<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 4)
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-12
</TABLE>
Phoenix International Ltd., Inc.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(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:
$45,462,092
------------------------------------------------------------------------
(5) Total fee paid:
$9,093
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials:
$9,093
----------------------------------------------------------------------------
[ ] 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
PHOENIX INTERNATIONAL LOGO
January 19, 2001
Dear Phoenix Shareholder:
You are cordially invited to attend a special meeting of the shareholders of
Phoenix International Ltd., Inc., which will be held at our corporate offices
located at 500 International Parkway, Heathrow, Florida on February 22, 2001 at
10:00 a.m., Eastern time.
THIS IS A VERY IMPORTANT MEETING THAT AFFECTS YOUR INVESTMENT IN OUR
CORPORATION.
At the special meeting you will be asked to consider and vote upon:
1. a proposal to approve and adopt an asset purchase agreement, dated
October 25, 2000, among Phoenix, London Bridge Software Holdings PLC, a
corporation organized under the laws of England and Wales ("London Bridge"),
and its indirect wholly-owned subsidiary, London Bridge Core Systems, Inc.
(formerly known as London Bridge Acquisition Company, Inc.), a Delaware
corporation ("Acquisition Company"), and to approve the transactions
contemplated thereby pursuant to which Acquisition Company will purchase
substantially all of our assets and will assume specified liabilities of
ours;
2. a proposal to amend Article I of our articles of incorporation to
change the name of our corporation from "Phoenix International Ltd., Inc."
to "Sphinx International, Inc." (or, if that name is not available, to
another name acceptable to us and Acquisition Company); and
3. a proposal to approve and adopt a plan of dissolution and to approve
the transactions contemplated thereby pursuant to which our corporation will
be liquidated and our net assets will be distributed to our shareholders.
APPROVAL OF THE SECOND PROPOSAL IS CONTINGENT UPON THE SHAREHOLDERS'
APPROVAL OF THE FIRST PROPOSAL. APPROVAL OF EACH OF THE FIRST PROPOSAL AND THE
THIRD PROPOSAL IS NOT CONTINGENT UPON THE SHAREHOLDERS' APPROVAL OF ANY OTHER
PROPOSAL.
AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THE ASSET PURCHASE AGREEMENT AND THE RELATED SALE OF ASSETS AND ASSUMPTION OF
LIABILITIES, THE PROPOSED AMENDMENT TO OUR ARTICLES OF INCORPORATION TO CHANGE
OUR CORPORATION'S NAME AND THE PLAN OF DISSOLUTION. OUR BOARD OF DIRECTORS HAS
DETERMINED THAT EACH PROPOSAL IS IN THE BEST INTERESTS OF OUR CORPORATION AND
ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND
ADOPTION OF EACH OF THE THREE PROPOSALS.
If our shareholders approve both the asset sale proposal and the plan of
dissolution proposal, we intend to distribute the remaining proceeds from the
asset sale and our other remaining net assets to our shareholders on a pro rata
basis following the resolution of, or other provision for, our remaining
liabilities. In such event, we believe that the shareholders are ultimately
likely to receive a total distribution ranging from $2.00 per share to $3.00 per
share. If the asset sale is approved and the plan of dissolution is rejected, we
will consummate the asset sale and our existing business operations will cease.
Our board of directors will then evaluate all available alternatives, including
the possible declaration of a special dividend to the shareholders of
substantially all of our remaining net assets. In such event, we believe that
the shareholders again are ultimately likely to receive a total distribution of
$2.00 - $3.00 per share. On the other hand, if both proposals are rejected, the
board of directors will evaluate all available options, but we believe that it
would be difficult, if not impossible, for us to continue our business or
identify another source of capital before we run out of cash. In such event, as
well as in the event that the shareholders reject the asset sale proposal but
approve the dissolution proposal, the shareholders would likely receive little,
if any, value.
The attached proxy statement provides detailed information about each of the
proposals. Please give this information your careful attention. IN PARTICULAR,
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION PROVIDED IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 16.
To vote your shares, you may use the enclosed proxy card or attend the
special meeting in person. ON BEHALF OF OUR BOARD OF DIRECTORS, I URGE YOU TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE, EVEN IF YOU
CURRENTLY PLAN TO ATTEND THE MEETING. Your vote is important, regardless of the
number of shares you own.
To approve each of the proposals, you MUST vote "FOR" the proposal by
following the instructions stated on the enclosed proxy card. If you vote to
abstain or if you do not vote at all, your abstention or non-vote will, in
effect, count as a vote against the proposals. Returning the enclosed proxy will
not prevent you from voting in person but will assure that your vote is counted
if you are unable to attend the special meeting.
Thank you for your support of our company.
Sincerely,
/S/BAHRAM YUSEFZADEH
Bahram Yusefzadeh
Chairman of the Board and Chief
Executive Officer
This proxy statement is dated January 19, 2001 and was first mailed to
shareholders on January 19, 2001.
<PAGE> 3
PHOENIX INTERNATIONAL LTD., INC.
500 INTERNATIONAL PARKWAY
HEATHROW, FLORIDA 32746
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 22, 2001
---------------------
Notice is hereby given that a special meeting of the shareholders of
Phoenix International Ltd., Inc. will be held at our corporate offices located
at 500 International Parkway, Heathrow, Florida on February 22, 2001 at 10:00
a.m. Eastern time for the following purposes:
1. To consider and vote upon the approval and adoption of an asset
purchase agreement, dated October 25, 2000, among Phoenix, London Bridge
Software Holdings PLC, a corporation organized under the laws of England
and Wales ("London Bridge"), and its indirect wholly-owned subsidiary,
London Bridge Core Systems, Inc. (formerly known as London Bridge
Acquisition Company, Inc.), a Delaware corporation ("Acquisition Company"),
and the approval of the transactions contemplated thereby pursuant to which
Acquisition Company will purchase substantially all of our assets and will
assume specified liabilities of ours. A copy of the asset purchase
agreement is included as Annex A to the attached proxy statement.
2. To consider and vote upon an amendment of Article I of our articles
of incorporation to change the name of our corporation from "Phoenix
International Ltd., Inc." to "Sphinx International, Inc." (or, if that name
is not available, to another name acceptable to us and Acquisition
Company).
3. To consider and vote upon the approval and adoption of a plan of
dissolution and the approval of the transactions contemplated thereby
pursuant to which our corporation will be liquidated and our net assets
will be distributed to the shareholders. A copy of the plan of dissolution
is included as Annex B to the attached proxy statement.
4. To transact such other business as may be properly brought before
the special meeting or any adjournment thereof.
APPROVAL OF THE SECOND PROPOSAL IS CONTINGENT UPON THE SHAREHOLDERS'
APPROVAL OF THE FIRST PROPOSAL. APPROVAL OF EACH OF THE FIRST PROPOSAL AND THE
THIRD PROPOSAL IS NOT CONTINGENT UPON THE SHAREHOLDERS' APPROVAL OF ANY OTHER
PROPOSAL. The proxy statement that accompanies this notice describes each of the
three proposals in more detail. We encourage you to read the proxy statement and
the attached annexes carefully.
Our board of directors has fixed the close of business on January 8, 2001
as the record date for determining the shareholders entitled to notice of and to
vote at the special meeting.
Accompanying this notice is a proxy card. WHETHER OR NOT YOU EXPECT TO BE
AT THE SPECIAL MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN
IT TO US PROMPTLY. If you plan to attend the special meeting and wish to vote
your shares personally, you may do so at any time before the proxy is voted.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ C. RUSSELL PICKERING
C. Russell Pickering
Secretary
Heathrow, Florida
January 19, 2001
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Investment Decisions........................................ 15
Risk Factors................................................ 17
Risks Related to the Asset Sale........................... 17
Risks Associated with the Dissolution of the
Corporation............................................ 18
Risks of Continuing the Business if the Asset Sale Does
Not Close.............................................. 20
General Risks of Continued Ownership of Phoenix Stock..... 25
Forward-Looking Statements.................................. 27
The Special Meeting......................................... 28
General................................................... 28
Record Date; Quorum; Required Vote; Shares Outstanding and
Entitled to Vote....................................... 28
Voting of Proxies......................................... 28
How to Revoke Your Proxy.................................. 29
Rights of Dissenting Shareholders......................... 29
Security Ownership of Management.......................... 30
Voting Agreements......................................... 30
Interests of Certain Persons in Matters to be Acted
Upon................................................... 31
Costs of Solicitation of Proxies.......................... 32
Proposal 1: The Asset Purchase Agreement and Asset Sale..... 32
London Bridge and Acquisition Company..................... 32
Background of the Asset Sale.............................. 33
Reasons for the Asset Sale; Recommendation of the Special
Committee of Our Board of Directors; Recommendation of
Our Board of Directors................................. 38
Fairness Opinion of Robinson-Humphrey..................... 39
Information Concerning Robinson-Humphrey.................. 43
The Asset Purchase Agreement.............................. 43
Use of Proceeds........................................... 58
Escrow Agreement.......................................... 58
Loan Agreement............................................ 59
Reseller Agreement........................................ 59
Accounting Treatment of the Asset Sale.................... 59
Proposal 2: Change of the Company's Name.................... 59
Proposal 3: The Plan of Dissolution......................... 60
Background and Reasons for the Dissolution................ 60
Reasons for the Dissolution; Recommendation of Our Board
of Directors........................................... 60
Description of the Plan of Dissolution.................... 61
Dissolution and Liquidation Procedure..................... 61
Revocation of the Plan of Dissolution..................... 61
Conduct of Our Corporation Following the Dissolution...... 61
Sale of Remaining Assets.................................. 62
Payment of Claims and Obligations......................... 62
Distributions to Shareholders............................. 62
Liquidating Trust......................................... 63
Continuing Liability of Shareholders After Dissolution.... 63
Regulatory Matters........................................ 63
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accounting Treatment...................................... 63
Material U.S. Federal Income Tax Consequences............... 64
Tax Consequences to Our Corporation....................... 64
Tax Consequences to U.S. Shareholders..................... 64
Special Considerations for Non-U.S. Shareholders.......... 65
Backup Withholding........................................ 66
Description of Phoenix...................................... 67
General................................................... 67
Industry Background....................................... 67
The Phoenix Solution...................................... 68
Strategy.................................................. 70
Technology................................................ 71
Target Markets............................................ 72
Sales and Marketing....................................... 73
Product Pricing........................................... 73
Worldwide Services........................................ 74
Product Development and New Products...................... 76
Competition............................................... 78
Intellectual Property and Other Proprietary Rights........ 79
Employees................................................. 79
Facilities................................................ 80
Legal Proceedings......................................... 80
Securities Ownership of Certain Beneficial Owners and
Management................................................ 81
Selected Financial and Operating Data....................... 84
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 86
Revenues.................................................. 86
Markets................................................... 87
Competition............................................... 87
Fluctuations in Financial Results......................... 88
Results of Operations..................................... 89
Liquidity and Capital Resources........................... 93
Impact of New Accounting Standards........................ 94
Year 2000 Issues.......................................... 95
Inflation................................................. 95
Quantitative and Qualitative Disclosures about Market
Risk................................................... 95
Where You May Find Additional Information................... 95
Index to Consolidated Financial Statements.................. F-1
Annex A -- Asset Purchase Agreement......................... A-1
Annex B -- Plan of Liquidation and Dissolution of Phoenix
International Ltd., Inc. ........................ B-1
Annex C -- Escrow Agreement................................. C-1
Annex D -- Fairness Opinion of Robinson-Humphrey............ D-1
Annex E -- Florida's Dissenters' Rights Statute............. E-1
</TABLE>
ii
<PAGE> 6
SUMMARY
This summary highlights selected information contained in this proxy
statement and may not contain all of the information that is important to you.
For a more complete description of the asset purchase agreement, the amendment
to our articles of incorporation to change our corporation's name, the plan of
dissolution and all the transactions related thereto, you should read carefully
the entire proxy statement, including the attached annexes. We have included
section and page references in this summary that will direct you to more
complete descriptions of the topics that we have summarized.
THE SPECIAL MEETING
TIME, DATE AND PLACE: The special meeting will be held at our corporate
offices at 500 International Parkway, Heathrow, Florida
on February 22, 2001 at 10:00 a.m. Eastern time.
RECORD DATE: Holders of record of our common stock as of the close of
business on January 8, 2001 will be entitled to vote at
the meeting.
PURPOSE: 1. To consider and vote upon the approval and adoption
of the asset purchase agreement among Phoenix, London
Bridge and Acquisition Company and the approval of
the transactions contemplated thereby pursuant to
which Acquisition Company will purchase substantially
all of our assets and will assume specified
liabilities of ours. A copy of the asset purchase
agreement is included as Annex A to this proxy
statement.
2. To consider and vote upon an amendment of Article I
of our articles of incorporation to change the name
of our corporation from "Phoenix International Ltd.,
Inc." to "Sphinx International, Inc." (or, if that
name is not available, to another name acceptable to
us and Acquisition Company).
3. To consider and vote upon the approval and adoption
of a plan of dissolution and the approval of the
transactions contemplated thereby pursuant to which
our corporation will be liquidated and our net assets
will be distributed to the shareholders. A copy of
the plan of dissolution is included as Annex B to
this proxy statement.
4. To transact such other business as may be properly
brought before the special meeting or any adjournment
thereof.
APPROVAL OF THE SECOND PROPOSAL IS CONTINGENT UPON THE
SHAREHOLDERS' APPROVAL OF THE FIRST PROPOSAL. APPROVAL
OF EACH OF THE FIRST PROPOSAL AND THE THIRD PROPOSAL IS
NOT CONTINGENT UPON APPROVAL OF ANY OTHER PROPOSAL.
BOARD
RECOMMENDATION: Our board of directors has unanimously approved each of
the asset purchase agreement and the related sale of
assets and assumption of liabilities, the proposed
amendment to our articles of incorporation to change our
corporation's name and the plan of dissolution. Our
board of directors has determined that each proposal is
in the best interests of our corporation and its
shareholders.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE:
- FOR APPROVAL AND ADOPTION OF THE ASSET PURCHASE
AGREEMENT AND APPROVAL OF THE TRANSACTIONS
CONTEMPLATED THEREBY;
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<PAGE> 7
- FOR APPROVAL OF THE AMENDMENT TO OUR ARTICLES OF
INCORPORATION TO CHANGE OUR CORPORATION'S NAME; AND
- FOR APPROVAL AND ADOPTION OF THE PLAN OF DISSOLUTION
AND APPROVAL OF THE TRANSACTIONS CONTEMPLATED THEREBY.
REQUIRED VOTE: Under our articles of incorporation, each proposal must
be approved by the affirmative vote of holders of at
least two-thirds, or 66 2/3%, of the outstanding shares
of our common stock. Abstentions and broker non-votes
will count as votes against the approval of the
proposals.
DISSENTERS' RIGHTS: The Florida Business Corporation Act provides
shareholders the right to dissent from and obtain
payment of the fair value of their shares with regard to
the proposed sale of assets to London Bridge. Therefore,
if (1) you deliver to us before the vote at the special
meeting a written notice of your intent to demand
payment for your shares if the asset sale is
consummated, (2) you do not vote your shares "FOR"
proposal 1 and (3) you comply with all of the other
procedures required by the Florida Business Corporation
Act to exercise your dissenters' rights, you may receive
payment for the fair value of your shares. The
provisions of the Florida Business Corporation Act that
detail the rights of dissenting shareholders and the
procedures they must follow to obtain payment for their
shares is attached to this proxy statement as Annex E.
Under the Florida Business Corporation Act, shareholders
do not have dissenters' rights with regard to proposals
2 and 3.
See "The Special Meeting -- Rights of Dissenting
Shareholders" on page 28.
INVESTMENT DECISIONS: The holders of our common stock face a basic investment
decision with respect to the proposed asset sale. The
shareholders could vote to approve both the asset sale
and the dissolution and thereby receive the proceeds of
the asset sale and any other net assets remaining after
our liabilities have been settled or otherwise provided
for. We currently believe that, in such event, total
distributions to shareholders would ultimately be
between $2.00 per share and $3.00 per share. Based on
the outcome of numerous contingencies, including
adjustments to the purchase price, claims against the
escrow, taxes, contractual disputes, litigation, claims
against third parties, operating and professional
expenses, severance payments and others, we expect the
actual amount distributed to shareholders to fall within
the range of $2.00 - $3.00 per share, but under some
scenarios the amount could be higher or lower. If the
shareholders vote to approve the asset sale but not the
dissolution, and assuming that we distribute to the
shareholders via special dividend any net assets
remaining after the asset sale, we believe that the
total distributions to shareholders would also
ultimately range from $2.00 per share to $3.00 per
share. Again, however, this amount could be higher or
lower, depending on the outcome of the numerous
contingencies noted above. For information regarding the
estimated ranges of the amounts of the more significant
contingencies, see "Summary -- Proposal 1: The Asset
Purchase Agreement and Asset Sale -- Working Capital
Adjustment," "-- Escrow" and "-- Retention of Specified
Assets and Liabilities" on pages 4 and 5 and "Proposal
1: The Asset Purchase Agreement and Asset Sale -- The
Asset Purchase Agreement -- Payment of the Purchase
Price," "-- Working Capital Adjustment to the Purchase
Price" and "-- Assets and Liabilities Not Assumed by
Acquisition Company" beginning on page 43.
2
<PAGE> 8
Alternatively, the shareholders could vote to reject the
asset sale proposal and the dissolution proposal,
leaving Phoenix with an extreme liquidity crisis and
urgent need for additional capital. We currently know of
no business strategy that is likely to produce
meaningful value for the shareholders if the asset sale
and the dissolution are not consummated. Similarly, if
the shareholders vote to reject the asset sale proposal
but to approve the dissolution proposal, thereby in
effect shutting down our existing business, we believe
that for the same reasons total distributions to
shareholders, if any, would be minimal.
In lieu of voting for the asset sale proposal, each
shareholder may exercise dissenters' rights.
Alternatively, instead of voting for either or both of
the asset sale proposal and the dissolution proposal, a
shareholder may elect to sell his or her shares on the
open market prior to the closure of the stock transfer
records of the Company, which is expected to occur
shortly following the special meeting if the plan of
dissolution is approved. See "Investment Decisions" on
page 14 for a further discussion of the choices
presented to each shareholder.
PROPOSAL 1: THE ASSET PURCHASE AGREEMENT AND ASSET SALE
PURCHASER: Acquisition Company will purchase our assets.
Acquisition Company is a Delaware corporation
headquartered in Atlanta, Georgia and an indirect
wholly-owned subsidiary of London Bridge. London Bridge
is a publicly-held UK corporation listed on the London
Stock Exchange under the trading symbol "LNB." London
Bridge and its subsidiaries provide business software
solutions for financial institutions around the world,
including software for customer relationship management
and credit risk management.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- London Bridge and Acquisition Company" on page
31.
ASSETS TO BE SOLD: Pursuant to the terms specified in the asset purchase
agreement, we will sell and Acquisition Company will
purchase substantially all of the assets that we use in
the operation of our business. Acquisition Company also
will assume liabilities and obligations of our
corporation that are associated with the purchased
assets and specified in the asset purchase agreement.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Assets and
Liabilities Assumed by Acquisition Company" on page 45.
PURCHASE PRICE: Acquisition Company has agreed to purchase our assets
for a cash purchase price of $45,462,092, subject to
adjustments described below. Acquisition Company will
pay the purchase price to us at the closing of the asset
sale adjusted as follows:
- An amount equal to 25% of the purchase price will be
deposited in escrow to cover contingent liabilities
and breaches of representations and warranties
pursuant to an escrow agreement among the parties.
- The purchase price will be reduced by $850,000 to
reflect expected reductions in our estimated
transactional costs resulting from Acquisition
Company's decision to purchase the stock of our New
Zealand subsidiary rather than its assets.
3
<PAGE> 9
- The purchase price will be reduced by $461,918 to
reflect the amount of professional fees we paid
between September 1, 2000 and October 25, 2000.
- An amount equal to the outstanding balance under a
loan agreement pursuant to which Acquisition Company
has provided us with a $10,000,000 line of credit will
be deposited into a separate account at closing. This
amount will be released from the account following the
resolution of the working capital adjustment described
below.
Acquisition Company also will assume specified
obligations and liabilities associated with our
business.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Purchase Price"
on page 42 and "-- Working Capital Adjustment to the
Purchase Price" on page 43.
WORKING CAPITAL
ADJUSTMENT: The amount corresponding to the amount borrowed by us
under the line of credit will be released from the
separate account following the resolution of the working
capital adjustment to the purchase price. The working
capital adjustment is generally as follows:
- The purchase price will be reduced for all amounts we
borrow under the $10,000,000 line of credit;
- The purchase price will be reduced by any reduction in
our working capital between October 25, 2000 and the
closing; and
- The purchase price will be increased by an allowance
of $2 million plus 1/3 of all license fees under new
contracts signed between October 25, 2000 and the
closing of the asset sale up to an additional $1.3
million.
The asset purchase agreement provides that this
adjustment is to be determined no later than 20 days
after the closing of the asset sale. Once determined,
the amount of the adjustment will be distributed out of
the separate account to Acquisition Company, and the
balance will be distributed to us. We estimate that the
amount of this downward working capital adjustment to
the purchase price could be as low as $4.4 million and
as high as $7.8 million.
The estimated ranges of the working capital adjustment
and other possible adjustments to the amount to be
distributed to the shareholders, as set forth in this
proxy statement, are based on information currently
available to us and assumptions which we believe to be
reasonable. However, final amounts cannot be known until
all liabilities are resolved, and the actual amounts
could be much higher or lower than the estimated ranges.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Working Capital
Adjustment to the Purchase Price" on page 43.
ESCROW: At the closing of the asset sale, 25% of the purchase
price will be deposited into an escrow account to
satisfy potential claims for indemnification made prior
to September 30, 2001 that we may be obligated to pay
pursuant to the asset purchase agreement. We are
currently aware of potential claims against the escrow
account that exceed $300,000. We are assuming that
claims against
4
<PAGE> 10
the escrow account could be as high as $1.0 million,
although total claims could be much higher. A copy of
the escrow agreement is attached to this proxy statement
as Annex C.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- Escrow Agreement" on page 57.
RETENTION OF SPECIFIED
ASSETS AND LIABILITIES: The asset purchase agreement provides that some of our
assets and liabilities will not be sold to Acquisition
Company in the asset sale and will be retained by us
instead. In connection with the plan of dissolution and
prior to distributions to shareholders, we will have to
settle, or otherwise provide for payment of, the
retained liabilities. In addition, we currently intend
to convert our non-cash assets that are not sold to
Acquisition Company pursuant to the asset purchase
agreement into cash prior to distributing such assets to
shareholders.
The following chart lists some of the retained
liabilities which could be significant and an estimated
range of amounts involved.
<TABLE>
<CAPTION>
LOW HIGH
----------- ----------
<S> <C> <C> <C>
Professional fees incurred prior to
closing.............................. 3,300,000 4,000,000
Taxes.................................. 500,000 1,000,000
Settlement of class action lawsuit..... 4,225,000 4,225,000
Settlement of litigation and customer
disputes (benefit)................... (1,000,000) 1,800,000
Severance for Phoenix officers......... 3,400,000 3,400,000
Costs of winding up business........... 900,000 2,000,000
</TABLE>
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Assets and
Liabilities Not Assumed by Acquisition Company" on page
47 and "Proposal 3: The Plan of
Dissolution -- Distributions to Shareholders" on page
61.
DISTRIBUTIONS TO
SHAREHOLDERS: We intend to distribute to our shareholders a portion of
the cash proceeds that we receive at the closing of the
asset sale. We will also have available for distribution
to our shareholders any amount to which we are entitled
following the resolution of the working capital
adjustment to the purchase price. We intend to
distribute these amounts to our shareholders as soon as
practicable following the closing of the asset sale.
We intend to distribute any funds remaining in the
escrow account as soon as practicable following the
termination of the escrow on September 30, 2001.
However, any such distribution could be delayed in the
event that disputes under the escrow agreement remain
unresolved on that date.
We will withhold from both distributions any amount that
we believe to be necessary to settle or otherwise
resolve any of our known or contingent liabilities that
are not to be assumed by Acquisition Company, to pay
taxes, professional fees and other transaction expenses
related to the asset sale and to fund the ongoing
expenses of winding up our business and dissolving our
corporation.
Based on our current expectations regarding deductions
and adjustments to the purchase price, costs of settling
and liquidating retained assets, liabilities and
disputes, and the cost of winding up the business, we
estimate that aggregate
5
<PAGE> 11
distributions to shareholders will be between $2.00 and
$3.00 per share, although actual aggregate distributions
could be higher or lower.
For information regarding liquidating distributions to
our shareholders upon our dissolution, see "Proposal
3: The Plan of Dissolution -- Distributions to
Shareholders" and "-- Payment of Claims and Obligations"
on page 61.
OPINION OF
ROBINSON-HUMPHREY: In connection with its approval of the asset purchase
agreement and the asset sale, our board of directors
received an opinion of our financial advisor, The
Robinson-Humphrey Company, LLC, as to the fairness, from
a financial point of view, to our corporation of the
consideration to be received in the asset sale. The full
text of Robinson-Humphrey's written opinion, dated
October 25, 2000, is attached to this proxy statement as
Annex D. We encourage you to read this opinion carefully
in its entirety for a description of the assumptions
made, matters considered and limitations on the review
undertaken. ROBINSON-HUMPHREY'S OPINION IS ADDRESSED TO
OUR BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO VOTE WITH
RESPECT TO MATTERS RELATING TO THE ASSET SALE.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- Fairness Opinion of Robinson-Humphrey" on page
38.
REASONS FOR THE ASSET
SALE: In the course of reaching their decision to approve the
asset purchase agreement and the asset sale, the board
of directors and the special committee of independent
directors formed to evaluate strategic alternatives
available to us each consulted with our management as
well as our financial advisors and outside legal counsel
and considered numerous factors relating to the benefits
and risks associated with the asset purchase agreement
and the asset sale.
For a full discussion of these factors, please see
"Proposal 1: The Asset Purchase Agreement and Asset
Sale -- Reasons for the Asset Sale; Recommendation of
the Special Committee of Our Board of Directors;
Recommendation of Our Board of Directors" on page 37.
CLOSING CONDITIONS: The asset purchase agreement contains closing conditions
that are customary to transactions similar to the asset
sale, including approval of the transaction by our
shareholders, expiration of the applicable waiting
periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, the accuracy of
our representations and warranties, the absence of a
material adverse change and the receipt of material
third-party consents.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Conditions to
Closing the Asset Sale" on page 52.
THE CLOSING: The closing of the asset sale will occur within five
business days following the satisfaction or waiver of
the conditions set forth in the asset purchase agreement
unless we agree with Acquisition Company and London
Bridge to a later date. We currently expect the closing
to occur shortly following the special meeting scheduled
for February 22, 2001.
CONDUCT OF BUSINESS
AFTER THE ASSET
SALE: Following the closing of the asset sale, we plan to
settle or otherwise resolve our liabilities that were
not assumed by Acquisition Company under the asset
purchase agreement. We do not expect to engage in any
product development, marketing or sales activities, and
we expect to retain only a small staff of administrative
personnel during this period. Thereafter, we intend to
file
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articles of dissolution with the Department of State of
the State of Florida pursuant to which we will liquidate
our remaining assets and wind up our business.
See "Proposal 3: The Plan of Dissolution" on page 59.
TERMINATION: The parties to the asset purchase agreement may
terminate it under specified circumstances including the
failure to close the asset sale by March 31, 2001.
For a discussion of these circumstances, see "Proposal
1: The Asset Purchase Agreement and Asset Sale -- The
Asset Purchase Agreement -- Termination of the Asset
Purchase Agreement" on page 54.
TERMINATION FEE: We will be required to pay Acquisition Company a
termination fee of $2,000,000 if:
- Acquisition Company terminates the asset purchase
agreement because our board of directors withdraws or
modifies its approval or recommendation to our
shareholders to approve the asset purchase agreement
and the asset sale or endorses, approves, recommends,
or causes us to enter into any other agreement with
respect to, another business combination proposal or
publicly proposes to do any of the foregoing; or
- after an alternative business combination proposal has
been publicly announced, our shareholders fail to
approve the asset purchase agreement; or
- we enter into an agreement with respect to or
consummate an alternative business combination
transaction within one year after the termination of
the asset purchase agreement, unless the asset
purchase agreement was terminated (1) by mutual
consent, (2) because of governmental actions or
proceedings, (3) because of a failure to consummate
the asset sale prior to March 31, 2001 or (4) because
Acquisition Company fails to satisfy specified
conditions to closing.
See "Proposal 1: The Asset Purchase Agreement and Asset
Sale -- The Asset Purchase Agreement -- Termination Fee"
on page 55.
MATERIAL FEDERAL INCOME
TAX CONSEQUENCES: We will recognize gain or loss for federal income tax
purposes on the sale of the assets. Our gain or loss
will be determined based upon the amount of the purchase
price (increased by the liabilities of our corporation
assumed by Acquisition Company) allocated to each asset
sold and our tax basis for each such asset. To the
extent that the purchase price allocated to an asset
exceeds its tax basis, we will recognize gain on the
disposition of the asset, and we will recognize loss to
the extent the purchase price allocated to an asset is
less than our tax basis in that asset. The asset sale
may also result in state or local income, franchise,
sales, use or other tax liabilities in state or local
tax jurisdictions in which we file tax returns. We may
have sufficient operating losses, expenses and net
operating loss carry forwards to offset the taxable gain
expected to result from the asset sale. However, we
cannot be sure of this, and in any event, we will still
be subject to alternative minimum tax liability which we
expect to exceed $500,000 and could be as much as
$1,000,000 or more.
Holders of our common stock will not recognize any gain
or loss due to the asset sale. Our shareholders may be
taxed on subsequent distributions of the proceeds of the
asset sale, depending on each shareholder's tax basis in
the
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shares of our common stock that such shareholder owns.
We encourage our shareholders to contact their own tax
advisors.
See "Material U.S. Federal Income Tax Consequences" on
page 63.
ACCOUNTING TREATMENT OF
THE ASSET SALE: The asset sale will be accounted for as a sale of assets
transaction.
INTERESTS OF CERTAIN
PERSONS IN THE ASSET
SALE: All of our executive officers and directors and Glenn W.
Sturm, one of our legal advisors, own shares of our
common stock and/or options to purchase shares of our
common stock. To that extent, their interest in the
asset sale is the same as that of our other
shareholders.
London Bridge owns approximately 9.2% of our outstanding
common stock and, as a shareholder, will be entitled to
participate pro rata in any distributions made to
shareholders pursuant to the plan of dissolution. London
Bridge also will be entitled, as a shareholder, to
receive its pro rata share of a settlement award under a
securities class action lawsuit that is pending against
us.
The shares of our common stock owned by London Bridge
are subject to a governance agreement, dated February
14, 2000, as amended on October 25, 2000, and a related
irrevocable proxy, which provide that we will vote the
shares subject to the governance agreement in favor of
the asset purchase agreement and the asset sale. These
shares are also subject to a registration rights
agreement, dated February 14, 2000, pursuant to which
London Bridge is entitled to have its shares registered
by us under certain circumstances.
The employment agreements of each of Messrs. Bahram
Yusefzadeh, Raju M. Shivdasani, C. Russell Pickering and
Theodore C. Burns have provisions regarding payments
that we must make to each in the event of their
termination after a change of control. We must make such
payments to Messrs. Pickering and Burns in the event
they are terminated without cause following a change of
control of our corporation. We must make such payments
to Messrs. Yusefzadeh and Shivdasani in the event they
are terminated without cause or they resign from our
corporation following a change of control of our
corporation. The payments are equal to the executive's
annual salary, or three times the executive's annual
salary in the case of Messrs. Yusefzadeh and Shivdasani.
In addition, we are obligated to provide for benefits
for Messrs. Yusefzadeh and Shivdasani until each has
attained the age of 65. In addition, all of the
outstanding stock options held by Messrs. Yusefzadeh,
Shivdasani and Pickering will vest upon a change of
control. The approval by our shareholders of the asset
purchase agreement and the asset sale constitutes a
change of control of our business under these
agreements.
See "The Special Meeting -- Interests of Certain Persons
in Matters to be Acted Upon" on page 30.
LOCK-UP AND VOTING
AGREEMENTS: Each of SAFECO Asset Management Company, SAFECO
Corporation and Robert Fleming, Inc. has entered into a
voting agreement with Acquisition Company whereby each
has agreed to vote its shares of our common stock in
favor of the asset purchase agreement and the asset sale
and against any other transaction. These three
shareholders in the aggregate own approximately 23.6% of
our shares of common stock.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO APPROVE THE ASSET PURCHASE AGREEMENT AND THE ASSET SALE.
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PROPOSAL 2: THE CHANGE OF THE COMPANY'S NAME
Pursuant to the asset purchase agreement, we have agreed to change our
corporate name to remove any reference to the name "Phoenix" or any other trade
name used in our business. The name change will take effect simultaneously with,
and is conditioned upon, the closing of the asset sale.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO AMEND ARTICLE I OF OUR ARTICLES OF INCORPORATION TO CHANGE OUR
CORPORATION'S NAME FROM "PHOENIX INTERNATIONAL, LTD., INC." TO "SPHINX
INTERNATIONAL, INC." (OR, IF THAT NAME IS NOT AVAILABLE, TO ANOTHER NAME
ACCEPTABLE TO US AND LONDON BRIDGE).
PROPOSAL 3: THE PLAN OF DISSOLUTION
TIMING AND PROCEDURE: We anticipate that, following approval of the plan of
dissolution by our shareholders and the closing of the
asset sale, we will file articles of dissolution with
the Department of State of the State of Florida and will
thereafter wind up our affairs, including taking actions
to liquidate any remaining assets and to make payments
of outstanding claims, at such times as our board of
directors deems necessary, appropriate, or advisable.
If the shareholders approve the plan of dissolution but
fail to approve the asset purchase agreement and the
asset sale or the asset sale is not completed as
contemplated, the board of directors will be authorized
in its discretion, but will not be obligated, to sell
all of our assets and to liquidate our corporation
without further shareholder action or approval. Our
board of directors does not, however, believe that such
a sale of our assets would be as advantageous to our
shareholders as the asset sale contemplated by the asset
purchase agreement.
See "Proposal 3: The Plan of Dissolution" on page 59.
POST-DISSOLUTION CONDUCT
OF PHOENIX: Under Florida law, after we file our articles of
dissolution, we will continue to exist solely for the
purpose of winding up our affairs. During this time, our
board of directors and officers will oversee the
liquidation of our assets but will not continue our
business. They will:
- settle and close our business;
- convert to cash as many of our non-cash assets as
possible;
- withdraw from any jurisdiction where we are
qualified to do business;
- pay or make provision to pay our expenses and other
liabilities;
- prosecute and defend any lawsuits;
- distribute our remaining assets to the shareholders;
and
- engage in any other acts necessary to wind up and
liquidate our business and affairs.
See "Proposal 3: The Plan of Dissolution -- Conduct of
Our Corporation Following the Dissolution" on page 60.
LIQUIDATING
DISTRIBUTIONS
TO SHAREHOLDERS: Before distributing any assets to our shareholders, we
will pay and discharge, or make provisions reasonably
likely to provide sufficient compensation for, all of
our claims and obligations, including pending,
contingent, conditional, or unmatured claims as well as
claims that have not arisen but that are likely to arise
after our dissolution.
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Once adequate provisions have been made for payment of
all of our claims and obligations, all of our remaining
assets will be distributed to shareholders in one or
more liquidating distributions. Uncertainties as to the
net value of our assets and the ultimate amount of our
liabilities make it impossible to predict the amount
that will be distributed to shareholders or the timing
of any such distribution.
See "Proposal 3: The Plan of
Dissolution -- Distributions to Shareholders" and
"-- Payment of Claims and Obligations" on page 61.
LIQUIDATING TRUST: Our board of directors may, in its absolute discretion,
transfer our assets to a liquidating trust after
dissolution.
See "Proposal 3: The Plan of Dissolution -- Liquidating
Trust" on page 62.
REVOCATION OF THE PLAN
OF DISSOLUTION: Pursuant to the terms of the plan of dissolution, our
board of directors may revoke the plan of dissolution
entirely without further shareholder action if it
determines that dissolution and liquidation are not in
the best interests of the shareholders. The board of
directors may not take such action unless it is within
120 days of the date the articles of dissolution are
effective.
See "Proposal 3: The Plan of Dissolution -- Revocation
of the Plan of Dissolution" on page 60.
CONTINUING LIABILITY OF
SHAREHOLDERS: Under Florida law, a shareholder may be liable for any
claim against our corporation that has not been paid or
otherwise provided for in an amount up to that
shareholder's pro rata share of the claim or the amount
distributed to the shareholder, whichever amount is
less.
See "Proposal 3: The Plan of Dissolution -- Continuing
Liability of Shareholders After Dissolution" on page 62.
REGULATORY MATTERS: Following shareholder approval of the plan of
dissolution, we will not be subject to any federal or
state regulatory requirements applicable to the
dissolution process other than the requirement to file
the articles of dissolution with the Department of State
of the State of Florida.
ACCOUNTING TREATMENT: Upon our dissolution we will change to a liquidation
basis of accounting. See "Proposal No. 3: The Plan of
Dissolution -- Accounting Treatment" on page 62.
MATERIAL FEDERAL INCOME
TAX CONSEQUENCES: Until the winding up and liquidation of our corporation
is completed, we will remain subject to income tax on
our taxable income. Each shareholder will recognize a
capital gain or loss equal to the difference between the
aggregate amount of the distribution made to the
shareholder in connection with our liquidation and the
adjusted tax basis of such shareholder's shares.
See "Material U.S. Federal Income Tax Consequences" on
page 63.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO APPROVE THE ADOPTION OF THE PLAN OF DISSOLUTION.
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: WHO IS SOLICITING MY PROXY?
A: Our board of directors is soliciting proxies from each of our shareholders.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The special meeting is scheduled to take place on February 22, 2001 at 10:00
a.m., Eastern time, at our corporate offices located at 500 International
Parkway, Heathrow, Florida.
Q: WHAT WILL OUR CORPORATION RECEIVE FOR THE ASSETS IT IS SELLING TO
ACQUISITION COMPANY?
A: Acquisition Company has agreed to purchase our assets for a purchase price of
$45,462,092, subject to adjustments specified in the asset purchase
agreement. Acquisition Company also will assume some of our liabilities,
which are designated in the asset purchase agreement, including liabilities
and all performance obligations under most of our customer contracts. We will
continue to be responsible for breaches of these contracts that occur prior
to the closing of the asset sale. See "Proposal 1: The Asset Purchase
Agreement and Asset Sale -- The Asset Purchase Agreement -- Purchase Price"
on page 42 and "-- Assets and Liabilities Assumed by Acquisition Company" on
page 45.
Q: HOW AND WHEN WILL THIS MONEY BE PAID TO OUR CORPORATION?
A: On the closing of the asset sale, Acquisition Company will pay us the
$45,462,092 purchase price by wire transfer, adjusted as follows:
- An amount equal to 25% of the purchase price will be deposited in escrow
to cover contingent liabilities and breaches of representations and
warranties pursuant to an escrow agreement among the parties.
- The purchase price will be reduced by $850,000 to reflect expected
reductions in our estimated transactional costs resulting from Acquisition
Company's decision to purchase the stock of our New Zealand subsidiary
rather than its assets.
- The purchase price will be reduced by $461,918 to reflect the amount of
professional fees we paid between September 1, 2000 and October 25, 2000.
- An amount equal to the outstanding balance under a loan agreement pursuant
to which Acquisition Company has provided us with a $10,000,000 line of
credit will be deposited into a separate account at closing. This amount
will be released from the separate account following the resolution of the
working capital adjustment.
See "Proposal 1: The Asset Purchase Agreement and Asset Sale -- The Asset
Purchase Agreement -- Purchase Price" on page 42 and "-- Working Capital
Adjustment to the Purchase Price" on page 43.
Q: WHAT WILL OUR BUSINESS BE FOLLOWING THE ASSET SALE?
A: Substantially all of our operations will be sold to Acquisition Company in
the asset sale. Following the asset sale, we will no longer be engaged in our
core business activities but will pursue those steps necessary to wind down
and liquidate in accordance with the plan of dissolution.
Q: WHAT WILL WE DO IF THE ASSET SALE IS NOT APPROVED BY THE SHAREHOLDERS?
A: If the asset sale is not approved, we will have an immediate and critical
need for additional capital in order to repay all amounts owing to
Acquisition Company under the line of credit and otherwise operate our
business. It is unlikely that we could raise sufficient additional capital on
terms more favorable than the asset sale, if at all, or in sufficient time to
avoid a default under the line of credit. We currently know of no business
strategy that is likely to produce meaningful value for the shareholders if
the shareholders
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do not approve the asset sale. In such event, we would likely run out of
cash, default under the line of credit and shut down the business, resulting
in minimal, if any, distributions to shareholders.
Q: WHEN DO YOU EXPECT THE ASSET SALE TO BE COMPLETED?
A: We expect to complete the asset sale within five business days following the
satisfaction of the conditions specified in the asset purchase agreement,
including the receipt of shareholder approval at the special meeting and
receipt of all necessary regulatory approvals. We expect that the asset sale
will be completed shortly following the special meeting scheduled for
February 22, 2001, but we cannot predict the exact timing of the closing.
Q: WHAT WILL WE DO IF THE PLAN OF DISSOLUTION IS NOT APPROVED BY THE
SHAREHOLDERS?
A: If the shareholders do not approve the plan of dissolution but do approve the
asset sale, we intend to consummate the asset sale. After closing the asset
sale, we would invest the available proceeds of the asset sale pending
resolution of disputes and claims against us. Unless our board of directors
and the shareholders should agree on a different course of action at a later
date, we would expect to either distribute to the shareholders via special
dividend any net assets remaining after the asset sale or possibly again seek
shareholder approval of a plan of dissolution.
Q: WILL I RECEIVE ANY PAYMENT AS A RESULT OF THE ASSET SALE?
A: You will not receive any payment directly from Acquisition Company as a
result of the asset sale. Once adequate provisions have been made for payment
of all of our claims and obligations, all of our remaining assets will be
distributed to shareholders in two or more liquidating distributions. We
expect to make the first distribution after the closing of the asset sale and
the resolution of the working capital adjustment. We expect that any amounts
held in escrow to cover our indemnification obligation under the asset
purchase agreement will be distributed after all claims pending against the
escrow account have been resolved. We cannot make a final distribution until
all litigation, disputes and our other liabilities have been fully resolved.
Q: WHAT WILL I RECEIVE AS A RESULT OF THE PLAN OF DISSOLUTION?
A: You will receive your pro rata share, based on the number of shares you own,
of the net assets remaining after provision has been made for the payment,
satisfaction and discharge of all known, unknown or contingent debts or
liabilities, including costs and expenses incurred in connection with the
dissolution.
Uncertainties as to the precise net value of our assets and the ultimate
amount of our liabilities make it impossible to predict the aggregate net
amounts that will ultimately be available for distribution to shareholders or
the timing of any such distribution.
Q: WHY IS THE CORPORATION CHANGING ITS NAME?
A: We have agreed to transfer our corporate name and trademarks to Acquisition
Company with our business. In order to recognize this transfer and to avoid
confusion following the closing of the asset sale, we have agreed, pursuant
to the asset purchase agreement, to change our corporate name to remove any
reference to the name "Phoenix" or any other trade name used in our business.
Q: CAN I STILL SELL MY SHARES OF THE CORPORATION'S COMMON STOCK?
A: You may continue to sell or otherwise transfer your shares of our common
stock. However, as of November 22, 2000, we were delisted from the Nasdaq
National Market, making it more difficult to dispose of, or obtain quotations
with respect to, our common stock. Prices for our shares are currently quoted
only on the electronic OTC ("over-the-counter") Bulletin Board. If the
shareholders approved asset sale and plan of dissolution, we intend to close
the company's stock transfer records shortly after the special meeting, which
will prevent any further trading in our stock. Anyone holding shares of our
stock
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when trading is halted will be unable to transfer them and will only have the
right to receive distributions payable with respect to those shares.
Q: WHAT IS THE REQUIRED SHAREHOLDER VOTE TO APPROVE EACH OF THE PROPOSALS?
A: Our articles of incorporation require the affirmative vote of at least
two-thirds, or 66 2/3%, of our outstanding common stock to approve each of
the three proposals.
Q: ARE THERE RISKS I SHOULD CONSIDER BEFORE DECIDING ON THE PROPOSALS?
A: Yes, you should carefully consider the factors discussed in the section
entitled "Risk Factors" on page 16.
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this proxy statement carefully, including each of the
annexes, and consider how the asset sale, the amendment to the articles of
incorporation and the plan of dissolution affect you as a shareholder. You
may also want to review the documents referenced under "Where You May Find
Additional Information" on page 94. You should then follow the procedures
explained in this proxy statement to vote your shares with respect to each
proposal.
Q: HOW DO I VOTE MY SHARES?
A: You should indicate on your proxy card how you want to vote for each proposal
and then sign and mail your proxy card in the enclosed return envelope as
soon as possible so that your shares may be represented and voted at the
special meeting. If you sign and mail a proxy that does not indicate how you
want to vote, your proxy will be voted FOR approval and adoption of the asset
purchase agreement and asset sale, FOR the approval of the amendment to our
articles of incorporation required in order to change our corporate name and
FOR the approval and adoption of the plan of dissolution. If you vote to
abstain or do not vote at all with regard to a proposal, your non-vote will,
in effect, count as a vote against the proposal.
Q: IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: No, your broker will not vote your shares for you unless you provide
instructions on how to vote. It is important that you follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares.
Q: MAY I CHANGE MY VOTE?
A: Yes, you may change your vote at any time before your proxy is voted at the
special meeting. To change your vote, simply send a written revocation or a
later-dated, completed and signed proxy card before the special meeting or
attend the special meeting and vote in person.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE ASSET SALE?
A: No, you will not owe any federal income tax solely as a result of the asset
sale. You may owe federal income tax to the extent that the aggregate amount
of distributions you receive in connection with our liquidation exceeds your
adjusted tax basis in your shares.
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Q: WILL I HAVE DISSENTERS' RIGHTS?
A: Under Florida law, which governs our corporation and the rights of our
shareholders, you are entitled to dissenters' rights with respect to proposal
1 relating to the approval of the asset purchase agreement and the asset
sale. Our shareholders are not entitled to dissenters' rights with respect to
proposal 2 relating to the change of our corporation's name or proposal 3
relating to the plan of dissolution. You should carefully review this proxy
statement and Annex E for information concerning the procedures you must
follow if you choose to exercise your dissenters' rights.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have questions about the asset sale, please contact C. Russell
Pickering, our corporate secretary, at (407) 548-5100 or by email at
[email protected].
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INVESTMENT DECISIONS
The basic investment decision to be made by the shareholders involves
voting to approve or disapprove the proposed asset sale transaction. The
proposed asset sale offers the likelihood that meaningful cash distributions
will be made to our shareholders. If the shareholders vote to approve the asset
sale and the plan of dissolution and if in fact the asset sale is completed and
our company is dissolved and liquidated, we intend to make one or more cash
distributions of the proceeds after purchase price adjustments and settlement of
all of our remaining liabilities. We believe that the total cash distributions
would likely be between $2.00 per share and $3.00 per share. The actual amount
could be higher under some scenarios and could be lower under other scenarios,
depending on the amount required to settle our liabilities, including the
purchase price adjustment, claims against the escrow, taxes, contractual
disputes, litigation, claims against third parties, operating expenses,
severance payments and professional fees, among others.
If the shareholders vote to approve the asset sale but not the plan of
dissolution, and if the asset sale is completed and it is assumed that we
distribute to our shareholders via special dividend any net assets remaining
after the asset sale, we again believe that the total cash distributions would
likely be between $2.00 per share and $3.00 per share. Again, however, this
amount could be higher under some scenarios and could be lower under other
scenarios, depending on the outcome of the numerous contingencies noted above.
If the shareholders vote to reject the asset sale proposal and the
dissolution proposal, we would be faced with an extreme liquidity crisis and
urgent need for additional capital, and it is likely that we would default under
the line of credit from Acquisition Company. In that situation, the board of
directors would be forced to consider alternatives which are likely to be less
favorable than the asset sale. We currently know of no alternative sales or
capital raising transactions or strategies that would be likely to produce
meaningful value for the shareholders. Given the material adverse effects of
recent developments on our ability to attract and retain customers, the board
believes it would be difficult to continue our business or identify another
purchaser who could buy the company before we run out of cash.
Similarly, if the shareholders vote to reject the asset sale proposal but
to approve the dissolution proposal, thereby effectively shutting down our
business, we believe that, for the same reasons, total distributions to
shareholders, if any, would be minimal.
The shareholders are faced with a choice between ultimately receiving an
amount estimated at between $2.00 per share and $3.00 per share if the asset
sale is approved and consummated but receiving, if anything, substantially less
than our book value per share of $0.45 at September 30, 2000 if the asset sale
is not consummated and the Company's business continues to deteriorate. For a
discussion of the consequences to us if the asset sale transaction does not
occur, see "Risk Factors -- Risks of Continuing the Business if the Asset Sale
Does Not Close" on page 19.
Alternatively, each holder of our common stock could make an investment
decision to exercise his or her dissenters' rights with regard to the asset sale
transaction. As a further alternative, each shareholder could elect to sell his
or her shares in the public market. However, all stock sales must be completed
prior to the date that our stock transfer records will be closed, which we
expect to occur shortly following the special meeting if the plan of dissolution
is approved. In addition, we intend to deregister our common stock and cease
filing annual, quarterly and special reports with the SEC in the first quarter
of 2001, which means you will then no longer be able to obtain current
information about us from the SEC website or its public reference room.
Recently, our shares have traded in the range from $0.10 to $2.00 per share in a
highly unpredictable and thinly traded market. While we estimate distributions
of $2.00 - $3.00 per share if the asset sale transaction is completed, the
actual total of such distributions might be greater than or less than the
trading price of our shares or the amount payable to shareholders who dissent
from the proposed asset sale transaction. For information regarding liquidating
distributions to our shareholders upon our dissolution, see "Proposal 3: The
Plan of Dissolution -- Distributions to Shareholders" and "-- Payment of Claims
and Obligations" on page 61. For information regarding your right to dissent
with regard to the asset sale transaction and the process for exercising that
right, see "The Special Meeting -- Rights of Dissenting Shareholders" on page
28.
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Our estimates of likely cash distributions to shareholders under various
alternative scenarios are forward-looking statements based on many assumptions
and estimates. We believe the expectations reflected in these forward-looking
statements are reasonable. However, forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which we cannot control. The actual amount of cash distributions to shareholders
under the different scenarios may differ materially from our estimates because
of the following matters:
- Twenty-five percent of the purchase price in the asset sale transaction
will be deposited in escrow to cover potential indemnification claims
made by Acquisition Company. Any amount remaining after satisfaction of
such indemnification claims will then be available to pay claims of
creditors and parties to litigation against us. Accordingly, less than
the full amount, and potentially none, of the purchase price that will be
deposited into escrow may be available for distribution to the
shareholders.
- Cash available for distribution to shareholders will be reduced by our
operating expenses until we are finally dissolved, including accrued and
continuing professional fees and severance payments to officers. These
expenses could be higher or lower than our estimates due to unanticipated
delays, unexpected settlement amounts of disputes and liabilities, and
many other factors.
- The purchase price in the asset sale transaction will be subject to a
downward working capital adjustment, including adjustments for operating
expenses until closing and changes in accounts receivable, accounts
payable and cash balances. The actual amount of the adjustment could be
higher or lower than our estimate, depending on the timing of the
closing, the level of our expenses, changes in our receivables and other
factors.
- Cash available for distribution to shareholders will be reduced by
payments necessary to satisfy our creditors, to settle a class action
lawsuit against us, to settle contract disputes with customers and to
satisfy other known and unknown claims which may be asserted against us
in the future. Actual amounts could be much greater than our estimates if
we cannot settle disputes or if certain disputes are resolved against us.
- Cash available for distribution to shareholders could be increased by any
amount received from any third party against whom Phoenix may have a
claim. Some of these claims could be substantial, although no recovery
can be anticipated or guaranteed and resolution of such claims could take
time.
- Cash available for distribution will be reduced by amounts owed by us for
taxes. Once we have prepared and filed our tax returns, actual amounts
that we owe could be significantly higher than our estimates.
- Other adjustments and reductions described under "Proposal 1: The Asset
Purchase Agreement and Asset Sale -- The Asset Purchase
Agreement -- Working Capital Adjustment to the Purchase Price" beginning
on page 43.
- The other risks outlined in "Risk Factors" beginning on page 17.
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RISK FACTORS
You should carefully consider the following risk factors, together with the
other information in this proxy statement, before you decide whether to vote to
approve the asset purchase agreement, the plan of dissolution and the
transactions contemplated thereby as described in this proxy statement. In
addition, you should keep in mind that the risks described below are not the
only risks that are relevant to your voting decision. The risks described below
are the risks that we currently believe are the material risks of which you
should be aware. However, additional risks that are not presently known to us,
or that we currently believe are not material, may also prove to be important.
RISKS RELATED TO THE ASSET SALE
BECAUSE OF THE CONDITIONS TO CLOSING SET FORTH IN THE ASSET PURCHASE AGREEMENT
AND BECAUSE THERE ARE SPECIFIED CIRCUMSTANCES UNDER WHICH ACQUISITION COMPANY
MAY TERMINATE THE ASSET PURCHASE AGREEMENT, WE CANNOT BE SURE WHEN OR EVEN IF
THE TRANSACTION WILL BE COMPLETED.
Acquisition Company may terminate the asset purchase agreement if we fail
to satisfy the conditions which we must meet, including the following:
- We must receive the approval of 66 2/3% of the outstanding shares of our
stock, which approval is the subject of this proxy statement;
- We must execute a final settlement agreement with respect to a securities
class action lawsuit against us, subject to approval of the court;
- There must not be any material adverse change in our business; and
- There must not be an objection by any government authority, including
under applicable anti-trust laws.
Additionally, Acquisition Company may terminate the asset purchase
agreement if, among other things:
- We lose more than 20% of our employees or more than 50% of the employees
in any specified department prior to the closing; or
- The acquisition is not completed prior to March 31, 2001.
We cannot be sure when we will be able to meet the closing conditions or
whether we will be able to meet them at all. We cannot be sure that Acquisition
Company will not have the right to terminate the asset purchase agreement prior
to closing.
THE NET PROCEEDS THAT WE RECEIVE FROM THE ASSET SALE WILL BE SIGNIFICANTLY LESS
THAN THE CASH AMOUNT OF THE PURCHASE PRICE SET FORTH IN THIS PROXY STATEMENT
BECAUSE OF ADJUSTMENTS TO THE PURCHASE PRICE.
The purchase price will be adjusted to reflect, among other things, the
amount we borrow under the line of credit and the amount of cash that we use
between the date of the asset purchase agreement and the closing. Due to our
recent lack of success in generating new revenue, our use of significant amounts
of cash in the operation of the business, and our incurrences of significant
professional fees related to this transaction, these adjustments could have a
significant adverse effect on the final purchase price. See "Investment
Decisions" on page 14.
WE MAY NOT RECEIVE ALL OF THE CASH FROM THE ESCROW ACCOUNT AT THE END OF THE
ESCROW PERIOD.
An amount equal to 25% of the purchase price is to be held in escrow until
September 30, 2001 to satisfy claims made by Acquisition Company for breaches of
representations and warranties made in the asset purchase agreement, to
reimburse Acquisition Company for the cost to cure pre-closing breaches by us of
contracts assigned to Acquisition Company, and to reimburse Acquisition Company
for the amount of any increase in the cost of finishing development and
implementation projects which were incomplete on the date the asset purchase
agreement was signed. We cannot predict what the amount of these deductions
could be,
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and it is possible that there could be significant deductions from the escrow
fund before it is distributed to us. Additionally, amounts held in the escrow
fund will not be released on September 30, 2001 to the extent that any claims
remain unresolved at that time. Because some claims could remain outstanding and
may take time to resolve, we cannot predict when the remaining amount of the
escrow fund will be released.
BECAUSE WE DO NOT KNOW THE CASH VALUE OF THE LIABILITIES THAT WE ARE RETAINING,
THE AMOUNT OF THE SALE PROCEEDS DISTRIBUTED TO THE SHAREHOLDERS MAY BE
SIGNIFICANTLY LESS THAN THE AMOUNT OF NET PROCEEDS WE RECEIVE FROM THE SALE.
We are retaining specified liabilities and disputes which we must resolve
and satisfy prior to distributing all of the proceeds of the asset sale to our
shareholders. These include, among others, the following:
- disputes with several of our international customers;
- litigation with one of our customers in the United States;
- the class action lawsuit;
- professional fees associated with resolving all retained liabilities and
disputes, including the class action lawsuit;
- professional fees incurred in connection with the sale of our assets to
Acquisition Company;
- taxes;
- accounts payable to some of our subsidiaries;
- the cost of paying severance to executives who have change-of-control
provisions and will not be employed by Acquisition Company; and
- the cost of winding up the business of the corporation.
We do not currently know the cost of satisfying these liabilities and
disputes, and some of them could be significant. Additional disputes and
liabilities could arise. Significant time could be required to resolve some of
these liabilities, which would delay the final distribution to shareholders.
Also, some of these items involve third parties and are therefore beyond our
control.
THE TIMING OF DISTRIBUTIONS TO THE SHAREHOLDERS IS UNKNOWN.
The proceeds of the sale available to the shareholders are expected to be
distributed in two or more payments. We anticipate the first distribution would
occur as soon as possible after the closing of the asset sale and resolution of
the working capital adjustment. We intend to distribute any funds remaining in
the escrow account as soon as possible following the termination of the escrow
on September 30, 2001. However, any such distribution could be delayed in the
event that disputes under the escrow agreement remain unresolved on that date.
We will withhold from all distributions any amounts we believe to be necessary
to settle or otherwise resolve claims and pay ongoing expenses. After all claims
have been satisfied, any remaining assets will be paid to the shareholders in
the final distribution.
RISKS ASSOCIATED WITH THE DISSOLUTION OF THE CORPORATION
THE BOARD OF DIRECTORS MAY AMEND, DELAY IMPLEMENTATION OF, OR TERMINATE THE PLAN
OF DISSOLUTION EVEN IF THE SHAREHOLDERS APPROVE THE PLAN OF DISSOLUTION.
Even if the shareholders vote to approve the plan of dissolution, our board
of directors has reserved the right, in its sole discretion, to amend, delay
implementation of, or terminate the plan of dissolution. Although the board of
directors intends to implement the plan of dissolution as soon as practicable
after the consummation of the asset sale (or as soon as practicable after the
special meeting if the shareholders approve the plan of dissolution but do not
approve the asset purchase agreement), the occurrence of certain contingencies
may require our board of directors to delay our dissolution. In addition, we
must resolve several retained liabilities, which could take a significant amount
of time. For example, the filing of any litigation or
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additional claims by creditors may require us to delay our dissolution. Any such
delay would likely increase our costs and reduce the amount of our assets that
are available for distribution to shareholders.
SHAREHOLDERS COULD BE LIABLE TO THE EXTENT OF ANY DISTRIBUTIONS TO THEM IF OUR
CONTINGENT RESERVES ARE INSUFFICIENT TO SATISFY OUR LIABILITIES.
Pursuant to the terms of the plan of dissolution, we will pay our expenses
and other known liabilities, and if and to the extent deemed necessary,
appropriate or desirable by the board of directors in its absolute discretion,
we may set aside assets in a contingency reserve for payment of any remaining
liabilities. We cannot be sure, however, that the contingency reserve will be
sufficient. Under Florida law, if we (or a liquidating trust to which our assets
are transferred under the plan of dissolution) have inadequate reserves for
payment of our expenses, obligations and liabilities, each shareholder could be
held personally liable for his or her pro rata share (based on the number of
shares owned) of any additional amounts owed to creditors, but only to the
extent of the total distributions received by that shareholder.
In addition, if a court holds at any time that we have failed to make
adequate provision for our obligations and liabilities or if the amount
ultimately required to be paid in respect of such obligations and liabilities
exceeds the amount available from the contingency reserves (and the assets of
any liquidating trust), a creditor of our corporation could seek an injunction
against the making of distributions under the plan of dissolution on the grounds
that the amounts to be distributed are needed to provide for the payment of our
expenses and liabilities. Any such action could delay or substantially diminish
the cash distributions to be made to shareholders.
PRIOR TO A FINAL DISTRIBUTION TO SHAREHOLDERS, WE MAY BE REQUIRED TO REGISTER AS
AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, WHICH COULD
LIMIT OUR OPERATING FLEXIBILITY AND SUBJECT US TO VARIOUS REPORTING REQUIREMENTS
AND INCREASED EXPENSES.
If we are required to register as an investment company under the
Investment Company Act of 1940 due to our investment of the proceeds of the
asset sale in "investment securities," we would be subject to restrictions on
our capital structure, business activities and corporate transactions. We would
also be required to comply with various reporting and other requirements under
the Investment Company Act and would be subject to additional expense.
Generally, an issuer is deemed to be an investment company subject to
registration if its holdings of "investment securities" (generally, securities
other than securities issued by majority owned subsidiaries and government
securities) exceed 40% of the value of its total assets exclusive of government
securities and cash items on an unconsolidated basis. However, a company that
otherwise would be deemed to be an investment company may be excluded from such
status for a one-year period provided that such company has a bona fide intent
to be engaged primarily, as soon as reasonably possible (and in any event within
that one-year period), in a business other than that of investing, reinvesting,
owning, holding or trading in securities. If we would otherwise be deemed to be
an investment company under the Investment Company Act, we intend to rely on
this exemption while we attempt to resolve all contingencies pending against,
and liquidate all remaining assets of, our corporation, and do not intend to
register as an investment company under the Investment Company Act during the
one-year period commencing with the closing of the asset sale.
If we have not resolved all contingencies pending against us, and
liquidated all of our remaining assets, within the one-year period referred to
above, we may be required either to (1) apply to the Securities and Exchange
Commission for exemptive relief from the requirements of the Investment Company
Act, or (2) invest certain of our assets in government securities and cash
equivalents that are not considered "investment securities" under the Investment
Company Act. There can be no assurance that we will be able to obtain exemptive
relief from the Commission. Alternatively, investment in government securities
and cash equivalents could yield a significantly lower rate of return than other
investments which we could make if we chose to register as an investment
company.
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RISKS OF CONTINUING THE BUSINESS IF THE ASSET SALE DOES NOT CLOSE
If the shareholders do not approve the sale of our assets to Acquisition
Company or if we do not otherwise complete the asset sale to Acquisition
Company, we will have significant risks in attempting to continue the operation
of our business, including but not limited to the risks that are summarized
below.
THE BOARD OF DIRECTORS WILL BE FORCED TO EVALUATE OTHER ALTERNATIVES WHICH ARE
LIKELY TO BE LESS FAVORABLE THAN THE ASSET SALE.
If the shareholders fail to approve the asset purchase agreement or if for
any other reason the asset sale fails to close, the board of directors will once
again evaluate all appropriate alternatives to maximize shareholder value,
including the following alternatives:
- Evaluate other strategic alternatives, including attempts to identify
another strategic partner or purchaser of our corporation or its assets;
- Continue to operate our business while attempting to raise capital from
other sources, and implementing remedial action to significantly reduce
operations and expenses; or
- Commence an orderly process of winding up our business operations in
contemplation of a complete liquidation pursuant to the plan of
dissolution, if the plan of dissolution is approved by the shareholders.
Given the significant adverse developments we have recently experienced and
the material adverse effect these developments have had on our ability to
attract new customers, the board believes it will be difficult to continue to
operate our business or identify another purchaser prepared to negotiate a
transaction on more favorable terms than those contained in the asset purchase
agreement, if at all.
WE WILL HAVE AN ACUTE AND IMMEDIATE NEED FOR ADDITIONAL CAPITAL. IF WE CANNOT
RAISE SUCH CAPITAL, WE MAY NOT BE ABLE TO CONTINUE TO OPERATE AS A GOING
CONCERN.
If the asset sale is not completed, we will have an acute and immediate
need for additional capital to operate our business. If we cannot raise such
capital, we will have to significantly curtail our operations and possibly sell
some of our assets. Even with such measures, it is likely that we would not have
sufficient capital to continue our operations. In addition, we do not believe
that we would have sufficient capital to satisfy customers and government
regulators with respect to our ability to continue to provide essential services
to our customers. As a result, there is substantial doubt about our ability to
continue as a going concern unless we are able to obtain substantial additional
financing, and we believe that our ability to raise such capital is limited.
WE WILL NEED ADDITIONAL CAPITAL TO REPAY AMOUNTS OWED TO ACQUISITION COMPANY. IF
WE CANNOT RAISE SUCH CAPITAL, WE MAY LOSE OUR INTELLECTUAL PROPERTY TO
ACQUISITION COMPANY WHICH WOULD PREVENT US FROM OPERATING AS A GOING CONCERN.
In addition to the asset purchase agreement, we have entered into a loan
agreement dated October 27, 2000 with Acquisition Company under which
Acquisition Company has agreed to lend our corporation up to $10,000,000. The
loan will provide working capital to us pending the closing of the asset sale.
We have borrowed $4 million under this line of credit, and may borrow much more.
It is unlikely that we could raise enough additional capital to avoid a default
under the line of credit. Because the line of credit is secured by all of our
intellectual property, including the Phoenix System, a default on the loan could
result in the loss of our most valuable asset -- our intellectual property -- to
Acquisition Company. This would prevent us from being able to continue
operations.
WE MAY BE REQUIRED TO PAY A TERMINATION FEE TO ACQUISITION COMPANY.
If our shareholders fail to approve the asset sale after an alternative
business combination proposal has been publicly announced, or if we fail to
satisfy specified closing conditions or terminate the asset purchase agreement
and pursue an alternative business combination under specified circumstances, we
will be required
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to pay Acquisition Company a termination fee of $2 million. This would be in
addition to amounts we are required to repay under the line of credit, further
increasing our immediate need for additional capital.
BECAUSE OF OUR FINANCIAL POSITION, WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS
STRATEGIES OR ATTRACT NEW CUSTOMERS.
We have experienced a significant decline in sales in the past two years
and our expenses have significantly exceeded our revenues. Our ability to
continue as a going concern will depend upon our ability to raise additional
capital. We have historically relied upon and continue to rely upon fees from
new customers for a substantial portion of our revenues, and these revenues have
been historically difficult to predict, even in the best of times. Due to
concerns our prospective customers may have about our financial condition, we
may not be able to sign new customers and generate the necessary new revenues
without additional capital. If we continue as an independent company, our
success will depend on our ability to continue product development; provide a
high level of customer service; upgrade our technologies and commercialize
products and services utilizing such technologies; respond to competitive
developments; expand our sales, marketing and implementation forces; enter into
sales agency and reseller agreements for both the United States and
international markets; manage our international operations; and attract, train,
motivate, manage and retain management and technical personnel on a timely
basis. It is likely that we will not have sufficient capital to achieve these
objectives, and a significant amount of time will be required to rebuild the
business, if it could be rebuilt at all.
REGULATORY AGENCIES COULD TAKE ACTION AGAINST US OR OUR CUSTOMERS WHICH COULD
HAVE A SIGNIFICANT ADVERSE EFFECT ON OUR BUSINESS.
Our ability to pursue alternatives if the asset sale does not close could
be significantly impaired if any bank regulatory agency, such as the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the Currency,
the Office of Thrift Supervision, or the Federal Reserve, elects to take
administrative action designed to protect our customers against a failure of our
business, which could include a requirement that we raise additional capital,
that we release our customers from their contracts, that we change our
management, or that we release our source code to a third party, or otherwise
subjects us to further regulatory scrutiny in the event the asset sale fails to
close. Additionally, such regulatory agencies could force our customers to
change to another vendor if they determine that we will not be able to support
our customers in the ordinary course of our business. The OCC is requiring our
customers to prepare contingency plans in the event that we are unable to
continue support for our customers.
WE MAY NOT HAVE SUFFICIENT RESOURCES TO SUPPORT OR EXPAND INTERNATIONAL SALES,
AND INTERNATIONAL SALES POSE ADDITIONAL RISKS IN CONNECTION WITH THIS BUSINESS.
International sales represented approximately half of our revenues for the
last two years. We believe that our continued growth and profitability will
require expansion of our international distribution capabilities. However,
international sales and customer support is necessarily more expensive and
difficult to maintain than U.S. sales and customer support, although the license
fees are typically much larger. We do not know if we will have sufficient
capital resources to continue to make and support international sales. We have
also experienced some difficulty with international customers, particularly in
Turkey. If we experience similar difficulties elsewhere, it would have a
material adverse effect on our business.
Additionally, risks inherent in our international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, currency risks, costs of localizing products for foreign
countries, lack of acceptance of localized products in foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, political instability, potentially adverse tax consequences,
restrictions on the repatriation of earnings and the burdens of complying with a
wide variety of foreign laws and regulations. In addition, the laws of some
foreign countries do not protect our proprietary rights to as great an extent as
do the laws of the United States. There can be no assurance that such factors
will not have a material adverse effect on our future international sales and,
consequently, our business, operating results and financial condition.
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IF WE DO NOT ACHIEVE SALES SUCCESS IN AUSTRALIA, WE WILL NOT BE ABLE TO RECOVER
OUR SIGNIFICANT INVESTMENTS THERE.
We have invested a significant amount of funds in our Australian credit
union product. If we do not achieve expected volumes of sales in Australia, we
will not be able to recover this investment. To a large degree, our success in
Australia will depend on our relationships with Siemens Business Services, who
provides sales and development support, and our application service center
partner in Australia, Data Action, who provides sales and support services, as
well as a large processing center. If the efforts of these agents are not
successful, it will be difficult for us to meet our business objectives in
Australia. In addition, we owe a significant amount of money to Siemens Business
Services for their personnel we have used to develop our Australian product.
Failure to repay this debt could materially adversely affect our relationship
with Siemens Business Services and therefore our ability to support our
Australian business.
WE WILL EXPERIENCE INCREASED COMPETITION WHICH COULD PREVENT US FROM MAKING NEW
SALES.
Our competitors will use our financial position against us in competition
for new customers. It is likely that we will not be able to overcome the
objections raised by our competitors and will therefore lose new sales to them.
Many of our current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, engineering, technical, marketing and other resources than we do.
WE MAY NOT BE ABLE TO ATTRACT OR MAINTAIN A SUFFICIENT SALES FORCE TO CONTINUE
TO SELL OUR PRODUCTS TO SUFFICIENT NUMBERS OF NEW CUSTOMERS REQUIRED TO GENERATE
THE REVENUES NECESSARY TO SUPPORT OUR OPERATIONS.
We will be required to hire additional sales personnel to achieve revenue
growth in the future. Competition for such personnel is intense, and we will
have a difficult time recruiting, retaining, and otherwise competing for such
personnel. If we cannot attract and maintain a sufficient sales force both here
and internationally, we may not make sufficient new sales to continue
operations.
WE WILL NEED TO RELY MORE HEAVILY ON SALES BY THIRD PARTY MARKETING AGENTS, AND
THEREFORE WILL HAVE LESS CONTROL OVER SALES.
Because of our financial position, we will have to find and rely more
heavily on third party marketing agents to reach sufficient sales. Consequently,
our success will depend in part on the ultimate success of these sales
relationships and on the ability of these agents to effectively market our
products. We cannot be sure that we will be able to find and keep such agents,
or insure that such agents achieve sufficient sales levels. In addition, it
takes a sufficient amount of time for a new sales agent to begin to make new
sales. We cannot be sure that we will have enough time to sign and train
sufficient sales agents to generate the revenue we will need. Further, it will
be difficult for us to attract or retain sales and marketing agents that will be
able to market our products effectively and that will be qualified to provide
timely and cost-effective customer support and service. In addition, our current
agreements with our marketing agents may not be exclusive and may be terminated
under certain circumstances by either party without cause, and certain of our
agents may offer competing product lines. Therefore, we cannot make any
assurance that any marketing agent will continue to represent our products or to
represent our products effectively.
WE WILL NOT BE ABLE TO INVEST IN SIGNIFICANT NEW DEVELOPMENT OF OUR PRODUCTS
WHICH COULD PUT US AT A COMPETITIVE DISADVANTAGE IN THE FUTURE.
The client/server application software market is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable in short periods of time. One of our strengths historically has
been the amount of money that we have invested in research and development to
improve and advance our product offerings. We have recently made available
significant new releases of our core processing products for the U.S.,
international, and Australian credit union markets, and plan to introduce in the
near future a significant upgrade to our internet banking product. However, we
will most likely not have sufficient capital to continue to invest in our
products
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at or near historical levels, if at all. This could adversely affect our ability
to sign new customers and retain the customers we have. We believe that our
current products are competitive in the industry, but we may not be able to keep
up with technological changes or be able to remain competitive with other
companies in the industry in the future.
WE COULD LOSE A SIGNIFICANT NUMBER OF KEY PERSONNEL WHICH WOULD MATERIALLY
AFFECT OUR ABILITY TO CONTINUE OPERATIONS AT ACCEPTABLE LEVELS FOR OUR
CUSTOMERS.
Our future performance depends in significant part upon the continued
service of our executive and senior management and key development,
implementation, support and sales personnel. Our future success also depends on
our continuing ability to attract and retain highly qualified personnel capable
of developing, expanding, supporting and managing our business and products,
both in the U.S. and internationally. As a technology company, we depend on such
key personnel with skills specific to our products. The development of such
skills takes time and requires a significant amount of training. Competition for
such personnel is intense. Because of our current financial condition, we have
lost many key personnel in the last six months, and it will be difficult for us
to attract and retain our key employees. The loss of the services of Mr.
Yusefzadeh or Mr. Shivdasani, or one or more of our other senior officers or key
technical, implementation or sales personnel could have a material adverse
effect on our business, operating results and financial condition, including our
ability to develop new products and support our current customers.
