a party to any merger, consolidation,
business combination, recapitalization, stock split, reverse stock split or
similar transaction; (e) form any subsidiary or acquire any equity interest in
any other entity; (f) make any capital expenditure exceeding $100,000 in the
aggregate during the Pre-Closing Period; (once CompuRAD has made aggregate
capital expenditures that exceed $100,000, it must seek Lumisys' consent for any
additional capital expenditures in increments of $25,000); (g) enter into any
material contract, or amend or terminate, or waive any material right under any
material contract; (h) sell, acquire, lease or license any asset to or from any
third party; (i) lend money to any third party, or incur or guarantee any
indebtedness (except for: advances to employees (other than affiliates of
CompuRAD) in each case not to exceed $1,000 per employee, in the ordinary course
of business and borrowings up to $1,000,000 under a certain credit line) (j)
establish, adopt or amend any employee benefit plan, pay any bonus (other than
to non-officer employees exceeding $35,000 in the aggregate) or make any
profit-sharing or similar payment to, or increase the amount of the compensation
payable to any of its directors, officers or employees; (k) hire any new
employee having an annual salary in excess of $100,000, or engage any consultant
or independent contractor for a period exceeding 30 days; (l) change any of its
methods of accounting or accounting practices in any respect, except as required
by generally accepted accounting principles; (m) make any tax election; (n)
commence or settle any legal proceeding other than in the ordinary course of
business; (o) take any other material action outside the ordinary course of
business or inconsistent with past practices; or (p) agree or commit to take any
action described in the clauses "(a)" through "(o)" above.
Pursuant to the Reorganization Agreement, one or more events, violations,
inaccuracies, circumstances or other matters will be deemed to have a "Material
Adverse Effect" on a party if such event(s), violation(s), inaccuracy(ies),
circumstance(s) or other matter(s) would have a material adverse effect on: (i)
the business, condition, capitalization, assets, liabilities, operations or
financial performance of the applicable party
55
<PAGE> 68
and its subsidiaries taken as a whole, (ii) the ability of the party to
consummate the Merger or any of the other transactions contemplated by the
Reorganization Agreement or to perform obligations under the Reorganization
Agreement, or (iii) Lumisys' ability to vote, receive dividends with respect to
or otherwise exercise ownership rights with respect to the stock of the
Surviving Corporation, except that any event(s), violation(s), inaccuracy(ies),
circumstance(s) or other matter(s) from the following shall not be taken into
account in determining whether there has been or there is reasonably expected to
be a Material Adverse Effect: (i) general economic conditions or conditions
affecting the party's industry generally, (ii) the delay or cancellation of
orders for the party's products from customers or distributors (or other
resellers) directly attributable to the announcement of the Reorganization
Agreement or pendency of the Merger, (iii) the lack of or delay in availability
of components or raw materials from the party's suppliers directly attributable
to the announcement of the Reorganization Agreement or pendency of the Merger,
and (iv) stockholder litigation brought or threatened against the party or any
member of the Board of Directors of the party with respect to the Reorganization
Agreement or pendency of the Merger, provided, however, that in any dispute, the
party asserting that any of the foregoing is "directly attributable" to or "with
respect to" the Reorganization Agreement or pendency of the Merger shall have
the burden of proof of such assertion by a preponderance of the evidence.
OPERATION OF LUMISYS' BUSINESS PRIOR TO THE MERGER. Pursuant to the
Reorganization Agreement, Lumisys has agreed that, during the Pre-Closing
Period, it shall not (without CompuRAD's consent) (a) declare or pay any
dividend on or make any other distribution (whether in cash, stock, equity
securities or property) in respect of any capital stock (other than ordinary and
routine cash dividends to its stockholders in accordance with past practices),
or split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for any capital stock; (b) sell, issue or grant any capital stock or other
security, any option, call, warrant or right to acquire any capital stock or
other security, or any instrument convertible into or exchangeable for any
capital stock or other security (except (1) pursuant to the 1995 Employee Stock
Purchase Plan, (2) Lumisys may issue Lumisys Common Stock upon the valid
exercise of Lumisys stock options outstanding as of the date of the
Reorganization Agreement, and (3) Lumisys may grant Lumisys stock options under
the Lumisys stock option plans to purchase up to an additional 240,000 shares of
Lumisys Common Stock after the date of the Reorganization Agreement and may
issue Lumisys Common Stock upon the exercise thereof); (c) amend or waive any of
its rights under, or accelerate the vesting under, any provision of any of
Lumisys' stock option plans except for amendments to Lumisys' stock option plans
to increase the number of shares subject to issuance pursuant to such Lumisys
stock option plans; (d) amend its certificate of incorporation or bylaws or
become a party to any merger, consolidation, or business combination; (e)
materially change its accounting methods, principles or practices, except as
required by generally accepted accounting principles; (f) take any action, or
permit any action to be taken, which would result in a failure to maintain the
listing and trading of Lumisys Common Stock on the Nasdaq National Market; (g)
make any tax election; (h) commence or settle any legal proceeding other than in
the ordinary course of business; (i) take any other material action outside the
ordinary course of business or inconsistent with past practices; or (j) agree or
commit to take any action described in clauses "(a)" through "(i)" of above.
ADDITIONAL COVENANTS
The Reorganization Agreement also contains certain additional covenants of
the parties including covenants relating to: (i) the preparation and filing of
the Registration Statement and Joint Proxy Statement/Prospectus; (ii) CompuRAD's
obligations with respect to the CompuRAD Special Meeting; (iii) Lumisys'
obligations with respect to the Lumisys Special Meeting; (iv) the assumption of
the CompuRAD Stock Options and the CompuRAD Warrants; (vi) indemnification of
officers and directors; (vii) actions regarding "pooling of interests"
accounting for the Merger; (viii) subject to certain limitations, the
preparation and filing of filings and notices and obtaining approvals, consents,
ratifications, permissions, waivers and authorizations; (ix) press release,
public statements and other disclosures regarding the Merger, the Reorganization
Agreement and the transactions contemplated thereby; (x) affiliate agreements;
(xi) tax matters and continuity of interest certificates; (xii) delivery of a
letter from Ernst & Young LLP and Price Waterhouse LLP with respect to the
Registration Statement; (xiii) resignation of CompuRAD officers and
56
<PAGE> 69
directors; (xiv) appointment of additional directors to the Lumisys Board; (xv)
regulatory approvals; and (xvi) financial information and reporting.
COMPURAD SPECIAL MEETING. CompuRAD has agreed in the Reorganization
Agreement (i) to take all action in accordance with applicable law to call, give
notice of, convene and hold the CompuRAD Special Meeting, and (ii) not to
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify,
in a manner adverse to Lumisys, the unanimous recommendation of the CompuRAD
Board that the CompuRAD Stockholders vote in favor of the Merger Proposal.
Notwithstanding the foregoing, prior to the approval of the Reorganization
Agreement by the CompuRAD Stockholders, if a Superior Offer (as defined below)
is made to CompuRAD and is not withdrawn, the CompuRAD Board may, in light of
the Superior Offer, to the extent it determines in good faith, after
consultation with outside legal counsel, that it is required to do so in order
to comply with its fiduciary duties to CompuRAD's Stockholders under applicable
law, (i) withdraw or modify its approval or recommendation of the Merger
Proposal or (ii) approve or recommend such Superior Offer; provided that, in so
withdrawing or modifying its approval or recommendation of the Merger Proposal
and/or recommending or approving a Superior Offer, neither CompuRAD nor its
Representatives (as defined in the Reorganization Agreement) shall have breached
the non-solicitation provisions of the Reorganization Agreement.
A "Superior Offer" means any bona fide offer made by a third party to
acquire, directly or indirectly more than 50% of outstanding CompuRAD Common
Stock on terms that the CompuRAD Board determines in its reasonable judgment,
after consultation with its financial advisor, to be more favorable to
CompuRAD's Stockholders than the terms of the Merger; provided, however, that
any such offer shall not be deemed to be a "Superior Offer" if any financing
required to consummate the transaction contemplated by such offer is neither
committed nor, in the good faith judgment of the CompuRAD Board, reasonably
capable of being obtained by such third party.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. Pursuant to the Reorganization
Agreement, Lumisys has agreed that, from the Effective Time, Lumisys will, and
Lumisys will cause the Surviving Corporation to, fulfill and honor in all
respects the obligations of CompuRAD pursuant to each indemnification agreement
in effect at the Effective Time between CompuRAD and each person who is or was a
director or officer of CompuRAD at or prior to the Effective Time and any
indemnification provisions under CompuRAD's Restated Certificate of
Incorporation or Bylaws as each is in effect on the date of the Reorganization
Agreement (the persons to be indemnified pursuant to the agreements or
provisions referred to in the foregoing clauses shall be referred to as the
"Indemnified Parties.") The Certificate of Incorporation and Bylaws of the
Surviving Corporation shall contain the provisions with respect to
indemnification and exculpation from liability set forth in CompuRAD's Restated
Certificate of Incorporation and Bylaws on the date of the Reorganization
Agreement which provisions will not be modified, repealed or amended for a
period of six years after the Effective Time in any manner that would adversely
affect the rights of any Indemnified Parties, unless required by applicable law.
Moreover, subject to certain limitations, Lumisys has agreed to cause the
Surviving Corporation to maintain in effect, during the three-year period
commencing as of the Effective Time, a policy of directors' and officers'
liability insurance for the benefit of each of the Indemnified Parties providing
coverage and containing terms no less advantageous to the Indemnified Parties
than the coverage and terms of CompuRAD's existing policy of directors' and
officers' liability insurance.
NO SOLICITATION
Pursuant to the Reorganization Agreement, CompuRAD has agreed that (i) it
will not directly or indirectly, and will not authorize or permit its
representative directly or indirectly to: (a) solicit, initiate, encourage or
induce the making, submission or announcement of any Acquisition Proposal (as
defined below) or take any action that could reasonably be expected to lead to
an Acquisition Proposal, (b) furnish any information regarding CompuRAD to any
third party in connection with or in response to an Acquisition Proposal, (c)
engage in discussions or negotiations with any third party with respect to any
Acquisition Proposal, (d) approve, endorse or recommend any Acquisition Proposal
or (e) enter into any letter of intent or
57
<PAGE> 70
similar document or any contract contemplating or otherwise relating to any
Acquisition Transaction; provided, however, prior to the approval of the Merger
Proposal by the CompuRAD Stockholders, no provision of the Reorganization
Agreement prohibits CompuRAD from furnishing nonpublic information regarding
CompuRAD to, or entering into discussions and participating in negotiations
with, any third party in response to an Acquisition Proposal that is submitted
by such third party (and not then withdrawn) if (A) neither CompuRAD nor any of
the representatives of CompuRAD violate any of the non-solicitation provisions
set forth in the Reorganization Agreement, (B) the CompuRAD Board concludes in
good faith, after consultation with outside legal counsel, that such action is
required in order for the CompuRAD Board to comply with its fiduciary
obligations to the CompuRAD Stockholders under applicable law, (C) concurrently
with furnishing any such nonpublic information to, or entering into discussions
or negotiations with, such third party, CompuRAD gives Lumisys written notice of
the identity of such third party and of CompuRAD's intention to furnish
nonpublic information to, or enter into discussions or negotiations with, such
third party, and CompuRAD receives from such third party an executed
confidentiality agreement containing customary and reasonable limitations on the
use and disclosure of all nonpublic written and oral information furnished to
such third party by or on behalf of CompuRAD and (D) concurrently with
furnishing any such nonpublic information to such Person, CompuRAD furnishes
such nonpublic information to Lumisys (to the extent such nonpublic information
has not been previously furnished by CompuRAD to Lumisys). CompuRAD also agreed
in the Reorganization Agreement that any violation of any of the above
restrictions by any representative of CompuRAD, whether or not such
representative is purporting to act on behalf of CompuRAD, shall be deemed to
constitute a breach of the no solicitation restriction set forth in the
Reorganization Agreement. In addition, CompuRAD also agreed that (ii) it shall
promptly advise Lumisys of any Acquisition Proposal made during the Pre-Closing
Period and of any such Acquisition Proposal and any modification or proposed
modification thereto.
"Acquisition Proposal" means any offer, proposal or inquiry (other than an
offer or proposal by Lumisys) contemplating or otherwise relating to any
acquisition transaction.
"Acquisition Transaction" means any transaction or series of related
transaction involving, (i) other than the transaction contemplated by the
Reorganization Agreement, any merger, consolidation, share exchange, business
combination, issuance of securities, acquisition of securities, tender offer,
exchange offer or other similar transaction (a) in which CompuRAD is a
constituent corporation, (b) in which a third party or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of third parties directly
or indirectly acquires CompuRAD or more than 50% of CompuRAD's business or
directly or indirectly acquires beneficial or record ownership of securities
representing more than 20% of the outstanding securities of any class of voting
securities of CompuRAD, or (c) in which CompuRAD issues securities representing
more than 20% of the outstanding securities of any class of voting securities of
CompuRAD; (ii) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of CompuRAD; or (iii) any liquidation
or dissolution of CompuRAD.
CONDITIONS TO THE MERGER
LUMISYS AND MERGER SUB
The obligations of Lumisys and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by the Reorganization
Agreement are subject to the satisfaction, at or prior to the Closing (as
defined in the Reorganization Agreement), of each of the following conditions:
(i) the representations and warranties of CompuRAD contained in the
Reorganization Agreement are accurate in all respects as of the date of the
Reorganization Agreement and shall be accurate in all respects as of the Closing
Date (as defined in the Reorganization Agreement) as if made on and as of the
Closing Date, except that any inaccuracies in such representations and
warranties will be disregarded if the circumstances giving rise to all such
inaccuracies (considered individually and collectively) do not constitute a
Material Adverse Effect on CompuRAD as described in the Reorganization
Agreement, (ii) each covenant or obligation that CompuRAD is required to comply
with or to perform at or prior to the Closing shall have been complied with and
performed in all material respects; (iii) the Registration Statement shall have
become effective in accordance
58
<PAGE> 71
with the provisions of the Securities Act, and no stop order shall have been
issued by the Commission with respect to the Registration Statement; (iv) the
Reorganization Agreement shall have been duly adopted and approved by the
CompuRAD Stockholders, the Merger shall have been duly approved by the CompuRAD
Stockholders and the issuance of Lumisys Common Stock in the Merger shall have
been duly approved by the Lumisys Stockholders; (v) Lumisys and CompuRAD shall
have received: (a) Affiliate Agreements; (b) Employment Offer Letters executed
by Dr. Phillip Berman, Cary Cole, and Henky Wibowo; (c) a letter from Ernst &
Young LLP, to the effect that Ernst & Young LLP is not aware of any fact from
CompuRAD's perspective that could preclude Lumisys from accounting for the
Merger as a "pooling of interests"; (d) a letter from Price Waterhouse LLP, to
the effect that Lumisys may account for the Merger as a "pooling of interests";
(e) a legal opinion of Cooley Godward, to the effect that the Merger will
constitute a tax-free reorganization, (this condition shall nonetheless be
deemed to be satisfied if counsel to CompuRAD renders such opinion to Lumisys);
(f) a closing certificate executed by CompuRAD's Chief Executive Officer; and
(g) the written resignations of all officers and directors of CompuRAD,
effective as of the Effective Time; (vi) no Material Adverse Effect with respect
to CompuRAD shall have occurred since the date of the Reorganization Agreement;
(vii) the shares of Lumisys Common Stock to be issued in the Merger shall have
been approved for listing (subject to notice of issuance) on the Nasdaq National
Market; (viii) no injunction or other order preventing the consummation of the
Merger shall have been issued by any court, and there shall not be any legal
requirement applicable to the Merger that makes consummation of the Merger
illegal; and (ix) there shall not be pending or threatened any governmental
legal proceeding challenging or seeking to restrain or prohibit the Merger or
any of the other transactions contemplated by the Reorganization Agreement and
seeking to prohibit or limit Lumisys's ability to exercise ownership rights with
respect to the stock of the Surviving Corporation or which would materially and
adversely affect the right of Lumisys, the Surviving Corporation or any
subsidiary of Lumisys to own the assets or operate the business of CompuRAD.
COMPURAD
The obligation of CompuRAD to effect the Merger and otherwise consummate
the transactions contemplated by the Reorganization Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions: (i) the
representations and warranties of Lumisys contained in the Reorganization
Agreement shall have been accurate in all respects as of the date of this
Agreement and shall be accurate in all respects as of the Closing Date as if
made on and as of the Closing Date, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to all such inaccuracies (considered individually and collectively) do not
constitute a Material Adverse Effect on Lumisys as described in the
Reorganization Agreement; (ii) all of the covenants and obligations that Lumisys
and Merger Sub are required to comply with or to perform at or prior to the
Closing shall have been complied with and performed in all material respects;
(iii) the Registration Statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been issued
by the Commission with respect to the Registration Statement; (iv) the
Reorganization Agreement shall have been duly approved and adopted by the
CompuRAD Stockholders, the Merger shall have been duly approved by the CompuRAD
Stockholders and the issuance of Lumisys Common Stock in the Merger shall have
been duly approved by the Lumisys Stockholders; (v) CompuRAD shall have
received: (a) a legal opinion of Wilson Sonsini, to the effect that the Merger
will constitute a tax-free reorganization (this condition shall nonetheless be
deemed to be satisfied if counsel to Lumisys renders such opinion to CompuRAD);
(b) a closing certificate executed by an executive officer of Lumisys; (c) a
letter from Price Waterhouse LLP to the effect that, Price Waterhouse LLP is not
aware of any fact concerning Lumisys or any of Lumisys's stockholders or
affiliates that could preclude Lumisys from accounting for the Merger as a
"pooling of interests"; (vi) no Material Adverse Effect with respect to Lumisys
shall have occurred since the date of the Reorganization Agreement; (vii) the
shares of Lumisys Common Stock to be issued in the Merger shall have been
approved for listing (subject to notice of issuance) on the Nasdaq National
Market; and (viii) no injunction or other order preventing the consummation of
the Merger by CompuRAD shall have been issued by any court and there shall not
be any legal requirement applicable to the Merger that makes consummation of the
Merger by CompuRAD illegal.
59
<PAGE> 72
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time, and unless specifically provided otherwise, whether
before or after the approval of the Merger by the stockholders of Lumisys or
CompuRAD: (i) by written mutual consent of Lumisys and CompuRAD; (ii) by either
Lumisys or CompuRAD if the Merger is not consummated by January 31, 1998,
provided, however, that the right to terminate the Reorganization Agreement for
such reason shall not be available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the Merger to occur
on or before such date and such action or failure to act constitutes a breach of
the Reorganization Agreement; (iii) by either Lumisys or CompuRAD if a court of
competent jurisdiction or other governmental body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger; (iv) by either Lumisys or CompuRAD if CompuRAD's Stockholders have
not approved the Merger Proposal at the CompuRAD Special Meeting (provided,
however, that the right to terminate the Reorganization Agreement as provided in
this clause "(iv)" shall not be available to CompuRAD where the failure to
obtain the required CompuRAD Stockholder vote shall have been caused by the
action or failure to act of CompuRAD and such action or failure to act
constitutes a material breach by CompuRAD of the Reorganization Agreement); (v)
by either Lumisys or CompuRAD if Lumisys Stockholders have not approved the
Share Proposal at the Lumisys Special Meeting (provided, however, that the right
to terminate the Reorganization Agreement as provided in this clause "(v)" shall
not be available to Lumisys where the failure to obtain the required Lumisys
Stockholder vote shall have been caused by the action or failure to act of
Lumisys and such action or failure to act constitutes a material breach by
Lumisys of the Reorganization Agreement); (vi) by Lumisys (at any time prior to
the approval of the Merger Proposal by the CompuRAD Stockholders) or by CompuRAD
(at any time after the CompuRAD Stockholders have failed to approve the Merger
Proposal at a CompuRAD Special Meeting) if a CompuRAD Triggering Event (as
defined below) shall have occurred; (vii) by Lumisys if any of CompuRAD's
representations and warranties contained in the Reorganization Agreement shall
be or shall have become materially inaccurate, or if any of CompuRAD's covenants
contained in the Reorganization Agreement shall have been breached in any
material respect, in either case such that the conditions which are required to
be satisfied prior to the obligations of Lumisys and Merger Sub to consummate
the Merger are not satisfied; provided, however, that if an inaccuracy in
CompuRAD's representations and warranties or a breach of a covenant by CompuRAD
is curable by CompuRAD and CompuRAD is continuing to exercise all reasonable
efforts to cure such inaccuracy or breach, and such cure shall occur prior to
January 31, 1998 and shall not individually or in the aggregate have or
reasonably be expected to have a Material Adverse Effect on CompuRAD, then
Lumisys may not terminate the Reorganization Agreement as provided in this
clause "(vii)", and provided further that Lumisys may not terminate the
Reorganization Agreement as provided in this clause "(vii)" if it shall have
materially breached the Reorganization Agreement; (viii) by CompuRAD if any of
Lumisys' representations and warranties contained in the Reorganization
Agreement shall be or shall have become materially inaccurate, or if any of the
Lumisys's covenants contained in the Reorganization Agreement shall have been
breached in any material respect, in either case such that the conditions which
are required to be satisfied prior to the obligations of CompuRAD to consummate
the Merger are not satisfied; provided, however, that if an inaccuracy in
Lumisys' representations and warranties or a breach of a covenant by Lumisys is
curable by Lumisys and Lumisys is continuing to exercise all reasonable efforts
to cure such inaccuracy or breach, and such cure shall occur prior to January
31, 1998 and shall not individually or in the aggregate have or reasonably be
expected to have a Material Adverse Effect on Lumisys, then CompuRAD may not
terminate the Reorganization Agreement as provided in this clause "(viii)", and
provided further that CompuRAD may not terminate the Reorganization Agreement as
provided in this clause "(viii)" if it shall have materially breached the
Reorganization Agreement; or (ix) by Lumisys if (a) any person who has signed a
Voting Agreement in favor of Lumisys, shall have breached, withdrawn, amended or
modified in a manner adverse to Lumisys, such Voting Agreement, (b) if, prior to
the Effective Time, any person who has signed a Voting Agreement challenges the
validity of such Voting Agreement, (c) if any person who has signed a Voting
Agreement in any way disposes of or encumbers any of the shares of CompuRAD
Common Stock owned directly or beneficially by such person as of the date of the
Reorganization Agreement, or (d) if any person who has signed a Voting Agreement
votes in favor of an Acquisition Proposal.
60
<PAGE> 73
A "CompuRAD Triggering Event" shall be deemed to have occurred if: (i) the
CompuRAD Board shall have failed to recommend unanimously, or shall for any
reason have withdrawn or shall have amended or modified in a manner adverse to
Lumisys its unanimous recommendation in favor of, the Merger or approval of the
Reorganization Agreement; (ii) CompuRAD shall have failed to include in the
Joint Proxy Statement/Prospectus the unanimous recommendation of the CompuRAD
Board in favor of approval of the Reorganization Agreement and the Merger; (iii)
the CompuRAD Board shall have approved, endorsed or recommended any Acquisition
Proposal; (iv) CompuRAD shall have entered into any letter of intent or similar
document or any contract relating to any Acquisition Proposal; (v) a tender or
exchange offer relating to securities of CompuRAD shall have been commenced and
CompuRAD shall not have sent to its securityholders, within ten business days
after the commencement of such tender or exchange offer, a statement disclosing
that CompuRAD recommends rejection of such tender or exchange offer; or (vii) an
Acquisition Proposal is publicly announced, and CompuRAD fails to issue a press
release announcing its opposition to such Acquisition Proposal within five
business days after such Acquisition Proposal is announced.
TERMINATION FEES
The Reorganization Agreement provides that if the Reorganization Agreement
is terminated and if CompuRAD consummates an Acquisition Transaction within
twelve months from the date the Reorganization Agreement is terminated, then
CompuRAD shall pay to Lumisys within two business days following the
consummation of such Acquisition Transaction, the sum of $1,000,000, provided
that the termination is pursuant to: (i) clause "(iv)" under "-- Termination of
the Reorganization Agreement" by Lumisys or CompuRAD (and if by Lumisys, only if
at the time the CompuRAD Special Meeting was held, there existed a publicly
announced and pending Acquisition Proposal), (ii) clause "(vi)" under
"-- Termination of the Reorganization Agreement" by Lumisys or CompuRAD (and if
by Lumisys, unless the occurrence of a CompuRAD Triggering Event is attributable
to Lumisys' failure to meet the condition as provided in clause "(vi)" under
"-- Conditions to the Merger -- CompuRAD" (but only if such failure to meet the
condition as provided in such clause arose from (A) Lumisys' breach of or
failure to perform its covenants under the Reorganization Agreement, or (B)
Lumisys' breach of or inaccuracy of any of its representations and warranties as
set forth in the Reorganization Agreement that resulted from facts,
circumstances, events or conditions which existed at any time prior to and
through the date of the Reorganization Agreement)), (iii) clause "(viii)" under
"--Termination of the Reorganization Agreement" by CompuRAD (provided that such
termination under such clause is not as a result of (A) Lumisys' breach of or
failure to perform its covenants as set forth in the Reorganization Agreement,
or (B) Lumisys' breach of or inaccuracy of any of its representations and
warranties as set forth in the Reorganization Agreement that resulted from
facts, circumstances, events or conditions which existed at any time prior to
and through the date of this Agreement), or (iv) clause "(ix") under
"-- Termination of the Reorganization Agreement.
The Reorganization Agreement further provides that if the Reorganization
Agreement is terminated Lumisys shall pay to CompuRAD within two business days
following the date of Reorganization Agreement is terminated as described in
this paragraph, the sum of $1,000,000, provided that the termination is pursuant
to: (i) clause "(ii)" under "-- Termination of the Reorganization Agreement" by
Lumisys (unless failure to consummate the Merger is attributable to the
restrictions or restraints imposed by any governmental body or because certain
conditions to Lumisys' and Merger Sub's obligation to consummate the Merger are
not met (subject to certain qualifications)), (ii) clause "(v)" under the
"-- Termination of the Reorganization Agreement" by either Lumisys or CompuRAD
(and if by CompuRAD, unless the condition as provided in clause "(vi)" under
"-- Conditions to Merger-Lumisys and Merger Sub" has not been met by CompuRAD at
the time of the Lumisys Special Meeting, during which the required Lumisys
Stockholder vote was not obtained, is held (but only if such failure to meet the
condition as provided in clause "(vi)" under "-- Conditions to Merger-Lumisys
and Merger Sub" arose from (A) CompuRAD's breach of or failure to perform its
covenants as set forth in the Reorganization Agreement, or (B) CompuRAD's breach
of or inaccuracy of any of its representations and warranties as set forth in
the Reorganization Agreement that resulted from facts, circumstances, events or
conditions which existed at any time prior to and through the date of the
Reorganization Agreement)), (iii) clause "(vii)" under the "--Termination of the
Reorganization
61
<PAGE> 74
Agreement" by Lumisys (provided that such termination under such clause is not
as a result of (A) CompuRAD's breach of or failure to perform its covenants as
set forth in the Reorganization Agreement, or (B) CompuRAD's breach of or
inaccuracy of any of its representations and warranties as set forth in the
Reorganization Agreement that resulted from facts, circumstances, events or
conditions which existed at any time prior to and through the date of the
Reorganization Agreement), or (iv) clause "(viii)" under the "-- Termination of
the Reorganization Agreement" by CompuRAD (provided that such termination under
such clause is as a result of (A) Lumisys' breach of or failure to perform its
covenants as set forth in the Reorganization Agreement, or (B) Lumisys' breach
of or inaccuracy of any of its representations and warranties set forth in the
Reorganization Agreement that resulted from facts, circumstances, events or
conditions which existed at any time prior to and through the date of this
Reorganization Agreement).
AMENDMENT; WAIVER
The Reorganization Agreement may be amended by CompuRAD and Lumisys at any
time provided, however, that (i) after any approval of the Merger Proposal by
the CompuRAD Stockholders, no amendment shall be made which by law requires
further approval of the CompuRAD Stockholders without the further approval of
the CompuRAD Stockholders, and (ii) after any such approval of the Share
Proposal, no amendment shall be made which by law or NASD regulation requires
further approval of the Lumisys Stockholders without the further approval of the
Lumisys Stockholders. The Reorganization Agreement may not be amended except by
an instrument in writing signed on behalf of each of Lumisys and CompuRAD.
62
<PAGE> 75
OTHER AGREEMENTS
VOTING AGREEMENTS
Pursuant to the Voting Agreements entered into in favor of Lumisys, Dr.
Phillip Berman (who beneficially owns approximately 517,500 shares of CompuRAD
Common Stock and is a director, President and Chief Executive Officer of
CompuRAD); Cary Cole (who beneficially owns approximately 490,500 shares of
CompuRAD Common Stock and is a director and Vice President of CompuRAD); Henky
Wibowo (who beneficially owns approximately 517,500 shares of CompuRAD Common
Stock and is a director and Vice President of CompuRAD); and Kevin Donovan (who
beneficially owns approximately 89,600 shares of CompuRAD and is the Vice
President, Finance and Chief Financial Officer of CompuRAD) (collectively, such
CompuRAD Stockholders referred to as the "Subject Stockholders" and the
aggregate approximately 1,615,000 shares of CompuRAD Common Stock held by the
Subject Stockholders in the aggregate referred to as the "Subject Shares"), who
hold in the aggregate approximately 41% of the outstanding CompuRAD Common
Stock, have agreed that, prior to the earlier of the valid termination of the
Reorganization Agreement or the Effective Time (the "Expiration Date"), they
will vote the Subject Shares in favor of (i) the Merger, (ii) the execution and
delivery by Lumisys of the Reorganization Agreement, (iii) the adoption and
approval of the terms thereof and (iv) in favor of each of the other actions
contemplated by the Reorganization Agreement and any action required in
furtherance thereof. The Subject Stockholders have also agreed that prior to the
Expiration Date they will not enter into any agreement or understanding with any
person to vote or give instructions with respect to the Subject Shares regarding
the Merger and the Reorganization Agreement, other than any agreement or
understanding to vote or give instructions in favor of the Merger and the
Reorganization Agreement. The Voting Agreements do not prevent the tender of the
Subject Shares as part of an Acquisition Proposal or the voting of the Subject
Shares for an Acquisition Proposal.
The Subject Stockholders have also delivered to Lumisys an irrevocable
proxy with respect to matters covered by the Voting Agreements and have agreed
to waive any rights of appraisal and any dissenters rights that they may have in
connection with the Merger. The Subject Stockholders have further agreed that
during the period commencing on the date of the Voting Agreement and ending on
the Expiration Date, they shall not (i) solicit, initiate, encourage or induce
the making, submission or announcement of any Acquisition Proposal or take any
action that could reasonably be expected to lead to an Acquisition Proposal,
(ii) furnish any information regarding CompuRAD to any person in connection with
or in response to an Acquisition Proposal, (iii) engage in discussions or
negotiations with any person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into any
letter of intent or similar document or any contract contemplating or otherwise
relating to any Acquisition Transaction.
AFFILIATE AGREEMENTS
It is a condition precedent to the consummation of the Merger that those
CompuRAD Stockholders who may be deemed to be an affiliate (the "Affiliate"), as
such term is defined in Rule 145 of the Act, will execute an agreement (the
"Affiliate Agreement") that prohibits the sale, transfer or other disposition of
Lumisys Common Stock received by such stockholder of CompuRAD unless at such
time: (i) such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Act; (ii) such sale, transfer or
other disposition is made in conformity with the requirements of Rule 145
promulgated under the Act, as evidenced by a broker's letter and a
representation letter executed by such stockholder (satisfactory in form and
content to Lumisys) stating that such requirements have been met; (iii) counsel
reasonably satisfactory to Lumisys shall have advised Lumisys in a written
opinion letter (satisfactory in form and content to Lumisys), upon which Lumisys
may rely, that such sale, transfer or other disposition will be exempt from
registration under the Act; or (iv) an authorized representative of the
Commission shall have rendered written advice to the Affiliate to the effect
that the Commission would take no action, or that the staff of the Commission
would not recommend that the Commission take action, with respect to such sale,
transfer or other disposition, and a copy of such written advice and all other
related communications with the Commission shall have been delivered to Lumisys.
63
<PAGE> 76
Such Affiliate Agreements also restrict sales, dispositions or other
transactions that reduce the Affiliate's risk of investment in respect of the
shares of CompuRAD Common Stock held by them so as to ensure that the Merger
will be treated as a pooling of interests for accounting and financial reporting
purposes.
EMPLOYMENT OFFER LETTERS
Dr. Phillip Berman, Cary Cole, and Henky Wibowo (each referred to as an
"Executive"), will execute Employment Offer Letters from Lumisys upon the
Closing (as defined in the Reorganization Agreement) which provide for the
employment of each Executive (subject to early termination) at their current
compensation. Such Executives will also be entitled to receive certain bonus
compensation under certain circumstances and will be entitled to participate in
certain other employee benefit plans that are generally made available to
Lumisys' employees.
Each of the Employment Offer Letters provides that if Lumisys terminates
such Executive's employment with Lumisys within two years after the Effective
Time without "cause," or if such Executive terminates his employment during such
two-year period for "good reason," then Lumisys will pay severance to such
Executive in an amount equivalent to such Executive's annual base salary for a
specified period of time. The amount of severance payment each Executive is
entitled to receive under his Employment Offer Letter is less than the amount of
severance each Executive is entitled to receive under his employment agreements
currently in effect with CompuRAD.
Pursuant to the Employment Offer Letters, an Executive's employment with
Lumisys will be deemed to have been terminated for "cause" if such employment is
terminated due to misconduct, including (i) the current use of illegal drugs;
(ii) indictment for any crime involving moral turpitude, fraud or
misrepresentation; (iii) the commission of any act which would constitute a
felony and which would adversely impact the business reputation of Lumisys; (iv)
fraud; (v) misappropriation or embezzlement of funds or property of Lumisys;
(vi) willful conduct which is materially injurious to the reputation, business
or business relationships of Lumisys; (viii) the failure of such Executive to
perform his duties and/or responsibilities provided that such failure of
performance has not been cured during a specified period of time; or (ix) a
material violation of any of the provisions of the Employment Offer Letter or of
the Proprietary Information and Inventions Agreement which has also been
executed by such Executive. Further, pursuant to the Employment Offer Letters,
an Executive may terminate his employment with Lumisys for "good reason" if
there has been (i) a material diminution in such Executive's salary, under
certain conditions or (ii) a relocation of such Executive outside of the San
Francisco Bay Area (other than returning to Tucson, Arizona).
In addition, each Employment Offer Letter contains a non-solicitation
covenant pursuant to which during the period of his employment with Lumisys and
for one year thereafter, the Executive agrees not to interfere with the business
of Lumisys by (i) soliciting, attempting to solicit, inducing or otherwise
causing any employee of Lumisys to terminate his or her employment with Lumisys;
or (ii) directly or indirectly soliciting the business of any customer of
Lumisys which at the time of termination or one year immediately prior thereto
was listed on Lumisys' customer list.
64
<PAGE> 77
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the merger of Lumisys and CompuRAD to be accounted for as a
pooling of interests. The unaudited pro forma combined condensed balance sheet
presents the combined financial position of Lumisys and CompuRAD assuming that
the proposed merger had occurred as of June 30, 1997. The unaudited pro forma
combined condensed statements of operations give effect to the proposed merger
of Lumisys by combining the results of operations for the six months ended June
30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994.
These unaudited pro forma combined condensed financial statements are based on
and should be read in conjunction with the historical financial statements and
notes thereto of Lumisys and CompuRAD, which are included elsewhere in this
Joint Proxy Statement/Prospectus.
LUMISYS AND COMPURAD
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales.................................. $15,094 $13,785 $28,966 $21,337 $10,131
Cost of revenues....................... 6,711 6,613 13,312 10,713 4,807
------- ------- ------- ------- -------
Gross profit................. 8,383 7,172 15,654 10,620 5,324
------- ------- ------- ------- -------
Operating expenses:
Research and development............. 3,324 2,534 5,545 3,510 1,826
Sales and marketing.................. 2,376 1,379 3,093 2,250 1,148
General and administrative........... 1,898 1,567 3,151 2,289 859
Amortization of intangible asset..... -- -- -- 203 203
Acquired in-process R&D.............. -- -- -- 1,442 --
Stock-based compensation and
expense........................... 6 361 367 100 --
------- ------- ------- ------- -------
Total operating expenses..... 7,604 5,841 12,156 9,794 4,036
------- ------- ------- ------- -------
Income from operations................. 779 1,331 3,498 826 1,288
Other income, net...................... 564 422 979 213 86
------- ------- ------- ------- -------
Income before provision for income
taxes................................ 1,343 1,753 4,477 1,039 1,374
Provision (benefit) for income taxes... 830 497 1,662 (762) 95
------- ------- ------- ------- -------
Net income............................. $ 513 $ 1,256 $ 2,815 $ 1,801 $ 1,279
======= ======= ======= ======= =======
Accretion of mandatorily redeemable
convertible preferred stock.......... -- -- -- -- 96
------- ------- ------- ------- -------
Net income attributable to common
stock................................ $ 513 $ 1,256 $ 2,815 $ 1,801 $ 1,183
======= ======= ======= ======= =======
Net income per share................... $ 0.05 $ 0.14 $ 0.30 $ 0.25 $ 0.19
======= ======= ======= ======= =======
Shares used in per share
calculations......................... 10,291 9,258 9,540 7,236 6,576
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
65
<PAGE> 78
LUMISYS AND COMPURAD
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
LUMISYS
JUNE COMPURAD PRO FORMA
30, JUNE 30, ------------------------
1997 1997 ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $19,822 $1,702 ($1,500) $20,024
Accounts receivable, net..................... 3,462 2,736 (245) 5,953
Inventories.................................. 3,487 660 -- 4,147
Deferred tax assets.......................... 1,429 -- -- 1,429
Other current assets......................... 322 196 -- 518
------- ------- ------- -------
Total current assets................. 28,522 5,294 -- 32,071
Property and equipment, net.................... 343 655 -- 998
Other assets................................... 57 -- -- 57
------- ------- ------- -------
$28,922 $5,949 ($1,745) $33,126
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 1,243 $ 873 $ (245) $ 1,871
Accrued expenses............................. 1,996 332 800 3,128
Deferred revenue............................. -- 360 -- 360
------- ------- ------- -------
Total current liabilities............ 3,239 1,565 555 5,359
------- ------- ------- -------
Note payable to related party.................. -- 122 -- 122
------- ------- ------- -------
Stockholders' equity:
Preferred stock.............................. -- -- -- --
Common stock................................. 6 6,552 (6,548) 10
Additional paid-in capital................... 23,485 473 6,548 30,506
Retained earnings (deficit).................. 2,218 (2,763) (2,300) (2,845)
Deferred compensation relating to stock
options................................... (26) -- -- (26)
------- ------- ------- -------
Total stockholders' equity........... 25,683 4,262 -- 27,645
------- ------- ------- -------
$28,922 $5,949 ($1,745) $33,126
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma unaudited combined condensed financial
statements.
66
<PAGE> 79
LUMISYS AND COMPURAD
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
1. PERIODS COVERED
The unaudited pro forma combined condensed balance sheet presents the
combined financial position of Lumisys and CompuRAD as of June 30, 1997 assuming
that the proposed Merger had occurred as of June 30, 1997. Such pro forma
information is based upon the historical consolidated balance sheet data of
Lumisys and historical balance sheet of CompuRAD as of that date. The unaudited
pro forma combined condensed statement of operations gives effect to the
proposed merger of Lumisys and CompuRAD by combining the results of operations
of Lumisys and CompuRAD for the three years ended December 31, 1996 and the six
months ended June 30, 1997 and 1996, respectively, on a pooling of interest
basis.
2. PRO FORMA NET INCOME PER SHARE
The unaudited pro forma combined net income per share is based upon the
weighted average number of common stock and common stock equivalent shares
outstanding of Lumisys and CompuRAD for each period using an exchange ratio of
one share of Lumisys Common Stock for each .928 shares of CompuRAD Common Stock.
3. CONFORMING ADJUSTMENTS AND INTERCOMPANY TRANSACTIONS
Sales from Lumisys to CompuRAD were $717,000 and $377,000 for the six
months ended June 30, 1997 and June 30, 1996, and $970,000, $233,000 and
$198,000 for fiscal 1996, 1995 and 1995, respectively. There were no sales from
CompuRAD to Lumisys during any periods presented.
Accounts receivable representing sales from Lumisys to CompuRAD were
$245,000 at June 30, 1997.
4. TRANSACTION COSTS AND RESTRUCTURING EXPENSES
Total costs associated with the Merger are expected to be approximately
$1.5 million. This amount is a preliminary estimate only and is, therefore,
subject to change. Such costs include approximately $1.5 million of transaction
costs. In addition, Lumisys will incur other costs of approximately $800,000.
Transaction costs to be incurred by Lumisys and CompuRAD include fees to
financial advisors and for legal and accounting expenses and other related
expenses.
These costs of the Merger will be expensed in the period in which the
transaction is consummated. Accordingly, the unaudited pro forma combined
statement of operations does not reflect such costs and expenses. The unaudited
pro forma combined condensed balance sheet gives effect to such expenses as is
if they had been incurred as of June 30, 1997.
67
<PAGE> 80
LUMISYS BUSINESS
The discussion in this Joint Proxy Statement/Prospectus contains
forward-looking statements which involve risks and uncertainties. Lumisys'
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, without limitation, those discussed in this section and the
sections entitled "Risk Factors," "Lumisys' Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this Joint Proxy Statement/Prospectus.
INTRODUCTION
Lumisys designs, manufactures and markets a family of precision digitizers
that convert medical images on film or video into digital format. Once in
digital form, the medical images can be stored, transmitted, viewed, enhanced,
manipulated and printed at any PC or workstation within a medical network.
Lumisys currently offers a comprehensive family of products for digitizing
medical film images under the Lumiscan label and video images under the Imagraph
name. These digitizers process images from all commercially available medical
imaging modalities, including x-ray, CT, MRI, ultrasound and nuclear medicine.
Lumisys is the leading supplier of laser-based film digitizers, with sales of
over 3,000 Lumiscan units since its first product was introduced in 1990, and
introduced a CCD-based digitizer in early 1996. Lumisys also offers high quality
board-level digitization and compression products for the capture of video
images, which have applications in medical imaging as well as in scientific and
industrial inspection and multimedia imaging.
In 1996, Lumisys introduced a CR system for use in the industrial
inspection market. The CR system reads images from reusable phosphor plates of
pipes, valves, aircraft parts and other structural objects.
Lumisys intends to maintain and enhance its market leadership by leveraging
its reputation for high quality, reliable and cost-effective products,
broadening its product lines through internal product develop ment, acquiring
complementary businesses or technologies and penetrating new geographic markets.
Lumisys sells its products primarily to OEMs and VARs, who then integrate
Lumisys' products into teleradiology and PACS networks. Lumisys has established
close working relationships with the leading suppliers of these systems
including Agfa, CEMAX, E-Med, Kodak, Olicon, CompuRAD and Sterling.
INDUSTRY BACKGROUND
The use of medical film images to diagnose and treat diseases and injuries
has been an important medical tool since the invention of x-ray technology and
the emergence of radiology as a medical specialty. Today, radiologists review
and interpret images from a variety of imaging modalities, including x-rays, CT,
MRI, ultrasound and nuclear medicine. These modalities are used in a range of
different applications requiring specialized equipment to produce images on film
or video displays. Medical imaging has reduced the need for exploratory surgical
procedures and has enabled clinicians to make faster and more precise diagnoses
and prescribe more targeted courses of treatment. Medical imaging is used in all
stages of the patient management cycle, from screening to diagnosis, treatment
and post-treatment assessment. In 1992, according to an industry source,
approximately $1 billion of medical film was consumed in the United States as a
result of radiographic and fluoroscopic studies performed, CT scans, MRI scans
and nuclear medicine examinations.
The healthcare industry in the United States continues to change
dramatically in response to the escalating costs associated with medical
products and services. An increased emphasis on lowering costs and optimizing
resources has encouraged the healthcare industry to evolve toward managed
regional healthcare systems. These changes in the healthcare industry are having
a profound impact on the practice of radiology. In the past, radiologists were
located in a medical facility close to the patient where they performed
examinations and interacted face-to-face with the local clinician and the
patient. As reimbursement for radiological interpretations have declined,
radiologists are under pressure to increase the number of interpretations and
compete for business over much larger geographic areas. In addition, with the
development of advanced medical imaging technologies, radiologists have been
able to sub-specialize, becoming, for example, neuroradiologists, mammographers,
orthopedic radiologists, angiographers or pediatric radiologists. The evolution
toward managed regional healthcare systems and increasing radiologist
specialization have resulted
68
<PAGE> 81
in a need to develop equipment and systems capable of transmitting medical
images rapidly to and from remote locations.
Concurrent with these changes in radiology, the computing and
telecommunications industries have experienced rapid growth and technological
advancements. Today, high-quality medical images can be transmitted over
broadband communications networks. Recent trends in the healthcare market to
lower costs and optimize resources combined with the rapid growth of digital
communications networks have accelerated the acceptance of teleradiology, the
practice of radiology from remote locations. In teleradiology, medical images at
the point of care are digitized and transmitted to central locations for
interpretation, bringing the patient's information to the radiologist faster and
at significantly lower cost than the traditional method of transporting the
patient from the point-of-care facility to the diagnostic facility.
In addition, the digitization and transmission of medical images has
enabled the formation of large scale image storage and management networks known
as PACS. PACS combine teleradiology and medical information systems to
facilitate (i) the management of medical images from various imaging modalities,
(ii) the storage and retrieval of the images in large electronic archives, (iii)
the manipulation and enhancement of such images for display at any time and at
any workstation in the network and (iv) the integration of radiological
information into existing patient management systems and hospital information
systems. PACS, typically found in large regional hospitals and university
research centers, minimize the risk of loss of the master image and reduce the
overall costs of providing efficient radiology services. It is estimated that
approximately 10% of all medical films are lost and an additional 10% to 15% are
misplaced or misfiled, creating the need to take expensive duplicate images,
delaying the delivery of quality medical care and resulting in increased medical
costs.
Increased adoption of teleradiology and PACS is currently occurring among
healthcare providers in response to pressures to create a more efficient
healthcare delivery system in the United States, Canada, Western Europe, Japan
and Australia. In addition, many countries in South America and Asia are
focusing on providing better healthcare and are investing in CT, MRI and other
modern imaging modalities. Lumisys believes that these countries present
potential opportunities for the implementation of teleradiology systems.
STRATEGY
Lumisys is a leading suppler of digitizers for medical film and video
images and has established a reputation for delivering high-quality, reliable
and cost-effective products. Lumisys intends to leverage this reputation by
broadening its product line, exploiting new market opportunities and penetrating
new geographic markets. Lumisys' strategy includes the following key elements:
APPLY CORE TECHNOLOGICAL COMPETENCIES TO DEVELOP NEW PRODUCTS. Lumisys has
developed expertise in electro-optics, image processing, circuit design,
computing, software and communications for image digitization. Lumisys' strategy
is to provide increased functionality, application-specific software and
additional components to enhance its core product line and address emerging
market needs.
ACQUIRE COMPLEMENTARY PRODUCTS AND TECHNOLOGY. Lumisys intends to continue
to identify and acquire complementary businesses, products and technologies that
offer Lumisys the ability to introduce new products, add core technological
competencies and leverage existing strengths to provide better solutions for its
target markets. In 1995, Lumisys acquired X-Ray Scanner Corporation ("XRS") to
accelerate its development of a lower cost CCD-based film digitizer line and
acquired Imagraph Corporation ("Imagraph") to add core technical competencies in
video image digitization and compression.
EXPLOIT MARKET OPPORTUNITIES THROUGH STRONG OEM RELATIONSHIPS. Lumisys has
established strong relationships with the key suppliers of medical image
management products and systems. These relationships provide Lumisys with
insight into emerging customer requirements, which allows Lumisys to position
its current products appropriately and to allocate more effectively its product
development resources. In addition, as OEM customers increasingly outsource
parts and components for their systems, Lumisys intends to take advantage of its
strong OEM relationships and its reputation for high-quality products to remain
the supplier of choice with an expanding product line.
69
<PAGE> 82
PENETRATE NEW GEOGRAPHIC MARKETS. Lumisys believes that significant
opportunities exist for international expansion, primarily in Canada, Western
Europe, Japan and Australia. In addition, many countries in South America and
Asia are focusing on providing better healthcare and are investing in CT, MRI
and other modern imaging modalities. Lumisys believes that these countries
present potential opportunities for the implementation of teleradiology systems.
Lumisys intends to identify specific market dynamics in these foreign countries
and design targeted products and systems for their medical imaging needs.
Lumisys' development of a lower cost CCD-based film digitizer was the first step
toward addressing some of the needs of these markets. Lumisys believes that the
basic system is particularly well suited to customers in developing countries
where price is a more important factor than in the United States. These
customers could then upgrade to Lumisys' laser-based digitizer products and
Lumisys' OEM customer's more sophisticated software systems as their needs
increase.
PRODUCTS AND APPLICATIONS
Lumisys currently offers a comprehensive family of products for digitizing
medical film and video images from all commercially available medical imaging
modalities. Lumisys digitizers enable the conversion of analog medical images
into the digital format required by integrated teleradiology systems. In a
typical teleradiology application, a film or video image is digitized into a
host computer using a Lumisys digitizer. The digitized film may be transmitted
over telephone line, dedicated high-speed communication lines or satellite links
and may be compressed to reduce transmission time. In a typical PACS network,
current or previously archived medical images from a variety of imaging
modalities and other patient information are transmitted over local and wide
area networks ("LAN/WAN"). Lumisys' digitizers make possible the entry of
medical images into PACS networks.
LUMISCAN PRODUCTS. The Lumiscan family consists of a full line of
laser-based scanning medical film densitometers, primarily used for x-ray film
digitization. These digitizers incorporate lasers, precision optics,
computer-controlled galvanometers and micropositioners, special purpose light
detectors and analog as well as digital electronic circuitry. The Lumiscan
product line also includes a CCD-based film digitizer that incorporates a
proprietary light source and a high quality CCD detector. In addition, the
Lumiscan product line includes a CR system that incorporates much of the same
technology and manufacturing techniques as the other digitizers. CR uses
specialized phosphor plates to capture an x-ray image instead of film. All
Lumiscan digitizers include sophisticated proprietary control software as well
as internally developed input/output and driver software.
The Lumiscan 50 and 75, introduced in 1993 and 1994, respectively, utilize
a common housing and are light weight, tabletop units. The Lumiscan 50 is a
lower resolution product that is used primarily in non-diagnostic teleradiology
applications. The Lumiscan 75 is a higher resolution product designed for
diagnostic teleradiology. The Lumiscan 85 is designed specifically to capture
information from x-ray mammograms, pediatric images and in non-destructive test
applications. The Lumiscan 85 offers very high resolution allowing it to capture
the wide dynamic range and requisite image information contained in these
images, which are generally smaller and require a higher optical density to
diagnose effectively.
The Lumiscan 150 and 200 utilize larger housings than the Lumiscan 50, 75
and 85 and are designed for PACS applications. These models are quickly being
displaced by the less expensive desktop models. The Lumiscan 150 was introduced
in 1992. The Lumiscan 200, introduced in 1991, is equipped with a film feeder
capable of automatically digitizing up to 70 sheets of film, increasing operator
productivity in high-volume PACS environments. The Lumiscan 100 was Lumisys'
first product, introduced in 1990, and has been superseded by Lumisys' other
Lumiscan products for most applications. The Lumiscan 100 is still commercially
available and is used primarily by large research universities because of its
high precision, variable resolution capabilities and ability to accommodate a
broad range of film sizes.
Lumisys began shipping the Lumiscan 20 tabletop film digitizer, which is
based on CCD technology, in January, 1996. The Lumiscan 20 is a less expensive
film digitizer designed for use in less demanding applications and environments,
where price is a more important factor than resolution. Lumisys designed the
70
<PAGE> 83
Lumiscan 20 to be cost-competitive, to exhibit superior image quality over
CCD-based products offered by its competitors and to include an optional film
feeder.
Lumisys introduced the Lumiscan 110 CR system in 1996. The CR system was
designed specifically to capture information from storage phosphors rather than
film. These digitizers are being used for filmless radiograph applications in
the non-destructive test ("NDT") market. Inspection of pipes, valves, aircraft
parts and other structural objects can be accomplished without the use of
conventional silver halide emulsion radiographic films. These digitizers are
similar in size and weight to the other Lumisys tabletop digitizers.
BOARD PRODUCTS. Lumisys also develops, manufactures and markets
high-quality, board-level digitization and compression products for the capture
of video images. These digital images can be reproduced on workstations and
displays, transmitted over networks, recorded into archives and accurately
reprinted. These products have applications in medical imaging as well as in
scientific and industrial inspection and multimedia imaging. They incorporate
programmable gate-arrays, embedded signal processors, proprietary software and
double-sided, surface-mounted technology. Additionally, Lumisys' proprietary
Auto-Sync software automatically adjusts to accommodate the variety of video
signals to be digitized. This capability allows Lumisys' OEM and VAR customers
to install these products without having to develop extensive video installation
expertise or to acquire special test equipment.
The HI*DEF Plus is a standard PC-compatible board that digitizes analog
video images at up to 140 MHz sampling rates with continuous Auto-Sync locking
circuitry to maintain image fidelity at optimum signal-to-noise ratios. This
product is primarily used to digitize video from CT, MRI, ultrasound and nuclear
medicine cameras in medical applications as well as from high resolution video
cameras used for industrial inspection and quality control applications.
