SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 27, 1999
ELECTRONIC CLEARING HOUSE, INC.
(Exact name of registrant as specified in its charter)
NEVADA 0-15245 93-0946274
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
No.)
28001 Dorothy Drive, Agoura Hills, California 91301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 706-8999
(Former name or former address, if changes since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 27, 1999, Electronic Clearing House, Inc., a Nevada corporation
("ECHO"), acquired Magic Software Development, Inc. ("Magic"), a New Mexico
corporation, through a merger (the "Merger") of ECHO's wholly-owned
subsidiary, ECHO Acquisition Corporation, a New Mexico corporation ("EAC"),
with and into Magic. The Merger was consumated on the terms set forth in an
Agreement and Plan of Reorganization dated April 20, 1999, by and among ECHO,
EAC and Magic (the "Merger Agreement"), attached hereto as Exhibit 2.1. As a
result of the Merger, Magic is now a wholly-owned subsidiary of ECHO.
Magic is a provider of electronic check verification, electronic check
re-presentment, check conversion, and check guarantee solutions to financial
services companies and retailers across the nation. Magic processes over 75
million check verification transactions per year, totaling over two billion
dollars. Magic currently employs 13 full-time employees, primarily
programmers and engineers.
At the present, a majority of Magic's revenue is generated from
electronic check verification. Electronic check verification is the process
of using an electronic device to verify information about a check being
presented for payment. The information is verified against data, which have
previously been collected and stored in a database. A verification compares
information to a negative database, a positive database, or combination of
both. ECHO intends to offer all of the services and products of Magic to its
core merchant base once Magic is fully integrated into ECHO's operations.
Pursuant to the Merger Agreement, ECHO issued a total of 1,000,000 shares
of common stock ("Base Shares") to the selling shareholders of Magic. The
Base Shares are to be held in escrow, and 500,000 shares will be released to
the selling shareholders of Magic on April 1, 2001 and 500,000 shares will be
released on April 1, 2002. In addition, up to 1,000,000 shares of common
stock ("Performance Shares") will be issued to the Magic selling shareholders
upon the achievement of certain predetermined earnings goals for fiscal year
2000 and 2001. Any Performance Shares issued will be held in escrow and 50%
will be released on April 1, 2003 and the balance to be released on April 1,
2004. The Merger is being accounted for as a purchase, not a pooling of
interests.
All liabilities and expenses paid by ECHO in connection with the Merger
were funded from ECHO's working capital. ECHO expects its operating results
to be adversely affected in the first year as a result of the Merger.
The description of the Merger contained herein is qualified in its
entirety by reference to the Merger Agreement and the Press Releases issued by
ECHO dated April 20, 1999, and April 29, 1999, copies of which are filed
herewith and incorporated herein by reference as Exhibits 2.1 and 99.1
respectively.
ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. Financial statements
of the business acquired, prepared pursuant to Rule 3-05 of
Regulation S-X, are unavailable as of the date of this filing. Such
information will be filed on or before July 9, 1999.
(b) PRO FORMA FINANCIAL INFORMATION. Pro Forma financial information
required pursuant to Article 11 of Regulation S-X is unavailable as
of the date of this filing. Such information will be filed on or
before July 9, 1999.
(c) EXHIBITS:
Exhibit
Number Description of Document
2.1 Merger Agreement and Plan of Reorganization, dated
April 20, 1999, by and among ECHO, EAC and Magic
99.1 Press Release, dated April 29, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
(Registrant)
By:
Alice L. Cheung, Treasurer &
Chief Financial Officer
Dated: May 11, 1999
<PAGE>
EXHIBIT 2.1
MERGER AGREEMENT AND PLAN OF REORGANIZATION
This Merger Agreement and Plan of Reorganization ("Agreement") is made as of
the 20th day of April, 1999 by and among Electronic Clearing House, Inc., a
Nevada corporation ("ECHO"), ECHO Acquisition Corporation, a New Mexico
corporation ("EAC"), Magic Software Development, Inc., a New Mexico
corporation ("Magic"), and the individuals listed and signing at the end of
this Agreement in Article XI ("Selling Shareholders").
WHEREAS the Selling Shareholders own all of the right, title and interest in
all of the outstanding shares of capital stock of Magic ("Magic Shares") as
set forth in Article XI;
WHEREAS EAC desires to merge into Magic and Magic desires to merge with EAC as
set forth in this Agreement ("Merger");
WHEREAS Selling Shareholders approve the Merger and desire to receive shares
of ECHO in connection with the Merger;
WHEREAS ECHO is wiling to issue up to 2,000,000 shares of the common capital
stock of ECHO in connection with the Merger ("ECHO Shares");
WHEREAS Magic would become a wholly-owned subsidiary of ECHO as a result of
the Merger;
NOW THEREFORE IN CONSIDERATION OF THE MUTUAL COVENANTS SET FORTH HEREIN, THE
PARTIES AGREE AS FOLLOWS:
I
TERMS OF TRANSACTION
1.1 Merger and Effect of Merger.
1.1.1. Merger of EAC and Magic. EAC will be merged with and into
Magic effective on date that Articles of Merger in the form attached to this
Agreement as Exhibit Al are filed with the New Mexico Secretary of State
("Effective Date").
1.1.2. Magic Surviving Corporation. Magic will be the surviving
corporation in the Merger. After the Effective Date, Magic's corporate name,
existence and all its purposes, powers and objectives will continue unaffected
and unimpaired by the Merger, Magic will continue to be governed by the laws
of the state of New Mexico, and Magic will succeed to EAC's rights, assets,
liabilities and obligations in accordance with the Business Corporation Act of
New Mexico.
1.1.3. Articles of Incorporation. No changes in the Articles of
Incorporation of Magic will be effected by the Merger. The Articles of
Incorporation of Magic on the Effective Date will continue to be the Articles
of Incorporation of Magic after the Effective Date. From and after the
Effective Date, said Articles of incorporation, as they may be amended from
time to time, will be, and may be separately certified as, the Articles of
Incorporation of Magic
1.1.4 Bylaws. The Bylaws of Magic in effect on the Effective Date
shall be the Bylaws of Magic after the Effective Date until those bylaws are
duly altered, amended or repealed.
1.1.5 Directors. The Directors of Magic on the Effective Date will be
the Directors of Magic after the Effective Date until their successors are
duly elected and qualify. The officers of Magic on the effective date shall be
the officers of Magic after the effective date, subject to the terms of this
Agreement.
1.1.6 Conversion of EAC Shares. Effective on the Merger, each share
of EAC at the time issued and outstanding will be converted into one share of
the common capital stock of Magic.
1.1.7 Conversion of Magic Shares. Effective on the Merger, all of the
shares of Magic at the time issued and outstanding (other than dissenting
shares to the extent provided in the Business Corporation Act) will by virtue
of the Merger and without action on the part of any shareholder of Magic be
converted into the right to receive ECHO Shares as provided in this Agreement.
1.1.6 Tax-Free Reorganization. The Merger is intended by ECHO, EAC,
Magic and the Selling Shareholders to be a tax-free reorganization as defined
in Section 368(a)(l)(A) of the Internal Revenue Code of 1986, as amended
("Code") (it being understood that no representation or warranty as to such
effect is or has been made); and this Agreement is intended to be a, Plan of
Reorganization under that Section.