ERRORS IN OUR PRODUCTS COULD ADVERSELY AFFECT OUR BUSINESS MORE THAN IN PREVIOUS
PERIODS.
Although we have recently released new versions of our core product in all
markets with a significant number of bug fixes, software products as complex as
ours, including these new releases, may contain undetected errors or failures.
Like all software companies, we have previously discovered software errors in
all of our new products and enhancements after their introduction and have
experienced delays, some customer dissatisfaction and lost revenues during the
periods required to correct these errors. Without sufficient capital, we may
have difficulty addressing customer concerns and fixing such errors on a
reasonable and timely basis, which could in turn have an adverse affect on our
ability to retain our customers and attract new customers.
BECAUSE WE DEPEND ON A SINGLE PRODUCT LINE FOR OUR REVENUE, DOWNTURNS IN DEMAND
FOR OUR PRODUCTS CAN HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our revenues are derived from two primary sources: (i) license fees for
software products and other revenues and commissions from the sale and delivery
of software and hardware products of third party vendors; and (ii) fees for a
full range of services complementing our products, including implementation,
programming, conversion, training and installation services, interface services
for tying the Phoenix System to third-party applications, customer and software
support services, disaster recovery services and Internet/Intranet consulting
services. Substantially all of these fees are attributable to licenses of our
principal product, the Phoenix System. We experienced a significant industry
wide reduction in demand for these types of products in 1999 and the first half
of 2000, the result of which was a significant decline in revenues and increase
in our use of cash. It is highly unlikely that we would survive another such
decline in demand.
WE DEPEND UPON THIRD-PARTY TECHNOLOGY TO DEVELOP, SUPPORT, AND OPERATE OUR
PRODUCTS. THE LOSS OF SUPPORT FOR ANY OF THESE PRODUCTS, OR THE CANCELLATION OR
OUR LICENSES TO USE SUCH PRODUCTS, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
ABILITY TO SELL AND SUPPORT OUR PRODUCTS.
The Phoenix System incorporates technology developed and owned by third
parties, including most significantly the relational database on which our
product operates, including those from Sybase and Microsoft, and development
tools provided by Centura and Cold Fusion. Consequently, we must rely upon third
parties to develop and introduce technologies that enhance our current products
and enable us, in turn, to develop our own products on a timely and
cost-effective basis to meet changing customer needs and technological trends in
the financial services software industry. Any impairment or termination of our
relationship with any licensor of third-party technology would force us to find
other products on a timely basis or develop our own technology and could have a
material adverse effect on our business, operating results and
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financial condition. It is doubtful that we would be able to obtain alternative
third-party technology necessary to continue to develop and support our products
on a timely basis or on commercially reasonable terms.
WE DEPEND ON PROPRIETARY TECHNOLOGY AND THERE IS A RISK THAT A THIRD PARTY COULD
MISAPPROPRIATE OUR TECHNOLOGY AND USE IT TO COMPETE AGAINST US.
Our success is dependent upon the architecture and design of our products.
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult or impossible, especially internationally. While we
are unable to determine the extent to which piracy of our software products
occurs, such piracy can be expected to be a problem, particularly in foreign
countries, where the laws do not protect our proprietary rights to as great an
extent as the United States. We cannot be sure that our means of protecting our
proprietary rights will be adequate or that our competitors will not develop
similar technology independently.
THERE IS A CHANCE THAT A THIRD PARTY COULD SUCCESSFULLY CHALLENGE OUR RIGHTS IN
THE INTELLECTUAL PROPERTY IN OUR PRODUCTS, WHICH WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR ABILITY TO SELL OUR PRODUCTS AND SUPPORT OUR CUSTOMERS.
We do not have any patents or patent applications pending, and have not
made a search of the patent databases concerning any of our products. Although
we are not aware that any of our products infringe the proprietary rights of
third parties, we cannot be sure that third parties will not claim infringement
by us with respect to current or future products. In particular, it is possible
that a third party could successfully raise patent infringement claims. Patent
infringement does not require access to or copying of third party technology,
and can arise independently and unintentionally without any overt act on our
part. Because of this and because of the complexity of our technology and the
enormous number of patents which have been filed, it is impossible for us to
determine if we are infringing on any third party patents. Further, although we
take precautions against copyright infringement, it is possible, although we
believe unlikely, that an employee could have used copyrighted material in the
development of our products. Defending against claims of this type is expensive,
and we would have a difficult time protecting claims of infringement by a larger
and more well financed competitor.
Any such claims, with or without merit, could be time-consuming for our
management and would result in costly litigation. Any judgment could award
substantial damages to the parties making such claims, cause product shipment
delays, require us to redevelop or replace portions of our products, require us
to pay royalties to the prevailing party, or require us to discontinue the use
of the challenged tradename, service mark or technology. Any of the foregoing
would be at significant expense which we may not be able to withstand, as we may
not have sufficient resources to effect such remedial development, or to pay
such royalties in the event that they arise.
WE COULD BE SUBJECTED TO PRODUCT LIABILITY CLAIMS WHICH COULD HAVE A SIGNIFICANT
ADVERSE EFFECT ON OUR FINANCIAL POSITION.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. The
agreements generally contain provisions such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In
addition, our license agreements generally limit the amounts recoverable for
damages to the amounts paid by the licensee for the product or service giving
rise to the damages claimed. It is possible, however, that the limitation of
liability provisions contained in our license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Although we have not experienced any product
liability claims to date, our sale and support of our products may entail the
risk of such claims. Although we have product liability insurance, a successful
product liability claim brought could have a material adverse effect upon our
business, operating results and financial condition.
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GENERAL ECONOMIC FACTORS WHICH WE CANNOT CONTROL COULD ADVERSELY AFFECT OUR
BUSINESS.
Because of our position, general economic downturns and other factors could
have a greater adverse effect on us than on our industry in general. We will
most likely not have sufficient capital to weather a downturn, and downward
price pressure could prevent us from generating sufficient revenue to continue
operating as a going concern.
GENERAL RISKS OF CONTINUED OWNERSHIP OF PHOENIX STOCK
NASDAQ HAS DE-LISTED OUR COMMON STOCK FROM THE NASDAQ NATIONAL MARKET.
Effective November 22, 2000, the Nasdaq Stock Market de-listed our common
stock from the Nasdaq National Market. The de-listing resulted from our failure
as of September 30, 2000 to meet Nasdaq's requirement of at least $4 million in
net tangible assets for continued listing of the common stock. For the same
reasons, our common stock is currently ineligible for listing on the Nasdaq
SmallCap Market. We do not currently believe that it would be productive for us
to pursue listing the common stock on any securities exchange. Accordingly, our
common stock is currently quoted only on the electronic OTC Bulletin Board. As a
result, the volume of trading activity in and the liquidity of our common stock
may be significantly reduced and the volatility of our stock price may be
significantly increased.
THE PRICE OF OUR COMMON STOCK IS VOLATILE AND MAY FLUCTUATE WIDELY PENDING THE
CLOSING AND SUBSEQUENT DISSOLUTION.
During the period in which the common stock has been publicly traded, the
market price of the common stock has fluctuated over a wide range and may
continue to do so in the future. Because a large portion of our stock is held by
insiders and institutional investors, the amount of shares publicly-traded on
the market is low. Further, the daily trading volume of our shares is limited.
Finally, on November 22, 2000, we were delisted from the Nasdaq National Market.
We will attempt to identify market makers who will quote our shares on the OTC
Bulletin Board, but may not be successful. In any case, we expect that the
market for our shares will be adversely affected as trading volume and liquidity
will further decrease. These factors serve to increase the volatility of our
stock price. The market price of the common stock could be subject to
significant fluctuations in response to various factors and events, including,
among other things, the depth and liquidity of the trading market of the common
stock, quarterly variations between actual and anticipated operating results,
growth rates, changes in estimates by analysts, market conditions in the
industry, announcements by competitors, regulatory actions and general economic
conditions. In addition, the stock market has from time to time experienced
significant price and volume fluctuations, which have particularly affected the
market prices of the stocks of high technology companies, and which may be
unrelated to the operating performance of particular companies. Any such event
would likely result in a material adverse effect on the price of the common
stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE MAY ADVERSELY
AFFECT THE PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of the common stock could adversely
affect the market price of our common stock. Several of our principal
shareholders hold a significant portion of our outstanding common stock, and a
decision by one or more of these shareholders to sell their shares could
adversely affect the market price of our common stock. The approval of the
transaction by our shareholders will trigger the immediate vesting of stock
options held by three of our executive officers. If those stock options are
exercised and the shares are sold in the market, it could have an adverse affect
on the market price of our common stock.
WE INTEND TO HALT THE TRADING OF OUR SHARES AFTER THE SPECIAL MEETING.
If the shareholders approve the asset sale and the plan of dissolution, we
intend to close the company's stock transfer records, preventing any further
transfers of our stock. Anyone holding shares of our stock at that time will not
be allowed to transfer them and will only have the right to receive
distributions payable with respect to those shares.
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WE INTEND TO DEREGISTER OUR COMMON STOCK AND CEASE FILING ANNUAL, QUARTERLY AND
OTHER REPORTS WITH THE SEC.
We are currently subject to the information requirements of the Securities
Exchange Act of 1934, which means we are required to file annual, quarterly and
special reports, proxy statements and other information with the SEC. We intend
to file with the SEC a certification and notification of termination of
registration of our common stock during the first quarter of 2001. If the SEC
does not deny our certification, we will no longer file annual reports (Form
10-K), quarterly reports (Form 10-Q) or special reports (Form 8-K), and,
beginning 90 days after the date of filing of our certification, we will no
longer be subject to the SEC's proxy rules. While this deregistration will
reduce our auditing and legal expenses, it also means that current information
about us will no longer be available over the SEC's website or in its Public
Reference Room. In conformity with Florida corporate law, we will mail to our
shareholders annual financial statements.
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FORWARD-LOOKING STATEMENTS
This proxy statement contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These
statements appear in a number of places in this proxy statement and include all
statements that are not historical statements of fact regarding our current
intent, beliefs, assumptions and expectations with respect to, among other
things:
- the asset sale and related transactions contemplated by the asset
purchase agreement;
- the liquidation of our corporation and related transactions contemplated
by the plan of dissolution;
- the amount of cash expected to be distributed to the shareholders and the
timing of such distributions; and
- the ongoing operation of our business, including:
- our operating strategy;
- the development and implementation of the Phoenix System and our other
products;
- our sales performance and prospects;
- our financing plans; and
- the possible impact on our operations and financial performance of
market conditions and other factors that have hindered us in the past,
such as the slowdown in purchases of software during 1999 and 2000.
The words "may," "would," "could," "continue," "will," "expect,"
"estimate," "anticipate," "goal," "strategy," "believe," "hope," "intend,"
"plan" and similar expressions are intended to identify forward-looking
statements.
We believe that the expectations reflected in our forward-looking
statements are reasonable. However, forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which we cannot control. Our actual results may differ materially from those
projected in our forward-looking statements. In evaluating forward-looking
statements, you should carefully consider various factors, including the risks
outlined in "Risk Factors."
For additional information that could cause actual results to differ
materially from those described in the forward-looking statements, you should
read our press releases, the registration statement on Form S-1 that we filed
with the Securities and Exchange Commission and which was declared effective on
August 13, 1997 (No. 333-31415), and pages 1 and 2 of our Form 10-K/A that we
filed with the Securities and Exchange Commission on October 25, 2000.
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THE SPECIAL MEETING
GENERAL
This proxy statement is being furnished to provide you with information
regarding the solicitation of proxies by our board of directors for use at the
special meeting.
At the special meeting, our shareholders will be asked to consider and vote
upon:
1. a proposal to approve and adopt the asset purchase agreement and to
approve the transactions contemplated thereby pursuant to which Acquisition
Company will purchase substantially all of our assets and will assume
specified liabilities of ours;
2. a proposal to amend Article I of our articles of incorporation to
change our corporation's name from "Phoenix International Ltd., Inc." to
"Sphinx International, Inc." (or, if that name is not available, to another
name acceptable to us and Acquisition Company); and
3. a proposal to adopt a plan of dissolution and to approve the
transactions contemplated thereby pursuant to which our corporation will be
liquidated and our net assets will be distributed to our shareholders.
The special meeting will be held on February 22, 2001 at 10:00 a.m. Eastern
time at our headquarters, 500 International Parkway, Heathrow, Florida.
RECORD DATE; QUORUM; REQUIRED VOTE; SHARES OUTSTANDING AND ENTITLED TO VOTE
Our board of directors has fixed January 8, 2001 as the record date for the
special meeting. Accordingly, only holders of shares of our common stock at the
close of business on January 8, 2001 are entitled to notice of and to vote at
the special meeting. Each holder of our common stock on the record date is
entitled to cast one vote per share, in person or by a properly executed proxy,
at the special meeting.
The affirmative vote of the holders of at least two-thirds, or 66 2/3%, of
our outstanding common stock is required to approve each of the proposals
presented for approval at the special meeting. As of the record date, there were
9,410,689 shares of our common stock outstanding and entitled to vote.
Under our bylaws, the holders of a majority of the common stock outstanding
and entitled to vote will constitute a quorum and will be sufficient for
transacting business at the special meeting. If a majority of the holders of
common stock is not present or represented at the special meeting, the
shareholders that are entitled to vote at the meeting may adjourn the meeting
until the amount of shares required to constitute a quorum is present.
Shares of our common stock that are represented in person or by proxy will
be counted for purposes of determining whether a quorum is present.
Additionally, shares of our common stock held of record by a broker that are
present in person or represented by proxy will be counted for purposes of
determining a quorum. If, however, under rules applicable to brokers, a broker
does not have discretionary voting authority to vote on any matter at the
special meeting in the absence of instructions from the beneficial owners, then
shares as to which no voting instruction have been furnished regarding such
matter will be considered "broker non-votes" and will not be counted with regard
to the matter for which no instructions have been provided. Because approval of
each of the proposals to be presented at the special meeting requires an
affirmative vote of at least two-thirds, or 66 2/3%, of our outstanding common
stock, abstentions and broker non-votes will have the same effect as votes to
reject each of the proposals.
VOTING OF PROXIES
Properly executed proxies that have not been revoked will be voted at the
special meeting in accordance with the instructions indicated in the proxies. If
a proxy card is returned without instructions indicating how to vote the proxy
for a proposal, a proxy will be voted "FOR" that proposal.
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Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to us in time to vote, one of the individuals named as
your proxy will vote your shares as you have directed.
If any other matters are properly presented at the special meeting, the
persons named in the enclosed form of proxy will have discretion to vote on
those matters in accordance with their best judgment. We are not aware of any
matters which will be presented at the special meeting other than those items
listed on the proxy card.
To vote a proxy using the enclosed proxy card, you must complete, sign and
date your proxy card and return it in the enclosed, prepaid envelope marked
"Proxy" to American Stock Transfer & Trust Company, prior to the special
meeting.
HOW TO REVOKE YOUR PROXY
Any proxy may be revoked by the person giving it at any time before it is
voted. Written proxies may be revoked by:
- filing with our secretary (including by facsimile) a written notice of
revocation bearing a later date than the date of the proxy or giving
notice of revocation at the special meeting;
- submitting a later-dated proxy relating to the same shares; or
- attending the special meeting and voting in person.
Any written notice of revocation of a proxy either must be delivered at the
special meeting or must be sent, in time to be received before the day of the
special meeting to:
Phoenix International Ltd., Inc.
500 International Parkway
Heathrow, Florida 32746
Fax: (407) 548-5296
Attention: Secretary
RIGHTS OF DISSENTING SHAREHOLDERS
Under the Florida Business Corporation Act, a shareholder in a Florida
corporation has the right to dissent from and obtain payment of the fair value
of his shares if a corporation sells all or substantially all of its property
and the shareholder of that corporation is entitled to vote on the transaction.
Under the Florida Business Corporation Act and our articles of incorporation,
the asset purchase agreement and the asset sale must be approved by a vote of
our shareholders. Therefore, our shareholders may individually choose to
exercise their right to dissent and receive an amount that represents the fair
value of their shares.
Shareholders who exercise their dissenters' rights will receive, upon the
satisfaction of a number of conditions, an amount that represents the fair value
of their shares. If, as a shareholder, you wish to exercise dissenters' rights,
you must deliver notice to us of your intent to demand payment for your shares
if the asset sale is effected. Such notice must be delivered before the vote
regarding approval of the asset purchase agreement and the asset sale is taken
at the special meeting. Additionally, if you intend to exercise your dissenters'
rights, you may not vote your shares in favor of approving the asset purchase
agreement and the asset sale.
If the asset purchase agreement and the asset sale are approved by our
shareholders at the special meeting, we will send written notice regarding this
approval to each shareholder who (1) gave notice of their intent to dissent and
(2) did not vote for the asset purchase agreement and the asset sale. We will
send such notice within ten days of the special meeting.
Within 20 days after we give the notice of the approval to the dissenting
shareholders, each dissenting shareholder who still wishes to dissent must file
a notice with us stating that the shareholder elects to dissent from the
transaction. This notice of election must include (a) the shareholder's name and
address, (b) the number of shares of our common stock to which the shareholder
dissents and (c) a demand for the payment
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of the fair value of those shares. Simultaneous with this notice of election,
any dissenting shareholder must also deposit his or her share certificates with
us. Once the shareholder has provided this notice of election, the shareholder
is entitled to payment only as provided by the Florida Business Corporation Act
and is not entitled to vote or to exercise any other rights as a shareholder of
our corporation. A dissenting shareholder may withdraw his or her notice of
election in writing at any time before we make an offer to him or her regarding
payment for his or her shares.
If a dissenting shareholder does not file this notice of election with us
within this 20-day period, the shareholder will be bound by the terms of the
asset purchase agreement and the asset sale, and the shareholder will receive
liquidating distributions pro rata with all of our other shareholders.
Within ten days after the period during which shareholders may send a
notice of election or within ten days of the closing of the asset sale
(whichever is later), but in no event later than 90 days after the special
meeting, we will make an offer to pay each dissenting shareholder who properly
gave a notice of election an amount that we estimate to be the fair value of
that shareholder's shares, plus accrued interest.
If a shareholder accepts our offer for payment of his or her shares within
30 days, we will pay that shareholder the offered amount for their shares within
90 days of our offer. If there are shareholders who do not accept our offer
within 30 days of our making it or if we fail to make an offer, we will commence
an action in a court of competent jurisdiction in order to have the fair value
of the shares owned by those shareholders determined. If we fail to commence
such an action, any dissenting shareholder may do so in the name of our
corporation. The court will determine the fair value of the shares as of the
date of the special meeting. We will pay each dissenting shareholder the amount
determined by this court as the fair value of the shares within ten days after
the final determination of the proceedings.
SECURITY OWNERSHIP OF MANAGEMENT
As of the record date, our directors and executive officers and their
affiliates beneficially owned approximately 2,729,697 outstanding shares or
26.5% of our common stock (including shares of common stock that may be acquired
by the exercise of an option within 60 days of the date of this proxy
statement). Accordingly, our directors, executive officers and their affiliates
own approximately 39.7% of the total number of shares of our common stock
required to approve each of the proposals that will be considered and voted upon
at the special meeting. Detailed information regarding the beneficial ownership
of our directors and executive officers is included under the section entitled
"Securities Ownership of Certain Beneficial Owners and Management" on page 80.
VOTING AGREEMENTS
SAFECO Asset Management Company, SAFECO Corporation and Robert Fleming,
Inc. own or have the power to vote shares of our common stock representing in
the aggregate approximately 23.6% of our outstanding shares. As a condition to
Acquisition Company entering into the asset purchase agreement and concurrently
with the execution thereof, each of SAFECO Asset Management Company, SAFECO
Corporation and Robert Fleming, Inc. entered into a voting agreement pursuant to
which, among other things, it agreed to vote its shares of our common stock in
favor of the asset purchase agreement and the asset sale. Such voting agreements
govern the voting of approximately 35.4% of the shares required to approve the
asset purchase agreement and the asset sale.
Our corporation and London Bridge are parties to a governance agreement,
dated February 14, 2000, as amended on October 25, 2000. Pursuant to the
governance agreement, we have the right to vote London Bridge's shares of our
common stock. We agreed, however, in the amendment of the governance agreement
that we will vote all shares of our common stock owned by London Bridge in favor
of the asset purchase agreement and the asset sale and against any alternative
transaction. Such governance agreement governs the voting of approximately 9.2%
of our outstanding common stock, which is approximately 13.7% of the shares
required to approve the asset purchase agreement and the asset sale.
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In the aggregate, the shares owned by the shareholders who have entered
into voting agreements and by London Bridge represent approximately 32.8% of our
outstanding common stock and approximately 49.2% of the shares required to
approve the asset purchase agreement and the asset sale.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
All of our executive officers and directors and Glenn W. Sturm, one of our
legal advisors, own shares of our common stock and/or options to purchase shares
of our common stock, and, to that extent, their interest in the asset sale is
the same as that of our other shareholders.
London Bridge owns approximately 9.2% of our outstanding common stock and,
as a shareholder, will be entitled to participate pro rata in any distributions
made to shareholders pursuant to the plan of dissolution. London Bridge also
will be entitled, as a shareholder, to receive its pro rata share of a
settlement award under a securities class action lawsuit that is pending against
us.
The shares of our common stock owned by London Bridge are subject to a
governance agreement, dated February 14, 2000, as amended October 25, 2000,
between us and London Bridge pursuant to which we had the right to vote London
Bridge's shares of our common stock. We agreed, however, in an amendment to the
governance agreement that we will vote all shares owned by London Bridge in
favor of the asset purchase agreement and the asset sale and against any
alternative transaction.
Pursuant to the governance agreement, London Bridge agreed to certain
standstill provisions for a three (3) year period which began on February 14,
2000, subject to specified exceptions such as the written approval of 66 2/3% of
our board of directors. These standstill provisions include an agreement not to:
- purchase or otherwise acquire or offer to acquire any additional
shares of our common stock,
- enter into, solicit or support a tender offer, merger or sale of all
or substantially all of our assets or other similar transaction
involving us,
- form or participate in a group formed to acquire, hold, vote or
dispose of our common stock,
- solicit any proxies on behalf of anyone other than us or participate
in any election contest,
- deposit any of our common stock in a voting trust or similar
arrangement that would entitle any third party to control more than
10% of the voting power of our outstanding common stock,
- publicly propose to revise these standstill provisions or publicly
propose to do or permit any of the foregoing transactions or
- assist or otherwise participate, including by providing funds, or
support any bona fide written offer by a third party to enter into a
tender offer, merger, sale of all or substantially all of our assets
or other similar transaction involving us.
The asset purchase agreement and the transactions contemplated thereby were
excluded from the standstill provisions. London Bridge also agreed to certain
restrictions on its ability to sell, transfer or otherwise dispose of any of our
common stock prior to February 14, 2003. In addition, pursuant to the governance
agreement, London Bridge agreed not to sell, transfer or otherwise convey any of
the shares to a known competitor of ours, except in accordance with the
governance agreement.
The governance agreement terminates on the earlier of (i) February 14,
2003, (ii) the date our board of directors decides to terminate the governance
agreement or (iii) the date we accept an offer by a third party to merge with or
buy all or substantially all of our assets or engage in a similar business
transaction.
Our corporation and London Bridge are also parties to a registration rights
agreement dated as of February 14, 2000 pursuant to which London Bridge is
entitled to have the shares of our common stock owned by London Bridge
registered by us, subject to certain limitations. Subject to these limitations,
London Bridge may request that we register at least 50% of the shares of our
common stock owned by London Bridge by written notice delivered between August
14, 2000 and February 14, 2002. London Bridge would be required to pay the cost
of such a registration. In addition, London Bridge may request that we register
the shares of our
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common stock owned by London Bridge in the event we propose to register any
shares of our common stock under the Securities Act of 1933, as amended, in
connection with a public offering of such securities for cash. In this case,
London Bridge would only be required to pay its pro rata portion of the costs of
registering such shares.
The employment agreements of each of Messrs. Yusefzadeh, Shivdasani,
Pickering and Burns contain provisions that provide each with payments in
amounts that are equal to such executive's annual salary, or three times such
executive's annual salary in the case of Messrs. Yusefzadeh and Shivdasani,
following the date that such executive's employment with us is terminated after
a change of control. We must make such payments to Messrs. Pickering and Burns
in the event they are terminated without cause following a change of control of
our corporation. We must make such payments to Messrs. Yusefzadeh and Shivdasani
in the event they are terminated without cause or they resign from our
corporation following a change of control of our corporation. The aggregate
amount of these severance payments equals approximately $1.9 million. In
addition, we are obligated to continue to pay for the provision of benefits for
Messrs. Yusefzadeh and Shivdasani until such time as each executive attains the
age of 65. We have not determined the cost of these benefits, but a cash
payment, including a tax reimbursement, could total an additional $1.5 million
or more. In addition all of the outstanding options held by these executives
will vest upon a change of control. The approval by our shareholders of the
asset purchase agreement and the asset sale constitutes a change of control
under these agreements. We intend to terminate these employment agreements
following the closing of the asset sale to the extent the services of these
executives are not needed to wind up and dissolve the corporation. The
employment of all of these executives will be terminated no later than the
completion of the liquidation and dissolution of the corporation, and we
anticipate that termination payments will be payable to Messrs. Yusefzadeh,
Shivdasani and Burns shortly after the closing of the asset sale.
Mr. Sturm is a director of, and served during 1999 and 2000 as chief
executive officer of, Netzee, Inc., a publicly held company of which we own
approximately 0.27% of the outstanding common stock. Our investment in this
stock was $1.5 million, which we paid to acquire shares of a predecessor of
Netzee in several transactions in 1997 and 1998. Mr. Sturm was a member of our
board of directors during 1997 and 1998. Our stock in Netzee is one of the
assets that we are selling to London Bridge.
COSTS OF SOLICITATION OF PROXIES
We will bear the cost of the solicitation of proxies from our shareholders
and the cost of printing and mailing this proxy statement. In addition to
solicitation by mail, our directors, officers and employees may solicit proxies
from our shareholders by telephone, telegram or electronically. Those directors,
officers and employees will not be additionally compensated for that
solicitation but may be reimbursed for out-of-pocket expenses in connection
therewith. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for the solicitation of votes from
beneficial owners of shares held of record by such persons.
PROPOSAL 1: THE ASSET PURCHASE AGREEMENT AND ASSET SALE
LONDON BRIDGE AND ACQUISITION COMPANY
London Bridge is a publicly-held UK corporation listed on the London Stock
Exchange under the symbol "LNB".
London Bridge and its subsidiaries provide business software solutions for
financial institutions around the world, including software for customer
relationship management and credit risk management. London Bridge's products
combine credit receivables management and customer relationship management
solutions to offer a comprehensive enterprise customer management solution that
enables management of the customer as an asset across an entire enterprise.
London Bridge's products are used by over 350 clients throughout the world in
the financial services, telecommunications, utilities, retail and e-business
sectors.
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Acquisition company is a Delaware corporation and a wholly-owned indirect
subsidiary of London Bridge headquartered in Atlanta, Georgia. London Bridge
formed Acquisition Company so that Acquisition Company could participate in the
asset sale. Acquisition Company has never conducted any other business.
BACKGROUND OF THE ASSET SALE
On December 1, 1999, Raju Shivdasani, our president and chief operating
officer, met with Gordon Crawford, the chief executive officer of London Bridge,
at a sales presentation to a prospect in the United Kingdom. Messrs. Crawford
and Shivdasani had some initial discussions about their respective companies.
Although specific terms of a transaction were not discussed, they did agree that
the parties' representatives should meet and continue the discussions.
Accordingly, on December 9, we agreed with London Bridge to enter into a mutual
confidentiality agreement, to exchange preliminary business and financial
information and to meet at our headquarters in Orlando.
On December 22, 1999, Jon Lee, then head of business development for London
Bridge, Bahram Yusefzadeh, our chairman of the board and chief executive
officer, and Mr. Shivdasani met at our headquarters in Orlando. Before the
meeting, the parties entered into a mutual confidentiality agreement. At this
meeting, Mr. Yusefzadeh informed Mr. Lee that we were engaged in capital raising
efforts. In response, Mr. Lee stated that London Bridge might have some interest
in becoming a shareholder of our corporation and that the two companies might
wish to consider exploring a marketing alliance. In particular, London Bridge
felt that our client/server software product would work well with its Vectus
product, which is a work flow product used primarily to automate the marketing,
application processing and customer account management stages of the lending
cycles for financial institutions. At the conclusion of the meeting, the parties
agreed that our representatives and representatives of London Bridge should meet
after the new year to pursue the matter further.
On January 18, 2000, Messrs. Yusefzadeh, Shivdasani, Crawford and Lee met
again at our headquarters in Orlando. At the meeting, a discussion was held
concerning our near-term capital needs. Mr. Crawford expressed an interest in
London Bridge becoming a shareholder of our corporation and in signing an
agreement to allow us to cooperatively market their products. Both companies
agreed that they should discuss such an investment further with advice from
their respective counsel and financial advisors. At this point, there were no
discussions of a potential business combination between the parties.
Throughout late January and early February, our representatives had several
discussions with representatives of London Bridge by telephone to finalize the
terms of a $5 million capital infusion and marketing agreement. On February 14,
2000, London Bridge purchased 861,623 shares, or approximately 9.2% of our
outstanding common stock, for a price of approximately $5 million. In connection
with this purchase, we entered into a governance agreement with London Bridge
whereby London Bridge agreed to "standstill" provisions for three years with
regard to acquisitions of shares of our common stock. London Bridge also agreed
to restrictions on its ability to sell or transfer our common stock, and London
Bridge granted our chief executive officer an irrevocable proxy for one year to
vote the shares of our common stock that London Bridge owns. We also entered
into a registration rights agreement with London Bridge in which we agreed to
register the shares of our common stock owned by London Bridge under certain
circumstances, and we entered into a marketing agreement pursuant to which
London Bridge granted us the right to market its work flow product, Vectus, in
conjunction with the Phoenix System.
Through the remainder of February and March of 2000, our representatives
exchanged information with London Bridge on several occasions relating to the
implementation of the Vectus marketing agreement along with other combined
efforts.
In March 2000, we began to consider additional financing alternatives
because of our potential need for additional capital. On March 30, 2000, Mr.
Yusefzadeh met with Mr. Michael C. Nunan, who was then with J.C. Bradford & Co.,
in Nashville, Tennessee. In consultation with Mr. Nunan, we identified London
Bridge as a possible source of additional capital because of its previous
investment in our corporation.
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In early April, we received an unsolicited invitation to enter into
negotiations for a business combination with a third party. On April 3, 2000,
Mr. Shivdasani spoke with Mr. Lee by telephone to discuss the possibility of
London Bridge making a competing offer. In light of the unsolicited invitation,
Messrs. Yusefzadeh and Shivdasani believed that exploring a transaction with
London Bridge was in our best interests because London Bridge's previous
investment in and familiarity with us would allow it to proceed quickly with a
business transaction with us.
On April 10 and 11, 2000, our representatives met with representatives of
London Bridge in Orlando to assess the technical compatibility between the
products of the two companies. On April 14, 2000, Mr. Lee called Mr. Shivdasani
and stated that London Bridge was interested in pursuing discussions but would
not be able to consider or act on a business combination prior to our annual
shareholders meeting in May. Mr. Lee suggested that London Bridge might be able
to continue discussions in July or August regarding a possible business
combination.
On May 5, 2000, we held a regularly scheduled meeting of our board of
directors. At this meeting the board of directors determined that it would be in
our best interest to seek out and evaluate potential strategic business
combinations and to explore the possibility of raising additional capital. The
board of directors also discussed the potential for conflicts of interests that
could arise for members of the board as a consequence of our potential
negotiations with third parties regarding possible business combination
transactions. As a result of these discussions, the board of directors appointed
an independent committee of the board to evaluate potential transactions between
our corporation and various third parties and delegated the full power and
authority of the board of directors to this committee for the purposes of
considering, evaluating and negotiating potential transactions and making
recommendations to the full board regarding any such transactions. The board
appointed Ronald E. Fenton, Ruann F. Ernst and J. Michael Murphy as members of
the special committee. The special committee subsequently approved the
engagement of The Robinson-Humphrey Company, LLC and Mr. Nunan as its financial
advisors and Alston & Bird LLP as its counsel, and authorized Mr. Yusefzadeh and
Mr. Shivdasani to work with the special committee and the financial advisors in
connection with discussions with potential strategic partners.
During the remainder of May, we, working with the special committee's
financial advisors, identified potential strategic partners and began contacting
them concerning their interest in a capital investment in our corporation or a
business combination with us.
On June 9, 2000, Mr. Yusefzadeh, along with the special committee's
financial advisors, met in London with Messrs. Crawford and Lee and explored
London Bridge's interest in acquiring us. London Bridge expressed an interest in
pursuing discussions with us because it believed that the two companies were a
strategic fit and that their products were technologically compatible. Although
no definitive decision or agreement with regard to a transaction had been
reached, the parties agreed to meet again in July.
On July 17, 2000, Messrs. Yusefzadeh, Shivdasani, Crawford and Lee met at
our headquarters in Orlando, along with representatives of the special
committee's financial advisors, and discussed our financial results for the
first six months of 2000.
On July 25, 2000, Mr. Yusefzadeh and Glenn W. Sturm of Nelson Mullins Riley
& Scarborough, L.L.P., our general counsel, met with Mr. Crawford in Atlanta to
discuss the general terms of a potential transaction, with the parties
tentatively agreeing on a cash tender offer for our common stock, followed by a
cash-out merger to enable London Bridge to acquire any remaining shares not
tendered. Mr. Crawford proposed that, prior to London Bridge committing to any
decision to pursue a transaction, we and London Bridge enter into an exclusivity
agreement and that London Bridge begin its commercial due diligence of us as
soon as possible.
On August 9, 2000, Mr. Sturm and M. Hill Jeffries of Alston & Bird met with
Messrs. Crawford and Lee in Atlanta. At this meeting, London Bridge expressed
concerns about a pending class action lawsuit against us alleging inaccurate
reporting of financial information by us and suggested a sale of assets as a
means of insulating London Bridge from all liability related to the lawsuit.
At a meeting of our board of directors held that evening, Messrs. Sturm and
Jeffries reported their discussions with Messrs. Crawford and Lee to the
directors. The board then authorized continued discussions
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<PAGE> 40
with London Bridge as well as an expansion of inquiries of interest to include
other possible interested parties who, because of competitive relationships with
us, had not initially been contacted about a possible strategic transaction with
us. The directors also authorized management and the financial advisors to
explore alternative means of financing our operations.
On August 10, 2000, Mr. Jeffries and Mr. Sturm again met with Mr. Crawford
and Mr. Lee in Atlanta to further discuss the structure of any transaction
between London Bridge and us. Later that day, Mr. Yusefzadeh and Mr. Sturm met
in Atlanta with Mr. Crawford and Mr. Lee to review the results of London
Bridge's due diligence review of us to date. The special committee then met
later in the day by telephone with its financial and legal advisors. Mr.
Jeffries, Mr. Sturm and Mr. Yusefzadeh updated the committee on the status of
discussions with London Bridge and various other potential strategic partners,
and Mr. Nunan suggested additional parties that the special committee might
contact. The special committee then authorized further discussions with London
Bridge as well as the exploration of possible interest by the additional parties
suggested by Mr. Nunan.
On August 11, 2000, Mr. Crawford telephoned Mr. Yusefzadeh to request
another meeting to continue discussions. The parties agreed to meet on August 15
in Atlanta.
On August 12, 2000, the special committee met again by telephone to hear
the results of discussions with the additional parties that had been contacted
at the suggestion of Mr. Nunan. The special committee then authorized the
continued aggressive pursuit of all strategic alternatives.
On August 14, 2000, our board of directors, along with our financial
advisors and counsel, met by telephone to discuss the various options for
business combination transactions that we and our advisors had been exploring.
Joseph Thompson of Robinson-Humphrey and Mr. Nunan reported that they had
contacted over 20 candidates with regard to a potential transaction with us.
They indicated that, based upon these discussions, they believed that London
Bridge was the candidate most interested in a transaction with us. At the
meeting, the board authorized the special committee, with the assistance of our
executive officers, to negotiate a definitive agreement for our acquisition by
London Bridge, subject to approval of any definitive agreement by the special
committee and the full board.
On August 15, 2000, Mr. Yusefzadeh, Mr. Jeffries and Mr. Sturm met with Mr.
Crawford and Patricia B. Todd, vice president and general counsel of London
Bridge, in Atlanta. The parties agreed to a cash tender offer/merger structure,
subject to (1) insulation of London Bridge from any exposure to liability for
the class action lawsuit, (2) London Bridge obtaining financing for the
transaction and (3) satisfactory completion of London Bridge's due diligence
review of us.
On August 20, 2000, King & Spalding, counsel to London Bridge, delivered a
draft agreement to us that contemplated a cash tender offer for all of our stock
other than shares owned by London Bridge, to be followed by a merger that would
cash out all shares not previously tendered and would result in us becoming a
wholly-owned subsidiary of London Bridge.
On August 22, 2000, a special meeting of our board of directors was held to
discuss the proposed timetable for a transaction with London Bridge. Mr.
Yusefzadeh reported that the special committee had received a 30-day exclusivity
agreement from London Bridge. After extensive discussion of the proposed
exclusivity agreement, the board of directors authorized Ronald Fenton, the
chairman of the special committee, to execute the exclusivity agreement. After
we executed the exclusivity agreement on August 22, 2000, London Bridge
determined to pursue a transaction with us and amended its Schedule 13D on file
with the Securities and Exchange Commission (resulting from London Bridge's
ownership of more than 5% of our common stock) to disclose the possibility of a
future business combination with us.
Also on August 22, 2000, we issued a press release announcing that we and
our auditors were reviewing our revenue recognition accounting treatment for
several contracts for the years 1997-1999. The press release stated that until
the completion of this review, our financial reports for those periods should
not be relied upon and that we would be unable to file our quarterly report on
Form 10-Q for the quarter ended June 30, 2000. In response to this press
release, The Nasdaq Stock Market notified us on August 23, that it had suspended
trading in our common stock on the Nasdaq National Market and that it intended
to delist our common stock
35
<PAGE> 41
from the Nasdaq National Market unless we filed our Form 10-Q and, if
applicable, restated financial statements with the SEC by August 30, 2000. By
appealing Nasdaq's determinations, we were able to delay the delisting of our
common stock pending a hearing before a Nasdaq listing qualification panel on
September 22, 2000. In late August, our auditors informed us that we would need
to restate our financial statements for 1997, 1998 and 1999 as well as for the
quarter ended March 31, 2000.
On August 26, 2000, Mr. Crawford informed Mr. Yusefzadeh that following
London Bridge's preliminary due diligence of our operations and our recent
public disclosures, London Bridge was now seriously considering, instead of a
tender offer/merger transaction, a purchase of all of our assets and assumption
of all of our liabilities other than those related to the class action
litigation. Mr. Yusefzadeh expressed his concern about the longer timetable that
would be required to complete such a transaction and our ability to finance our
operations for the additional period of time.
During late August and early September, the parties became increasingly
eager to announce the signing of a definitive agreement for a transaction.
London Bridge, however, continued to maintain that it was unwilling to assume
any liabilities relating to a settlement or verdict in the class action
shareholder lawsuit. Accordingly, on September 7, 2000, London Bridge offered,
as an alternative to an acquisition of our common stock through a cash tender
offer and subsequent cash-out merger, to pursue an agreement whereby it would
purchase substantially all of our assets and assume substantially all of our
liabilities with the exception of three specified customer contracts and the
class action lawsuit. The proposal was subject to London Bridge completing its
due diligence of our operations. The transaction would be contingent on the
settlement of the class action lawsuit. London Bridge proposed to pay a cash
purchase price of approximately $45,000,000, subject to numerous adjustments,
for the assets and to assume all but the specified liabilities. London Bridge
would also provide interim financing to enable us to continue operations,
subject to certain conditions.
On September 11, 2000, our board of directors met by telephone to discuss
the transaction proposed by London Bridge. The special committee authorized
continued discussions with London Bridge with regard to a transaction that
reflected these general terms.
At a telephonic meeting of our board of directors held on September 14,
2000, Mr. Yusefzadeh reported that the Federal Deposit Insurance Corporation, a
federal bank regulatory agency responsible for supervising the operations of
many of our bank clients, had raised concerns about our financial condition. The
FDIC indicated that if we did not promptly take action to strengthen our
financial condition for the benefit of our bank clients, the FDIC might give an
unsatisfactory report on our operations and in the worst case could request that
we release our clients from their contracts so that they could seek alternative
vendors.
On September 15, 2000, counsel for London Bridge delivered an initial draft
of an asset purchase agreement, which we and our counsel reviewed.
On September 21, 2000, we and London Bridge extended the term of the
exclusivity agreement through October 8, 2000 and agreed to negotiate in good
faith towards the execution of a definitive agreement by that date.
London Bridge continued to conduct further due diligence on us throughout
the remainder of September and October. As a result of this further due
diligence, London Bridge proposed excluding a number of additional assets and
liabilities from the proposed transaction. Negotiations continued regarding
this, the nature and amount of adjustments to the purchase price and other
issues throughout the remainder of September and the first three weeks of
October. Our board of directors met regularly during this time to receive
updates on the status of these negotiations.
On October 19, 2000, the board of directors met by telephone to discuss the
current status of the negotiations. Messrs. Sturm and Nunan and representatives
from Alston & Bird and Robinson-Humphrey were present. Mr. Yusefzadeh reviewed
the current status of negotiations with London Bridge and reported that he
believed that the parties were close to reaching an agreement. Mr. Jeffries of
Alston & Bird then made a presentation related to various legal aspects of the
proposed transaction, and he and C. Russell Pickering, our senior vice
president, corporate counsel and corporate secretary, reviewed the current terms
of the asset purchase agreement. Mr. Yusefzadeh then reviewed with the board the
factors which management considered
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<PAGE> 42
to be favorable and unfavorable to the approval of the transaction.
Representatives of Robinson-Humphrey described in general terms the financial
analysis that Robinson-Humphrey had undertaken with respect to the proposed
asset sale. The board of directors instructed Messrs. Yusefzadeh, Pickering,
Sturm and Jeffries to continue with the negotiations. Also at this meeting, Mr.
Pickering informed the directors that he believed that Nasdaq would agree to
extend the date by which we would need to file our restated financial statements
with the SEC from October 6 to October 23.
On October 20, 2000, Mr. Yusefzadeh and Mr. Lee spoke by telephone. Mr.
Yusefzadeh informed Mr. Lee that our board of directors at its October 19
meeting had expressed dissatisfaction with the proposed financial terms of the
transaction, including the purchase price adjustments and the terms of the
interim financing. In a telephone conversation on October 21, 2000 among Messrs.
Yusefzadeh, Crawford and Lee, the parties were able to reach agreement on many
of these issues.
On October 22, 2000, the board of directors met by telephone to discuss the
current status of the negotiations. Messrs. Sturm and Nunan and representatives
of Alston & Bird and Robinson-Humphrey were present. Mr. Yusefzadeh reviewed the
current status of negotiations with London Bridge. Representatives of
Robinson-Humphrey then responded to questions posed by members of the board at
its October 19 meeting.
During the evening of October 22, 2000, Mr. Sturm and Mr. Crawford spoke by
telephone and resolved some of the remaining issues with regard to the purchase
price adjustments and the interim financing.
On October 23, 2000, the board of directors met by telephone, and Mr.
Yusefzadeh reported concerning the current status of the negotiations.
On October 24, 2000, we agreed to the terms of a memorandum of
understanding that stated the terms of a settlement of the class action
litigation.
In the evening of October 24, 2000, the board of directors held a special
telephonic meeting attended by members of management and representatives of
Alston & Bird, Nelson Mullins Riley & Scarborough and Robinson-Humphrey. Mr.
Yusefzadeh reviewed the remaining open issues in the negotiations.
Representatives of Robinson-Humphrey then reviewed the results of
Robinson-Humphrey's financial analysis and then delivered its oral opinion
(which was later confirmed in writing) to the special committee of our board of
directors that, from a financial point of view, the net consideration to be
received by us pursuant to the asset purchase agreement was fair to us. The
special committee then made its recommendation to the board that the board
approve the asset purchase agreement and the asset sale and recommend it to our
shareholders for adoption. Based on this recommendation of the special
committee, the board of directors (1) determined that the asset sale was
advisable, in the best interests of and fair to our shareholders, (2) approved
the asset purchase agreement and related documents and the transactions
contemplated by those documents, and (3) recommended that our shareholders adopt
the asset purchase agreement and approve the related transactions.
During the evening of October 24 and early morning of October 25, 2000, we
and our legal advisors and London Bridge and its legal advisors completed the
negotiation of and revisions to the asset purchase agreement and finalized the
other documentation related to the asset sale. We and Acquisition Company signed
the definitive asset purchase agreement and related documents on the morning of
October 25. We also filed with the SEC our required reports containing revised
and restated financial information on the morning of October 25. Before the
opening of trading on the Nasdaq National Market on that day, we issued a press
release announcing the execution of the asset purchase agreement, our filing of
the SEC reports and the agreement in principle for settlement of the class
action lawsuit.
On October 31, 2000, our common stock began trading again on the Nasdaq
National Market.
Effective November 22, 2000, Nasdaq de-listed our common stock from the
Nasdaq National Market.
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<PAGE> 43
REASONS FOR THE ASSET SALE; RECOMMENDATION OF THE SPECIAL COMMITTEE OF OUR BOARD
OF DIRECTORS; RECOMMENDATION OF OUR BOARD OF DIRECTORS
At the meeting of our board of directors and of the special committee
thereof on October 24, 2000, the board of directors, based on the unanimous
recommendation of the special committee, voted unanimously to approve the asset
purchase agreement and related documents and transactions and to recommend that
our shareholders vote to approve the asset purchase agreement and the asset
sale.
In the course of reaching their decision to approve the asset purchase
agreement and the asset sale, the special committee and the board of directors
each consulted with our management and the financial and legal advisors and
considered numerous factors, including, but not limited to, the following:
- Our lack of sufficient short- or long-term liquidity to continue to
operate our business without additional capital;
- The adverse effects on sales and prospects for future sales resulting
from our lack of sufficient capital;
- The potential determination by the Federal Deposit Insurance Corporation
that our current financial position is not satisfactory and the FDIC's
ability to take actions adverse to our corporation, including ordering
our customers to create contingency plans to replace their current
Phoenix products, unless we can demonstrate a feasible plan to improve
our capital position;
- The continuing negative effects of the class action shareholder
litigation alleging inaccurate reporting of financial information by us;
- Our damaged credibility among current and potential customers and
investors because of the recent restatement of our financial statements;
- The suspension of trading in our common stock by The Nasdaq National
Market on August 23, 2000, which had negatively affected the market for
our common stock;
- The departure of several key employees and numerous other employees due
to the uncertainty relating to our prospects;
- The exhaustive search by The Robinson-Humphrey Company and Michael C.
Nunan for other potential acquirers and for third parties to provide
financing for us;
- The significant risks inherent in other identified alternatives, which
would likely result in our shareholders receiving little or no value for
their stock;
- The opinion of Robinson-Humphrey that the consideration to be received by
our corporation in the asset sale is fair from a financial point of view
to our corporation;
- The premium inherent in the current per share value of the asset sale,
assuming distribution of most or all of the proceeds of the asset sale to
shareholders, compared to the last reported sales price of our common
stock on the Nasdaq National Market;
- The likelihood of a distribution of a majority of the proceeds of the
asset sale to our shareholders in the relatively near future and the
likelihood that such a distribution may be treated as a return of capital
to the shareholders and taxed at the capital gains tax rate; and
- The provisions of the asset purchase agreement that permit the board of
directors to consider alternative proposals and to terminate the asset
purchase agreement in order to pursue a superior alternative proposal.
The special committee and the full board of directors also identified and
considered a number of potentially negative factors in their deliberations
concerning the asset purchase agreement and the asset sale, including:
- A possible reduction in the purchase price based on the resolution of a
specific contingent obligation to a customer, the required escrow by us
of 25% of the purchase price until September 30, 2001 to
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<PAGE> 44
indemnify London Bridge and Acquisition Company for certain losses and
the uncertainty relating to whether any of this amount will be available
for distribution to our shareholders;
- The resulting inability to determine the exact amount of the proceeds
from the asset sale that will be available for distribution to our
shareholders;
- The retention by us, pursuant to the asset purchase agreement, of some
significant liabilities after the asset sale is consummated; and
- Our likely inability to complete an alternative transaction if the asset
sale is not completed due to the factors discussed above.
This list of the factors considered and the reasons given for the asset
sale is not intended to be exhaustive. In light of the variety of factors
considered in connection with its evaluation of the asset purchase agreement and
asset sale, neither the special committee nor the board of directors found it
practicable to, and neither quantified or otherwise assigned relative weight to,
the specific factors considered by each in reaching a determination.
After carefully evaluating each of these factors, both positive and
negative, the special committee and the full board of directors have determined
that the asset purchase agreement and the asset sale are in the best interests
of our corporation and its shareholders.
THE SPECIAL COMMITTEE AND THE FULL BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND
THAT YOU VOTE FOR THE APPROVAL OF THE ASSET PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
FAIRNESS OPINION OF ROBINSON-HUMPHREY
We engaged Robinson-Humphrey and Michael C. Nunan on July 21, 2000 to act
as our exclusive financial advisors in connection with the asset sale. On
October 24, 2000, at a meeting of the special committee of our board of
directors held to evaluate the asset purchase agreement and the asset sale,
Robinson-Humphrey reviewed with the special committee its financial analysis of
the consideration to be received by us in the asset sale and delivered to the
special committee its oral opinion to the effect that, as of the date of the
opinion and based on and subject to the matters described in the opinion,
including various assumptions we directed Robinson-Humphrey to make, the
consideration to be received in the asset sale, less certain retained
liabilities identified by us to Robinson-Humphrey, was fair, from a financial
point of view, to us. Robinson-Humphrey confirmed its October 24, 2000 oral
opinion by delivering to the special committee its written opinion dated October
25, 2000, that, as of the date of the opinion and based on and subject to the
matters described in the opinion, the consideration to be received in the asset
sale, less certain retained liabilities identified by us to Robinson-Humphrey,
was fair, from a financial point of view, to us.
The full text of Robinson-Humphrey's written opinion dated October 25,
2000, which describes the assumptions made, matters considered and limitations
on the review undertaken, is attached as Annex D and is incorporated herein by
reference.
ROBINSON-HUMPHREY'S OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE OF OUR
BOARD OF DIRECTORS, RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, TO US OF THE CONSIDERATION TO BE RECEIVED BY US IN THE ASSET SALE, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO VOTE WITH
RESPECT TO MATTERS RELATING TO THE ASSET SALE. THE SUMMARY OF
ROBINSON-HUMPHREY'S OPINION DESCRIBED BELOW IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF ITS OPINION WHICH IS ATTACHED AS ANNEX D.
In arriving at its opinion, Robinson-Humphrey:
- reviewed the asset purchase agreement;
- reviewed and analyzed publicly available information concerning us which
Robinson-Humphrey believed to be relevant to its inquiry;
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<PAGE> 45
- reviewed and analyzed financial and operating information with respect to
our business, operations and prospects furnished to Robinson-Humphrey by
us;
- conducted discussions with members of our management concerning our
business, operations, assets, present condition and future prospects,
including, without limitation, discussions regarding the near-term
liquidity needs of, and capital resources available to, us;
- reviewed the trading history of our common stock from July 2, 1996 to
October 24, 2000;
- compared our restated historical financial results and our present
financial condition with those of publicly traded companies which were
deemed relevant;
- reviewed historical data relating to percentage premiums paid in
acquisitions of publicly traded technology companies during 2000; and
- compared the financial terms of the asset sale with the publicly
available financial terms of other recent transactions which
Robinson-Humphrey deemed relevant.
In rendering its opinion, Robinson-Humphrey assumed and relied upon the
accuracy and completeness of the financial and other information, including the
amount and value of certain liabilities to be retained by us, used by
Robinson-Humphrey in arriving at its opinion without independent verification.
With respect to our financial forecasts, including the amount and character of
the retained liabilities, provided to or discussed with Robinson-Humphrey,
Robinson-Humphrey assumed, at the direction of our management and without
independent verification or investigation, that such forecasts and the
calculation of the retained liabilities had been reasonably prepared on bases
reflecting the best currently available information, estimates and judgments of
our management as to our future financial performance and such retained
liabilities, and Robinson-Humphrey expressed no opinion with respect to such
forecasts or the amount or character of the retained liabilities or the
assumptions on which the forecasts or the amount of the retained liabilities
were based. Robinson-Humphrey expressed no opinion as to the outcome of the
litigation liability retained by us or any potential effect such outcome may
have upon the amount of the retained liabilities or the net consideration which
may ultimately be available to our shareholders. In arriving at its opinion,
Robinson-Humphrey did not conduct a physical inspection of our properties and
facilities or make or obtain any evaluations or appraisals of our assets or
liabilities, contingent or otherwise, including the retained liabilities.
Robinson-Humphrey's opinion is necessarily based upon market, economic and
other conditions as they may have existed and could be evaluated as of October
25, 2000. Robinson-Humphrey expressed no opinion as to our underlying valuation,
future performance or long-term viability. Although subsequent developments may
affect its opinion, Robinson-Humphrey does not have any obligation to update or
revise its opinion. We imposed no other instructions or limitations on
Robinson-Humphrey with respect to the investigations made or the procedures
followed by it in rendering its opinion.
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed financial and comparative analyses, the material
portions of which are summarized below. The summary set forth below includes the
financial analyses used by Robinson-Humphrey and deemed to be material, but does
not purport to be a complete description of the analyses performed by
Robinson-Humphrey in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In addition,
Robinson-Humphrey believes that its analyses must be considered as an integrated
whole, and that selecting portions of such analyses and the factors considered
by it, without considering all of such analyses and factors, could create a
misleading or incomplete view of the process underlying its analyses set forth
in the opinion.
In performing its analyses, Robinson-Humphrey made numerous assumptions
with respect to industry and economic conditions, many of which are beyond our
control. Any estimates contained in such analyses are not necessarily indicative
of actual past or future results or values, which may be significantly more or
less favorable than as set forth therein. Estimates of values of companies do
not purport to be appraisals or necessarily to reflect the price at which such
companies may actually be sold, and such estimates are
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<PAGE> 46
inherently subject to substantial uncertainty. No company, business or
transaction used in such analyses as a comparison is identical to us, our
business or the asset sale, and an evaluation of the results of those analyses
is not entirely mathematical. Rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, businesses or transactions analyzed.
Robinson-Humphrey's opinion and financial analyses were only one of many
factors considered by the special committee of our board of directors in its
evaluation of the asset sale and should not be viewed as determinative of the
views of the special committee of our board of directors or management with
respect to the asset sale or the consideration payable in the asset sale. The
type and amount of consideration payable in the asset sale was determined
through negotiation between us and London Bridge. Although Robinson-Humphrey
provided financial advice to us during the course of negotiations, the decision
to enter into the asset sale was solely that of the special committee and our
board of directors.
The following is a summary of the material financial analyses presented by
Robinson-Humphrey to our board of directors in connection with its opinion.
Because the asset sale consists of the disposal of substantially all of the
operating assets and all but certain excluded liabilities and because we intend
to liquidate after the asset sale and certain other events, Robinson-Humphrey's
analysis for purposes of its opinion examines our assets and liabilities as a
single operating entity, rather than on an individual basis.
Selected Companies Analysis. Robinson-Humphrey compared financial and
stock market information for us and the following selected publicly held
technology companies with similar liquidity needs:
<TABLE>
<S> <C>
- Alysis Technologies, Inc. - Health Risk Management
- Applix, Inc. - Landmark Systems Corp
- Aspeon, Inc. - Litronic Inc.
- Bitstream Inc. - OAO Technology Solutions
- Catalyst International - Pervasive Software
- Comshare, Incorporated - Previo, Inc.
- Credit Management - Ravisent Technologies
Solutions, Inc.
- CyberGuard Corporation - Symix Systems, Inc.
- Dataware Technologies - Veramark Technologies
- Evolving Systems, Inc. - Versant Corporation
</TABLE>
Robinson-Humphrey reviewed firm values, calculated as equity market value
plus debt, as multiples of, among other things, latest 12 months and estimated
calendar years 2000 and 2001 revenues. All multiples were based on closing stock
prices on October 23, 2000. Estimated financial data for the selected companies
were based on publicly available research analysts' estimates. The following
table states the low, average and high multiples indicated by these analyses:
<TABLE>
<CAPTION>
LOW AVERAGE HIGH
---- ------- ----
<S> <C> <C> <C>
SELECTED COMPANIES' FIRM VALUE TO:
Latest 12 Months Revenue.................................... 0.21x 1.21x 3.07x
Estimated Calendar Year 2000 Revenue........................ 0.20x 1.11x 2.22x
Estimated Calendar Year 2001 Revenue........................ 0.17x 0.60x 1.16x
</TABLE>
These implied multiples of firm value were compared to the multiple of the
pre-tax consideration to be received in the asset sale of approximately $38.3
million, consisting of approximately $45.5 million in cash and approximately $3
million in forgivable working capital advances available under a working capital
line of credit extended by London Bridge to us in connection with the asset
sale, less approximately $10.2 million in liabilities to be retained by us, to
our latest 12 months revenues of approximately $16.9 million (2.3x), estimated
calendar year 2000 revenue of approximately $14.6 million (2.6x) and estimated
calendar year 2001
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revenue of approximately $10.8 million (3.5x). Estimated financial data for our
business was based on internal estimates of our management.
Selected Transactions Analysis. Robinson-Humphrey reviewed the purchase
prices and implied transaction multiples in the following selected transactions
in the banking software and processing industry:
<TABLE>
<CAPTION>
ACQUIRER TARGET ACQUISITION DATE
-------- -------------------------- ----------------
<S> <C> <C>
Transaction Network Services Inc............ Suntech Processing Systems 02/27/98
Phoenix Technologies Ltd.................... Award Software 04/16/98
Jack Henry & Associates..................... Peerless Group 12/16/98
SunGard Data Systems Inc.................... FDP Corp. 01/19/99
TSI International Software, Ltd............. Braid Group, LTD 03/23/99
First Data Corp............................. Paymentech Inc. 07/27/99
Security First Technologies Corp............ Edify Corporation 11/11/99
John H. Harland Company..................... Concentrex Incorporated 07/17/00
</TABLE>
Robinson-Humphrey reviewed firm values in the selected transactions as
multiples of, among other things, latest 12 months revenue. All multiples for
the selected transactions were based on publicly available information at the
time of announcement of the relevant transaction. The following table states the
low, average and high implied multiples indicated by these analyses:
<TABLE>
<CAPTION>
LOW AVERAGE HIGH
----- ------- -----
<S> <C> <C> <C>
Firm Value to Latest 12 Months Revenue...................... 0.91x 2.67x 5.22x
</TABLE>
This implied multiple of firm value was compared to the multiple of the
pre-tax consideration to be received in the asset sale of approximately $38.3
million, consisting of approximately $45.5 million in cash and approximately $3
million in forgivable working capital advances available under a working capital
line of credit extended by London Bridge to us in connection with the asset
sale, less approximately $10.2 million in liabilities to be retained by us, to
our latest 12 months revenues of approximately $16.9 million (2.3x). Estimated
financial data for our business was based on internal estimates of our
management.
Discounted Cash Flow Analysis. Robinson-Humphrey performed a discounted
cash flow analysis using financial projections for 2000 through 2004, using
discount rates ranging from 35% to 45% and terminal value multiples of estimated
calendar year 2004 revenues ranging from 0.75x to 1.25x. A discounted cash flow
analysis is an analysis of the present value of the projected cash flows for the
periods using the discount rates indicated. Free cash flow means earnings before
interest and after taxes plus depreciation and amortization expense minus
capital expenditures and increases in working capital. The analysis indicated
that on a stand-alone basis, we would have a negative equity value.
Premiums Paid Analysis. Robinson-Humphrey analyzed the transaction
premiums over the unaffected share price paid in 51 acquisition transactions of
publicly-traded technology companies with transaction values up to $150 million,
effected since January 1, 2000, based on the target company's stock price one
day, one week and four weeks prior to public announcement of the transaction.
This analysis indicated the following premiums paid in the selected
transactions:
<TABLE>
<CAPTION>
PURCHASE PRICE PREMIUM PRIOR TO
ANNOUNCEMENT
--------------------------------
1 DAY 1 WEEK 4 WEEKS
------- -------- ---------
<S> <C> <C> <C>
Average................................................... 14.1% 13.9% 13.4%
High...................................................... 92.0% 132.6% 121.5%
Low....................................................... (46.3)% (54.4)% (69.9)%
Implied Premium Paid for Phoenix(1)....................... N/A N/A 35.7%(2)
</TABLE>
---------------
(1) Assumed per share gross purchase price of approximately $4.07 equal to
assumed pre-tax consideration in the asset sale of approximately $38.3
million, consisting of approximately $45.5 million in cash and
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approximately $3 million in forgivable working capital advances available
under a working capital line of credit extended by London Bridge to us in
connection with the asset sale, less approximately $10.2 million in
liabilities to be retained by us, divided by 9,410,172 outstanding shares of
our common stock on May 11, 2000.
(2) Our shares did not trade on the Nasdaq Stock Market for the period from
August 24, 2000 until after the date of the fairness opinion. Based on last
trade on August 23, 2000 of $3.00 per share.
The summary set forth above does not purport to be a complete description
of the analyses conducted or data presented by Robinson-Humphrey. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Robinson-Humphrey
believes that the summary set forth above and its analyses must be considered as
a whole and that selecting only portions thereof, without considering all of its
analyses, could create an incomplete view of the processes underlying its
analyses and opinion. Robinson-Humphrey based its analyses on assumptions that
it deemed reasonable, including assumptions concerning general business and
economic conditions and industry-specific factors. The preparation of fairness
opinions does not involve mathematical weighing of the results of the individual
analyses performed, but requires Robinson-Humphrey to exercise its professional
judgment, based on its experience and expertise, in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by
Robinson-Humphrey was carried out in order to provide a different perspective on
the transaction and to add to the total mix of information available.
Robinson-Humphrey did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness. Rather, in reaching its conclusion, Robinson-Humphrey considered
the results of the analyses in light of each other and ultimately reached its
conclusion based on the results of all analyses taken as a whole.
INFORMATION CONCERNING ROBINSON-HUMPHREY
Robinson-Humphrey is a nationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements, and valuations
for corporate and other purposes. We selected Robinson-Humphrey because of its
expertise, reputation in the technology and banking software industries and
familiarity with us. In the ordinary course of business, Robinson-Humphrey and
its affiliates may actively trade or hold the securities and other instruments
and obligations of our company for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
Pursuant to an engagement letter dated July 21, 2000, we agreed to pay
Robinson-Humphrey a fee of $200,000 in connection with the preparation and
delivery of its opinion. If the asset sale is consummated, an additional fee
equal to 1.5% of the aggregate consideration to be paid for our assets,
including liabilities assumed, will be paid to our financial advisors
Robinson-Humphrey and Michael C. Nunan, to be shared on the basis of 70% to
Robinson-Humphrey and 30% to Mr. Nunan. We have also agreed to reimburse
Robinson-Humphrey for its out-of-pocket expenses incurred in connection with the
engagement, and to indemnify Robinson-Humphrey against specified liabilities,
including specified liabilities under federal securities laws.
THE ASSET PURCHASE AGREEMENT
Purchase Price
Subject to certain adjustments described below, the purchase price to be
paid by Acquisition Company for the assets it purchases under the terms of the
asset purchase agreement is $45,462,092. In addition to payment of the purchase
price, as additional consideration for its purchase of substantially all of our
assets, Acquisition Company has also agreed to assume and discharge specified
obligations and liabilities related to our business.
London Bridge publicly announced on October 2, 2000 that it had raised
approximately L51.9 million (approximately $75.6 million on that date) from a
sale of its stock to institutional investors. London Bridge has furnished us a
summary of its bank deposits resulting from the stock sale to confirm that it
has adequate
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resources to complete the transaction. This summary, dated December 28, 2000,
indicates that London Bridge had on deposit $68.9 million from which to pay the
cash purchase price.
Payment of the Purchase Price
At the closing of the asset sale, Acquisition Company will:
(a) deposit in an escrow account:
(i) an amount equal to 25% of the purchase price to be paid at
closing; and
(ii) an amount equal to the balance then outstanding under the
$10,000,000 line of credit extended from Acquisition Company
to us; and
(b) pay or cause to be paid to us an amount equal to the purchase
price minus (i) the amounts paid into escrow as described above,
(ii) $850,000, to reflect expected reductions in various
transaction costs to us resulting from Acquisition Company's
election to purchase the shares of our New Zealand subsidiary
rather than its assets, and (iii) $461,918 which equals the amount
of professional fees paid by us between September 1, 2000 and
October 25, 2000.
The amounts held in the escrow account described in paragraph (a) above will be
held and disbursed in accordance with the terms of the asset purchase agreement
and the escrow agreement.
Working Capital Adjustment to the Purchase Price
The working capital purchase price adjustment generally reflects the change
in our working capital between October 25, 2000, the date we signed the asset
purchase agreement, and the closing. We estimate that the amount of the working
capital purchase price adjustment could be as low as $4.4 million and as high as
$7.8 million. The following generally describes the components of the working
capital adjustment:
Line of Credit
- The purchase price will be decreased for amounts we borrowed under the
$10,000,000 line of credit.
Cash Burn Allowance
- We are allowed to use a certain amount of cash without any purchase price
adjustment. Therefore the purchase price will be increased by a $2
million "cash burn" allowance.
New License Fees
- The purchase price will be increased by 1/3 of the amount of license fees
recognizable under new customer contracts we sign between October 25,
2000 and the closing. This is the case whether new contracts are sold by
us or by London Bridge under the reseller agreement we entered into on
October 25, 2000. If a new license is sold by one of our resellers, we
will receive credit for 1/3 of the net license fees to us after deducting
reseller fees and royalties. The amount of the upward adjustment is
limited to $1.33 million for $4 million in new license fees.
- The purchase price will not be adjusted for new accounts receivable or
cash received in relation to new license contracts.
Fixed Assets
- The purchase price will be decreased for the value of fixed assets which
are sold for cash prior to closing.
- The purchase price will be increased for the value of fixed assets which
are acquired for cash prior to closing.
- The purchase price will not be adjusted for depreciation in fixed assets.
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Cash and Long Term Assets
- The purchase price will be increased for increases in cash and long term
investments readily convertible into cash.
- The purchase price will be decreased for decreases in cash and long term
investments readily convertible into cash.
- The purchase price will not be adjusted for increases in cash due to
borrowings under the line of credit.
- The purchase price will not be adjusted for increases in cash related to
assets and contracts not being assumed by Acquisition Company, including
any settlements from litigation or customer disputes which we retain.
Accounts Receivable
- The purchase price will be increased for increases in accounts receivable
associated with assets to be assumed by Acquisition Company.
- The purchase price will be decreased for decreases in accounts receivable
associated with assets to be assumed by Acquisition Company.
- The purchase price will not be adjusted for changes in accounts
receivable associated with assets we will retain.
Accounts Payable
- The purchase price will be increased for decreases in accounts payable to
be assumed by Acquisition Company.
- The purchase price will be decreased for increases in accounts payable to
be assumed by Acquisition Company.
- The purchase price will not be adjusted for changes in accounts payable
which we will retain.
Prepaid Expenses
- The purchase price will be increased for amounts prepaid during the
adjustment period to third parties for services to be provided to
Acquisition Company after the closing.
Prepaid Service Fees
- The purchase price will be decreased for amounts prepaid to us during the
adjustment period for services to be provided to our customers after the
closing.
Capital Leases
- The purchase price will be decreased for increases in capital liability
under capital leases.
- The purchase price will be increased for decreases in capital liability
under capital leases.
Minority Interests
- The purchase price will be increased for decreases in the liability for
minority interests in Phoenix International New York.
- The purchase price will be decreased for increases in the liability for
minority interests in Phoenix International New York.
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Incomplete Development Projects
- The purchase price will be increased for decreases in the amount of work
required to complete unfinished fixed price development and
implementation projects.
- The purchase price will be decreased for increases in the amount of work
required to complete unfinished fixed price development and
implementation projects.
Items that will not Adjust the Purchase Price
The purchase price will not be adjusted for:
- capitalized software development costs;
- purchased software;
- market fluctuations in our equity investments;
- changes to goodwill and intangible assets;
- changes to deferred revenue; and
- adjustments to bad debt reserves.
The asset purchase agreement requires us to resolve the amount of any
working capital adjustment within 20 days following the closing of the asset
sale. On the day following such resolution, the amounts held in the separate
account corresponding to the amounts we borrowed under the line of credit will
be distributed. The amount of the working capital adjustment, if negative, will
be paid to Acquisition Company, and the remainder in such account, if any, will
be distributed to us.
We expect that the working capital adjustment could be significant. We have
not sold our products to any new customers since the second quarter of 2000.
However, London Bridge has agreed to assist us in making sales, and this has
resulted in new sales which will provide for an upward adjustment of
approximately $660,000 to the purchase price. Additional sales of the Phoenix
System prior to the closing of the asset sale are possible, although unlikely.
In the last two years we have used a significant amount of cash in our
operations. We expect to continue to use cash to fund our operations pending the
closing of the asset sale. Our use of cash will result in a negative adjustment
in the purchase price which could be significant. Further, because our cash
reserves fell below $2 million, we have borrowed and expect to continue to
borrow money under the line of credit to fund our operations, resulting in
negative adjustments to the purchase price. Assuming that the asset sale will
close shortly after the special meeting, we expect total borrowings from
Acquisition Company to be between $4.0 million and $8.0 million. It is possible
that we will require up to the full $10 million under the line of credit to fund
our operations pending the closing.
Assets and Liabilities Assumed by Acquisition Company
Under the terms of the asset purchase agreement, Acquisition Company has
agreed to purchase substantially all of the assets used by us in the operation
of our business as of the date of the closing of the asset sale, which assets
include:
- all inventory located at, stored on behalf of or in transit to us or our
subsidiaries;
- all deposits, advances, pre-paid expenses and credits;
- all fixed assets and tangible personal property;
- all of our rights under specified customer contracts and any rights to
enforce non-disclosure agreements that relate to the assets assumed by
Acquisition Company;
- all rights to real property and all licenses, permits, approvals,
qualifications, easements and other rights relating thereto;
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- all intangible assets including goodwill and the intellectual property
owned or controlled by us or any of our subsidiaries;
- all receivables relating to the contracts assumed by Acquisition Company;
- all rights to causes of action, lawsuits, judgments, claims and demands
of any nature available to or being pursued by us or any of our
subsidiaries to the extent related to the assets or liabilities purchased
or assumed by Acquisition Company;
- all rights in and under all express or implied guarantees, warranties,
representations, covenants, indemnities and similar rights in favor of us
or our subsidiaries to the extent related to the assets or liabilities
purchased or assumed by Acquisition Company;
- all permits, approvals, licenses, qualifications, product registrations,
safety certifications, authorizations or similar rights to the extent
that they are assignable;
- copies of all information, correspondence and records with respect to the
assets and liabilities purchased or assumed by Acquisition Company;
- all of our rights with respect to advertisements used specifically in our
business;
- all of our rights under any noncompetition, nondisclosure or other
restrictive covenant made for the benefit of us or our subsidiaries;
- all right, title and interest in and to the equity interest of Netzee
Inc. owned by us;
- any cash, cash equivalents or marketable securities and all rights to any
of our bank accounts (excluding proceeds from the sale or settlement of
any asset or liability not purchased or assumed by Acquisition Company);
- all of our rights and interests in and to our investment in Phoenix
International New York, Inc.;
- all of our ownership interests in Phoenix International A.P. Limited New
Zealand;
- all of our interest under the leases assumed by Acquisition Company; and
- copies of our tax returns and books of account.
Under the terms of the asset purchase agreement, Acquisition Company has
agreed to assume, pay, discharge or perform, as appropriate, certain liabilities
and obligations of ours arising out of the operation of our business prior to
the date of the closing of the asset sale, which liabilities shall specifically
include:
- our obligations under the contracts assumed by Acquisition Company that
are disclosed on the face of the contracts or that we have otherwise
disclosed to Acquisition Company;
- liabilities and obligations with respect to the other assets assumed by
Acquisition Company to the extent such liabilities arise after the
closing of the asset sale;
- specified liabilities and obligations related to or arising from
transferred employees or employee benefit and compensation plans; and
- our trade payables that pertain to the assets and liabilities purchased
or assumed by Acquisition Company and arise in the ordinary course of
business.
Acquisition Company will perform all obligations under any contract it
assumes under the asset purchase agreement regardless of whether such obligation
was required to be performed before or after the closing of the asset sale;
however, any losses or damages that result from our breach of such contracts
prior to the closing of the asset sale will remain our responsibility.
Other than those obligations and liabilities specifically assumed by
Acquisition Company in the asset purchase agreement, Acquisition Company will
not assume any of our liabilities or obligations. We will retain responsibility
for all liabilities accrued as of the closing of the asset sale and all
liabilities arising from our operations prior to such date, regardless of
whether such liabilities are accrued or disclosed.