Lumisys also offers the Imascan line of monochrome and color video frame
grabbers with SVGA display capabilities on a single board. These PCI boards have
applications in medical ultrasound imaging as well as graphic arts, desktop
video and the teleconference markets. Imascan Precision is the most recent
addition to this family and integrates the most advanced features offered by
this product line.
In the fourth quarter of 1996, the company introduced its integrated
compression engine known as I.C.E. Clarity. This computer board can compress or
decompress images at a speed greater than thirty images per second. When used in
a multitasking operating system such as Windows NT, lossless JPEG
compression/decompression operations can be accomplished in real-time while
consuming very little computer processing bandwidth. Applications for this
product have been initially targeted for capturing, reviewing and archiving
medical images from cardiology workstations.
RESEARCH AND DEVELOPMENT
Lumisys devotes significant resources to research and development
activities to design new products and product enhancements and identify new
applications for existing products. Lumisys has developed expertise in
electro-optics, image processing, circuit design, computing, software and
communications for image digitization, which Lumisys believes it can leverage to
introduce new products and product enhancements. Lumisys' engineers work closely
with its OEM and VAR customers to assist in the integration of Lumisys' products
with those of the OEMs and VARs and to identify new applications for Lumisys'
products. Occasionally, Lumisys receives funding from certain OEM and VAR
customers to develop specialized applications.
For the years 1996, 1995 and 1994, Lumisys' research and development
expenditures were approximately $4.1 million, $2.9 million (not including a
charge of $1.4 million for acquisition of in-process research and development)
and $1.5 million, respectively. These amounts represented 18.0%, 16.7% and 17.0%
of total revenues in the respective periods. In 1996, research and development
resources were used primarily for the development of the CR system (the Lumiscan
110) and the integrated compression engine ("ICE") product which were introduced
in 1996.
For the six months ended June 30, 1997, research and development expenses
increased 10.5% to $2,249,000 from $2,035,000 for the six months ended June 30,
1996. As a percentage of sales, research and development expenses increased to
20.2% in the six months ended June 30, 1997 from 18.5% in 1996. The
71
<PAGE> 84
increase for the six month period was primarily due to increased engineering
expenses as a result of the continuing development of the computed radiography
reader for the medical market.
As of September 30, 1997, Lumisys had 31 employees engaged in research and
development activities.
SALES AND MARKETING
Lumisys sells its film digitizers primarily to OEM and VAR customers who
integrate these products into teleradiology and PACS networks. Lumisys also
sells its film digitizers to a few end users, primarily university and medical
research groups. Lumisys' video image digitizers are sold to many of these same
customers as well as to dealers, distributors and resellers for medical,
multimedia, scientific and industrial applications.
Lumisys markets its products primarily through an internal sales
organization. In addition, Lumisys exhibits its products at major trade shows
and supports the OEMs, VARs, dealers, distributors and resellers with product
literature and application notes for reference and distribution. Lumisys
maintains a staff of eleven sales and marketing personnel, with three
individuals responsible for film digitizer products, six individuals responsible
for video image digitizers, one individual responsible for software products and
one individual responsible for new business development. All of the sales
personnel are supported by a technical support organization and the engineering
staff is available to support Lumisys' customers when appropriate. Lumisys
devotes a substantial portion of its marketing efforts to developing, monitoring
and enhancing its relationships with existing customers and to identifying and
cultivating new customers entering the market. The loss of one or more customers
or a change in their buying pattern could have a material effect on Lumisys'
business and results of operations.
Lumisys emphasizes customer service and support by developing quality
products, encouraging customer feedback through extensive contacts with key OEM
and VAR customers, maintaining accurate documentation of technical support
requests and providing customers with telephone support. The technical support
staff conducts a film digitizer service training course for OEM and VAR
personnel on a regular basis, providing Lumisys' customers with the expertise
needed to install and support Lumisys' products. Lumisys provides a limited
one-year parts or factory repair warranty to end-user customers, which can be
performed by either the end customer or the OEMs or VARs service personnel once
installation has been completed. Although Lumisys' warranty policy permits the
customer to return the product in the event of malfunction, product returns to
date have been insignificant.
MANUFACTURING
Lumisys' manufacturing activities consist primarily of assembling and
testing components and subassemblies acquired from qualified vendors as well as
assembling, aligning, system testing and performing quality assurance inspection
of the end product. Lumisys' film digitizer facility operates under the FDA GMP
guidelines and is a registered medical device manufacturer.
Lumisys purchases industry-standard parts and components for the assembly
of its products, generally from multiple vendors. Although Lumisys relies on
single-source suppliers for certain components, such as lasers, photomultiplier
tubes and certain electronic components primarily to control price and quality,
Lumisys believes that alternate sources of supply are available from other
vendors for such components and has qualified second source suppliers for some,
but not all, single-sourced parts. Lumisys maintains good relationships with its
vendors and, to date, has not experienced any material supply problems.
COMPETITION
Although to date competition in the United States laser-based film
digitizer market has not been significant, a new company, CLS entered the market
in 1996 with a product similar to the laser-based film digitizers offered by
Lumisys. In additional, several Japanese competitors, such as Konica, Nishimoto
Sangyo and Abe Sekkei, offer competitive products on an international basis and
may decide in the future to devote additional resources to marketing competitive
products in the United States. The markets for medical film digitizers
incorporating CCDs are highly competitive. Lumisys faces competition from
companies such as
72
<PAGE> 85
Vidar Systems Inc., Canon Inc., Vision Ten Inc., Hell Linotype and Howtek in the
CCD-based film digitizer market. There can be no assurance that Lumisys'
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features that
render Lumisys' products less competitive or obsolete.
In addition, large domestic companies, such as Kodak, Imation, Sterling and
GE, and European companies, such as Siemens, Philips and Agfa, have the
technical and financial ability to design and market digitizer products
competitive with Lumisys' products, and some of them have in the past produced
and marketed such products. While most of these companies currently purchase
products from Lumisys, Lumisys believes that it will be required to continue to
improve the price and performance characteristics of its products to retain
their business especially in view of the fact that these customers are not
contractually required to purchase their digitizers exclusively or at all from
Lumisys. All of these companies have significantly greater financial, marketing
and manufacturing resources than Lumisys and would be significant competitors if
they decided to enter this market.
The markets for medical video image digitizers are also highly competitive.
Competitors in the video digitizer market are Precision Digital Images Corp.,
Epix, Inc. and Matrox Electronic Systems Ltd.
As a result of the substantial investment required by an OEM or VAR
customer to integrate capital equipment into a production line, or to integrate
components and subsystems into a product design, Lumisys believes that once an
OEM or VAR customer has selected certain capital equipment or certain components
or subsystems from a particular vendor, the customer generally relies upon that
vendor to provide equipment for the specific production line or product
application and may seek to rely upon that vendor to meet other component or
subsystem requirements. Accordingly, Lumisys may be at a competitive advantage
or disadvantage with respect to a particular customer depending on whether that
customer utilizes Lumisys' or a competitor's component or subsystem.
PATENTS AND INTELLECTUAL PROPERTY
Lumisys believes that the success of its business depends more on the
technical competence and creativity of its employees and successful business
execution than on patents, trademarks and copyrights. Although Lumisys has
obtained several patents it generally does not rely primarily on patent
protection with respect to its products. As of September 30, 1997, Lumisys held
or had a license to twelve United States patents, expiring between 2010 and
2014.
Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that may prevent, limit or interfere with Lumisys'
ability to make and sell some of its products. Although Lumisys believes that
its products do not infringe the patents or other proprietary rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against Lumisys or that such claims will not be successful.
Lumisys also relies upon trade secret protection for its confidential and
proprietary information. Lumisys routinely enters into confidentiality
agreements with its employees, consultants and customers who have access to
Lumisys' confidential or proprietary information. It is not clear, however, that
these agreements will provide meaningful protection of Lumisys' trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information.
GOVERNMENT REGULATION
The manufacturing and marketing of Lumisys' digitizer and video board
products are subject to extensive government regulation in the United States and
in other countries, and the process of obtaining and maintaining required
regulatory approvals is lengthy, expensive and uncertain. All of Lumisys'
laser-based film digitizers, the CCD-based film digitizer and the QR2000
software products that are commercially available have received marketing
clearance from the FDA via a 510(k) filing. International sales of Lumisys'
products
73
<PAGE> 86
may be subject to regulation in various countries. The regulatory review process
varies from country to country. To date, Lumisys' revenue has not been adversely
impacted by an inability to obtain domestic or foreign marketing clearances.
Lumisys is also required to register as a Class II medical device
manufacturer with the FDA and state agencies, such as the CDHS. As such, Lumisys
may be inspected on a routine basis by both the FDA and the CDHS for compliance
with the FDA's GMP and other applicable regulations. These regulations require
that Lumisys manufacture its products and maintain its documents in a prescribed
manner with respect to manufacturing, reporting of product malfunctions and
other matters. Lumisys was inspected by the FDA in 1996 and was found to be
compliant with the FDA's GMP regulations but has not been inspected by CDHS to
date.
LUMISYS PROPERTIES
Lumisys' principal facilities are located in Sunnyvale, California and
Chelmsford, Massachusetts. Corporate headquarters are located in the Sunnyvale
facility, an approximately 25,000 square foot facility leased through December
2000. The Chelmsford facility, which houses the Imagraph division, is located in
an approximately 20,000 square foot building leased through June 2002.
LUMISYS LEGAL PROCEEDINGS
On July 9 and July 10, 1997, two class action complaints were filed in the
Superior Court of the State of California, County of Santa Clara, and the U.S.
District Court for the Northern District of California, respectively, against
Lumisys, several of its current and former officers and directors, and its
underwriters. The complaints are brought on behalf of all persons who purchased
Lumisys Common Stock during the putative class period, November 15, 1995 to July
11, 1996. The complaints allege that, during the class period, defendants made
material misstatements and omitted to disclose material information concerning
Lumisys' actual and expected performance and results, causing the price of
Lumisys Common Stock to be artificially inflated. The federal complaint alleges
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and SEC Rule 10b-5 promulgated thereunder; the state complaint alleges claims
under California state law. Neither the federal nor the state complaint
specifies the amount of damages sought. Lumisys and the other defendants
vigorously deny all allegations of wrongdoing, and intend to defend themselves
aggressively. On September 19, 1997, defendants filed a motion to dismiss the
federal complaint. On October 10, 1997, defendants filed demurrers to the state
complaint. There can be no assurance that Lumisys will prevail in this action or
that the plaintiffs will not recover damages.
74
<PAGE> 87
LUMISYS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Lumisys should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Joint Proxy Statement/Prospectus contains forward-looking
statements that involve risks and uncertainties. Lumisys' actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the sections entitled "Risk
Factors," and "Lumisys Business," as well as those discussed elsewhere in this
Joint Proxy Statement/Prospectus.
OVERVIEW
Lumisys designs, manufactures and markets a family of precision digitizers
that convert medical images on film or video into digital format. Lumisys' first
product, the Lumiscan 100, was introduced in 1990. Subsequently, Lumisys has
introduced a new Lumiscan model every year. Substantially all of Lumisys' sales
are derived from medical image digitizers and replacement parts to OEMs and VARs
who integrate these products into teleradiology and PACS networks.
In March 1996, Lumisys acquired the QR2000 software technology to add core
technical competencies in software development. In 1995, Lumisys acquired XRS to
accelerate the development of a CCD-based film digitizer line and Imagraph to
add core technical competencies in video image digitization and compression.
Lumisys recorded a write-off aggregating $1.4 million for acquired in-process
research and development associated with the 1995 acquisitions. Lumisys intends
to continue to identify and acquire complementary businesses, products and
technologies to broaden its product lines and enter new markets. Such
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of debt, one-time acquisition charges and amortization expenses
related to goodwill and intangible assets, each of which could adversely affect
Lumisys' financial condition and results of operations.
RECENT OPERATING RESULTS AND DEVELOPMENTS
Lumisys' revenues for the third quarter of fiscal 1997 were $6,032,000 and
its net income was $618,000, or $0.09 per share. These results compared with
revenues of $5,933,000 and net income of $816,000, or $0.12 per share, for the
same quarter of 1996. As of September 30, 1997, Lumisys had cash, cash
equivalents and short-term investments of approximately $21,389,000. Lumisys
anticipates filing with the SEC its report on Form 10-Q for the quarter ended
September 30, 1997, on or before November 14, 1997.
75
<PAGE> 88
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of sales. The financial statement
information and the discussion below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------- -------------------------
1997 1996 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 44.7 46.5 45.6 46.6 45.9
Gross profit..................................... 55.3 53.5 54.4 53.4 54.1
Operating expenses:
Sales and marketing.............................. 11.4 8.5 8.5 9.1 9.6
Research and development......................... 20.2 18.5 18.0 16.7 17.0
General and administrative....................... 9.1 11.0 9.7 10.4 8.1
Acquired in-process research and development..... -- -- -- 8.2 --
Total operating expenses........................... 40.7 38.1 36.2 44.4 34.7
Income from operations............................. 14.6 15.3 18.2 9.0 19.4
Interest income, net............................... 4.5 3.9 4.0 1.3 1.0
Income before income taxes......................... 19.1 19.2 22.2 10.3 20.4
Provision (benefit) for income taxes............... 7.5 4.5 7.2 (4.3) 1.0
Net income......................................... 11.7 14.7 15.0 14.6 19.4
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
SALES. Sales for the six months ended June 30, 1997 increased 1.3% to $11.1
million from $11.0 million for the six months ended June 30, 1996. The slight
increase for the six month period was due to sales of new products introduced in
the last half of 1996 which were partially offset by decreased system sales in
1997.
GROSS PROFIT. Gross profit for the six months ended June 30, 1997 increased
4.9% to $6.2 million from $5.9 million for the six months ended June 30, 1996.
Gross margin increased in the six month period to 55.3% from 53.5%, primarily
due to stable prices for systems and continued product cost control.
SALES AND MARKETING. Sales and marketing expenses increased 34.8% to $1.3
million for the six months ended June 30, 1997 from $0.9 million for the same
period of 1996. As a percentage of sales, sales and marketing expenses increased
to 11.4% in the six months ended June 30, 1997 from 8.5% in the six months ended
June 30, 1996. The increase for the six month period was primarily due to the
increase in the Company's sales and marketing personnel to explore new product
introductions. The Company expects sales and marketing expenses to increase in
absolute dollars as the Company grows.
RESEARCH AND DEVELOPMENT. For the six months ended June 30, 1997, research
and development expenses increased 10.5% to $2.2 million from $2.0 million for
the six months ended June 30, 1996. As a percentage of sales, research and
development expenses increased to 20.2% in the six months ended June 30, 1997
from 18.5% in the six months ended June 30, 1996. The increase for the six month
period was primarily due to increased engineering expenses as a result of the
continuing development of the computed radiography reader for the medical
market. The Company believes that advanced technology is a key element in the
success of its business and expects to continue to increase its research and
development expenditures in absolute dollar amounts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
16.1% in the six months ended June 30, 1997 to $1.0 million from $1.2 million in
the same period of 1996. As a percentage of sales, general and administrative
expenses decreased to 9.1% for the six months ended June 30, 1997 from 11.0% in
76
<PAGE> 89
the six month period ended June 30, 1996. The decrease is due in part to lower
acquisition related charges in 1997 and to the reorganization of Imagraph which
resulted in a decrease in administrative personnel.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company recognized a provision
for income taxes of $830,000 in the six months ended June 30, 1997 compared to
$497,000 in the same period of 1996. The provision for taxes in the first half
of 1996 was reduced by the recognition of $315,000 of deferred tax assets. The
Company has provided a partial valuation allowance against the balance of the
deferred tax assets remaining as of June 30, 1997. The Company expects to
continue to be subject to an effective tax rate of approximately 39% for the
remainder of 1997.
FISCAL 1996 COMPARED WITH FISCAL 1995
SALES. Sales increased 30.3% in 1996 to $23.0 million from $17.7 million in
1995. This increase was due in part to new products launched in 1996 and late
1995. The new products included the Lumiscan 20, a CCD-based film digitizer
developed with technology obtained in the XRS acquisition, the Lumiscan 110, a
computed radiography system used in industrial inspection and the Lumiscan 85, a
high end digitizer targeted for mammography and non-destructive test
applications. The remaining increase in sales is a result of growth in demand
for teleradiology and PACS networks. In 1996, no customers accounted for more
than 10% of Lumisys' sales compared to three customers accounting for 10% or
more of Lumisys' sales in 1995.
GROSS PROFIT. Gross profit increased 32.7% in 1996 to $12.5 million from
$9.4 million in 1995. Gross margin increased from 53.4% to 54.4% primarily due
to increased sales which improved absorption of manufacturing overhead.
SALES AND MARKETING. Sales and marketing expenses increased in 1996 to $1.9
million from $1.6 million in 1995, primarily due to the increase in Lumisys'
sales and marketing personnel. As a percentage of sales, sales and marketing
expenses decreased to 8.5% in 1996 from 9.1% in 1995. Because Lumisys'
distribution channels rely on established OEM and VAR customers, which generally
provide sales and field support for the products, Lumisys does not need to
increase sales and support personnel proportionately with increases in sales.
However, Lumisys anticipates that additional resources will be required as
Lumisys expands both its customer and geographic bases.
RESEARCH AND DEVELOPMENT. Research and development expenses increased in
1996 to $4.1 million from $2.9 million in 1995, primarily due to increased
engineering. As a percentage of sales, research and development expenses
increased to 18.0% in 1996 from 16.7% in 1995. Lumisys believes that advanced
technology is a key element in the success of its business and expects to
continue to increase its research and development expenditures in absolute
dollar amounts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
in 1996 to $2.2 million from $1.8 million in 1995. The increase was primarily
due to the on-going costs associated with increased personnel expenses as a
result of being a public company. As a percentage of sales, general and
administrative expenses decreased to 9.7% in 1996 from 10.4% in 1995. Lumisys
expects that its general and administrative expenses will increase in absolute
dollars in the future as Lumisys expands its staffing to support expanded
operations.
PROVISION (BENEFIT) FOR INCOME TAXES. Lumisys recorded a current provision
for income taxes of $2.0 million in 1996 which was partially offset by a
deferred benefit of $315,000 resulting in a net provision of $1.7 million. In
1995, Lumisys recorded a provision for income taxes of $352,000 which was offset
by the recognition of $1.1 million of deferred tax assets, resulting in a net
benefit of $762,000 for the year. The recognition of deferred tax assets was
based on Lumisys' assessment that it is more likely than not that this portion
of the deferred tax assets will be realized. Lumisys has provided a partial
valuation allowance against the balance of the deferred tax assets. At December
31, 1996, Lumisys had net operating loss carryforwards available to reduce
income taxes for federal and state income tax purposes of approximately $800,000
and $500,000, respectively; such carryforwards expire through 2007 but are
substantially limited per year. In addition, at December 31, 1996, Lumisys had
research and development tax carryforwards available to reduce income taxes for
federal and state income tax purposes of approximately $40,000 and $120,000
which expire from 2004 to 2010. See Note 5 of Notes to Consolidated Financial
Statements.
77
<PAGE> 90
FISCAL 1995 COMPARED WITH FISCAL 1994
SALES. Sales increased 100.5% in 1995 to $17.7 million from $8.8 million in
1994. This increase was due in part to the acquisition of Imagraph and XRS,
which contributed $4.8 million and $0.4 million, respectively, or approximately
29.4% of sales in 1995. Excluding the acquisitions, the percentage increase in
sales would have been 41.2%, primarily as a result of growth in demand for
teleradiology and PACS networks. In 1995, each of three customers accounted for
more than 10% of Lumisys' sales, as they did in 1994.
GROSS PROFIT. Gross profit increased 98% in 1995 to $9.4 million from $4.8
million in 1994. Gross profit as a percentage of sales declined from 54.1% to
53.4% primarily due to the lower gross profit margins associated with the
Imagraph video board products acquired in March 1995.
SALES AND MARKETING. Sales and marketing expenses increased in 1995 to $1.6
million from $0.9 million in 1994, primarily due to the increase in Lumisys'
sales and marketing personnel as a result of the acquisitions of Imagraph and
XRS. As a percentage of sales, sales and marketing expenses decreased to 9.1% in
1995 from 9.6% in 1994. Because Lumisys' distribution channels rely on
established OEM and VAR customers, which generally provide sales and field
support for the products, Lumisys does not need to increase sales and support
personnel proportionately with increases in sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased in
1995 to $2.9 million from $1.5 million in 1994, primarily due to increased
engineering personnel as a result of the acquisitions of Imagraph and XRS. As a
percentage of sales, research and development expenses decreased to 16.7% in
1995 from 17.0% in 1994.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
in 1995 to $1.8 million from $0.7 million in 1994. The increase was due in part
to expenses incurred in anticipation of the acquisitions of Imagraph and XRS and
in part to the on-going costs associated with increased personnel expenses
following the acquisitions. As a percentage of sales, these expenses increased
to 10.4% in 1995 from 8.1% in 1994.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE. Acquired in-process
research and development expenses represent a non-recurring charge in 1995 of
$1.4 million relating to products being developed by Imagraph and XRS at the
time of the acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. Lumisys recognized a benefit for
income taxes of $762,000 in 1995 compared with a provision of $95,000 in 1994.
The acquired in-process research and development expense is not deductible for
tax purposes, which resulted in significantly higher alternative minimum taxes
for 1995, offset by the recognition of $1.1 million of deferred tax assets,
based on Lumisys' assessment that it is more likely than not that this portion
of the deferred tax assets will be realized.
QUARTERLY RESULTS
The following table sets forth a summary of Lumisys' quarterly operating
data for each quarter of fiscal 1995 and 1996 and the first two quarters of
fiscal 1997. This information has been derived from Lumisys' unaudited quarterly
consolidated financial statements. In management's opinion, these quarterly
results have been prepared on a basis consistent with the audited Consolidated
Financial Statements contained elsewhere herein, and include all adjustments,
consisting only of normal recurring adjustments, which Lumisys considers
necessary for a fair presentation of the information for the quarters presented.
This data should be read in
78
<PAGE> 91
conjunction with Lumisys' Consolidated Financial Statements and Notes thereto
appearing elsewhere in this report. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97
------- ------- ------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................. $2,404 $4,674 $5,013 $5,571 $5,110 $5,872 $5,933 $ 6,107 $5,818 $5,311
Cost of sales......... 1,068 2,191 2,322 2,647 2,395 2,716 2,684 2,710 2,598 2,372
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Gross profit.......... 1,336 2,483 2,691 2,924 2,715 3,156 3,249 3,397 3,220 2,939
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing... 247 453 412 494 483 456 463 547 636 628
Research and
development......... 387 834 821 904 999 1,036 1,064 1,046 1,033 1,216
General and
administrative...... 266 516 540 510 628 584 622 404 510 508
Acquired in-process
research and
development......... 1,442 -- -- -- -- -- -- -- -- --
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Total operating
expenses.......... 2,342 1,803 1,773 1,908 2,110 2,076 2,149 1,997 2,179 2,352
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Income (loss) from
operations(1)....... (1,006) 680 918 1,016 605 1,080 1,100 1,400 1,041 587
Interest income,
net................. 47 31 32 113 215 214 238 249 250 252
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes............... (959) 711 950 1,129 820 1,294 1,338 1,649 1,291 839
Provision (benefit)
for income taxes.... 54 (731) (47) (38) 98 398 522 644 503 327
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Net income
(loss)(1)(2)........ $(1,013) $1,442 $ 997 $1,167 $ 722 $ 896 $ 816 $ 1,005 $ 788 $ 512
======= ====== ====== ======= ====== ====== ====== ====== ====== ======
</TABLE>
AS A PERCENTAGE OF TOTAL SALES:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97
------- ------- ------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales......... 44.4 46.9 46.3 47.5 46.9 46.2 45.2 44.4 44.7 44.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross Profit.......... 55.6 53.1 53.7 52.5 53.1 53.8 54.8 55.6 55.3 55.3
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating Expenses:
Sales and Marketing... 10.3 9.7 8.2 8.9 9.4 7.8 7.8 9.0 10.9 11.8
Research and
Development......... 16.1 17.8 16.4 16.2 19.6 17.6 17.9 17.1 17.8 22.9
General and
Administrative...... 11.0 11.1 10.8 9.2 12.3 10.0 10.5 6.6 8.8 9.6
Acquired in-process
research and
development......... 60.0 -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Operating
Expenses.......... 97.4 38.6 35.4 34.3 41.3 35.4 36.2 32.7 37.5 44.3
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations(1)....... (41.8) 14.5 18.3 18.2 11.8 18.4 18.5 22.9 17.9 11.1
Interest income,
net................. 1.9 0.7 0.7 2.0 4.2 3.6 4.0 4.1 4.3 4.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........ (39.9) 15.2 19.0 20.2 16.0 22.0 22.5 27.0 22.2 15.8
Provision (benefit)
for income taxes.... 2.2 (15.6) (0.9) (0.7) 1.9 6.8 8.8 10.6 8.6 6.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)(1)(2)... (42.1)% 30.8% 19.9% 20.9% 14.1% 15.2% 13.7% 16.4% 13.5% 9.6%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
79
<PAGE> 92
(1) In the quarter ended March 31, 1995, Lumisys recorded a one-time charge of
$1,442,000 (60% of sales for such quarter) related to acquired in-process
research and development.
(2) Excludes accretion of mandatorily redeemable convertible preferred stock.
Lumisys has experienced quarterly fluctuations in operating results caused
by various factors, including the timing of orders by major customers, customer
inventory levels, shifts in product mix, the incurrence of acquisition-related
costs and general conditions in the healthcare industry which have reduced
capital equipment budgets and delayed or reduced the adoption of teleradiology,
and expects that these fluctuations will continue.
Gross margins declined after the first quarter of 1995 due to the
acquisition of Imagraph on March 31, 1995 and the lower margins on the Imagraph
video board products. In 1996, gross margins increased due to better utilization
of manufacturing overhead and increased further in the first two quarters of
1997 due to increased volume, continued product cost control and stable prices
for systems.
Operating expenses for the last three quarters of 1995 increased
significantly due to the acquisitions of XRS and Imagraph. In 1996, operating
expenses fluctuated due to increased headcount and increased operating volume.
Operating expenses declined as a percent of sales due to increased sales volume
during the first two quarters of 1997.
Lumisys typically does not obtain long-term volume purchase contracts from
its customers, and a substantial portion of Lumisys' backlog is scheduled for
delivery within 90 days or less. Customers may cancel orders and change volume
levels or delivery times without penalty. Quarterly sales and operating results
therefore depend on the volume and timing of the backlog as well as bookings
received during the quarter. A significant portion of Lumisys' operating
expenses are fixed, and planned expenditures are based primarily on sales
forecasts and product development programs. If sales do not meet Lumisys'
expectations in any given period, the adverse impact on operating results may be
magnified by Lumisys' inability to adjust operating expenses sufficiently or
quickly enough to compensate for such a shortfall.
LIQUIDITY AND CAPITAL RESOURCES
Lumisys has financed its activities primarily from net cash provided by
operations, which contributed $1.8 million in the first half of 1997 compared
with $792,000 for the same period in 1996.
At June 30, 1997, Lumisys' working capital was $25.3 million. Lumisys had
$19.8 million in cash and cash equivalents at June 30, 1997 compared with $18.4
million of cash and cash equivalents at December 31, 1996. The increase is
primarily due to net income for the period.
Lumisys does not currently have any significant capital commitments and
believes that existing cash and funds expected to be generated from operations
will provide adequate cash to fund Lumisys' anticipated working capital and
other cash needs for at least the next twelve months. Thereafter, if cash
generated from operations is insufficient to satisfy Lumisys' projected
requirements, Lumisys may be required to sell additional equity or debt
securities or obtain bank or other credit facilities. There can be no assurance
that Lumisys will be able to sell such securities or obtain such credit
facilities on acceptable terms in the future, if at all. The sale of additional
equity or debt securities could result in additional dilution to Lumisys'
stockholders.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods ending after December 15, 1997. Reclassification of financial statements
for earlier periods for comparative purposes is required. Lumisys will adopt
SFAS 130 in 1997 and does not expect such adoption to have a material effect on
the consolidated financial statements. See Note 2 to the Lumisys Consolidated
Financial Statements.
80
<PAGE> 93
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Lumisys has
not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in 1998. See Note 2 to the
Lumisys Consolidated Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 is effective for Lumisys' fiscal year ending December 31, 1997. Under
SFAS 128, primary earnings per share is replaced by basic earnings per share and
fully diluted earnings per share is replaced by diluted earnings per share. See
Note 2 to the Lumisys Consolidated Financial Statements.
In 1996, Lumisys implemented the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Lumisys' adoption of SFAS 123 in 1996 does not have a material
effect on Lumisys' financial position or results of operations, as Lumisys
elected to continue to measure the compensation cost of stock option plans using
the intrinsic value based method. See Note 2 to the Lumisys Consolidated
Financial Statements.
81
<PAGE> 94
LUMISYS MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS -- LUMISYS
The executive officers and directors of Lumisys are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ ----- ---------------------------------------------------
<S> <C> <C>
Stephen J. Weiss 59 President, Chief Executive Officer and Director
Craig L. Klosterman 43 Chief Operating and Chief Financial Officer
Douglas G. Devivo, Ph.D. 54 Chairman of the Board of Directors
C. Richard Kramlich 62 Director
Matthew D. Miller, Ph.D. 50 Director
Austin E. Vanchieri 54 Director
John M. Burgess 54 Vice President, Sales
Linden J. Livoni 50 Vice President, Engineering
Kuldip K. Ahluwalia 41 Vice President, Marketing and Business Development
Dean MacIntosh 38 Vice President, Finance
Mark Mariotti 36 Vice President and General Manager of Imagraph
</TABLE>
STEPHEN J. WEISS has served as a member of the Lumisys Board and the
President and Chief Executive Officer of Lumisys since joining Lumisys in
January 1990. Prior to that time, Mr. Weiss was a founder of Virtual Imaging, a
medical imaging company, where he last held the position of President. From 1971
to 1985, Mr. Weiss was an Executive Vice President of ADAC Laboratories, a
medical imaging company.
CRAIG L. KLOSTERMAN has served as the Chief Financial Officer since
February 1993 and also as Lumisys' Chief Operating Officer since October 1994.
Mr. Klosterman also served as Vice President, Operations for Lumisys from
January 1994 through October 1994. From 1988 to 1992, he worked at Voysys
Corporation, a telephone communications company, where he last held the position
of Vice President of Finance and from 1987 through 1988 he served as controller
of Silicon Solutions Corporation, a subsidiary of Zycad Corporation, a
computer-aided engineering company.
DOUGLAS G. DEVIVO, PH.D. has been a member of the Lumisys Board since April
1989. Dr. DeVivo is a general partner of ALCE Partners, Vanguard Associates and
Vanguard Associates II, venture capital investment partnerships, and has been
involved in venture capital as a general partner since 1981. Dr. DeVivo is also
a director of Gabelli Securities, Inc. and the Chairman and Chief Executive
Officer of Verticom, Inc.
C. RICHARD KRAMLICH has been a member of the Lumisys Board since October
1987. Mr. Kramlich has been a General Partner of New Enterprise Associates, a
venture capital firm, since June 1978. Mr. Kramlich is also a director of Ascend
Communications, Inc., Chalone Inc., Macromedia, Inc., Silicon Graphics, Inc. and
SyQuest Technology, Inc.
MATTHEW D. MILLER, PH.D. has been a member of the Lumisys Board since March
1995. Dr. Miller has been the President of M-Squared Media and Technology, an
investment and consulting firm, since August 1994. Previously, Dr. Miller served
as Vice President, Technology of General Instrument Corporation, a diversified
electronics manufacturer, from August 1988 to July 1994. Prior to joining
General Instrument Corporation, Dr. Miller served as Vice President, Technology
of Viacom, Inc., a broadcast and cable company, from April 1984 to August 1988.
Mr. Miller is also a director of Faroudja Inc., a technology company.
AUSTIN E. VANCHIERI has been a member of the Lumisys Board since May 1997.
Mr. Vanchieri has been the President and Chief Executive Office of Visual Edge
Technology, Inc., a company that develops software for the pre-press market,
since October 1992. Previously, Mr. Vanchieri served as President of FROX, Inc.,
a start-up involved in industrial information/entertainment products. Prior to
joining FROX, Inc., Mr. Vanchieri spent over 20 years with Xerox Corporation,
most recently as Corporate Vice President and President of the Information
Products Division.
82
<PAGE> 95
JOHN M. BURGESS has served as Lumisys' Vice President of Sales since May
1990. From 1986 to 1990, Mr. Burgess served as Vice President, Sales and
Marketing for Diasonics, a medical imaging company. Prior to joining Diasonics,
Mr. Burgess served as an Executive Vice President of ADAC Laboratories.
LINDEN J. LIVONI has served as Lumisys' Vice President of Engineering since
January 1992. Prior to that time, Mr. Livoni spent six years as Director of
Engineering at Greyhawk Systems, Inc., a high-resolution display company.
Previously, Mr. Livoni served as Director of Engineering for the Digital
Radiography Division of Diasonics.
KULDIP K. AHLUWALIA has served as Lumisys' Vice President of Marketing and
Business Development since December 1996. From 1994 through 1996, Mr. Ahluwalia
served as Marketing Manager for Toshiba America Medical Systems, a medical
imaging company.
DEAN MACINTOSH has served as Lumisys' Vice President, Finance since
February, 1997, and as Controller since joining Lumisys in August 1995. From
1987 to 1995, Ms. MacIntosh worked at SSE Telecom, Inc., a satellite
communications company where she last held the position of Vice President,
Administration and Corporate Controller.
MARK MARIOTTI has served as Vice President of Lumisys and General Manager
of the Imagraph division of Lumisys since February 1997 and as Vice President of
Finance and Operations of the Imagraph division of Lumisys since joining Lumisys
in March 1995. Between July 1988 and March 1995, Mr. Mariotti held several
positions at Imagraph, including Vice President of Finance and Operations and
Controller. Prior to joining Imagraph, Mr. Mariotti held senior financial and
accounting positions with Charles River Data Systems and Honeywell.
COMPENSATION OF DIRECTORS
Directors do not currently receive any cash compensation from Lumisys for
their service as members of the Lumisys Board, although they are reimbursed for
certain expenses in connection with attendance at Board and Committee meetings.
Douglas G. DeVivo, Ph.D., Chairman of the Lumisys Board, received the amount of
$15,000 during 1996 for services rendered to Lumisys.
In August 1995, the Lumisys Board adopted the 1995 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Lumisys Common Stock to non-employee directors of
Lumisys ("Non-Employee Directors"). The maximum number of shares of Lumisys
Common Stock that may be issued pursuant to options granted under the Directors'
Plan is 112,500. Pursuant to the terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Lumisys Board) will
automatically be granted an option to purchase 18,750 shares of Lumisys Common
Stock on the date of his or her election to the Lumisys Board. On the date of
adoption of the Directors' Plan, each person who was then a Non-Employee
Director of Lumisys and who had not received within the one year period prior to
adoption of the Directors' Plan either an option grant or the right to purchase
shares of Lumisys Common Stock, was granted an option to purchase 18,750 shares
of Lumisys Common Stock under the Directors' Plan. Thereafter, each Non-Employee
Director will automatically be granted an option to purchase an additional
18,750 shares of Lumisys Common Stock under the Directors' Plan on the date any
and all previous options or stock purchases by such person either under the
Directors' Plan or otherwise become fully vested.
Outstanding options under the Directors' Plan vest at the rate of 25% of
the shares subject to the option on the first anniversary of the date of grant
and 6.25% of the shares subject to the option each quarter thereafter for the
next three years. The exercise price of options granted under the Directors'
Plan must equal the fair market value of the Lumisys Common Stock on the date of
grant. No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan are generally nontransferable. The Directors' Plan will
terminate on August 15, 2005, unless earlier terminated by the Lumisys Board.
83
<PAGE> 96
In the event of a merger or consolidation, or a reverse merger or
reorganization in which Lumisys is not the surviving corporation, options
outstanding under the Directors' Plan will automatically become fully vested and
will terminate if not exercised prior to such event.
During the last fiscal year, Lumisys did not grant any options under the
Directors' Plan. As of October 31, 1997, 7,031 options were exercised under the
Directors' Plan.
COMPENSATION OF EXECUTIVE OFFICERS OF LUMISYS
The following table shows for the fiscal years ended December 31, 1996,
1995 and 1994, compensation awarded or paid to or earned by, Lumisys' Chief
Executive Officer and Lumisys' other executive officers who earned more than
$100,000 during the year ended December 31, 1996 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------ UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($)(2)
- ------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stephen J. Weiss............... 1996 $179,432 $ 40,346 -- $500
President and Chief Executive 1995 138,613 65,246 25,000 500
Officer 1994 143,077 36,000 33,000 500
Craig L. Klosterman............ 1996 144,500 30,319 -- 500
Chief Operating and Chief 1995 128,769 40,006 25,000 500
Financial Officer 1994 119,808 27,196 32,500 500
John M. Burgess................ 1996 125,000 105,325(3) -- 500
Vice President, Sales 1995 125,000 86,346(4) 12,500 500
1994 125,000 70,000 25,000 500
Linden J. Livoni............... 1996 129,717 27,100 -- 500
Vice President, Engineering 1995 119,653 31,738 -- 500
1994 109,778 18,000 18,750 500
Eystein G. Thordarson.......... 1996 132,372 10,000 -- 500
Former Vice President and 1995 134,000(5) 0 75,000 500
President of Imagraph 1994 -- -- -- --
Corporation
</TABLE>
- ---------------
(1) Bonus payments are based on the individual's performance, the individual's
salary level and Lumisys' overall financial performance. Also includes
interest forgiven on loans from Lumisys to Messrs. Weiss, Klosterman,
Burgess and Livoni.
(2) Consists of $500 per year in Lumisys matching payments under its 401(k)
Plan.
(3) Includes a commission payment of $104,643.
(4) Includes a commission payment of $82,800.
(5) Mr. Thordarson joined Lumisys in March 1995 when Lumisys acquired Imagraph
Corporation. Includes salary paid to Mr. Thordarson in 1995 prior to
Lumisys' acquisition of Imagraph Corporation. Mr. Thordarson resigned as an
officer of Lumisys in May, 1996.
84
<PAGE> 97
STOCK OPTION GRANTS AND EXERCISES
During the fiscal year ended December 31, 1996, no options were granted to
the Chief Executive Officer or the Named Executive Officers. The following table
shows for the fiscal year ended December 31, 1996, certain information regarding
options exercised by and held at year end by the Chief Executive Officer and the
Named Executive Officers, which were granted to them under Lumisys' 1987 Stock
Option Plan.
AGGREGATE OPTION EXERCISES IN 1996 AND DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT DECEMBER 31, AT DECEMBER 31,
EXERCISE REALIZED 1996(#) 1996($)(2)
NAME (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stephen J. Weiss............... -- -- 26,374/31,626 $ 189,379/184,861
Craig L. Klosterman ........... -- -- 20,493/31,407 139,364/182,938
John M. Burgess................ -- -- 21,874/15,626 176,118/110,632
Linden J. Livoni............... -- -- 10,547/8,203 92,603/72,022
Eystein G. Thordarson.......... 23,350 $447,553 9,462/-- 77,399/--
</TABLE>
- ---------------
(1) Value realized is based on the fair market value of Lumisys Common Stock on
the date of exercise minus the exercise price and does not necessarily
indicate that the optionee sold such stock.
(2) Fair market value of Lumisys Common Stock at December 31, 1996 ($9.38) minus
the exercise price of the options multiplied by the number of shares
underlying the option.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF LUMISYS
In May 1994, Lumisys loaned the following directors and officers of Lumisys
the amounts set forth below in connection with such person's exercise of certain
outstanding stock options. Each loan was made pursuant to a promissory note
which was secured by the underlying stock and had an interest rate of 4.94% per
year. Each loan was due and payable on May 31, 1997 and was paid in full by such
directors and officers on such date.
<TABLE>
<CAPTION>
NAME AMOUNT
----------------------------------------------------------- -------
<S> <C>
Stephen J. Weiss........................................... $65,250
John M. Burgess............................................ --
Linden J. Livoni........................................... 12,225
Craig L. Klosterman........................................ 22,050
Douglas G. DeVivo, Ph.D.................................... 15,000
</TABLE>
Lumisys believes that the foregoing transactions were in its best interest
and were on terms no less favorable to Lumisys than could be obtained from
unaffiliated third parties.
Lumisys has entered into indemnity agreements with certain officers and
directors which provide, among other things, that Lumisys will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be made
a party by reason of his position as director, officer or other agent of
Lumisys, and otherwise to the full extent permitted under Delaware law and
Lumisys' Bylaws.
85
<PAGE> 98
BENEFICIAL SECURITY OWNERSHIP OF
CERTAIN OWNERS AND MANAGEMENT OF LUMISYS
The following table sets forth certain information regarding the ownership
of Lumisys Common Stock as of October 31, 1997 by: (i) each person or entity who
is known by Lumisys to beneficially own five percent or more of the outstanding
Lumisys Common Stock, (ii) each director of Lumisys; (iii) each of the executive
officers named in the Summary Compensation Table; and (iv) all directors and
executive officers of Lumisys as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL
- ----------------------------------------------------------------------- --------- ----------
<S> <C> <C>
The TCW Group, Inc..................................................... 564,300 8.72%
865 South Figueroa Street
Los Angeles, CA 90017
Bala S. Manian......................................................... 369,597 5.71
Biometric Imaging
1025 Terra Bella Avenue
Mountain View, CA 94043
Stephen J. Weiss(2).................................................... 166,926 2.58
C. Richard Kramlich(3)................................................. 117,884 1.82
Craig L. Klosterman(4)................................................. 82,400 1.27
John M. Burgess(5)..................................................... 77,501 1.20
Linden J. Livoni(6).................................................... 59,709 *
Douglas G. DeVivo, Ph.D.(7)............................................ 53,515 *
Matthew D. Miller, Ph.D................................................ 14,063 *
Kuldip K. Ahluwalia(8)................................................. 12,500 *
Dean MacIntosh(9)...................................................... 12,017 *
Mark Mariotti(10)...................................................... 7,291 *
Austin E. Vanchieri.................................................... -- *
All directors and executive officers as a group (11 persons)(11)....... 603,806 9.33
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Lumisys believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
6,474,181 shares outstanding on October 31, 1997, adjusted as required by
rules promulgated by the SEC.
(2) Includes 16,126 shares subject to stock options exercisable within 60 days
of October 31, 1997. Does not include 3,000 shares of CompuRAD Common Stock
owned by Mr. Weiss which will be converted into approximately 2,784 shares
of Lumisys Common Stock upon consummation of the Merger.
(3) Includes 100,000 shares beneficially owned by New Enterprise Associates IV,
Limited Partnership, a Delaware limited partnership. Mr. Kramlich is a
general partner of NEA Partners IV, Limited Partnership, a Delaware limited
partnership, which is the general partner of New Enterprise Associates IV,
Limited Partnership, a Delaware limited partnership. Mr. Kramlich shares
voting and investment power with respect to such shares and disclaims
beneficial ownership of such shares except to the extent of his
proportionate partnership interest therein. Also includes 10,547 shares
subject to stock options exercisable within 60 days of October 31, 1997.
(4) Includes 22,869 shares subject to stock options exercisable within 60 days
of October 31, 1997. Does not include 150 shares held by Elaine Klosterman,
Mr. Klosterman's mother, as custodian for Mr. Klosterman's three children.
86
<PAGE> 99
(5) Includes 31,251 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(6) Includes 9,234 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(7) Includes 28,515 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(8) Includes 12,500 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(9) Includes 10,391 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(10) Includes 7,291 shares subject to stock options exercisable within 60 days
of October 31, 1997.
(11) Includes 100,000 shares held by entities affiliated with certain directors
and includes 148,724 shares subject to stock options held by directors and
officers exercisable within 60 days of October 31, 1997. See footnotes
(2)-(10).
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)
Section 16(a) of the Exchange Act requires Lumisys' directors and executive
officers, and persons who own more than ten percent of a registered class of
Lumisys' equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Lumisys Common Stock and other equity
securities of Lumisys. Officers, directors and greater than ten percent
stockholders are required by the SEC regulation to furnish Lumisys with copies
of all Section 16(a) forms they file.
To Lumisys' knowledge, based solely on a review of the copies of such
reports furnished to Lumisys and written representations that no other reports
were required, during the nine month period ended September 30, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with; except that Mr.
Vanchieri, a Director of Lumisys, filed one late report covering his initial
report of ownership. The report was filed once he became aware of the
requirement to file an initial report of ownership.
87
<PAGE> 100
COMPURAD BUSINESS
The discussion in this Joint Proxy Statement/Prospectus contains
forward-looking statements which involve risks and uncertainties. CompuRAD's
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, without limitation, those discussed in this section and the
sections entitled "Risk Factors" and "CompuRAD's Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as those
discussed elsewhere in this Joint Proxy Statement/Prospectus.
GENERAL
CompuRAD, is a leading provider of software that enables healthcare
clinicians to access medical images and clinical information at any point of
care. CompuRAD pioneered the use of personal computer software in the
point-to-point, on call teleradiology market, with the introduction of its PC
Teleradiology product. In response to the increasing acceptance of teleradiology
and increasing demand for multi-user and multi-access off-site teleradiology
systems, CompuRAD introduced its iNET product line in late 1994. In 1997,
CompuRAD introduced ClinicalWare, an Internet/Intranet software solution which
provides enterprise-wide, secure electronic access through a Web browser to
clinical information systems at any point of care.
CompuRAD sells its products both through a direct sales force and
indirectly through a network of VARs and large medical image equipment vendors.
CompuRAD's resellers include Konica Medical and National Imaging Resources, a
nationwide consortium of X-ray dealers. CompuRAD presently has licensed its
products to hospitals, clinics, other healthcare facilities and physician
groups. CompuRAD's customers include New York University Medical Center, Alliant
Health Systems, Symphony Mobilex and The Nursing Home Group plus many other
leading healthcare facilities and organizations.
CompuRAD was incorporated in Arizona in January 1992 under the name
CompuMed, Inc. In January 1996, CompuMed, Inc. merged with and into CompuMed
Teleradiology, Inc., a Delaware Corporation. It subsequently changed its name to
CompuRAD, Inc. in February 1996.
PRODUCTS
CompuRAD has developed a comprehensive line of medical image management
software products which it believes are the most cost-effective and
user-friendly products available. CompuRAD has expanded its product line and
capabilities substantially from its first product, PC Teleradiology, to include
a full range of software designed to enable healthcare organizations to capture,
store, distribute and display medical images over LANs and WANs. In addition,
CompuRAD plans to capitalize on its expertise in the medical image management
systems market by entering the larger healthcare information system market with
its ClinicalWare product, which offers a comprehensive Internet/Intranet
solution to access textual image data from disparate information systems across
healthcare enterprises.
Software and systems as complex as those offered by CompuRAD frequently
contain undetected errors or failures when first introduced or when new versions
are released. CompuRAD has in the past discovered bugs and system errors in
certain of its software enhancements, both before and after initial shipment.
There can be no assurance that, despite testing by CompuRAD, errors will not
occur in CompuRAD's products resulting in loss of, or delay in, market
acceptance. Any such loss or delay could have a materially adverse effect on
CompuRAD's business, financial condition and results of operations. Peripherals
and hardware from third party manufacturers may contain defects and
incompatibilities which could adversely affect market acceptance of CompuRAD's
software products.
In addition, the markets for CompuRAD's software are characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements of products, operating systems and
environments. CompuRAD's future success will depend upon its ability to enhance
its current product line, to complete products currently under development, to
develop and introduce new products that keep pace with technological
developments and to respond to evolving customer requirements. Any failure by
CompuRAD to anticipate or respond adequately to technological developments by
its
88
<PAGE> 101
competitors or to changes in customer requirements, or any significant delays in
product development or introduction could have a materially adverse effect on
CompuRAD's business, financial condition and results of operations. In the past,
CompuRAD has occasionally experienced delays in the development and introduction
of new software and software enhancements, and there can be no assurance that
CompuRAD will not experience such delays in the future. Timeliness of delivery
is of critical importance to certain customers, and CompuRAD's failure to
successfully develop and ship such products in a timely manner could result in
cancellation of customer orders which could have a materially adverse effect on
CompuRAD's business, financial condition and results of operations.
CURRENT PRODUCT OFFERINGS
PC TELERADIOLOGY. CompuRAD's initial product, PC Teleradiology, is designed
to capture, store, distribute and display medical images. PC Teleradiology
systems are used for point-to-point teleradiology applications, such as
applications that connect hospitals to physicians' homes or clinics to
hospitals. PC Teleradiology systems operate on Windows, DOS and Macintosh
platforms. Sales of PC Teleradiology and associated hardware (including industry
standard scanners, PC's and direct capture boards) accounted for approximately
10% and 33% of CompuRAD's revenues in 1996 and 1995, respectively. This product
is currently only being offered to existing PC Teleradiology users who wish to
add additional nodes.
INET. CompuRAD introduced its iNET product line in late 1994, which
CompuRAD believes is the most scalable and affordable teleradiology solution
available in the industry. The iNET product line supports on-call, off-site and
in-hospital applications and it runs in either a point-to-point or networked
configuration. iNET allows users to capture, store, distribute and display
medical images quickly and easily and provides medical image management across
diverse clinical environments.
The iNET product line consists of the following products:
iNET Server is a file and communication server running on Windows NT. It
is configured with a relational database and is designed to support
multiple teleradiology sessions as well as route image traffic over LANs
and WANs.
iCAPTURE is used to frame grab monochrome video signals from a variety
of radiology modalities including CAT Scan, MRI, Ultrasound and Nuclear
Medicine.
iSCAN digitizes up to 14" x 17" x-ray film images by using CCD and laser
film digitizers.
iFCR acquires images from Fuji Computed Radiography ("CR") systems.
iVIEW and iVIEW+ display medical images on a PC. iVIEW is used for
single SVGA monitors. iVIEW+ supports higher resolution and
multi-monitor workstations. iVIEW and iVIEW+ can receive images from the
iNET Server over a LAN or WAN or directly from iSCAN, iCAPTURE and iFCR
through point-to-point transmissions.
iNET Pro is a DICOM 3.0 version of CompuRAD's standard iNET Server
product. It is a file and communication server running on Windows NT. It
is configured with a relational database and is designed to support
multiple teleradiology sessions to route images, schedule image routing,
compress images for storage and wide area network routing, and convert
image between JPEG and DICOM file formats.
iVIEW Pro displays medical images on a PC with single and multi-monitor
configurations. CompuRAD believes that the individually configurable
user interface offers many unique functions presently unavailable in
competitive products. iVIEW Pro is DICOM 3.0 compliant and is
interoperable with other DICOM 3.0 servers, archives and devices from
most major medical manufacturers (e.g. General Electric, Siemens,
Picker, Sterling).
iARCHIVE is hierarchical storage management software used to manage,
store and retrieve DICOM medical images. iARCHIVE uses standard archival
media including RAID arrays, magneto-optical disks and digital linear
tapes. It operates on UNIX, Solaris and Informix SQL.
89
<PAGE> 102
CompuRAD's target customers for iNET include: (i) radiologists and
radiology groups; (ii) hospitals and other healthcare facilities; (iii) mobile
X-ray companies; and (iv) medical imaging equipment manufacturers and suppliers.
Sales of iNET accounted for approximately 81% and 61% of CompuRAD's revenues in
1996 and 1995, respectively.
CLINICALWARE. ClinicalWare, recently introduced in 1997, is an
Internet/Intranet solution that provides a single point of access to clinical
information such as transcribed reports, on-line knowledge bases and medical
images at any point of care.
ClinicalWare provides (i) the means to integrate information which resides
on disparate clinical information systems in an integrated delivery system
("IDS"); (ii) easy access to information through the use of either a standard
Web browser; (iii) support for emerging healthcare protocols, such as HL-7 and
DICOM which enable interfacing among various healthcare information systems; and
(iv) security and access management features such as flexible assignment of
different user and access profiles based on workstation location, day and time
and application scenarios.
The market for Internet/Intranet-related software designed for use in
healthcare environments is in the early stages of development. Since this market
is new, and because current and future competitors are likely to introduce
competing Internet/Intranet software, it is difficult to predict the rate at
which the market will grow, if at all, or the rate at which new or increased
competition will result in market saturation. CompuRAD's ClinicalWare product
was only recently introduced in 1997 and is highly dependent upon the market
acceptance of the Internet/Intranet technologies for healthcare environments. If
the market for such Internet/ Intranet software fails to grow or grows more
slowly than anticipated, CompuRAD's business, financial condition and results of
operations would be materially adversely effected. CompuRAD has had only limited
shipments of ClinicalWare and expects that the sales cycle for ClinicalWare will
be longer than that for its other existing products and that the price for
ClinicalWare will be higher than that for CompuRAD's other current products.
Accordingly, CompuRAD's quarterly revenues and operating results may be subject
to greater fluctuation as CompuRAD begins to market and sell ClinicalWare.
Additionally, CompuRAD faces greater challenges in installing and supporting
ClinicalWare because of the complexity of Internet/Intranet related software and
systems. CompuRAD has limited experience in marketing, installing and supporting
Internet/Intranet clinical information systems, and there can be no assurance
that CompuRAD can obtain the necessary resources to market, install and support
ClinicalWare in an efficient, cost-effective and competitive manner. The failure
of ClinicalWare to achieve market acceptance for any reason could have a
materially adverse effect on CompuRAD's business, financial condition and
results of operations.
Target customers for ClinicalWare include: (i) integrated and community
healthcare delivery systems; (ii) hospitals and other healthcare facilities;
(iii) multi-office physician groups; (iv) managed care providers and insurance
carriers; (v) imaging centers; and (vi) radiology groups.