1.2 Base Shares
1.2.1 Issuance of Base Shares to Selling Shareholders at the
Effective Date. Upon effectiveness of the Merger, ECHO will issue to each of
the Selling Shareholders the number of ECHO Shares set forth opposite that
Selling Shareholders name in Article XI as "Base Shares," aggregating a total
of 1,000,000 Base Shares, subject to the terms of this Agreement.
1.2.2 Escrow of Base Shares.Certificates representing the Base Shares
shall be delivered to the Secretary of ECHO, to be held in escrow in
accordance with an escrow agreement containing the terms set forth in the form
of escrow agreement attached to this Agreement as Exhibit A2 ("Escrow
Agreement"). Subject to the terms of the Escrow Agreement, certificates for
500,000 Base Shares shall be released from the escrow and delivered to the
Selling Shareholders on April 1, 2001; and certificates for the remaining
500,000 Base Shares shall be released from the escrow and delivered to the
Selling Shareholders on April 1, 2002. Base Shares reflected in certificates
held in escrow cannot be transferred or otherwise alienated until released
from escrow except as provided in this Agreement.
1.3 Performance Shares.
1.3.1. Issuance of Performance Shares to Selling Shareholders On
Achievement of Performance Goals. As of the last day of Performance Period # 1
(April 1, 1999 through March 31, 2001) and Performance Period #2 (April 1,
2001 through March 31, 2002). ECHO will issue to each of the Selling
Shareholders the number of ECHO Shares to which that Selling Shareholder shall
be entitled pursuant to this Section 1.3.1, up to the total number of Shares
set forth opposite that Selling Shareholder's name in Article XI as
"Performance Shares," aggregating up to a maximum of 1,000,000 Performance
Shares, subject to the terms of this Agreement.
The number of Performance Shares that shall be issued under this Section
1.3.1 Is based on Net Earnings accrued during Performance Period #1 and
Performance Period #2.
Net Earnings shall be net earnings before taxes as reflected on the
income statement of Magic for the applicable Performance Period, calculated in
accordance with generally accepted accounting principles. Net earnings shall
reflect deductions for administrative charges of ECHO in accordance with
ECHO's good faith general policy for allocating administrative charges to
subsidiaries. ECHO's current policy for allocating administrative charges is
set forth in Exhibit B.
In the event of a merger of ECHO or Magic with another company (other
than the Merger contemplated by this Agreement), whether ECHO or Magic is the
surviving company or absorbed company, or the acquisition of 50 percent of the
outstanding shares of ECHO or Magic by another company or other person or
group of persons in the same transaction or series of related transactions
prior to the end of any Performance Period, Net Earnings shall be the Net
Earnings calculated as previously described divided by two (2) in respect to
the period from the closing of such transaction or series of related
transactions until the end of Performance Period #2.
Performance Period #1 shall commence on April 1, 1999 and shall terminate
on March 31, 2001.
For Performance Period #1, Performance Shares shall be issued in
accordance with the following:
Number of
Net Earnings Performance Shares
Less than $250,000 None
$250,000 or more 250,000 plus one Performance Share
for each $1.00 by which Net Earnings
exceed $250,000, up to the maximum
of 1,000,000 Performance Shares
Performance Period #2 shall commence on April 1, 2001 and shall terminate
on March 31, 2002. For Performance Period #2, Performance Shares shall be that
percentage of the Remaining Shares (as defined hereinafter) represented by the
ratio: (1) the amount by which Net Earnings for Performance Period #2 exceeds
$1,000,000, up to a maximum of $1,000,000; divided by (2) $1,000,000. Thus, if
500,000 shares are issued in respect to Performance Period #1 (resulting in
500,000 Remaining Shares) and Net Earnings for Performance Period #2 were
$1,600,000, then 300,000 shares would be issued in respect to Performance
Period #2; that is $1,600,000 - $1,000,000 = $600,000, $600,000/$1,000,000 =
.60, .60 x 500,000 = 300,000. "Remaining Shares" means 1,000,000 Performance
Shares less the number of Performance Shares issued with respect to
Performance Period #1.
Each Selling Shareholder shall be entitled to receive that percentage of
the aggregate number of Performance Shares issued as is pro rata to the number
of Magic Shares held by that Shareholder immediately prior to Closing.
Fractional shares shall not be issued. Any fraction of a share shall be
rounded up to 1 share.
The number of Performance Shares to be issued hereunder shall be
appropriately adjusted to reflect any stock split, stock dividend, stock
combination or similar transaction effected without additional payment for
shares. The foregoing shall not apply to any conversion of convertible
securities or any issue of securities on exercise of warrants or options to
purchase such securities.
1.3.2 Escrow of Performance Shares. Certificates for Performance Shares
shall be delivered to the Secretary of ECHO immediately on issue, to be held
in escrow in accordance with the Escrow Agreement. Subject to the terms of the
Escrow Agreement, certificates for fifty percent (50%) of the aggregate number
of Performance Shares that shall have been issued with respect to Performance
Periods #1 and #2 shall be released from the escrow and delivered to the
Selling Shareholders on April 1, 2003; and certificates for the remaining
fifty percent (50%) of the Performance Shares that shall have been so issued
shall be released from the escrow and delivered to the Selling Shareholders on
April 1, 2004. Thus, if 500,000 Performance Shares are issued with respect to
Performance Period #1 ending March 31, 200 1, and 300,000 Performance Shares
are issued with respect to Performance Period #2 ending March 31, 2002,
aggregating 800,000 Performance Shares, certificates for 400,000 of those
Performance Shares will be released from the escrow on April 1, 2003 and
certificates for 400,000 of those Performance Shares will be released from the
escrow on April 1, 2004.
Performance Shares reflected in certificates held in escrow cannot be
transferred or otherwise alienated until released from escrow, except as
provided in this Agreement.
1.4 Shareholder Rights. Subject to the terms of the Escrow Agreement,
Selling Shareholders shall have all of the rights of Shareholders with respect
to Base Shares and Performance Shares upon issuance thereof, except the right
to assign or transfer those Shares while such Shares are held in the escrow
subject to the terms of this Agreement.
1.5 Allocation of Base Shares. For ECHO tax and accounting purposes, the
parties intend that all Base Shares issued to Selling Shareholders shall be
allocated in respect to Magic tangible assets at book value of those tangible
assets and in respect to Magic intangible assets at fair market value of those
intangible assets.
1.6 Limited Right to Transfer. Notwithstanding any other provision of
this Agreement, Selling Shareholders shall have the right to transfer ECHO
Shares to any person, provided that: (1) the transfer does not violate any
federal or state securities law or other law, (2) the transferee agrees to be
bound by all of the terms of the Escrow Agreement, (3) the Selling
Shareholders assume all tax liabilities arising out of the transfer; and (4)
the Selling Shareholders indemnify ECHO against any claim and/or liability
arising out of such transfer.
II
MAGIC EMPLOYEES
2.1 Kris D. Winckler. Effective as of the Effective Date ECHO agrees to
cause Magic to employ Kris D. Winckler in the position of President, upon the
terms and conditions set forth in Exhibit Cl to this Agreement.
2.2 Steven D. Kirk. Effective as of the Effective Date, ECHO agrees to
cause Magic to employ Steven D. Kirk in the position of Vice President-Sales,
upon the terms and conditions set forth in Exhibit C2 to this Agreement.
2.3 Robert L. Hare. Effective as of the Effective Date, ECHO agrees to
cause Magic to employ Robert L. Hare in the position of Vice President-
Development, upon the terms and conditions set forth in Exhibit C3 to this
Agreement.