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Assets and Liabilities Not Assumed by Acquisition Company
The assets assumed by Acquisition Company will exclude those assets not
specifically assumed by Acquisition Company under the terms of the asset
purchase agreement (as described above), including:
- all ownership and other rights with respect to our employee benefit
plans, except as specifically provided in the asset purchase agreement,
and contracts with current or former employees;
- any permit, approval, license, qualification, registration,
certification, authorization or similar right that by its terms is not
transferable to Acquisition Company and is indicated in the asset
purchase agreement or related documents as not being transferable;
- any accounts receivable from any of our affiliates and any collateral
associated therewith;
- charter documents, minute books, stock ledgers, tax returns, books of
account and other constituent records relating to our corporate
organization, other than Phoenix International New York, Inc.;
- rights that we have under the asset purchase agreement and related
documents or agreements or any of the transactions contemplated in
writing by such documents;
- specified contracts related to assets and liabilities we are retaining;
- all of the properties and assets which we have transferred or disposed of
prior to the closing of the asset sale, and the transfer or disposition
of which was approved by Acquisition Company;
- all of the assets, properties and rights primarily relating to or arising
out of any liabilities not assumed by Acquisition Company under the asset
purchase agreement;
- the rights to any of our claims for federal, state or local tax refunds;
- the rights to any of our claims relating to, resulting from or arising
out of claims made in pending or future suits, actions, investigations or
other legal governmental or administrative proceedings, as well as cash
proceeds from the settlement or resolution of such claims; and
- the stock or equity interests of any subsidiary of ours, other than that
of our subsidiaries in New York and New Zealand.
Under the terms of the asset purchase agreement, Acquisition Company will
not assume, agree to pay, discharge or satisfy any liability and obligation of
ours that is not specifically assumed by Acquisition Company, including those
liabilities or obligations:
- relating to breaches by us, before the closing of the asset sale, of
contracts assumed by Acquisition Company;
- relating to any liability or obligation owed to any of our affiliates;
- for taxes with respect to any period, except for taxes (other than sales
taxes) related to the assets and liabilities assumed by Acquisition
Company that accrue for any period after the closing of the asset sale;
- for any indebtedness with respect to borrowed money and notes payable
except with respect to those leases assumed by Acquisition Company;
- relating to, resulting from or arising out of (i) claims made in pending
or future suits, actions, investigations, or other legal, governmental or
administrative proceedings or (ii) claims based on violations of law as
in effect on or prior to the closing of the asset sale, breach of
contract, employment practices, or environmental, health and safety
matters, in each case arising out of or relating to events that occurred,
or services performed, or the operation of our business, prior to the
closing, except as otherwise provided for in the asset purchase
agreement;
- pertaining to any asset not assumed by Acquisition Company under the
terms of the asset purchase agreement;
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- relating to, resulting from or arising out of our former operations of
our corporation or our subsidiaries that have been discontinued or
disposed of prior to the closing of the asset sale;
- under or relating to our employee benefit plans, whether or not such
liability or obligation arises prior to, on or after the closing;
- of ours arising or incurred in connection with (i) the negotiation,
preparation and execution of the asset purchase agreement and the
transactions contemplated thereby and (ii) fees and expenses of counsel,
accountants, brokers, financial advisors or other experts of our
corporation specified in the asset purchase agreement or in connection
with class action or other litigation; and
- relating to or arising out of any disputes related to employment or
related matters which accrued to us or any of our subsidiaries prior to
the closing of the asset sale.
Such liabilities not to be assumed by Acquisition Company shall include all
claims, actions, litigation and proceedings relating to any or all of the
foregoing and all costs and expenses related thereto.
Some of the liabilities that we will retain could be significant. Following
is a description of some of these liabilities:
- Class Action Lawsuit. On November 23, 1999, a lawsuit was filed in the
District Court for the Middle District of Florida as a purported class
action initiated by George Taylor, one of our former employees.
Initially, we and our chief executive officer were named as defendants.
The lawsuit alleges, among other things, that we and our chief executive
officer improperly recognized revenues, overstated revenues and failed to
disclose that our revenues were allegedly in decline, all of which
allegedly caused our stock price to be higher than it otherwise would
have been during the class period. The lawsuit alleges that these
purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000, the
plaintiffs filed an amended complaint which, among other things, (1)
added four additional investors as named plaintiffs and proposed class
representatives; (2) expanded the purported class period to the period
from May 5, 1997 to April 15, 1999; and (3) added our president as an
additional named defendant. We and the other two defendants filed motions
to dismiss, which were denied by the court without opinion in August
2000. Additionally, our insurance carriers have denied coverage for the
claims in this lawsuit.
On October 24, 2000, we entered into an agreement in principle to settle
the consolidated securities class action litigation with a settlement
class composed of shareholders who acquired our common stock during the
period between May 5, 1997 and August 22, 2000, including London Bridge.
The settlement of this action provides for us to pay $4,225,000 in cash to
the putative shareholder class. The settlement is subject to certain
customary conditions, including limited discovery to confirm the fairness
of the settlement, notice to the proposed settlement class, and
preliminary and final court approval of the settlement and its terms.
Although we have a settlement agreement in place, it is possible that the
plaintiffs could request a revision to the settlement following discovery,
or that it might not be approved by the court. In these instances, the
amount we would have to pay to settle the lawsuit could increase, possibly
significantly. In addition we will continue to incur legal and other
professional fees, which could be significant, until we have a full and
final resolution of this matter.
- Contractual Disputes with Customers. We will also retain the liabilities
associated with certain contractual disputes between us and certain of
our customers, including the following:
- IBM/Sekerbank. We will retain our contracts with IBM for Sekerbank. In
1998, we contracted to provide software and software development and
implementation services as a subcontractor to IBM Turk Limited Sirketi
for the benefit of its customer, Sekerbank T.A.S. In May of 1999, IBM
informed us that its contract with Sekerbank had been cancelled. IBM
then purported to cancel its contract with us. According to IBM,
Sekerbank cancelled their contract with IBM because of our failure to
perform, called in an IBM performance bond from a bank, and received
most of its money back from IBM. IBM has paid us over $1.0 million under
the subcontract, has requested a return of
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all funds, and has indicated it may have claims against us for up to
$5.2 million in damages. We disagree with IBM's position, believe that
IBM is responsible for the cancellation of the contract by Sekerbank,
and believe that we have claims against IBM under our subcontract for
the remaining value of the contract, which amounts to at least $3.9
million. We are attempting to negotiate a resolution to this dispute,
but cannot be sure of the amount we will receive or be forced to pay
until the dispute is resolved. We do not have any indication of when
this would be, and it could take a significant amount of time to resolve
this matter. Further, it is possible that we will have to litigate or
arbitrate this dispute, and in that case we could incur substantial
legal and professional fees.
- Toprakbank. In June of 2000, we received notice from Toprakbank A.S.,
one of our customers in Turkey, that it had canceled its implementation
of the Phoenix System. We have exchanged letters with Toprakbank making
cross claims against each other. Toprakbank has paid us $550,000 under
the contract and has requested a refund of this money. Our receivables
from Toprakbank exceed $1.3 million, and we have requested payment of
this amount, plus future support fees under the contract. We are
attempting to negotiate a resolution to this dispute, but cannot be sure
of the amount we will receive or be forced to pay until the dispute is
resolved. We do not have any indication of when this would be, and it
could take a significant amount of time to resolve this matter. Further,
it is possible that we will have to litigate or arbitrate this dispute,
and in that case we could incur substantial legal and professional fees.
- Other litigation and disputes. We are also engaged in other litigation
and disputes in the ordinary course of our business which will not be
assumed by Acquisition Company. The settlement and resolution of these
disputes could take time, and we will continue to incur legal and
professional fees until all such disputes have been resolved. Until all
such disputes are resolved, we will have to reserve amounts to cover
these contingencies, which amounts will not be available for distribution
to our shareholders until such disputes are fully and finally resolved.
We cannot currently estimate the cost of resolving these disputes.
We estimate that the settlement of customer disputes, litigation and other
disputes could result in total payments to us of as much as $1.0 million or
could cost us as much as $1.8 million although total potential claims by and
against us greatly exceed the estimated total settlement amounts. The total cost
or benefit of disputes and litigation could, therefore, be much higher than
these estimates.
- Employment agreements. We will be obligated to pay, under specified
circumstances, Messrs. Yusefzadeh, Shivdasani, Burns and Pickering
severance pursuant to their employment agreements if their employment is
terminated without cause or, in the case of Messrs. Yusefzadeh and
Shivdasani, if they resign for any reason after the shareholders approve
the asset sale. The aggregate amount of these payments is $1.9 million.
We will also be obligated to arrange for health insurance coverage for
Messrs. Yusefzadeh and Shivdasani through age 65, the cost of which will
likely be substantial and could be an additional $1.5 million or more.
- Taxes. We have estimated our tax liability under alternative minimum tax
to be approximately $500,000 and have assumed that it could be as high as
$1,000,000, although we will not know the actual amount of the taxes
until the returns are filed. Our estimates are based on numerous
assumptions, some or all of which could prove to be incorrect, and our
actual taxes could be higher or lower.
- Professional Fees. We are retaining all professional fees associated
with resolution of any of the retained liabilities, including the class
action lawsuit, and all fees associated with the asset purchase,
including legal, accounting and financial advisory fees. We expect these
fees in the aggregate to total between $3.3 million and $4.0 million. If
we must enter into litigation to resolve any disputes or liabilities, if
the closing of this transaction is delayed for any reason, if the class
action settlement is not approved by the court, if any other disputes,
liabilities or contingencies arise, or if existing matters require
additional attention, these fees will be much higher.
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The Closing of the Asset Sale
The closing is expected to occur five (5) business days following the
satisfaction or waiver of all of the conditions to each party's obligations
under the asset purchase agreement, or on another date as the parties mutually
agree. It is anticipated that the closing will occur shortly following the
special meeting scheduled for February 22, 2001.
Representations and Warranties
Article 3 of the asset purchase agreement contains various representations
and warranties we made to Acquisition Company related to, among other things:
- our corporate organization and similar corporate matters;
- our authorization to execute and perform, and the enforceability of, the
asset purchase agreement;
- the absence of any conflict caused by our execution and performance of
the asset purchase agreement;
- government approvals and filings;
- compliance with all laws applicable to us and our business;
- filings made by us with the SEC under the requirements of the Securities
Act and the Exchange Act and the financial statements included therewith;
- the absence of material changes since the end of our last fiscal year;
- our taxes, including the jurisdictions in which we or our subsidiaries
are required to pay taxes and all tax returns required to be filed;
- real property used by us in connection with our business;
- assets used by us in connection with our business;
- descriptions of all of our existing projects with respect to the
contracts to be assumed by Acquisition Company;
- litigation that is material to our business;
- contracts, including the contracts to be assumed by Acquisition Company,
that are material to the operation of our business, including certain
oral modifications to the terms of such contracts;
- the truthfulness and completeness of the information provided in this
proxy statement as well as its conformance with the requirements of the
Exchange Act;
- employee benefit plans;
- labor and employment matters;
- environmental matters and compliance;
- intellectual property;
- the existence of any brokers;
- insurance policies;
- notes and accounts receivable;
- transactions with affiliates;
- the absence of any existing discussions with any other party with respect
to a proposal to acquire our assets;
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- the absence of any shareholder's rights agreement that would limit or
impair the ability of Acquisition Company to purchase, or become the
direct or indirect beneficial owner of, shares of our common stock or any
other equity or debt securities;
- our major suppliers and customers;
- licenses and permits material to our business;
- certain contracts or agreements relating to the business of Phoenix
International A.P. Limited New Zealand; and
- the truthfulness of the representations and warranties made by us in the
asset purchase agreement.
Article 4 of the asset purchase agreement contains representations and
warranties made by London Bridge and Acquisition Company to us related to, among
other things:
- their corporate organization and similar corporate matters;
- their authorization to execute and perform, and the enforceability of,
the asset purchase agreement;
- the absence of any conflict caused by their execution and performance of
the asset purchase agreement;
- government approvals and filings;
- the truthfulness and completeness of the information provided by them to
us in this proxy statement; and
- the absence of any brokers.
Indemnification
Under Article 9 of the asset purchase agreement, we have agreed to
indemnify Acquisition Company and its affiliates from and against all losses,
damages, claims and expenses incurred in connection with, arising out of or
related to:
- liabilities that were not assumed by Acquisition Company;
- any breach or inaccuracy of any representation or warranty made by us in
the asset purchase agreement or any related agreements or documents;
- any breach of any covenant, agreement or undertaking made by us in or
pursuant to the asset purchase agreement or any related agreements or
documents;
- any fraud, willful misconduct or bad faith by us in connection with the
asset purchase agreement or any related agreements or documents;
- any violation of any environmental law that arises out of or relates to
(i) any act or omission by us or (ii) the ownership, use, control or
operation, on or prior to the closing of the asset sale, of the real
property or any other property used in our business (whether currently or
previously owned or leased by us);
- any liability or obligation relating to litigation relating to us, our
officers, directors, employees or affiliates which relates to matters or
events occurring prior to the closing of the asset sale;
- non-compliance by the parties with any applicable bulk sales legislation;
or
- any inaccuracy, misstatement or omission given in our disclosure letter
delivered to Acquisition Company as part of the asset purchase agreement,
specifically relating to information regarding our existing projects,
with respect to which inaccuracies, misstatements or omissions, we knew
or should reasonably have known after due inquiry at the time such
statements were delivered to Acquisition Company.
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Acquisition Company has agreed that it will not make a claim against us for
indemnification after September 30, 2001. In addition, Acquisition Company will
not make an indemnification claim with respect to indemnification obligations
arising out of breaches of representations and warranties, any breach of a
covenant or agreement, a violation of any environmental law or an inaccuracy,
misstatement or omission related to our existing projects, (a) unless the loss
incurred with respect thereto exceeds $10,000 and (b) until the aggregate amount
of all losses greater than $10,000 exceeds $150,000. In no event will the
limitations described in the preceding sentence apply to indemnification claims
for unpaid software license fees. In the event the amount of losses exceeds
$150,000, Acquisition Company may claim indemnification, subject to certain
exceptions, for losses in excess of $100,000 but in no event greater than the
aggregate amount held in escrow under the terms of the escrow agreement.
Acquisition Company has agreed to indemnify us and our affiliates from and
against all losses, damages, claims and expenses incurred in connection with,
arising out of or incident to:
- Acquisition Company's failure to perform, discharge or satisfy any of the
liabilities it has assumed under the asset purchase agreement;
- any breach or inaccuracy of any representation or warranty made by
Acquisition Company in the asset purchase agreement or in any of the
related agreements or documents;
- any breach of any covenant, agreement or undertaking made by Acquisition
Company in the asset purchase agreement or in any related agreements or
documents; or
- any fraud, willful misconduct or bad faith of Acquisition Company in
connection with the asset purchase agreement or any related agreements or
documents.
Conditions to Closing the Asset Sale
The obligation of each of the parties to the asset purchase agreement to
consummate the asset sale is subject to the satisfaction or waiver of specified
conditions before the closing of the asset sale, including the following:
- The absence of any instituted, pending or threatened investigation or
proceeding by any governmental entity, or any other person before any
governmental entity, that is seeking to delay, prohibit or limit the
asset sale and that is reasonably likely to be determined adversely to us
or Acquisition Company;
- The absence of any injunction or similar action, or any consent or
approval withheld with respect to, the asset sale by any governmental
entity that, in the reasonable judgment of Acquisition Company, may
result in the delaying, prohibiting or limiting of the asset sale;
- The receipt of all consents from any governmental entity that is required
in connection with the execution and performance of the asset purchase
agreement, except where the failure to have obtained or made any such
consent would not have a material adverse effect on our business;
- The expiration or termination of all applicable waiting periods under the
HSR Act;
- The approval and adoption of the asset purchase agreement and the asset
sale by our shareholders, as required by the Florida Business Corporation
Act, our articles of incorporation and our bylaws; and
- The final agreement between Acquisition Company and us as to (1) the
amount of our working capital as of the date of the asset purchase
agreement and (2) the allocation of the purchase price with respect to
the assets assumed by Acquisition Company.
Our obligation to consummate the asset sale is subject to the satisfaction
or waiver of specified conditions before the closing of the asset sale,
including the following:
- there shall not exist inaccuracies in the representations and warranties
of Acquisition Company such that the aggregate effect of such
inaccuracies has or may be reasonably likely to prevent or materially
delay the performance by Acquisition Company of its obligations under the
asset purchase agreement
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or the closing of the asset sale, and the delivery of a certificate to us
by an authorized officer of Acquisition Company confirming that such
condition has been met;
- Acquisition Company having performed in all material respects all
covenants and agreements required to be performed by Acquisition Company
prior to or on the closing of the asset sale and the delivery of a
certificate to us by an authorized officer of Acquisition Company
confirming that such condition has been met; and
- the delivery to us of (a) documents evidencing the assumption by
Acquisition Company of certain licenses, contracts and liabilities; (b) a
copy of the resolutions of Acquisition Company's board of directors which
relate to the asset sale and a certificate evidencing that such
resolutions were duly adopted and are in effect; (c) the escrow agreement
and (d) all other documents required of Acquisition Company pursuant to
the asset purchase agreement.
Acquisition Company's obligation to consummate the asset sale is subject to
the satisfaction or the waiver of specified conditions before the closing of the
asset sale, including the following:
- the absence of any inaccuracies or omissions in our representations and
warranties such that the aggregate effect of such inaccuracies or
omissions has a material adverse effect in excess of $2,000,000 as of the
closing of the asset sale and the delivery of a certificate to
Acquisition Company by one of our authorized officers confirming that
such condition has been met;
- the absence of any material inaccuracies or omissions in certain of our
representations and warranties relating to our existing projects,
litigation, material contracts, information contained in this proxy
statement, employee benefit plans, labor and employment matters,
intellectual property or documents relating to materials we have provided
to London Bridge and Acquisition Company relating to our New Zealand
subsidiary and the delivery of a certificate to Acquisition Company by
one of our authorized officers confirming that such condition has been
met;
- our having performed and satisfied in all material respects all covenants
and agreements required to be performed by us prior to or on the closing
of the asset sale and the delivery of a certificate to Acquisition
Company by one of our authorized officers confirming that such condition
has been met;
- the absence of any material adverse change or a development likely to
result in a material adverse change in our business or the assets and
liabilities to be assumed by Acquisition Company pursuant to the asset
purchase agreement;
- receipt of all consents, or waivers, with respect to specified contracts
to be assumed by Acquisition Company to the extent such contracts require
such a consent;
- the repayment in full of our indebtedness by a disbursement of a portion
of the purchase price and our delivery to Acquisition Company of evidence
that all liens on the assets purchased by Acquisition Company pursuant to
the asset purchase agreement have been released;
- our delivery to Acquisition Company of an estoppel or a consent, as
applicable, from the landlords of each parcel of real property leased by
us;
- receipt of an opinion from our outside counsel as to matters specified in
the asset purchase agreement;
- the delivery to Acquisition Company of certain instruments and
documentation transferring to Acquisition Company all right, title, and
interest in the assets to be assumed by Acquisition Company under the
asset purchase agreement as well as possession of: (a) those assets to be
assumed; (b) documents evidencing the assignment of the contracts and
licenses to be assumed by Acquisition Company; (c) a copy of the
resolutions of our board of directors which relate to the asset sale and
a certificate evidencing that such resolutions were duly adopted and are
in effect; (d) the Escrow Agreement and (e) all other documents required
of us pursuant to the asset purchase agreement;
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- Acquisition Company and certain individuals entering into confidentiality
agreements described in the asset purchase agreement; and
- the resolution of the class action lawsuit, subject only to court
approval.
Termination of the Asset Purchase Agreement
The asset purchase agreement may be terminated at any time at or prior to
the closing of the asset sale:
- by mutual written consent;
- by Acquisition Company or us if any court of competent jurisdiction or
other governmental entity shall have taken any action permanently
restraining, enjoining or otherwise prohibiting the asset sale and such
action shall have become final, so long as the party terminating the
asset purchase agreement uses all commercially reasonable efforts to have
such order, decree, ruling or action vacated;
- by Acquisition Company or us if the asset sale has not been consummated
on or before March 31, 2001, except that a party whose failure to fulfill
any obligation under the asset purchase agreement has been the primary
cause of, or resulted in, the failure to timely consummate the asset sale
will not have the right to terminate the agreement for this reason;
- by Acquisition Company or us if the asset purchase agreement and the
asset sale shall fail to be approved and adopted by our shareholders at
the special meeting;
- by Acquisition Company if our board of directors (i) withdraws or
modifies, in a manner adverse to Acquisition Company, its approval or
recommendation of the asset purchase agreement or the asset sale, (ii)
endorses, approves, recommends, or causes us to enter into an agreement
with respect to, another business combination proposal or shall have
publicly proposed to do any of the foregoing;
- by Acquisition Company, if (i) any of the conditions to the obligation of
Acquisition Company to complete the asset sale as set forth in the asset
purchase agreement become incapable of fulfillment and are not waived by
Acquisition Company or (ii) we breach any of our representations or
warranties which breach would give rise to the failure of a condition
required to be satisfied by us or breach in any material respect any of
our covenants or other obligations under the asset purchase agreement and
such breach shall not have been cured in all material respects or waived
by Acquisition Company within 20 days of our receiving notice from
Acquisition Company with respect thereto;
- by Acquisition Company, if (i) more than 20% of the employees of us and
our subsidiaries or (ii) more than 50% of the employees of us or our
subsidiaries in any individual department, as of the date of the asset
purchase agreement terminate, or announce the termination of, their
employment with us or such subsidiary or their employment is terminated
by us or such subsidiary prior to the date of the closing of the asset
sale and in the case of (i) and (ii) such terminations materially impact
our ability, or the ability of the subsidiary, to meet customer
obligations with respect to sales, support, development, installation,
implementation or maintenance;
- by us, if (i) any of the conditions of Acquisition Company set forth in
the asset purchase agreement shall have become incapable of fulfillment
and are not waived by us or (ii) Acquisition Company breaches any of its
representations or warranties which breach would give rise to the failure
of a condition required to be satisfied by Acquisition Company or
breaches in any material respect any of its obligations hereunder and
such breach shall not have been cured in all material respects or waived
by us within 20 days of Acquisition Company receiving notice from us with
respect thereto; or
- by us, if our board of directors (i) withdraws or modifies in a manner
adverse to London Bridge or Acquisition Company its approval or
recommendation of the asset sale or the asset purchase agreement or (ii)
endorses, approves or recommends another proposal or enters into an
agreement with respect to a business combination proposal that is
superior to the proposal of Acquisition Company.
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Termination Fee
We will be required to pay Acquisition Company a termination fee of
$2,000,000 if:
- Acquisition Company terminates the asset purchase agreement because our
board of directors withdraws or modifies its recommendation to our
shareholders or endorses, approves, recommends, or causes us to enter
into an agreement with respect to, another business combination proposal;
or
- our shareholders fail to approve the asset purchase agreement and the
asset sale after an alternative business combination proposal has been
publicly announced; or
- we enter into an agreement with respect to, or consummate, an alternative
business combination transaction within one year after the termination of
the asset purchase agreement, unless the asset purchase agreement was
terminated (1) by mutual consent, (2) because of governmental actions or
proceedings (3) by a failure to consummate the asset sale prior to March
31, 2001 or (4) because Acquisition Company fails to satisfy specified
conditions to closing.
Covenants
Pursuant to the asset purchase agreement, we have agreed to take or refrain
from taking certain actions prior to the closing of the asset sale without the
prior consent of Acquisition Company. These covenants are typical of
transactions like those contemplated by the asset purchase agreement. First, we
have agreed to conduct our business in a manner that is consistent with our past
business practices, to preserve our business organizations, and to maintain our
current business relationships and comply with all laws that are applicable to
our business. Additionally, we have agreed not to take specified actions with
respect to our capital stock, including declaring dividends, repurchasing shares
of our capital stock, issuing shares of capital stock (unless pursuant to the
exercise of a previously outstanding option or warrant) or any other security
that is convertible into shares of our stock or taking any action that would
result in the conditions to the closing of the asset sale not being satisfied.
Finally, we have agreed that without the prior consent of Acquisition Company,
we would not take any actions with respect to:
- amending any of our governing or organizational documents;
- creating, assuming or guaranteeing any additional indebtedness;
- accelerating the timing of payments of our outstanding indebtedness;
- making any loans or advances to any third party;
- mortgaging, pledging or selling any of the assets to be assumed by
Acquisition Company;
- merging or consolidating with any other entity;
- changing our accounting policies except in accordance with generally
accepted accounting principles;
- changing the employment terms of any of our directors or officers;
- changing the terms of our compensation, severance and benefit plans for
our employees;
- amending or canceling, or agreeing to amend or cancel, a contract that is
to be assumed by Acquisition Company;
- entering into any contract that is the type of contract that would have
been assumed by Acquisition Company under the terms of the asset purchase
agreement;
- paying, loaning or advancing any amount to, or selling, leasing any
properties or assets to or entering into an agreement with any of our
officers or directors or any associates or affiliates of our officers and
directors;
- forming or commencing operations of any new business;
- making any tax election;
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- entering into any agreement or arrangement, or amending or canceling any
current agreements, with respect to any purchase, sale or lease of real
property;
- settling or paying any claims, litigation or liability involving amounts
in excess of $50,000;
- entering into any customer or other third-party agreements;
- amending or terminating any contract to be assumed by Acquisition Company
under the asset purchase agreement;
- hiring additional employees or consultants;
- entering into any contracts requiring us to incur expenses that are in
excess of the revenues of such contract; and
- entering into contracts that incur expenses or costs in excess of
$50,000, committing us to any contract containing provisions relating to
fixed pricing, services to be conducted on other than a time and
materials basis, and contracts with penalties, liquidated damages or any
other onerous contractual provisions.
In addition to these covenants made by us, the asset purchase agreement
contains covenants amongst all of the parties regarding:
- our corporation providing and furnishing Acquisition Company with certain
information about our business both before and after the closing of the
asset sale;
- each party's notification obligations upon the occurrence of certain
events that effect the terms of the asset purchase agreement;
- each party taking actions that are reasonable to consummate the asset
sale, including obtaining all consents from any governmental agency or
third party necessary therefor;
- the recommendations, conduct and efforts of our board of directors with
regard to the asset purchase agreement and asset sale and to any
proposals to acquire our assets from any third parties;
- the meeting of our shareholders held to vote to approve the asset
purchase agreement and the asset sale and the solicitation of proxies
related thereto;
- the drafting and filing of a proxy statement related to the solicitation
of proxies for the meeting of our shareholders held to vote to approve
the asset purchase agreement and the asset sale;
- our corporation obtaining all necessary consents and assigning all
licenses for the assumption of those assets by Acquisition Company
pursuant to the asset purchase agreement;
- each party's consulting with the other regarding the timing and content
of any announcements regarding any aspect of the asset purchase agreement
or asset sale;
- actions taken by us with respect to our employees and employee benefit
plans;
- the imposition and payment of taxes related to, or arising out of, the
asset sale;
- the maintenance of our insurance plans at the request of Acquisition
Company;
- changing our corporation's name;
- the risk of loss associated with the assets assumed by Acquisition
Company and the maintenance of insurance for such assets until the
closing of the asset sale;
- certain permitted meetings to be held among representatives of
Acquisition Company and us and specified current customers of ours;
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- our removing, from designated assets not purchased by Acquisition
Company, all data and information with respect to rights to intellectual
property and certain licensed rights acquired by Acquisition Company
under the asset purchase agreement; and
- London Bridge's unconditionally guaranteeing the performance of each of
the obligations of Acquisition Company under the asset purchase
agreement.
No Solicitation
The asset purchase agreement prohibits us from soliciting, initiating or
encouraging any third party to submit any inquiries or proposals related to the
acquisition of our assets or business or to participate in or encourage any
discussions or negotiations with respect to such a proposal. The asset purchase
agreement permits us to participate in negotiations with a third party that
submits an unsolicited proposal prior to the date of the special meeting so long
as:
- our board of directors, after taking the advice of independent
outside legal counsel into consideration, determines in good faith
that such participation is advisable for the board of directors in
order for the board to comply with its fiduciary obligations to our
shareholders under applicable law;
- prior to taking such action, we receive from such person or entity
an executed agreement in reasonably customary form relating to the
confidentiality of information to be provided by us to such person
or entity; and
- our board of directors concludes in good faith, based upon written
advice from our independent financial advisors, that the proposal is
superior to the proposal of Acquisition Company.
Under the asset purchase agreement, we must promptly provide oral and
written notice to Acquisition Company of: (a) the receipt of any unsolicited
proposal or any inquiry which may lead to such a proposal, (b) the material
terms and conditions of the proposal, (c) the identity of the person or entity
making any such proposal or inquiry and (d) our intention to furnish information
to, or enter into negotiations with, such person or entity. We must continue to
keep Acquisition Company informed of the status and details of any such proposal
or inquiry.
Fees and Expenses
We and Acquisition Company are each required to pay our own legal,
accounting, out-of-pocket and other expenses incident to the asset purchase
agreement and to any action taken by such party in preparation for consummation
of the asset sale.
USE OF PROCEEDS
We plan to use a portion of the proceeds from the asset sale:
- to settle liabilities of our corporation that were not assumed pursuant
to the asset purchase agreement;
- to take actions to liquidate our assets that were not sold in the asset
sale; and
- to fund transaction expenses related to the asset sale.
The remainder of the proceeds, together with amounts received by us in
connection with the foregoing, will be available for distribution to
shareholders in accordance with the plan of dissolution.
ESCROW AGREEMENT
An amount equal to 25% of the purchase price will be placed in an escrow
account at closing pursuant to an escrow agreement among the parties. A copy of
the escrow agreement is attached to this proxy statement as Annex C. The escrow
agreement contains provisions governing the making of claims against, and the
distribution of, the amount held in escrow.
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LOAN AGREEMENT
On October 27, 2000, we entered into a loan agreement with Acquisition
Company, whereby Acquisition Company agreed to lend us up to $10,000,000 to fund
our working capital requirements until the closing of the asset sale. The line
of credit is secured by our intellectual property. We may not draw on the line
of credit more than once in any 30-day period. Each borrowing must be a minimum
of $200,000 and cannot exceed $2,000,000. Interest on the line of credit is
equal to the prime rate plus 1.0%. Interest and principal are payable on
maturity.
The maturity date of the loan is the earlier of (i) the closing of the
asset sale, (ii) 90 days following an event of default under the terms of the
loan agreement, (iii) the conversion of the outstanding amounts under the loan
into shares of our common stock at the option of Acquisition Company and (iv)
the termination of the asset purchase agreement in accordance with its terms.
The loan agreement also contains other customary representations, warranties and
covenants.
The amount that we borrow under the line of credit will be repaid at the
closing of the asset sale by application of a credit equal to any negative
adjustment to the purchase price resulting from borrowings in excess of a
permitted amount and the amount of the permitted borrowings. Assuming that the
asset sale will close shortly after the special meeting, we expect total
borrowings from Acquisition Company to be between $4.0 million and $8.0 million.
RESELLER AGREEMENT
Under the reseller agreement, we have granted London Bridge the right to
market and license the Phoenix System worldwide, except for areas in Africa and
the Middle East where we have other exclusive arrangements. For all new license
contracts entered into under this reseller agreement between October 25, 2000
and the closing of the asset sale, we will receive a credit on the working
capital purchase price adjustment of 1/3 of the license fees up to $4 million in
the aggregate recognizable under such contracts. For license fees in excess of
$4 million, we will receive 50% of all cash proceeds received from such
customers. We will be responsible for the provision of all professional services
and customer support under such contracts, and the fees for such services will
be charged at our standard rates. We will receive 80% of all professional
services fees under such contracts, and London Bridge will receive 20% of such
fees. We will receive 75% of all customer support fees, and London Bridge will
receive 25% of such fees.
If the asset sale does not close and the asset purchase agreement is
terminated, we will have the right to terminate the reseller agreement and all
customers obtained by London Bridge pursuant to the reseller agreement will have
the right to have their contracts assigned to us from London Bridge. Further,
London Bridge will be obligated to remit to us 70% of all cash proceeds received
from such customers prior to the date of the termination.
Under the reseller agreement, we have deposited our source code in escrow.
London Bridge will be entitled to obtain our source code to support its
customers if we fail to provide such support or become insolvent.
ACCOUNTING TREATMENT OF THE ASSET SALE
The asset sale will be accounted for as a sale of assets transaction.
PROPOSAL 2: CHANGE OF THE COMPANY'S NAME
At the meeting of our board of directors on November 19, 2000, the
directors present voted unanimously to approve an amendment to Article I of our
Articles of Incorporation to change our corporation's name to "Sphinx
International, Inc." (or, if that name is not available, to another name
acceptable to us and London Bridge). If approved by the shareholders, Article I
of our Articles of Incorporation will be amended to provide as follows:
"The name of the Corporation is 'Sphinx International, Inc.' The
principal office of the Corporation is 500 International Parkway,
Heathrow, Florida 32746."
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Pursuant to the asset purchase agreement, we have agreed to change our
corporate name to remove any reference to the name "Phoenix" or any other trade
name used in our business. The name change will take effect simultaneous with,
and is conditioned upon, the closing of the asset sale. In conjunction with the
change of our name, we have agreed:
- to file in all jurisdictions in which we are qualified to do business any
documents necessary to reflect our name change or to terminate our
qualification to do business therein and
- at or prior to the closing of the asset sale, to execute and deliver to
Acquisition Company all consents related to such change of name as may be
requested by Acquisition Company.
Our Articles of Incorporation may only be amended by the affirmative vote
of the holders of 66 2/3% of our outstanding common stock; therefore, we must
obtain shareholder approval. If this amendment is adopted, shareholders will not
be required to exchange outstanding stock certificates for new certificates.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO AMEND ARTICLE I OF OUR ARTICLES OF INCORPORATION TO CHANGE OUR
CORPORATION'S NAME FROM "PHOENIX INTERNATIONAL LTD., INC." TO "SPHINX
INTERNATIONAL, INC." (OR, IF THAT NAME IS NOT AVAILABLE, TO ANOTHER NAME
ACCEPTABLE TO US AND LONDON BRIDGE).
PROPOSAL 3: THE PLAN OF DISSOLUTION
Our board of directors unanimously approved the proposed liquidation and
plan of dissolution on November 19, 2000, subject to the approval of the
shareholders at the special meeting.
The plan of dissolution provides that upon its approval by the
shareholders, the board of directors, without further action by the
shareholders, may (a) dissolve our corporation, (b) liquidate our assets, (c)
pay, or provide for the payment of, any remaining, legally enforceable
obligations of our corporation, and (d) distribute any remaining assets to the
shareholders. Our Articles of Incorporation require the affirmative vote of the
holders of two-thirds, or 66 2/3%, of our outstanding common stock to approve
the plan of dissolution.
BACKGROUND AND REASONS FOR THE DISSOLUTION
For the nine months ended September 30, 2000, we sustained a net loss of
more than $17 million and in the year ended December 31, 1999, we sustained a
net loss of more than $16 million. We have sustained net losses in each year of
our existence except the year ended December 31, 1996, during which we generated
net income of approximately $900,000. During 2000, our employee head count has
been reduced through both our workforce downsizing and by unplanned employee
attrition. We have closed only eight new contracts for the provision of our core
banking solution in the first nine months of 2000, as compared to 13 in the
first nine months of 1999, and 29 in the first nine months of 1998. These eight
contracts were signed in the first half of 2000, and no new contracts have been
signed since June 30, 2000. These and other factors led the board of directors
to enter into the asset purchase agreement and to propose that our corporation
be dissolved and liquidated.
After an extensive exploration and evaluation of various strategic
alternatives that would protect the rights of creditors and enhance shareholder
value, the board of directors adopted a resolution approving the implementation
of the plan of dissolution. The board of directors believes that the dissolution
and liquidation of our corporation would protect our creditors and preserve
shareholder value and is in the best interests of our corporation and our
shareholders.
REASONS FOR THE DISSOLUTION; RECOMMENDATION OF OUR BOARD OF DIRECTORS
Following the closing of the asset sale, our corporation would have few of
the resources necessary to conduct active business operations. While we would
have cash and a few non-operating assets, we would have no employees, other than
some of our officers, and no equipment or facilities except those necessary to
administer the dissolution and liquidation of our corporation.
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If the asset sale is not closed, we will have an immediate and critical
need for additional capital in order to repay all amounts owing to Acquisition
Company under the line of credit and otherwise operate our business. It is
unlikely that sufficient additional capital could be raised on terms more
favorable than the asset sale, if at all, or in sufficient time to avoid a
default under the line of credit. Upon a default under the line of credit and
expiration of a 90-day standstill period, Acquisition Company would have the
right to foreclose on the collateral for the line of credit. All of our
intellectual property, including the Phoenix System and other software and
know-how, is pledged to Acquisition Company as collateral to secure the line of
credit. In the event of such a foreclosure, we would be unable to continue our
core business, which is built on the Phoenix System.
Thus, whether or not the asset sale closes, we will likely not have the
ability to continue our existing operations. Our board of directors believes it
is not feasible at this time to plan to enter into a new line of business and
that attempting to do so might jeopardize the assets that can be made available
to our creditors and shareholders through dissolution of our corporation.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE PLAN OF DISSOLUTION AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
DESCRIPTION OF THE PLAN OF DISSOLUTION
Certain material features of the plan of dissolution are summarized below.
This summary is qualified in its entirety by reference to the complete text of
the plan of dissolution and the relevant portions of the Florida Business
Corporation Act. A complete copy of the plan of dissolution is attached to this
proxy statement as Annex B. Shareholders should carefully read the plan of
dissolution in its entirety.
DISSOLUTION AND LIQUIDATION PROCEDURE
Following approval of the plan of dissolution by the holders of two-thirds,
or 66 2/3%, of our outstanding common stock, we will file articles of
dissolution with the Department of State of the State of Florida. The
dissolution will be effective on the effective date of such articles.
Once the articles of dissolution are filed and the plan of dissolution is
effective, the steps taken to wind up our affairs as described below will be
completed at such times as the board of directors, in its absolute discretion,
deems necessary, appropriate, or advisable to maximize the value of our assets
upon liquidation but such steps may not be delayed longer than is permitted by
applicable law.
REVOCATION OF THE PLAN OF DISSOLUTION
The plan of dissolution provides that it may be revoked by our board of
directors. Under the Florida Business Corporation Act, any revocation must occur
within 120 days following the effective date of the articles of dissolution. By
approving the plan of dissolution, shareholders will also be granting the board
of directors the authority, notwithstanding the shareholder approval of the plan
of dissolution, to abandon the plan of dissolution without further shareholder
action, if our board of directors determines that dissolution and liquidation
are not in the best interests of our corporation and our shareholders.
CONDUCT OF OUR CORPORATION FOLLOWING THE DISSOLUTION
Once our articles of dissolution are filed and effective, we will cease to
exist for the purpose of continuing our business, but will nevertheless
continue, for a term of three years for the purpose of winding up our affairs.
During this time, we will undertake the following tasks:
- settle and close our business;
- convert to cash, by sales, as much of our remaining non-cash assets as
possible;
- withdraw from any jurisdiction where we are qualified to do business;
- pay or make provision for the payment of all of our expenses and
liabilities;
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- prosecute and defend lawsuits, if any;
- distribute our remaining assets, which should be primarily cash, but
which may consist of other financial assets, to the shareholders; and
- do any other act necessary to wind up and liquidate our business and
affairs.
Our board of directors and our remaining officers will oversee our
dissolution and liquidation. As compensation for the foregoing, our remaining
officers will continue to receive salary and benefits as determined by our board
of directors. We also anticipate that members of our board of directors will
receive compensation during this period, although the form and amount of such
compensation has not been finally determined.
We expect the costs of winding up our affairs to total between $900,000 and
$2,000,000.
SALE OF REMAINING ASSETS
The plan of dissolution gives the board of directors, to the fullest extent
permitted by law, the authority to sell all of our assets. Accordingly,
shareholder approval of the plan of dissolution will constitute, to the fullest
extent permitted by law, approval of our sale of any and all of our remaining
assets, on such terms and conditions as our board of directors, in its absolute
discretion and without further shareholder approval, may determine.
Notwithstanding the separate approval our board of directors is seeking at the
special meeting for the asset sale, our board of directors will have the
authority to sell all of our assets in alternate transactions pursuant to
shareholder approval of the plan of dissolution, without further shareholder
action or approval, even if the shareholders fail to approve the asset sale or
the asset sale is not consummated as contemplated.
PAYMENT OF CLAIMS AND OBLIGATIONS
In accordance with Section 607.1406 of the Florida Business Corporation
Act, before distributing any assets to shareholders, we will pay and discharge,
or make provisions as will be reasonably likely to provide sufficient
compensation for, the following:
- all claims and obligations, including all contingent, conditional, or
unmatured contractual claims known to our corporation;
- any claim against our corporation which is the subject of a pending
action, suit, or proceeding to which our corporation is a party; and
- claims that have not been made known to us or that have not arisen, but
that, based on facts known to us, are likely to arise or become known to
our corporation after the certificate of dissolution becomes effective.
DISTRIBUTIONS TO SHAREHOLDERS
Claims, liabilities, and expenses from operations, including operating
costs, salaries, income taxes, payroll and local taxes, and miscellaneous office
expenses, will continue to occur following approval of the plan of dissolution.
We anticipate that expenses for professional fees and other expenses of
liquidation will be significant. These expenses will reduce the amount of assets
available for ultimate distribution to shareholders.
Before making any distribution to shareholders, the board of directors must
first make adequate provision for the payment, satisfaction, and discharge of
all known, unascertained, or contingent debts and liabilities, including costs
and expenses incurred and anticipated to be incurred in connection with the sale
of any assets remaining after the dissolution.
Our board of directors will determine, in its sole discretion and in
accordance with applicable law, the timing of, the amount, the kind of, and the
record date for any distribution made to shareholders. Liquidating distributions
will be made to shareholders on a pro rata basis. We are not required to pay all
of our liabilities and obligations prior to making distributions to
shareholders, but instead, will reserve assets in a contingency reserve deemed
by management and our board of directors to be adequate to provide for such
liabilities and obligations when due. Although our board of directors has not
established a firm timetable for any distribution
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to shareholders, after the dissolution has become effective, the board of
directors will, subject to exigencies inherent in winding up our business, make
a final distribution as promptly as practicable.
We intend to make a distribution to holders of our common stock in the
first quarter of 2001, followed by subsequent distributions after the release of
funds from escrow under the asset purchase agreement and the conversion to cash
of other assets after the initial distribution. No assurances can be given,
however, as to the ultimate amounts to be distributed, or the timing of any
distributions.
Shareholders should not send their stock certificates with the enclosed
proxy. Following our dissolution, shareholders will be sent additional
instructions for receiving distributions.
LIQUIDATING TRUST
If deemed advisable by our board of directors for any reason, we may,
following dissolution, transfer any of our assets to a trust established for the
benefit of shareholders, subject to the claims of creditors. Thereafter, these
assets will be sold or distributed on terms approved by the trustees. In any
event, if all of our assets have not otherwise been distributed within three
years after dissolution, we will transfer all of our remaining assets to the
liquidating trust. Our board of directors is authorized to appoint one or more
trustees of the liquidating trust and to cause our corporation to enter into a
liquidating trust agreement with the trustee(s) on such terms and conditions as
may be approved by our board of directors. Shareholder approval of the plan of
dissolution will also constitute approval of any such appointment and any
liquidating trust agreement.
CONTINUING LIABILITY OF SHAREHOLDERS AFTER DISSOLUTION
Following our dissolution and liquidation, it is possible that some claims
may still exist that could be asserted against our corporation. Florida law
provides that, if the assets of a corporation are distributed in connection with
the dissolution of a corporation, a shareholder may be liable for claim(s)
against the corporation. In such event, a shareholder's potential liability for
any such claim against our corporation would be limited to the lesser of (a) the
shareholder's pro rata share of such claim or (b) the actual amount distributed
to the shareholder in connection with the dissolution.
An individual shareholder's total liability for any claims against our
corporation after it is dissolved will not exceed the amount actually
distributed to that shareholder in the dissolution.
REGULATORY MATTERS
Except for our filing of the certificate of dissolution with the Department
of State of the State of Florida, we are not subject to any federal or state
regulatory requirements nor are we required to obtain any federal or state
approval in order to consummate the dissolution.
ACCOUNTING TREATMENT
Upon our dissolution, we will change our basis of accounting from the
going-concern basis to the liquidation basis. Under the liquidation basis of
accounting, assets are stated at their estimated net realizable values and
liabilities are stated at their anticipated settlement amounts. Recorded
liabilities will include the estimated costs associated with carrying out the
plan of liquidation. For periodic reporting, a statement of net assets in
liquidation will summarize the liquidation value per outstanding share of common
stock. Valuations presented in the statement will represent management's
estimates, based on present facts and circumstances, of the net realizable
values of assets and costs required to carry out the plan of liquidation.
The valuation of assets and liabilities will necessarily require many
estimates and assumptions, and there will be substantial uncertainties in
carrying out the provisions of the plan of liquidation. Ultimate values of
assets and settlement amounts for liabilities are expected to differ from
estimates recorded in interim statements.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material U.S. federal income
tax consequences that may result from the asset sale by our corporation and the
dissolution and liquidation of our corporation pursuant to the plan of
dissolution. This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations promulgated under the Code, judicial
decisions, and administrative rulings as of the date of this proxy statement,
all of which are subject to change or differing interpretations, including
changes and interpretations with retroactive effect. The discussion below does
not address all U.S. federal income tax consequences nor any state, local or
foreign tax consequences of the asset sale by our corporation or our
liquidation. Shareholders subject to special treatment, including dealers in
securities or foreign currency, tax-exempt entities, non-U.S. shareholders,
banks, thrifts, insurance companies, persons that hold our common stock as part
of a "straddle", a "hedge", a "constructive sale" transaction or a "conversion
transaction," persons that have a "functional currency" other than the U.S.
dollar, and investors in pass-through entities, may be subject to special rules
not discussed below. This discussion also does not address the U.S. federal
income tax consequences on our shareholders that do not hold that stock as a
capital asset. For purposes of the discussion below, a U.S. shareholder is a
citizen or resident of the U.S.; a corporation, partnership or other entity
organized under the laws of the U.S. or any political subdivision thereof; an
estate whose income is subject to U.S. federal income taxation regardless of its
source; or a trust if a U.S. court can exercise primary supervision over the
trust's administration and one or more U.S. persons are authorized to control
all substantial decisions of the trust. A non-U.S. shareholder is any holder
that is not a U.S. shareholder.
THIS MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES DISCUSSION IS FOR
GENERAL INFORMATION ONLY AND MAY NOT ADDRESS ALL TAX CONSIDERATIONS THAT MAY BE
SIGNIFICANT TO A HOLDER OF OUR COMMON STOCK. SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE LIQUIDATION,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS AND
CHANGES IN APPLICABLE TAX LAWS.
TAX CONSEQUENCES TO OUR CORPORATION
We will generally recognize taxable gain or loss on the sales of our
property pursuant to the asset sale. The amount of such gain or loss will be the
difference between (i) our adjusted tax basis in each asset and (ii) the amount
of the purchase price (including any liabilities assumed by Acquisition Company
or to which the transferred asset is subject) allocated to that asset in the
case of a sale, or the asset's fair market value in the case of a liquidating
distribution. It is currently anticipated that the net taxable income recognized
by our corporation as a result of the asset sale will not create a current
regular federal income tax liability of our corporation because of our
anticipated level of operating losses and expenses for the year in which the
asset sale takes place. We may however be subject to the alternative minimum tax
("AMT"). Net operating loss ("NOL") carry-forwards may only be used to offset
90% of income that is subject to AMT in any year.
After the plan of dissolution becomes effective until the liquidation is
completed, we will continue to be subject to income tax on any taxable income we
recognize. We will recognize gain or loss on sales of any property. In addition,
upon distributions, if any, of property other than cash, to shareholders
pursuant to the Plan of Dissolution, we will recognize gain or loss as if such
property was sold to shareholders at its fair market value. We may discharge its
liabilities at less than the face amount of such liabilities. Our discharge of
liabilities, at less than face amount, may result in our realization of income
to the extent of the excess of the face amount of the liabilities over the
amount paid in satisfaction thereof. Any operating losses, expenses and NOL
carry-forwards we have will be available to offset any taxable income we
recognize. Because the amount of our taxable income and our expenses and NOLs is
not yet certain, there can be no such assurance that we will not have any
regular income tax or AMT, or what the amount of any regular income tax or AMT
liability may be.
TAX CONSEQUENCES TO U.S. SHAREHOLDERS
The shareholders will not recognize any gain or loss as a result of the
asset sale.
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If our corporation liquidates, a shareholder will recognize gain or loss
equal to the difference between (i) the sum of the amount of cash and the fair
market value of property (other than cash) distributed to such shareholder
directly or to the liquidating trust on the shareholder's behalf, and (ii) such
shareholder's tax basis in his shares of our common stock. A shareholder's tax
basis in his shares will generally equal the shareholder's cost for his or her
shares of our common stock. The gain or loss will be a capital gain or loss,
assuming our stock is held as a capital asset, and will be a long term capital
gain or loss if the stock has been held for more than one year. Long-term
capital gains realized by shareholders that are individuals are generally
subject to a 20% maximum tax rate. The tax basis of any property other than cash
received by each shareholder upon the complete liquidation of our corporation
will be the fair market value of the property at the time of the distribution.
If we liquidate, shareholders may receive one or more liquidation
distributions, including a deemed distribution of cash and property transferred
to a liquidating trust. The amount of any distribution should be applied first
to reduce a shareholder's tax basis in his shares of our stock, but not below
zero. If a shareholder owns more than one block of shares of our stock, the
amount of any distribution must be allocated among the several blocks of shares
owned by the shareholder in the proportion that the number of shares in a
particular block bears to the total number of shares owned by the shareholder.
The amount of the distributions in excess of a shareholder's basis in our common
stock will be gain, and should be recognized in the year that the aggregate
amount of the distributions received (or transferred to a liquidating trust)
exceed the shareholder's basis in its stock. If the amount of the distributions
is less than the shareholder's basis in our shares of our common stock, the
shareholder will generally recognize a loss in the year the final distribution
is received.
If we liquidate, we will provide shareholders and the IRS with a statement
of the cash and the fair market value of any property distributed to the
shareholders (or transferred to a liquidating trust) during that year as
determined by our corporation, at such time and in such manner as required by
the Treasury regulations.
As noted above, we may transfer assets to a liquidating trust as part of
its complete liquidation. A trust treated as a liquidating trust for tax
purposes will not be subject to taxation on the receipt of a distribution of our
assets, nor on the income generated by such assets. Instead, a distribution to a
liquidating trust is treated as a distribution directly to shareholders. Each
shareholder will be treated as receiving a liquidating distribution equal to its
share of the amount of cash and the fair market value of the assets distributed
to the trust. Therefore, a shareholder may recognize gain if the value of the
liquidating distribution to a liquidating trust exceeds its remaining basis in
its stock, although the shareholder may not receive a current distribution of
cash with which to pay the resulting tax liability until a later tax year. In
addition, the shareholder will be treated as the owner of the liquidating trust.
Each shareholder will therefor be required to take into account its ratable
share of the liquidating trust's items of income and loss when computing its own
taxable income.
If the trust established to receive liquidating distributions fails to
qualify as a liquidating trust for tax purposes, the tax consequences of the
transfer of assets to and from the trust will depend on the reason for the
failure to qualify, but is most likely that the trust will be taxable as a
corporation, rather than as a trust. If the liquidating trust is taxable as a
corporation, the trust itself will be subject to tax, and the shareholders could
be subject to tax both upon the receipt of the interest in the trust and the
receipt of distributions to the trust. If we establish a liquidating trust, we
intend to cause the trust to qualify for treatment as a liquidating trust for
federal income tax purposes.
If the shareholders vote to approve the asset sale but not the plan of
dissolution, then we may distribute to the shareholders, via a special dividend,
the net proceeds of the asset sale as well as any remaining assets. While not
entirely clear, such special dividend would likely be taxed as a dividend paid
to the shareholders to the extent of our earnings and profits, rather than as a
liquidating distribution against which shareholders may offset their basis and
which would result in a capital gain or loss.
SPECIAL CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS
Generally, a non-U.S. shareholder's gain or loss from our liquidation and
dissolution will be determined in the same manner as that of a U.S. shareholder.
A non-U.S. shareholder should not be subject to U.S. federal income taxation on
any gain or loss as a result of our liquidation unless (a) the gain is
effectively connected
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with a U.S. trade or business of the non-U.S. shareholder, (b) that shareholder
is an individual who has been present in the U.S. for 183 days or more during
the taxable year of disposition and certain other conditions are satisfied, or
(c) we are or have been a "U.S. real property holding corporation" or "USRPHC")
for U.S. federal income tax purposes at any time within the shorter of the
five-year period preceding the date of the receipt of the final liquidating
distribution or the period the Non-U.S. shareholder held the common stock.
We do not believe we are or have been within the prescribed period a
USRPHC, for U.S. federal income tax purposes. In general, we will be treated as
a USRPHC if the fair market value of its U.S. real property interests equals or
exceeds 50% of the total fair market value of its U.S. and non-U.S. real
property interests and its other assets used or held in a trade or business. If
we are a USRPHC, then any liquidating distributions paid to Non-U.S.
Shareholders may be subject to income tax withholding at a rate of 10%.
An individual non-U.S. shareholder described in clause (a) above will be
taxed on the net gain derived from the liquidation under regular graduated U.S.
federal income tax rates. An individual non-U.S. shareholder described in clause
(b) above will be subject to a flat 30% tax on the gain derived from the
liquidation. If a Non-U.S. shareholder that is a foreign corporation falls under
clause (a) above, it will be taxed on its gain under regular graduated U.S.
federal income tax rates and, in addition, may be subject to the branch profits
tax equal to 30% of its effectively connected earnings and profits within the
meaning of the Code for the taxable year, as adjusted for specified items,
unless it qualifies for a lower rate under an applicable income tax treaty.
As discussed above, if the plan of dissolution is not approved, any special
distribution of the asset sale proceeds and any remaining net assets would
likely be treated as a dividend. Dividends paid to a non-U.S. shareholder will
generally be subject to withholding of United States federal income tax at a
rate of 30% or such lower rate as may be specified by an applicable income tax
treaty if the non-U.S. shareholder is treated as a resident of such foreign
country within the meaning of the applicable treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the non-U.S.
shareholder within the United States and, if a tax treaty applies, are
attributable to a United States permanent establishment maintained by the
non-U.S. shareholder are not subject to the withholding tax but instead will be
subject to United States federal income tax on a net income basis at the regular
graduated tax rates and may be subject to the branch profits tax as described
above.
BACKUP WITHHOLDING
Unless a shareholder complies with certain reporting and/or certification
procedures or is an exempt recipient under applicable provisions of the Code and
Treasury regulations promulgated under the Code, such shareholder may be subject
to a 31% backup withholding tax with respect to any payments received pursuant
to the liquidation. Backup withholding generally will not apply to payments made
to certain exempt recipients such as a corporation or financial institution or
to a shareholder who furnishes a correct taxpayer identification number or
provides a certificate of foreign status and provides certain other required
information. If backup withholding applies, the amount withheld is not an
additional tax, but is credited against that shareholder's U.S. federal income
tax liability.
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DESCRIPTION OF PHOENIX
GENERAL
We provide highly adaptable, enterprise-wide client/server application
software and related services to the financial services industry. Our flagship
product, the Phoenix System(TM), is a fully integrated processing solution that
manages financial institutions' retail and wholesale operations in an
open-system environment. We offer the Phoenix System to financial institutions
around the world along with our trade finance and global payments software
products and a full suite of professional and systems integration services. Our
market in the United States includes new, or "de novo," financial institutions
and existing institutions with assets up to $3 billion. Internationally, we
focus on retail-oriented institutions in Africa, the Asia-Pacific region,
Europe, Central and South America, and the Middle East that have up to 300
branches and/or up to 2 million accounts. As of September 30, 2000, our client
base included over 134 institutions in 31 countries.
Our Chairman of the Board and Chief Executive Officer, Bahram Yusefzadeh,
has 31 years of experience in the banking software industry, and our senior
management team has over 190 combined years of experience in the banking
software and financial services industry. Mr. Yusefzadeh founded our corporation
to develop and market a new generation of integrated banking software
applications using client/server technology capable of replacing less flexible
and technologically dated "legacy" systems. To develop the Phoenix System, we
have combined:
- our management's extensive experience with banking and banking software
systems;
- input from a consortium of financial institutions; and
- advances in client/server and e-commerce technology.
We have formed alliances with U.S. and international financial institutions
and technology and service providers to further develop, enhance and expand the
Phoenix System and its capabilities for all of our markets.
INDUSTRY BACKGROUND
Many financial institutions employ computer systems for their core
processing needs that are based on older "legacy" computer architecture. These
legacy systems were originally developed to operate on large mainframe and
mid-range computers. Like these legacy systems, the Phoenix System supports all
of the core areas of financial institution data processing, including: system
administration; processing of accounts, loans, and deposits; nightly processing;
general ledger; budgeting; teller functions; and holding company accounting.
Although some modified legacy systems have introduced newer technologies to make
them easier to use, increase data storage, and provide more flexible access to
data, these systems generally are limited because they are based on decades-old
architecture which does not allow full integration of available data. Without
such integration, the information provided by these modified legacy systems
generally is neither complete nor readily accessible to the user. Thus, we
believe that financial institutions using legacy-based systems are at a
competitive disadvantage to those using more modern and open architectures, such
as client/server based systems like the Phoenix System.
In recent years, the competitive landscape of the financial services
industry has changed dramatically. Financial institutions now compete directly
with diversified non-financial institution financial service providers,
including insurance companies and investment banks. Financial institutions, like
other businesses, face pressure and challenges to do things faster, more
efficiently, and more profitably. Recent developments such as the rapid
acceptance and use of electronic commerce have further elevated customer
expectations of convenient access to a full suite of financial services. In
order to stay competitive, we believe that financial institutions must have easy
access to detailed information about their institution and their customers in
order to effectively develop and market profitable products and services and
expand their relationships with their customers. The Phoenix System provides
such access and a consolidated presentation of each customer's total
relationship with the financial institution.
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We believe that client/server computing makes possible the development of
powerful applications capable of addressing enterprise-wide business problems in
a flexible and cost-effective manner. The client/server model consists of a
centrally located "server" or group of "servers" which are responsible for data
storage and account and system processing, and remote PC-based workstation
"clients" which are connected to the servers through an enterprise-wide network
and which are used to enter, change, manipulate and analyze the institution's
data. Because of this allocation of functions, a client/server system is
scalable, meaning that its responsiveness and capacity can be increased by
upgrading the server or replacing it with a more powerful model. Client/server
systems also offer the level of data integrity and security that financial
institutions require because access to information can be controlled by
server-based relational database management systems.
Due to the recent and rapid developments in banking software technology and
e-commerce and the demand for easy access to an institution's data, we believe
that an increasing number of U.S. and international financial institutions are
re-evaluating the functionality of their current software and hardware systems
and will be looking for alternative systems which can improve their performance
and increase their flexibility and functionality. We created the Phoenix System
to help these financial institutions meet their needs.
THE PHOENIX SOLUTION
The Phoenix System allows financial institutions to integrate their
customer and account data in a comprehensive management information system. This
system is readily accessible throughout the entire institution, can be modified
to suit the particular needs of each institution, and is easily interfaced with
other products. We believe that the Phoenix System is easy to use, simple to
learn, and that it can enable a financial institution to provide higher quality
customer service with reduced operating and training costs. Unlike some legacy
systems, the Phoenix System is an integrated system that provides advantages in
three critical areas: customer relationship management, management decision
support, and financial product development. Due to its inherent structure, the
Phoenix System is flexible and scalable, stores dates and performs calculations
using four-digit years, and allows financial institutions to take advantage of
many emerging technologies relatively easily and cost efficiently. In addition,
when used in conjunction with our trade finance product and our third party
treasury product, the Phoenix System provides an integrated "universal" banking
system for international clients.
Advanced Technology. The Phoenix System operates in an "open systems"
environment using a graphical user interface, modern relational database
technology and nonproprietary hardware and software components. The Phoenix
System divides core processing functions among seven discrete but integrated
software modules:
<TABLE>
<S> <C>
- system administration - holding company financial statements
- account processing - executive information system
- nightly processing - budgeting
- teller system
</TABLE>
The core applications of the Phoenix System include:
- account processing for deposits and loans;
- a self-balancing general ledger system;
- full on-line transaction processing capabilities; and
- a comprehensive set of access controls.
Because of the Phoenix System's architecture and features, account
processing can be customized to provide an analysis-based approach tailored to
each institution's products and services. The ledger system supports both batch
and on-line memo post transaction processing functions, and includes
multi-currency functionality in some international versions. The on-line
processor allows users to post on-line transactions to any account in the
Phoenix System, some of which can be accomplished in real time. Finally, the
access control system allows an institution to restrict access to different
levels of information, allowing the institution
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to limit transactional activity, implement logging activities for audit purposes
and combine connections with an interactive context sensitive on-line help
system.
Financial Product Development. The Phoenix System allows a financial
institution to quickly develop, deliver and process new financial products and
services. Each product can be as simple or as sophisticated as an institution's
customers and competition demand. In the Phoenix System, financial product
development is parameter-driven, meaning that institutions can design products
and services by simply selecting product features from a variety of options. An
institution can develop several kinds of new financial products rapidly without
significant technical programming or support personnel. In addition, the Phoenix
System allows institutions to analyze the profitability of both individual loans
and customer relationships and broad categories of customers. Institutions can
also perform "what if" calculations to model the financial impact of new
products and services based upon information maintained on the Phoenix System.
Customer Relationship Management. The Phoenix System places a structural
emphasis on managing customer relationships, allowing an institution to pursue a
more personalized approach to its products and services. Our Relationship
Information Management system, or "RIM", integrates a customer's account data,
transactional activity, financial data from third party financial applications,
marketing information, relationships with other customers and accounts,
financial statements and other types of information in order to present each
customer's total relationship portfolio in one place. The RIM benefits an
institution by providing its management with critical assistance in managing,
tracking and analyzing the financial condition, profitability, creditworthiness
and overall relationship with each customer and groups of customers. The RIM
includes the following features:
- Marketing and Other Personal Information. The RIM tracks a range of
personal information, such as employment history, homeownership status,
other credit providers and other bank accounts.
- On-line Financial Statements and Portfolios. The RIM maintains
information regarding a customer's assets, liabilities, income, expenses
and net worth, and can provide cash flow analysis.
- Extensive Customer Relationship Tracking. The RIM can track
relationships between customers, groups of customers, accounts and groups
of accounts.
- Customer-Based Statements. The RIM enables the Phoenix System to allow
customer statements to be customized to contain an unlimited number of
accounts, and each statement can be configured to show summary
information, detailed account information, or both summary and detailed
account information.
- Integrated Signature, Photograph and Document Imaging. The RIM provides
on-line images of a customer's signature card and personal photograph and
can store and display images including images of loan collateral, other
assets, Social Security cards and drivers' licenses.
- Flexible Inquiry Capability. The RIM allows users to progress through
increasingly detailed levels of information, enabling thorough and quick
research of customer inquiries without having to enter arcane codes or
search through voluminous printed reports.
- Third Party Information. The RIM is able to integrate the data existing
in the RIM with data from external and third party software and service
providers, including information on trust, brokerage, insurance and
credit card accounts.
Management Decision Support. The Phoenix System provides a financial
institution's executives with the following functions:
- a fully integrated general ledger;
- a broad suite of standard reports augmented by an ad hoc reporting
capability;
- an integrated set of budgeting templates; and
- customer and account profitability analysis.
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The Phoenix System's executive information system, or "EIS", allows senior
executives to track performance and model the effect of business strategies and
changes in market conditions on their financial institution. The EIS takes into
account both the relationship of a particular indicator to other related
categories of information, as well as the trends for that indicator over time.
In addition, the EIS provides an institution with statistical measures of
product penetration, profitability and performance.
Future Development Plans. Future development of our product will be
controlled by London Bridge if the asset sale is completed. If the asset sale is
not completed, we will be forced to significantly reduce our future development
plans to reduce expenses. Without significant additional capital investment, we
will not be able to engage in further significant development.
STRATEGY
Our primary objective is to advance our position as a leading provider of
enterprise-wide client/server application software for the financial services
industry worldwide by pursuing the following strategies:
Maintain and Extend Technology Leadership. In 1998, 1999 and 2000, we
delivered significant upgrades in the U.S. and international versions of
the Phoenix System. The Phoenix System runs on both the Unix and Windows NT
operating systems, and in conjunction with the Sybase and Microsoft SQL
Server database management systems. The system is 32-bit enabled and runs
on hardware platforms from leading suppliers in the world, including
IBM(R), Unisys(R), Sun Microsystems(R), Compaq(R), and Hewlett-Packard(R),
among others. Most recently, we introduced significant performance
improvements to manage the more demanding processing needs of larger
financial institutions and multiple institutions processed in a service
bureau environment. We intend to continue to commit substantial resources
to maintain and extend our technological leadership. However, in light of
our cash position and operating losses, the amount of resources committed
to this effort will be significantly less than our prior levels. Following
the closing of the asset sale, London Bridge will direct further
development efforts with respect to our products. If the asset sale is not
completed, we will be forced to significantly reduce our future development
plans to reduce expenses. Without significant additional capital
investment, we will not be able to engage in further significant
development.
U.S. Distribution. We market our products through direct sales and
implementation forces in key geographic locations and through strategic
sales and marketing relationships. Our U.S. client base now includes
clients in 29 states. As discussed in more detail below, we have also
entered the application service provider business in the United States,
which allows financial institutions to outsource the maintenance and
operation of the Phoenix System to our remote service centers, as opposed
to running the system themselves "in-house." This capability will allow us
to market the Phoenix System to a large number of financial institutions
which prefer to outsource their processing operations, a market which we
have not previously addressed. We estimate that as many as half of the
financial institutions in our target market are potential candidates for
our application service center outsourced processing solution,
significantly increasing our potential market for the Phoenix System.
International Distribution. We currently have offices in Sydney,
Australia; Singapore and Wellington, New Zealand. Approximately 60 of our
more than 250 employees are based overseas. In addition, we have marketing
alliances with several overseas distributors including in Africa, the
Middle East, Australia and the Philippines.
e-Commerce Services. In October 1999, we implemented the first phase
of our strategy to offer the Phoenix System in an outsourcing or
"application service center" environment by (1) purchasing a controlling
interest in Phoenix International New York, Inc. (formerly Servers On-Line,
Inc.), an application service center using the Phoenix System located in
Ronkonkoma, New York, and (2) acquiring the account processing clients of
ERAS JV, an application service center using the Phoenix System located in
Miami, Florida. These acquisitions provided us with application service
centers, or "ASCs," in the Northeast and the Southeast. ERAS JV's Miami
application service center subsequently was relocated to our Orlando
facilities. These acquisitions are part of our ongoing strategy to broaden
our market and deliver our client/server-based core banking system both to
U.S. financial institutions that
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wish to run their processing services at their own facilities and those
institutions that would prefer to outsource their account processing
functions to a third party. The ASCs will also provide us with more
recurring revenue because such contracts involve larger monthly service
fees, as opposed to the large up front license fee and smaller annual
support fees we receive from our in-house clients. Our current client
processing agreements have an average term of five years.
Leverage Existing Customer Base. At the end of 1999, our client base
included over 140 financial institutions worldwide. We endeavor to leverage
our implemented client base by:
- attempting to maximize recurring revenues from our clients by offering
service fee-based complementary products and services;
- licensing additional subsidiaries of our clients' holding companies;
- seeking favorable references from existing clients in the course of
developing new client relationships; and
- consulting with existing clients in the development of new products
and product enhancements.
We believe that many financial institutions looking for updated technology
solutions are hesitant to be the first institution to implement new technologies
within their region. As we have secured new clients in new regions, we believe
that these "anchor" installations have helped us generate new business from
those regions. During 1999 in the United States, we successfully leveraged our
relationships to collect additional license fees from and sell additional
products to 21 pre-existing U.S. clients.
However, we have closed only eight new contracts for the provision of our
core banking solution in the first nine months of 2000, as compared to 13 in the
first nine months of 1999, and 29 in the first nine months of 1998. We believe
that the downturn in sales is attributable to:
- negative publicity from the purported class action lawsuit discussed
elsewhere in this proxy statement;
- negative postings on our Yahoo! chat board;
- a slower than anticipated return to normal sales activity following the
Year 2000 related downturn;
- concerns of prospective customers about our viability due to our recent
losses and decreasing capital reserves;
- the announced restatement of our financials results;
- the trading halt imposed by Nasdaq; and
- our customers are being asked by the office of Comptroller of the
Currency to prepare contingency plans for replacing us as a vendor.
In addition, during the first nine months of 2000, only one new bank has been
added to our Application Service Centers. We do not anticipate that we will open
any new ASCs in the near term, and none are currently planned.
TECHNOLOGY
We work with leading hardware manufacturers and development tool and
relational database vendors in the client/server community to produce our
software. These vendors include Microsoft(R), Hewlett-Packard Company(R),
IBM(R), Centura(R) Software Corporation, Sun Microsystems(R), and Sybase(R),
among others. The Phoenix System operates on Microsoft Windows(R) 95/98, Windows
NT(R), and UNIX and we are working to certify the system. During 2000, we
released U.S. Version 3.0 YE containing many upgrades to the Phoenix System, and
completed International Version I-2.0.5 for international clients adding new
functionality to support multi-currency retail banking made significant progress
on our Australian credit union product and through our reseller in the Middle
East are working on an Arabic version of a product for that market. In addition,
we are in the process of certifying a version of the Phoenix System to run on
Microsoft's new SQL Server 7. Some of the key technological features of the
Phoenix System are described below.
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Centralized Relational Database Management System. An advantage of the
Phoenix System as compared to legacy or modified legacy systems is that the
Phoenix System stores and maintains data in an open relational database rather
than in a proprietary flat file format. As a result, an institution's data can
be easily accessed and integrated by many third-party products, such as
commercially available query and report writing tools. In addition, a structured
query language, or "SQL", relational database allows users to expand and change
the structures of the tables and manipulate data stored and maintained in the
Phoenix System.
Both the Windows NT and UNIX versions of the Phoenix System, as well as our
ancillary products TradeWind(TM) and TradeCentre(TM), use Sybase System 11.x, a
relational database technology provided by Sybase. We are currently in the
process of certifying the new version 12.0 of the Sybase relational database
management system. The Phoenix System, TradeWind, and TradeCentre can run on
hardware platforms from Hewlett-Packard, IBM, NCR(R) Corporation, Sun
Microsystems, Inc., Unisys(R), and other hardware platforms that are UNIX or
Microsoft Windows NT compliant. During 1999, we conducted benchmark studies on
the newest and largest platform from Hewlett-Packard, the V2500, continuing our
focus on scaling the Phoenix System for use by larger institutions.
Replication and Distributed Data Processing. We have leveraged the open
architecture of the Phoenix System to implement an advanced distributed database
for support of our off-line teller system. The off-line teller system uses a
local database on each branch server to maintain normal processing in the event
of hardware or network failure at the central server. Off-line branches are
supported using Centura's SQL Base for either Novell(R) NetWare or Microsoft
Windows NT.
Open Protocols for Data Communication. We use the industry standard TCP/IP
protocol for communicating with the relational database server, and either
IPX/SPX or TCP/IP for communicating with the local area network file server.
These protocols allow our clients using either Windows NT or Novell NetWare
networks to implement a broad array of local area network and wide area network
topologies and configurations. In addition, clients that have an existing
network infrastructure in place that supports TCP/IP do not have to reinvest in
new technology to run our products.
32-bit Application Support. U.S. Version 2.5 and International Version
I-2.0.5 of the Phoenix System, which we released on a widespread basis to our
clients in 1999, are native 32-bit applications which enable our clients to take
further advantage of operating systems from Microsoft (Windows 95/98 and Windows
NT Workstation). These systems offer our clients substantial benefits in the
areas of fault tolerance, ability to support more complex transaction processing
(multi-tasking), performance and security.
TARGET MARKETS
The United States Market. The following table shows the number of FDIC
insured depository institutions grouped by asset size as of the end of the
second quarter of 2000:
- 5,681 institutions with assets of less than $100 million;
- 2,858 institutions with assets from $100 million to $300 million;
- 1,035 institutions with assets from $300 million to $1 billion;
- 300 institutions with assets from $1 billion to $3 billion; and
- 226 institutions with assets of more than $3 billion.
These numbers include both commercial banks and savings institutions. We
primarily focus our direct in-house sales efforts in the U.S. on commercial
financial institutions and savings institutions with asset sizes from $100
million to $3 billion, a range that includes over 4,000 institutions. Our
application service center business targets institutions with less than $300
million in assets, which includes approximately 9,000 institutions. We believe
that many of these financial institutions seek cost-effective, flexible, and
sophisticated technology solutions that can help them compete more effectively
in the changing financial services marketplace. The Phoenix System operates with
both the Microsoft Windows NT and UNIX operating system environments. We believe
the Windows NT version is attractive to much of our market of U.S.
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financial institutions because of the lower overall hardware and operating
expenses associated with a Windows NT environment.
The International Market. We currently divide international financial
institutions into two groups based upon the number of branches and accounts:
those with more than 300 branches and/or 2 million accounts, which we refer to
as "Tier 1," and those with less than 300 branches or 2 million accounts, which
we refer to as "Tier 2." Today, we primarily focus our international sales and
marketing efforts on Tier 2 institutions located in Africa, the Asia-Pacific
region, Europe, Latin America, the Caribbean and the Middle East. We also target
Tier 1 institutions who can use the Phoenix System in regional or market segment
areas of their operations. One of our clients, Bank of Hawaii, is a Tier 1
institution that uses the Phoenix System to run its operations in particular
regions. Sophisticated international financial institutions offer a broad array
of financial products and services and demand technology that is open, powerful
and economical. We also believe that these technology-minded institutions are
looking for software solutions that will last at least 10 to 15 years.
Therefore, these institutions appreciate the flexibility, scalability,
functionality and expandability of our client/server technology. During 1999, we
derived over half of our revenues from our international clients. There are many
risks associated with significant international operations which could have a
material impact on our operations and financial performance, including
governmental and regulatory changes, the relative political and economic
instability of foreign markets, the diminished ability to monitor and maintain
client relationships across larger geographical areas, the increased costs
incurred to maintain international operations, and the other risks discussed
elsewhere in this proxy statement.