MAMMOWORKS. MammoWorks is a Windows application developed in response to
the need for compliance with the Mammography Quality Standards Act. The
application supports scheduling, outcome measurements, quality assurance
reporting, transcription and patient tracking and recall, thus helping
mammography facilities better manage their outcome reporting and patient
management. To date, revenues from this product have not been significant.
THIRD PARTY SOFTWARE DEVELOPMENT AND LICENSING
CompuRAD offers customized Windows NT/Windows 95 application software to
other large medical image management systems providers including international
medical equipment manufacturers, healthcare information system vendors and
system integrators. CompuRAD presently sells software to members of National
Imaging Resources ("NIR"), a nationwide consortium of X-ray dealers, and has
developed customized software for Siemens Medical Systems ("Siemens Magic View
50"). CompuRAD also licenses software to Siemens and Konica Medical which such
companies then sub-license to their customers. CompuRAD intends to pursue other
third party alliances and agreements as methods of promoting CompuRAD's
technology as the desktop standard for image enabling healthcare applications.
Historically,
90
<PAGE> 103
CompuRAD has retained the intellectual property rights to the software it
develops for third parties and plans to do so in the future.
RESEARCH AND DEVELOPMENT
CompuRAD's research and development activities include the design and
development of new software and updates and enhancement of existing software.
CompuRAD's new product development program is focused on improving access to
medical images and clinical information. Updates and enhancements of its
existing software include efforts to improve connectivity, compression
algorithms and user interface design. As of September 30, 1997, 25 of CompuRAD's
employees were involved in research and development. Research and development
expense for the years ended December 31, 1996 and 1995 totaled approximately
$1,400,000 and $564,000, respectively.
SERVICE AND SUPPORT
CompuRAD provides installation, training and support services to its
customers. As of September 30, 1997, CompuRAD's service and support organization
consisted of 17 employees responsible for working with customers to install,
configure and support CompuRAD's systems. Typical installation services include
project planning, hardware testing and configuration, on-site installation, and
training of customer personnel in system operation and maintenance. On-site
installation generally requires one to four weeks. CompuRAD also provides
telephone support services to its customers 24 hours a day, seven days a week,
as well as other services, including on-site support, software customization
services, and technical and user training programs.
CompuRAD licenses its software and provides installation, training and
support services to customers pursuant to the terms of software licensing and
support agreements. Under the software license agreements, CompuRAD generally
grants to the customer a perpetual, non-exclusive and non-transferable right to
use CompuRAD's products. In addition, CompuRAD provides installation and
training services. Maintenance and support contracts typically are sold on a
renewable annual basis.
CUSTOMERS
CompuRAD presently has licensed its products to hospitals, clinics, other
healthcare facilities and physician groups. CompuRAD's customers include New
York University Medical Center, Alliant Health Systems, Symphony Mobilex and the
Nursing Home Group plus many other leading healthcare facilities and
organizations.
In 1996 and 1995, one customer, Symphony Mobilex, accounted for
approximately 22% and 31%, respectively, of CompuRAD's revenues. No other
customer accounted for more than 10% of CompuRAD's revenues during these
periods. CompuRAD's five largest customers in 1996 and 1995 accounted for 33%
and 49%, respectively, of CompuRAD's revenues. CompuRAD has agreements with OEMs
and some of these agreements require OEMs to purchase a minimum amount of
CompuRAD's products each year. A significant reduction in sales volume
attributable to the loss of any of CompuRAD's customers, losses arising from
customer disputes regarding shipments or license, installation and service fees
or CompuRAD's inability to collect accounts receivable from any major customer
could have a materially adverse effect on CompuRAD's business, financial
condition and results of operations.
To date, sales of CompuRAD's teleradiology products, including PC
Teleradiology and its successor iNET, accounted for a substantial majority of
its revenues. In 1996 and 1995, 81% and 61% of CompuRAD's revenues were derived
from sales of iNET and 10% and 33% were attributable to sales of PC
Teleradiology. Sales of the iNET product line could decline for a number of
reasons including consolidation in the healthcare market and changes in
government regulation that reduce or eliminate reimbursement for teleradiology
services. If sales of CompuRAD's iNET product line decline for any reason,
CompuRAD's business, financial condition and results of operations would be
materially adversely effected.
91
<PAGE> 104
BACKLOG
CompuRAD's backlog consists of purchase orders for software licenses,
hardware and unamortized technical support for which delivery has been specified
by a customer within the next six months. CompuRAD accepts purchase orders for
periods beyond six months which are not included in backlog. At September 30,
1997, CompuRAD's backlog was approximately $906,000, compared with a backlog of
$430,000 at December 31, 1996 and $1,154,000 at December 31, 1995. Due to the
possibility of cancellation of software licenses and hardware orders and
potential delays in product shipment and because CompuRAD's revenues often
reflect orders shipped in the same quarter as received, backlog at any
particular date is not necessarily indicative of actual sales for any subsequent
period. CompuRAD's backlog has in the past been larger as well as smaller than
its backlog at September 30, 1997, and may be expected to vary substantially
from time to time. In addition, orders for software and systems have varied
substantially from quarter to quarter and are expected to continue to do so.
SALES AND MARKETING
CompuRAD sells its software directly to end users through nine direct sales
representatives and indirectly through the X-ray dealers/VARs that make up NIR.
CompuRAD sells its products to the NIR VARs, which then resell CompuRAD's
products to end-user customers. CompuRAD also licenses software to Siemens and
Konica Medical which such companies then sub-license to their customers.
CompuRAD's marketing strategy is designed to promote the quality and
reliability of CompuRAD's products through advertising in major industry
publications and through direct marketing programs. CompuRAD also participates
in the RSNA (Radiological Society of North America) trade show and convention,
and HIMSS (Healthcare Information Management Systems Show).
CompuRAD is seeking to add to its international dealer network and is in
discussions with several international trading companies and systems
integrators. CompuRAD's international sales effort and partnership strategy is
focused on Japan, southeast Asia, Europe, Australia, and South America. CompuRAD
already has entered into agreements with resellers in New Zealand, Chile and
Thailand.
COMPETITION
CompuRAD believes that the principal competitive factors for selecting
medical image management software and systems are the reputation and market
position of the vendor and the price, reliability, ease of use, functionality
and performance of the product or system. CompuRAD believes it competes
effectively with respect to these factors.
Competition in the markets for medical image management products and
healthcare information systems and services is intense and is expected to
increase. CompuRAD's competitors include other providers of medical image
management and healthcare information products. CompuRAD's principal competitors
in the medical image management industry are E-Med, CEMAX, Applicare Medical
Imaging B.V. and Access Radiology Corporation. Furthermore, other major
healthcare information and equipment companies not presently offering competing
products may enter CompuRAD's markets. In addition, the emerging market for
Internet/Intranet clinical information systems is expected to be highly
competitive, and CompuRAD's competitors in this market could include many of its
competitors in the medical image management systems market as well as other
providers of healthcare information systems and new entrants into the
marketplace. Increased competition could result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
effect CompuRAD's business, financial condition and results of operations. In
addition, many of CompuRAD's competitors and potential competitors have
significantly greater financial, technical, product development, marketing and
other resources and market recognition than CompuRAD. Many of CompuRAD's
competitors also currently have, or may develop or acquire, substantial
installed customer bases in the healthcare industry. As a result of these
factors, CompuRAD's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products than
CompuRAD. There can be no assurances that CompuRAD will be able to compete
successfully against current and future competitors or
92
<PAGE> 105
that competitive pressures faced by CompuRAD will not have a materially adverse
effect on its business, financial condition or results of operations.
PROPRIETARY RIGHTS
CompuRAD relies on a combination of trade secrets, copyright and trademark
laws, nondisclosure and other contractual provisions to protect its proprietary
rights. CompuRAD currently has no patents covering its technology and has not
registered any of its trademarks. There can be no assurance that measures taken
by CompuRAD to protect its intellectual property will be adequate or that
CompuRAD's competitors will not independently develop systems and services that
are substantially equivalent or superior to those of CompuRAD. Substantial
litigation regarding intellectual property rights exists in the software
industry, and CompuRAD expects that software products may be increasingly
subject to third party infringement claims as the number of competitors in
CompuRAD's industry segment grows and the functionality of systems overlap.
Although CompuRAD believes that its systems and applications do not infringe
upon the proprietary rights of third parties, there can be no assurance that
third parties will not assert infringement claims against CompuRAD in the
future, that CompuRAD would prevail in any such dispute or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim. In addition, any such claim may require
CompuRAD to incur substantial litigation expenses or subject CompuRAD to
significant liabilities and could have a material adverse effect on CompuRAD's
business, financial condition and results of operations.
GOVERNMENT REGULATION
Medical image management software is subject to extensive government
regulation as a medical device in the United States by the FDA and in other
countries by corresponding foreign regulatory authorities. The process of
obtaining and maintaining required regulatory clearances and approvals is
lengthy, expensive and uncertain. Generally, before a new medical device can be
introduced into the market in the United States, the manufacturer or distributor
must obtain FDA clearance of a 510(k) premarket notification or approval of a
PMA application. If a medical device manufacturer or distributor can establish,
among other things, that a device is "substantially equivalent" in intended use
and technological characteristics to certain legally marketed devices, for which
the FDA has not required a PMA, the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k). In recent years,
the FDA has been requiring a more rigorous demonstration of substantial
equivalence. Material changes to legally marketed medical devices are also
subject to FDA review and clearance or approval prior to commercialization in
the United States.
CompuRAD relies on 510(k) pre-market notification for its current
internally developed products. Additionally, CompuRAD relies on 510(k) clearance
and the finding by the FDA of substantial equivalence for the Image Management
System (IMS) and the Film Image ScanSoftware (FISS) technologies acquired from
Star in July 1997. However, CompuRAD believes that its success depends upon
commercial sales of new versions of its medical image management software which
may be subject to clearance or approval from the FDA and its foreign
counterparts. There can be no assurance that a similar 510(k) clearance for any
future product or enhancement of an existing product will be granted or that the
process will not be lengthy. If CompuRAD cannot establish that a product is
"substantially equivalent" to certain legally marketed devices, the 510(k)
clearance procedure may be unavailable and CompuRAD may be required to utilize
the longer and more expensive PMA process. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for additional data
as a prerequisite to clearance or approval, could have a material adverse effect
on CompuRAD's business, operating results and financial condition.
The process of obtaining a 510(k) clearance generally requires supporting
data, which can be extensive and extend the regulatory review process for a
considerable length of time. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved
uses. CompuRAD has been inspected once and will continue to be inspected on a
routine basis by the FDA for compliance with the FDA's QSR and other applicable
regulations. CompuRAD will be required to adhere to applicable FDA QSR
regulations and similar regulations in other countries, which include testing,
control, and documentation
93
<PAGE> 106
requirements. Failure to comply with applicable regulatory requirements could
result in the failure of the government to grant market clearance or premarket
approval, withdrawal of approvals or criminal prosecution. CompuRAD is also
subject to other federal, state and local laws and regulations relating to safe
working conditions and manufacturing practices. The extent of government
regulation that might result from any future legislation or administrative
action cannot be predicted. Failure to comply with regulatory requirements could
have a material adverse effect on CompuRAD's business, financial condition and
results of operations.
Sales of CompuRAD's software outside the United States are subject to
foreign regulatory requirements that vary from country to country. Additional
approvals from foreign regulatory authorities may be required, and there can be
no assurance that CompuRAD will be able to obtain foreign marketing approvals on
a timely basis or at all, or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. In Europe,
CompuRAD will be required to obtain certifications necessary to enable the "CE"
mark to be affixed to CompuRAD's products by mid 1998 to continue commercial
sales in member countries of the European Union. The CE mark is an international
symbol of quality and complies with applicable European medical device
directives. CompuRAD has not obtained such certifications, and there can be no
assurance it will be able to obtain such certifications or any other
international regulatory approvals in a timely manner, or at all. Failure to
comply with foreign regulatory requirements could have a material adverse effect
on CompuRAD's business, financial condition and results of operations.
COMPURAD PROPERTY
CompuRAD leases approximately 20,000 square feet of office space in Tucson,
Arizona for its corporate operations. The lease expires in 2001. CompuRAD
believes that its existing facilities are adequate for its current needs but may
require more space as its business expands.
94
<PAGE> 107
COMPURAD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of CompuRAD should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Joint Proxy Statement/Prospectus contains forward-looking
statements that involve risks and uncertainties. CompuRAD's actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the sections entitled "Risk
Factors," and "CompuRAD Business," as well as those discussed elsewhere in this
Joint Proxy Statement/Prospectus.
GENERAL
CompuRAD, Inc. is a leading provider of software that enables healthcare
clinicians to access medical images and clinical information at any point of
care. CompuRAD pioneered the use of personal computer software in the
point-to-point, on call teleradiology market, with the introduction of its PC
Teleradiology product. In response to the increasing acceptance of teleradiology
and increasing demand for multi-user and multi-access off-site teleradiology
systems, CompuRAD introduced its iNET product line in late 1994. In 1997,
CompuRAD introduced ClinicalWare, an Internet/Intranet software solution which
provides enterprise-wide, secure electronic access through a Web browser to
clinical information systems at any point of care.
On July 30, 1997 CompuRAD acquired technology from Star, including a DICOM
archive, formerly known as Image Management Server ("IMS"). Management believes
that this acquisition complements and extends CompuRAD's existing iNETPro and
iVIEWPro DICOM image product lines allowing CompuRAD to offer a comprehensive,
top-to-bottom, medical image networking solution to a wider spectrum of
customers. The product, which has received 510(k) clearance, will be marketed by
CompuRAD under the brand name iARCHIVE and is configurable for shelf storage
management as well as multi-terabyte, robotic archival of medical images on
jukeboxes of magneto-optical disks or digital linear tape. CompuRAD also
acquired certain assets of Medical Imaging Technology Associates, Inc. ("MITA")
related to nuclear medicine software. The MITA acquisition will close in April
1998.
RECENT FINANCIAL RESULTS
CompuRAD's net revenues, net loss and net loss per share for the three
months ended September 30, 1997 were $2.0 million, $420,000 and $0.11,
respectively, as compared to net revenues, net income, and net income per share
for the three months ended September 30, 1996 of $2.0 million, $73,000 and
$0.02, respectively. For the nine months ended September 30, 1997, CompuRAD's
net revenues, net loss and net loss per share were $6.7 million, $1.2 million
and $0.31, respectively, compared to net revenues, net loss and net loss per
share for the nine months ended September 30, 1996, of $5.2 million, $288,000
and $0.11, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
NET REVENUES. Net revenues for the year ended December 31, 1996 were $6.9
million, compared with $3.9 million for the year ended December 31, 1995,
reflecting an increase of 77%. Of these amounts, hardware sales, software
licenses and maintenance and support services accounted for 45.5%, 46.4% and
8.1%, respectively, for the 1996 period and 58.8%, 36.3% and 4.9%, respectively,
for the 1995 period. The overall increase in revenues was attributable to a
substantial increase in revenues from sales of iNET software, offset in part by
a decrease in revenues from sales of CompuRAD's PC Teleradiology products. One
customer represented 22% and 31% of net revenues in 1996 and 1995, respectively.
GROSS MARGIN. Gross margin increased to 45.4% for the year ended December
31, 1996 from 30.3% for the year ended December 31, 1995. This substantial
increase in gross margin was attributable principally to a substantial change in
the relative mix of higher margin software sales and lower margin hardware
sales, reflecting CompuRAD's preference to focus on software rather than
hardware sales. The increase in gross
95
<PAGE> 108
margin was also attributable to a slightly higher average selling price,
reflecting the availability during the 1996 period of the entire iNET product
line. Cost of hardware sales for the year ended December 31, 1996 was $2.8
million and for the year ended December 31, 1995 was $2.2 million. Cost of
software licenses for the year ended December 31, 1996 was $663,000 and for the
year ended December 31, 1995 was $314,000. Cost of maintenance and support
services for the year ended December 31, 1996 was $286,000 and for the year
ended December 31, 1995 was $174,000.
SELLING AND MARKETING EXPENSE. Selling and marketing expense for the year
ended December 31, 1996 was $1.1 million, or 16.6% of net revenues, compared
with $644,000 or 16.5% of net revenues, for the year ended December 31, 1995, an
increase of 77.7%. This increase was attributable primarily to increases in
compensation associated with a larger sales force and greater advertising and
marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for the
year ended December 31, 1996 was $1.4 million, compared with $564,000 for the
year ended December 31, 1995, an increase of 148.2%. As a percentage of net
revenues, these expenses increased to 20.2% for 1996 from 14.4% for 1995. This
increase reflected CompuRAD's hiring of additional research and development
staff, and, to a lesser extent, an increase in fees paid to independent
contractors during certain periods in 1996. In addition, the year ended December
31, 1996 is the first period that included any expense associated with the
development of ClinicalWare. CompuRAD expects that research and development
expense will continue to increase due in part to expenses associated with the
development of additional ClinicalWare products.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the year ended December 31, 1996 was $913,000, or 13.2% of net revenues,
compared with $457,000, or 11.7% of net revenues, for the year ended December
31, 1995, reflecting an increase of 99.8%. This increase reflected the hiring of
additional administrative staff as well as the establishment of a bad debt
reserve of $80,000.
AMORTIZATION OF INTANGIBLE ASSET. Amortization of intangible asset
represents amortization of the technology purchased by CompuRAD from Arizona
State Radiology, P.C. ("ASR") in 1993. This amortization was completed in 1995.
STOCK-BASED COMPENSATION AND EXPENSES. Stock-based compensation and
expenses are comprised of non-cash charges associated with CompuRAD's grant of
options to purchase 75,000 shares of CompuRAD's Common Stock at an exercise
price of $0.007 per share to the co-signer of CompuRAD's borrowing from BankOne
Arizona, N.A. in May 1996 and CompuRAD's issuance of 150,000 shares of CompuRAD
Common Stock to an executive officer of CompuRAD in March 1996. The difference
between the exercise price of such options (or in the case of the March 1996
issuance, the price paid for such shares) and the deemed fair market value of
CompuRAD Common Stock on the dates of grant was recognized immediately as a
non-cash charge. The fair market value of CompuRAD Common Stock was deemed to be
$1.00 per share in March 1996 and $2.50 per share in April 1996, resulting in
total charges for the year ended December 31, 1996 of $367,500.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
NET REVENUES. Net revenues increased 156.8% from approximately $1.5 million
in 1994 to approximately $3.9 million in 1995. Net revenues increased
substantially during 1994 as the PC Teleradiology products gained increasing
market acceptance. The substantial increase in net revenues from 1994 to 1995
reflects both the continued acceptance of CompuRAD's PC Teleradiology software
and systems, as well as the initial sales of its iNET software and systems to a
larger market. CompuRAD also expanded its sales force during 1995, which enabled
CompuRAD to market its products to a greater number of potential customers. The
increase in CompuRAD's installed base was offset in part by lower average
selling prices during 1995, as CompuRAD aggressively reduced the price of its PC
Teleradiology software and hardware to gain market share.
Hardware sales represented 52.6% and 58.8% of net revenues for 1994 and
1995, respectively. Software licenses represented 41.1% and 36.3% of net
revenues for the two years, respectively, and maintenance and support fees
represented 6.3% and 4.9% of net revenues for the two years, respectively. The
increase in hardware sales as a percentage of net revenues during 1995 is
attributable to the fact that CompuRAD's
96
<PAGE> 109
largest customer during the year, Symphony Mobilex, generally included
substantial hardware components in its orders.
GROSS MARGIN. Gross margin decreased from 36.7% in 1994 to 30.3% in 1995.
In 1994, CompuRAD changed its hardware strategy to buying pre-assembled computer
hardware, frequently from major brand name manufacturers, such as Dell Computer
Corporation and Acer America Corporation, in order to allow CompuRAD to
concentrate on software sales. The decline in gross margins continued in 1995 as
CompuRAD priced both its hardware and PC Teleradiology software aggressively to
gain market share. As CompuRAD began to phase out its PC Teleradiology product
in 1996 and increase software license revenues as a percentage of net revenues,
however, gross margins began to recover during the first six months of 1996.
Cost of software licenses for 1994 and 1995 were approximately $147,000 and
$314,000, respectively. Cost of maintenance and support services for 1994 and
1995 were approximately $60,000 and $174,000, respectively.
SELLING AND MARKETING EXPENSE. Selling and marketing expense increased
116.8% in 1994 from approximately $297,000 to approximately $644,000 in 1995. As
a percentage of net revenues, these expenses represented 19.5% and 16.5% in 1994
and 1995, respectively. The increase from 1994 to 1995 was primarily
attributable to increased compensation associated with a larger sales force, as
well as increased marketing and advertising expenditures.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
increased 70.8% from approximately $330,000 in 1994 to approximately $564,000 in
1995. These expenses represented 21.7% and 14.4% of revenues for 1994 and 1995,
respectively. The substantial increase in absolute dollars over the two year
period reflects the substantial investment by CompuRAD in developing the iNET
product line during 1994 and 1995. This investment included an increase in the
number of CompuRAD employees devoted to research and development from 4 at
December 31, 1994 to 16 at December 31, 1995. All of CompuRAD's expenditures in
connection with research and development have been recognized as expense, rather
than capitalized, since the expenses incurred following demonstration of the
technological feasibility of CompuRAD's products have been immaterial.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased 210.2% from approximately $147,000 in 1994 and to approximately
$457,000 in 1995. These expenses represented 9.7% and
11.7% of net revenues in 1994 and 1995 respectively. The increases in general
and administrative expense in absolute dollars and as a percentage of sales
during 1995 is attributable to the hiring of additional administrative
personnel, principally a chief financial officer and the conversion of Dr.
Berman to a full-time Chief Executive Officer.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
represents amortization of CompuRAD's purchase of technology from ASR in 1993.
STOCK-BASED COMPENSATION AND EXPENSES. Stock-based compensation and
expenses represent non-cash charges in connection with option grants by CompuRAD
to employees during 1995.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
NET REVENUES. Net revenues for the six months ended June 30, 1997 were $4.7
million, compared with $3.2 million for the six months ended June 30, 1996,
reflecting an increase of 47.2%. Of these amounts, hardware sales, software
licenses and maintenance and support services accounted for 45.1%, 46.0% and
8.9%, respectively, for the 1997 period and 44.9%, 48.0% and 7.1%, respectively,
for the 1996 period. The overall increase in revenues was attributable to a
substantial increase in revenues from sales of iNET software, partially offset
by a decrease in revenues from sales of CompuRAD's PC Teleradiology products,
and initial sales of CompuRAD's ClinicalWare line. One customer represented
24.4% and 22.4% of net revenues for the six months ended June 30, 1997 and 1996,
respectively. No other customer accounted for more than 10% of net revenues in
either period.
GROSS MARGIN. Gross margin increased to 47.5% for the six months ended June
30, 1997 from 40.9% for the six months ended June 30, 1996. This increase in
gross margin was attributable to a continued change in the relative mix of
higher margin direct, OEM and channel software sales. Cost of hardware sales for
the six
97
<PAGE> 110
months ended June 30, 1997 was $2.0 million and for the six months ended June
30, 1996 was $1.3 million. Cost of software licenses for the six months ended
June 30, 1997 was $279,000 and for the six months ended June 30, 1996 was
$374,000. Cost of maintenance and support services for the six months ended June
30, 1997 was $186,000 and for the six months ended June 30, 1996 was $169,000.
SELLING AND MARKETING EXPENSE. Selling and marketing expense for the six
months ended June 30, 1997 was $1.1 million, or 23.7% of net revenues, compared
with $441,000 or 13.9% of net revenues, for the six months ended June 30, 1996,
an increase of 152.2%. This increase was attributable primarily to increases in
compensation associated with a larger sales force and greater advertising and
marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for the
six months ended June 30, 1997 was $1.1 million, or 23.0% of net revenues,
compared with $499,000, or 15.7% of net revenues, for the six months ended June
30, 1996, an increase of 115.4%. This increase was attributable primarily to
CompuRAD's hiring and contracting additional research and development staff.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the six months ended June 30, 1997 was $880,000, or 18.8% of net revenues,
compared with $354,000, or 11.1% of net revenues, for the six months ended June
30, 1996, reflecting an increase of 149.0%. This increase was attributable
primarily to CompuRAD's hiring of additional administrative staff and additional
legal and other professional services.
STOCK-BASED COMPENSATION AND EXPENSES. Stock-based compensation and
expenses are comprised of non-cash charges primarily associated with CompuRAD's
grant of options to purchase 75,000 shares of CompuRAD Common Stock to the
co-signer of CompuRAD's borrowing from BankOne Arizona, N.A. in May 1996 and
CompuRAD's issuance of 150,000 shares of CompuRAD Common Stock to an executive
officer of CompuRAD in March 1996. The difference between the exercise price of
such options (or in the case of the March 1996 issuance, the price paid for such
shares) and the deemed fair market value of CompuRAD Common Stock on the dates
of grant of $2.50 and $1.00 per share, respectively, was recognized immediately
as a $337,500 non-cash charge. Total stock-based compensation and expenses for
the six months ended June 30, 1996 were $361,500.
LIQUIDITY AND CAPITAL RESOURCES
Although there are no current capital commitments, CompuRAD expects its
capital needs and operating expenditures to increase in the next few years.
There can be no assurance that CompuRAD will not need additional capital.
CompuRAD's need for additional financing will depend upon numerous factors,
including, but not limited to, the level of future revenues and expenditures,
market acceptance of new products, the results and scope of ongoing research and
development projects, competing technologies, market and regulatory developments
and increased working capital requirements. There can be no assurance that
additional financing will be available when needed or, if available, that it
will be available on acceptable terms. If additional funds are raised by issuing
equity securities, further dilution to then existing stockholders may result and
debt financing, if available, may involve restrictive covenants. If adequate
funds are not available, CompuRAD's business, financial condition and results of
operations could be materially affected.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"),
which is required to be adopted on December 31, 1997. At that time, CompuRAD
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. Due to CompuRAD's net losses for the three months and six
months ended June 30, 1997 and 1996, the impact of SFAS No. 128 will not be
material.
98
<PAGE> 111
COMPURAD MANAGEMENT AFTER THE MERGER
The names of CompuRAD's directors and executive officers and certain
information about them are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ------------------------------------------------
<S> <C> <C>
Phillip Berman, M.D. 44 Chairman, Chief Executive Officer and President
Cary Cole............... 31 Vice President, Sales and Director
Henky Wibowo............ 31 Vice President, Engineering and Director
David I. Lapan.......... 49 Director
Kevin Donovan........... 40 Vice President, Finance and Chief Financial
Officer
</TABLE>
PHILLIP BERMAN, M.D., Chairman, Chief Executive Officer and President. Dr.
Berman founded CompuRAD and has served as Chairman, President and Chief
Executive Officer of CompuRAD since 1992. After practicing medicine in New York,
Dr. Berman founded Arizona State Radiology, P.C., a radiology practice in
Tucson, Arizona ("ASR") in 1988. Dr. Berman served as President of ASR until
1995 and as Chairman of Radiology of St. Mary's Hospital in Tucson through 1992.
Dr. Berman received a B.A. in Anthropology from Harvard University in 1975 and
an M.D. from The Medical College of Pennsylvania in 1980. He served as an intern
at Cedars-Sinai Medical Center in Los Angeles and a resident in Diagnostic
Radiology at the University of California at San Diego and Scripps Clinic.
CARY COLE, Vice President, Sales and Director. Mr. Cole joined CompuRAD in
1992 as a consultant and has served as Vice President, Sales and Director of
CompuRAD since 1993. He was President of Student Financial Resources Corporation
and Educational Programs and Services Corporation from 1990 to 1992. Mr. Cole
received his B.S. in Business Administration from the University of Arizona in
1989.
HENKY WIBOWO, Vice President, Engineering, Secretary and Director. Mr.
Wibowo co-founded CompuRAD and has served as Vice President, Engineering of
CompuRAD since 1992. He was an engineer at IIS, Inc., now known as Avalon
Software, from 1990 to 1991. Mr. Wibowo received a B.S. in Electrical
Engineering from Oregon State University in 1988 and an M.S. in Electrical
Engineering from the University of Arizona in 1990.
DAVID I. LAPAN, M.D., F.A.C.C., Director. Dr. Lapan was appointed to
CompuRAD's Board of Directors in May 1997. Dr. Lapan has been a cardiologist
with the Pima Heart Associates, P.C. since March 1980. Dr. Lapan is currently
the acting Director of Spalding Diagnostic Center at St. Mary's Hospital and the
Director of Cardiovascular Services for Carondelet Hospitals. Dr. Lapan received
a B.A. in Psychology from the University of California at Berkeley and a M.D.
from the University of California at San Francisco.
KEVIN DONOVAN, Vice President, Finance and Chief Financial Officer. Mr.
Donovan has served as Vice President, Finance and Chief Financial Officer of
CompuRAD since August 1993. Mr. Donovan served on CompuRAD's Board of Directors
from 1994 until July 1996. Prior to joining CompuRAD, Mr. Donovan was a partner
in the New York accounting firm Dannible & McKee from 1988 to 1993. He received
a B.S. in Accounting from Syracuse University in 1980 and obtained his C.P.A.
license in the State of New York in 1982 and in the State of Arizona in 1994.
99
<PAGE> 112
COMPENSATION OF EXECUTIVE OFFICERS OF COMPURAD
The following table sets forth certain information regarding compensation
paid by CompuRAD to CompuRAD's Chief Executive Officer and CompuRAD's most
highly compensated other executive officers and non-executive officer employees
whose salary and bonus for such year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION
----------------------------------------------------- ---- --------- ------------
<S> <C> <C> <C>
Phillip Berman, M.D.................................. 1996 $ 134,000 --
Chairman, Chief Executive Officer and President 1995 83,333(1) --
1994 -- --
Ronald Michaels...................................... 1996 78,000 $150,000(3)
Executive Vice President(2) 1995 -- --
1994 -- --
Cary Cole............................................ 1996 139,200 --
Vice President, Sales 1995 60,000 87,571(4)
1994 60,000 66,478(4)
Henky Wibowo......................................... 1996 105,000 --
Vice President, Engineering 1995 68,692 --
1994 55,038 --
Kevin Donovan........................................ 1996 68,538 --
Vice President Finance and Chief Financial Officer 1995 30,527 --
1994 4,385 --
Scott Evers.......................................... 1996 36,000 82,177(4)
Regional Sales Manager 1995 24,000 38,078(4)
1994 -- 2,000(4)
</TABLE>
- ---------------
(1) Dr. Berman became Chief Executive Officer in March 1996.
(2) Mr. Michaels resigned from his position as Executive Vice President of
CompuRAD in May, 1997.
(3) Represents the fair market value in March 1996 of 150,000 shares of CompuRAD
Common Stock issued to Mr. Michaels.
(4) Represents sales commissions earned.
STOCK OPTION GRANTS, OPTION EXERCISES AND OPTION VALUES IN FISCAL 1996
No stock options were granted to CompuRAD's Chief Executive Officer or the
Named Executive Officers during 1996. During 1996, except for Kevin Donovan,
none of the Chief Executive Officer or Named Executive Officers exercised any
options to purchase shares of CompuRAD Common Stock, nor did they hold any
options to purchase CompuRAD Common Stock at December 31, 1996. Mr. Donovan
exercised options to purchase 37,500 shares in 1996 with a realized value of
$202,500. Realized value is based on the fair market value of CompuRAD Common
Stock on the date of exercise minus the exercise price and does not necessarily
indicate that such stock was actually sold.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF COMPURAD
CompuRAD, Dr. Phillip Berman, Cary Cole, Henky Wibowo and Kevin Donovan,
among others, entered into a Settlement Agreement (the "Settlement Agreement")
with ASR and certain other individuals affiliated with ASR, including Dr. Thomas
Stejskal, formerly a director of CompuRAD and a principal stockholder (the "ASR
Affiliates"), dated July 14, 1996, pursuant to which CompuRAD and Dr. Berman
have resolved all previously outstanding difference between them and ASR and the
ASR Affiliates regarding the use of intellectual property included in CompuRAD's
software. In consideration for entering the Settlement Agreement, CompuRAD has:
(i) issued 126,000 shares to certain of the ASR Affiliates; (ii) issued to ASR a
non-interest bearing promissory note in the amount of $250,000 payable December
31, 2002; and (iii) agreed
100
<PAGE> 113
to pay ASR $541,676, at CompuRAD's option, in cash, in shares of Common Stock or
any combination of cash and shares of Common Stock. CompuRAD issued 93,480
shares of stock to ASR in November 1996 in full settlement of the $541,676. The
Company is in mediation with ASR regarding the calculation of the "Discounted
Value" used to determine the number of shares issued as additional consideration
to ASR for the transfer of certain intellectual property rights, technology and
other property to the Company. Dependent upon the outcome of such mediations,
the Company may be required to issue more shares of common stock to ASR.
Pursuant to that certain Agreement dated September 15, 1997 between the Company
and ASR, the parties have agreed that Arthur Andersen will making a binding
determination of the Discounted Value and the additional number of shares, if
any, thereby required to be issued by the Company to ASR. Such determination is
required to take place prior to October 31, 1997.
On April 16, 1996 CompuRAD entered into an Agreement to Co-Sign Loan (the
"Co-Sign Agreement") with Harold Cole, the father of Cary Cole, Vice President,
Sales and a director of CompuRAD, to assist CompuRAD in obtaining a short-term
loan (the "BankOne Loan") in the amount of $250,000 from BankOne, Arizona, N.A.,
secured by CompuRAD's assets. Pursuant to the terms of the Co-Sign Agreement,
Harold Cole agreed to pay such sums on the BankOne Loan as necessary for
CompuRAD to meet its obligations under that loan. In consideration for Harold
Cole's entering the Co-Sign Agreement, in April 1996, CompuRAD granted to him an
option to purchase up to 75,000 shares of CompuRAD's Common Stock at a per share
price of $0.007 per share. Such option was exercised in full in May 1996. The
BankOne Loan was paid in full upon the completion of CompuRAD's initial public
offering.
In July 1996, CompuRAD acquired the ClinicalWare product line from Pinga,
Inc., a company owned by Dr. Berman, Cary Cole and Henky Wibowo, each of whom
are directors and executive officers and principal Stockholders of CompuRAD. The
purchase price of $90,000 was determined on the basis of the expenses incurred
by Pinga, Inc. relating to the development of the ClinicalWare software.
In March 1995, CompuRAD and U.S. Radiology ("USR"), a company owned by Dr.
Berman, entered into a license agreement pursuant to which USR granted CompuRAD
an exclusive right to use the MammoWorks product. CompuRAD was obligated to pay
USR a license fee of $150 per copy licensed by CompuRAD, up to 500 licenses.
CompuRAD would not have been obligated to pay any additional license fees to USR
after the first 500 licenses. Through July 1996, 70 MammoWorks copies were
licensed by CompuRAD, and $10,500 was paid to Dr. Berman. In July 1996, CompuRAD
and USR entered into a Technology Transfer Agreement pursuant to which USR and
Dr. Berman transferred all their rights and interests in the MammoWorks product
to CompuRAD for $1.00. CompuRAD is obligated to pay a royalty fee to USR on the
remaining 430 copies licensed by CompuRAD. CompuRAD has no further obligations
under the March 1995 license agreement. From July 1996 to December 31, 1996, 41
copies were licensed by CompuRAD and $6,150 was paid to USR.
CompuRAD's principal offices, until October 1996, were subject to a
five-year lease between Dr. Berman, in his individual capacity, and El Dorado
Tucson Limited Partnership, an Arizona Tucson Limited Partnership. From March 1,
1993 until July 31, 1995, CompuRAD and ASR co-occupied the space. During that
period, CompuRAD paid a portion of the rent based on its pro rata use. From
August 1, 1995 until CompuRAD moved its principal offices in October 1996,
CompuRAD occupied all of the space and paid the full rent of approximately
$75,000.
From time to time during the two years prior to CompuRAD's initial public
offering, CompuRAD has issued shares of CompuRAD Common Stock to certain
directors and officers of CompuRAD in connection with the exercise of options by
such individuals.
CompuRAD believes that all of the transactions set forth above were made on
terms no less favorable to CompuRAD than could have been obtained from
unaffiliated third parties. CompuRAD has adopted a policy that all future
transactions between CompuRAD and its directors, officers, principal
Stockholders and their affiliates shall be on terms no less favorable to
CompuRAD than could be obtained by CompuRAD from unrelated third parties and
shall be approved by a majority of the members of the Board and by a majority of
the disinterested directors.
101
<PAGE> 114
BENEFICIAL SECURITY OWNERSHIP OF CERTAIN
OWNERS AND MANAGEMENT OF COMPURAD
The following table sets forth certain information regarding the beneficial
ownership of CompuRAD's Common Stock as of October 31, 1997 by: (i) each person
or entity who is known by CompuRAD to beneficially own five percent or more of
the outstanding Common Stock, (ii) each director; (iii) CompuRAD's Chief
Executive Officer and each of the other executive officers of CompuRAD other
than the Chief Executive Officer whose total salary and bonus for fiscal year
1996 exceeded $100,000; and (iv) all directors and executive officers of
CompuRAD as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
(1)
-----------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL
---------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Phillip Berman, M.D.(2)(3)...................................... 535,000 13.5%
c/o CompuRAD, Inc.
1350 North Kolb Road
Tucson, Arizona 85715
Henry Wibowo(4)(5).............................................. 530,500 13.3%
c/o CompuRAD, Inc.
1350 North Kolb Road
Tuscon, Arizona 85715
Cary Cole(5)(6)................................................. 503,500 12.7%
c/o CompuRAD, Inc.
1350 North Kolb Road
Tuscon, Arizona 85715
Phillip A. Lamoreaux(7)......................................... 265,200 6.7%
1505 Bridgeway, Suite 125
Sausalito, CA 94965
Kevin Donovan(8)(9)............................................. 91,600 2.3%
Jose L. Canchola................................................ -- --
Stewart F. Gross................................................ 11,400 *
David Lapan..................................................... 3,000 *
All directors and executive officers as a group (7
Persons)(10).................................................. 1,675,000 42.2%
</TABLE>
- ---------------
* Represents less than 1% of the total number of shares of Common Stock
outstanding.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the SEC. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, CompuRAD believes that each of the
stockholders named herein has sole voting and investment power with respect
to the shares indicated as beneficially owned. Applicable percentages are
based on 3,973,880 shares outstanding as of October 31, 1997, adjusted as
required by rules promulgated by the SEC.
(2) Dr. Berman is the majority shareholder of the P. Berman Family, L.L.C.,
which is the general partner of Sequoia Investments Limited Partnership,
which is the record owner of 517,500 shares of CompuRAD Common Stock.
(3) Includes 17,500 shares subject to options exercisable within 60 days from
October 31, 1997.
(4) To CompuRAD's knowledge, this person has sole voting and investment power
with respect to all shares of CompuRAD Common Stock shown as beneficially
owned by him, subject to community property laws where applicable.
(5) Includes 13,000 shares subject to options exercisable within 60 days from
October 31, 1997.
102
<PAGE> 115
(6) Mr. Cole if the manager of MC(2) Management Group, L.L.C., which is the
general partner of MC(2) Investments Limited Partnership, LLP, which is the
record owner of 440,000 shares of CompuRAD Common Stock. Mr. Cole is a
member of MC(2) Foundation, which is the record owner of 50,500 shares of
CompuRAD Common Stock.
(7) To CompuRAD's knowledge based on Schedule 13D on file with the Securities
and Exchange Commission, Mr. Lamoreaux has sole voting and investment power
with respect to 33,500 shares of Common Stock and shared voting and
investment power with respect to 231,700 shares of CompuRAD Common Stock
with Lamoreaux Partners, a California limited partnership, of which Mr.
Lamoreaux is the General Partner.
(8) Mr. Donovan owns 52,100 shares of CompuRAD Common Stock as community
property with his wife. Mr. Donovan is the indirect beneficial owner of
37,500 shares of CompuRAD Common Stock through his wife, who is the
custodian for their children's shares.
(9) Includes 2,000 shares subject to options exercisable within 60 days from
October 31, 1997.
(10) Includes 45,500 shares subject to options exercisable within 60 days from
October 31, 1997. See footnotes 3, 5 and 9 above.
103
<PAGE> 116
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(a)
Section 16(a) of the Exchange Act requires CompuRAD's directors and
executive officers, and persons who own more than ten percent of a registered
class of CompuRAD's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of CompuRAD's Common Stock and
other equity securities of CompuRAD. Officers, directors and greater than ten
percent stockholders are required by the SEC regulation to furnish CompuRAD with
copies of all Section 16(a) forms they file.
To CompuRAD's knowledge, based solely on a review of the copies of such
reports furnished to CompuRAD and written representations that no other reports
were required, during the nine month period ended September 30, 1997, all
Section 16(a) filing requirements applicable to its officer, directors and
greater than ten percent beneficial owners were complied with, except that Dr.
Lapan and Mr. Gross have not yet filed reports on Form 3.
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF LUMISYS CAPITAL STOCK
The authorized capital stock of Lumisys consists of 25,000,000 shares of
Lumisys Common Stock and 5,000,000 shares of Preferred Stock, $0.001 par value
("Lumisys Preferred Stock"). As of the Lumisys Record Date, there were
approximately 6,474,314 shares of Lumisys Common Stock outstanding held of
record by approximately 167 stockholders and no shares of Lumisys Preferred
Stock outstanding. Lumisys Common Stock is listed on the Nasdaq National Market
under the symbol "LUMI."
LUMISYS COMMON STOCK. Holders of Lumisys Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. The holders
of the Lumisys Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Lumisys Board out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Lumisys, the holders of Lumisys Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference, if any of any outstanding shares of Lumisys Preferred Stock. There
are no redemption or sinking fund provisions applicable to the Lumisys Common
Stock. All outstanding shares of Lumisys Common Stock are fully paid and
non-assessable, and the shares of Lumisys Common Stock to be outstanding after
the completion of the Merger will be fully paid and non-assessable.
LUMISYS PREFERRED STOCK. Lumisys has 5,000,000 shares of Lumisys Preferred
Stock authorized. The Lumisys Board has the authority to issue up to 5,000,000
shares of Lumisys Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed on any unissued
and undesignated shares of Lumisys Preferred Stock and to fix the number of
shares constituting a series and the designations of such series, without any
further vote or action by the stockholders. Although it presently has no
intention to do so, the Lumisys Board, without stockholder approval, can issue
Lumisys Preferred Stock with voting and conversion rights which could adversely
affect the voting power or other rights of the holders of Lumisys Common Stock.
The issuance of Lumisys Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Lumisys. Lumisys has no present
plans to issue Lumisys Preferred Stock.
REGISTRATION RIGHTS. Pursuant to an agreement between Lumisys and a small
number of holders (or their permitted transferees) ("Holders") of a limited
amount of Lumisys Common Stock, the Holders are entitled to certain rights with
respect to the registration of such shares under the Securities Act. If Lumisys
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, the Holders are
entitled to notice of the registration and are entitled to include, at Lumisys'
expense, such shares therein, provided, among other conditions, that the
underwriters have the right to limit the number of such shares included in the
registration. In addition, certain of the Holders may require Lumisys at its
expense on not more than two occasions, to file a registration statement under
the Securities Act with respect to their shares of Lumisys Common Stock, and
Lumisys is required to use its best efforts to effect the registration, subject
to certain restrictions and limitations. Further, certain of the Holders may
104
<PAGE> 117
require Lumisys, at its expense, to register their shares on Form S-3 when such
form becomes available to Lumisys, subject to certain conditions and
limitations.
LUMISYS TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for
the Lumisys Common Stock is Boston Equiserve Limited Partnership, 435 Tasso
Street, Suite 250, Palo Alto, CA 94301 and its telephone number is (650)
853-1698.
DESCRIPTION OF COMPURAD CAPITAL STOCK
The authorized capital stock of CompuRAD consists of 20,000,000 shares of
CompuRAD Common Stock, and 5,000,000 shares of Preferred Stock, $0.01 par value
("CompuRAD Preferred Stock"). As of the CompuRAD Record Date, there were
approximately 3,973,880 shares of CompuRAD Common Stock outstanding held of
record by approximately 50 stockholders and no shares of CompuRAD Preferred
Stock outstanding. CompuRAD Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "COMD."
COMPURAD COMMON STOCK. Holders of CompuRAD Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. The holders
of the CompuRAD Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time the CompuRAD Board out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of CompuRAD, the holders of CompuRAD Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preference, if any of any outstanding shares of CompuRAD Preferred
Stock. There are no redemption or sinking fund provisions applicable to the
CompuRAD Common Stock. All outstanding shares of CompuRAD Common Stock are fully
paid and nonassessable, and the shares of CompuRAD Common Stock to be
outstanding after the completion of the Merger will be fully paid and non-
assessable.
COMPURAD PREFERRED STOCK. CompuRAD has 5,000,000 shares of CompuRAD
Preferred Stock authorized. The CompuRAD Board has the authority to issue up to
5,000,000 shares of CompuRAD Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions granted to or imposed on
any unissued and undesignated shares of CompuRAD Preferred Stock and to fix the
number of shares constituting a series and he designations of such series,
without any further vote or action by the stockholders. Although it presently
has no intention to do so, the CompuRAD Board, without stockholder approval, can
issue CompuRAD Preferred Stock with voting and conversion rights which could
adversely affect the voting power or other rights of the holders of CompuRAD
Common Stock. The issuance of CompuRAD Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of CompuRAD. CompuRAD has
no present plans to issue CompuRAD Preferred Stock.
105
<PAGE> 118
COMPARISON OF RIGHTS OF HOLDERS OF LUMISYS
COMMON STOCK AND HOLDERS OF COMPURAD COMMON STOCK
Upon consummation of the Merger, the holders of CompuRAD Common Stock will
become holders of Lumisys Common Stock under the terms of the Reorganization
Agreement. As stockholders of CompuRAD, the rights of such holders of CompuRAD
Common Stock are presently governed by Delaware law and by CompuRAD's
Certificate of Incorporation, as amended, and Bylaws, as amended; upon
consummation of the Merger, as stockholders of Lumisys, their rights will
continue to be governed by Delaware Law, but will also be governed by the
Certificate of Incorporation, as amended, and Bylaws, as amended, of Lumisys.
The following discussion summarizes the material differences between the rights
of holders of CompuRAD Common Stock and Lumisys Common Stock.
PERCENTAGE OF VOTING STOCK; INFLUENCE OVER AFFAIRS
Upon completion of the Merger, the percentage ownership of Lumisys by each
former CompuRAD Stockholder will be substantially less than such holders'
current percentage ownership of CompuRAD. Accordingly, former CompuRAD
Stockholders will have a significantly smaller voting influence over the affairs
of Lumisys than they currently enjoy over the affairs of CompuRAD.
APPRAISAL RIGHTS
While CompuRAD Stockholders are entitled to appraisal rights under the DGCL
in connection with the Merger, Lumisys Stockholders are not entitled to
appraisal right under the DGCL in connection with the Merger.
STOCKHOLDERS' ABILITY TO ACT BY WRITTEN CONSENT WITHOUT A MEETING
The CompuRAD Certificate of Incorporation, as amended, and Bylaws, as
amended, allow for the CompuRAD Stockholders to act by written consent without a
meeting, whereas Lumisys' Certificate of Incorporation, as amended, eliminates
the ability of the Lumisys Stockholders to act by written consent without a
meeting. The elimination of the ability of stockholders to act by written
consent could lengthen the amount of time required to take stockholder actions
by requiring all actions to occur at a duly noticed and formally called
stockholders' meeting. This lengthening of time has the potential to deter
hostile takeover attempts. If the ability of stockholders to act by written
consent is eliminated, a holder or group of holders controlling a majority in
interest of a corporation's capital stock, for example, would not be able to
amend such corporation's bylaws or remove its directors pursuant to a
stockholders' written consent.
NASDAQ RULES
The CompuRAD Common Stock is traded on the Nasdaq SmallCap Market and will
cease to trade on the Nasdaq SmallCap Market upon consummation of the Merger.
The Lumisys Common Stock is traded on the Nasdaq National Market. There are
material differences between the corporate governance rules of the Nasdaq
SmallCap Market and the Nasdaq National Market.
EXPERTS
The consolidated financial statements of Lumisys as of December 31, 1996
and for each of the three years ended December 31, 1996 included in this Joint
Proxy Statement/Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of CompuRAD at December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996, included in the
Joint Proxy Statement, which is referred to and made a part of this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
106
<PAGE> 119
LEGAL MATTERS
The validity of the shares of Lumisys Common Stock to be issued in
connection with the Merger will be passed upon for Lumisys by Cooley Godward
LLP, Palo Alto, California. As of October 30, 1997, attorneys at Cooley Godward
LLP performing services for Lumisys beneficially own an aggregate of 4,279
shares of Lumisys Common Stock. In addition, Andrei M. Manoliu, Ph.D. a partner
of Cooley Godward LLP is the Secretary of Lumisys.
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS
Representatives of Price Waterhouse LLP and Ernst & Young LLP expect to be
present at the Lumisys Special Meeting and the CompuRAD Special Meeting,
respectively, and, while such representatives have stated that they do not plan
to make a statement at such meetings, they will be available to respond to
appropriate questions from stockholders in attendance.
STOCKHOLDER PROPOSALS
Lumisys Stockholders who wish to submit proposals for presentation to
Lumisys' 1998 Annual Meeting of Stockholders must have submitted the proposal to
Lumisys Incorporated, 225 Humboldt Court, Sunnyvale, CA 94089, Attention:
Secretary, in advance of December 9, 1997 for inclusion, if appropriate, in
Lumisys' proxy statement and form of proxy relating to its 1998 Annual Meeting.
CompuRAD Stockholders who wish to submit a proposal for presentation to
CompuRAD's 1998 Annual Meeting of Stockholders (if the Merger has not been
consummated prior to the date the meeting is to be held) must submit the
proposal to CompuRAD, Inc., 1350 North Kolb Road, Tucson, AZ 85715, Attention:
Secretary. Such proposal must be received not later than January 9, 1998 for
inclusion, if appropriate, in CompuRAD's proxy statement and form of proxy
relating to its 1998 Annual Meeting.
107
<PAGE> 120
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LUMISYS INCORPORATED
Report of Independent Accountants.................................................. F-2
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and as of December 31,
1996, and 1995.................................................................. F-3
Consolidated Statements of Income for the six month periods ended June 30, 1997 and
June 30, 1996 (unaudited) and for the years ended December 31, 1996, 1995 and
1994............................................................................ F-4
Consolidated Statements of Cash Flows for the six month periods ended June 30, 1997
and June 30, 1996 (unaudited) and for the years ended December 31, 1996, 1995
and 1994........................................................................ F-5
Consolidated Statements of Stockholders' Equity (Deficit) as of June 30, 1997
(unaudited) and for the years ended December 31, 1996, 1995 and 1994............ F-6
Notes to Consolidated Financial Statements......................................... F-7
Valuation and Qualifying Accounts.................................................. F-18
COMPURAD, INC.