2.4 Steven J. Freed. Effective as of the Effective Date, ECHO agrees to
cause Magic to employ Steven J. Freed in the position of Vice President-
Operations, upon the terms and conditions set forth in Exhibit C4 to this
Agreement.
2.5 Other Employees. ECHO and Kris D. Winckler will determine whether
employees of Magic other than those referred to in Sections 2.1 through 2.4
shall be retained as employees of Magic. Any retention of those employees will
be on an "at-will" basis, unless ECHO agrees otherwise. There are no
assurances that those employees will be retained for any period of time after
the Effective Date, and any or all of such employees may be terminated at any
time for any reason or no reason.
III
REPRESENTATIONS AND WARRANTIES OF
MAGIC AND SELLING SHAREHOLDERS
Magic and the Selling Shareholders jointly and severally represent and
warrant to ECHO as of the date of this Agreement and as of the Effective Date
as follows, except as set forth in Exhibit D:
3.1 Organization and Standing: Authority. Magic is a corporation duly
organized, validly existing, and in good standing under the laws of New
Mexico. Magic has the requisite corporate power and authority to own, lease
and operate its properties and assets, and to carry on its business as
presently conducted and as proposed to be conducted and to enter into this
Agreement. All corporate action on the part of Magic, its shareholders,
directors and officers necessary for the authorization, execution, delivery
and performance of this Agreement by Magic has been taken or will be taken
prior to the Closing. This Agreement, when executed and delivered, is a valid
and binding obligation of Magic and each of the Selling Shareholders, and will
not violate the Articles of incorporation or bylaws of Magic or any agreement,
law, regulation, government order or other obligation under which Magic or any
of the Selling Shareholders is bound. Magic is duly qualified as a foreign
corporation to do business and is in good standing in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where failure to be so
qualified will not have an effect on the business, properties, assets,
condition (financial or otherwise), liabilities, operations or prospects of
Magic taken as a whole in an amount in excess of $10,000 ("Material Adverse
Effect").
3.2 Corporate Documents. Magic has delivered to ECHO true copies of its
Articles of Incorporation and its bylaws as currently in effect, all stock
records, and all minutes of meetings and all consents and other actions of its
shareholders, board of directors, executive committee, and other governing
boards. There shall have been no changes to these documents at the time of the
Effective Date. Magic is in full compliance with all provisions of such
documents.
3.3 Bank Statements. Magic has delivered statements of all banks and
other institutions at which it maintains funds for each of the three preceding
months. Magic does not maintain funds at any institution other than those for
which statements have been delivered hereunder.
3.4 Subsidiaries. Magic has no subsidiaries or affiliated companies and
does not otherwise own or control, directly or indirectly, any other
corporation, association or business entity.
3.5 Capitalization. The authorized capital stock of the Magic consists
10,000 shares of Common Stock, of which 100 shares are issued and outstanding.
All issued and outstanding shares have been duly authorized and validly
issued, and are fully-paid and nonassessable. There are no outstanding
options, warrants, conversion privileges or other rights presently outstanding
to purchase or otherwise acquire any authorized but unissued shares of capital
stock or other securities of Magic, nor any agreements to issue any such
rights. All outstanding capital stock was issued in full compliance with all
applicable laws. There are no bonds, debentures, notes or other evidences of
indebtedness having the right to vote on any matter.
3.6 Financial Statements. Magic has delivered to ECHO a balance sheet and
income statement for each of the fiscal years ended December 31, 1994, 1995,
1996, 1997, and 1998, prepared in accordance with generally accepted
accounting principles. The balance sheet and income statement for the fiscal
year ended December 31, 1998 has been audited by a firm of public accountants
acceptable to ECHO. The balance sheets fairly present the assets, liabilities,
and financial condition of Magic as of the dates presented and the income
statements fairly present the results of operations of Magic for the periods
therein referred to. To the best of Magic's and each Selling Shareholder's
knowledge, there have been no material changes in any asset or liability
reflected in the most recent such balance sheet after the date of that balance
sheet. Magic has not sold, exchanged or otherwise disposed of any of its
assets or rights, other than in the ordinary course of business.
3.7 Liabilities. To the best of Magic's and each Selling Shareholder's
knowledge, other than as disclosed in the most recent balance sheet or other
document delivered to ECHO, Magic has no direct or contingent liabilities.
There are no known or expected actions, suits, proceedings or investigations
pending against Magic or its properties before any court, governmental agency,
or other tribunal, domestic or foreign. No known claims against Magic or any
of its shareholders, directors, officers, employees, agents or consultants
have been asserted claiming any rights to any tangible or intangible property
owned, claimed or used by Magic, or claiming that the business of Magic
violates any patent, trade secret, or other right of any person including any
former or other present employer of any such guarantor, surety, co-signer,
endorser or co-maker with respect to the liability of any other person. Magic
has not declared or paid any dividends, or authorized or made any distribution
upon or with respect to any class or series of its capital stock. Magic has
given no power of attorney to any person.
3.8 Intangible Assets. A list of all intangible assets, including
without limitation all concepts, designs, ideas, methods, computer programs,
systems, patents, trade secrets, trademarks, trade names and copyrights, is
set forth in Exhibit E. Developing, marketing, assigning or transferring, or
other use of any such intangible asset after the Effective Date will not
infringe the rights of any other person. Magic possess sufficient legal rights
to all intangible assets necessary for the conduct of Magic's business as now
conducted and as proposed to be conducted. Without limiting the foregoing,
Magic has not entered into any cross-licensing arrangement with any person or
entity, and there are no agreements relating to and materially affecting any
intangible asset or the use or ownership thereof, including without limitation
license agreements, confidentiality or non-disclosure agreements, assignments
or agreements to assign, development agreements, settlement agreements or
similar agreements. None of the Selling Shareholders, and to the best of
Magic's and each Selling Shareholder's knowledge no other person who is an
employee of Magic, is obligated under any agreement or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with such person's duties with Magic or that would conflict with
Magic's business as presently proposed to be conducted. Magic will not need to
utilize any inventions, trade secrets or proprietary information of any of its
employees or shareholders made prior to their employment by Magic, except for
inventions, trade secrets or proprietary information that have been assigned
to Magic (copies of all such assignments having been delivered to ECHO).
Neither Magic nor any Selling Shareholder has received information that any
other person is engaged in any activity or contemplating any activity that
might constitute an infringement or other violation of Magic's rights with
regard to any of its intangible assets.
3.9 Agreements and Licenses. All oral and written agreements, including
without limitation all licenses, to which Magic is a party or under which it
is bound are listed in Exhibit F. All such agreements and licenses have been
delivered to ECHO. All such agreements and licenses are valid, binding and
enforceable in accordance with their terms. Magic is not in default or breach
of any such agreement or license. Execution and performance of this Agreement
will not violate or breach any such agreement or license. Without limiting the
generality of the foregoing, no warranty or representation has been made to
any customer of Magic other than as set forth in written agreements with such
customer, all of which are listed in Exhibit F.
3.10 Title to Properties. Magic has good and marketable title to all its
properties and assets, including leasehold interests, trade secrets,
trademarks, copyrights, patents, software, systems and other intangible
assets. Magic's tide to its properties and assets is free and clear of any
lien, claim, encumbrance or restriction of any nature. In particular, without
limiting the generality of the foregoing, no person has any claim, lien or
other rights in or against any intellectual property or other intangible asset
of Magic including without limitation any of Magic's software programs except
pursuant to written license agreements all of which are listed in Exhibit F.