SALES AND MARKETING
We market our software and services directly through our sales and
marketing personnel and through third party agents that provide products and
services to the financial services industry. We have established local
representation relationships with agents located in several countries that
assist in the sales, implementation, and support processes. We believe these
agency relationships will assist us in building our international following in
the future.
Our direct sales and marketing personnel and consultants are experienced in
the sales process for banking software products and generate leads through a
marketing program which includes direct mail, networking, telemarketing,
seminars, and trade shows. White papers and other sales support literature and
ongoing client communications also contribute to the lead development process.
We also actively market our products and services through our Internet web site
which allows prospects to read or download product information, access online
product presentations, and register to receive information by mail or email.
Our direct sales and marketing force is complemented, particularly in the
international market, by various indirect distribution channels, including a
network of sales, marketing and support agents. Some agents also provide
implementation, training, support and other services to end-users. In all cases,
the Phoenix System remains sole property of our corporation. In most cases, if
we terminate our relationship with an agent, clients sold by that agent continue
to pay support fees to us.
PRODUCT PRICING
In-House System Pricing. For those clients who license the Phoenix System
for in-house use, we price the Phoenix System and related services in two
components: (1) license fees for software products and other revenues and
commissions from the sale and delivery of software and hardware products of
third party vendors; and (2) fees for a full range of complementary services,
including implementation, programming, conversion, training, and installation
services, interface services for tying the Phoenix System to third-party
applications, client and software support services, disaster recovery services,
and Internet/Intranet consulting services. License agreements generally have a
term of five years and automatically renew for one-year periods thereafter until
cancelled. Each agreement also contains a five-year commitment to pay customer
and software support fees, which we recognize as revenue on a quarterly basis.
Most license agreements provide that we can cancel the license if the client
does not continue to pay for client and software support. Implementation,
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conversion, training, installation and interface fees are generally paid at the
beginning of a license relationship or when the particular service is performed,
although in some instances these fees are paid over time.
In the United States, license fees are based on the asset size of each
institution client. Internationally, each institution pays a base license fee
and an incremental license fee based on the number of branches and/or accounts
of such financial institution. Implementation, programming services, conversion,
training and interface fees vary based on the complexity of a particular
project. Implementation fees in the United States are generally fixed, and
internationally are generally charged on a time and materials basis for work
performed. Customer and software support fees both in the U.S. and
internationally are paid annually or quarterly and are generally calculated as a
percentage of the total license fees. Both in the U.S. and internationally, as
the asset size of each client institution increases or as branches or accounts
are added, clients pay additional incremental license fees, and the client's
software support fees are increased proportionately over the life of the license
agreement.
Application Service Center Pricing. Our new application service centers,
or "ASCs," use the Phoenix System to provide remote institution and account
processing services to clients. ASC clients pay an up-front fee for hardware and
implementation of the Phoenix System, and then a monthly fee for processing
services based on the number of accounts and transactions processed each month.
Since there is no license fee, the up-front fees received are lower, but the
recurring fees to us are higher as a percentage of total contract value than the
support fees received from in-house clients.
Pricing to Our Sales Agents. Our agents license our products at a discount
for sublicensing or are paid a commission based upon sales. Under many of these
agreements, we anticipate that primary responsibility for implementation and
training services will shift to the agents as they successfully complete the
requisite training and successfully complete one or more installations under our
supervision. Under these sublicensing arrangements, agents will retain a greater
percentage of the implementation, conversion, and training service fees as they
accept more of the responsibility for these services. We believe, however, that
the difference in the margins obtained from direct and indirect sales should not
have a material adverse effect on our business, operating results, and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this proxy statement.
WORLDWIDE SERVICES
In 2000, we divided our business between United States and international
operations. The Worldwide Services Division was split into two divisions, one
focusing primarily on customers in the United States and the other focusing
primarily on international customers. While the functions remain largely the
same, the new structure allows each unit to focus on a one code line and thereby
bring greater efficiency and more targeted service to our customers. Both the
U.S. group and the international group provide a comprehensive range of direct
client care services including implementation, training and ongoing support. We
have created a separate group dedicated to providing services for clients
utilizing our application service centers, or "ASCs," an option that delivers
the Phoenix System to clients who wish to outsource their processing operations,
and have dedicated units for ongoing technical, education and professional
services for ASC customers.
Implementation Services. Our comprehensive implementation services help
new clients and banks acquired by existing clients convert to the Phoenix System
by providing extensive project planning and coordination. As part of the overall
implementation process, each client is assigned an Implementation Manager and a
dedicated team of implementation experts that guide the client through the
entire installation and coordinate the conversion and implementation process,
including data conversion, software installation, network certification,
education, training and consulting. Each implementation team consists primarily
of data conversion analysts and conversion programmers who convert a client's
current account data to the Phoenix System. Data conversion activities include
data mapping, program development, data conversion, extensive testing, detailed
data auditing and a complete trial, or "mock," conversion prior to the final
implementation date.
Education and Training Services. We offer a comprehensive education and
training program both for new and existing clients. As part of the
implementation process for new clients, we provide training classes to
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familiarize them with the Phoenix System and train them to set up the Phoenix
System's customized parameters. Training courses are available both on-site and
at our headquarters in Orlando. We also provide hands-on application training
services at the client site prior to installation, and post-conversion support.
Additional on-site training for the Phoenix System and ancillary products is
available upon request.
Consulting and Development Services. We offer consulting and development
services, including assistance for clients planning large-scale implementations,
assistance in managing operational reorganizations, and customized programming
services for clients who wish to customize the Phoenix System to meet their own
unique information processing needs.
International Services. Through a number of international strategic
alliance agreements, we may transfer responsibility for implementation, support,
development and/or product localization services to an agent servicing the
particular area of the world. To ensure quality control, each agent is required
to send their staff to us for training and to work side-by-side with a Phoenix
implementation team on at least one implementation project. Upon successful
completion of training, the agent then assumes direct primary responsibility for
the client care services in their region for which they have been certified.
Some agents are able to provide more local services than others, depending on
their resources and the experience of their personnel. This process allows us to
deliver and install our software faster and across more areas. While these
alliances add depth and breadth to our worldwide client support capabilities, we
still remain focused on ensuring client satisfaction and quality assurance
levels through our many worldwide offices.
Ongoing Customer Support. Once implementation is complete, each client is
transitioned to a Client Care Unit for ongoing support. Each Client Care Unit is
led by a Client Care Manager and a team of support representatives. A Client
Care Manager is assigned to each client at contract signing and works with the
Implementation Manager to provide indirect support during the implementation
process to insure a smooth transition.
We deliver ongoing support via a range of communication vehicles including
telephone, Internet, electronic mail, and fax. Our support personnel are
available on a 24 hour per day, seven day per week basis. Our Internet support,
called SupportNet, is a special client-only area of our web site. It provides a
free, online support mechanism for our clients allowing clients with Internet
access to obtain online support through features such as a discussion forum,
online support documents for the Phoenix System, online software defect
reporting, online enhancement requests, and on-line file transfers.
Clients are given a single phone number and email address for all support
services. The client care team members answer inquiries directly when possible,
but are also accessible by pager, cellular telephone, and laptop computer so the
Client Care Manger has maximum utilization of resources at all times. This
enables clients to have their questions answered, addressed and resolved as
expediently as possible. Additionally, many client support activities can be
performed through high-speed data lines connected directly to a client's
location. Our support personnel have the ability to connect remotely to the
server at the client site and perform work as if they were physically at the
client's site. This approach helps us deliver cost-effective support services to
clients without the traditional expense associated with on-site visits.
We are committed to maintaining high levels of service and support to
ensure our client's satisfaction due to the mission-critical nature of the
Phoenix System and its impact on the client's day-to-day operations. Our Client
Care Units provide support not only for the ongoing use and maximization of the
Phoenix System, but also can help clients identify potential network and
technology infrastructure problems.
Internet/Intranet Product and Customization. In conjunction with our
Internet banking product, we offer Internet consulting services to help clients
design their web sites and establish a presence on the World Wide Web. We also
help clients create their own internal web environment, or Intranet, enabling
them to improve the flow of communication, eliminate paper, increase
productivity levels and enhance the dissemination of information with less
additional hardware and infrastructure costs.
Business Recovery Services. We offer business recovery services to assist
clients in re-establishing processing capacity within 24 hours of an
interruption in processing capability caused by a disaster or other event. Our
disaster recovery service offering is a separate 5-year contract that has an
initial implementation fee
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and annual service fees. We provide this service through a third party service
provider, SunGard Recovery Services, Inc. We receive a commission based on the
monthly fees SunGard charges to our clients. This service satisfies current
United States financial institution regulatory obligations to maintain and
annually test a disaster recovery plan.
Additional Services. We provide a wide range of professional services,
including on-site operations support, process audits, additional education
services, and customized plans to address specific client needs as they relate
to the use and operation of our suite of products. We offer a full range of
networking support, database services, and on-site consulting upon request, both
directly and through our third party service providers. We perform on-site
network certification for all clients during their initial software
installation, and these same network engineers and database analysts are
available for ongoing support as part of our professional services offering.
PRODUCT DEVELOPMENT AND NEW PRODUCTS
We were founded in January 1993 for the purpose of developing and marketing
a new generation of integrated banking software applications that would replace
less flexible and technologically dated legacy systems. Hewlett-Packard provided
developmental-stage assistance by supplying computer hardware for development
and testing of our products. Early in our history, a group of U.S. financial
institutions participated in a joint application development program under which
end-users were involved in product development and testing. The joint
application development program helped reduce the development cycle by
increasing the efficiency with which design problems were identified and
corrected. U.S. financial institutions continue to contribute to plans for new
products and enhancements as part of our user group, known as "PHOCUS."
We believe that our future success will depend in large part on our ability
to maintain and enhance our current product and service offerings and to
develop, acquire, integrate and introduce new products and features that will
keep pace with technological advances and satisfy evolving client requirements.
We develop and adjust product direction in response to two core trend areas: (1)
developments in the financial services industry and (2) developments in
technology. Our ability to execute this strategy depends upon raising
significant additional capital. Otherwise, we will be forced to reduce expenses
by curtailing development until we can become cash-flow positive.
International Enhancements. Consistent with our original plan,
international versions of the Phoenix System support numerous international
features, such as multi-currency and multi-language capability. The Phoenix
Systems multi-currency capability supports world currencies formatted in
accordance with the standards established by the International Standards
Organization. We have acquired additional international capabilities, such as a
trade finance system, and have rights to license AFA Systems International's
"Musketeer" treasury and risk management systems to our clients.
Future Technologies. We are participating on the advisory council for
Windows DNAfs, an industry framework being developed by Microsoft. This
framework is intended to define a way of constructing software applications to
allow different financial services industry software providers to exchange data
and communicate with each other. We have worked with Microsoft on its DNAfs
specifications in anticipation that it would be included in our future product
enhancements, named "Project Aurora." Project Aurora is a set of technologies,
tools and frameworks that we were developing to serve as the foundation for a
new set of products to be delivered in the coming years. However, due to lack of
funding and employee attrition, we have curtailed our development of Project
Aurora. We have written off the costs of this project, which were previously
capitalized. The continuation and fruition of Project Aurora are currently at
significant risk.
Product Development Cycle. Each year, we host a conference for our
"PHOCUS" users group, which includes all current U.S. and international users of
the Phoenix System. We use the suggestions and feedback from this conference and
other sources of client feedback to help develop plans for new products and
enhancements. We meet with PHOCUS approximately twice a year to offer
recommendations and to help prioritize product development and enhancement
projects. For each new market, country or region where we sell our software, we
attempt to adapt and augment the Phoenix System to meet customer needs.
Additionally, our product development personnel continue to independently
develop new product ideas and enhancements.
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Once a product idea has been formalized, we use an internal review process to
(1) determine whether to develop the product or enhancement, (2) set a
development schedule, and (3) develop a budget for the product or enhancement.
Product Plans. Our product development efforts are currently focused on
enhancing the functionality of the Phoenix System so that it will be attractive
to a broader range of clients both in the U.S. and abroad. Our product plans are
dependent upon obtaining adequate financing. Our product plans focus on
extending the usefulness of the Phoenix System into new and emerging alternative
delivery channels. We are striving to improve our competitive position by
completing, licensing, acquiring, or delivering to client institutions new
products and enhancements including, among others, the following:
- Internet Banking. We intend to continue to enhance our Internet Banking
product. We are evaluating current functionality, including the ability
to open accounts over the Internet, including fully automated online
opening and funding of accounts on the Phoenix System. Additional
features planned include ACH support, check imaging, account alerts,
on-line stock brokerage services, OFX support, account aggregation and
biometric security support.
- Online Brokerage. In March of 2000, we entered into a marketing
arrangement with Stockwalk.com, Inc. pursuant to which we will integrate
Stockwalk.com's online brokerage services with our Internet banking
products, allowing our financial institution clients to offer their
customers seamless retail banking and co-branded online brokerage
services. In compliance with applicable rules and regulations, all
brokerage services will be provided and controlled directly by
Stockwalk.com.
- Report Engine. We intend to further developing the reporting
capabilities of the Phoenix System. Product plans include further
enhancements to enable greater control and flexibility in establishing
high performance reporting. In addition, enhancements focusing on
user-defined client correspondence are planned to enable our clients to
flexibly control the presentation of information to their customers.
- Larger Bank Processing. In 1999 and 2000 we worked on increasing the
scalability of the Phoenix System through an enhanced, multi-threaded,
multi-tasking overnight process. We believe that such enhancements will
help to broaden the appeal of the Phoenix System for larger institutions.
We also continue to develop a variety of enhancements to process larger
financial institutions, capitalizing on the latest database and server
technological advances. One key project includes enhancements to
capitalize on the features of the new version 12.0 of the Sybase
relational database management system.
The discussion of potential future products, new enhancements and product
development plans are subject to significant technical risks, including: delays
in the development, introduction, production or implementation of the new
enhancements or products; failure to achieve market acceptance; failure to meet
development, functionality and performance expectations; and undetected and
uncorrected errors or failures. These product plans are also subject to the
availability of funding and our ability to retain the services of skilled
employees. These product plans are "forward-looking statements" which are
subject to the risks and uncertainties discussed in this report and in our
filings with the Securities and Exchange Commission, including the "Risk
Factors" described therein and elsewhere in this proxy statement.
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COMPETITION
The financial services software market is intensely competitive, rapidly
evolving and subject to rapid technological change. Competitors vary in size and
in the scope and breadth of the products and services offered. We encounter
competition in the U.S. from a number of sources, including:
- Fiserv, Inc.
- BISYS, Inc.
- Marshall & Ilsley Corp.
- East Point Technology, Inc. & a division of Marshall Ilsley Corp.
- Electronic Data Systems Corp.
- Jack Henry & Associates, Inc.
- ALLTEL Information Services, Inc.
- Prologic Corporation
- The Kirchman Corporation
- Open Solutions, Inc.
All of these companies offer core retail software systems or outsourcing
alternatives to the financial services industry. Of these competitors, we
believe that only East Point and Open Solutions offer true client/server
solutions. Many of our competitors have far greater resources then we do and
competition from new companies is possible.
In the international arena, we compete with several global players,
including:
- Fiserv, Inc.
- Midas-Kapiti International, Inc.
- ACT/Kindle Banking Systems
- Sanchez Computer Associates, Inc.
- Prologic Corporation
- Financial Network Services
In addition, there are smaller, regional competitors in the countries that
we target internationally. We expect additional competition from other
established and emerging companies as the client/server application software
market continues to develop and expand.
In general, we believe we compete on the basis of:
- product architecture, including distributed computing capability, access
to commercial SQL databases and ease of customization and integration
with other applications;
- functionality, including the breadth and depth of features and functions
and ease of use;
- service and support, including the range and quality of technical
support, training, implementation and consulting services and the
capability to provide these on a global basis;
- management expertise, including management's banking software experience
and financial services industry knowledge; and
- product pricing in relation to performance and support.
We believe that the Phoenix System has been a market leader in the areas of
product architecture and management expertise and that we compete favorably in
the areas of functionality, service, support and product pricing.
We believe that our current competitors do not offer application software
that provides the level of flexibility and functionality featured in our
customer relationship management, customer profitability analysis, or executive
information modules. We expect additional competition from other established and
emerging companies as the client/server market continues to develop and expand.
In addition, competition could increase as a result of software industry
consolidations, including particularly the acquisition of any of the
client/server based retail banking system providers by one of the larger service
providers to the financial
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services industry. We cannot estimate the possible adverse consequences to our
financial condition or results of operations from competition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Our license agreements contain provisions which limit the
use of the software, state that title remains with us, protect confidentiality,
permit the termination of license for misuse or abuse and require licensees to
notify us of infringements on our property and rights. We presently do not have
any patents, pending patent applications, registered trademarks or copyright
registrations. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, particularly overseas. While we are unable to
determine the extent to which piracy of our software products exists, we are not
aware of any software piracy of our products to date. However, in our industry,
particularly in certain overseas markets, software piracy is a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States.
Nevertheless, we believe that due to the rapid pace of technological change in
the information technology and software industries, factors such as the
technological and creative skills of our employees, new product developments,
frequent product enhancements, and the timeliness and quality of support
services are more important to establishing and maintaining a competitive
advantage in the industry than merely copying our software.
We do not believe that any of our products infringe upon the proprietary
rights of third parties. We cannot be sure, however, that third parties will not
claim infringement by us with respect to current or future products. We expect
that software product developers will be increasingly subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available at all or on terms acceptable to us. This could have a material
adverse effect upon our business, operating results, and financial conditions.
EMPLOYEES
As of October 31, 2000, we had a total of 251 employees and contract
workers, of which 91 were engaged in research and development (including
research projects and project development), 61 in implementation and training,
client support and sales and marketing for the U.S. market, 72 in client support
and sales and marketing for the international markets, 18 in finance and
administration, 7 in executive management, and 2 in corporate marketing. These
figures reflect a downsizing of 54 employees in May 2000 and additional
attrition and cost reductions involving 59 employees and contract workers from
June through October 30, 2000. All of our executive officers employed as of the
date of this proxy statement have entered into employment agreements with our
corporation. None of our employees are represented by a labor union. To date, we
have not experienced any work stoppages and consider our relations with our
employees to be satisfactory.
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FACILITIES
The following chart summarizes our worldwide facilities and the terms of
the lease for each. We do not own any real property. The New York facility is
used by our majority-owned subsidiary Phoenix International New York, Inc. and
the New Zealand facility is used by our wholly-owned subsidiary, Phoenix
International A.P. Limited.
<TABLE>
<CAPTION>
SQUARE LEASE TERM LEASE
LOCATION FUNCTION FOOTAGE IN MONTHS EXPIRATION
-------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Heathrow, Florida, USA.......... Headquarters, administration, sales, 48,000 120 3/31/07
development & implementation
Heathrow, Florida, USA.......... Mostly vacant 22,500 120 3/31/07
Sydney, Australia............... Research & development 6,500 36 9/30/01
Wellington, New Zealand......... Sales, development & implementation 1,500 6 3/31/00
Singapore....................... Sales 500 Month to month
Ronkonkoma, New York, USA....... Sales & implementation 5,500 60 12/31/02
</TABLE>
In the third quarter of 2000, we moved most of our Orlando operations into
the 48,000 square foot building and are currently seeking a sublessee for
approximately 13,500 square feet of our 22,500 square foot facility. In
addition, we intend to relocate our UK operations to a serviced office, and have
assigned our 3,400 square foot UK facilities and associated lease to a third
party.
LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings covering a variety
of matters arising in the ordinary course of our business activities.
On November 23, 1999, a lawsuit was filed in the District Court for the
Middle District of Florida as a purported class action initiated by George
Taylor, a former Phoenix employee. Initially, Phoenix and our chief executive
officer were named as defendants. The lawsuit alleges, among other things, that
Phoenix and our chief executive officer improperly recognized revenues,
overstated revenues and failed to disclose that our revenues were allegedly in
decline, all of which allegedly caused our stock price to be higher than it
otherwise would have been during the class period. The lawsuit alleges that
these purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000, the plaintiffs filed
an Amended Complaint which, among other things, (1) adds four additional
investors as named plaintiffs and proposed class representatives; (2) expands
the purported class period to the period from May 5, 1997 to April 15, 1999; and
(3) adds Phoenix's president as an additional named defendant. Phoenix and the
other two defendants filed Motions to Dismiss, which were denied by the Court
without opinion in August 2000. The parties are beginning to conduct discovery.
Phoenix's insurance carriers have denied coverage for the claims in this
lawsuit. On October 24, 2000, Phoenix entered into an agreement in principle to
settle the consolidated securities class action litigation with a settlement
class comprising shareholders who acquired Phoenix common stock during the
period between May 5, 1997 and August 22, 2000. The settlement is subject to
certain customary conditions, notice to the proposed settlement class,
confirmatory discovery and preliminary and final court approval.
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2000, the number and
percentage ownership of our common stock by: (i) each of our directors, (ii) our
chief executive officer and each of our named executive officers, (iii) each
person or entity known by us to own beneficially more than five percent of our
common stock and (iv) all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
NAME NUMBER OUTSTANDING
---- --------- -----------------
<S> <C> <C>
Safeco Corporation(1)....................................... 1,640,000 17.4%
Bahram Yusefzadeh(2)........................................ 1,491,036 15.5%
London Bridge Software Holdings(3).......................... 861,623 9.2%
Robert Fleming, Inc.(4)..................................... 585,455 6.2%
Dimensional Fund Advisors, Inc.(5).......................... 527,150 5.6%
Ronald E. Fenton(6)......................................... 359,869 3.8%
Raju M. Shivdasani(7)....................................... 343,400 3.5%
William C. Hess(8).......................................... 221,768 2.3%
J. Michael Murphy(9)........................................ 94,288 1.0%
O. Jay Tomson(10)........................................... 66,646 *
Ruann F. Ernst(11).......................................... 57,500 *
Daniel P. Baker(12)......................................... 53,267 *
Theodore C. Burns(13)....................................... 35,025 *
Richard Powers(14).......................................... 19,515 *
All directors and officers as a group (14 people)........... 2,861,902 27.4%
</TABLE>
---------------
* Indicates less than 1.0%.
(1) As reported by SAFECO Corporation in a Statement on Schedule 13G filed with
the SEC as of December 31, 1999. In its Statement on Schedule 13G, Safeco
reports that it is a holding company for SAFECO Asset Management Company, a
registered investment advisor to several investment companies and sponsor
of SAFECO Common Stock Trust, an employee benefit plan. As a result of its
ownership of SAFECO Asset Management and sponsorship of SAFECO Common Stock
Trust, SAFECO may be deemed to be the beneficial owner of the shares of our
Common Stock managed by SAFECO Asset Management and owned by SAFECO Common
Stock Trust. SAFECO specifically disclaims ownership over these shares of
Common Stock. SAFECO's address is SAFECO Plaza, Seattle, Washington 98185.
(2) Includes:
(a) 920,276 shares held in his name;
(b) 291,541 shares held by the Yusefzadeh Family Limited Partnership
of which Mr. Yusefzadeh is the general partner;
(c) 55,143 shares held by the Bahram and Laury Yusefzadeh Charitable
Trust, of which Mr. Yusefzadeh is a director;
(d) options to acquire 118,478, 3,000, 3,000, 15,000, 6,000, 6,000,
25,000, 25,000, 6,000, and 6,250 shares that are currently
exercisable at exercise prices of $3.16, $8.00, $14.08, $9.83,
$18.50, $14.75, $6.06, $6.67, $3.88, and $4.47 respectively, per
share;
(e) 348 shares held by his daughter; and
(f) 10,000 shares held at Roxbury Capital, 7,500 of which are in Mr.
Yusefzadeh's IRA and 2,500 of which are in Mrs. Yusefzadeh's IRA.
Mr. Yusefzadeh disclaims beneficial ownership with respect to the
shares held by his daughter. Mr. Yusefzadeh's address is c/o
Phoenix International Ltd., Inc., 500 International Parkway,
Heathrow, Florida 32746.
(3) As reported by London Bridge in a statement on Schedule 13D filed with the
SEC as of February 14, 2000. Pursuant to such Statement on Schedule 13D,
London Bridge owns 861,623 shares in its name. London Bridge's address is
25 London Bridge Street, 16th Floor, New Long Bridge House, London, England
SE1 95G.
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<PAGE> 87
(4) As represented by such shareholder, a New York Trust, in a voting agreement
executed with London Bridge. Robert Fleming's address is 320 Park
Avenue -- 11th Floor, New York, New York 10022.
(5) Dimensional Fund Advisors Inc. is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940, and furnishes
investment advice to four investment companies registered under the
Investment Company Act of 1940 and serves as investment manager to certain
other investment vehicles, including commingled group trusts. In its role
as investment advisor and investment manager, Dimensional Fund Advisors
possessed both voting and investment power over 527,150 shares of Phoenix
International, Inc. stock. The securities are owned directly by entities
for whom Dimensional Fund Advisors serves as investment advisor or manager,
and Dimensional disclaims beneficial ownership of such securities.
Dimensional Fund Advisors address is 1299 Ocean Avenue, 11th Floor, Santa
Monica, California 90401.
(6) Includes:
(a) 16,375 shares held by Mr. Fenton;
(b) options to acquire 3,000, 4,500, 6,000, 13,500, 13,500, and 15,000
shares that are currently exercisable at exercise prices of $8.00,
$10.17, $14.08, $18,50, $14,75, and $3.88, respectively, per
share; and
(c) 287,994 shares held in the name of BankSecurity Corporation,
subsequently acquired and merged into F&M Bancorporation. F&M
Bancorporation's address is 11 North First Avenue, Marshalltown,
Iowa 50158. Mr. Fenton disclaims beneficial ownership of these
shares.
(7) Includes options to acquire 87,000, 75,000, 15,000, 6,000, 50,000, 4,000,
73,500, 2,000, 6,000, and 18,900 that are currently exercisable at exercise
prices of $8.00, $13.75, $9.83, $11.83, $13.38, $14.75, $6.13, $14.75,
$3.88 and $4.06, respectively, per share. Includes 6,000 shares purchased
in 1999 through J. C. Bradford & Co.
(8) Includes:
(a) 30,294 shares held in Mr. Hess' name;
(b) 7,666 shares held by his individual retirement account;
(c) options to acquire 3,000, 13,938, 4,500, 7,500, 7,500, and 7,500
shares that are currently exercisable at exercise prices of $8.00,
$2,87, $14.08, $18.50, $14.75, and $3.87, respectively, per share;
(d) 96,429 shares held in the name of Community Grain Corporation, of
which he is the secretary and treasurer and over which he shares
voting and dispositive power;
(e) 4,425 shares held in the name of Raccoon Valley State Bank
Charitable Fund, of which he is an officer and director;
(f) 4,425 shares held in the name of Perry State Bank Charitable Fund,
of which he is an officer and director;
(g) 4,425 shares held in the name of Sac City State Bank Charitable
Fund, of which he is an officer and director;
(h) 22,500 shares held in the name of Iowa Savings Bank Charitable
Foundation, of which he is an officer and director;
(i) 7,666 shares held in the name of Audubon State Bank Charitable
Foundation. Mr. Hess is the president of Iowa Savings Bank and
chairman of the board of Sac City State Bank. Me. Hess disclaims
beneficial ownership of the shares of Common Stock described in
clauses (d) - (i) above.
(9) Includes:
(a) 33,850 shares held in the name of Murphy Family Partners, Ltd.;
and
(b) options to acquire 3,000, 13,938, 1,500, 4,500, 12,000, 12,000,
and 13,500 shares that are currently exercisable at exercise
prices of $8.00, $2.87, $10.17, $14.08, $18.50, $14.75, and $3.88,
respectively, per share. Mr. Murphy is the general partner of
Murphy Family Partners, Ltd. and exercises sole voting and
dispositive power over the shares held by Murphy Family Partners,
Ltd.
(10) Includes:
(a) 3,000 shares held in Mr. Tomson's name;
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<PAGE> 88
(b) options to acquire 3,000, 3,000, 7,500, 7,500, and 7,500 shares
that are currently exercisable at exercise prices of $8.00,
$14.08, $18.50, $14.75, and $3.88, respectively, per share.
(c) 35,146 shares held in the name of First Citizens National Bank
Charitable Foundation, Inc. Mr. Tomson is a director of First
Citizens Financial Corporation and First Citizens National Bank
Charitable Foundation, Inc. Mr. Tomson disclaims beneficial
ownership of the shares held by these entities.
(11) Includes options to acquire 3,000, 4,500, 15,000, 15,000, and 15,000 shares
that are currently exercisable at exercise prices of $8.50, $14.08, $18.50,
$14.75, and $3.87, respectively, per share.
(12) Includes options to acquire 18,000, 6,000, 20,000, 7,650 and 1,617 shares
that are currently exercisable at exercise prices of $13.00, $18.33, $6.13,
$4.06 and $1.13, respectively, per share.
(13) Includes options to acquire 18,000, 7,500, and 2,025 shares that are
currently exercisable at prices of $16.38, $6.13 and $4.06, respectively,
per share. Includes 7,500 shares purchased by Mr. Burns in 1999:
(a) 2,500 shares are held directly by Mr. Burns; and
(b) 5,000 shares are held in an IRA account on behalf of Mr. Burns.
(14) Includes:
(a) options to acquire 17,000 shares that are currently exercisable at
a price of $4.375 per share;
(b) 1,015 shares held in IRA accounts; and
(c) 1,500 held jointly with Mr. Powers' wife.
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SELECTED FINANCIAL AND OPERATING DATA
The selected statement of operations data set forth below for the years
ended December 31, 1999, 1998 and 1997 and the selected balance sheet data at
December 31, 1999 and 1998 have been derived from our audited consolidated
financial statements, as restated. The selected statement of operations data for
the years ended December 31, 1996 and 1995 and the nine months ended September
30, 1999 and the selected balance sheet data at December 31, 1997, 1996 and 1995
and at September 30, 1999 have been derived from our unaudited consolidated
financial statements, as restated. The selected statement of operations data for
the nine months ended September 30, 2000 and the selected balance sheet data at
September 30, 2000 have been derived from our unaudited consolidated financial
statements. The information set forth below under the caption "Other Data" is
unaudited. The results of operations for the nine months ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
year. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and notes thereto
elsewhere in this proxy statement.
<TABLE>
<CAPTION>
11 MONTHS
NINE MONTHS ENDED ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER
--------------------------- --------------------------------------- DECEMBER 31, 31,
2000 1999 1999 1998 1997 1996 1995(1)
------------ ------------ ------------ ----------- ---------- ------------ ----------
(UNAUDITED) (RESTATED (RESTATED) (RESTATED AND UNAUDITED)
AND
UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
License fees and other....... $ 3,549,637 $ 6,934,123 $ 9,642,778 $10,683,843 $8,226,322 $5,814,195 $2,580,247
Implementation, customer and
software support and other
service fees............... 7,796,302 6,506,151 8,543,828 8,658,062 5,213,031 3,279,473 1,556,164
------------ ------------ ------------ ----------- ---------- ---------- ----------
Total revenues......... 11,345,939 13,440,274 18,186,606 19,341,905 13,439,353 9,093,668 4,136,411
Expenses:
Cost of license fees and
other...................... 4,166,070 2,974,027 4,839,219 2,080,569 1,739,398 674,037 375,783
Cost of implementation,
customer and software
support and other service
fees....................... 5,179,366 6,708,549 9,038,765 6,233,850 3,649,284 2,264,290 1,246,886
Sales and marketing.......... 3,295,202 3,533,662 5,295,021 4,440,521 3,264,055 1,377,353 983,290
General and administrative... 7,025,147 4,817,447 6,292,817 5,219,078 2,748,680 1,822,871 1,058,190
Product development.......... 8,150,460 7,911,508 10,672,362 7,153,589 3,289,653 1,760,691 654,797
------------ ------------ ------------ ----------- ---------- ---------- ----------
Total expenses......... 27,816,245 25,945,193 36,138,184 25,127,607 14,691,070 7,899,242 4,318,946
Other income (expense):
Interest income.............. 362,201 842,382 1,013,490 1,698,308 799,676 223,548 121,815
Interest expense............. (21,293) (27,207) (43,958) (57,102) (52,376) (19,231) (12,060)
Other income (expense)....... 1,256,677 (31,911) (34,860) 82,407 133,656 (2,242) (4,252)
------------ ------------ ------------ ----------- ---------- ---------- ----------
Income (loss) before minority
interest and income taxes.... (17,386,375) (11,721,655) (17,016,906) (4,062,089) (370,761) 1,396,501 (77,032)
Minority interest............. 110,728 -- 54,248 -- -- -- --
------------ ------------ ------------ ----------- ---------- ---------- ----------
Income (loss) before income
taxes........................ (17,275,647) (11,721,655) (16,962,658) (4,062,089) (370,761) 1,396,501 (77,032)
Income tax expense............ 73,353 136,965 32,264 348,265 394,970 481,666 255,999
------------ ------------ ------------ ----------- ---------- ---------- ----------
Net income (loss)............. $(17,349,000) $(11,858,620) $(16,994,922) $(4,410,354) $ (765,731) $ 914,835 $ (333,031)
============ ============ ============ =========== ========== ========== ==========
Net income (loss) per
share -- basic............... $ (1.87) $ (1.39) $ (2.00) $ (0.53) $ (0.11) $ 0.18 $ (0.08)
============ ============ ============ =========== ========== ========== ==========
Net income (loss) per
share -- diluted............. $ (1.87) $ (1.39) $ (2.00) $ (0.53) $ (0.11) $ 0.16 $ (0.08)
============ ============ ============ =========== ========== ========== ==========
Weighted average shares
outstanding -- basic......... 9,266,517 8,515,506 8,518,323 8,378,784 6,698,317 5,110,173 4,394,276
============ ============ ============ =========== ========== ========== ==========
Weighted average shares
outstanding -- diluted....... 9,266,517 8,515,506 8,518,323 8,378,784 6,698,317 5,572,680 4,394,276
============ ============ ============ =========== ========== ========== ==========
OTHER DATA
Total product development
expenditures(2).............. 13,470,244 14,664,357 $ 20,506,714 $11,705,993 $5,132,271 $2,966,515 $1,788,172
Total personnel(3)............ 275 369 372 368 193 124 87
Implemented customers(4)...... 111 94 101 64 39 27 12
</TABLE>
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<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------------------- -------------------------
2000 1999 1999 1998
----------- ------------------------ ----------- -----------
(UNAUDITED) (RESTATED AND UNAUDITED) (RESTATED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets.......... $9,962,898 13,925,757 $11,164,099 $17,300,800
Total assets............ 29,011,608 41,883,557 36,536,138 45,813,004
Current liabilities..... 24,563,613 19,463,260 19,539,278 11,133,163
Long-term obligations... 184,313 240,441 472,517 357,299
Total shareholders'
equity (deficit)...... 4,263,682 22,179,856 16,524,343 34,322,542
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(RESTATED AND UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA
Current assets.......... $25,685,700 $ 9,174,111 $ 1,533,053
Total assets............ 45,777,521 12,083,167 3,228,289
Current liabilities..... 8,162,655 5,868,989 4,811,191
Long-term obligations... 595,821 190,000 --
Total shareholders'
equity (deficit)...... 37,019,045 6,024,178 (1,582,902)
</TABLE>
---------------
(1) During 1995 Phoenix changed its fiscal year end from January 31 to December
31. Accordingly, the consolidated financial statements for the period ended
December 31, 1995 include only eleven months of operations.
(2) The total of capitalized software development costs, product development
expenses and purchased software.
(3) All personnel, including contract workers and part-time employees.
(4) Customers that have used a Phoenix product to support daily operations. Does
not reflect mergers. See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial statements.
As a result of the nonpayment by customers of amounts due under certain
software license arrangements that we had previously recognized as revenue, we
conducted a comprehensive review of our software licensing arrangements and the
recognition of revenue for the years 1995 through 1999, the three months ended
March 31, 2000 and 1999, the three and six months ended June 30, 1999 and the
three and nine months ended September 30, 1999. As a result of that review, we
determined that, in certain instances, revenue that we had recognized at the
time the software was delivered should have been recognized either as payments
became due, as the related services were performed, upon completion of all
services required under the arrangements, or over the life of the contract (up
to five years). Additionally, in some instances we should have offset revenue
against development costs. In addition, we have determined that we capitalized
certain software development costs prior to the related software reaching
technological feasibility, or otherwise capitalized them in error. As a result,
we have restated the financial statements for the five years ended December 31,
1999, the three months ended March 31, 2000 and 1999, the three and six months
ended June 30 1999, and the three and nine months ended September 30, 1999. The
effects of the restatement for the three years ended December 31, 1999 are more
particularly described in Note 1 to those restated audited financial statements,
which are contained elsewhere in the proxy statement. The effects of the
restatement for the nine months ended September 30, 1999 are more particularly
described in Note 2 to the restated unaudited financial statements for the nine
months ended September 30, 2000 and 1999, which are contained elsewhere in the
proxy statement. Our auditors have previously issued unqualified opinions with
respect to our previously filed financial statements for the five years ended
December 31, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this discussion in conjunction with our consolidated
financial statements, as restated, and the related notes, which are included
elsewhere in this proxy statement. As discussed in "Selected Financial and
Operating Data" and also in the notes to the financial statements included
herein, we have restated our financial results for 1997, 1998, and 1999 and,
among other interim periods, the three and nine months ended September 30, 1999.
The following discussion has been revised to reflect the results of such
restatement.
REVENUES
We generate revenue primarily from software license sales and from related
services, including implementation and customization services, maintenance and
support activities and training services. We do not offer third parties or any
of our customers the right to return our software products. Our software license
revenues are generated from licensing our products directly to end users and
indirectly through resellers. We recognize revenues in accordance with
provisions of Statement of Position 97-2, "Software Revenue Recognition," in
1998 and 1999, Statement of Position 91-1, "Software Revenue Recognition," in
1997 and prior periods, and SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" in all periods. The
nature of each licensing arrangement determines how we recognize revenues and
the related costs:
- Our customer contracts are multi-element arrangements that include a
software license, consulting services, maintenance and customer training.
Undelivered elements typically include maintenance, customer training,
consulting and, when significant customization services are essential to
the functionality of the software, the software license is also
considered undelivered. As required under SOP 97-2, we allocate the
contract value to the various elements of the contract using the fair
value of the elements, regardless of any separate prices stated within
the contract.
- If the contract requires us to perform significant production,
modification, or customization of software, revenue from the software
license, its modification and implementation are recognized using the
percentage-of-completion method of accounting based on estimates of
effort expended for modification and implementation to total expected
effort. The duration of contracts of this type typically ranges from
three to twelve months.
- Contracts to modify or customize software are evaluated to determine if
they constitute funded software development arrangements of the type
contemplated by SOP 97-2. If so, professional services revenue from those
arrangements is credited first to the amount of any development costs
capitalized, and the remainder is deferred. Thereafter, revenue is offset
against any additional costs that are subsequently capitalized and any
remaining amounts are recognized in income when the project is completed.
- If the contract requires delivery of the product to the end user and we
are not required to perform significant production, modification, or
customization, we recognize software license revenues under the
provisions of SOP 97-2. Accordingly, such software license revenues are
recognized when a noncancelable license agreement has been signed, the
product has been shipped, the fees are fixed and determinable and
collectability is probable.
- If the contract requires delivery of the product to a third-party
reseller or integrator, and we are obligated to provided other services
to the reseller, we recognize revenue over the period for which it is
obligated to provide such services or, where collection is not probable,
the lesser of over the service period or upon receipt of cash.
- Services under international contracts are generally provided under time
and materials arrangements. Services under domestic contracts are
provided under fixed price and time and material arrangements. The
resultant service revenues and expenses are recognized as services are
performed, except in the case of funded development arrangements, when
they are offset against development costs. Revenues
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from maintenance activities, which consist of fees for ongoing support
and product updates, are recognized ratably over the term of the
maintenance contract, typically five years, and the associated costs are
expensed as incurred. When maintenance is sold with software licenses
that are subject to the percentage-of-completion method of accounting, we
account for the maintenance revenues separately from the license
revenues. We use objective evidence of the fair value to determine the
value of the maintenance. This objective evidence of fair value consists
of the renewal rate for the maintenance. Our resellers are also able to
sell maintenance contracts to their end users for a separate fee payable
to us. The objective evidence of fair value for maintenance revenues in
reseller arrangements is the same as the objective evidence when the sale
is directly between us and an end user.
- Cost of software license revenues includes the cost of the media, product
packaging, documentation, and certain third-party royalties. In addition,
we generally warrant our products to meet standard specifications for a
period of 30 to 90 days following the delivery of the product to our
customer.
- Cost of service, maintenance, and other revenues consists of compensation
and related overhead costs for personnel engaged in consulting, training,
maintenance and support activities, as well as costs for third-party
consultants utilized in providing such services. Provisions for estimated
losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance and estimated
profitability may result in revisions to costs and revenues and are
recognized in the period in which the revisions are determined; the
effects of which may be material. Costs and estimated earnings in excess
of billings have not been recognized in the accompanying consolidated
balance sheets.
MARKETS
We market the Phoenix System both in the United States and internationally.
In the United States, we have two different kinds of customers: financial
institutions who license our software and operate it themselves on an "in-house"
basis, and financial institutions who rely on us to host and manage the software
for them through our application service centers, or "ASCs." We have only
recently entered the ASC market, and to date have only a limited number of
customers. Our in-house target market includes financial institutions with
assets in the range of $100 million to $3 billion (over 4,000 institutions), and
our ASC target market includes financial institution with assets of less than
$300 million (over 9,000 institutions). As these markets overlap to some extent,
our total potential target market in the U.S. consists of approximately 10,000
financial institutions.
Internationally, we also have two different types of customers:
retail-oriented financial institutions with up to 300 branches and/or two
million accounts, which use our software for all of their operations, and larger
institutions, which use our software only for particular divisions and/or
regional operations.
We intend to pursue potential customers in all of our markets by increasing
our direct and indirect distribution channels. Historically, the majority of our
revenue has come from our direct sales force. We believe that in the future our
revenue will increasingly come from sales made by our marketing agents,
strategic partners, and other indirect sales channels, particularly in the
international market. Our gross margins and the composition of our revenue and
expenses will vary depending on the relative proportions of direct and indirect
sales. We do not believe, however, that the difference in the margins obtained
from direct and indirect sales will have a material adverse effect on our
business, operating results, or financial condition.
COMPETITION
We have experienced intense competition in our markets and expect increased
competition from many sources. Many of our competitors have significantly
greater resources and operating histories than we do. We intend to invest
significantly in product development and other aspects of our business to stay
competitive. We believe that the banking software market for financial
institutions is diffuse with several barriers to entry, including costs of entry
and time to market. We believe that the use of client/server technology such as
the Phoenix System and the other products we offer will continue to gain market
share in the financial services industry, displacing older "legacy" hardware and
software systems for at least the next several years. Although
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client/server technology is rapidly evolving, the open architecture design of
the Phoenix System allows us to adapt to and incorporate changing technologies.
We intend to maintain our leadership position by integrating new technologies,
adding new applications, and enhancing and increasing the functionality of our
existing applications.
FLUCTUATIONS IN FINANCIAL RESULTS
Our quarterly and annual operating results have varied significantly in the
past and may vary significantly in the future. Factors that may cause our future
operating results to vary include, but are not limited to:
- whether adverse market conditions and other factors that hindered our
sales in 1999 continue to impact our efforts;
- the size and timing of significant orders;
- the mix of direct and indirect sales;
- the mix and timing of U.S. and foreign sales;
- the manner in which revenue from new orders is recognized as a result of
the application of generally accepted accounting principles;
- possible delays or other problems in new product announcements;
- changes in our pricing policies and those of our competitors;
- possible delays or other problems in the development, implementation, and
release of our products and enhancements;
- the distraction of management's time, adverse impact on sales and
marketing efforts, and possible increased costs due to pending
litigation;
- whether we will have sufficient capital to satisfy concerns of prospects;
- resolution of customer disputes;
- changes in our strategy and operating expenses; and
- competition and general economic factors.
Product revenues are difficult to forecast because the market for
client/server application software products is evolving and affected by many
different factors, including general considerations beyond our control such as
the recent slowdown attributable to Year 2000 concerns. Our sales cycle varies
substantially from customer to customer and can exceed 12 months in some cases.
In addition, license fee revenue from any particular contract can be recognized
in multiple ways, which can cause significant variations in the recognition of
revenue from customer to customer. Depending on how the contract is structured,
the terms of each transaction, and other factors, license fees can be recognized
immediately upon execution of the contract (up front), over the period required
to implement the software for the customer (over 3 to 12 months), or over the
life of the contract (up to five years). Therefore we do not believe that
quarter-to-quarter comparisons of our results of operations can or should be
relied upon as indications of our future performance.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain line items in our statement of operations for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------
2000 1999 2000 1999
------- ------- ------ -----
<S> <C> <C> <C> <C>
Revenues:
License fees and other................................. 6.1% 49.3% 31.3% 51.6%
Implementation, customer and software support and other
service fees........................................ 93.9 50.7 68.7 48.4
------ ------ ------ -----
Total revenues................................. 100.0 100.0 100.0 100.0
Expenses:
Cost of license fees and other......................... 27.7 34.7 36.7 22.1
Cost of implementation, customer and software support
and other service fees.............................. 50.0 58.2 45.6 49.9
Sales and marketing.................................... 35.8 32.2 29.0 26.3
General and administrative............................. 136.2 52.1 61.9 35.8
Product development.................................... 90.1 61.5 71.8 58.9
------ ------ ------ -----
Total expenses................................. 339.7 238.6 245.2 193.0
Other income (expense):
Interest income........................................ 2.7 6.2 3.2 6.3
Interest expense....................................... (0.2) (0.2) (0.2) (0.2)
Other income (loss).................................... (41.1) (0.1) (10.1) (0.2)
------ ------ ------ -----
Loss before income taxes................................. (278.3) (132.8) (152.3) (87.2)
Income tax expense....................................... 0.7 0.2 0.6 1.0
------ ------ ------ -----
Net loss....................................... (279.0)% (133.0)% (152.9)% (88.2)%
====== ====== ====== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Total revenues decreased by 22% to $2.9 million in the three
months ended September 30, 2000, from $3.8 million in the three months ended
September 30, 1999. Revenues from license fees decreased 90% to $0.2 million in
the three months ended September 30, 2000, from $1.9 million in the three months
ended September 30, 1999, while service fee revenues increased 44% to $2.7
million in the three months ended September 30, 2000 from $1.9 million in the
three months ended September 30, 1999. No new contracts to license and implement
the Phoenix System were signed in the third quarter of 2000, compared with 2
contracts signed in the third quarter of 1999. The decrease in license fee
revenue in the third quarter of 2000 is attributable to the absence of new
contract signings in the quarter; the effect of applying subscription accounting
to all contracts signed in the first and second quarters of 2000, pursuant to
which all license and service revenues are spread over the term of the contract,
which is typically five years; and only a modest amount of license fees
recognized from contracts executed in prior periods. Since a significant portion
of our license fees are deferred under the provisions of SOP 97-2, there is
often a lag between the signing of a contract and the recognition of the related
license fee revenue. Service fee revenues increased largely as a result of
higher customer and software support fees, which increased from $0.9 million in
the third quarter of 1999 to $1.5 million in the third quarter of 2000.
Expenses. Cost of license fees decreased 38% to $0.8 million in the three
months ended September 30, 2000 from $1.3 million in the three months ended
September 30, 1999. These costs decreased primarily as a result of lower
third-party commission and royalty expenses, which declined from $0.7 million in
the third quarter of 1999 to $0.2 million in the third quarter of 2000.
Amortization of capitalized software was unchanged at $0.6 million in both
quarters.
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Cost of implementation, customer and software support and other service
fees decreased 33% to $1.5 million in the three months ended September 30, 2000
from $2.2 million in the three months ended September 30, 1999, largely as a
result of decreased employee headcount, primarily in the implementation services
area.
Sales and marketing expenses decreased 13% to $1.0 million in the three
months ended September 30, 2000 from $1.2 million in the three months ended
September 30, 1999, primarily as a result of cost containment initiatives
instituted during the quarter.
General and administration expenses increased 104% to $4.0 million in the
three months ended September 30, 2000, from $2.0 million in the three months
ended September 30, 1999. Professional services fees relating largely to the
restatement of our financial statements and the negotiations for the sale of our
assets to London Bridge Software Holdings plc totaled $1.9 million in the third
quarter of 2000, a significant increase from professional services fees of $0.5
million in the third quarter of 1999. Also in the third quarter of 2000, we
recorded an accrual for the cost of subletting unoccupied office space and
disposing of unused furniture and equipment of $0.7 million.
Product development expenses increased 14% to $2.6 million in the three
months ended September 30, 2000 from $2.3 million in the three months ended
September 30, 1999, primarily as a result of less costs being capitalized in the
third quarter of 2000 than in the third quarter of 1999, which was partially
offset by decreased employee headcount and related costs.
Total Other Income (Expense). Interest income was $80,000 in the three
months ended September 30, 2000 compared to $232,000 in the three months ended
September 30, 1999. Interest income decreased primarily due to a decrease in
interest-yielding investments used to fund operations. Other income (expense)
included a realized loss of $1.2 million related to the decline in the fair
value of an investment we had previously recorded as a charge to shareholders'
equity.
Income Tax Expense (Benefit). Income tax expense was $21,000 for the three
months ended September 30, 2000, and $7,000 for the three months ended September
30, 1999, reflecting our estimate of foreign taxes on projected foreign income.
Net Income (Loss). As a result of all of the above, we incurred a net loss
of $8.2 million for the three months ended September 30, 2000, compared to net
loss of $5.0 million for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues. Total revenues decreased 16% to $11.3 million in the nine months
ended September 30, 2000 from $13.4 million for the nine months ended September
30, 1999. License fee revenues decreased 49% to $3.5 million for the nine months
ended September 30, 2000 from $6.9 million in the nine months ended September
30, 1999, while service fee revenues increased 20% to $7.8 million for the nine
months ended September 30, 2000 from $6.5 million for the nine months ended
September 30, 1999. We signed new contracts to license and implement the Phoenix
System with 8 customers in the nine months ended September 30, 2000, compared
with 12 customers in the nine months ended September 30, 1999. The decrease in
license fee revenue for the nine months ended September 30, 2000 is largely
attributable to the absence of new contract signings in the third quarter of
2000 and the effect of applying subscription accounting to all contracts signed
in the first and second quarters of 2000, pursuant to which all license and
service revenues are spread over the term of the contract, typically five years.
Since a significant portion of our license fees are deferred under the
provisions of SOP 97-2, there is often a lag between the signing of a contract
and the recognition of the related license fee revenue. Service fee revenues
increased largely as a result of higher customer and software support fees,
which increased from $2.3 million of the nine months ended September 30, 1999 to
$4.1 million of the nine months ended September 30, 2000.
Expenses. Cost of license fees increase 40% to $4.2 million in the nine
months ended September 30, 2000 from $3.0 million in the nine months ended
September 30, 1999. These costs increased primarily as a result of higher
amortization of capitalized software costs, which increased from $1.7 million in
the nine
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<PAGE> 96
months ended September 30, 1999 to $2.2 million in the nine months ended 2000,
write-downs of capitalized software costs of $0.5 million to their net
realizable values, and higher third-party commission and royalty expenses, which
increased from $1.3 million in the nine months ended September 30, 1999 to $2.0
million in the nine months ended September 30, 2000.
Cost of implementation, customer and software support and other service
fees decreased $1.5 million, or 23%, to $5.2 million in the nine months ended
September 30, 2000 from $6.7 million in the nine months ended September 30,
1999, primarily as a result of decreased staffing, travel and personnel costs
related to implementation activities, and to a lesser extent, customer support
activities.
Sales and marketing expenses decreased to $3.3 million in the nine months
ended September 30, 2000, from $3.5 million in the nine months ended September
30, 1999. This decrease is attributable to cost containment initiatives
instituted during 2000.
General and administration expenses increased 45% to $7.0 million in the
nine months ended September 30, 2000 from $4.8 million in the nine months ended
September 30, 1999. Professional service fees increased from $0.7 million in the
nine months ended September 30, 1999 to $2.2 million in the nine months ended
September 30, 2000. This is largely due to costs incurred in the third quarter
of 2000 associated with the restatement of our financial statements and the
negotiations for the sale of our assets to London Bridge Software Holdings. Also
in the third quarter of 2000, we recorded an accrual for the cost of subletting
unoccupied office space and disposing of unused furniture and equipment of $0.7
million.
Product development expenses increased 3.0% to $8.2 million in the nine
months ended September 30, 2000 from $7.9 million in the nine months ended
September 30, 1999, primarily as a result of less costs being capitalized in the
third quarter of 2000 than in the third quarter of 1999, which was partially
offset by decreased employee headcount and related costs.
Total Other Income (Expense). Interest income was $362,000 in the nine
months ended September 30, 2000 and $842,000 in the nine months ended September
30, 1999. Interest income decreased in the nine months ended September 30, 2000
period primarily due to a decrease in interest-bearing funds used to fund
operations. Other income (expense) included a realized loss of $1.2 million
related to the decline in the fair value of our investment in Netzee Inc. we had
previously recorded as a charge to shareholders' equity.
Income Tax Expense. The income tax expense was $73,000 for the nine months
ended September 30, 2000 and $137,000 for the nine months ended September 30,
1999.
Net Income (Loss). As a result of all of the above, we incurred a $17.3
million net loss in the nine months ended September 30, 2000 compared to net
loss of $11.9 million in the nine months ended September 30, 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999, TO THE YEAR ENDED DECEMBER 31,
1998
Revenues. Total revenues were $18.2 million in 1999, representing a 6%
decline from $19.3 million in 1998. License fee revenues decreased from $10.7
million to $9.6 million from 1998 to 1999, while service fee revenues decreased
from $8.7 million to $8.5 million over the same period. New contracts to license
and implement the Phoenix System were signed with 18 customers in 1999 compared
with 38 customers in 1998, and license fees of approximately $7.7 million were
contracted in 1999 compared with license fees of approximately $16.0 million
contracted in 1998. Since a significant portion of our license fees are deferred
under the provisions of SOP 97-2, there is often a lag between the signing of a
contract and the recognition of the related license fee revenue. However, we
believe the decrease in contracts signed was largely attributable to an
industry-wide slowdown in software sales caused by delays in purchase decisions
related to the Year 2000 and to the adverse impact on sales of publicity related
to litigation against us. The 10% decline in license fee revenue resulted from
the decreased number of new contract signings in 1999, almost entirely offset by
the recognition of license fee revenue relating to contacts executed in prior
periods. Service fee revenue declined 1% from 1998 to 1999, as a result of the
decreased level of contract signings, somewhat offset by increased service
activity in 1999 under customer arrangements entered into in prior years.
Customer and software support fees increased 50% from $2.2 million in 1998 to
$3.3 million in 1999 as the base of implemented
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customers continued to grow, and a record number of system implementations were
completed in 1999. International revenues increased 12% from $8.3 million in
1998 to $9.3 million in 1999, and represented 51% of 1999 revenues compared to
43% of 1998 revenues. The increase in international sales is a result of our
expanded presence, through new customer sites and sales offices, in
international markets.
Expenses. Our operating expenses increased 44% to $36.1 million in 1999
from $25.1 million in 1998.
Cost of license fees and commissions from the sale of third party products
increased 133% to $4.8 million in 1999 from $2.1 million in 1998. The increase
was mainly attributable to higher amortization of capitalized software
development costs, which rose from $1.1 million in 1998 to $2.4 million in 1999,
a write-down of $311,000 of purchased software acquired to assist in the
development of our internet banking product and $100,000 in prepaid royalties
deemed to be impaired in 1999, increases in royalties paid to third parties and
commissions paid to marketing agents related to international sales of the
Phoenix System.
Cost of service fees increased 45.0% to $9.0 million in 1999 from $6.2
million in 1998 primarily as a result of increased staffing levels, travel and
personnel related costs required to support an increased number of installations
and customers under support agreements. Cost of service fees consists primarily
of personnel-related costs incurred in providing implementation, training, and
customer support services.
Sales and marketing expenses increased 19.2% to $5.3 million in 1999 from
$4.4 million in 1998, primarily as a result of an increase of $590,000 in
staffing, travel, and personnel-related costs, $170,000 of expenses related to a
new Singapore sales office, and increased advertising and marketing costs of
$140,000.
General and administrative expenses increased 20.6% to $6.3 million in 1999
from $5.2 million in 1998, primarily as a result of increases of $547,000 in
professional service fees, and $520,000 in bad debt expense.
Product development expenses increased 49.2% to $10.7 million in 1999 from
$7.2 million in 1998. Product development expenses increased primarily as a
result of increased personnel-related costs in the United States to support
development of the U.S. and international code lines, and in our new Australian
software development center, which is developing the credit union version of the
code line.
Other Income (Expense). Interest income was $1.0 million in 1999 compared
to $1.7 million in 1998. Interest income decreased in 1999 primarily due to a
decrease in interest-yielding funds. Interest expense was $44,000 in 1999
compared to $57,000 in 1998.
Minority Interest. During 1999, we increased our ownership interest in
Phoenix International New York, Inc. (formerly Servers On-Line, Inc.) to 54% of
the outstanding common shares, which was in addition to the convertible
preferred stock position we acquired in 1998 for $300,000. Phoenix International
New York runs our Northeast application service center and had a net loss for
fiscal year 1999. Minority interest of approximately $54,000 was recognized in
1999 to reflect the portion of this loss attributable to the minority
shareholders of Phoenix International New York.
Income Tax Expense. In 1999, we had income tax expense of $32,000 compared
to income tax expense of $348,000 in 1998. In both years, tax expense consisted
primarily of foreign taxes. No benefit was recognized for our net operating
losses generated in either year as management determined that there is
significant uncertainty regarding our ability to utilize our net operating loss
carryforwards for the foreseeable future.
Net Loss. Net loss increased 386% to a $17.0 million loss for 1999 from a
$4.4 million loss in 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998, TO THE YEAR ENDED DECEMBER 31,
1997
Revenues. Total revenues were $19.3 million in 1998, representing a 44%
increase from $13.4 million in 1997. License fee revenues increased from $8.2
million to $10.7 million, from 1998 to 1999, while service fee revenues
increased from $5.2 million to $8.7 million over the same period. New contracts
to license and implement the Phoenix System were signed with 38 customers in
1998 compared with 35 customers in 1997, and license fees of approximately $16.0
million were contracted in 1998 compared with license fees of approximately
$12.7 million contracted in 1997. Since a significant portion of our license
fees are deferred under the provisions of SOP 97-2, there is often a lag between
the signing of a contract and the recognition of
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the related license fee revenue. The 30% increase in license fee revenue
resulted from the moderate increase in the number of new contract signings in
1998, an increase in the number of high-value contracts in 1998, and the
recognition of license fee revenue relating to contacts executed in prior
periods. Service fee revenue increased 66% from 1997 to 1998 as a result of the
increased level of contract signings and increased service activity under
customer arrangements entered into in the current year and prior year. Customer
and software support fees increased 83% from $1.2 million in 1997 to $2.2
million in 1998 as the base of implemented customers continued to grow.
International revenues increased 32% from $6.3 million in 1997 to $8.3 million
in 1998, and represented 43% of 1998 revenues compared to 47% of 1997 revenues.
Expenses. Our operating expenses increased 71% to $25.1 million in 1998
from $14.7 million in 1997.
Cost of license fees and other fees increased 20% to $2.1 million in 1998
from $1.7 million in 1997. These costs increased mainly as a result of higher
amortization of capitalized software development costs, which rose from $0.6
million in 1997 to $1.1 million in 1998.
Cost of implementation, customer and software support, and other service
fees increased 71% to $6.2 million in 1998 from $3.6 million in 1997 as a result
of increased staffing levels required to support increased numbers of
installations and customers under support agreements.
Sales and marketing expenses increased 36% to $4.4 million in 1998 from
$3.2 million in 1997, primarily as a result of increased staffing, travel, and
personnel costs related to our sales efforts.
General and administrative expenses increased 89.9% to $5.2 million in 1998
from $2.7 million in 1997. The increase was primarily the result of $592,000 of
increased professional service fees; $500,000 of increased rent largely
associated with new facilities occupied in Orlando; $600,000 of increased
personnel-related costs, including employee bonuses, and an increase of $400,000
for the provision to the allowance for doubtful accounts.
Product development expenses increased 118% to $7.2 million in 1998 from
$3.2 million in 1997. Product development expenses increased primarily as a
result of increased personnel-related costs in the United States to support
development of the U.S. and international code lines.
Other Income (Expense). Interest income was $1.7 million in 1998 compared
to $800,000 in 1997. Interest income increased in 1998 due to twelve full months
of income earned from interest bearing accounts in 1998, compared to five months
in 1997. Interest income is primarily the result of income earned from the
investment of proceeds from our secondary public offering of common stock, which
we completed in August 1997. Interest expense was $57,000 in 1998 and $52,000 in
1997. Other income was $82,000 in 1998 compared to $134,000 in 1997, primarily
as a result of fulfilling obligations under an economic development grant and
realizing foreign exchange gains from the operations of two of our foreign
subsidiaries, Phoenix International A.P. Limited and Phoenix EMEA Limited.
Income Tax Expense. Income tax expense was $348,000 in 1998, compared to
$395,000 in 1997. In both years, tax expense consisted primarily of foreign
taxes. No benefit was recognized for our net operating losses generated in
either year as management determined that there is significant uncertainty
regarding our abilities to utilize our net operating low carryforwards for the
foreseeable future.
Net Loss. Net loss increased 430% to $4.4 million in 1998 from $0.8
million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our cash needs through existing cash and
investment balances, sales of capital stock, interest on investments and, to a
lesser extent, through cash flow from operations. We have not historically
relied on lines of credit or other borrowings to fund operations. At September
30, 2000, we had cash and cash equivalents of $1.2 million, and long-term
investments of $3.1 million. Long-term investments consist primarily of U.S.
Treasury securities. For the nine months ended September 30, 2000, our
operations used net cash of $8.3 million, primarily due to our net loss
position. However, during the ten-week period since we signed the asset purchase
agreement with London Bridge on October 25, 2000, our operations have used net
cash of over $4 million. We have borrowed $4 million under the London Bridge
line of credit. We
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anticipate ending the year with approximately $2 million in cash. We expect to
continue to borrow under the London Bridge line of credit.
For the nine months ended September 30, 2000, investing activities provided
net cash of $1.1 million, which included $5.9 million from the sale of
investments, reduced primarily by $4.6 million invested in capitalized software
development costs and $0.5 million in purchase of property and equipment.
For the nine months ended September 30, 2000, financial activities provided
$5.8 million primarily from the net proceeds from the issuance of common stock.
Shortly after the execution of the asset purchase agreement pursuant to
which we agreed to sell substantially all of our assets to London Bridge, we
also entered into a loan agreement. Under the terms of the loan agreement,
London Bridge Acquisition Company has agreed to provide us with a $10,000,000
line of credit. We may draw upon the line of credit to fund approved operational
expenses to keep our cash reserve from falling below $2 million. The amount that
we borrow under the line of credit will be repaid at the closing of the asset
sale by application of a credit against the purchase price. The credit will be
reduced to the extent that we borrow more than an allowed amount.
With the line of credit, we believe our cash balances, investments, and
cash flow from operations will be sufficient to meet working capital, capital
expenditure, and software development requirements through the closing of the
transaction with London Bridge, expected to occur during the first quarter of
2001. This assumes that we do not sign any new business during this period. To
the extent that we sign new contracts and collect license and other fees up
front, our need to borrow capital from London Bridge will be reduced. However,
based on recent experience we cannot count on new contracts in the near future.
If the transaction with London Bridge does not close, we will have an
immediate need for additional capital to continue operations and to repay the
amounts borrowed from London Bridge under the loan agreement. If we are unable
to raise this capital in a timely fashion, London Bridge may be able to
foreclose on our intellectual property, in which we have granted them a security
interest in connection with the loan agreement. Further, we may not be able to
continue operations. Therefore, if we are not able to complete the transaction
with London Bridge, these factors raise substantial doubt about the ability of
Phoenix to continue as a going concern. These statements are "forward looking"
statements which are subject to risks and uncertainties as previously discussed.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 2000, we adopted the provisions of SOP 97-2 that limit
what is considered vendor-specific objective evidence (VSOE) of the fair value
of the various elements in a multiple-element software arrangement to the price
charged when the same element is sold separately. Because of the structure of
our contracts prior to October 1, 2000, we have determined that we do not have
VSOE, as defined in SOP 97-2, for all undelivered elements in our software
arrangements entered into between January 1, 2000 and October 1, 2000 (the date
that we modified the structure of our contracts). As a result, all contracts
that include maintenance entered during that period will be required to be
recognized over the period we are to provide post contract customer software
support, generally five years.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be measured
at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for our financial statements beginning in 2001. We are currently
studying the future effects of adopting this statement. However, due to our
limited use of derivative financial instruments, adoption of Statement No. 133
is not expected to have a significant effect on our financial position or
results of operation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. We are
required to adopt the provisions of this Bulletin in our fourth fiscal quarter
of 2000 and
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are currently in the process of assessing the impact of its adoption. While
Staff Accounting Bulletin No. 101 does not supersede the software industry
specific revenue recognition guidance, which Phoenix believes it is in
compliance with, once complete guidance is disseminated, this bulletin may
change current interpretations of software revenue recognition requirements. We
do not expect the adoption of Staff Accounting Bulletin No. 101 to have a
significant effect on our financial position or results of operations.
YEAR 2000 ISSUES
We discussed in our reports filed in 1998 and 1999 the nature and progress
of our plans to become Year 2000 ready. In late 1999, we completed the
remediation and testing of our systems. As a result of those planning and
implementation efforts, we experienced no significant disruptions in
mission-critical information technology and non-information technology systems
due to the Year 2000, and believe our systems successfully responded to the Year
2000 date change. We are not aware of any material problems resulting from Year
2000 issues, either with our products, our internal systems, or the products and
services of third parties used in our operations. We will continue to monitor
our mission critical computer applications and those of our suppliers and
vendors throughout the Year 2000 to help ensure that we promptly address any
latent Year 2000 matters that may arise.
INFLATION
The effects of inflation on our operations were not significant during the
periods presented in the financial statements contained herein. Generally,
throughout the periods discussed, any increases in revenue have resulted
primarily from higher volumes, rather than price increases.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investments. While we have significant international operations, our contracts
are all written for payments to be made in U.S. Dollars and, therefore, we do
not believe we are materially subject to fluctuations in foreign currency
exchange rates. Our short term and long term investments are principally in a
single financial institution with significant assets and consist of U.S.
Treasury bills and notes with maturities of less than three years. We do not
consider the interest rate risk for these investments to be material. We do not
have any material credit facilities and, therefore, do not have a significant
risk due to potential fluctuations in interest rates for loans at this time.
Changes in interest rates could decrease our interest income and could make it
more costly to borrow money in the future and may impede our future acquisition
and growth strategies if management determines that the costs associated with
borrowing funds are too high to implement these strategies.
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, which means we are required to file annual, quarterly and special
reports, proxy statements and other information with the SEC. Our SEC filings
are available to the public over the internet at the SEC's website at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We intend to deregister our common stock and
cease filing reports with the SEC during the first quarter of 2001. Through
November 21, 2000, our common stock was traded on the Nasdaq National Market
under the symbol "PHXX", and such reports, proxy statements and other
information about us that we filed on or before November 21, 2000 also can be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
Ordinary shares of London Bridge are traded on the London Stock Exchange
under the symbol "LNB". Additional information about the London Stock Exchange
and London Bridge is available over the internet at the
http://www.londonstockexchange.com or by calling the London Stock Exchange at
020-7797-1372.
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PHOENIX INTERNATIONAL LTD., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999.................. F-2
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended September 30,
2000 and 1999............................................. F-3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2000 and 1999..... F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Report of Independent Auditors.............................. F-10
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-11
Consolidated Statements of Operations for the Years ended
December 31, 1999, 1998 and 1997.......................... F-12
Consolidated Statements of Shareholders' Equity/(Deficit)
for the Years ended December 31, 1999, 1998 and 1997...... F-13
Restated Consolidated Statements of Cash Flows for the Years
ended December 31, 1999, 1998 and 1997.................... F-14
Notes to Consolidated Financial Statements for the Years
ended December 31, 1999, 1998 and
1997...................................................... F-15
</TABLE>
F-1
<PAGE> 102
PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,163,376 $ 2,484,977
Accounts receivable, net of allowance for doubtful
accounts of $1,273,000 and $1,085,000 at September 30,
2000 and December 31, 1999, respectively............... 8,118,768 8,039,819
Prepaid expenses and other current assets................. 680,754 639,303
------------ ------------
Total current assets.............................. 9,962,898 11,164,099
Long-term investments, available for sale................... 3,054,578 8,964,771
Property and equipment:
Computer equipment and purchased software................. 5,571,973 5,087,369
Furniture, office equipment and leasehold improvements.... 2,488,830 2,481,248
------------ ------------
8,060,803 7,568,617
Accumulated depreciation and amortization................. (5,160,788) (3,964,923)
------------ ------------
Property and equipment, net............................... 2,900,015 3,603,694
Capitalized software costs and purchased software net of
accumulated amortization of $5,842,000 and $4,099,000 at
September 30, 2000 and December 31, 1999, respectively.... 11,548,047 10,077,480
Goodwill and other intangible assets, net of accumulated
amortization of $214,000 and $41,000 at September 30,
2000, and December 31, 1999, respectively................. 1,140,158 1,210,268
Equity investments and other assets......................... 405,912 1,515,826
------------ ------------
Total assets...................................... $ 29,011,608 $ 36,536,138
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 439,967 $ 905,395
Accrued expenses.......................................... 4,621,318 2,791,894
Accrued contractor services............................... 2,351,789 1,683,496
Capital lease, current portion............................ 165,897 155,222
Deferred revenue.......................................... 16,984,642 14,003,270
------------ ------------
Total current liabilities......................... 24,563,613 19,539,277
Capital lease, long term portion............................ 73,585 199,871
Minority interests.......................................... 110,728 272,647
------------ ------------
Total long-term liabilities....................... 184,313 472,518
------------ ------------
Total liabilities................................. 24,747,926 20,011,795
Shareholders' equity:
Common stock, $0.01 par value: 50,000,000 shares
authorized, 9,410,689 and 8,526,942 issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 94,107 85,269
Additional paid-in capital................................ 48,496,708 43,921,394
Unrealized gain (loss) on investments available for
sale................................................... (73,483) (577,670)
Retained earnings (deficit)............................... (44,253,650) (26,904,650)
------------ ------------
Total shareholders' equity........................ 4,263,682 16,524,343
------------ ------------
Total liabilities and shareholders' equity........ $ 29,011,608 $ 36,536,138
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-2
<PAGE> 103
PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
License fees and other............... $ 179,379 $ 1,851,167 $ 3,549,637 $ 6,934,123
Implementation, customer and software
support and other service fees.... 2,743,076 1,901,661 7,796,302 6,506,151
----------- ----------- ------------ ------------
Total revenues............... 2,922,455 3,752,828 11,345,939 13,440,274
Expenses:
Cost of license fees and other....... 809,501 1,302,901 4,166,070 2,974,027
Cost of implementation, customer and
software support and other service
fees.............................. 1,460,374 2,182,682 5,179,366 6,708,549
Sales and marketing.................. 1,045,073 1,207,163 3,295,202 3,533,662
General and administrative........... 3,980,560 1,954,219 7,025,147 4,817,447
Product development.................. 2,632,058 2,307,869 8,150,460 7,911,508
----------- ----------- ------------ ------------
Total expenses............... 9,927,566 8,954,834 27,816,245 25,945,193
Other income (expense):
Interest income...................... 79,698 231,843 362,201 842,382
Interest expense..................... (5,910) (9,292) (21,293) (27,207)
Other income (loss).................. (1,202,168) (4,986) (1,146,249) (31,911)
----------- ----------- ------------ ------------
Loss before income taxes............... (8,133,491) (4,984,441) (17,275,647) (11,721,655)
Income tax expense..................... 20,580 6,518 73,353 136,965
----------- ----------- ------------ ------------
Net loss............................... $(8,154,071) $(4,990,959) $(17,349,000) $(11,858,620)
=========== =========== ============ ============
Net loss per share -- basic and
diluted.............................. $ (0.87) $ (0.59) $ (1.87) $ (1.39)
=========== =========== ============ ============
Weighted average shares outstanding --
basic and diluted.................... 9,410,258 8,526,768 9,266,517 8,515,506
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
F-3
<PAGE> 104
PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
(RESTATED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................... $(17,349,000) $(11,858,620)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,099,152 2,657,314
Loss on marketable securities.......................... 1,229,369 --
Provision for doubtful accounts........................ 188,000 220,000
Minority interest...................................... (161,919) --
Changes in operating assets and liabilities:
Accounts receivable.................................... (266,950) (5,180,957)
Prepaid expenses and other current assets.............. (500,894) (215,382)
Accounts payable....................................... (465,428) 775,420
Accrued expenses....................................... 2,497,717 1,293,811
Deferred revenue....................................... 3,440,815 6,251,098
------------ ------------
Net cash used in operating activities............. (8,289,138) (6,057,316)
Cash Flows from Investing Activities:
Purchases of property and equipment......................... (492,186) (574,583)
Sale of short term investments.............................. 5,959,075 8,956,280
Investment in ERAS.......................................... (103,297) --
Capitalized software costs.................................. (4,570,896) (6,294,799)
Settlement of prepaid royalty............................... 335,850 --
Purchase of other assets.................................... -- (70,000)
------------ ------------
Net cash provided by investing activities......... 1,128,546 2,016,898
Cash Flows from Financing Activities:
Payments of capital lease obligations....................... (115,612) (107,090)
Proceeds from funded research and development
arrangements.............................................. 1,370,450 1,451,868
Net proceeds from issuance of common stock.................. 4,584,152 139,899
------------ ------------
Net cash provided by financing activities......... 5,838,991 1,484,677
------------ ------------
Net decrease in cash and cash equivalents......... (1,321,601) (2,555,741)
Cash and cash equivalents at beginning of the
period.......................................... 2,484,977 3,795,962
------------ ------------
Cash and cash equivalents at end of the period.... $ 1,163,376 $ 1,240,221
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
F-4
<PAGE> 105
PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring accruals, which we
consider necessary for a fair presentation of our financial position and the
results of operations for the interim periods presented. The condensed
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
(including the auditors report, which contains a going concern qualification),
"Selected Financial and Operating Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Phoenix's
annual report on Form 10-K/A for the year ended December 31, 1999.