Report of Independent Auditors..................................................... F-19
Balance Sheets as of December 31, 1996, and 1995 and June 30, 1997 (unaudited)..... F-20
Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and
for the six months ended June 30, 1997 (unaudited) and June 30, 1996............ F-21
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996,
1995 and 1994 and for the six months ended June 30, 1997 (unaudited)............ F-22
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and
for the six months ended June 30, 1997 (unaudited) and June 30, 1996............ F-23
Notes to Financial Statements...................................................... F-24
</TABLE>
F-1
<PAGE> 121
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lumisys Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Lumisys
Incorporated at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the management of Lumisys
Incorporated. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits of the consolidated financial statements of Lumisys Incorporated also
included an audit of the Financial Statement Schedule on page F-18. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
January 22, 1997
F-2
<PAGE> 122
LUMISYS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
JUNE ------- -------
30,
1997
-------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $19,822 $18,438 $11,426
Short-term investments.................................... -- -- 3,934
Accounts receivable, net of allowances of $316, $296 and
$249................................................... 3,462 3,199 2,410
Inventories (Note 3)...................................... 3,487 3,053 3,003
Deferred tax asset........................................ 1,429 1,429 1,114
Other current assets...................................... 322 453 294
------- ------- -------
Total current assets.............................. 28,522 26,572 22,181
Property and equipment, net (Note 3)........................ 343 345 162
Other assets................................................ 57 173 400
------- ------- -------
$28,922 $27,090 $22,743
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,243 $ 823 $ 1,525
Accrued expenses (Note 3)................................. 1,996 1,604 1,468
------- ------- -------
Total current liabilities......................... 3,239 2,427 2,993
------- ------- -------
Commitments (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding........... -- -- --
Common stock, $0.001 par value; 25,000 shares authorized;
6,441, 6,415 and 6,240 shares issued and outstanding... 6 6 6
Additional paid-in capital................................ 23,485 23,887 22,702
Retained earnings (accumulated deficit)................... 2,218 918 (2,521)
Notes receivable from stockholders........................ -- (114) (297)
Deferred compensation related to stock options............ (26) (34) (140)
------- ------- -------
Total stockholders' equity........................ 25,683 24,663 19,750
------- ------- -------
$28,922 $27,090 $22,743
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 123
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------------
------------------- 1996 1995 1994
1996 ------- ------- -------
-------
1997 (UNAUDITED)
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.................................... $11,129 $10,982 $23,022 $17,662 $ 8,807
Cost of sales............................ 4,970 5,111 10,505 8,228 4,042
------- ------- ------ ------- -------
Gross profit................... 6,159 5,871 12,517 9,434 4,765
------- ------- ------ ------- -------
Operating expenses:
Sales and marketing.................... 1,264 938 1,949 1,606 851
Research and development............... 2,249 2,035 4,145 2,946 1,496
General and administrative............. 1,018 1,213 2,238 1,832 712
Acquired in-process research and
development......................... -- -- -- 1,442 --
------- ------- ------ ------- -------
Total operating expenses....... 4,531 4,186 8,332 7,826 3,059
------- ------- ------ ------- -------
Income from operations................... 1,628 1,685 4,185 1,608 1,706
Interest income, net..................... 502 429 916 223 95
------- ------- ------ ------- -------
Income before income taxes............... 2,130 2,114 5,101 1,831 1,801
Provision (benefit) for income taxes..... 830 497 1,662 (762) 95
------- ------- ------ ------- -------
Net income............................... 1,300 1,617 3,439 2,593 1,706
Accretion of mandatorily redeemable
convertible preferred stock............ -- -- -- -- 96
------- ------- ------ ------- -------
Net income attributable to common
stock.................................. $ 1,300 $ 1,617 $ 3,439 $ 2,593 $ 1,610
======= ======= ====== ======= =======
Net income per share (Note 2)............ $ 0.19 $ 0.24 $ 0.50 $ 0.49 $ 0.34
======= ======= ====== ======= =======
Shares used to compute net income per
share (Note 2)......................... 6,710 6,841 6,829 5,305 4,998
======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 124
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $ 1,300 $ 1,617 $ 3,439 $ 2,593 $ 1,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 105 101 176 199 64
Provision for doubtful accounts............... 47 165 (12)
Provision for obsolete inventories............ 102 375 145
Deferred income taxes......................... -- (315) (315) (1,114) --
Deferred compensation related to stock
options..................................... 8 37 33 --
Interest on notes receivable from
stockholders................................ (2) (5) (8) (14) (8)
In-process acquired research and
development................................. -- 1,442 --
Changes in assets and liabilities (net of
effects of Imagraph and XRS acquisitions):
Accounts receivable......................... (263) (437) (836) (556) (492)
Inventories................................. (434) (568) (152) (1,657) (448)
Other current assets........................ 131 (159) (180) 20
Other assets................................ 116 39 227 (100) --
Accounts payable............................ 420 (182) (702) 414 68
Accrued expenses............................ 392 542 136 280 362
------- ------- ------ ------- -------
Net cash provided by operating activities.......... 1,773 792 1,992 1,880 1,405
------- ------- ------ ------- -------
Cash flows from investing activities:
Sales (purchases) of short-term investments...... -- 3,934 3,934 (3,934) --
Purchases of property and equipment.............. (103) (70) (359) (108) (61)
Purchase of Imagraph............................. -- -- -- (1,800) --
Purchase of XRS.................................. -- -- -- (200) --
Purchase of minority interest in affiliated
company....................................... -- -- -- (300) --
------- ------- ------ ------- -------
Net cash provided by (used in) investing
activities....................................... (103) 3,864 3,575 (6,342) (61)
------- ------- ------ ------- -------
Cash flows from financing activities:
Proceeds from sale of common stock, including tax
benefit....................................... 160 82 1,254 12,255 4
Payment on notes receivable from stockholders.... 115 174 191 -- 9
Purchase of treasury stock....................... (561) -- -- -- --
------- ------- ------ ------- -------
Net cash provided by (used in) financing
activities....................................... (286) 256 1,445 12,255 13
------- ------- ------ ------- -------
Net increase in cash and cash equivalents.......... 1,384 4,912 7,012 7,793 1,357
Cash and cash equivalents at beginning of period... 18,438 11,426 11,426 3,633 2,276
------- ------- ------ ------- -------
Cash and cash equivalents at end of period......... $19,822 $16,338 $18,438 $11,426 $ 3,633
======= ======= ====== ======= =======
Supplemental disclosures of cash flow information:
Cash paid for income taxes.................... $ 572 $ 499 $ 951 $ 251 $ 18
Supplemental schedule of noncash investing and
financing activities:
Accretion of mandatorily redeemable
convertible preferred stock................. $ -- $ -- $ -- $ -- $ 96
Common stock issued for notes receivable...... -- -- -- -- 275
Common stock issued for purchase of XRS and to
consultant.................................. -- -- -- 33 --
Series C mandatorily redeemable convertible
preferred stock issued for purchase of
Imagraph.................................... -- -- -- 200 --
Deferred compensation related to stock options
reversed for terminated employees........... -- -- 69 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 125
LUMISYS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED NOTES DEFERRED TOTAL
COMMON STOCK ADDITIONAL EARNINGS RECEIVABLE COMPENSATION STOCKHOLDERS'
---------------- PAID-IN (ACCUMULATED FROM RELATED TO EQUITY
SHARES AMOUNT CAPITAL DEFICIT) STOCKHOLDERS STOCK OPTIONS (DEFICIT)
------ ------ ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 1,670 $ -- $ 38 $ (6,724) $ (9) $ -- $(6,695)
Exercise of stock options... 464 2 277 -- -- -- 279
Advances to executives for
exercise of stock
options................... -- -- -- -- (275) -- (275)
Payment on note receivable
from stockholder.......... -- -- -- -- 9 -- 9
Interest on note receivable
from stockholder.......... -- -- -- -- (8) -- (8)
Accretion of mandatorily
redeemable convertible
preferred stock........... -- -- -- (96) -- -- (96)
Net income.................. -- -- -- 1,706 -- -- 1,706
----- --- ------- ------ ----- ----- -------
Balance at December 31,
1994........................ 2,134 2 315 (5,114) (283) -- (5,080)
Exercise of stock options... 35 -- 22 -- -- -- 22
Deferred compensation
related to stock
options................... -- -- 173 -- -- (173) --
Amortization of deferred
compensation.............. -- -- -- -- -- 33 33
Interest on note receivable
from stockholder.......... -- -- -- -- (14) -- (14)
Issuance of common stock to
Director.................. 19 -- 23 -- -- -- 23
Issuance of common stock in
connection with
acquisition of XRS and to
consultant................ 27 -- 33 -- -- -- 33
Conversion of mandatorily
redeemable convertible
preferred stock........... 2,275 2 9,928 -- -- -- 9,930
Issuance of common stock in
initial public offering... 1,750 2 12,208 -- -- -- 12,210
Net income.................. -- -- -- 2,593 -- -- 2,593
----- --- ------- ------ ----- ----- -------
Balance at December 31,
1995........................ 6,240 6 22,702 (2,521) (297) (140) 19,750
Exercise of stock options... 151 -- 171 171
Amortization of deferred
compensation.............. -- -- -- -- -- 37 37
Tax benefit for disqualified
dispositions and exercise
of non-qualified stock
options................... -- -- 1,026 -- -- -- 1,026
Deferred compensation
related to stock options
reversed for terminated
employees................. -- -- (69) -- -- 69 --
Interest on notes receivable
from stockholders......... -- -- -- -- (8) -- (8)
Payments on notes receivable
from stockholders......... -- -- -- -- 191 -- 191
Issuance of common stock
under employee stock
purchase plan............. 28 -- 177 -- -- -- 177
Shares canceled in
connection with
acquisition of XRS........ (4) -- (16) -- -- -- (16)
Cost of issuance of common
stock..................... -- -- (104) -- -- -- (104)
Net income.................. -- -- -- 3,439 -- -- 3,439
----- --- ------- ------ ----- ----- -------
Balance at December 31,
1996........................ 6,415 6 23,887 918 (114) (34) 24,663
----- --- ------- ------ ----- ----- -------
Exercise of stock options
(unaudited)............... 105 -- 98 -- -- -- 98
Amortization of deferred
compensation
(unaudited)............... -- -- 8 8
Interest on notes receivable
from stockholders
(unaudited)............... -- -- -- -- (2) -- (2)
Payments on notes receivable
from stockholders
(unaudited)............... -- -- 116 116
Issuance of common stock
under employee stock
purchase plan
(unaudited)............... 11 -- 62 -- -- -- 62
Purchase of treasury stock
(unaudited)............... (90) -- (562) -- -- -- (562)
Net income (unaudited)...... -- -- -- 1,300 -- -- 1,300
----- --- ------- ------ ----- ----- -------
Balance at June 30, 1997
(unaudited)................. 6,441 $ 6 $ 23,485 $ 2,218 $ -- $ (26) $25,683
===== === ======= ====== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 126
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
Lumisys Incorporated (the "Company") designs, manufactures, and markets a
family of precision digitizers that convert images on film or video into digital
format. The Company commenced operations on February 4, 1987, and operates in
one industry segment.
CERTAIN EQUITY TRANSACTIONS
In conjunction with an initial public offering of the Company's Common
Stock (the "Offering") in 1995, all outstanding shares of mandatorily redeemable
convertible Preferred Stock automatically converted into Common Stock upon the
closing of the Offering.
In September and October 1995, the Company's Board of Directors authorized,
and the stockholders approved, the reincorporation of the Company in Delaware
and the associated exchange of four shares of Common Stock and four shares of
mandatorily redeemable convertible Preferred Stock into one share of each
corresponding class and series of stock of the Delaware successor (resulting in
a one-for four reverse stock split of the Company's Common and Preferred Stock).
All applicable share and per share amounts of Common and Preferred Stock have
been retroactively adjusted to reflect this reverse stock split. Effective upon
the closing of the Offering, the Company was authorized to issue 25,000,000
shares of Common Stock and 5,000,000 shares of undesignated Preferred Stock and
the Board of Directors have the authority to issue the undesignated Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION
Revenues are recognized when products are shipped. Sales to international
customers, primarily located in Europe, represented, 13%, 12%, 9% and 17% of
total sales for the six months period ended June 30, 1997 (unaudited) and fiscal
1996, 1995 and 1994, respectively. All transactions are denominated in U.S.
dollars.
The following table summarizes the percentage of total sales from customers
accounting for more than 10% of the Company's total sales in any one of the
three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CUSTOMER 1996 1995 1994
--------------------------------------- ---- ---- ----
<S> <C> <C> <C>
A.................................... 9% 11% 14%
B.................................... 6% 12% 15%
C.................................... 8% 10% 16%
D.................................... 5% 5% 11%
</TABLE>
F-7
<PAGE> 127
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the six months ended June 30, 1997 (unaudited) there were no customers
representing 10% or more of the Company's sales.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all debt instruments with maturities of three months
or less when purchased to be cash equivalents. The Company generally invests its
available cash in commercial paper and money market funds with several financial
institutions.
The Company has categorized its short-term investments as available for
sale. Realized gains or losses are determined using the specific identification
method and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except that those unrealized losses which are
deemed to be other than temporary are reflected in the income statement. As of
December 31, 1995, short-term investments consisted of a marketable debt
security and its carrying value approximated cost. As of December 31, 1996, the
Company did not have any short-term investments.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market, and reserves are provided for obsolete, slow-moving
or unsaleable inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three years. Leasehold improvements are amortized using the
straightline method over the lesser of the remaining lease terms or the
estimated useful lives of the related assets.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and are
expensed as incurred. Certain software development costs are capitalized once
technological feasibility is established, which the Company defines as the
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
sales to total projected product sales, whichever method results in greater
amortization. To date, the period between achieving technological feasibility
and the general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
WARRANTY
Upon product shipment, the Company provides for the estimated cost that may
be incurred under its product warranties.
INCOME TAXES
A deferred income tax asset or liability is established for the expected
future consequences resulting from the differences between the financial
reporting and income tax bases of assets and liabilities and from net operating
loss and tax credit carryforwards.
F-8
<PAGE> 128
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company limits the amount of cash invested with any one
financial institution. The Company's trade accounts receivable are derived
primarily from sales in the United States, Europe and the Far East. The
Company's credit policy is to require prepayment of 50% prior to shipment on
domestic sales and prepayment of 100% or a letter of credit on foreign sales.
Prepayments are generally made less than one week prior to shipment. The
Company's prepayment policy has not resulted in significant unearned revenue
balances at the reported balance sheet dates. The Company performs ongoing
credit evaluations of its customers' financial condition and may modify its
sales terms in certain circumstances based on these reviews. The Company
maintains reserves for potential credit losses; historically, such losses have
been minor and within management's expectations.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
outstanding shares of Common Stock and common stock equivalents, assuming the
conversion of mandatorily redeemable convertible Preferred Stock into common
shares, which occurred upon completion of the Offering, and the exercise of
stock options (using the treasury stock method). Common stock equivalents are
excluded from the computation if their effect is anti-dilutive, except that
pursuant to the requirements of the Securities and Exchange Commission,
mandatorily redeemable convertible preferred stock (using the if converted
method) and common equivalent shares (using the treasury stock method and the
initial public offering price) issued subsequent to August 31, 1994 through
November 14, 1995 have been included in the computation as if they were
outstanding for all periods presented prior to the offering effective date,
November 14, 1995.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The financial information at June 30, 1997 and for the six month periods
ended June 30, 1997 and 1996 is unaudited. In the opinion of management, this
information has been prepared on the same basis as the audited consolidated
financial statements and includes all adjustments, consisting solely of normal
recurring adjustments, necessary for the fair statement of results for the
interim periods. The results of operations and cash flows for the six month
period ended June 30, 1997 are not necessarily indicative of the results of any
future period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In 1996, the Company implemented the disclosure requirements of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." The Company's adoption of SFAS 123 in 1996 does not
have a material effect on the Company's financial position or results of
operations, as the Company elected to continue to measure the compensation cost
of stock option plans using the intrinsic value based method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 is effective for the Company's fiscal year ending December 31, 1997.
Under SFAS 128, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings per
share. If the Company had
F-9
<PAGE> 129
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
adopted SFAS 128 for the years ended December 31, 1996 and 1995 and for the six
month period ended June 30, 1997 the earnings per share would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
SIX MONTHS ENDED ----------------- -----------------
JUNE 30, 1997
----------------
(UNAUDITED)
<S> <C> <C> <C>
Basic earnings per share...... $.20 $ .54 $ .50
Diluted earnings per share.... $.19 $ .50 $ .49
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods ending after December 15, 1997. Reclassification of financial statements
for earlier periods for comparative purposes is required. The Company will adopt
SFAS 130 in 1997 and does not expect such adoption to have a material effect on
the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments Of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 beginning in 1998 and has not
evaluated the impact of such adoption on the notes to its consolidated financial
statements.
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT AMOUNTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------------
1997 1996 1995
----------- ------ ------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Inventories:
Raw materials............................... $ 2,247 $2,607 $2,283
Work-in-process............................. 1,114 422 774
Finished goods.............................. 1,243 959 779
------ ------ ------
4,604 3,988 3,836
Less: inventory reserves.................... (1,117) (935) (833)
------ ------ ------
$ 3,487 $3,053 $3,003
====== ====== ======
Property and equipment:
Machinery and equipment..................... $ 1,057 $1,045 $ 686
Furniture and fixture....................... 64 14 14
Leasehold improvements...................... 45 33 33
------ ------ ------
1,166 1,092 733
Less: accumulated depreciation and
amortization............................. (823) (747) (571)
------ ------ ------
$ 343 $ 345 $ 162
====== ====== ======
Accrued expenses:
Payroll and related benefits................ $ 671 $ 670 $ 538
Warranty.................................... 470 471 533
Other....................................... 855 463 397
------ ------ ------
$ 1,996 $1,604 $1,468
====== ====== ======
</TABLE>
F-10
<PAGE> 130
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACQUISITIONS
IMAGRAPH CORPORATION
On March 31, 1995, the Company purchased all the outstanding shares of
Imagraph Corporation ("Imagraph"), a developer and manufacturer of advanced
graphics controllers and frame grabbers, in exchange for $1,800,000 in cash and
36,845 shares of Series C mandatorily redeemable convertible Preferred Stock.
The transaction was accounted for as a purchase; accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of the acquisition. The in-process
research and development represents the estimated current fair market value,
using a risk-adjusted income approach, of specifically identified technologies
which had not reached technological feasibility and had no alternative future
uses. The purchased technology met the technological feasibility criteria for
capitalization and estimated current fair market value was determined using a
risk-adjusted income approach. The results of Imagraph are included in the
Company's operations commencing from the date of acquisition. The allocation of
the purchase price, which is based principally on an independent appraisal, is
as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 855
Inventories................................................. 940
Property and equipment...................................... 49
In-process research and development......................... 877
Purchased technology........................................ 120
Other assets................................................ 45
Accounts payable assumed.................................... (717)
Other liabilities assumed................................... (169)
------
Total purchase price...................................... $2,000
======
</TABLE>
The total purchase price is derived as follows:
<TABLE>
<S> <C>
Cash payment................................................ $1,800
Issuance of Series C mandatorily redeemable convertible
preferred stock........................................... 200
------
$2,000
======
</TABLE>
X-RAY SCANNER CORPORATION
On March 2, 1995, the Company purchased all the outstanding shares of X-Ray
Scanner Corporation ("XRS"), a developer and manufacturer of medical film
scanning digitizers, in exchange for $200,000 in cash, 15,058 shares of the
Company's Common Stock and $10,000 in acquisition expenses. The transaction was
accounted for using the purchase method; accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition. The in-process research
and development represents the estimated current fair market value, using a
risk-adjusted income approach, of specifically identified technologies which had
not reached technological feasibility and had no alternative future uses. The
results of XRS are included in the Company's operations commencing from the
F-11
<PAGE> 131
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
date of acquisition. Prior years results of XRS are not material in relation to
the results of operations of the Company. The allocation of the purchase price
is as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development.......................... $ 565
Other assets................................................. 25
Accounts payable assumed..................................... (150)
Other liabilities assumed.................................... (212)
-----
Total purchase price....................................... $ 228
=====
</TABLE>
The total purchase price is derived as follows:
<TABLE>
<S> <C>
Cash payment................................................. $ 200
Issuance of Common Stock..................................... 18
Other expenses............................................... 10
-----
$ 228
=====
</TABLE>
PRO FORMA INFORMATION
The following pro forma information reflects the results of operations for
the years ended December 31, 1995 and 1994 as if the acquisition of Imagraph had
occurred as of January 1, 1994, and after giving effect to certain adjustments.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what operating results would have been had the
acquisition actually taken place as of January 1, 1994, or what operating
results may occur in the future.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Sales................................ $19,056 $13,604
======= =======
Net income........................... $ 2,724 $ 1,856
======= =======
Net income per share................. $ 0.51 $ 0.37
======= =======
</TABLE>
NOTE 5 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- ---
<S> <C> <C> <C>
Current:
Federal...................................... $1,619 $ 126 $65
State........................................ 358 226 30
------ ------- ----
----
1,977 352 95
------ ------- ----
----
Deferred:
Federal...................................... (365) (751) --
State........................................ 50 (363) --
------ ------- ----
----
(315) (1,114) --
------ ------- ----
----
$1,662 $ (762) $95
====== ======= ========
</TABLE>
During 1996, income taxes payable was reduced by approximately $1.0 million
in connection with the exercise of nonqualified stock options.
F-12
<PAGE> 132
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision (benefit) reconciles to the amount computed by multiplying
income before tax by the U.S. statutory rate (34%) as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------- -----
<S> <C> <C> <C>
Provision at statutory rate.................. $1,734 $ 623 $ 612
Utilization of net operating loss -- (940) (537)
carryforwards..............................
Decrease in valuation allowance.............. (384) (1,114) --
Nondeductible acquired research and -- 490 --
development................................
State taxes, net of federal benefit.......... 313 149 20
Other........................................ (1) 30 --
------ ------- ------
--
$1,662 $ (762) $ 95
====== ======= ========
</TABLE>
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Net operating loss carryforwards....................... $ 303 $ 303
Tax credit carryforwards............................... 160 571
Currently nondeductible accruals....................... 1,167 810
Depreciation and amortization.......................... 180 195
------ ------
1,810 1,879
Deferred tax assets valuation allowance................ (381) (765)
------ ------
Net deferred tax assets................................ $1,429 $1,114
====== ======
</TABLE>
Management believes that the available objective evidence, including the
recent acquisitions made by the Company and the necessary expenditures for
research and development and for marketing in the high technology segment it
pursues, creates uncertainty regarding the attainment of sufficient
profitability to realize the deferred tax assets and therefore a partial
valuation allowance has been recorded.
At December 31, 1996, the Company had net operating loss carryforwards
available to reduce income taxes for federal and state income tax purposes of
approximately $800,000 and $500,000, respectively; such carryforwards expire
through 2007. In addition, at December 31, 1996, the Company had research and
development credit carryforwards available to reduce income taxes for federal
and state income tax purposes of approximately $40,000 and $120,000 which expire
from 2004 to 2010.
NOTE 6 -- STOCK PLANS
The Company initially reserved 45,000 shares of Common Stock for issuance
under its 1987 Stock Option Plan (the "1987 Plan"). During 1990, the Board of
Directors authorized an additional 580,000 shares to be reserved for issuance
and during each of the years ended December 31, 1992, 1994 and 1995, the Board
of Directors authorized an additional 250,000 shares to be reserved for
issuance. The 1987 Plan provides for the grant of incentive stock options and
nonstatutory stock options (designated "Supplemental Stock"). Incentive stock
options are available for employees, officers and employee directors and are
granted at exercise prices which are not less than 100% of fair market value on
the date of the grant. Supplemental Stock is available for employees, officers,
consultants and directors and is granted at exercise prices not less than 85% of
fair market value on the date of grant. All options are to have a term not
greater than ten years from the date of grant. The Board shall determine the
number of shares for which an option can be granted. Options granted generally
vest 25 percent after one year and then ratably at 6 1/4 percent per quarter
over a three year period.
F-13
<PAGE> 133
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1995, the Board of Directors determined that no additional
options would be granted under the 1987 Plan and adopted the 1995 Stock Option
Plan (the "1995 Plan") under which an aggregate of 350,000 shares of Common
Stock have been reserved for issuance upon exercise of options granted to
employees, officers and employee directors of and consultants to the Company.
The 1995 Plan will terminate in September 2005, unless terminated earlier by the
Board of Directors.
The 1995 Plan provides for the grant of both incentive stock options and
nonstatutory stock options (designated "Supplemental Stock"). The maximum term
of options granted under the 1995 Plan is ten years. The exercise price of
incentive stock options granted under the 1995 Plan must equal at least the fair
value of the Company's Common Stock on the date of grant. The exercise price of
Supplemental Stock options under the Plan must equal at least 85% of the fair
market value of the Company's Common Stock on the date of grant. The exercise
price of options granted to any person who at the time of grant owns stock
possessing more than 10% of the total combined voting power of all classes of
stock must be at least 110% of the fair market value of such stock on the date
of grant and the terms of these options cannot exceed five years. The Board
shall determine the number of shares for which an option can be granted. Options
granted under the 1995 Plan will generally vest 25 percent after one year and
then ratably at 6 -1/4 percent per quarter over a three year period.
Under certain events, the Company has the right to repurchase, at the
original issue price, a declining percentage of certain of the common shares
issued to employees under written agreements with such employees. The Company's
right to repurchase such stock declines on a percentage basis based on the
length of the employees' continuous employment with the Company. At December 31,
1996, 8,508 shares of Common Stock were subject to repurchase by the Company.
The Company has recorded compensation expense for the difference between
the grant price and the deemed fair market value of the Company's Common Stock
for options granted in March 1995. Such compensation expense was approximately
$37,000 for the year ended December 31, 1996 and $33,000 for the nine month
period ended December 31, 1995. During 1996, forfeited options resulted in a
reduction of $69,000 from the maximum aggregated compensation expense to
approximately $104,000 over the vesting period of four years.
In August 1995, the Board adopted the 1995 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which provided for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors Plan will be administered by the Board.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors Plan is 112,500. Pursuant to the terms of
the Directors Plan, each person who is elected as a director of the Company or a
compensated Chairman of the Board (a "Non-Employee Director") will automatically
be granted on option to purchase 18,750 shares of Common Stock on the date of
his or her election to the Board. On the date of adoption of the Directors Plan,
each person who was then a Non-Employee Director of the Company and who had not
received within the one-year period prior to adoption of the Directors Plan
either an option grant or other right to purchase shares of Common Stock, was
granted an option to purchase 18,750 shares of Common Stock under the Directors
Plan. Thereafter, each Non-Employee Director will automatically be granted an
option to purchase an additional 18,750 shares of Common Stock under the
Directors Plan on the date any and all previous options or stock purchases by
such person either under the Directors Plan or otherwise become fully vested.
Options granted under the Directors Plan will vest 25 percent after one year and
then ratably at 6 -1/4 percent per quarter thereafter over a three year period.
No options granted under the Directors Plan may be exercised later than ten
years from the date of grant. The exercise price of options under the Directors
Plan must be equal to the fair market value of the Common
F-14
<PAGE> 134
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock on the date of grant. Options granted under the Directors Plan are
generally nontransferable. The Directors Plan will terminate August 2005 unless
terminated earlier by the Board.
Pursuant to the Directors Plan, in August 1995 each of two Non-Employee
Directors was granted an option to purchase 18,750 shares of Common Stock at an
exercise price of $6.00 per share.
In September 1995, the Company's Board of Directors approved the 1995
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares
of Common Stock for issuance to eligible employees. The Purchase Plan permits
eligible employees to purchase Common Stock through periodic payroll deductions
of up to 10% of their annual compensation. Each offering period will have a
duration of 12 months and shares of Common Stock will be purchased for each
participant at semi-annual intervals during each offering period. The price at
which the Common Stock is purchased under the Purchase Plan is equal to 85
percent of the lower of the fair value on the commencement date of each offering
period or the semiannual purchase date. As of December 31, 1996, 28,450 shares
had been issued under the Purchase Plan.
At December 31,1996, the Company has three stock-based compensation plans,
as described above. The Company has elected to continue to apply APB Opinion 25
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C> <C>
Net income................................... As reported $3,439 $2,593
Pro forma $3,197 $2,514
Net income per share......................... As reported $ 0.50 $ 0.49
Pro forma $ 0.47 $ 0.47
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-valuation model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0
percent for both years; expected volatility of 57.8 and 59.8 percent, risk-free
interest rates of 6.01 and 6.26; and expected lives of 3 years for
non-officer/director and 5 years for officers and directors for both years.
F-15
<PAGE> 135
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity is presented below:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE PRICE
-------- -------------
<S> <C> <C>
Outstanding at December 31, 1993..................... 678,817 $0.59
Options granted...................................... 198,625 $0.60
Options exercised.................................... (464,546) $0.60
Options forfeited.................................... (17,267) $0.60
--------
Outstanding at December 31, 1994..................... 395,621 $0.59
Options granted...................................... 465,238 $3.66
Options exercised.................................... (34,683) $0.65
Options forfeited.................................... (13,048) $1.00
--------
Outstanding at December 31, 1995..................... 813,128 $2.34
Options granted...................................... 153,225 $9.61
Options exercised.................................... (151,141) $1.13
Options forfeited.................................... (139,172) $4.60
--------
Outstanding at December 31, 1996..................... 676,040 $3.79
========
Vested at December 31, 1996.......................... 273,287
========
Available for future grant at December 31, 1996...... 287,625
========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS VESTED
WEIGHTED-AVERAGE ----------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE VESTED EXERCISE PRICE
- ----------------- ----------- ---------------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
$0.26 to $ 0.60 265,963 6.66 years $ 0.59 198,098 $ 0.59
1.20 to 1.20 121,634 8.20 1.20 37,747 1.20
4.00 to 6.00 133,255 8.60 5.79 36,784 5.72
8.00 to 11.44 155,188 9.71 9.59 658 8.00
------- -------
$0.26 to $11.44 676,040 8.02 $ 3.79 273,287 1.38
======= =======
</TABLE>
Using the Black-Scholes option-valuation model, the weighted average fair
value of options granted in 1996 and 1995 is $5.09 and $2.06 respectively.
The fair value of the employees' purchase rights under the Purchase Plan,
which is described above, was estimated using the Black-Scholes option-valuation
model with the following assumptions for 1996 and 1995, respectively: dividend
yield of 0 percent for both years; an expected life of 1 year for both years;
expected volatility of 59 and 56 percent; and risk-free interest rates of 5.52
and 5.96 percent. The weighted-average fair value of those purchase rights
granted in 1996 and 1995 was $2.74 per share for both years.
NOTE 7 -- NOTES RECEIVABLE FROM RELATED PARTIES
During May 1994, the Company made loans totaling $275,000 to certain
executives and directors pursuant to the Company's 1987 Stock Option Plan. The
loans are secured by 458,500 shares of the Company's Common Stock. The loans
bear interest at the lesser of 4.94 percent per annum or the maximum rate
permissible by law. Accrued interest is payable annually in arrears. The loans
are due on the earlier of May 31, 1997 or upon the borrower's termination of
employment with the Company. Notes receivable deducted from stockholders' equity
(deficit) at December 31, 1996, 1995, 1994 and 1993 include loan balances plus
accrued interest.
F-16
<PAGE> 136
LUMISYS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1995, the Company made a loan totaling $125,000 to an employee of
the Company. The loan bears interest at 7.96 percent per annum and is payable at
a rate of $25,000 plus accrued interest annually commencing March 1, 1996. In
addition, the Company has entered into a non-competition agreement with the same
employee at a rate of $25,000 per year over a five year period commencing March
1, 1995.
NOTE 8 -- COMMITMENTS
The Company leases its facilities under noncancelable operating leases
which expire at various dates through 2000. Future minimum lease commitments are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1997................................................ $277
1998................................................ 221
1999................................................ 221
2000................................................ 221
----
$940
====
</TABLE>
Total rent expense was approximately $220,000, $441,000, $318,000 and
$173,000 for the six months period ended June 30, 1997 (unaudited) and fiscal
1996, 1995 and 1994, respectively.
F-17
<PAGE> 137
LUMISYS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
SIX MONTHS PERIOD ENDED JUNE 30, 1997
AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts...................... $ 96 $ 62 $ (74) $ 84
Inventory reserves................................... $506 $ 145 $ (130) $ 521
Year ended December 31, 1995:
Allowance for doubtful accounts...................... $ 84 $ 172 $ (7) $ 249
Inventory reserves................................... $521 $ 402 $ (90) $ 833
Year ended December 31, 1996:
Allowance for doubtful accounts...................... $249 $ 50 $ (3) $ 296
Inventory reserves................................... $833 $ 434 $ (332) $ 935
Six months period ended June 30, 1997 (unaudited):
Allowance for doubtful accounts...................... $296 $ 20 -- $ 316
Inventory reserves................................... $935 $ 182 -- $1,117
</TABLE>
F-18
<PAGE> 138
REPORT OF ERNST YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
CompuRAD, Inc.
We have audited the accompanying balance sheets of CompuRAD, Inc., as of
December 31, 1996 and 1995, and the related statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1996, and for the six months ended June 30, 1996.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CompuRAD, Inc., as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, and for the six months
ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Tucson, Arizona
January 31, 1997
F-19
<PAGE> 139
COMPURAD, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1996 1995 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 4,051,968 $ 36,024 1,702,469
Accounts receivable, net of $140,000 and $80,000
allowance at June 30, 1997 and December 31, 1996,
respectively...................................... 1,423,910 143,873 2,735,566
Inventories....................................... 313,724 328,425 659,720
Prepaid expenses and other........................ 75,789 4,689 196,523
----------- ----------- -----------
Total current assets................................ 5,865,391 513,011 5,294,278
Property and equipment, net......................... 538,018 100,637 654,697
----------- ----------- -----------
Total assets........................................ $ 6,403,409 $ 613,648 $ 5,948,975
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 558,290 $ 578,978 $ 872,783
Accrued expenses.................................. 456,428 95,864 331,942
Customer deposits and unearned revenue............ 227,329 528,967 359,803
----------- ----------- -----------
Total current liabilities........................... 1,242,047 1,203,809 1,564,528
Note payable to related party (Note 2).............. 117,969 99,969 121,935
Other liabilities to related party (Note 6)......... -- 541,676 --
Stockholders' equity (deficit) (Note 3):
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding......... -- -- --
Common stock, $.01 par value; 20,000,000 shares
authorized, 3,860,710, 3,857,260 and 2,186,100
shares issued and outstanding at June 30, 1997,
December 31, 1996 and 1995, respectively....... 6,551,967 25,966 6,551,972
Stock subscriptions receivable.................... -- (6,250) --
Paid in capital -- stock-based compensation and
expenses....................................... 467,500 100,000 473,500
Accumulated deficit............................... (1,976,074) (1,351,522) (2,762,960)
----------- ----------- -----------
Total stockholders' equity (deficit)................ 5,043,393 (1,231,806) 4,262,512
----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)......................................... $ 6,403,409 $ 613,648 $ 5,948,975
=========== =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE> 140
COMPURAD, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................. $6,914,453 $3,907,558 $1,521,884 $ 4,682,420 $3,180,345
Cost of revenues............. 3,776,829 2,721,726 963,017 2,458,621 1,879,181
---------- ---------- ---------- ---------- ----------
Gross profit................. 3,137,624 1,185,832 558,867 2,223,799 1,301,164
Operating expenses:
Selling and marketing...... 1,144,449 643,951 297,052 1,111,836 440,828
Research and development... 1,399,635 563,859 330,052 1,074,961 498,975
General and
administrative.......... 913,249 456,994 147,326 880,391 353,556
Amortization of intangible
asset................... -- 203,333 203,334 -- --
Stock-based compensation
and expenses (Note 3)... 367,500 100,000 -- 6,000 361,500
---------- ---------- ---------- ---------- ----------
Loss from operations......... (687,209) (782,305) (418,897) (849,389) (353,695)
Other income (expense)....... 62,657 (10,208) (8,793) 62,503 (7,211)
---------- ---------- ---------- ---------- ----------
Net loss..................... $ (624,552) $ (792,513) $ (427,690) $ (786,886) $ (360,906)
========== ========== ========== ========== ==========
Net loss per common share.... $ (0.21) $ (0.38) $ (0.25) $ (0.20) $ (0.14)
========== ========== ========== ========== ==========
Shares used in computing net
loss per common share...... 2,920,956 2,080,595 1,700,433 3,858,980 2,605,406
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE> 141
COMPURAD, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PAID IN
CAPITAL
COMMON STOCK STOCK DEFERRED
---------------------- SUBSCRIPTIONS COMPEN- ACCUMULATED
SHARES AMOUNT RECEIVABLE SATION DEFICIT TOTAL
--------- ---------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994.................... 1,063,500 $ 11,090 $(6,250) -- $ (131,319) $ (126,479)
Net loss................ -- -- -- -- (427,690) (427,690)
--------- ---------- ------- -------- ----------- -----------
Balance at December 31,
1994.................... 1,063,500 11,090 (6,250) -- (559,009) (554,169)
Exercise of common stock
options.............. 1,122,600 14,876 -- -- -- 14,876
Stock-based compensation
and expenses (Note
3)................... -- -- -- 100,000 -- 100,000
Net loss................ -- -- -- -- (792,513) (792,513)
--------- ---------- ------- -------- ----------- -----------
Balance at December 31,
1995.................... 2,186,100 25,966 (6,250) 100,000 (1,351,522) (1,231,806)
Proceeds of initial
public offering, net
of offering costs of
$933,000............. 1,150,000 5,967,000 -- -- -- 5,967,000
Conversion of debt into
common stock......... 93,480 541,676 -- -- -- 541,676
Exercise of common stock
options and common
stock award.......... 427,680 17,325 -- -- -- 17,325
Collection of stock
subscriptions
receivable........... -- -- 6,250 -- -- 6,250
Stock-based compensation
and expenses (Note
3)................... -- -- -- 367,500 -- 367,500
Net loss................ -- -- -- -- (624,552) (624,552)
--------- ---------- ------- -------- ----------- -----------
Balance at December 31,
1996.................... 3,857,260 6,551,967 -- 467,500 (1,976,074) 5,043,393
--------- ---------- ------- -------- ----------- -----------
Exercise of common stock
options and common
stock award
(unaudited).......... 3,450 5 -- -- -- 5
Stock-based compensation
and expenses
(unaudited)(Note
3)................... -- -- -- 6,000 -- 6,000
Net loss (unaudited).... -- -- -- -- (786,886) (786,886)
--------- ---------- ------- -------- ----------- -----------
Balance at June 30, 1997
(unaudited)............. 3,860,710 $6,551,972 $ -- $473,500 $(2,762,960) $ 4,262,512
========= ========== ======= ======== =========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE> 142
COMPURAD, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1996 1995 1994 1997 1996
----------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................... $ (624,552) $(792,513) $(427,690) $ (786,886) $(360,906)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization........... 74,609 242,618 229,185 113,990 25,270
Stock-based compensations
and expenses........... 367,500 100,000 -- 6,000 361,500
Provision for bad debt.... 80,000 -- -- 60,000 --
Changes in operating assets
and liabilities:
Accounts receivable....... (1,360,037) (31,457) 4,128 (1,371,656) (549,939)
Inventories............... 14,701 (199,577) (101,918) (345,996) 79,303
Prepaid expenses and
other.................. (71,100) (4,689) -- (120,734) (877)
Accounts payable and
accrued expenses....... 339,876 349,131 197,955 193,973 250,312
Customer deposits and
unearned revenue....... (301,638) 382,097 79,391 132,474 13,133
----------- --------- --------- ----------- ---------
Net cash (used in) provided
by operating activities... (1,480,641) 45,610 (18,949) (2,118,835) (182,204)
INVESTING ACTIVITIES:
Purchases of property and
equipment................. (493,990) (31,969) (27,887) (230,669) (26,542)
----------- --------- --------- ----------- ---------
Net cash used in investing
activities................ (493,990) (31,969) (27,887) (230,669) (26,542)
FINANCING ACTIVITIES:
Proceeds from note
payable................... 250,000 -- -- -- 250,000
Principal payments on note
payable................... (250,000) -- -- -- (1,545)
Proceeds from issuance of
common stock.............. 5,990,575 14,876 -- 5 16,044
----------- --------- --------- ----------- ---------
Net cash provided by
financing activities...... 5,990,575 14,876 -- 5 264,499
----------- --------- --------- ----------- ---------
Net increase (decrease) in
cash...................... 4,015,944 28,517 (46,836) (2,349,499) 55,753
Cash and cash equivalents,
beginning of period....... 36,024 7,507 54,343 4,051,968 36,024
----------- --------- --------- ----------- ---------
Cash and cash equivalents,
end of period............. $ 4,051,968 $ 36,024 $ 7,507 $ 1,702,469 $ 91,777
=========== ========= ========= =========== =========
</TABLE>
See accompanying notes.
F-23
<PAGE> 143
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CompuRAD, Inc. ("the Company") develops, manufactures and markets computer
software which captures, stores, distributes and displays electronic medical
images and other types of clinical information and distributes this information
i) between hospitals and physicians, offices and homes; ii) between clinicians
and healthcare delivery systems; and iii) between various departments within
hospitals and clinics. The Company currently operates primarily in North America
and in only one business segment, the medical software industry.
INTERIM FINANCIAL INFORMATION
The financial statements at June 30, 1997 and for the six months ended June
30, 1997 are unaudited, but include all adjustments (consisting only of normal
recurring adjustments) that management considers necessary for a fair
presentation of the financial information set forth herein, in accordance with
generally accepted accounting principles. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results for the entire year.
CASH AND CASH EQUIVALENTS
Cash equivalents include investments (primarily money market accounts and
overnight reverse repurchase agreements) with maturities of three months or less
from the date of purchase. On December 31, 1996, the Company purchased $4
million of U.S. Government Securities from Bank One, Arizona (the "Bank") under
an agreement to resell such securities. The Company did not take possession of
the securities, which were instead held in the Company's safekeeping account at
the Bank. The amortized cost of this investment approximates the market value.
INVENTORIES
The Company values its inventories at the lower of cost or market. Cost is
computed on a first-in, first-out basis. Substantially all inventories are
comprised of finished computer hardware goods purchased from other computer
manufacturers. The Company does not modify any such computer hardware, but
integrates its software into the customer's ordered system.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist primarily of computer
equipment and office furniture. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets, which range from
three to seven years. Accumulated depreciation was $223,825, $109,835 and
$53,226 at June 30, 1997, December 31, 1996 and 1995, respectively.
IMPAIRMENT OF ASSETS
Impairment is recognized in operating results if a permanent decline in
value occurs. The Company will measure possible impairment of its intangible and
tangible assets periodically, by comparing the cash flows generated by those
assets to their carrying values. The Company will periodically evaluate the
useful lives assigned to the various categories of intangible and tangible
assets considering such factors as (i) demand, obsolescence, competition, market
share, and other economic factors; (ii) legal and regulatory provisions; and
(iii) the periods expected to be benefited.
F-24
<PAGE> 144
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
SOFTWARE DEVELOPMENT COSTS
Under Statement of Financial Accounting Standards No. 86, Accounting for
The Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, once
technological feasibility is established related to software development costs
for new products or for enhancements to existing products which extend the
product's useful life, such costs are capitalized up until the time the product
or enhancement is available for release to customers, after which the
capitalized costs are amortized over the estimated life of the products. There
have been no new products or enhancements for which technological feasibility
has been established at June 30, 1997. Through June 30, 1997, all software
development costs have been charged to expense.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This method
gives consideration to the future tax consequences associated with temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes.
STOCK BASED COMPENSATION
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and intends to
continue to do so.
REVENUE RECOGNITION
Revenue from the sale of hardware and software is recognized when the
product has been shipped, and related costs of installation are accrued upon
shipment. Revenue from maintenance, service, and support agreements is
recognized over the term of the agreement, which in most instances is one year.
Revenue from post-contract customer support is recognized in the period the
customer support services are provided. At the request of certain customers, the
Company acquires computer hardware for purposes of configuration with its
software products. The Company expects that this service of acquiring hardware
for resale will be phased out in the next several years.
CREDIT RISK
The Company's products are sold exclusively to entities and individuals in
the healthcare industry. The Company has not experienced significant bad debts
in the past. The Company generally requires customer deposits on orders of up to
50% to mitigate its credit risk. One customer represented 22% and 31% of net
revenues in 1996 and 1995, respectively and 24% and 22% of net revenues for the
six months ended June 30, 1997 and 1996, respectively. No individual customer
represented more than 10% of net revenues in 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash, accounts receivable, and notes payable represent
financial instruments as defined by Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments. The carrying
value of these financial instruments is a reasonable approximation of fair
value.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-25
<PAGE> 145
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER COMMON SHARE
Loss per common share is computed using the weighted average number of
shares of common stock outstanding, except as noted below. Common equivalent
shares from stock options are excluded from the computation when their effect is
antidilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and Staff Policy, common shares, warrants, and
options issued during the period commencing 12 months prior to the initial
filing of the initial public offering at prices below the anticipated public
offering price are presumed to have been in contemplation of the public offering
and have been included in the calculation for periods prior to the initial
public offering, determined using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"),
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. Due to the Company's net losses for the periods presented, the
impact of SFAS No. 128 will not be material.
2. NOTES PAYABLE
NOTE PAYABLE TO RELATED PARTY
Note payable to related party consists of a $250,000 unsecured,
non-interest bearing note to Arizona State Radiology ("ASR") (see Note 6), which
is payable on December 31, 2002. Original issue discount has been recorded to
establish the effective interest rate of the note to 14% per annum. Unamortized
original issue discount totaled $128,065, $132,031 and $150,031 at June 30,
1997, December 31, 1996 and 1995, respectively. Interest expense totaled
$18,000, $12,272 and $10,768 for the years ended December 31, 1996, 1995 and
1994, respectively and $3,966 and $9,000 for the six months ended June 30, 1997
and 1996, respectively.
NOTE PAYABLE TO BANK
On May 6, 1996, the Company received a $250,000 loan and issued a note
payable to a bank which was repaid September 1996. The note was co-signed by a
relative of a Company director and officer, who received options to purchase
75,000 shares of the Company's common stock at $0.007 per share as consideration
for such co-signature. The Company has recognized a charge of $187,500, based on
an estimated fair market value of $2.50 per share, in connection with such
option grant. The note was paid in full upon completion of the Company's initial
public offering.
3. COMMON STOCK
In January 1996, the Company merged with and into CompuMed Teleradiology, a
Delaware corporation. As a result of the merger, a new class of preferred stock
was authorized, and the par value of the Company's stock was changed from no par
to $.01 per share.
On August 28, 1996, the Company completed an initial public offering,
selling 1,000,000 shares of common stock at $6.00 per share. The net proceeds to
the Company were $5,130,000. In connection with the initial public offering,
there was a 150-for-1 stock split. All share and per share amounts have been
F-26
<PAGE> 146
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
retroactively restated to reflect the stock split. On October 1, 1996, the
Company's underwriters exercised a portion of their overallotment option. The
underwriters purchased an additional 150,000 shares of Common Stock from the
Company, resulting in additional net proceeds of $837,000 to the Company.
Warrants for the purchase of 100,000 shares of Common Stock were
outstanding at December 31, 1996, with exercise prices of $7.20 per share. These
warrants are currently exercisable, will terminate in August 2001, and may be
exercised on a net basis.
STOCK BASED COMPENSATION AND EXPENSES
The Company established a non-qualified stock option plan ("the 1994 Plan")
effective October 27, 1994. The exercise price of the options, as well as the
vesting period, are established by the Company's Board of Directors. The Company
does not intend to grant further options under the 1994 Plan. A summary of
activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Balance at October 27, 1994 (inception of
Plan)...................................... -- $ -- $ --
Granted.................................... 637,500 0.050 0.050
Exercised.................................. -- -- --
Canceled................................... -- -- --
---------- ----------- --------------
Balance at December 31, 1994................. 637,500 0.050 0.050
Granted.................................... 917,250 0.00 0.00
Exercised.................................. (1,122,600) 0.00-0.050 0.020
Canceled................................... (54,750) 0.00 0.00
---------- ----------- --------------
Balance at December 31, 1995................. 377,400 0.00-0.050 0.025
Granted.................................... 75,000 0.007 0.007
Exercised.................................. (277,680) 0.00-7.435 0.036
Canceled................................... (3,450) 0.00 0.00
---------- ----------- --------------
Balance at December 31, 1996................. 171,270 0.00-7.435 0.0005
Granted.................................... -- -- --
Exercised.................................. (3,450) 0.007 0.007
Canceled................................... (8,250) 0.00 0.00
---------- ----------- --------------
Balance at June 30, 1997..................... 159,570 $ 0.007 $ 0.007
========= ========== ==========
Options exercisable at June 30, 1997......... 30,810
=========
</TABLE>
All options granted in 1995 had an exercise price of less than $0.005 per
share. The Company recognized stock-based compensation and expenses of $367,500
and $100,000 for the year ended December 31, 1996 and 1995, respectively, and
$6,000 and $361,500 for the six months ended June 30, 1997 and 1996,
respectively, for the difference between the exercise price of stock options and
common stock awards granted in October 1995, March 1996, and April 1996, and the
fair value of the Company's common stock, as estimated by its Board of
Directors. Stock-based compensation and expenses are amortized to expense over
the vesting periods of the underlying awards.
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of Financial
F-27
<PAGE> 147
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), requires use of option valuation models that were not
developed for use in valuing stock options.
Pro forma information regarding net income or loss is required by Statement
123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that Statement. For pro forma disclosure
purposes, the fair value for these options was estimated at the date of grant
using the Minimum Value method, as all options were granted prior to the
Company's initial public offering. The following assumptions were used for 1996
and 1995:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Contractual term of the award....................... 15 years 15 years
Expected life of award.............................. 2 years 2 years
Fair value of stock at grant date................... $1.00-7.44 $0.39
Option exercise price............................... $-- $--
Risk-free interest rate............................. 6% 6%
</TABLE>
Option valuation models require the input of highly subjective assumptions
including the expected exercise life of an award. Because the Company's stock
options have characteristics significantly different from traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma net loss under Statement 123 is not materially different from
historical results.
The weighted-average fair value of options granted was $1.50 per share and
$0.19 per share in 1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan ("1996 Purchase Plan"). A total of 100,000 shares are reserved for
issuance under the 1996 Purchase Plan. The 1996 Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, subject to
certain limitations. The price at which stock is purchased under the 1996
Purchase Plan is equal to 85% of the fair market value of the common stock on
the first day of the applicable offering period or the last day of the
applicable offering period, whichever is lower. No shares have been issued under
the 1996 Purchase Plan.
1996 STOCK OPTION PLAN
In July 1996, the Board of Directors adopted the 1996 Stock Plan ("the 1996
Plan"), reserving 400,000 shares for issuance thereunder. Under the 1996 Plan,
options and stock purchase rights may be granted to the Company's employees,
directors and consultants. Only employees may receive incentive stock options,
which are intended to qualify for certain tax treatment; nonemployees, including
nonemployee directors, may receive nonstatutory stock options, which do not
qualify for such treatment. No options have been granted to nonemployees. The
exercise price of incentive stock options under the 1996 Plan must be at least
equal to the fair market value of the common stock on the date of grant and,
with the exception of the Company's officers whose options vest at the date of
grant, the options generally vest on a cumulative annual basis over a five year
F-28
<PAGE> 148
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
period and expire ten years from the date of grant unless terminated sooner
pursuant to the provisions of the 1996 Plan. A summary of activity under the
1996 Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
------- ----------- --------------
<S> <C> <C> <C>
Balance at July 15, 1996 (inception of Plan)............ -- $ -- $ --
Granted............................................... -- -- --
Exercised............................................. -- -- --
Canceled.............................................. -- -- --
------- ----------- -----
Balance at December 31, 1996............................ -- -- --
Granted............................................... 150,640 5.125-6.60 5.89
Exercised............................................. -- -- --
Canceled.............................................. (44,750) 5.125-6.00 5.84
------- ----------- -----
Balance at June 30, 1997................................ 105,890 $5.125-6.60 $ 5.92
======= =========== =====
Options exercisable at June 30, 1997.................... 34,500
=======
</TABLE>
4. INCOME TAXES
The Company was a subchapter S corporation for income tax purposes prior to
its initial public offering, and all tax attributes of the Company flowed
through to its stockholders. At the date of the offering, deferred taxes were
established for the difference in the financial reporting and tax basis of the
Company's assets and liabilities.
The Company's deferred tax assets at June 30, 1997 and December 31, 1996
approximate $640,000 and $322,000, respectively. The deferred tax assets at each
such date were fully offset by a valuation allowance due to uncertainties
regarding recoverability.
5. OPERATING LEASES
In August 1996, the Company entered into a lease arrangement for a new
facility to conduct its corporate operations. The Company is responsible for
monthly rental payments and certain monthly operating and maintenance expenses
of the facility. The lease expires in 2001. The future minimum rental payments
under this operating lease arrangement are as follows:
<TABLE>
<S> <C>
1997.............................................. $193,001
1998.............................................. 204,702
1999.............................................. 208,755
2000.............................................. 217,104
2001.............................................. 167,661
--------
$991,223
========
</TABLE>
Rent expense totaled $44,196, $39,513 and $31,949 for the years ended
December 31, 1996, 1995 and 1994, respectively and $101,385 and $32,307 for the
six months ended June 30, 1997 and 1996, respectively.
F-29
<PAGE> 149
COMPURAD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997 IS UNAUDITED)
6. RELATED PARTY TRANSACTIONS
The Company's president was, and certain of the Company's stockholders are,
stockholders of ASR. Certain technology was transferred to the Company shortly
after its inception by ASR. The terms and amount to be paid to ASR for such
technology were subject to negotiations between the parties, which were
finalized in July 1996. The final settlement, which is reflected in the
accompanying financial statements if it had occurred on January 1, 1993, called
for the Company to pay ASR a settlement consisting of common stock, a note
payable (see Note 2), and a deferred payment of $541,676 due either in cash or
stock. The technology was valued at $610,000, based on the value of
consideration given, and was amortized over a three year period beginning
January 1, 1993. The technology is fully amortized on the accompanying balance
sheets. The Company issued 93,480 shares of stock to ASR in November 1996 in
compensation of the deferred payment. Subsequently, ASR requested mediation with
the Company related to the number of shares tendered. Should mediation be
unsuccessful, ASR could file litigation against the Company. While the outcome
of such litigation is uncertain, the Company believes it has meritorious
defenses to the claims and intends to conduct a vigorous defense.
7. SUBSEQUENT EVENTS
On July 30, 1997, the Company purchased certain technology from Star
Technologies, Inc., a Delaware corporation, for 100,000 restricted shares of the
Company's Common Stock and future royalties on software sales.
On August 28, 1997, the Company entered into an agreement to acquire
certain assets from Medical Imaging Technology Associates, Inc. for 17,500
shares of common stock, effective April 1998.
On September 28, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization with Lumisys, Inc. ("Lumisys"), subject to the
approval of both stockholder groups. In the merger, each outstanding share of
the Company's outstanding common stock will be converted into the right to
receive 0.928 shares of Lumisys' common stock. In addition, outstanding options
and warrants to purchase the Company's common stock will be converted into
corresponding rights to purchase Lumisys' common stock on the same basis. There
is no assurance that the merger will be successfully completed.