To the best of Magic's and each Selling Shareholder's knowledge, there are no
pending or threatened proceedings of any nature alleging any violation of any
right of any other person with respect to any of Magic's properties or assets.
3.11 Accounts Receivable and other Receivables. To the best of Magic's
and each Selling Shareholder's knowledge, all accounts receivable are current
and collectible in the ordinary course of business Magic has not made any
loans or advances to any person, other than in the ordinary course of
business.
3.12 Insurance. All policies of insurance owned or held by Magic are
listed in Exhibit G. All such policies are in full force and effect, and will
not be affected by the transactions contemplated by this Agreement.
3.13 Leases. All leases under which Magic is bound are listed in Exhibit
H. All such leases are in full force and effect, and will not be affected by
the transactions contemplated by this Agreement. Magic is not in default or
breach of any lease.
3.14 Employees. Magic has no (a) retirement, pension, profit sharing,
deferred compensation, bonus, or other compensation plan, other than regular
salaries and wages, (0) stock option, stock purchase or other employee stock
or equity plan, (c) medical or disability plan, (d) other employee benefit
plan, (e) employment agreement of any kind. To the best of Magic's and the
Selling Shareholder's knowledge, no director, officer or employee is obligated
under any contract, license, covenant, commitment or other agreement, or
subject to any judgment, decree, or other order that would conflict with his
or her obligation to use his or her best efforts to promote the interests of
Magic. Except as provided in this Agreement, no employee of Magic has been
granted the right to continued employment by Magic or to any material
compensation following termination of employment by Magic or consummation of
the transactions contemplated by this Agreement. Neither Magic nor any Selling
Shareholder is aware that any officer or employee intends to terminate his or
her employment with Magic.
3.15 Taxes. All tax liabilities of any nature incurred by Magic have been
paid. To the best of Magic's and each Selling Shareholder's knowledge, no
facts exist that would be grounds for the assessment of any additional tax
liability. All required tax returns of Magic have been accurately prepared and
duly and timely filed. Magic has not been advised that any of its returns,
federal, state or other, have been or are being audited.
3.16 Compliance with Law. To the best of Magic's and each Selling
Shareholder's knowledge, Magic is in full compliance with all laws and
regulations applicable to its business, and all judgments, decrees, orders,
and writs to which Magic is subject (copies of all of which have been
delivered to ECHO). To the best of Magic's and each Selling Shareholder's
knowledge, Magic possesses from the appropriate governmental authorities, all
licenses, permits, certificates, approvals, franchises and other
authorizations as are necessary for Magic to engage in the business currently
conducted.
3.17 Governmental Consent. To the best of Magic's and each Selling
Shareholder's knowledge, after consultation with legal counsel, no consent,
approval or authorization of or designation, declaration or filing with any
governmental authority on the part of Magic or the Selling Shareholders is
required in connection with the valid execution and delivery of this Agreement
or the consummation of any other transaction contemplated hereby except filing
Articles of Merger as provided in Section 1.1.
3.18 Investment Intent. Each of the Selling Shareholders will acquire the
ECHO Shares to be issued to that Shareholder pursuant to this Agreement for
investment for his own account, not as a nominee or agent, and not with a view
to or for sale in connection with any distribution of the ECHO Shares, or any
part thereof; he has no present intention of selling, granting participation
in' or otherwise distributing the ECHO Shares.
3.19 No Registration of ECHO Shares. Each of the Selling Shareholders
understands that the ECHO Shares have not been registered under the Securities
Act of 1933 ("Securities Act") nor registered or qualified under the New
Mexico Securities Act, the Washington Securities Act including Chapter 21.20
of the Revised Code of Washington ("RCW"), nor other applicable securities
law, on the basis that the sale provided for in this Agreement and the
issuance of securities hereunder is exempt from registration under the
Securities Act and from registration or qualification under applicable
securities laws, and that ECHO's reliance on such exemptions is predicated on
the representations set forth herein. in this connection, each of the Selling
Shareholders understands that the offering of ECHO Shares contemplated by this
Agreement and related documents and disclosures have not been reviewed or
recommended by the U.S. Securities and Exchange Commission ("SEC") nor by the
securities administrator of New Mexico, Washington or any other state or
jurisdiction. Therefore, ECHO Shares cannot be resold unless registered under
the Securities Act, and registered or qualified under any applicable state
securities law including without limitation the Securities Act of Washington
Chapter 21.20 RCW and the Securities Act of New Mexico, or unless an exemption
from registration is available.
3.20 Restrictions on Transfer. Each of the Selling Shareholders
understands that the ECHO Shares cannot be sold or transferred unless
registered under the Securities Act of 1933 and registered or qualified under
applicable state or other securities laws, or an exemption applies.
3.21 Knowledge of Business/Ability to Bear Economic Risk. Each of the
Selling Shareholders is familiar with the business of ECHO, and has received
each of the following: (1) ECHO's 1998 Annual Report to Shareholders; (2) Form
10-K for the Fiscal Year ended September 30, 1998; (3) Form 10-Q for period
ended December 31, 1998; (4) Proxy Statement dated January 4, 1999. Each of
the Selling Shareholders understands that he can request, and that ECHO will
promptly provide to the Selling Shareholder on such request, any exhibit
required to be filed with the Securities and Exchange Commission m connection
the foregoing documents including the Exhibits referred to in Part IV of the
aforementioned Form 10-K. Each of the Selling Shareholders is experienced in
the type of business engaged in by ECHO, is able to fend for himself in the
transactions contemplated by this Agreement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits
and risks of investment in the ECHO Shares, and has the ability to bear the
economic risks of the investment.
3.22 Due Diligence. Each of the Selling Shareholders represents that he
has had the opportunity to ask questions of; and to receive answers from, ECHO
concerning the terms and conditions of his investment in the ECHO Shares and
to obtain additional information (to the extent ECHO possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to him or to
which he had access.
3.23 Free of Liens and Encumbrances. The Magic Shares are validly
issued, fully-paid and nonassessable, and are free of any liens, claims,
encumbrances, or other restrictions of any kind.
Neither the execution of this Agreement nor the transactions contemplated
herein shall violate the Articles of incorporation or bylaws of Magic, any
agreement, or any law, rule or order of any governmental authority or any
court.
3.24 Operation of Software and Systems. All data processing systems,
including all software programs, of Magic operate normally in accordance with
the specifications and functions for those systems and software programs
previously disclosed to ECHO. Magic is making all such systems ready for the
year 2000 and does not expect such systems to be adversely affected by the
advent of that year. Except as stated in the first sentence of this Section
324, neither Magic nor any of the Selling Shareholders is aware of any
material defect in design, materials, manufacture, performance or otherwise in
any products or services developed, manufactured, distributed, licensed, sold
or provided by Magic since Magic's incorporation or any defect in repair to,
service of; or replacement of; any such products which would give rise to a
Material Adverse Effect.
3.25 Suppliers and Customers. No substantial supplier or customer (who
accounted for more than 2% of aggregate 1998 purchases or more than 2% of
aggregate 1998 revenues, as the case may be) or any prospective customer, has
indicated to Magic or to any Selling Shareholder that it intends to terminate
its relationship with Magic, nor does Magic or any Selling Shareholder have
knowledge that any such supplier or customer intends to terminate such
relationship. There is no information that would indicate that Magic does not
have good business relations with each supplier and customer, or that
consummation of the transactions contemplated by this Agreement would or might
disrupt Magic's existing relationships with any such supplier or customer.