2. RESTATEMENT
As a result of the nonpayment of amounts due under certain software license
arrangements, we conducted a comprehensive review of our software licensing
arrangements and the recognition of revenue for the years 1997 through 1999. As
a result of that review, we determined that, in certain instances, revenue that
we recognized at the time the software was delivered should have been recognized
either as payments became due, as the services related to the software were
performed, upon completion of all services required under the arrangements or
over the life of the contract (up to five years). Additionally, in some
instances we should have offset revenue against development costs. In addition,
we have determined that we capitalized certain software development costs prior
to the related software reaching technological feasibility, or otherwise
capitalized development costs in error. As a result, we have restated the
financial statements for the years ended December 31, 1999, 1998, and 1997, the
three-month periods ended March 31, 2000 and 1999, the three- and six-month
periods ended June 30, 1999, and the three- and nine-months ended September 30,
1999.
The effects of the restatement of our financial statements for the three
and nine-month periods ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Capitalized software costs, net............ $12,884,808 $ 9,230,454 $12,884,808 $ 9,230,454
Total assets............................... 56,695,535 41,883,557 56,695,535 41,883,557
Deferred revenue........................... 4,978,905 14,149,798 4,978,905 14,149,798
Total liabilities.......................... 12,503,058 19,703,701 12,503,058 19,703,701
Shareholders' equity....................... 44,192,477 22,179,856 44,192,477 22,179,856
License fees............................... $ 387,659 $ 1,851,167 $ 5,201,067 $ 6,934,123
Services fees.............................. 2,550,777 1,901,661 9,008,380 6,506,151
Total revenues............................. 2,938,436 3,752,828 14,209,447 13,440,274
Total expenses............................. 8,852,447 8,954,834 24,967,845 25,945,193
Net loss................................... (3,702,690) (4,990,959) (6,483,837) (11,858,620)
Net loss per share -- basic and diluted.... $ (0.43) $ (0.59) $ (0.76) $ (1.39)
Weighted average shares
outstanding -- basic and diluted......... 8,526,768 8,526,768 8,515,506 8,515,506
</TABLE>
3. NET LOSS PER SHARE
Net loss per share is calculated and presented in accordance with Statement
of Financial Accounting Standards No. 128, Earnings per Share. We have computed
basic earnings per share using the average number
F-5
<PAGE> 106
PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of common shares outstanding. We have computed diluted earnings per share on the
basis of the average number of common shares outstanding plus the effect of
dilutive outstanding stock options using the "treasury stock" method based on
average stock price for the period.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Numerator -- net loss available to common
shareholders............................ $(8,154,071) $(4,990,959) $(17,349,000) $(11,858,620)
Denominator for basic and diluted net loss
per share -- weighted average shares
outstanding............................. 9,410,258 8,526,768 9,266,517 8,515,506
Net loss per share -- basic and diluted... $ (0.87) $ (0.59) $ (1.87) $ (1.39)
</TABLE>
Pursuant to Statement of Financial Accounting Standards No. 128 the
denominators for basic and diluted net loss per share are identical for the nine
months ended September 30, 2000 and 1999, due to our net losses. According to
the statement, the exercise of any outstanding options or warrants for a company
with a net loss is considered antidilutive. Accordingly, we have excluded from
the computation of diluted net loss per share employee stock options and
warrants exercisable into 1,948,915 shares of common stock at September 30, 1999
and 2,108,969 shares of common stock at September 30, 2000.
4. COMPREHENSIVE LOSS
We adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income as of January 1, 1998. This statement establishes new rules
for the reporting and display of comprehensive income and its components.
Comprehensive loss for the three months and nine months ended September 30, 2000
and 1999, is comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Net loss as reported.............. $(8,154,071) $(4,990,959) $(17,349,000) $(11,858,620)
Other comprehensive income:
unrealized gain (loss) on
investments available for
sale............................ 1,293,683 (26,543) 504,187 (423,964)
----------- ----------- ------------ ------------
Comprehensive loss................ $(6,860,388) $(5,017,502) $(16,844,813) $(12,282,584)
=========== =========== ============ ============
</TABLE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2000, we are required to adopt the provisions of SOP
97-2 that limit what is considered vendor-specific objective evidence (VSOE) of
the fair value of the various elements in a multiple-element software
arrangement to the price charged when the same element is sold separately.
Because of the structure of our contracts prior to October 1, 2000, we
determined that we do not have VSOE, as defined in SOP 97-2, for all undelivered
elements in its software arrangements entered into between January 1, 2000 and
October 1, 2000 (the date that we modified the structure of our contracts). As a
result, all contracts that include maintenance entered during that period will
be required to be recognized over the post-contract support period, generally
five years.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
statement establishes accounting and reporting standards for
F-6
<PAGE> 107
PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivative financial instruments and requires recognition of derivatives in the
Statement of Financial Position to be measured at fair value. Gains or losses
resulting from changes in the value of derivatives would be accounted for
depending on the intended use of the derivative and whether it qualifies for
hedge accounting. This statement is effective for our financial statements
beginning in 2001. We are currently studying the future effects of adopting this
statement. However, due to our limited use of derivative financial instruments,
adoption of Statement No. 133 is not expected to have a significant effect on
our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. We are
required to adopt the provisions of this Staff Accounting Bulletin in our fourth
fiscal quarter of 2000 and are currently in the process of assessing the impact
of its adoption. While Staff Accounting Bulletin 101 does not supersede the
software industry specific revenue recognition guidance, which we believe we are
in compliance with, once complete guidance is disseminated, it may change
current interpretations of software revenue recognition requirements. We do not
expect the adoption of SAB 101 to have a significant effect on our financial
position or results of operations.
6. FACILITIES
In the third quarter of 2000, we moved most of our Orlando operations into
one building, and we are currently seeking to sublet a portion of our second,
smaller facility there. As a result, we have accrued the cost of the unoccupied
space through the date upon which we expect to sublease the space, the cost of
rental commissions expected to be paid, expected write-downs on furniture and
equipment to be disposed of, and the difference between rental payments expected
to be received and amounts payable under our lease, which together approximate
$0.7 million.
7. INVESTMENT IN EQUITY SECURITIES
In the third quarter of 2000, we determined that the decline in the fair
value of our investment in Netzee, Inc. from its historical cost should be
accounted for in earnings as a realized loss in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As a result, we recorded a $1.2 million charge to
operations for the quarter. We had previously accounted for the decline in the
fair value of this investment through a separate component of shareholders'
equity, which equaled $1.1 million at June 30, 2000.
8. CONTINGENCIES
Litigation
On November 23, 1999, a lawsuit was filed in the District Court for the
Middle District of Florida as a purported class action initiated by George
Taylor, a former Phoenix employee. Initially, Phoenix and our chief executive
officer were named as defendants. The lawsuit alleges, among other things, that
Phoenix and our chief executive officer improperly recognized revenues,
overstated revenues and failed to disclose that our revenues were allegedly in
decline, all of which allegedly caused our stock price to be higher than it
otherwise would have been during the class period. The lawsuit alleges that
these purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000, the plaintiffs filed
an Amended Complaint which, among other things, (1) added four additional
investors as named plaintiffs and proposed class representatives; (2) expanded
the purported class period to the period from May 5, 1997 to April 15, 1999; and
(3) added Phoenix's president as an additional named defendant. Phoenix and the
other two defendants filed Motions to Dismiss, which were denied by the Court
without opinion in August 2000. The parties are beginning to conduct discovery.
Our insurance carriers have denied coverage for the claims in this lawsuit. On
October 24, 2000, we entered into an agreement in principle to
F-7
<PAGE> 108
PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settle the consolidated securities class action litigation with a settlement
class comprising shareholders who acquired Phoenix common stock during the
period between May 5, 1997 and August 22, 2000. The settlement of this action
provides that we will pay $4.2 million in cash to the putative shareholder
class. The settlement is subject to certain customary conditions, notice to the
proposed settlement class and preliminary and final court approval.
In addition, we are subject to various claims and legal proceedings
covering a variety of matters arising in the ordinary course of our business
activities.
Customer Disputes
- IBM/Sekerbank. In 1998, we contracted to provide software and software
development and implementation services as a subcontractor to IBM Turk
Limited Sirketi for the benefit of its customer, Sekerbank T.A.S. In May
of 1999, IBM informed us that its contract with Sekerbank had been
cancelled. IBM then purported to cancel its contract with Phoenix.
According to IBM, Sekerbank cancelled their contract with IBM because of
our failure to perform, called in an IBM performance bond from a bank,
and received most of its money back from IBM. IBM has paid Phoenix over
$1 million under the subcontract, has requested a return of all funds,
and has indicated they may have claims against us up to $5.2 million in
damages. We disagree with IBM's position. We believe that IBM, and not
Phoenix, is responsible for the cancellation of the contract by
Sekerbank, and believes that we have claims against IBM under its
subcontract for the remaining value of the contract, which amounts to at
least $3.9 million. The parties are in negotiation to resolve the
dispute. The contract calls for arbitration of disputes; however, no
arbitration or other action has been filed by either party.
- Toprakbank. In June of 2000, we received notice from Toprakbank A.S.,
one of our customers in Turkey, that it had canceled its implementation
of the Phoenix System. The parties have exchanged letters making cross
claims against each other. Toprakbank has paid us $550,000 under the
contract and has requested a refund of this money. Our receivables from
Toprakbank exceed $1.3 million, and we have requested payment of this
amount, plus future support fees under the contract. The parties are in
negotiation to resolve the dispute. The contract calls for arbitration of
disputes; however, no arbitration or other action has been filed by
either party.
- Demirbank. In June of 2000, we received notice from Demirbank T.A.S.,
one of our customers in Turkey, that it has canceled its implementation
of the Phoenix System. To date Demirbank has paid us over $4.6 million
under its agreement. Our receivables from Demirbank currently exceed
$900,000. We have not received any demand from Demirbank. We have
requested payment of all receivables due. The parties are in negotiation
to resolve the dispute. The contract calls for arbitration of disputes;
however, no arbitration or other action has been filed by either party.
9. SUBSEQUENT EVENTS
Asset Purchase Agreement Executed with London Bridge Software Holdings plc
On October 25, 2000, we entered into an Asset Purchase Agreement with
London Bridge Software Holdings plc. and its indirect wholly owned subsidiary
London Bridge Acquisition Company, Inc. Pursuant to the Agreement, we have
agreed to sell substantially all of our assets to London Bridge for cash in the
amount of $45,462,092, subject to adjustment based on the deterioration in our
working capital between the date of the agreement and the closing of the
transaction. In connection with this transaction, London Bridge has agreed to
assume certain specified liabilities. We will retain all other liabilities.
London Bridge has also agreed to loan us up to $10 million for our interim
working capital requirements pursuant to a loan agreement. The loan agreement
contains various restrictions and limitations on our ability to borrow funds.
Because of the potential reductions in the purchase price, uncertainty regarding
the amount of claims to be made by London Bridge
F-8
<PAGE> 109
PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under the representations and warranties made in the purchase agreement, and
uncertainty regarding the value of some of the assets and liabilities we will
retain, the amount of net proceeds ultimately distributed to our shareholders
likely will differ from and could be substantially less than the stated purchase
price of $45,462,092.
International Turnkey Systems
On November 9, 2000, we amended our agreement with our reseller in the
Middle East, International Turnkey Systems. In exchange for the forgiveness of
$660,000 of outstanding receivables from ITS, the amendment eliminates the
requirement in our marketing agreement with ITS for Phoenix to provide ITS with
$1.65 million in professional services work.
F-9
<PAGE> 110
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Phoenix International Ltd., Inc.
We have audited the accompanying consolidated balance sheets, as restated,
of Phoenix International Ltd., Inc. as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows, all as restated, for each of the three years in the period ending
December 31, 1999. Our audits also included the financial statement schedule, as
restated, listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of Phoenix's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements, as restated,
referred to above present fairly, in all material respects, the consolidated
financial position of Phoenix International Ltd., Inc. at December 31, 1999 and
1998, and the consolidated results of its operations and its cash flows for each
of the three years in the period ending December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, as restated, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Phoenix International Ltd., Inc. will continue as a going concern. As more fully
described in Note 2, the Company's operating losses and negative cash flows have
continued into 2000 and have adversely impacted the Company's liquidity. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The accompanying consolidated financial statements for the years ended
December 31, 1999, 1998, and 1997 have been restated as discussed in Note 1.
ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 2000, except for
Note 1, the second through the
fifth paragraphs of Note 2, and Note 14, as to
which the date is October 21, 2000
F-10
<PAGE> 111
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,484,977 $ 3,795,962
Investments available for sale............................ -- 5,995,640
Accounts receivable, net of allowance for doubtful
accounts of $1,085,000 and $673,000 at December 31,
1999 and 1998, respectively............................ 8,039,819 6,969,793
Prepaid expenses and other current assets................. 639,303 539,405
------------ -----------
Total current assets.............................. 11,164,099 17,300,800
Long-term investments, available for sale................... 8,964,771 16,533,770
Property and equipment:
Computer equipment and purchased software................. 5,087,369 4,245,907
Furniture, office equipment and leasehold improvements.... 2,481,248 2,307,329
------------ -----------
7,568,617 6,553,236
Accumulated depreciation and amortization................. (3,964,923) (2,224,508)
------------ -----------
3,603,694 4,328,728
Capitalized software costs, net of accumulated amortization
of $4,099,000 and $2,182,000 at December 31, 1999 and
1998, respectively........................................ 10,077,480 5,770,556
Goodwill and other intangible assets, net................... 1,210,268 --
Equity investment and other assets.......................... 1,515,826 1,879,150
------------ -----------
Total assets...................................... $ 36,536,138 $45,813,004
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 905,395 $ 597,260
Accrued expenses.......................................... 2,791,894 1,664,219
Accrued contractor services............................... 1,683,496 830,933
Capital lease, current portion............................ 155,223 142,051
Deferred revenue.......................................... 14,003,270 7,898,700
------------ -----------
Total current liabilities......................... 19,539,278 11,133,163
Capital lease, long-term portion............................ 199,870 357,299
Minority interest........................................... 272,647 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value:
10,000,000 shares authorized, none issued and
outstanding........................................... -- --
Common stock, $0.01 par value:
50,000,000 shares authorized, 8,526,942 and 8,498,633
issued and outstanding at December 31, 1999 and 1998,
respectively.......................................... 85,269 84,986
Additional paid-in capital................................ 43,921,394 43,781,279
Unrealized (losses) gains on investments available for
sale................................................... (577,670) 366,005
Retained deficit.......................................... (26,904,650) (9,909,728)
------------ -----------
Total shareholders' equity........................ 16,524,343 34,322,542
------------ -----------
Total liabilities and shareholders' equity........ $ 36,536,138 $45,813,004
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 112
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(RESTATED)
<S> <C> <C> <C>
Revenues:
License fees and other............................... $ 9,642,778 $10,683,843 $ 8,226,322
Implementation, customer and software support and
other service fees................................ 8,543,828 8,658,062 5,213,031
------------ ----------- -----------
Total revenues............................... 18,186,606 19,341,905 13,439,353
Expenses:
Costs of license fees and other...................... 4,839,219 2,080,569 1,739,398
Costs of implementation, customer and software
support and other service fees.................... 9,038,765 6,233,850 3,649,284
Sales and marketing.................................. 5,295,021 4,440,521 3,264,055
General and administrative........................... 6,292,817 5,219,078 2,748,680
Product development.................................. 10,672,362 7,153,589 3,289,653
------------ ----------- -----------
Total expenses............................... 36,138,184 25,127,607 14,691,070
Other income (expense):
Interest income...................................... 1,013,490 1,698,308 799,676
Interest expense..................................... (43,958) (57,102) (52,376)
Other income (expense)............................... (34,860) 82,407 133,656
------------ ----------- -----------
Loss before minority interest and income taxes......... (17,016,906) (4,062,089) (370,761)
Minority interest...................................... 54,248 -- --
------------ ----------- -----------
Loss before income taxes............................... (16,962,658) (4,062,089) (370,761)
Income tax expense..................................... 32,264 348,265 394,970
------------ ----------- -----------
Net loss............................................... $(16,994,922) $(4,410,354) $ (765,731)
============ =========== ===========
Net loss per share -- basic and diluted................ $ (2.00) $ (0.53) $ (0.11)
============ =========== ===========
Weighted average shares outstanding -- basic and
diluted.............................................. 8,518,323 8,378,784 6,698,317
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 113
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
(RESTATED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS/
(LOSSES) ON
COMMON STOCK INVESTMENTS
ALL CLASSES ADDITIONAL STOCK AVAILABLE TOTAL
------------------- PAID-IN SUBSCRIPTION FOR RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLES SALE (DEFICIT) EQUITY
--------- ------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996....... 5,758,365 $57,583 $10,708,061 $(110,683) $ -- $ (4,630,783) $ 6,024,178
Common stock issued in
connection with a public
offering, net of issuance
costs........................ 2,211,000 22,110 31,508,362 -- -- -- 31,530,472
Issuance of common stock from
exercise of stock options.... 68,622 686 234,915 -- -- -- 235,601
Payment on employee stock
receivable................... -- -- -- 97,323 -- -- 97,323
Issuance of common stock in
connection with
acquisition.................. 115,140 1,152 (1,089) -- -- -- 63
Retained deficit recorded in
connection with
acquisition.................. -- -- -- -- -- (102,861) (102,861)
Net loss....................... -- -- -- -- -- (765,731) (765,731)
--------- ------- ----------- --------- --------- ------------ ------------
Balance, December 31, 1997....... 8,153,127 81,531 42,450,249 (13,360) -- (5,499,375) 37,019,045
Comprehensive income:
Net loss..................... -- -- -- -- -- (4,410,354) (4,410,354)
Other comprehensive income:
Unrealized appreciation on
certain securities
available for sale....... -- -- -- -- 366,006 -- 366,006
------------
Comprehensive income........... -- -- -- -- -- -- (4,044,348)
Issuance of common stock from
exercise of stock options.... 345,506 3,455 1,331,030 -- -- -- 1,334,485
Payment on employee stock
receivable................... -- -- -- 13,360 -- -- 13,360
--------- ------- ----------- --------- --------- ------------ ------------
Balance, December 31, 1998....... 8,498,633 84,986 43,781,279 -- 366,006 (9,909,729) 34,322,542
Comprehensive income:
Net loss..................... -- -- -- -- -- (16,994,922) (16,994,922)
Other comprehensive loss:
Unrealized depreciation on
certain securities
available for sale....... -- -- -- -- (943,675) -- (943,675)
------------
Comprehensive loss............. -- -- -- -- -- -- (17,938,597)
Issuance of common stock from
exercise of stock options and
employee stock purchase
plan......................... 28,309 283 140,115 -- -- -- 140,398
--------- ------- ----------- --------- --------- ------------ ------------
Balance, December 31, 1999....... 8,526,942 $85,269 $43,921,394 $ -- $(577,670) $(26,904,650) $ 16,524,343
========= ======= =========== ========= ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 114
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(RESTATED)
<S> <C> <C> <C>
Operating Activities:
Net loss.............................................. $(16,994,922) $(4,410,354) $ (765,731)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 3,711,829 2,363,026 1,150,545
Provision against accounts receivable............ 849,978 547,225 140,000
Revenue under economic development grant......... -- (95,000) (95,000)
Minority interest................................ (54,248) -- --
Changes in operating assets and liabilities, net
of effects of purchase of business:
Accounts receivable............................ (2,125,496) (3,178,383) (3,828,899)
Prepaid expenses and other current assets...... (46,613) (514,581) (59,195)
Accounts payable............................... 285,870 (27,664) 240,231
Accrued expenses............................... 1,980,238 664,712 908,400
Deferred revenue............................... 6,104,570 2,321,406 2,203,320
------------ ----------- ------------
Net cash provided by (used in) operating activities... (6,288,794) (2,329,613) (106,329)
Investing Activities:
Sales of investments, available for sale............ 14,801,573 2,058,451 --
Purchases of investments, available for sale........ (1,866,094) (3,428,841) (18,062,189)
Purchases of property and equipment................. (696,911) (3,235,769) (1,250,085)
Capitalized software development costs.............. (8,171,613) (3,947,159) (1,715,811)
Acquisition of business, net of cash acquired....... (255,548) -- --
Acquisition of service bureau contracts............. (375,000) -- --
Decrease (increase) in other assets................. -- -- (1,369,261)
------------ ----------- ------------
Net cash provided by (used in) investing activities... 3,436,407 (8,553,318) (22,397,346)
Financing Activities:
Proceeds from funded software development
arrangements..................................... 1,934,261 428,025 --
Repayment of promissory note........................ (389,000) -- --
Capital lease payments.............................. (144,257) (131,468) (96,182)
Net proceeds from issuance of common stock.......... 140,398 1,334,485 31,766,136
Cash payments for stock subscription receivables...... -- 13,360 97,323
------------ ----------- ------------
Net cash provided by (used in) financing activities... 1,541,402 1,644,402 31,767,277
Net increase (decrease) in cash and cash
equivalents......................................... (1,310,985) (9,238,529) 9,263,602
Cash and cash equivalents at beginning of period...... 3,795,962 13,034,491 3,770,889
------------ ----------- ------------
Cash and cash equivalents at end of year.............. $ 2,484,977 $ 3,795,962 $ 13,034,491
============ =========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest......................................... $ 38,501 $ 54,352 $ 50,597
============ =========== ============
Income taxes..................................... $ 213,120 $ 43,727 $ 24,500
============ =========== ============
Supplemental Schedule of Noncash Investing and
Financing Activities:
Equipment financed by capital lease................. $ -- $ -- $ 727,000
============ =========== ============
Purchase of developed software through forgiveness
of receivable.................................... $ -- $ -- $ 286,000
============ =========== ============
Investment in common stock through cancellation of
prepaid royalties................................ $ -- $ 650,000 $ --
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the nonpayment of amounts due under certain software license
arrangements that had been previously recognized as revenue, Phoenix conducted a
comprehensive review of its software licensing arrangements and the recognition
of revenue for the years 1997 through 1999. As a result of that review, Phoenix
determined that, in certain instances, revenue that had been recognized at the
time the software was delivered should have been recognized either as payments
became due, as the related services were performed, upon completion of all
services required under the arrangements or in some instances should have been
accounted for as funded development arrangements. In addition, Phoenix has
determined that certain software development costs were capitalized prior to the
related software reaching technological feasibility, or were otherwise
capitalized in error. As a result, the financial statements for the years ended
December 31, 1999, 1998, and 1997 have been restated.
The effects of the restatement of Phoenix's financial statements for the
years ending December 31, 1999, 1998, and 1997 are as follows (in thousands
except for per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Capitalized software costs,
net......................... $ 14,540 $ 10,077 $ 7,155 $ 5,770
Total assets.................. 44,523 36,536 59,502 45,813
Deferred revenue.............. 4,576 14,003 2,649 7,898
Retained earnings (accumulated
deficit).................... (11,377) (26,905) 4,298 (9,910)
Shareholders' equity.......... 34,481 16,524 50,811 34,322
License fees and other........ 7,749 9,642 16,034 10,683 $12,664 $ 8,226
Implementation, customer and
software support and other
service fees................ 11,901 8,543 9,903 8,658 5,178 5,213
Total revenues................ 19,651 18,186 25,938 19,341 17,843 13,439
Total expenses................ 35,159 36,138 23,921 25,127 14,762 14,691
Net income (loss)............. (15,675) (16,994) 2,431 (4,410) 3,040 (766)
Net income (loss) per share --
basic....................... (1.84) (2.00) 0.29 (0.53) 0.45 (0.11)
Net income (loss) per share --
diluted..................... (1.84) (2.00) 0.27 (0.53) 0.41 (0.11)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Phoenix International Ltd., Inc., was formed on January 11, 1993, and
designs, develops, markets, and supports highly adaptable, enterprise-wide
client/server application software for the financial services industry and
provides account processing services for financial institutions using such
software. Phoenix's primary market is small to mid-sized financial institutions.
Basis of presentation
The accompanying financial statements, as restated, have been prepared
assuming that Phoenix will continue as a going concern. These financial
statements have been restated for the matters discussed in Note 1. Phoenix
suffered a significant loss in 1999 and used a significant amount of cash in
operations in 1999, both prior to the restatement of its financial statements.
Management believed the 1999 results were attributable to the adverse effect on
customers' purchase decisions related to their concerns about the effect of Year
2000, the publicity related to certain adverse postings on Yahoo!, and certain
litigation against Phoenix, and believed such factors would not continue into
2000.
F-15
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual results in 2000 have not improved as expected by management, sales
have continued to lag, and the Company has continued to use cash to fund
operations. Management believes the factors discussed above, additional adverse
publicity caused by the restatement of its financial statements as discussed in
Note 1, and its continued losses and decline in cash reserves have continued to
depress 2000 operating results and adversely impact Phoenix's liquidity. As a
result, at the time of the restatement of its 1999 financial statements,
substantial doubt exists as to whether Phoenix will be able to continue as a
going concern without additional debt or equity financing.
Phoenix is currently in discussions with London Bridge Group of North
America, Inc. regarding the possible acquisition of Phoenix and believes that it
will be able to obtain a bridge loan from London Bridge in connection with the
acquisition that would be sufficient to satisfy its short term working capital
needs. However, if the acquisition does not take place Phoenix will need
additional financing to support its planned operations. If such financing cannot
be obtained Phoenix will be required to significantly curtail its operations.
The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of Phoenix, its
majority-owned subsidiary Phoenix International New York, Inc. (formerly Servers
On-Line, Inc.), and the following wholly-owned subsidiaries: Phoenix
International A.P. Limited in New Zealand, Phoenix EMEA Limited in the United
Kingdom, Phoenix International (Australia) Pty. Limited, Phoenix International
Software (Singapore) Pte. Ltd., and Phoenix FSC Inc., a company domiciled in the
U.S. Virgin Islands. All significant intercompany balances and transactions have
been eliminated.
Minority interests represent outside shareholders' 46% ownership of the
common stock of Phoenix International New York, Inc., a provider of bank
processing and consulting services in which Phoenix purchased a 54% interest
during 1999. The acquisition was recorded as a purchase and the earnings of
Phoenix International New York are included in our results of operations from
the date of the acquisition. The loss attributable to the minority shareholder
interest in 1999 was $54,248 and is included in minority interest in the
consolidated statements of operations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Numerator -- net loss........................... $(16,994,922) $(4,410,354) $(765,731)
============ =========== =========
Denominator for basic and diluted net loss per
share -- weighted average shares
outstanding................................... 8,518,323 8,378,784 6,698,317
============ =========== =========
Net loss per share -- basic and diluted......... $ (2.00) $ (0.53) $ (0.11)
============ =========== =========
</TABLE>
Due to Phoenix's losses, potentially dilutive shares were anti-dilutive and
therefore not included in the calculation of net loss per diluted share. There
were outstanding options and warrants to purchase 1,775,166
F-16
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
potentially dilutive shares at December 31, 1999, 1,509,672 potentially dilutive
shares at December 31, 1998, and 1,344,015 potentially dilutive shares at
December 31, 1997.
Revenue and Cost Recognition
Phoenix generates revenue primarily from software license sales and from
related services, including implementation and customization services,
maintenance and support activities and training services. Phoenix does not offer
third parties or any of its customers the right to return Phoenix's software
products. Phoenix's software license revenues are generated from licensing
Phoenix's products directly to end users and indirectly through resellers.
Phoenix recognizes revenues in accordance with provisions of Statement of
Position 97-2, "Software Revenue Recognition," in 1998 and 1999, Statement of
Position 91-1, "Software Revenue Recognition," in 1997 and prior periods, and
SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" in all periods. The nature of each licensing
arrangement determines how revenues and the related costs are recognized:
- Phoenix's customer contracts are multi-element arrangements that include
a software license, implementation and consulting services, maintenance
and customer training. Undelivered elements typically include
maintenance, customer training, consulting and, when significant
customization services are essential to the functionality of the
software, the software license is also considered undelivered. As
required under SOP 97-2, Phoenix allocates the contract value to the
various elements of the contract using the fair value of the elements,
regardless of any separate prices stated within the contract.
- If the contract requires Phoenix to perform significant production,
modification, or customization of software, revenue from the software
license, its modification and implementation are recognized using the
percentage-of-completion method of accounting based on estimates of
effort expended for modification and implementation to total expected
effort. The duration of contracts of this type typically ranges from
three to twelve months.
- Contracts to modify or customize software are evaluated to determine if
they constitute funded software development arrangements of the type
contemplated by SOP 97-2. If so, professional services revenue from those
arrangements is credited first to the amount of any development costs
capitalized, and the remainder is deferred. Thereafter, revenue is offset
against any additional costs that are subsequently capitalized and any
remaining amounts are recognized in income when the project is completed.
- If the contract requires delivery of the product to the end user and
Phoenix is not required to perform significant production, modification,
or customization, Phoenix recognizes software license revenues under the
provisions of SOP 97-2. Accordingly, such software license revenues are
recognized when a noncancelable license agreement has been signed, the
product has been shipped, the fees are fixed and determinable and
collectability is probable.
- If the contract requires delivery of the product to a third-party
reseller or integrator, and Phoenix is obligated to provide other
services to the reseller, Phoenix recognizes revenue over the period for
which it is obligated to provide such services or, where collection is
not probable, the lesser of over the service period or upon receipt of
cash.
- Services under international contracts are generally provided under time
and materials arrangements. Services under domestic contracts are
provided under fixed price and time and material arrangements. The
resultant service revenues and expenses are recognized as services are
performed, except in the case of funded development arrangements, where
they are offset against development costs. Revenues from maintenance
activities, which consist of fees for ongoing support and product
updates, are recognized ratably over the term of the maintenance
contract, typically five years, and the associated costs are expensed as
incurred. When maintenance is sold with software licenses that are
subject to the percentage-of-completion method of accounting, Phoenix
accounts for the maintenance revenues
F-17
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separately from the license revenues. Phoenix utilizes objective evidence
of the fair value to determine the value of the maintenance. This
objective evidence of fair value consists of the renewal rate for the
maintenance. Phoenix's resellers are also able to sell maintenance
contracts to their end users for a separate fee payable to Phoenix. The
objective evidence of fair value for maintenance revenues in reseller
arrangements is the same as the objective evidence when the sale is
directly between Phoenix and an end user.
- Cost of software license revenues includes the cost of the media, product
packaging, documentation, and certain third-party royalties. In addition,
Phoenix generally warrants its products to meet standard specifications
for a period of 30 to 90 days following the delivery of the product to
the customer.
- Cost of service, maintenance, and other revenues consists of compensation
and related overhead costs for personnel engaged in consulting, training,
maintenance and support activities, as well as costs for third-party
consultants utilized in providing such services. Provisions for estimated
losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance and estimated
profitability may result in revisions to costs and revenues and are
recognized in the period in which the revisions are determined; the
effects of which may be material. Costs and estimated earnings in excess
of billings have not been recognized in the accompanying consolidated
balance sheets. Billings in excess of costs and estimated earnings on
uncompleted contracts are classified as deferred revenues in the
accompanying consolidated balance sheets.
Cash, Cash Equivalents and Investment Securities
We consider all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Investments in marketable
securities are classified as available-for-sale and are recorded at fair value
with any unrealized holding gains or losses, net of deferred taxes, included as
a component of equity and other comprehensive income. Realized gains and losses
on investments are determined based on amortized cost using specific
identification.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets (generally three to five years for computer
equipment and purchased software, and four to seven years for furniture and
office equipment). Depreciation expense was $1,699,612 in 1999, $1,252,066 in
1998, and $525,488 in 1997. Leasehold improvements are amortized over the
related lease term. Property and equipment includes $787,281 of furniture
purchased under a capital lease, with accumulated amortization of $309,289 at
December 31, 1999, and $196,820 at December 31, 1998.
Capitalized Software Costs
We capitalize certain software development costs in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Any funding
received under funded-software development arrangements reduces capitalized
amounts pursuant to SOP 97-2. Costs incurred internally to develop a computer
software product are charged to product development expense when incurred until
technological feasibility has been established for the product. Thereafter, all
software production costs are capitalized and recorded at the lower of
unamortized cost or net realizable value. Capitalization ceases upon general
release to customers. After general release, capitalized costs are amortized
using the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product (currently five years). Capitalized
software costs also include purchased software costs of $1,262,000 at December
31, 1999, and $761,000 at December 31, 1998. Amortization of capitalized
software development costs and purchased
F-18
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
software is included in costs of license fees and other. Changes in capitalized
software costs, net of accumulated amortization are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Balance, at beginning of year.................... $ 5,770,556 $ 3,362,382 $1,985,628
Internal costs capitalized during the year....... 7,395,549 3,186,159 1,690,811
Purchased software............................... 1,262,000 761,000 311,000
Less funding under software development
contracts...................................... (1,934,261) (428,025) --
Less amortization expense........................ (2,416,364) (1,110,960) (625,057)
----------- ----------- ----------
Balance, at end of year.......................... $10,077,480 $ 5,770,556 $3,362,382
=========== =========== ==========
</TABLE>
Goodwill and Other Intangible Assets
Intangible assets, consisting primarily of goodwill and purchased contracts
of approximately $876,000 and $375,000, respectively, resulting from
acquisitions during 1999, are amortized on a straight-line basis over periods
ranging from 3.5 years for contracts to 15 years for goodwill. Goodwill and
other intangible assets are periodically reviewed for impairment based on an
assessment of future operations, using estimates of undiscounted future cash
flows, to ensure they are appropriately valued. Accumulated amortization as of
December 31, 1999, was $40,986.
Stock Based Compensation
Stock options granted to our employees are generally for a fixed number of
shares with an exercise price equal to or greater than the fair value of the
shares at the date of grant. We account for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations, and accordingly recognize no compensation expense for stock
option grants for which the terms are fixed. Compensation expense is recognized
for increases in the estimated fair value of common stock for stock options with
variable terms. We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
which encourages, but does not require, companies to adopt a fair value based
method for determining expense related to stock-based compensation.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Advertising
expense was $163,535 in 1999, $222,207 in 1998, and $130,242 in 1997. Marketing
and tradeshow expense was $483,720 in 1999, $273,465 in 1998, and $161,272 in
1997.
Recently Issued Accounting Standards
Effective January 1, 2000, Phoenix is required to adopt the provisions of
SOP 97-2 that limit what is considered vendor-specific objective evidence (VSOE)
of the fair value of the various elements in a multiple-element software
arrangement to the price charged when the same element is sold separately.
Because of the structure of Phoenix's contracts prior to October 1, 2000,
Phoenix has determined that it does not have VSOE, as defined in SOP 97-2, for
all undelivered elements in its software arrangements entered into between
January 1, 2000 and October 1, 2000 (the date that Phoenix modified the
structure of its contracts). As a result, all contracts that include maintenance
entered into during that period will be required to be recognized over the
period of post-contract customer support, generally five years.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
financial instruments and requires recognition of derivatives in the Statement
of Financial Position to be measured at fair value. Gains or losses resulting
from changes in the value of derivatives would be
F-19
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounted for depending on the intended use of the derivative and whether it
qualifies for hedge accounting. This statement is effective for our financial
statements beginning in 2001. We are currently studying the future effects of
adopting this statement. However, due to our limited use of derivative financial
instruments, adoption of Statement No. 133 is not expected to have a significant
effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. We are
required to adopt the provisions of this bulletin 101 in our fourth fiscal
quarter of 2000 and are currently in the process of assessing the impact of its
adoption. While Staff Accounting Bulletin No. 101 does not supersede the
software industry specific revenue recognition guidance, which Phoenix believes
it is in compliance with, once complete guidance is disseminated, this bulletin
may change current interpretations of software revenue recognition requirements.
We do not expect the adoption of Staff Accounting Bulletin No. 101 to have a
significant effect on our financial position or results of operations.
3. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject Phoenix to significant
concentrations of credit risk consist principally of cash and cash equivalents,
investments, and trade accounts receivable.
Our cash and cash equivalents at December 31, 1999, were held primarily by
a single financial institution. Trade accounts receivable are unsecured and due
under stated terms from a small number of customers which are primarily in the
banking business and are generally subject to regulatory oversight. Trade
receivables due from foreign customers comprised 76% of total trade receivables
as of December 31, 1999, and 72% of total trade receivables as of December 31,
1998. Our long-term investments are held principally by a single financial
institution and consist of United States Treasury bills and United States
Treasury notes with maturities of less than three years (for which interest rate
risk is not considered material).
Fair Value
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
- Cash and Cash Equivalents: The carrying amount reported in the balance
sheet approximates the fair value of cash and cash equivalents.
- Investments: Available for sale investments are carried at market value
as determined by quoted market prices.
4. COMMITMENTS
Leases
We lease furniture and computer equipment under a capital lease, and office
space and equipment under non-cancelable operating leases. Total rent expense
for all operating leases was $2,315,327 in 1999, $1,382,926 in 1998, and
$701,617 in 1997.
F-20
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital leases and aggregate
non-cancelable operating leases with terms of one year or more consisted of the
following at December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Years ending December 31,
2000...................................................... $180,552 $ 2,199,493
2001...................................................... 180,552 2,071,254
2002...................................................... 30,092 1,803,992
2003...................................................... -- 1,736,997
2004...................................................... -- 1,756,780
Thereafter................................................ -- 4,491,595
-------- -----------
Total minimum lease payments................................ 391,196 14,060,110
Amounts representing interest............................... (36,103) --
-------- -----------
Net minimum lease payments.................................. $355,093 $14,060,110
======== ===========
</TABLE>
Professional Services
Pursuant to its Marketing Agreement with International Turnkey Systems
(ITS), Phoenix agreed to purchase 2,750 man-days of professional services at a
cost of $600 per man-day. However, Phoenix is not obligated to purchase such
services until ITS has been certified to deliver such services and Phoenix has
sufficient requirements contracted from customers for such work.
5. ACQUISITIONS
In May 1997, Phoenix completed the merger of Hampton Resources Limited, a
New Zealand corporation and its subsidiaries, Priority Solutions Ltd. and
Priority Solutions International, Ltd. (collectively "Priority Solutions") in
exchange for 76,760 shares of Phoenix common stock into Phoenix's wholly-owned
subsidiary, Phoenix International A.P. Limited, a New Zealand corporation
("Phoenix A.P. Limited"). Phoenix A.P. Limited is a provider of international
banking software products and services.
The Phoenix A.P. Limited acquisition has been accounted for as a pooling of
interests. Phoenix believes that the historical results of operations and other
financial information of Priority Solutions are not material in relation to
Phoenix's results of operations and other financial information. Phoenix has
not, therefore, restated its historical financial statements but has included
the results of Phoenix A.P. Limited's ongoing operations in its financial
statements, effective April 1, 1997.
During October 1999, Phoenix increased its ownership interest in Phoenix
International New York, Inc. (formerly Servers On-Line, Inc.) to 54% of the
outstanding common shares, which was in addition to the convertible preferred
stock position acquired in 1998 for $300,000. Phoenix International New York,
Inc. operates our Northeast application service center. The purchase price and
related costs of approximately $960,000 were satisfied by the issuance of a
$389,000 promissory note, conversion of $311,000 of Phoenix International New
York's liabilities to Phoenix into equity, and payment of $260,000 in cash.
Upon satisfaction of specific performance criteria, the minority
shareholders of Phoenix International New York, Inc. have the option to sell
their remaining interests to Phoenix in exchange for a total of $250,000 in cash
and $350,000 in Phoenix common stock. The acquisition of Phoenix International
New York, Inc. was accounted for as a purchase under Accounting Principles Board
Opinion No. 16. In accordance with such opinion, we allocated the purchase price
based on the fair value of the assets acquired and liabilities assumed. Acquired
intangibles, which include renewable contracts and goodwill, total $876,000 and
are being amortized over periods ranging from 3.5 to 15 years.
F-21
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operations of Phoenix International New York are included in our
consolidated results from the date of acquisition in October of 1999. Pro forma
financial statements for the Servers On-Line acquisition are not required under
APB No. 16 as the effect of the acquisition is not material to our results of
operations.
Also during 1999, Phoenix purchased from ERAS JV contracts to provide data
processing services on an outsourced basis to certain financial institution for
a total of $375,000. The value of these contracts is recorded as an intangible
asset which is being amortized over the initial terms of these contracts.
6. CAPITALIZATION
In May 1997, the shareholders approved an amendment to our articles of
incorporation increasing the number of shares of common stock authorized for
issuance to 50,000,000.
In August 1997, Phoenix completed a secondary public offering of its common
stock. We issued 2,211,000 shares of common stock, including the underwriter's
over-allotment option, at a price of $15.67 per share. The proceeds to Phoenix
from the offering, net of underwriting discounts and offering expenses, were
approximately $31.5 million.
In May 1998, Phoenix effected a three-for-two stock split in the form of a
50% stock dividend, distributed on May 18, 1998, to shareholders of record on
May 11, 1998. Accordingly, all share and per share amounts have been adjusted to
reflect this split.
The Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock, par value $0.01 per share. The terms of preferred stock have
not been designated and no shares have been issued.
7. STOCK OPTIONS
Phoenix has various stock option plans that authorize its Board of
Directors to grant employees, officers, and directors qualified and unqualified
options to purchase shares of its common stock. Stock options are generally
granted with an exercise price at or above the fair market value of Phoenix
common stock on the date of the grant. As of December 31, 1999, we had three
stock incentive plans:
- the Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
effective March of 1995;
- the Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
effective October of 1995; and
- the Phoenix International Ltd., Inc. 1996 Director Stock Option Plan.
Up to 780,000 shares of Phoenix common stock may be issued pursuant to
options granted under the March 1995 Employee Stock Option Plan; however, the
Board does not intend to issue any additional shares under such plan. As of
December 31, 1999, the October 1995 Employee Stock Option Plan authorized the
grant of options to purchase up to 1,304,959 shares of Phoenix common stock and
the 1996 Director Stock Option Plan authorized the grant of options to purchase
up to 352,480 shares of Phoenix common stock. Stock options granted under these
plans have varying vesting schedules, but options typically vest over a three to
five year period from the date of grant and options expire within ten years from
the date of grant.
Stock options granted under the 1996 Stock Option Director Plan are
non-qualified, have a term of five years, and may be exercised only after the
six month anniversary of the date of grant.
At December 31, 1999, we had 63,231 shares available for issuance under the
March 1995 Employee Stock Option Plan, 162,126 shares under the October 1995
Employee Stock Option Plan, and 106,480 shares under the 1996 Director Stock
Option Plan. At December 31, 1999, we had reserved 2,781,939 shares of common
stock for issuance upon exercise of options and warrants to purchase common
stock.
Phoenix's Board of Directors approved in February 2000 an amendment to
increase the total number of shares available for issuance under the October
1995 Employee Stock Option Plan to 2,100,000 shares, and an amendment to
increase the number of shares available for issuance under the 1996 Director
Stock Option
F-22
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan to total 500,000 shares. Each of these amendments was approved by Phoenix's
shareholders at its annual meeting held on May 5, 2000.
We have elected to follow APB Opinion No. 25 and related interpretations in
accounting for our employee stock options rather than the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123. Under APB Opinion No. 25, because the exercise price of our employee stock
options generally equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by Statement of Financial Accounting Standards No. 123, which also requires that
the information be determined as if Phoenix had accounted for our employee stock
options granted subsequent to December 31, 1994, under the fair value method of
Statement of Financial Accounting Standards No. 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted average assumptions and fair values:
<TABLE>
<CAPTION>
NO DIVIDEND YIELD,
WEIGHTED AVERAGE
VOLATILITY FACTORS OF
THE EXPECTED MARKET WEIGHTED AVERAGE WEIGHTED AVERAGE
RISK-FREE PRICE OF PHOENIX EXPECTED LIFE OF FAIR VALUE OF
YEAR INTEREST RATES COMMON STOCK OPTIONS GRANTED OPTIONS GRANTED
---- -------------- --------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1997....................... 6.24% 0.49 3.97 years $8.86
1998....................... 5.18 0.54 2.80 years 5.21
1999....................... 5.64 0.68 2.02 years 2.80
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the option's vesting period. Our pro forma
information follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Pro forma net loss............................. $(19,791,719) $(6,300,104) $(2,213,581)
Pro forma net loss per share -- basic and
diluted...................................... (2.32) (0.75) (0.33)
</TABLE>
A summary of our option activity and related information follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1996:........................... 987,030 $ 4.71
Granted................................................... 408,450 13.97
Exercised................................................. (68,622) 3.47
Cancelled................................................. (11,343) 4.10
---------
Outstanding at December 31, 1997:........................... 1,315,515 7.66
Granted................................................... 639,457 14.04
Exercised................................................. (345,506) 4.15
Cancelled................................................. (128,294) 9.65
---------
Outstanding at December 31, 1998:........................... 1,481,172 11.06
Granted................................................... 492,200 7.72
Exercised................................................. (22,352) 2.94
Cancelled................................................. (204,354) 11.94
---------
Outstanding at December 31, 1999............................ 1,746,666 10.11
=========
</TABLE>
F-23
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 1999, range from
$2.86 to $19.33 per share. There were 790,094 options exercisable at a weighted
average exercise price of $10.02 at December 31, 1998, and 774,383 options
exercisable at a weighted average exercise price of $6.72 at December 31, 1997.
The following table sets forth by group of exercise price ranges, the number of
shares, weighted average exercise price, and weighted average remaining
contractual life of options outstanding, and the number and weighted average
exercise price of options currently exercisable as of December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE --------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER OF LIFE EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES (YEARS) PRICE SHARES PRICE
--------------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 2.86 - $ 6.67 600,028 7.23 $ 4.95 342,453 $ 4.03
$ 8.00 - $13.75 622,388 7.07 10.65 433,326 10.35
$14.08 - $19.34 524,250 5.85 15.39 404,700 15.30
--------------- --------- ---- ------ --------- ------
$ 2.86 - $19.34 1,746,666 6.76 $10.11 1,180,479 $10.21
=============== ========= ==== ====== ========= ======
</TABLE>
We have warrants outstanding at December 31, 1999, to purchase up to 28,500
shares of common stock at an exercise price of $9.60 per share which were issued
in July 1997 to the underwriters of our initial public offering pursuant to the
underwriting agreement. The warrants are exercisable through July 2001.
8. INCOME TAXES
Significant components of the provision for income taxes are as follows for
the years ended December 31, 1999, December 31, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Current foreign tax expense............................. $32,264 $348,265 $394,970
Deferred domestic tax expense........................... -- -- --
------- -------- --------
Total tax expense............................. $32,264 $348,265 $394,970
======= ======== ========
</TABLE>
Income (loss) before income taxes in the U.S. and foreign tax jurisdictions
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
U.S............................................. $(17,271,000) $(5,162,000) $(772,000)
Foreign......................................... 308,000 1,100,000 401,000
------------ ----------- ---------
Loss before income taxes........................ $(16,963,000) $(4,062,000) $(371,000)
============ =========== =========
</TABLE>
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-24
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of our deferred income tax assets and liabilities at
December 31, 1999, December 31 1998, and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation................... $ (104,000) $ (94,000) $ (60,000)
Capitalized software, net.................... (3,829,000) (2,245,000) (1,308,000)
Total tax liabilities................ (3,933,000) (2,339,000) (1,368,000)
Deferred tax assets:
Alternative minimum tax credit............... 51,000 51,000 20,000
Research and development credit
carryforwards............................. 1,482,000 903,000 504,000
Allowance for doubtful accounts.............. 412,000 262,000 60,000
Net operating loss carryforwards............. 12,074,000 6,311,000 2,626,000
Deferred revenue............................. 3,874,000 1,816,000 1,871,000
Other........................................ 101,000 78,000 60,000
------------ ----------- -----------
Total tax assets..................... 17,994,000 9,421,000 5,141,000
Subtotal....................................... 14,061,000 7,082,000 3,773,000
Valuation allowance for deferred tax assets.... (14,061,000) (7,082,000) (3,773,000)
------------ ----------- -----------
Net deferred tax assets........................ $ -- $ -- $ --
============ =========== ===========
</TABLE>
The reconciliation of income tax computed at U.S. Federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Tax at U.S. statutory rates...................... $(5,767,304) $(1,381,080) $(126,059)
State taxes...................................... (678,506) (199,038) (14,830)
Foreign tax rate differential.................... (6,388) (79,612) 234,205
Tax credits...................................... (578,515) (429,695) (325,725)
Foreign tax credit............................... -- -- 737,664
Stock option tax deduction....................... (2,586) (959,847) (346,553)
Other............................................ 85,986 88,450 185,212
Change in valuation allowance.................... 6,979,577 3,309,087 51,056
----------- ----------- ---------
Total tax expense...................... $ 32,264 $ 348,265 $ 394,970
=========== =========== =========
</TABLE>
As a result of operating losses incurred in 1999 and earlier, and because
of uncertainties related to the Company's ability to generate sufficient future
taxable income to realize the benefit of net deferred tax assets related
principally to net operating losses, the Company has recorded a valuation
allowance against the net deferred tax assets based on management's belief that
it is "more likely than not" that the net deferred tax assets for which the
valuation allowance has been recorded will not be realized. We will continue to
assess the valuation allowance and to the extent it is determined that such
allowance is no longer required, the tax benefit of the remaining net deferred
tax assets will be recognized in the future.
We had net operating loss carryforwards of approximately $31,774,000
available at December 31, 1999, that expire approximately $188,000 in 2008,
$823,000 in 2009, $1,317,000 in 2010, $3,881,000 in 2011, $9,472,000 in 2018,
and $16,093,000 in 2019. In addition, we have available research and development
tax credit carryforwards of approximately $1.5 million that also expire in years
2008 through 2019. These net operating losses and tax credit carryforwards are
subject to change if the Company determines that it is necessary to amend its
prior tax returns to reflect certain changes resulting from the restatement.
Whether we can utilize these carryforwards to reduce future income taxes depends
on our ability to generate sufficient taxable income prior to the expiration of
the carryforwards. Further, ownership changes have occurred that limit the net
operating loss and tax credit carryforwards of the Company, and a may impact the
Company's ability to utilize its net operating loss and tax credit carryforwards
in the future.
F-25
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFITS
We maintain a 401(k) plan that covers substantially all employees. Phoenix
may, at its discretion, contribute by matching employee contributions. Defined
contributions are limited to the maximum amount deductible under the Internal
Revenue Code. In 1999, we made contributions totaling $122,000, and did not make
contributions to the 401(k) plan in 1997 or 1998.
We have a profit sharing plan with discretionary contributions covering
substantially all employees. We did not make contributions to the profit sharing
plan in 1997, 1998, or 1999.
We established an employee stock purchase plan, effective July 1, 1998, in
which substantially all employees may participate. Eligible employees may
purchase Phoenix common stock at a discount to market value at established
dates. We have reserved 150,000 shares of its common stock for issuance under
this plan. The plan is designed as a non-compensatory plan under Section 423 of
the Internal Revenue Code. Payroll deductions used to purchase Phoenix common
stock totaled $79,000 in 1999, compared with $75,000 in 1998.
10. EMPLOYMENT AGREEMENTS
Phoenix has entered into employment agreements with our senior executives.
Certain agreements commit Phoenix to various obligations if the employee is
terminated without cause or if there is a change in the control of Phoenix. The
major obligations are for salaries and bonus, healthcare premiums, and the
vesting of previously granted stock options.
11. SEGMENTS, MAJOR CUSTOMERS AND EXPORT SALES
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, requires disclosure of
certain financial information for reportable operating segments based on our
organizational structure. We have no identifiable segments that meet Statement
of Financial Accounting Standards No. 131 criteria.
Major customers as defined by Phoenix are those that individually account
for 10% or more of total revenues. There were no major customers in 1999 or
1998. Sales to one major customer in 1997 comprised 15% of revenues.
Domestic and export sales, as a percentage of total revenues, were as
follows:
<TABLE>
<CAPTION>
LATIN EUROPE,
UNITED AMERICA & AFRICA & PACIFIC
STATES CARIBBEAN MIDDLE EAST RIM
------ ---------- ----------- -------
<S> <C> <C> <C> <C>
1999.............................................. 49% 19% 22% 10%
1998.............................................. 57 17 24 2
1997.............................................. 53 22 15 10
</TABLE>
12. CONTINGENCIES (ALSO SEE NOTE 14 -- SUBSEQUENT EVENTS)
Litigation
Phoenix is subject to various claims and legal proceedings covering a
variety of matters arising in the ordinary course of its business activities.
On November 23, 1999, a lawsuit was filed in the District Court for the
Middle District of Florida as a purported class action initiated by George
Taylor, a former Phoenix employee. Initially, Phoenix and our chief executive
officer were named as defendants. The lawsuit alleges, among other things, that
Phoenix and our chief executive officer improperly recognized revenues,
overstated revenues and failed to disclose that our revenues were allegedly in
decline, all of which allegedly caused our stock price to be higher than it
otherwise would have been during the class period. The lawsuit alleges that
these purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000,
F-26
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the plaintiffs filed an Amended Complaint which, among other things, (1) adds
four additional investors as named plaintiffs and proposed class
representatives; (2) expands the purported class period to the period from May
5, 1997 to April 15, 1999; and (3) adds Phoenix's president as an additional
named defendant. Phoenix and the other two defendants filed Motions to Dismiss,
which were denied by the Court without opinion in August 2000. The parties are
beginning to conduct discovery. Phoenix's insurance carriers have denied
coverage for the claims in this lawsuit. Phoenix is vigorously defending this
case.
Customer Disputes
IBM/Sekerbank. In 1998, Phoenix contracted to provide software and
software development and implementation services as a subcontractor to IBM Turk
Limited Sirketi for the benefit of its customer, Sekerbank T.A.S. In May of
1999, IBM informed Phoenix that its contract with Sekerbank had been cancelled.
IBM then purported to cancel its contract with Phoenix. According to IBM,
Sekerbank cancelled their contract with IBM because of the failure of Phoenix to
perform, called in an IBM performance bond from a bank, and received most of its
money back from IBM. IBM has paid Phoenix over $1 million under the subcontract,
has requested a return of all funds, and has indicated they may have claims
against Phoenix for up to $5.2 million in damages. Phoenix disagrees with IBM's
position, believes that IBM, and not Phoenix, is responsible for the
cancellation of the contract by Sekerbank, and believes that it has claims
against IBM under its subcontract for the remaining value of the contract, which
amounts to at least $3.9 million. The parties are in negotiation to resolve the
dispute. The contract calls for arbitration of disputes; however, no arbitration
or other action has been filed by either party.
13. RELATED PARTY TRANSACTIONS
In 1997 and 1998, Phoenix purchased a total of 11% of the equity of Dyad
Corporation in several transactions for a total purchase price of $1.5 million.
In 1999, Dyad Corporation merged with and became a wholly-owned subsidiary of
Netzee, Inc. Pursuant to such merger, Phoenix received 70,976 shares of Netzee
stock representing less than 1% of the shares outstanding, in exchange for its
11% interest in Dyad. A partner with Nelson Mullins Riley & Scarborough, L.L.P.,
Phoenix's primary outside legal counsel, served on Phoenix's Board of Directors
from 1996 until 1999, was a director of Dyad Corporation, and as of December 31,
1999, was a director and the chief executive officer of Netzee.
In December 1998, Phoenix entered into a service agreement and a marketing
agent agreement with Towne Services, Inc. ("TSI"). This marketing agent
agreement allows Phoenix exclusive marketing and distribution rights in various
regions of the world for Collections Works, one of TSI's software products. The
agreement provides for payment by Phoenix of $485,000 for this right. Phoenix's
chief executive officer is a director of TSI and another one of our shareholders
and directors is also a shareholder and director of TSI. On June 28, 2000,
Phoenix modified its marketing arrangement for software from TSI. In exchange
for $365,000, Phoenix agreed to convert its exclusive marketing rights for TSI's
Collection Works product into non-exclusive rights. Further, TSI paid Phoenix a
total of $175,000 in consideration of the sale of exclusive marketing rights to
Collection works to an entity in Malaysia. Phoenix retained non-exclusive rights
to market the TSI product on revised terms. In December of 1998 TSI also
purchased an internet and intranet site and associated services from Phoenix for
a total of $275,000.
In September 1997, Phoenix entered into a software license and cooperative
marketing agreement with Servers On-Line. In October of 1999, we acquired a 54%
controlling interest in Servers On-Line, Inc., and changed the name of the
company to Phoenix International New York, Inc. Prior to such acquisition,
Phoenix recognized $169,000 in revenues during 1999 from this company, and
$181,500 in 1998. Certain officers of the acquired company are now officers of
Phoenix.
To encourage certain bank shareholders' initial investment in Phoenix, we
offered a discount, equal to the shareholders' initial investment in Phoenix, to
be applied toward license fees if and when each shareholder licensed the Phoenix
System for use in the normal course of its operations. Discounts offered since
inception
F-27
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
total $896,250. Discounts of $41,250 were used in 1998 and no discounts were
used in 1997 or 1999. Net of discounts used, license fee revenue from these
shareholders totaled $95,316 in 1999, $68,778 in 1998, and $340,660 in 1997.
Implementation, support, and other service revenues from these shareholders
totaled $358,074 in 1999, $485,647 in 1998, and $588,198 in 1997.
14. SUBSEQUENT EVENTS
Phoenix's Board of Directors approved in February 2000 an amendment to
increase the total number of shares available for issuance under the October
1995 Employee Stock Option Plan to 2,100,000 shares, and an amendment to
increase the number of shares available for issuance under the 1996 Director
Stock Option Plan to total 500,000 shares. Each of these amendments was approved
by Phoenix's shareholders at the annual shareholders meeting on May 5, 2000.
In February 2000, London Bridge purchased 861,623 shares of Phoenix common
stock for $5,000,000. This acquisition made London Bridge a 9.16% equity owner
in Phoenix as of the transaction date. In connection with such purchase, Phoenix
entered into an agreement with London Bridge to market one of its products
called "Vectus."
On August 22, 2000, we entered into an exclusivity agreement with London
Bridge Software Holdings plc, which among other things, provided for a 30-day
period of exclusivity during which the parties agreed to work towards definitive
agreements regarding an acquisition of Phoenix by London Bridge. On September
22, 2000, Phoenix and London Bridge extended the period of exclusivity through
October 8, 2000, and agreed to negotiate in good faith with respect to the
execution by that date of a definitive agreement providing for the acquisition
of Phoenix by London Bridge and the extension by London Bridge of a working
capital line of credit of up to $10 million for interim financing. On October 7,
2000, the parties agreed to extend the exclusivity period through October 31,
2000 on the same terms. Drafts of acquisition documents have been circulated for
comment, and we are continuing our discussions and negotiations with London
Bridge concerning the potential acquisition and interim financing. Consummation
of any transaction, however, is contingent on several conditions, including
resolution of the pending purported class action lawsuit and successful
completion of due diligence.
On August 23, 2000, the Nasdaq Stock Market halted trading in our common
stock at the last reported price of $3.00 per share. Trading in our common stock
will remain halted until we have satisfied Nasdaq's request for additional
information primarily regarding accounting issues identified in our press
release dated August 22, 2000. Nasdaq also indicated that it would delist our
common stock from trading on the Nasdaq National Market at the opening of
business on September 1, 2000, because of our failure to timely file our June
30, 2000 Form 10-Q, unless we appealed Nasdaq's decision. We timely requested an
appeal, and appeared at a hearing before the Nasdaq Listing Qualifications Panel
on September 22, 2000. The Listing Qualifications Panel stated that if Phoenix
failed to file its restated financial results and required periodic reports on
or before October 20, 2000, then our common stock would be delisted at that
time. We are fully cooperating with Nasdaq and do not expect that the
restatement of our financial statements will impact our ability to maintain
compliance with Nasdaq's quantitative listing requirements.
Any delisting by Nasdaq would likely have an adverse and material effect on
the price of our common stock and on the ability of our shareholders to sell
their shares. Such delisting could also adversely affect our ability to obtain
additional debt or equity financing and may result in a reduction in the amount
and quality of security analysts' and news media's coverage of our business
operations. There can be no assurance that our actions will be successful to
maintain listing on the Nasdaq National Market.
On May 11, 2000, we initiated cost saving measures by eliminating open
positions, terminating approximately 15% of our existing workforce, and
reorganizing employees along US and International business lines. The cost of
salaries and employee benefits for the terminated employees was approximately
$3.5 million on an annualized basis. Severance-related expenses in connection
with these terminations was approximately $200,000.
F-28
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the third quarter of 2000, Phoenix moved most of its Orlando operations
into one building, and is currently seeking a sublessee for a portion of its
second, smaller facility there. In addition, Phoenix intends to relocate its UK
operations to a serviced office, and is currently in negotiations to sublease
its UK facilities to a third party.
In the second quarter of 2000, we determined that the completion of project
Aurora was at significant risk. We, therefore wrote off approximately $406,000
in capitalized software development costs in the second quarter of 2000 related
to this project.
In the third quarter of 2000, we determined that the decrease of the value
of our investment in Netzee was other than temporary and we will therefore
record a loss in that quarter.
In June of 2000, Phoenix received notice from its customer in Turkey,
Toprakbank A.S., that it intended to cancel its implementation of the Phoenix
System. The parties have exchanged letters making cross claims against each
other. Toprakbank has paid Phoenix $550,000 under the contract and has requested
a refund of this money. Phoenix receivables from Toprakbank exceed $1.3 million,
and Phoenix has requested payment of this amount, plus future support fees under
the contract. The parties are in negotiation to resolve the dispute. The
contract calls for arbitration of disputes; however, no arbitration or other
action has been filed by either party.
In June of 2000, Phoenix received notice from its customer in Turkey,
Demirbank T.A.S., that it intended to cancel its implementation of the Phoenix
System. No demand has been received from Demirbank. Demirbank has paid Phoenix
over $4.6 million to date. Phoenix receivables from Demirbank exceed $900,000.
Phoenix is in discussions with Demirbank for amicable termination of the
relationship and settlement of outstanding issues.
On June 28, 2000, Phoenix modified its marketing arrangement for software
from TSI. In exchange for $365,000, Phoenix agreed to convert its exclusive
marketing rights for TSI's Collection Works product into non-exclusive rights.
Further, TSI paid Phoenix a total of $175,000 in consideration of the sale of
exclusive marketing rights to Collection works to an entity in Malaysia. Phoenix
retained non-exclusive rights to market the TSI product on revised terms. In
December of 1998 TSI also purchased an Internet and intranet site and associated
services from Phoenix for a total of $275,000.
In October, Phoenix learned that a mini-tender offer for 400,000 shares of
Phoenix stock at a cash price of $.50 per share, less distributions after
September 7, 2000, was commenced by Sutter Opportunity Fund 2, LLC ("Sutter").
Phoenix recommended to its shareholders that they reject this mini-tender offer.
F-29
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
1999 -- Restated:
Revenues............................... $ 5,424,176 $ 4,263,270 $ 3,752,828 $ 4,746,332
Operating loss......................... (2,510,360) (4,792,553) (5,202,006) (5,446,659)
Net loss............................... (2,267,014) (4,600,647) (4,990,959) (5,136,302)
Net loss per share -- basic and
diluted(2).......................... $ (0.27) $ (0.54) $ (0.59) $ (0.60)
Weighted average shares outstanding --
basic and diluted................... 8,504,949 8,514,802 8,526,768 8,526,772
Capitalized software costs, net........ $ 6,738,391 $ 8,473,554 $ 9,230,454 $10,077,480
Total assets........................... 44,145,160 45,030,951 41,883,557 36,536,138
Deferred revenue....................... 8,514,115 11,989,526 14,149,798 14,003,270
Shareholders' equity................... 31,945,448 27,197,358 22,179,856 16,524,343
1999 -- As Reported:
Revenues............................... 5,534,755 5,736,256 2,938,436 5,441,755
Operating loss......................... (2,290,856) (2,553,530) (5,914,011) (4,750,222)
Net loss............................... (1,308,092) (1,473,056) (3,702,690) (9,191,333)
Net loss per share -- basic and
diluted(2).......................... $ (0.15) $ (0.17) $ (0.43) $ (1.08)
Weighted average shares outstanding --
basic and diluted................... 8,504,949 8,514,802 8,526,768 8,526,772
Capitalized software costs, net........ $ 8,893,023 $11,328,576 $12,884,808 $14,540,780
Total assets........................... 58,305,593 59,139,663 56,695,535 44,523,804
Deferred revenue....................... 2,775,422 3,408,621 4,978,905 4,576,804
Shareholders' equity................... 49,459,438 47,912,421 44,192,477 34,481,933
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
1998 -- Restated:
Revenues............................... $ 4,515,114 $ 4,709,601 $ 5,476,932 $ 4,640,258
Operating loss......................... (546,977) (627,550) (1,453,440) (3,157,736)
Net loss............................... (184,438) (233,552) (1,149,422) (2,842,942)
Net loss per share -- Basic(2)......... $ (0.02) $ (0.03) $ (0.14) $ (0.33)
Weighted average shares outstanding --
basic and diluted................... 8,231,703 8,366,344 8,422,974 8,494,114
Capitalized software costs, net........ $ 4,163,103 $ 4,714,097 $ 5,204,825 $ 5,770,556
Total assets........................... 45,536,552 44,825,733 47,788,645 45,813,003
Deferred revenue....................... 4,464,648 4,726,559 6,814,101 7,898,700
Shareholders' equity................... 37,545,562 37,421,930 37,387,549 34,322,542
1998 -- As Reported:
Revenues............................... 4,598,444 5,666,703 8,002,479 7,670,583
Operating (loss)....................... (381,856) 361,326 1,251,261 785,673
Net loss............................... 35,124 497,664 1,116,285 781,938
Net income per share -- Basic(2)....... $ 0.00 $ 0.06 $ 0.13 $ 0.09
Net income per share -- Diluted(3)..... $ 0.00 $ 0.06 $ 0.13 $ 0.09
Weighted average shares outstanding --
basic............................... 8,231,703 8,366,344 8,422,974 8,494,114
Weighted average shares outstanding --
diluted............................. 8,725,628 8,928,034 8,874,710 8,934,755
Capitalized software costs, net........ $ 4,446,610 $ 5,306,812 $ 6,271,374 $ 7,155,436
Total assets........................... 53,022,437 53,402,203 57,241,428 59,502,573
Deferred revenue....................... 1,632,636 2,253,915 2,499,216 2,649,364
Shareholders' equity................... 46,574,968 47,174,110 49,215,840 50,811,992
</TABLE>
F-30
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
1997 -- Restated:
Revenues............................... $ 3,134,737 $ 3,498,845 $ 2,417,304 $ 4,388,467
Operating income (loss)................ 540,366 (88,010) (1,406,111) (297,962)
Net income............................. 465,672 (181,289) (1,198,637) 148,523
Net income (loss) per
share -- Basic(2)................... $ 0.08 $ (0.03) $ (0.17) $ 0.02
Net income (loss) per
share -- Diluted(3)................. $ 0.07 $ (0.03) $ (0.16) $ 0.02
Weighted average shares outstanding --
basic............................... 5,773,046 5,917,110 6,950,588 8,152,524
Weighted average shares outstanding --
diluted............................. 6,429,960 6,568,083 7,647,260 8,672,229
Capitalized software costs, net........ $ 2,534,212 $ 2,814,925 $ 3,069,306 $ 3,362,382
Total assets........................... 11,961,457 11,571,671 42,976,378 45,777,521
Deferred revenue....................... 3,227,609 2,790,846 3,613,306 5,577,294
Shareholders' equity................... 6,640,618 6,425,029 36,849,415 37,019,045
1997 -- As Reported:
Revenues............................... 3,713,724 4,706,108 3,354,710 6,068,492
Operating income (loss)................ 1,111,610 856,953 (312,324) 1,423,313
Net income............................. 1,013,296 763,674 9,971 1,253,575
Net income per share -- Basic(2)....... $ 0.18 $ 0.13 $ 0.00 $ 0.15
Net income per share -- Diluted(3)..... $ 0.16 $ 0.12 $ 0.00 $ 0.14
Weighted average shares outstanding --
basic............................... 5,773,046 5,917,110 6,950,588 8,152,524
Weighted average shares outstanding --
diluted............................. 6,429,960 6,568,083 7,647,260 8,672,229
Capitalized software costs, net........ $ 2,534,212 $ 2,814,925 $ 3,124,397 $ 3,522,484
Total assets........................... 13,764,384 15,029,073 46,548,965 52,157,495
Deferred revenue....................... 899,453 1,172,202 1,031,360 1,851,960
Shareholders' equity................... 10,748,081 11,477,455 43,110,449 45,835,131
</TABLE>
---------------
(1) Quarterly financial data has been restated. See Note 1.
(2) Due to rounding of quarterly calculations being different from rounding of
year to date information, the sum of basic net income per share for the four
quarters does not equal basic net loss per share for the year.
(3) Due to the calculation of weighted average shares outstanding for the year
as the average of quarterly weighted average shares outstanding, the sum of
diluted net income per share for the four quarters does not equal diluted
net income per share for the year.
F-31
<PAGE> 132
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
BY AND AMONG
LONDON BRIDGE SOFTWARE HOLDINGS PLC,
LONDON BRIDGE ACQUISITION COMPANY, INC.
AND
PHOENIX INTERNATIONAL LTD., INC.
DATED AS OF OCTOBER 25, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
A-1
<PAGE> 133
TABLE OF CONTENTS
<TABLE>
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ARTICLE I PURCHASE AND SALE................................................. A-6
Section 1.1 Agreement to Purchase and Sell.............................. A-6
Section 1.2 Assets...................................................... A-6
Section 1.3 Excluded Assets............................................. A-7
Section 1.4 Assumption of Assumed Liabilities........................... A-8
Section 1.5 Excluded Liabilities........................................ A-9
Section 1.6 New Zealand Share Option.................................... A-10
ARTICLE II PURCHASE PRICE; ADJUSTMENTS; ALLOCATIONS......................... A-10
Section 2.1 Purchase Price.............................................. A-10
Section 2.2 Payment of Purchase Price................................... A-10
Section 2.3 Adjustment of Purchase Price................................ A-10
Section 2.4 [Intentionally omitted.].................................... A-11
Section 2.5 Allocation of Certain Items................................. A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER.................... A-12
Section 3.1 Organization................................................ A-12
Section 3.2 Authorization............................................... A-12
Section 3.3 No Conflict................................................. A-13
Section 3.4 Required Filings and Consents............................... A-14
Section 3.5 Compliance.................................................. A-14
Section 3.6 SEC Filings, Financial Statements........................... A-14
Section 3.7 Absence of Certain Changes or Events........................ A-15
Section 3.8 Taxes....................................................... A-15
Section 3.9 Real Property............................................... A-16
Section 3.10 Assets...................................................... A-16
Section 3.11 Existing Seller Projects.................................... A-17
Section 3.12 Litigation.................................................. A-17
Section 3.13 Material Contracts.......................................... A-17
Section 3.14 Information Supplied........................................ A-19
Section 3.15 Employee Benefit Plans...................................... A-19
Section 3.16 Labor and Employment Matters................................ A-20
Section 3.17 Environmental Compliance and Disclosure..................... A-22
Section 3.18 Intellectual Property....................................... A-22
Section 3.19 Brokers..................................................... A-26
Section 3.20 Insurance Policies.......................................... A-26
Section 3.21 Notes and Accounts Receivable............................... A-26
Section 3.22 Transactions with Affiliates................................ A-26
Section 3.23 No Existing Discussions..................................... A-27
Section 3.24 Shareholders' Rights Agreement.............................. A-27
Section 3.25 Major Suppliers and Customers............................... A-27
Section 3.26 Licenses and Permits........................................ A-27
Section 3.27 New Zealand Documents....................................... A-28
Section 3.28 Disclosure.................................................. A-28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE
PURCHASER........................................................ A-28
Section 4.1 Organization and Standing................................... A-28
Section 4.2 Authority for Agreement..................................... A-29
Section 4.3 No Conflict................................................. A-29
Section 4.4 Required Filings and Consents............................... A-29
</TABLE>
A-2
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<TABLE>
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Section 4.5 Information Supplied........................................ A-29
Section 4.6 Brokers..................................................... A-30
ARTICLE V CERTAIN COVENANTS AND AGREEMENTS.................................. A-30
Section 5.1 Conduct of the Business Pending the Closing................. A-30
Section 5.2 Access to Information; Confidentiality...................... A-31
Section 5.3 Notification of Certain Matters; Supplements to Seller
Disclosure Letter........................................... A-32
Section 5.4 Reasonable Best Efforts; Further Assurances................. A-32
Section 5.5 Board Recommendations....................................... A-33
Section 5.6 Acquisition Proposals....................................... A-34
Section 5.7 Seller Shareholders' Meeting................................ A-35
Section 5.8 Proxy Statement............................................. A-35
Section 5.9 [Intentionally omitted.].................................... A-36
Section 5.10 Consents.................................................... A-36
Section 5.11 Public Announcements........................................ A-36
Section 5.12 Employees................................................... A-37
Section 5.13 Transfer Taxes; Expenses.................................... A-38
Section 5.14 Insurance................................................... A-38
Section 5.15 Name Change................................................. A-38
Section 5.16 Risk of Loss................................................ A-39
Section 5.17 Customer Visits............................................. A-39
Section 5.18 Personal Computer Equipment................................. A-39
Section 5.19 Parent Guarantee............................................ A-39
ARTICLE VI CONDITIONS TO CLOSING............................................ A-39
Section 6.1 Conditions to Each Party's Obligations...................... A-39
Section 6.2 Conditions to Obligations of the Purchaser.................. A-40
Section 6.3 Conditions to Obligations of the Seller..................... A-42
ARTICLE VII CLOSING......................................................... A-42
ARTICLE VIII TERMINATION..................................................... A-43
Section 8.1 Termination................................................. A-43
Section 8.2 Effect of Termination....................................... A-44
ARTICLE IX INDEMNIFICATION.................................................. A-44
Section 9.1 Indemnification Obligations of the Seller................... A-44
Section 9.2 Indemnification Obligations of the Purchaser................ A-45
Section 9.3 Indemnification Procedure................................... A-46
Section 9.4 Claims Period............................................... A-47
Section 9.5 Liability Limits............................................ A-47
Section 9.6 Investigations.............................................. A-47
ARTICLE X MISCELLANEOUS PROVISIONS.......................................... A-48
Section 10.1 Notices..................................................... A-48
Section 10.2 Schedules and Exhibits...................................... A-48
Section 10.3 Assignment; Successors in Interest.......................... A-49
Section 10.4 Number; Gender.............................................. A-49
Section 10.5 Captions.................................................... A-49
Section 10.6 Controlling Law; Amendment.................................. A-49
Section 10.7 Consent to Jurisdiction, Etc................................ A-49
Section 10.8 Severability................................................ A-49
Section 10.9 Counterparts................................................ A-49
Section 10.10 Enforcement of Certain Rights............................... A-49
Section 10.11 Waiver...................................................... A-50
Section 10.12 Integration................................................. A-50
</TABLE>
A-3
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<TABLE>
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<S> <C> <C>
Section 10.13 Compliance with Bulk Sales Laws............................. A-50
Section 10.14 Cooperation Following the Closing........................... A-50
Section 10.15 Transaction Costs........................................... A-50
Section 10.16 Certain Definitions......................................... A-50
Section 10.17 Business Day................................................ A-51
Section 10.18 Agreement not to Sue........................................ A-51
</TABLE>
A-4
<PAGE> 136
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of October 25,
2000, is made and entered into by and among LONDON BRIDGE SOFTWARE HOLDINGS PLC,
a corporation organized under the laws of England and Wales ("Parent"), LONDON
BRIDGE ACQUISITION COMPANY, INC., a Delaware corporation and an indirect wholly
owned subsidiary of Parent (the "Purchaser"), and PHOENIX INTERNATIONAL LTD.,
INC., a Florida corporation (on behalf of itself and its subsidiaries the
"Seller"). The Purchaser and the Seller are sometimes individually referred to
herein as a "Party" and collectively as the "Parties."