F-30
<PAGE> 150
ANNEX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG:
LUMISYS INCORPORATED
A DELAWARE CORPORATION;
SAC ACQUISITION CORPORATION,
A DELAWARE CORPORATION; AND
COMPURAD, INC.,
A DELAWARE CORPORATION
------------------------
DATED AS OF SEPTEMBER 28, 1997
------------------------
<PAGE> 151
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 1. DESCRIPTION OF TRANSACTION................................................ 1
1.1 Merger of Merger Sub into the Company..................................... 1
1.2 Effect of the Merger...................................................... 1
1.3 Closing; Effective Time................................................... 1
1.4 Certificate of Incorporation and Bylaws; Directors and Officers........... 1
1.5 Conversion of Shares...................................................... 2
1.6 Closing of the Company's Transfer Books................................... 3
1.7 Exchange of Certificates.................................................. 3
1.8 Dissenting Shares......................................................... 4
1.9 Tax Consequences.......................................................... 5
1.10 Accounting Consequences................................................... 5
1.11 Further Action............................................................ 5
Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. 5
2.1 Due Organization; Subsidiaries; Etc....................................... 5
2.2 Certificate of Incorporation and Bylaws................................... 5
2.3 Capitalization, Etc....................................................... 5
2.4 SEC Filings; Financial Statements......................................... 7
2.5 Absence of Changes........................................................ 7
2.6 Title to Assets........................................................... 8
2.7 Receivables............................................................... 9
2.8 Real Property; Equipment; Leasehold....................................... 9
2.9 Proprietary Assets........................................................ 9
2.10 Contracts................................................................. 11
2.11 Liabilities............................................................... 12
2.12 Compliance with Legal Requirements........................................ 12
2.13 Certain Business Practices................................................ 12
2.14 Governmental Authorizations............................................... 12
2.15 Tax Matters............................................................... 12
2.16 Employee and Labor Matters; Benefit Plans................................. 13
2.17 Environmental Matters..................................................... 15
2.18 Insurance................................................................. 15
2.19 Transactions with Affiliates.............................................. 15
2.20 Legal Proceedings; Orders................................................. 15
2.21 Authority; Binding Nature of Agreement.................................... 16
2.22 No Existing Discussions................................................... 16
2.23 Accounting Matters........................................................ 16
2.24 Vote Required............................................................. 16
2.25 Non-Contravention; Consents............................................... 16
2.26 Fairness Opinion.......................................................... 17
2.27 Financial Advisor......................................................... 17
2.28 Section 203 of the DGCL Not Applicable.................................... 17
Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 17
3.1 Organization, Standing and Power.......................................... 17
3.2 Certificate of Incorporation and Bylaws................................... 18
3.3 Capitalization, Etc....................................................... 18
3.4 SEC Filings; Financial Statements......................................... 19
</TABLE>
i
<PAGE> 152
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.5 Absence of Certain Changes or Events...................................... 19
3.6 Title to Assets........................................................... 20
3.7 Receivables............................................................... 20
3.8 Real Property; Equipment; Leasehold....................................... 20
3.9 Proprietary Assets........................................................ 20
3.10 Contracts................................................................. 21
3.11 Liabilities............................................................... 22
3.12 Compliance with Legal Requirements........................................ 22
3.13 Certain Business Practices................................................ 22
3.14 Governmental Authorizations............................................... 22
3.15 Tax Matters............................................................... 23
3.16 Employee and Labor Matters; Benefit Plans................................. 23
3.17 Environmental Matters..................................................... 23
3.18 Insurance................................................................. 24
3.19 Transactions with Affiliates.............................................. 24
3.20 Legal Proceedings; Orders................................................. 24
3.21 Authority; Binding Nature of Agreement.................................... 24
3.22 Vote Required............................................................. 25
3.23 Non-Contravention; Consents............................................... 25
3.24 No Existing Discussions................................................... 25
3.25 Accounting Matters........................................................ 25
3.26 Financial Advisor......................................................... 25
3.27 Fairness Opinion.......................................................... 25
3.28 Valid Issuance............................................................ 25
Section 4. CERTAIN COVENANTS OF THE PARTIES.......................................... 25
4.1 Access and Investigation.................................................. 25
4.2 Operation of the Company's Business....................................... 25
4.3 Operation of Parent's Business............................................ 27
4.4 No Solicitation........................................................... 28
Section 5. ADDITIONAL COVENANTS OF THE PARTIES....................................... 29
5.1 Registration Statement; Joint Proxy Statement............................. 29
5.2 Company Stockholders' Meeting............................................. 30
5.3 Parent Stockholders' Meeting.............................................. 31
5.4 Regulatory Approvals...................................................... 31
5.5 Stock Options, Warrants, and Employee Stock Purchase Plans................ 31
5.6 Indemnification of Officers and Directors................................. 33
5.7 Pooling of Interests...................................................... 34
5.8 Additional Agreements..................................................... 34
5.9 Disclosure................................................................ 34
5.10 Affiliate Agreements...................................................... 34
5.11 Tax Matters............................................................... 34
5.12 Comfort Letters........................................................... 35
5.13 Resignation of Officers and Directors..................................... 35
5.14 Appointment of Additional Directors....................................... 35
5.15 Consents.................................................................. 35
5.16 Financial Information and Reporting....................................... 35
Section 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.............. 35
6.1 Accuracy of Representations............................................... 35
</TABLE>
ii
<PAGE> 153
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.2 Performance of Covenants.................................................. 36
6.3 Effectiveness of Registration Statement................................... 36
6.4 Stockholder Approval...................................................... 36
6.5 Agreements and Documents.................................................. 36
6.6 No Material Adverse Effect................................................ 37
6.7 Listing................................................................... 37
6.8 No Restraints............................................................. 37
6.9 No Governmental Litigation................................................ 37
Section 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY......................... 37
7.1 Accuracy of Representations............................................... 37
7.2 Performance of Covenants.................................................. 37
7.3 Effectiveness of Registration Statement................................... 37
7.4 Stockholder Approval...................................................... 37
7.5 Documents................................................................. 37
7.6 No Material Adverse Effect................................................ 38
7.7 Listing................................................................... 38
7.8 No Restraints............................................................. 38
Section 8. TERMINATION............................................................... 38
8.1 Termination............................................................... 38
8.2 Effect of Termination..................................................... 40
8.3 Expenses; Termination Fees................................................ 40
Section 9. MISCELLANEOUS PROVISIONS.................................................. 41
9.1 Amendment................................................................. 41
9.2 Waiver.................................................................... 41
9.3 No Survival of Representations and Warranties............................. 41
9.4 Entire Agreement; Counterparts; Applicable Law; Jurisdiction.............. 42
9.5 Attorneys' Fees........................................................... 42
9.6 Assignability............................................................. 42
9.7 Notices................................................................... 42
9.8 Construction.............................................................. 43
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A -- Certain definitions
Exhibit B -- Form of Certificate of Incorporation of Surviving Corporation
Exhibit C -- Form of Affiliate Agreement
Exhibit D -- Continuity of Interest Certificate
Exhibit E -- Form of Employment Offer Letter
Exhibit F -- Individuals to execute Employment Offer Letters
Exhibit G -- Voting Agreement
Exhibit H -- Individuals to execute the Voting Agreement
</TABLE>
iii
<PAGE> 154
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of September 28, 1997, by and among: LUMISYS INCORPORATED a
Delaware corporation ("Parent"); SAC ACQUISITION CORPORATION, a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); and
COMPURAD, INC., a Delaware corporation (the "Company"). Certain capitalized
terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will
cease to exist, and the Company will become a wholly owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For financial reporting purposes, it is intended that the
Merger be accounted for as a "pooling of interests."
C. The respective Boards of Directors of Parent, Merger Sub and the Company
have approved this Agreement and approved the Merger.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on a date to be designated by Parent (the "Closing
Date"), which (subject to the satisfaction or waiver of the conditions set forth
in Sections 6 and 7) shall be no later than the tenth business day after the
satisfaction of the latest to occur of the conditions set forth in Sections 6.4
and 7.4. Contemporaneously with or as promptly as practicable after the Closing,
a properly executed certificate of merger conforming to the requirements of the
DGCL (the "Certificate of Merger") shall be filed with the Secretary of State of
the State of Delaware. The Merger shall take effect at the time the Certificate
of Merger is filed with the Secretary of State of the State of Delaware (the
"Effective Time").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND
OFFICERS. Unless otherwise determined by Parent prior to the Effective Time:
(a) the Certificate of Incorporation of the Surviving Corporation
shall be amended and restated as of the Effective Time to conform to
Exhibit B;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time; and
1
<PAGE> 155
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the respective individuals
who are directors and officers of Merger Sub immediately prior to the
Effective Time.
1.5 CONVERSION OF SHARES
(a) At the Effective Time, by virtue of the Merger and without any
further action on the part of Parent, Merger Sub, the Company or any
stockholder of the Company:
(i) any shares of Company Common Stock then held by the Company or
any Subsidiary of the Company (or held in the Company's treasury) shall
be canceled and retired and shall cease to exist, and no consideration
shall be delivered in exchange therefor;
(ii) any shares of Company Common Stock then held by Parent, Merger
Sub or any other Subsidiary of Parent shall be canceled and retired and
shall cease to exist, and no consideration shall be delivered in
exchange therefor;
(iii) except as provided in clauses "(i)" and "(ii)" above and
subject to Sections 1.5(b), 1.5(d), 1.5(e) and 1.8, each share of
Company Common Stock then outstanding shall be converted into the right
to receive 0.9280 of a share of Parent Common Stock, which shares shall
have been registered under the Securities Act pursuant to a registration
statement on Form S-4 as described in Section 5.1 hereof; and
(iv) each share of the common stock, $0.001 par value per share, of
Merger Sub then outstanding shall be converted into one share of common
stock of the Surviving Corporation.
(b) The fraction of a share of Parent Common Stock specified in
Section 1.5(a)(iii) (as such fraction may be adjusted in accordance with
this Section 1.5(b)) is referred to as the "Exchange Ratio." If, between
the date of this Agreement and the Effective Time, the outstanding shares
of Company Common Stock or Parent Common Stock are changed into a different
number or class of shares by reason of any stock split, stock dividend,
reverse stock split, reclassification, recapitalization or other similar
transaction, then the Exchange Ratio shall be appropriately adjusted.
(c) In accordance with rules and regulations relating to pooling of
interests accounting, if any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any
applicable restricted stock purchase agreement or other agreement with the
Company or under which the Company has any rights, then the shares of
Parent Common Stock issued in exchange for such shares of Company Common
Stock will also be unvested and subject to the same repurchase option, risk
of forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends. The Company shall take all action that may be necessary to ensure
that, from and after the Effective Time, Parent is entitled to exercise any
such repurchase option or other right set forth in any such restricted
stock purchase agreement or other agreement.
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates or scrip for any such
fractional shares shall be issued. Any holder of Company Common Stock who
would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common
Stock issuable to such holder) shall, in lieu of such fraction of a share
and, upon surrender of such holder's Company Stock Certificate(s) (as
defined in Section 1.6), be paid in cash the dollar amount (rounded to the
nearest whole cent), without interest, determined by multiplying such
fraction by the closing price of a share of Parent Common Stock on the
Nasdaq National Market System on the date the Merger becomes effective.
2
<PAGE> 156
(e) If there are any Excess Company Merger Expenses (as defined in
Section 8.3(a)), the Exchange Ratio shall be adjusted as follows:
<TABLE>
<S> <C> <C> <C> <C>
New Exchange Ratio = Exchange Ratio X (Number of Company Common
Stock to be exchanged in the
Merger + Company Options (as
defined in Section 2.3) and
Company Warrants (as defined
in Section 2.3) X
7.50 -- Excess Company Merger
Expenses
-----------------------------
7.50 X Number of Company
Common Stock to be exchanged
in the Merger + Company
Options and Company Warrants)
</TABLE>
1.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time shall automatically be canceled and retired and shall cease to
exist, and all holders of certificates representing shares of Company Common
Stock that were outstanding immediately prior to the Effective Time shall cease
to have any rights as stockholders of the Company; and (b) the stock transfer
books of the Company shall be closed with respect to all shares of Company
Common Stock outstanding immediately prior to the Effective Time. No further
transfer of any such shares of Company Common Stock shall be made on such stock
transfer books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of Company Common Stock
(a "Company Stock Certificate") is presented to the Exchange Agent (as defined
in Section 1.7) or to the Surviving Corporation or Parent, such Company Stock
Certificate shall be canceled and shall be exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) On or prior to the Closing Date, Parent shall select a reputable
bank or trust company to act as exchange agent in the Merger (the "Exchange
Agent"). Promptly after the Effective Time, Parent shall deposit with the
Exchange Agent (i) certificates representing the shares of Parent Common
Stock issuable pursuant to this Section 1, and (ii) cash sufficient to make
payments in lieu of fractional shares in accordance with Section 1.5(d).
The shares of Parent Common Stock and cash amounts so deposited with the
Exchange Agent, together with any dividends or distributions received by
the Exchange Agent with respect to such shares, are referred to
collectively as the "Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, (but
in any event within 10 business days thereafter) Parent shall cause the
Exchange Agent to mail to the holders of Company Stock Certificates (i) a
letter of transmittal in customary form and containing such provisions as
Parent may reasonably specify (including a provision confirming that
delivery of Company Stock Certificates shall be effected, and risk of loss
and title to Company Stock Certificates shall pass, only upon delivery of
such Company Stock Certificates to the Exchange Agent), and (ii)
instructions for use in effecting the surrender of Company Stock
Certificates in exchange for certificates representing Parent Common Stock.
Upon surrender of a Company Stock Certificate to the Exchange Agent for
exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by the Exchange Agent or
Parent, (A) the holder of such Company Stock Certificate shall be entitled
to receive in exchange therefor a certificate representing the number of
whole shares of Parent Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.5 (and cash in lieu of any
fractional share of Parent Common Stock and any dividends or other
distributions to which such holder is entitled pursuant to Section 1.7(c)),
and (B) the Company Stock Certificate so surrendered shall be canceled.
Until surrendered as contemplated by this Section 1.7, each Company Stock
Certificate shall be deemed, from and after the Effective Time, to
represent only the right to receive shares of Parent Common Stock (and cash
in lieu of any fractional share of Parent Common Stock and any dividends or
other distributions to which such holder is entitled pursuant to Section
1.7(c)) as contemplated by
3
<PAGE> 157
Section 1. If any Company Stock Certificate shall have been lost, stolen or
destroyed, Parent may, in its discretion and as a condition precedent to
the issuance of any certificate representing Parent Common Stock, require
the owner of such lost, stolen or destroyed Company Stock Certificate to
provide an appropriate affidavit and to deliver a bond (in such sum as
Parent may reasonably direct) as indemnity against any claim that may be
made against the Exchange Agent, Parent or the Surviving Corporation with
respect to such Company Stock Certificate.
(c) No dividends or other distributions declared or made with respect
to Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of any fractional shares shall be paid to such holder,
until such holder surrenders such Company Stock Certificate in accordance
with this Section 1.7 (at which time such holder shall be entitled, subject
to the effect of applicable escheat or similar laws, to receive all such
dividends and distributions, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to
holders of Company Stock Certificates as of the date 180 days after the
date on which the Merger becomes effective shall be delivered to Parent
upon demand, and any holders of Company Stock Certificates who have not
theretofore surrendered their Company Stock Certificates in accordance with
this Section 1.7 shall thereafter look only to Parent for satisfaction of
any claims for Parent Common Stock, cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to
Parent Common Stock.
(e) Each of the Exchange Agent, Parent and the Surviving Corporation
shall be entitled to deduct and withhold from any consideration payable or
otherwise deliverable pursuant to this Agreement to any holder or former
holder of Company Common Stock such amounts as may be required to be
deducted or withheld therefrom under the Code or any provision of state,
local or foreign tax law or under any other applicable Legal Requirement.
To the extent such amounts are so deducted or withheld, such amounts shall
be treated for all purposes under this Agreement as having been paid to the
Person to whom such amounts would otherwise have been paid.
(f) Neither Parent nor the Surviving Corporation shall be liable to
any holder or former holder of Company Common Stock or to any other Person
with respect to any shares of Parent Common Stock (or dividends or
distributions with respect thereto), or for any cash amounts, delivered to
any public official pursuant to any applicable abandoned property law,
escheat law or similar Legal Requirement.
1.8 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of Company Common Stock outstanding immediately prior
to the Effective Time that were not voted in favor of the Merger and are
held by stockholders who have complied with the applicable provisions of
Title 8, Section 262 of the DGCL ("Dissenting Shares") shall not be
converted into or represent the right to receive Parent Common Stock in
accordance with Section 1.5(a)(iii) (or cash in lieu of fractional shares
in accordance with Section 1.5(d)), and each holder of Dissenting Shares
shall be entitled only to such rights as may be granted to such holder
under Title 8, Section 262 of the DGCL. From and after the Effective Time,
a holder of Dissenting Shares shall not have and shall not be entitled to
exercise any of the voting rights or other rights of a stockholder of the
Surviving Corporation. If any holder of Dissenting Shares shall fail to
assert or perfect, or shall waive, rescind, withdraw or otherwise lose,
such holder's right to dissent and obtain payment under Title 8, Section
262 of the DGCL, then such shares shall automatically be converted into and
shall represent only the right to receive (upon the surrender of Company
Stock Certificate(s) previously representing such shares) Parent Common
Stock in accordance with Section 1.5(a)(iii) (and cash in lieu of any
fractional share in accordance with Section 1.5(d) and any dividends or
other distributions to which such holder is entitled pursuant to Section
1.7(c)).
4
<PAGE> 158
(b) The Company: (i) shall promptly notify Parent in writing of any
notice received by the Company of a stockholder's intent to demand payment
for such stockholder's shares of Company Common Stock pursuant to Title 8,
Section 262 of the DGCL, and shall promptly notify Parent in writing of any
other notice, demand or instrument delivered to the Company pursuant to the
DGCL; and (ii) shall give Parent's Representatives the opportunity to
participate in all negotiations and proceedings with respect to any such
notice, demand or instrument. The Company shall not make any payment or
settlement offer with respect to any such notice or demand unless Parent
shall have consented in writing to such payment or settlement offer.
1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 ACCOUNTING CONSEQUENCES. For financial reporting purposes, the Merger
is intended to be accounted for as a "pooling of interests."
1.11 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that, except
as set forth in the Company SEC Documents (as defined in Section 2.4(a)) or in
the Company Disclosure Schedule:
2.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) The Company has no Subsidiaries; and the Company does not own any
capital stock of, or any equity interest of any nature in, any other
Entity, other than the Entities identified in Part 2.1(a)(ii) of the
Company Disclosure Schedule. The Company has not agreed nor is obligated to
make, nor is bound by any Contract under which it may become obligated to
make, any future investment in or capital contribution to any other Entity.
The Company has not, at any time, been a general partner of any general
partnership, limited partnership or other Entity.
(b) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation
and has all necessary power and authority: (i) to conduct its business in
the manner in which its business is currently being conducted; (ii) to own,
lease and use its assets in the manner in which its assets are currently
owned, leased and used; and (iii) to perform its obligations under all
Contracts by which it is bound.
(c) The Company is qualified to do business as a foreign corporation,
and is in good standing, under the laws of all jurisdictions where the
nature of its business requires such qualification and where the failure to
be so qualified would have a Material Adverse Effect on the Company.
(d) The Company has not conducted any business under or otherwise
used, for any purpose or in any jurisdiction, any fictitious name, assumed
name, trade name, or other name, other than the names set forth in Part
2.1(d) of the Company's Disclosure Schedule.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has delivered to
Parent accurate and complete copies of its certificate of incorporation and
bylaws, in each case as amended as of the date of this Agreement.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Company consists of: (i)
20,000,000 shares of Company Common Stock, of which 3,962,750 shares have
been issued and are outstanding and of which no shares
5
<PAGE> 159
are held by the Company in its treasury as of the date of this Agreement;
and (ii) 5,000,000 shares of Preferred Stock, $0.01 par value per share, of
which no shares are outstanding or are held by the Company in its treasury
as of the date of this Agreement. All of the outstanding shares of Company
Common Stock have been duly authorized and validly issued, and are fully
paid and nonassessable. Except as set forth in Part 2.3(a)(i) of the
Company Disclosure Schedule: (i) none of the outstanding shares of Company
Common Stock is entitled or subject to any preemptive right, right of
participation, right of maintenance or any similar right; (ii) none of the
outstanding shares of Company Common Stock is subject to any right of first
refusal in favor of the Company; and (iii) there is no Company Contract
relating to the voting or registration of, or restricting any Person from
purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of Company Common
Stock. The Company is not under any obligation, nor is it bound by any
Contract pursuant to which it may become obligated, to repurchase, redeem
or otherwise acquire any outstanding shares of Company Common Stock.
(b) At the close of business on September 25, 1997: (i) 151,410 shares
of Company Common Stock were subject to issuance pursuant to outstanding
options to purchase shares of Company Common Stock under the Company's 1994
Stock Option Plan; (ii) 179,790 shares of Company Common Stock were subject
to issuance pursuant to outstanding options to purchase shares of Company
Common Stock under the Company's 1996 Stock Option Plan; and (iii) 100,000
shares of Company Common Stock were subject to issuance pursuant to rights
to purchase shares of Company Common Stock under the 1996 Employee Stock
Purchase Plan. (Stock options granted by the Company pursuant to the 1994
Stock Option Plan and the 1996 Stock Option Plan are referred to in this
Agreement as "Company Options"; the 1994 Stock Option Plan and the 1996
Stock Option Plan are collectively referred to as the "Company Stock
Plans.") As of close of business on September 25, 1997, 100,000 shares of
Company Common Stock were subject to issuance pursuant to outstanding
warrants to purchase Company Common Stock (the "Company Warrants"). Part
2.3(b)(i) of the Company Disclosure Schedule sets forth the following
information with respect to each Company Option outstanding as of the date
of this Agreement: (i) the particular plan pursuant to which such Company
Option was granted; (ii) the name of the optionee; (iii) the number of
shares of Company Common Stock subject to such Company Option; (iv) the
exercise price of such Company Option; (v) the date on which such Company
Option was granted; (vi) the applicable vesting schedules, and the extent
to which such Company Option is vested and exercisable as of the date of
this Agreement; and (vii) the date on which such Company Option expires.
The Company has delivered to Parent accurate and complete copies of all
stock option plans pursuant to which the Company has ever granted stock
options, and the forms of all stock option agreements evidencing such
options. Part 2.3(b)(ii) of the Company Disclosure Schedule sets forth the
following information with respect to each Company Warrant: (i) the name of
the holder of such Company Warrant; (ii) the number of shares of Company
Common Stock subject to such Company Warrant; (iii) the exercise price of
such Company Warrant; (iv) the date on which such Company Warrant was
issued; (v) vesting and (vi) the date on which such Company Warrant
expires. The Company has delivered to Parent an accurate and complete copy
of each Company Warrant.
(c) Other than the Company Options and the Company Warrants, there is
no: (i) outstanding subscription, option, call, warrant or right (whether
or not currently exercisable) to acquire any shares of the capital stock or
other securities of the Company; (ii) outstanding security, instrument or
obligation that is or may become convertible into or exchangeable for any
shares of the capital stock or other securities of the Company; (iii)
stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which the Company is or may become obligated to
sell or otherwise issue any shares of its capital stock or any other
securities; or (iv) condition or circumstance that may give rise to or
provide a basis for the assertion of a claim by any Person to the effect
that such Person is entitled to acquire or receive any shares of capital
stock or other securities of the Company.
(d) All outstanding shares of Company Common Stock, all outstanding
Company Options, all outstanding warrants to purchase Company Common Stock
and all outstanding shares of capital stock of
6
<PAGE> 160
the Company have been issued and granted in compliance with (i) all
applicable securities laws and other applicable Legal Requirements, and
(ii) all requirements set forth in applicable Contracts.
2.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent accurate and complete copies
of all registration statements, proxy statements and other statements,
reports, schedules, forms and other documents filed by the Company with the
SEC since December 31, 1996 (the "Company SEC Documents"), including the
Company's registration statement on Form SB-2 filed with the SEC on August
28, 1996. All statements, reports, schedules, forms and other documents
required to have been filed by the Company with the SEC have been so filed.
As of the time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing): (i) each of the Company SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of the Company 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 the light of the circumstances under
which they were made, not misleading.
(b) The financial statements (including any related notes) contained
in the Company SEC Documents ("Company Financial Statements"): (i) complied
as to form in all material respects with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods covered (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-QSB of the SEC, and except that the unaudited
financial statements may not contain footnotes and are subject to normal
and recurring year-end adjustments which will not, individually or in the
aggregate, be material in amount), and (iii) fairly present the financial
position of the Company as of the respective dates thereof and the results
of operations and cash flows of the Company for the periods covered
thereby.
(c) The Company has delivered to Parent an unaudited balance sheet of
the Company as of June 30, 1997 (the "Company Unaudited Interim Balance
Sheet"), and the related unaudited statement of operations, statement of
stockholders' equity and statement of cash flows of the Company for the
quarter then ended. The financial statements referred to in this Section
2.4(c): (i) were prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the basis on which the
financial statements referred to in Section 2.4(b) were prepared (except
that such financial statements do not contain footnotes and are subject to
normal and recurring year-end adjustments which will not, individually or
in the aggregate, be material in amount), and (ii) fairly present the
financial position of the Company as of June 30, 1997 thereof and the
results of operations and cash flows of the Company for the six month
period ended June 30, 1997.
2.5 ABSENCE OF CHANGES. Except as disclosed in the Company SEC Documents,
since June 30, 1997:
(a) there has not been any Material Adverse Effect on the Company;
(b) the Company has not (i) declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(c) the Company has not sold, issued or granted, or authorized the
issuance of (i) any capital stock or other security (except for Company
Common Stock issued upon the exercise of outstanding Company Options and
outstanding Company Warrants), (ii) any option, warrant or right to acquire
any capital stock or any other security (except for Company Options
described in Part 2.3(b)(i) of the Company Disclosure Schedule), or (iii)
any instrument convertible into or exchangeable for any capital stock or
other security;
(d) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of any of
the Company's Stock Plans, (ii) any provision of any
7
<PAGE> 161
agreement evidencing any outstanding Company Option, (iii) any restricted
stock purchase agreement, or (iv) any provision of any agreement evidencing
any outstanding Company Warrant;
(e) there has been no amendment to the certificate of incorporation,
bylaws or other charter or organizational documents of the Company, and the
Company has not effected or been a party to any merger, consolidation,
share exchange, business combination, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(f) the Company has not formed any Subsidiary or acquired any equity
interest or other interest in any other Entity;
(g) the Company has not made any capital expenditure which, when added
to all other capital expenditures made on behalf of the Company since June
30, 1997, exceeds $100,000 in the aggregate;
(h) except in the ordinary course of business and consistent with past
practices, the Company has not (i) entered into or permitted any of the
assets owned or used by it to become bound by any Material Contract (as
defined in Section 2.10), or (ii) amended or terminated, or waived any
material right or remedy under, any Material Contract;
(i) the Company has not (i) acquired, leased or licensed any material
right or other material asset from any other Person, (ii) sold or otherwise
disposed of, or leased or licensed, any material right or other material
asset to any other Person, or (iii) waived or relinquished any right,
except for rights or other assets acquired, leased, licensed or disposed of
in the ordinary course of business and consistent with past practices;
(j) the Company has not written off as uncollectible, or established
any extraordinary reserve with respect to, any account receivable or other
indebtedness;
(k) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with past practices;
(l) the Company has not (i) lent money to any Person, or (ii) incurred
or guaranteed any indebtedness for borrowed money except for advances to
customers and employees (other than customers and employees who are also
affiliates of the Company as identified in Part 2.19 of the Company
Disclosure Schedule) in the ordinary course of business and consistent with
past practices;
(m) the Company has not (i) established or adopted any Plan, Welfare
Plan or Pension Plan (as defined in Section 2.16), (ii) caused or permitted
any Plan, Welfare Plan or Pension Plan to be amended in any material
respect, (iii) paid any bonus or made any profit-sharing or similar payment
to, or materially increased the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees, or (iv) hired any new employees;
(n) the Company has not changed any of its methods of accounting or
accounting practices (i) having a Material Adverse Effect on the Company or
(ii) that may have an effect on rules and regulations related to pooling of
interests accounting, except insofar as such change is required by a change
in generally accepted accounting principles;
(o) the Company has not made any Tax election that could have a
Material Adverse Effect on the Company;
(p) the Company has not entered into any material transaction or taken
any other material action outside the ordinary course of business or
inconsistent with past practices; and
(q) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(p)" above.
2.6 TITLE TO ASSETS. The Company owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: (a) all assets
reflected on the Company Unaudited Interim Balance Sheet; and (b) all other
assets reflected in the books and records of the Company as being owned by the
8
<PAGE> 162
Company. All of said assets are owned by the Company free and clear of any
Encumbrances, except for (i) any lien for current taxes not yet due and payable,
(ii) liens that have arisen in the ordinary course of business and that do not
(in any case or in the aggregate) materially detract from the value of the
assets subject thereto or materially impair the operations of the Company, and
(iii) liens described in Part 2.6 of the Company Disclosure Schedule.
2.7 RECEIVABLES.
(a) Except as set forth on the Part 2.7(a) of the Company's Disclosure
Schedule, all existing accounts receivable of the Company (including those
accounts receivable reflected on the Company Unaudited Interim Balance
Sheet that have not yet been collected and those accounts receivable that
have arisen since June 30, 1997 and have not yet been collected) represent
valid obligations of customers of the Company arising from bona fide
transactions entered into in the ordinary course of business. All existing
accounts receivable of the Company (including those accounts receivable
reflected on the Company's Unaudited Interim Balance Sheet that have not
yet been collected and those accounts receivable as of September 30, 1997)
are current and, to the Company's knowledge will be collected in full when
due, without any counterclaim or set off (net of an allowance for doubtful
accounts which shall not exceed $150,000 in the aggregate).
(b) Part 2.7(b) of the Company Disclosure Schedule contains an
accurate and complete list as of the date of this Agreement of all loans
and advances made by Company to any employee, director, consultant or
independent contractor other than routine travel advances made to employees
in the ordinary course of business.
2.8 REAL PROPERTY; EQUIPMENT; LEASEHOLD. The Company does not own any real
property or any interest in real property, except for the leasehold created
under the real property lease previously made available to Parent by the Company
and listed on Part 2.8(a) of the Company Disclosure Schedule.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9(a)(i) of the Company Disclosure Schedule identifies each
Proprietary Asset owned by the Company and registered with any Governmental
Body or for which an application has been filed with any Governmental Body
and the names of the jurisdictions covered by the applicable registration
or application. Part 2.9(a)(ii) of the Company Disclosure Schedule
identifies all other Proprietary Assets owned by the Company. Part
2.9(a)(iii) of the Company Disclosure Schedule identifies any ongoing
royalty or payment obligations of the Company in excess of $10,000 with
respect to, each Proprietary Asset that is licensed or otherwise made
available to the Company by a third party (except for any Proprietary Asset
that is licensed to the Company under any third party software license
generally available to the public), and identifies the Contract under which
such Proprietary Asset is being licensed or otherwise made available to the
Company. The Company has good, valid and marketable title to all of the
Company Proprietary Assets identified in Parts 2.9(a)(i) and 2.9(a)(ii)
(except for Proprietary Assets licensed to the Company by a third party) of
the Company Disclosure Schedule, free and clear of all Encumbrances, except
for (i) any lien for current taxes not yet due and payable, and (ii) minor
liens that have arisen in the ordinary course of business and that do not
(individually or in the aggregate) materially detract from the value of the
assets subject thereto or materially impair the operations of the Company.
The Company has a valid right to use, license and otherwise exploit
(subject to the terms of any Company Contract pursuant to which Proprietary
Assets have been licensed to the Company by a third party) all Proprietary
Assets identified in Parts 2.9(a)(i), 2.9(a)(ii)(with respect to
Proprietary Assets licensed to the Company by a third party) and
2.9(a)(iii) of the Company Disclosure Schedule. Except as set forth in Part
2.9(a)(iv) of the Company Disclosure Schedule, the Company has not
developed jointly with any other Person any Company Proprietary Asset that
is material to the business of the Company as currently conducted or
proposed to be conducted with respect to which such other Person has any
rights. Except as set forth in Part 2.9(a)(v) of the Company Disclosure
Schedule, there is no Company Contract (with the exception of end user
license agreements in the form previously delivered by the Company to
Parent) pursuant to which any Person has any right (whether or not
currently exercisable) to use, license or otherwise exploit any Company
Proprietary Asset.
9
<PAGE> 163
(b) The Company has taken reasonable measures and precautions to
protect and maintain the confidentiality, secrecy and value of all material
Company Proprietary Assets (except Company Proprietary Assets whose value
would be unimpaired by disclosure). Without limiting the generality of the
foregoing, except as set forth in Part 2.9(b) of the Company Disclosure
Schedule, (i) all current and former employees of the Company who are or
were involved in, or who have contributed to, the creation or development
of any material Company Proprietary Asset have executed and delivered to
the Company an agreement (containing no exceptions to or exclusions from
the scope of its coverage) that is substantially identical to the form of
Non-Disclosure Agreement previously delivered by the Company to Parent, and
(ii) all current and former consultants and independent contractors to the
Company who are or were involved in, or who have contributed to, the
creation or development of any material Company Proprietary Asset have
executed and delivered to the Company an agreement (containing no
exceptions to or exclusions from the scope of its coverage) that is
substantially identical to the form of Consultant Confidential Information
and Invention Assignment Agreement previously delivered to Parent. No
current or former employee, officer, director, stockholder, consultant or
independent contractor has any valid right, claim or interest in or with
respect to any Company Proprietary Asset.
(c) Except as set forth in Part 2.9(c) of the Company Disclosure
Schedule: (i) all trademarks, service marks, copyrights, and to the
knowledge of the Company, patents, held by the Company are valid,
enforceable and subsisting; (ii) none of the Company Proprietary Assets and
no Proprietary Asset that is currently being developed by the Company
(either by itself or with any other Person) infringes, misappropriates or
conflicts with any Proprietary Asset owned or used by any other Person;
(iii) none of the products that are or have been designed, created,
developed, assembled, manufactured or sold by the Company is infringing,
misappropriating or making any unlawful or unauthorized use of any
Proprietary Asset owned or used by any other Person, and none of such
products has at any time infringed, misappropriated or made any unlawful or
unauthorized use of, and the Company has not received any notice or other
communication (in writing or otherwise) of any actual, alleged, possible or
potential infringement, misappropriation or unlawful or unauthorized use
of, any Proprietary Asset owned or used by any other Person; and (iv) no
other Person is infringing, misappropriating or making any unlawful or
unauthorized use of, and no Proprietary Asset owned or used by any other
Person infringes or conflicts with, any material Company Proprietary Asset.
(d) The Company Proprietary Assets constitute all the Proprietary
Assets necessary to enable the Company to conduct its business in the
manner in which such business has been and is being conducted and in the
manner in which such business is currently proposed to be conducted by the
Company. The Company has not (i) licensed any of the material Company
Proprietary Assets to any Person on an exclusive basis, or (ii) entered
into any covenant not to compete or Contract limiting its ability to
exploit fully any material Company Proprietary Assets or to transact
business in any market or geographical area or with any Person.
(e) Except as set forth in Part 2.9(e)(i) of the Company Disclosure
Schedule, the Company has not disclosed or delivered to any Person, or
permitted the disclosure or delivery to any escrow agent or other Person,
of the source code, or any portion or aspect of the source code, or any
proprietary information or algorithm contained in any source code, of any
Company Proprietary Asset. Part 2.10(a)(ii) of the Company Disclosure
Schedule identifies each Contract pursuant to which the Company has
deposited or is required to deposit with an escrowholder or any other
Person the source code, or any portion or aspect of the source code, or any
proprietary information or algorithm contained in or relating to any source
code, of any Company Proprietary Asset (the "Escrow Contracts"), and
further describes whether the execution of this Agreement or the
consummation of any of the transactions contemplated hereby could
reasonably be expected to result in the release or disclosure of the source
code, or any portion or aspect of the source code, or any proprietary
information or algorithm contained in or relating to any source code, of
any material Company Proprietary Asset. To the Company's knowledge, no
event has occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) will, or could reasonably be expected to,
result in the disclosure or delivery to any Person of the source code, or
any portion or aspect of the source code, or any proprietary information or
algorithm
10
<PAGE> 164
contained in any source code, of any material Company Proprietary Asset,
pursuant to the terms of any Escrow Contract.
2.10 CONTRACTS.
(a) Part 2.10 of the Company Disclosure Schedule identifies each
Company Contract that constitutes a "Material Contract" that has not
already been disclosed in the Company SEC Documents. (For purposes of this
Agreement, each of the following and each of the Contracts filed as part of
the Company SEC Documents shall be deemed to constitute a "Material
Contract"):
(i) any Contract relating to the employment of, or the performance
of services by, any employee or consultant, and any Contract pursuant to
which the Company is or may become obligated to make any severance,
termination, bonus or relocation payment or any other payment (other
than payments in respect of salary) in excess of $60,000, to any current
or former employee or director;
(ii) any Contract (A) relating to the acquisition, transfer,
development, sharing or license of any Proprietary Asset (except for any
Contract pursuant to which (1) any Proprietary Asset is licensed to the
Company under any third party software license generally available to
the public, or (2) any Proprietary Asset is licensed by the Company to
any Person on a non-exclusive basis); or (B) of the type referred to in
Section 2.9(e);
(iii) any Contract which provides for indemnification of any
officer, director, employee or agent;
(iv) any Contract imposing any material restriction on the right or
ability of the Company (A) to engage in any line of business or to
compete with any Person or grant any exclusive distribution rights, (B)
to acquire any product or other asset or any services from any other
Person, to sell any product or other asset to or perform any services
for any other Person or to transact business or deal in any other manner
with any other Person, or (C) develop or distribute any technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of
maintenance or any similar right with respect to any securities, or (C)
providing the Company with any right of first refusal with respect to,
or right to repurchase or redeem, any securities;
(vi) any Contract requiring that the Company give any notice or
provide any information to any Person prior to accepting any Acquisition
Proposal;
(vii) any Contract (excluding the Company's non-exclusive license
agreements of its products entered into in the ordinary course of the
Company's business) that has a term of more than 60 days and that may
not be terminated by the Company (without penalty) within 60 days after
the delivery of a termination notice by the Company;
(viii) any Contract that contemplates or involves (A) the payment
or delivery of cash or other consideration on or after the date hereof
having a value in excess of $60,000 in the aggregate or (B) the
performance of services on or after the date hereof having a value in
excess of $60,000 in the aggregate;
(ix) any Contract to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations; and
(x) any other Contract, not otherwise identified in clauses "(i)"
through "(ix)", if the Company's performance or breach of such Contract
could reasonably be expected to have a Material Adverse Effect on the
Company.
(b) To the Company's knowledge, each Company Contract that constitutes
a Material Contract is valid and in full force and effect, and is
enforceable in accordance with its terms, subject to (i) laws of
11
<PAGE> 165
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
(c) Except as set forth in Part 2.10 of the Company Disclosure
Schedule: (i) the Company has not violated or breached, or committed any
default under, any Material Contract, and, to the knowledge of the Company,
no other Person has violated or breached, or committed any default under,
any Material Contract; (ii) to the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) could reasonably be expected to (A) result in a
violation or breach of any of the provisions of any Material Contract, (B)
give any Person the right to declare a default or exercise any remedy under
any Material Contract, (C) give any Person the right to a rebate,
chargeback, penalty or change in delivery schedule under any Material
Contract, (D) give any Person the right to accelerate the maturity or
performance of any Material Contract, or (E) give any Person the right to
cancel, terminate or modify any Material Contract; (iii) since June 30,
1995, the Company has not received any notice or other communication
regarding any actual or possible violation or breach of, or default under,
any Material Contract; and (iv) the Company has not waived any of its
material rights under any Material Contract.
(d) The Company is not currently renegotiating, any amount paid or
payable to the Company under any Material Contract, or any other material
term or provision of any Material Contract.
2.11 LIABILITIES. As of the date of this Agreement, except as set forth in
the Company SEC Documents, the Company does not have any accrued, contingent or
other liabilities of any nature, either matured or unmatured except for: (a)
liabilities that would be required under generally accepted accounting
principles to be disclosed on a balance sheet of the Company, and (b) recurring
liabilities that have been incurred by the Company in the ordinary course of
business and consistent with past practices.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since inception been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and could not reasonably be expected to have a Material Adverse
Effect on the Company.
2.13 CERTAIN BUSINESS PRACTICES. Neither the Company nor any director,
officer, agent or employee of the Company has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
2.14 GOVERNMENTAL AUTHORIZATIONS. The Company holds all Governmental
Authorizations necessary to enable the Company to conduct its business in the
manner in which such business is currently being conducted except where failure
to so hold such Governmental Authorization would not have a Material Adverse
Effect on the Company. All such Governmental Authorizations are valid and in
full force and effect. The Company is, and at all times since inception has
been, in substantial compliance with the terms and requirements of such
Governmental Authorizations.
2.15 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the
Company with any Governmental Body with respect to any taxable period
ending on or before the Closing Date (the "Company Returns") (i) have been
or will be filed on or before the applicable due date (including any
extensions of such due date), and (ii) have been, or will be when filed,
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on the Company Returns to be due on or
before the Closing Date have been or will be paid on or before the Closing
Date.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
12
<PAGE> 166
(c) No Company Return has ever been examined or audited by any
Governmental Body. No extension or waiver of the limitation period
applicable to any of the Company Returns has been granted (by the Company
or any other Person), and no such extension or waiver has been requested
from the Company.
(d) No claim or Legal Proceeding is pending or, to the knowledge of
the Company, has been threatened against or with respect to the Company in
respect of any material Tax. There are no unsatisfied liabilities for
material Taxes (including liabilities for interest, additions to tax and
penalties thereon and related expenses) with respect to any notice of
deficiency or similar document received by the Company with respect to any
material Tax (other than liabilities for Taxes asserted under any such
notice of deficiency or similar document which are being contested in good
faith by the Company and with respect to which adequate reserves for
payment have been established). There are no liens for material Taxes upon
any of the assets of the Company except liens for current Taxes not yet due
and payable. The Company has not entered into or become bound by any
agreement or consent pursuant to Section 341(f) of the Code. The Company
has not been, nor will be, required to include any adjustment in taxable
income for any tax period (or portion thereof) pursuant to Section 481 or
263A of the Code or any comparable provision under state or foreign Tax
laws as a result of transactions or events occurring, or accounting methods
employed, prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of the Company that, considered individually or
considered collectively with any other such Contracts, will, or could
reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G or
Section 162 of the Code as a result of the transactions contemplated by
this Agreement.
2.16 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.16(a) of the Company Disclosure Schedule identifies each
salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program or agreement
(collectively, the "Plans") sponsored, maintained, contributed to or
required to be contributed to by the Company for the benefit of any current
or former employee of the Company.
(b) Except as set forth in Part 2.16(a) of the Company Disclosure
Schedule, the Company does not maintain, sponsor or contribute to, nor has
at any time in the past maintained, sponsored or contributed to, any
employee pension benefit plan (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or
not excluded from coverage under specific Titles or Merger Subtitles of
ERISA) for the benefit of employees or former employees of the Company (a
"Pension Plan").
(c) Except as set forth in Part 2.16(a) of the Company Disclosure
Schedule, the Company does not maintain, sponsor or contribute to any: (i)
employee welfare benefit plan (as defined in Section 3(1) of ERISA, whether
or not excluded from coverage under specific Titles or Merger Subtitles of
ERISA) for the benefit of any employees or former employees of the Company
(a "Welfare Plan"), or (ii) self-funded medical, dental or other similar
Plan. None of the Plans identified in the Company Disclosure Schedule is a
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, the Company has made available to
Parent: (i) an accurate and complete copy of such Plan (including all
amendments thereto); (ii) an accurate and complete copy of the annual
report, if required under ERISA, with respect to such Plan for the last two
years; (iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, (iv) if such Plan is
funded through a trust or any third party funding vehicle, an accurate and
complete copy of the trust or other funding agreement (including all
amendments thereto) and accurate and complete copies the most
13
<PAGE> 167
recent financial statements thereof; (v) accurate and complete copies of
all Contracts relating to such Plan, including service provider agreements,
insurance contracts, minimum premium contracts, stop-loss agreements,
investment management agreements, subscription and participation agreements
and recordkeeping agreements; and (vi) an accurate and complete copy of the
most recent determination letter received from the Internal Revenue Service
with respect to such Plan (if such Plan is intended to be qualified under
Section 401(a) of the Code).
(e) The Company is not and has never been required to be treated as a
single employer with any other Person under Section 4001(b)(1) of ERISA or
Section 414(b), (c), (m) or (o) of the Code. The Company has never been a
member of an "affiliated service group" within the meaning of Section
414(m) of the Code. The Company has never made a complete or partial
withdrawal from a multiemployer plan, as such term is defined in Section
3(37) of ERISA, resulting in "withdrawal liability," as such term is
defined in Section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under either Section 4207 or 4208 of ERISA).
(f) The Company does not have any plan or commitment to create any
Welfare Plan or any additional Pension Plan, or to modify or change any
existing Pension Plan (other than to comply with applicable law) in a
manner that would affect any employee of the Company.
(g) No Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former employee of the Company
after any such employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant
to Section 4980B of the Code, (ii) deferred compensation benefits accrued
as liabilities on the Company Unaudited Interim Balance Sheet, and (iii)
benefits the full cost of which are borne by current or former employees of
the Company (or the employees' beneficiaries)).
(h) With respect to any Plan constituting a group health plan within
the meaning of Section 4980B(g)(2) of the Code, the provisions of Section
4980B of the Code ("COBRA") have been complied with in all material
respects. Part 2.16(h) of the Company Disclosure Schedule describes all
obligations of the Company as of the date of this Agreement under any of
the provisions of COBRA.
(i) Each of the Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements,
including but not limited to ERISA and the Code.
(j) Each of the Plans intended to be qualified under Section 401(a) of
the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such
determination letter should be revoked.
(k) Neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any payment (including any
bonus, golden parachute or severance payment) to any current or former
employee or director of the Company (whether or not under any Plan), or
materially increase the benefits payable under any Plan, or result in any
acceleration of the time of payment or vesting of any such benefits.
(l) Part 2.16(l) of the Company Disclosure Schedule contains a list of
all salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. The Company is not a party to any
collective bargaining contract or other Contract with a labor union
involving any of its employees. All of the employees of the Company are "at
will" employees.
(m) Part 2.16(m) of the Company Disclosure Schedule identifies each
Employee who is not fully available to perform work because of disability
or other leave and sets forth the basis of such leave and the anticipated
date of return to full service.
(n) The Company does not have any knowledge of any facts indicating
that (i) the consummation of the Merger or any of the other transactions
contemplated by this Agreement will have a Material Adverse Effect on the
labor relations of the Company, or (ii) any of the employees of the Company
14
<PAGE> 168
intends to terminate his or her employment with the Company, except for
such terminations that either individually or taken together with all other
such terminations, would not have a Material Adverse Effect on the Company.
2.17 ENVIRONMENTAL MATTERS. The Company is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. The Company has not received any notice from a Governmental
Body, that alleges that the Company is not in compliance with any Environmental
Law, and, to the knowledge of the Company, there are no circumstances that may
prevent or interfere with the compliance by the Company with any Environmental
Law in the future. To the knowledge of the Company, no current or prior owner of
any property leased or controlled by the Company has received any notice from a
Government Body that alleges that such current or prior owner or the Company is
not in compliance with any Environmental Law. To the knowledge of the Company,
all property that is leased to, controlled by or used by the Company, and all
surface water, groundwater and soil associated with or adjacent to such property
is in clean and healthful condition and is free of any material environmental
contamination of any nature. (For purposes of this Section 2.17: (i)
"Environmental Law" means any federal, state, local or foreign Legal Requirement
relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other substance that is now or hereafter regulated by any Environmental Law or
that is otherwise a danger to health, reproduction or the environment.)
2.18 INSURANCE. The Company has made available to Parent a copy of all
material insurance policies relating to the business, assets and operations of
the Company. Each of such insurance policies is in full force and effect. Since
December 31, 1996, the Company has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any
material claim under any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance policy. Except as
set forth in Part 2.18 of the Company Disclosure Schedule, there is no pending
claim (including any workers' compensation claim) under or based upon any
insurance policy of the Company.
2.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Company SEC
Documents and Part 2.19 of the Company Disclosure Schedule, since the date of
the Company's last proxy statement filed with the SEC, no event has occurred
that would be required to be reported by the Company pursuant to Item 404 of
Regulation S-K promulgated by the SEC. Part 2.19 of the Company Disclosure
Schedule identifies each person who is an "affiliate" (as that term is used in
Rule 145 under the Securities Act) of the Company as of the date of this
Agreement.
2.20 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the knowledge of the
Company) no Person has threatened to commence any Legal Proceeding: (i)
that involves the Company or any of the assets owned or used by the Company
which alone or in the aggregate has had or would have a Material Adverse
Effect on the Company; or (ii) that challenges, or that may have the effect
of preventing, delaying, making illegal or otherwise interfering with, the
Merger or any of the other transactions contemplated by this Agreement. To
the knowledge of the Company, no event has occurred, and no claim, dispute
or other condition or circumstance exists, that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any
such Legal Proceeding that would have a Material Adverse Effect on the
Company.
(b) There is no material order, writ, injunction, judgment or decree
to which the Company, or any of the assets owned or used by the Company, is
subject. To the knowledge of the Company, no officer or
15
<PAGE> 169
key employee of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer or other employee from
engaging in or continuing any conduct, activity or practice relating to the
business of the Company.
2.21 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has the requisite
corporate power and authority to enter into and to perform its obligations under
this Agreement, subject to the approval of this Agreement by the Required
Company Stockholder Vote. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of the Company and its
stockholders, (b) unanimously authorized and approved the execution, delivery
and performance of this Agreement by the Company and unanimously approved the
Merger, and (c) unanimously recommended the approval of this Agreement and the
Merger by the holders of Company Common Stock and directed that this Agreement
and the Merger be submitted for consideration by the Company's stockholders at
the Company Stockholders' Meeting (as defined in Section 5.2). This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
2.22 NO EXISTING DISCUSSIONS. During the period between August 26, 1997,
the date on which the parties entered into a non-solicitation agreement, and the
date of this Agreement, neither the Company nor any Representative of the
Company, is or was engaged, directly or indirectly, in any discussions or
negotiations with any other Person relating to any Acquisition Proposal.
2.23 ACCOUNTING MATTERS. To the knowledge of the Company, neither the
Company nor any affiliate (as that term is used in Rule 145 under the Securities
Act) of the Company has taken or agreed to take, or plans to take, any action
that could prevent Parent from accounting for the Merger as a "pooling of
interests." Ernst & Young LLP has confirmed orally to the Company, Parent, and
Price Waterhouse LLP, that, after having reviewed the transactions contemplated
by this Agreement and having conducted a reasonable investigation of the
Company, Ernst & Young LLP is not aware of any fact concerning the Company that
could preclude Parent from accounting for the Merger as a "pooling of
interests."
2.24 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Company Common Stock outstanding on the record date for the
Company Stockholders' Meeting (the "Required Company Stockholder Vote") is the
only vote of the holders of any class or series of the Company's capital stock
necessary to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
2.25 NON-CONTRAVENTION; CONSENTS. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the certificate of incorporation, bylaws or other charter
or organizational documents of the Company, as amended, or (ii) any
resolution adopted by the stockholders, the Board of Directors or any
committee of the Board of Directors of the Company;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order,
writ, injunction, judgment or decree to which the Company, or any of the
assets owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
business of the Company or to any of the assets owned or used by the
Company;
16
<PAGE> 170
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under (or an event which with notice or lapse of
time or both would become a default), any provision of any Material
Contract, or give any Person the right to (i) declare a default or exercise
any remedy under any such Material Contract, (ii) a rebate, chargeback,
penalty or change in delivery schedule under any such Material Contract,
(iii) accelerate the maturity or performance of any such Material Contract,
or (iv) cancel, terminate or modify any term of such Material Contract;
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by the Company (except for liens
that will not, in any case or in the aggregate, have a Material Adverse
Effect on the Company); or
(f) result in, or increase the likelihood of, the disclosure or
delivery to any escrowholder or other Person of the source code, or any
portion or aspect of the source code, or any proprietary information or
algorithm contained in or relating to any source code, of any material
Company Proprietary Asset, or the transfer of any material asset of the
Company to any Person pursuant to any Escrow Contract.
Except as may be required by the Exchange Act, the DGCL, and the NASD Bylaws (as
they relate to the Form S-4 Registration Statement and the Joint Proxy
Statement) the Company has not been, is not or will not be required to make any
filing with or give any notice to, or to obtain any Consent from, any Person in
connection with (i) the execution, delivery or performance of this Agreement or
any of the other agreements referred to in this Agreement, or (ii) the
consummation of the Merger or any of the other transactions contemplated by this
Agreement.
2.26 FAIRNESS OPINION. The Company's Board of Directors has received the
written opinion of CIBC Wood Gundy, financial advisor to the Company, dated the
date of this Agreement, to the effect that the consideration to be received by
the stockholders of the Company in the Merger is fair to the stockholders of the
Company from a financial point of view. The Company has furnished an accurate
and complete copy of said written opinion to Parent.
2.27 FINANCIAL ADVISOR. Except for CIBC Wood Gundy, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The fees and expenses of all accountants, brokers, financial
advisors, legal counsel and other Persons retained by the Company in connection
with the negotiation and effectuation of this Agreement and the transactions
contemplated hereby incurred or to be incurred by the Company will not exceed
$500,000 in the aggregate. The Company has furnished to Parent accurate and
complete copies of all agreements under which any such fees, commissions or
other amounts have been paid or may become payable and all indemnification and
other agreements related to the engagement of CIBC Wood Gundy.
2.28 SECTION 203 OF THE DGCL NOT APPLICABLE. As of the date hereof and at
all times on or prior to the Effective Time, the restrictions applicable to
business combinations contained in Section 203 of the DGCL are, and will be,
inapplicable to the execution, delivery and performance of this Agreement and to
the consummation of the Merger and the other transactions contemplated by this
Agreement. Prior to the execution of those Voting Agreements, in the form of
Exhibit G, of even date herewith between Parent and each of the individuals
identified on Exhibit H, the Board of Directors of the Company approved said
Voting Agreements and the transactions contemplated thereby.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents (as defined in Section 3.4(a)) or in the
Parent Disclosure Schedule:
3.1 ORGANIZATION, STANDING AND POWER. Parent and Merger Sub are
corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of Parent and Merger Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect on Parent and Merger Sub.