3.26 Records. Magic has made available all of its records to ECHO in all
media, including without limitation all financial records, product records,
software code, written operating procedures, customer records, personnel
records, and insurance records.
3.27 No Material Adverse Effect. To the best of Magic's and each Selling
Shareholder's knowledge, there does not exist any fact or circumstance which,
alone or together with another fact of circumstance, could reasonably be
expected to have a Material Adverse Effect on the business, properties,
assets, condition (financial or otherwise), liabilities, operations,
properties or future prospects of Magic.
3.28 Brokers and Finders. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based on arrangements
made by Magic or any of the Selling Shareholders.
3.29 Truth of Representations and Warranties. All of the
representations and warranties set forth in this Article III shall be true as
of the time of the Effective Date. No representation or warranty or other
statement made to ECHO by Magic or any Selling Shareholder contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statement, in light of the circumstances under which the statement
was made, not misleading.
3.30 Survival of Provisions. The provisions of this Article III shall
survive Closing and the Merger.
3.31 Knowledge Representation. When the words "to the best of Magic's
and each Selling Shareholder's knowledge" appear in the provisions of this
Article III, it is understood that no affirmative investigation has been made
to confirm such "knowledge."
IV
REPRESENTATIONS AND WARRANTIES OF ECHO AND EAC
ECHO and EAC each represents and warrants to Magic and the Selling
Shareholders as of the date of this Agreement and as of the date of the
Effective Date as follows, except as set forth in Exhibit
I:
4.1 Organization and Standing: Authority. ECHO is a corporation duly
organized, validly existing, and in good standing under the laws of Nevada.
EAC is a corporation duly organized, validly existing, and in good standing
under the laws of New Mexico. Each has the requisite corporate power and
authority to own, lease and operate its properties and assets, and to carry on
its business as presently conducted and as proposed to be conducted and to
enter into this Agreement. All corporate action on the part of ECHO and EAC,
its shareholders, directors and officers necessary for the authorization,
execution, delivery and performance of this Agreement by ECHO and EAC has been
taken or will be taken prior to the Effective Date This Agreement, when
executed and delivered, is a valid and binding obligation of ECHO and EAC and
will not violate the Articles of incorporation or bylaws of ECHO or EAC or any
agreement, law, regulation, government order or other obligation under which
ECHO or EAC is bound.
4.2 Capitalization. The authorized capital stock of ECHO consists
26,000,000 shares of Common Stock, of which 15,114,300 shares were issued and
outstanding on September 30,1998; and 5,000,000 shares of Convertible
Preferred Stock, of which 23,511 shares of Series H Preferred Stock were
issued and outstanding on that date, 325,000 shares of Series K Preferred
Stock were issued and outstanding on that date, and 168,000 shares of Series L
Preferred Stock were issued and outstanding on that date. All issued and
outstanding shares have been duly authorized and validly issued, are fully-
paid and nonassessable, and were issued in full compliance with all applicable
laws. Options to acquire up to 3,801,000 shares of Common Stock at exercise
prices ranging from $0.40 to $1.06 per share were outstanding on September 30,
1998, and warrants to acquire up to 1,000,000 shares of Common Stock at $0.40
per share were outstanding on that date. Holders of shares of Common Stock
have one vote for each share of Common Stock held in connection with matters
on which a shareholder vote is taken, the right to receive dividends and other
distributions when, as and if declared by the board of directors, and such
other rights as may be set forth in the Articles of incorporation and required
by applicable law The rights of holders of capital stock of ECHO are more
fully described in the Articles of incorporation of ECHO, and the foregoing
description in this Section 4.2 is subject in all respects to the provisions
of those Articles. There are no bonds, debentures, notes or other evidences of
indebtedness having the right to vote on any matter. The authorized capital
stock of EAC consists of 10,000 shares of Common Stock of which 100 shares are
issued and outstanding. The rights of holders of capital stock of EAC are more
fully described in the Articles of incorporation of EAC.
4.3 Corporate Documents. ECHO and EAC has each delivered to Magic true
copies of its Articles of Incorporation and its bylaws as currently in effect.
There shall have been no changes to these documents at the time of the
Effective Date.
4.4 Financial Statements. ECHO has delivered to Magic a balance sheet
and income statement for each of the fiscal years ended September 30, 1994,
1995, 1996, 1997, and 1998, prepared in accordance with generally accepted
accounting principles. The balance sheets fairly present the assets,
liabilities, and financial condition of ECHO as of the dates presented and the
income statements fairly present the results of operations of ECHO for the
periods therein referred to. To the best of ECHO's knowledge, there have been
no material changes in any asset or liability reflected in the most recent
such balance sheet after the date of that balance sheet.
4.5 Governmental Consent. To the best of ECHO's and EAC's knowledge,
after consultation with legal counsel, no consent, approval or authorization
of or designation, declaration or filing with any governmental authority on
the part of ECHO or EAC is required in connection with the valid execution and
delivery of this Agreement, or the offer, sale or delivery of the ECHO Shares,
or the consummation of any other transaction contemplated hereby, except
filing Articles of Merger as provided in Section 1.1, certain securities
filings in connection with applicable exemptions from registration and/or
qualification requirements, and certain filings required by federal securities
regulations.
4.6 Free of Liens and Encumbrances. The ECHO Shares when issued as
provided in this Agreement will be validly issued, fully-paid and
nonassessable, and will be free of any liens, claims, encumbrances, or other
restrictions of any kind except those relating to applicable securities laws
requirements and those set forth in this Agreement. Neither the execution of
this Agreement nor the issuance of the ECHO Shares to Selling Shareholders as
contemplated herein shall violate the Articles of incorporation or bylaws of
ECHO or EAC, any agreement, or any law, rule or order of any governmental
authority or any court.
4.7 Truth of Representations and Warranties. All of the representations
and warranties set forth in this Article IV shall be true as of the Effective
Date. No representation or warranty or other statement made to Magic or any
Selling Shareholder by ECHO or EAC contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statement, in
light of the circumstances under which the statement was made, not misleading.
4.8 Due Diligence. ECHO represents that ECHO has had the opportunity to
ask questions of; and to receive answers from, Magic concerning the terms and
conditions of its investment in Magic Shares and to obtain additional
information (to the extent Magic possessed such information or could acquire
it without unreasonable effort or expense) necessary to verify the accuracy of
any information furnished to ECHO or to which ECHO had access.
4.9 Suppliers and Customers. No substantial supplier or customer (who
accounted for more than 2% of aggregate 1998 purchases or more than 2% of
aggregate 1998 revenues, as the case may be) or any prospective customer, has
indicated to ECHO or EAC that it intends to terminate its relationship with
ECHO or EAC, nor does ECHO or EAC have knowledge that any such supplier or
customer intends to terminate such relationship. There is no information that
would indicate that ECHO or EAC does not have good business relations with
each supplier and customer, or that consummation of the transactions
contemplated by this Agreement would or might disrupt ECHO's and EAC's
existing relationships with any such supplier or customer.
4.10 Records. ECHO and EAC has made available to Magic all records
requested by Magic in all media, including without limitation all requested
financial records, product records, software code, written operating
procedures, customer records, personnel records, and insurance records.
4.11 No Material Adverse Effect. To the best of ECHO's and EAC's
knowledge, there does not exist any fact or circumstance which, alone or
together with another fact of circumstance, could reasonably be expected to
have an effect on the business, properties, assets, condition (financial or
otherwise), liabilities, operations, properties or prospects of ECHO or EAC
taken as a whole in an amount in excess of $200,000.