WITNESSETH:
WHEREAS, the Parties desire to enter into this Agreement pursuant to which
the Seller proposes to sell to the Purchaser, and the Purchaser proposes to
purchase from the Seller (the "Acquisition"), certain of the assets used or held
for use by the Seller in the conduct of its business as a going concern (the
"Business"), and the Purchaser proposes to assume certain of the liabilities and
obligations of the Seller;
WHEREAS, in furtherance of the foregoing, upon the terms and subject to the
conditions of this Agreement, the Parties will effect the Acquisition in
accordance with the Business Corporation Act of the State of Florida (the
"FBCA");
WHEREAS, as of the date hereof, SAFECO Asset Management Company, SAFECO
Corporation and Robert Fleming, Inc. (collectively, the "Shareholders")
beneficially own or have the power to vote shares of common stock of the Seller,
$0.01 par value per share ("Seller Common Stock"), representing in the aggregate
approximately 24.0% of the outstanding Seller Common Stock;
WHEREAS, concurrently with the execution and delivery of this Agreement,
and as a condition and inducement to the Purchaser entering into this Agreement,
each of the Shareholders has entered into a shareholder's agreement, dated as of
the date hereof (individually a "Shareholder's Agreement" and collectively, the
"Shareholders' Agreements"), pursuant to which, among other things, the
Shareholder has agreed to vote its shares in favor of the Acquisition;
WHEREAS, concurrently with the execution of this Agreement, the Parties
have amended the Governance Agreement between the Seller and the Purchaser dated
February 14, 2000 and the related irrevocable proxy to provide, among other
things, that the Seller will vote the shares of Seller Common Stock owned by the
Purchaser subject to such agreement in favor of the transactions contemplated by
this Agreement and against any Alternative Transaction (as hereinafter defined);
WHEREAS, concurrently with the execution of this Agreement, the Seller and
the Purchaser have entered into a License and Reseller Agreement whereby the
Purchaser has agreed to resell certain products and services of the Seller;
WHEREAS, concurrently with the execution of this Agreement the parties
hereto have entered into a loan agreement pursuant to which the Purchaser has
agreed to provide a $10,000,000 line of credit to the Seller (the "Line of
Credit");
WHEREAS, the Board of Directors of the Seller has unanimously determined
that the Acquisition and this Agreement are fair to, and in the best interests
of, the Seller and the holders of Seller Common Stock;
WHEREAS, the Board of Directors of the Purchaser unanimously approved this
Agreement and the Acquisition upon the terms and subject to the conditions set
forth herein;
WHEREAS, the Board of Directors of the Seller has unanimously approved this
Agreement, the Acquisition and the transactions contemplated hereby, which
approval was based in part on the opinion of The Robinson-Humphrey Company, LLC
(the "Independent Advisor"), independent financial advisor to the Seller, that,
as of the date of such opinion and based on the assumptions, qualifications and
limitations contained therein, the consideration to be received by the Seller in
the Acquisition is fair, from a financial point of view to the Seller;
A-5
<PAGE> 137
WHEREAS, the Board of Directors of the Seller has unanimously resolved to
recommend that the holders of the Seller Common Stock approve the Acquisition,
this Agreement and the transactions contemplated hereby.
WHEREAS, the Parties desire to make certain representations, warranties and
agreements in connection with the Acquisition;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the Parties agree as
follows:
ARTICLE I
PURCHASE AND SALE
Section 1.1 Agreement to Purchase and Sell. Subject to the terms and
conditions of this Agreement, at the Closing (as hereinafter defined) and except
as otherwise specifically provided in this Article I, the Seller will grant,
sell, assign, transfer and deliver to the Purchaser, and the Purchaser will
purchase and acquire from the Seller (and its subsidiaries), all right, title
and interest of the Seller (and its subsidiaries) in and to the Assets (as
hereinafter defined), except for the Excluded Assets (as hereinafter defined),
of the Seller (and its subsidiaries), free and clear of all mortgages, liens,
pledges, security interests, charges, claims, restrictions and encumbrances of
any nature whatsoever other than those set forth in Section 3.10 of the Seller
Disclosure Letter (collectively, the "Liens"), and the Purchaser will assume the
Assumed Liabilities (as hereinafter defined).
Section 1.2 Assets. Except as otherwise expressly set forth in Section
1.3, the Assets shall include the following assets (the "Assets") used in and
for the Business as of the Closing Date (as hereinafter defined):
(a) all inventory, including without limitation, office and other
supplies, spare, replacement and component parts, and other inventory
property located at, stored on behalf of or in transit to the Seller or any
subsidiary of the Seller;
(b) all deposits, advances, pre-paid expenses and credits;
(c) all fixed assets, equipment, furnishings, computer hardware
(including operating systems and firmware), vehicles, fixtures and other
tangible personal property;
(d) all rights of the Seller and its subsidiaries under those
contracts listed in Section 1.2(d) of the Seller Disclosure Letter
delivered by the Seller to the Purchaser concurrently with the execution of
this Agreement (the "Seller Disclosure Letter") and any rights to enforce
non-disclosure agreements which relate to the Assets (collectively, the
"Assumed Contracts");
(e) all Real Property (as hereinafter defined), identified in Section
3.9 of the Seller Disclosure Letter and all licenses, permits, approvals,
qualifications, easements and other rights relating thereto;
(f) all goodwill, patents, patent applications, copyrights, copyright
applications, methods, know-how, software, technical documentation,
processes, procedures, inventions, trade secrets, trademarks, trade names,
service marks, service names, registered user names, technology, research
records, data, designs, plans, drawings, manufacturing know-how and
formulas, whether patentable or unpatentable, and other intellectual or
proprietary rights or property of the Seller and its subsidiaries (and all
rights thereto and applications therefor), including, without limitation,
the Intellectual Property (as hereinafter defined) owned or controlled by
the Seller or any of its subsidiaries, the Intellectual Property Rights (as
hereinafter defined) and the Licensed Rights (as hereinafter defined);
(g) all accounts receivable (including, but not limited to, accounts
receivable that have been written off in full prior to the Closing), notes
receivable and other receivables and any security therefor relating to the
Assumed Contracts;
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<PAGE> 138
(h) all rights to causes of action, lawsuits, judgments, claims and
demands of any nature available to or being pursued by the Seller or any of
its subsidiaries, whether arising by way of counterclaim or otherwise, to
the extent related to the Assets or the Assumed Liabilities (as hereinafter
defined) and except as such relate to obligations under an Assumed Contract
that accrue prior to the Closing Date;
(i) all rights in and under all express or implied guarantees,
warranties, representations, covenants, indemnities and similar rights in
favor of the Seller or any of its subsidiaries to the extent related to the
Assets or the Assumed Liabilities;
(j) all permits, approvals, licenses, qualifications, product
registrations, safety certifications, authorizations or similar rights to
the extent that they are assignable, including, but not limited to, those
set forth on Section 3.26 of the Seller Disclosure Letter (unless otherwise
indicated thereon);
(k) copies of all information, files, correspondence, records, data,
plans, reports, contracts and recorded knowledge with respect to the Assets
and Assumed Liabilities, including customer, supplier, price and mailing
lists, computer media, sales and marketing materials, invoices,
correspondence and all accounting or other books and records of the Seller
and its subsidiaries in whatever media retained or stored, including,
without limitation, computer programs and disks (other than with respect to
such files, books and records relating exclusively to Excluded Assets or
Excluded Liabilities);
(l) all of the Seller's rights with respect to advertisements used
specifically in the Business, and all of the Seller's goodwill relating to
or arising in connection with the Business, including with respect to the
Seller's intangible assets used in or for the Business;
(m) all of the Seller's rights under any noncompetition, nondisclosure
or other restrictive covenant made for the benefit of the Seller or any of
its subsidiaries (or any of their respective predecessors) in any contract
with current or former employees of the Seller, or its subsidiaries
regardless of whether any such current employee accepts the Purchaser's
offer pursuant to Section 5.12;
(n) all right, title and interest in and to the equity interest of
Netzee Inc. owned by the Seller; and
(o) any cash, cash equivalents or marketable securities and all rights
to any bank accounts of the Seller or any of its subsidiaries (but
excluding any cash, cash equivalents or marketable securities from the
proceeds of the sale or settlement of any Excluded Asset or Excluded
Liability);
(p) all of the Seller's rights and interests in and to its investment
in Phoenix International New York, Inc.;
(q) all of the Seller's interest under the leases included in the
Assumed Contracts, and
(r) copies of all tax returns and books of account of the Seller and
its subsidiaries.
Section 1.3 Excluded Assets. Notwithstanding anything to the contrary set
forth in this Agreement, the Assets will not include any assets of the Seller or
its subsidiaries not identified in Section 1.2 and shall explicitly exclude,
without limitation, the following assets, properties and rights of the Seller
and its subsidiaries (collectively, the "Excluded Assets"):
(a) except as otherwise provided in Section 5.12, all ownership and
other rights with respect to the Seller Benefit Plans (as hereinafter
defined), contracts with current or former employees of the Seller or its
subsidiaries, and all claims and other rights to one or more refunds,
recoveries or other payments of workers' compensation related or group
health plan related funds or other assets;
(b) any permit, approval, license, qualification, registration,
certification, authorization or similar right that by its terms is not
transferable to the Purchaser as indicated in Section 3.26 of the Seller
Disclosure Letter as not being transferable;
(c) any accounts receivable from an Affiliate (as hereinafter defined)
and any collateral associated therewith;
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<PAGE> 139
(d) the charter documents, minute books, stock ledgers, tax returns,
books of account and other constituent records relating to the corporate
organization of the Seller and its subsidiaries, other than Phoenix
International New York, Inc.;
(e) the rights that accrue to the Seller and its subsidiaries under
this Agreement, the Seller Ancillary Documents (as hereinafter defined),
the Purchaser Ancillary Documents (as hereinafter defined) or any of the
transactions contemplated in writing by such documents;
(f) the contracts identified in Section 1.3(f) of the Seller
Disclosure Letter;
(g) all of the properties and assets which shall have been transferred
or disposed of by the Seller, its subsidiaries or any Affiliate of the
Seller or its subsidiaries prior to Closing which transfers or dispositions
have been approved with the Purchaser's prior written consent;
(h) all of the assets, properties and rights primarily relating to or
arising out of any Excluded Liabilities (as hereinafter defined);
(i) the rights to any of Seller's claims for federal, state or local
tax refunds;
(j) the artwork and personal computer equipment set forth in Section
1.3(j) of the Seller Disclosure Letter;
(k) the rights to any of Seller's claims (other than with respect to
claims arising out of the Purchaser's status as a shareholder of the
Seller, except for claims arising with respect to this Agreement which
shall be resolved pursuant to Article IX hereof) relating to, resulting
from or arising out of claims made in pending or future suits, actions,
investigations or other legal governmental or administrative proceedings,
including but not limited to those identified in Section 1.3(k) of the
Seller Disclosure Letter or 3.12 of the Seller Disclosure Letter or the
issues which are the subject thereof (and any cash proceeds from the
settlement or resolution thereof);
(l) the stock or equity interests of any subsidiary of the Seller,
other than with respect to Phoenix International New York, Inc.; and
(m) the assets, properties and rights of the Seller with respect to
its non-trade finance operations in New Zealand all of which are identified
in Section 1.3(m) of the Seller Disclosure Letter.
Section 1.4 Assumption of Assumed Liabilities.
(a) Except as specifically provided in Section 1.4(b), the Purchaser
will not assume, in connection with the transactions contemplated by this
Agreement, any liability or obligation of the Seller or any of its
subsidiaries whatsoever, and the Seller and its subsidiaries will retain
responsibility for all liabilities and obligations accrued as of or on the
Closing Date and all liabilities and obligations arising from the Seller's
and its subsidiaries' operations prior to or on the Closing Date, whether
or not accrued and whether or not disclosed.
(b) As the sole exception to the provisions in Section 1.4(a),
effective as of the close of business on the Closing Date, the Purchaser
will assume and agree to pay, discharge or perform, as appropriate, the
following liabilities and obligations of the Seller existing as of such
time and arising out of the conduct of the Business prior to or on the
Closing Date (collectively, the "Assumed Liabilities"):
(i) obligations of the Seller and its subsidiaries under the
Assumed Contracts to the extent such obligations are disclosed on the
face of such Assumed Contracts or are disclosed and quantified in
Section 3.11 of the Seller Disclosure Letter (or if not otherwise so
disclosed would result in costs or expenses less than $15,000 with
respect to any individual Assumed Contract or customer) and accrue and
relate to the operations of the Business;
(ii) liabilities and obligations with respect to the Assets to the
extent such liabilities and obligations arise or accrue after the
Closing Date;
(iii) liabilities and obligations as set forth in Section 5.12; and
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(iv) trade payables of the Seller and its subsidiaries pertaining
to the Assets or Assumed Liabilities arising in the ordinary course of
business consistent with past practice which have accrued prior to the
date hereof or in compliance with Article V hereof.
Notwithstanding the foregoing, and for the avoidance of doubt, the Purchaser
shall perform all obligations under the Assumed Contracts, whether required to
be performed either before or after the Closing; provided that any losses or
damages resulting from the breach of any such Assumed Contract prior to the
Closing shall not be assumed by the Purchaser and shall be included in the
Excluded Liabilities.
Section 1.5 Excluded Liabilities. Specifically, and without in any way
limiting the generality of Section 1.4(a), the Assumed Liabilities will not
include, and in no event will the Purchaser assume, agree to pay, discharge or
satisfy any liability or obligation under this Agreement or otherwise have any
responsibility for, any liability or obligation (together with all other
liabilities of the Seller and its subsidiaries that are not Assumed Liabilities,
the "Excluded Liabilities"):
(a) relating to any liability or obligation (including, without
limitation, accounts payable) owed by the Seller or any of its Affiliates
to any Affiliate of the Seller;
(b) for Taxes (as hereinafter defined) with respect to any period,
except for Taxes (other than sales taxes) related to the Assets and Assumed
Liabilities which accrue for any period after the Closing;
(c) for any indebtedness with respect to borrowed money and notes
payable, including any interest or penalties accrued thereon, except with
respect to leases included in the Assumed Contracts collectively, the
"Closing Date Indebtedness");
(d) relating to, resulting from or arising out of (i) claims made in
pending or future suits, actions, investigations, or other legal,
governmental or administrative proceedings, including but not limited to
those identified in Section 1.3(k) of the Seller Disclosure Letter or
Section 3.12 of the Seller Disclosure Letter or (ii) claims based on
violations of law as in effect on or prior to the Closing, breach of
contract, employment practices, or environmental, health and safety
matters, in each case arising out of or relating to events which shall have
occurred, or services performed, or the operation of the Business, prior to
the Closing, except as otherwise provided in Section 5.12;
(e) pertaining to any Excluded Asset;
(f) relating to, resulting from or arising out of any former
operations of the Seller or its subsidiaries that have been discontinued or
disposed of prior to the Closing;
(g) under or relating to any Seller Benefit Plan, whether or not such
liability or obligation arises prior to, on or after the Closing Date
(except as may be required by Section 5.12) and including but not limited
to any liability with respect to vested options to purchase shares of
Seller Common Stock;
(h) of the Seller arising or incurred in connection with (i) the
negotiation, preparation and execution of this Agreement and the
transactions contemplated hereby and (ii) any fees and expenses of counsel,
accountants, brokers, financial advisors or other experts of the Seller
which have accrued as of the Closing Date (collectively, the "Professional
Fees"), including, but not limited to those Professional Fees incurred in
connection with the following:
(i) this Agreement and the transactions contemplated hereby;
(ii) in connection with the class action litigation filed in United
States District Court, Middle District Florida as In re Phoenix
International Ltd. Securities Litigation, Case 99-1495-CIV-ORL-18C (the
"Class Action") or resolution of any matters relating to the cause of
action;
(iii) the restatement of the Seller's financial statements; or
(iv) with respect to any of the other disputes identified in
Section 3.12 of the Seller Disclosure Letter; or
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(i) except as otherwise provided in Section 5.12, relating to,
resulting from or arising out of the Seller's (or its subsidiaries')
hiring, retention, failure to hire or termination of any person as an
employee, independent contractor or consultant which accrued prior to or on
the Closing Date.
Such Excluded Liabilities shall include all claims, actions, litigations and
proceedings relating to any or all of the foregoing and all costs and expenses
in connection therewith.
Section 1.6 New Zealand Share Option. Within ten (10) days following the
date hereof, the Purchaser may, at its option, notify the Seller that the
Purchaser intends to purchase all of the issued and outstanding shares of
Phoenix International A.P. Limited New Zealand owned by the Seller or any of its
Affiliates (the "New Zealand Share Option"). If the Purchaser exercises the New
Zealand Share Option, the assets and liabilities of Phoenix International A.P.
Limited New Zealand included in the Assets and Assumed Liabilities pursuant to
Sections 1.2 and 1.4 shall not be transferred to the Purchaser pursuant to such
sections; rather, the issued and outstanding shares of Phoenix International
A.P. Limited New Zealand owned by the Seller or any of its Affiliates (and all
rights, powers and privileges associated therewith) shall be included in the
Assets. The Seller shall use its commercially reasonable efforts promptly to
cooperate with and assist the Purchaser in completing any necessary due
diligence in connection with the New Zealand Share Option.
ARTICLE II
PURCHASE PRICE; ADJUSTMENTS; ALLOCATIONS
Section 2.1 Purchase Price.
(a) Subject to adjustment pursuant to Section 2.1(b) and (c) and
Section 2.3, the aggregate amount to be paid for the Assets (the "Purchase
Price") shall be equal to $45,462,092.00 (which was calculated in
accordance with Schedule 2.1(a) of this Agreement). In addition to the
foregoing payment, as additional consideration for the grant, sale,
assignment, transfer and delivery of the Assets, the Purchaser shall assume
and discharge the Assumed Liabilities.
(b) At least three (3) business days prior to the Closing Date, the
Seller shall deliver to the Purchaser a true, accurate and complete
itemized list of all Professional Fees which have been paid between
September 1, 2000 and the date hereof, which shall be updated by the Seller
on and as of the Closing. The Purchase Price shall be reduced on a dollar
for dollar basis in an amount equal to the aggregate amount of such
payments through the date hereof and shall be included as a part of the
Final Purchase Price Adjustment.
(c) If the Purchaser exercises the New Zealand Share Option, the
Purchase Price shall be reduced by an amount equal to $850,000.
Section 2.2 Payment of Purchase Price. On the Closing Date, the Purchaser
shall:
(a) deposit in escrow with the escrow agent identified in the form of
Escrow Agreement attached as Exhibit 2.2(a) (the "Escrow Agreement") (i) an
amount equal to 25% of the Purchase Price (the "Escrow Amount") and (ii) an
additional amount equal to the then outstanding balance under the Line of
Credit (the "Holdback Amount"), which amounts shall be held and disbursed
in accordance with the terms of this Agreement and such Escrow Agreement;
and
(b) pay or cause to be paid to the Seller an amount equal to the
Purchase Price minus (i) the Escrow Amount and (ii) the Holdback Amount.
Section 2.3 Adjustment of Purchase Price.
(a) As promptly as practicable following the date hereof (but in any
event on or prior to November 15, 2000), the Seller shall deliver to the
Purchaser a balance sheet of the Seller (the "Initial Seller Balance
Sheet") which indicates the net working capital of the Seller as of the
date hereof (the "Initial Working Capital"). The Purchaser shall have ten
(10) business days following receipt of the Initial Seller Balance Sheet
during which to provide written notification ("Initial Dispute Notice") to
the
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Seller of any dispute of any item therein, which notice shall set forth in
reasonable detail the basis for such dispute. If the Purchaser does not
timely deliver the Initial Dispute Notice, the Initial Seller Balance Sheet
shall be deemed to reflect the final agreement of the parties. The
Purchaser and the Seller shall cooperate in good faith to resolve any
dispute as promptly as possible, and upon such resolution, a final
agreement upon the Initial Working Capital shall be promptly prepared and
signed off on by each of the parties. If the Purchaser and the Seller are
unable to resolve the Initial Working Capital dispute (the "Initial
Dispute") within five (5) business days of Seller's receipt of the Initial
Dispute Notice (or such longer period agreed in writing by the parties),
the parties shall engage a mutually agreeable independent "Big 5"
accounting firm (the "Arbitrator") to resolve the Initial Dispute and such
resolution shall be final and binding on the parties. The Arbitrator shall
use commercially reasonable efforts to complete its work within five (5)
business days of its engagement. The expenses of the Arbitrator shall be
paid by the party against whom the Arbitrator resolves the dispute or, if
the resolution is only partially in favor of one party, the expenses shall
be paid by each of the parties in an amount that is in proportion to the
allocation of the amount in dispute which is attributable to each such
party.
(b) As promptly as practicable following the Closing Date (but in any
event within five (5) business days), the Purchaser will prepare (in
consultation with the Seller) and deliver to the Seller a revised balance
sheet which shall reflect the net working capital of the Seller as of the
Closing Date after application of the agreed upon adjustments which shall
be calculated in accordance with the methodology described in Schedule
2.3(a) (the "Preliminary Purchase Price Adjustment"). The Seller shall have
five (5) business days following receipt of the Preliminary Purchase Price
Adjustment during which to provide written notification ("PPA Dispute
Notice") to the Purchaser of any dispute of any item therein, which notice
shall set forth in reasonable detail the basis for such dispute. If the
Seller does not timely deliver the PPA Dispute Notice, the Preliminary
Purchase Price Adjustment shall be deemed to reflect the final agreement of
the parties. The Purchaser and the Seller shall cooperate in good faith to
resolve any dispute as promptly as possible, and upon such resolution, a
Final Purchase Price Adjustment (as hereinafter defined) shall be promptly
prepared and signed off on by each of the parties.
(c) If the Purchaser and the Seller are unable to resolve the Purchase
Price adjustment dispute (the "PPA Dispute") within five (5) business days
of Purchaser's receipt of the PPA Dispute Notice (or such longer period
agreed in writing by the parties), the parties shall engage a mutually
agreeable Arbitrator to resolve the PPA Dispute and such resolution shall
be final and binding on the parties. The Arbitrator shall use commercially
reasonable efforts to complete its work within five (5) business days of
its engagement. The expenses of the Arbitrator shall be paid by the party
against whom the Arbitrator resolves the dispute or, if the resolution is
only partially in favor of one party, the expenses shall be paid by each of
the parties in an amount that is in proportion to the allocation of the
amount in dispute which is attributable to each such party. The Preliminary
Purchase Price Adjustment as finally determined pursuant to this Section
2.3 is referred to herein as the "Final Purchase Price Adjustment." Within
one (1) business day after the determination of the Final Purchase Price
Adjustment, the parties shall cause (i) the positive difference between the
Holdback Amount and the Final Purchase Price Adjustment (including any
amounts earned thereon pursuant to the Escrow Agreement) to be paid to the
Seller out of the Holdback Amount held in escrow and (ii) any amounts
remaining in the escrow account after the distribution described in clause
(i) with respect to the Holdback Amount (including any amounts earned
thereon pursuant to the Escrow Agreement) shall be returned to the
Purchaser.
Section 2.4 [INTENTIONALLY OMITTED.]
Section 2.5 Allocation of Certain Items. With respect to certain expenses
incurred with respect to the Assets in the operation of the Business, the
following allocations will be made between the Purchaser and the Seller:
(a) Workers' Compensation. Pursuant to the provisions of this
Agreement, the Seller will be responsible for and pay any and all workers'
compensation claims asserted by or with respect to any employee or former
employee of the Seller (or any of them) in respect of any injury or other
compensable event or occupational illness or disease which occurred or is
attributable to any event, state
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of facts or condition which existed or occurred in whole prior to or on the
Closing Date. The Purchaser is responsible for and will pay any and all
workers' compensation claims asserted by or with respect to any employee
hired by the Purchaser in respect of any injury or other compensable event
or occupational illness or disease which occurred or is attributable to any
event, state of facts or condition which existed or occurred in whole after
the Closing Date. If any such injury or other compensable event or
occupational illness or disease of a person who was employed both by the
Seller prior to or on the Closing Date and by the Purchaser after the
Closing Date is attributable primarily to causes occurring prior to or on
the Closing Date and is the basis of a workers' compensation claim asserted
after the date hereof, then liability for any such claim shall be the
responsibility of the Seller. Prior to the Closing Date, the Seller shall
pay to its employees (and the employees of its Subsidiaries) all
compensation (including overtime wages) owed to such employees as of the
Closing Date as well as all accrued bonuses and sales commissions earned as
of the Closing Date.
(b) Appropriate cash payments by the Purchaser or the Seller, as the
case may require, shall be made hereunder from time to time as soon as
practicable after the facts given rise to the obligation for such payments
are known in the amounts necessary to give effect to the allocations
provided for in this Section 2.5; provided, however, that such payments
shall not be required to the extent an accrued expense or prepaid expense
is adequately reflected with respect to such item on the Seller's financial
statements.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser as follows:
Section 3.1 Organization. Each of the Seller and each of its subsidiaries
(the "Subsidiaries") (i) is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, (ii)
has full corporate power and authority and all necessary government approvals to
own, lease and operate its properties and assets and to conduct its business as
presently conducted and (iii) is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
business makes such qualification or licensing necessary, except where the
failure to be so qualified or licensed would not, individually or in the
aggregate, have a Seller Material Adverse Effect. The Seller has furnished or
made available to the Purchaser true and complete copies of its articles of
incorporation (including any certificates of designations attached thereto, the
"Seller Articles of Incorporation") and bylaws (the "Seller Bylaws") and the
articles of incorporation and bylaws (or equivalent organizational documents) of
each Subsidiary, each as amended to date. Such articles of incorporation, bylaws
or equivalent organizational documents are in full force and effect, and neither
the Seller nor any Subsidiary is in violation of any provision of its articles
of incorporation, bylaws or equivalent organizational documents. Section 3.1 of
the Seller Disclosure Letter contains a true and complete list of the
Subsidiaries and a list of the jurisdictions in which the Seller and its
Subsidiaries are registered or qualified to do business.
Section 3.2 Authorization.
(a) Each of the Seller and its Subsidiaries, as applicable, has all
necessary power and authority to execute and deliver this Agreement and any
other certificate, agreement, document or other instrument to be executed
and delivered by it in connection with the transactions contemplated by
this Agreement (the "Seller Ancillary Documents") and to perform its
obligations hereunder and under the Seller Ancillary Documents and, subject
to obtaining necessary shareholder approval, to consummate the Acquisition
and the other transactions contemplated by this Agreement and the Seller
Ancillary Documents. The execution, delivery and performance by each of the
Seller and its Subsidiaries, as applicable, of this Agreement and the
Seller Ancillary Documents, and the approval and consummation by the Seller
of the Acquisition and the other transactions contemplated by this
Agreement and the Seller Ancillary Documents, have been duly authorized by
all necessary corporate action (including, without limitation, the
unanimous approval of the Board of Directors of the Seller) and no other
corporate
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proceedings on the part of the Seller or any of its Subsidiaries are
necessary to authorize this Agreement or the Seller Ancillary Documents or
to consummate the Acquisition or the other transactions contemplated by
this Agreement or the Seller Ancillary Documents (other than, with respect
to the Acquisition, the approval and adoption of this Agreement by the
affirmative vote of a two-thirds of the voting power of the then
outstanding shares of Seller Common Stock). This Agreement has been and the
Seller Ancillary Documents will be duly executed and delivered by each of
the Seller and its Subsidiaries and, assuming the due authorization,
execution and delivery by the Purchaser, constitute a legal, valid and
binding obligation of the Seller and its Subsidiaries enforceable against
the Seller and its Subsidiaries in accordance with their terms. The
affirmative vote of holders of two-thirds of the outstanding shares of
Seller Common Stock entitled to vote is the only vote of the Seller's
shareholders (the "Seller Shareholders") necessary to approve this
Agreement, the Acquisition and the other transactions contemplated by this
Agreement and the Seller Ancillary Documents.
(b) At a meeting duly called and held on October 24, 2000, the Board
of Directors of the Seller unanimously (i) determined that this Agreement,
the Seller Ancillary Documents and the Shareholders' Agreements and the
other transactions contemplated hereby and thereby, including the
Acquisition, are fair to and in the best interests of the Seller and the
Seller Shareholders, (ii) approved, authorized and adopted this Agreement,
the Acquisition and the other transactions contemplated hereby, and (iii)
resolved to recommend approval and adoption of this Agreement and the
Acquisition by the Seller Shareholders. The actions taken by the Board of
Directors of the Seller constitute approval of the Acquisition, this
Agreement, the Seller Ancillary Documents and the Shareholders' Agreements
and the other transactions contemplated hereby and thereby by the Board of
Directors of the Seller under the provisions of Section 607.0901 of the
FBCA such that Section 607.0901 of the FBCA does not apply to this
Agreement, the Seller Ancillary Documents the Shareholders' Agreements or
the transactions contemplated hereby or thereby. Other than Section
607.0901 of the FBCA, no state antitakeover or similar statute or provision
in the Seller's or its Subsidiaries' governing documents is applicable to
the Purchaser in connection with the Acquisition, this Agreement, the
Seller Ancillary Documents or the Shareholders' Agreements or any of the
transactions contemplated hereby or thereby.
(c) The Independent Advisor has delivered to the Board of Directors of
the Seller its written opinion, dated as of the date of this Agreement,
that, as of such date and based on the assumptions, qualifications and
limitations contained therein, the consideration to be received by the
Seller in the Acquisition is fair to the Seller from a financial point of
view. A copy of such opinion shall be provided to the Purchaser promptly
upon its delivery to the Seller.
Section 3.3 No Conflict. The execution and delivery of this Agreement and
the Seller Ancillary Documents by the Seller do not, and the performance of this
Agreement and the Seller Ancillary Documents by the Seller and its Subsidiaries
and the consummation of the Acquisition and the other transactions contemplated
by this Agreement and the Seller Ancillary Documents will not, (i) conflict with
or violate the Seller Articles of Incorporation or Seller Bylaws or equivalent
organizational documents of any of its Subsidiaries, (ii) subject to Section
3.4, conflict with or violate any United States federal, state or local or any
foreign statute, law, rule, regulation, ordinance, code, order, judgment, decree
or any other requirement or rule of law (a "Law") applicable to the Seller or
any of its Subsidiaries or by which any property or asset of the Seller or any
of its Subsidiaries is bound or affected, or (iii) except as listed in Section
3.3 of the Seller Disclosure Letter result in a breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, give to others any right of termination, amendment, acceleration
or cancellation of, result in triggering any payment or other obligations, or
result in the creation of a lien or other encumbrance on any property or asset
of the Seller or any of its Subsidiaries pursuant to, any Assumed Contract to
which the Seller or any of its Subsidiaries is a party or by which the Seller or
any of its Subsidiaries or any property or asset of any of them is bound or
affected, except in the case of clauses (ii) and (iii) for any such conflicts,
violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, prevent or materially delay the performance by
the Seller of its obligations under this Agreement or the consummation of the
Acquisition or the other transactions contemplated by this Agreement or the
Seller Ancillary Documents.
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Section 3.4 Required Filings and Consents. Except as set forth in Section
3.4 of the Seller Disclosure Letter, the execution and delivery of this
Agreement by the Seller do not, and the performance of this Agreement and the
Seller Ancillary Documents by the Seller and its Subsidiaries will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any United States federal, state or local or any foreign
government or any court, administrative or regulatory agency or commission or
other governmental authority or agency, domestic or foreign (a "Governmental
Entity"), except for those required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act").
Section 3.5 Compliance. Each of the Seller and its Subsidiaries (i) has
been operated at all times in compliance in all material respects with all Laws
applicable to the Seller or any of its Subsidiaries or by which any property,
business or asset of the Seller or any of its Subsidiaries is bound or affected
and (ii) except as set forth in Section 3.5 of the Seller Disclosure Letter is
not in default or violation of any Assumed Contract to which the Seller or any
of its Subsidiaries is a party or by which the Seller or any of its Subsidiaries
or any property or asset of the Seller or any of its Subsidiaries is bound or
affected.
Section 3.6 SEC Filings, Financial Statements.
(a) Except as set forth in Section 3.6(a) of the Seller Disclosure
Letter, the Seller and each Subsidiary, as necessary, has filed all forms,
reports, statements and documents required to be filed with the Securities
and Exchange Commission (the "SEC") since January 1, 1997 (the "SEC
Reports"), each of which has complied in all material respects with the
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder, or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder. Except as set forth in
Section 3.6(a) of the Seller Disclosure Letter, none of the SEC Reports
(including, but not limited to, any financial statements or schedules
included or incorporated by reference therein) contained when filed any
untrue statement of a material fact or omitted or omits to state a material
fact required to be stated or incorporated by reference therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Except to the
extent that information contained in any SEC Report has been revised or
superseded by a later filed SEC Report, none of the SEC Reports contains
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Except as set forth in Section 3.6(b) of the Seller Disclosure
Letter, all of the financial statements included in the SEC Reports, in
each case, including any related notes thereto, as filed with the SEC
(collectively referred to as the "Seller Financial Statements"), have been
prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as may be permitted by Form 10-Q of the SEC and
subject, in the case of the unaudited statements, to normal, recurring
audit adjustments) and fairly present the consolidated financial position
of the Seller and its Subsidiaries at the respective date thereof and the
consolidated results of its operations and changes in cash flows for the
periods indicated. The Seller Financial Statements contain proper reserves
for claims, litigation and uncollectible accounts receivable.
(c) There are no liabilities of the Seller or any of its Subsidiaries
of any kind whatsoever, whether or not accrued and whether or not
contingent or absolute, that are material to the Seller and its
Subsidiaries, taken as a whole, with respect to the Assets and Assumed
Liabilities other than (i) liabilities disclosed or provided for in the
consolidated balance sheet of the Seller and its Subsidiaries at June 30,
2000, including the notes thereto, (ii) liabilities disclosed in the SEC
Reports, (iii) liabilities incurred on behalf of the Seller in connection
with this Agreement and the contemplated Acquisition, and (iv) liabilities
incurred in the ordinary course of business consistent with past practice
since December 31, 1999, none of which are, individually or in the
aggregate, reasonably likely to be material to the Seller.
(d) The Seller will make available upon filing to the Purchaser a
complete and correct copy of any amendments or modifications which have not
yet been filed with the SEC to agreements, documents or
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other instruments which previously had been filed by the Seller with the
SEC as exhibits to the SEC Reports pursuant to the Securities Act and the
rules and regulations promulgated thereunder or the Exchange Act and the
rules and regulations promulgated thereunder.
Section 3.7 Absence of Certain Changes or Events. Except as contemplated
by this Agreement, in Section 3.7 of the Seller Disclosure Letter or in the SEC
Reports, since December 31, 1999, the Seller and its Subsidiaries have conducted
their respective businesses only in the ordinary course and consistent with past
practice and there has not been (a) any Seller Material Adverse Change (as
hereinafter defined) nor has there been any event or occurrence of any condition
that has had or would reasonably be expected to have a Seller Material Adverse
Effect (as hereinafter defined) or (b) any of the following:
(i) any declaration, setting aside or payment of any dividend on, or
other distribution (whether in cash, stock or property) in respect of, any
of the Seller's capital stock, or any purchase, redemption or other
acquisition of any of the Seller's capital stock or any other securities of
the Seller or any options, warrants, calls or rights to acquire any such
shares or other securities option or purchase agreements;
(ii) any granting (either orally or in writing) by the Seller or any
Subsidiary of any increase in compensation or fringe benefits, except for
normal increases in compensation in the ordinary course of business
consistent with past practice, or any payment by the Seller or any
Subsidiary of any bonus, except for bonuses made in the ordinary course of
business consistent with past practice, in each case to any director,
officer or employee;
(iii) any granting (either orally or in writing) by the Seller or any
Subsidiary to any officer or employee of any stock options or any severance
or termination pay or any increase in such pay;
(iv) any entry by the Seller or any Subsidiary into any currently
effective employment, severance, termination or indemnification or
consulting agreement with any current or former director, officer, employee
or consultant;
(v) any damage, destruction or loss, whether or not covered by
insurance, that individually or in the aggregate could reasonably be
expected have a Seller Material Adverse Effect;
(vi) any change in accounting methods, principles or practices by the
Seller or any Subsidiary;
(vii) any Tax (as hereinafter defined) election that individually or
in the aggregate could reasonably be expected to have a Seller Material
Adverse Effect or any other any adverse effect on the Seller's or any
Subsidiary's Tax attributes or any settlement or compromise of any Tax
liability;
(viii) any revaluation by the Seller or any Subsidiary of any of its
assets for financial accounting purposes;
(ix) any contract, agreement or understanding with regard to the
acquisition, disposition or encumbrance of any Intellectual Property (as
hereinafter defined) or rights thereto other than licenses in the ordinary
course of business consistent with past practice.
(x) any action of the type described in Sections 5.1(b) or 5.1(c)
which had such action been taken after the date of this Agreement would be
in violation of any such Section.
Section 3.8 Taxes. The Seller and each of its Subsidiaries have timely
filed all Tax Returns (as hereinafter defined) required to be filed by any of
them, except for those Tax Returns the failure of which to file would not, or
would not be reasonably expected to, result in a Seller Material Adverse Effect.
All such Tax Returns are true, correct and complete in all material respects.
All Taxes (as hereinafter defined) of the Seller and its Subsidiaries which are
(i) shown as due on such Tax Returns, (ii) otherwise due and payable or (iii)
claimed or asserted by any taxing authority to be due, have been paid, except
for those Taxes being contested in good faith and for which adequate reserves
have been established in the financial statements included in the SEC Reports in
accordance with GAAP and those Taxes, the failure of which to pay would not, or
would not reasonably be expected to, result in a Seller Material Adverse Effect.
There are no liens for any Taxes upon the Assets other than statutory liens for
Taxes not yet due and payable and liens for real estate Taxes contested in good
faith. The Seller does not know of any proposed or threatened Tax claims or
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assessments which, if upheld, could individually or in the aggregate have a
Seller Material Adverse Effect. Neither the Seller nor any of its Subsidiaries
has made an election under Section 341(f) of the Code. Neither the Seller nor
any of its Subsidiaries has waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, which waiver or extension is currently in effect. The Seller and
each Subsidiary has withheld and paid over to the relevant taxing authority all
Taxes required to have been withheld and paid in connection with payments to
employees, independent contractors, creditors, shareholders or other third
parties. Since January 1, 1997, the Seller has obligated all of the Seller's and
it Subsidiaries' customers and other applicable third parties so that any Tax
levied and/or assessed by the applicable taxing authority on the sale by the
Seller or any of its Subsidiaries of software licenses and services (other than
Tax on the income to the Seller or its Subsidiaries) will be paid by such
customers or third parties. The unpaid Taxes of the Seller and its Subsidiaries
for the current taxable period (A) did not, as of the most recent Seller
Financial Statements, exceed the reserve for Tax liability set forth on the face
of the balance sheet in the most recent Seller Financial Statements and (B) do
not exceed that reserve as adjusted for the passage of time through the Closing
in accordance with the past custom and practice of the Seller and its
Subsidiaries in filing their Tax Returns. For purposes of this Agreement, (a)
"Tax" (and, with correlative meaning, "Taxes") means any federal, state, local
or foreign income, gross receipts, property, sales, use, license, excise,
franchise, employment, payroll, premium, withholding, alternative or added
minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty or addition thereto, whether disputed or
not, imposed by any Governmental Entity, and (b) "Tax Return" means any return,
report or similar statement required to be filed with respect to any Tax
(including any attached schedules), including, without limitation, any
information return, claim for refund, amended return or declaration of estimated
Tax.
Section 3.8 of the Seller Disclosure Letter sets forth with reasonable
specificity: (i) all jurisdictions in which the Seller or any Subsidiary
currently has a presence requiring it to pay Taxes (a "Taxable Presence") and
all jurisdictions in which the Seller or any Subsidiary has had a Taxable
Presence since January 1, 1997 and (ii) all Tax Returns filed or due to be filed
applicable to the three year period ending on the date hereof.
Section 3.9 Real Property.
(a) Neither the Seller nor any of its Subsidiaries owns any real
property.
(b) Section 3.9(b) of the Seller Disclosure Letter sets forth a true
and correct description of the parcels of real property used in connection
with the Business and leased by the Seller or any Subsidiary (together with
all fixtures and improvements thereon, the "Real Property"). The Seller or
such Subsidiary has a valid leasehold interest in its Real Property, free
and clear of any Liens. The leases of the Real Property are in full force
and effect.
(c) To the knowledge of the Seller no portion of the Real Property, or
any of the buildings and improvements located thereon, violates any law,
rule, regulation, ordinance or statute, including those relating to zoning,
building, land use, environmental, health and safety, fire, air, sanitation
and noise control.
(d) The improvements on the Real Property are in good operating
condition and in a state of good maintenance and repair, ordinary wear and
tear excepted, are adequate and suitable for the purposes for which they
are presently being used. There are no condemnation or appropriation or
similar proceedings pending or, to the knowledge of the Seller, threatened
against any of the Real Property or the improvements thereon.
Section 3.10 Assets.
(a) The Assets constitute all of the assets necessary and sufficient
to conduct the operations of the Business in accordance with the Seller's
past practices. Except as set forth in Section 3.10 of the Seller
Disclosure Letter, the Seller has (and will convey to the Purchaser at the
Closing) good and marketable title to the Assets, free and clear of all
Liens. All equipment and other items of depreciable, fixed assets included
in the Assets (a) are in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted, (b) are usable in
the regular and ordinary course of business and
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(c) conform to all applicable material laws, ordinances, codes, rules and
regulations applicable thereto, and the Seller has no knowledge of any
defects or problems with any of the Assets. Except as set forth in Section
3.10 of the Seller Disclosure Letter no person other than the Seller or a
Subsidiary owns any equipment or other depreciable fixed assets or assets
situated on the premises of the Seller or a Subsidiary which are necessary
to the operation of the Business, except for the leased items that are
subject to personal property leases. Since December 31, 1999, the Seller
has not sold, transferred or disposed of any assets, other than sales of
inventory in the ordinary course of business. Section 3.10 of the Seller
Disclosure Letter sets forth a true, correct and complete list and general
description of each depreciable fixed asset of the Seller and its
Subsidiaries. Except as set forth in Section 3.10(a) of the Seller
Disclosure Letter, the Seller and each of its Subsidiaries either own, or
have valid leasehold or licensed interests in, all properties and assets
used by them in the conduct of their business. The Seller is not an
Affiliate of Phoenix International Industries, Inc. and no outstanding
Liens with respect to Phoenix International Industries, Inc. have any
affect on Assets.
(b) Except as set forth in Section 3.10(b) of the Seller Disclosure
Letter, neither the Seller nor any of its Subsidiaries has any legal
obligation, absolute or contingent, to any other person to sell or
otherwise dispose of (outside of ordinary course customer agreements
consistent with past practice) any of its assets.
Section 3.11 Existing Seller Projects. Section 3.11 of the Seller
Disclosure Letter sets forth a complete and accurate description of the
incomplete development, implementation, testing, quality assurance and
documentation projects of the Seller and its Subsidiaries to their customers
(including start date, live date, type, principal terms, estimated fees, time
input to date, amount invoiced and collected to date, man days remaining to
complete the Seller's obligations, current project status, financial outlays
required to complete such project, and amounts not yet invoiced) with respect or
relating to the Assumed Contracts and new potential projects as of the date
hereof. In addition, at the Closing, the Seller shall deliver to the Purchaser
an update of any changes to the information contained in Section 3.11 of the
Seller Disclosure Letter as of 2 days prior to the Closing Date.
Section 3.12 Litigation. Except for such matters disclosed in Section
3.12 of the Seller Disclosure Letter and those matters which, if adversely
determined individually or in the aggregate, are not, and would not reasonably
be expected to be, material to the Seller, there are no claims, suits, actions,
investigations, indictments or information, or administrative, arbitration or
other proceedings ("Litigation") pending or, to the knowledge of the Seller,
threatened against the Seller or any of its Subsidiaries. There are no
judgments, orders, injunctions, decrees, stipulations or awards (whether
rendered by a court, administrative agency, or by arbitration, pursuant to a
grievance or other procedure) against or relating to the Seller or any of its
Subsidiaries.
Section 3.13 Material Contracts. The Seller has provided to the Purchaser
true, correct and complete copies of all contracts material to the operation of
the Business, including, but not limited to, the following contracts to which
the Seller or a Subsidiary is a party (individually a "Material Contract" and
collectively the "Material Contracts"):
(a) all bonds, debentures, notes, loans, credit or loan agreements or
loan commitments, mortgages, indentures, guarantees or other contracts
relating to the borrowing of money or binding upon any properties or assets
(real, personal or mixed, tangible or intangible) of the Seller or its
Subsidiaries;
(b) all leases relating to Real Property or other leases or licenses
involving any properties or assets (whether real, personal or mixed,
tangible or intangible) involving an annual commitment or payment of more
than $10,000 individually by the Seller or its Subsidiaries;
(c) all contracts or agreements which limit or restrict the Seller or
its Subsidiaries or, to the knowledge of the Seller, any officers or key
employees of the Seller or its Subsidiaries from engaging in any business
in any jurisdiction;
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(d) all franchising and licensing agreements other than customer
contracts entered into in the ordinary course of business consistent with
past practice and non-exclusive software licenses for generally available
software;
(e) any contract or agreement for capital expenditures or the
acquisition or construction of fixed assets requiring the payment by the
Seller or any of its Subsidiaries of an amount in excess of $10,000;
(f) any contract that provides for an increased payment or benefit, or
accelerated vesting, upon the execution of the Agreement or in connection
with the transactions contemplated hereby;
(g) any contract or agreement granting any person a Lien on all or any
part of any assets;
(h) any contract or agreement for the cleanup, abatement or other
actions in connection with any Hazardous Materials (as hereinafter
defined), the remediation of any existing environmental condition or
relating to the performance of any environmental audit or study;
(i) any contract or agreement granting to any person an option or a
first refusal, first-offer or similar preferential right to purchase or
acquire any assets;
(j) any contract or agreement with any agent, distributor or
representative which is not terminable without penalty on thirty (30)
calendar days' or less notice;
(k) except for contracts with customers entered into in the ordinary
course of business consistent with past practice and license agreements
with respect to generally available software, any contract or agreement for
the granting or receiving of a license or sublicense or under which any
person is obligated to pay or has the right to receive a royalty, license
fee or similar payment;
(l) any contract providing for the indemnification or holding harmless
of any officer, director or employee;
(m) any joint venture or partnership contract;
(n) any customer contract for the provision of goods or services by
the Seller;
(o) any outstanding power of attorney empowering any Person to act on
behalf of the Seller;
(p) any contracts, consulting agreements or termination or severance
agreements in respect of any officer, employee or former employee (to the
extent any obligations remain in existence with respect to such former
employee), consultant or independent contractor (other than Seller Benefit
Plans); and
(q) all existing contracts and commitments (other than those described
in subparagraphs (a) through (p) of this Section 3.13) to which the Seller
or any of its Subsidiaries is a party or by which its properties or assets
are bound involving an annual commitment or annual payment to or from the
Seller or any of its Subsidiaries of more than $30,000 individually or
which is otherwise material to the Business.
Copies of all correspondence and a written summary of all oral commitments
with respect to the Assumed Contracts that would result in a material
modification of such contract or would result in costs or expenses in excess of
$15,000 have been provided by the Seller to the Purchaser or such commitments
have been quantified in Section 3.11 of the Seller Disclosure Letter.
Notwithstanding the foregoing, the Seller has not provided to the Purchaser
copies of all nondisclosure agreements, employment letters and software licenses
for generally available software. Each of the employment letters that has not
been provided to the Seller is substantially in the form included in Section
3.13 of the Seller Disclosure Letter.
The Assumed Contracts are legal, valid, binding and enforceable in
accordance with their respective terms with respect to the Seller and, to the
Seller's knowledge, each other party to such Assumed Contracts. Except as set
forth in Section 3.5 of the Seller Disclosure Letter, there are no existing
defaults or breaches of the Seller under any Assumed Contract (or events or
conditions which, with notice or lapse of time or both would constitute a
default or breach) and, to the knowledge of the Seller, there are no such
defaults (or events or conditions which, with notice or lapse of time or both,
would constitute a default or breach) with respect to any third party to any
Assumed Contract. Except as set forth in Section 3.13 of the Seller Disclosure
Letter,
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the Seller is not participating in any discussions or negotiations regarding
modification of or amendment to any Assumed Contract or entry in any new
material contract applicable to the Business or the Assets. Section 1.2(d) of
the Seller Disclosure Letter identifies each Assumed Contract set forth therein
that requires the consent of or notice to the other party thereto to avoid any
breach, default or violation of such contract, agreement or other instrument in
connection with the transactions contemplated hereby, including the assignment
of such Assumed Contract to the Purchaser. Section 1.2(d) of the Seller
Disclosure Letter also identifies each Assumed Contract set forth therein that
(i) obligates the Seller or any of its Subsidiaries to perform research and
development, (ii) contains any fixed price research and development obligations
or (iii) contains any research and development or deliverable obligations which
are currently unfunded, not supported by customer obligations to pay for such
efforts on a time and material basis, unscheduled or behind schedule.
Section 3.14 Information Supplied. The proxy statement to be mailed to
the Seller Shareholders in connection with the meeting (the "Shareholders'
Meeting") to be called to consider the Acquisition (the "Proxy Statement") at
the date such document is first published, sent or delivered to Seller
Shareholders or, unless promptly corrected, at any time during the pendency of
the Shareholder's Meeting, will not 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 made therein, in light of the
circumstances under which they were made, not misleading. The Proxy Statement
will comply as to form and substance in all material respects with the
requirements of the Exchange Act and the applicable rules and regulations of the
SEC thereunder. Notwithstanding the foregoing, no representation or warranty is
made by the Seller with respect to statements made or incorporated by reference
therein based on information supplied by the Purchaser for inclusion or
incorporation by reference in the Proxy Statement.
Section 3.15 Employee Benefit Plans. All material employee benefit plans,
compensation arrangements and other benefit arrangements covering employees of
the Seller or any of its Subsidiaries (the "Seller Benefit Plans") and all
employee agreements providing for compensation, severance or other benefits to
any employee or former employee of the Seller or any of its Subsidiaries are
listed in Section 3.15 in the Seller Disclosure Letter. True, correct and
complete copies of the following documents with respect to each of the Seller
Benefit Plans have been made available by the Seller to the Purchaser: (i) any
plans and related trust documents and amendments thereto, (ii) summary plan
descriptions and material modifications thereto, (iii) written communications
made since January 1, 2000 to employees relating to the Seller Benefit Plans,
(iv) written descriptions of all non-written agreements relating to the Seller
Benefit Plans and (v) the form of the option agreements for each of the
Company's stock option plans. The Seller Benefit Plans comply in all material
respects with the requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code and other applicable laws, and any
Seller Benefit Plan intended to be qualified under Section 401(a) of the Code
will be the subject of an application for a determination letter within the
remedial amendment period under Section 401(b) of the Code or is a model
prototype plan and continues to satisfy in all material respects the
requirements for such qualification. Neither the Seller nor any of its
Subsidiaries nor any ERISA Affiliate of the Seller maintains, contributes to or
has maintained or contributed in the past six (6) years to any benefit plan
which is covered by Title IV of ERISA or Section 412 of the Code. Neither any
Seller Benefit Plan, nor the Seller nor any Subsidiary has incurred any material
liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA
or engaged in any material transaction that is reasonably likely to result in
any such material liability or penalty. Each of the Seller and its Subsidiaries
and any ERISA Affiliate which maintains a "group health plan" within the meaning
of Section 5000(b)(1) of the Code has complied in all material respects with the
notice and continuation requirements of Section 4980B of the Code, Part 6 of
Subtitle B of Title I of ERISA and the regulations thereunder (COBRA), and the
creditable coverage certification requirements and limitations on pre-existing
condition exclusion requirements of Section 9801 of the Code, Part 7 of Subtitle
B of Title I of ERISA and the regulations thereunder (HIPAA). Except as set
forth in Section 3.15 of the Seller Disclosure Letter, each Seller Benefit Plan
has been maintained and administered in material compliance with its terms and
with ERISA and the Code to the extent applicable thereto and all other
applicable laws. There is no pending or, to the knowledge of the Seller,
threatened or anticipated material Litigation against or otherwise involving any
of the Seller Benefit Plans and no material Litigation (excluding claims for
benefits incurred in the ordinary
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course of Seller Benefit Plan activities) has been brought against or with
respect to any such Seller Benefit Plan. All contributions required to be made
as of the date hereof to the Seller Benefit Plans have been made or provided
for. Except as set forth in Section 3.15 of the Seller Disclosure Letter, as
described in the SEC Reports or as required by Law, neither the Seller nor any
of its Subsidiaries maintains or contributes to any plan or arrangement which
provides or has any material liability to provide life insurance or medical or
other employee welfare benefits to any employee or former employee upon his
retirement or termination of employment, and neither the Seller nor any of its
Subsidiaries has ever represented, promised or contracted (whether in oral or
written form) to any employee or former employee that such benefits would be
provided. Except as set forth in Section 3.15 of the Seller Disclosure Letter,
(i) there are no outstanding options (whether or not vested) to purchase stock
of the Seller, (ii) the form of each option issued under any of the Company's
stock option plans is identical in all material respects to the form of the
option agreement for such plan made available to the Purchaser, (iii) the
execution, delivery and performance of, and consummation of the transactions
contemplated by, this Agreement will not entitle any current or former employee,
director, officer, consultant, independent contractors, contingent worker or
leased employee (or any of their dependents, spouses or beneficiaries) of the
Seller to severance pay, accelerate the time of payment or vesting of any stock
options or other payments (other than vesting under the Seller's 401(k) plan) or
increase the amount of compensation due any such person, and (iv) there are no
agreements in effect between the Seller or any Subsidiary and any individual
retained by the Seller or any Subsidiary to provide services as a consultant or
independent contractor.
For purposes of this Agreement "ERISA Affiliate" means any business or
entity which is a member of the same "controlled group of corporations," an
"affiliated service group" or is under "common control" with an entity within
the meanings of Sections 414(b), (c) or (m) of the Code, is required to be
aggregated with the entity under Section 414(o) of the Code, or is under "common
control" with the entity, within the meaning of Section 4001(a)(14) of ERISA, or
any regulations promulgated or proposed under any of the foregoing Sections.
Section 3.16 Labor and Employment Matters.
(a) Section 3.16(a) of the Seller Disclosure Letter contains a true
and complete list of (a) all of the officers of the Seller and the
Subsidiaries, specifying their position, age, length of service and the
annual salary, bonus and allocation of amounts paid and other benefits
provided to each of them, respectively, and annual rate of compensation and
(b) all of the employees (whether full-time, part-time or otherwise) and
independent contractors of the Seller and the Subsidiaries as of the date
hereof, specifying their annual salary, hourly wages, age, position,
status, length of service and the allocation of annual salary, bonus and
other amounts paid and other benefits provided to each of them,
respectively, consulting or other independent contractor fees, together
with an appropriate notation next to the name of any officer or other
employee on such list who is subject to any written employment agreement or
any other written term sheet or other document describing the terms and/or
conditions of employment of such employee or of the rendering of services
by such independent contractor. Except as set forth on Section 3.16(a) of
the Seller Disclosure Letter, neither the Seller nor any Subsidiary is a
party to or bound by any material contracts, consulting agreements or
termination or severance agreements in respect to any officer, employee or
former employee, consultant or independent contractor. The Seller has
provided to the Purchaser true, correct and complete copies of each such
employment agreement, term sheet or other document. The Seller has not
received a claim from any Governmental Entity to the effect that the Seller
or any Subsidiary has improperly classified as an independent contractor
any person named on Section 3.16(a) of the Seller Disclosure Letter. Except
as set forth in Section 3.16 of the Seller Disclosure Letter, neither the
Seller nor any Subsidiary has made any verbal commitments to any such
officers, employees or former employees, consultants or independent
contractors with respect to compensation, promotion, retention,
termination, severance or similar matters in connection with the
transactions contemplated by this Agreement or otherwise. Except as
indicated on Section 3.16(a) of the Seller Disclosure Letter, all officers
and employees of the Seller and the Subsidiaries are actively at work (as
defined in Section 5.12(a)) on the date hereof.
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(b) Neither the Seller nor any of its Subsidiaries is a party to, or
bound by, any collective bargaining agreement or other contracts,
arrangements, agreements or understandings with a labor union or labor
organization that was certified by the National Labor Relations Board
("NLRB"). There is no existing, pending or, to the knowledge of the Seller,
threatened (i) unfair labor practice charge or complaint, labor dispute,
labor arbitration proceeding or any other matter before the NLRB or any
other comparable state agency against or involving the Seller or any of its
Subsidiaries, (ii) activity or proceeding by a labor union or
representative thereof to organize any employees of the Seller or any of
its Subsidiaries, (iii) certification or decertification question relating
to collective bargaining units at the premises of the Seller or any of its
Subsidiaries or (iv) lockout, strike, organized slowdown, work stoppage or
work interruption with respect to such employees.
(c) Neither the Seller nor any of its Subsidiaries has taken any
action that would constitute a "Mass Layoff" or "Plant Closing" within the
meaning of the Worker Adjustment and Retraining Notification ("WARN") Act
or would otherwise trigger notice requirements or liability under any state
or local plant closing notice law. No agreement, arbitration or court
decision or governmental order in any way limits or restricts any of the
Seller, any of its Subsidiaries or the Purchaser from relocating or closing
any of the operations of the Seller or any of its Subsidiaries.
(d) The Seller and its Subsidiaries are in compliance with all
applicable Laws relating to employment and the payment of wages and
benefits. There are no, and the Seller has no reason to believe there would
be any, citations, investigations, administrative proceedings or formal
complaints of violations of any federal or state wage and hour laws pending
or, to the knowledge of the Seller, threatened before the Department of
Labor or any federal, state or administrative agency or court against or
involving the Seller or any of its Subsidiaries.
(e) The Seller and each of its Subsidiaries are in compliance with all
immigration laws relating to employment and, to the knowledge of the
Seller, there are no citations, investigations, administrative proceedings
or formal complaints of violations of the immigration laws pending or
threatened before the Immigration and Naturalization Service or any
federal, state or administrative agency or court against or involving the
Seller or any of its Subsidiaries.
(f) There are no investigations, administrative proceedings, charges
or formal complaints of discrimination (including discrimination based upon
sex, age, religion, marital status, race, national origin, sexual
preference, disability, handicap or veteran status) pending or, to the
knowledge of the Seller, threatened before the Equal Employment Opportunity
Commission or any federal, state or local agency or court against or
involving the Seller or any of its Subsidiaries. No discrimination, sexual
harassment, retaliation and/or wrongful or tortious conduct claim is
pending or, to the knowledge of the Seller, threatened against the Seller
or any of its Subsidiaries under the 1866, 1877, 1964 or 1991 Civil Rights
Acts, the Equal Pay Act, the Age Discrimination in Employment Act, as
amended, the Americans with Disabilities Act, the Family and Medical Leave
Act, the Fair Labor Standards Act, ERISA, or any other federal law relating
to employment or any comparable state or local fair employment practices
act regulating discrimination in the workplace, and no wrongful discharge,
libel, slander, invasion of privacy or other claim (including but not
limited to violations of the Fair Credit Reporting Act, as amended, and any
applicable whistleblower statutes) under any state or federal law is
pending or, to the knowledge of the Seller, threatened against the Seller
or any of its Subsidiaries.
(g) If the Seller or any of its Subsidiaries is a federal, state or
local contractor obligated to develop and maintain an affirmative action
plan, no discrimination claim, show-cause notice, conciliation proceeding,
sanctions or debarment proceedings is pending or, to the knowledge of the
Seller, has been threatened against the Seller or any of its Subsidiaries
with the Office of Federal Contract Compliance Programs or any other
Federal agency or any comparable state or local agency or court and no desk
audit or on-site review is in progress.
(h) There are no citations, investigations, administrative proceedings
or formal complaints of violations of local, state or federal occupational
safety and health laws pending or, to the knowledge of the
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Seller, threatened before the Occupational Safety and Health Review
Commission or any federal, state or local agency or court against or
involving the Seller or any of its Subsidiaries.
(i) No workers' compensation or retaliation claim is pending against
the Seller or any of its Subsidiaries in excess of $50,000 in the aggregate
and the Seller maintains adequate insurance with respect to workers'
compensation claims pursuant to insurance policies that are currently in
force, or has accrued an adequate liability for such obligations,
including, without limitation, adequate accruals with respect to accrued
but unreported claims and retroactive insurance premiums.
Section 3.17 Environmental Compliance and Disclosure. Except as set forth
in Section 3.17 of the Seller Disclosure Letter:
(a) Each of the Seller and its Subsidiaries possesses, and is in
compliance in all material respect with, all permits, licenses and
governmental authorizations and has filed all notices that are required
under, all Environmental Laws (as hereinafter defined) applicable to the
Seller or any Subsidiary, as applicable, and the Seller and each of its
Subsidiaries is in compliance in all material respects with all applicable
limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those laws
or contained in any Law, regulation, code, plan, order, decree, judgment,
notice, permit or demand letter issued, entered, promulgated or approved
thereunder, including, but not limited to, with respect to the use,
storage, treatment, manufacture, generation, disposal and handling of
Hazardous Materials;
(b) Neither the Seller nor any Subsidiary has received notice of
actual or threatened liability arising under or relating to any
Environmental Laws and, to the knowledge of the Seller, there are no facts
or circumstances which could form the basis for the assertion of any claim
against the Seller or any Subsidiary under any Environmental Laws; and
(c) Neither the Seller nor any Subsidiary has been subject to any
administrative or judicial proceeding pursuant to and, to the knowledge of
the Seller, has not been alleged to be in violation of, applicable
Environmental Laws or regulations either now or any time during the past
five years;
As used in this Section 3.17, the term "Environmental Laws" means any and
all past and present laws (including without limitation statutes, regulations,
and common law) of the United States, any State or political subdivision
thereof, or any other nation or political subdivision, for the protection of the
environment or human health and safety, including without limitation, judgments,
awards, decrees, regulations, rules, standards, requirements, orders and permits
issued by any court, administrative agency or commission or other Governmental
Entity under such laws, and shall include without limitation the Comprehensive
Environmental Response Compensation and Liability Act (42 USC 9601 et seq.), the
Clean Air Act (42 USC sec.sec. 7401 et seq.), the Resource Conservation and
Recovery Act (42 USC sec.sec. 6901 et seq.), the Clean Water Act (33 USC
sec.sec. 1251 et seq.), the Occupational Safety and Health Act (29 U.S.C.
sec.sec. 651 et seq.), the Toxic Substance Control Act (15 USC sec.sec. 2601 et
seq.), and the Safe Drinking Water Act (42 USC sec.sec. 300f et seq.), as well
as any and all state or local laws that relate to pollution, contamination of
the environment, human health, or safety, and all future amendments to such
laws, and all past, present and future regulations, rules, standards,
requirements, orders and permits issued thereunder.
As used in this Section 3.17, the term "Hazardous Materials" means any
waste, pollutant, hazardous substance, toxic, radioactive, ignitable, reactive
or corrosive substance, hazardous waste, special waste, controlled waste,
industrial substance, by-product, process intermediate product or waste,
petroleum or petroleum-derived substance or waste, chemical liquids or solids,
liquid or gaseous products, or any constituent of any such substance or waste or
any other material which may be harmful to human health or the environment.
Section 3.18 Intellectual Property.
(a) For purposes of this Agreement, "Intellectual Property" shall mean
trademarks (registered or unregistered), service marks, brand names,
certification marks, trade dress, assumed names, trade names and other
indications of origin, the goodwill associated with the foregoing and
registrations in any
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jurisdiction of, and applications in any jurisdiction to register, the
foregoing, including any extension, modification or renewal of any such
registration or application; inventions, discoveries and ideas, whether
patented, patentable or not patentable in any jurisdiction; mask works,
trade secrets, know-how and confidential information and rights in any
jurisdiction to limit the use or disclosure thereof by any person; writings
and other works of commercial value, whether copyrighted, copyrightable or
not copyrightable in any jurisdiction; registration or applications for
registration of copyrights in any jurisdiction, and any renewals or
extensions thereof; any similar intellectual property or proprietary rights
and computer programs and software (including source code, object code and
data); licenses, immunities, covenants not to sue and the like relating to
the foregoing; and any claims or causes of action arising out of or related
to any infringement or misappropriation of any of the foregoing.
(b) Section 3.18(b) of the Seller Disclosure Letter sets forth a true
and complete list of all Intellectual Property which the Seller and/or its
Subsidiaries own in whole or in part and/or have a valid claim of ownership
in whole or in part (such as a contract right of assignment from an
employee or independent contractor) (hereinafter referred to as the
"Intellectual Property Rights"), including, but not limited to, the
following items:
(i) all United States and foreign patents and applications
therefor;
(ii) all patentable inventions which have not yet become the
subject of a patent application, but for which the Seller intends to
file a patent application;
(iii) all United States and foreign trademark, trade name, service
mark, collective mark, and certification mark registrations and
applications therefor at the federal, state or local level;
(iv) all material trademarks, trade names, service marks,
collective marks, and certification marks which have been used by the
Seller or its Subsidiaries in commerce at any time in the last five
years (and for each, the date of first use in commerce and a description
of the goods and services in connection with which it has been used);
and
(v) all United States and foreign and copyright registrations and
applications therefor.
Section 3.18(b) of the Seller Disclosure Letter also sets forth a
true and complete list of all items described in subsections (i) through
(iv) of the previous sentence in which the Seller or any of its
Subsidiaries own a license (the "Licensed Rights"). Notwithstanding the
foregoing, Licensed Rights relating to nonexclusive software licenses
for generally available software are not required to be disclosed in
Section 3.18(b) of the Seller Disclosure Letter although they are
included as Licensed Rights. Except as set forth in Section 3.18(b) of
the Seller Disclosure Letter, neither the Seller nor any Subsidiary has
(i) any unpatented inventions which have been the subject of a patent
application, (ii) any material copyrightable works of authorship which
have not been the subject of a copyright registration or application
therefor, including but not limited to software code, manuals and other
text works, photographs, video recordings, and audio recordings, or
(iii) any mask works.
(c) Section 3.18(b) of the Seller Disclosure Letter sets forth with
respect to each registered patent, trademark, service mark and copyright
owned or controlled by the Seller or any Subsidiary, (x) a brief
description of such Intellectual Property, and (y) the names of the
jurisdictions covered by the applicable registration or application.
Section 3.18(c) of the Seller Disclosure Letter identifies all material
licenses, sublicenses and other agreements to which the Seller or any
Subsidiary is a party and pursuant to which the Seller or any Subsidiary is
authorized to use any Intellectual Property of any third party in or as
part of any Seller or Subsidiary product, other than non-exclusive software
licenses for generally available software (such as MS Word and the like).
To the knowledge of the Seller, the Seller and each Subsidiary owns, is
licensed or otherwise possesses legally sufficient rights to use all
Intellectual Property that the Seller or such Subsidiary uses in any
material respect in the business of the Seller or such Subsidiary, except
for the failure to own a license or possess such rights which to remedy
would not cause a Seller Material Adverse Effect.
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(d) Section 3.18(d) of the Seller Disclosure Letter contains a
complete list of each software product and module currently marketed by the
Seller or any of its Subsidiaries in connection with the Business. Section
3.18(d) of the Seller Disclosure Letter also contains a complete list of
all software products owned, marketed, licensed or used by the Seller or
any of its Subsidiaries with respect to the Business (other than those
which are generally available prepackaged products) at any time within one
year from the date hereof. With regard to the software products developed
by the Seller, Section 3.18(d) of the Seller Disclosure Letter also sets
forth the language in which such software is written, the type of hardware
platform(s) and the operating system environment on or in which it runs,
and any royalties or license fees required to be paid to a third party for
the use of any "layered" or incorporated software not owned by the Seller
or one of its Subsidiaries. Section 3.18(d) of the Company Disclosure
Letter contains a true, correct and complete list of all licenses (other
than non-exclusive software licenses for generally available software)
granted to the Seller or any of its Subsidiaries from any third party with
respect to any Intellectual Property, in each case identifying the software
covered thereby.
(e) To the knowledge of the Seller, there is no past, present or
prospective claim by any third party that any of the Seller's or any
Subsidiary's Intellectual Property is invalid or unenforceable or that the
conduct of the Seller or any Subsidiary violates any Intellectual Property
of any other person. Neither the Seller nor any Subsidiary has at any time
received any notice or other communication (in writing or otherwise has no
knowledge) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful use by the Seller or any Subsidiary of any
Intellectual Property rights of any other person. To the knowledge of the
Seller, except as set forth in Section 3.18(e) of the Seller Disclosure
Letter, no other person is infringing, misappropriating or making any
unlawful use of the Seller's or any Subsidiary's Intellectual Property, no
Intellectual Property owned or used by any other person infringes or
conflicts with, any of the Seller's or any Subsidiary's Intellectual
Property, and no party to any licensing agreement, distributorship or
similar arrangement with the Seller or any Subsidiary relating to the
Intellectual Property is in breach of or default of its obligations in any
material respects.
(f) Except as set forth in Section 3.18(f) of the Seller Disclosure
Letter, all former and current employees, contractors or consultants of the
Seller and each Subsidiary, including all employees, contractors and
consultants involved in the development of Intellectual Property of the
Seller and its Subsidiaries, employed or engaged at any time during the
period since the initial formation date of the Seller, have executed and
delivered to the Seller a confidential information agreement in
substantially the form attached in Section 3.18(f) of the Seller Disclosure
Letter. To the knowledge of the Seller, no employee, contractor or
consultant associated with any person who has contributed to, or
participated in, the conception and development of Intellectual Property
for the Seller or any Subsidiary has asserted or threatened any claim
against the Seller or any Subsidiary in connection with such person's
involvement in the conception and development of such Intellectual Property
and no such person has a reasonable basis for any such claim.
(g) The Seller and its Subsidiaries have taken commercially reasonable
steps to protect their Intellectual Property. Notwithstanding the
foregoing, however, the Seller has not filed for any patents, copyrights or
trademarks with respect to its Intellectual Property. The Seller's and its
Subsidiaries' trade secrets, including without limitation its source code,
customer lists, prospect lists and marketing and business plans, have not
been disclosed to any person except pursuant to licenses or Contracts
requiring such persons to keep such trade secrets confidential.
(h) Except as set forth in Section 3.18(h) of the Seller Disclosure
Letter, neither the Seller nor any Subsidiary has granted any licenses to a
third party to use, distribute, or modify the source code to create
Derivative Works (as hereinafter defined), of any product marketed by,
commercially available from or under development by the Seller or any
Subsidiary. Neither the Seller nor any Subsidiary has received written
notice of any existing claim for the release of the Seller's or any
Subsidiary's source code from an applicable escrow deposit. As used herein,
"Derivative Work" shall mean a work that is based upon one or more
preexisting works, such as a revision, enhancement, modification,
abridgment, condensation, expansion or any other form in which such
preexisting works may be recast, transformed or adapted, and which, if
prepared without authorization of the owner of the copyright in such
preexisting work, would
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constitute a copyright infringement. For purposes hereof, a Derivative Work
shall also include any compilation that incorporates such a preexisting
work as well as translations from one human language to another and from
one type of code to another.