17
<PAGE> 171
3.2 CERTIFICATE OF INCORPORATION AND BYLAWS. Parent has delivered to the
Company accurate and complete copies of the certificate of incorporation, bylaws
and other charter and organizational documents of Parent and the Merger Sub, in
each case as amended as of the date hereof.
3.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of Parent consists of: (i) 25,000,000
shares of Parent Common Stock, of which 6,474,096 shares have been issued
and are outstanding and of which no shares are held by Parent in its
treasury as of the date of this Agreement; and (ii) 5,000,000 shares of
Parent Preferred Stock, $0.001 par value per share, of which no shares are
outstanding or are held by the Company in its treasury. All of the
outstanding shares of Parent Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. Except as set forth
in Part 3.3(a)(i) of the Parent Disclosure Schedule: (i) none of the
outstanding shares of Parent Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any
similar right; (ii) none of the outstanding shares of Parent Common Stock
is subject to any right of first refusal in favor of Parent; and (iii)
there is no Parent Contract relating to the voting or registration of, or
restricting any Person from purchasing, selling, pledging or otherwise
disposing of (or granting any option or similar right with respect to), any
shares of Parent Common Stock. Parent is not under any obligation, nor is
bound by any Contract pursuant to which it may become obligated, to
repurchase, redeem or otherwise acquire any outstanding shares of Parent
Common Stock.
(b) At the close of business on September 25, 1997: (i) 316,707 shares
of Parent Common Stock were subject to issuance pursuant to outstanding
options to purchase Parent Common Stock under Parent's 1987 Stock Option
Plan; (ii) 352,068 shares of Parent Common Stock were subject to issuance
pursuant to outstanding options to purchase Parent Common Stock under
Parent's 1995 Stock Option Plan; (iii) 62,500 shares of Parent Common Stock
were subject to issuance pursuant to outstanding options to purchase Parent
Common Stock under Parent's 1995 Non-Employee Director's Stock Option Plan;
(iv) 110,302 shares of Parent Common Stock were subject to issuance
pursuant to rights to purchase Parent Common Stock under Parent's 1995
Employee Stock Purchase Plan; and (v) 26,587 shares of Parent Common Stock
were subject to issuance pursuant to outstanding options granted outside of
any Parent stock option plan. (Stock options granted by Parent pursuant to
the 1995 Stock Option Plan, pursuant to the 1995 Non-Employee Director's
Stock Option Plan, pursuant to the 1987 Stock Option Plan and outside of
any stock option plan are referred to in this Agreement as "Parent
Options." The 1995 Stock Option Plan, the 1987 Stock Option Plan, and the
1995 Non-Employee Director's Stock Option Plan are collectively referred to
as "Parent's Stock Plans.") Part 3.3(b) of the Parent Disclosure Schedule
sets forth the following information with respect to each Parent Option
outstanding as of September 25, 1997, (i) the particular plan pursuant to
which such Parent Option was granted; (ii) the name of the optionee; (iii)
the number of shares of Parent Common Stock subject to such Parent Option;
(iv) the exercise price of such Parent Option; (v) the date on which such
Parent Option was granted; (vi) the applicable vesting schedules, and the
extent to which such Parent Option is vested and exercisable as of
September 25, 1997, and (vii) the date on which such Parent Option expires.
(c) Except for shares to be issued pursuant to rights to purchase
Parent Common Stock under Parent's 1995 Employee Stock Purchase Plan and
Parent Options, there is no: (i) outstanding subscription, option, call,
warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of Parent; (ii) outstanding
security, instrument or obligation that is or may become convertible into
or exchangeable for any shares of the capital stock or other securities of
Parent; (iii) stockholder rights plan (or similar plan commonly referred to
as a "poison pill") or Contract under which Parent is or may become
obligated to sell or otherwise issue any shares of its capital stock or any
other securities; or (iv) condition or circumstance that may give rise to
or provide a basis for the assertion of a claim by any Person to the effect
that such Person is entitled to acquire or receive any shares of capital
stock or other securities of Parent.
(d) All outstanding shares of Parent Common Stock, all outstanding
Parent Options, and all outstanding warrants to purchase Parent Common
Stock have been issued and granted in compliance
18
<PAGE> 172
with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has delivered to the Company accurate and complete copies
of all registration statements, proxy statements, and other statements,
reports, schedules, forms and other documents filed by the Company with the
SEC since December 31, 1996 (the "Parent SEC Documents") including the
Company's registration statement on Form S-1 filed with the SEC on November
1995. All statements, reports, schedules, forms and other documents
required to be filed by Parent with the SEC have been so filed. As of the
time it was filed with the SEC (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing): (i)
each of the Parent SEC Documents complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act (as the
case may be); 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 the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents ("Parent Financial Statements"): (i) complied as to form in all
material respects with the published rules and regulations of the SEC
applicable thereto; (ii) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered (except as may be indicated in the notes to such financial
statements and, in the case of unaudited statements, as permitted by Form
10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments); and (iii)
fairly present the consolidated financial position of Parent and its
Subsidiaries as of the respective dates thereof and the consolidated
results of operations of Parent and its Subsidiaries for the periods
covered thereby.
(c) Parent has delivered to the Company an unaudited consolidated
balance sheet of Parent as of June 30, 1997 (the "Parent Unaudited Interim
Balance Sheet"), and the related unaudited consolidated statement of
operations, statement of stockholders' equity and statement of cash flows
of Parent for the quarter then ended. The financial statements referred to
in this Section 3.4(c): (i) were prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the basis
on which the financial statements referred to in Section 3.4(b) were
prepared (except that such financial statements do not contain footnotes
and are subject to normal and recurring year-end adjustments which will
not, individually or in the aggregate, be material in amount), and (ii)
fairly present the consolidated financial position of Parent as of June 30,
1997 thereof and the consolidated results of operations and cash flows of
Parent for the six months ended June 30, 1997.
3.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Parent SEC Documents, since June 30, 1997:
(a) there has not been any Material Adverse Effect on Parent;
(b) Parent has not declared, accrued, set aside or paid any dividend;
(c) Parent has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of any of
the Parent's Stock Plans, (ii) any provision of any agreement evidencing
any outstanding Parent Option, (iii) or any restricted stock purchase
agreement;
(d) except in the ordinary course of business and consistent with past
practices, Parent has not (i) entered into or permitted any of the assets
owned or used by it to become bound by any Material Contract (as defined in
Section 3.10), or (ii) amended or terminated, or waived any material right
or remedy under, any Material Contract;
(e) Parent has not (i) acquired, leased or licensed any material right
or other material asset from any other Person, (ii) sold or otherwise
disposed of, or leased or licensed, any material right or other material
asset to any other Person, or (iii) waived or relinquished any right,
except for rights or other
19
<PAGE> 173
assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with past practices;
(f) Parent has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance, except
for pledges of immaterial assets made in the ordinary course of business
and consistent with past practices;
(g) Parent has not changed any of its methods of accounting or
accounting practices (i) having a Material Adverse Effect on Parent or (ii)
that may have an effect on rules and regulations related to pooling of
interests accounting, except insofar as such change is required by a change
in generally accepted accounting principles;
(h) Parent has not made any Tax election that could have a Material
Adverse Effect on Parent;
(i) Parent has not entered into any material transaction or taken any
other material action outside the ordinary course of business or
inconsistent with past practices; and
(j) Parent has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(i)" above.
3.6 TITLE TO ASSETS. Parent owns, and has good, valid and marketable title
to, all assets purported to be owned by it, including: (a) all assets reflected
on the Parent Financial Documents; and (b) all other assets reflected in the
books and records of Parent as being owned by Parent. All of said assets are
owned by Parent free and clear of any Encumbrances, except for (i) any lien for
current taxes not yet due and payable, (ii) liens that have arisen in the
ordinary course of business and that do not (in any case or in the aggregate)
materially detract from the value of the assets subject thereto or materially
impair the operations of Parent, and (iii) liens described in Part 3.6 of the
Parent Disclosure Schedule.
3.7 RECEIVABLES. All existing accounts receivable of Parent (a) represent
valid obligations of customers of Parent arising from bona fide transactions
entered into in the ordinary course of business, (b) are current and, to
Parent's knowledge will be collected in full when due, without any counterclaim
or set off (net of an allowance for doubtful accounts not to exceed $316,000 in
the aggregate).
3.8 REAL PROPERTY; EQUIPMENT; LEASEHOLD. Parent does not own any real
property or any interest in real property, except for the leasehold created
under the real property lease listed on Part 3.8(a) of the Parent Disclosure
Schedule.
3.9 PROPRIETARY ASSETS.
(a) Parent, directly or indirectly, owns or is licensed or otherwise
possesses legally enforceable rights to use all Proprietary Assets that are
material to the business of Parent as currently conducted or as proposed to
be conducted by Parent ("Parent Proprietary Assets").
(b) Parent has taken reasonable measures and precautions to protect
and maintain the confidentiality, secrecy and value of all Material Parent
Proprietary Assets (except Parent Proprietary Assets whose value would be
unimpaired by disclosure). No current or former employee, officer,
director, stockholder, consultant or independent contractor has any valid
right, claim or interest in or with respect to any Parent Proprietary
Asset.
(c) Except as set forth in Part 3.9(c) of the Parent Disclosure
Schedule: (i) all trademarks, service marks, copyrights, and to the
knowledge of Parent, patents, held by Parent are valid, enforceable and
subsisting; (ii) none of the Parent Proprietary Assets and no Proprietary
Asset that is currently being developed by Parent (either by itself or with
any other Person) infringes, misappropriates or conflicts with any
Proprietary Asset owned or used by any other Person; (iii) none of the
products that are or have been designed, created, developed, assembled,
manufactured or sold by Parent is infringing, misappropriating or making
any unlawful or unauthorized use of any Proprietary Asset owned or used by
any other Person, and none of such products has at any time infringed,
misappropriated or made any unlawful or unauthorized use of, and Parent has
not received any notice or other communication (in writing or otherwise) of
any actual, alleged, possible or potential infringement, misappropriation
or unlawful or
20
<PAGE> 174
unauthorized use of, any Proprietary Asset owned or used by any other
Person; and (iv) no other Person is infringing, misappropriating or making
any unlawful or unauthorized use of, and no Proprietary Asset owned or used
by any other Person infringes or conflicts with, any material Parent
Proprietary Asset.
(d) Parent has not (i) licensed any of the material Parent Proprietary
Assets to any Person on an exclusive basis, or (ii) entered into any
covenant not to compete or Contract limiting its ability to exploit fully
any material Parent Proprietary Assets or to transact business in any
market or geographical area or with any Person.
(e) Except as set forth in Part 3.9(e) of the Parent Disclosure
Schedule, Parent has not disclosed or delivered to any Person, or permitted
the disclosure or delivery to any escrow agent or other Person, of the
source code, or any portion or aspect of the source code, or any
proprietary information or algorithm contained in any source code, of any
Parent Proprietary Asset. To Parent's knowledge, no event has occurred, and
no circumstance or condition exists, that (with or without notice or lapse
of time) will, or could reasonably be expected to, result in the disclosure
or delivery to any Person of the source code, or any portion or aspect of
the source code, or any proprietary information or algorithm contained in
any source code, of any material Parent Proprietary Asset pursuant to a
Contract.
3.10 CONTRACTS.
(a) Part 3.10 of the Parent Disclosure Schedule identifies each Parent
Contract that constitutes a "Parent Material Contract" that has not already
been disclosed in the Parent SEC Documents. (For purposes of this
Agreement, each of the following and each of the Contracts filed as part of
the Parent SEC Documents shall be deemed to constitute a "Parent Material
Contract"):
(i) any Contract relating to the employment of, or the performance
of services by, any employee or consultant, and any Contract pursuant to
which Parent is or may become obligated to make any severance,
termination, bonus or relocation payment or any other payment (other
than payments in respect of salary) in excess of $60,000, to any current
or former employee or director;
(ii) any Contract (A) relating to the acquisition, transfer,
development, sharing or license of any Proprietary Asset (except for any
Contract pursuant to which (1) any Proprietary Asset is licensed to
Parent under any third party software license generally available to the
public, or (2) any Proprietary Asset is licensed by Parent to any Person
on a non-exclusive basis); or (B) of the type referred to in Section
3.9(e);
(iii) any Contract which provides for indemnification of any
officer, director, employee or agent;
(iv) any Contract imposing any material restriction on the right or
ability of Parent (A) to engage in any line of business or to compete
with any Person or grant any exclusive distribution rights, (B) to
acquire any product or other asset or any services from any other
Person, to sell any product or other asset to or perform any services
for any other Person or to transact business or deal in any other manner
with any other Person, or (C) develop or distribute any technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of
maintenance or any similar right with respect to any securities, or (C)
providing Parent with any right of first refusal with respect to, or
right to repurchase or redeem, any securities;
(vi) any Contract requiring that Parent give any notice or provide
any information to any Person prior to accepting any Acquisition
Proposal;
(vii) any Contract (excluding Parent's non-exclusive license
agreements of its products entered into in the ordinary course of
Parent's business) that has a term of more than 60 days and that may not
be terminated by Parent (without penalty) within 60 days after the
delivery of a termination notice by Parent;
21
<PAGE> 175
(viii) any Contract that contemplates or involves (A) the payment
or delivery of cash or other consideration on or after the date hereof
having a value in excess of $60,000 in the aggregate or (B) the
performance of services on or after the date hereof having a value in
excess of $60,000 in the aggregate;
(ix) any Contract to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations; and
(x) any other Contract, not otherwise identified in clauses "(i)"
through "(ix)", if Parent's performance or breach of such Contract could
reasonably be expected to have a Material Adverse Effect on Parent.
(b) To Parent's knowledge, each Parent Contract that constitutes a
Parent Material Contract is valid and in full force and effect, and is
enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors,
and (ii) rules of law governing specific performance, injunctive relief and
other equitable remedies.
(c) Except as set forth in Part 3.10 of the Parent Disclosure
Schedule: (i) Parent has not violated or breached, or committed any default
under, any Parent Material Contract, and, to the knowledge of Parent, no
other Person has violated or breached, or committed any default under, any
Parent Material Contract; (ii) to the knowledge of Parent, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) could reasonably be expected to (A) result in a
violation or breach of any of the provisions of any Parent Material
Contract, (B) give any Person the right to declare a default or exercise
any remedy under any Parent Material Contract, (C) give any Person the
right to a rebate, chargeback, penalty or change in delivery schedule under
any Parent Material Contract, (D) give any Person the right to accelerate
the maturity or performance of any Parent Material Contract, or (E) give
any Person the right to cancel, terminate or modify any Parent Material
Contract; (iii) since June 30, 1997, Parent has not received any notice or
other communication regarding any actual or possible violation or breach
of, or default under, any Parent Material Contract; and (iv) Parent has not
waived any of its material rights under any Parent Material Contract.
(d) Parent is not currently renegotiating, any amount paid or payable
to Parent under any Parent Material Contract, or any other material term or
provision of any Material Contract.
3.11 LIABILITIES. As of the date of this Agreement, except as set forth in
the Parent SEC Documents, Parent does not have any accrued, contingent or other
liabilities of any nature, either matured or unmatured except for: (a)
liabilities that would be required under generally accepted accounting
principles to be disclosed on a balance sheet of Parent, and (b) recurring
liabilities that have been incurred by Parent in the ordinary course of business
and consistent with past practices.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Parent is, and has at all times
since inception been, in compliance with all applicable Legal Requirements,
except where the failure to comply with such Legal Requirements has not had and
could not reasonably be expected to have a Material Adverse Effect on Parent.
3.13 CERTAIN BUSINESS PRACTICES. Neither Parent nor any director, officer,
agent or employee of Parent has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
3.14 GOVERNMENTAL AUTHORIZATIONS. Parent holds all material Governmental
Authorizations necessary to enable Parent to conduct its business in the manner
in which such business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. Parent is, and at all
times since inception has been, in substantial compliance with the terms and
requirements of such Governmental Authorizations.
22
<PAGE> 176
3.15 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of Parent
with any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "Parent Returns") (i) have been or will be
filed on or before the applicable due date (including any extensions of
such due date), and (ii) have been, or will be when filed, prepared in all
material respects in compliance with all applicable Legal Requirements. All
amounts shown on the Parent Returns to be due on or before the Closing Date
have been or will be paid on or before the Closing Date.
(b) The Parent Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
(c) No Parent Return has ever been examined or audited by any
Governmental Body. No extension or waiver of the limitation period
applicable to the Parent Returns has been granted (by Parent or any other
Person), and no such extension or waiver has been requested from Parent.
(d) No claim or Legal Proceeding is pending or, to the knowledge of
Parent, has been threatened against or with respect to Parent, in respect
of any material Tax. There are no unsatisfied liabilities for material
Taxes (including liabilities for interest, additions to tax and penalties
thereon and related expenses) with respect to any notice of deficiency or
similar document received by Parent with respect to any material Tax (other
than liabilities for Taxes asserted under any such notice of deficiency or
similar document which is being contested in good faith by Parent and with
respect to which adequate reserves for payment have been established).
There are no liens for material Taxes upon any of the assets of Parent
except liens for current Taxes not yet due and payable.
3.16 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Except with respect to Parent's wholly owned subsidiary, Parent is
not, nor has ever been required to be treated as a single employer with any
other Person under Section 4001(b)(1) of ERISA or Section 414(b), (c), (m)
or (o) of the Code. Parent has never been a member of an "affiliated
service group" within the meaning of Section 414(m) of the Code. Parent has
never made a complete or partial withdrawal from a multiemployer plan, as
such term is defined in Section 3(37) of ERISA, resulting in "withdrawal
liability," as such term is defined in Section 4201 of ERISA (without
regard to subsequent reduction or waiver of such liability under either
Section 4207 or 4208 of ERISA).
(b) Each of the Plans of Parent has been operated and administered in
all material respects in accordance with applicable Legal Requirements,
including but not limited to ERISA and the Code.
(c) Each of the Plans of Parent intended to be qualified under Section
401(a) of the Code has received a favorable determination from the Internal
Revenue Service, and Parent is not aware of any reason why any such
determination letter should be revoked.
(d) Parent is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of
employment, including employee compensation matters.
(e) Parent does not have any knowledge of any facts indicating that
the consummation of the Merger or any of the other transactions
contemplated by this Agreement will have a Material Adverse Effect on the
labor relations of Parent.
3.17 ENVIRONMENTAL MATTERS. Parent is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by Parent of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. Parent has not received any notice from a Governmental Body
that alleges that Parent is not in compliance with any Environmental Law, and,
to the knowledge of Parent, there are no circumstances that may prevent or
interfere with the compliance by Parent with any Environmental Law in the
future. To the knowledge of Parent, no current or prior owner of any property
leased or controlled by
23
<PAGE> 177
Parent has received any notice from a Government Body that alleges that such
current or prior owner or Parent is not in compliance with any Environmental
Law. To the knowledge of Parent, all property that is leased to, controlled by
or used by Parent, and all surface water, groundwater and soil associated with
or adjacent to such property is in clean and healthful condition and is free of
any material environmental contamination of any nature. (For purposes of this
Section 3.17: (i) "Environmental Law" means any federal, state, local or foreign
Legal Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (ii) "Materials of Environmental Concern" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is now or hereafter regulated by
any Environmental Law or that is otherwise a danger to health, reproduction or
the environment.)
3.18 INSURANCE. Since December 31, 1996, Parent has not received any
notice or other communication regarding any actual or possible (a) cancellation
or invalidation of any insurance policy, (b) refusal of any coverage or
rejection of any material claim under any insurance policy, or (c) material
adjustment in the amount of the premiums payable with respect to any insurance
policy.
3.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Parent SEC
Reports, since the date of Parent's last proxy statement filed with the SEC, no
event has occurred that would be required to be reported by the Company pursuant
to Item 404 of Regulation S-K promulgated by the SEC. Part 3.19 of the Parent
Disclosure Schedule identifies each person who is an "affiliate" (as that term
is used in Rule 145 under the Securities Act) of Parent as of the date of this
Agreement.
3.20 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the knowledge of
Parent) no Person has threatened to commence any Legal Proceeding: (i) that
involves Parent or any of the assets owned or used by Parent which, alone
or in the aggregate, has had or would have a Material Adverse Effect on
Parent; or (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, the Merger or any
of the other transactions contemplated by this Agreement. To the knowledge
of Parent, no event has occurred, and no claim, dispute or other condition
or circumstance exists, that could reasonably be expected to, give rise to
or serve as a basis for the commencement of any such Legal Proceeding that
would have a Material Adverse Effect on Parent.
(b) There is no material order, writ, injunction, judgment or decree
to which Parent, or any of the assets owned or used by Parent, is subject.
To the knowledge of Parent, no officer or key employee of Parent is subject
to any order, writ, injunction, judgment or decree that prohibits such
officer or other employee from engaging in or continuing any conduct,
activity or practice relating to the business of Parent.
3.21 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Merger Sub have
the requisite corporate power and authority to enter into and to perform their
obligations under this Agreement, subject to the approval of the issuance of
Parent Common Stock in the Merger by the Required Parent Stockholder Vote. The
Board of Directors of Parent (at a meeting duly called and held) has (a)
unanimously determined that the issuance of Parent Common Stock in the Merger is
advisable and fair and in the best interests of Parent and its stockholders, (b)
unanimously authorized and approved the execution, delivery and performance of
this Agreement by Parent and unanimously approved the issuance of Parent Common
Stock in connection with the Merger and (c) unanimously recommended the approval
of the issuance of Parent Common Stock in connection with the Merger by Parent's
stockholders at the Parent Stockholders' Meeting (as defined in Section 5.3).
This Agreement constitutes the legal, valid and binding obligation of Parent and
Merger Sub, enforceable against them in accordance with its terms, subject to
(a) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (b) rules of law governing specific performance,
injunctive relief and other equitable remedies.
24
<PAGE> 178
3.22 VOTE REQUIRED. The only vote of Parent's stockholders required to
approve the issuance of Parent Common Stock in the Merger is the vote prescribed
by the NASD Rules (the "Required Parent Stockholder Vote").
3.23 NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery of
this Agreement by Parent and Merger Sub nor the consummation by Parent and
Merger Sub of the Merger will (a) conflict with or result in any breach of any
provision of the certificate of incorporation or bylaws of Parent or the
certificate of incorporation or bylaws of Merger Sub, (b) result in a default by
Parent or Merger Sub under any Parent Material Contract to which Parent or
Merger Sub is a party, except for any default which has not had and will not
have a Material Adverse Effect on Parent, or (c) result in a violation by Parent
or Merger Sub of any order, writ, injunction, judgment or decree to which Parent
or Merger Sub is subject, except for any violation which has not had and will
not have a Material Adverse Effect on Parent.
3.24 NO EXISTING DISCUSSIONS. During the period between August 26, 1997,
the date on which the parties entered into a non-solicitation agreement, and the
date of this Agreement, neither Parent nor any Representative of Parent, is or
was engaged, directly or indirectly, in any discussions or negotiations with any
other Person relating to any Acquisition Proposal with respect to Parent.
3.25 ACCOUNTING MATTERS. To the knowledge of Parent, neither Parent nor
any affiliate (as that term is used in Rule 145 under the Securities Act) of
Parent has taken or agreed to take, or plans to take, any action that could
prevent Parent from accounting for the Merger as a "pooling of interests." Price
Waterhouse LLP has confirmed orally to the Company, Parent, and Ernst & Young
LLP, that, after having reviewed the transactions contemplated by this Agreement
and having conducted a reasonable investigation of Parent, Price Waterhouse LLP
is not aware of any fact concerning Parent that could preclude Parent from
accounting for the Merger as a "pooling of interests."
3.26 FINANCIAL ADVISOR. Except for Hambrecht & Quist LLC, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent.
3.27 FAIRNESS OPINION. Parent's Board of Directors has received the
written opinion of Hambrecht & Quist LLC, financial advisor to Parent, dated the
date of this Agreement, to the effect that the Exchange Ratio is fair to Parent
and its stockholders from a financial point of view.
3.28 VALID ISSUANCE. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
SECTION 4. CERTAIN COVENANTS OF THE PARTIES
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement to the Effective Time (the "Pre-Closing Period"), each party shall,
and shall cause its respective Representatives to: (a) provide the other party
and the other party's Representatives with reasonable access to such disclosing
party's Representatives, personnel and assets and to all existing books,
records, Tax Returns, work papers and other documents and information relating
to such disclosing party; and (b) provide the other party and the other party's
Representatives with such copies of the existing books, records, Tax Returns,
work papers and other documents and information relating to such disclosing
party, and with such additional financial, operating and other data and
information regarding such disclosing party, as the other party may reasonably
request. Except as required by law, each of the parties will hold, and will
cause its officers, employees, accountants, legal counsel, financial advisors
and other Representatives and controlled affiliates to hold, any and all
information received from the other party, directly or indirectly, in confidence
in accordance with the Mutual Confidential Disclosure Agreement dated March 12,
1997 between Parent and the Company.
4.2 OPERATION OF THE COMPANY'S BUSINESS.
(a) During the Pre-Closing Period: (i) the Company shall conduct its
business and operations (A) in the ordinary course and consistent with past
practices and (B) in compliance with all applicable Legal Requirements and
the requirements of the Company's Material Contracts; (ii) to the extent
25
<PAGE> 179
consistent with the foregoing, the Company shall use commercially
reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and employees and
maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons
having business relationships with the Company; (iii) the Company shall
keep in full force all insurance policies referred to in Section 2.18; (iv)
the Company shall provide all notices, assurances and support required by
any Company Contract relating to any Proprietary Asset in order to ensure
that no condition of default or breach under such Company Contract occurs
which could result in, or could increase the likelihood of, (A) any
transfer or disclosure by the Company of any source code materials or other
Proprietary Asset, or (B) a release from any escrow of any source code
material or other Proprietary Asset which has been deposited or is required
to be deposited in escrow under the terms of such Escrow Contract; and (v)
the Company shall (to the extent requested by Parent) cause its officers to
report regularly to Parent concerning the status of the Company's business.
(b) During the Pre-Closing Period, the Company shall not (without the
prior written consent of Parent, which consent shall not be unreasonably
withheld or delayed):
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities except for repurchases from employees following their
termination pursuant to the terms of their existing stock option or
stock purchase agreements, which agreements are disclosed on Part
4.2(b)(i) of the Company Disclosure Schedule;
(ii) sell, issue, grant or authorize the issuance or grant of (A)
any capital stock or other security, (B) any option, call, warrant or
right to acquire any capital stock or other security, or (C) any
instrument convertible into or exchangeable for any capital stock or
other security (except (1) pursuant to the 1996 Employee Stock Purchase
Plan, (2) the Company may issue Company Common Stock upon the valid
exercise of Company Options outstanding as of the date of this Agreement
and (3) the Company may grant Company Options under the Company Stock
Plans to purchase up to an additional 120,000 shares of Company Common
Stock after the date hereof and may issue Company Common Stock upon the
exercise thereof, which shall have at least exercise prices equal to the
fair market value on the date of the grant, consistent with past
practice);
(iii) amend or waive any of its rights under, or accelerate the
vesting under, any provision of any of the Company's stock option plans,
any provision of any agreement evidencing any outstanding stock option
or any restricted stock purchase agreement, or otherwise modify any of
the terms of any outstanding option, warrant or other security or any
related Contract;
(iv) amend or permit the adoption of any amendment to its
certificate of incorporation or bylaws or other charter or
organizational documents, or effect or become a party to any merger,
consolidation, share exchange, business combination, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(v) except as disclosed in Part 2.1(a)(i) of the Company Disclosure
Schedule, form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) make any capital expenditure (except that the Company may make
capital expenditures that, when added to all other capital expenditures
made on behalf of the Company during the Pre-Closing Period, do not
exceed $100,000 in the aggregate; once the Company has made aggregate
capital expenditures that exceed $100,000, it must seek Parent's consent
for any additional capital expenditures in increments of $25,000);
(vii) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Contract, or amend
or terminate, or waive or exercise any material right or remedy under,
any Material Contract;
(viii) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except in each case for
26
<PAGE> 180
immaterial assets acquired, leased, licensed or disposed of by the
Company in the ordinary course of business and consistent with past
practices), or waive or relinquish any material right;
(ix) lend money to any Person, or incur or guarantee any
indebtedness (except for: (i) advances to employees (other than to the
Company's affiliates as identified on Part 2.19 of the Company
Disclosure Schedule) in each case not to exceed $1,000 per employee, in
the ordinary course of business and in accordance with past practices
and (ii) make borrowings up to $1,000,000 under that certain credit line
of the Company with Silicon Valley Bank substantially on the terms
described in Part 4.2(ix) of the Company Disclosure Schedule; provided,
however, that the Company shall (x) notify Parent prior to entering into
an agreement with Silicon Valley Bank relating to such credit line, (y)
provide Parent with a copy of the Company's executed agreement with
Silicon Valley Bank relating to such credit line as soon as such an
agreement is executed and (z) provide prompt updates to Parent regarding
each drawdown the Company makes under such credit line, and in any
event, to provide such updates no later than two business days after
each such drawdown);
(x) establish, adopt or amend any employee benefit plan, pay any
bonus (other than to non-officer employees in the aggregate amount not
to exceed $35,000) or make any profit-sharing or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits
or other compensation or remuneration payable to, any of its directors,
officers or employees;
(xi) hire any new employee having an annual salary in excess of
$100,000, or engage any consultant or independent contractor for a
period exceeding 30 days;
(xii) change any of its methods of accounting or accounting
practices in any respect, except as required by generally accepted
accounting principles, to the extent consistent with past practices and
after consultation with Parent;
(xiii) make any Tax election except in the ordinary course of
business consistent with past practice or in respect of which amounts
are reflected or reserved against in the most recent Company Unaudited
Interim Balance Sheet;
(xiv) commence or settle any Legal Proceeding other than in the
ordinary course of business consistent with past practice or in respect
of settlements, to the extent the amount of such settlement has been
reflected or reserved against in the Company Unaudited Interim Balance
Sheet;
(xv) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices; or
(xvi) agree or commit to take any of the actions described in
clauses "(i)" through "(xv)" of this Section 4.2(b).
(c) During the Pre-Closing Period, the Company shall give prompt
notice to Parent of any event or occurrence that has caused or is
reasonably expected to cause any representation or warranty made by it in
this Agreement to become untrue or inaccurate such that the condition set
forth in Section 6.1 would not be satisfied; provided, however that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the
parties under this Agreement, except as specifically set forth in this
Agreement.
4.3 OPERATION OF PARENT'S BUSINESS.
(a) During Pre-Closing Period, Parent shall not (without the prior
written consent of the Company, which consent shall not be unreasonably
withheld or delayed):
(i) declare or pay any dividend on or make any other distribution
(whether in cash, stock, equity securities or property) in respect of
any capital stock (other than ordinary and routine cash dividends to its
stockholders in accordance with past practices), or split, combine or
reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for any
capital stock;
27
<PAGE> 181
(ii) sell, issue, grant or authorize the issuance or grant of (A)
any capital stock or other security, (B) any option, call, warrant or
right to acquire any capital stock or other security, or (C) any
instrument convertible into or exchangeable for any capital stock or
other security (except (1) pursuant to the 1995 Employee Stock Purchase
Plan, (2) Parent may issue Parent Common Stock upon the valid exercise
of Parent Options outstanding as of the date of this Agreement, and (3)
Parent may grant Parent Options under the Parent Stock Plans to purchase
up to an additional 240,000 shares of Parent Common Stock after the date
hereof and may issue Parent Common Stock upon the exercise thereof);
(iii) amend or waive any of its rights under, or accelerate the
vesting under, any provision of any of Parent's stock option plans, any
provision of any agreement evidencing any outstanding stock option or
any restricted stock purchase agreement, or otherwise modify any of the
terms of any outstanding option, warrant or other security or any
related Contract except for amendments to Parent's Stock Plans to
increase the number of shares subject to issuance pursuant to such
Parent's Stock Plans;
(iv) amend or permit the adoption of any amendment to its
certificate of incorporation or bylaws or other charter or
organizational documents or effect or become a party to any merger,
consolidation, share exchange, or business combination;
(v) materially change its accounting methods, principles or
practices, except as required by generally accepted accounting
principles;
(vi) take any action, or permit any action to be taken, which would
result in a failure to maintain the listing and trading of Parent Common
Stock on Nasdaq National Market System;
(vii) make any Tax election except in the ordinary course of
business consistent with past practice or in respect of which amounts
are reflected or reserved against in the most recent Parent Unaudited
Interim Balance Sheet;
(viii) commence or settle any Legal Proceeding other than in the
ordinary course of business consistent with past practice or in respect
of settlements, to the extent the amount of such settlement has been
reflected or reserved against in the Parent Unaudited Interim Balance
Sheet;
(ix) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices; or
(x) agree or commit to take any of the actions described in clauses
"(i)" through "(ix)" of this Section 4.3(a).
(b) During the Pre-Closing Period, Parent shall give prompt notice to
the Company of any event or occurrence that has caused or is reasonably
expected to cause any representation or warranty made by it in this
Agreement to become untrue or inaccurate such that the condition set forth
in Section 7.1 would not be satisfied; provided, however that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the
parties under this Agreement.
4.4 NO SOLICITATION.
(a) The Company shall not directly or indirectly, and shall not
authorize or permit any Representative of the Company directly or
indirectly to, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal or take any action
that could reasonably be expected to lead to an Acquisition Proposal, (ii)
furnish any information regarding the Company to any Person in connection
with or in response to an Acquisition Proposal, (iii) engage in discussions
or negotiations with any Person with respect to any Acquisition Proposal,
(iv) approve, endorse or recommend any Acquisition Proposal or (v) enter
into any letter of intent or similar document or any Contract contemplating
or otherwise relating to any Acquisition Transaction; provided, however,
prior to the approval and adoption of this Agreement and approval of the
Merger by the Required Company
28
<PAGE> 182
Stockholder Vote, no provision of this Agreement shall prohibit the Company
from furnishing nonpublic information regarding the Company to, or entering
into discussions and participating in negotiations with, any Person in
response to an Acquisition Proposal that is submitted by such Person (and
not then withdrawn) if (A) neither the Company nor any of the
Representatives of the Company shall have violated any of the restrictions
set forth in this Section 4.4, (B) the Board of Directors of the Company
concludes in good faith, after consultation with outside legal counsel,
that such action is required in order for the Board of Directors of the
Company to comply with its fiduciary obligations to the Company's
stockholders under applicable law, (C) concurrently with furnishing any
such nonpublic information to, or entering into discussions or negotiations
with, such Person, the Company gives Parent written notice of the identity
of such Person and of the Company's intention to furnish nonpublic
information to, or enter into discussions or negotiations with, such
Person, and the Company receives from such Person an executed
confidentiality agreement containing customary and reasonable limitations
on the use and disclosure of all nonpublic written and oral information
furnished to such Person by or on behalf of the Company and (D)
concurrently with furnishing any such nonpublic information to such Person,
the Company furnishes such nonpublic information to Parent (to the extent
such nonpublic information has not been previously furnished by the Company
to Parent). Without limiting the generality of the foregoing, the Company
acknowledges and agrees that any violation of any of the restrictions set
forth in the preceding sentence by any Representative of the Company,
whether or not such Representative is purporting to act on behalf of the
Company, shall be deemed to constitute a breach of this Section 4.4 by the
Company.
(b) The Company shall promptly advise Parent orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period. The Company shall
keep Parent fully informed with respect to the status of any such
Acquisition Proposal and any modification or proposed modification thereto.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 REGISTRATION STATEMENT; JOINT PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement,
Parent and the Company shall prepare and cause to be filed with the SEC the
Joint Proxy Statement and Parent shall prepare and cause to be filed with
the SEC the Form S-4 Registration Statement, in which the Joint Proxy
Statement will be included as a prospectus. Each of Parent and the Company
shall use all reasonable efforts to cause the Form S-4 Registration
Statement and the Joint Proxy Statement to comply with the rules and
regulations promulgated by the SEC, to respond promptly to any comments of
the SEC or its staff and to have the Form S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable
after it is filed with the SEC. Parent will use all reasonable efforts to
cause the Joint Proxy Statement to be mailed to Parent's stockholders, and
the Company will use all reasonable efforts to cause the Joint Proxy
Statement to be mailed to the Company's stockholders, as promptly as
practicable after the Form S-4 Registration Statement is declared effective
under the Securities Act. The parties shall promptly furnish to the other
party all information concerning itself, its stockholders and its
affiliates that may be required or reasonably requested in connection with
any action contemplated by this Section 5.1. If any event relating to the
Company occurs, or if the Company becomes aware of any information, that
should be disclosed in an amendment or supplement to the Form S-4
Registration Statement or the Joint Proxy Statement, then the Company shall
promptly inform Parent thereof and shall cooperate with Parent in filing
such amendment or supplement with the SEC and, if appropriate, in mailing
such amendment or supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Parent shall use reasonable efforts
to obtain all regulatory approvals needed to ensure that the Parent Common
Stock to be issued in the Merger: (i) will be registered or qualified under
the securities law of every jurisdiction of the United States in which any
registered holder of Company Common Stock has an address of record on the
record date for determining the stockholders entitled to notice of and to
vote at the Company Stockholders' Meeting, and (ii) will be approved for
29
<PAGE> 183
quotation at the Effective Time on the Nasdaq National Market; provided,
however, that Parent shall not be required (A) to qualify to do business as
a foreign corporation in any jurisdiction in which it is not now qualified
or (B) to file a general consent to service of process in any jurisdiction.
(c) None of the information to be supplied by or on behalf of the
parties for inclusion in the Form S-4 Registration Statement will, at the
time the Form S-4 Registration Statement becomes effective under the
Securities Act, 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 the light of the circumstances under
which they are made, not misleading. None of the information to be supplied
by or on behalf of the parties for inclusion in the Joint Proxy Statement
will, at the time the Joint Proxy Statement is mailed to the stockholders
of the Company, at the time of the Company Stockholders' Meeting or as of
the Effective Time, 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 the light of the circumstances
under which they are made, not misleading. The Joint Proxy Statement will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated by the SEC
thereunder, except that no representation or warranty is made by Parent
with respect to statements made or incorporated by reference therein based
on information supplied by the Company for inclusion or incorporation by
reference in the Joint Proxy Statement and no representation or warranty is
made by the Company with respect to statements made or incorporated by
reference therein based on information supplied by Parent for inclusion or
incorporation by reference in the Joint Proxy Statement.
5.2 COMPANY STOCKHOLDERS' MEETING.
(a) The Company shall take all action necessary under all applicable
Legal Requirements to call, give notice of, convene and hold a meeting of
the holders of Company Common Stock to consider, act upon and vote upon the
approval of this Agreement and of the Merger (the "Company Stockholders'
Meeting"). The Company Stockholders' Meeting will be held as promptly as
practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act. The Company shall
ensure that the Company Stockholders' Meeting is called, noticed, convened,
held and conducted, and that all proxies solicited in connection with the
Company Stockholders' Meeting are solicited, in compliance with all
applicable Legal Requirements.
(b) Subject to Section 5.2(c): (i) the Board of Directors of the
Company shall unanimously recommend that the Company's stockholders vote in
favor of and approve and adopt this Agreement and approve the Merger at the
Company Stockholders' Meeting; (ii) the Joint Proxy Statement shall include
a statement to the effect that the Board of Directors of the Company has
unanimously recommended that the Company's stockholders vote in favor of
and approve and adopt this Agreement and approve the Merger at the Company
Stockholders' Meeting; and (iii) neither the Board of Directors of the
Company nor any committee thereof shall withdraw, amend or modify, or
propose or resolve to withdraw, amend or modify, in a manner adverse to
Parent, the unanimous recommendation of the Board of Directors of the
Company that the Company's stockholders vote in favor of and approve and
adopt this Agreement and approve the Merger. For purposes of this
Agreement, said recommendation of the Board of Directors of the Company
shall be deemed to have been modified in a manner adverse to Parent if said
recommendation shall no longer be unanimous.
(c) Notwithstanding any other provision in this Agreement, prior to
the approval of this Agreement by the Required Company Stockholder Vote, if
a Superior Offer is made to the Company and is not withdrawn, the Board of
Directors of the Company may, in light of the Superior Offer, to the extent
it determines in good faith, after consultation with outside legal counsel,
that it is required to do so in order to comply with its fiduciary duties
to the Company's stockholders under applicable law, withdraw or modify its
approval or recommendation of this Agreement and the Merger or approve or
recommend such Superior Offer; provided that, in so withdrawing or
modifying its approval or recommendation of this Agreement and the Merger
and/or recommending or approving a Superior Offer, neither the Company nor
its Representatives shall have breached Section 4.4, provided, further,
that the Company may refrain
30
<PAGE> 184
from soliciting proxies from its stockholders with respect to this
Agreement and the Merger, in which event, however, the Company shall,
subject to compliance with applicable law: (i) immediately deliver a copy
of a complete, accurate and current list of the Company's stockholders to
Parent; and (ii) upon the request of Parent, include in the materials
mailed by the Company to the Company's stockholders with respect to calling
and giving notice of the Company Stockholders' Meeting, proxy solicitation
materials that have been prepared by Parent in accordance with the Exchange
Act. To the extent that there is no temporary restraining order,
preliminary or permanent injunction or other final and nonappealable order,
decree or ruling issued by any court of competent jurisdiction which
remains in effect and which has the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, the Company shall remain
obligated and nothing shall limit the Company's obligation under Section
5.2(a) to call, give notice of, include Parent's proxy solicitation
materials in the notice materials mailed by the Company to the Company's
stockholders, convene and hold the Company Stockholders' Meeting and to
cause the Company's stockholders to take a final vote on this Agreement and
the Merger (regardless of whether the unanimous recommendation of the Board
of Directors of the Company shall have been withdrawn, amended or
modified).
5.3 PARENT STOCKHOLDERS' MEETING.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the
holders of Company Common Stock to consider and vote upon the issuance of
Parent Common Stock in the Merger (the "Parent Stockholders' Meeting"). The
Parent Stockholders' Meeting will be held as promptly as practicable and in
any event within 45 days after the Form S-4 Registration Statement is
declared effective under the Securities Act; provided, however, that
notwithstanding the foregoing, nothing in this Section 5.3 shall obligate
Parent to call, give notice of, convene or hold a Parent Stockholders'
Meeting (i) if the holders of the Company Common Stock do not approve and
adopt this Agreement and approve the Merger or (ii) if, prior to the time
the Parent Stockholders' Meeting is scheduled to be held, there is a
Material Adverse Effect on the Company that arose from (A) the Company's
breach of or failure to perform its covenants as set forth in Sections 4
and 5 hereof, or (B) the Company's breach of or inaccuracy of any of its
representations and warranties as set forth in Section 2 that resulted from
facts, circumstances, events or conditions which existed at any time prior
to and through the date of this Agreement.
(b) (i) The Board of Directors of Parent shall unanimously recommend
that Parent's stockholders vote in favor of the issuance of Parent Common
Stock in the Merger; (ii) the Joint Proxy Statement shall include a
statement to the effect that the Board of Directors of Parent has
unanimously recommended that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger; and (iii) neither the Board
of Directors of Parent nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify, in a manner
adverse to the Company, the unanimous recommendation of the Board of
Directors of Parent that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger. For purposes of this
Agreement, said recommendation of Parent's Board of Directors shall be
deemed to have been modified in a manner adverse to the Company if said
recommendation shall no longer be unanimous.
5.4 REGULATORY APPROVALS. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body.
5.5 STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLANS.
(a) Subject to Section 5.5(b), at the Effective Time by virtue of the
Merger and without the need for any further corporate action, all rights
with respect to Company Common Stock under each Company Option then
outstanding shall be converted into and become rights with respect to
Parent Common Stock, and Parent shall assume each such Company Option in
accordance with the terms of the stock option plan (as in effect as of the
date of this Agreement) under which it was issued and the stock option
agreement by which it is evidenced. From and after the Effective Time, (i)
each Company Option
31
<PAGE> 185
assumed by Parent may be exercised solely for shares of Parent Common
Stock, (ii) the number of shares of Parent Common Stock subject to each
such Company Option shall be equal to the number of shares of Company
Common Stock subject to such Company Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounding down to the
nearest whole share (with cash, less the applicable exercise price, being
payable for any fraction of a share), (iii) the per share exercise price
under each such Company Option shall be adjusted by dividing the per share
exercise price under such Company Option by the Exchange Ratio and rounding
up to the nearest cent and (iv) any restriction on the exercise of any such
Company Option shall continue in full force and effect and the term,
exercisability, vesting schedule and other provisions of such Company
Option shall otherwise remain unchanged; provided, however, that each
Company Option assumed by Parent in accordance with this Section 5.5(a)
shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend, reverse stock
split, reclassification, recapitalization or other similar transaction
subsequent to the Effective Time. Parent shall file with the SEC, no later
than 5 days after the Effective Time, a registration statement on Form S-8
relating to the shares of Parent Common Stock issuable with respect to the
Company Options assumed by Parent in accordance with this Section 5.5(a).
The adjustments provided herein with respect to any Company Option that are
"incentive stock options" as defined in Section 422 of the Code shall be
and are intended to be effected in a manner which is consistent with
Section 424(a) of the Code.
(b) Notwithstanding anything to the contrary contained in this Section
5.5, in lieu of assuming outstanding Company Options in accordance with
Section 5.5(a), Parent may, at its election, cause such outstanding Company
Options to be replaced by issuing reasonably equivalent replacement stock
options in substitution therefor.
(c) The Company shall take all action that may be necessary (under the
plans pursuant to which Company Options are outstanding and otherwise) to
effectuate the provisions of this Section 5.5 and to ensure that, from and
after the Effective Time, holders of Company Options have no rights with
respect thereto other than those specifically provided in this Section 5.5.
As soon as practicable after the Effective Time, Parent shall deliver to
the participants in the Company Stock Plans appropriate notice setting
forth such participants' rights pursuant thereto and the assumption of such
Company Stock Plans by Parent as described in Section 5.5(a).
(d) At the Effective Time, all rights with respect to the Company
Warrants that are then outstanding shall be converted into and become
rights with respect to Parent Common Stock, and Parent shall assume each
Company Warrant in accordance with the terms (as in effect as of the date
hereof) of such Company Warrants. From and after the Effective Time, (i)
each Company Warrant assumed by Parent may be exercised solely for shares
of Parent Common Stock, (ii) the number of shares of Parent Common Stock
subject to each such Company Warrant shall be equal to the number of shares
of Company Common Stock subject to such Company Warrant immediately prior
to the Effective Time multiplied by the Exchange Ratio, rounding down to
the nearest whole share (with cash, less the applicable exercise price,
being payable for any fraction of a share), (iii) the per share exercise
price under each such Company Warrant shall be adjusted by dividing the per
share exercise price under such Company Warrant by the Exchange Ratio and
rounding up to the nearest cent and (iv) any restriction on the exercise of
any such Company Warrant shall continue in full force and effect and the
term, exercisability, vesting schedule and other provisions of such Company
Warrant shall otherwise remain unchanged; provided, however, that each
Company Warrant assumed by Parent in accordance with this Section 5.5(d)
shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend, reverse stock
split, reclassification, recapitalization or other similar transaction
subsequent to the Effective Time. The Company shall take all action that
may be necessary (under the Company Warrants and otherwise) to effectuate
the provisions of this Section 5.5(d) and to ensure that, from and after
the Effective Time, holders of Company Warrants have no rights with respect
thereto other than those specifically provided herein. As soon as
practicable after the Effective Time, Parent shall deliver to the Company
Warrant holders appropriate notice setting forth such holders' rights
pursuant thereto and the assumption of such Company Warrants by Parent as
described in this Section 5.5(d).
32
<PAGE> 186
(e) The Company shall terminate the Company's 1996 Employee Stock
Purchase Plan ("ESPP") by having its Board of Directors amend the ESPP as
necessary to provide that: (i) any shares of Company Common Stock shall be
purchased under the ESPP on a new "Exercise Date" (as such term is defined
in the ESPP) set by the Board of Directors of the Company, which new
Exercise Date shall be on the last trading day immediately prior to the
Effective Time, or such earlier time as the Board of Directors of the
Company shall specify and (ii) immediately following such purchase of
shares of Company Common Stock on the new Exercise Date, the ESPP shall
terminate.
(f) Parent shall assume all Stock Purchase Agreements and the Company
shall assign its repurchase rights under such Stock Purchase Agreements to
Parent pursuant to Section 10 of the Stock Purchase Agreements. The Stock
Purchase Agreements so assumed by Parent under this Agreement will continue
to have, and be subject to, the same terms and conditions set forth in the
applicable Stock Purchase Agreement by which it is evidenced (including,
without limitation, any repurchase rights) immediately prior to the
Effective Time, except that (i) the Stock Purchase Agreement will be for
that number of whole shares (and no fractional shares) of Parent Common
Stock equal to the product of the number of shares of Company Common Stock
that have not vested immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of
Parent Common Stock and (ii) the per share repurchase price for the
unvested shares of Parent Common Stock subject to the repurchase right will
be equal to the quotient determined by dividing the purchase price per
share of Company Common Stock at which such Company Common Stock was
purchased under the Stock Purchase Agreement by the Exchange Ratio, rounded
up to the nearest whole cent.
5.6 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) From the Effective Time, Parent will, and will cause the Surviving
Corporation to, fulfill and honor in all respects the obligations of the
Company pursuant to (i) each indemnification agreement in effect at such
time between the Company and each person who is or was a director or
officer of the Company at or prior to the Effective Time and (ii) any
indemnification provisions under the Company's Restated Certificate of
Incorporation or Bylaws as each is in effect on the date hereof (the
persons to be indemnified pursuant to the agreements or provisions referred
to in clauses (i) and (ii) of this Section 5.6 shall be referred to as,
individually, the "Indemnified Party.") The Certificate of Incorporation
and Bylaws of the Surviving Corporation shall contain the provisions with
respect to indemnification and exculpation from liability set forth in the
Company's Certificate of Incorporation and Bylaws on the date of this
Agreement which provisions shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner
that would adversely affect the rights thereunder of any Indemnified Party,
unless required by applicable law. In addition, the terms of the existing
indemnification agreements entered into by the Company and its officers and
directors as of the date of this Agreement shall not be terminated by
Parent or the Surviving Corporation for a period of six years after the
Effective Time, unless required by applicable law.
(b) From the Effective Time until the third anniversary of the
Effective Time, the Surviving Corporation shall maintain in effect, for the
benefit of the current directors and officers of the Company with respect
to acts or omissions occurring prior to the Effective Time, the existing
policy of directors' and officers' liability insurance maintained by the
Company as of the date of this Agreement (the "Existing Policy"); provided,
however, that (i) the Surviving Corporation may substitute for the Existing
Policy a policy or policies of comparable coverage, and (ii) the Surviving
Corporation shall not be required to pay an annual premium for the Existing
Policy (or for any substitute policies) in excess of $150,000. In the event
any future annual premium for the Existing Policy (or any substitute
policies) exceeds $150,000, the Surviving Corporation shall be entitled to
reduce the amount of coverage of the Existing Policy (or any substitute
policies) to the amount of coverage that can be obtained for a premium
equal to $150,000.
(c) This Section 5.6 shall survive the consummation of the Merger at
the Effective Time and is intended to be for the benefit of the Company,
Parent, the Surviving Corporation and each Indemnified
33
<PAGE> 187
Party and such Indemnified Party's heirs and representatives and shall be
binding on all successors and assigns of Parent and the Surviving
Corporation.
5.7 POOLING OF INTERESTS. Each of the Company and Parent agrees (a) not to
take any action during the Pre-Closing Period that would adversely affect the
ability of Parent to account for the Merger as a "pooling of interests," and (b)
to use all reasonable efforts to attempt to ensure that none of its "affiliates"
(as that term is used in Rule 145 under the Securities Act) takes any action
that could adversely affect the ability of Parent to account for the Merger as a
"pooling of interests."
5.8 ADDITIONAL AGREEMENTS.
(a) Subject to Section 5.8(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, but subject to Section 5.8(b), each party to this Agreement (i)
shall make all filings (if any) and give all notices (if any) required to
be made and given by such party in connection with the Merger and the other
transactions contemplated by this Agreement, (ii) shall use all reasonable
efforts to obtain each Consent (if any) required to be obtained (pursuant
to any applicable Legal Requirement or Contract, or otherwise) by such
party in connection with the Merger or any of the other transactions
contemplated by this Agreement, (iii) shall use all reasonable efforts to
lift any restraint, injunction or other legal bar to the Merger, (iv) shall
execute and deliver any additional instruments, documents, certificates or
agreements necessary to consummate the Merger and the other transactions
contemplated by this Agreement and to carry out the purposes and intent of
this Agreement, and (v) shall fulfill their respective obligations under
Sections 6 and 7. Each of the Company and Parent shall promptly deliver to
the other party a copy of each such filing made, each such notice given and
each such Consent obtained by the other party during the Pre-Closing
Period.