4.12 Brokers and Finders. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based on arrangements
made by ECHO or EAC.
4.13 Survival of Provisions. The provisions of this Article IV shall
survive the Effective Date and the Merger.
4.14 Knowledge Representation. When the words "to the best of ECHO's and
EAC's knowledge" appear in the provisions of this Article IV, it is understood
that no affirmative investigation has been made to confirm such "knowledge."
V
RESTRICTIVE LEGENDS
5.1 Securities Act of 1933. Each certificate representing the ECHO
Shares shall bear a legend substantially as follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, OR (2) THE TRANSFER
IS MADE IN COMPLIANCE WITH SECURITIES AND EXCHANGE
COMMISSION RULE 144, OR (3) ECHO RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THE SECURITIES REASONABLY
SATISFACTORY TO ECHO, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.
5.2 Escrow Legend. While in escrow as provided in this Agreement, each
certificate representing ECHO Shares shall bear a legend substantially as
follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER SET FORTH IN AN ESCROW AGREEMENT,
A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY, AND CANNOT BE TRANSFERRED EXCEPT AS PROVIDED IN
THAT ESCROW AGREEMENT.
5.3 Additional Legends. Each certificate representing ECHO Shares shall
bear any other legend required by the securities laws or other laws of any
jurisdiction.
5.4 Restrictions on Transfer. ECHO need not register a transfer of any
of the ECHO Shares unless the conditions and requirements specified in the
applicable legend are satisfied. in addition, ECHO shall make a notation
regarding the restrictions on transfer of ECHO Shares in its stock books. ECHO
Shares shall be transferred on the books of ECHO only if transferred or sold
in compliance with the Securities Act of 1933 and applicable state securities
and other laws.
VI
SELLING SHAREHOLDER COVENANTS
6.1 Covenant Regarding Competition. Each of Kris D. Winckler, Steven D.
Kirk, Robert L. Hare, and Steven J. Freed agrees that, during the three (3)
year period after the Closing, he will not, directly or indirectly, in any
state or territory of the United States or in any other country:
(A) engage in any enterprise which competes with Magic or may
reasonably result in competition with Magic;
(B) solicit any employee of Magic or any consultant engaged by Magic
for the purpose of hiring such employee or consultant;
(C) solicit any customer of Magic for the purpose of providing any
services or any products to such customer similar to the products sold
to that customer by Magic.
6.2 Trade Secrets. Each of the Selling Shareholders agrees that he will
not at any time use or disclose any Trade Secrets of ECHO or any subsidiary of
ECHO including without limitation Magic (individually and collectively
referred to in this Section 6.2 as "ECHO"), except as otherwise agreed in a
writing signed by a duly authorized officer of ECHO and by the Selling
Shareholder. Trade Secrets include ECHO's marketing plans, product plans,
customer lists, confidential proprietary rights in ECHO's intellectual
property, and other nonpublic proprietary information that ECHO may designate
as a "Trade Secret." Each of the Selling shareholders further agrees that he
will not use or disclose the nonpublic proprietary information of any other
person that the Selling Shareholder has reason to know that ECHO has an
obligation to protect from disclosure or use.
6.3 Inventions Disclaimer and Assignment. Each of the Selling
Shareholders disclaims any right, title or interest in any tangible or
intangible asset of Magic including without limitation any concept, design,
idea, method, computer program, software, system, manual, documentation or
trade Secret of Magic ("Magic Asset"), and hereby assigns and transfers to
Magic any right, title or interest that such Selling Shareholder may now or in
the future have in any Magic Asset. Each of the Selling Shareholders will
assist Magic (at Magic's expense) in obtaining and from time to time enforcing
patents, copyrights, and other legal protection for Magic Assets in the United
States and any other country, including without limitation by executing all
documents confirming his assignment of any Magic Asset necessary to ensure and
perfect Magic's right to such Magic Asset and to apply for and obtain patents,
copyrights and other legal protection.
6.4 Remedies. Each of the Selling Shareholders acknowledges that a
breach of this Article VI may cause ECHO continuing and irreparable injury to
its business which may not be adequately compensated for by money damages.
Each of the Selling Shareholders therefore agrees that in the event of any
actual or threatened breach of this Article VI, ECHO shall be entitled, in
addition to other available remedies, to a temporary restraining order and to
injunctive preliminary and final relief to prevent any violations of this
Article VI. in any such injunctive proceedings, the prevailing party shall be
entitled to recover its reasonable attorneys' fees, costs and other expenses.
6.5 Survival of Provisions. The provisions of this Article VI shall
survive and continue in effect after Effective Date.
VII
INDEMNITY
7.1 Indemnity by ECHO. ECHO shall indemnify and hold harmless the
Selling Shareholders and their heirs, representatives and assigns, from any
claims, liabilities, losses, damages and related expenses caused by breach of
any provision of this Agreement, including without limitation any
representation or warranty set forth in Article IV.
7.2 Indemnity by Selling Shareholders. The Selling Shareholders shall
jointly and severally indemnify and hold harmless ECHO, and its successors and
assigns, from any claims, liabilities, losses, damages and related expenses
caused by breach of any provision of this Agreement, including without
limitation any representation or warranty set forth in Article III.
7.3 Further Indemnity by ECHO. ECHO agrees to indemnify Magic and the
Selling Shareholders from all liabilities, including reasonable attorneys fees
and court costs, arising from an alleged non-circumvention agreement between
ECHO and Precision Life Style International Corp.
PLIC).
7.3 Survival of Provisions. The provisions of this Article VII shall
survive and continue in effect after the Effective Date.
VIII
CONDITIONS TO CLOSING
8.1 ECHO Conditions. The obligations of ECHO under this Agreement are subject
to the fulfillment on or before the date of Closing of each of the following
conditions, any of which may be waived by ECHO in writing:
8.1.1 Delivery of Documents at Closing. All documents required to be
delivered to ECHO at Closing shall have been tendered for delivery to ECHO.
8.1.2 Compliance with Law. All consents, authorizations, permits or
other approvals, if any, that are required by any governmental authority or
regulatory agency (other than filing the Articles of Merger), or under any
agreement or other document under which ECHO or Magic is obligated, shall have
been duly obtained and shall be effective. Consummation of the transactions
contemplated by this Agreement shall comply with all requirements of corporate
law applicable to mergers; and shall not violate any law, regulation, or order
of any governmental authority or any court, nor any obligation under which
ECHO, EAC or Magic is bound.
8.1.3 ECHO Director Approval. The board of directors of ECHO shall
have approved the execution of this Agreement.
8.1.4 Magic Director Approval. The board of directors of Magic shall
have approved this Agreement and the Merger, and shall have directed that the
Merger be submitted to the shareholders of Magic for approval, and copies of
the resolution of such board of directors setting forth such approvals and
direction, certified by the President and Secretary of Magic, shall have been
delivered to ECHO.
8.1.5 Magic Shareholder Approval. The shareholders of Magic shall
have approved the Merger as required by law, and copies of the resolution of
such shareholders setting forth such approval, certified by the President and
Secretary of Magic, shall have been delivered to ECHO.
8.1.6 Documents. All documents delivered to ECHO pursuant to this
Agreement shall be reasonably acceptable to ECHO.
8.1.7 Adverse Changes. No material adverse change shall have occurred
in the financial condition, working capital, assets, liabilities, business,
operations or prospects of Magic since the date of its most recent balance
sheet delivered to ECHO as provided in this Agreement.