(i) Except as set forth in Section 3.18(i) of the Seller Disclosure
Letter, neither the Seller nor any Subsidiary has assigned, sold or
otherwise transferred ownership of any of its Intellectual Property nor
licensed any of the Seller's or any Subsidiary's Intellectual Property to
any person on an exclusive basis, nor has the Seller or any Subsidiary
entered into any covenant not to compete or Contract limiting its ability
to exploit fully any of its Intellectual Property nor granted any exclusive
rights to market any products of the Company or any Subsidiary.
(j) Except as set forth in Section 3.18(j) of the Seller Disclosure
Letter, to the extent third-party Intellectual Property is marketed to
customers of the Seller or any Subsidiary together with the Intellectual
Property of the Seller or any Subsidiary, (i) the Seller or such Subsidiary
has complied with all restrictions required by the owner of such
Intellectual Property to be placed in the documentation of such licenses;
and (ii) the Seller or such Subsidiary has either expressly provided in its
customer agreements that maintenance and other technical support for such
third-party products is to be provided by the third party directly with the
customer, or has executed a subcontract agreement with the third party
which remain in effect for the entire period that the Seller or such
Subsidiary is obligated to provide support to the customer, and all fees to
such third parties owed by the Seller or such Subsidiary have been paid in
full.
(k) The conduct of the Seller's and its Subsidiaries' business, as
presently conducted, and the execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated by this
Agreement and compliance with the provisions of this Agreement will not,
conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of,
or result in the creation of any lien, claim or encumbrance on, any
Intellectual Property owned by the Seller or any Subsidiary, except where
the occurrence of any of the foregoing would not reasonably be expected to
have a Seller Material Adverse Effect individually or collectively.
(l) [INTENTIONALLY OMITTED.]
(m) The Intellectual Property Rights are free and clear of any liens,
claims or encumbrances and are not subject to any arrangement or license
requiring any payment to any person which has not previously been fully
paid or the obligation to grant rights to any person in exchange.
(n) The Intellectual Property Rights and the Licensed Rights are all
those material rights necessary to the conduct of the business of each of
the Seller, its Subsidiaries and the Seller's Affiliates as presently
conducted.
(o) The validity of the Intellectual Property Rights and title thereto
and validity of the Licensed Rights, (i) have not been questioned in any
prior Litigation; (ii) are not being questioned in any pending Litigation;
and (iii) to the knowledge of the Seller, are not the subject(s) of any
threatened or proposed Litigation.
(p) To the knowledge of the Seller, the business of each of the Seller
and its Subsidiaries, as presently conducted, does not conflict with and
has not been alleged to conflict with any patents, trademarks, trade names,
service marks, copyrights or other intellectual property rights of others.
(q) The consummation of the transactions contemplated hereby will not
result in the loss or impairment of any of the Intellectual Property Rights
or the Seller's or its Subsidiaries' right to use any of the Licensed
Rights.
(r) Other than as disclosed in any section of the Seller Disclosure
Letter, to the knowledge of the Seller, there are no third parties using
any of the Intellectual Property Rights material to the business of the
Seller or its Subsidiaries as presently conducted.
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(s) Each of the Seller and its Subsidiaries owns, or possesses
sufficiently broad and valid rights to, all computer software programs that
are material to the conduct of the business of the Seller and its
Subsidiaries. There are no infringement suits, actions or proceedings
pending or, to the knowledge of the Seller, threatened against the Seller
or any Subsidiary with respect to any software owned or licensed by the
Seller or any Subsidiary.
(t) The Seller and its Subsidiaries have collected and submitted to
the appropriate owner of such third party software all appropriate and
required license fees for all third party software which has been provided
to customers of the Seller and its Subsidiaries.
(u) Except as set forth in Section 3.18(u) of the Seller Disclosure
Letter or Section 3.11 of the Seller Disclosure Letter, with respect to (i)
current clients of the Seller or any Subsidiary who are the recipient of
current oral or written proposals of the Seller or any Subsidiary and (ii)
prospective clients of the Seller or any Subsidiary who are the recipient
of information in response to a current customer request for proposal from
the Seller or any Subsidiary, there is no functionality required other than
that contained in the current versions of the Seller's products, outside of
functionality described in Section 3.11 of the Seller Disclosure Letter.
Section 3.19 Brokers. Except pursuant to the Independent Advisor
Engagement Letter (as hereinafter defined) and as set forth in Section 3.19 of
the Seller Disclosure Letter, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with this
Agreement, the Acquisition or the other transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Seller. Section
3.19 of the Seller Disclosure Letter includes a complete and correct copy of all
agreements between the Seller and the Independent Advisor and between the Seller
and Michael C. Nunan pursuant to which such person would be entitled to any
payment relating to this Agreement, the Acquisition or the other transactions
contemplated by this Agreement.
Section 3.20 Insurance Policies. The Seller has delivered to the
Purchaser prior to the date hereof a complete and accurate list of all insurance
policies in force naming the Seller, any of its Subsidiaries or employees
thereof as an insured or beneficiary or as a loss payable payee or for which the
Seller or any Subsidiary has paid or is obligated to pay all or part of the
premiums. Neither the Seller nor any Subsidiary has received notice of any
pending or threatened cancellation or premium increase (retroactive or
otherwise) with respect thereto, and each of the Seller and the Subsidiaries is
in compliance in all material respects with all conditions contained therein.
Except as set forth in Section 3.20 of the Seller Disclosure Letter, there are
no material pending claims against such insurance policies by the Seller or any
Subsidiary as to which insurers are defending under reservation of rights or
have denied liability, and there exists no material claim under such insurance
policies that has not been properly filed by the Seller or any Subsidiary.
Except for the self-insurance retentions or deductibles set forth in the
policies contained in the aforementioned list and except as set forth in Section
3.20 of the Seller Disclosure Letter, the policies are adequate in scope and
amount to cover all prudent and reasonably foreseeable risks which may arise in
the conduct of the business of the Seller and the Subsidiaries.
Section 3.21 Notes and Accounts Receivable.
(a) Except as disclosed in Section 3.21(a) of the Seller Disclosure
Letter, there are no notes receivable of the Seller or any Subsidiary owing
by any director, officer, shareholder or employee of the Seller or any
Subsidiary ("Affiliate Debt").
(b) Except as disclosed in Section 3.21(b) of the Seller Disclosure
Letter, all accounts receivable of the Seller and any Subsidiary are
current or covered by adequate reserves for uncollectability, and there are
no material disputes regarding the collectibility of any such accounts
receivable.
Section 3.22 Transactions with Affiliates. Except as set forth in Section
3.22 of the Seller Disclosure Letter (other than compensation and benefits
received in the ordinary course of business as an employee or director of the
Seller or its Subsidiaries) (collectively, the "Affiliate Transactions"), no
director, officer or other Affiliate or Associate (as hereinafter defined) of
the Seller or any Subsidiary or any entity in which, to the knowledge of the
Seller, any such director, officer or other Affiliate or Associate, owns any
beneficial
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interest (other than a publicly held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market and less than 1%
of the stock of which is beneficially owned by any such persons) has any
interest in: (i) any contract, arrangement or understanding with, or relating to
the business or operations of Seller or any Subsidiary; (ii) any loan,
arrangement, understanding, agreement or contract for or relating to
indebtedness of the Seller or any Subsidiary; or (iii) any property (real,
personal or mixed), tangible, or intangible, used or currently intended to be
used in, the business or operations of the Seller or any Subsidiary.
Section 3.23 No Existing Discussions. As of the date hereof, the Seller
is not engaged, directly or indirectly, in any negotiations or discussions with
any other party with respect to an Acquisition Proposal (as hereinafter
defined).
Section 3.24 Shareholders' Rights Agreement. Neither the Seller nor any
Subsidiary has adopted, or intends to adopt, a shareholders' rights agreement or
any similar plan or agreement which limits or impairs the ability to purchase,
or become the direct or indirect beneficial owner of, shares of Seller Common
Stock or any other equity or debt securities of the Seller or any of its
Subsidiaries.
Section 3.25 Major Suppliers and Customers.
(a) Section 3.25(a) of the Seller Disclosure Letter sets forth a list
of each supplier of goods or services to Seller and the Subsidiaries to
whom the Seller and the Subsidiaries paid in the aggregate more than
$200,000 during the 12-month period ended June 30, 2000 (each a "Major
Supplier" and, collectively, "Major Suppliers"), together with in each case
the amount paid during such period. Neither the Seller nor any Subsidiary
is engaged in any material dispute with any Major Supplier and, to the
knowledge of the Seller, no Major Supplier intends to terminate, limit or
reduce its business relations with the Seller or any Subsidiary. As of the
date hereof the Seller has no reason to believe that the consummation of
the transactions contemplated hereunder will have a material adverse effect
on the business relationship of the Seller or any Subsidiary with any Major
Supplier. Except as set forth in Section 3.25(a) of the Seller Disclosure
Letter, to the knowledge of the Seller, none of the officers or directors
of the Seller or any Subsidiary, or any Affiliate or Associate of any
officer or director of the Seller or any Subsidiary (or any company or
other organization in which any officer or director of the Seller or any
Subsidiary or any Affiliate or Associate of any officer or director of the
Seller or any Subsidiary has a direct or indirect or indirect financial
interest), has any financial interest in any supplier of the Seller or any
Subsidiary (other than a publicly held corporation whose stock is traded on
a national securities exchange or in the over-the-counter market and less
than 1% of the stock of which is beneficially owned by any such persons).
(b) Section 3.25(b) of the Seller Disclosure Letter sets forth a list
of each customer which accounted for net revenue to the Seller and the
Subsidiaries in the aggregate of more than $200,000 during the 12-month
period ended June 30, 2000 (each a "Major Customer" and, collectively,
"Major Customers") together with the amount of net revenue produced during
such period. Neither the Seller nor any Subsidiary is engaged in any
material dispute with any Major Customer and, to the knowledge of the
Seller, no Major Customer intends to terminate, limit or reduce its
business relations with the Seller or any Subsidiary. As of the date hereof
the Seller has no reason to believe that the consummation of the
transactions contemplated hereunder will materially adversely affect the
business relationship of the Seller or any Subsidiary with any Major
Customer. Except as set forth in Section 3.25(b) of the Seller Disclosure
Letter, none of the officers or directors of the Seller or any Subsidiary,
or any Affiliate or Associate of any officer or director of the Seller or
any Subsidiary (or any company or other organization in which any officer
or director of the Seller or any Subsidiary or any Affiliate or Associate
of any officer or director of the Seller or any Subsidiary has a direct or
indirect financial interest), has any financial interest in any customer of
the Seller or any Subsidiary (other than a publicly held corporation whose
stock is traded on a national securities exchange or in the
over-the-counter market and less than 1% of the stock of which is
beneficially owned by any such persons).
Section 3.26 Licenses and Permits. Section 3.26 of the Seller Disclosure
Letter sets forth a true and complete list of all material notifications,
licenses, permits (including, without limitation, environmental,
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construction and operation permits), franchises, certificates, approvals,
exemptions, classifications, registrations and other similar documents and
authorizations, and applications therefor (collectively, the "Licenses") held by
the Seller or a Subsidiary and issued by, or submitted by the Seller or a
Subsidiary to, any Governmental Entity or other person or entity. The Seller
owns or possesses all of the Licenses which are necessary to enable it to carry
on the Business as presently conducted. All Licenses are valid, binding, and in
full force and effect. The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
adversely affect any License which would, or be reasonably expected to, cause a
Seller Material Adverse Effect. The Seller and its Subsidiaries have taken all
necessary action to maintain each License, except where the failure to so act is
not likely to have a material adverse effect on the Seller, such Subsidiary or
the Business. No loss or expiration of any License is threatened, pending, or
reasonably foreseeable (other than expiration upon the end of any term).
Section 3.27 New Zealand Documents.
(a) The Seller has provided to the Purchaser all contracts or
agreements entered into by or otherwise obligating in any manner Phoenix
International A. P. Limited New Zealand (the "New Zealand Contracts"),
other than with respect to the assets relating to the products specifically
identified in Section 1.3(m) of the Seller Disclosure Letter. Provided that
the New Zealand Share Option is not exercised, the New Zealand Contracts
which are being assumed by the Purchaser pursuant to the terms of this
Agreement are listed as such on Section 1.2(d) of the Seller Disclosure
Letter. Other than as disclosed in Section 3.27 of the Seller Disclosure
Letter there are no liabilities, disputes or obligations with respect to
Phoenix International A.P. Limited New Zealand outside of the ordinary
course of business. Other than with respect to the Seller and Phoenix
International A. P. Limited New Zealand, none of the Subsidiaries has
entered into any contracts (whether written or oral) or made any
commitments other than with respect to real property leases and equipment
leases associated with such real property leases and employment letters.
(b) The Seller is the record and beneficial owner of, and has good and
marketable record title to, all of the issued and outstanding equity
interests in Phoenix International A. P. Limited New Zealand (the "New
Zealand Shares"). The New Zealand Shares are validly issued, fully paid and
non-assessable and are owned by the Seller free and clear of any Liens,
with no defects in title. The Seller has the exclusive right, power and
authority to vote the New Zealand Shares and is not party to or bound by
any agreement affecting or relating to its right to transfer or vote the
New Zealand Shares. There are no proxies outstanding or powers of attorney
granted by the Seller with respect to any of the New Zealand Shares. If the
New Zealand Share Option is exercised, the Seller shall transfer to the
Purchaser all of the Seller's right, title and interest in and to the New
Zealand Shares free and clear of all Liens.
Section 3.28 Disclosure. No representation or warranty made by the Seller
in this Agreement or in the Seller Disclosure Letter contains an untrue
statement of a material fact or omits to state a material fact required to be
stated herein or therein or necessary to make the statements contained herein or
therein not misleading. The representations and warranties of the Seller
contained herein, disregarding all qualifications and exemptions contained
therein relating to materiality or a Seller Material Adverse Effect, are true
and correct with only such exceptions as would not in the aggregate reasonably
be expected to have a Seller Material Adverse Effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
Each of Parent and the Purchaser hereby jointly and severally represent and
warrant to the Seller as follows:
Section 4.1 Organization and Standing. Each of Parent and the Purchaser
(a) is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation, (b) has full corporate power and
authority to own, lease and operate its properties and assets and to conduct its
business as presently conducted and (c) is duly qualified or licensed to do
business as a foreign corporation and is in good
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standing in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except where the failure to be so qualified or licensed
would not, individually or in the aggregate, have a material adverse effect on
the Purchaser. Parent indirectly owns all of the capital stock of the Purchaser.
Section 4.2 Authority for Agreement. Each of Parent and the Purchaser has
all necessary corporate power and authority to execute and deliver this
Agreement and any other certificate, agreement, document or other instrument to
be executed and delivered by it in connection with the transactions contemplated
by this Agreement (the "Purchaser Ancillary Documents") and to perform its
obligations hereunder and under the Purchaser Ancillary Documents and to
consummate the Acquisition and the other transactions contemplated by this
Agreement and the Purchaser Ancillary Documents. The execution, delivery and
performance by each of Parent and the Purchaser of this Agreement and the
Purchaser Ancillary Documents, and the consummation by each of Parent and the
Purchaser of the Acquisition and the other transactions contemplated by this
Agreement and the Purchaser Ancillary Documents, have been duly authorized by
all necessary corporate action and no other corporate proceedings on the part of
either Parent or the Purchaser are necessary to authorize this Agreement or the
Purchaser Ancillary Documents or to consummate the Acquisition or the other
transactions contemplated by this Agreement and the Purchaser Ancillary
Documents. This Agreement has been and the Purchaser Ancillary Documents will be
duly executed and delivered by such person and, assuming due authorization,
execution and delivery by the Seller, constitute a legal, valid and binding
obligation of each of Parent and the Purchaser enforceable against each of
Parent and the Purchaser in accordance with their terms.
Section 4.3 No Conflict. The execution and delivery of this Agreement and
the Purchaser Ancillary Documents by each of Parent and the Purchaser do not,
and the performance of this Agreement and the Purchaser Ancillary Documents by
each of Parent and the Purchaser and the consummation of the Acquisition and the
other transactions contemplated by this Agreement will not, (i) conflict with or
violate the certificate of incorporation or bylaws or other organizational
documents of Parent or the Purchaser, (ii) conflict with or violate any Law
applicable to Parent or the Purchaser or by which any property or asset of
Parent or the Purchaser is bound or affected, or (iii) result in any breach of
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance on any property or asset of Parent or the Purchaser
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which such
person is a party or by which Parent or the Purchaser or any property or asset
of the Purchaser is bound or affected, except in the case of clauses (ii) and
(iii) for any such conflicts, violations, breaches, defaults or other
occurrences which would not, individually or in the aggregate, prevent or
materially delay the performance by Parent or the Purchaser of its obligations
under this Agreement or the consummation of the Acquisition or the other
transactions contemplated by this Agreement and the Purchaser Ancillary
Documents.
Section 4.4 Required Filings and Consents. The execution and delivery of
this Agreement by each of Parent and the Purchaser do not, and the performance
of this Agreement and the Purchaser Ancillary Documents by each of Parent and
the Purchaser will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except for those
required by the HSR Act and where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not,
individually or in the aggregate, prevent or materially delay the performance by
the Purchaser of any of its obligations under this Agreement or the consummation
of the Acquisition or the other transactions contemplated by this Agreement.
Section 4.5 Information Supplied. None of the information supplied or to
be supplied by Parent or the Purchaser for inclusion or incorporation by
reference in the Proxy Statement, at the date such documents are first
published, sent or delivered to Seller Shareholders or, unless promptly
corrected at any time during the pendancy of the Shareholders' Meeting, will
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
made therein, in light of the circumstances under which they were made, not
misleading.
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Section 4.6 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission payable by Parent or the
Purchaser in connection with this Agreement, the Acquisition or the other
transactions contemplated by this Agreement or the Purchaser Ancillary Documents
based upon arrangements made by or on behalf of such person.
ARTICLE V
CERTAIN COVENANTS AND AGREEMENTS
Section 5.1 Conduct of the Business Pending the Closing.
(a) The Seller covenants and agrees that between the date of this
Agreement and the Closing, unless the Purchaser shall otherwise consent in
writing (which consent shall not be unreasonably withheld), (i) the
business of the Seller and its Subsidiaries shall be conducted only in, and
the Seller and its Subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with prior practice,
(ii) the Seller and its Subsidiaries shall use reasonable best efforts to
preserve intact their business organizations, to keep available the
services of their current officers and employees and to preserve the
current relationships of the Seller and its Subsidiaries with customers,
suppliers and other persons with which the Seller or its Subsidiaries has
business relations, and (iii) the Seller and its Subsidiaries will comply
with all applicable Laws and regulations wherever its business is
conducted, including, without limitation, the timely filing of all reports,
forms or other documents with the SEC required pursuant to the Securities
Act or the Exchange Act. Without limiting the foregoing, neither the Seller
nor any of its Subsidiaries shall, except in the ordinary course of
business consistent with past practice as of December 31, 1999, (i)
materially reduce the expenses of the Seller or its Subsidiaries relating
to sales or customer service or support, (ii) materially discount the price
or materially alter the terms of any of the Seller's or its Subsidiaries'
products or services, (iii) reduce or discount any accounts receivable of
the Seller or any Subsidiary to accelerate collection of such accounts
receivable or sell or factor any accounts receivable of the Seller or any
Subsidiary, or (iv) manage the accounts payable of the Seller or any
Subsidiary in a manner inconsistent with the Seller's past practice as of
December 31, 1999.
(b) The Seller covenants and agrees that between the date of this
Agreement and the Closing the Seller shall not, nor shall the Seller permit
any of its Subsidiaries, without the prior written consent of the
Purchaser, to (i) declare or pay any dividends on or make other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, except for dividends by a wholly owned Subsidiary of the
Seller to the Seller or another wholly owned Subsidiary of the Seller, (ii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock; (iii) repurchase or
otherwise acquire any shares of its capital stock; (iv) issue, deliver or
sell, or authorize or propose the issuance, delivery or sale of, any shares
of its capital stock or any securities convertible into any such shares of
its capital stock, or any rights, warrants or options to acquire any such
shares or convertible securities or any stock appreciation rights, phantom
stock plans or stock equivalents, other than the issuance of shares of
Seller Common Stock upon (x) the exercise of Seller Options outstanding as
of the date of this Agreement, (y) the exercise of warrants outstanding as
of the date of this Agreement or (z) the issuance of options to purchase
Seller Common Stock described in Section 3.7 of the Seller Disclosure
Letter (the allocation of which is subject to the prior approval of the
Purchaser) or (v) take any action that would, or could reasonably be
expected to, result in any of the conditions set forth in Article VI not
being satisfied.
(c) The Seller covenants and agrees that between the date of this
Agreement and the Closing the Seller shall not, nor shall the Seller permit
any of its Subsidiaries to, without the prior written consent of the
Purchaser, which consent shall not be unreasonably withheld (such response
shall be made within five (5) business days of receipt by the Purchaser of
notice of such request (or two (2) business days in the case of clauses
(xvii), (xix) and (xx) below), otherwise consent shall be deemed to have
been given) (i) amend its articles of incorporation (including any
certificate of designations attached thereto) or bylaws or other equivalent
organizational documents; (ii) create, assume or incur any indebtedness for
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borrowed money or guaranty any such indebtedness of another person, other
than (A) borrowings under existing lines of credit (or under any
refinancing of such existing lines) or (B) indebtedness owing to, or
guaranties of indebtedness owing to, the Seller or (C) guarantees, loans or
advances to employees less than $5,000 to an individual employee and
$20,000 in the aggregate with respect to business travel expenses in the
ordinary course of business consistent with past practice; (iii) accelerate
the timing of payments of any outstanding indebtedness for borrowed money;
(iv) make any loans or advances to any other person other than loans or
advances between any Subsidiaries of the Seller or between the Seller and
any of its Subsidiaries (other than guarantees, loans or advances to
employees less than $5,000 to an individual employee and $20,000 in the
aggregate with respect to business travel expenses in the ordinary course
of business consistent with past practice); (v) mortgage or pledge any of
the Assets; (vi) merge or consolidate with any other entity in any
transaction, or sell any business or Assets other than with respect to
customer agreements approved in writing by the Purchaser (other than with
respect to the sale of the assets identified in Section 1.3(m) of the
Seller Disclosure Letter); (vii) change its accounting policies except as
required by GAAP; (viii) make any change in employment terms for any of its
directors or officers; (ix) alter, amend or create any obligations with
respect to compensation, severance, benefits, change of control payments or
any other payments to employees, directors or Affiliates of the Seller or
its Subsidiaries or enter into any new, or amend any existing, employment
agreements; (x) make any change to the Seller Benefit Plans; (xi) amend or
cancel or agree to the amendment or cancellation of any Assumed Contract or
enter into a contract that would have been an Assumed Contract had such
contract been in existence as of the date of this Agreement; (xii) pay,
loan or advance (other than the payment of compensation, directors' fees or
reimbursement of expenses in the ordinary course of business) any amount
to, or sell, transfer or lease any properties or assets (real, personal or
mixed, tangible or intangible) to, or enter into any agreement with, any of
its officers or directors or any Affiliate or Associate of any of its
officers or directors; (xiii) form or commence the operations of any
business or any corporation, partnership, joint venture, business
association or other business organization or division thereof; (xiv) make
any Tax election (other than in the ordinary course of business consistent
with past practice) or settle or compromise any tax liability; (xv) enter
into any agreements, arrangements or understandings with respect to the
purchase, sale or lease of any real property or amend, cancel or extend any
agreement, arrangement or understanding with respect to the lease of any
real property; (xvi) pay, discharge, settle or satisfy any claims,
litigation, liabilities or obligations (whether absolute, accrued, asserted
or unasserted, contingent or otherwise) involving amounts in excess of
$50,000 in the aggregate except in connection with cash only settlements in
connection with the Excluded Liabilities or the Class Action identified in
Section 3.12 of the Company Disclosure Letter; (xvii) enter into any
customer or third party agreements; (xviii) hire additional employees or
consultants; (xix) modify, amend or terminate any Contract to which the
Seller or any Subsidiary is a party or waive, release or assign any
material rights or claims thereunder; (xx) enter into any Contracts which
will require the Seller or any Subsidiary to incur expenses that are
reasonably likely to exceed the revenues from such Contracts; or (xxi)
enter into any Contracts which incur expenses or costs in excess of $50,000
in the case of any one Contract or commit the Seller or any Subsidiary to
any Contract containing provisions relating to fixed pricing, services to
be conducted on other than a time and materials basis, contracts containing
penalties or liquidated damages or any other onerous contractual
provisions.
Section 5.2 Access to Information; Confidentiality.
(a) From the date hereof to the Effective Time, the Seller shall, and
shall cause the officers, directors, employees, auditors, attorneys,
financial advisors, lenders and other agents (collectively, the
"Representatives") of the Seller to, afford the Representatives of the
Purchaser upon 24 hours prior notice reasonable access during regular
business hours to the officers, employees, agents, properties, offices and
other facilities, books and records of the Seller and its Subsidiaries, and
shall furnish the Purchaser with all financial, operating and other data
and information as the Purchaser, through its Representatives, may
reasonably request. The Seller shall furnish to the Purchaser monthly
financial and operating data and information as promptly as practicable
following the end of each calendar month. The Purchaser and the Seller will
remain subject to the terms of the confidentiality agreement between the
Purchaser and the Seller dated December 20, 1999 (the "Confidentiality
Agreement").
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(b) No investigation pursuant to this Section 5.2 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
(c) After the Closing, the Purchaser shall grant to the Seller
reasonable access to the books, records and documents included in the
Assets and to the former employees of the Seller employed by the Purchaser
(which access shall not unreasonably interfere with the operation of the
Business by the Purchaser after the Closing) with respect to the pursuit,
defense or resolution by the Seller of any outstanding claim or liability
relating to the Excluded Assets and Excluded Liabilities.
Section 5.3 Notification of Certain Matters; Supplements to Seller
Disclosure Letter.
(a) The Seller shall give prompt notice to the Purchaser, and the
Purchaser shall give prompt notice to the Seller, of (i) the occurrence, or
nonoccurrence, of any event which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate and (ii) any failure by such to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.3 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
(b) From time to time up to the Closing Date, for informational
purposes only, the Seller will promptly supplement or amend the Seller
Disclosure Letter which it has delivered pursuant to this Agreement with
respect to any matter first existing or occurring after the date hereof
which, if existing or occurring at or prior to the date hereof, would have
been required to be set forth or described in such letter or which is
necessary to correct any information in such letter which has been rendered
inaccurate thereby. No supplement or amendment to the Seller Disclosure
Letter will have any effect for the purpose of determining satisfaction of
the conditions set forth in Section 6.2 or for the purpose of determining
the Seller's indemnification obligations under Section 9.1, unless such
supplement or amendment is accepted in writing by Purchaser.
Notwithstanding the foregoing, any supplement or amendment to the Seller
Disclosure Letter that adversely affects or modifies the Assets or Assumed
Liabilities (other than with respect to changes in the ordinary course of
business consistent with past practice) must be approved in writing by the
Purchaser in its sole satisfaction.
Section 5.4 Reasonable Best Efforts; Further Assurances.
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto will use its reasonable best efforts to (i) take, or cause
to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate the Acquisition and the other
transactions contemplated by this Agreement as soon as practicable after
the date hereof and (ii) obtain and maintain all approvals, consents,
waivers, registrations, permits, authorizations, clearances and other
confirmations required to be obtained from any third party and/or any
Governmental Entity that are necessary, proper or advisable to consummate
the Acquisition and the transactions contemplated hereby (each a "Required
Approval"). In furtherance and not in limitation of the foregoing, each
party hereto agrees to make as promptly as practicable, to the extent it
has not already done so, (i) appropriate filings of a Notification and
Report Form pursuant to the HSR Act with respect to the transactions
contemplated hereby (which filing shall be made in any event within ten
business days of the date hereof), (ii) all necessary filings with other
Governmental Entities relating to the Acquisition, and to supply as
promptly as practicable any additional information and documentary material
that may be requested pursuant to such laws and to use its best efforts to
cause the expiration or termination of the applicable waiting periods under
the HSR Act and the receipt of Required Approvals under such other laws as
soon as practicable.
(b) Each of the parties hereto shall, in connection with the efforts
referenced in Section 5.4(a) to obtain all Required Approvals, use its
reasonable best efforts to (i) cooperate in all respects with each other in
connection with any filing or submission and in connection with any
investigation or other inquiry, including any proceeding initiated by a
private party, (ii) promptly inform the other party of any communication
received by such party from, or given by such party to, the Antitrust
Division of the Department of Justice (the "DOJ") or any other Governmental
Entity and of any material communication received or given in connection
with any proceeding by a private party, in each case regarding any of
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the transactions contemplated hereby, and (iii) promptly inform the other
party of the timing and content of any communications with the DOJ or any
such other Governmental Entity or, in connection with any proceeding by a
private party, with any other person, and to the extent permitted by the
DOJ or such other applicable Governmental Entity or other Person, give the
other party the opportunity to attend and participate in such meetings and
conferences.
(c) In furtherance and not in limitation of the covenants of the
parties contained in Sections 5.4(a) and 5.4(b), if any administrative or
judicial action or proceeding, including any proceeding by a private party,
is instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Regulatory Law (as
hereinafter defined), or if any statute, rule, regulation, executive order,
decree, injunction or administrative order is enacted, entered, promulgated
or enforced by a Governmental Entity which would make the Acquisition or
the transactions contemplated hereby illegal or would otherwise prohibit or
materially impair or delay the consummation of the Acquisition or the
transactions contemplated hereby, each of the parties hereto shall
cooperate in all respects with each other and use its respective
commercially reasonable efforts to contest and resist any such action or
proceeding and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other action or order, whether temporary,
preliminary or permanent, that is in effect and that prohibits, prevents or
restricts consummation of the Acquisition or the transactions contemplated
by this Agreement and to have such statute, rule, regulation, executive
order, decree, injunction or administrative order repealed, rescinded or
made inapplicable. Notwithstanding any provision of this Agreement to the
contrary, the Purchaser shall be not required under the terms of this
Agreement to dispose of or hold separate all or any portion of the
businesses or assets of the Seller or any of its Subsidiaries or of the
Purchaser or any of its Subsidiaries in order to remedy or otherwise
address the concerns (whether or not formally expressed) of any
Governmental Entity under the HSR Act or any other antitrust statute or
regulation. For purposes of this Agreement, "Regulatory Law" means the
Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the
Federal Trade Commission Act, as amended, and all other Federal, state and
foreign, if any, statutes, rules, regulations, orders, decrees,
administrative and judicial doctrines and other laws that are designed or
intended to regulate mergers, acquisitions or other business combinations.
(d) In connection with, and without limiting the foregoing, the Seller
shall (i) take all actions necessary to ensure that no state antitakeover
statute or similar statute or regulation is or becomes operative with
respect to this Agreement, the Acquisition or any other transactions
contemplated by this Agreement or the Shareholders' Agreements and (ii) if
any state antitakeover statute or similar statute or regulation is or
becomes operative with respect to this Agreement, the Shareholders'
Agreements, the Acquisition or any other transaction contemplated by this
Agreement or the Shareholders' Agreements, take all actions necessary to
ensure that this Agreement, the Shareholders' Agreements, the Acquisition
and any other transactions contemplated by this Agreement or the
Shareholders' Agreements may be consummated as promptly as practicable on
the terms contemplated by this Agreement and the Shareholders' Agreements
and otherwise to minimize the effect of such statute or regulation on the
Acquisition and the other transactions contemplated by this Agreement and
the Shareholders' Agreements.
(e) The Seller will give any notices to third parties and use its
reasonable best efforts (in consultation with the Purchaser) to obtain any
third party consents (i) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (ii) disclosed or required to
be disclosed in the Schedules to this Agreement, including, without
limitation, the consents described in Section 3.13 of the Seller Disclosure
Letter, (iii) required to avoid a breach of or default under any Assumed
Contracts in connection with the consummation of the transactions
contemplated by this Agreement or (iv) required to prevent a Seller
Material Adverse Change.
Section 5.5 Board Recommendations.
(a) In connection with the Acquisition and Shareholders' Meeting, the
Board of Directors of the Seller shall (i) subject to Section 5.5(b),
recommend to the holders of the Seller Common Stock to vote
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in favor of the Acquisition and use its reasonable best efforts to obtain
the necessary approvals by the Seller Shareholders of this Agreement and
(ii) otherwise comply with all legal requirements applicable to such
meeting.
(b) Neither the Board of Directors of the Seller nor any committee
thereof shall, except as expressly permitted by this Section 5.5(b) (i)
withdraw, qualify or modify, or propose publicly to withdraw, qualify or
modify, in a manner adverse to the Purchaser, the approval or
recommendation of such Board of Directors or such committee of the
Acquisition or this Agreement, (ii) approve or recommend, or propose
publicly to approve or recommend, any transaction involving an Acquisition
Proposal (as hereinafter defined) from a third party (an "Alternative
Transaction"), or (iii) cause the Seller to enter into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Alternative
Transaction. Notwithstanding the foregoing, if prior to the date of the
Shareholders' Meeting the Board of Directors of the Seller determines in
good faith, after it has received a Superior Proposal (as hereinafter
defined) in compliance with Section 5.6 and after taking into consideration
advice from outside counsel with respect to its fiduciary duties to the
Seller Shareholders under applicable Law, that such action is advisable for
the Board of Directors of the Seller to comply with its fiduciary
obligations to the Seller Shareholders under applicable Law, the Board of
Directors of the Seller may (subject to this and the following sentences)
inform Seller Shareholders that it no longer believes that the Acquisition
is advisable and no longer recommends approval thereof (a "Subsequent
Determination") and cause the Seller to enter into an Acquisition Agreement
with respect to a Superior Proposal, but only at a time that is after the
third business day (or the second business day, in the case of a material
amendment to a Superior Proposal) following the Purchaser's receipt of
written notice advising the Purchaser that the Board of Directors of the
Seller is prepared to accept a Superior Proposal. Such written notice shall
specify the material terms and conditions of such Superior Proposal,
identify the person making such Superior Proposal and state that the Board
of Directors of the Seller intends to make a Subsequent Determination.
During such three business day period (or two business day period in the
case of a material amendment), the Seller shall provide an opportunity for
the Purchaser to propose such adjustments to the terms and conditions of
this Agreement as would enable the Seller to proceed with its
recommendation to its shareholders without a Subsequent Determination. For
purposes of this Agreement, a "Superior Proposal" means any proposal (on
its most recently amended or modified terms, if amended or modified) made
by a third party to enter into an Alternative Transaction which the Board
of Directors of the Seller determines in its good faith judgment (based on,
among other things, the advice of an independent financial advisor) to be
more favorable to the Seller Shareholders than the Acquisition from a
financial point of view (taking into account whether, in the good faith
judgment of the Board of Directors of the Seller, after obtaining the
advice of such independent financial advisor, the third party is reasonably
able to finance the transaction, and any proposed changes to this Agreement
that may be proposed by the Purchaser in response to such Alternative
Transaction).
(c) Nothing contained in this Section 5.5 shall prohibit the Seller
from taking and disclosing to its shareholders a position contemplated by
Rule 14d-9 or 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to the Seller Shareholders if, in the good faith judgment of
the Board of Directors of the Seller, after consultation with outside
counsel, failure to take such a position or to so disclose would be
inconsistent with applicable Law; provided, however, neither the Seller nor
its Board of Directors nor any committee thereof shall, except as
specifically permitted by Section 5.5(b), withdraw, qualify, or modify, or
propose to withdraw, qualify or modify, its position with respect to the
Acquisition or this Agreement or approve or recommend, or propose to
approve or recommend an Alternative Transaction.
Section 5.6 Acquisition Proposals. The Seller shall not, nor shall it
authorize or permit any of its Subsidiaries or Representatives to, directly or
indirectly, (a) solicit, initiate or encourage the submission of any Acquisition
Proposal or (b) participate in or encourage any discussion or negotiations
regarding, or furnish to any person any non-public information with respect to,
or take any other action to facilitate any inquiries or the making of, any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition
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Proposal; provided, however, that the foregoing shall not prohibit the Board of
Directors of the Seller from furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes an unsolicited
Acquisition Proposal prior to the date of the Shareholders' Meeting if, and to
the extent that, (A) the Board of Directors of the Seller, after taking into
consideration advice of independent outside legal counsel, determines in good
faith that such action is advisable for the Board of Directors of the Seller to
comply with its fiduciary obligations to the Seller Shareholders under
applicable Law, (B) prior to taking such action, the Seller receives from such
person or entity an executed agreement in reasonably customary form relating to
the confidentiality of information to be provided to such person or entity and
(C) the Board of Directors of the Seller concludes in good faith, based upon
written advice from its independent financial advisor, that the Acquisition
Proposal is a Superior Proposal. The Seller shall promptly provide oral and
written notice to the Purchaser of (a) the receipt of any such Acquisition
Proposal or any inquiry which could reasonably be expected to lead to any
Acquisition Proposal, (b) the material terms and conditions of such Acquisition
Proposal or inquiry, (c) the identity of such person or entity making any such
Acquisition Proposal or inquiry and (d) the Seller's intention to furnish
information to, or enter into discussions or negotiations with, such person or
entity. The Seller shall continue to keep the Purchaser informed of the status
and details of any such Acquisition Proposal or inquiry. For purposes of this
Agreement, "Acquisition Proposal" means any bona fide proposal with respect to a
merger, consolidation, share exchange, tender offer or similar transaction
involving the Seller, or any purchase or other acquisition of all or any
significant portion of the assets of the Seller or a 25% or greater equity
interest in the Seller.
Section 5.7 Seller Shareholders' Meeting.
(a) The Seller shall cause the Shareholders' Meeting to be duly called
and held as soon as practicable following the date hereof for the purpose
of voting on the approval and adoption of this Agreement and the
Acquisition. The Seller shall take all action necessary in accordance with
applicable Law and the Seller Articles of Incorporation and Seller Bylaws
to duly call, give notice of, and convene the Shareholders' Meeting.
(b) The Seller shall, at the direction of the Purchaser, solicit from
holders of shares of Seller Stock entitled to vote at the Shareholders'
Meeting proxies in favor of such approval and shall take all other
reasonable action necessary or helpful to secure the vote or consent of
such holders required by the FBCA or this Agreement to effect the
Acquisition.
Section 5.8 Proxy Statement.
(a) The Purchaser and the Seller will as promptly as practicable
following the date hereof jointly prepare, and the Seller shall file, the
Proxy Statement with the SEC and will use all commercially reasonable
efforts to respond to the comments of the SEC and to cause the Proxy
Statement to be mailed to the Seller Shareholders at the earliest practical
time. The Seller shall furnish all information concerning it and the
holders of its capital stock as the Purchaser may reasonably request in
connection with such actions. Each party to this Agreement will notify the
other parties and the Board of Directors of the Seller promptly of the
receipt of the comments of the SEC, if any, and of any request by the SEC
for amendments or supplements to the Proxy Statement or for additional
information with respect thereto, and will supply the other parties with
copies of all correspondence between such party or its Representatives, on
the one hand, and the SEC or members of its staff, on the other hand, with
respect to the Proxy Statement or the Acquisition. If (A) at any time prior
to the Shareholders' Meeting, any event should occur relating to the Seller
or any of its Subsidiaries which should be set forth in an amendment of, or
a supplement to, the Proxy Statement, the Seller will promptly inform the
Purchaser and (B) if at any time prior to the Shareholders' Meeting, any
event should occur relating to the Purchaser or any of its associates or
Affiliates, or relating to the plans of any such persons for the Seller
after the Effective Time that should be set forth in an amendment of, or a
supplement to, the Proxy Statement, the Purchaser will promptly inform the
Seller, and in the case of (A) or (B) the Seller and the Purchaser, will,
upon learning of such event, promptly prepare, and the Seller shall file
and, if required, mail such amendment or supplement to the Seller
Shareholders; provided, prior to such filing or mailing, the Seller and the
Purchaser shall consult with each other with respect to such amendment or
supplement. The Purchaser
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and the Seller will file, pursuant to and in a manner consistent with Rule
14a-12 under the Exchange Act any soliciting material sent or given to
shareholders of the Seller. The Purchaser shall vote, or cause to be voted,
in favor of the Acquisition and this Agreement all shares of Seller Stock
directly or indirectly beneficially owned by it.
(b) The Seller hereby consents to the inclusion in the Proxy Statement
of the recommendation of the Board of Directors of the Seller described in
Section 5.5, subject to any modification, amendment or withdrawal thereof,
and represents that the Independent Advisor has, subject to the terms of
its engagement letter with the Seller and the Board of Directors of the
Seller (the "Independent Advisor Engagement Letter"), agreed to consent to
the inclusion of references to its opinion in the Proxy Statement, subject
to any modification, amendment or withdrawal thereof. The Seller and its
counsel shall permit the Purchaser and its counsel to participate in all
communications with the SEC and its staff, including any meetings and
telephone conferences, relating to the Proxy Statement, the Acquisition or
this Agreement.
Section 5.9 [INTENTIONALLY OMITTED.]
Section 5.10 Consents.
(a) To the extent that third party consents relating to Assumed
Contracts have not been obtained by the Seller as of the Closing, the
Seller shall, during the remaining term of such Assumed Contracts (the
"Non-Assignable Contracts"), use all commercially available efforts to (a)
obtain as promptly as practicable the consent of the applicable third
party, (b) make the benefit of such Non-Assignable Contracts available to
the Purchaser so long as the Purchaser fully cooperates with the Seller and
promptly reimburses the Seller for all payments made by the Seller in
connection therewith and indemnifies the Seller with respect thereto, and
(c) enforce at the request of the Purchaser and at the expense and for the
account of the Purchaser, any rights of the Seller arising from such
Non-Assignable Contracts against the other party or parties thereto
(including the right to terminate any such Non-Assignable Contracts in
accordance with the terms thereof). The Seller will not take any action or
suffer any omission which would limit or restrict or terminate in any
material respect the benefits to the Purchaser of such Non-Assignable
Contracts unless, in good faith and after consultation with and prior
written notice to the Purchaser, the Seller is ordered orally or in writing
to do so by a Governmental Entity of competent jurisdiction or the Seller
is otherwise required to do so by law; provided that if any such order is
appealable, the Seller will, at the Purchaser's cost and expense, take such
actions as are requested by the Purchaser to file and pursue such appeal
and to obtain a stay of such order. With respect to any such Non-Assignable
Contract as to which the necessary approval or consent for the assignment
or transfer to the Purchaser is obtained following the Closing, the Seller
shall transfer such Non-Assignable Contract to the Purchaser by execution
and delivery of an instrument of conveyance reasonably satisfactory to the
Purchaser and the Seller within three (3) business days following receipt
of such approval or consent. Notwithstanding the foregoing, the Seller
shall not be indemnified to the extent of any losses which result from (i)
the Seller's failure to take any lawful action in accordance with the
Purchaser's reasonable instructions or (ii) the Seller's gross negligence
or willful misconduct.
(b) The Seller agrees to use its reasonable best efforts to assign
those Licenses listed in Section 3.18(c) of the Seller Disclosure Letter to
the Purchaser, but if the Seller shall have failed to procure for the
Purchaser such assignment prior to the Closing Date, then the Seller shall
either procure a separate license for the benefit of the Purchaser or shall
notify the Purchaser at least three (3) business days prior to the Closing
that the Seller agrees to reimburse the Purchaser for its reasonable cost
of obtaining a license to reasonably equivalent software.
(c) The Purchaser shall take such commercially reasonable action as
the Seller reasonably requests from time to time in order to assist the
Seller in obtaining any third party consent relating to an Assumed
Contract.
Section 5.11 Public Announcements. Subject to their respective legal
obligations (including requirements of stock exchanges and other similar
regulatory bodies), the Purchaser and the Seller shall consult with
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one another regarding the timing and content of all announcements regarding any
aspect of this Agreement or the transactions contemplated hereby to the
financial community, government agencies, employees, customers or the general
public and shall use reasonable efforts to agree upon the text of any such
announcement prior to its release.
Section 5.12 Employees.
(a) Transferred Employees. On the Closing Date, the Seller shall
terminate the employment of all of its employees identified in Section
3.16(a) of the Seller Disclosure Letter except as otherwise provided in
this Section 5.12. Commencing on the Closing Date, the Purchaser shall
offer employment, on an "at will" basis, to all of the employees of the
Seller who are actively at work on the Closing Date other than those
employees of the Seller who are identified in Section 5.12(a) of the Seller
Disclosure Letter as employees with respect to whom the Purchaser shall
have no hiring obligation. Employees of the Seller who accept such offer
are, as of the time they first perform services for the Purchaser, referred
to herein as the "Transferred Employees". The Purchaser shall have no
obligation of any kind to offer employment with respect to any employee of
the Seller who is not actively at work on the Closing Date. For these
purposes "actively at work" will mean: (i) any employee who has averaged a
minimum of thirty (30) hours per week in a permanent position in the last
three months prior to the Closing Date; (ii) any employee absent on the
Closing Date due to the Family Medical Leave Act or similar state laws;
(iii) any employee absent on the Closing Date due to maternity leave under
the Seller's maternity leave policy; (iv) any employee absent on the
Closing Date due to military duty; (v) any employee absent on the Closing
Date due to jury duty; and (vi) any employee absent on the Closing Date due
to vacation or personal days consistent with the Seller's employment
policies. The Purchaser shall take all action in connection with the
employment or hiring of the Transferred Employees as may be reasonably
requested by the Seller to avoid the applicability of the Worker Adjustment
and Retraining Notification Act, similar state law, or both to the
termination of such employees by the Seller.
(b) Compensation and Benefits. The Purchaser shall provide to the
Transferred Employees total compensation and employee benefits that are
substantially comparable in the aggregate to the value of the total
compensation and employee benefits provided to the Transferred Employees by
the Seller immediately prior to the Closing Date. The Purchaser shall
provide each Transferred Employee credit under the Purchaser's vacation
policy for any earned but unused vacation such Transferred Employee had
accumulated with the Seller as of the Closing Date, provided that such
accumulated vacation does not exceed four (4) weeks and no more than two
(2) weeks of such accumulated vacation may be carried forward to the
calendar year beginning after the Closing Date in accordance with the
Purchaser's vacation policy.
(c) COBRA Coverage. To the extent required by applicable law, if the
Purchaser is deemed to be a "successor employer" as a result of the Seller
and its Affiliates ceasing to provide any "group health plan" in connection
with the sale of assets contemplated by this Agreement, the Purchaser shall
offer and provide continuation coverage required under Section 4980B of the
Code and Part 6 of Title I of ERISA ("COBRA Coverage") to each person who
is an "M&A qualified beneficiary" as a result of the sale of assets
contemplated by this Agreement; provided, however, that notwithstanding the
foregoing, the Purchaser shall not be responsible and the Seller shall be
solely responsible for providing COBRA Coverage to any person who remains
employed by the Seller after the Closing Date or any dependents of such
person. "Group health plan" is defined in Section 4980B of the Code and
"M&A qualified beneficiary" and "successor employer" are defined in Prop.
Treas. Reg. Section 54.4980B-9, Q&A 4.
(d) Information. The Seller shall provide the Purchaser all
information relating to each Transferred Employee as the Purchaser may
reasonably require in connection with its employment of such persons,
including, without limitation, initial employment dates, termination dates,
reemployment dates, hours of service, compensation and tax withholding
history in a form that will be usable by the Purchaser and such information
shall be true and correct in all material respects.
(e) Seller Stock Option Plans and Seller Employee Stock Purchase
Plan. Except to the extent stock option vesting may arise without the
exercise of discretion of the board of directors of the Seller
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after the date hereof under applicable stock option related, employment
related, severance related or other agreements (which in each case is
identified in Section 3.19(e) of the Seller Disclosure Letter), the Seller
shall take all necessary actions to ensure that no stock options issued
pursuant to the Seller's stock option plans described in Section 3.15 of
the Seller Disclosure Letter (together with any other plan or agreement
whereby stock options or similar instruments have been granted to any
employee of the Seller or its Subsidiaries, collectively the "Seller Option
Plans") will accelerate or vest as a result of this Agreement or the
consummation of the Acquisition or the other transactions contemplated
hereby. The Purchaser shall issue options under its stock option plan (the
"Purchaser Option Plan") in substitution for the options issued to
Transferred Employees under the Seller Option Plans outstanding on the
Closing Date (the "Seller Options") to the extent that such Seller Options
were not vested on such date and such nonvested Seller Options are canceled
or expire pursuant to the Seller Option Plans effective as of the issuance
of replacement options under the Purchaser Option Plan or pursuant to an
applicable Transferred Employee's termination of employment with the
Seller. The Seller shall terminate the Seller's employee stock purchase
plan before the Closing Date.
(f) Seller's 401(k) Plan. As soon as administratively practicable
following the Closing Date, and subject to the requirements of applicable
law and documents, the Seller shall cause that portion of each Transferred
Employee's account under the Seller's 401(k) plan, if any, attributable to
the Seller's matching contribution and profit sharing contribution to be
fully vested and shall cause the 401(k) plan to make distributions to those
Transferred Employees, subject to applicable consent requirements. The
Purchaser in its discretion may permit the Purchaser's 401(k) plan to
accept a rollover of distributions from the Seller's 401(k) plan prior to
the receipt of a favorable determination letter, in which case, the Seller
shall provide to the Purchaser such evidence of qualification of the
Seller's 401(k) plan as the Purchaser shall reasonably request.
(g) Certain Transferred Employee Matters. As of the Closing Date, the
Purchaser shall and does hereby assume and undertake to discharge in all
respects all monetary obligations of the Seller arising from the Seller's
termination of employment of the employees of the Seller identified in
Section 5.12(g) of the Seller Disclosure Letter, which obligations arise
under the employment contracts of such employees which have been provided
to the Purchaser.
Section 5.13 Transfer Taxes; Expenses. Any sales taxes, real property
transfer or gains taxes, recording fees or any other similar taxes payable as a
result of the Acquisition or any other action contemplated by this Agreement
will be paid by the party upon which those taxes are imposed by applicable laws.
Notwithstanding the foregoing, any taxes imposed by the State of Florida on
either the Seller or the Purchaser with respect to the Line of Credit
(including, but not limited to the related loan agreement and promissory note)
shall be paid by the Seller. The Parties will cooperate in the preparation,
execution and filing of all returns, questionnaires, applications or other
documents regarding any real property transfer or gains, sales, use, transfer,
value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated hereby that are required or
permitted to be filed on or before the Closing.
Section 5.14 Insurance. If requested by the Purchaser, the Seller shall
in good faith cooperate with the Purchaser and take all actions reasonably
requested by the Purchaser that are necessary or desirable to permit the
Purchaser to have available to it following the Closing the benefits (whether
direct or indirect) of the insurance policies maintained by or on behalf of the
Seller that are currently in force. All costs relating to the actions described
in this Section shall be borne by the Purchaser.
Section 5.15 Name Change. Simultaneously with the Closing, the Seller
shall change its corporate name to remove any reference to the name "Phoenix" or
any other trade name used in the Business. As promptly as practicable after the
Closing Date, the Seller shall file in all jurisdictions in which it is
qualified to do business any documents necessary to reflect such change of name
or to terminate its qualification therein. In connection with enabling the
Purchaser, at or as soon as practicable after the Closing Date, to use the
current corporate name of the Seller, the Seller shall, at or prior to the
Closing Date, execute and deliver to
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the Purchaser all consents related to such change of name as may be requested by
the Purchaser, and will otherwise cooperate with the Purchaser.
Section 5.16 Risk of Loss. The risk of loss with respect to the Assets
shall remain with the Seller until the Closing. Until the Closing, the Seller
shall maintain in force all the policies of property damage insurance under
which any of the Assets is insured. If before the Closing any of the Assets is
lost, damaged or destroyed and the loss, damage or destruction would likely
result in a Seller Material Adverse Change, then:
(a) the Purchaser may terminate this Agreement in accordance with the
provisions of Section 8.1; or
(b) the Purchaser may require the Seller to assign to the Purchaser
the proceeds of any insurance payable as a result of the occurrence of such
loss, damage or destruction and to reduce the Purchase Price by the amount
of the replacement cost of the Assets which were lost, damaged or destroyed
less the amount of any proceeds of insurance payable as a result of the
occurrence.
Section 5.17 Customer Visits. Between the date hereof and the Closing
Date, the Seller shall permit the Purchaser to discuss and meet, and shall
cooperate in such discussions and meetings, with any customer of the Seller that
the Purchaser reasonably requests. A senior executive of the Seller, reasonably
satisfactory to the Purchaser, shall accompany the Purchaser's representative to
such meeting and shall participate with the Purchaser's representative in any
such discussions. Furthermore, the Seller shall cooperate with the Purchaser in
the preparation of a presentation to such customers with respect to the
Acquisition.
Section 5.18 Personal Computer Equipment. Immediately prior to the
Closing, the Seller shall remove all data and information with respect to the
Intellectual Property Rights and Licensed Rights (other than generally available
software) relating to the Assets or Assumed Liabilities stored on personal
computing equipment not being transferred to the Purchaser under this Agreement
from such personal computing equipment. Prior to the Closing Date the Purchaser
and each of the owners of such personal computing equipment shall enter into a
confidentiality agreement on customary terms reasonably acceptable to the
parties.
Section 5.19 Parent Guarantee. Parent hereby unconditionally guarantees
the due and punctual performance of each of the obligations and undertakings of
the Purchaser under this Agreement when and to the extent the same are required
to be performed and subject to the terms and conditions hereof.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 Conditions to Each Party's Obligations. The respective
obligations of each Party to effect the transactions contemplated by this
Agreement will be subject to the fulfillment at or prior to the Closing of each
of the following conditions:
(a) Proceedings. There shall not be instituted, pending or threatened
any action, investigation or proceeding by any Governmental Entity, or
shall there be instituted, pending or threatened any action or proceeding
by any other person, domestic or foreign, before any Governmental Entity,
which is reasonably likely to be determined adversely to the Seller or the
Purchaser, (A) challenging or seeking to make illegal, to delay materially
or otherwise, directly or indirectly, to restrain or prohibit the
consummation of the Acquisition, seeking to obtain material damages or
imposing any material adverse conditions in connection therewith, (B)
seeking to restrain, prohibit or delay in any material manner the exercise
of full rights of ownership or operation by the Purchaser or its Affiliates
of all or any portion of the Assets, or to compel the Purchaser or any of
its Affiliates to dispose of or hold separate all or any material portion
of the Assets or the assets of the Purchaser or any of its Affiliates, (C)
seeking to impose or confirm limitations in any material manner on the
ability of the Purchaser or any of its Affiliates effectively to exercise
full rights of ownership of the Assets, (D) seeking to require divestiture
by the Purchaser or any of its Affiliates of the Assets, or (E) that
otherwise would reasonably be expected to have a Seller Material Adverse
Effect;
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(b) Injunction. There shall not be any action taken, or any statute,
rule, regulation, injunction, order or decree proposed, enacted, enforced,
promulgated, issued or deemed applicable to, or any consent or approval
withheld with respect to, the Acquisition by any Governmental Entity that,
in the reasonable judgment of the Purchaser, may, directly or indirectly,
result in any of the consequences referred to in clauses (A) through (E) of
paragraph (a) above;
(c) Governmental Consents. All consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Governmental Entity required in connection with the execution, delivery or
performance of this Agreement will have been obtained or made, except where
the failure to have obtained or made any such consent, approval, order,
authorization, declaration or filing would not have a Seller Material
Adverse Effect.
(d) Antitrust Approvals. The waiting periods or extensions thereof
applicable to the consummation of the Acquisition under the HSR Act shall
have expired or been terminated.
(e) Shareholder Approval. This Agreement and the Acquisition shall
have been approved and adopted by the requisite vote of the Seller
Shareholders, as required by the FBCA, the Seller Articles of Incorporation
and the Seller Bylaws.
(f) Initial Working Capital and Allocation of Purchase Price. Prior
to the Closing, the Purchaser and the Seller shall agree upon (i) the
Initial Working Capital and (ii) the allocation of the Purchase Price with
respect to the Assets in accordance with the principles set forth in
Schedule 6.1(f). The Purchaser and the Seller agree to file all Tax Returns
on the basis of such allocation.
Section 6.2 Conditions to Obligations of the Purchaser. The obligations
of the Purchaser to consummate the transactions contemplated by this Agreement
will be subject to the fulfillment at or prior to the Closing of each of the
following additional conditions:
(a) Representations and Warranties.
(i) There shall not exist inaccuracies or omissions in the
representations and warranties of the Seller set forth in Article III
such that the aggregate effect of such inaccuracies has or may
reasonably be likely to have a Seller Material Adverse Effect; provided
that for purposes of this section only, those representations and
warranties which are qualified by references to materiality or Seller
Material Adverse Effect or similar phrases shall be deemed not to
include such qualification. For purposes of this Section 6.2(a), the
accuracy of the representations and warranties of the Seller set forth
in Article III shall be assessed as of the date hereof and as of the
Closing Date with the same force and effect as if made as of the Closing
Date (provided that such representations and warranties which are
confined as to a specific date shall speak only as of such date). For
purposes of this Section 6.2(a), a Seller Material Adverse Effect shall
mean a Seller Material Adverse Effect as defined in Section 10.16(c)
which results in or may be reasonably likely to result in an adverse
change or changes in the aggregate in excess of $2,000,000.
(ii) The representations and warranties of the Seller set forth in
Sections 3.11, 3.12 (to the extent such Litigation relates to any Asset
or Assumed Contract), 3.13, 3.14, 3.15 and 3.16 (to the extent any
misrepresentation or omission in Section 3.15 or 3.16 affects the
Purchaser's ability to perform its obligations under Section 5.12), 3.18
and 3.27 shall have been true and correct in all material respects as of
the date hereof and shall be true and correct in all material respects
as of the Closing Date as though made on and as of the Closing Date,
except that those representations and warranties that by their terms are
qualified by materiality shall be true and correct in all respects;
(b) Performance of Obligations of the Seller. The Seller shall have
performed in all material respects all covenants and agreements required to
be performed by it under this Agreement on or prior to the Closing Date;
(c) No Material Adverse Change. Between the date hereof and the
Closing Date, there shall not have occurred (nor shall the Purchaser have
become aware of) any material adverse change, or any
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development likely to result in a material adverse change, in or affecting
the Business, the Assets, the Assumed Liabilities or the results of
operations, business, condition or prospects of the Business;
(d) Seller Certificate. The President and Chief Executive Officer of
the Seller shall have executed and delivered to the Purchaser a certificate
as to compliance with the conditions set forth in Sections 6.2(a), (b) and
(c);
(e) Consents. The Seller shall have obtained and delivered to the
Purchaser the written consents (or waivers with respect thereto) with
respect to the contracts identified on Schedule 6.2(e) and for all third
party contracts included in the Assumed Contracts to the extent such
contracts require consent with respect to the use or transfer of software
licenses (all such consents and waivers shall be in full force and effect);
(f) Closing Date Indebtedness; Release of Liens. The Closing Date
Indebtedness shall have been repaid in full by disbursement of a portion of
the Purchase Price, and the Seller shall have delivered to the Purchaser
satisfactory evidence that the obligations of the Seller with respect to
the Promissory Note, dated October 31, 1999 issued by the Seller in favor
of Phoenix International New York, Inc. have been satisfied in full and all
Liens affecting the Assets have been released, including, but not limited
to, those Liens listed on Schedule 6.2(f), but excluding those identified
in Section 1.1;
(g) Estoppel and Consent Certificates. The Seller shall have
delivered to the Purchaser an Estoppel and Consent Certificate reasonably
satisfactory to the Purchaser executed by the landlord of each Leased Real
Property;
(h) Opinion of Seller's Counsel. The Purchaser shall have received an
opinion from outside counsel to the Seller, dated the Closing Date, in
substantially the form attached as Exhibit 6.2(h);
(i) Ancillary Documents. The Seller shall have delivered, or caused
to be delivered, to the Purchaser the following:
(i) executed deeds, bills of sale, instruments of assignment,
certificates of title and other conveyance documents, dated the Closing
Date, transferring to the Purchaser all of the Seller's right, title and
interest in and to the Assets, together with possession of the Assets,
including the Bill of Sale in substantially the form attached hereto as
Exhibit 6.2(i)(i) (the "Bill of Sale");
(ii) documents evidencing the assignment of the Assumed Contracts
and the assignment of any assignable Licenses, including the Assignment
and Assumption Agreement in substantially the form attached hereto as
Exhibit 6.2(i)(ii) (the "Assignment and Assumption Agreement");
(iii) a copy of resolutions of the board of directors of the Seller
authorizing the execution, delivery and performance of this Agreement by
the Seller and a certificate of the secretary or assistant secretary of
the Seller, dated the Closing Date, certifying that such resolutions
were duly adopted and are in full force and effect;
(iv) the Escrow Agreement;
(v) all other documents required to be entered into by the Seller
pursuant to this Agreement or reasonably requested by the Purchaser to
convey the Assets to the Purchaser or to otherwise consummate the
transactions contemplated by this Agreement;
(j) the Purchaser and each of the applicable individuals shall have
entered into the agreements described in Section 5.18; and
(k) There shall be a full and final resolution of the Class Action,
which shall be documented by a signed settlement agreement between the
parties (and approved by the Purchaser), subject only to court approval.
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Section 6.3 Conditions to Obligations of the Seller. The obligations of
the Seller to consummate the transactions contemplated by this Agreement will be
subject to the fulfillment at or prior to the Closing of each of the following
additional conditions:
(a) Representations and Warranties. There shall not exist
inaccuracies in the representations and warranties of the Purchaser set
forth in Article IV such that the aggregate effect of such inaccuracies has
or may be reasonably likely to prevent or materially delay the performance
by the Purchaser of any of its obligations under this Agreement or the
consummation of the Acquisition or the other transactions contemplated by
this Agreement; provided that for purposes of this section only, those
representations and warranties which are qualified by references to
materiality or similar phrases shall be deemed not to include such
qualification. For purposes of this Section 6.3(a), the accuracy of the
representations and warranties of the Purchaser set forth in Article IV
shall be assessed as of the date hereof and as of the Closing Date with the
same force and effect as if made as of the Closing Date (provided that such
representations and warranties which are confined as to a specified date
shall speak only as of such date);
(b) Performance of Obligations by the Purchaser. The Purchaser shall
have performed in all material respects all covenants and agreements
required to be performed by it under this Agreement on or prior to the
Closing Date;
(c) Certificates. The Purchaser shall have delivered to the Seller a
certificate of an authorized officer as to compliance with the conditions
set forth in Sections 6.3(a) and (b); and
(d) Ancillary Documents. The Purchaser shall have delivered, or
caused to be delivered, to the Seller and the Shareholder the following:
(i) documents evidencing the assumption of the Assumed Contracts,
the acceptance of assignable Licenses and the assumption of the Assumed
Liabilities, including the Assignment and Assumption Agreement;
(ii) a copy of the resolutions of the board of directors of the
Purchaser authorizing the execution, delivery and performance of this
Agreement by the Purchaser and a certificate of its secretary or
assistant secretary, dated the Closing Date, that such resolutions were
duly adopted and are in full force and effect;
(iii) the Escrow Agreement; and
(iv) all other documents required to be entered into or delivered
by the Purchaser at or prior to the Closing pursuant to this Agreement,
including the Bill of Sale.
ARTICLE VII
CLOSING
The consummation of the transactions contemplated by this Agreement is
referred to in this Agreement as the "Closing." The "Closing Date" will be the
date on which the Closing occurs. The Closing will occur within five (5)
Business Days following the satisfaction or waiver of the conditions set forth
in Article VI, or on such other date as the Parties may agree. The Closing will
take place at the offices of King & Spalding, 191 Peachtree Street, Atlanta,
Georgia, or at such other place as the Parties may agree.
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ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated at any time at
or prior to the Closing (the "Termination Date"):
(a) By mutual written consent of duly authorized representatives of
the Purchaser and the Seller;
(b) By the Purchaser or the Seller if any court of competent
jurisdiction or other Governmental Entity shall have issued an order,
decree, ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the Acquisition and such order, decree, ruling or
other action shall have become final and nonappealable; provided however,
that the party terminating this Agreement pursuant to this Section 8.1(b)
shall use all commercially reasonable efforts to have such order, decree,
ruling or action vacated;
(c) By the Purchaser or the Seller if the Acquisition shall not have
been consummated on or before March 31, 2001; provided, however, that the
right to terminate this Agreement under this Section 8.1(c) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the primary cause of, or resulted in, the failure to
consummate the Acquisition on or before such date;
(d) By the Purchaser if the Board of Directors of the Seller (i) shall
have withdrawn or shall have modified in a manner adverse to the Purchaser
its approval or recommendation of the Acquisition or this Agreement, (ii)
causes the Seller to enter into an agreement with respect to an Acquisition
Proposal, (iii) shall have endorsed, approved or recommended any
Acquisition Proposal or (iv) shall have publicly proposed to do any of the
foregoing; provided, however, that any public statement by the Seller that
it has received an Acquisition Proposal shall not be deemed to be a public
proposal to withdraw or modify the recommendation of the Board of Directors
of the Seller;
(e) By the Purchaser or the Seller if this Agreement and the
Acquisition shall fail to be approved and adopted by the Seller
Shareholders at the Shareholders' Meeting;
(f) By the Purchaser, if (i) any of the conditions set forth in
Section 6.2 shall have become incapable of fulfillment and shall not have
been waived by the Purchaser or (ii) the Seller shall breach any of its
representations or warranties which breach would give rise to the failure
of a condition set forth in Section 6.2(a) or breach in any material
respect any of its covenants or other obligations hereunder and, within
twenty (20) days after written notice of such breach to the Seller from the
Purchaser, such breach shall not have been cured in all material respects
or waived by the Purchaser;
(g) Except as set forth in Section 8.1(g) of the Seller Disclosure
Letter, by the Purchaser if (i) more than 20% of the employees of the
Seller and its Subsidiaries as of the date hereof terminate, or announce
the termination of, their employment with the Seller or such Subsidiary or
their employment is terminated by the Seller or such Subsidiary prior to
the Closing Date or (ii) more than 50% of the employees of the Seller or
its Subsidiaries in any departments described in Section 8.1(g) of the
Seller Disclosure Letter as of the date hereof terminate, or announce the
termination of, their employment with the Seller or such Subsidiary or
their employment is terminated by the Seller or such Subsidiary prior to
the Closing Date, and in the case of (i) and (ii) such terminations
materially impact the ability of the Seller or such Subsidiary to meet its
customer obligations with respect to sales, support, development,
installation, implementation or maintenance (in furtherance of the
foregoing, the Purchaser will use its commercially reasonable efforts to
assist the Seller in the retention of such employees; provided such efforts
shall not include any cash payments to be made by the Purchaser);
(h) By the Seller, if (i) any of the conditions set forth in Section
6.3 shall have become incapable of fulfillment and shall not have been
waived by the Seller or (ii) the Purchaser shall breach any of its
representations or warranties which breach would give rise to the failure
of a condition set forth in Section 6.3(a) or breach in any material
respect any of its obligations hereunder and, within twenty (20) days after
written notice of such breach to the Purchaser from the Seller, such breach
shall not have been cured in all material respects or waived by the Seller;
or
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(i) By the Seller if, in compliance with its obligations under
Sections 5.5 and 5.6, the Board of Directors of the Seller (i) shall have
withdrawn or shall have modified in a manner adverse to Parent or Purchaser
its approval or recommendation of the Acquisition or this Agreement or (ii)
shall have endorsed, approved or recommended any Acquisition Proposal or
entered into an agreement with respect to a Superior Proposal.
Section 8.2 Effect of Termination.
(a) In the event of the termination of this Agreement pursuant to
Section 8.1 hereof, this Agreement shall forthwith be terminated and have
no further effect except as specifically provided herein and, except as
provided in the last sentence of Section 5.2(a), in this Section 8.2 and in
Section 10.15, there shall be no liability on the part of any party hereto,
provided that nothing herein shall relieve any party from liability for any
willful breach hereof.
(b) If (i) the Purchaser exercises its right to terminate this
Agreement under Section 8.1(d) or (ii) (A) after the date of this Agreement
any Acquisition Proposal involving the Seller shall have been publicly
announced and (B) this Agreement or the Acquisition shall thereafter be
terminated pursuant to Section 8.1(e), the Seller shall pay to the
Purchaser upon demand $2.0 million (the "Termination Fee"), payable in
same-day funds.
(c) If within one year after termination of this Agreement, the Seller
shall enter into any agreement relating to, or consummate, an Acquisition
Proposal with a person other than the Purchaser, then immediately prior to,
and as a condition of, consummation of such transaction the Seller shall
pay to the Purchaser upon demand the Termination Fee, payable in same-day
funds; provided that no such amount shall be payable if the Termination Fee
shall have become payable or have been paid in accordance with Section
8.2(b) of this Agreement; provided, further, that no such amount shall be
payable if this Agreement is terminated pursuant to Section 8.1(a), (b),
(c) or (h).
(d) Notwithstanding anything to the contrary set forth in this
Agreement, if the Seller fails promptly to pay to the Purchaser any amounts
due under this Section 8.2, the Seller shall pay the costs and expenses
(including reasonable legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee or
obligation at the publicly announced prime rate of Citibank, N.A. in effect
from time to time from the date such fee or obligation was required to be
paid.
ARTICLE IX
INDEMNIFICATION
Section 9.1 Indemnification Obligations of the Seller. The Seller shall
indemnify, defend and hold harmless the Purchaser and its Affiliates, each of
their respective officers, directors, employees, agents and representatives and
each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Purchaser Indemnified Parties") from, against and in respect
of any and all claims, liabilities, obligations, losses, costs, expenses,
penalties, fines and judgments (at equity or at law) and damages whenever
arising or incurred (including, without limitation, amounts paid in settlement,
costs of investigation and reasonable attorneys' fees and expenses) arising out
of or relating to:
(a) any Excluded Liability;
(b) [INTENTIONALLY OMITTED];
(c) any breach or inaccuracy of any representation or warranty (other
than with respect to Section 3.18(m)) made by the Seller in this Agreement
or in the Seller Ancillary Documents without regard to qualifications with
respect to materiality, Seller Material Adverse Effect or similar phrases
contained therein;
(d) any breach or inaccuracy of any representation or warranty made by
the Seller in Section 3.18(m) or in Section 3.18(m) of the Seller
Disclosure Letter, without regard to qualifications with
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respect to knowledge, materiality, Seller Material Adverse Effect or
similar phrases contained therein; provided, however, that the obligation
of the Seller to indemnify the Purchaser pursuant to this Section 9.1(d)
shall be reduced on a dollar for dollar basis to the extent that unpaid
software license fees which cause a breach or inaccuracy of Section 3.18(m)
or Section 3.18(m) of the Seller Disclosure Letter have actually been paid
or are subsequently paid by a third party pursuant to the terms of such
Assumed Contract;
(e) any breach of any covenant, agreement or undertaking made by the
Seller in this Agreement or in the Seller Ancillary Documents;
(f) any fraud, willful misconduct or bad faith of the Seller in
connection with this Agreement or the Seller Ancillary Documents;
(g) any provision of any Environmental Law and arising out of or
relating to (i) any act or omission of the Seller, or its employees, agents
or representatives or (ii) the ownership, use, control or operation on or
prior to the Closing Date of the real property or any plant, facility,
site, area or property used in the business of the Seller (whether
currently or previously owned or leased by the Seller), including, without
limitation, arising from any release of any Hazardous Materials or off-site
shipment of any Hazardous Materials at or from the real property or any
such plant, facility, site, area or property;
(h) any liability or obligation relating to the Class Action, or any
other litigation relating to the Seller, its officers, directors, employees
or Affiliates which relates to matters or events occurring prior to the
Closing Date;
(i) non-compliance by the Parties with any applicable bulk sales
legislation; or
(j) any inaccuracy, misstatement or omission in Section 3.11 of the
Seller Disclosure Letter delivered as of the date hereof and the Closing
Date with respect to such inaccuracies, misstatements or omissions about
which the Seller knew or should reasonably have known after due inquiry at
the time such statements were delivered to the Purchaser.
The claims, liabilities, obligations, losses, costs, expenses, penalties, fines
and damages of the Purchaser Indemnified Parties described in this Section 9.1
as to which the Purchaser Indemnified Parties are entitled to indemnification
are hereinafter collectively referred to as the "Purchaser Losses."
Notwithstanding anything contained herein to the contrary, Purchaser Losses
shall not include any liabilities with respect to software license fees to the
extent such fees were paid by the Seller prior to the Closing Date.
Section 9.2 Indemnification Obligations of the Purchaser. The Purchaser
will indemnify and hold harmless the Seller, its officers, directors, employees,
agents and representatives and each of the heirs, executors, successors and
assigns of any of the foregoing (collectively, the "Seller Indemnified Parties")
from, against and in respect of any and all claims, liabilities, obligations,
losses, costs, expenses, penalties, fines and judgments (at equity or at law,
including statutory and common) and damages whenever arising or incurred
(including, without limitation, amounts paid in settlement, costs of
investigation and reasonable attorneys' fees and expenses) arising out of or
relating to:
(a) the Purchaser's failure to perform, discharge or satisfy the
Assumed Liabilities;
(b) any breach or inaccuracy of any representation or warranty made by
the Purchaser in this Agreement or in any of the Purchaser Ancillary
Documents without regard to qualifications with respect to materiality,
Seller Material Adverse Effect or similar phrases contained therein;
(c) any breach of any covenant, agreement or undertaking made by the
Purchaser in this Agreement or in any of the Purchaser Ancillary Documents;
or
(d) any fraud, willful misconduct or bad faith of the Purchaser in
connection with this Agreement or the Purchaser Ancillary Documents.
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The claims, liabilities, obligations, losses, costs, expenses, penalties, fines
and damages of the Seller Indemnified Parties described in this Section 9.2 as
to which the Seller Indemnified Parties are entitled to indemnification are
hereinafter collectively referred to as "Seller Losses."
Section 9.3 Indemnification Procedure.