(b) Notwithstanding anything to the contrary contained in this
Agreement, Parent shall not have any obligation under this Section 5.8: (i)
to dispose or cause any of its Subsidiaries to dispose of any assets, or to
commit to cause the Company to dispose of any assets; (ii) to discontinue
or cause any of its Subsidiaries to discontinue offering any product, or to
commit to cause the Company to discontinue offering any product; (iii) to
license or otherwise make available, or cause any of its Subsidiaries to
license or otherwise make available, to any Person, any technology,
software or other Proprietary Asset, or to commit to cause the Company to
license or otherwise make available to any Person any technology, software
or other Proprietary Asset the Company is not already required to license
or otherwise make available under Contracts existing as of the date of this
Agreement and identified on Part 2.9 of the Company Disclosure Schedule; or
(iv) to hold separate or cause any of its Subsidiaries to hold separate any
assets or operations (either before or after the Closing Date), or to
commit to cause the Company to hold separate any assets or operations.
5.9 DISCLOSURE. Parent and the Company shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or any of the other transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, neither the Company
nor Parent shall, nor shall either of them permit any of their respective
Representatives to, make any disclosure regarding the Merger or any of the other
transactions contemplated by this Agreement unless (a) the other party shall
have approved such disclosure or (b) the disclosing party shall have been
advised in writing by its outside legal counsel that such disclosure is required
by applicable law.
5.10 AFFILIATE AGREEMENTS. The Company shall use all reasonable efforts to
cause each Person identified in Part 2.19 of the Company Disclosure Schedule and
each other Person who is or becomes an "affiliate" (as that term is used in Rule
145 under the Securities Act) of the Company to execute and deliver to Parent,
prior to the date of the mailing of the Joint Proxy Statement to the Company's
stockholders, an Affiliate Agreement in the form of Exhibit C.
5.11 TAX MATTERS. At or prior to the Closing, the Company and Parent shall
execute and deliver to Cooley Godward LLP and Wilson Sonsini Goodrich & Rosati,
a Professional Corporation tax representation
34
<PAGE> 188
letters in customary form. In addition, the Company shall use all reasonable
efforts to obtain and deliver to Parent, as soon as practicable after the date
of this Agreement, Continuity of Interest Certificates in the form of Exhibit D,
signed by Phillip Lamoreaux. Parent and the Company shall use all reasonable
efforts prior to the Effective Time to cause the Merger to qualify as a tax free
reorganization under Section 368(a)(1) of the Code and each shall use reasonable
efforts to obtain the opinions of counsel referred to in Sections 6.5(e) and
7.5(a) hereof.
5.12 COMFORT LETTERS. The Company shall use all reasonable efforts to
cause Ernst & Young LLP, certified public accountants to the Company, to provide
comfort letters dated the date on which the Form S-4 Registration Statement
shall become effective and reasonably acceptable in form and substance to
Parent, relating to the performance of Ernst & Young LLP of customary
procedures, including a review of interim financial statement information as
described in SAS No. 71, with respect to the financial statements of the Company
contained in or incorporated by reference in the Form S-4 Registration
Statement. Parent shall use all reasonable efforts to cause Price Waterhouse
LLP, certified public accountants to Parent, to provide comfort letters dated
the date on which the Form S-4 Registration Statement shall become effective and
reasonably acceptable in form and substance to the Company, relating to the
performance of Price Waterhouse LLP of customary procedures, including a review
of interim financial statement information as described in SAS No. 71, with
respect to the financial statements of Parent contained in or incorporated by
reference in the Form S-4 Registration Statement.
5.13 RESIGNATION OF OFFICERS AND DIRECTORS. The Company shall use all
reasonable efforts to obtain and deliver to Parent prior to the Closing the
resignation of each officer and director of the Company.
5.14 APPOINTMENT OF ADDITIONAL DIRECTORS. As of the Effective Time, the
Board of Directors of Parent shall have taken appropriate action to cause the
number of directors comprising the full Board of Directors of Parent to be
increased to seven (7) persons, and Dr. Phillip Berman and Dr. David Lapan to be
appointed as of the Effective Time as new members of the Board of Directors,
each to serve until their respective successors are duly elected, appointed and
qualified.
5.15 CONSENTS. As soon as practicable after the date hereof, the Company
will use its best efforts to obtain all material Consents, waivers and approvals
required to be obtained in connection with the Merger and the other transactions
contemplated by this Agreement (including the Consents identified in Part 5.15
of the Company Disclosure Schedule).
5.16 FINANCIAL INFORMATION AND REPORTING. During the Pre-Closing Period,
each of Parent and the Company will furnish to the other, as soon as practicable
after the end of such party's monthly accounting periods, and in any event
within 21 days thereafter, a consolidated balance sheet of such party, as of the
end of each such monthly period, and a consolidated statement of income and a
consolidated statement of cash flows of such party, for such period and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 ACCURACY OF REPRESENTATIONS.
The representations and warranties of the Company contained in this
Agreement shall have been accurate in all respects as of the date of this
Agreement and shall be accurate in all respects as of the Closing Date as if
made on and as of the Closing Date, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to all such inaccuracies (considered individually and collectively) do not
constitute a Material Adverse Effect on the Company (it being understood that,
for purposes of determining the accuracy of such representations and warranties
(i) all "Material Adverse Effect" qualifications and other materiality
qualifications contained in such representations and warranties shall be
35
<PAGE> 189
disregarded and (ii) any update of or modification of the Company Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded).
6.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
6.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
6.4 STOCKHOLDER APPROVAL. This Agreement shall have been duly adopted and
approved by the Required Company Stockholder Vote, the Merger shall have been
duly approved by the Required Company Stockholder Vote and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the required
Parent Stockholder Vote.
6.5 AGREEMENTS AND DOCUMENTS. Parent and the Company shall have received
the following agreements and documents, each of which shall be in full force and
effect:
(a) Affiliate Agreements in the form of Exhibit C, executed by each
Person who could reasonably be deemed to be an "affiliate" of the Company
(as that term is used in Rule 145 under the Securities Act), which
Affiliate Agreement shall also contain customary continuity of interest
representations;
(b) Accepted employment letters in the form of Exhibit E, executed by
the individuals identified on Exhibit F; and none of the individuals
identified on Exhibit F shall have expressed an intention to terminate his
employment with the Company or to decline to accept employment with Parent;
(c) a letter from Ernst & Young LLP, dated as of the Closing Date and
addressed to Parent, the Company and Price Waterhouse LLP, reasonably
satisfactory in form and substance to Parent and Price Waterhouse LLP, to
the effect that, after reasonable investigation, Ernst & Young LLP is not
aware of any fact concerning the Company or any of the Company's
stockholders or affiliates that could preclude Parent from accounting for
the Merger as a "pooling of interests" in accordance with generally
accepted accounting principles, Accounting Principles Board Opinion No. 16
and all published rules, regulations and policies of the SEC;
(d) a letter from Price Waterhouse LLP, dated as of the Closing Date
and addressed to Parent, reasonably satisfactory in form and substance to
Parent, to the effect that Parent may account for the Merger as a "pooling
of interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC;
(e) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date and addressed to Parent, to the effect that the Merger will constitute
a reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, Cooley Godward LLP may rely
upon the continuity of interest representations and tax representation
letters referred to in this Agreement), provided, however, that if Cooley
Godward LLP does not render such opinion or withdraws or modifies such
opinion, this condition shall nonetheless be deemed to be satisfied if
counsel to the Company renders such opinion to Parent;
(f) a certificate executed on behalf of the Company by its Chief
Executive Officer confirming that the conditions set forth in Sections 6.1,
6.2, 6.4 (as to the Required Company Stockholder Vote only), 6.6, 6.8, and
6.9 have been duly satisfied; and
(g) the written resignations of all officers and directors of the
Company, effective as of the Effective Time; provided further that (i) the
written resignations of Phillip Berman, Cary Cole, and Henky Wibowo (the
"Executives") shall also contain provisions providing for the release by
the Executives of the Company's obligations under the Executives' existing
employment agreements with the Company and (ii) a voluntary termination by
the Executives of such employment agreements.
36
<PAGE> 190
6.6 NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to
the Company shall have occurred since the date of this Agreement (except for any
Material Adverse Effect that shall have been cured without such cure resulting
or reasonably being expected to result in a Material Adverse Effect on the
Company).
6.7 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
6.8 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.9 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or has threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) seeking to prohibit or limit in any material
respect Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (c) which would materially and adversely affect the right of
Parent, the Surviving Corporation or any Subsidiary of Parent to own the assets
or operate the business of the Company.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS.
The representations and warranties of Parent contained in this Agreement
shall have been accurate in all respects as of the date of this Agreement and
shall be accurate in all respects as of the Closing Date as if made on and as of
the Closing Date, except that any inaccuracies in such representations and
warranties will be disregarded if the circumstances giving rise to all such
inaccuracies (considered individually and collectively) do not constitute a
Material Adverse Effect on Parent (it being understood that, for purposes of
determining the accuracy of such representations and warranties (i) all
"Material Adverse Effect" qualifications and other materiality qualifications
contained in such representations and warranties shall be disregarded and (ii)
any update of or modification of the Parent Disclosure Schedule made or
purported to have been made after the date of this Agreement shall be
disregarded).
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all material
respects.
7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
7.4 STOCKHOLDER APPROVAL. This Agreement shall have been duly approved and
adopted by the Required Company Stockholder Vote, the Merger shall have been
duly approved by the Required Company Stockholder Vote and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
7.5 DOCUMENTS. The Company shall have received the following documents:
(a) a legal opinion of Wilson Sonsini Goodrich & Rosati, a
Professional Corporation dated as of the Closing Date, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368 of the Code (it being understood that, in rendering such opinion,
Wilson Sonsini Goodrich & Rosati may rely upon the continuity of interest
representations and tax representation letters referred to in
37
<PAGE> 191
this Agreement), provided, however, that if Wilson Sonsini Goodrich &
Rosati does not render such opinion or withdraws or modifies such opinion,
this condition shall nonetheless be deemed to be satisfied if counsel to
Parent renders such opinion to the Company;
(b) a certificate executed on behalf of Parent by an executive officer
of Parent, confirming that conditions set forth in Sections 7.1, 7.2, 7.4
(as to the Required Parent Stockholder Vote only) 7.6 and 7.8 have been
duly satisfied; and
(c) a letter from Price Waterhouse LLP, dated as of the Closing Date
and addressed to the Company, Parent and Ernst & Young LLP, reasonably
satisfactory in form and substance to the Company and Ernst & Young LLP, to
the effect that, after reasonable investigation, Price Waterhouse LLP is
not aware of any fact concerning Parent or any of Parent's stockholders or
affiliates that could preclude Parent from accounting for the Merger as a
"pooling of interests" in accordance with generally accepted accounting
principles, Accounting Principles Board Opinion No. 16 and all published
rules, regulations and policies of the SEC.
7.6 NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to
the Parent shall have occurred since the date of this Agreement (except for any
Material Adverse Effect that shall have been cured without such cure resulting
or reasonably being expected to result in a Material Adverse Effect on Parent).
7.7 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
7.8 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger by
the Company shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger by the Company
illegal.
SECTION 8. TERMINATION
8.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned prior to the Effective Time (unless
otherwise indicated below, whether before or after approval and adoption of this
Agreement and approval of the Merger by the Required Company Stockholder Vote
and whether before or after approval of the issuance of Parent Common Stock in
the Merger by the Required Parent Stockholder Vote):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by January 31, 1998, provided, however, that the right to
terminate this Agreement under this Section 8.1(b) shall not be available
to any party whose action or failure to act has been a principal cause of
or resulted in the failure of the Merger to occur on or before such date
and such action or failure to act constitutes a breach of this Agreement;
(c) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Parent or the Company if (i) the Company Stockholders'
Meeting (including any adjournments or postponements thereof) shall have
been held and completed and the Company's stockholders shall have taken a
final vote on a proposal to approve and adopt this Agreement and to approve
the Merger and (ii) this Agreement shall not have been adopted and approved
and the Merger shall not have been approved at such meeting by the Required
Company Stockholder Vote (provided, however, that the right to terminate
this Agreement under Section 8.1(d) shall not be available to the Company
where the failure to obtain the Required Company Stockholder Vote shall
have been caused by the action or failure to act of the Company and such
action or failure to act constitutes a material breach by the Company of
this Agreement);
38
<PAGE> 192
(e) by either Parent or the Company if (i) the Parent Stockholders'
Meeting (including any adjournments or postponements thereof) shall have
been held and completed and Parent's stockholders shall have taken a final
vote on the issuance of Parent Common Stock in the Merger and (ii) the
issuance of Parent Common Stock in the Merger shall not have been approved
at such meeting by the Required Parent Stockholder Vote (provided, however,
that the right to terminate this Agreement under Section 8.1(e) shall not
be available to Parent where the failure to obtain the Required Parent
Stockholder Vote shall have been caused by the action or failure to act of
Parent and such action or failure to act constitutes a material breach by
Parent of this Agreement);
(f) by Parent (at any time prior to the approval and adoption of this
Agreement and the approval of the Merger by the Required Company
Stockholder Vote) or by the Company (at any time after (i) a Company
Stockholders' Meeting has been held and completed, (ii) a final vote on the
proposal to approve and adopt this Agreement and to approve the Merger has
been taken at such Company Stockholders' Meeting and (iii) the Required
Company Stockholder Vote has not been obtained at such Company
Stockholders' Meeting) if a Company Triggering Event shall have occurred;
(g) by Parent if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of the Company's covenants contained in this
Agreement shall have been breached in any material respect, in either case
such that the conditions set forth in Section 6.1, 6.2 or 6.6 would not be
satisfied as of the time such representation or warranty shall have become
inaccurate or as of the time of such breach; provided, however, that if an
inaccuracy in the Company's representations and warranties or a breach of a
covenant by the Company is curable by the Company and the Company is
continuing to exercise all reasonable efforts to cure such inaccuracy or
breach during the 45-day period commencing upon delivery by Parent of a
written notice to the Company describing such inaccuracy or breach, then
Parent may not terminate this Agreement under this Section 8.1(g) on
account of such inaccuracy or breach until the end of such cure period (if
such inaccuracy or breach then remains uncured), and provided further that
Parent may not terminate this Agreement pursuant to this Section 8.1(g) if
it shall have materially breached this Agreement (it being understood that
(i) the cure period described in this Section 8.1(g) shall in no event
extend beyond January 31, 1998, and (ii) that any such cure shall not
individually or in the aggregate have or reasonably be expected to have a
Material Adverse Effect on the Company);
(h) by the Company if any of Parent's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of Parent's covenants contained in this Agreement
shall have been breached in any material respect, in either case such that
the conditions set forth in Section 7.1, 7.2 or 7.6 would not be satisfied
as of the time such representation or warranty shall have become inaccurate
or as of the time of such breach; provided, however, that if an inaccuracy
in Parent's representations and warranties or a breach of a covenant by
Parent is curable by Parent and Parent is continuing to exercise all
reasonable efforts to cure such inaccuracy or breach during the 45-day
period commencing upon delivery by the Company of a written notice to
Parent describing such inaccuracy or breach, then the Company may not
terminate this Agreement under this Section 8.1(h) on account of such
inaccuracy or breach until the end of such cure period (if such inaccuracy
or breach then remains uncured), and provided further that the Company may
not terminate this Agreement pursuant to this Section 8.1(h) if it shall
have materially breached this Agreement (it being understood that (i) the
cure period described in this Section 8.1(h) shall in no event extend
beyond January 31, 1998 and (ii) that any such cure shall not individually
or in the aggregate have or reasonably be expected to have a Material
Adverse Effect on Parent); or
(i) by Parent, if (i) any Person who has signed a Voting Agreement in
favor of Parent, in the form of Exhibit G, shall have breached, withdrawn,
amended or modified in a manner adverse to Parent, such Voting Agreement,
(ii) if, prior to the Effective Time, any Person who has signed a Voting
Agreement challenges the validity of such Voting Agreement, (iii) if any
Person who has signed a Voting Agreement in any way disposes of or
encumbers any of the shares of Company Common Stock owned directly or
beneficially by such Person as of the date of this Agreement, or (iv) if
any Person who has signed a Voting Agreement votes in favor of an
Acquisition Proposal.
39
<PAGE> 193
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect and shall relieve Parent, Merger Sub and the Company of any
liability or obligation under this Agreement; provided, however, that the
liabilities and obligations under (i) Sections 5.9, 8.2, 8.3 and 9 shall survive
the termination of this Agreement and shall remain in full force and effect, and
(ii) the termination of this Agreement shall not relieve any party from any
liability for any breach of any representation, warranty or covenant contained
in this Agreement.
8.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Parent and the Company shall share equally all fees and expenses, other
than attorneys' fees, incurred in connection with the filing, printing and
mailing of the Form S-4 Registration Statement and the Joint Proxy
Statement and any amendments or supplements thereto; and provided further
that to the extent that the aggregate of the fees and expenses specified in
Section 2.27 exceeds $500,000 (the amount of such excess shall be referred
to herein as "Excess Company Merger Expenses"), the adjustment set forth in
Section 1.5(e) shall be made.
(b) If this Agreement is terminated:
(i) pursuant to Section 8.1(d) by Parent or the Company (and if by
Parent, only if at the time the Company Stockholders' Meeting was held,
there existed a publicly announced and pending Acquisition Proposal),
(ii) pursuant to Section 8.1(f) by Parent or the Company (and if by
Parent, unless the occurrence of a Company Triggering Event is
attributable to Parent's failure to meet the condition set forth in
Section 7.6 (but only if such failure to meet the condition set forth in
Section 7.6 arose from (A) Parent's breach of or failure to perform its
covenants as set forth in Sections 4 and 5, or (B) Parent's breach of or
inaccuracy of any of its representations and warranties as set forth in
Section 3 that resulted from facts, circumstances, events or conditions
which existed at any time prior to and through the date of this
Agreement)),
(iii) pursuant to Section 8.1(h) by the Company (provided that such
termination under Section 8.1(h) is not as a result of (A) Parent's
breach of or failure to perform its covenants as set forth in Sections 4
and 5, or (B) Parent's breach of or inaccuracy of any of its
representations and warranties as set forth in Section 3 that resulted
from facts, circumstances, events or conditions which existed at any
time prior to and through the date of this Agreement), or
(iv) pursuant to Section 8.1(i),
and if an Acquisition Transaction is consummated within twelve months from the
date this Agreement is terminated, then the Company shall pay to Parent within
two business days following the consummation of such Acquisition Transaction,
the sum of $1,000,000 by wire transfer of immediately available funds to an
account designated by Parent.
(c) If this Agreement is terminated:
(i) pursuant to Section 8.1(b) by Parent (unless failure to
consummate the Merger is attributable to the restrictions or restraints
imposed by any Governmental Body or because the conditions set forth in
Sections 6.3, 6.5(a), 6.5(b), 6.5(c), 6.5(d), (but only if such
condition was not met due to a change in the Company's situation between
the date of this Agreement and the termination date), 6.5(g), and 6.6
(but only if such Material Adverse Effect arose from (A) the Company's
breach of or failure to perform its covenants as set forth in Sections 4
and 5, or (B) the Company's breach of or inaccuracy of any of its
representations and warranties as set forth in Section 2 that resulted
from facts, circumstances, events or conditions which existed at any
time prior to and through the date of this Agreement) have not been
met),
40
<PAGE> 194
(ii) pursuant to Section 8.1(e) by either Parent or the Company
(and if by the Company, unless the condition set forth in Section 6.6
has not been met by the Company at the time the Parent Stockholders'
Meeting, during which the Required Parent Stockholder Vote was not
obtained, is held (but only if such failure to meet the condition set
forth in Section 6.6 arose from (A) the Company's breach of or failure
to perform its covenants as set forth in Sections 4 and 5, or (B) the
Company's breach of or inaccuracy of any of its representations and
warranties as set forth in Section 2 that resulted from facts,
circumstances, events or conditions which existed at any time prior to
and through the date of this Agreement)),
(iii) pursuant to Section 8.1(g) by Parent (provided that such
termination under Section 8.1(g) is not as a result of (A) the Company's
breach of or failure to perform its covenants as set forth in Sections 4
and 5, or (B) the Company's breach of or inaccuracy of any of its
representations and warranties as set forth in Section 2 that resulted
from facts, circumstances, events or conditions which existed at any
time prior to and through the date of this Agreement), or
(iv) pursuant to Section 8.1(h) by the Company (provided that such
termination under Section 8.1(h) is as a result of (A) Parent's breach
of or failure to perform its covenants as set forth in Sections 4 and 5,
or (B) Parent's breach of or inaccuracy of any of its representations
and warranties as set forth in Section 3 that resulted from facts,
circumstances, events or conditions which existed at any time prior to
and through the date of this Agreement),
then, Parent shall pay to the Company two business days following the date this
Agreement is terminated as described in this Section 8.3(c), the sum of
$1,000,000 by wire transfer of immediately available funds to an account
designated by the Company.
SECTION 9. MISCELLANEOUS PROVISIONS
9.1 AMENDMENT. This Agreement may be amended by the Company and Parent at
any time (whether before or after approval of this Agreement and the Merger by
the stockholders of the Company; and whether before or after approval of the
issuance of Parent Common Stock in the Merger by Parent's stockholders)
provided, however, that (i) after any such approval of this Agreement and the
Merger by the Company's stockholders, no amendment shall be made which by law
requires further approval of the stockholders of the Company without the further
approval of such stockholders, and (ii) after any such approval of the issuance
of Parent Common Stock in the Merger, no amendment shall be made which by law or
NASD regulation requires further approval of Parent's stockholders without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
9.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No party shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it
is given.
9.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
41
<PAGE> 195
9.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW; JURISDICTION.
(a) This Agreement and the other agreements referred to herein between
Parent and the Company constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among or
between any of the parties with respect to the subject matter hereof and
thereof.
(b) This Agreement may be executed in several counterparts, each of
which shall be deemed an original and all of which shall constitute one and
the same instrument, and shall be governed in all respects by the laws of
the State of Delaware as applied to contracts entered into and to be
performed entirely within Delaware.
(c) Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any court of the United States located in the
State of Delaware or of any Delaware state court in the event any dispute
arises out of this Agreement or the transactions contemplated by this
Agreement, (ii) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such
court and (iii) agrees that it will not bring any action relating to this
Agreement or the transactions contemplated by this Agreement in any court
other than a court of the United States located in the State of Delaware or
a Delaware state court.
9.5 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the Company's rights hereunder may be assigned, by
operation of law or otherwise, in whole or in part by any of the parties without
the prior written consent of the other party, and any attempted assignment of
this Agreement or any of such rights by a party without such consent shall be
void and of no effect. Except as set forth in Section 5.6 with respect to the
current directors and officers of the Company, nothing in this Agreement,
express or implied, is intended to or shall confer upon any Person any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
9.7 NOTICES. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
<TABLE>
<S> <C>
If to parent: Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94086
Attn: Stephen J. Weiss
With a copy to: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Andrei M. Manoliu
If to Merger sub: SAC Acquisition Corporation
c/o Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94086
Attn: Stephen J. Weiss
With a copy to: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Andrei M. Manoliu
</TABLE>
42
<PAGE> 196
<TABLE>
<S> <C>
If to the Company: CompuRAD, Inc.
1350 North Kolb Road
Tucson, Arizona 85715
Attn: Dr. Phillip Berman
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: David J. Segre
</TABLE>
9.8 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
LUMISYS INCORPORATED
By: /s/ STEPHEN J. WEISS
------------------------------------
SAC ACQUISITION CORPORATION
By: /s/ STEPHEN J. WEISS
------------------------------------
COMPURAD, INC.
By: /s/ DR. PHILLIP BERMAN
------------------------------------
43
<PAGE> 197
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION PROPOSAL. "Acquisition Proposal" shall mean any offer, proposal
or inquiry (other than an offer or proposal by Parent) contemplating or
otherwise relating to any Acquisition Transaction.
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) other than the transactions contemplated by this Agreement, any
merger, consolidation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or
other similar transaction (i) in which the Company is a constituent
corporation, (ii) in which a Person or "group" (as defined in the Exchange
Act and the rules promulgated thereunder) of Persons directly or indirectly
acquires the Company or more than 50% of the Company's business or directly
or indirectly acquires beneficial or record ownership of securities
representing more than 20% of the outstanding securities of any class of
voting securities of the Company, or (iii) in which the Company issues
securities representing more than 20% of the outstanding securities of any
class of voting securities of the Company;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of the Company; or
(c) any liquidation or dissolution of the Company.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
COMPANY COMMON STOCK. "Company Common Stock" shall mean the Common Stock,
$0.01 par value per share, of the Company.
COMPANY CONTRACT. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any asset of the Company is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
COMPANY DISCLOSURE SCHEDULE. "Company Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by the Company and that has been
delivered by the Company to Parent on the date of this Agreement and signed by
the President of the Company.
COMPANY PROPRIETARY ASSET. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
COMPANY TRIGGERING EVENT. A "Company Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of the Company shall have failed to
recommend unanimously, or shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to Parent its unanimous recommendation
in favor of, the Merger or approval of this Agreement; (ii) the Company shall
have failed to include in the Joint Proxy Statement the unanimous recommendation
of the Board of Directors of the Company in favor of approval of this Agreement
and the Merger; (iii) the Board of Directors of the Company shall have approved,
endorsed or recommended any Acquisition Proposal; (iv) the Company shall have
entered into any letter of intent or similar document or any Contract relating
to any Acquisition Proposal; (v) a tender or exchange offer relating to
securities of the Company shall have been commenced and the Company shall not
have sent to its securityholders, within ten business days after the
commencement of such tender or exchange offer, a statement disclosing that the
Company recommends rejection of such tender or exchange offer; or (vii) an
Acquisition Proposal is publicly announced, and the Company fails to issue a
press release announcing its opposition to such Acquisition Proposal within five
business days after such Acquisition Proposal is announced.
A-1
<PAGE> 198
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
FORM S-4 REGISTRATION STATEMENT. "Form S-4 Registration Statement" shall
mean the registration statement on Form S-4 to be filed with the SEC by Parent
in connection with issuance of Parent Common Stock in the Merger, as said
registration statement may be amended prior to the time it is declared effective
by the SEC.
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, variance, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
JOINT PROXY STATEMENT. "Joint Proxy Statement" shall mean the joint proxy
statement/prospectus to be sent to the Company's stockholders in connection with
the Company Stockholder's Meeting and to Parent's stockholders in connection
with the Parent Stockholders' Meeting.
KNOWLEDGE. A party shall be deemed to have "knowledge" of a particular fact
or other matter if:
(a) an officer or director of such party is actually aware of such
fact or other matter; or
(b) a prudent officer or director of such party could be expected to
discover or otherwise become aware of such fact or other matter in the
course of conducting a reasonably diligent investigation concerning the
truth or existence of such fact or other matter.
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. One or more events, violations, inaccuracies,
circumstances or other matters will be deemed to have a "Material Adverse
Effect" on a party if such event(s), violation(s), inaccuracy(ies),
A-2
<PAGE> 199
circumstance(s) or other matter(s) would have a material adverse effect on: (i)
the business, condition, capitalization, assets, liabilities, operations or
financial performance of the applicable party and its Subsidiaries taken as a
whole, (ii) the ability of the party to consummate the Merger or any of the
other transactions contemplated by this Agreement or to perform obligations
under this Agreement, or (iii) Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation except that any event(s), violation(s),
inaccuracy(ies), circumstance(s) or other matter(s) from the following shall not
be taken into account in determining whether there has been or there is
reasonably expected to be a Material Adverse Effect: (i) general economic
conditions or conditions affecting the party's industry generally, (ii) the
delay or cancellation of orders for the party's products from customers or
distributors (or other resellers) directly attributable to the announcement of
this Agreement or pendency of the Merger, (iii) the lack of or delay in
availability of components or raw materials from the party's suppliers directly
attributable to the announcement of this Agreement or pendency of the Merger,
and (iv) stockholder litigation brought or threatened against the party or any
member of the Board of Directors of the party with respect to this Agreement or
pendency of the Merger, provided, however, that in any dispute, the party
asserting that any of the foregoing is "directly attributable" to or "with
respect to" this Agreement or pendency of the Merger shall have the burden of
proof of such assertion by a preponderance of the evidence.
PARENT COMMON STOCK. "Parent Common Stock" shall mean the Common Stock,
$0.001 par value per share, of Parent.
"PARENT DISCLOSURE SCHEDULE" shall mean the disclosure schedule that has
been prepared by Parent and that has been delivered by Parent to the Company on
the date of this Agreement and signed by the President of Parent.
PERSON. "Person" shall mean any individual, Entity or Governmental Body.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, source code, algorithm, invention, design,
blueprint, engineering drawing, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset; or (b) right to
use or exploit any of the foregoing.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SUBSIDIARY. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities of other interests in such Entity that is sufficient
to enable such Person to elect at leased a majority of the members of such
Entity's Board of Directors or other governing body.
SUPERIOR OFFER. "Superior Offer" shall mean any bona fide offer made by a
third party to acquire, directly or indirectly more than 50% of outstanding
Company Common Stock on terms that the Board of Directors of the Company
determines in its reasonable judgment, after consultation with its financial
advisor, to be more favorable to the Company's stockholders than the terms of
the Merger; provided, however, that any such offer shall not be deemed to be a
"Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is neither committed nor, in the good faith judgment
of the Board of Directors of the Company, reasonably capable of being obtained
by such third party.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty),
A-3
<PAGE> 200
deficiency or fee, and any related charge or amount (including any fine, penalty
or interest), imposed, assessed or collected by or under the authority of any
Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
A-4
<PAGE> 201
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
[SURVIVING CORPORATION]
I.
The name of this corporation is [Surviving Corporation].
II.
The address, including street, number, city, and county, of the registered
office of the corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington, 19805, County of New Castle; and the name of the registered agent of
the corporation in the State of Delaware at such address is Corporation Service
Company.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Delaware General Corporation
Law.
IV.
1. This corporation is authorized to issue one class of stock to be
designated "Common Stock". The total number of shares of Common Stock which the
corporation is authorized to issue is one thousand (1,000) shares each having a
par value of one-tenth of one cent ($0.001).
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by the Board
of Directors in the manner provided in the Bylaws.
2. The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may change or repeal
any Bylaw adopted by the Board of Directors by the affirmative vote of the
holders of a majority of the voting power of all of the then outstanding shares
of the capital stock of the corporation (considered for this purpose as one
class); and, provided further, that no amendment or supplement to the Bylaws
adopted by the Board of Directors shall vary or conflict with any amendment or
supplement thus adopted by the stockholders.
3. The directors of the corporation need not be elected by written ballot
unless the Bylaws so provide.
VI.
1. To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, no director of the
corporation shall be personally liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
2. The corporation may indemnify to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director, officer or employee of the
corporation or
B-1
<PAGE> 202
any predecessor of the corporation or serves or served at any other enterprise
as a director, officer or employee at the request of the corporation or any
predecessor to the corporation.
3. Neither any amendment nor repeal of this Article VI, nor the adoption of
any provisions of the Corporation's Certificate of Incorporation inconsistent
with this Article VI, shall eliminate or reduce the effect on this Article VI,
in respect of any matter occurring, or any action, suite, claim or proceeding
accruing or arising or that, but for this Article VI, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
VII.
The name and mailing address of the incorporator is as follows:
Andrei M. Manoliu
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-0663
VIII.
The corporation is to have perpetual existence.
IX.
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the Delaware General Corporation
Law, do make this Certificate, hereby declaring and certifying that this is my
act and deed and that the facts herein stated are true and accordingly have
hereunto set my hand this day of October, 1997.
--------------------------------------
Andrei M. Manoliu
Sole Incorporator
B-2
<PAGE> 203
EXHIBIT C
FORM OF AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT (this "Agreement") is being executed and delivered
as of , 1997 by ("Affiliate") in favor of and for the
benefit of LUMISYS INCORPORATED, a Delaware corporation ("Parent").
RECITALS
A. Affiliate is a stockholder [and an officer and director] of COMPURAD,
INC., a Delaware corporation (the "Company").
B. Parent, the Company and SAC Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), have entered
into an Agreement and Plan of Merger and Reorganization dated as of ,
1997 (the "Reorganization Agreement"), providing for the merger of Merger Sub
with and into the Company (the "Merger"). The Reorganization Agreement
contemplates that, upon consummation of the Merger, (i) the Company's
stockholders will receive shares of common stock, par value $.001 per share, of
Parent ("Parent Common Stock") in exchange for their shares of the common stock,
par value $.01 per share, of the Company ("Company Common Stock") and (ii) the
Company will become a wholly owned subsidiary of Parent. It is accordingly
contemplated that Affiliate will receive shares of Parent Common Stock in the
Merger.
C. Affiliate may be deemed to be an "affiliate" of the Company for purposes
of: (i) the restrictions on resale imposed by the Securities Act of 1933, as
amended (the "Act"); and (ii) determining Parent's eligibility to account for
the Merger as a "pooling of interests" under applicable "pooling of interests"
accounting requirements (including Accounting Principles Board Opinion No. 16
and Accounting Series Releases 130 and 135, as amended, of the Securities and
Exchange Commission (the "SEC")).
AGREEMENT
1. REPRESENTATIONS AND WARRANTIES. Affiliate represents and warrants to
Parent as follows:
(a) Restrictions as Affiliate.
(i) Affiliate is the holder and beneficial owner of
( ) shares of Company Common Stock (the "Company Shares"), and
Affiliate has good and valid title to the Company Shares, free and clear
of any liens, pledges, security interests, adverse claims, equities,
options, proxies, charges, encumbrances or restrictions of any nature.
(ii) Affiliate has carefully read this Agreement, and has discussed
with counsel to the extent Affiliate felt necessary the limitations
imposed on Affiliate's ability to sell, transfer or otherwise dispose of
the Company Shares and the shares of Parent Common Stock that Affiliate
is to receive in the Merger (the "Parent Shares"). Affiliate fully
understands the limitations this Agreement places upon Affiliate's
ability to sell, transfer or otherwise dispose of the Company Shares and
the Parent Shares.
(iii) Affiliate understands that the representations, warranties
and covenants set forth in this Agreement will be relied upon by Parent
and its counsel and accountants for purposes of determining Parent's
eligibility to account for the Merger as a "pooling of interests," for
purposes of determining whether Parent should proceed with the Merger
and for various other purposes.
(b) Continuity of Interest.
(i) Affiliate did not acquire any of the Company Shares in
contemplation of the Merger.
(ii) Affiliate has not engaged in a Sale (as defined below) of any
shares of Company Common Stock in contemplation of the Merger.
C-1
<PAGE> 204
(iii) Affiliate has no plan or intention to engage in a sale,
exchange, transfer, distribution, redemption or reduction in any way of
Affiliate's risk of ownership (by short sale or otherwise), or other
disposition, directly or indirectly (such actions being collectively
referred to herein as a "Sale") of more than fifty percent (50%) of the
shares of Parent Common Stock to be received by Affiliate in the Merger.
(For purposes of the preceding sentence, shares of Company Common Stock
(or the portion thereof) (i) with respect to which Affiliate will
receive consideration in the Merger other than shares of Parent Common
Stock (including cash to be received in lieu of fractional shares of
Parent Common Stock) and/or (ii) with respect to which a Sale (A)
occurred in contemplation of the Merger or (B) will occur prior to the
Merger, shall be considered shares of Company Common Stock exchanged for
shares of Parent Common Stock in the Merger and then disposed of
pursuant to a plan).
(iv) Affiliate has no plan or intention to exercise dissenters'
rights in connection with the Merger.
(v) Affiliate is not aware of, or participating in, any plan or
intention on the part of the stockholders of the Company to engage in a
Sale or Sales of more than fifty percent (50%) of the shares of Parent
Common Stock to be received in the Merger. (For purposes of the
preceding sentence, shares of Company Common Stock (or the portion
thereof) (i) with respect to which a stockholder of the Company receives
consideration in the Merger other than shares of Parent Common Stock
(including, without limitation, cash received pursuant to the exercise
of dissenters' rights or in lieu of a fractional share of Parent Common
Stock) or (ii) with respect to which a Sale occurs prior to and in
contemplation of the Merger, shall be considered shares of outstanding
Company Common Stock exchanged for shares of Parent Common Stock in the
Merger and then disposed of pursuant to a plan).
(vi) Except to the extent written notification to the contrary is
received by Parent and the Company from Affiliate prior to the
consummation of the Merger, the representations, warranties and
certifications contained herein shall be accurate at all times from the
date hereof through the date on which the Merger is consummated.
(vii) Affiliate has consulted with such legal counsel and financial
advisors as he has deemed appropriate in connection with the execution
of this Agreement.
(viii) Affiliate understands that Parent, Merger Sub, the Company,
and the Company's stockholders, as well as legal counsel to Parent,
Merger Sub and the Company (in connection with rendering their opinions
that the Merger will be a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended) will be relying
on (a) the truth and accuracy of the representations, warranties and
certifications contained herein and (b) Affiliate's performance of the
obligations set forth herein.
2. PROHIBITIONS AGAINST TRANSFER.
(a) Affiliate agrees that during the period from the date on which the
Merger is consummated through the date on which financial results covering
at least thirty (30) days of post-Merger combined operations of Parent and
the Company have been published by Parent (within the meaning of the
applicable "pooling of interests" accounting requirements), Affiliate
agrees that (i) he shall not sell, transfer or otherwise dispose of, or
reduce his interest in or risk relating to, any shares of Parent Common
Stock (including the Parent Shares), and (ii) he shall ensure that none of
his children sells, transfers or otherwise disposes of, or reduces his
interest in or risk relating to, any shares of Parent Common Stock received
in the Merger.
(b) Without limiting the generality of Section 2(a) of this Agreement,
Affiliate shall not effect any sale, transfer or other disposition of any
of the Parent Shares, and Affiliate shall ensure that none of his
C-2
<PAGE> 205
children effects any sale, transfer or other disposition of any shares of
Parent Common Stock received in the Merger; unless:
(i) such sale, transfer or other disposition has been registered
under the Act;
(ii) such sale, transfer or other disposition is made in conformity
with the requirements of Rule 144 under the Act, as evidenced by a
broker's letter and a representation letter executed by Affiliate
(satisfactory in form and content to Parent) stating that such
requirements have been met;
(iii) counsel reasonably satisfactory to Parent shall have advised
Parent in a written opinion letter (satisfactory in form and content to
Parent), upon which Parent may rely, that such sale, transfer or other
disposition will be exempt from registration under the Act; or
(iv) an authorized representative of the SEC shall have rendered
written advice to Affiliate to the effect that the SEC would take no
action, or that the staff of the SEC would not recommend that the SEC
take action, with respect to such sale, transfer or other disposition,
and a copy of such written advice and all other related communications
with the SEC shall have been delivered to Parent.
3. STOP TRANSFER INSTRUCTIONS; LEGEND.
Affiliate understands that the Parent Shares will be characterized as
"restricted securities" for purposes of Rule 144 under the Act, and that
therefore any sale, transfer or other disposition of any of the Parent Shares
must be made in conformity with the provisions of said Rule or be registered
under the Act. Affiliate acknowledges and agrees that (i) stop transfer
instructions will be given to Parent's transfer agent with respect to the Parent
Shares, and (ii) each certificate representing any of such shares shall bear a
legend identical or similar in effect to the following legend (together with any
other legend or legends required by applicable state securities laws or
otherwise):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE. THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT DATED AS OF , 1997,
BETWEEN THE REGISTERED HOLDER HEREOF AND Lumisys Incorporated, A COPY OF
WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF LUMISYS
INCORPORATED"
4. INDEPENDENCE OF OBLIGATIONS. The covenants and obligations of Affiliate
set forth in this Agreement shall be construed as independent of any other
agreement or arrangement between Affiliate, on the one hand, and the Company or
Parent, on the other. The existence of any claim or cause of action by Affiliate
against the Company or Parent shall not constitute a defense to the enforcement
of any of such covenants or obligations against Affiliate.
5. SPECIFIC PERFORMANCE. Affiliate agrees that in the event of any breach
or threatened breach by Affiliate of any covenant, obligation or other provision
contained in this Agreement, Parent shall be entitled (in addition to any other
remedy that may be available to Parent) to: (a) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision; and (b) an injunction restraining such
breach or threatened breach.
6. INDEMNIFICATION. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Affiliate shall hold harmless and
indemnify Parent from and against, and shall compensate and reimburse Parent
for, any loss, damage, injury, decline in value, lost opportunity, liability,
exposure, claim, demand, settlement, judgment, award, fine, penalty, tax, fee,
charge, cost or expense of any nature (whether or not relating to a third party
claim) which is directly or indirectly suffered or incurred at any time by
Parent or any of Parent's affiliates or to which Parent or any of Parent's
affiliates otherwise becomes subject and that
C-3
<PAGE> 206
arises from any inaccuracy in or breach of any representation, warranty,
covenant or obligation of Affiliate contained in this Agreement.
7. OTHER AGREEMENTS. Nothing in this Agreement shall limit any of the
rights or remedies of Parent under the Reorganization Agreement and nothing in
the Reorganization Agreement shall limit any of the rights or remedies of Parent
under this Agreement.
8. NOTICES. Any notice or other communication required or permitted to be
delivered to Affiliate or Parent under this Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party hereto):
If to Parent: Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94089
Attention: Stephen J. Weiss
With a Copy To: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Andrei M. Manoliu, Esq.
Facsimile No.: (415) 857-0663
To Affiliate at:
With a Copy To: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: David J. Segre, Esq.
Facsimile No.: (415) 493-6811
9. SEVERABILITY. If any provision of this Agreement or any part of any such
provision is held under any circumstances to be invalid or unenforceable in any
jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
10. GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of laws).
11. WAIVER. No failure on the part of Parent to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of Parent in
exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy. Parent shall not be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on
C-4
<PAGE> 207
behalf of Parent; and any such waiver shall not be applicable or have any effect
except in the specific instance in which it is given.
12. CAPTIONS. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
13. FURTHER ASSURANCES. Affiliate shall execute and/or cause to be
delivered to Parent such instruments and other documents and shall take such
other actions as Parent may reasonably request to effectuate the intent and
purposes of this Agreement.
14. ENTIRE AGREEMENT. This Agreement and the Reorganization Agreement set
forth the entire understanding of Parent and Affiliate relating to the subject
matter hereof and thereof and supersede all other prior agreements and
understandings between Parent and Affiliate relating to the subject matter
hereof and thereof.
15. NON-EXCLUSIVITY. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may have,
whether at law, in equity, by contract or otherwise, all of which shall be
cumulative (and not alternative).
16. AMENDMENTS. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent and Affiliate.
17. ASSIGNMENT. This Agreement and all obligations of Affiliate hereunder
are personal to Affiliate and may not be transferred or delegated by Affiliate
at any time. Parent may freely assign any or all of its rights under this
Agreement (including its indemnification rights under Section 6), in whole or in
part, to any other person or entity without obtaining the consent or approval of
Affiliate.
18. BINDING NATURE. Subject to Section 17, this Agreement will inure to the
benefit of Parent and its successors and assigns and will be binding upon
Affiliate and his representatives, executors, administrators, estate, heirs,
successors and assigns.
19. ATTORNEYS' FEES AND EXPENSES. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against Affiliate, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
20. SURVIVAL. Each of the representations, warranties, covenants and
obligations contained in this Agreement shall survive the consummation of the
Merger.
Affiliate has executed this Agreement on September , 1997.
Signature:
- --------------------------------------------------------------------------------
C-5
<PAGE> 208
EXHIBIT D
FORM OF CONTINUITY OF INTEREST CERTIFICATE
("Stockholder") is aware that an Agreement and Plan of
Merger and Reorganization dated as of September , 1997 (the "Reorganization
Agreement") and related Certificate of Merger (together, the "Agreements") has
been made and entered into by and among LUMISYS INCORPORATED, a Delaware
corporation ("Parent"), SAC ACQUISITION CORPORATION, a Delaware corporation and
a wholly owned subsidiary of Parent ("Merger Sub") and COMPURAD, INC., a
Delaware corporation (the "Company") providing for the merger of Merger Sub with
and into the Company (the "Merger"). The Reorganization Agreement contemplates
that, upon consummation of the Merger, (i) the Company's stockholders will
receive shares of common stock, par value $.001 per share, of Parent ("Parent
Common Stock") in exchange for their shares of common stock, par value $.01 per
share, of the Company ("Company Common Stock") and (ii) the Company will become
a wholly owned subsidiary of Parent. It is accordingly contemplated that
Stockholder will receive shares of Parent Common Stock in the Merger.
1. Stockholder represents, warrants and certifies to Parent, Merger Sub,
the Company and the Company's Stockholders as follows:
(a) Stockholder currently is the owner of shares of Company
Common Stock (the "Shares"), and did not acquire any of the Shares in
contemplation of the Merger.
(b) Stockholder has not engaged in a Sale (as defined below) of any
shares of Company Common Stock in contemplation of the Merger.
(c) Stockholder has no plan or intention to engage in a sale,
exchange, transfer, distribution, redemption or reduction in any way of
Stockholder's risk of ownership (by short sale or otherwise), or other
disposition, directly or indirectly (such actions being collectively
referred to herein as a "Sale") of more than [fifty percent (50%)] of the
shares of Parent Common Stock to be received by Stockholder in the Merger.
(For purposes of the preceding sentence, shares of Company Common Stock (or
the portion thereof) (i) with respect to which Stockholder will receive
consideration in the Merger other than shares of Parent Common Stock
(including cash to be received in lieu of fractional shares of Parent
Common Stock) and/or (ii) with respect to which a Sale (A) occurred in
contemplation of the Merger or (B) will occur prior to the Merger, shall be
considered shares of Company Common Stock exchanged for shares of Parent
Common Stock in the Merger and then disposed of pursuant to a plan).
(d) Stockholder has no plan or intention to exercise dissenters'
rights in connection with the Merger.
(e) Stockholder is not aware of, or participating in, any plan or
intention on the part of the stockholders of the Company to engage in a
Sale or Sales of more than fifty percent (50%) of the shares of Parent
Common Stock to be received in the Merger. (For purposes of the preceding
sentence, shares of Company Common Stock (or the portion thereof) (i) with
respect to which a stockholder of the Company receives consideration in the
Merger other than shares of Parent Common Stock (including, without
limitation, cash received pursuant to the exercise of dissenters' rights or
in lieu of a fractional share of Parent Common Stock) or (ii) with respect
to which a Sale occurs prior to and in contemplation of the Merger, shall
be considered shares of outstanding Company Common Stock exchanged for
shares of Parent Common Stock in the Merger and then disposed of pursuant
to a plan).
(f) Except to the extent written notification to the contrary is
received by Parent and the Company from Stockholder prior to the
consummation of the Merger, the representations, warranties and
certifications contained herein shall be accurate at all times from the
date hereof through the date on which the Merger is consummated.
(g) Stockholder has consulted with such legal counsel and financial
advisors as he has deemed appropriate in connection with the execution of
this Certificate.
D-1
<PAGE> 209
2. Stockholder understands that Parent, Merger Sub, the Company, and the
Company's stockholders, as well as legal counsel to Parent, Merger Sub and the
Company (in connection with rendering their opinions that the Merger will be a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended) will be relying on (a) the truth and accuracy of the
representations, warranties and certifications contained herein and (b) the
Stockholder's performance of the obligations set forth herein.
Stockholder has executed this Certificate on , 1997.
--------------------------------------
D-2
<PAGE> 210
EXHIBIT E
LUMISYS INCORPORATED
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
RE: Employment Terms
Dear:
LUMISYS INCORPORATED (the "Company") is pleased to offer you the position
of President, effective upon the closing of the acquisition of CompuRAD, Inc. by
the Company (the "Closing"), on the following terms, which terms shall be
effective only upon the Closing.
1. REPORTING DUTIES
You will be responsible for all functional areas of the combined company,
including duties customarily associated with the position and other duties as
assigned by me. You will work at our facility located in Tucson, Arizona. Of
course, the Company may change your position, duties, and work location from
time to time as it deems necessary; provided that no such change shall occur
prior to September 1998.
2. COMPENSATION
Your compensation will be $ per month, less payroll deductions and
all required withholdings. You will be paid bi-weekly (26 payment periods per
year) and you will be eligible for the following standard Company benefits:
group medical, dental and life insurance, vacation and participation in the
Company's 401(k) and employee stock purchase plan. Details about these benefit
plans are available for your review. The Company may modify compensation and
benefits from time to time as it deems necessary.
3. BONUS
You will also be eligible annually for a discretionary year-end bonus, in
an amount to be determined by the Company's Board of Directors (the "Board") in
its sole discretion. You will earn this bonus if all of the following criteria
are met: (i) the Company must meet or exceed its planned revenue and profit
objectives for the bonus year, as determined by the Board; (ii) your performance
must meet or exceed expectations for your position, as determined by the Board;
and (iii) you must remain an active employee through the end of the bonus year.
If your employment terminates for any reason before the end of the bonus year,
you will not receive this bonus; no prorated bonus can be earned, provided
however, that if you are terminated at any time in 1998 (unless you are
terminated for "cause" as defined in Paragraph 8 below), you will receive a
pro-rated bonus for the year 1998. In addition, if the Closing occurs after
January 1, 1998, any bonus for the year 1998 will be calculated to cover the
period from January 1, 1998 as if you had been employed during that period. It
is currently expected that you will not receive a bonus from the Company for the
services you performed during the year 1997.
4. RELOCATION EXPENSES
You will receive relocation benefits for your move from Arizona to
California from the date of this Agreement to December 31, 1998, under the terms
of the Relocation Benefits Agreement, attached hereto as Exhibit B, up to a
maximum reimbursement amount to be mutually agreed upon by the parties.
E-1
<PAGE> 211
5. COMPANY POLICIES REGARDING CONFIDENTIAL INFORMATION AND OTHER MATTERS
As a Company employee, you will be expected to abide by Company rules and
regulations, acknowledge in writing that you have read the Company's Employee
Handbook, and sign and comply with the Proprietary Information and Inventions
Agreement, attached hereto as Exhibit A, which prohibits unauthorized use or
disclosure of Company proprietary information. As required by law, this offer is
subject to satisfactory proof of your right to work in the United States.
Normal working hours are from 8:00 a.m. to 5:00 p.m., Monday through
Friday. As an exempt salaried employee, you will be expected to work additional
hours as required by the nature of your work assignments. Except with the prior
written consent of the Board, you will not during the term of your employment
with the Company undertake or engage in any other employment, occupation or
business enterprise. You may engage in civic and not-for-profit activities so
long as such activities do not materially interfere with the performance of your
duties hereunder.
6. RESTRICTIVE COVENANT
During the term of your employment, except as permitted by this paragraph,
you agree not to acquire, assume or participate in, directly or indirectly, any
position, investment or interest known by you to be adverse or antagonistic to
the Company, its business or prospects, financial or otherwise. During the term
of your employment by the Company, including any period of salary continuation
following your termination, as described below, you will not directly or
indirectly, whether as an officer, director, stockholder, partner, proprietor,
associate, representative, consultant, or in any capacity whatsoever engage in,
become financially interested in, be employed by or have any business connection
with any other person, corporation, firm, partnership or other entity whatsoever
which competes with the Company, throughout the world, in any line of business
engaged in (or planned to be engaged in) by the Company. Notwithstanding the
above, however, you may own, as a passive investor, securities of any competitor
corporation, so long as your and your family's aggregate holdings in any one
such corporation do not constitute more than 1% of the voting stock of such
corporation.
7. NON-SOLICITATION
While employed by the Company, and for one (1) year thereafter, you agree
not to interfere with the business of the Company by: (i) soliciting, attempting
to solicit, inducing, or otherwise causing any employee of the Company to
terminate his or her employment with the Company; or (ii) directly or indirectly
soliciting the business of any customer of the Company which at the time of
termination or one year immediately prior thereto was listed on the Company's
customer list.
8. TERMINATION
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in a writing signed by a Company officer. Notwithstanding the
foregoing, in the event before the second anniversary of Closing the Company
terminates your employment without "cause" or you terminate your employment for
"good reason," the Company will continue, as severance, your base salary at its
then current rate for a period of twelve (12) months following such termination.
For the purposes of the foregoing, "cause" means misconduct, including: (i) the
current use of illegal drugs; (ii) indictment for any crime involving moral
turpitude, fraud or misrepresentation; (iii) commission of any act which would
constitute a felony and which would adversely impact the business or reputation
of the Company; (iv) fraud; (v) misappropriation or embezzlement of Company
funds or property; (vi) willful conduct which is materially injurious to the
reputation, business or business relationships of the Company; (viii) your
failure to perform your responsibilities and/or duties provided that you have
thirty days (from the date that the Company delivers a written notice to you
describing your failure to perform) to cure any failure to perform; or (ix) a
material violation of any of the provisions of this employment offer letter or
of the attached Proprietary
E-2
<PAGE> 212
Information and Inventions Agreement. For purposes of the foregoing, "good
reason" means: (i) material diminution in your duties or salary (except in
connection with a fairly administered across the board salary reduction plan
adopted by the Board) or (ii) relocation outside of the San Francisco Bay Area
(other than back to the Tucson area if the Company provides relocation expenses
for such relocation).
9. ENTIRE AGREEMENT
This letter, including Exhibits A, B, and C, constitutes the complete,
final and exclusive embodiment of the entire agreement between you and the
Company with respect to the terms and conditions of your employment. This letter
agreement is entered into without reliance on any promise or representation,
written or oral, other than those expressly contained herein. It may not be
modified except in a writing signed by you and a duly authorized officer of the
Company.
The employment terms in this letter supersede any other agreements or
promises made to you by anyone, whether oral or written. In addition, all
employment contracts, terms of employment, offer letters or similar agreements,
arrangements or understandings between you and CompuRAD, Inc. terminate as of
the Closing.
In consideration of the terms of the Closing and this offer letter, you
hereby agree to release and hold harmless CompuRAD, Inc., the Company and their
officers, directors and agents for any and all acts or omissions relating to
your employment with CompuRAD, Inc. prior to the Closing and do so by executing
the Release attached hereto as Exhibit C.