8.1.8 Representations and Warranties True. The representations and
warranties of Magic and the Selling Shareholders set forth in Article III
shall be true in all material respects as of the date of Closing.
8.1.9 Employee Agreements. Each of the employees of Magic designated
by ECHO shall have signed and delivered a Nondisclosure and Inventions
Disclaimer Agreement substantially in the form of Exhibit J.
8.1.10 Resignations of Directors and Officers. Each director and
each officer of Magic shall have signed a resignation in the form of Exhibit
K.
8.1.11 Investor Representations. Each Selling Shareholder shall have
delivered to ECHO an executed copy of investor Representations and, based on
those investor Representations and other information known to ECHO, ECHO shall
have determined that issuance of ECHO Shares to the Selling Shareholders
complies with the Securities Act and applicable State Law.
8.2 Magic/Selling Shareholder Conditions. The obligations of Magic and the
Selling Shareholders under this Agreement are subject to the fulfillment on or
before the date of Closing of each of the following conditions, any of which
may be waived by Magic and Selling Shareholders holding a majority of the
Magic Shares in writing:
8.2.1 Delivery of Documents at Closing. All documents required to be
delivered to Selling Shareholders at Closing shall have been tendered for
delivery to the Selling Shareholders.
8.2.2 Compliance with Law. All consents, authorizations, permits or
other approvals, if any, that are required by any governmental authority or
regulatory agency (other than filing the Articles of Merger), or under any
agreement or other document under which ECHO or Magic is obligated, shall have
been duly obtained and shall be effective. Consummation of the transactions
contemplated by this Agreement shall comply with all requirements of corporate
law applicable to mergers; and shall not violate any law, regulation, or order
of any governmental authority or any court, nor any obligation under which
ECHO, EAC or Magic is bound.
8.2.3 EAC Director Approval. The board of directors of EAC shall have
approved this Agreement and the Merger, and shall have directed that the
Merger be submitted to the shareholder of EAC for approval, and copies of the
resolution of such board of directors setting forth such approval, certified
by the President and Secretary of EAC, shall have been delivered to the
Selling Shareholders.
8.2.4 EAC Shareholder Approval. The shareholders of EAC shall have
approved the Merger as required by law, and copies of the resolution of such
shareholder setting forth such approval, certified by the President and
Secretary of EAC, shall have been delivered to ECHO.
8.2.5 Adverse Changes. No material adverse change shall have occurred
in the financial condition, working capital, assets, liabilities, business,
operations or prospects of ECHO since the date of its most recent balance
sheet filed with the Securities and Exchange Commission.
8.2.6 Representations and Warranties True. The representations and
warranties of ECHO as set forth in Article Iv shall be true in all material
respects as of the date of Closing.
IX
CLOSING
9.1 Date of Closing. The closing of the transactions contemplated by
this Agreement ("Closing") shall take place on April 20, 1999 at 12:00
o'clock, at the offices of Magic located at the address Set forth at the end
of this Agreement, or at such other date, time and place as ECHO, Magic and
Selling Shareholders holding a majority of the Magic Shares may agree in
writing.
9.2 Documents to be Delivered At Closing. At the Closing, the parties
shall deliver the following.
(1) Each of the Selling Shareholders shall deliver to ECHO:
(A) Certificates for Magic Shares as provided in this Agreement, duly
endorsed to transfer all right, title and interest in such Shares to
ECHO along with such other documents as ECHO shall reasonably request to
ensure the transfer to ECHO of all such right, title and interest,
totaling all of the Magic Shares.
(B) An executed copy of the Escrow Agreement.
(C) An executed copy of this Agreement, if not previously delivered.
(D) Completed and executed Investor Representations, if not previously
delivered.
(2) ECHO shall deliver
(A) Certificates for the number of Basic Shares issued to each Selling
Shareholder, to the Escrow Agent in accordance with the Escrow
Agreement.
(B) An executed copy of the Employment Agreement, to Kris D. Winckler,
Steven D. Kirk, Robert L. Hare, and Steven J. Freed, respectively.
(C) An executed copy of the Escrow Agreement, to each Selling
Shareholder.
(D) An executed copy of this Agreement, to each Selling Shareholder, if
not previously delivered.
(3) Magic shall deliver to ECHO
(A) Employment, Nondisclosure and Inventions Disclaimer Agreements as
provided in Section 8.1.9.
(B) Resignations signed by each director and officer of Magic as
provided in Section 8.1.10.
(C) An executed copy of the Escrow Agreement.
(D) Executed copies of Employment Agreements with Kris D.
Winckler, Steven D. Kirk, Robert L. Hare, and Steven J. Freed.
(E) An executed copy of this Agreement, if not previously delivered.
(F) Articles of Merger, signed by the President and Secretary of Magic.
(4) EAC shall deliver to Magic and to the Selling Shareholders:
(A) Copies of resolutions adopted by the board of directors of EAC
approving this Agreement and the Merger, certified by the President and
the Secretary of EAC.
(B) Copies of resolutions adopted by the shareholder of EAC approving
this Agreement and the Merger, certified by the President and the
Secretary of Magic.
(C) Articles of Merger, signed by the President and the Secretary of
EAC.
(5) Kris D. Winckler, Steven D. Kirk, Robert L. Hare, and Steven J. Freed
shall each deliver an executed copy of his Employment Agreement, to ECHO.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Governing Law. This Agreement was made in and shall be governed in
all respects by the laws of the State of California, except that the laws of
New Mexico shall govern the Merger.
10.2 Survival. The representations, warranties, covenants and agreements
made herein shall not be waived or affected by any investigation by any party
and shall survive the closing of the transactions contemplated hereby.
10.3 Successors and Assigns. The provisions of this Agreement shall
inure to the benefit of, and shall be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
10.4 Entire Agreement. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof
10.5 Amendments. Any amendment or modification to this Agreement must be
in writing signed by all of the parties.
10.6 Notices. All notices required or permitted hereunder shall be in
writing and shall be mailed by registered or certified mall, postage prepaid,
or otherwise delivered by hand or by messenger, addressed to each party at the
address set forth at the end of this Agreement, or at such other address as
the party shall have furnished by notice hereunder.
10.7 Expenses. Each party shall bear its own expenses, including legal
fees, incurred on its behalf with respect to this Agreement and the
transactions contemplated hereby.
10.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each of which shall be
enforceable against the parties actually executing such counterpart, and all
of which together shall constitute one instrument.
10.9 Headings. The headings in this Agreement are for convenience of
reference only and are not to be considered in construing this Agreement.
10.10 Waivers. Any waiver of any breach or default under this Agreement,
or any waiver of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing.
10.11 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective
if it materially changes the economic benefit of this Agreement to any party.
10.12 Attorneys Fees. If legal or other proceedings are instituted by
any party against any other party to enforce any provision of this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees,
court costs and ancillary expenses.
10.13 Assumption of Liabilities. ECHO assumes and agrees to pay amounts
owing to Lila Hare and Debra Kirk, aggregating $53,536.60 on or before April
1, 2000. ECHO will hold harmless Magic and the Selling Shareholders from any
liability in connection therewith.
10.14 Certain Magic Liabilities. ECHO will hold harmless Magic and
Selling Shareholders from any liability in connection with Magic's office
lease and its equipment loan from First Security Bank and will endeavor to get
Selling Shareholders released from their personal guarantee of the office
lease and equipment loan.