(a) Promptly after receipt by a Purchaser Indemnified Party or a
Seller Indemnified Party (hereinafter collectively referred to as an
"Indemnified Party") of notice by a third party (including any Governmental
Entity) of any complaint or the commencement of any audit, investigation,
action or proceeding with respect to which such Indemnified Party may be
entitled to receive payment from the other Party for any Purchaser Losses
or the Seller Losses (as the case may be), such Indemnified Party will
notify the Purchaser or the Seller, as the case may be (the "Indemnifying
Party"), promptly following the Indemnified Party's receipt of such
complaint or of notice of the commencement of such audit, investigation,
action or proceeding; provided, however, that the failure to so notify the
Indemnifying Party will relieve the Indemnifying Party from liability under
this Agreement with respect to such claim only if, and only to the extent
that, such failure to notify the Indemnifying Party results in the
forfeiture by the Indemnifying Party of rights and defenses otherwise
available to the Indemnifying Party with respect to such claim. If the
Indemnifying Party provides written notice to the Indemnified Party within
ten (10) days following receipt by the Indemnifying Party of notice of a
claim pursuant to the preceding sentence and such Indemnifying Party
assumes full responsibility for any Purchaser Losses or Seller Losses (as
the case may be) resulting from such audit, investigation, action or
proceeding, the Indemnifying Party may assume the defense of such audit,
investigation, action or proceeding, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of the
fees and disbursements of such counsel. In the event, however, that the
Indemnifying Party declines or fails to assume the defense of the audit,
investigation, action or proceeding on the terms provided above or to
employ counsel reasonably satisfactory to the Indemnified Party, in either
case within such ten (10)-day period, then such Indemnified Party may
employ counsel to represent or defend it in any such audit, investigation,
action or proceeding and the Indemnifying Party will pay the reasonable
fees and disbursements of such counsel as incurred; provided, however, that
the Indemnifying Party will not be required to pay the fees and
disbursements of more than one (1) counsel for all Indemnified Parties in
any jurisdiction in any single audit, investigation, action or proceeding.
In any audit, investigation, action or proceeding with respect to which
indemnification is being sought hereunder, the Indemnified Party or the
Indemnifying Party, whichever is not assuming the defense of such action,
will have the right to participate in such matter and to retain its own
counsel at such Party's own expense. The Indemnifying Party or the
Indemnified Party, as the case may be, will at all times use reasonable
efforts to keep the Indemnifying Party or the Indemnified Party, as the
case may be, reasonably apprised of the status of the defense of any matter
the defense of which they are maintaining and to cooperate in good faith
with each other with respect to the defense of any such matter.
(b) No Indemnified Party may settle or compromise any claim or consent
to the entry of any judgment with respect to which indemnification is being
sought hereunder without the prior written consent of the Indemnifying
Party, unless (i) the Indemnifying Party fails to assume and maintain the
defense of such claim pursuant to Section 9.3(a) and (ii) such settlement,
compromise or consent includes an unconditional release of the Indemnifying
Party from all liability arising out of such claim. An Indemnifying Party
may not, without the prior written consent of the Indemnified Party, settle
or compromise any claim or consent to the entry of any judgment with
respect to which indemnification is being sought hereunder unless (i) such
settlement, compromise or consent includes an unconditional release of the
Indemnified Party from all liability arising out of such claim, (ii) does
not contain any admission or statement suggesting any wrongdoing or
liability on behalf of the Indemnified Party and (iii) does not contain any
equitable order, judgment or term which in any manner affects, restrains or
interferes with the Assets, the business of the Indemnified Party or any of
the Indemnified Party's Affiliates.
(c) In the event an Indemnified Party claims a right to payment
pursuant to this Agreement, such Indemnified Party will send written notice
of such claim to the appropriate Indemnifying Party. Such
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notice will specify the basis for such claim. As promptly as possible after
the Indemnified Party has given such notice, such Indemnified Party and the
appropriate Indemnifying Party will establish the merits and amount of such
claim (by mutual agreement, litigation, arbitration or otherwise) and,
within five (5) Business Days of the final determination of the merits and
amount of such claim, the Indemnifying Party will pay to the Indemnified
Party immediately available funds in an amount equal to such claim as
determined hereunder.
(d) The Purchaser shall promptly notify the Seller upon its receipt of
notice or its determination of a potential Purchaser Loss arising or
resulting from a breach of a customer contract included in the Assumed
Contracts which breach occurred prior to the Closing. The Purchaser shall
consult with the Seller and use its commercially reasonable efforts to cure
breaches in the ordinary course of business and otherwise mitigate such
Purchaser Losses. In any event, the Purchaser shall have the burden of
proof with respect to demonstrating that such Purchaser Losses described in
this section were the result of commitments, liabilities, actions or
omissions which occurred prior to Closing and for purposes of this Section
9.3(d), Purchaser Losses shall not include the ordinary cost of performance
to cure such breach resulting solely from delays in performance prior to
the Closing Date of such contract to the extent such obligation is included
in the Assumed Liabilities.
Section 9.4 Claims Period. For purposes of this Agreement, a "Claims
Period" shall be the period during which a claim for indemnification may be
asserted under this Agreement by an Indemnified Party. The Claims Periods under
this Agreement shall begin on the date hereof and terminate on September 30,
2001.
Notwithstanding the foregoing, if, prior to the close of business on the
last day of the Claims Period, an Indemnifying Party shall have been properly
notified of a claim for indemnity hereunder and such claim shall not have been
finally resolved or disposed of at such date, such claim shall continue to
survive and shall remain a basis for indemnity hereunder until such claim is
finally resolved or disposed of in accordance with the terms hereof.
Section 9.5 Liability Limits. Notwithstanding anything to the contrary
set forth herein, the Purchaser Indemnified Parties shall not make a claim
against the Seller for indemnification for Purchaser Losses with respect to
Section 9.1 (c), (d), (e), (g) or (j) unless and until the aggregate amount of
such Purchaser Losses exceeds $150,000 (the "Purchaser Basket"), in which event
the Purchaser Indemnified Parties may claim indemnification for all Purchaser
Losses in excess of $100,000 up to an aggregate amount equal to the Escrow
Amount; provided, however, the Purchaser Basket shall not be applicable to
Purchaser Losses with respect to Section 9.1(a), (b), (f), (h) or (i) or Section
9.1(c) or (d) as such Section 9.1(c) or (d) relates to unpaid third party
license fees (which the parties acknowledge will be fully recoverable by the
Purchaser). Notwithstanding the foregoing, in no event will the Purchaser
Indemnified Parties give any notice to or otherwise make any claim against an
Indemnifying Party for Purchaser Losses with respect to Section 9.1(c), (d),
(e), (g) or (j) or Section 9.3(d) unless and until the aggregate amount of such
Purchaser Losses incurred with respect to the matter for which indemnification
is sought exceeds (or the reasonable estimate of such Purchaser Loss is expected
to exceed) $10,000.
Section 9.6 Investigations. The respective representations and warranties
of the Parties contained in this Agreement or in any certificate or other
document delivered by any Party prior to the Closing and the rights to
indemnification set forth in Article IX will not be deemed waived or otherwise
affected by any investigation made by a Party to this Agreement.
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ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 Notices. All notices, communications and deliveries under
this Agreement will be made in writing signed by or on behalf of the Party
making the same, will specify the Section under this Agreement pursuant to which
it is given or being made, and will be delivered personally or by telecopy
transmission or sent by registered or certified mail (return receipt requested)
or by next day mail (with evidence of delivery and postage and other fees
prepaid) as follows:
To the Purchaser: London Bridge Group
16th Floor London Bridge House
25 London Bridge Street
London SE1 9SG
United Kingdom
Telecopier: 011-44-207-940-0241
Attention: Jon Lee
with copies to: LBSS, Inc.
2550 W. Tyvola Road
Suite 460
Charlotte, North Carolina 28217
Telecopier: (704) 357-8220
Attention: Patricia B. Todd, Esq., General Counsel
and
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Telecopier: (404) 572-5100
Attention: Alan J. Prince, Esq., Mark E. Thompson, Esq.
If to the Seller: Phoenix International Ltd., Inc.
500 International Parkway
Heather, Florida 32746
Telecopier: (407) 548-5342
Attention: Bahram Yusefzadeh
with a copy to: Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309
Telecopier: (404) 881-4777
Attention: M. Hill Jeffries, Esq., W. Scott Ortwein, Esq.
and
Nelson, Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street
Atlanta, Georgia 30309
Telecopier: (770) 200-7150
Attention: Glenn W. Sturm, Esq.
or to such other representative or at such other address of a Party as such
Party may furnish to the other Parties in writing.
Section 10.2 Schedules and Exhibits. The Schedules and Exhibits to this
Agreement are hereby incorporated into this Agreement and are hereby made a part
of this Agreement as if set out in full in this Agreement.
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Section 10.3 Assignment; Successors in Interest. No assignment or
transfer by any Party of such Party's rights and obligations under this
Agreement will be made except with the prior written consent of the other
Parties to this Agreement; provided that the Purchaser shall, without the
obligation to obtain the prior written consent of any other Party to this
Agreement, be entitled to assign this Agreement or all or any part of its rights
or obligations hereunder to any one (1) or more Affiliates of the Purchaser.
This Agreement will be binding upon and will inure to the benefit of the Parties
and their successors and permitted assigns, and any reference to a Party will
also be a reference to a successor or permitted assign.
Section 10.4 Number; Gender. Whenever the context so requires, the
singular number will include the plural and the plural will include the
singular, and the gender of any pronoun will include the other genders.
Section 10.5 Captions. The titles, captions and table of contents
contained in this Agreement are inserted in this Agreement only as a matter of
convenience and for reference and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision of this Agreement.
Unless otherwise specified to the contrary, all references to Articles and
Sections are references to Articles and Sections of this Agreement and all
references to Schedules or Exhibits are references to Schedules and Exhibits,
respectively, to this Agreement.
Section 10.6 Controlling Law; Amendment. This Agreement will be governed
by and construed and enforced in accordance with the internal laws of the State
of Delaware without reference to its choice of law rules. This Agreement may not
be amended, modified or supplemented except by written agreement of the Parties.
Section 10.7 Consent to Jurisdiction, Etc. Each of the Parties hereby
irrevocably consents and agrees that any action, suit or proceeding arising in
connection with any disagreement, dispute, controversy or claim arising out of
or relating to this Agreement or any related document (for purposes of this
Section, a "Legal Dispute") shall be brought only to the exclusive jurisdiction
of the courts of the State of Delaware or the federal courts located in the
State of Delaware. The Parties agree that, after a Legal Dispute is before a
court as specified in this Section 10.7 and during the pendency of such Legal
Dispute before such court, all actions, suits or proceedings with respect to
such Legal Dispute or any other Legal Dispute, including, without limitation,
any counterclaim, cross-claim or interpleader, shall be subject to the exclusive
jurisdiction of such court. Each of the Parties hereby waives, and agrees not to
assert, as a defense in any legal dispute, that such Party is not subject
thereto or that such action, suit or proceeding may not be brought or is not
maintainable in such court or that such Party's property is exempt or immune
from execution, that the action, suit or proceeding is brought in an
inconvenient forum or that the venue of the action, suit or proceeding is
improper. Each Party hereto agrees that a final judgment in any action, suit or
proceeding described in this Section 10.7 after the expiration of any period
permitted for appeal and subject to any stay during appeal shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by applicable laws.
Section 10.8 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction will, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction will not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by law, the Parties waive any provision of law which renders any such
provision prohibited or unenforceable in any respect.
Section 10.9 Counterparts. This Agreement may be executed in two (2) or
more counterparts, each of which will be deemed an original, and it will not be
necessary in making proof of this Agreement or the terms of this Agreement to
produce or account for more than one (1) of such counterparts.
Section 10.10 Enforcement of Certain Rights. Nothing expressed or implied
in this Agreement is intended, or will be construed, to confer upon or give any
Person other than the Parties, and their successors or permitted assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, or result in such Person being deemed a third party beneficiary of
this Agreement.
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Section 10.11 Waiver. Any agreement on the part of a Party to any
extension or waiver of any provision of this Agreement will be valid only if set
forth in an instrument in writing signed on behalf of such Party. A waiver by a
Party of the performance of any covenant, agreement, obligation, condition,
representation or warranty will not be construed as a waiver of any other
covenant, agreement, obligation, condition, representation or warranty. A waiver
by any Party of the performance of any act will not constitute a waiver of the
performance of any other act or an identical act required to be performed at a
later time.
Section 10.12 Integration. This Agreement and the documents executed
pursuant to this Agreement supersede all negotiations, agreements and
understandings among the Parties with respect to the subject matter of this
Agreement, except for that certain Confidentiality Agreement dated December 20,
1999 between the Seller and the Purchaser and constitutes the entire agreement
between the Parties.
Section 10.13 Compliance with Bulk Sales Laws. The Parties hereby waive
compliance by the Parties with the bulk sales laws and any other similar laws in
any applicable jurisdiction in respect of the transactions contemplated by this
Agreement.
Section 10.14 Cooperation Following the Closing. Following the Closing,
each of the Parties shall deliver to the others such further information and
documents and shall execute and deliver to the others such further instruments
and agreements as the other Party shall reasonably request to consummate or
confirm the transactions provided for in this Agreement, to accomplish the
purpose of this Agreement or to assure to the other Party the benefits of this
Agreement.
Section 10.15 Transaction Costs. Except as provided above or as otherwise
expressly provided herein, (a) the Purchaser will pay its own fees, costs and
expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement, including the fees, costs and expenses of its
financial advisors, accountants and counsel, and (b) the Seller will pay the
fees, costs and expenses of the Seller incurred in connection with, and the
transactions contemplated by, this Agreement, including the fees, costs and
expenses of their financial advisors, accountants and counsel.
Section 10.16 Certain Definitions.
(a) As used in this Agreement, the term "knowledge" with reference to
the phrase "Seller's knowledge" or "to the best of the Sellers knowledge"
or similar phrases shall mean (i) all facts known by those individuals
identified on Schedule 10.16(a) on the date hereof after due inquiry and
diligence with respect to the matters at hand and (ii) all facts that such
persons should have known on the date hereof with respect to the matters at
hand if they had made reasonable due inquiry and exercised diligence.
(b) For purposes of this Agreement, the term "Affiliate" shall mean
with respect to a specified person a person that directly, or indirectly,
through one or more intermediaries, controls, or is controlled by, or is
under common contract with the person specified, and the term "person"
shall mean any individual, corporation, public limited company, partnership
(general or limited), limited liability company, limited liability
partnership, trust, joint venture, joint-stock company, syndicate,
association, entity, unincorporated organization or government or any
political subdivision, agency or instrumentality thereof. The term
"Associate" as used in this Agreement as used to indicate a relationship
with any person shall mean (i) any corporation or organization (other than
a majority-owned subsidiary) of which such person is an officer or partner
or is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities, (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity, and (iii) any
relative or spouse of such person, or any relative of such spouse, who has
the same home as such person or who is a director or officer of an entity
or any of its parents or subsidiaries.
(c) For purposes of this Agreement, the phrases "Seller Material
Adverse Effect" and "Seller Material Adverse Change" mean any state of
facts, change, event, effect or occurrence that is or may be reasonably
likely to be materially adverse to the business, financial condition,
results of operations, prospects, properties, assets, or liabilities
(including, without limitation, contingent liabilities) of the Business or
the Seller and its Subsidiaries taken as a whole; provided, any adverse
change, event or effect that is demonstrated to be primarily caused by (a)
the announcement or pendency of the Acquisition or
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the transactions contemplated hereby, (b) actions and omissions of the
Seller (or any of its Subsidiaries) taken with the prior informed written
consent of the Purchaser in contemplation of the transactions contemplated
hereby, (c) the effects of compliance with this Agreement on the operating
performance of the Seller, including expenses incurred by the Seller in
connection with the consummation of the transactions contemplated by this
Agreement, (d) changes, events or occurrences in the United States
securities markets which are not specific to the Seller, (f) changes,
events or occurrences relating to the industry which provides software
affiliated services to the retail banking industry in general, and not
specifically to the Seller and (g) any adverse change in the price of
Seller Common Stock shall not be taken into account in determining whether
there has been a Seller Material Adverse Effect or Seller Material Adverse
Change. A Seller Material Adverse Effect and Seller Material Adverse Change
shall also include any state of facts, change, event, effect or occurrence
that shall have occurred or been threatened that (when taken together with
all other adverse state of facts, changes, events, effects or occurrences
that have occurred or been threatened) is or would be reasonably likely to
prevent or materially delay the performance by the Seller of any of its
obligations under this Agreement or the consummation of the Acquisition or
the other transactions contemplated by this Agreement.
Section 10.17 Business Day. As used in this Agreement, the term "Business
Day" means any day except Saturday, Sunday or any day on which banks are
generally not open for business in the City of New York.
Section 10.18 Agreement not to Sue. Parent and the Purchaser hereby
covenant and agree not to institute or cause to be instituted any suit or other
form of action or proceeding of any kind or nature whatsoever against the Seller
based on any and all claims, damages, liabilities, demands, rights, suits,
actions or causes of action of any kind or nature whatsoever, in law or equity,
that they ever had, have claimed to have, now have or may hereafter claim to
have arising out of, in connection with or with respect to events transpiring
prior to the date hereof as to which Parent and the Purchaser had actual
knowledge as of the date hereof, except as may otherwise be provided in Article
IX hereof with respect to claims arising with respect to this Agreement.
Notwithstanding the foregoing, and for the avoidance of doubt, the preceding
sentence shall in no way preclude Parent's ability to participate (in its
capacity as a shareholder of the Seller) in any class action (or other form of
action or proceeding) initiated by other shareholders of the Seller against, by
or in the name of the Seller.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed, as of the date first above written.
LONDON BRIDGE SOFTWARE HOLDINGS PLC
By: /s/ JONATHAN LEE
------------------------------------
Name Jonathan Lee
Title: Chief Operating Officer
LONDON BRIDGE ACQUISITION COMPANY,
INC.
By: /s/ JONATHAN LEE
------------------------------------
Name Jonathan Lee
Title: President
PHOENIX INTERNATIONAL LTD., INC.
By: /s/ BAHRAM YUSEFZADEH
------------------------------------
Name Bahram Yusefzadeh
Title: Chairman and Chief Executive
Officer
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ANNEX B
PLAN OF LIQUIDATION AND DISSOLUTION OF
PHOENIX INTERNATIONAL LTD., INC.
WHEREAS, the Board of Directors (the "Board") of Phoenix International
Ltd., Inc. (the "Company"), a Florida corporation, has deemed it advisable that
the Company should be liquidated and subsequently dissolved and has approved and
determined that this Plan of Liquidation and Dissolution of Phoenix
International Ltd., Inc. (this "Plan") is advisable and in the best interests of
the shareholders of the Company; and
WHEREAS, the Board has directed that this Plan be submitted to the
shareholders of the Company for their approval or rejection at a special meeting
of shareholders of the Company to be held on such date as the Board may
determine, in accordance with the requirements of the Florida Business
Corporation Law (the "FBCL") and our Articles of Incorporation (the "Articles of
Incorporation") and has authorized the filing with the Securities and Exchange
Commission (the "SEC"), and the distribution to shareholders, of a proxy
statement (the "Proxy Statement"), in connection with the solicitation of
proxies for such meeting; and
WHEREAS, the Board, upon substantial completion of the liquidation of our
properties and assets or such earlier time as determined in its discretion, may
voluntarily dissolve the Company in accordance with the FBCL and the Internal
Revenue Code of 1986, as amended (the "Code"), upon the terms and conditions set
forth in this Plan;
NOW, THEREFORE, the Board hereby adopts and sets forth this Plan of
Liquidation and Dissolution of Phoenix International Ltd., Inc. as follows:
I. EFFECTIVE DATE OF PLAN.
The effective date of this Plan (the "Effective Date") shall be the date on
which holders of at least 66 2/3% of the outstanding shares of common stock of
the Company vote to approve this Plan.
II. CESSATION OF BUSINESS ACTIVITIES.
This Plan is intended to be a complete plan of liquidation and dissolution.
It is intended that this Plan shall be a plan of complete liquidation within the
terms of Section 331 of the Code. The Plan shall be deemed to authorize such
action as, in the opinion of counsel for the Company, may be necessary to
conform with the provisions of Section 331 of the Code. After the Effective
Date, the Company shall not engage in any business activities except for the
purpose of preserving the value of its assets, prosecuting and defending suits
by or against the Company, settling disputes, adjusting and winding up its
business and affairs, selling and liquidating its properties and assets and,
after satisfying Claimants (as defined below), making distributions to
shareholders in accordance with this Plan. Notwithstanding the foregoing, at any
time within 120 days following the effective date of the Articles of Dissolution
filed in accordance with Article IV of this Plan, the Board may, in its
discretion and without further shareholder action, revoke the Articles of
Dissolution and abandon this Plan in the event the Board determines that
continuing the Plan is not in the best interests of the Company and its
shareholders. The directors in office on the Effective Date and, at the pleasure
of such directors, the officers of the Company, shall continue in office solely
for these purposes and as otherwise provided in this Plan.
III. LIQUIDATION OF ASSETS.
After the Effective Date, the Company shall sell, exchange, transfer,
lease, license, or otherwise dispose of all of its property and assets,
including our intellectual property and other intangible assets, to the extent,
for such consideration (which may consist in whole or in part of money or other
property) and upon such terms and conditions as the Board deems expedient and in
the best interests of the Company and its shareholders,
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without any further vote or action by our shareholders. Our assets and
properties may be sold in bulk to one buyer or a small number of buyers or on a
piecemeal basis to numerous buyers. The Company will not be required to obtain
appraisals or other third party opinions as to the value of its properties and
assets in connection with the liquidation. As part of the liquidation of its
property and assets, the Company shall collect, or make provision for the
collection of, all accounts receivable, debts and claims owing to the Company.
IV. ARTICLES OF DISSOLUTION.
At such time as the Board determines in its discretion to be appropriate,
the officers of the Company shall execute and cause to be filed with the Florida
Department of State (the "Department") and elsewhere as may be required or
deemed appropriate, such documents as may be required to effectuate the
dissolution of the Company, including articles of dissolution conforming to the
requirements of Section 607.1403 of the FBCL (the "Articles of Dissolution").
From and after the date such documents are accepted by the Department, and
unless revoked as provided under Article II hereof, the Company will be deemed
to be completely dissolved, but will continue to exist under Florida law for the
purposes of paying, satisfying and discharging any existing debts or
obligations, collecting and distributing its assets, and doing all other acts
required to liquidate and wind up our business affairs. The members of the Board
in office at the time the Articles of Dissolution are accepted for filing by the
Department shall have all powers provided to them under the FBCL and other
applicable law.
V. PAYMENT OF DEBTS.
Prior to making any distributions to our shareholders, the Company shall
pay, or as determined by the Board or by any court of competent jurisdiction,
make reasonable provision to pay to the Claimants all claims and obligations of
the Company, including all contingent, conditional or unmatured claims known to
the Company. As soon as practicable after filing the Articles of Dissolution,
the Company shall notify all known creditors and those asserting claims against
the Company, whether such claims are fixed, contingent, conditional, or
unmatured (collectively, the "Claimants"), of the dissolution of the Company and
describing the procedure for filing their claims with the Company.
Following the Effective Date, the Board may, if and to the extent deemed
necessary or advisable by the Board, establish a contingency reserve (the
"Contingency Reserve") and set aside into the Contingency Reserve such amounts
of cash or property of the Company as the Board, in its discretion, determines
is sufficient to account for unknown events, claims, contingencies and expenses
incurred in connection with the collection and defense of our property and
assets and the liquidation and dissolution provided for in this Plan, including
claims which are likely to arise or become known to the Company after the filing
of the Articles of Dissolution. Following the payment, satisfaction or other
resolution of all such events, claims, contingencies and expenses, any amounts
remaining in the Contingency Reserve shall be distributed in accordance with
this Plan.
VI. DISTRIBUTIONS TO COMMON SHAREHOLDERS.
Following the payment or the provision for the payment of claims and
obligations as provided in Article V hereof, the Company shall distribute pro
rata to the holders of its common stock all of its remaining property and
assets, if any, in one or a series of distributions.
VII. POWERS OF BOARD AND OFFICERS.
The Board and the officers of the Company are authorized to approve such
changes to the terms of any of the actions referred to herein, to interpret any
of the provisions of this Plan, and to make, execute and deliver such other
agreements, conveyances, assignments, transfers, certificates and other
documents and take such other action as the Board and the officers of the
Company deem necessary or desirable in order to carry out the provisions of this
Plan and effect the complete liquidation and dissolution of the Company in
accordance with
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the Code and the FBCL and any rules and regulations of the SEC or any state
securities commission, including, without limitation, any instruments of
dissolution or other documents, and withdrawing any qualification to conduct
business in any state in which the Company is so qualified, as well as the
preparation and filing of any tax returns or reports. Without limiting the
generality of the foregoing, the appropriate officer of the Company is
authorized and directed, within thirty (30) days after the shareholders approve
this Plan, to execute and file a United States Form 966 pursuant to Section 6043
of the Code and such additional forms and reports with the Internal Revenue
Service as may be appropriate in connection with this Plan and the carrying out
thereof.
VIII. CANCELLATION OF STOCK.
The distributions to our shareholders pursuant to this Plan, if any, shall
be in complete redemption and cancellation of all of the outstanding common
stock of the Company. As a condition to any disbursement made under the Plan
after the filing of the Articles of Dissolution, the Board may require
shareholders to surrender their certificates evidencing the common stock to the
Company or its agent for cancellation. If a shareholder's certificate for shares
of common stock has been lost, stolen or destroyed, such shareholder may be
required, as a condition to the disbursement of any distribution under this
Plan, to furnish to the Company satisfactory evidence of the loss, theft or
destruction thereof, together with a surety bond or other security or indemnity
reasonably satisfactory to the Company.
IX. RESTRICTIONS ON TRANSFER OF SHARES.
After filing the Articles of Dissolution, the Company may proceed to delist
the common stock of the Company from the Nasdaq National Market or any other
securities exchange on which such shares may then be listed. Further, the
Company may elect to close its stock transfer books and discontinue recording
transfers of common stock at any time following the filing of the Articles of
Dissolution as of such date set forth in a written notice to the holders of the
common stock (the "Dissolution Record Date"), and thereafter, certificates
representing the common stock of the Company shall not be assignable or
transferable on the books of the Company except by will, intestate succession or
operation of law. The proportionate interests of all of the shareholders of the
Company shall be fixed on the basis of their respective stock holdings at the
close of business on the Dissolution Record Date, and, after the Dissolution
Record Date, any distributions made by the Company shall be made solely to the
shareholders of record at the close of business on the Dissolution Record Date,
except as may be necessary to reflect subsequent transfers recorded on the books
of the Company as a result of any assignments by will, intestate succession or
operation of law.
X. LIQUIDATING TRUST.
If advisable for any reason to complete the liquidation and distribution of
our assets to its shareholders, the Board may at any time transfer to a
liquidating trust (the "Trust") the remaining assets of the Company. The Trust
thereupon shall succeed to all of the then remaining assets of the Company,
including all amounts in the Contingency Reserve, and any remaining liabilities
and obligations of the Company. However, if all of our assets are not
distributed within three years after the date this Plan is approved by the
shareholders, the Company will transfer all of its remaining assets to the
Liquidating Trust. The sole purpose of the Trust shall be to prosecute and
defend suits by or against the Company, to settle and close the business of the
Company, to dispose of and convey the assets of the Company, to satisfy the
remaining liabilities and obligations of the Company and to collect and
distribute the remaining assets of the Company to its shareholders. Any
distributions made from the Trust shall be made in accordance with the
provisions of this Plan. The Board may appoint one or more of its members to act
as trustee or trustees of the Trust and to cause the Company to enter into a
liquidating trust agreement with such trustee or trustees on such terms and
conditions as the Board determines. Approval of this Plan by the shareholders
also will constitute the approval by the shareholders of any appointment of the
trustees and of the liquidating trust agreement between the Company and such
trustees.
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XI. COMPENSATION.
The Company may pay to our officers, directors, employees and agents or
trustees, or any of them, compensation for services rendered in connection with
the implementation of this Plan. Approval of this Plan by the shareholders of
the Company shall constitute the approval of the shareholders of the payment of
any such compensation referred to in this Article.
XII. INDEMNIFICATION.
The Company shall continue to indemnify its officers, directors, employees,
agents and trustees in accordance with its Articles of Incorporation, bylaws and
any contractual arrangements as therein or elsewhere provided, and such
indemnification shall apply to acts or omissions of such persons in connection
with the implementation of this Plan and the winding up of the affairs of the
Company. Our obligation to indemnify such persons may be satisfied out of the
Contingency Reserve or out of assets transferred to the Trust, if any. The Board
and the trustees of any Trust are authorized to obtain and maintain insurance as
may be necessary to cover our indemnification obligations.
XIII. COSTS.
The Company is authorized, empowered and directed to pay all legal,
accounting, printing and other fees, costs and expenses for services rendered to
the Company in connection with the preparation, adoption and implementation of
this Plan, including, without limitation, any such fees and expenses incurred in
connection with the preparation of a proxy statement for the meeting of
shareholders to be held for the purpose, among others, of voting upon the
approval of this Plan.
The within and foregoing Plan of Liquidation and Dissolution of Phoenix
International Ltd., Inc., was duly adopted by its Board of Directors on the 19th
day of November, 2000.
/s/ C. Russell Pickering
--------------------------------------
C. Russell Pickering, Secretary
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ANNEX C
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made this day of , 2000 (the "Escrow
Agreement") by and among LONDON BRIDGE SOFTWARE HOLDINGS PLC, a corporation
organized under the laws of England and Wales ("Parent"), LONDON BRIDGE
ACQUISITION COMPANY, INC., a Delaware corporation ("London Bridge"), and PHOENIX
INTERNATIONAL LTD., INC., a Florida corporation ("Phoenix") (each individually
referred to herein as a "Party" and collectively referred to herein as the
"Parties") and , N.A., as escrow agent (the "Escrow Agent").
Capitalized terms used herein but not otherwise defined shall have the
respective meanings ascribed to such terms in the Asset Purchase Agreement (as
defined below).
WITNESSETH:
WHEREAS, pursuant to that certain Asset Purchase Agreement between Parent,
London Bridge and Phoenix dated October 25, 2000 (the "Asset Purchase
Agreement"), London Bridge is acquiring certain assets and liabilities of
Phoenix; and
WHEREAS, the Parties have agreed to adjust the Purchase Price (as defined
in the Asset Purchase Agreement) pursuant to Section 2.3 of the Asset Purchase
Agreement; and
WHEREAS, the Parties have agreed to indemnify each other for certain
claims, liabilities, obligations, losses, costs, expenses, penalties, fines and
judgments (at equity or at law) and damages (including, amounts paid in
settlement, costs of investigation and reasonable attorneys' fees and expenses)
pursuant to Article IX of the Asset Purchase Agreement; and
WHEREAS, this Escrow Agreement is entered into pursuant to Article II of
the Asset Purchase Agreement to establish an escrow pursuant to which the
Parties can satisfy claims with respect to adjustments of the Purchase Price and
for indemnification pursuant to Article IX of the Asset Purchase Agreement.
NOW THEREFORE, the Parties and the Escrow Agent, intending to be legally
bound, hereby agree as follows:
Section 1. Appointment of the Escrow Agent; Deposit of Escrow Amount. The
parties hereby appoint the Escrow Agent as, and the Escrow Agent hereby agrees
to assume and perform the duties of, the Escrow Agent under and pursuant to this
Escrow Agreement. Simultaneously with the execution of this Escrow Agreement, an
amount equal to the sum of (i) $ (as increased by any earnings thereon,
the "Holdback Amount") and (ii) $ (as increased by any earnings thereon
and as reduced by any disbursements or losses on investments, the "Escrow
Fund"), has been delivered in immediately available funds by London Bridge to
the Escrow Agent. The Holdback Amount shall secure the Parties' obligations with
respect to the Final Purchase Price Adjustment (as defined in the Asset Purchase
Agreement). The Escrow Fund shall secure Phoenix's obligations with respect to a
claim by London Bridge for indemnification pursuant to the indemnification
claims set forth in Article IX of the Asset Purchase Agreement. Escrow Agent
acknowledges receipt of the Holdback Amount and the Escrow Fund and hereby
agrees to act as escrow agent and to hold, safeguard and disburse the Holdback
Amount and the Escrow Fund pursuant to the terms and conditions hereof.
Section 2. The Holdback Fund and the Escrow Fund. The Holdback Amount and
the Escrow Fund shall be held by the Escrow Agent in a separate account
maintained for the purpose on the terms and subject to the conditions of this
Escrow Agreement. Amounts held in the Holdback Amount and the Escrow Fund shall
not be available to, and shall not be used by, the Escrow Agent to set off any
obligations of any of the parties owing to the Escrow Agent in any capacity,
except as expressly provided in this Escrow Agreement.
Section 3. Investment of the Escrow Fund; Taxes.
(a) The Escrow Agent shall invest and reinvest all cash funds held
from time to time as part of the Holdback Amount and the Escrow Fund, in
(i) a money market fund managed by the Escrow Agent or (ii) such other
investments as London Bridge and Phoenix shall approve in writing.
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(b) All taxes in respect of earnings on the Holdback Amount and the
Escrow Fund shall be the obligation of and shall be paid when due by the
Escrow Agent from the Holdback Amount and the Escrow Fund.
Section 4. Claims Against the Holdback Amount and the Escrow Fund.
(a) Upon determination of the Final Purchase Price Adjustment pursuant
to the terms of Section 2.3 of the Asset Purchase Agreement, the Parties
shall jointly execute and deliver an order (the "Purchase Price Adjustment
Order") specifying the amount of the Holdback Amount payable to Phoenix and
the amount of the Holdback Amount payable to London Bridge, in each case as
increased by the pro rata portion of any earnings thereon. Promptly upon
receipt of such Purchase Price Adjustment Order, the Escrow Agent shall
transfer to Phoenix and London Bridge, as applicable, from the Holdback
Amount the amounts specified in the Purchase Price Adjustment Order.
(b) Upon compliance with the terms of this Escrow Agreement, London
Bridge shall be entitled to obtain from the Escrow Fund amounts equal to
all Purchaser Losses covered by the indemnity pursuant to Article IX of the
Asset Purchase Agreement. Upon receipt by the Escrow Agent on or before the
close of business on the Release Date (as defined below in Section 5(b)) of
a certificate signed by an officer of London Bridge in substantially the
form of the attached Annex I (the "Certificate of Instruction"), the Escrow
Agent shall give written notice to Phoenix of the Escrow Agent's receipt of
the Certificate of Instruction not later than the second business day
following receipt thereof, together with a duplicate copy of such
certificate.
(c) If the Escrow Agent:
(i) shall not, within twenty (20) calendar days following its
receipt of a Certificate of Instruction (the "Objection Period"), have
received from Phoenix a certificate in substantially the form of Annex
II attached hereto (an "Objection Certificate") disputing Phoenix's
obligation to pay the Purchaser Losses referred to in such Certificate
of Instruction, or
(ii) shall have received such an Objection Certificate within the
Objection Period and shall thereafter have received either
(x) a certificate from London Bridge and Phoenix substantially
in the form of Annex III attached hereto (a "Resolution Certificate")
stating that London Bridge and Phoenix have agreed that the Purchaser
Losses referred to in such Certificate of Instruction (or a specified
portion thereof) are payable to the Purchaser Indemnified Party(ies),
or
(y) a copy of the final award rendered by the arbitrator
pursuant to Section 10 of this Escrow Agreement accompanied by a
certificate of London Bridge substantially in the form of Annex IV
attached hereto (an "Arbitration Certificate") stating that the
Purchaser Losses referred to in such Certificate of Instruction (or a
specified portion thereof) are payable to the Purchaser Indemnified
Party(ies), and
(iii) shall not have received a certificate of London Bridge
substantially in the form of Annex V attached hereto (a "London Bridge
Cancellation Certificate") canceling the Certificate of Instruction in
its entirety, then the Escrow Agent shall, on the second business day
next following:
(x) the expiration of the Objection Period or
(y) the Escrow Agent's receipt of a Resolution Certificate or an
Arbitration Certificate, as the case may be,
pay over to London Bridge from the Escrow Fund, by wire transfer of
immediately available funds to a bank account of London Bridge's
designation, the amount set forth in said Certificate of Instruction or
in such Resolution Certificate or Arbitration Certificate; provided that
in the event the Escrow Agent receives an Objection Certificate, a
London Bridge Cancellation Certificate, or an Arbitration Certificate
which specifies a lesser amount, such lesser amount; the Escrow Agent
shall
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not make any payments to London Bridge until the Escrow Agent shall have
received a Resolution Certificate or an Arbitration Certificate
identifying the amount to be paid.
(d) The Escrow Agent shall give written notice to London Bridge of its
receipt of an Objection Certificate not later than the second business day
following receipt thereof, together with a copy of such Objection
Certificate.
(e) Upon the payment by the Escrow Agent of the amount referred to in
a Certificate of Instruction, such Certificate of Instruction shall be
deemed canceled. Upon the receipt by the Escrow Agent of a Resolution
Certificate or Arbitration Certificate and the payment by the Escrow Agent
of the amount referred to therein, the related Certificate of Instruction
shall be deemed canceled.
(f) Upon London Bridge's determination that it has no claim or has
released its claim with respect to any Purchaser Losses referred to in a
Certificate of Instruction (or a specified portion thereof), London Bridge
will promptly deliver to the Escrow Agent a London Bridge Cancellation
Certificate canceling such Certificate of Instruction (or such specified
portion thereof, as the case may be), and such Certificate of Instruction
(or portion thereof) shall thereupon be deemed canceled. The Escrow Agent
shall give written notice to Phoenix of its receipt of a London Bridge
Cancellation Certificate not later than the second business day following
receipt thereof, together with a copy of such London Bridge Cancellation
Certificate.
(g) Upon receipt of a copy of the final award rendered by the
arbitrator pursuant to Section 10 of this Escrow Agreement stating that
none of the Purchaser Losses referred to in a Certificate of Instruction as
to which Phoenix delivered an Objection Certificate within the Objection
Period is payable to any of the Purchaser Indemnified Party(ies), Phoenix
may deliver a copy of such order (accompanied by a certificate of Phoenix
substantially in the form of Annex VI attached hereto (a "Phoenix
Cancellation Certificate")) canceling such Certificate of Instruction, and
such Certificate of Instruction shall thereupon be deemed canceled. The
Escrow Agent shall give written notice to London Bridge of its receipt of a
Phoenix Cancellation Certificate not later than the second business day
next following receipt thereof, together with a copy of such Phoenix
Cancellation Certificate.
Section 5. Release of Escrow Fund.
(a) Upon the Escrow Agent being furnished with a Purchase Price Adjustment
Order, the Escrow Agent shall, within one (1) business day thereafter, pay to
Phoenix and London Bridge, as applicable, out of the Holdback Amount the amounts
specified in such Purchase Price Adjustment Order.
(b) Subject to the terms of this Escrow Agreement, following September 30,
2001 (the "Release Date"), the Escrow Agent shall pay to Phoenix the balance of
the Escrow Fund, by wire transfer of immediately available funds to a bank
account of Phoenix's designation, less the sum of any amounts designated in
Certificates of Instruction received by the Escrow Agent prior to the Release
Date that have not been canceled in accordance with paragraph (e), (f) or (g) of
Section 4, and any taxes accrued through the Release Date pursuant to Section
3(b). At such time on or following the Release Date, as all Certificates of
Instruction received by the Escrow Agent prior to the Release Date have been
canceled in accordance with paragraph (e), (f) or (g) of Section 4 and all
payments relating to such canceled Certificates of Instruction have been made in
accordance with Section 4 and all taxes paid pursuant to Section 3(b), the
Escrow Agent shall promptly pay to Phoenix the balance in the Escrow Fund, by
wire transfer of immediately available funds to a bank account designated by
Phoenix, and this Escrow Agreement (other than Sections 6, 7, 8 and 11) shall
automatically terminate.
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Section 6. Duties and Obligations of the Escrow Agent. The duties and
obligations of the Escrow Agent shall be limited to and determined solely by the
provisions of this Escrow Agreement and the certificates delivered in accordance
herewith and the Escrow Agent is not charged with knowledge of or any duties or
responsibilities in respect of any other agreement or document. In furtherance
and not in limitation of the foregoing:
(i) the Escrow Agent shall not be liable for relying in good faith
upon any written certification, notice, direction, request, waiver,
consent, receipt or other document that the Escrow Agent reasonably
believes to be genuine and duly authorized, executed and delivered;
(ii) the Escrow Agent shall not be liable for any error of
judgment, or for any act done or omitted by it, or for any mistake in
fact or law, or for anything that it may do or refrain from doing in
connection herewith; provided, however, that notwithstanding any other
provision in this Escrow Agreement, the Escrow Agent shall be liable for
its willful misconduct or negligence or breach of this Escrow Agreement;
(iii) the Escrow Agent may seek the advice of legal counsel
selected with reasonable care in the event of any dispute or question as
to the construction of any of the provisions of this Escrow Agreement or
its duties hereunder, and it shall incur no liability in respect of any
action taken, omitted or suffered by it in good faith in accordance with
the opinion of such counsel;
(iv) in the event that the Escrow Agent shall in any instance,
after seeking the advice of legal counsel pursuant to the immediately
preceding clause, in good faith be uncertain as to its duties or rights
hereunder, it shall be entitled to refrain from taking any action in
that instance and its sole obligation, in addition to those of its
duties hereunder as to which there is no such uncertainty, shall be to
keep safely all property held in the Holdback Amount and the Escrow Fund
until it shall be directed otherwise in writing by each of the parties
hereto or by a final award rendered by arbitration pursuant to Section
10 of this Escrow Agreement; provided, however, in the event that the
Escrow Agent has not received such written direction or award within one
hundred eighty (180) calendar days after requesting the same, it shall
have the right to interplead the parties in any court of competent
jurisdiction and request that such court determine its rights and duties
hereunder;
(v) the Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either
directly or by or through agents or attorneys selected with reasonable
care and the Escrow Agent shall not be responsible for and shall not be
under a duty to examine into or pass upon the validity, binding effect,
execution or sufficiency of this Escrow Agreement or of any agreement
amendatory or supplemental hereto; and
(vi) the Escrow Agent agrees to keep confidential and shall not
publish, disseminate or otherwise disclose, or use (except for the
benefit of the Parent, London Bridge or Phoenix) at any time either
during or subsequent to this Escrow Agreement, any confidential
information, knowledge or data of the Parent, London Bridge or Phoenix,
including but not limited to information regarding or contained in this
Escrow Agreement, the Asset Purchase Agreement or any agreements
contemplated hereby or thereby or other subject matter pertaining to any
business of the Parent, London Bridge or Phoenix or any of such party's
clients, customers, consultants, shareholders or affiliates, that the
Escrow Agent may produce, obtain or otherwise acquire or have access to
during the course of this Escrow Agreement (collectively the
"Confidential Information"). The Escrow Agent further agrees not to
deliver, reproduce or in any way allow any Confidential Information to
be delivered to or used by any third parties without specific direction
or consent of a duly authorized representative of London Bridge or
Phoenix, as applicable. All Confidential Information and all tangible
materials containing Confidential Information are and shall remain the
sole property of its source.
Section 7. Cooperation. The parties shall provide to the Escrow Agent all
instruments and documents within their respective powers that are necessary for
the Escrow Agent to perform its duties and responsibilities hereunder.
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Section 8. Fees and Expenses; Indemnity. London Bridge shall compensate
the Escrow Agent for performing its duties hereunder in accordance with Annex
VII attached hereto. London Bridge and Phoenix hereby jointly and severally
agree to indemnify and hold harmless the Escrow Agent against any and all
losses, claims, damages, liabilities and expenses, including reasonable costs of
investigation and counsel fees and disbursement, which may be imposed upon the
Escrow Agent or incurred by the Escrow Agent in connection with its acceptance
of appointment as escrow agent hereunder, or the performance of its duties
hereunder, including any litigation arising from this Escrow Agreement or
involving the subject matter hereof or the cash deposited hereunder; provided
that notwithstanding the foregoing, neither London Bridge nor Phoenix shall be
required to indemnify the Escrow Agent for any such loss, liability, cost or
expense arising as a result of the Escrow Agent's willful misconduct or
negligence or breach of this Escrow Agreement.
Section 9. Resignation and Removal of the Escrow Agent.
(a) The Escrow Agent may resign as such after thirty (30) calendar
days following the giving of prior written notice thereof to London Bridge
and Phoenix. In addition, the Escrow Agent may be removed and replaced on a
date designated in a written instrument signed by London Bridge and Phoenix
and delivered to the Escrow Agent. Notwithstanding the foregoing, no such
resignation or removal shall be effective until a successor escrow agent
has acknowledged its appointment as such as provided in paragraph (c)
below. In either event, upon the effective date of such resignation or
removal, the Escrow Agent shall deliver the property comprising the
Holdback Amount and the Escrow Fund to such successor escrow agent,
together with such records maintained by the Escrow Agent in connection
with its duties hereunder and other information with respect to the
Holdback Amount and the Escrow Fund as such successor may reasonably
request.
(b) If a successor escrow agent shall not have acknowledged its
appointment as such as provided in paragraph (c) below, in the case of a
resignation, prior to the expiration of thirty (30) calendar days following
the date of a notice of resignation or, in the case of a removal, on the
date designated for the Escrow Agent's removal, as the case may be, for any
reason, the Escrow Agent may select a successor escrow agent and any such
resulting appointment shall be binding upon all of the parties to this
Escrow Agreement, provided that any such successor selected by the Escrow
Agent shall be a financial institution of comparable size and services as
the Escrow Agent.
(c) Upon written acknowledgment by a successor escrow agent appointed
in accordance with the foregoing provisions of this Section 9 of its
agreement to serve as escrow agent hereunder and the receipt of the
property then comprising the Holdback Amount and the Escrow Fund, the
Escrow Agent shall be fully released and relieved of all duties,
responsibilities and obligations under this Escrow Agreement, subject to
the proviso contained in clause (ii) of Section 6, and such successor
escrow agent shall for all purposes hereof be the Escrow Agent.
Section 10. Arbitration.
(a) In the event that London Bridge and Phoenix have not reached an
agreement with respect to a Resolution Certificate after good faith
negotiations within sixty (60) days after a Certificate of Objection has
been delivered to London Bridge, either London Bridge or Phoenix may by
written notice to the other demand arbitration of the matter and the
parties agree that such matter and all actions to enforce or interpret this
Escrow Agreement shall be settled by final and binding arbitration in
Atlanta, Georgia before a single arbitrator (the "Arbitrator") administered
under the rules then in effect for the American Arbitration Association
(the "AAA") for commercial cases, provided that the arbitration process
shall permit a reasonable order of discovery and shall be conducted on an
expedited basis to permit a final arbitration decision as soon as
practicable. At any time prior to a final decision by the Arbitrator, the
parties may agree to suspend arbitration in order to pursue voluntary
mediation of the dispute. The decision of the Arbitrator shall be final,
unappealable and binding, and judgment on the award rendered by the
Arbitrator may be entered in any court having jurisdiction. The Arbitrator
shall be authorized to award any relief, whether legal or equitable,
including specific performance, except that the Arbitrator shall not have
the power to award remedies that would not be available from a court in
Georgia having jurisdiction of the matter.
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(b) The Arbitrator shall be selected by a process defined by the AAA,
but must have experience with software companies and must not have any
conflict of interest or bias.
(c) Subject to the right of the prevailing party to seek reimbursement
from the losing Party pursuant to Section 11.03 below, the parties agree to
share equally the costs, including fees, of the Arbitrator selected or
appointed under this Section 10. As soon as practicable after selection of
the Arbitrator, the Arbitrator or its designated representative shall
determine a reasonable estimate of the Arbitrator's anticipated fees and
costs, and send a statement to each party setting forth that party's equal
share of the fees and costs. Each party shall, within ten (10) days after
receipt of the statement, deposit the required sum with the Arbitrator.
Section 11. Miscellaneous.
Section 11.01 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Escrow Agreement, the Asset Purchase Agreement and other
agreements contemplated thereby (including the documents and the instruments
referred to herein) (a) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (b) are not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Section 11.02 Governing Law. This Escrow Agreement shall be governed and
construed in accordance with the laws of the State of Delaware without regard to
any applicable conflicts of law.
Section 11.03 Attorneys Fees. Except as otherwise provided in Section
10(c), in the event a dispute, claim, or other proceeding is brought to enforce
or interpret the provisions of this Escrow Agreement, the prevailing party shall
be entitled to recover from the nonprevailing party, in addition to all other
remedies available at equity and law, the cost, including but not limited to
reasonable attorneys' fees, incurred by the prevailing party therein, including
any appeal or other subsequent proceeding. A party shall be considered to
prevail if it secures a more favorable result than the other party (who shall be
considered the nonprevailing party).
Section 11.04 Assignment. Neither this Escrow Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that either of Parent and London
Bridge may assign, in its sole discretion, any or all of its rights, interests
and obligations hereunder to any Affiliate of Parent. Subject to the preceding
sentence, this Escrow Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
Section 11.05 Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing and shall be given by delivery (by
mail or otherwise) or transmitted to the address or facsimile number listed
below, and will be effective (in all cases) upon receipt. Without limiting the
generality of the foregoing, a mail, express, messenger or other receipt signed
by any person at such address shall conclusively evidence delivery to and
receipt at such address, and any printout showing successful facsimile
transmission of the correct total pages to the correct facsimile number shall
conclusively evidence transmission to and receipt at such facsimile number.
(a) If to Phoenix: Phoenix International Ltd., Inc.
500 International Parkway
Heather, Florida 32746
Telecopier: (407) 548-5342
Attention: Bahram Yusefzadeh
Rusty Pickering, Esq.
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with a copy to: Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309
Telecopier: (404) 881-4777
Attention: M. Hill Jeffries, Esq.
W. Scott Ortwein, Esq.
and
Nelson, Mullins Riley & Scarborough, LLP
999 Peachtree Street
Atlanta, Georgia 30309
Telecopier: (770) 200-7150
Attention: Glenn W. Sturm, Esq.
(b) If to Parent or
London Bridge: 25 New London Bridge House
25 London Bridge Street
16th Floor
London SE1 9SG
United Kingdom
Telecopier: 011-44-207-940-0241
Attention: Jon Lee
with copies to: LBSS, Inc.
2550 W. Tyvola Road
Suite 460
Charlotte, North Carolina 28217
Telecopier: (704) 357-8220
Attention: Patricia B. Todd, Esq.
General Counsel
and
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Telecopier: (404) 572-5100
Attention: Alan J. Prince, Esq.
Mark E. Thompson, Esq.
(c) If to Escrow Agent
[insert name, address and fax]
Any party may change its or his address or facsimile number for purposes of this
Section by giving the other parties written notice of the new address or
facsimile number in accordance with this Section.
Section 11.06 Construction. The Section headings in this Escrow Agreement
are provided for convenience only, and shall not be considered in the
interpretation hereof. References herein to Sections, Exhibits, Annexes or
Schedules refer, unless otherwise specified, to the designated Section of,
Exhibit to, Annex to or Schedule of this Escrow Agreement. Terms such as
"herein," "hereto" and "hereof" refer to this Escrow Agreement as a whole.
Whenever under the terms of this Escrow Agreement, the time for performance of a
covenant or condition falls on a Saturday, Sunday or legal holiday, such time
for performance shall be extended to the next Business Day. The masculine,
feminine or neuter gender and the singular or plural number shall be deemed to
include the others whenever the context so indicates or requires.
Section 11.07 Counterparts, Separate Signature Pages. This Escrow
Agreement may be executed in any number of counterparts, or using separate
signature pages. Each such executed counterpart and each
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counterpart to which such signature pages are attached shall be deemed to be an
original instrument, but all such counterparts together shall constitute one and
the same instrument.
Section 11.08 Invalidity of Provision. If any provision of this Escrow
Agreement as applied to either party or to any circumstance shall be adjudged by
a court of competent jurisdiction to be void or unenforceable for any reason,
the same shall in no way affect (to the maximum extent permissible by law) any
other provision of this Escrow Agreement, the application of any such provision
under circumstances different from those adjudicated by the court, or the
validity or enforceability of this Escrow Agreement as a whole.
Section 11.09 Amendments and Waivers. This Escrow Agreement may be
amended by the parties hereto and each of the parties hereto may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, and (ii) waive compliance
of the other party with any of the agreements or conditions to its obligations
contained herein. This Escrow Agreement may be amended, and any extension or
waiver shall be valid, only if set forth in a written instrument signed by both
parties.
Section 11.10 Further Assurances. From time to time following the
Closing, the Parties will execute and deliver such instruments and take such
other actions (each at the requesting party's expense, limited to the reasonable
out of pocket costs of the performing party) as may be reasonably required to
(i) carry out the intent of this Escrow Agreement, and (ii) confirm the
consummation of the transactions contemplated hereby.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the Parties hereto have caused this Escrow Agreement to
be executed as of the date first above written.
<TABLE>
<S> <C>
PARENT LONDON BRIDGE SOFTWARE HOLDINGS
PLC
By:
--------------------------------------------------------
Name:
Title:
LONDON BRIDGE LONDON BRIDGE ACQUISITION
COMPANY, INC.
By:
--------------------------------------------------------
Name:
Title:
PHOENIX PHOENIX INTERNATIONAL LTD., INC.
By:
--------------------------------------------------------
Name:
Title:
ESCROW AGENT
By:
--------------------------------------------------------
Name:
Title:
</TABLE>
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<PAGE> 197
ANNEX I
CERTIFICATE OF INSTRUCTION
TO
____________________________
AS ESCROW AGENT
The undersigned, London Bridge Acquisition Company, Inc., a Delaware
corporation ("London Bridge"), pursuant to Section 4(b) of the Escrow Agreement
dated as of , 2000 entered into by and among: (i) London Bridge
Software Holdings, plc; (ii) London Bridge; (iii) Phoenix International LTD.,
Inc., a Florida corporation ("Phoenix"); and (iv) you (terms defined in said
Escrow Agreement have the same meanings when used herein), hereby:
(a) certifies that (i) London Bridge has sent to Phoenix a written
notification of a claim for indemnity pursuant to Article IX of the Asset
Purchase Agreement, and (ii) Purchaser Losses in the amount of $
are payable to [THE PURCHASER INDEMNIFIED PARTY(IES)] by Phoenix pursuant
to Article IX of the Asset Purchase Agreement; and
(b) instructs you to pay to [THE PURCHASER INDEMNIFIED PARTY(IES)]
from the Escrow Fund such Purchaser Losses, by wire transfer of immediately
available funds to London Bridge's account at (Account No.:
), (i) within two business days following the expiration of the
Objection Period, unless you receive an Objection Certificate from Phoenix
prior to the expiration of the Objection Period, or (ii) if you receive an
Objection Certificate within the Objection Period, within two business days
following your receipt of a Resolution Certificate or an Arbitration
Certificate.
LONDON BRIDGE ACQUISITION
COMPANY, INC.
By:
------------------------------------
Name:
Title:
Dated:
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<PAGE> 198
ANNEX II
OBJECTION CERTIFICATE
TO
____________________________
AS ESCROW AGENT
Phoenix International LTD., Inc., a Florida corporation ("Phoenix"),
pursuant to Section 4(c) of the Escrow Agreement dated as of , 2000
entered into by and among: (i) London Bridge Software Holdings plc; (ii) London
Bridge Acquisition Company, Inc. ("London Bridge"); (iii) Phoenix; and (iv) you
(terms defined in said Escrow Agreement have the same meanings when used
herein), hereby:
(a) disputes that the Purchaser Losses referred to in the Certificate
of Instruction dated are payable to [THE PURCHASER
INDEMNIFIED PARTY(IES)] by Phoenix pursuant to Article IX of the Asset
Purchase Agreement; and
(b) certifies that the undersigned has sent to London Bridge a written
statement of the undersigned dated disputing the liability
of Phoenix to [THE PURCHASER INDEMNIFIED PARTY(IES)] for such Purchaser
Losses.
PHOENIX INTERNATIONAL LTD, INC.
By:
------------------------------------
Name:
Title:
Dated:
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<PAGE> 199
ANNEX III
RESOLUTION CERTIFICATE
TO
____________________________
AS ESCROW AGENT
The undersigned, London Bridge Acquisition Company, Inc., a Delaware
corporation ("London Bridge"), and Phoenix International LTD, Inc., a Florida
corporation ("Phoenix"), pursuant to Section 4(c) of the Escrow Agreement dated
as of , 2000 entered into by and among London Bridge Software Holdings
plc, London Bridge, Phoenix and you (terms defined in said Escrow Agreement have
the same meanings when used herein), hereby:
(a) certify that (i) London Bridge and Phoenix have resolved their
dispute as to the matter described in the Certificate of Instruction dated
and the related Objection Certificate dated ,
and (ii) the final Purchaser Losses owed with respect to the matter
described in such Certificates of Instruction is $ ; and
(b) instruct you to pay to [THE PURCHASER INDEMNIFIED PARTY(IES)] from
the Escrow Fund the Losses referred to in clause (ii) of paragraph (a)
above, by wire transfer of immediately available funds to London Bridge's
account at (Account No.: ), within two business
days of your receipt of this Certificate.
<TABLE>
<S> <C>
LONDON BRIDGE LONDON BRIDGE ACQUISITION
COMPANY, INC.
By:
----------------------------------------------------
Name:
Title:
PHOENIX PHOENIX INTERNATIONAL LTD, INC.
By:
----------------------------------------------------
Name:
Title:
</TABLE>
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<PAGE> 200
ANNEX IV
ARBITRATION CERTIFICATE
TO
____________________________
AS ESCROW AGENT
The undersigned, London Bridge Acquisition Company, Inc., a Delaware
corporation ("London Bridge"), pursuant to Section 4(c) of the Escrow Agreement
dated as of , 2000 entered into by and among: (i) London Bridge
Software Holdings, plc; (ii) London Bridge; (iii) Phoenix International LTD.,
Inc., a Florida corporation ("Phoenix"); and (iv) you (terms defined in said
Escrow Agreement have the same meanings when used herein), hereby:
(a) certifies that (i) attached hereto is a copy of the final award
rendered by the Arbitrator pursuant to Section 10 of the Escrow Agreement
resolving the dispute between Phoenix and the Purchaser Indemnified
Party(ies) as to the matter described in the Certificate of Instruction
dated and the related Objection Certificate dated
, and (ii) the final Purchaser Losses owed with respect to the
matter described in such Certificates, as provided in such order, is
$ ; and
(b) instructs you to pay to [THE PURCHASER INDEMNIFIED PARTY(IES)]
from the Escrow Fund the Purchaser Losses referred to in clause (ii) of
paragraph (a) above, by wire transfer of immediately available funds to
[THE PURCHASER INDEMNIFIED PARTY(IES)] account at (Account
No.: ), within two business days of your receipt of this
Certificate.
LONDON BRIDGE LONDON BRIDGE ACQUISITION
COMPANY, INC.
By:
------------------------------------
Name:
Title:
Dated:
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<PAGE> 201
ANNEX V
LONDON BRIDGE CANCELLATION CERTIFICATE
TO
____________________________
AS ESCROW AGENT
The undersigned, London Bridge Acquisition Company, Inc., a Delaware
corporation ("London Bridge"), pursuant to Section 4(c) of the Escrow Agreement
dated as of , 2000 entered into by and among: (i) London Bridge
Software Holdings, plc; (ii) London Bridge; (iii) Phoenix International LTD.,
Inc., a Florida corporation ("Phoenix"); and (iv) you (terms defined in said
Escrow Agreement have the same meanings when used herein), hereby:
(a) certifies that (i) it hereby releases its claim against Phoenix with
respect to [specify all or a portion] of the Purchaser Losses
designated in the Certificate of Instruction dated , and (ii) as a
result, the Purchaser Losses owed with respect to such Certificate of
Instruction is $ ; and
(b) agrees that such Certificate of Instruction is, to the extent released
as provided in clause (i) of paragraph (a) above, canceled.
LONDON BRIDGE LONDON BRIDGE ACQUISITION
COMPANY, INC.
By:
------------------------------------
Name:
Title:
Dated:
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<PAGE> 202
ANNEX VI
PHOENIX CANCELLATION CERTIFICATE
TO
____________________________
AS ESCROW AGENT
Phoenix International LTD., Inc., a Florida corporation ("Phoenix"),
pursuant to Section 4(g) of the Escrow Agreement dated as of , 2000
entered into by and among: (i) London Bridge Software Holdings plc; (ii) London
Bridge Acquisition Company, Inc. ("London Bridge"); (iii) Phoenix; and (iv) you
(terms defined in said Escrow Agreement have the same meanings when used
herein), hereby:
(i) certifies that the attached copy of the final award rendered by the
Arbitrator pursuant to Section 10 of the Escrow Agreement resolving the dispute
between [THE PURCHASER INDEMNIFIED PARTY(IES)] and Phoenix as to the matter
described in the Certificate of Instruction dated , and the related
Objection Certificate dated ; and
(ii) as provided in such order, there are no Purchaser Losses with respect
to the matter described in such Certificates.
<TABLE>
<S> <C>
PHOENIX PHOENIX INTERNATIONAL LTD, INC.
By:
---------------------------------------------
Name:
Title:
Dated:
---------------------------------------------
</TABLE>
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<PAGE> 203
ANNEX D
(ROBINSON-HUMPHREY LOGO)
October 25, 2000
Special Committee of the Board of Directors
Phoenix International Ltd., Inc.
500 International Parkway
Heathrow, Florida 32746
Ladies and Gentlemen:
You have asked the Robinson-Humphrey Company, LLC ("Robinson-Humphrey") to
render a written opinion (the "Opinion") to the Special Committee of the Board
of Directors of Phoenix International Ltd., Inc. ("Phoenix" or the "Company") as
to the fairness, from a financial point of view, to the Company of the
Consideration (defined below) to be received by the Company pursuant to the
Asset Purchase Agreement, dated as of October 25, 2000 (the "Agreement"), by and
between London Bridge Software Holdings plc, London Bridge Acquisition Company,
Inc.(together, "London Bridge") and the Company. The Agreement provides for,
among other things and with the exceptions set forth in the Agreement, the sale
by the Company to London Bridge of substantially all of the Company's assets
(other than certain excluded assets) and the assumption by London Bridge of
certain specified liabilities of the Company (the "Proposed Transaction") for
total consideration of approximately $48.5 million in cash, which includes $3.0
million in the form of forgivable working capital advances under the Loan
Agreement, dated as of October 25, 2000 by and between the Company and London
Bridge, and the assumption of such liabilities, as specified in the Agreement
(collectively, the "Gross Consideration"). Approximately 25% of the cash portion
of the Gross Consideration is required to be paced in escrow subject to certain
potential claims and adjustments, You have estimated that in the aggregate
amount of the liabilities to be retained by the Company, including any liability
related to outstanding lawsuits with the Company's stockholders, is
approximately $10.2 million (the "Retained Liabilities"), and have directed us
to assume that the net consideration to be received by the Company in connection
with the Proposed Transaction will be $38.3 million (the "Net Consideration").
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement;
(2) publicly available information concerning the Company which we believe to be
relevant to our inquiry; (3) financial and operating information with respect to
the business, operations and prospects of the Company furnished to us by the
Company; (4) a trading history of the Company's common stock from July 2, 1996
to the present; (5) a comparison of the related historical financial results of
the Company and present financial condition of the Company with those of
publicly traded companies which we deemed relevant; (6) historical data relating
to percentage premiums paid in acquisitions of publicly traded technology
companies during 2000; and (7) a comparison of the financial terms of the
Proposed Transaction with the publicly available financial terms of certain
other recent transactions which we deemed relevant. In addition, we have had
discussions with the management of the Company concerning its business,
operations, assets, present condition and future prospects, including, without
limitation, discussions regarding the near-term liquidity needs of, and capital
resources available to , Phoenix. We also undertook such other studies, analyses
and investigations as we deemed appropriate.
(ROBINSON-HUMPHREY LETTERHEAD)
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<PAGE> 204
We have assumed and relied upon the accuracy and completeness of the
financial and other information, including the amount of the Retained
Liabilities, used by us in arriving at our opinion without independent
verification. With respect to the financial forecasts/projections of the
Company, including the amount and character of the Retained Liabilities,
provided to our discussed with us, we assumed, at the direction of the
management of the Company and without independent verification or investigation,
that such forecasts/ projections and the calculation of the Retained Liabilities
have been reasonably prepared on bases reflecting the bet currently available
information, estimates and judgments of the management of the Company as to the
future financial performance of the Company and such Retained Liabilities, and
were express no opinion with respect to such forecasts/projections or the amount
or character of the Retained Liabilities or the assumptions on which the
forecasts/projections or the amount of the Retained Liabilities are based.
Furthermore, we understand that the financial forecasts/projections provided to
us by management of the Company assume that the Company does not effect a
transaction of a similar nature to the Proposed Transaction. Our opinion
expressly does not address the outcome of the litigation retained by the Company
or any potential effect such outcome may have upon the amount of the Retained
Liabilities or the Net Consideration.
In arriving at our opinion, we have not conducted a physical inspection of
the properties and facilities of the Company and have not made nor obtained any
evaluations or appraisals of the assets or liabilities, contingent or otherwise,
including the Retained Liabilities, of the Company. Our opinion is necessarily
based upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter. We express no opinion as to the
underlying valuation, future performance or long-term viability of Phoenix. It
should be understood that, although subsequent developments may affect this
Opinion, we do not have any obligation to update or revise the Opinion.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of the rendering of
this opinion. In the ordinary course of our business, we may trade in the equity
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the forgoing, and such other factors as we deemed
relevant, we are of the opinion as of the date hereof that, from a financial
point of view, the Net Consideration to be received by the Company in the
Proposed Transaction if fair to the Company. This Opinion is being rendered at
the behest of the Special Committee of the Board of Directors and is for the
benefit of both the Special Committee and the entire Board of Directors of the
Company in its evaluation of the Proposed Transaction, and does not constitute a
recommendation as to how any stockholder should vote with respect to any matters
relating to the Proposed Transaction.
THE ROBINSON-HUMPHREY COMPANY, LLC
(ROBINSON-HUMPHREY COMPANY, LLC SIG)
D-2
<PAGE> 205
ANNEX E
FLORIDA DISSENTERS' RIGHTS STATUTE
607.1301. DISSENTERS' RIGHTS; DEFINITIONS
The following definitions apply to sec.sec. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in
the case of a merger pursuant to sec. 607.1104, the day prior to the date
on which a copy of the plan of merger was mailed to each shareholder of
record of the subsidiary corporation.
607.1302. RIGHT OF SHAREHOLDERS TO DISSENT
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his or her shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under sec. 607.1104, and the shareholders would have been
entitled to vote on action taken, except for the applicability of
sec. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to sec. 607.1202, including a sale in dissolution but not
including a sale pursuant to court order or a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within 1 year after the date of sale;
(c) As provided in sec. 607.0902(11), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the corporation
is a party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder
is entitled to vote on the amendment and if such amendment would adversely
affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of
his or her shares;
2. Altering or abolishing the voting rights pertaining to any of
his or her shares, except as such rights may be affected by the voting
rights of new shares then being authorized of any existing or new class
or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any
of his or her shares, when such exchange, cancellation, or
reclassification would alter or abolish the shareholder's voting rights
or alter his or her percentage of equity in the corporation, or
effecting a reduction or cancellation of accrued dividends or other
arrearages in respect to such shares;
4. Reducing the stated redemption price of any of the shareholder's
redeemable shares, altering or abolishing any provision relating to any
sinking fund for the redemption or purchase of any of his
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<PAGE> 206
or her shares, or making any of his or her shares subject to redemption
when they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of
the shareholder's preferred shares which had theretofore been
cumulative;
6. Reducing the stated dividend preference of any of the
shareholder's preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary
liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his or her name. In that event, the shareholder's rights shall be determined as
if the shares as to which he or she has dissented and his or her other shares
were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or series
which, on the record date fixed to determine the shareholders entitled to vote
at the meeting of shareholders at which such action is to be acted upon or to
consent to any such action without a meeting, were either registered 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 not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or her
shares under this section may not challenge the corporate action creating his or
her entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
607.1320. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
(1)(a) If a proposed corporate action creating dissenters' rights under
sec. 607.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights and be accompanied by a copy of sec.sec. 607.1301, 607.1302,
and 607.1320. A shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for his or her shares if the
proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A proxy
or vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under
sec. 607.1302 is effectuated by written consent without a meeting, the
corporation shall deliver a copy of sec.sec. 607.1301, 607.1302, and 607.1320 to
each shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him or her, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating the shareholder's name and address, the number,
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<PAGE> 207
classes, and series of shares as to which he or she dissents, and a demand for
payment of the fair value of his or her shares. Any shareholder failing to file
such election to dissent within the period set forth shall be bound by the terms
of the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date the
shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5), to pay for his
or her shares. After such offer, no such notice of election may be withdrawn
unless the corporation consents thereto. However, the right of such shareholder
to be paid the fair value of his or her shares shall cease, and the shareholder
shall be reinstated to have all his or her rights as a shareholder as of the
filing of his or her notice of election, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim,
if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder
is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value for
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more
than 12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month
period ended on the date of such balance sheet or, if the corporation was
not in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his or her shares shall be made within 90 days
after the making of such offer or the consummation of the proposed action,
whichever is later. Upon payment of the agreed value, the dissenting shareholder
shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in the county in this state where the registered office of the
corporation is located requesting that the fair value of such shares be
determined. The court shall also determine whether each dissenting shareholder,
as to whom
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the corporation requests the court to make such determination, is entitled to
receive payment for his or her shares. If the corporation fails to institute the
proceeding as herein provided, any dissenting shareholder may do so in the name
of the corporation. All dissenting shareholders (whether or not residents of
this state), other than shareholders who have agreed with the corporation as to
the value of their shares, shall be made parties to the proceeding as an action
against their shares. The corporation shall serve a copy of the initial pleading
in such proceeding upon each dissenting shareholder who is a resident of this
state in the manner provided by law for the service of a summons and complaint
and upon each nonresident dissenting shareholder either by registered or
certified mail and publication or in such other manner as is permitted by law.
The jurisdiction of the court is plenary and exclusive. All shareholders who are
proper parties to the proceeding are entitled to judgment against the
corporation for the amount of the fair value of their shares. The court may, if
it so elects, appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. The appraisers shall have
such power and authority as is specified in the order of their appointment or an
amendment thereof. The corporation shall pay each dissenting shareholder the
amount found to be due him or her within 10 days after final determination of
the proceedings. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in failing to accept
such offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of a
merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
E-4
<PAGE> 209
PROXY PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PHOENIX INTERNATIONAL LTD., INC.
500 INTERNATIONAL PARKWAY, HEATHROW, FLORIDA 37246
THE UNDERSIGNED SHAREHOLDER(S) OF PHOENIX INTERNATIONAL LTD., INC.
("PHOENIX") HEREBY CONSTITUTES AND APPOINTS BAHRAM YUSEFZADEH AND C. RUSSELL
PICKERING, AND EACH OF THEM, ATTORNEYS AND PROXIES OF THE UNDERSIGNED, EACH WITH
POWER OF SUBSTITUTION, TO ATTEND, VOTE AND ACT FOR THE UNDERSIGNED AT THE
SPECIAL MEETING OF SHAREHOLDERS OF PHOENIX TO BE HELD ON FEBRUARY 22, 2001 AT
10:00 A.M. EASTERN TIME AND AT ANY ADJOURNMENT OR POSTPONEMENT THEREOF,
ACCORDING TO THE NUMBER OF SHARES OF COMMON STOCK OF PHOENIX WHICH THE
UNDERSIGNED MAY BE ENTITLED TO VOTE, AND WITH ALL THE POWERS WHICH THE
UNDERSIGNED WOULD POSSESS IF PERSONALLY PRESENT, AS FOLLOWS:
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR EACH OF THE PROPOSALS DESCRIBED ON THE REVERSE SIDE.
(Continued and to be dated and signed on reverse side)
PLEASE MARK YOUR
VOTES AS IN THIS
A[X] EXAMPLE
1. to approve a proposal to approve and adopt an asset purchase agreement, dated
October 25, 2000, among Phoenix, London Bridge Software Holdings PLC, a
corporation organized under the laws of England and Wales ("London Bridge"), and
its wholly-owned subsidiary, London Bridge Core Systems, Inc., a Delaware
corporation ("Acquisition Company"), and to approve the transactions
contemplated thereby pursuant to which Acquisition Company will purchase
substantially all of Phoenix's assets and will assume specified liabilities of
Phoenix;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. to approve a proposal to amend Article I of Phoenix's articles of
incorporation to change the name of Phoenix from "Phoenix International Ltd.,
Inc." to "Sphinx International, Inc." (or if that name is not available, to
another name acceptable to Phoenix and Acquisition Company); and
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. to approve a proposal to approve and adopt a plan of dissolution and to
approve the transactions contemplated thereby pursuant to which Phoenix will be
liquidated and its net assets will be distributed to its shareholders.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the proxies are authorized to transact such other
business as may properly be brought before the special meeting or any
adjournment thereof.
APPROVAL OF THE SECOND PROPOSAL IS CONTINGENT UPON THE SHAREHOLDERS' APPROVAL
OF THE FIRST PROPOSAL. APPROVAL OF EACH OF THE FIRST PROPOSAL AND THE THIRD
PROPOSAL IS NOT CONTINGENT UPON THE SHAREHOLDERS' APPROVAL OF ANY OTHER
PROPOSAL.
The undersigned revokes any prior proxy at such meeting and ratifies all that
said attorneys and proxies, or any of them, may lawfully do by virtue hereof.
Receipt of the notice of special meeting of shareholders and the proxy statement
is hereby acknowledged.
PLEASE COMPLETE, SIGN, DATE AND MAIL PROMPTLY IN THE POSTAGE-PAID ENVELOPE
ENCLOSED.
Dated , 2001
-------------------- -----------
Signature
Dated , 2001
-------------------- -----------
Signature, if held jointly
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS
ABOVE. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL
TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT
OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON.