Please sign and date this letter, and return it to me, if you wish to
accept employment at the Company under the terms described above.
We look forward to your favorable reply and to a productive and enjoyable
work relationship.
Sincerely,
Stephen J. Weiss
ACCEPTED:
- ---------------------------------------------------------
Phillip Berman
- ---------------------------------------------------------
Date
Attachment:
Exhibit A: Proprietary Information and Inventions Agreement
Exhibit B: Relocation Benefits Agreement
Exhibit C: Release
E-3
<PAGE> 213
EXHIBIT A
LUMISYS INCORPORATED
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by LUMISYS
INCORPORATED (the "Company"), and the compensation now and hereafter paid to me,
I hereby agree as follows:
1. RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during the
term of my employment and thereafter, I will hold in strictest confidence and
will not disclose, use, lecture upon or publish any of the Company's Proprietary
Information (defined below), except as such disclosure, use or publication may
be required in connection with my work for the Company, or unless an officer of
the Company expressly authorizes such in writing. I hereby assign to the Company
any rights I may have or acquire in such Proprietary Information and recognize
that all Proprietary Information shall be the sole property of the Company and
its assigns and the Company and its assigns shall be the sole owner of all trade
secret rights, patent rights, copyrights, mask work rights and all other rights
throughout the world (collectively, "Proprietary Rights") in connection
therewith.
The term "Proprietary Information" shall mean trade secrets, confidential
knowledge, data or any other proprietary information of the Company. By way of
illustration but not limitation, "Proprietary Information" includes (a) trade
secrets, inventions, mask works, ideas, processes, formulas, source and object
codes, data, programs, other works of authorship, know-how, improvements,
discoveries, developments, designs and techniques (hereinafter collectively
referred to as "Inventions"); and (b) information regarding plans for research,
development, new products, marketing and selling, business plans, budgets and
unpublished financial statements, licenses, prices and costs, suppliers and
customers; and information regarding the skills and compensation of other
employees of the Company.
2. THIRD PARTY INFORMATION. I understand, in addition, that the Company has
received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose (to anyone other than Company personnel who need to know such
information in connection with their work for the Company) or use, except in
connection with my work for the Company, Third Party Information unless
expressly authorized by an officer of the Company in writing.
3. ASSIGNMENT OF INVENTIONS.
3.1 Assignment. I hereby assign to the Company all my right, title and
interest in and to any and all Inventions (and all Proprietary Rights with
respect thereto) whether or not patentable or registrable under copyright or
similar statutes, made or conceived or reduced to practice or learned by me,
either alone or jointly with others, during the period of my employment with the
Company. Inventions assigned to or as directed by the Company by this paragraph
3 are hereinafter referred to as "Company Inventions." I recognize that this
Agreement does not require assignment of any invention which qualifies fully for
protection under Section 2870 of the California Labor Code (hereinafter "Section
2870"), which provides as follows:
(i) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
A-1
<PAGE> 214
(ii) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (i), the provision is against the
public policy of this state and is unenforceable.
3.2 Government. I also assign to or as directed by the Company all my
right, title and interest in and to any and all Inventions, full title to which
is required to be in the United States by a contract between the Company and the
United States or any of its agencies.
3.3 Works for Hire. I acknowledge that all original works of authorship
which are made by me (solely or jointly with others) within the scope of my
employment and which are protectable by copyright are "works made for hire," as
that term is defined in the United States Copyright Act (17 U.S.C., Section
101).
4. ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every
proper way to obtain and from time to time enforce United States and foreign
Proprietary Rights relating to Company Inventions in any and all countries. To
that end I will execute, verify and deliver such documents and perform such
other acts (including appearances as a witness) as the Company may reasonably
request for use in applying for, obtaining, perfecting, evidencing, sustaining
and enforcing such Proprietary Rights and the assignment thereof. In addition, I
will execute, verify and deliver assignments of such Proprietary Rights to the
Company or its designee. My obligation to assist the Company with respect to
Proprietary Rights relating to such Company Inventions in any and all countries
shall continue beyond the termination of my employment, but the Company shall
compensate me at a reasonable rate after my termination for the time actually
spent by me at the Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable effort,
to secure my signature on any document needed in connection with the actions
specified in the preceding paragraph, I hereby irrevocably designate and appoint
the Company and its duly authorized officers and agents as my agent and attorney
in fact, which appointment is coupled with an interest, to act for and in my
behalf to execute, verify and file any such documents and to do all other
lawfully permitted acts to further the purposes of the preceding paragraph with
the same legal force and effect as if executed by me. I hereby waive and
quitclaim to the Company any and all claims, of any nature whatsoever, which I
now or may hereafter have for infringement of any Proprietary Rights assigned
hereunder to the Company.
5. OBLIGATION TO THE COMPANY AFTER TERMINATION. I agree to keep and
maintain adequate and current records (in the form of notes, sketches, drawings
and in any other form that may be required by the Company) of all Proprietary
Information developed by me and all Inventions made by me during the period of
my employment at the Company, which records shall be available to and remain the
sole property of the Company at all times.
6. PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I
made prior to the commencement of my employment with the Company are excluded
from the scope of this Agreement. To preclude any possible uncertainty, I have
set forth on Attachment 1 attached hereto a complete list of all Inventions that
I have, alone or jointly with others, conceived, developed or reduced to
practice or caused to be conceived, developed or reduced to practice prior to
the commencement of my employment with the Company, that I consider to be my
property or the property of third parties and that I wish to have excluded from
the scope of this Agreement. If disclosure of any such Invention on Attachment 1
would cause me to violate any prior confidentiality agreement, I understand that
I am not to list such Inventions in Attachment 1 but am to inform the Company
that all such Inventions have not been listed for that reason.
7. NO IMPROPER USE OF MATERIALS. During my employment by the Company I will
not improperly use or disclose any confidential information or trade secrets, if
any, of any former employer or any other person to whom I have an obligation of
confidentiality, and I will not bring onto the premises of the Company any
unpublished documents or any property belonging to any former employer or any
other person to whom I have an obligation of confidentiality unless consented to
in writing by that former employer or person. I will use in the performance of
my duties only information which is generally known and used by persons with
training and experience comparable to my own, which is common knowledge in the
industry or otherwise legally in the public domain, or which is otherwise
provided or developed by the Company.
A-2
<PAGE> 215
8. NO CONFLICTING OBLIGATION. I represent that my performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence information acquired by me in
confidence or in trust prior to my employment by the Company. I have not entered
into, and I agree I will not enter into, any agreement either written or oral in
conflict herewith.
9. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I
will deliver to the Company any and all drawings, notes, memoranda,
specifications, devices, formulas, and documents, together with all copies
thereof, and any other material containing or disclosing any Company Inventions,
Third Party Information or Proprietary Information of the Company. I further
agree that any property situated on the Company's premises and owned by the
Company, including disks and other storage media, filing cabinets or other work
areas, is subject to inspection by Company personnel at any time with or without
notice. Prior to leaving, I will cooperate with the Company in completing and
signing the Company's termination statement for technical and management
personnel.
10. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and
unique and because I may have access to and become acquainted with the
Proprietary Information of the Company, the Company shall have the right to
enforce this Agreement and any of its provisions by injunction, specific
performance or other equitable relief, without bond and without prejudice to any
other rights and remedies that the Company may have for a breach of this
Agreement.
11. NOTICES. Any notices required or permitted hereunder shall be given to
the appropriate party at the address specified below or at such other address as
the party shall specify in writing. Such notice shall be deemed given upon
personal delivery to the appropriate address or if sent by certified or
registered mail, three days after the date of mailing.
12. GENERAL PROVISIONS.
12.1 Governing Law. This Agreement will be governed by and construed
according to the laws of the State of California.
12.2 Entire Agreement. This Agreement is the final, complete and exclusive
agreement of the parties with respect to the subject matter hereof and
supersedes and merges all prior discussions between us. No modification of or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing and signed by the party to be charged. Any
subsequent change or changes in my duties, salary or compensation will not
affect the validity or scope of this Agreement. As used in this Agreement, the
period of my employment includes any time during which I may be retained by the
Company as a consultant.
12.3 Severability. If one or more of the provisions in this Agreement are
deemed unenforceable by law, then such provision will be deemed stricken from
this Agreement and the remaining provisions will continue in full force and
effect.
12.4 Successors and Assigns. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns.
12.5 Survival. The provisions of this Agreement shall survive the
termination of my employment and the assignment of this Agreement by the Company
to any successor in interest or other assignee.
12.6 Employment. I agree and understand that nothing in this Agreement
shall confer any right with respect to continuation of employment by the
Company, nor shall it interfere in any way with my right or the Company's right
to terminate my employment at any time, with or without cause.
12.7 Waiver. No waiver by the Company of any breach of this Agreement shall
be a waiver of any preceding or succeeding breach. No waiver by the Company of
any right under this Agreement shall be construed as a waiver of any other
right. The Company shall not be required to give notice to enforce strict
adherence to all terms of this Agreement.
A-3
<PAGE> 216
This Agreement shall be effective as of the first day of my employment with
the Company, namely: , 19 .
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY
FILLED OUT ATTACHMENT 1 TO THIS AGREEMENT.
Dated:
- ------------------------------------ --------------------------------------
Signature
--------------------------------------
(Printed Name)
--------------------------------------
(Address)
--------------------------------------
--------------------------------------
ACCEPTED AND AGREED TO:
LUMISYS INCORPORATED
By:
- ----------------------------------------
Title:
- --------------------------------------
A-4
<PAGE> 217
ATTACHMENT 1
MEMORANDUM
TO: LUMISYS INCORPORATED
FROM:
- -----------------------------------
DATE:
- -----------------------------------
RE: Inventions
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by LUMISYS INCORPORATED (the
"Company") that have been made or conceived or first reduced to practice by me
alone or jointly with others prior to my engagement by the Company:
[ ] No inventions or improvements.
[ ] See below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Due to confidentiality agreements with prior employer, I cannot
disclose certain inventions that would otherwise be included on the
above-described list.
[ ] Additional sheets attached.
2. I propose to bring to my employment the following devices, materials and
documents of a former employer or other person to whom I have an obligation of
confidentiality that are not generally available to the public, which materials
and documents may be used in my employment pursuant to the express written
authorization of my former employer or such other person (a copy of which is
attached hereto):
[ ] No material.
[ ] See below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Additional sheets attached.
Date:
- -------------------------------------- --------------------------------------
Employee
A-5
<PAGE> 218
EXHIBIT B
RELOCATION BENEFITS AGREEMENT
Effective on
----------------------------------- 1997 (the "Effective Date"), I,
(Start Date) (Name)
hereby agree to the following terms and conditions with respect to all
relocation costs paid to me or on my behalf by Lumisys Incorporated (the
"Company"), whether by reimbursement to me or by direct payment to third
parties, in connection with my relocation from Arizona to my new home in
- ------------------------------, California (the "Relocation Costs"):
1. If I remain a President of the Company for 12 months from the
Effective Date, I shall have no obligation to repay any of the Relocation
Costs.
2. If my employment terminates for "cause" or without "good reason"
within one year from the effective date, I agree to repay to the Company a
portion of the Relocation Costs, including tax assistance payments or other
amounts paid to federal or state tax agencies as withholding or other
credit against taxes, to be calculated as follows:
For each full month of full-time employment, the Company will forgive
1/12 of my Relocation Costs. The remaining unforgiven Relocation Costs
are due and payable to the Company on demand.
3. I understand that all reimbursements and allowances paid to me or
on my behalf as Relocation Costs, including tax assistance payments and
amounts withheld as payroll deductions, in connection with my relocation
must be included as a part of my gross income and therefore may be subject
to tax. If I am required under paragraph 2 of this agreement to repay
Relocation Costs to the Company, I will repay the entire amount determined
under paragraph 2, including tax assistance payments and amounts withheld
as payroll deductions.
I also understand that my ability to deduct a portion of my Relocation
Costs is subject to specific limits and other IRS requirements, including
the requirement that I must be able to substantiate my expenses by keeping
copies of my receipts. I UNDERSTAND THAT IF I AM AUDITED BY THE IRS OR ANY
STATE TAX AGENCY, I ALONE AND NOT THE COMPANY WILL BE LIABLE FOR ANY TAXES,
INTEREST OR PENALTIES DUE IF ANY CLAIMED DEDUCTIONS ARE DENIED FOR ANY
REASON, INCLUDING IF I FAIL TO KEEP COPIES OF RECEIPTS. I understand that I
cannot rely on the Company or any officer or employee of the Company for
advice regarding the proper tax treatment of my Relocation Costs, and that
I am responsible for obtaining independent advice from my own personal tax
advisor.
4. I understand that nothing in this agreement assures me of a
continuing position with the Company, or in any way changes the Company's
right to end the employment relationship as it deems necessary.
5. If I am obligated under this agreement to repay the Company for
Relocation Costs, I hereby authorize the Company to deduct the entire
amount due from my final paycheck, including from any vacation pay due.
6. Before submitting expenses for reimbursement as Relocation Costs, I
will inform the Company whether my spouse is eligible for relocation
benefits from another employer, and if so, the terms of those benefits. If
my spouse is eligible for any of the same relocation benefits which the
Company has offered me, I will only receive one-half of any such benefits
from the Company.
<TABLE>
<S> <C>
- ---------------------------------------- ----------------------------------------
Employee signature Date
</TABLE>
B-1
<PAGE> 219
EXHIBIT C
RELEASE
Except as otherwise set forth in this Release, I hereby release, acquit and
forever discharge CompuRAD, Inc. (the "Company"), its parents and subsidiaries,
and their officers, directors, agents, servants, employees, attorneys,
shareholders, successors, assigns and affiliates, of and from any and all
claims, liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities and obligations of every kind and nature, in law, equity,
or otherwise, known and unknown, suspected and unsuspected, disclosed and
undisclosed, arising out of or in any way related to agreements, events, acts or
conduct at any time prior to and including the execution date of this Release,
including but not limited to: all such claims and demands directly or indirectly
arising out of or in any way connected with my employment with the Company or
the termination of that employment; claims or demands related to salary,
bonuses, commissions, stock, stock options, or any other ownership interests in
the Company, vacation pay, fringe benefits, expense reimbursements, severance
pay, or any other form of compensation; claims pursuant to any federal, state or
local law, statute, or cause of action including, but not limited to, the
federal Civil Rights Act of 1964, as amended; the federal Americans with
Disabilities Act of 1990; the federal Age Discrimination in Employment Act of
1967, as amended ("ADEA"); the California Fair Employment and Housing Act, as
amended; the Arizona Civil Rights Act, as amended; tort law; contract law;
wrongful discharge; discrimination; harassment; fraud; defamation; emotional
distress; and breach of the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under the ADEA, as amended. I also acknowledge that the
consideration given for the waiver and release in the preceding paragraph hereof
is in addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (a) my waiver and release do not apply to any rights or claims that may
arise after the execution date of this Release; (b) I have been advised hereby
that I have the right to consult with an attorney prior to executing this
Release; (c) I have twenty-one (21) days to consider this Release (although I
may choose to voluntarily execute this Release earlier); (d) I have seven (7)
days following the execution of this Release by the parties to revoke the
Release; and (e) this Release shall not be effective until the date upon which
the revocation period has expired, which shall be the eighth day after this
Release is executed by me, provided that the Company has also executed this
Release by that date ("Effective Date").
In giving this release, which includes claims which may be unknown to me at
present, I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND
TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
By:
------------------------------------
Date:
-----------------------------------
C-1
<PAGE> 220
EXHIBIT F
INDIVIDUALS TO EXECUTE EMPLOYMENT OFFER LETTERS
1. Phillip Berman, M.D.
2. Cary Cole
3. Henky Wibowo
F-1
<PAGE> 221
EXHIBIT G
VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of September 28, 1997 by and
between LUMISYS INCORPORATED, a Delaware corporation ("Parent"), and
____________________ ("Stockholder").
RECITALS
A. Parent, SAC Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and CompuRAD, Inc., a Delaware
corporation (the "Company"), are entering into an Agreement and Plan of Merger
and Reorganization of even date herewith (as amended from time to time, the
"Reorganization Agreement"; capitalized terms used but not otherwise defined in
this Voting Agreement have the meanings assigned to such terms in the
Reorganization Agreement), which provides (subject to the conditions set forth
therein) for the merger of Merger Sub with and into the Company (the "Merger").
B. As of the date hereof, Stockholder owns the number of shares of Company
Common Stock set forth below Stockholder's name on the signature page hereto
(all such shares, together with any shares of Company Common Stock or other
shares of capital stock of the Company that may hereafter be acquired by
Stockholder, being referred to herein as the "Subject Shares").
C. As a condition to the willingness of Parent and Merger Sub to enter into
the Reorganization Agreement, Parent and Merger Sub have required that
Stockholder agree, and in order to induce Parent and Merger Sub to enter into
the Reorganization Agreement Stockholder has agreed, to enter into this Voting
Agreement.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. TRANSFER OF SUBJECT SHARES
1.1 TRANSFER OF VOTING RIGHTS. Stockholder covenants and agrees that,
prior to the earlier to occur of: (i) the Effective Time, or (ii) the valid
termination of the Reorganization agreement (the "Expiration Date"), and except
as otherwise contemplated hereby, Stockholder will not deposit any of the
Subject Shares into a voting trust or grant a proxy or enter into a voting
agreement or similar agreement with respect to any of the Subject Shares.
1.2 OBLIGATIONS OF TRANSFEREES. Each transferee or any subsequent
transferee of the Subject Shares or any interest in such Subject Shares, shall
hold such Subject Shares or interest in the Subject Shares subject to all the
provisions of this Voting Agreement. Each transferee shall sign a counterpart of
this Agreement, agreeing to be bound by the terms and conditions hereof, prior
to receipt of any Subject Shares.
SECTION 2. VOTING OF SUBJECT SHARES
2.1 PRE-TERMINATION VOTING AGREEMENT. Without in any way limiting the
Stockholder's right to vote the Subject Shares in his sole discretion on any
other matters that may be submitted to a stockholder vote, consent or other
approval (including by written consent), at any meeting of the stockholders of
the Company called to vote upon the Merger and the Reorganization Agreement or
at any adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including by written consent) with respect to the
Merger and the Reorganization Agreement is sought, the Stockholder hereby agrees
that, prior to the Expiration Date, at any meeting of the stockholders of the
Company, however called, and in any written action by consent of stockholders of
the Company, Stockholder shall vote the Subject Shares in favor of: (i) the
Merger, (ii) the execution and delivery by the Company of the Reorganization
Agreement, (iii) the adoption
G-1
<PAGE> 222
and approval of the terms thereof and (iv) in favor of each of the other actions
contemplated by the Reorganization Agreement and any action required in
furtherance hereof or thereof.
Prior to the Expiration Date, Stockholder shall not enter into any agreement or
understanding with any Person to vote or give instructions with respect to the
Subject Shares regarding the Merger and the Reorganization Agreement, other than
any agreement or understanding to vote or give instructions in favor of the
Merger and the Reorganization Agreement.
2.2 PROXY; FURTHER ASSURANCES. Contemporaneously with the execution of
this Voting Agreement, Stockholder shall deliver to Parent a proxy in the form
attached hereto as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the Subject Shares (the "Proxy").
SECTION 3. WAIVER OF APPRAISAL RIGHTS.
Stockholder hereby waives any rights of appraisal and any dissenters'
rights that Stockholder may have in connection with the Merger.
SECTION 4. NO SOLICITATION
Stockholder covenants and agrees that, during the period commencing on the
date of this Voting Agreement and ending on the Expiration Date, Stockholder
shall not, directly or indirectly, and shall not authorize or permit any
Representative of Stockholder, directly or indirectly, to: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal; (ii) furnish any information regarding the
Company to any Person in connection with or in response to an Acquisition
Proposal or potential Acquisition Proposal; (iii) engage in discussions with any
Person with respect to any Acquisition Proposal; (iv) approve, endorse or
recommend any Acquisition Proposal; or (v) enter into any letter of intent or
other similar document or any Contract contemplating or otherwise relating to
any Acquisition Proposal. Stockholder shall immediately cease any existing
discussions with any Person that relate to any Acquisition Proposal.
Notwithstanding the foregoing, Stockholder shall not be prevented from taking
any action that is not prohibited under Section 4.4 of the Reorganization
Agreement, whether he is acting in his capacity as a Stockholder of the Company
or as an officer or director of the Company; provided that nothing herein shall
be deemed to excuse Stockholder's performance of his voting obligations
hereunder.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER
Stockholder hereby represents and warrants to Parent as follows:
5.1 AUTHORIZATION, ETC. Stockholder has all requisite power and capacity
to execute and deliver this Voting Agreement and to perform his obligations
hereunder. This Voting Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding obligation of
Stockholder, enforceable against Stockholder in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
5.2 NO CONFLICTS, REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Voting Agreement by Stockholder
do not, and the performance of this Voting Agreement by Stockholder will
not: (i) conflict with or violate any Legal Requirement, order, decree or
judgment applicable to Stockholder or by which he or any of his properties
is bound or affected; or (ii) result in any breach of or constitute a
default (with notice or lapse of time, or both) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of an Encumbrance on the Subject Shares pursuant to,
any Contract to which Stockholder is a party or by which Stockholder or any
of his properties is bound or affected.
(b) The execution and delivery of this Voting Agreement by Stockholder
do not, and the performance of this Voting Agreement by Stockholder will
not, require any Consent of any Person.
G-2
<PAGE> 223
5.3 TITLE TO SUBJECT SHARES. Stockholder owns of record and beneficially
the Subject Shares set forth under Stockholder's name on the signature page
hereof and does not directly or indirectly own, either beneficially or of
record, any shares of capital stock of the Company, or rights to acquire any
shares of capital stock of the Company, other than the Subject Shares set forth
below Stockholder's name on the signature page hereof.
5.4 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Voting Agreement are accurate in all respects as of the date
of this Voting Agreement, will be accurate in all respects at all times through
the Expiration Date and will be accurate in all respects as of the date of the
consummation of the Merger as if made on that date.
SECTION 6. COVENANTS OF STOCKHOLDER
6.1 FURTHER ASSURANCES. From time to time and without additional
consideration, Stockholder will execute and deliver, or cause to be executed and
delivered, such additional or further transfers, assignments, endorsements,
proxies, consents and other instruments as Parent may reasonably request for the
purpose of effectively carrying out and furthering the intent of this Voting
Agreement.
6.2 LEGEND. Promptly after the date of this Voting Agreement, and in any
event, no later than two business days following the date of this Voting
Agreement, Stockholder shall instruct the Company to cause each certificate of
Stockholder evidencing the Subject Shares to bear a legend in the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE VOTING AGREEMENT DATED AS OF SEPTEMBER 28, 1997, AS
IT MAY BE AMENDED, BETWEEN THE ISSUER AND THE REGISTERED HOLDER OF THIS
CERTIFICATE, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES
OF THE ISSUER.
SECTION 7. MISCELLANEOUS
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. This Voting
Agreement shall terminate, and the provisions hereof shall be of no further
force or effect upon the Expiration Date.
7.2 INDEMNIFICATION. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Stockholder shall hold harmless and
indemnify Parent from and against, and shall compensate and reimburse Parent
for, any Damages (regardless of whether or not such Damages relate to a
third-party claim) which are directly or indirectly suffered or incurred at any
time by Parent, or to which Parent otherwise becomes subject, and that arise
from or are directly or indirectly connected with any breach of any
representation, warranty, covenant or obligation of Stockholder contained
herein.
7.3 EXPENSES. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
G-3
<PAGE> 224
7.4 NOTICES. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party hereto):
if to Stockholder:
at the address set forth below Stockholder's signature on the
signature page hereto;
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94306
Attention: David J. Segre
if to Parent:
Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94086
Attention: Stephen J. Weiss
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Andrei M. Manoliu
7.5 SEVERABILITY. Any term or provision of this Voting Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Voting Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Voting Agreement in any other jurisdiction. If any
provision of this Voting Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
7.6 ENTIRE AGREEMENT. This Voting Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings between the parties with respect thereto. No
addition to or modification of any provision of this Voting Agreement shall be
binding upon either party hereto unless made in writing and signed by both
parties hereto. The parties hereto waive trial by jury in any action at law or
suit in equity based upon, or arising out of, this Voting Agreement or the
subject matter hereof.
7.7 ASSIGNMENT; BINDING EFFECT. Except as provided herein, neither this
Voting Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by either of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other party, except that
Parent may assign all or any of its rights hereunder to any affiliate of Parent.
Subject to the preceding sentence, this Voting Agreement shall be binding upon
and shall inure to the benefit of (i) Stockholder and his heirs, successors and
assigns and (ii) Parent and its successors and assigns. Notwithstanding anything
contained in this Voting Agreement to the contrary, nothing in this Voting
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto or their respective heirs, successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Voting
Agreement.
G-4
<PAGE> 225
7.8 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Voting Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that Parent shall be entitled to an injunction or
injunctions to prevent breaches of this Voting Agreement and to enforce
specifically the terms and provisions hereof in any Delaware court or other
court of proper jurisdiction, this being in addition to any other remedy to
which Parent is entitled at law or in equity.
7.9 OTHER AGREEMENTS. Nothing in this Voting Agreement shall limit any of
the rights or remedies of Parent or any of the obligations of Stockholder under
any Affiliate Agreement between Parent and Stockholder or any other agreement.
7.10 GOVERNING LAW. This Voting Agreement shall be governed in all
respects by the laws of the State of Delaware, as applied to contracts entered
into and to be performed entirely within the State of Delaware.
7.11 COUNTERPARTS. This Voting Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
7.12 CONSTRUCTION.
(a) Headings of the Sections of this Voting Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(b) For purposes of this Voting Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the
feminine gender shall include the masculine and neuter genders; and the
neuter gender shall include masculine and feminine genders.
(c) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Voting
Agreement.
(d) As used in this Voting Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(e) Except as otherwise indicated, all references in this Voting
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of
this Voting Agreement and Exhibits to this Voting Agreement.
[remainder of this page intentionally left blank]
G-5
<PAGE> 226
IN WITNESS WHEREOF, Parent and Stockholder have caused this Voting
Agreement to be executed as of the date first written above.
LUMISYS INCORPORATED
By:
Name:
Title:
STOCKHOLDER
Name:
Address:
Facsimile:
Number of Shares of Company
Common Stock owned of record as
of the date of this Voting
Agreement:
G-6
<PAGE> 227
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of CompuRAD, Inc., a Delaware corporation (the
"Company"), hereby irrevocably (to the fullest extent permitted by law) appoints
and constitutes , and Lumisys, Incorporated, a
Delaware corporation ("Parent"), and each of them, the attorneys and proxies of
the undersigned with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to (i) the shares of capital
stock of the Company owned by the undersigned as of the date of this proxy,
which shares are specified on the final page of this proxy and (ii) any and all
other shares of capital stock of the Company which the undersigned may acquire
after the date hereof. (The shares of the capital stock of the Company referred
to in clauses (i) and (ii) of the immediately preceding sentence are
collectively referred to as the "Shares.") Upon the execution hereof, all prior
proxies given by the undersigned with respect to any of the Shares are hereby
revoked, and no subsequent proxies will be given with respect to any of the
Shares.
This proxy is irrevocable and is coupled with an interest. This proxy is
granted in connection with the Voting Agreement of even date herewith between
Parent and the undersigned (the "Voting Agreement") and in consideration of
Parent entering into the Agreement and Plan of Merger and Reorganization of even
date herewith among Parent, SAC Acquisition Corporation, a Delaware corporation
and wholly owned subsidiary of Parent, and the Company (the "Reorganization
Agreement"). Capitalized terms used but not otherwise defined in this proxy have
the meanings assigned to such terms in the Reorganization Agreement.
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time at any meeting of the stockholders of
the Company, however called, or in any written action by consent of stockholders
of the Company, until the earlier to occur of the valid termination of the
Reorganization Agreement or the Effective Time, as follows: (i) in favor of the
Merger, (ii) in favor of the execution and delivery by the Company of the
Reorganization Agreement and the adoption and approval of the terms thereof and
(iii) in favor of each of the other actions contemplated by the Reorganization
Agreement and any action required in furtherance hereof or thereof.
This proxy shall be binding upon the heirs, successors and assigns of the
undersigned (including any transferee of any of the Shares).
Dated: September 28, 1997
--------------------------------------
Name:
--------------------------------------
Number of Shares of Company
Common Stock:
--------------------------------------
G-7
<PAGE> 228
EXHIBIT H
INDIVIDUALS TO EXECUTE THE VOTING AGREEMENT
1. Phillip Berman, M.D.
2. Cary Cole
3. Henky Wibowo
4. Kevin Donovan
H-1
<PAGE> 229
ANNEX B
VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of September 28, 1997 by and
between LUMISYS INCORPORATED, a Delaware corporation ("Parent"), and
____________________ ("Stockholder").
RECITALS
A. Parent, SAC Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and CompuRAD, Inc., a Delaware
corporation (the "Company"), are entering into an Agreement and Plan of Merger
and Reorganization of even date herewith (as amended from time to time, the
"Reorganization Agreement"; capitalized terms used but not otherwise defined in
this Voting Agreement have the meanings assigned to such terms in the
Reorganization Agreement), which provides (subject to the conditions set forth
therein) for the merger of Merger Sub with and into the Company (the "Merger").
B. As of the date hereof, Stockholder owns the number of shares of Company
Common Stock set forth below Stockholder's name on the signature page hereto
(all such shares, together with any shares of Company Common Stock or other
shares of capital stock of the Company that may hereafter be acquired by
Stockholder, being referred to herein as the "Subject Shares").
C. As a condition to the willingness of Parent and Merger Sub to enter into
the Reorganization Agreement, Parent and Merger Sub have required that
Stockholder agree, and in order to induce Parent and Merger Sub to enter into
the Reorganization Agreement Stockholder has agreed, to enter into this Voting
Agreement.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. TRANSFER OF SUBJECT SHARES
1.1 TRANSFER OF VOTING RIGHTS. Stockholder covenants and agrees that,
prior to the earlier to occur of: (i) the Effective Time, or (ii) the valid
termination of the Reorganization agreement (the "Expiration Date"), and except
as otherwise contemplated hereby, Stockholder will not deposit any of the
Subject Shares into a voting trust or grant a proxy or enter into a voting
agreement or similar agreement with respect to any of the Subject Shares.
1.2 OBLIGATIONS OF TRANSFEREES. Each transferee or any subsequent
transferee of the Subject Shares or any interest in such Subject Shares, shall
hold such Subject Shares or interest in the Subject Shares subject to all the
provisions of this Voting Agreement. Each transferee shall sign a counterpart of
this Agreement, agreeing to be bound by the terms and conditions hereof, prior
to receipt of any Subject Shares.
SECTION 2. VOTING OF SUBJECT SHARES
2.1 PRE-TERMINATION VOTING AGREEMENT. Without in any way limiting the
Stockholder's right to vote the Subject Shares in his sole discretion on any
other matters that may be submitted to a stockholder vote, consent or other
approval (including by written consent), at any meeting of the stockholders of
the Company called to vote upon the Merger and the Reorganization Agreement or
at any adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including by written consent) with respect to the
Merger and the Reorganization Agreement is sought, the Stockholder hereby agrees
that, prior to the Expiration Date, at any meeting of the stockholders of the
Company, however called, and in any written action by consent of stockholders of
the Company, Stockholder shall vote the Subject Shares in favor of: (i) the
Merger, (ii) the execution and delivery by the Company of the Reorganization
Agreement, (iii) the adoption
B-1
<PAGE> 230
and approval of the terms thereof and (iv) in favor of each of the other actions
contemplated by the Reorganization Agreement and any action required in
furtherance hereof or thereof.
Prior to the Expiration Date, Stockholder shall not enter into any
agreement or understanding with any Person to vote or give instructions with
respect to the Subject Shares regarding the Merger and the Reorganization
Agreement, other than any agreement or understanding to vote or give
instructions in favor of the Merger and the Reorganization Agreement.
2.2 PROXY; FURTHER ASSURANCES. Contemporaneously with the execution of
this Voting Agreement, Stockholder shall deliver to Parent a proxy in the form
attached hereto as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the Subject Shares (the "Proxy").
SECTION 3. WAIVER OF APPRAISAL RIGHTS.
Stockholder hereby waives any rights of appraisal and any dissenters'
rights that Stockholder may have in connection with the Merger.
SECTION 4. NO SOLICITATION
Stockholder covenants and agrees that, during the period commencing on the
date of this Voting Agreement and ending on the Expiration Date, Stockholder
shall not, directly or indirectly, and shall not authorize or permit any
Representative of Stockholder, directly or indirectly, to: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal; (ii) furnish any information regarding the
Company to any Person in connection with or in response to an Acquisition
Proposal or potential Acquisition Proposal; (iii) engage in discussions with any
Person with respect to any Acquisition Proposal; (iv) approve, endorse or
recommend any Acquisition Proposal; or (v) enter into any letter of intent or
other similar document or any Contract contemplating or otherwise relating to
any Acquisition Proposal. Stockholder shall immediately cease any existing
discussions with any Person that relate to any Acquisition Proposal.
Notwithstanding the foregoing, Stockholder shall not be prevented from taking
any action that is not prohibited under Section 4.4 of the Reorganization
Agreement, whether he is acting in his capacity as a Stockholder of the Company
or as an officer or director of the Company; provided that nothing herein shall
be deemed to excuse Stockholder's performance of his voting obligations
hereunder.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER
Stockholder hereby represents and warrants to Parent as follows:
5.1 AUTHORIZATION, ETC. Stockholder has all requisite power and capacity
to execute and deliver this Voting Agreement and to perform his obligations
hereunder. This Voting Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding obligation of
Stockholder, enforceable against Stockholder in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
5.2 NO CONFLICTS, REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Voting Agreement by Stockholder
do not, and the performance of this Voting Agreement by Stockholder will
not: (i) conflict with or violate any Legal Requirement, order, decree or
judgment applicable to Stockholder or by which he or any of his properties
is bound or affected; or (ii) result in any breach of or constitute a
default (with notice or lapse of time, or both) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of an Encumbrance on the Subject Shares pursuant to,
any Contract to which Stockholder is a party or by which Stockholder or any
of his properties is bound or affected.
(b) The execution and delivery of this Voting Agreement by Stockholder
do not, and the performance of this Voting Agreement by Stockholder will
not, require any Consent of any Person.
B-2
<PAGE> 231
5.3 TITLE TO SUBJECT SHARES. Stockholder owns of record and beneficially
the Subject Shares set forth under Stockholder's name on the signature page
hereof and does not directly or indirectly own, either beneficially or of
record, any shares of capital stock of the Company, or rights to acquire any
shares of capital stock of the Company, other than the Subject Shares set forth
below Stockholder's name on the signature page hereof.
5.4 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Voting Agreement are accurate in all respects as of the date
of this Voting Agreement, will be accurate in all respects at all times through
the Expiration Date and will be accurate in all respects as of the date of the
consummation of the Merger as if made on that date.
SECTION 6. COVENANTS OF STOCKHOLDER
6.1 FURTHER ASSURANCES. From time to time and without additional
consideration, Stockholder will execute and deliver, or cause to be executed and
delivered, such additional or further transfers, assignments, endorsements,
proxies, consents and other instruments as Parent may reasonably request for the
purpose of effectively carrying out and furthering the intent of this Voting
Agreement.
6.2 LEGEND. Promptly after the date of this Voting Agreement, and in any
event, no later than two business days following the date of this Voting
Agreement, Stockholder shall instruct the Company to cause each certificate of
Stockholder evidencing the Subject Shares to bear a legend in the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE VOTING AGREEMENT DATED AS OF SEPTEMBER 28, 1997, AS
IT MAY BE AMENDED, BETWEEN THE ISSUER AND THE REGISTERED HOLDER OF THIS
CERTIFICATE, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES
OF THE ISSUER.
SECTION 7. MISCELLANEOUS
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. This Voting
Agreement shall terminate, and the provisions hereof shall be of no further
force or effect upon the Expiration Date.
7.2 INDEMNIFICATION. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Stockholder shall hold harmless and
indemnify Parent from and against, and shall compensate and reimburse Parent
for, any Damages (regardless of whether or not such Damages relate to a
third-party claim) which are directly or indirectly suffered or incurred at any
time by Parent, or to which Parent otherwise becomes subject, and that arise
from or are directly or indirectly connected with any breach of any
representation, warranty, covenant or obligation of Stockholder contained
herein.
7.3 EXPENSES. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
B-3
<PAGE> 232
7.4 NOTICES. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party hereto):
if to Stockholder:
at the address set forth below Stockholder's signature on the
signature page hereto;
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94306
Attention: David J. Segre
if to Parent:
Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94086
Attention: Stephen J. Weiss
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Andrei M. Manoliu
7.5 SEVERABILITY. Any term or provision of this Voting Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Voting Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Voting Agreement in any other jurisdiction. If any
provision of this Voting Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
7.6 ENTIRE AGREEMENT. This Voting Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings between the parties with respect thereto. No
addition to or modification of any provision of this Voting Agreement shall be
binding upon either party hereto unless made in writing and signed by both
parties hereto. The parties hereto waive trial by jury in any action at law or
suit in equity based upon, or arising out of, this Voting Agreement or the
subject matter hereof.
7.7 ASSIGNMENT; BINDING EFFECT. Except as provided herein, neither this
Voting Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by either of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other party, except that
Parent may assign all or any of its rights hereunder to any affiliate of Parent.
Subject to the preceding sentence, this Voting Agreement shall be binding upon
and shall inure to the benefit of (i) Stockholder and his heirs, successors and
assigns and (ii) Parent and its successors and assigns. Notwithstanding anything
contained in this Voting Agreement to the contrary, nothing in this Voting
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto or their respective heirs, successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Voting
Agreement.
B-4
<PAGE> 233
7.8 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Voting Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that Parent shall be entitled to an injunction or
injunctions to prevent breaches of this Voting Agreement and to enforce
specifically the terms and provisions hereof in any Delaware court or other
court of proper jurisdiction, this being in addition to any other remedy to
which Parent is entitled at law or in equity.
7.9 OTHER AGREEMENTS. Nothing in this Voting Agreement shall limit any of
the rights or remedies of Parent or any of the obligations of Stockholder under
any Affiliate Agreement between Parent and Stockholder or any other agreement.
7.10 GOVERNING LAW. This Voting Agreement shall be governed in all
respects by the laws of the State of Delaware, as applied to contracts entered
into and to be performed entirely within the State of Delaware.
7.11 COUNTERPARTS. This Voting Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
7.12 CONSTRUCTION.
(a) Headings of the Sections of this Voting Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(b) For purposes of this Voting Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the
feminine gender shall include the masculine and neuter genders; and the
neuter gender shall include masculine and feminine genders.
(c) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Voting
Agreement.
(d) As used in this Voting Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(e) Except as otherwise indicated, all references in this Voting
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of
this Voting Agreement and Exhibits to this Voting Agreement.
[remainder of this page intentionally left blank]
B-5
<PAGE> 234
IN WITNESS WHEREOF, Parent and Stockholder have caused this Voting
Agreement to be executed as of the date first written above.
LUMISYS INCORPORATED
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER
--------------------------------------
Name:
--------------------------------------
Address:
----------------------------------
----------------------------------
Facsimile:
----------------------------------
Number of Shares of Company
Common Stock owned of record as
of the date of this Voting
Agreement:
----------------------------------
B-6
<PAGE> 235
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of CompuRAD, Inc., a Delaware corporation (the
"Company"), hereby irrevocably (to the fullest extent permitted by law) appoints
and constitutes , and Lumisys, Incorporated, a Delaware
corporation ("Parent"), and each of them, the attorneys and proxies of the
undersigned with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to (i) the shares of capital
stock of the Company owned by the undersigned as of the date of this proxy,
which shares are specified on the final page of this proxy and (ii) any and all
other shares of capital stock of the Company which the undersigned may acquire
after the date hereof. (The shares of the capital stock of the Company referred
to in clauses (i) and (ii) of the immediately preceding sentence are
collectively referred to as the "Shares.") Upon the execution hereof, all prior
proxies given by the undersigned with respect to any of the Shares are hereby
revoked, and no subsequent proxies will be given with respect to any of the
Shares.
This proxy is irrevocable and is coupled with an interest. This proxy is
granted in connection with the Voting Agreement of even date herewith between
Parent and the undersigned (the "Voting Agreement") and in consideration of
Parent entering into the Agreement and Plan of Merger and Reorganization of even
date herewith among Parent, SAC Acquisition Corporation, a Delaware corporation
and wholly owned subsidiary of Parent, and the Company (the "Reorganization
Agreement"). Capitalized terms used but not otherwise defined in this proxy have
the meanings assigned to such terms in the Reorganization Agreement.
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time at any meeting of the stockholders of
the Company, however called, or in any written action by consent of stockholders
of the Company, until the earlier to occur of the valid termination of the
Reorganization Agreement or the Effective Time, as follows: (i) in favor of the
Merger, (ii) in favor of the execution and delivery by the Company of the
Reorganization Agreement and the adoption and approval of the terms thereof and
(iii) in favor of each of the other actions contemplated by the Reorganization
Agreement and any action required in furtherance hereof or thereof.
This proxy shall be binding upon the heirs, successors and assigns of the
undersigned (including any transferee of any of the Shares).
Dated: September 28, 1997
Name:
Number of Shares of Company
Common Stock:
B-7
<PAGE> 236
ANNEX C-1
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415) 576-3300
September 28, 1997
Confidential
The Board of Directors
Lumisys Incorporated
225 Humboldt Court
Sunnyvale, CA 94089
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Lumisys Incorporated ("Lumisys" or the "Company") of the consideration
to be paid by the Company in connection with the proposed acquisition by Lumisys
of the common stock of CompuRAD, Inc. ("CompuRAD") (the "Proposed Transaction")
under the terms of the Common Stock Purchase Agreement, dated as of September
23, 1997, among CompuRAD and Lumisys and the related Exhibits and Schedules
thereto (the "Agreement"). The Agreement provides, among other things, that
Lumisys will issue to stockholders of CompuRAD, upon consummation of the
Proposed Transaction, .928 shares of Lumisys common stock for each share of
CompuRAD common stock based on the fully diluted share calculations as described
in the Agreement.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Lumisys in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Lumisys and have received fees for rendering these
services. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of Lumisys and receives
customary compensation in connection therewith, and also provides research
coverage for Lumisys. In the ordinary course of business, Hambrecht & Quist
actively trades in the equity and derivative securities of Lumisys for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. Hambrecht & Quist may in the
future provide additional investment banking or other financial advisory
services to Lumisys.
RvR Securities, Inc., an affiliate of Hambrecht and Quist, was the managing
underwriter in the initial public offering of CompuRAD in August 1996.
Additionally, individuals affiliated with Hambrecht and Quist have owned shares
of CompuRAD.
1
<PAGE> 237
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available financial statements of Lumisys
for recent years and interim periods to date and certain other relevant
financial and operating data of Lumisys made available to us from published
sources and from the internal records of Lumisys;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to Lumisys prepared by the
management of Lumisys;
(iii) discussed the business, financial condition and prospects of
Lumisys with certain of its officers;
(iv) reviewed the publicly available financial statements of CompuRAD
for recent years and interim periods to date and certain other relevant
financial and operating data of CompuRAD made available to us from
published sources and from the internal records of CompuRAD;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to CompuRAD prepared by the
management of CompuRAD;
(vi) discussed the business, financial condition and prospects of the
CompuRAD with certain of its officers;
(vii) analyzed the pro forma impact of the Proposed Transaction on
earnings per share of Lumisys;
(viii) reviewed and analyzed with Lumisys management and Board of
Directors the strategic rationale for the proposed transaction;
(ix) reviewed the recent reported prices and trading activity for the
common stocks of Lumisys and CompuRAD and compared such information and
certain financial information for Lumisys and CompuRAD with similar
information for certain other companies engaged in businesses we consider
comparable;
(x) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(xi) reviewed the Agreement; and
(xii) performed such other analyses and examinations and considered
such other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Lumisys or CompuRAD considered
in connection with our review of the Proposed Transaction, and we have not
assumed any responsibility for independent verification of such information or
any independent valuation or appraisal of any of the assets or liabilities of
Lumisys or CompuRAD. With respect to the financial forecasts and projections
made available to us and used in our analysis, we have assumed that they reflect
the best currently available estimates and judgments of the expected future
financial performance of Lumisys and CompuRAD. For purposes of this Opinion, we
have assumed that neither Lumisys nor CompuRAD is a party to any pending
transactions, including external financings, recapitalizations or material
merger discussions, other than the Proposed Transaction and those activities
undertaken in the ordinary course of conducting their respective businesses. Our
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this letter and
any change in such conditions would require a reevaluation of this opinion.
We express no opinion as to the price at which the shares of Lumisys or
CompuRAD will trade after the announcement or consummation of the Proposed
Transaction.
It is understood that this letter is for the information of the Board of
Directors only and may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced
2
<PAGE> 238
in full in the Proxy Statement. This letter does not constitute a recommendation
to any stockholder as to how such stockholder should vote on the Proposed
Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be paid by Lumisys in the Proposed Transaction is fair to
the Company from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By: /s/ PAUL B. CLEVELAND
------------------------------------
Paul B. Cleveland
Managing Director
3
<PAGE> 239
ANNEX C-2
LOGO
September 28, 1997
Private and Confidential
Board of Directors
CompuRAD, Inc.
1350 North Kolb Road
Tucson, AZ 85715
To the Members of the Board of Directors:
We understand that pursuant to an Agreement and Plan of Merger and
Reorganization dated as of September 28, 1997 (the "Agreement") among Lumisys,
Inc. ("Lumisys"), its wholly-owned subsidiary SAC Acquisition Sub, Inc., ("SAC")
and CompuRAD, Inc. ("CompuRAD" or the "Company") Lumisys and the Company intend
to consummate a transaction in which SAC will merge with the Company and each
currently outstanding share of CompuRAD common stock would be converted into
Lumisys common stock (the "Transaction") resulting in the issuance of
approximately 3,857,129 shares of Lumisys common stock with an approximate value
of $25,794,550 as of the market close September 26, 1997. The Company has
provided us with a copy of the Agreement.
You have asked us to render our opinion as to whether the consideration to
be received by the holders of common stock of the Company in connection with the
Transaction is fair from a financial point of view, to the stockholders of the
Company.
In connection with our review, and in arriving at an opinion, we have,
among other things:
(i) reviewed CompuRAD's Annual Report to Stockholders and Annual
Report on Form 10-K for the year ended December 31, 1996 and Lumisys'
Annual Reports to Stockholders and Annual Reports on Form 10-K for the
years ended December 31, 1995 and 1996, and their respective Quarterly
Reports on Form 10-Q for the periods ended March 31 and June 30, 1997;
(ii) reviewed certain internal financial and operating information,
including summary projections provided to us by the management of CompuRAD
and Lumisys relating to their respective business prospects;
(iii) met with members of senior management of CompuRAD to discuss
CompuRAD's operations, historical financial statements and future
prospects, as well as their views with respect to the operations,
historical financial statements and future prospects of Lumisys, and their
views of the business, operational and strategic benefits, potential
synergies (including revenue enhancements and cost savings) and other
implications of the Transaction;
met with members of senior management of Lumisys to discuss Lumisys'
operations, historical financial statements and future prospects, as well
as their views of the business, operational and strategic benefits,
potential synergies (including revenue enhancements and cost savings) and
other implications of the Transaction;
reviewed the pro forma financial impact of the Transaction;
(iv) performed such other analyses and examinations and considered
such other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant;
(v) reviewed public information with respect to certain other
companies whose businesses we considered to be relevant to an assessment of
the businesses of CompuRAD and Lumisys; and
1
<PAGE> 240
(vi) reviewed the current state of financial markets.
We have not independently verified the information provided by management
of the Company and Lumisys but have relied upon assurances of the management of
CompuRAD and Lumisys that they are unaware of any facts that would make the
information provided to us incomplete or misleading. We have not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities of Lumisys nor have we concluded a physical inspection of the
properties of Lumisys. We have not tested or verified the technical requirements
of any contracts or products nor evaluated the probable costs and required time
necessary to successfully implement new product development plans. We have also
not solicited independent legal evaluations of any of Lumisys' or CompuRAD's
contracts including certain licensing agreements. With respect to the financial
forecasts and projections made available and used in the analysis, we have
assumed that they have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company and
Lumisys. Our opinion is necessarily conditional upon such information,
assumptions, reliance and limitations, and is also based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the date
of this letter.
Based upon and subject to the foregoing, it is our opinion, as the date
hereof, that the consideration to be received by the stockholders of CompuRAD in
the Transaction is fair from a financial point of view to the stockholders of
CompuRAD.
CIBC Wood Gundy Securities Corp. has been retained by the Company to act as
financial advisor to the Company in connection with the Transaction and will
receive a fee for such advisory services, including the rendering of this
opinion. Pursuant to a letter agreement dated September 3, 1997, CompuRAD has
agreed to indemnify CIBC Wood Gundy Securities Corp. against certain losses and
liabilities.
This letter is solely for the information of the Board of Directors of the
Company and may not to be referred to, in whole or in part, or provided to any
third party without prior written consent of CIBC Wood Gundy Securities Corp.
CIBC WOOD GUNDY SECURITIES CORP.
James E. Anderson
Managing Director
3
<PAGE> 241
ANNEX D
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL. C. SEC. 262 (1996)
SEC. 262. APPRAISAL RIGHTS
(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 sec. 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 sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
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 sec. 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
sec.sec. 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 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
1
<PAGE> 242
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 sec. 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:
(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 subsection (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 his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his 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 his 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 sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or 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; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. 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
2
<PAGE> 243
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 his 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 S 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
his 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 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 his
certificates of stock
3
<PAGE> 244
to the Register in Chancery, if such is required may participate fully in all
proceedings until it is finally determined that he 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 his 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.
4
<PAGE> 245
PROXY
LUMISYS INCORPORATED
SPECIAL MEETING OF STOCKHOLDERS -- November 25, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF LUMISYS INCORPORATED (the "COMPANY")
The undersigned hereby appoints Stephen J. Weiss and Craig L. Klosterman,
and each of them, as attorneys-in-fact and proxies of the undersigned, with full
power of substitution, to vote all of the shares of the Company's common stock
which the undersigned may be entitled to vote at the Special Meeting of
Stockholders of the Company to be held at the corporate offices of the Company
at 225 Humboldt Court, Sunnyvale, CA 94089, on November 25, 1997 at 10:30 a.m.
local time, and at any and all adjournments or postponements thereof, with all
of the powers which the undersigned would possess if personally present, upon
and in respect of the following proposal and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting. The proposal referred to herein is
described in detail in the accompanying joint proxy statement/prospectus.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
PROPOSAL SPECIFIED ON THE REVERSE SIDE. IF A SPECIFIC DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
POSTPAID RETURN ENVELOPE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
FOLLOWING PROPOSALS.
To approve the issuance of shares of the Company's common stock, $0.001 par
value per share (the "Common Stock"), pursuant to an Agreement and Plan of
Merger and Reorganization, dated as of September 28, 1997, by and among the
Company, SAC Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of the Company, and CompRAD, Inc., a Delaware corporation.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as your name appears hereon. If the stock is registered
in the names of two or more persons, each should sign. Executors,
administrators, trustees, guardians and attorneys-in-fact should add their
titles. If signer is a corporation, please give full corporate name and have a
duly authorized officer sign, stating title. If signer is a partnership, please
sign in partnership name by authorized person.
Signature:
------------------------------ Date:
------------
Signature:
------------------------------ Date:
------------
<PAGE> 246
COMPURAD, INC.
1350 NORTH KOLB ROAD
TUCSON, ARIZONA 85715
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS OF COMPURAD, INC.
TO BE HELD ON NOVEMBER 25, 1997
The undersigned hereby appoints Dr. Phillip Berman and Henky Wibowo, each
with full power of substitution, as proxy of the undersigned, to attend the
Special Meeting of Stockholders of COMPURAD, INC. (the "Company") to be held at
the principal executive offices of the Company located at 1350 North Kolb Road,
Tucson, Arizona at 9:30 a.m., local time on November 25, 1997, and at any and
all adjournments thereof, and to vote all Common Stock of the Company, as
designated on the reverse side of this proxy, with all powers the undersigned
would possess if personally present at the meeting.
This proxy will be voted or withheld from being voted in accordance with
the instructions specified. Where no choice is specified, this proxy will confer
discretionary authority and will be voted FOR approval of the Merger (as defined
below). This proxy confers authority for the above named persons to vote in his
discretion with respect to amendments or variations to the matters identified in
the notice of the meeting accompanying this proxy and such other matters which
may properly come before the meeting. A stockholder has the right to appoint a
person, who need not be a stockholder, to attend and act on his behalf at the
meeting, other than the person designed in this form of proxy, such right may be
exercised by inserting the name of such person in the blank space provided.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. Approval and adoption of the Agreement and Plan of Merger and
Reorganization dated as of September 28, 1997 (the "Merger Agreement"), among
Lumisys Incorporated ("Lumisys") SAC Acquisition Corporation, a wholly owned
subsidiary of Lumisys ("Sub"), and the Company, providing for the merger of Sub
with and into the Company upon the terms and subject to the conditions of the
Merger Agreement (the "Merger").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign, date and return the proxy
card promptly in the enclosed
envelope.
NOTE: Please sign exactly as name
appears hereon. When signing as
executor, administrator, attorney,
trustee or guardian please give your
full title as such. If a corporation,
please sign in full corporation name
by president or other authorized
officer. If a partnership, please sign
in partnership name by authorized
person. If a joint tenancy, please
have both tenants sign.
Dated: , 1997
--------------------------------------
(Signature)
--------------------------------------
(Print your name)