10.15 ECHO Funding Commitment. In the event that ECHO falls to provide
funding in at least the amounts and on or before the times set forth in
Exhibit L, all unearned Performance Shares shall immediately vest.
10.16 Selling Shareholders' Spousal Indemnity and Representations. Each
of the Selling Shareholders will indemnify and hold harmless ECHO, its
successors and assigns, against all liabilities, all defects in title to Magic
Shares transferred to ECHO pursuant to this Agreement, and all related costs
and expenses, arising out of any claim by the spouse of the Selling
Shareholder based on marital rights of the spouse in such Magic Shares. Kris
D. Winckler and Steven Kirk each represents that the person signing along with
that Selling Shareholder below is the spouse of that Selling Shareholder.
Robert L. Hare and Steven I. Freed each represents that he is not married as
of the date of Closing. Robert Moller and Lisa Moller represent that they are
spouses and co-owners of the Magic Shares indicated opposite their names.
10.17 Further Action. Each party agrees to execute and deliver such
documents and to take such further action after Closing as may be necessary or
appropriate to effect the Merger and the other provisions of this Agreement.
10.18 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
ARTICLE XI
SIGNATURES AND SHARE AMOUNTS
The parties hereto have evidenced their agreement to the provisions of
this Agreement by their signatures subscribed below, it being understood that
the Selling Shareholders hold the number of Magic Shares indicated, and the
Selling Shareholders are entitled to receive the number of Base Shares
indicated and up to the maximum number of Performance Shares indicated, in
accordance with and subject to the terms of this Agreement.
Each spouse signing below represents that she has read and understood
this Agreement, she consents to its terms, and she releases and assigns any
community property or other interest she may have in any of the Magic Shares
to ECHO pursuant to this Agreement.
"ECHO" "MAGIC"
ELECTRONIC CLEARING HOUSE, INC. MAGIC SOFTWARE DEVELOPMENT, INC.
By: Joel M. Barry, By: Kris D. Winckler,
Chairman and President and Chief
Chief Executive Officer Executive Officer
28001 Dorothy Drive 215 Central Avenue N.W., Suite 3A
Agoura Hills, CA 91301-2697 Albuquerque, NM 87102
"EAC"
ECHO ACQUISITION CORPORATION
By: Joel M. Barry,
Chairman and Chief Executive Officer
28001 Dorothy Drive
Agoura Hills, CA 91301-2697
<TABLE>
<CAPTION>
MAXIMUM
MAGIC BASE PERFORMANCE
SELLING SHAREHOLDERS SHARES SHARES SHARES
<S> <C> <C> <C>
Kris Winckler 25 250,000 250,000
Patricia Winckler
Steven D. Kirk 25 250,000 250,000
Debra Kirk
Robert L. Hare 25 250,000 250,000
Steven J. Freed 18 180,000 180,000
Richard Moller 7 70,000 70,000
Lisa Moller
/TABLE
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
April 29, 1999
ECHO ANNOUNCES THE COMPLETION OF THE ACQUISITION OF
MAGIC SOFTWARE DEVELOPMENT, INC.
Agoura Hills, Calif.--Electronic Clearing House, Inc. (NASDAQ:ECHO)
today announced the completion of the acquisition of Magic Software
Development, Inc. (Magic). ECHO had announced an agreement in principle on
March 8, 1999 and final recording of the acquisition with the appropriate
state agencies occurred on April 27, 1999. Magic, who will operate as a wholly
owned subsidiary of ECHO, is based in Albuquerque, New Mexico, and is a
provider of electronic check conversion, electronic check re-presentment,
check verification, and check guarantee solutions to financial services
companies and retailers across the nation.
Under the terms of the acquisition, ECHO issued 1,000,000 shares of ECHO
common stock. The shares will be held in escrow and 500,000 shares will be
released to the Magic selling shareholders on April 1, 2001 and 500,000 shares
will be released on April 1, 2002.
An additional 1,000,000 shares of ECHO stock will be placed into escrow
to be issued to the Magic selling shareholders under a performance clause
wherein, should the Magic subsidiary's performance meet or exceed
predetermined earnings goals for fiscal year 2000 and 2001, a proportionate
number of performance based shares will be issued. Any shares issued under the
performance clause will be held in escrow and 50% will be released on April 1,
2003 and the balance will be released on April 1, 2004.
Mr. Kris Winckler, President of Magic, will remain the President of the
ECHO subsidiary and Mr. Dave Griffin, Vice President of ECHO, has been
designated Director of Check Services and will assist in the integration of
Magic products and services with the ECHO family of products and services.
"We believe it is logical for a merchant to expect their payments
processor to provide a full complement of payment options and, with the
addition of Magic, ECHO will be one of a select few processors in the nation
who will have fully integrated credit card and check services", stated Joel M.
Barry, CEO of ECHO. "We intend to make both forms of payment available in
real time over the internet, which will further distinguish ECHO from other
less technically capable processors, and maximize the benefit to our growing
internet base of merchants", stated Mr. Barry.
Magic has been an active member of the Electronic Check Counsel, a group
of national retailers, banks and electronic processors, that was set up by the
National Automated Clearing House Association (NACHA) to investigate and
advise NACHA on new electronic check products. "NACHA just announced its
approval of new rules relating to electronic check conversion which will
result in substantial cost savings for both retailers and financial
institutions", said Kris Winckler, President of Magic.
In a check conversion transaction, the consumer presents a retail
merchant with a check which is run through an electronic reader to capture the
consumer's bank account number, routing information, and check serial number.
The merchant then returns the check to the consumer with a "void" stamped on
the check. The consumer signs a receipt authorizing the electronic
transaction and keeps a copy as a record of the purchase. The merchant
initiates an Automated Clearing House (ACH) debit, using the check information
and transaction amount, which is processed electronically through the ACH
network. The ACH Network is commonly used for payments such as Direct Deposit
of payroll and Social Security benefits, and automated bill payments. In 1998,
more than 5.3 billion ACH payments were made worth over $16 trillion.
The benefits to retailers of using electronic checks at the point of
sale include reduced costs from the elimination of paper handling, faster and
more effective redeposit and return item processing, simplified
reconciliation, detailed settlement and transaction reporting, improved
customer information flow, and a lower incidence of fraud.
"Magic is a leader in developing and deploying electronic check services
and, with ECHO's background and capabilities in credit card and internet-based
processing, the combined suite of services we will be able to offer to
merchants should make ECHO a highly preferred processor with merchants across
the nation", stated Winckler.
"The Magic team of programmers and engineers match well with ECHO's
distinction as a technically competent company", stated Mr. Barry. "We think
some innovative products and services, especially in the internet, will
naturally result from this combination of talent."
To take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, you are hereby cautioned that this
release contains forward-looking statements that are based upon current
expectations and involve a number of risks and uncertainties. Actual
operations and results may differ materially from those expressed in the
forward-looking statements made by the Company.
Electronic Clearing House, Inc. provides credit card processing, check
guarantee, inventory tracking services and various Internet services to over
19,000 retail merchants and U-Haul dealers across the nation. ECHO also
designs, develops and manufactures software and point-of-sale hardware that is
utilized as credit card processing terminals, automated money order
dispensers, inventory tracking devices, and casino cash advance systems.
# # #
Media Contact:
Donna Camras, Corporate Secretary URL: http://www.echo-inc.com
818-706-8999, ext. 3033 E-MAIL: [email protected]
Electronic Clearing House, Inc.
Agoura Hills, Calif.
